REG - Headlam Group PLC - Final Results
9 March 2021
Headlam Group plc
('Headlam', the 'Company' or the 'Group')
Final Results
Strong and sustained recovery in H2 2020
Headlam Group plc (LSE: HEAD), Europe's leading floorcoverings distributor, today announces its final results for the year ended 31 December 2020.
2020 Overview
Financials
·
Total revenue only 15.3% below 2019 at £609.2 million (2019: £719.2 million), a strong recovery from the 30.6% below in the first-half
·
Underlying¹ profit before tax of £15.9 million (2019: £39.5 million), representing a strong reversal of the first-half underlying¹ loss before tax of £1.2 million
·
Statutory loss before tax of £17.1 million (2019: £35.2 million profit), reflecting a significant level of non-underlying items, the vast majority having arisen as a direct consequence of COVID-19 and being non-cash in nature
·
Highly cash generative during the year despite the initial impact of COVID-19, with an increase in cash of £27.0 million (2019: £10.2 million decrease) and in part reflects the actions taken to preserve Balance Sheet strength
·
Average net debt² for the year of £8.6 million (2019: £3.3 million), a material reduction on the first-half average net debt² of £35.3 million
·
Net funds position (excluding lease liabilities) of £51.6 million as at 31 December 2020 (2019: £27.0 million), which included the benefit of £12.0 million of deferred VAT payable by 31 March 2021
·
Net funds as at 31 December 2020 after the impact of IFRS 16 'Leases' of £8.3 million (2019: £17.6 million net debt)
Operational
·
Following the extensive temporary closures during the second-quarter due to COVID-19, operations remained open throughout the second-half with strong recovery in demand
·
Many mitigating actions put in place against the impact of COVID-19, including the acceleration of certain projects under the Operational Improvement Programme ('OIP')
·
Opening of new regional distribution centre in Ipswich improving service to customers throughout the South East of England, and enabling commencement of network consolidation activities
·
Accelerated OIP now anticipated to generate a net benefit in excess of £4 million in 2021, rising to in excess of £8 million in 2022
2021 Activity
·
Two new key projects under the OIP being launched, and which will help more quickly realise revenue benefits and cost base improvements
·
Trading in January and February 2021, typically the quietest trading months, soft given lockdowns and non-essential retail businesses being closed. The busier months ahead to benefit from easing of restrictions, reopening of retail businesses, and the OIP improving performance and revenue growth opportunities
·
Environmental, Social and Governance ('ESG') Strategy being published in May 2021, with a Capital Markets Day to be held in July 2021 to provide more detail on ESG Strategy and the OIP
·
Resumption of dividend payments, with a nominal ordinary dividend of 2 pence per share to be paid in May 2021 reflecting the Board's confidence in the future prospects for the business
Steve Wilson, Chief Executive, said:
"The Company's financial performance in 2020 was pleasing given the backdrop created by COVID-19, and demonstrated the resilience of the business. Much was achieved operationally despite the disruption caused, and the Company has entered 2021 a stronger business as a result of ongoing mitigating actions against the impact of COVID-19 and an accelerated Operational Improvement Programme which is giving rise to meaningful benefits."
A video of the Company's final results presentation is available to view here: http://bit.ly/HEAD_FY20_results
The presentation, and video, is also available on the Company's website: www.headlam.com
¹ Underlying is before non-underlying items, which includes amortisation of acquired intangible assets, impairment of goodwill, acquisition related fees, movements in deferred and contingent consideration, finance costs on deferred and contingent consideration, business restructuring costs, and non-recurring pension costs in relation to guaranteed minimum pension equalisation.
² Average net debt is calculated by aggregating the net debt position, excluding the impact of IFRS 16 'Leases', for each business day and dividing by the total number of business days.
Enquiries:
Headlam Group plc
Steve Wilson, Chief Executive
Chris Payne, Chief Financial Officer
Catherine Miles, Director of Communications
Tel: 01675 433 000
Email: headlamgroup@headlam.com
Investec Bank plc (Corporate Broker)
David Flin / Alex Wright
Tel: 020 7597 5970
Panmure Gordon (UK) Limited (Corporate Broker)
Erik Anderson / Dominic Morley / Ailsa MacMaster
Tel: 020 7886 2500
Alma PR (Financial PR)
Susie Hudson / Harriet Jackson / Faye Calow
Tel: 020 3405 0205
headlam@almapr.co.uk
Notes for Editors:
Headlam is Europe's leading floorcoverings distributor, providing the channel between suppliers and trade
customers of floorcoverings.
Headlam works with suppliers across the globe manufacturing a diverse range of floorcovering products, and provides them with a cost efficient and effective route to market for their products into the highly fragmented customer base. Alongside long-established processing and distribution expertise, suppliers benefit from Headlam's marketing and customer servicing into the most extensive customer base.
To maximise customer reach, Headlam operates 67 businesses across the UK and Continental Europe (France, the Netherlands and Switzerland). Each business operates under its own trade brand and utilises individual sales teams while being supported by the Company's network and centralised resources.
The Company's customer base covers both the residential and commercial sectors, with the principal customer groups being independent retailers and smaller flooring contractors alongside other groups such as larger retailers, housebuilders, specifiers, and local authorities.
Headlam is focused on providing customers with a market-leading service through:
· the broadest product offering;
· unrivalled product knowledge and tailored solutions;
· sales team and marketing support;
· e-commerce support;
· 'just-in-time' nationwide delivery and collection service; and
· other support including the provision of credit.
Chairman's Statement
2020 was a challenging year, but one in which the Company took important steps to make itself more successful. Following the significant impact of COVID-19 on trading in Q2 2020, when the vast majority of the Company's operations were temporarily closed, the second-half was characterised by a strong and sustained recovery. This demonstrated the resilience of our business, the commitment and tenacity of our people, and our ability to support customers during a difficult period.
The swift decisions and actions taken by the Company enabled the safety and protection of our people, and preserved the financial stability of the business during a critical period. The focus on supporting the wellbeing of our people has never been more important, with a COVID-19 Secure workplace, improved communications, an assistance programme, and the provision of an enhanced form of the UK Government's Coronavirus Job Retention Scheme having all contributed to supporting our people during the period.
A positive arising from a hugely difficult year, is that the Board believes the Company has entered 2021 a stronger business. Ongoing mitigating actions against the impact of COVID-19, including a more centralised approach to the management of costs; accelerated projects under the Operational Improvement Programme ('OIP'); and improved levels of stakeholder engagement will more effectively support the future success of the Company.
Since its instigation, the OIP has necessitated considerable planning and engagement with our people. This process has been vital to ensuring its effective implementation, the limiting of risk, and maximising the upside of the opportunities. With the considerable work undertaken in recent years and during 2020, despite the operational disruption caused by the impact of COVID-19, the Company has a clear roadmap to achieving the associated operational and financial improvements, with the ambition of achieving a 7.5% UK operating margin run-rate during 2023.
The implementation of the OIP increases the sustainability of the Company by improving the relevance of the business model as well as revenue growth opportunities. Sustainability will be further enhanced through the introduction of a concerted ESG (Environmental, Social and Governance) Strategy during 2021. This Strategy, to be published in May 2021 at the same time as the Company's Annual General Meeting, will detail the Company's approach to addressing its significant ESG-related opportunities and risks, with associated KPIs to measure performance going forward. The Company intends to provide detail on its ESG Strategy and the OIP, including the newly introduced projects for 2021, as detailed in the Chief Executive's Review, at a Capital Markets Day to be held in July 2021 at its new regional distribution centre in Ipswich. If circumstances do not permit physical attendance, the Company will provide a virtual presentation.
COVID-19 underscored the necessity of maintaining a strong balance sheet throughout the economic cycle, and following consultation the Board articulated this within its Capital Allocation Priorities which were detailed in the January 2021 Pre-Close Trading Update announcement. Based upon a prioritised low average net debt² position, the Company is focused on growth investment and returns to shareholders. Ordinary dividends were suspended following the emergence of COVID-19 because of the unknown duration of the pandemic, and impact on demand and cash flow. However, with the strong recovery in trading during the second-half of 2020, and the Board's confidence in the future prospects for the business, the Board has elected to resume the payment of dividends with a nominal ordinary dividend of 2 pence per share to be paid in May 2021. The Board is committed to providing dividend income for shareholders, with an interim dividend in respect of 2021 currently anticipated to be made, and a return to dividend payments based on earnings is anticipated next year.
