Headlam Regulatory News (HEAD)

21 January 2021

Headlam Group plc

('Headlam' or the 'Company')

Pre-close Trading Update

Strong and sustained recovery maintained through the second-half

Intention to reinstate dividend

Headlam Group plc (LSE: HEAD), Europe's leading floorcoverings distributor, is pleased to provide a trading update in respect of the year ended 31 December 2020, and ahead of announcing its final results on 9 March 2021.

2020 Financial Performance

Whilst trading in Q2 2020 was significantly impacted by COVID-19, trading in the second-half was characterised by a strong and sustained recovery to 2019 levels. Accordingly, total revenue for the full year was only 15.3% below the prior year at £609.1 million, compared to 30.6% below for the first-half.

The recovery was driven by the UK residential sector which performed exceptionally well despite the continuation of restrictions and further lockdown periods, and compensated for a significantly weaker commercial sector particularly in the UK. In the second-half, residential sector revenue was up 8.8% against the prior year compared to a decline of 17.8% for the commercial sector, albeit this still represented a strong recovery from the 34.4% decline seen in the first-half.

Revenue for the collective Continental European businesses was down only 4.1% on the year compared with 2019 due to robust performances in Switzerland and the Netherlands helping to offset weakness in France, which was subject to severe lockdown measures.

In-line with the Trading Update on 19 November 2020, the Company expects to report underlying¹ profit before tax towards the top of the range of £14 million to £16 million. Reflecting the strong cash flow from operations upon the return to more normalised operations in the second-half, average net debt for the year was £8.6 million, a material reduction on the first-half average net debt of £35.3 million (both figures exclude the impact of IFRS 16 'Leases').

As at 31 December 2020, the Company had a net cash position of £50.5 million (inclusive of £12.0 million deferred VAT payable in Q1 2021), and total banking facilities available of £110.3 million of which £102.8 million was undrawn.

Ordinary Dividend

Given the recovered performance in the second-half, and commitment to providing dividend income for shareholders, the Board is pleased to announce its intention to reinstate the ordinary dividend which was suspended following the emergence of COVID-19. It is the Board's current intention to propose an initial nominal ordinary dividend at the time of the Company's final results announcement in March 2021, which will be paid to shareholders in May 2021 following approval at the AGM. A further ordinary dividend will be declared at the time of the Company's interim results announcement in September 2021 unless exceptional or unforeseen circumstances prevail. From 2022, the Board expects to announce dividends in-line with the parameters set out in the Company's Capital Allocation Priorities published below. The Company has also taken the opportunity to accelerate its dividend payment timetable so that dividends are paid to shareholders in a shorter timescale, namely:

Capital Allocation Priorities

As signposted in the November 2020 Trading Update, listed below, in order of priority, are the Board's Capital Allocation Priorities including targeted parameters:

1. Maintain a strong balance sheet, with targeted average net debt² during a financial year of not more than 0.75x EBITDA, unless exceptional or unforeseen circumstances prevail.

2. Investment, both opex and capex, in the core distribution business to optimise performance and growth.

3. Provide income to shareholders through a bi-annual ordinary dividend distribution paid out of cash with a target cover ratio of 2x earnings for the combined pay-out, and an interim and final dividend payment split of approximately 1/3 : 2/3.

4. Consideration of investment in acquisition opportunities aimed at growing the Company's core market position, including extending the product portfolio and weighting in certain customer segments.

5. After applying the priorities and parameters above, return any surplus cash to shareholders. The Board will keep under review and determine at the appropriate time the most effective method of returning surplus cash, including consideration of special dividends and share buybacks for cancellation.

The Board will review these priorities on a regular basis.

2021 Trading and Brexit

To-date in January 2021, typically the Company's quietest trading month, with non-essential retail businesses closed in the UK, France and the Netherlands, total revenue is down 5.1% against the prior year. The Company confirmed earlier this month that its operations in the UK and Continental Europe affected by current lockdowns are remaining fully open for the duration of the lockdown periods, with the safety and protection of its people, customers and necessary visitors to site remaining the Company's priority. The Company will closely monitor all government guidance and provide any updates as and when appropriate. 

The network consolidation and transport integration projects under the Operational Improvement Programme are both progressing to plan. The Company will now take the opportunity to accelerate the new projects being introduced during 2021, following extensive planning, to more quickly realise cost base improvements and revenue benefits, which will help mitigate against potential reductions in demand going forward due to the ongoing impact and consequences of COVID-19. Further detail on the outcomes of the 2020 projects, new 2021 projects, and anticipated benefits arising from the overall Programme along with the Company's operating margin aspiration will be provided in the final results announcement.

Pleasingly, and as a result of its preparatory work, the Company has experienced very limited disruption to product flow to-date from the EU following Brexit, and has continued to purchase product in-line with customer demand.

The Board would again like to thank and recognise the commitment and resilience its people have shown throughout 2020 and into the early days of 2021 as they deal with the ongoing consequences of the COVID-19 pandemic, and is highly appreciative of the support and understanding all its stakeholders have shown throughout the period.

Enquiries:

¹Underlying is before non-underlying items, which includes amortisation of acquired intangible assets, non-cash impairment of goodwill, acquisitions related fees, restructuring costs, movements in deferred and contingent consideration, finance costs on deferred and contingent consideration, non-recurring pension costs in relation to guaranteed minimum pension ('GMP') equalisation, and non-recurring costs relating to senior personnel changes.

²Net debt calculation excludes leasing liabilities as defined by IFRS 16 and pension liabilities based on IAS 19.

Notes for Editors:

Headlam is Europe's leading floorcoverings distributor, providing the channel between suppliers and trade customers of floorcoverings.

Headlam works with suppliers across the globe manufacturing a diverse range of floorcovering products, and provides them with a cost efficient and effective route to market for their products into the highly fragmented customer base. Alongside long-established processing and distribution expertise, suppliers benefit from Headlam's marketing and customer servicing into the most extensive customer base.

To maximise customer reach, Headlam operates 67 businesses across the UK and Continental Europe (France, the Netherlands and Switzerland). Each business operates under its own trade brand and utilises individual sales teams while being supported by the Company's network and centralised resources. The Company's diverse customer base covers both the residential and commercial sectors, and encompasses the two principal customer groups of independent retailers and smaller flooring contractors alongside other groups such as larger retailers, specifiers, and local authorities.

Headlam is focused on providing customers with a market-leading service through:

§ the broadest product offering;

§ unrivalled product knowledge and tailored solutions;

§ marketing and sales team support;

§ e-commerce support;

§ 'just-in-time' nationwide delivery and collection service; and

§ other support including the provision of credit

Headlam's business is characterised by a high volume of smaller value orders delivered to customers next day, with this capability enabled by its extensive distribution network, material handling and processing capabilities, and customer servicing expertise.

www.headlam.com