REG - Headlam Group PLC - Final Results
08/03/2023 07:15
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RNS Number : 2179S Headlam Group PLC 08 March 2023
8 March 2023
Headlam Group plc
('Headlam' or the 'Company')
Final Results
Many achievements despite very challenging industry headwinds in the year
Headlam (LSE: HEAD), the UK's leading floorcoverings distributor, today
announces its Final Results for the year ended 31 December 2022 (the
'Period'), and an update on current trading.
Financial Results
2022 2021 % change
Revenue £663.6m £667.2m -0.5%
Gross margin 33.1% 33.0% +10bps
Underlying¹ expenses £180.8m £183.2m -1.3%
Underlying¹ operating profit £39.2m £37.3m +5.1%
Underlying¹ operating margin 5.9% 5.6% +30bps
Underlying¹ profit before tax £37.1m £35.8m +3.6%
Underlying¹ basic earnings per share 35.5p 31.5p +12.7%
Ordinary dividend per share 17.4p 16.4p +6.1%
Statutory Results
Operating profit £43.9m £29.1m +50.9%
Operating margin 6.6% 4.4% +220bps
Profit before tax £41.8m £27.6m +51.4%
Financial Highlights
· Revenue maintained despite very challenging industry headwinds,
reflecting revenue development actions and support from product price
increases
· Gross margin steady, with benefit of price increases offset by
reduced proportion of revenue from higher margin residential sector due to
impacts of UK cost of living crisis
· Underlying¹ expenses effectively controlled despite significant
widespread operational cost inflation
· Statutory results higher than underlying¹ due to insurance claim
proceeds following a fire creating a net credit on non-underlying items
· £37.1 million of returns to shareholders via ordinary and special
dividends, and Share Buyback Programme
· Average net funds excluding lease liabilities of £3.1 million (2021:
£38.3 million)
Operational Highlights
· Pleasing progress in delivering on strategy of driving new revenue
growth and capturing greater market share from a more efficient operating base
· Several new larger customers won, with considerable potential for
scalability
· Roll-out of trade counter sites to create nationwide footprint
progressing to plan, with strong KPIs from new sites
· Several own product brands successfully relaunched, and new Everyroom
brand having very positive sales since launch in H2 2022
· 26% of sales now coming from digital channels (2019: 11%), and
further digital enhancements made to the service proposition
· Ongoing investment in the business to improve the service
proposition, with modest overall investment required to deliver on the growth
strategy
Post Year End and Current Trading
· Acquired Melrose Interiors, largest independent supplier to the
online rug industry and highly complementary to the strategy
· UK freehold properties revalued at an increased £138.5 million
(January 2020: £101.4 million)
· £15.0 million Share Buyback Programme completed on 2 March 2023,
considered one of the most effective mechanisms to enact a shareholder return
due to level of the Company's ordinary shares
· Relatively robust revenue performance to date despite continued weak
UK residential sector
· Larger customer contributions and steady commercial sector helping to
offset weakness
· Trading in line with market expectations(²) for the year
Commenting, Chris Payne, Chief Executive, said:
"Despite very challenging industry headwinds in the year, most notably the UK
cost of living crisis and significant operational cost inflation, revenue was
maintained and profit improved against 2021. So far in 2023, revenue
performance is slightly ahead of last year despite a continuing weak
residential sector."
Presentations
The Company's Final Results Presentation accompanying this announcement is
available on its website at Reports & presentations | Headlam
(https://www.headlam.com/investors/reports-presentations/) .
The Company is hosting an in-person presentation and Q&A for analysts in
London today at 09:00am GMT. To register interest in attending, please
email headlam@almapr.co.uk (mailto:headlam@almapr.co.uk)
The Company is also hosting an online presentation and Q&A for investors
today at 11:00am GMT. The presentation is open to all existing and potential
shareholders. Investors can register to attend via the following
link: https://bit.ly/Headlam_FY22_webinar
(https://bit.ly/Headlam_FY22_webinar)
A video of the presentation by the Chief Executive will be made available on
the Company's website following the conclusion of the investor presentation,
with the Q&A from the online presentation also made available.
Footnotes
¹Underlying is before non-underlying items, which includes i) impairment of
intangibles, fixed assets and right of use assets, ii) amortisation of
acquired intangibles, iii) property disposal profits, iv) impairment of
property, plant and equipment and inventory (following a fire), v) insurance
proceeds (following fire) and vi) business restructuring costs in 2021.
(²)Company-compiled consensus market expectations for revenue and underlying
profit before tax, on a mean basis, are available on the Company's website at
www.headlam.com (http://www.headlam.com) .
Enquiries:
Headlam Group plc Tel: 01675 433 000
Chris Payne, Chief Executive Email: headlamgroup@headlam.com (mailto:headlamgroup@headlam.com)
Catherine Miles, Director of IR and ESG
Panmure Gordon (UK) Limited (Corporate Broker) Tel: 020 7886 2500
Tom Scrivens / Atholl Tweedie Tel: 020 7418 8900
Peel Hunt LLP (Corporate Broker)
George Sellar / John Welch
Alma PR (Financial PR) Tel: 020 3405 0205
David Ison / Matthew Young Email: headlam@almapr.co.uk
Notes to Editors:
Operating for over 30 years, Headlam is the UK's leading floorcoverings
distributor. The Company works with suppliers across the globe manufacturing
the broadest range of products, and gives them a highly effective route to
market, selling their products into the large and diverse trade customer base.
The Company has an extensive customer base spanning independent and multiple
retailers, small and large contractors, and housebuilders. It provides its
customers with a market leading service through the largest product range,
in-depth knowledge, ecommerce and marketing support, and nationwide next day
delivery service. To maximise customer reach and sales opportunity, Headlam
operates 67 businesses and trade brands across the UK and Continental Europe
(France and the Netherlands), which are supported by the group's network,
central resources and processes.
Chairman's Statement
2022 was a busy year, with many achievements including pleasing progress in
early stage delivery on the strategy. However, the year also presented very
challenging headwinds, not least significant operational cost increases and an
inflationary environment which resulted in a cost of living crisis, materially
impacting a large proportion of the Company's domestic marketplace. This
served to subdue overall financial performance and mask early contributions
from the strategy, although they served as an important counterbalance to the
weak UK residential sector so that group revenue was broadly maintained year
on year.
The strategy of driving revenue growth and capturing increased market share
from a more efficient and modernised operating base is being delivered through
various discrete projects. Each has an accelerating contribution profile which
will support value creation for all stakeholders. Successes in the year
included new larger customer wins with potential to scale up, effective
execution of the early stage roll-out of improved trade counters nationwide,
and launches / relaunches of own product brands to appeal to a wider customer
base.
In support of delivery and oversight of the strategy, the Board was refreshed
and enhanced during the year, bringing further relevant expertise and skills.
Additionally, significant operational capability has been added throughout the
business, mostly notably in customer and digital strategies, IT, trade counter
management, and HR support.
Due to the economic backdrop, support for the Company's people of both a
financial and non-financial nature was a particular focus. A tiered annual pay
award and commitment to the National Real Living Wage has sought to provide
additional support for more junior colleagues, and investment in the HR team
will allow enhancements in the areas of wellbeing and colleague development
opportunities.
Despite the inflationary cost pressures in the year, the Company continued to
invest across the business to strengthen its position, support revenue growth,
and build foundations for future opportunities. Alongside investment in
people, the Company invested in sites, systems and customer service
propositions, all of which support the strategy. As the investment required to
deliver on the strategy is relatively modest, the Board can fulfil this
priority and maintain a strong balance sheet while continuing its focus on
shareholder returns.
The Company's well developed ESG strategy is an important framework to ensure
the sustainability and long-term success of Headlam, and is closely aligned
with the overall strategy. Importantly, it will allow the Company to capture
commercial opportunities, advance efficiency and modernisation measures, as
well as support colleagues and local communities. Of note, the Company is
actively engaged in many decarbonisation actions in support of its Net Zero
emissions target (Scope 1 and 2) by 2035, including investing in solar panels
to both reduce emissions and defray future energy costs. Furthermore, the
Company anticipates launching sustainable products during 2023 to capture
growing customer demand.
Headlam is a long-established market leading business with solid foundations
that have been strengthened through the development and increasing
implementation of the strategy. The Company is now engaging with a far larger
proportion of the overall market and has significant growth ambitions. Whilst
there will be a lag to this translating into overall financial performance
given the economic backdrop and upfront investment required for some projects,
the Board is highly confident in the strategy and its future success. The
Board wishes to thank all its stakeholders, especially its people, and looks
forward to updating on demonstrable progress under both the overall and ESG
strategies as 2023 progresses.
Keith Edelman
Non-Executive Chairman
8 March 2023
Chief Executive Review
Introduction
The Company has a long heritage, although many of the market leading
businesses and brands within the group have even longer, having been
established well before becoming part of Headlam. The Company is proud to be a
clear market leader, and seeks to build on its heritage and strength through
delivering on the strategy, supporting all its stakeholders, and having a
shared vision across the group of being the leading, most trusted experts in
flooring. Despite a difficult UK market backdrop, the Company is pleased with
many of the outcomes during 2022, and looks to build upon them during 2023.