As announced in December 2020, Alison Littley will be stepping down from the Board as a Non-Executive Director on 31 March 2021, and we wish to thank her for her valuable contribution, including her oversight and development of the Company's Remuneration Policy in her role as Chair of the Remuneration Committee. To bring further skills on to the Board, and increase oversight of the Company's strategic and corporate aims, the Board has announced its intention to appoint two new Non-Executive Directors during 2021, with the independent search process progressing well.
The Board would finally, and most importantly, like to thank and recognise the huge commitment and resilience our people have shown throughout 2020 and into 2021, and the support and understanding of all our stakeholders. Difficult decisions had to be made during 2020, but the Company is stronger for it with a clear ambition, and is now in a position to more positively impact all its stakeholders going forward.
Philip Lawrence
Non-Executive Chairman
9 March 2021
Chief Executive's Review
2020 Financial Performance
The Group's revenue profile during 2020 can be categorised into three parts. The first-quarter of the year evidenced consistency, being broadly in-line with the equivalent prior year period. The second-quarter was significantly impacted by the emergence of the COVID-19 pandemic, as detailed below, and the second-half was then characterised by a strong and sustained recovery to comparable 2019 levels.
As a consequence, first-half revenue was down materially on the same period in the prior year, being 30.6% below. However, the recovered performance in the second-half led to total revenue for the year being only 15.3% below 2019 at £609.2 million (2019: £719.2 million).
This pleasing performance, given the backdrop created by COVID-19, was principally due to:
· following the extensive closures during the second-quarter, the Company's UK operations remaining open throughout the second-half of the year and during lockdown periods;
· the responses and mitigating actions put in place, as described below; and
· an exceptional performance from the UK residential sector in the second-half despite ongoing restrictions and lockdown periods.
UK revenue was down 17.3% on the year at £504.7 million, with the second-half residential performance not able to fully recover its shortfall in the first-half, and the commercial sector being materially down for the whole year, albeit with an improvement in the second-half. On the Continent, revenue for the collective four businesses was down only 4.1% on the year at £104.5 million with robust performances in Switzerland and the Netherlands helping to offset weakness in France, which was subject to lockdown measures similar to the UK. Further detail on revenue and segmental performance is given in the Financial Review.
Total underlying¹ profit before tax for the year was £15.9 million (2019: £39.5 million), representing a strong reversal from the £1.2 million underlying¹ loss before tax reported in the first-half. The Company has reported a statutory loss before tax of £17.1 million for the year (2019: £35.2 million profit). As highlighted in the September 2020 interim results announcement, this reflects a significant level of non-underlying items during the year, with the vast majority having arisen as a direct consequence of the impact of COVID-19 and being non-cash in nature. These items are fully detailed in the Financial Review.
Impact of COVID-19 and Mitigating Actions
As previously detailed in the interim results announcement, below is a summary of the timeline of events, responses, and mitigating actions taken as a consequence of COVID-19:
· The vast majority of the Company's UK operations temporarily closed on 24 March 2020 following the UK Government guidance issued. The Company then took a demand-led and phased approach to the reopening of its UK operations while becoming COVID-19 Secure, which was fully implemented in June 2020. By the end of the first-half, the Company was operating on a largely normalised basis.
· Overheads were reduced and managed to materially lower levels following the impact of COVID-19. Strict centralised controls were put in place to ensure operating costs were aligned with the recovering revenue profile; product purchasing was limited to specific projects or orders; and non-essential operational and capital spend was deferred.
· Certain projects forming part of the Operational Improvement Programme ('OIP') were accelerated to help more quickly realise revenue benefits and cost base improvements, and mitigate against potential COVID-19 related reduction in demand going forward.
· Other continuing actions include: COVID-19 Secure strictly adhered to, enabling continuation of operations; more centralised approach to managing overheads and operating costs; improved contingency plans; new infrastructure in place, including to support increased working-from-home; improvements to the trade counter network to support increased 'click and collect' activity; and product purchasing in-line with customer demand.
Strategy
Whilst COVID-19 has caused many disruptions and changes to operating practices, some temporary and others perhaps becoming the new normal, it has demonstrated the validity of the Company's strategic aims and the associated developments to the business model. These strategic aims are centred around improvement, and increasing the success and sustainability of the business through:
· broadening and growing in the industry;
· improving operational and financial performance; and
· investing in the business, people, and the customer service proposition.
A key enabler of the strategic aims is the OIP, with its progress described in detail below. Many of the projects also support the anticipated and accelerated changes brought about by COVID-19, including ongoing changes to customers ordering and interaction preferences, and the increased importance of communication and culture.
Employee Wellbeing and Support
Throughout the period, the safety and protection of employees, customers and necessary visitors to sites has remained the Company's absolute priority. Alongside being COVID-19 Secure, the Company has issued a COVID-19 Secure Pack detailing all the guidance for employees to follow as well as the support available, and this continues to be updated as necessary and used in conjunction with employee briefings and ongoing site audits. Furthermore, employees are now working from home where they are able to do so, and investment has been made in infrastructure to support the increased need for home-working.
In addition to protection and safety, the Company increased and improved its internal communications during the year. This was already being instigated following recommendations arising from a Culture Capture exercise undertaken before the impact of COVID-19, but was accelerated following its emergence. An important component of these improved communications is the 'MyHub' engagement portal which is being launched during March 2021, and provides dedicated communications, support, and recognition for employees, and, importantly, features a specific 'wellbeing' section.
Operational Improvement Programme ('OIP')
The primary projects of focus during 2020 under the OIP were:
· Transport Integration focused around more effective delivery fleet utilisation;
· Network Consolidation with the enabler being the opening of the new regional distribution centre in Ipswich;
· Increased E-commerce Capabilities to better support customers; and
· An enhanced Trade Counter Proposition to capture more revenue opportunity.
Against the backdrop of COVID-19, the Company took the opportunity to accelerate the roll-out of the Transport Integration project which centres around the elimination of duplicated delivery routes by different Company businesses, and enables an enhancement to customer service, improved operating and financial performance, and reduction in environmental impact through fewer vehicles needed to service individual areas. By the beginning of November 2020, the project had been successfully implemented over approximately 25% of the Company's UK deliveries, and the roll-out will continue as planned in 2021 aligned with the network consolidation activity detailed below. Full national roll-out is on-track to be complete by early Q4 2021.
The new regional distribution centre in Ipswich opened in July 2020 after a COVID-19 related delay to the commissioning of plant and equipment. In September 2020, the Company was able to commence the employee engagement and operational activities relating to the planned consolidation of businesses and parts of the Company's network into the centre during 2020 and the first-half of 2021. The consolidation which is enabling a simplification of the network, delivery of meaningful overhead and operating cost efficiencies, and improved service to customers throughout the South East of England is progressing to plan. Seven sites and / or businesses have already been consolidated into Ipswich, with the remaining one on-track to be complete by 30 June 2021.
Together, the Network Consolidation and Transport Integration projects detailed above are expected to generate net cost savings in excess of £4 million per annum from 2022.
Enhancing e-commerce capabilities was a focus in the year, and many of the improvements made have additionally helped support customers more effectively against the backdrop of COVID-19. One key activity was the relaunch of the B2B websites with improved functionality, making it easier for customers to place and track orders, and additionally advise on availability with their customers. Since their launch, there has been a material increase in the usage of the B2B websites and the number of orders being placed on-line. There was also ongoing development of e-commerce infrastructure to better support larger retailers who typically require more systems integration, and increased digitalisation of processes across the business including paperless invoicing.
The Company has an established trade counter network of 53 UK sites, which have been particularly beneficial since the impact of COVID-19 and able to support the increased need and preference for 'click and collect'. During 2020, the Company finalised its plans to enhance the existing trade counter network and both develop and expand the national footprint, thereby allowing it to capture more revenue opportunity and reduce delivery costs through increased collections. The 'blueprint' format, established following customer insight work, will broaden the offering to all trade customers with flooring needs, and supports the Company's strategic aim of broadening its customer base. By the end of 2021, it is anticipated that there will be 10 sites in the new 'blueprint'. With an accelerating roll-out of the proposition from 2022, a national network of up to 90 sites is currently envisaged by 2025.
Following extensive planning, two new key projects are now being launched this year. These alongside the other ongoing projects will help more quickly realise revenue benefits and cost base improvements, and increase the mitigation against potential reduction in demand due to the ongoing impact and consequences of COVID-19.
The first project centres around Buying, and incorporates a more strategic group-level approach to product purchasing and ranging, and an increased partnership approach with suppliers. This will increase the benefit to both the Company and the supplier through improving supply chain efficiencies, including in the areas of production scheduling, buying and deliveries. The Company has already commenced joint business plans with suppliers and product-specific tender processes, which will be rolled-out. Alongside other benefits, these will reduce the number of SKUs and create warehouse capacity.
The second key project is Customer Focus, and follows from the outputs of the customer insight and segmentation work undertaken in 2020, with the resulting work-streams covering:
· Sales Force Effectiveness;
· Tailored Service Propositions to specific customer groups which will broaden the customer base; and
· Key Account Management of larger retailers and other customers such as housebuilders and contractors.
Collectively they will improve the customer service proposition, maximise revenue growth opportunities, and enable the Company's customer-facing activities to become more efficient and effective.
After all restructuring and delivery costs, and applying prudent revenue growth expectations given the COVID-19 backdrop, the OIP as a whole is anticipated to generate a net benefit in excess of £4 million in 2021, rising to over £8 million in 2022, with the ambition of achieving a 7.5% UK operating margin run-rate during 2023 (unless exceptional or unforeseen circumstances prevail).
The Company has also commenced consultation on restructuring proposals this month to more effectively align overall headcount with the trading volumes experienced outside of the busier trading months when less resource is required to support operations.
Dividend
As detailed in the Chairman's Statement, given the recovered performance in the second-half of the year, the preservation of balance sheet strength supported by the mitigating actions, and confidence in future prospects underpinned by the OIP, the Company will be paying a nominal ordinary dividend of 2 pence per share in May 2021. Details of the payment, alongside the payment timetable for future dividends, are given in the Financial Review.
Brexit and Purchasing
Pleasingly, and as a result of its preparatory work, the Company has continued to experience very limited disruption to product flow to-date from the EU following Brexit, and has continued to purchase product in-line with customer demand. Currently product purchases from suppliers in the EU account for approximately 57% of total purchases, UK 33%, and the rest of the world 10% (based on actual purchase prices from suppliers), with the Company having accounts with over 180 suppliers.
Environmental, Social and Governance ('ESG')
The Company has and is continuing to effectively address many key ESG issues, however, the publication of the ESG Strategy Report in May 2021 will allow an improved focus on, and measurement of, the Company's progress in addressing its significant ESG-related risks and opportunities. A Materiality Assessment, prepared in conjunction with a specialist ESG consultancy and following engagement with representatives from internal and external stakeholder groups, will be published in the forthcoming 2020 Annual Report and Accounts. Following on from the ESG Report's publication, the Company will provide an update on progress on a bi-annual basis.
Current Trading
January and February are always typically the Company's quietest trading months. Given lockdowns and non-essential retail businesses being closed across the majority of the Company's operations during January and February 2021, trading was soft in those two months. The Company is looking forward to the busier months with the benefit of lockdown restrictions easing, retail businesses re-opening, and the OIP improving performance and revenue growth opportunities.
Principal Risks and Uncertainties
During the year the Board carried out a robust assessment of the emerging and principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The events of the year, including COVID-19 which significantly impacted the Company's operations, marketplace and people, has resulted in one new Principal Risk and updates to the Board's assessment of the level of risk for certain of the Principal Risks detailed within the 2019 Annual Report and Accounts. No Principal Risk from the 2019 Annual Reports and Accounts has been deleted.
The new Principal Risk, and those Principal Risks where the assessment of the level of risk has been updated, are as follows:
· Market demand - increased risk, due to the global economic downturn and recessionary environments caused by COVID-19, and which is likely to have an impact on market demand for an unknown duration
· IT resilience and cyber security - increased risk, due to COVID-19 highlighting some resourcing capacity restraints and lack of flexibility of the existing IT infrastructure
· Health and safety - increased risk, due to COVID-19 introducing a considerable new risk to keeping people healthy and safe in the workplace
· Supply chain (incorporating Brexit) - decreased risk, because while Brexit has increased administration, tariffs and the likelihood of extended supply chain timelines which may affect the Company's ability to service customers in a timely manner, as reported above the Company has experienced very limited disruption to product flow to-date from the EU following Brexit
· Change and decision making - new risk, due to the impact of COVID-19 requiring the Company to make a number of material decisions in a limited timeframe, and during the year certain projects under the OIP were accelerated increasing the level of change and decision making in the organisation
Accordingly, the 2020 Annual Report and Accounts will report Principal Risks, including the mitigating actions taken against them, under the following headings (not given in order of significance): Market demand; Competitor risk; IT resilience and cyber security; People; Health and safety; Supply chain (incorporating Brexit); Legislation and regulation; Environmental; and Change and decision making.
Statement of Directors' Responsibilities in respect of the financial statements
The 2020 Annual Report and Accounts which will be issued in March 2021, contains a responsibility statement in compliance with DTR 4.1.12 of the Listing Rules which sets out that as at the date of approval of this final results announcement and 2020 Annual Report and Accounts on 9 March 2021, the Board of Directors confirm to the best of their knowledge:
· The Group and unconsolidated Company financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Company, and the undertakings included in the consolidation taken as a whole; and
· the performance review contained in the final results announcement and Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Group and the undertakings including the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.
Steve Wilson
Chief Executive
9 March 2021
Financial Review
Revenue
As detailed in the Chief Executive's Review, total revenue was down 15.3% at £609.2 million, with the UK down 17.3% and Continental Europe down 4.1% at £504.7 million and £104.5 million respectively, and the UK accounting for 82.8% of total revenue in the year (2019: 84.8%).
Within the UK revenue performance, the residential sector declined by 10.8% and the commercial sector by 29.5%. However, this overall year performance masks the fact that the second-half represented a material improvement on the first-half in both sectors, with second-half UK residential revenue up 9.3% and commercial revenue down 20.9% compared with the second-half of 2019. In the year, the residential sector accounted for an increased 70.2% of UK revenue (2019: 65.1%).
Continental Europe performed markedly better than the UK owing to less overall COVID-19 related restrictions. While commercial sector revenue declined by 9.4%, residential sector revenue was flat on the previous year and accounted for 58.4% of total Continental European revenue (2019: 56.0%).
As a consequence of the above performances, the residential sector accounted for a much increased 68.2% of total revenue in the year (2019: 63.7%).
£M
%
£M
%
Revenue for the year ended 31 December 2019
UK
610.2
84.8
Continental Europe
109.0
15.2
719.2
100.0
Incremental items during the 12-month period to 31 December 2020
UK:
Like-for-like³
(115.5)
(18.9)
Changes in working days
4.0
0.6
Acquisitions
6.0
1.0
(105.5)
(17.3)
Continental Europe:
Like-for-like³
(7.5)
(6.9)
Changes in working days
0.5
0.5
Translation effect
2.5
2.3
(4.5)
(4.1)
Total movement
(110.0)
(15.3)
Revenue for the year ended 31 December 2020
UK
504.7
82.8
Continental Europe
104.5
17.2
609.2
100.0
³ Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2020 and 2019 periods, and is adjusted for any variances in working days.
Gross Margin
Gross margin reduced by 90 basis points in the year from 31.9% to 31.0%. Purchasing was deliberately limited following the impact of COVID-19, and the reduction in purchases in the year led to lower rebates being achieved through the tiered rebate agreements, which was not wholly offset by the benefit of the shift in product mix towards the higher margin residential sector.
Expenses
Underlying¹ distribution costs and administrative expenses totalled £171.0 million in the year (2019: £187.2 million), a reduction of £16.2 million on the prior year, which was supported by the Company's swift actions to temporarily close operations in the second-quarter and manage variable costs to materially lower levels. The reduction is net of grants totalling £11.0 million claimed under governmental job retention schemes but this is partially offset by a £5.5 million increase in the provision for bad and doubtful debts.
