Headlam Regulatory News (HEAD)

6 March 2019

Headlam Group plc

('Headlam' or the 'Company')

Final Results

Headlam Group plc (LSE: HEAD), Europe's leading distributor of floorcoverings, is pleased to announce its final results for the year ended 31 December 2018.

Financial Highlights*:

· Total revenue increased 2.3% to £708.4 million (2017: £692.5 million) despite the generally softer trading backdrop evident throughout the year

· Like-for-like** revenue declined in both the UK and Continental Europe, 4.2% and 1.8% respectively, with the softer market being more keenly felt in the UK

· Gross margin increased 80 basis points to an historic high of 32.3% (2017: 31.5%) due to an increased contribution from the higher-margin specification business area, as well as the benefits from early settlement discount on trade creditors and ongoing pricing discipline

· Underlying*** profit before tax increased £0.3 million to £43.4 million (2017: £43.1 million)

· Statutory profit before tax of £40.4 million marginally down on prior year (2017: £40.7 million)

· Basic earnings per share increased 2.3% to 40.0 pence (2017: 39.1 pence)

· Cash generated from operations remained strong, being 121% of operating profit (2017: 132%)

· Net cash position at year-end increased 4.0% to £36.7 million (2017: £35.3 million), and included acquisition spend of £9.1 million

· Total ordinary dividend in respect of 2018 increased slightly to 25.0 pence (2017: 24.8 pence)

*All prior year revenue, like-for-like revenue and gross margin numbers are restated to present comparatives on a consistent basis with 2018. This follows the reclassification in 2018 of some items between revenue, cost of sales and operating expenses to better reflect their nature.

**Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2018 and 2017 periods and is adjusted for any variances in working days.

***Underlying is before non-underlying items which includes intangibles amortisation relating to businesses acquired, acquisition fees, contingent consideration movements, non-recurring pension costs in relation to guaranteed minimum pension ('GMP') equalisation and non-recurring costs relating to senior personnel changes.

Operational Highlights:

· Ten efficiency initiatives focused on improving operational practices and financial performance, some earlier-stage ones beginning to contribute in 2018, with increasing benefits expected throughout 2019

· Five smaller strategic acquisitions completed in 2018, further enhancing and broadening the Company's industry and geographical position

· Planning approval received for the new regional distribution centre in Ipswich, with the land acquired post the year-end

· Board supplemented with a wealth of experience throughout the year, with several operational appointments bringing significant additional expertise into the business

Current Trading:

· Positive start to the year, with both the UK and Continental Europe up on a like-for-like revenue basis

· Commitment to a progressive dividend policy, with the 2019 dividend currently intended to be maintained in-line with 2018 despite the previously announced anticipated lower underlying profit before tax in 2019

Steve Wilson, Chief Executive, said:

"Despite the generally softer trading backdrop that was evident throughout 2018, it was pleasing that total revenue and underlying profit increased in the year. Our focus for 2019 and 2020 is operational and financial improvement through the pursuit of efficiency initiatives. These will help mitigate against any future weaker trading backdrops and enable the delivery of an improved performance going forward. We have had a positive start to the year and I would like to thank all our people for their hard work and dedication."

Enquiries:

Notes for Editors:

Headlam is Europe's leading distributor of floorcoverings having grown significantly via organic growth and acquisition since 1992.

Headlam's core business provides the distribution channel between suppliers and trade customers of floorcoverings, providing suppliers with the greatest coverage and customer penetration for their products across the UK and Continental Europe, and customers with the broadest range of products supported by next day delivery.

The Company is engaged with suppliers across 22 countries whose products cover a significant proportion of the floorcoverings market including carpet, residential vinyl, engineered wood, laminate, luxury vinyl tiles, ceramic tiles, underlay and commercial flooring. The Company's customers are within both the residential and commercial sectors and comprise principally independent retailers and flooring contractors.

The Company comprises 67 wholly-owned businesses in the UK and Continental Europe (UK 63, Continental Europe 4) each operating under their own trade brand and utilising their individual sales team which achieves greater market penetration.

Each of the businesses is supported by the Company's centralised and financial resources and extensive distribution network across the UK and Continental Europe.

www.headlam.com

Chairman's Welcome

I am pleased to present my first final results having succeeded Dick Peters as Chairman upon his retirement after last year's AGM.

Headlam is a market-leading business developed around an established business model and underpinned by strong operational cash generation and balance sheet strength. I am continually impressed by the commitment of our people, who I especially want to thank for their considerable efforts during 2018, in what was a demanding year due in the most part to the UK market weakness that prevailed throughout. Despite this backdrop, it is pleasing to report financial results marginally ahead of 2017 and an improved dividend for 2018 totalling 25.0 pence (subject to shareholders' approval at the AGM).

