REG - Headlam Group PLC - Final Results
05/03/2024 07:00
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RNS Number : 5336F Headlam Group PLC 05 March 2024
5 March 2024
Headlam Group plc
('Headlam', the 'Company', the 'Group')
Full Year Results
Good strategic progress and operating cash generation; profits lower
year-on-year due to macro and industry headwinds
Headlam Group plc (LSE: HEAD), the UK's leading floorcoverings distributor,
today announces its full year results in respect of the year ended 31 December
2023 (the 'Period').
2023 2022
% change
Revenue £656.5m £663.6m (1.1)%
Gross margin 31.7% 33.1% (140)bps
EBITDA £36.7m £57.9m (36.6)%
Underlying(1) Operating Profit £16.1m £39.2m (58.9)%
Underlying(1) Profit Before Tax £11.0m £37.1m (70.4)%
Underlying(1) Basic Earnings Per Share 11.0p 35.5p (69.0)%
Ordinary dividend per share 10.0p 17.4p (42.5)%
Underlying(1) Operating Cash Flow £26.0m £12.8m 103.1%
Net Debt/(Funds) £29.6m £(1.8)m
Leverage 1.3x 0.0x
Statutory results
Operating profit £12.2m £43.9m (72.2)%
Operating margin 1.9% 6.6% (470)bps
Profit before tax £7.1m £41.8m (83.0)%
Basic Earnings Per Share 9.6p 40.1p (76.1)%
Operational and strategic highlights
· Significant investment for the future, including £6.3 million in
cutting tables, sortation units and other warehouse and transport equipment in
Regional Distribution to improve the customer proposition for independent
retailers
· Strong revenue growth from Larger Customers and Trade Counters,
up 26% and 8.5% respectively
· 12 new trade counters and a further 11 refurbished or relocated;
performing in line with business case
· 2.7% revenue growth in Own Product Brands in the UK, supported by
successful launch of Everyroom brand during the previous year
· Investments in digital capability; new Headlam brand website
launched; 38% of revenue now through digital channels
· Ongoing expansion of market-leading position, as we broaden the
base of the business to position it well for when the market improves
Financial overview
· Group revenue down 1.1%, with UK flat despite challenging market
backdrop, as growth in revenue from Larger Customers (+26%) and Trade Counters
(+8.5%) offset decline in Regional Distribution; Continental Europe revenue
down 7.7%
· UK volume declined 5%, in line with the market(2), reflecting
reduction in residential property transactions (which declined 20% in 2023)
and cost of living crisis reducing consumer spending on home improvements
· Underlying Profit Before Tax of £11.0 million (2022: £37.1
million) in line with revised expectations(3)
· Year-on-year decline in profit principally driven by the macro
and industry headwinds, including: £11 million profit impact from lower
volume, £10 million from operating cost inflation, £5 million unwind of
manufacturer-led price benefit in the prior year and £4 million profit
reduction from strategic investments; partially mitigated by £10.3 million of
efficiencies and cost savings
· Strong cash generation with £26.0 million of positive Underlying
Operating Cash Flow (2022: £12.8 million), higher than previous two years,
reflecting stabilised working capital
· Net debt increased by £31.4 million (Leverage of 1.3x) after
£18.2 million capital expenditure, £6.1 million acquisitions and £17.4
million returns to shareholders (ordinary dividends and share buybacks).
£71.0 million of cash and undrawn facilities at year end
· Strong balance sheet position underpinned by freehold properties
valued at £149 million, over £100 million of net positive working capital
and strong operating cash generation
· Final ordinary dividend of 6.0 pence proposed, taking the full
year dividend to 10.0 pence (2022: 17.4 pence); cover lowered to 1.1x
reflecting confidence in medium term prospects and strength of balance sheet
Outlook
· The market weakness observed at the end of 2023 has continued
into the first few weeks of 2024. We have seen negative volumes across our UK
and Continental European businesses, despite continued growth in Larger
Customers and Trade Counters. Group revenue in February 2024 was 6% lower than
2023, albeit ahead of January 2024
· External data on housing transactions and consumer spending on
home improvements, and latest projections for RMI(4) and flooring spend in
2024, indicate a delayed market recovery
· The medium-term market outlook remains strong; flooring market
volumes in 2023 were around 20% lower than in 2019 and we expect volumes to
improve significantly over the coming years as the market recovers
· The combination of this market recovery and our strategic
initiatives to grow revenue to £200 million in each of Larger Customers and
Trade Counters provides opportunity for material uplift to revenue, profit and
cash given the operational leverage within the business, boosted by reducing
capital expenditure requirements following a period of investment
Commenting, Chris Payne, Chief Executive, said:
"2023 has been a challenging year for the flooring industry, with reduced
demand in the residential market and high operating cost inflation, which
looks set to continue in 2024. However, I am pleased with the action taken
across the Group to partially mitigate the impact and to deliver higher
operating cash flow. We continued to invest to broaden the base of the
business, providing a foundation for significant profit uplift in the coming
years as the market improves."
Presentations
The Group's full year presentation that accompanies this announcement is
available on its website at www.headlam.com (http://www.headlam.com)
The Group will be hosting an in-person presentation for analysts in London
today at 9.00am UK time at the offices of Panmure Gordon. To register
interest in attending, please email: headlamgroup@headlam.com
(mailto:headlamgroup@headlam.com)
The Group will also be hosting an online presentation and Q&A for
investors today at 11.00am UK time. The presentation is open to all existing
and potential shareholders. Investors can register to attend by clicking on
this link: https://bit.ly/HEAD_FY23_results_webinar
(https://protect-eu.mimecast.com/s/WabHC7ANlfmZO5zSNcHDl?domain=bit.ly)
A video of the presentation by the Chief Executive and Chief Financial Officer
will be made available on the Group's website following the conclusion of the
investor presentation, with the Q&A from the online presentation also made
available.
Footnotes
1. To supplement IFRS reporting, we also present our results on an
underlying basis to show the performance of the business before non-underlying
items. These items are detailed in note 2 and principally comprise:
amortisation of acquired intangibles and other acquisition-related costs;
impairment of intangibles, property, plant and equipment and right-of-use
assets; insurance proceeds (following fire); profit on sale of property, plant
and equipment; and business restructuring and change-related costs. These
underlying measures, along with other alternative financial measures including
debt and cash flow metrics, form the Group's Alternative Performance Measures
(APMs) that are used internally by management as key measures to assess
performance. Further explanation in relation to these measures can be found in
the glossary of APMs at the end of this announcement.
2. Source: commissioned specialist research from MTW Research
3. Company-compiled consensus market expectations for revenue and
underlying profit before tax, on a mean basis, are available on the Group's
website at www.headlam.com (http://www.headlam.com/)
4. RMI = repair, maintenance and improvement
5. THE INFORMATION CONTAINED WITHIN THIS ANNOUNCEMENT IS DEEMED BY THE
COMPANY TO CONSTITUTE INSIDE INFORMATION AS STIPULATED UNDER THE MARKET ABUSE
REGULATION (EU) NO. 596/2014 AS IT FORMS PART OF UK DOMESTIC LAW PURSUANT TO
THE EUROPEAN UNION (WITHDRAWAL) ACT 2018, AS AMENDED. UPON THE PUBLICATION OF
THIS ANNOUNCEMENT VIA A REGULATORY INFORMATION SERVICE, THIS INFORMATION IS
CONSIDERED TO BE IN THE PUBLIC DOMAIN.