The reduction in expenses could have been greater but for the Company paying its furloughed UK workforce an enhanced form of the Government's Job Retention Scheme ('Scheme') during the year. A total of 93% of the Company's UK workforce were initially furloughed following the March 2020 closures, and employees were subsequently brought back into the business as soon as demand and re-opening in a COVID-19 safe manner would allow. By mid-July 2020, less than 10% of the workforce were still furloughed, with the last few employees leaving the Scheme in October 2020.
Underlying¹ distribution costs and administrative expenses expressed as a proportion of revenue were 28.1% (2019: 26.0%). Whilst variable costs were reduced significantly in the year, a high proportion of the cost base is fixed, particularly within administrative expenses. The relative proportions of underlying¹ distribution costs and administrative expenses as a percentage of total underlying¹ expenses were 70.9% and 29.1%, respectively (2019: 72.5% and 27.5%).
As noted above, the Company provided for bad and doubtful debts at a higher rate as a result of the perceived higher risk given the economic environment, particularly with respect to the oldest debts being held. The resulting charge equates to 1.1% of total revenue in the year (2019: 0.2%), although cash collections exceeded expectations following the impact of COVID-19.
Costs were incurred in the year in support of the OIP, mostly in relation to the Network Consolidation and Transport Integration projects which together are expected to generate net cost savings in excess of £4 million per annum from 2022.
Non-underlying items
As indicated within the interim results announcement, there was a significant level of non-underlying items in the year. Non-underlying items before tax totalled £33.0 million during the year (2019: £4.3 million) and primarily relate to goodwill impairment charges, non-cash in nature, and which occurred as a direct consequence of the impact of COVID-19 on both current and forecast trading. The below table details the individual non-underlying items:
¹ Underlying is before non-underlying items, which includes amortisation of acquired intangible assets, impairment of goodwill, acquisition related fees, movements in deferred and contingent consideration, finance costs on deferred and contingent consideration, business restructuring costs, and non-recurring pension costs in relation to guaranteed minimum pension equalisation. Total distribution costs and administrative expenses for the year ended 31 December 2020 were £203.6 million (2019: £191.1 million).
2020
£M2019
£MNon-underlying items
Goodwill impairment
28.0
2.1
Amortisation of intangibles
1.6
1.4
Movements and finance costs for deferred and contingent consideration
-
0.1
Non-underlying non-cash items
29.6
3.6
Acquisitions related fees
0.7
0.7
Business restructuring costs
2.4
-
GMP equalisation
0.3
-
Non-underlying cash items
3.4
0.7
Non-underlying items before tax
33.0
4.3
£20.9 million of the total £28.0 million goodwill impairment is in relation to Domus, and represents a full write-down of the remaining residual goodwill following its acquisition in 2017. Domus' reliance on larger scale projects with long-lead times, predominately in the London area, causes its financial performance to be highly sensitive to prolonged recessionary market backdrops which result in delays and cancellations to projects, and means the recovery cycle can take longer. As previously announced, a restructuring was undertaken at Domus in 2020 to more align its cost base to its revenue profile.
£1.9 million of the total £2.4 million business restructuring costs relate directly to the Network Consolidation activity under the OIP, with £0.2 million relating to the Transport Integration project also under the OIP.
Operating Profit and Profit Before Tax
The Company has reported an underlying¹ operating profit of £17.9 million (2019: £42.2 million) and, in-line with the guidance given within the January 2021 Pre-close Trading Update announcement, the Company has reported an underlying¹ profit before tax of £15.9 million (2019: £39.5 million). After including the non-underlying items above, this gives a statutory operating loss of £15.0 million (2019: £38.3 million profit) and a statutory loss before tax of £17.1 million (2019: £35.2 million profit).
Underlying
£MNon-underlying
£MTotal
£MOperating profit 2019
42.2
(3.9)
38.3
Gross margin movement in 2020:
(40.5)
-
(40.5)
Expense changes
Volume
4.1
-
4.1
Furlough grants
11.0
-
11.0
Bad debt provision
(5.5)
-
(5.5)
People costs (including bonuses)
5.5
-
5.5
Effect of acquisitions
(1.4)
-
(1.4)
Other
2.5
(29.0)
(26.5)
Total decrease
(24.3)
(29.0)
(53.3)
Operating profit/(loss) 2020
17.9
(32.9)
(15.0)
Tax
The underlying¹ effective tax rate for 2020 was 24.5% (2019: 17.4%) which is higher than the headline rate of corporation tax in the UK of 19.0%. The difference is largely due to the impact of the change in UK rate applied to the net deferred tax liability from 17% in 2019 to 19% in the current year, following the reversal of the previously enacted rate reduction by the UK Government.
The Company is committed to being fully compliant with the relevant tax laws and compliance obligations regarding the filing of tax returns, payment and collection of tax. The Company maintains an open relationship with HM Revenue & Customs and currently operates within a level of tax compliance risk that is rated as 'low'.
Dividend
The declared nominal ordinary dividend of 2 pence per share will be payable on 31 May 2021 to shareholders on the register as at 7 May 2021, and equates to a cash outflow of £1.7 million.
As referenced in the January 2021 Pre-close Trading Update, the Company has also taken the opportunity to accelerate its dividend payment timetable so that final and interim dividends are paid to shareholders in a shorter timescale, namely:
Ordinary Dividend
Declared / Proposed
Approval
Payable
Final (in respect of 12 months ended 31 December)
March
AGM by shareholders in May
May
Interim (in respect of six months ended 30 June)
September
Board in August
November
Capital Expenditure and Investments
Total capital expenditure in the year was £15.4 million (2019: £18.3 million), with the main component being spend of £9.7 million on the new Ipswich regional distribution centre (2019: £15.5 million), which was completed just under budget at a total of £25.7 million. Depreciation on the Ipswich centre commenced in August 2020.
Cash Flows and Banking Facilities
During the year, the Company was highly cash generative despite the initial impact of COVID-19, with an increase in cash of £27.0 million (2019: £10.2 million decrease) which in part reflects the actions taken to preserve Balance Sheet strength.
2020
£M2019
£MCash flows from operating activities
EBITDA
37.0
62.5
Change in inventories
15.3
(0.6)
Change in receivables
23.2
(4.7)
Change in payables
(4.8)
(2.0)
Share-based payments and profit on sale of PPE
-
0.7
Cash generated from the operations
70.7
55.9
Interest and Tax
(8.2)
(10.8)
Capital investment
(15.0)
(15.8)
Lease payments
(15.7)
(14.9)
Dividends
(6.3)
(20.9)
Other
1.5
(3.7)
Net cash flows
27.0
(10.2)
Working capital movements generated a cash inflow of £33.7 million (2019: £7.3 million outflow), largely due to deferred VAT and a reduction in product purchasing. In-line with the focus on cash management, the Company limited product purchasing to specific projects or orders from March 2020 through to June 2020, leading to lower stock levels, and prioritised utilising its existing inventory to satisfy demand. This led to a reduction in the inventory position from £132.4 million as at 31 December 2019 to £119.7 million as at 30 June 2020, with the benefits of a reduction in duplications and slow-moving stock across the network, and increased warehousing capacity for fast-moving products. From July 2020 the Company elevated its purchasing levels in-line with demand and ended the year with inventory of £118.5 million. There was an overall cash inflow for 2020 from a decrease in inventories of £15.3 million, inclusive of the one acquisition in the year and exchange rate movements.
Cash collections exceeded expectations, resulting in a £23.2 million cash inflow from trade and other receivables for 2020, partially offset by a £4.8 million cash outflow from a reduction in trade and other payables.
As shown in the table above, the other main drivers of cash flow movements during the year were interest and tax, capital investment and lease payments. The cash outflow in respect of dividends relates to the 2019 interim dividend which was paid in January 2020. The proposed 2019 final dividend of 17.45 pence was suspended following the impact of COVID-19, and would have totalled £14.6 million payable in July 2020.