During the year we completed the planned succession and development of our Board by adding individuals with a wealth of new experience and expertise pertinent to the delivery of our strategic aims and future ambitions. As previously detailed, Amanda Aldridge was appointed a Non-Executive Director in February 2018 and assumed the role of Chair of the Audit Committee in June 2018 following my stepping down from the position after three years. Additionally, in conjunction with Andrew Eastgate's forthcoming retirement in May 2019 after nine years' service, Keith Edelman and Alison Littley were appointed Non-Executive Directors and assume the positions of Senior Independent Director and Chair of the Remuneration Committee respectively. I am delighted to welcome them to Headlam and their experience spanning the areas of supply chain management, consumer and customer-led service innovation, and commercial development mean their contributions will be invaluable. I also lastly wish to thank Andrew for his considerable service to the Company.

As announced earlier this year, 2019 is likely to present us with further general market weakness in the UK and an increased element of economic and political uncertainty. As previously announced, this is one of the factors contributing to our expectation that 2019 profits will be lower than 2018. This situation serves to reinforce our concerted commitment to pursuing multiple efficiency initiatives aimed at improving operational and financial performance, developing the business, and providing a more robust platform for future growth.

During 2019, I expect to see increasing momentum towards and contribution from these initiatives, aided by the enhanced Board and an expanded senior team following recent appointments bringing additional skills and expertise into the business.

Against this backdrop of confidence in our ability to deliver an improved future performance, the Board has reiterated its commitment to a progressive dividend policy, with the 2019 dividend currently intended to be maintained in-line with that of 2018.

I look forward to being able to update you on our progress during the year and within next year's Report.

Philip Lawrence

Chairman

6 March 2019

Chief Executive's Review

2018 Financial Performance

Despite the generally softer trading backdrop that was evident throughout 2018, it was pleasing that total revenue* increased by 2.3% in the year to £708.4 million (2017: £692.5 million). The Continental European businesses in aggregate outperformed this result, growing 5.3% and representing 14.7% of total revenue (2017: 14.3%), while the UK improved by 1.8% and accounted for 85.3% of total revenue (2017: 85.7%).

Disappointingly, like-for-like** revenue declined in both the UK and Continental Europe, 4.2% and 1.8% respectively. This was a reflection of the generally softer markets, more keenly felt in the UK, with a noticeable weakness in the UK residential sector where the Company's distribution business is more heavily weighted. This particular weakness resulted in the percentage of total revenue attributable to the residential sector declining to 64.6% in the year (2017: 67.9%).

The UK like-for-like performance did, however, show an improvement in the second half of the year compared with the first (H1 2018: -5.5%; H2 2018: -3.5%). The commercial sector reversed a small decline in the first half to end the year up 0.6%, and the full-year residential sector decline of 6.2% represented an uplift on the first half (H1 2018: -7.6%; H2 2018: -5.1%). Pleasingly, the month of September was comparatively strong, recording a good like-for-like uplift on the previous year in both the residential and commercial sectors, with September noteworthy for being when the majority of the educational refurbishment activity completes.

In contrast to the UK, the second half performance in Continental Europe was weaker than the first, moving from a modest positive like-for-like position to a decline (H1 2018: +1.7%; H2 2018: -4.5%), and the residential sector was positive for the year (FY 2018: +2.8%) while the commercial sector declined (FY 2018: -6.9%).

Gross margin* increased by 80 basis points during the year, from 31.5% in 2017 to 32.3%, an historic high. The improvement in the year was due in the most part to an increased contribution from the higher-margin specification business area, as well as the benefits from early settlement discount on trade creditors and ongoing pricing discipline implemented across the Company since late 2016.

Due to year-on-year inflationary cost increases and the expanded specification business area having a higher overhead percentage when compared with revenue, total underlying*** distribution expenses and administration costs increased to 26.1% as a percentage of revenue (2017: 25.2%). This 90 basis points increase offset the gross margin improvement leading to the year's underlying operating margin declining by 10 basis points from 6.3% to 6.2%.

Underlying profit before tax increased by £0.3 million during the year to £43.4 million compared with £43.1 million for the previous year, and statutory profit before tax of £40.4 million was marginally down on the prior year (2017: £40.7 million).

The net cash position increased year-on-year, being £36.7 million as at 31 December 2018 (2017: £35.3 million), and included acquisition spend during the year of £9.1 million on five smaller businesses to further enhance and broaden the Company's industry and geographical position.

Efficiency Initiatives

Ten efficiency initiatives currently being pursued are focused on improving operational practices and financial performance, and are collectively aimed at improving the Company's operating margin. Whilst most of these initiatives are at an early-stage in their implementation, we have previously highlighted the initiative focused on the streamlining of processes and pricing discipline implemented since late 2016. This initiative has contributed to gross margin improving by 130 basis points since 2016 and reaching an historic high in 2018. Other initiatives which began to contribute to the financial performance in 2018 included the work completed in connection with a revised group procurement approach to Goods Not for Resale ('GNFR') and changes to our vehicle leasing contracts.

Additionally, we are making progress with our trials in relation to inventory management and more effective utilisation of the delivery fleet. Thus far, the inventory management trial at Coleshill, our largest distribution hub, has resulted in improved customer service through a meaningful reduction in the number of stock-outs, whilst creating surplus warehouse capacity of approximately 10%. This increased capacity has helped support the Company's investment in additional inventory across its fastest-moving products in 2019 to partially mitigate potential disruption and maintain levels of customer service in the event of a hard Brexit.

The review around the more effective utilisation of our delivery fleet incorporates two separate initiatives both currently being trialled, these being dynamic route planning and the aggregation and consolidation of geographic specific deliveries. The latter deliveries initiative, whereby deliveries destined for the same customers or geographic location by different Headlam businesses are consolidated at, and delivered from, the nearest warehouse location, is currently being trialled in South Wales. The proposed benefits of improved customer service levels, reduction in the cost to serve and reduced carbon footprint are beginning to materialise. There is potential to extend this trial across a number of the Company's other locations.

As each of the ten initiatives continues to be progressed, we will see increasing benefits throughout 2019 and a more meaningful impact on financial and operational performance in 2020 and beyond. It is our aim to expedite activity as much as possible while ensuring there is no disruption to the business and customer service levels, which ultimately influences the pace of implementation.

Continental Europe

In Continental Europe, following investment in people and an acquisition during 2018, the emphasis has been on revenue improvement and restoring their collective profitability, with additional focus on higher margin products and certain market segments. In the Netherlands, against a positive market backdrop, there has been investment in new product ranges, particularly luxury vinyl tile ('LVT'), and progress towards extracting operating synergies following the acquisition of Dersimo BV in March 2018, which enlarged the Company's Dutch footprint.

In Switzerland, following continued investment in the specification-focused sales team and showrooms, there have been positive developments in terms of product mix and associated higher margin revenue.

A strategic review has been completed at the French business following the appointment of a new Managing Director in 2018 to address the previous decline in performance. Areas now being focused on, in association with an improved sales team, include specification and higher-margin own-branded products, and leveraging of the business' position as the only national distributor. Progress to date in 2019 has been encouraging.

Acquisitions

We completed five smaller strategic acquisitions in 2018, spending a total of £9.1 million during the year. Ashmount Flooring Supplies Limited, Rackhams Limited and Garrod Bros Ltd expanded our footprint in Greater London, an area where we have historically been underrepresented. Dersimo BV increased our presence and geographical coverage in the Netherlands, and CECO (Flooring) Limited based in Carryduff, south of Belfast, extended our position in the specification area which provides an opportunity to broaden our overall position in the industry. We are delighted to welcome the businesses and their employees to Headlam, and to be able to provide support for their future growth and development through our financial and centralised resources.

Whilst we are a leading business in aggregate, there are a number of market segments and product categories where we hold underweight positions, and this provides scope for growth whether organically or through further strategic acquisitions. While our present overarching focus is the improvement of performance of the existing business portfolio and network, we continue to monitor a deliberately reduced pipeline of acquisitions, and remain responsive to further opportunity.

Investments and Capital Expenditure

In-line with our focus on improvement, during 2019 investment and capital expenditure will primarily be focused on the development of our new regional distribution centre in Ipswich which will enable greater network optimisation and provide improved support to our surrounding businesses and customers in the South East of England. In October 2018 we received planning approval for the centre and as of last month acquired the land at a cost of £4.0 million. Ground-work preparation will start in the second quarter of this year to enable the project to move to the construction phase by the second half of 2019. The current timetable indicates that the centre, which is estimated to cost a total of approximately £26 million, should be operational in mid-2020.

In addition to ongoing maintenance capital expenditure of typically £3-4 million per annum in connection with the running of our operations in a largely freehold property portfolio, there has been recent investment in people and expertise. Some of this investment is specifically to support the timely delivery of our efficiency initiatives.

People

As detailed in the Chairman's Welcome, the Board has been supplemented with a wealth of experience and expertise. Additionally, we have made several operational appointments, the most senior being the UK Operations Director who will join the Company and Senior Management Team shortly. I believe we now have all the appropriate people in place to fulfil our ambitions.

Dividends

We are committed to providing improving returns to shareholders and a progressive dividend policy****. The Board seeks to protect dividend payments against short-term fluctuations in profit resulting from temporary adverse trading conditions. This commitment is enabled by the strength of our balance sheet, and additionally reflects our confidence in the ability to improve profitability and maintain a strong balance sheet and operational cash generation going forward.

The Board has proposed a final ordinary dividend of 17.45 pence (2017: 17.25 pence), payable on 1 July 2019 to shareholders on the register as at 7 June 2019. This brings the total ordinary dividend declared and proposed in respect of 2018 to 25.0 pence, a slight increase on the 24.8 pence in 2017.

Current Trading and Outlook

As advised in January 2019, we have taken a prudent view of 2019 and expect revenue to be in-line with 2018 due to the anticipated further general weakness in the UK market, and as a consequence it is anticipated that underlying profit before tax will be lower than 2018 due to a number of factors. These include the anticipated movement in revenue mix and associated margin, the year-on-year inflationary pressure on distribution costs and administrative expenses, and the efficiency initiatives being predominately at an early stage and not yet sufficiently material in their contribution to offset the current weak market backdrop and increases in overheads.

