Group Finance Director's Review

Kevin Higginson
Group Finance Director 

Financial summary

Figures within the income statement have been impacted significantly this year by the disposal of the Floors Division on 30th September and the acquisition of MTX in January 2008. The key highlights of the year are

Windmill rotor blades manufactured with Enka®-Fusion flow medium.

Synthetic grass yarn production, Bonar Yarns, Scotland.

Synthetic turf for soccer.

Post-balance sheet events

The Directors announced on 19th February 2009 that the Company proposes to raise approximately £30m (net of expenses) by way of a Placing and Open Offer of 132,489,559 Open Offer Shares at 25 pence per Ordinary Share.

The Placing and Open Offer has been fully underwritten by the Placing Agents. The Open Offer Shares to be issued pursuant to the Placing and Open Offer, when fully paid, will rank pari passu with the Ordinary Shares or, after the Capital Reorganisation, the New Ordinary Shares.

Before proceeding with the Placing and Open Offer, the Company’s Ordinary Share capital will be reorganised by means of the Capital Reorganisation which will involve: (i) the subdivision and reclassification of each issued Ordinary Share into one New Ordinary Share of 5 pence and one Deferred Share of 20 pence; and (ii) the subdivision of each authorised but unissued Ordinary Share into five New Ordinary Shares of 5 pence each. On completion of the Capital Reorganisation, each Ordinary Shareholder will hold one New Ordinary Share and one Deferred Share for each Ordinary Share currently held.

Accounting standards

There have been no significant changes to the accounting standards which impact the business this year.

Taxation

The taxation charge was £4.7m on profit before amortisation and non-recurring items and tax from continuing operations (2007 (restated): £3.0m). The effective tax rate on profit before amortisation and non-recurring items was 29.4%, up from 28.8% in the prior year.

Earnings

The basic measure showed a loss per share of (0.20)p compared with earnings of 3.27p for 2007 reflecting the non-recurring items arising in the year.

On the earnings per share measure calculated using profit before amortisation and non-recurring items for continuing operations, EPS has increased by 59.5% to 7.37p from 4.62p.

Dividend Policy

In light of the Placing and Open Offer, a final dividend will not be recommended for the year ended 30th November 2008. It is the Board’s intention, subject to the Group’s trading position and prevailing economic circumstances, to resume dividend payments for the year to 30th November 2009. It is the Board’s intention that the level of the dividend payment would be established at a sustainable level with the dividend per share to be covered at least twice by earnings per share (before amortisation and non-recurring items).

The interim dividend of 1.925p per share (2007: 1.75p) already paid will, therefore, constitute the total dividend on the ordinary shares for the year (2007: 4.85p) for the year.

Preference dividends of £23.0k (2007: £23.0k) were paid in the year.

Share capital

The total share capital was 154.6m ordinary shares in issue as at 30th November 2008 (2007: 153.9m). The average number of ordinary shares in issue during the year was 154.0m.

Share price

The share price achieved a high of 124.25p and a low of 22.0p during the year, with the share price as at 30th November 2008 being 40.5p (2007: 114.25p). The primary objective of the Board remains the enhancement of shareholder value through profitable, cash-generative growth. The market capitalisation as at 30th November 2008 was £62.6m (2007: £175.9m).

Pensions

The pension deficits have increased during the year, principally as a result of the schemes acquired as part of the MTX acquisition and actuarial losses arising as a result of investment performance. There was additionally a cash injection of some £3.0m (2007: £3.0m) from the Company to the UK Scheme. In addition, a section 75 liability arose on the disposal of the Floors Division resulting in an additional £8.0m payment to the new owners of the Floors Division for funding into the UK Scheme.

The Company has recognised a non-operating non-recurring charge of £6.2m resulting in a provision of £6.0m for certain liabilities in connection with the UK Scheme and certain associated professional costs in connection with the matters referred to in note 5.

Operating non-recurring items

There was a net non-recurring charge from continuing operations of £1.4m (2007: £nil). Following the acquisition of MTX in January 2008, we have incurred a number of post-acquisition integration costs. In addition, a restructuring programme has commenced resulting in a number of additional costs. This has resulted in a charge of some £2.3m. During the year, we disposed of surplus land at Colbond Inc, generating a profit on disposal of £0.9m.

Cash flow and net debt

Net debt at the end of the year was £104.5m compared with £50.5m last year, reflecting additional debt arising on acquisitions, primarily of MTX, offset by the inflow from the disposal of the Floors Division, the translation impact of debt primarily denominated in euros and good operating cash flow benefiting from strong management of working capital.

Acquisitions and disposals

We completed the acquisition of MTX for €163.0m in January 2008. MTX Group produces technical coated fabrics and is principally based in Germany. Additionally, on 8th January 2008, we acquired Westbond Ltd, a producer of fusion-bonded high quality carpet tiles for a consideration of some £10.9m. Westbond was subsequently disposed of on 30th September 2008 as part of the disposal of the Floors Division.