As at 31 December 2020, the Company had a net funds position (excluding lease liabilities) of £51.6 million (2019: £27.0 million), which included the benefit of £12.0 million of deferred VAT, payable by 31 March 2021.
At
1 January 2020
£M
Non-cash
Items
£M
Cash flows
£M
Foreign
exchange
movements
£M
At
31 December
2020
£M
Cash at bank and in hand
33.4
-
27.0
0.4
60.8
Debt due within one year
(0.2)
-
(1.8)
-
(2.0)
Debt due after one year
(6.2)
-
(0.6)
(0.4)
(7.2)
Net funds excluding lease liabilities
27.0
-
24.6
-
51.6
Lease liabilities
(44.6)
(14.3)
15.7
(0.1)
(43.3)
Net (debt)/funds
(17.6)
(14.3)
40.3
(0.1)
8.3
Reflecting the strong cash flow from operations upon the return to more normalised operations in the second-half, average net debt² for the year was £8.6 million (2019: £3.3 million), a material reduction on the first-half average net debt² of £35.3 million.
As at 31 December 2020, the Company had total banking facilities available of £110.3 million, of which £102.8 million was undrawn.
During the year, the Company agreed revised covenant tests with its two principal UK banks, Barclays Bank PLC and HSBC Bank Plc, on the existing facilities which run to 30 April 2023, for both the 30 June 2020 and 31 December 2020 period-ends. The revised covenant tests for 31 December 2020 were positive annual underlying1 EBITDA and maximum net debt of £45.0 million, both of which were complied with. The original leverage and interest cover covenants, agreed in August 2019, were reverted to from 1 January 2021.
Viability and Going Concern
Updated principal risks and uncertainties, to those published in the 2019 Annual Report and Accounts, will be contained in the forthcoming 2020 Annual Report and Accounts. As detailed in the Chief Executive's Review, the events of the year resulted in one new Principal Risk and updates to the Board's assessment of the level of risk for certain of the Principal Risks detailed within the 2019 Annual Report and Accounts.
The Board reviewed the Company's resilience to the principal risks and uncertainties by considering stress testing forecasts through adverse scenarios including (A) a reduction in market demand whilst there is ongoing inflationary fixed cost pressure; and (B) an economic crisis similar to that experienced in 2008, both modelled over a three-year period from 1 January 2021. The testing indicated that the Company would be able to operate within its current facilities and meet its financial covenants in both scenarios.
A further, less likely, more severe scenario was also considered, where the Company experiences a reduction in revenue, behind plan by 16% in 2021. In this scenario, the Company would be able to operate within its current facilities and meet its financial covenants. However, should the reduction in revenue be greater than this, the Board would need to take significant mitigating actions to remain within its banking covenants.
Mitigating actions, which are within the management's control, include a reduction in the cost base to better align it with market demand and revenue performance. These actions are not included in any of the scenarios modelled. As at 31 December 2020, the Company had a net funds position excluding lease liabilities of £51.6 million and had total banking facilities available of £110.3 million, of which £102.8 million was undrawn.
The Board was, therefore, comfortable that the Company would maintain resilience in the event such scenarios occurred and concluded that there was a reasonable expectation that the Company would continue to operate and meet its liabilities over a three-year period.
Based on the results from these scenarios, and having considered the available mitigating actions, the Board can have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of this assessment. In particular, the Board believes there are reasonable grounds for stating that the Company has adequate resources to continue in operational existence for a period no shorter than twelve months from the date of this Financial Review, and it is appropriate to adopt the going concern basis in preparing the Company's Financial Statements.
Chris Payne
Chief Financial Officer
9 March 2021
Consolidated Income Statement
For the year ended 31 December 2020
Note
Underlying
2020
£M
Non-underlying
(Note 2)
2020
£M
Total
2020
£M
Underlying
2019
£M
Non-underlying
(Note 2)
2019
£M
Total
2019
£M
Revenue
1
609.2
-
609.2
719.2
-
719.2
Cost of sales
(420.3)
-
(420.3)
(489.8)
-
(489.8)
Gross profit
188.9
-
188.9
229.4
-
229.4
Distribution costs
(121.3)
-
(121.3)
(135.7)
-
(135.7)
Administrative expenses
(49.7)
(32.9)
(82.6)
(51.5)
(3.9)
(55.4)
Operating profit/(loss)
1
17.9
(32.9)
(15.0)
42.2
(3.9)
38.3
Finance income
0.8
-
0.8
0.8
-
0.8
Finance expenses
(2.8)
(0.1)
(2.9)
(3.5)
(0.4)
(3.9)
Net finance costs
(2.0)
(0.1)
(2.1)
(2.7)
(0.4)
(3.1)
Profit/(loss) before tax
15.9
(33.0)
(17.1)
39.5
(4.3)
35.2
Taxation
4
(3.9)
0.7
(3.2)
(6.9)
0.3
(6.6)
Profit/(loss) for the year attributable to the equity shareholders
12.0
(32.3)
(20.3)
32.6
(4.0)
28.6
Earnings/(loss) per share
Basic
5
14.3p
(24.2)p
38.8p
34.0p
Diluted*
5
14.2p
(24.2)p
38.6p
33.8p
Ordinary dividend per share
Interim dividend for the financial year
6
-
7.55p
Dividend declared
6
2.00p
-
All Group operations during the financial years were continuing operations.
*For the year ended 31 December 2020, diluted earnings/(loss) per share are reported the same as basic earnings/(loss) per share, as a result of the earnings being negative so the impact of them is anti-dilutive.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2020
2020
£M
2019
£M
(Loss)/profit for the year attributable to the equity shareholders
(20.3)
28.6
Other comprehensive income/(expense)
Items that will never be reclassified to profit or loss
Remeasurement of defined benefit plans
(0.3)
0.9
Related tax
0.1
(0.2)
(0.2)
0.7
Items that are or may be reclassified to profit or loss
Foreign exchange translation differences arising on translation of overseas operations
0.9
(0.5)
0.9
(0.5)
Other comprehensive income for the year
0.7
0.2
Total comprehensive (expense)/income attributable to the equity shareholders for the year
(19.6)
28.8
Statement of Financial Position
At 31 December 2020
Note
2020
£M
2019
£M
Assets
Non-current assets
Property, plant and equipment
122.9
114.6
Right of use assets
42.1
43.9
Intangible assets
21.1
48.5
Deferred tax assets
-
0.7
186.1
207.7
Current assets
Inventories
118.5
132.4
Trade and other receivables
101.6
123.7
Cash and cash equivalents
60.8
33.4
280.9
289.5
Non-current assets classified as held for sale
0.4
-
281.3
289.5
Total assets
1
467.4
497.2
Liabilities
Current liabilities
Other interest-bearing loans and borrowings
(2.0)
(0.2)
Lease liabilities
(12.5)
(13.9)
Trade and other payables
(178.4)
(181.9)
Income tax payable
(0.2)
(5.0)
(193.1)
(201.0)
Non-current liabilities
Other interest-bearing loans and borrowings
(7.2)
(6.2)
Lease liabilities
(30.8)
(30.7)
Provisions
(2.1)
(2.3)
Deferred tax liabilities
(8.7)
(7.6)
Employee benefits
(5.5)
(4.3)
(54.3)
(51.1)
Total liabilities
1
(247.4)
(252.1)
Net assets
220.0
245.1
Equity attributable to equity holders of the parent
Share capital
4.3
4.3
Share premium
53.5
53.5
Other reserves
3.4
1.3
Retained earnings
158.8
186.0
Total equity
220.0
245.1
Statement of Changes in Equity
For the year ended 31 December 2020
Share
capital
£M
Share
premium
£M
Capital
redemption
reserve
£M
Special reserve
£M
Translation
reserve
£M
Treasury
reserve
£M
Retained
earnings
£M
Total
equity
£M
Balance at 1 January 2019
4.3
53.5
0.1
-
7.4
(7.4)
177.1
235.0
Profit for the year attributable to the equity shareholders
-
-
-
-
-
-
28.6
28.6
Other comprehensive income
-
-
-
-
(0.5)
-
0.7
0.2
Total comprehensive (expense)/income for the year
-