It is gratifying that despite being an established and leading business with considerable financial strength, there remain multiple initiatives and measures under our control which should enable improvement in performance going forward. This position provides the confidence to support our current intention to maintain the 2019 dividend in-line with that of 2018.

We have had a positive start to the year, with both the UK and Continental Europe up on a like-for-like revenue basis for the year-to-date. I would like to thank all our people for their hard work and dedication in 2018, and delivery of an improved financial performance in a somewhat challenging year. I believe that with the improvements we are putting in place and the evolution of our business firmly underway, 2019 will be a year of progress towards our objectives.

Steve Wilson

Chief Executive

6 March 2019

*All prior year revenue, like-for-like revenue and gross margin numbers are restated to present comparatives on a consistent basis with 2018. This follows the reclassification in 2018 of some items between revenue, cost of sales and operating expenses to better reflect their nature.

**Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2018 and 2017 periods and is adjusted for any variances in working days.

***Underlying is before non-underlying items which includes intangibles amortisation relating to businesses acquired, acquisition fees, contingent consideration movements, non-recurring pension costs in relation to guaranteed minimum pension ('GMP') equalisation and non-recurring costs relating to senior personnel changes.

**** A progressive dividend policy is one where the dividend is expected to rise at least in-line with increases in earnings per share, and if earnings per share falls, the dividend will not be reduced.

Financial Review

2017 Income Statement Restatement

As disclosed in the 2018 Interim Report, the Income Statement for 2017 has been restated due to the reclassification, in 2018, of some items between revenue, cost of sales and operating expenses to better reflect their nature. The 2017 restated results are presented in a consistent manner with 2018 and all references to year-on-year movements are on a restated basis.

Revenue

During the year, total revenue improved by 2.3% from £692.5 million to £708.4 million, an increase of £15.9 million. Like-for-like* revenue declined in both the UK and Continental Europe, by 4.2% and 1.8% respectively.

* Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2018 and 2017 periods and is adjusted for any variances in working days

UK

The Company's UK revenue performance was marginally up on 2017 at £604.2 million (2017: £593.5 million), reflecting a weak market backdrop throughout the year compared with 2017, particularly in the residential sector, offset by contributions from acquisitions. Year-on-year revenue from acquired businesses during the year amounted to £33.1 million while like-for-like revenue declined by £24.7 million.

The residential sector represented 66.3% of UK revenue in 2018 (2017: 70.4%), a reduction of 4.1% and 6.2% on an absolute and like-for-like basis respectively. As a consequence, there was a slight shift in the business mix towards the commercial sector, now representing 33.7% of UK revenue in 2018 (2017: 29.6%), although the year-on-year movement was almost flat on a like-for-like basis, up 0.6%.

Continental Europe

The Continental European businesses delivered a 5.3% increase in revenue to £104.3 million, with this growth, driven by an acquisition in the Netherlands during the year, being slightly offset by the 1.8% decline in like-for-like revenue.

Continental Europe accounted for 14.7% of total revenue in 2018, up from 14.3% in 2017. In contrast to the UK, the weighting between the residential and commercial sector revenue showed a slight movement towards residential compared with 2017, accounting for 54.7% of revenue (2017: 52.6%).

Gross Margin

Gross margin increased by 80 basis points in the year from 31.5% to 32.3% predominately as a result of the positive impact of higher margin acquisitions (55 basis points), with the balance largely due to the benefit arising from anticipated early settlement discount on trade creditors and the ongoing focus on pricing discipline since late 2016.

Expenses

Combined distribution costs and administrative expenses increased by 6.2% up £11.0 million to £187.7 million. On an underlying basis, and after adjusting for the impact of the acquisitions during the year, total costs actually decreased by £3.3 million which was largely driven by a reduction in performance-related bonus payments offsetting the 2% cost of living award given to all UK employees bar the Executive Directors and Senior Management Team.

Underlying distribution costs and administrative expenses expressed as a proportion of total revenue increased from 25.2% in 2017 to 26.1% in 2018. This was predominately as a consequence of the expansion into the specification business area which typically has a higher fixed cost base compared with the Company's distribution businesses.

The relative proportions of distribution costs and administrative expenses as a percentage of total expenses for 2018 remained largely consistent at 72.7% and 27.3% respectively (2017: 72.9% and 27.1%).

After adjusting for the effect of the acquisitions during the year, the annual movement in other expenses was relatively modest, with the next largest item being the £3.2 million decrease in people costs reflecting the reduction in performance-related bonus payments offset by the aforementioned 2% cost of living award.