Financial Performance and Marketplace
The Company's financial performance is given in detail in the Financial
Review, but despite the adverse external factors in the year, revenue was
broadly similar to 2021 at £663.6 million (2021: £667.2 million), costs were
effectively controlled and lower than 2021, and underlying¹ profit before tax
improved to £37.1 million (2021: £35.8 million). This reflected the revenue
development and efficiency actions undertaken in the year.
The external factors affecting the marketplace evolved as the year progressed.
Industry wide supply issues evident in the second half of 2021 continued into
the first half of 2022. These in large part stemmed from the consequences of
COVID-19, with upstream raw material shortages and cost inflation leading to
product availability issues. This in turn led to manufacturers implementing
significant price increases across many product categories, peaking in the
first half and then beginning to moderate in the second.
The inflationary environment in the UK that had been evident at the beginning
of the year continued to worsen ultimately leading to the cost of living
crisis. This backdrop particularly impacted consumer spending on discretionary
items. As a consequence, the residential sector of the marketplace, which
accounts for approximately two-thirds of the Company's revenue, was notably
weak in the year with underlying volumes significantly down. However, product
price increases provided support to the Company's revenue performance, as did
a recovery in the commercial sector, pleasing performances by the Continental
European businesses, and early contributions from the strategy, as described
below. The Company's businesses in France and the Netherlands are now all
benefiting from strong leadership coupled with more positive market backdrops
than that of the UK, and have been positive contributors to overall
performance.
Strategy and Operations
As summarised in the Chairman's Statement, the Company's strategy is driving
revenue growth from a more efficient and modernised operating base. It is
about targeting, appealing to, and supporting a wider base of customers beyond
traditional flooring specialists to capture an increased share of the overall
£3 billion² UK marketplace. It is about modernising and being more efficient
to both improve the customer service proposition and increase shareholder
returns. It is about being front footed and capturing more commercial
opportunities, particularly as the market and customer base evolves. This
includes in the area of sustainability where companies increasingly need to
demonstrate their credentials.
The key projects to drive revenue growth are detailed below. Each of the
projects began to contribute to performance in 2022, both financially and
operationally, with full period effects and accelerating contributions from
this year onwards.
The Company has not lost sight of its 7.5% operating margin ambition. However,
it does require a base of more normalised volume without the material weakness
seen in a large proportion of the market, with the Company benefitting from
operational gearing on a partially fixed cost base. Underlying¹ operating
margin was 5.9% in 2022 (2021: 5.6%), and therefore the margin ambition shows
the scope for meaningful uplift to financial performance.
A continued focus on cost control, and ongoing consolidation and integration
actions, present the most meaningful efficiency measures. Transport
integration, for example, has been very successful in reducing the Company's
commercial fleet and associated costs, with the project completing across the
country next month and moving to a continuous improvement phase. Similarly,
consolidation of certain functions including in the area of sales have
continued, with a more unified approach to better leverage central resources.
The Company has many regional and national businesses and brands, and while it
may seem unwieldy to have a large number, they are all long-established
customer facing businesses that enable maximisation of reach and sales
opportunity at both a regional and national level. Therefore, the focus is on
greater collaboration to minimise potential overlaps and generating increased
sales to increase productivity of the existing assets. The shift to a
collaborative approach has taken time to achieve as it has been imperative
that all colleagues are invested in the strategy, and also ensuring the
foundations of the business are not disrupted. During 2023, the Company will
continue to improve efficiencies and the service offering, including through
central transport planning and vehicle telematics, centralisation of slower
moving stockholding, and more efficient order taking.
Key Revenue Drivers
The key revenue growth drivers are as follows, with their purpose and progress
to date:
Multiple Retailers and Other Larger Customers
Targeting the multiple retailer and other larger customer segments where the
Company is significantly underweight to materially grow revenue
The Company had not previously actively targeted this estimated £1 billion
market despite having a good track record in servicing a number of customers
in this segment, and had approximately £60 million of revenue in 2021.
Following the assembly of a dedicated team and investment in the service
proposition including digital enabling work, the Company has successfully
added a number of new customers. These include Homebase, a builders merchant,
a furniture retailer with a new flooring offering, and a top 10 UK
housebuilder. Each offers considerable potential for scalability through
adding further lines and product categories to the initial number of SKUs. The
Company has also successfully grown its business with some existing customers,
including Tapi, the fastest growing carpet retailer in the UK with over 170
stores. The aim is to grow overall revenue in this area by £100 million
within five years.
Headlam is able to offer larger customers a compelling and comprehensive
service proposition tailored to their specific needs through: product insight
and exclusive products; competitive purchase rates; supply chain management;
stockholding and storage solutions; processing and national distribution to
any number of locations and frequency. All this serves to reduce complexity
and cost for customers, and also suppliers.
The Company is targeting contributions from new business of in excess of £12
million in 2023, albeit likely to go towards offsetting declines in existing
revenue due to the market backdrop. While gross margins are typically below
the Company average, operating margins from this area remain strong due to
scale benefits, with modest incremental infrastructure and investment required
to support the targeted revenue growth.
Trade Counters
Accelerating roll-out of new and improved trade counter sites across the UK,
creating a truly nationwide footprint that appeals to a wider range of
customers, thereby capturing greater market share
The improved trade counters offer a convenient, one-stop shop for all trade
customers who may supply and fit flooring as part of their overall offering,
enlarging the Company's customer base from traditional flooring specialists
and fitters. The network offers a collection service (from any site), walk-in
service, exclusive products, accessories and workwear, all with knowledgeable
advice. The Company has a target of 90 invested sites (new, relocated or
refitted) by the end of 2025 from the 53 uninvested sites in 2021. As at 31
December 2022, the Company had 58 sites of which 24 were invested.
Headlam will be the only flooring distributor to have a national standalone
trade counter network, with potential to increase the geographic coverage and
density after the initial 90, continuing to fill in areas where there is no
physical presence and making the sites more accessible and convenient for
customers by lowering travel time.
This fast growing business unit is targeted to add approximately £120 million
of revenue upon maturity to the approximate £80 million reported for 2021
through a relatively modest total capital investment of around £25 million
(£6 million incurred so far by 31 December 2022).
The first wave of invested sites are already demonstrating strong KPIs against
the uninvested sites in terms of revenue, new account openings, and margin.
The five new sites in 2022, which are modelled to breakeven end of year 2 with
sales maturity in year 5, are cumulatively ahead of budget. Collectively,
revenue from invested sites was up 10% against uninvested sites in 2022. Due
to the upfront investment required, the project is expected to be profit
diluting in 2023 and 2024, then profit enhancing from 2025 onwards.
Products and Brands
Leveraging the group's established own product brands, maximising their sales
potential, and launching and marketing new brands to capture further market
share and increase sales
The Company has a large portfolio of well recognised and regarded own product
brands, many of which have been in the marketplace for a number of years.
Product brands are an important point of differentiation in the marketplace as
the majority of flooring product is relatively unbranded. Recognisable brands,
particularly those at middle / upper price points, can attract higher margins
and be more immune to the inflationary impact on consumer spend.
In recent years many of the Company's brands have been unleveraged and not
sufficiently invested in terms of digital presence, marketing spend, and new
product development. During 2022, several brands were refreshed and
relaunched, including investment in social media awareness and improved
websites. For example, following its relaunch, Kingsmead Carpets, one of the
Company's high quality carpet brands, has already doubled its weekly social
media users and quadrupled organic traffic via Google searches.
During the second half of 2022, the Company also launched a new and exclusive
affordable brand, Everyroom, which holds good appeal when consumers are more
cost conscious due to the inflationary environment. Feedback and sales since
the launch have been very positive, with the brand being a 2023 finalist for a
leading trade award and generating over £8 million of sales since its launch.
During 2023, the Company expects to launch over 40 new products, including
existing range refreshes and new own branded sustainable and recyclable
ranges.
Digital Strategy
Comprehensive strategy to build enhanced digital and ecommerce capabilities
and applications to appeal to a wider customer base, support revenue
opportunities, and help lower the cost to serve
Through a combination of improved B2B websites and the launch of its
industry-leading app, myheadlam, the Company achieved 26% of its sales coming
from digital channels by the end of 2022 from a base of 11% in 2019.
The digital strategy is an important foundation for all the revenue growth
opportunities, including improving supplier and customer engagement, and
product and brand awareness. A key deliverable in 2022 was introducing a
product information management system ('PIM') to enable centralised control
and distribution of product data to all business channels, including suppliers
and customers, through quick and effective automated flows. It allows the
acceleration of product to market, and richer more detailed information and
imagery for use internally and externally by customers. The Company will seek
to leverage the PIM further in 2023 and drive sales through better showcasing
of product specifications, upselling and cross selling, and collecting product
data from suppliers at source.
Other focus areas in 2023 include embedding a new Order Management System
('OMS') that will provide better aggregated stock visibility across the
network, allowing the Company to improve the service to customers through near
real time inventory feeds. The OMS will also enable improvements to the
Company's Drop Ship Vendor ('DSV') capabilities. The Company introduced this
service proposition in 2022, whereby the Company can provide a full end to end
fulfilment service for customers, delivering orders direct to their customers'
homes on their behalf (using carrier partners). The digital strategy is
closely aligned with the product brands strategy, and the new websites being
launched in 2023 will have direct-to-consumer sampling fulfilment, creating
further brand awareness.
Summary
The ambition for the trade counter, larger customers and product brands
projects is collectively well in excess of £200 million of new revenue within
the next five years, with additional revenue coming through from the digital
strategy, including new social media audiences and greater awareness. However,
if the overall market backdrop continues to be weaker, some new revenue may go
towards offsetting declines in existing markets.
The question typically arises on whether there is cannibalisation of existing
revenue from any of the revenue growth projects, and thus far the Company's
trading information suggests this is limited. Trade counters are opening in
areas where the Company has no physical presence. The Company is significantly
underweight in multiple retailers and larger customers and can concurrently
service many different customers in a wide spectrum of areas. New product
launches are targeted at areas of the market where the Company is under
represented, whether that be identified price points such as the Everyroom
value proposition or product categories like Luxury Vinyl Tiles ('LVT').
Melrose Interiors and Acquisitions
As previously announced, in January 2023 the Company acquired Melrose
Interiors, the largest independent supplier to the UK online rug industry,
which also has operations in third-party logistics
(https://protect-eu.mimecast.com/s/pM3DCOZVQHpr5n5cvy0YQ?domain=urldefense.proofpoint.com)
, recycling
(https://protect-eu.mimecast.com/s/RS7RCPYXRIKAvWvh1rdJS?domain=urldefense.proofpoint.com)
, and an in-house rug and sampling / pattern book department.
Melrose Interiors is a great illustration of an acquisition that is highly
complementary to the Company and its strategy. It introduces a number of new
larger customers to the group, including major high street and online
retailers, it operates in a product category where the Company is underweight,
it helps build upon DSV and digital capabilities with its proven B2B and B2C
fulfilment. Melrose Interiors also has market leading environmental
credentials through its award winning Re lay brand of recycled rugs and value
creating upcycling of surplus carpet from across the industry into samples and
pattern books.
Whilst the Company's main focus currently is organic growth and leveraging
existing opportunities, it will continue to review any acquisitions
complementary to the strategy and which may expedite progress.
People
Colleagues are at the heart of the business, and the Company continues to
focus on improving the support to its people, of both a financial and
non-financial nature. Developments during 2022 included increased colleague
engagement, ongoing community support, new colleague recognition schemes, and
enhanced benefits. An area of pressing importance was the inflationary impact
on cost of living, and to help address this the Company undertook targeted pay
reviews and also ensured that everyone received the equivalent of the National
Real Living Wage. To further support more junior colleagues, the Company has
taken a tiered approach to its annual pay award for 2023, with lower salaried
employees receiving a higher percentage increase to their salaries, with this
percentage decreasing higher up the scale.
As outlined in the Chairman's Statement, the Board was refreshed in the year
and significant operational capability added to support delivery of the
strategy. The new Non-Executive Directors, Karen Hubbard, Robin Williams, and
Jemima Bird, have all made important contributions since their joining.
Additionally, Adam Phillips who was announced as the Company's new Chief
Financial Officer in late 2022 will be joining on 20 March 2023.
New senior management appointments during 2022 included a Managing Director of
Trade Counters to head-up the business unit, and a Chief Information Officer
to oversee the resilience and scalability of IT systems and infrastructure
including in support of the strategy. Additionally, in early 2023 a Chief
Customer Officer joined to lead customer and digital strategy, encompassing
customer communications, brand development, marketing, and ecommerce.
It is with great sadness that during the year there was an accident at one of
the group's sites during which a much-valued and long serving colleague died.
Headlam's priority has been support for the family and colleagues, as well as
to continue to strive to provide the safest working environment possible. As
of the date of this announcement, the local authority's investigation is
ongoing. Safety is the Board's highest priority. The Executive and site
leadership teams widely and regularly communicate this as the Company's first
behavioural value to embed a strong health and safety culture across the
business.
Sustainability and ESG Strategy
A comprehensive Sustainability Report is being published later this month
alongside the Company's 2022 Annual Report and Accounts. It contains full
details on the Company's ESG (Environmental, Social and Governance) Strategy
which supports the long-term sustainability and success of Headlam for the
benefit of all stakeholders and which, therefore, is closely aligned with the
strategy detailed above. The Board's priorities are to reduce the Company's
environmental impact, make Headlam a great place to work by supporting its
people and communities, and being a business of integrity with robust
controls. The Board also sees real opportunity from continuing to develop and
progress the associated actions as while they mitigate risk and address
regulation, they also confer greater efficiency, help capture commercial
opportunities, and provide competitive advantage with both people and customer
attraction. As referred to above, customers, particularly larger ones, are
increasingly requiring sustainability credentials in order to undertake
business with companies, and the Company is judged to have the best
credentials amongst its direct peer group(³).
Notable undertakings in 2022, and targets for this year, include the below
which are fully expanded upon in the Sustainability Report.
Environmental
Key achievements in 2022:
· Exceeded initial 50% target of UK non-commercial fleet being electric
/ low emission vehicles (31 Dec 22: 69%).
· Initial trialling of electric commercial vehicles (albeit with
limited feasible options currently).
· Set Net Zero and SBTi aligned interim(4) targets for Scope 1 and 2
emissions.
· 44% reduction achieved for UK emissions against 2019 baseline (Scope
1 and 2).
· Good Energy and Recycling Behaviours workshops commenced across the
group.
Targets for 2023:
· Installation of owned solar panels across all larger UK sites.
· Achievement of ISO 14001 environmental certification at key sites.
· Over 80% of UK non-commercial fleet being electric / low emission.
· Launch own branded sustainable and recyclable ranges.
Social
Key achievements in 2022:
· Moving to one pension for all colleagues, providing a more generous
and flexible contribution structure, and consistency and fairness across the
group.
· Enhancing and harmonising holiday entitlement, and putting in place
equal sick pay.
· Targeted pay increases, and ensuring everyone receives at least the
equivalent of National Real Living Wage.
· Local Communities Programme launched, allowing for funded donations
to local causes, as well as paid volunteering time and flooring product
donations.
Targets for 2023:
· Group wide diversity strategy established and rolled-out.
· Long Service Awards Scheme introduced to recognise and applaud the
long heritage of businesses and colleagues across the group.
· New 'Headlam Way' launched to bring the Company's Values to life and
immerse them across the group.
· Roll-out of mental health support and training.
Governance
Key achievements in 2022:
· Executive ESG Committee established assisting the Board on the
progression and development of the ESG Strategy.
· Reformatted Risk Committee and Employee Forum making them more
effective.
· Independently managed whistleblowing platform put in place, with new
'Speak Up' policy and embedding of behaviours.
· Investment in IT (resilience, systems, and people), with monthly
cyber security training for all colleagues.
Targets for 2023:
· Sedex accreditations for all main sites and businesses (focus on
ethical and responsible practices).
· Building on disclosures, including SBTi validation of emission
targets.
· Ongoing supplier engagement, covering areas including Ethical Code of
Conduct, Sustainability Charter, and Modern Slavery.
· Positive stakeholder feedback, and maintenance of 'low risk' ESG
scores.
Investments and Shareholder Returns
As explained in the Chairman's Statement, investment in the business to
support growth has been a priority while maintaining a strong balance sheet to
ensure the financial stability of the Company. The balance sheet, with almost
wholly undrawn banking facilities at year end, is underpinned by the Company's
inventory position and freehold UK distribution sites. The valuation of these
sites was updated in January 2023 using external valuers, and now stands at an
increased £138.5 million as detailed in the Financial Review, though the
Company has chosen to hold its property at cost in the balance sheet.
The main investment areas, which are expanded upon in the Financial Review,
are the trade counter roll-out, improvements to systems and equipment to
optimise performance and support revenue growth, and in support of the ESG
Strategy. The upfront nature of some of the investment means there is a lag on
return, for example expected payback on total capital employed for each of the
trade counter project and solar panels investment is from year 3.
In line with the commitment to providing dividend income for shareholders, the
Board is proposing a 2022 final ordinary dividend of 11.2 pence per share
(2021: 8.6 pence per share), subject to shareholder approval at the
forthcoming AGM in May 2023 with the timetable given in the Financial Review.
The final dividend combined with the 2022 interim ordinary dividend of 6.2
pence per share gives a total pay out of 17.4 pence per share in respect of
the 2022 financial year, which is in line with the Company's targeted cover
ratio of around 2x earnings.
In March 2022 at the time of its final results announcement, the Company
announced a total £30.0 million return of surplus capital to shareholders via
a special dividend plus a £15.0 million Share Buyback Programme to repurchase
its ordinary shares. A Share Buyback Programme was considered one of the most
effective mechanisms to enact the return due to the level of the ordinary
shares, and therefore earnings per share enhancing and one of the best uses of
the Company's surplus capital. The Share Buyback Programme completed on 2
March 2023.