Enquiries
Headlam Group plc Tel: 01675 433 000
Chris Payne, Chief Executive Email:headlamgroup@headlam.com (mailto:headlamgroup@headlam.com)
Adam Phillips, Chief Financial Officer
Panmure Gordon (UK) Limited (Corporate Broker) Tel: 020 7886 2500
Tom Scrivens / Atholl Tweedie
Peel Hunt LLP (Corporate Broker) Tel: 020 7418 8900
George Sellar / Finn Nugent
Notes to Editors
Operating for over 30 years, Headlam is the UK's leading floorcoverings
distributor. The Group 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
Group 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 68 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.
Chief Executive's Review
Introduction
Headlam is a clear market leader with strong foundations, and through the
implementation of our strategy we are broadening the base of the business,
providing good growth opportunities by accessing additional areas of the
market. During the year, we successfully serviced an increasingly diverse
range of customer types, spanning independent retailers, tradespeople, major
multiple retailers, housebuilders, online retailers and contractors.
2023 presented challenging macro and industry-specific headwinds, which
hampered financial performance; however, we made good strategic progress and
we remain optimistic about our medium-term prospects. Our strategy and the
investments we have been making in the business position it well for when the
market recovers.
Financial summary and marketplace
During the year, the unprecedented levels of inflation and rising cost of
borrowing brought significant headwinds. RMI (repair, maintenance and
improvement) spend was projected to have declined 11% in 2023; and residential
property transactions declined 20% year-on-year. Consequently, home
improvements and DIY was one of worst performing categories of retail spend in
2023, with spend significantly declining year on year, particularly in the
latter months. These factors caused volumes to materially decline in the
residential sector of the flooring market, which accounts for approximately
two-thirds of the value of the market.
The Group's overall UK volumes improved from high single-digit decline at the
start of the year to almost flat compared to 2022 in July and August. However,
and consistent with observations from similar markets, the market deteriorated
significantly in September and this persisted through the rest of the year,
albeit we did see an improvement in the Group's trading during our peak
residential month of November. Over the year as a whole, the Group's UK
volumes declined 5%, in line with the market (according to commissioned
external research from MTW Research). Continental Europe revenue declined
7.7%, reflecting weak markets, particularly in the Netherlands.
In addition to the volume weakness in the market, there was £10 million of
operational cost inflation, driven by elevated pay and energy costs.
Furthermore, the temporary benefit in 2022 from manufacturer-led price
increases unwound in 2023, which further impacted profitability. Overall,
this resulted in a reduction in underlying profit before tax from £37.1
million in 2022 to £11.0 million in 2023. Further detail on the year-on-year
movement in profit is contained in the Financial Review.
Testament to the strength of the business model, operating cash generation was
strong, allowing us to continue investing for the future. The Group generated
£26.0 million of Underlying Operating Cash Flow, higher than either of the
previous two years, reflecting a stabilised working capital position.
Additionally, during H2 2023, we agreed a settlement with insurers for the
Kidderminster building, which was destroyed by a fire in 2021, and
subsequently separately sold the land, resulting in combined cash proceeds,
net of fees, of £9.7 million. We invested £18.2 million in capital
expenditure, £6.1 million in acquisitions and returned £17.4 million to
shareholders in the form of dividends and the share buyback programme, which
completed in March 2023. Net debt increased by £31.4 million in the year to
£29.6 million, reflecting these investments and shareholder returns.
The Board is recommending a 2023 final ordinary dividend of 6.0 pence per
share (2022: 11.2 pence per share), subject to shareholder approval at the
forthcoming AGM in May 2024, taking the full year dividend to 10.0 pence per
share (2022: 17.4 pence per share). In recommending this final dividend the
Board acknowledges that the short-term outlook remains challenging; however,
also takes into account that the medium-term prospects remain strong, and that
the Group has a strong balance sheet and good operating cash flow generation,
supplemented by lower capital expenditure requirements going forward.
Furthermore, the Board also recognises the non-underlying cash proceeds
received in 2023 in respect of insurance settlement and property disposal, and
the intention to release more capital from disposal of surplus property in
2024. Accordingly, and as signalled at the half year results in September
2023, the Group will temporarily lower its dividend cover in respect of the
ordinary dividend. The Group intends to retain a lower level of cover through
2024 and then re-evaluate with a view to building back to 2.0x cover over the
medium-term as the market and Group earnings improve.
Strategic progress
Despite the macro and industry headwinds, we made good progress in many areas
of our strategy, the outputs of which have been masked by the impact of the
external headwinds on overall financial performance. We invested in people, in
new and enhanced capabilities, and in the network and infrastructure; all
supporting growth, efficiency, and customer service. These strategically
important investments have strengthened the foundations of the business, and
position us well for growth across a broader spectrum of the marketplace. The
key strategic growth initiatives delivered good results in the year. Revenue
from Larger Customers and Trade Counters in the UK, the two main revenue
growth drivers, was up 26% and 8.5%, respectively, compared with 2022,
offsetting the 7.0% decline in the Regional Distribution business.
Larger Customers
Revenue grew by 26% in the year to £83.3 million, reflecting the scaling of
existing customer relationships, adding further product lines and categories,
combined with new customer wins. We successfully grew sales and partnerships
with a broader range of customers, including flooring retailers, homeware
retailers, builders' merchants, housebuilders and online retailers. Towards
the end of the year, we launched trials in a chain of builders' merchants and
in a national discount retailer; both involve only a small proportion of their
respective estates initially, with the potential for nationwide rollouts over
time. Furthermore, at the end of the year, starting with the Boxing Day sale,
we significantly increased our share of the flooring category with a
nationwide retailer.
We have a dedicated account management team who develop new, and service
existing, customer relationships. We increased the size of this team in the
year, including sales expertise in particular segments of the market, such as
housebuilders, where we look to build upon our initial entry point.
We have a strong pipeline of growth, across both existing and new customers,
providing opportunity to grow revenue from Larger Customers to a targeted
£200 million over the coming years.
Trade Counters
Revenue for the year was £97.1 million (2022: £89.5 million), an increase of
8.5%, and 2,400 new customer accounts were opened across the trade counter
network. Collectively, 'invested' trade counters (new, relocated or refitted)
performed in line with the business case, despite the weak market. The key
ingredients for a successful trade counter are location and colleagues,
supported by a dedicated management team focusing on the rollout and
performance management of all sites.
12 new trade counters were opened in the year and a further 11 were
refurbished or relocated. This took the total number of trade counters to 67
at the end of the year, of which 47 have been invested in (31 December 2022:
58 total, 24 invested). We closed two sites during the year and also merged
two sites.
In 2024, we are targeting to invest in at least 20 sites, around half of which
could be new sites, taking our total number of trade counters to around 80.
Our aim is to create a nationwide footprint that services the fitter and
general contractor market; a segment of the overall flooring market to which
we cannot currently provide nationwide service and, as such, is an important
growth opportunity. During the year, we increased our target to a total of 100
invested sites by the end of 2025 (from a previous target of 90), in order to
reach 80% of the UK population within a circa 20-minute drive time. We expect
this increase in total site numbers to require no increase in the previously
expected total capital expenditure due to savings made in the cost of each
trade counter investment as we build our expertise and drive efficiencies and
economies of scale. Our aim is to grow revenue in Trade Counters to £200
million.
Regional Distribution
Our Regional Distribution business incorporates all our local business brands
across the UK and supports operations across the Group through its national
network and processing and delivery capabilities. This part of our business,
which accounted for 64.2% of total UK revenue in 2023 (2022: 69.0%), was
particularly impacted by the trading environment as it predominantly comprises
a high volume of smaller individual residential orders, which have been
particularly impacted by consumers cutting back their spending on home
improvements. Accordingly, revenue declined by 7.0% to £370.8 million (2022:
£398.9 million). Competition has also been heightened in this part of the
market, with aggressive pricing at times; despite this, our gross margins have
been stable and well-controlled.
