Gradus edging away from the abyss

THE MANAGING director of flooring products firm Gradus believes that the prospects for his company are much brighter following a recent improvement in trading figures and a refinancing agreed at the end of its last financial year.

Accounts for the Macclesfield-based company have just been filed for 2009 which show that its pre-tax losses widened to £4.8m in the year to December 31 (2008: £3.8m) as its sales fell by 14% to £26.2m.

However, managing director Steve Watt told TheBusinessDesk.com that after experiencing its sharpest decline in trading during the last quarter of 2009 and in the first two months of 2010, business had picked up throughout the summer months. By  the end of its third quarter later this month, the group is likely to be ahead of the same period a year earlier.

“The hardest thing we attempted to do was to get this refinancing done at a time when the market was most difficult,” said Watt. “We’ve done that now and our cost base has been managed accordingly. The markets have now bottomed out.”

The company, which makes flooring accessories such as stair edgings, floor trims and coverings such as carpets and vinyl floor tiles, said that it had been negotiating the £25m debt-for-equity refinancing which took place in December 2009, with its bankers for nearly 12 months before a deal was finally agreed which saw £25m worth of bank debt converted into equity in a deal that gave Lloyds Banking Group a majority stake in the firm.

Gradus had initially been sold by Close Brothers Private Equity in 2007 in a £41m secondary buy-out backed by Bank of Scotland’s Integrated Finance (BOS-IF) arm in February 2007. The deal saw Gradus’s management being given a 75% stake. However, a downturn in the construction market had a knock-on effect on sales and the firm’s net debts ballooned to more than £43m.

Following the debt-for-equity swap, its debts reduced to £21m and it finished the financial year with net assets of £12.9m – compared with net liabilities of £5.9m a year earlier.

“The company was always profitable – it made an operating profit last year of £3.8m even in the downturn, but the rolled up interest being accrued meant that the business would never get to a stage where it was generating enough to provide some value in the equity,” said Watt.

He argued that concurrent actions to cut overheads – including a reduction in employee numbers which has seen its headcount shrink by around 50 people to 250 – had placed the company in a stronger position coming out of the downturn than it was going in”. This has included transfers following the sale of a loss-making fabrics business in July to Morada Home, but Watt argued that job cuts had been kept to a minimum.

“These guys have been very loyal and we’ve done everything we could to hang on to as many people as possible,” said Watt. “The reason we stayed in Macclesfield (when it was looking for new headoffices three years ago) was that if we moved we felt we could lose 25-30% of our core experienced staff.”

He added that there “was never a question” of it being unable to repay the bank debt part of its loans, and added that its order books in key strength sectors such as education and healthcare were likely to provide strong demand for  at least another two years.

“It is very fragile, but the outlook for the business is a lot more certain in terms of our ability to benefit from the upside”