Post Period-End and Current Trading
In general, the residential sector has continued to be weak since the
beginning of the year. However, growing revenue contributions from larger
customers since the start of the year, combined with a steady commercial
sector performance, has led to modest positive overall sales metrics and a
relatively robust revenue performance at this early stage in the year.
Thanks to Colleagues
Lastly, almost exactly a year on from being formally appointed Chief
Executive, I would like to give my personal thanks to all my colleagues at
Headlam following a year of challenges from many directions. Having visited
every one of our main sites in the past 12 months and endeavoured to meet as
many of my colleagues as possible, I truly believe we are galvanized around
our collective purpose and refreshed values. We have improved Headlam as great
place to work, and will continue to do so.
Chris Payne
Chief Executive
8 March 2023
¹Underlying is before non-underlying items, which includes i) impairment of
intangibles, fixed assets and right of use assets, ii) amortisation of
acquired intangibles, iii) property disposal profits, iv) impairment of
property, plant and equipment and inventory (following a fire), v) insurance
proceeds (following fire) and vi) business restructuring costs in 2021.
²Source: LEK Consulting, 2020
³ Source: Inspired Energy, 2022
(4) Interim target of a 46% emissions reduction by 2030 against baseline year
set at 2019 (Scope 1 and 2)
Financial Review
The following financial results represent continuing operations only, and
exclude the contribution from the Swiss business Belcolor AG ('Belcolor')
within the 2021 financial results following its disposal in May 2021.
Revenue
Total revenue in the year was £663.6 million (2021: £667.2 million), with a
5.4% uplift in Continental Europe (France and the Netherlands) helping to
offset a 1.4% decline in the UK related to market weakness in the residential
sector. Revenue was supported in the year by manufacturer led product price
increases due to raw material and operational cost inflation. The UK and
Continental Europe accounted for 87.1% and 12.9% of total revenue respectively
in the year (2021: UK 87.8%; Continental Europe 12.2%).
Within the UK, the commercial sector was a positive contributor, up 9.2%, as
it recovered from COVID-19 related impacts in the prior two years. Conversely,
the residential sector declined 6.0%, being particularly affected by the
impact of the inflationary environment on consumer spending. Continental
Europe was a positive contributor across both the residential and commercial
sectors, being up 5.6% and 5.0% respectively in the year.
For the group as a whole, residential sector revenue declined 4.7% in the year
and accounted for 65.6% of total revenue (2021: 68.5%), with commercial sector
revenue increasing 8.6% and accounting for 34.4% of total revenue (2021:
31.5%).
£M % £M %
Revenue for the year ended 31 December 2021
UK 585.8 87.8
Continental Europe 81.4 12.2
667.2 100.0
Incremental items during the 12-month period to 31 December 2022
UK:
Like-for-like* (0.9) (0.2)
Changes in working days (7.1) (1.2)
(8.0) (1.4)
Continental Europe:
Like-for-like* 4.5 5.5
Changes in working days 0.2 0.2
Translation effect (0.3) (0.3)
4.4 5.4
Total movement (3.6) (0.5)
Revenue for the year ended 31 December 2022
UK 577.8 87.1
Continental Europe 85.8 12.9
663.6 100.0
*Like-for-like revenue is calculated based on constant currency from
activities and businesses that made a full contribution in both the 2022 and
2021 periods, and is adjusted for any variances in working days.
No acquisitions were made in 2022 or 2021. After the year end, the Company
acquired Melrose Interiors Ltd and its parent company Birch Close Trading Ltd.
Further detail is given later in this Financial Review, and in Note 7 to the
Financial Statements.
Gross Margin
Gross margin for the year was similar to the prior year at 33.1% (2021:
33.0%), with the benefit of product price inflation being offset by a reduced
proportion of revenue coming from the higher margin residential sector. Within
the residential sector, there was also a more marked reduction in the
proportion of revenue from cut length carpet which typically offers the
highest margin. In the first half of the year, gross margin was temporarily
lifted to a high of 33.7% due to the unprecedented inflationary environment,
with the manufacturer-led price increases being passed directly through to
customers and the Company benefiting from pricing uplifts on its existing
inventory position. As anticipated, the position normalised in the second half
of the year with price increases moderating.
Expenses
Underlying¹ distribution costs and administrative expenses in the year
decreased by £2.4 million to £180.8 million (2021: £183.2 million), with
widespread operational cost inflation being offset by efficiency measures,
including ongoing transport integration and cost control in areas such as
headcount. Performance-related bonus costs were also lower in the year, and
there was a reduction in the amounts provided for bad and doubtful debts
having previously been increased as a precaution against any consequences of
COVID-19, with ongoing good cash collection. Underlying¹ distribution costs
accounted for 71.6% (2021: 68.7%), and underlying¹ administrative expenses
for 28.4% (2021: 31.3%), of total underlying¹ operating expenses, with much
of the Company's cost base fixed.
As previously indicated, the Company's costs will be adversely impacted in the
2023 financial year, with a significant rise in the Company's energy costs of
approximately £2.4 million compared with 2022 due to the increase in energy
prices and expiry of a fixed price energy contract. The installation of solar
panels across the Company's main UK sites during 2023 will help offset energy
costs in the near-term. Additionally, people costs are also anticipated to be
over 6% higher year on year due to wage inflation through the cost of living
pay award at the beginning of the year.
Statutory distribution costs and administrative expenses in the year were
£182.3 million (2021: £191.4 million), higher than underlying¹ due to
non-cash amortisation of acquired intangibles, all detailed below.
Profit, Margin and Non-Underlying Items
The reduction in expenses led to an improved underlying¹ operating profit and
underlying¹ profit before tax of £39.2 million and £37.1 million
respectively (2021: underlying¹ operating profit £37.3 million; underlying¹
profit before tax £35.8 million), and the underlying¹ operating margin was
5.9% (2021: 5.6%).
Underlying Non-underlying Total
£M £M £M
Operating profit/(loss) 2021 37.3 (8.2) 29.1
Gross margin movement (1.0) - (1.0)
Other operating income changes 0.5 6.2 6.7
Expense changes:
People costs (includes wage inflation offset by lower performance-related 4.9 - 4.9
bonus payments)
Operational cost inflation (3.5) - (3.5)
Bad debt provision 1.3 - 1.3
Other (0.3) 6.7 6.4
Total increase 1.9 12.9 14.8
Operating profit 2022 39.2 4.7 43.9
The statutory profit before tax for the year was £41.8 million (2021: £27.6
million), an uplift on underlying¹ due to a net credit on non-underlying
items.
Total non-underlying items before tax reflected a net credit of £4.7 million
in the year, comprising £6.2 million of proceeds from an insurance claim
offset by a £1.5 million non-cash amortisation of acquired intangibles. As
previously detailed, in the 2021 financial results the Company recognised a
non-underlying impairment of £7.3 million (pre-tax) following a fire that
completely destroyed its Kidderminster distribution centre in December 2021.
The insurance claim item above includes the full settlement of the inventory
losses as a result of the fire along with interim payments for the losses
relating to the building and contents.
The below table details the individual non-underlying items:
2022 2021
£M £M
Non-underlying items
Impairment of goodwill and intangibles - 2.1
Amortisation of intangibles 1.5 1.6
Impairment of property, plant and equipment and inventory (following a fire) - 7.3
Non-underlying non-cash items 1.5 11.0
Insurance proceeds (following fire) (6.2) -
Property disposal profit - (5.1)
Business restructuring costs - 2.3
Non-underlying cash items (6.2) (2.8)
Non-underlying items before tax ((credit) / cost) (4.7) 8.2
In addition to the non-underlying insurance item, £0.5 million has been
recognised as part of the insurance claim as underlying other operating
income, relating to compensation for business interruption, which offsets lost
revenue and related costs recognised through underlying profit.
Tax
The Company's consolidated underlying effective tax rate for the year was
20.1% (2021: 25.8%). This is higher than the standard rate of corporation tax
in the UK of 19.0% primarily due to expenses not deductible for tax purposes,
albeit lower than 2021 which included restatement of deferred tax balances.
The planned increase in the UK headline tax rate to 25% in April 2023 will
increase the Company's underlying effective tax rate in 2023 to approximately
24%.
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' (2021: 'low').
Earnings per share ('EPS')
Basic earnings per share on an underlying¹ basis increased from 31.5 pence
per share in the prior year to 35.5 pence per share. 3.7 pence of this
improvement reflected the increased underlying profit performance and 0.3
pence was as a result of the impact of the Share Buyback Programme which
reduced the weighted average number of shares (excluding treasury shares) (as
detailed in Note 4 to the Financial Statements). Statutory basic earnings per
share was 40.1 pence (2021: 23.5 pence).
Investments
During the year key capital investments were made in support of the strategy,
although overall spend was relatively modest in line with the capital light
nature of the strategy. The tangible capital expenditure of £12.6 million
(2021: £6.1 million) was primarily focused on the trade counter project, and
investment in warehouse equipment.
Capital expenditure for 2023 is anticipated to be around £20 million, and
will continue to be mainly focused on trade counters and the ongoing programme
to modernise the operating base and network. It also includes a £3.7 million
investment in solar panels, plus a further investment in the associated
battery storage.
Cash Flow
2022 2021
£M £M
Cash flows from operating activities
Profit before tax 41.8 33.4
Adjustments for:
Depreciation, amortisation and impairment 20.2 30.0
Finance income and expense 2.1 1.5
Profit on sale of property, plant and equipment - (11.1)
Insurance proceeds for property, plant and equipment following fire (1.7) -
Loss on sale of subsidiary - 0.1
Share-based payments 0.9 1.2
Change in inventories (8.3) (26.6)
Change in receivables (3.5) (16.6)
Change in payables (34.2) 5.4
Cash generated from the operations 17.3 17.3
Interest and Tax (6.4) (3.5)
Disposal proceeds - 16.2
Capital investment (including intangibles) (13.8) (6.9)
Insurance proceeds from property, plant and equipment following fire 1.7 -
Payments to acquire own shares (Share Buyback Programme) (9.8) -
Net repayment of borrowings (7.3) (1.2)
Lease payments (14.0) (15.0)
Dividends (27.3) (6.6)
Other 0.2 0.7
Net cash flows (59.4) 1.0
There was a net cash outflow of £59.4 million in the year. This included
£37.1 million of returns to shareholders, comprising a £27.3 million
dividend outflow (via both ordinary and special dividend payments) and £9.8
million outflow in relation to the £15.0 million Share Buyback Programme.
There was also a working capital outflow relating to investment in inventory
of £8.3 million in the year and a decrease in payables of £34.2 million. The
Company had built its inventory position towards the end of 2021 to protect
against product supply issues at the time, and maintained its investment in
inventory during 2022 in support of new product launches during 2022.
Inventory at the year end was £139.8 million (31 December 2021: £130.9
million), with the uplift from 2021 also partly due to price inflation. In
line with its market leading position and customer service proposition, the
Company typically carries a large inventory position, with a relatively low
risk of obsolescence.
The decrease in payables followed the in-year settlement of amounts owed to
suppliers resulting from the inventory build at the end of 2021. The decrease
in payables also included performance-related bonus accruals reduced by £6.0
million against 2021. The increase in receivables included a reduction of
£2.5 million in the amounts provided for bad and doubtful debts, with a £4.2
million provision still remaining as at 31 December 2022. Following from the
working capital outflow described above, cash conversion for the year was 39%
(2021: 59%).
Banking Facilities
The Company had a net funds position excluding lease liabilities of £1.8
million at 31 December 2022 (31 December 2021: £53.7 million) and a net debt
position including lease liabilities of £35.9 million at 31 December 2022 (31
December 2021: £17.7 million net funds including lease liabilities), with the
main reason for the year-on-year movement being the large level of returns to
shareholders and working capital movements described above.
At Non-cash Cash Foreign At
1 January items flows exchange 31 December
2022 £M £M movements 2022
£M £M £M
Cash at bank and in hand 61.2 - (59.4) 0.3 2.1
Debt due within one year (0.6) - 0.3 - (0.3)
Debt due after one year (6.9) - 7.0 (0.1) -
Lease liabilities (36.0) (15.5) 14.0 (0.2) (37.7)
Liabilities from financing activities (43.5) (15.5) 21.3 (0.3) (38.0)
Net funds excluding lease liabilities 53.7 - (52.1) 0.2 1.8
Net funds/(debt) 17.7 (15.5) (38.1) - (35.9)
Average net funds excluding lease liabilities for the year was £3.1 million
(2021: £38.3 million).
Cash outflows in the first half of 2023 will include the completion of the
Share Buyback Programme (£5.2 million), the initial consideration in relation
to Melrose Interiors (£4.1 million as detailed below), and the final ordinary
dividend payment, if approved by shareholders at the forthcoming AGM (£9.0
million).
At the year end the Company had total committed banking facilities available
of £81.5 million (31 December 2021: £76.6 million), all of which were
undrawn as at 31 December 2022 (31 December 2021: £69.8 million undrawn). The
Company also had uncommitted banking facilities available at the year end of
£18.8 million (31 December 2021: £28.2 million) of which £18.5 million was
undrawn as at 31 December 2022 (31 December 2021: £27.5 million undrawn).
In November 2022, the Company requested that its banks grant the one year
extension option to the £81.5 million revolving credit facility to maximise
the period of liquidity available to the Company. In February 2023 the banks
approved this extension such that the Company's revolving credit facility will
now expire in October 2027.
Dividends and Share Buyback Programme
As detailed in the Chief Executive Review, the Board have proposed a final
ordinary dividend of 11.2 pence per share (2021: final ordinary dividend 8.6
pence per share). If approved by shareholders at the 2023 AGM to be held on 25
May 2023, it will be payable on 2 June 2023 to shareholders on the register as
at 12 May 2023 and as above equates to a cash outflow of £9.0 million.
Below is a table showing the dividend returns to shareholders in respect of
the 2021 and 2022 financial years. It includes the special dividend declared
in 2022 as part of a total £30.0 million return of surplus capital to
shareholders announced in March 2022 which included the Share Buyback
Programme.
Payment Year / Total Payment Year / Total Payment Year / Total
2023 2022 2021
£M £M £M
Dividend of a nominal amount of 2.00p, paid 28 May 2021 - - 1.7
Interim dividend in respect of 2021 financial year of 5.80p, paid 29 November - - 4.9
2021
Final dividend in respect of 2021 financial year of 8.60p, paid 27 May 2022 - 7.2 -
Special dividend of 17.70p, paid 27 May 2022 - 14.9 -
Interim dividend in respect of 2022 financial year of 6.20p, paid 28 November - 5.2 -
2022
Final dividend (proposed) in respect of 2022 financial year of 11.2p, paid 2 9.0 - -
June 2023
9.0 27.3 6.6
It is anticipated that an interim ordinary dividend, in line with the
Company's capital allocation priorities as detailed below, will be declared in
September 2023 and paid in November 2023.
The outflow in the year related to the total £15.0 million Share Buyback
Programme was £9.8 million. The Programme completed on 2 March 2023, with a
total of 4,689,343 ordinary shares purchased through the Programme and all
held in treasury. At 31 December 2022, the full £15.0 million was recognised
in the treasury reserve, with a £5.2 million liability recorded for share
buyback amounts committed, but not yet purchased.
Capital Allocation Priorities
The Board regularly reviews and follows a clear capital allocation framework
and set of priorities which is given below. This set of priorities ensures a
necessary balance of firstly ensuring the financial stability of the Company,
followed by investment in the business to support revenue growth and ESG
strategies, followed by shareholder returns.
Priority Allocation Rationale
1 Maintain a strong balance sheet Ensures the financial stability and long term sustainability of the Company.
Targeted average net debt during a financial year of not more than 0.75x
EBITDA (unless exceptional or unforeseen circumstances prevail). On an ongoing
basis, is considered against the prevailing economic environment and market
backdrop, and could be adjusted accordingly.
2 Investment in the business (including in relation to the revenue growth and Investment to optimise performance and support growth, in turn leading to
ESG strategies) improved financial performance. Key areas would be in support of delivering on
the strategy to drive new revenue, and ESG actions to enhance the
sustainability of the Company. 2022 and 2023 investments include trade
counters, network (sites and equipment), systems (IT and digital) and solar
panels.
3 Ordinary dividend income for shareholders Recognising shareholders' expectation of dividend income due to the cash
generative nature of the Company, market leading position, and relatively
modest investment required to deliver on the strategy. A targeted bi-annual
distribution (paid out of cash) and cover ratio of around 2x earnings for the
total annual pay out (higher weighting to final dividend). On an ongoing
basis, is considered against the prevailing economic environment and market
backdrop, and could be adjusted accordingly.
4 Funding of potential mergers and acquisitions (M&A) M&A supporting the strategic intent of driving and adding new revenue and
revenue streams. Potential investment in acquisition opportunities would be
aimed at growing the Company's position and market share, including in new /
underweight product categories and customer segments. An example would be the
acquisition of Melrose Interiors which adds new larger customers to the
Company's customer base, and meaningful entry into the rugs and sampling
market.
5 Potential return of surplus capital After applying all the priorities above, return surplus capital to
shareholders. Surplus cash would be considered after considering all
anticipated cash requirements as well as the prevailing factors at the time,
including the economic environment and market backdrop. The Board would
consider the most effective mechanism to do so at that time, including
consideration of special dividends and share buyback programmes. For example,
if the Company's share price was considered low, the Board may consider that
purchasing the Company's ordinary shares through a share buyback programme to
be one of the best uses of the Company's surplus capital. This was the case
during 2022 when the Company commenced its £15.0 million Share Buyback
Programme.