Despite the industry headwinds, we made considerable progress in upgrading the
network to increase the level of service to all customers, whilst also
creating operational efficiencies. Investments included new cutting tables and
sortation units in three of our largest distribution centres, and the
installation of owned solar panels across most of our larger UK sites. The
combined capital expenditure in the Regional Distribution business was over
£9 million; this was higher than in previous years, reflecting a busy year of
upgrade and replenishment, combined with the one-off investment in solar
panels, and we expect it to reduce going forwards.
Headlam's scale and reach remains a competitive advantage for its Regional
Distribution business, with great service and breadth of product providing
compelling reasons to use Headlam.
We have a large portfolio of established Own Product Brands, an important
point of differentiation in the marketplace. Revenue from Own Product Brands
was up 2.7% in the year and represented 34.5% of the revenue through the
Regional Distribution channel. This revenue growth was supported by the
successful launch of the Group's newest brand Everyroom in the second half of
2022. Everyroom has quickly won traction and wide recognition, including
winning a leading trade award in March 2023.
During 2023, we enhanced the team leading this area of the business, and
invested in social media awareness, new B2B2C websites for our leading Crucial
Trading and Kersaint Cobb product brands, and new product development to
support the increased appeal to a wider cross-section of customers/consumers.
Alongside Everyroom, several of our other brands also received prestigious
awards during 2023, including Kingsmead Carpets, Kersaint Cobb, Crucial
Trading, and Manx Tomkinson.
Digital & IT transformation
34% of revenue in 2023 was through digital channels; this includes electronic
ordering from Larger Customers. Digital transformation and ecommerce
initiatives serve as an important foundation for all areas of our strategy. We
are focused on moving our business to a more digitally-enabled and
multi-channel model, providing many benefits including: more efficient
order-taking processes; quick and effective automated information flows;
better supplier and customer engagement; greater product and brand awareness;
and a lower cost to serve.
During 2023, we rolled out a drop ship vendor proposition to larger retailers
and launched a Headlam brand website (www.headlamgroup.com
(http://www.headlamgroup.com) ) to better showcase who we are and our
experience, knowledge, products and services.
To support the digital improvements, and to provide a more agile and flexible
IT platform to support the future growth of the business, during the year we
made the decision to replace the core IT system used in the UK. This will take
place over the next three years and will involve modular, cloud-based systems;
we will continue to operate the current system and can accommodate a period of
dual running until fully ready to switch over, in order to ensure a smooth
transition with minimal disruption.
Efficiencies and mitigating actions
Efficiency is a key part of the overall strategy, and further efficiency and
mitigating actions were introduced during 2023 to help support margins and
better align costs with the weak market backdrop. These included flexing
operational headcount, implementing targeted price increases, and ongoing
optimisation of transport operations. The latter was centred around the
implementation of dynamic route planning, which reduces fuel and other
transport costs through the optimisation of journeys.
Efficiency and mitigating actions contributed £10.3 million in 2023,
providing a partial offset against the impact of volume decline and
operational cost inflation.
During the year we reviewed the size and location of our network and, even
after taking account of the volume growth anticipated over the coming years,
made the decision to exit our Stockport distribution centre, given an
overlapping service presence and stockholding capability in the north of
England. In its place we have agreed a lease on a cross-dock facility, which
we expect to move into in the coming weeks. Overall, this network optimisation
adjustment results in a lower operating cost, whilst still providing capacity
for significant growth, and releases capital through the disposal of the
Stockport freehold, which we expect to occur over the coming months.
Whilst we have successfully implemented material mitigations in 2023, the
flooring distribution business model has an inherent fixed cost element that
drives relatively high operating leverage. As volumes decline, this can weigh
heavily on profitability. However, as volumes recover, it can also have a
significantly positive impact on profit.
Sustainability and our people
We have made good progress on our sustainability agenda during 2023. From an
environmental perspective, this has included a reduction in carbon emissions
aided by our investment in solar panels; the transition of over 85% of our
non-commercial vehicle fleet to low or no emission; and transport
efficiencies, which have reduced fuel consumption.
The safety of our colleagues, and any visitors to our sites, is of utmost
importance to us. The Board, Executive Team, and site leadership teams widely
and regularly communicate safety as Headlam's first behavioural value in order
to embed a strong health and safety culture. Every meeting starts with a
'safety moment', and we have seen meaningful improvements in H&S culture
and reporting.
Other priorities for our people include having an inclusive and collaborative
culture where everyone can succeed. We held a 'Lead the Way' conference in
October 2023 for all management colleagues in the UK business, the first time
this had been done, with a focus on delivering success together. Building
skills to succeed now and in the future is another priority area and is being
supported by the comprehensive learning and development programmes being
rolled out. During the year we also conducted our first colleague engagement
survey, providing valuable insight into what is working well and what we can
do better to engage our colleagues.
Outlook
The market weakness observed at the end of 2023 has continued into the first
few weeks of 2024. We have seen negative volumes across our UK and Continental
European businesses, despite continued growth in Larger Customers and Trade
Counters. Group revenue in February 2024 was 6% lower than 2023, albeit ahead
of January 2024. External data on housing transactions and consumer spending
on home improvements, and latest projections for RMI and flooring spend in
2024, indicate a delayed market recovery.
The medium-term market outlook remains strong; flooring market volumes in 2023
were around 20% lower than in 2019 and we expect volumes to improve
significantly over the coming years as the market recovers. The combination of
this market recovery and our strategic initiatives to grow revenue to £200
million in each of Larger Customers and Trade Counters provides opportunity
for material uplift to revenue and profit given the operational leverage
within the business. Furthermore, the Group's capital expenditure requirements
are expected to decline in 2024 and then again in 2025, providing a boost to
cash generation.
Summary
The Group is well positioned despite the market backdrop, with ongoing
expansion of its market-leading position, broadening of its market presence,
and ongoing efficiencies; all of which will support future financial
performance as the market improves.
We continue to focus on supporting the needs and requirements of all our
stakeholders. We are confident in our strategy and look forward to the
positive long-term prospects for the Group, and rebuilding of returns for
shareholders. The Board thanks all the Group's colleagues for their continued
hard work during this challenging period for the flooring market.
Chris Payne
Chief Executive
5 March 2024
Financial Review
Summary income statement
Underlying(1) result Non-underlying items Underlying(1) result Non-underlying items
2023 2023 Total 2022 2022 Total
£m £m 2023 £m £m 2022
£m £m
Revenue 656.5 - 656.5 663.6 - 663.6
Cost of sales (448.7) - (448.7) (444.1) - (444.1)
Gross profit 207.8 - 207.8 219.5 - 219.5
Operating costs (191.7) (3.9) (195.6) (180.3) 4.7 (175.6)
Operating profit/(loss) 16.1 (3.9) 12.2 39.2 4.7 43.9
Net finance costs (5.1) - (5.1) (2.1) - (2.1)
Profit/(loss) before tax 11.0 (3.9) 7.1 37.1 4.7 41.8
Tax (2.2) 2.8 0.6 (7.4) (0.8) (8.2)
Profit/(loss) after tax 8.8 (1.1) 7.7 29.7 3.9 33.6
(1) To supplement IFRS reporting, we also present our results on an underlying
basis to show the performance of the business before non-underlying items.
These items are detailed in note 2 and principally comprise: amortisation of
acquired intangibles and other acquisition-related costs; impairment of
intangibles, property, plant and equipment and right-of-use assets; insurance
proceeds (following fire); profit on sale of property, plant and equipment;
and business restructuring and change-related costs.
Revenue
Total revenue in the year was £656.5 million (2022: £663.6 million), a 1.1%
decrease reflecting flat year-on-year revenue in the UK offset by 7.7% decline
in Continental Europe (France and the Netherlands). The UK and Continental
Europe accounted for 87.9% and 12.1% of total revenue, respectively, in the
year (2022: UK 87.1%; Continental Europe 12.9%).
The table below shows the breakdown in revenue across the different customer
channels in the UK. Revenue from Larger Customers grew by 26% in the year,
reflecting growth with existing customers as well as new customer wins. Trade
Counters revenue increased by 8.5% as we continued the investment programme;
12 new sites opened, and 11 existing sites refurbished or relocated during the
year. The combination of growth in these two channels offset the decline in
Regional Distribution, where revenue declined by 7.0%, particularly reflecting
the weak residential market, with the commercial sector more resilient. Other
UK revenue comprises our two ceramics specification businesses, where revenue
growth was strong at 13.0%.
2023 2022 Year-on-year
£m £m %
Larger Customers 83.3 66.3 25.6%
Trade Counters 97.1 89.5 8.5%
Regional Distribution 370.8 398.9 (7.0)%
Other 26.1 23.1 13.0%
UK 577.3 577.8 (0.1)%
Continental Europe 79.2 85.8 (7.7)%
Group 656.5 663.6 (1.1)%
For the Group, as set out in the table below, residential sector revenue
declined 2.4% in the year and accounted for 64.7% of total revenue (2022:
65.6%), with commercial sector revenue increasing 1.5% and accounting for
35.3% of total revenue (2022: 34.4%).
2023 2022 Year-on-year
£m £m %
Residential 424.7 435.3 (2.4)%
Commercial 231.8 228.3 1.5%
Group 656.5 663.6 (1.1)%
During the year, the Group made three small acquisitions: two in the UK and
one in the Netherlands. These acquisitions added £9.0 million of revenue in
the year.
Gross margin
Gross margin of 31.7% (2022: 33.1%) represented a return to long-term historic
average gross margin levels in the range of 31% to 32%, after the temporary
uplift in gross margin in 2022 from the unprecedented proliferation of
manufacturer-led price increases. During 2023 there were only limited
manufacturer-led price increases and the Group had already sold through, in
the previous year, the stock it was holding at the pre-increase prices. This
led to a year-on-year reduction in gross margin in the first nine months of
2023 whilst the temporary uplift unwound. Excluding this impact, the
underlying gross margin was stable and well-controlled despite aggressive
competitor pricing in some elements of the market.
Operating costs
Underlying operating costs increased by 6.3% (£11.4 million) to £191.7
million (2022: £180.3 million). £4.6 million of this related to
acquisitions; excluding these, like-for-like underlying operating costs
increased by 3.8% (£6.8 million). This reflected a combination of
inflationary pressures and strategic investments, partially offset by cost
efficiencies. Cost inflation totalled £10.2 million of which £5.3 million
was payroll-related with pay inflation averaging 6.7% for the year. Energy
costs increased by £2.0 million, reflecting the end of the previous
fixed-rate contract in the UK in September 2022 in which prices had been fixed
prior to the Ukraine war and, hence, were much lower than spot rates. Other
cost inflation included business rates following the review in April 2023; the
previous review having been in 2017.
The Group also made strategic investments, including the roll-out of trade
counters along with investments in capability and resource to deliver on the
other strategic growth areas.
All of the above cost increases were partially offset by cost savings. These
included flexing down the operational headcount to account for the lower
year-on-year volumes; cost savings from transport consolidation; the
implementation of dynamic planning in the transport network (which was phased
in during H2); and lower bonus accruals. In the second half, the Group also
benefitted from renegotiated electricity pricing (albeit still at elevated
levels compared to 2022) and a reduction in electricity consumption as a
result of the solar panel investments.
Furthermore, operating costs benefited from a £2.3 million reduction (2022:
£2.5 million reduction) in the loss allowance for trade receivables due to an
improved receivables profile and an update of the expected loss rates, based
on latest experience.
Profit
Underlying Operating Profit of £16.1 million (2022: £39.2 million) was a
reduction of £23.1 million and reflected the decline in volumes,
normalisation in gross margin, cost inflation, and strategic investments, as
explained above. Consequently, underlying operating profit margin was 2.5% in
2023 (2022: 5.9%). The table below breaks down the year-on-year movement:
Underlying Operating Profit
£m
2022 39.2
Volume (11.1)
Unwind of prior year impact of manufacturer-led price increases (5.1)
Strategic investments (3.9)
Cost inflation (10.2)
Continental Europe (3.1)
Mitigating actions 10.3
2023 16.1
Volume decline, in the UK, contributed to a £11.1 million reduction in
profit; volumes were 5.0% lower year-on-year in the UK business (residential
and commercial combined) and even lower in Continental Europe. This was net of
volume growth from Larger Customers and Trade Counters.
As explained above, the lack of manufacturer-led price increases resulted in a
return in gross margin back to pre-2021 levels; this equated to an adverse
£5.1 million profit impact.
Strategic investments also contributed to a £3.9 million reduction in profit.
These investments comprised the initial operating losses on newly invested
trade counters; a new dedicated management team for the Trade Counter
business; and incremental investments in people and capability to deliver on
other elements of the strategy (including digital, brand and customer
enhancements).
Cost inflation was a £10.2 million headwind as explained above. The operating
profit generated by our French and Dutch businesses declined by £3.1 million,
of which £2.4 million related to the Netherlands where the flooring market
has been particularly weak, with suppliers reporting volume reductions of over
20%.
Mitigating actions provided £10.3 million of offsetting benefit. These
actions included cost savings, efficiency programmes and targeted price
increases on certain ranges.
Interest costs of £5.1 million (2022: £2.1 million) were £3.0 million
higher year-on-year reflecting higher average borrowings, principally due to
the deployment of capital in the previous year by way of a special dividend
and share buybacks, combined with the base interest rate increases.
Reflecting the movement in Underlying Operating Profit, and the increase in
interest costs, Underlying Profit Before Tax reduced to £11.0 million (2022:
£37.1 million).
The statutory profit before tax for the year was £7.1 million (2022: £41.8
million), after a net non-underlying expense before tax of £3.9 million
(2022: net non-underlying income of £4.7 million before tax).
Non-underlying items
Total non-underlying items before tax reflected a net expense of £3.9 million
in the year as set out below. The cash impact of non-underlying items in 2023
was a net cash inflow of £6.5 million.
2023 2023 2023 2022 2022 2022
Cash Non-cash Total Cash Non-cash Total
£m £m £m £m £m £m
Amortisation of acquired intangibles & other acquisition-related costs (2.3) (1.5)
(0.5) (1.8) - (1.5)
Insurance proceeds (following fire) 8.6 - 8.6 6.2 - 6.2
Property disposal 1.8 (0.7) 1.1 - - -
Business restructuring and change-related costs (including impairment) (11.3) -
(3.4) (7.9) - -
Non-underlying income / (expense) before tax (3.9) 4.7
6.5 (10.4) 6.2 (1.5)
Amortisation of acquired intangibles and other acquisition-related expenses of
£2.3 million (2022: £1.5 million) comprised £1.4 million (2022: £1.5
million) of amortisation of acquired intangibles and £0.9 million (2022:
£nil) of other acquisition-related expenses, comprising professional fees and
the amortisation of the fair value adjustment to acquired inventories.
£8.6 million income, all of which was received in cash in the year, was
recognised in respect of the final settlement of the buildings and contents
insurance claim on the Kidderminster building, which was destroyed by fire in
2021. In the previous year £6.2 million income was recognised in respect of
claims on contents and inventory insurance, also in relation to the
Kidderminster building.
Following the settlement of the insurance claim, the Group then disposed of
the land on which the Kidderminster building had been sited, generating a
£1.1 million profit.
Business restructuring and change-related costs totalled £11.3 million and
comprised: £5.6 million in respect of the write-off of previously capitalised
software development costs and termination payments owing to the software
developer, following the decision to replace the existing ERP; £2.3 million
of restructuring costs in relation to network optimisation (which are expected
to be non-recurring), principally representing stock and fixed asset
impairments at the Stockport site; £2.2 million of headcount reduction costs;
and £1.2 million of change-related costs, including the cost of terminating
vehicle leases as a result of lower vehicle requirements arising from the
dynamic route planning project and consultancy fees.
In addition to the non-underlying insurance item, £0.4 million (2022: £0.5
million) has been recognised as underlying other operating income, relating to
compensation for business interruption, which offsets lost revenue and related
costs recognised through underlying profit.
Tax
The Group's consolidated underlying effective tax rate for the year was 20.0%
(2022: 20.1%). This is lower than the standard rate of corporation tax in the
UK, primarily due to the recognition of previously unrecognised tax losses.
The Group's underlying effective tax rate in 2024 is expected to be around
26%, broadly in line with the standard rate of corporation tax in the UK. The
Group's statutory effective tax rate for the year was 8.5% (credit) (2022:
19.6% (charge)).
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' (2022: 'low').
Earnings per share ('EPS')
Basic earnings per share on an underlying basis decreased from 35.5 pence per
share in the prior year to 11.0 pence per share, reflecting the factors set
out above. The share buyback programme, which completed in March 2023, reduced
the weighted average number of shares for 2023 compared to the prior year, as
detailed in note 4. Statutory basic earnings per share was 9.6 pence (2022:
40.1 pence); the decrease of 76.1% also reflected the factors set out above,
combined with a net non-underlying expense after tax of £1.1 million in 2023
compared to a net non-underlying income after tax of £3.9 million in 2022.
Cash flow and Net Debt
2023 2022
£m £m
Underlying operating profit 16.1 39.2
Depreciation and other non-cash items 20.6 18.7
EBITDA 36.7 57.9
Change in inventories 10.0 (8.3)
Change in receivables 2.7 (3.5)
Change in payables (24.0) (34.2)
Other 0.6 0.9
Underlying Operating Cash Flow 26.0 12.8
Interest and Tax (9.1) (6.4)
Lease payments (13.0) (14.0)
Capital expenditure (18.2) (13.8)
Property disposal and insurance settlement 10.4 6.2
Other non-underlying items (3.9) -
Acquisitions (6.1) -
Dividends (12.2) (27.3)
Payments to acquire own shares (share buyback programme) (5.2) (9.8)
Other - 0.2
Net cash flow before movement in borrowings (31.3) (52.1)
Movement in borrowings 49.7 (7.3)
Net cash flows 18.4 (59.4)
Underlying Operating Cash Flow in the Period was £26.0 million compared to
£12.8 million in 2022. This is despite the profit headwinds from lower
volumes, cost inflation and strategic investments, and reflects good
underlying cash generation plus a stabilisation in the working capital
requirements after the impact of unprecedented levels of inflation on
inventory costs in the previous two years.
Inventories and receivables were well controlled and reduced by £10.0 million
and £2.7 million, respectively. Payables declined by £24.0 million,
partially reflecting the reduction in stock and partially reflecting timing of
supplier payments; the latter is expected to reverse in 2024, with a
consequential cash flow benefit. Overall, working capital movements generated
a £11.3 million outflow, driven by the timing difference on payables;
excluding this timing difference, working capital would have been broadly
flat.
Capital expenditure was £18.2 million (2022: £13.8 million) in what was a
busy year for replenishment capital expenditure, combined with growth
investment. The investments included £6.3 million in cutting tables,
sortation units and other warehouse and transport equipment; £5.7 million in
trade counters; and £2.5 million in solar panels. Capital expenditure for
2024 is expected to be around £12 million. Investment of around £3 million
is also expected in the Group's new IT system; however, as the new systems are
likely to be cloud-based, software-as-a-service, the accounting treatment is
such that the development costs will need to be expensed. We therefore expect
to expense around £3 million of development costs, which will be recorded as
a non-underlying item.
The settlement of the Kidderminster insurance claim and the subsequent sale of
the land generated cash proceeds of £10.4 million; in the previous year the
insurance claim proceeds totalled £6.2 million. There was a £3.9 million
cash outflow in respect of other non-underlying items, comprising
acquisition-related expenses and restructuring and business change costs.
£6.1 million, net of cash acquired, was invested in the acquisitions of
Melrose Interiors (UK, January 2023), Het Stoffen Gilde (Netherlands, July
2023) and PD Patterns (UK, September 2023). There were no acquisitions in the
previous year.
£17.4 million of shareholder returns were made in the year, comprising £5.2
million of payments to acquire own shares under the share buyback programme
(2022: £9.8 million) and £12.2 million of ordinary dividend payments (2022:
£27.3 million, comprising £12.4 million ordinary and £14.9 million special
dividends). The share buyback programme completed on 2 March 2023, with a
total of 4,689,343 ordinary shares purchased and all held in treasury.
Net Debt excluding lease liabilities was £29.6 million at the end of the
year, an increase of £31.4 million from 31 December 2022. This equates to
Leverage of 1.3x, being the ratio of Net Debt excluding leases to EBITDA
(pre-IFRS16 basis). The Group targets a long-term average Leverage range of
0.5x to 1.0x. We expect Net Debt to reduce during 2024, with ongoing operating
cash generation boosted by the timing difference on payables and the disposal
of one or two surplus freehold properties.
Net Debt including lease liabilities was £73.0 million at 31 December 2023
(2022: £35.9 million).
At the end of the year, the Group had total banking facilities available of
£100.6 million (31 December 2022: £100.3 million), of which £81.5 million
(31 December 2022: £81.5 million) were committed. These facilities expire in
October 2027. The Group had £71.0 million of cash and undrawn facilities at
31 December 2023 (31 December 2022: £102.1 million). The Group's banking
facilities are subject to two covenants: interest cover (defined as the ratio
of EBITDA to net interest expense) and leverage (defined as Net Debt as a
ratio of EBITDA). Both covenants are on a pre IFRS 16 basis and are tested at
30 June and 31 December each year. The interest cover ratio was amended from
an EBIT to an EBITDA basis going forward in February 2024.
Dividends
As detailed in the Chief Executive Review, the Board has proposed a final
ordinary dividend of 6.0 pence per share (2022: final ordinary dividend 11.2
pence per share). If approved by shareholders at the 2024 AGM to be held on 23
May 2024, it will be payable on 7 June 2024 to shareholders on the register as
at 10 May 2024 and is expected to be a cash outflow of £4.8 million.
Capital allocation priorities
The Board regularly reviews and follows a clear capital allocation framework,
which is set out below. During the year, and as previously published in
September 2023, this was modified slightly as follows:
· the introduction of a long-term average target Leverage range of
0.5-1.0x Net Debt to EBITDA (on a pre-IFRS16 basis, i.e. excluding capitalised
leases); and
· equal prioritisation given to share buybacks, M&A, and
special dividends, with the choice at any given time dependent on both market
conditions and available opportunities.