-
-
-
(0.5)
-
29.3
28.8
Transactions with equity shareholders, recorded directly in equity
Share-based payments
-
-
-
-
-
-
0.8
0.8
Share options exercised by employees
-
-
-
-
-
1.3
(0.5)
0.8
Ordinary shares issued
-
-
-
0.5
-
-
-
0.5
Effect of movement on foreign exchange on current taxation
-
-
-
-
(0.1)
-
-
(0.1)
Deferred tax on share options
-
-
-
-
-
-
0.2
0.2
Dividends to equity holders
-
-
-
-
-
-
(20.9)
(20.9)
Total contributions by and distributions to equity shareholders
-
-
-
0.5
(0.1)
1.3
(20.4)
(18.7)
Balance at 31 December 2019
4.3
53.5
0.1
0.5
6.8
(6.1)
186.0
245.1
Balance at 1 January 2020
4.3
53.5
0.1
0.5
6.8
(6.1)
186.0
245.1
(Loss)/profit for the year attributable to the equity shareholders
-
-
-
-
-
-
(20.3)
(20.3)
Other comprehensive income/(expense)
-
-
-
-
0.9
-
(0.2)
0.7
Total comprehensive income/(expense) for the year
-
-
-
-
0.9
-
(20.5)
(19.6)
Transactions with equity shareholders, recorded directly in equity
Share-based payments
-
-
-
-
-
-
(0.1)
(0.1)
Share options exercised by employees
-
-
-
-
-
0.2
(0.1)
0.1
Ordinary shares issued
-
-
-
1.0
-
-
-
1.0
Deferred tax on share options
-
-
-
-
-
-
(0.2)
(0.2)
Dividends to equity holders
-
-
-
-
-
-
(6.3)
(6.3)
Total contributions by and distributions to equity shareholders
-
-
-
1.0
-
0.2
(6.7)
(5.5)
Balance at 31 December 2020
4.3
53.5
0.1
1.5
7.7
(5.9)
158.8
220.0
Cash Flow Statement
For the year ended 31 December 2020
Restated**
2020
£M
2019
£M
Cash flows from operating activities
(Loss)/profit before tax for the year
(17.1)
35.2
Adjustments for:
Depreciation of property, plant and equipment, amortisation and impairment
35.8
8.9
Depreciation of right-of-use asset
16.2
15.3
Finance income
(0.8)
(0.8)
Finance expense
2.9
3.9
Loss/(profit) on sale of property, plant and equipment
0.1
(0.1)
Share-based payments
(0.1)
0.8
Operating cash flows before changes in working capital and other payables
37.0
63.2
Change in inventories
15.3
(0.6)
Change in trade and other receivables
23.2
(4.7)
Change in trade and other payables
(4.8)
(2.0)
Cash generated from the operations*
70.7
55.9
Interest paid
(2.7)
(3.4)
Interest received
0.8
0.9
Tax paid
(6.3)
(8.3)
Net cash flow from operating activities
62.5
45.1
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
0.1
0.1
Acquisition of subsidiaries, net of cash acquired
(1.0)
(4.4)
Repayment of acquired borrowings on acquisition
(0.2)
-
Acquisition of property, plant and equipment
(15.0)
(15.8)
Net cash flow from investing activities
(16.1)
(20.1)
Cash flows from financing activities
Proceeds from the issue of treasury shares
0.2
0.8
Drawdown of borrowings
50.9
45.0
Repayment of borrowings
(48.5)
(45.2)
Principal elements of lease payments
(15.7)
(14.9)
Dividends paid
(6.3)
(20.9)
Net cash flow from financing activities
(19.4)
(35.2)
Net increase/(decrease) in cash and cash equivalents
27.0
(10.2)
Cash and cash equivalents at 1 January
33.4
43.8
Effect of exchange rate fluctuations on cash held
0.4
(0.2)
Cash and cash equivalents at 31 December
60.8
33.4
*Cash generated from the Group operations for the year ended 31 December 2020, includes an amount of £11.0 million cash received under governmental job retention schemes in the UK and France.
** Cash flow restated to present interest paid and interest received both within net cashflow from operating activities.
Notes to the Financial Statements
1 Segment reporting
As at 31 December 2020, the Group had 63 operating segments in the UK and four operating segments in Continental Europe. Each segment represents an individual trading operation, and each operation is wholly aligned to the sales, marketing, supply and distribution of floorcovering products. The operating results of each operation are regularly reviewed by the Chief Operating Decision Maker, which is deemed to be the Chief Executive. Discrete financial information is available for each segment and used by the Chief Executive to assess performance and decide on resource allocation.
The operating segments have been aggregated to the extent that they have similar economic characteristics. The key economic indicators considered by management in assessing whether operating segments have similar economic characteristics are the products supplied, the type and class of customer, method of sale and distribution and the regulatory environment in which they operate.
As each operating segment is a trading operation wholly aligned to the sales, marketing, supply and distribution of floorcovering products, management considers all segments have similar economic characteristics except for the regulatory environment in which they operate, which is determined by the country in which the operating segment resides.
The Group's internal management structure and financial reporting systems differentiate the operating segments on the basis of the differing economic characteristics in the UK and Continental Europe and accordingly present these as two separate reportable segments. This distinction is embedded in the construction of operating reports reviewed by the Chief Executive, the Board and the executive management team and forms the basis for the presentation of operating segment information given below.
UK
Continental Europe
Total
2020
£M
2019
£M
2020
£M
2019
£M
2020
£M
2019
£M
Revenue
External revenues
504.7
610.2
104.5
109.0
609.2
719.2
Reportable segment underlying operating profit
15.5
41.3
2.1
3.5
17.6
44.8
Reportable segment assets
296.5
329.1
47.8
47.2
344.3
376.3
Reportable segment liabilities
(200.9)
(205.5)
(31.3)
(29.1)
(232.2)
(234.6)
During the year there were no inter-segment revenues for the reportable segments (2019: £nil).
Reconciliations of reportable segment profit, assets and liabilities and other material items:
2020
£M
2019
£M
Profit for the year
Total underlying operating profit for reportable segments
17.6
44.8
Non-underlying items
(32.9)
(3.9)
Unallocated income/(expense)
0.3
(2.6)
Operating (loss)/profit
(15.0)
38.3
Finance income
0.8
0.8
Finance expense
(2.9)
(3.9)
(Loss)/profit before taxation
(17.1)
35.2
Taxation
(3.2)
(6.6)
(Loss)profit for the year
(20.3)
28.6
2020
£M
2019
£M
Assets
Total assets for reportable segments
344.3
376.3
Unallocated assets:
Properties, plant and equipment
105.4
102.1
Right of use assets
0.7
0.6
Deferred tax assets
-
0.7
Non-current assets classified as held for sale
0.4
-
Cash and cash equivalents
16.6
17.5
Total assets
467.4
497.2
Liabilities
Total liabilities for reportable segments
(232.2)
(234.6)
Unallocated liabilities:
Lease liabilities
(0.8)
(0.6)
Employee benefits
(5.5)
(4.3)
Income tax payable
(0.2)
(5.0)
Deferred tax liabilities
(8.7)
(7.6)
Total liabilities
(247.4)
(252.1)
UK
£M
Continental
Europe
£M
Reportable
segment total
£M
Unallocated
£M
Consolidated
total
£M
Other material items 2020
Capital expenditure
9.1
0.7
9.8
5.6
15.4
Impairment of goodwill
23.4
4.6
28.0
-
28.0
Depreciation
2.8
0.7
3.5
2.7
6.2
Depreciation of right of use assets
14.0
2.1
16.1
0.1
16.2
Non-underlying items (excluding finance expenses and impairments)
4.8
0.1
4.9
-
4.9
Other material items 2019
Capital expenditure
2.0
0.8
2.8
15.5
18.3
Impairment of goodwill*
2.1
-
2.1
-
2.1
Depreciation
2.2
0.7
2.9
2.4
5.3
Depreciation of right of use assets
13.1
2.0
15.1
0.1
15.2
Non-underlying items (excluding finance expenses and impairments)
1.7
0.1
1.8
-
1.8
*Prior year figures updated to reflect correct allocation between segments
In the UK the Group's freehold properties are held within Headlam Group plc and a rent is charged to the operating segments for the period of use. Therefore, the operating reports reviewed by the Chief Executive show all the UK properties as unallocated and the operating segments report a segment result that includes a property rent. This is reflected in the above disclosure.
