Headlam Regulatory News (HEAD)

27 July 2020

Headlam Group plc

('Headlam' or the 'Company')

Pre-Close Trading Update and New Distribution Centre Operational

Headlam Group plc (LSE: HEAD), Europe's leading floorcoverings distributor, today announces a trading update in respect of the six months ended 30 June 2020 (the 'Period') ahead of announcing its interim results on Thursday, 3 September 2020.

As previously announced, trading had been resilient and broadly in-line with that of the prior year until 24 March 2020, when the vast majority of the Company's UK operations were closed following the UK Government guidance issued at that time in response to the emerging COVID-19 pandemic.

Whilst the UK and French businesses were significantly affected, the Company's other smaller operations in Switzerland and the Netherlands continued to trade comparatively well due to less restrictive governmental measures, with only a small minority of the workforce subject to the equivalent of the UK Government's Furlough Scheme.

Total revenue for the Period of £242.1 million was 30.6% below the comparative period in 2019 (H1 2019: £348.7 million), being 34.4% and 9.6% below in the UK and Continental Europe respectively. However, the UK revenue profile recovered strongly during June 2020 following the reopening of all of the Company's principal distribution centres by late May 2020 and the reopening of retail businesses in mid-June 2020.

The below table details the UK revenue performance during the Period.

Following the site closures in March 2020, the Company took a demand-led and phased approach to the reopening of its UK operations, adhering to all UK Government guidelines and prioritising the safety and protection of its people, customers and necessary visitors to site. Overheads were reduced and managed to materially lower levels, with operating costs aligned with the developing revenue profile; product purchasing limited to specific projects or orders; and non-essential operational and capital spend deferred.

Following on from the significantly weakened revenue profiles of April and May, and strong revenue recovery in June, trading to-date in July has seen a continuation in revenue growth back towards 2019 revenue levels. Currently, July 2020 UK revenue is running ahead of July 2019's UK revenue.

Given the Company's limited visibility on order book, it is not possible to predict whether the current revenue recovery will be sustained through the second half of the year. Historically, the Company's trading activity is second-half weighted with the important trading periods being the refurbishment of educational institutions during summer holidays and redecoration in residential accommodation in the run-up to the Christmas period. Notwithstanding that overall demand is typically influenced by economic conditions, should there be a re-emergence of COVID-19 and associated lock-down measures this would suppress the Company's revenues.

The Company announced in May 2020 that it had agreed revised covenant tests with its banks, Barclays Bank PLC and HSBC Bank Plc, for 30 June 2020 on the existing facilities which run to 30 April 2023. The Company is currently in discussions with its banks regarding the extension of these covenant amendments for 31 December 2020. As at 30 June 2020, net debt was £22.5 million, with banking facilities available to the Company of £110.7 million and headroom of £88.2 million. The Company remains confident it can manage the business and cash flows within these facilities.

Given the uncertain trading environment in terms of COVID-19 and any impact on future performance, and therefore the need to prioritise cash management in order to preserve the financial stability of the Company, the Board does not intend to declare an interim dividend in respect of the six months ended 30 June 2020. The Board remains committed to providing dividend income to its shareholders once the environment and wider considerations enable it to do so.

The Company has undertaken a business review of Domus and its markets, and has commenced a restructuring which it is anticipated will result in a cost base more aligned to the predicted revenue profile going forward with an associated reduction in headcount. The Company will also undertake an assessment of the carrying value of its intangible assets when preparing its interim results, which will reflect the adverse impact of COVID-19. As a consequence, the Company expects to recognise a non-cash impairment in the carrying value of its investment in Domus which will result in a full write-down of the remaining £20.9 million residual goodwill. This will contribute to the Company reporting a statutory loss before tax for the Period of approximately £25 million against an underlying loss before tax for the Period of approximately £2 million.

As part of its focus on the longer-term and growth, the Company has continued with the planning or accelerated implementation of some of the projects forming part of its Operational Improvement Programme. Notably, the previously detailed project relating to transport integration has been accelerated and expanded to a much larger area. This project enables the Company to enhance its customer service proposition, improve operating and financial performance, and reduce its environmental impact. As the project results in less vehicles needed to service areas due to delivery routes no longer being duplicated, it will also likely result in a reduction in driver numbers.

New Distribution Centre

Following a delay due to the impact of COVID-19, the Company's new 190,000 square feet regional distribution centre, located in Ipswich, became operational earlier this month. The facility, which is a significant milestone in terms of improving the service to customers throughout the South East of England, enables benefits to accrue from improved operational efficiencies and enhanced capacity to support growth. The centre was completed on budget at a total cost of approximately £26.0 million, including land acquisition and internal fit-out costs. Following the build-up of operations, it is currently expected to be profit enhancing in 2022.

Outlook

The Company is now operating at largely normalised operations in the UK, with COVID-19 Secure fully implemented throughout the network, and a resumption of nation-wide next-day delivery operations and elevated levels of product buying to satisfy customer demand. The Company is highly appreciative of the support and understanding its stakeholders have shown during this period, which has enabled the most considered approach to reopening, the wellbeing and safety of employees, and cash management which has exceeded the Company's expectations.

Whilst the current revenue performance is pleasing, it is still not possible given both COVID-19 and the economic backdrop to provide guidance at this stage on the expected outturn for the financial year ending 31 December 2020.

The Company will host virtual meetings for both analysts and institutional investors following the announcement of the interim results. For further information, or to register attendance, please contact Alma PR on 020 3405 0205 or headlam@almapr.co.uk.

Key features, photos and build time-lapse videos of the new Ipswich distribution centre can be found on the Company's website at www.headlam.com/news-enquiries/ipswich-distribution-centre/.

Enquiries:

Notes for Editors:

Operating for 28 years, Headlam is Europe's leading floorcoverings distributor.

Headlam provides the distribution channel between suppliers and trade customers of floorcoverings. Working in partnership with suppliers across the globe manufacturing a diverse range of floorcovering products and ancillary accessories, Headlam provides an unparalleled route to market for their products across the UK and certain Continental European territories.

The utilisation of an outsourced distribution channel enables manufacturers to focus on their core activities, incur reduced costs associated with distribution, and benefit from localised sales, marketing and distribution expertise that provides a more effective and greater route to market for their products.

To maximize customer and market penetration, and reflecting the regionalised nature of the marketplace, Headlam comprises 67 individual businesses in the UK and Continental Europe (France, the Netherlands and Switzerland) each operating under their own unique trade brand and utilising individual sales teams.

Headlam's extensive customer base, operating within both the residential and commercial sectors and comprising principally independent retailers and flooring contractors, receives the broadest product offering supported by next day delivery as well as additional marketing and other support.

Headlam's offering is enabled through its unrivalled operating expertise, long-established supplier and customer relationships, and comprehensive distribution network. Following years of considerable investment, Headlam's distribution network currently comprises four national distribution hubs, 19 regional distribution centres and a supporting network of smaller warehouse premises, trade counters, showrooms and specification centres.

In 2019, Headlam worked with 190 suppliers from 19 countries and fulfilled 5.3 million customer orders.

www.headlam.com