Headlam Regulatory News (HEAD)

19 November 2020

Headlam Group plc

('Headlam' or the 'Company')

Trading Update

Strong and sustained recovery in the second half to date

Underlying profit before tax materially ahead of market expectations

Headlam Group plc (LSE: HEAD), Europe's leading floorcoverings distributor, is pleased to provide a trading update following its interim results announcement on 3 September 2020.

Following the Q2 2020 performance which was significantly impacted by COVID-19, trading to-date in the second half has seen a strong and sustained recovery to 2019 levels. Revenue for the four months to 31 October 2020 was down only 1.2% on the same period in the prior year, with November 2020 currently ahead of last year despite the lockdown in England and other restrictions in the rest of the UK. An exceptional UK residential sector performance has compensated for a significantly weaker commercial sector across both the UK and Continental Europe, albeit there has been an improving trend across the commercial sector. On a like-for-like¹ basis, UK residential sector revenue was up 10.5% in the four months to 31 October 2020.

Given this sustained recovery in performance and management's continued focus on costs, the Company now expects to report underlying² profit before tax for the year materially ahead of current market expectations of a breakeven performance³.

Unaudited underlying² profit before tax for the four months to 31 October 2020 was £13.3 million, a strong reversal from the £1.2 million underlying² loss before tax reported in the first half. Subject to trading for the remainder of the year, where there is a possibility that fitting capacity may constrain sales during December 2020, it is the Company's current expectation that underlying² profit before tax for the year will be in the range of £14 million to £16 million. The Company confirmed earlier this month that its operations are remaining fully open for the duration of the current lockdown period in England, with the safety and protection of its people, customers and necessary visitors to site remaining the Company's priority.

With cash collections continuing to exceed expectations and reflecting the strong cash flow from operations, average net debt for the year-to-date, excluding IFRS 16 'Leases', is approximately £13.6 million, a material reduction on the first half (H1 2020: average net debt £35.3 million). As at 31 October 2020, banking facilities available to the Company were £110.6 million with headroom of £102.1 million. 

The Company has increased its product purchasing in the last few months to support customer demand, and, to further support customers through the initial weeks of Brexit and minimise any potential delays in receipt of product, the Company is currently elevating its inventory position across its fastest-moving products.

The Company has continued with the projects under its Operational Improvement Programme which will give rise to both revenue and margin enhancement. Several projects continue in the planning phase which will be detailed in Q1 2021 along with the anticipated financial and operational benefits. The two most significant currently underway are the network consolidation in the South East and transport integration, both outlined in the interim results announcement.

Following the previously announced consolidation of businesses into the new Ipswich regional distribution centre to be undertaken in the first half of 2021 and closure of sites no longer required, it is now also proposed that the main warehousing and distribution operations of Domus will move to the Company's Rochester site where capacity will be created following the consolidation. This will allow for the termination of existing leases in West Molesey upon their expiry in July 2021 and further network simplification.

Against the backdrop of COVID-19, the Company took the opportunity to accelerate the roll-out of the transport integration project focused around more effective delivery fleet utilisation. The roll-out to the 'North' was completed last month, with the project having now been implemented over approximately 25% of the Company's UK deliveries. The roll-out will continue in Q2 2021, with full national roll-out scheduled to be complete by early Q4 2021.

The current expectation is that the network consolidation and transport integration will generate cost savings in excess of £4 million per annum from 2022, following a modest net benefit in 2021 after all restructuring and delivery costs and applying prudent revenue expectations given the COVID-19 backdrop. Further detail will be provided in Q1 2021 along with detail on other projects that will provide additional financial benefits in 2021 and beyond.

The Company's next Trading Update will be on the 21 January 2021, at which point the Company expects to provide an update on the reinstatement of an ordinary dividend as well as its wider capital allocation priorities.

The Board would again like to thank and recognise the resilience its people have shown throughout the period, and is highly appreciative of the support and understanding all its stakeholders have shown through the impact of COVID-19.

Enquiries:

¹Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2020 and 2019 periods and is adjusted for any variances in working days.

²Underlying 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.

³Company-compiled consensus market expectations for 2020 revenue and underlying profit before tax (prior to any updates following this announcement) are £561.2 million and £0.0 million respectively (on a mean and post IFRS 16 adoption basis).

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