Property Valuation
The Company completed its triennial property valuation in January 2023, using
external valuers. The latest valuation of the predominately freehold UK
distribution sites amounted to £138.5 million (January 2020: £101.4
million), and includes the new Ipswich site completed in July 2020 which is
not within the previous 2020 valuation and a reduction in the Kidderminster
site valuation as a result of the fire. External valuers were also used to
provide a valuation of the main sites in France and the Netherlands for the
first time, which amounted to an additional £10.3 million. The Company has
chosen to hold its property at cost in the balance sheet.
Pensions
The accounting valuation for the legacy defined benefit pension scheme showed
a surplus of £2.1 million as at 31 December 2022. However, as the Company
does not have an unconditional right to a surplus refund, the pension scheme
is recorded as a deficit of £3.2 million as at 31 December 2022 reflecting
the level of deficit recovery plan payments that the Company committed to
following the last actuarial valuation as at 31 March 2020. The next actuarial
valuation will be performed as at 31 March 2023.
Post Year End Events - Melrose Interiors Acquisition
On 4 January 2023, the Company completed the acquisition of Melrose Interiors
in line with its strategy and capital allocation priorities of making
complementary acquisitions which drive certain revenue streams. The Company
recorded a consideration of £4.7 million, and goodwill arising on the
acquisition of £2.0 million (see Note 7 to the Financial Statements). The
consideration consists of £4.1 million of cash paid on completion and
contingent financial performance related consideration which is expected to be
£0.6 million over the next two years. The potential amount of contingent
financial performance related consideration, whilst forecast to be £0.6
million, could be between £nil and £3.0 million depending on performance for
the two years to 31 December 2024.
Alternative Performance Measures
The Company uses Alternative Performance Measures ('APMs') to assess its
financial, operational and social performance towards the achievement of its
strategy. Such measures may either exclude amounts that are included in, or
include amounts that are excluded from, the most directly comparable statutory
measure (where one exists), calculated and presented in accordance with IFRS.
Such exclusions or inclusions give in the Company's opinion more normalised
performance measures, and the Company believes that these APMs are also used
by investors, analysts and other interested parties in their analysis.
The APMs have limitations and may not be comparable to other similarly titled
measures used by other companies. They should not be viewed in isolation, but
as supplementary information.
An explanation of each APM is included in the 2022 Annual Report and Accounts
to be published later this month, along with a reconciliation of the
adjustments made to the Income Statement to derive underlying¹ profit
measures. Underlying¹ items are calculated before charges associated with the
acquisition of businesses and other items which by virtue of their nature,
size or/and expected frequency require adjustment to show the performance of
the group in a consistent manner which is comparable year on year. These
underlying¹ measures are relevant to investors and other stakeholders, as
supplementary information, to fully understand the underlying performance of
the business. A limitation of underlying¹ profit measures is that they
exclude the recurring amortisation of intangible assets acquired in business
combinations but do not similarly exclude the related revenue.
Viability and Going Concern
Updates to principal risks and uncertainties against those contained in the
2021 Annual Report and Accounts are summarised below, and included in the 2022
Annual Report and Accounts. During the course of the year, the risks have been
reviewed and some reframed to increase the focus on certain specific areas in
alignment with the Group's internal risk register and strategy. As part of the
reframing, the previous 'Market' and 'IT' risks have each been split into two
parts, and the previous 'Competition' risk incorporated into one of the
'Market' risks.
The Board reviewed the Company's resilience to the principal risks and
uncertainties by considering stress testing forecasts through adverse
scenarios, which involve a reduction in market demand: (A) a sustained
recessionary environment characterised by a long period of underperformance
throughout the assessment period, and (B) an economic crisis with a sharp
decline in demand in the first year before a recovery. The impact of inflation
on the results for the year and the inflationary impact on consumer spending
which could contribute to the occurrence of these scenarios has been
considered as part of the assessment.
The testing indicated that the Company would be able to operate within its
current facilities and meet its financial covenants in both scenarios. A less
likely, more severe scenario (reverse stress test) was also considered, where
the Company experiences a revenue year on year decline of 20% in 2023. 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 mitigating actions to remain
within its banking covenants.
Mitigating actions, which are within the Board and management's control,
include a reduction in the cost base to better align it with market demand and
revenue performance, suspension of ordinary dividend(s), and a freeze on
non-critical capital spend. These actions are not included in any of the
scenarios modelled, but were effectively implemented during 2020 following the
initial impact of COVID-19.
As above, as at 31 December 2022 the Company had a net funds position
excluding lease liabilities of £1.8 million and had total banking facilities
available of £100.3 million, including £81.5 million of committed facilities
which 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.
Principal Risks and Uncertainties
The Company is exposed to a number of principal risks which may affect its
business model, future performance, solvency or liquidity. The group has a
well-established framework for reviewing and assessing these risks on a
regular basis; and has put in place appropriate processes, procedures and
actions to mitigate against them. However, no system of control or series of
mitigations can completely eliminate all risks. The principal risks and
uncertainties that may affect the group were last reported on within the 2021
Annual Report and Accounts and have been considered and updated for the 2022
Annual Report and Accounts.
No new principal risks have been identified, and the scope of the principal
risks remain broadly unchanged since last reported. Although the level of risk
of two principal risks have considered to have lessened slightly compared with
the 2021 Annual Report and Accounts, including due to enhanced mitigating
actions: IT (systems and infrastructure) principal risk; and Supply chain
principal risk. The only emerging risk assessed as being of any significance
continues to be Impact of digitalisation, albeit not currently material and
not judged in any way a principal risk.
8 March 2023
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2022
Non- Non-
underlying underlying
Underlying (Note 2) Total Underlying (Note 2) Total
2022 2022 2022 2021 2021 2021
Continuing operations Note £M £M £M £M £M £M
Revenue 1 663.6 - 663.6 667.2 - 667.2
Cost of sales (444.1) - (444.1) (446.7) - (446.7)
Gross profit 219.5 - 219.5 220.5 - 220.5
Distribution costs (129.5) - (129.5) (125.9) - (125.9)
Administrative expenses (51.3) (1.5) (52.8) (57.3) (8.2) (65.5)
Other operating income 0.5 6.2 6.7 - - -
Operating profit/(loss) 1 39.2 4.7 43.9 37.3 (8.2) 29.1
Finance income 0.7 - 0.7 0.4 - 0.4
Finance expenses (2.8) - (2.8) (1.9) - (1.9)
Net finance costs (2.1) - (2.1) (1.5) - (1.5)
Profit/(loss) before tax 37.1 4.7 41.8 35.8 (8.2) 27.6
Taxation 3 (7.4) (0.8) (8.2) (9.2) 1.5 (7.7)
Profit/(loss) from continuing operations 29.7 3.9 33.6 26.6 (6.7) 19.9
Profit from discontinued operation - - - 0.1 4.4 4.5
Profit/(loss) for the year attributable to the equity shareholders 29.7 3.9 33.6 26.7 (2.3) 24.4
Earnings per share for profit from continuing operations
Basic 4 35.5p 40.1p 31.5p 23.5p
Diluted 4 35.2p 39.8p 31.1p 23.2p
Earnings per share for profit from discontinued operations
Basic 4 - - 0.2p 5.3p
Diluted 4 - - 0.2p 5.2p
Ordinary dividend per share
Interim dividend for the financial year 5 6.20p 5.80p
Final dividend declared 5 11.20p 8.60p
Declared special dividend 5 - 17.70p
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2022
2022 2021
£M £M
Profit for the year attributable to the equity shareholders 33.6 24.4
Other comprehensive income/(expense)
Items that will never be reclassified to profit or loss
Remeasurement of defined benefit plans 0.1 (2.6)
Related tax - 0.8
0.1 (1.8)
Items that are or may be reclassified to profit or loss
Exchange differences arising on translation of overseas operations 0.4 (1.2)
Reclassification of foreign currency translation reserve on disposal of - (4.8)
subsidiary
0.4 (6.0)
Other comprehensive income/(expense) for the year 0.5 (7.8)
Total comprehensive income attributable to the equity shareholders for the 34.1 16.6
year
Total comprehensive income/(expense) attributable to the equity shareholders
for the year arising from:
Continuing operations 34.1 16.9
Discontinued operations - (0.3)
34.1 16.6
STATEMENTS OF FINANCIAL POSITION
At 31 December 2022
2022 2021
Note £M £M
Assets
Non-current assets
Property, plant and equipment 119.9 113.3
Right of use assets 36.7 35.0
Intangible assets 17.8 18.1
174.4 166.4
Current assets
Inventories 139.8 130.9
Trade and other receivables 119.1 114.0
Cash and cash equivalents 2.1 61.2
261.0 306.1
Total assets 1 435.4 472.5
Liabilities
Current liabilities
Other interest-bearing loans and borrowings (0.3) (0.6)
Lease liabilities (11.4) (10.5)
Trade and other payables (153.2) (178.0)
Employee benefits (1.0) (1.0)
Income tax payable (1.9) (1.0)
(167.8) (191.1)
Non-current liabilities
Other interest-bearing loans and borrowings - (6.9)
Lease liabilities (26.3) (25.5)
Provisions (1.7) (2.7)
Deferred tax liabilities (12.1) (10.3)
Employee benefits (2.7) (3.9)
(42.8) (49.3)
Total liabilities 1 (210.6) (240.4)
Net assets 224.8 232.1
Equity attributable to equity holders of the parent
Share capital 4.3 4.3
Share premium 53.5 53.5
Other reserves (15.8) (1.6)
Retained earnings 182.8 175.9
Total equity 224.8 232.1
STATEMENT OF CHANGES IN EQUITY - GROUP
For the year ended 31 December 2022
Capital
Share Share redemption Special Translation Treasury Retained Total
capital premium reserve reserve reserve reserve earnings equity
Note £M £M £M £M £M £M £M £M
Balance at 1 January 2021 4.3 53.5 0.1 1.5 7.7 (5.9) 158.8 220.0
Profit for the year attributable to the equity shareholders - - - - - - 24.4 24.4
Other comprehensive expense - - - - (6.0) - (1.8) (7.8)
Total comprehensive (expense)/income for the year - - - - (6.0) - 22.6 16.6
Transactions with equity shareholders, recorded directly in equity
Share-based payments - - - - - - 1.2 1.2
Share options exercised by employees - - - - - 1.0 (0.3) 0.7
Deferred tax on share options - - - - - - 0.2 0.2
Dividends to equity holders 5 - - - - - - (6.6) (6.6)
Total contributions by and distributions to equity shareholders - - - - - 1.0 (5.5) (4.5)
Balance at 31 December 2021 4.3 53.5 0.1 1.5 1.7 (4.9) 175.9 232.1
Balance at 1 January 2022 4.3 53.5 0.1 1.5 1.7 (4.9) 175.9 232.1
Profit for the year attributable to the equity shareholders - - - - - - 33.6 33.6
Other comprehensive income - - - - 0.4 - 0.1 0.5
Total comprehensive income for the year - - - - 0.4 - 33.7 34.1
Transactions with equity shareholders, recorded directly in equity
Share-based payments - - - - - - 0.9 0.9
Share options exercised by employees - - - - - 0.4 (0.2) 0.2
Deferred tax on share options - - - - - - (0.2) (0.2)
Repurchase of own shares - - - - - (15.0) - (15.0)
Dividends to equity holders 5 - - - - - - (27.3) (27.3)
Total contributions by and distributions to equity shareholders - - - - - (14.6) (26.8) (41.4)
Balance at 31 December 2022 4.3 53.5 0.1 1.5 2.1 (19.5) 182.8 224.8
CASH FLOW STATEMENTS
For the year ended 31 December 2022
2022 2021
£M £M
Cash flows from operating activities
Profit before tax for the year:
Continuing operations 41.8 27.6
Discontinued operations - 5.8
41.8 33.4
Adjustments for:
Depreciation of property, plant and equipment, amortisation and impairment of 7.7 9.2
intangible assets
Depreciation of right-of-use assets 12.5 13.5
Finance income (0.7) (0.4)
Finance expense 2.8 1.9
Profit on sale of property, plant and equipment - (11.1)
Insurance proceeds for property, plant and equipment following fire (1.7) -
Impairment of property, plant and equipment and inventory, following fire - 7.3
Loss on sale of subsidiary - 0.1
Share-based payments 0.9 1.2
Operating cash flows before changes in working capital and other payables 63.3 55.1
Change in inventories (8.3) (26.6)
Change in trade and other receivables (3.5) (16.6)
Change in trade and other payables (34.2) 5.4
Cash generated from the operations 17.3 17.3
Interest paid (1.2) (0.5)
Interest received 0.6 0.5
Tax paid (5.8) (3.5)
Net cash flow from operating activities 10.9 13.8
Cash flows from investing activities
Proceeds from sale of property, plant and equipment - 19.7
Disposal of discontinued operation, net of cash disposed of - (3.5)
Acquisition of property, plant and equipment (12.6) (6.1)
Insurance proceeds for property, plant and equipment following fire 1.7 -
Acquisition of intangible assets (1.2) (0.8)
Net cash flow from investing activities (12.1) 9.3
Cash flows from financing activities
Proceeds from the issue of treasury shares 0.2 0.7
Payment to acquire own shares* (9.8) -
Proceeds from borrowings 25.0 -
Repayment of borrowings (32.3) (1.2)
Principal elements of lease payments (14.0) (15.0)
Dividends paid (27.3) (6.6)
Net cash flow from financing activities (58.2) (22.1)
Net (decrease)/increase in cash and cash equivalents (59.4) 1.0
Cash and cash equivalents at 1 January 61.2 60.8
Effect of exchange rate fluctuations on cash held 0.3 (0.6)
Cash and cash equivalents at 31 December 2.1 61.2
* During the period 3,122,721 shares were acquired for
£9.8 million under the Group's Share Buyback Programme
NOTES TO THE FINANCIAL STATEMENTS
1 Segment reporting
As at 31 December 2022, the Group had 16 operating segments in the UK and
three operating segments in Continental Europe. Each segment represents an
individual distribution centre 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. In the
prior year each individual trading operation within each site was classified
as a segment. With the development of the business strategy, performance is
now assessed at a higher level, with each distribution centre (including
satellite trade counters) reviewed.
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.
The assets and liabilities in the prior year have been re-presented to better
reflect their segmental allocation.
Continuing operations
UK Continental Europe Total
2022 Restated 2022 Restated 2022 Restated
2021 2021 2021
£M £M £M £M £M £M
Revenue
External revenues 577.8 585.8 85.8 81.4 663.6 667.2
Reportable segment underlying operating profit 36.8 37.0 3.4 3.1 40.2 40.1
Reportable segment assets 371.0 378.8 40.7 30.3 411.7 409.1
Reportable segment liabilities (173.8) (201.4) (22.8) (27.7) (196.6) (229.1)
During the year there were no inter-segment revenues for the reportable
segments (2021: £nil).
Reconciliations of reportable segment profit, assets and liabilities and other
material items:
2022 2021
£M £M
Profit for the year
Total underlying operating profit for reportable segments 40.2 40.1
Non-underlying items 4.7 (8.2)
Unallocated expense (1.0) (2.8)
Operating profit 43.9 29.1
Finance income 0.7 0.4
Finance expense (2.8) (1.9)
Profit before taxation 41.8 27.6
Taxation (8.2) (7.7)
Profit from continuing operations 33.6 19.9
Profit from discontinued operations - 4.5
Profit for the year 33.6 24.4
2022 Restated
2021
£M £M
Assets
Total assets for reportable segments 411.7 409.1
Unallocated assets:
Intangible assets 3.0 -
Cash and cash equivalents 20.7 63.4
Total assets 435.4 472.5
Liabilities
Total liabilities for reportable segments (196.6) (229.1)
Unallocated liabilities:
Income tax payable (1.9) (1.0)
Deferred tax liabilities (12.1) (10.3)
Total liabilities (210.6) (240.4)
Reportable
Continental segment Consolidated
UK Europe total Unallocated total
Continuing Operations £M £M £M £M £M
Other material items 2022
Capital expenditure 12.1 0.5 12.6 - 12.6
Depreciation 5.9 0.3 6.2 - 6.2
Depreciation of right of use assets 10.7 1.8 12.5 - 12.5
Non-underlying items (4.8) 0.1 (4.7) - (4.7)
Other material items 2021 (Restated)
Capital expenditure 5.7 0.4 6.1 - 6.1
Impairment of goodwill 1.2 - 1.2 - 1.2
Impairment of intangible assets 0.9 - 0.9 - 0.9
Impairment of property, plant and equipment and inventory (following fire) 7.3 - 7.3 - 7.3
Depreciation 4.8 0.4 5.2 - 5.2
Depreciation of right of use assets 11.6 1.9 13.5 - 13.5
Non-underlying items (excluding impairments) (1.1) (0.1) (1.2) - (1.2)
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
2022 2021 2022 2021 2022 2021
£M £M £M £M £M £M
Revenue
Residential 382.8 407.2 52.5 49.7 435.3 456.9
Commercial 195.0 178.6 33.3 31.7 228.3 210.3
577.8 585.8 85.8 81.4 663.6 667.2
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 are associated with the
acquisition of businesses or other items which by virtue of their nature, size
and expected frequency require adjustment to show the performance of the Group
in a consistent manner which is comparable year-on-year.
The following are the principal items classed as non-underlying:
· Impairment of intangibles, fixed assets and right of use assets as
they are significant, non-recurring items;
· Amortisation of acquired intangibles as they relate to the
acquisition of businesses;
· Property disposal profits as they are not generated from the normal
course of business;
· Impairment of property, plant and equipment (following a fire) as it
is a significant, non-recurring item;
· Insurance proceeds (following fire) as it is a significant,
non-recurring item;
· Business restructuring cost which is a significant cash item that
falls in 2021, and for which no further costs are expected.
See the Financial Review for details on alternative performance measures.