Items totalling £2.9 million (net) have been treated as non-underlying in 2018 (2017: £2.4 million). These non-underlying items related to amortisation of acquired intangible assets (£1.8 million), acquisition related fees for the five acquisitions made in 2018 (£0.5 million), non-recurring people costs (£0.8 million), pension equalisation costs associated with past service liabilities (£1.2 million) and a credit from the release of contingent consideration accrued for the Domus acquisition in 2017 (£1.4 million). These are discussed in detail in note 4 to the Financial Statements.

Operating Profit

Underlying operating profit was marginally up on 2017 at £44.3 million (2017: £43.8 million), however, the underlying operating margin was slightly reduced at 6.2% (2017: 6.3%). The underlying operating margin was almost maintained despite the £7.6 million loss of gross profit from a reduction in like-for like-revenue. This was due to the positive contribution from acquisitions of £2.8 million, improvement in pricing, a reduction in cost of sales for the anticipated early settlement discount received from the year-end trade creditors, reduction in performance-related bonus payments, and ongoing operating cost mitigations.

One of the key areas of strategic focus is improving the Company's operating efficiency. The Company has a rolling program of margin improvement initiatives, most of which are at an early-stage of implementation with some earlier ones having been commenced in 2017 or 2018. Some of these started to deliver initial benefits in 2018, with more meaningful contributions to come. These primarily were achieved by operating a group procurement function in relation to a number of goods not for resale and an extension of commercial vehicle and car leasing contracts. Commenced in 2018, these changes will deliver an accumulated cost saving of over £1.0 million per annum once fully deployed following the full fleet replacement cycle over the next few years and as supply contracts come up for renewal.

Tax

The underlying effective tax rate for 2018 was 17.9% (2017: 18.5%) which is lower than the headline rate of corporation tax in the UK of 19.0%. This difference is largely due to an adjustment in prevailing overseas tax rates and a release in creditors for uncertain tax positions following the ongoing review of tax risks in the Company. The full effective rate of tax in 2018 was lower at 17.2% (2017: 19.1%) due to non-underlying tax credits.

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 with a level of tax compliance risk that is rated as "low".

Ordinary Dividends and Earnings Per Share

When declaring the interim and recommending the final dividend, the Board considers the Company's cash resource, adequacy of distributable reserves and future expectations of performance.

The total dividend payable in respect to 2018 equates to an earnings per share cover ratio of 1.6 (2017: 1.6), cash outflow of £21.0 million, and reflects a free cash flow (cash from operating activities less capital equipment spend) cover ratio of 1.7 (2017: 1.9).

Dividend announcements, approvals and payments are typically expected to be as follows:

Acquisitions, Related Goodwill and Other Intangible Assets

The Board has a methodology for calculating the value of acquired intangible assets and the period over which intangible assets are amortised for each acquired business.

In arriving at values for goodwill and the associated intangible assets, the Board has taken a judgment on the discounted fair value of any contingent consideration which is payable after completion of the acquisition. Similarly, the Company has taken judgments over attributing values for the intangible assets of order book, brand value, any non-compete arrangements with sellers and customer relationships together with a useful economic life over which to amortise the assets. After evaluating the above, this leaves the Company with residual goodwill value which reflects the overall value to the Company as a result of having a more diverse product range and broader route to market.

The carrying value of contingent consideration and goodwill for acquired businesses is then reviewed at the end of each financial year.

As an illustration, the impact of each of the five acquired businesses in 2018 are shown in the table below, together with the current value and amortisation charge in the Income Statement (although it is worth noting that the Garrod Bros intangible asset was fully written down in 2018). Further information is contained in note 8 to the Financial Statements.

*Both Rackhams and Garrod Bros are currently subject to a merger inquiry by the Competition and Markets Authority ('CMA')

Retirement Benefits

The Company operates two defined benefit pension schemes in the UK and in Switzerland, the assets and liabilities of which are dominated by the UK scheme which is closed to new members.

The net liability attaching to employee benefits is as follows:

The year-on-year decrease in the net liability amounts to £6.8 million, which reflects the elimination of the short-term deficit contributions which ceased to be paid by the Company during 2018 following the most recent triennial valuation. This was mainly caused by the changes in financial assumptions, where annual salary increases are assumed to rise in-line with RPI rather than at a 1.5% uplift to RPI as previously the case and an increase in the discount rate to 2.7% (0.3% increase), offset by negative changes in the returns on asset performance.

Following recent pension case law, the UK scheme liabilities have increased to reflect gender equalisation of benefits for past service. This has resulted in a one-off £1.2 million cost in the Income Statement for 2018, categorized within the non-underlying items.

Capital Allocation, Investment Decisions and Return on Capital

The Board is committed to ensuring the efficient allocation of capital, with a clear strategy for sustainable growth, with controls in place to govern capital expenditure and working capital. The Board routinely reviews organic growth opportunities and associated investment, value enhancing acquisitions, and shareholder returns to ensure the Company deploys an optimal capital structure. Such investment opportunities are subject to both internal rate of return and cash flow payback criteria, regularly reviewed by the Company to ensure consistency of assessment.

Return on Capital Employed (measured as earnings before interest and taxes ('EBIT') as % of capital employed) in 2018 was 23.2% (2017: 26.2%).

