Headlam Regulatory News (HEAD)

24 November 2022

Headlam Group plc

('Headlam' or the 'Company')

Trading and ESG Update

Headlam (LSE: HEAD), the leading floorcoverings distributor, today provides an update on trading, and Environmental, Social and Governance ('ESG') strategy and progress.

Trading Update

Trading since the interim results announcement on 6 September 2022 has continued the themes reported at that time. Most notably, the impact of the cost of living crisis suppressing market volumes in the UK residential sector, with growth in the commercial sector helping to partially offset. Continental Europe continued its positive performance across both sectors.

As a result of progress made under the Company's growth strategy, including new larger customer wins and the trade counter roll out, and support from price inflation, the Company's revenue was only marginally below the prior year period for the 10 months to 31 October 2022. To date in November 2022, a month heavily reliant on residential orders, the Company has seen a seasonal uplift but this is below historic levels and this trend is expected to continue until year end.

The Company, therefore, now expects underlying profitability for the year to remain ahead of 2021 and to be marginally below the low end of the range of market expectations¹. The Company's strategy of driving new revenue to gain market share from a more efficient operating base has helped provide a countermeasure against the market weakness, and will continue to do so during 2023.

The Company will announce its Pre-Close Trading Update on 19 January 2023, ahead of announcing final results for the year ended 31 December 2022 in early March 2023.

ESG Update

The Company continues to meaningfully develop and progress its overall ESG Strategy and associated actions. Below is an update on the areas considered most salient under the 'E', 'S' and 'G' pillars. Importantly, the Company's sustainability agenda and ESG Strategy is focused not just on mitigating risk, addressing regulatory matters and efficiency measures, but also on capturing strategic opportunity and gaining competitive advantage.

Environmental

The Company has previously committed to a Net Zero emissions target (Scope 1 and 2) by 2035 and is actively engaged in transition planning. To strengthen and ensure progress towards this commitment, the Company is now introducing an interim target aligned with the Science Based Targets initiative ('SBTi') of a 46% reduction by 2030 against a baseline year set at 2019. The Company will follow a 'true' Net Zero strategy aligned with best practice, whereby it will focus on actual decarbonisation in achieving these targets and only consider offsetting actions for the residual 10%. Decarbonisation actions currently being pursued by the Company include:

· Moving the whole non-commercial fleet to electric or low emission vehicles, with excellent progress made and already well above the Company's initial 50% target by year end 2022;

· Trialling and roll-out of electric commercial vehicles where feasible (with limited feasibility currently due to technology and cost constraints);

· Ongoing transport integration (i.e. more efficient deliveries profile), further FORS accreditations, and focus on driving behaviours;

· Energy saving opportunity surveys being completed at key sites across the network, and the energy saving and efficiency recommendations identified being rolled out across all sites;

· Promotion of 'Good Energy and Recycling Behaviours' across the group, with associated workshops; and

· Installation of solar panels across all the Company's larger sites during 2023.

The investment in, and installation of, solar panels is important to achieve both a near-term reduction in emissions as well as helping offset higher energy costs as described in the interim results. A total upfront capital investment of £3.2 million will be made in solar panels in 2023 helping to offset energy costs that will be approximately £2.4 million higher in 2023 against 2022 due to the previously highlighted expiry of a fixed price energy contract in October 2022.

Although the near-term focus is on reducing the Company's own operational emissions, the Company is currently undergoing its second exercise in measuring its value chain (Scope 3) emissions which will be reported within the 2022 Annual Report published in March 2023. This will assist in increasing the sustainability of the industry as a whole, and the future transition to a circular economy.

Although the marketplace is still on the whole relatively undeveloped in terms of demanding sustainable products, with sustainable products making up a low proportion of the overall offering, the marketplace will increasingly signal a preference for sustainable products and focus on closed-loop recycling. The Company aims to take a lead in launching and marketing sustainable products, capturing competitive advantage, with a particular focus on fully recyclable ranges. Working closely with certain suppliers, the Company is currently at the trialling and proof of concept stage of new technology with a view to launching own branded sustainable ranges during 2023. Launches will initially be into the residential sector, with opportunities in the commercial sector also being investigated for future launches.

Social

Of most pressing importance 'socially' is the current inflationary impact on cost of living. To help address this, and support the most vulnerable to a decline in their circumstances, the Company is taking a tiered approach to its annual pay award. For 2023, lower salaried employees will receive a higher percentage increase to their salaries, with this percentage decreasing higher up the scale. The Company will continue to ensure that everyone receives the equivalent of the National Real Living Wage. The Company's people costs are anticipated to be 6.9% higher in 2023 than 2022, mainly due to wage inflation through the cost of living pay award.

The Company is focused on both financial and non-financial support to its people and the communities in which it operates. The Company's locally focused Community Programme launched in 2022 continues to be rolled out, and allows for funded donations to local causes, as well as paid volunteering time and flooring product donations. Additionally, the Company has recently formally launched its Apprenticeship Programme, and will promote apprenticeships across the business and enrol new colleagues who wish to obtain qualifications. Through all the actions the Company is pursuing, it is improving Headlam as a place to work, helping to attract, retain and support great people.

Governance

Focus on corporate governance, and the assessment / mitigation of risks, continues to be a priority for the Company. Supply Risk Chain is identified as being one of the key material issues in the last published Materiality Assessment, and to help mitigate against this there has been increased engagement with suppliers including on: Sustainability Charter; Ethical Code of Conduct; and Self-Assessment Questionnaire (delivered by a third-party leading social audit business).

The Company's current Remuneration Policy expires next year, and the new Policy to be put to shareholder approval at the 2023 Annual General Meeting will include an ESG related element connected to performance related variable remuneration. Detail on targets will be provided in the 2022 Annual Report.

Pleasingly, the Company continues to have 'low risk' independently evaluated ESG rating scores, and was recently judged to have the best sustainability credentials amongst its direct peer group by a leading sustainability adviser.

Footnote

¹Company-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

This announcement contains information which, prior to its disclosure, was inside information as stipulated under Regulation 11 of the Market Abuse (Amendment) (EU Exit) Regulations 2019/310 (as amended).