Non-underlying income for continuing and discontinued operations after tax of
£3.9 million (expense 2021: £2.3 million) relate to the following:
2022 2021
£M £M
Continuing operations:
Impairment of intangibles, fixed assets and right of use assets - 2.1
Amortisation of acquired intangibles 1.5 1.6
Property disposal - (5.1)
Impairment of property, plant and equipment and inventory (following a fire) - 7.3
Insurance proceeds (following fire) (6.2) -
Business restructuring cost - 2.3
(4.7) 8.2
Taxation on non-underlying items 0.8 (1.5)
(3.9) 6.7
Discontinued operation:
Disposal of subsidiary (including Swiss property disposal) - (4.4)
(3.9) 2.3
The business restructuring related to aligning overall headcount with trading
patterns and evolving customer servicing, along with executive settlement
agreements and were all cash in nature. Cumulative non-underlying business
restructuring costs since their initiation as part of the business change
strategy amounted to £4.7 million and covered the period July 2020 to
December 2021.
3 Taxation
Recognised in the income statement
2022 2021
£M £M
Current tax expense:
Current year 7.2 6.4
Adjustments for prior years (0.6) (0.3)
6.6 6.1
Deferred tax expense:
Origination and reversal of temporary differences 0.8 -
Effect of change in UK tax rates 0.3 2.7
Adjustments for prior years 0.5 0.2
1.6 2.9
Total tax 8.2 9.0
Total tax continuing operations in income statement 8.2 7.7
Total tax discontinued operations in income statement - 1.3
2022 2021
£M £M
Tax relating to items charged/(credited) to equity
Deferred tax on:
Share options 0.2 (0.2)
Deferred tax on other comprehensive expense:
Defined benefit plans - (0.8)
0.2 (1.0)
Total tax reported directly in reserves 0.2 (1.0)
Factors that may affect future current and total tax charges
The UK headline corporation tax rate for the year was 19.0% (2021: 19.0%). In
the Spring Budget of 2021, the UK Government announced that from 1 April 2023
the rate of UK corporation tax will increase from 19% to 25%. This new law was
substantively enacted on 24 May 2021. UK deferred tax assets and liabilities
have been calculated at a rate of 25% (2021: 25%).
Reconciliation of effective tax rate
2022 2021
% £M % £M
Profit before tax on continuing operations 41.8 27.6
Profit before tax on discontinued operations - 5.8
Total profit before tax 41.8 33.4
Tax using the UK corporation tax rate 19.0 7.9 19.0 6.3
Effect of change in UK tax rate 0.7 0.3 8.1 2.7
Local tax incentives (0.7) (0.3) (0.5) (0.2)
Non-deductible expenses/non-taxable income 1.2 0.5 1.0 0.4
Impact of losses not recognised (0.3) (0.1) (0.3) (0.1)
Adjustments in respect of prior years (0.2) (0.1) (0.1) (0.1)
Total tax in income statement 19.7 8.2 27.2 9.0
Add back tax on non-underlying items - continuing (0.8) 1.5
Add back tax on non-underlying items - discontinued - (1.3)
Total tax charge excluding non-underlying items 7.4 9.2
Profit before non-underlying items 37.1 35.9
Adjusted effective tax rate excluding non-underlying items 20.1% 25.8%
4 Earnings per share
2022 2021
£M £M
Continuing operations earnings
Earnings for basic and diluted earnings per share 33.6 19.9
Earnings for underlying basic and underlying diluted earnings per share 29.7 26.6
Discontinued operations earnings
Earnings for basic and diluted earnings per share - 4.5
Earnings for underlying basic and underlying diluted earnings per share - 0.1
2022 2021
Number of shares
Weighted average number of ordinary shares for the purposes of basic earnings 83,626,126 84,484,084
per share
Effect of diluted potential ordinary shares:
Weighted average number of ordinary shares at 31 December 83,626,126 84,484,084
Dilutive effect of share options 615,584 1,070,830
Weighted average number of ordinary shares for the purposes of diluted 84,241,710 85,554,914
earnings per share
Continuing operations earnings per share
Basic 40.1p 23.5p
Diluted 39.8p 23.2p
Underlying basic 35.5p 31.5p
Underlying diluted 35.2p 31.1p
Discontinued operations earnings per share
Basic - 5.3p
Diluted - 5.2p
Underlying basic - 0.2p
Underlying diluted - 0.2p
At 31 December 2022, the Company held 4,046,617 shares (2021: 1,013,991) 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.
5 Dividends
2022 2021
£M £M
Dividend of a nominal amount of 2.00p paid 28 May 2021 - 1.7
Interim dividend for 2021 of 5.80p paid 29 November 2021 - 4.9
Final dividend for 2021 of 8.60p paid 27 May 2022 7.2 -
Special dividend of 17.70p paid 27 May 2022 14.9 -
Interim dividend for 2022 of 6.20p paid 28 November 2022 5.2 -
27.3 6.6
The Board of Directors have declared a final dividend of 11.2p per share which
if approved by shareholders at the forthcoming AGM, will be payable on 2 June
2023.
The total value of dividends proposed or declared but not recognised at 31
December 2022 is £9.0 million (2021: £22.1 million).
6 Contingent asset
At 31 December 2022, the Group and Company identified a contingent asset
relating to parts of an insurance claim for losses arising from damage to the
Group's property and contents, as a result of the Kidderminster fire in
December 2021, whilst the asset relating to the inventory losses has been
recognised in the financial statements.
The insurers have accepted liability in respect of the Kidderminster fire
claim. However, the refund relating to the property and contents damage could
not be reliably measured at 31 December 2022 because the decision to progress
with the reinstatement was not final and a change to that decision would cause
the insurance refund to be based on a negotiated settlement (dependent on
negotiations with insurers) rather than the like-for-like reinstatement costs
and the resulting values could be materially different. In addition, the
competitive tendering process for the construction had not concluded and so
the construction costs were not known.
An amount of £1.7 million was recognised in the Group financial statements at
31 December 2022 (2021: £nil) relating to refunds for property and contents
damage, having been received in cash.
The £4.5 million insurance claim refund relating to inventory losses as a
result of the Kidderminster fire was recognised in the Group financial
statements at 31 December 2022 (2021: £nil) and was received in cash during
the year.
7 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 period from 1 January 2023 to 2 March 2023 1,566,622 shares were
purchased by the Company.
The Group requested a one-year extension to existing banking facilities which
was granted by the banks in February 2023 and will now expire in October 2027.
On 4 January 2023 the Group acquired 100% of the issued share capital of Birch
Close Trading Limited, and its subsidiaries, for a consideration of £4.7
million. The acquired group trades as Melrose Interiors ('Melrose'), which is
the largest independent supplier to the UK online rug industry, and has
operations in third-party logistics, recycling and an in-house rug, sampling
and pattern book department. Melrose brings a number of new larger customers
to the Group, including major high street and online retailers, a customer
segment where the Group is targeting growth and will work with Melrose to
scale up opportunities.
The financial effects of this transaction have not been recognised at 31
December 2022. The operating results and assets and liabilities of the
acquired group will be consolidated from 4 January 2023.
Details of the consideration transferred are:
Purchase consideration £M
Cash paid 4.1
Contingent consideration 0.6
Total purchase consideration 4.7
The fair values of the assets and liabilities of Birch Close Trading Limited
group as at the date of acquisition are as follows:
Fair value
£M
Property, plant and equipment 0.5
Right of use assets 2.7
Intangible assets 1.7
Inventories 1.8
Trade and other receivables 1.5
Cash and cash equivalents 0.4
Lease liabilities (2.7)
Trade and other payables (2.8)
Deferred tax liabilities (0.4)
Net identifiable assets acquired 2.7
Goodwill 2.0
Net assets acquired 4.7
The goodwill is attributable to the access to new larger customers to the
Group and the ability to produce sampling and pattern books in house. None of
the goodwill is expected to be deductible for tax purposes.
The contingent consideration arrangement requires the Group to pay the former
owners of the Birch Close Trading Limited group an amount of £0.8 million
plus £2 for every £1 of EBITDA exceeding £1.0 million or minus £1 for
every £1 miss of EBITDA of £1.0 million for the years ended 31 December 2023
and 31 December 2024 up to a maximum undiscounted amount of £3.0 million.
EBITDA for the calculation of the contingent consideration is earnings before
interest, tax, depreciation and amortisation. The potential undiscounted
amount of all future payments that the Group could be required to make under
this arrangement is between £nil and £3.0 million. The fair value of the
contingent consideration of £0.6m has been estimated by calculating the
present value of the future expected cash flows. The estimates are based on a
discount rate of 4.6%.
The fair value of acquired trade receivables is £1.4 million. The gross
contractual amount for trade receivables due is £1.4 million, with a loss
allowance of £nil recognised on acquisition.
8 Additional information
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 December 2022 or 2021 but is derived
from those accounts. Statutory accounts for 2021 have been delivered to the
registrar of companies, and those for 2022 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 posted
to shareholders during March 2023 and will be displayed on the Company's
website at www.headlam.com during March 2023. 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 2022 was
approved by the Board on 8 March 2023.
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