Capital Expenditure

The Company incurred a replacement level of capital expenditure on its land and buildings of £0.4 million during the year (2017: £0.2 million), and capital expenditure on plant and machinery of £3.5 million (2017: £2.8 million).

Activity in relation to the new Ipswich regional distribution centre is now meaningfully underway. Total capital expenditure is estimated to be in the region of £26.0 million, with £0.5 million spend incurred in 2018, approximately £16.0 million expected in 2019 (including land acquisition cost of £4.0 million), and the balance in 2020.

New Accounting Standard Not Yet Applied - IFRS 16 Leases

This new standard is effective for financial periods beginning after 1 January 2019 and eliminates the classification between operating and finance leases over 12 months in length. Full information, including an evaluation of the impact on the Company's financial statements, is detailed in note 2 to the Financial Statements. While adoption of the new standard will have a material impact on the presentation of the Group Statement of Financial Position, the Group expects that the impact on the Income Statement for 2019 will be a reduction in the net profit before tax by approximately £0.5 million.

Cash Flow

Net Cash Flow from Operating Activities

During the year, net cash flow from operating activities was £40.0 million (2017: £43.2 million) with the key drivers behind this positive cash flow generation shown below.

Cash generated from operations remained strong in the year despite the weaker trading backdrop, being 121% of operating profit (2017: 132%).

Cash Flows from Investing and Financing Activities

The table below summarises the cash flow movements arising from investing and financing activities during the year. The overall net cash outflow from the two activities was £38.5 million, with the main factors being the payment of dividends, acquisition consideration (net of cash acquired), investment in capital equipment, and an increase in shares acquired reflecting payments to acquire own shares for treasury to satisfy future obligations under the Company's employee share schemes. In 2018, there was a £4.8 million reduction in dividends paid owing to an additional special dividend being paid in relation to 2017.

Net Funds

Net funds at the year-end increased slightly to £36.7 million from £35.3 million in 2017 as a result of the net cash outflows arising from operating, investing and financing activities outlined above.

In both 2017 and 2018, the Company drew-down on its banking facilities during the year in-line with the normal swings in working capital. Average net debt in 2018 was £16.9 million (2017: £9.2 million net funds).

Funding and Going Concern

The Company increased its committed UK banking facilities in 2017 to £72.5 million (Sterling denominated) and €8.6 million (Euro denominated) all with end dates of December 2021. The Company also has short-term uncommitted facilities which amount to £25.0 million, and are renewable on an annual basis. In addition, the Company has existing facilities of £7.6 million in Continental Europe.

The Company maintains sufficient banking facilities to fund its operations and investments, and as at 31 December 2018, 93.6% of the total facilities were undrawn as shown below.

Having reviewed the Company's resources and a range of likely outcomes, 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 12 months from the date of this Financial Review and it is appropriate to adopt the going concern basis in preparing the Company's Financial Statements.

Chris PayneChief Financial Officer

6 March 2019

Financial Statements

Consolidated Income Statement

for the year ended 31 December 2018

* The results for the year ended 31 December 2017 have been restated to reflect changes made for the year ended 31 December 2018 as reported in note 1.

All Group operations during the financial years were continuing operations.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2018

Statement of Financial Position

at 31 December 2018

Statement of Changes in Equity

for the year ended 31 December 2018

Cash Flow Statement

for the year ended 31 December 2018

Notes

1 Income Statement Restatement

The Consolidated Income Statement for the year ended 31 December 2017 has been restated to reclassify a number of rebates and prompt payment discounts between revenue, cost of sales, distribution costs and operating expenses in order to more appropriately reflect their nature. Consequently, these adjustments mean the prior year comparatives are now presented in a consistent manner with the current year.

2 IFRS16 'Leases' - Not yet applied

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018 reporting periods and have not been early adopted by the group.

International Financial Reporting Standard (IFRS) 16 'Leases' (replacing IAS 17).

The Standard is effective for periods beginning after 1 January 2019 and it will therefore be effective in the consolidated financial statements for the Group for the year ending 31 December 2019. Adoption of the new standard will have a material impact on the Group.

This new standard eliminates the classification of leases over 12 months in length as either operating or finance leases and introduces a single lessee accounting model whereby all leases are accounted for on balance sheet, unless of low-value. The standard will therefore require that the Group's leased assets are recorded within property, plant and equipment as 'right of use assets' with a corresponding lease liability which is based on the discounted value of the cash payments required under each lease. The income statement will be affected by the replacement of the operating lease expense with a depreciation charge and a finance expense.

The lease liability has been measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate at transition. The right-of-use asset is measured at its carrying amount as if the standard had been applied since the commencement of the lease, discounted using the incremental borrowing rate at transition. Where data is not available to enable this measurement to be made, the right-of-use asset is measured at an amount equal to the lease liability. Transition recognition exemptions relating to short-term and low value leases have been applied as well as practical expedients taken, where available, to simplify the transition process.