Each segment is a continuing operation.
The Chief Executive, the Board and the senior executive management team have access to information that provides details on revenue by principal product group for the two reportable segments, as set out in the following table:
Revenue by principal product group and geographic origin is summarised below:
UK
Continental Europe
Total
2020
£M
2019
£M
2020
£M
2019
£M
2020
£M
2019
£M
Revenue
Residential
354.3
397.0
61.0
61.0
415.3
458.0
Commercial
150.4
213.2
43.5
48.0
193.9
261.2
504.7
610.2
104.5
109.0
609.2
719.2
2 Non-underlying items
In order to illustrate the underlying trading performance of the Group, presentation has been made of performance measures excluding those items which it is considered would distort the comparability of the Group's results. These non-underlying items are defined as those items that, by virtue of their nature, size or expected frequency, warrant separate additional disclosure in the financial statements in order to fully understand the underlying performance of the Group.
Non-underlying items of £33.0 million (2019: £4.3 million) relate to the following:
2020
£M
2019
£M
Impairment of goodwill (note 3)
28.0
2.1
Amortisation of acquired intangibles
1.6
1.4
Acquisitions related fees
0.7
0.7
Movements in deferred and contingent consideration
(0.1)
(0.3)
Finance costs on deferred and contingent consideration
0.1
0.4
Business restructuring
2.4
-
GMP Equalisation
0.3
-
33.0
4.3
The related tax on these costs is £0.7 million (2019: £0.3 million).
3 Impairment tests for cash-generating units containing goodwill ('CGU')
Goodwill is attributed to the businesses identified below for the purpose of testing impairment. These businesses are the lowest level at which goodwill is monitored and represent operating segments.
The aggregate carrying amounts of goodwill allocated to each CGU are as follows:
Reported
segment
2020
£M
2019
£M
Joseph, Hamilton & Seaton
UK
4.4
4.4
Crucial Trading
UK
1.4
1.4
Belcolor AG
Continental Europe
-
3.3
Domus Group of Companies Limited
UK
-
20.9
Mitchell Carpets Limited
UK
-
0.3
McMillan Flooring
UK
0.1
0.1
CECO (Flooring) Limited
UK
1.2
2.2
Dersimo BV
Continental Europe
-
1.3
Ashmount Flooring Supplies Limited
UK
0.4
0.4
Rackhams Limited
UK
-
0.4
Telenzo
UK
0.3
0.3
Other
UK
1.0
1.4
8.8
36.4
Impairment
Each year, or whenever events or a change in the economic environment or performance indicates a risk of impairment, the Group reviews the value of goodwill balances allocated to its cash-generating units.
An impairment test is a comparison of the carrying value of the assets of a business or CGU to their recoverable amount. The recoverable amount represents the higher of the CGU's fair value less the cost to sell and value in use. Where the recoverable amount is less than the carrying value, an impairment results.
During the year ended 31 December 2020, all goodwill was tested for impairment, which resulted in an impairment charge on goodwill attributable to the Domus Group of Companies Limited CGU ("Domus") of £20.9 million (2019: £2.1 million), Belcolor AG £3.3 million, Dersimo BV £1.3 million, CECO (Flooring) Limited £1.0 million, Rackhams Limited £0.4 million, Mitchell Carpets Limited £0.3 million, Supertex Limited of £0.4 million and other £0.4 million.
£20.9 million of the total £28.0 million goodwill impairment is in relation to Domus, and represents a full write-down of the remaining residual goodwill following its acquisition in 2017. Domus' reliance on larger scale projects with long-lead times, predominately in the London area, causes its financial performance to be highly sensitive to prolonged recessionary market backdrops which result in delays and cancellations to projects, and means the recovery cycle can take longer.
Value in use was determined by discounting the future cash flows generated from the continuing use of the CGU on a basis consistent with 2019, and applying the following key assumptions.
Key assumptions
Cash flows were projected based on actual operating results, the approved 2021 business plan and management's assessment of planned performance in the period to 2025. For the purpose of impairment testing the cash flows were assumed to grow into perpetuity at a rate of 2.0% beyond 2025.
The main assumptions within the operating cash flows used for 2021 include the achievement of future sales volumes and prices for all key product lines, control of purchase prices, achievement of budgeted operating costs and no significant adverse foreign exchange rate movements. These assumptions have been reviewed in light of the current economic environment.
The Directors have estimated the discount rate by reference to an industry average weighted average cost of capital. This has been adjusted to include an appropriate risk factor to reflect current economic circumstances and the risk profile of the CGUs. A pre-tax weighted average cost of capital of 11.7% (2019: 10.5%) has been used for impairment testing for the UK, Netherlands 12.0% (2019: 11.5%) and Switzerland 10.3% (2019: 11.5%) to reflect the differing risk profiles of these segments.
The CGUs in the UK, excluding Domus have similar characteristics and risk profiles, and therefore a single discount rate has been applied to each UK CGU. The CGUs in Continental Europe operate under a different regulatory environment and this is therefore reflected in the risk factor used to determine the discount rates in the UK and Continental Europe. Domus has different characteristics to the rest of the CGUs in the UK and therefore a pre-tax discount rate of 12.6% (2019: 11.4%) has been deemed more appropriate.
Sensitivity analysis
The Group has applied sensitivities to assess whether any reasonable possible changes in these key assumptions could cause a further impairment that would be material to these Consolidated Financial Statements. The sensitivity analysis did not identify any risk of material misstatement with the exception of the four CGUs below for which there was limited headroom.
The Directors performed sensitivity analysis on the estimated recoverable amounts focusing on a reasonably possible change in the key assumptions within the first five years of:
i) sales growth in the cash flow forecasts;
ii) gross margin; and
iii) the pre-tax discount rate used to convert the cash flow forecasts to present values.
The table below shows the sensitivities for certain CGU's and the impact of changes in key assumptions:
Reduction in headroom
Original headroom*
Sales growth decrease 1%
Gross margin decrease 1%
Discount rate increase 1%
£M
£M
£M
£M
Domus Group of Companies Limited
2.0
2.7
1.9
1.0
Belcolor AG
-
3.8
3.4
0.7
CECO (Flooring) Limited
-
0.4
0.4
0.2
Dersimo BV
(0.2)
(0.9)
(1.1)
(0.2)
*Following the impairments already incurred to date.
4 Taxation
Recognised in the income statement
2020
£M
2019
£M
Current tax expense:
Current year
2.7
7.9
Adjustments for prior years
(0.9)
(0.7)
1.8
7.2
Deferred tax expense:
Origination and reversal of temporary differences
0.1
(0.7)
Effect of change in UK tax rates
0.9
-
Adjustments for prior years
0.4
0.1
1.4
(0.6)
Total tax in income statement
3.2
6.6
2020
£M
2019
£M
Tax relating to items credited/(charged) to equity
Current tax on:
Income and expenses recognised directly in equity
-
(0.1)
Translation reserve
-
0.1
-
-
Deferred tax on:
Share options
0.2
(0.3)
Income and expenses recognised directly in equity
-
-
Deferred tax on other comprehensive income:
Defined benefit plans
(0.1)
0.2
0.1
-
Total tax reported directly in reserves
0.1
(0.1)
Factors that may affect future current and total tax charges
The UK headline corporation tax rate for the year was 19.0% (2019: 19.0%). The 2016 Finance Bill enacted provisions to reduce the main rate of UK corporation tax to 17.0% from 1 April 2020. However, in the March 2020 Budget it was announced that the reduction in the UK rate to 17.0% would not occur and the Corporation Tax Rate would be held at 19.0%. The closing deferred tax balance in respect of UK entities has therefore been calculated at 19.0% (2019: 17.0%).
In addition, an increase in the Dutch corporation tax rate to 25.0% (2019: 20.5%) was enacted in December 2020 which has also been taken into account in the calculation of the related deferred tax balance.