The target Leverage range is considered prudent by the Board and has been set
with reference to the balance sheet underpin provided by the Group's
substantial freehold property portfolio (with an independent market valuation
of £148.8 million at January 2023) plus its inventory position (£131.5
million at 31 December 2023), and the strong cash generation characteristics
of the business, whilst also recognising the increased cost of debt compared
to recent years. The target range is a long-term average and, as such, the
Board is comfortable with the Group's Leverage being below or above the target
range over the short-term (for example, as a consequence of an acquisition or
disposal), with the intention of reverting back to within the range in a
reasonable timescale.
Priority Rationale
1 Maintain a strong Ensures the financial stability and long-term sustainability of the Group.
balance sheet Long-term average Leverage target range of 0.5 to 1.0x.
2 Investment in the business Investment to optimise performance and support growth, in turn leading to
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 Group. 2023 investments included trade counters, network
(sites and equipment) 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 long-term average cover ratio of around 2x
earnings for the total annual pay-out (higher weighting to final dividend).
The Board proposes a temporary relaxation of the cover ratio, during the
period of market weakness, on the basis of the Group's strong balance sheet
and cash generative characteristics, combined with the positive medium-term
prospects.
4 Acquisitions and/or return of surplus capital After all of the above priorities have been fulfilled, the Board would
consider M&A or a return of surplus capital to shareholders. The two
options have equal priority, with the selection being determined by whichever
the Board assesses would provide the best long-term value at the relevant
time, taking into account factors such as the prevailing share price.
Potential investment in acquisition opportunities would be aimed at growing
the Group'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 Group's customer
base, and meaningful entry into the rugs and sampling market.
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.
Pensions
The accounting valuation for the legacy defined benefit pension scheme showed
a surplus of £4.4 million as at 31 December 2023 (31 December 2022: £2.1
million surplus). However, as the Company does not have an unconditional right
to a surplus refund, the pension scheme is recorded as a deficit of £2.3
million as at 31 December 2023 (31 December 2022: £3.2 million deficit)
reflecting the level of deficit recovery plan payments that the Company
committed to following the last actuarial valuation as at 31 March 2020.
Viability and Going Concern
The Board reviewed the Group's resilience to principal risks and uncertainties
by considering stress testing forecasts through a downside scenario, which
involves modelling a significant reduction in market demand, on top of the
significant market decline observed in 2023. 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 Group would be able to
operate within its current facilities and meet its financial covenants.
Mitigating actions, which are within the Board and management's control, are
included in the downside modelling and 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.
As above, as at 31 December 2023 the Group had a Net Debt position excluding
lease liabilities of £29.6 million and had total banking facilities available
of £100.6 million, including £81.5 million of committed facilities. The
Group had cash and undrawn facilities of £71.0 million at 31 December 2023.
Having reviewed the financial projections and the downside modelling, and
having considered the available mitigating actions, the Board has a reasonable
expectation that the Group will be able to continue in operation and meet its
liabilities as they fall due over the three-year period of this assessment.
Furthermore, the Board believes there are reasonable grounds for stating that
the Group has adequate resources to continue in operational existence for a
period no shorter than 12 months from the date of this Financial Review, and
it is appropriate to adopt the going concern basis in preparing the Group's
Financial Statements.
Principal risks and uncertainties
The Group 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 2022
Annual Report and Accounts and have been considered and updated for the 2023
Annual Report and Accounts.
No new principal risks have been identified. The risk ratings of a number of
the principal risks have been amended slightly; however, the scope of the
principal risks remain broadly unchanged since last reported.
Adam Phillips
Chief Financial Officer
5 March 2024
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2023
Note Underlying Non- Total Underlying Non- Total
2023 underlying 2023 2022 underlying 2022
£M (Note 2) £M £M (Note 2) £M
2023 2022
£M £M
Revenue 1 656.5 - 656.5 663.6 - 663.6
Cost of sales (448.7) - (448.7) (444.1) - (444.1)
Gross profit 207.8 - 207.8 219.5 - 219.5
Distribution costs (131.3) - (131.3) (129.5) - (129.5)
Administrative expenses (60.8) (12.5) (73.3) (51.3) (1.5) (52.8)
Other operating income 0.4 8.6 9.0 0.5 6.2 6.7
Operating profit/(loss) 1 16.1 (3.9) 12.2 39.2 4.7 43.9
Finance income 0.3 - 0.3 0.7 - 0.7
Finance expenses (5.4) - (5.4) (2.8) - (2.8)
Net finance costs (5.1) - (5.1) (2.1) - (2.1)
Profit/(loss) before tax 11.0 (3.9) 7.1 37.1 4.7 41.8
Taxation 3 (2.2) 2.8 0.6 (7.4) (0.8) (8.2)
Profit/(loss) for the year attributable to the equity shareholders 8.8 (1.1) 7.7 29.7 3.9 33.6
Earnings per share
Basic 4 11.0p 9.6p 35.5p 40.1p
Diluted 4 10.9p 9.6p 35.2p 39.8p
Ordinary dividend per share
Interim dividend for the financial year 5 4.0p 6.2p
Final dividend declared 5 6.0p 11.2p
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2023
2023 2022
£M £M
Profit for the year attributable to the equity shareholders 7.7 33.6
Other comprehensive (expense)/income
Items that will never be reclassified to profit or loss
Remeasurement of defined benefit plans (0.3) 0.1
Related tax 0.1 -
(0.2) 0.1
Items that are or may be reclassified to profit or loss
Exchange differences arising on translation of overseas operations (0.2) 0.4
(0.2) 0.4
Other comprehensive (expense)/income for the year (0.4) 0.5
Total comprehensive income attributable to the equity shareholders for the 7.3 34.1
year
STATEMENT OF FINANCIAL POSITION
At 31 December 2023
Note 2023 2022
£M £M
Assets
Non-current assets
Property, plant and equipment 127.6 119.9
Right of use assets 41.6 36.7
Intangible assets 19.4 17.8
Deferred tax assets 0.9 -
189.5 174.4
Current assets
Inventories 131.5 139.8
Trade and other receivables 117.1 119.1
Income tax receivable 3.1 -
Cash and cash equivalents 21.1 2.1
272.8 261.0
Total assets 1 462.3 435.4
Liabilities
Current liabilities
Bank overdrafts (0.7) -
Other interest-bearing loans and borrowings (50.0) (0.3)
Lease liabilities (11.9) (11.4)
Trade and other payables (129.1) (153.2)
Employee benefits (1.1) (1.0)
Income tax payable - (1.9)
(192.8) (167.8)
Non-current liabilities
Lease liabilities (31.5) (26.3)
Provisions (2.6) (1.7)
Deferred tax liabilities (13.2) (12.1)
Employee benefits (1.8) (2.7)
(49.1) (42.8)
Total liabilities 1 (241.9) (210.6)
Net assets 220.4 224.8
Equity attributable to equity holders of the parent
Share capital 4.3 4.3
Share premium 53.5 53.5
Other reserves (15.5) (15.8)
Retained earnings 178.1 182.8
Total equity 220.4 224.8
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2023
Note Share Share Capital Special Translation Treasury Retained Total
capital premium redemption reserve reserve reserve earnings equity
£M £M reserve £M £M £M £M £M
£M
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
Balance at 1 January 2023 4.3 53.5 0.1 1.5 2.1 (19.5) 182.8 224.8
Profit for the year attributable to the equity shareholders - - - - - - 7.7 7.7
Other comprehensive expense - - - - (0.2) - (0.2) (0.4)
Total comprehensive (expense)/income for the year - - - - (0.2) - 7.5 7.3
Transactions with equity shareholders, recorded directly in equity
Share-based payments - - - - - - 0.6 0.6
Share options exercised by employees - - - - - 0.5 (0.5) -
Deferred tax on share options - - - - - - (0.1) (0.1)
Dividends to equity holders 5 - - - - - - (12.2) (12.2)
Total contributions by and distributions to equity shareholders - - - - - 0.5 (12.2) (11.7)
Balance at 31 December 2023 4.3 53.5 0.1 1.5 1.9 (19.0) 178.1 220.4
CASH FLOW STATEMENT
For the year ended 31 December 2023
Group
2023 2022
£M £M
Cash flows from operating activities
Profit before tax for the year 7.1 41.8
Adjustments for:
Depreciation and impairment of property, plant and equipment, amortisation and 14.0 7.7
impairment of intangible assets and other acquisition-related costs
Depreciation and impairment of right-of-use assets 13.9 12.5
Finance income (0.3) (0.7)
Finance expense 5.4 2.8
Insurance proceeds for property, plant and equipment (following fire) (8.6) (1.7)
Profit on sale of property, plant and equipment (1.1) -
Share-based payments 0.6 0.9
Operating cash flows before changes in working capital and other payables 31.0 63.3
Change in inventories 10.0 (8.3)
Change in trade and other receivables 2.7 (3.5)
Change in trade and other payables (22.1) (34.2)
Cash generated from/(used in) the operations 21.6 17.3
Interest paid (4.7) (1.2)
Interest received 0.3 0.6
Tax (paid)/received (4.7) (5.8)
Net cash flow from operating activities 12.5 10.9
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 2.3 -
Acquisition of subsidiary, net of cash acquired (6.1) -
Acquisition of property, plant and equipment (17.4) (12.6)
Insurance proceeds for property, plant and equipment following fire 8.6 1.7
Acquisition of intangible assets (0.8) (1.2)
Net cash flow from investing activities (13.4) (12.1)
Cash flows from financing activities
Proceeds from the issue of treasury shares - 0.2
Payment to acquire own shares* (5.2) (9.8)
Proceeds from borrowings 110.0 25.0
Repayment of borrowings (60.3) (32.3)
Principal elements of lease payments (13.0) (14.0)
Dividends paid (12.2) (27.3)
Net cash flow from financing activities 19.3 (58.2)
Net increase/(decrease) in cash and cash equivalents 18.4 (59.4)
Cash and cash equivalents at 1 January 2.1 61.2
Effect of exchange rate fluctuations on cash held (0.1) 0.3
Cash and cash equivalents at 31 December 20.4 2.1
* During the period 1,566,622 (2022: 3,122,721) shares were acquired for £5.2
million (2022: £9.8 million) under the Group's Share Buyback Programme
NOTES TO THE FINANCIAL STATEMENTS
1 Segment reporting
As at 31 December 2023, 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.
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
2023 2022 2023 2022 2023 2022
£M £M £M £M £M £M
Revenue
External revenues 577.3 577.8 79.2 85.8 656.5 663.6
Reportable segment underlying 22.0 36.8 0.2 3.4 22.2 40.2
operating profit
Reportable segment assets 359.4 371.0 35.6 40.7 395.0 411.7
Reportable segment liabilities (209.8) (173.8) (18.9) (22.8) (228.7) (196.6)
During the year there were no inter-segment revenues for the reportable
segments (2022: £nil).
In the UK the Group's freehold properties are held within Headlam Group plc
and a rent is charged to the operating segments. In the current year this rent
has been allocated to the operating segments to better reflect their
performance.
Reconciliations of reportable segment profit, assets and liabilities and other
material items:
2023 2022
£M £M
Profit for the year
Total underlying operating profit for reportable segments 22.2 40.2
Non-underlying items (3.9) 4.7
Unallocated expense (6.1) (1.0)
Operating profit 12.2 43.9
Finance income 0.3 0.7
Finance expense (5.4) (2.8)
Profit before taxation 7.1 41.8
Taxation 0.6 (8.2)
Profit for the year 7.7 33.6
2023 2022
£M £M
Assets
Total assets for reportable segments 395.0 411.7
Unallocated assets:
Intangible assets 0.1 3.0
Income tax receivable 3.1 -
Deferred tax assets 0.9 -
Cash and cash equivalents 63.2 20.7
Total assets 462.3 435.4
Liabilities
Total liabilities for reportable segments (228.7) (196.6)
Unallocated liabilities:
Income tax payable - (1.9)
Deferred tax liabilities (13.2) (12.1)
Total liabilities (241.9) (210.6)
UK Continental Reportable Unallocated Consolidated
£M Europe segment £M total
£M total £M
£M
Other material items 2023
Capital expenditure 17.1 0.3 17.4 - 17.4
Depreciation 6.7 0.4 7.1 - 7.1
Depreciation of right of use assets 12.0 1.5 13.5 - 13.5
Impairment of property, plant and equipment 1.9 - 1.9 - 1.9
Impairment of intangible assets - - - 3.6 3.6
Impairment of right of use assets 0.4 - 0.4 - 0.4
Non-underlying items (excluding impairment) (2.3) 0.1 (2.2) 0.2 (2.0)
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)
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
2023 2022 2023 2022 2023 2022
£M £M £M £M £M £M
Revenue
Residential 377.2 382.8 47.5 52.5 424.7 435.3
Commercial 200.1 195.0 31.7 33.3 231.8 228.3
577.3 577.8 79.2 85.8 656.5 663.6
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:
· Insurance proceeds (following fire) and related loss on disposal
of items under construction and profit on sale of property, plant and
equipment as these are non-recurring items;
· Amortisation of acquired intangibles and other
acquisition-related items as they relate to the acquisition of businesses;
· Impairment of intangibles, property, plant and equipment and
right of use assets as, in totality, they are significant, non-recurring items
relating to the decision to replace the ERP system and the decision to close
certain sites; and
· Business restructuring and change-related costs which is a
significant item in 2023 comprising £3.4 million cash costs and £2.0 million
non-cash costs and relate to the period from January to December 2023. No
further costs are currently expected. See note 3 for further details.
See the Group's Annual Report and Accounts for details on alternative
performance measures.
Non-underlying expense after tax of £1.1 million (2022: income of £3.9
million) relate to the following:
2023 2022
£M £M
Amortisation of intangibles and other acquisition-related costs 2.3 1.5
Impairment of property, plant and equipment, intangible assets and right of 5.9 -
use assets
Insurance proceeds (following fire) (8.6) (6.2)
Profit on sale of property, plant and equipment (1.1) -
Business restructuring and change-related costs 5.4 -
3.9 (4.7)
Taxation on non-underlying items (2.8) 0.8
1.1 (3.9)
Included within impairment is £3.6 million impairment of intangible assets,
£1.9 million impairment of property, plant and equipment and £0.4 million
impairment of right of use assets. The impairment charges relate to the write
off of software development costs following the decision to replace the
existing ERP system and the write down of assets following the decision to
close certain sites.
Insurance proceeds relates to an insurance claim for losses arising from the
Kidderminster fire in December 2021. Profit on sale of property, plant and
equipment includes £1.2 million loss on disposal of items under construction
relating to previously capitalised costs associated with the rebuild of the
Kidderminster site, including site clearance fees and professional adviser
fees incurred before the decision was made to dispose of the site and also a
£2.3 million profit on sale relating to the ultimate disposal of the
Kidderminster land.