The Group has collated information on leases held at the 31 December 2018 for an evaluation of the impact of IFRS 16. It is estimated that on transition the lease liability and the right-of-use asset brought on balance sheet will be valued at approximately £48.5 million. Net current assets will be £13.2 million lower, due to the presentation of a portion of the liability as a current liability.

The group expects that the impact on the income statement for 2019 will be a reduction in the net profit before tax by approximately £0.5 million as a result of adopting the new rules with the operating lease expense recognised under the existing standard (IAS 17) (Full year total operating lease cost 2018: £15.3 million) being replaced by depreciation and finance costs. There will be no overall impact on the Group's cash and cash equivalents.

The group will apply the standard from its mandatory adoption date of 1 January 2019 using the modified retrospective approach. Under this approach, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings on 1 January 2019, with no restatement of comparative information. All right-of-use assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).

There are no other new standards, amendments to existing standards, or interpretations that are not yet effective that would be expected to have a material impact on the Group.

3 Segment reporting

On 31 December 2018, the Group had 63 operating segments in the UK and four operating segments in Continental Europe. Each segment represents an individual trading operation, and each operation is wholly aligned to the sales, marketing, supply and distribution of floorcovering products. The operating results of each operation are regularly reviewed by the Chief Operating Decision Maker, which is deemed to be the Group Chief Executive. Discrete financial information is available for each segment and used by the Group 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 Group Chief Executive, the Board and the executive management team and forms the basis for the presentation of operating segment information given below.

* The results for the year ended 31 December 2017 have been restated to reflect changes made for the year ended 31 December 2018 reported in note 1.

During the year there were no inter-segment revenues for the reportable segments (2017: £nil).

Reconciliations of reportable segment profit, assets and liabilities and other material items:

In the UK the Group's freehold properties are held within Headlam Group plc and a rent is charged to the operating segments for the period of use. Therefore, the operating reports reviewed by the Group Chief Executive show all the UK properties as unallocated and the operating segments report a segment result that includes a property rent. This is reflected in the above disclosure.

Each segment is a continuing operation.

The Group 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:

* The results for the year ended 31 December 2017 have been restated to reflect changes made for the year ended 31 December 2018 reported in note 1.

4 Non-underlying items

In order to illustrate the underlying trading performance of the Group, presentation has been made of performance measures excluding those items which it is considered would distort the comparability of the Group's results. These non-underlying items are defined as those items that, by virtue of their nature, size or expected frequency, warrant separate additional disclosure in the financial statements in order to fully understand the underlying performance of the Group.

Non-underlying items of £2,942,000 relate to non-recurring costs relating to personnel changes, GMP equalisation, a release of contingent consideration, intangibles amortisation relating to businesses acquired, acquisitions fees, and the related tax of £807,000 on these costs, see table below.

5 Taxation

Recognised in the income statement

Factors that may affect future current and total tax charges

The UK headline corporation tax rate for the period was 19.0% (2017: 19.25%). The UK tax rate will be further reduced to 17% with effect from 1 April 2020 which was enacted during 2016. The majority of the deferred tax balance in respect of UK entities has therefore been calculated at 17.0% (2017: 17.0%) on the basis that most of the balances will materially reverse after 1 April 2020.

In addition, a reduction in the French corporation tax rate to 25% by 2022 was enacted in December 2017 which has also been taken into account in the calculation of the related deferred tax balance.

Reconciliation of effective tax rate

6 Earnings per share

7 Dividends

Interim dividends of 7.55p per share (2017: 7.55p per share) are not provided for at 31 December 2018, but are recognised in the financial statements when the dividend is paid. The dividend was paid on 2 January 2019 and totalled £6,322,000.

The final proposed dividend of 17.45p per share (2017: 17.25p per share) will not be provided for until authorised by Shareholders at the forthcoming AGM. There are no income tax consequences. The cost of the final proposed dividend will be £14,612,000.

The total value of dividends proposed but not recognised at 31 December 2018 is £20,934,000 (2017: £20,969,000).

8 Acquisitions

On 2 March 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of Dersimo BV ('Dersimo') located in the western Netherlands. Dersimo is a full-service distributor of both soft and hard floors from a combination of well-known manufacturer brands as well as its own carpet and vinyl designs which are manufactured as a private label. The Dersimo acquisition is complementary to the Company's market-leading core business which supplies a high volume of small orders into both the residential and commercial sectors, and increases the Company's presence and geographical coverage in the Netherlands.

On 30 March 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of BETU Holdings Limited (a non-trading holding company), the parent company of CECO (Flooring) Limited ('CECO'). CECO is a leading provider of flooring and wallcovering products to retail and commercial customers throughout Northern Ireland and the Republic of Ireland. The CECO acquisition diversifies and broadens the Company's overall position in the commercial specification market.

On 1 July 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of Ashmount Flooring Supplies Limited ('Ashmount'), a floorcovering distribution business based in Tottenham, North London. The Ashmount acquisition expands the Company's presence in commercial products in Greater London, a geographic area in which the Company has historically had a low market share.

On 28 September 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of Rackhams Limited ('Rackhams') located in Highams Park, East London. Established in 1935, Rackhams is a leading provider of retail and commercial products to customers in Greater London and the surrounding counties with a strong Rackhams 'brand' having been developed in recent years. The Rackhams acquisition expands the Company's presence in Greater London, a geographic area in which the Company has historically had a low market share.

On 26 October 2018, a subsidiary company of Headlam Group plc completed the acquisition of all the trade and assets of Garrod Bros Ltd ('Garrod Bros') located in Enfield, North London. Established in 1827, Garrod Bros is a leading provider of commercial flooring products and accessories to customers in Greater London. The Garrod Bros acquisition expands the Company's presence in commercial products in Greater London, a geographic area in which the Company has historically had a low market share.

Both the Rackhams and Garrod Bros acquisitions are currently subject to a merger inquiry by the Competition and Markets Authority ('CMA').

The acquired businesses contributed revenues of £13.7 million and an operating profit of £0.6 million to the Group for the year ended 31 December 2018. If the acquisitions had occurred on 1 January 2018, pro-forma revenue and operating profit for the year ended 31 December 2018 would have increased to £717.7 million and £42.0 million respectively.

Details of the acquisitions are provisional and are shown in aggregate below:

Professional fees of £0.5 million were incurred in relation to acquisition activity and have been expensed to the income statement within non-underlying administration expenses.

The book value of receivables given in the table above represents both the gross contracted and fair value of amounts receivable. At the acquisition date, the entire book value of receivables was expected to be collected.

Goodwill of £4.4 million arose on the acquisitions, there were also intangible assets on acquisition of £3.6 million which were attributed to brand names, order book, non-compete agreements and customer relationships. During the year £0.5 million of intangibles have been amortised to the income statement on these acquisitions.

The residual goodwill reflects the significant benefit the acquisitions will have on the Group by bringing further geographic coverage, offering an expanded product range, developing a more sophisticated customer route to market, providing an additional avenue for growth and a different order profile.

Furthermore, acquired businesses gain access to the Group's extensive product ranges and benefit from enhanced sales and marketing investment. These changes typically enable acquired businesses to enhance the service provided to their customers and ultimately, develop and grow.

Deferred and contingent consideration

The acquisition of CECO Limited was financed by initial cash consideration of £4.3 million paid on completion and satisfied from the Group's existing cash and debt facilities and deferred consideration of £1.4 million. On 3 August 2018 the first of the deferred consideration of £400,000 was paid.

The deferred and contingent consideration have been discounted back and reported at present value, and contingent consideration has been recognised based on management's assessment of the probability of it being paid.

Prior year acquisitions

In the prior year the Group acquired Mitchell Carpets Limited, Domus Group of Companies Limited and its subsidiary entities and the business and certain assets of McMillan Flooring.

The fair values of the assets and liabilities acquired have been reconsidered as part of the hindsight period but no adjustment was considered necessary. In relation to Domus Group of Companies Limited, the contingent consideration has been decreased as a result of a change in forecast future profitability.

The acquired businesses contributed revenues of £4.5 million and an operating loss of £0.1 million to the Group for the year ended 31 December 2017. If the acquisitions had occurred on 1 January 2017, pro-forma revenue and operating profit for the year ended 31 December 2017 would have increased to £721.9 million and £44.6 million respectively.

Deferred and contingent consideration

The acquisition of Domus Group of Companies Limited was financed by initial cash consideration of £24.2 million paid on completion and satisfied from the Group's existing cash and debt facilities; a deferred consideration of £3.3 million, payable in cash and Ordinary shares of 5 pence each in the capital of the Company ('Ordinary Shares'), of which £1.6 million is payable on 7 December 2019 and £1.7 million is payable on 7 December 2020; and a further maximum contingent consideration of £2.7 million, payable in cash based on Domus achieving certain EBITDA targets over the three-year period ending 31 December 2020.

The deferred and contingent consideration have been discounted back and reported at present value, and contingent consideration has been recognised based on management's assessment of the probability of it being paid. The contingent consideration has been further reduced as at 31 December 2018 based on the EBITDA achieved to date.

9 Subsequent events

Management has given due consideration to any events occurring in the period from the reporting date to the date these financial statements were authorised for issue and has concluded that there are no material adjusting or non-adjusting events to be disclosed in these financial statements.

10 Additional information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2018 or 2017 but is derived from those accounts. Statutory accounts for 2017 have been delivered to the registrar of companies, and those for 2018 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The Company anticipates that the Company's statutory accounts will be posted to shareholders during March 2019 and will be displayed on the Company's website at www.headlam.com during March 2019. Copies of the statutory accounts will also be available from the Company's registered office at Headlam Group plc, PO Box 1, Gorsey Lane, Coleshill, Birmingham, B46 1LW.

This final results announcement for the year ended 31 December 2018 was approved by the Board on 6 March 2019.