Reconciliation of effective tax rate
2020
2019
%
£M
%
£M
Profit before tax
(17.1)
35.2
Tax using the UK corporation tax rate
19.0
(3.2)
19.0
6.7
Effect of change in UK tax rate
(5.3)
0.9
-
-
Effect of change in overseas tax rate
-
-
0.1
0.1
Recognition of tax losses
-
-
(1.6)
(0.6)
Non-deductible expenses / non-taxable income
(2.9)
0.5
1.9
0.7
Non-deductible non-underlying costs
(31.0)
5.3
1.1
0.4
Effect of tax rates in foreign jurisdictions
0.1
(0.1)
(0.2)
(0.1)
Impact of losses not recognised
(1.7)
0.3
-
-
Adjustments in respect of prior years
2.9
(0.5)
(1.5)
(0.6)
Total tax in income statement
(18.7)
3.2
18.8
6.6
Add back tax on non-underlying items
0.7
0.3
Total tax charge excluding non-underlying items
3.9
6.9
Profit before non-underlying items
15.9
39.5
Adjusted effective tax rate excluding non-underlying items
24.5%
17.4%
5 Earnings per share
2020
£M
2019
£M
Earnings
Earnings for underlying basic and underlying diluted earnings per share
12.0
32.6
(Loss)/earnings for basic and diluted earnings per share
(20.3)
28.6
2020
2019
Number of shares
Weighted average number of ordinary shares for the purposes of basic earnings per share
84,228,880
83,971,792
Effect of diluted potential ordinary shares:
Weighted average number of ordinary shares at 31 December
84,228,880
83,971,792
Dilutive effect of share options
543,732
536,952
Weighted average number of ordinary shares for the purposes of diluted earnings per share
84,772,612
84,508,744
(Loss)/earnings per share
Basic
(24.2)p
34.0p
Diluted*
(24.2)p
33.8p
Underlying basic
14.3p
38.8p
Underlying diluted
14.2p
38.6p
*For the year ended 31 December 2020, diluted earnings/(loss) per share are reported the same as basic earnings/(loss) per share, as a result of the earnings being negative so the impact of them is anti-dilutive.
At 31 December 2020, the Company held 1,211,073 shares (2019:1,260,396) in relation to treasury stock and shares held in trust for satisfying options and awards under employee share schemes. These shares have been disclosed in the treasury reserve and are excluded from the calculation of earnings per share.
6 Dividends
2020
£M
2019
£M
Interim dividend for 2019 of 7.55p paid 2 January 2020
6.3
-
Interim dividend for 2018 of 7.55p paid 2 January 2019
-
6.3
Final dividend for 2018 of 17.45p paid 1 July 2019
-
14.6
6.3
20.9
The final proposed dividend for 2019 of 17.45p per share was suspended by the Board prior to being authorised by shareholders at the Annual General Meeting in May 2020 in order to preserve the strength of the statement of financial position due to the uncertainty surrounding COVID-19. The final proposed dividend for 2018 of 17.45p per share was authorised by shareholders at the Annual General Meeting on 24 May 2019 and paid on 1 July 2019.
The Board of Directors have declared a dividend of a nominal amount of 2.00p per share which will be paid on 31 May 2021.
The total value of dividends proposed or declared but not recognised at 31 December 2020 is £1.7 million (2019: £6.3 million).
7 Acquisitions
On 1 March 2020, a subsidiary company of Headlam Group plc entered into an agreement to acquire Supertex Furnishing Limited ('Supertex'). Supertex operates from a warehouse and offices in Leyland, Lancashire, supplying domestic flooring (carpet, vinyl and accessories) to the retail flooring trade. Supertex distributes cut-length orders from stock throughout the North West on a next day delivery service.
The acquisition enlarges Headlam's residential sector activities in the North West, a competitive region of the UK. Supertex will continue to be operated under its own brand and operate from the Group's existing premises in Stockport creating operating efficiencies, with a trade counter remaining in Leyland to service the local area.
The acquired business contributed revenue of £1.5 million and an operating loss of £0.4 million to the group for the year ended 31 December 2020. Profitability for Supertex was effected by the COVID-19 pandemic and the lockdown of the branch during 2020. If the acquisition had occurred on 1 January 2020, pro-forma revenue would have increased to £609.5 million and underlying operating profit would have decreased to £17.8 million for the year ended 31 December 2020.
Details of the acquisition are provisional and are shown below:
Acquiree's
book value
£M
Fair value
adjustments
£M
Acquisition
amounts
£M
Acquiree's provisional net assets at the acquisition date:
Intangible assets
-
0.7
0.7
Property, plant and equipment
0.2
-
0.2
Inventories
0.4
-
0.4
Trade and other receivables
0.4
-
0.4
Trade and other payables
(0.5)
-
(0.5)
Deferred tax
(0.2)
(0.1)
(0.3)
Debt
(0.2)
-
(0.2)
Net identifiable assets and liabilities
0.1
0.6
0.7
Goodwill on acquisition
0.4
0.4
Consideration
1.1
Satisfied by:
Cash
1.0
Deferred consideration
0.1
1.1
Analysis of cash flows:
On completion
1.0
Professional fees of £0.1 million were incurred in relation to acquisition activity and have been expensed to the income statement within administration expenses.
The book value of receivables given in the table above represents the gross contracted amounts receivable. At the acquisition date, the entire book value of receivables was expected to be collected.
Goodwill of £0.4 million arose on the Supertex acquisition. There were also intangible assets on acquisition of £0.7 million which were attributed to brand names and customer relationships. During the year £0.2 million of intangibles have been amortised to the income statement on this acquisition.
The residual goodwill reflected the significant benefit the acquisition would have on the Group by bringing further geographic coverage and providing an additional avenue for growth. Due to the emergence of the COVID-19 pandemic since the acquisition date, these benefits have been significantly impaired and following a review and sensitivity analysis the goodwill was impaired by the full amount of £0.4 million.
Prior year acquisitions
In the prior year the Group acquired all the trade and assets of Edel Telenzo Carpets Ltd. ('Telenzo'). Telenzo is the UK distribution company for Edel Carpets, a modern carpet producer from Genemuiden, in the Netherlands.
The fair values of the assets and liabilities acquired have been reconsidered as part of the hindsight period, but no adjustment was considered necessary.
Deferred and contingent consideration
The acquisition of Domus Group of Companies Limited was financed by initial cash consideration of £24.2 million paid on completion and satisfied from the Group's existing cash and debt facilities; a deferred consideration of £3.3 million, payable in cash and Ordinary shares of 5 pence each in the capital of the Company ('Ordinary Shares'), of which £1.6 million was payable on 7 December 2019 and £1.7 million was payable on 7 December 2020; and a further maximum contingent consideration of £2.7 million, payable in cash based on Domus achieving certain EBITDA targets over the three-year period ending 31 December 2020.
The deferred and contingent consideration were discounted back and reported at present value at the date of the acquisition. Management have written down the contingent consideration each year based on their assessment of the probability of it being paid. On 7 December 2020 there was no contingent consideration payable but deferred consideration of £1.7 million was paid.
8 Subsequent events
Management have given due consideration to any events occurring in the period from the reporting date to the date these Financial Statements were authorised for issue and have concluded that there are no material adjusting or non-adjusting events to be disclosed in these Financial Statements with the exception of the following:
In the UK budget on 3 March 2021 the Chancellor announced that the UK headline corporation tax rate would increase from 19% to 25% from 1 April 2023. This is anticipated to be substantively enacted during 2021. As a result, the UK deferred tax balances will likely be restated to 25% in the 2021 group accounts, resulting in an increase in the net deferred tax liability of approximately £2.6 million.
The impact of COVID-19 following the year end, and mitigating actions in place, are fully detailed in the Chief Executive's Review and Financial Review.
9 Additional information
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2020 or 2019 but is derived from those accounts. Statutory accounts for 2019 have been delivered to the registrar of companies, and those for 2020 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
The Company anticipates that the Company's statutory accounts will be issued during March 2021 and will be displayed on the Company's website at www.headlam.com during March 2021. Copies of the statutory accounts will also be available from the Company's registered office at Headlam Group plc, PO Box 1, Gorsey Lane, Coleshill, Birmingham, B46 1LW.
This final results announcement for the year ended 31 December 2020 was approved by the Board on 9 March 2021.
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