Headlam Regulatory News (HEAD)

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 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 expectations² 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.

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

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

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.

²Company-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.

Enquiries:

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, recycling, 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 group³.

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 interim4 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%).

*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%).

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:

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

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.

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.

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.

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2022

Total comprehensive income/(expense) attributable to the equity shareholders for the year arising from:

STATEMENTS OF FINANCIAL POSITION

At 31 December 2022

STATEMENT OF CHANGES IN EQUITY - GROUP

For the year ended 31 December 2022

CASH FLOW STATEMENTS

For the year ended 31 December 2022

* 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

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:

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:

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: