CHARTER plc AGM Statement
22/07/2003
At today’s Annual General Meeting, Mr David Gawler, Chairman & Chief Executive made the following statement:
“Review of the results for the year ended 31 December 2002
At this Meeting the shareholders consider the Annual Report and Accounts for the year ended 31 December 2002. I am pleased to report that in that year the group generated a profit before tax of £12.0 million compared with a loss before tax of £20.3 million in 2001.
The Welding and Cutting business (“Esab”) generated adjusted operating profits of £36.0 million, marginally higher than the £35.7 million achieved in 2001. However the adjusted operating profits of the Air and Gas Handling business (“Howden”) of £1.5 million were below the board’s expectations and fell short of the operating profits of £7.2 million earned in 2001. The Specialised Engineering businesses had a successful year in 2002 generating operating profits of £5.4 million compared with £2.9 million in the previous year.
The Accounts for 2002 include costs of £25.3 million in respect of operating exceptional items offset by net non-operating exceptional credits of £21.8 million, resulting in a net exceptional charge of £3.5 million. In 2001 exceptional costs totalled £42.5 million and there was an exceptional interest credit of £4.4 million.
Howden North America
Earlier this year, certain accounting irregularities were discovered in one of Howden’s business units in North America. An exceptional charge of £3.9 million was recorded in the 2002 Accounts, which reflected the overstatement of this unit’s profits not arising in 2002. This exceptional charge formed part of the total operating exceptional costs of £25.3 million in 2002. The detailed investigation into these accounting irregularities found no evidence of any defalcation or that any cash or other assets had left the group as a result.
The closure of Howden’s manufacturing plant located in Camden, South Carolina, announced to the workforce in November 2002, was completed in the first quarter of 2003. This plant manufactured fans for the commercial and general ventilation markets in the USA. The majority of the exceptional costs of closing this plant were provided in the 2002 Accounts.
In view of the recent results of Howden in North America, a strategic and operational review has been undertaken and in May 2003 the closures were announced of the manufacturing plant in Springfield, Illinois, together with two smaller facilities in Canada. The exceptional cost relating to the May 2003 closures is expected to be about £4 million. Following these closures, Howden’s fan manufacturing business in North America will be concentrated at two factories, one in New Philadelphia, Ohio, and the other in Mexico City.
Bank refinancing
At 31 December 2002, net debt stood at £194.0 million, a reduction of £20.1 million during the year. At that date, there were in issue US dollar denominated private placement loan notes totalling US$206 million, equivalent to £128 million, and the group met its day-to-day working capital requirements through a £127 million syndicated revolving credit facility under which £87 million was drawn.
On 7 March 2003, at the time of the release of the Preliminary Announcement of the Results for 2002, Charter was in discussions with its lending banks concerning the renewal of its syndicated revolving credit facility which was due to expire on 31 July 2003. I can now report that the revolving credit facility has been renewed for the period to 31 March 2005 with an initial facility amount of £120 million.
Under the terms of the renewal, the Company will need progressively to reduce its debt between now and 10 March 2004 through asset disposals, cash flow and alternative sources of debt finance. In this regard, a number of properties and non-core businesses have been identified for sale.
The total amount of the exceptional one-off financing costs in connection with the renewal of the facility is expected to be around £5 million, including the fees charged by the investigating accountants appointed by the banking syndicate. The terms of the refinancing impose increased levels of margins and fees payable to the banks, which it is estimated will cost the group some £2 million over the period to 31 March 2005.
At the end of June 2003, despite the cash outflows associated with the exceptional items, net debt had declined to £193 million and the principal amounts drawn under the syndicated facility totalled £94 million.
US loan notes
As explained in the 2002 Accounts, certain longer dated holders of the group’s US private placement loan notes have informed the Company that they consider that a technical default has arisen under the loan notes as a result of the accounting irregularities at one of the units in Howden North America which were announced by the Company earlier in the year. The directors remain of the view, based on their knowledge of the situation and on advice from the Company’s legal advisers, that no such default has occurred and the note holders have been advised accordingly. In the event that the views of the Company and its advisers are proven to be incorrect and on the further assumption that the note holders, as a result, were to decide to accelerate the notes, then the full amount of notes and other outstanding indebtedness would become immediately due and payable.
Of the total loan notes outstanding at 31 December 2002 of US$206 million, US$72 million are due for scheduled repayment on 10 March 2004 and the terms of the renewal of the Company’s banking facility recognise the need to repay these notes on that date.
Prospects
As I said in my Chairman’s Statement in the Accounts, significant progress was made during 2002 in closing loss making units in Howden and Esab, and restructuring several of the group’s operating businesses. These measures have reduced the group’s ongoing cost base, which should provide the foundation for an improvement in the competitive position of the group’s operating businesses. As I pointed out earlier, exceptional costs are being incurred in 2003 in respect of the ongoing restructuring of the businesses and in connection with the refinancing exercise.
Demand in 2002 was below that experienced in the prior year. So far, the current year has shown little improvement in many of the key markets, particularly in North America, and parts of Europe, and margins remain under pressure. However, some improvement is expected in certain markets in the second half of the year.”
Contact
Andrew Fenwick, Pamela Small, Brunswick +44 (0) 20 7404 5959