Business restructuring and change-related costs relate to network
optimisation, including headcount reduction costs as a result of the
restructuring, together with the cost of closing certain sites and the
implementation of dynamic transport planning which led to further headcount
reductions and vehicle termination costs. The costs comprise £3.4 million
cash costs and £2.0 million non-cash costs and relate to the period from
January 2023 to December 2023. No further cash or non-cash costs are currently
expected in 2024.
3 Taxation
Recognised in the income statement
2023 2022
£M £M
Current tax (credit)/expense:
Current year - 7.2
Adjustments for prior years (0.3) (0.6)
(0.3) 6.6
Deferred tax (credit)/expense:
Origination and reversal of temporary differences (0.5) 0.8
Effect of change in UK tax rates - 0.3
Adjustments for prior years 0.2 0.5
(0.3) 1.6
Total tax (0.6) 8.2
2023 2022
£M £M
Tax relating to items (credited)/charged to equity
Deferred tax on:
Share options 0.1 0.2
Deferred tax on other comprehensive expense:
Defined benefit plans (0.1) -
Total tax reported directly in reserves - 0.2
Factors that may affect future current and total tax charges
The UK headline corporation tax rate for the year was 23.5% (2022: 19.0%). In
the Spring Budget of 2021, the UK Government announced that from 1 April 2023
the rate of UK corporation tax would increase from 19.0% to 25.0%. This new
law was substantively enacted on 24 May 2021. UK deferred tax assets and
liabilities have been calculated at a rate of 25.0% (2022: 25.0%).
The Group is within the scope of the OECD Pillar Two model rules. The Pillar
Two legislation was enacted on 11 July 2023. The Group does not expect the
Pillar Two legislation to have any material impact.
Reconciliation of tax (credit)/charge
2023 2022
£M £M
Profit before tax 7.1 41.8
Tax using the UK corporation tax rate of 23.5% (2022: 19.0%) 1.7 7.9
Effect of change in UK tax rate - 0.3
Local tax incentives - (0.3)
(Non-taxable income)/non-deductible expenses (1.3) 0.5
Impact of losses not recognised - (0.1)
Recognition of deferred tax on losses (0.9) -
Adjustments in respect of prior years (0.1) (0.1)
Total tax in income statement (0.6) 8.2
Add back tax on non-underlying items 2.8 (0.8)
Total tax charge excluding non-underlying items 2.2 7.4
Profit before tax before non-underlying items 11.0 37.1
Adjusted effective tax rate excluding non-underlying items 20.0% 20.1%
Total effective tax rate (credit)/charge (8.5)% 19.6%
4 Earnings per share
2023 2022
£M £M
Earnings for basic and diluted earnings per share 7.7 33.6
Earnings for underlying basic and underlying diluted earnings per share 8.8 29.7
2023 2022
Number of shares
Weighted average number of ordinary shares for the purposes of basic earnings 80,270,756 83,626,126
per share
Effect of diluted potential ordinary shares:
Weighted average number of ordinary shares at 31 December 80,270,756 83,626,126
Dilutive effect of share options 107,110 615,584
Weighted average number of ordinary shares for the purposes of diluted 80,377,866 84,241,710
earnings per share
Earnings per share
Basic 9.6p 40.1p
Diluted 9.6p 39.8p
Underlying basic 11.0p 35.5p
Underlying diluted 10.9p 35.2p
At 31 December 2023, the Company held 5,449,419 shares (2022: 4,046,617) 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
2023 2022
£M £M
Final dividend for 2021 of 8.6p paid 27 May 2022 - 7.2
Special dividend of 17.7p paid 27 May 2022 - 14.9
Interim dividend for 2022 of 6.2p paid 28 November 2022 - 5.2
Final dividend for 2022 of 11.2p paid 2 June 2023 9.0 -
Interim dividend for 2023 of 4.0p paid 28 November 2023 3.2 -
12.2 27.3
The Board of Directors have declared a final dividend of 6.0p per share which
if approved by shareholders at the forthcoming AGM, will be payable on 7 June
2024.
The total value of dividends proposed or declared but not recognised at 31
December 2023 is £4.8 million (2022: £9.0 million).
6 Additional information
The financial information set out above does not constitute the Group's
statutory accounts for the years ended 31 December 2023 or 2022 but is derived
from those accounts. Statutory accounts for 2022 have been delivered to the
registrar of companies, and those for 2023 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 Group anticipates that the Group's statutory accounts will be posted to
shareholders during March 2024 and will be displayed on the Group's website at
www.headlam.com during March 2024. Copies of the statutory accounts will
also be available from the Company's registered office at Headlam Group plc,
Gorsey Lane, Coleshill, Birmingham, B46 1JU.
This final results announcement for the year ended 31 December 2023 was
approved by the Board on 5 March 2024.
ALTERNATIVE PERFORMANCE MEASURES ('APMs')
Glossary of Alternative Performance Measures Closest equivalent statutory measure Definition and purpose
Underlying Administrative Expenses Administrative expenses Calculated as administrative expenses before items associated with the
acquisition of businesses and 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
Underlying Operating Profit Operating profit Calculated as operating profit before items associated with the acquisition of
businesses and 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
Underlying Operating Profit Margin None Calculated as underlying operating profit divided by revenue. This measure is
used to assess how effective the Group is at converting revenue into
underlying operating profit
Underlying Profit Before Tax Profit before tax Calculated as profit before tax before items associated with the acquisition
of businesses and 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. Underlying profit before
tax is used in the determination of Executive Directors' annual bonuses
Underlying Profit After Tax Profit after tax Calculated as profit after tax before items associated with the acquisition of
businesses and 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
Underlying Basic Earnings Per Share Basic earnings per share Calculated as basic earnings per share before items associated with the
acquisition of businesses and 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
Underlying Diluted Earnings Per Share Diluted earnings per share Calculated as diluted earnings per share before items associated with the
acquisition of businesses and 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
EBIT None Calculated as underlying operating profit adjusted to exclude the impact of
IFRS 16 and share-based payments
EBITDA None Calculated as underlying operating profit excluding the impact of depreciation
and amortisation
Underlying Operating Cash Flow None Calculated as shown in the table in the Financial Review. This metric is used
to assess underlying cash generation
Net Debt / Funds including lease liabilities None Calculated as cash and cash equivalents less other interest-bearing loans and
borrowings and less lease liabilities. This is used as a measure of liquidity
Net Debt / Funds None Calculated as cash and cash equivalents less other interest-bearing loans and
borrowings
This is provided for use by investors, who used this metric before the
adoption of IFRS16 and continue to do so
Average Net Debt / Funds None Calculated by aggregating the net debt / funds position for each business day
and dividing by the total number of business days. This is used as a measure
of liquidity maintained throughout the year
Like for Like None Calculated as year-on-year revenue growth, expressed as a percentage and
Revenue Growth adjusted to normalise currency and for consistent working days, for businesses
making a full year's contribution. This allows a consistent measure of
year-on-year performance
Underlying selling, general and administrative costs None Calculated as distribution costs and underlying administrative expenses
divided by revenue and expressed as a percentage. This measure shows how
effective the Group is at converting gross profit into underlying operating
profit
Return on Capital Employed None Calculated as underlying operating profit measured as a percentage of average
capital employed, being total equity less non-current other interest-bearing
loans and borrowings less cash and cash equivalents
This demonstrates the relative level of profit generated by the capital
employed
Cash Conversion None Calculated as Underlying Operating Cash Flow divided by Underlying Operating
and expressed as a percentage
This cash conversion measure demonstrates the success of the Group in
converting profit to cash, which underpins the quality of earnings and
reflects the effectiveness of working capital management
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