During the year, we established Bonar Emirates Technical Yarns Industries LLC (“BETY”) together with Abu Dhabi Basic Industries Corporation PJSC to manufacture artificial grass yarns and carpet backing yarns, based in Abu Dhabi. We have treated BETY as a subsidiary in the Group accounts as we hold economic control. We anticipate that production will commence in the second half of 2009.

On 30th September 2008, we disposed of our Floors Division generating a profit on disposal of £55.9m. Profit before amortisation and non-recurring items in the ten month period to disposal was £10.4m (year to 30th November 2007: £12.0m). Net profit attributable to discontinued operations was £60.8m (2007: £8.1m). The 2007 results have been restated to show the results from the Floors Division as a discontinued operation.

Bank facilities

The Group started the year with bank facilities of approximately £234.7m. During the year, bank consent was required for the disposal of the Floors Division. Consent was obtained unanimously, and included conditions whereby part of the then-available facilities were cancelled, and the rate of interest payable increased to 1.50% above the London inter-bank offered rate. At 30th November 2008, the Group held two committed bank facilities, of £149.4m and €81.0m, making total facilities of approximately £216.4m. Subsequent to year end, facilities totalling €81.0m were cancelled voluntarily.

The final maturity of these unsecured facilities is December 2011. Further details of the facilities can be found in note 19 to the accounts.

Treasury

The objective of the Treasury operation is the management of financial risk at optimal cost. The department manages the relationships with the Group’s key external debt providers centrally. Acting as a cost centre, it operates within a range of Board-approved policies, using conventional financial instruments and specified derivatives. There have been no changes to the treasury policies and controls during the year, although subsequent to year end as part of a review of policies, the Board revised its foreign exchange policy (see below). No transactions of a speculative nature are permitted. The treasury department is subject to periodic independent review by the internal audit department. In addition, during the year, the department was also subject to review by external consultants. Underlying policy assumptions and activities are reviewed by the Board. Controls over exposure changes and transaction authenticity are in place.

Funding and liquidity risk

The Group’s funding objective is to maintain the constant availability of an appropriate amount of reasonably priced funding for the Group’s operational and strategic needs for the foreseeable future, and accordingly to safeguard its ability to continue as a going concern. The Group finances its operations from shareholders’ funds and borrowing facilities. Group policy is to maintain committed facilities to a minimum of 110% of peak gross debt requirements.

Whilst the Group maintains uncommitted facilities to maintain short-term flexibility, its principal debt funding comprises committed bank facilities which are detailed above. During the year, the facilities, which are multi-currency, have been drawn in both euros and pounds sterling. From time to time, the Group purchases its own shares on the market through our employee benefit trust; the timing of these purchases depends on market prices. The shares are intended to be used for issuing shares under the Group’s share option programmes.

The Group’s objectives when managing capital are

• to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and
• to provide an adequate return to shareholders commensurate with the level of risk.

The Group sets the amount of capital in proportion to risk. The Group manages its capital structure and makes changes in the light of changes in economic conditions and risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. There were no changes in the Group’s approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

Internet rate risk

The Group’s strategy is to ensure with a reasonable amount of certainty that the overall Group interest charge is protected against material adverse movements in interest rates. The acquisitions over the last two years have introduced a significant level of debt into the Group. The higher gearing is expected to remain, notwithstanding the disposal of the Floors Division and the Placing and Open Offer just announced.

The Board’s policy for the management of interest rate risk is to ensure that a proportion of core debt be subject to protection against higher interest rates. The proportion is subject to review at the time of the annual budget setting and the Group has purchased interest rate caps to mitigate the impact of potential increases in interest rates. Subsequent to the year end, the Company entered into a series of cross-currency swaps with two of its relationship banking counterparties which mature in November 2011, broadly coterminous with the expiry of the Group’s banking facilities.

Foreign exchange risk

The Group has net assets outside of the UK, predominantly within the euro zone. To mitigate the fluctuation in the value of these assets when translated into sterling, the policy is to hedge the net assets using a mixture of debt and foreign exchange swaps. Subsequent to the year end, the Board altered this policy to hedge only a proportion of the net assets. At 30th November 2008, there were no material currency exposures after accounting for the effect of hedging transactions.

There is limited transactional exposure within the Group and, where exposures are regarded as highly probable, they are hedged.

Credit risk

Credit risk is the risk of loss in relation to a financial asset due to non-payment by the customer or counterparty. The Group’s objective is to reduce its exposure to counterparty default by restricting the type of counterparty it deals with and by employing an appropriate policy in relation to the collection of financial assets. The Group’s principal financial assets are cash, derivative financial instruments and receivables which represent the Group’s maximum exposure to credit risk in relation to financial assets.

The credit risk in relation to cash and derivative financial instruments is limited because Group policy restricts its dealings to counterparties with high credit ratings, and with which it has an ongoing banking relationship. The Group has set maximum permitted exposures with each counterparty.

For receivables, the amounts presented in the balance sheet are net of allowances for doubtful receivables estimated by the Group’s management based on prior experience and their assessment of the current economic environment. The maximum exposure to credit risk for trade receivables and other financial assets is represented by their carrying amount. There are no significant exposures to any one customer.

Kevin Higginson
Group Finance Director
19th February 2009