Interim Results Presentation For the six months ended 30 June 2020 - - PowerPoint PPT Presentation

Interim Results Presentation For the six months ended 30 June 2020

Countries of operations

4

3 2 1 4

• 1. UK
• 2. France
• 3. Switzerland
• 4. Netherlands

1

About Us

Years in

• peration

28

Employees

+2,500

Businesses

67

Distribution hubs and centres

23

Supplier countries

19

Active customer accounts

+70,000

Market leading position Broadest product offering Across Europe Scaled operations Executive Directors Extensive network

Customer orders processed in 2019

5.3m

SKUs

Steve Wilson

Chief Executive and Executive Director

Chris Payne

Chief Financial Officer and Executive Director

+36,000

2

Marketplace and Customer Base

2019 UK floorcoverings market value*

£2.1 billion

Independent retailer Flooring contractor Specifier∆ Other Specifier∆ Flooring contractor Larger retailer End-consumer Corporate Housebuilder Developer Corporate Housebuilder Developer e.g. direct to a local authority Housebuilder End-consumer Developer Housebuilder End-consumer Developer End-consumer

Residential Sector (c 2/3rd of value) Commercial Sector (c 1/3rd of value)

* Source: AMA Research, MTW Research, Mintel, value expressed by reference to manufacturers’ selling price

∆ Including architects and interior designers who determine the products to be used on a project

3

Marketplace Dynamics and Headlam’s Position

Large and mature market

• Key drivers of demand:
• Repair, Maintenance and Improvement (‘RMI’) spend
• Housing transactions
• Construction activity

Headlam’s position

• Principal customer base – independent retailer and smaller flooring contractors
• These groups considered more resilient during weaker market backdrops:
• Typically lifestyle businesses, and adaptable
• Not encumbered with larger overheads or commitments in terms of people and rents
• Very limited exposure to large scale projects and construction work
• RMI spend to lower-end of the scale predominate driver of performance
• Revenue characterised by a high volume of smaller value orders
• Average order size of £136 in 2019, a ‘relatively modest’ mostly discretionary spend
• Underweight in a variety of customer groups

4

Accelerated certain Operational Improvement Programme projects to improve customer service, and create operating efficiencies and meaningful

• verhead savings

Interim Results - Overview

Significantly impacted by COVID-19, but undertook swift actions to preserve the Balance Sheet, and had returned to normalised

• perations by end-June

Pleasing current trading given economic backdrop, with cash collections exceeding expectations. Committed to resuming dividends once there is a period of more normalised trading

COVID-19 Timeline, Response and Mitigating Actions

6

COVID-19: A timeline of events

Jan Feb Mar Apr May Jul Jun Aug

Trading resilient and broadly in-line with prior year until 24 March 2020 All UK

• perations

closed except largest distribution hub French operations: Similar profile to the UK Swiss and Dutch operations: Traded comparatively well throughout due to less restrictive governmental measures Demand-led and phased approach to reopening Non-essential UK retail businesses closed: Only limited delivery services for essential products and a customer collection service for pre-

• rdered products in operation

UK retail open All principal UK distribution centres

• pen, phased

reopening of UK trade counter network Normalised

• perations, and

July revenue above 2019

7

COVID-19: Management Response

Prioritising the safety and wellbeing of our people

• Adhered to all government guidelines and prioritised

the safety of people

• Paid enhanced form of the UK Government's

Coronavirus Job Retention Scheme throughout

• COVID-19 Secure fully implemented throughout the

network in June 2020

• Increased communications to provide as much

clarity and supportive information as possible Operational Improvement Plan acceleration

• Designed to make the business more customer

focused and operationally efficient, aimed at revenue and margin enhancement

• 4 current primary projects, will create meaningful
• verhead and operating cost efficiencies to increase

sustainability

• Will support anticipated changes to customer
• rdering /interaction preferences

Focus on cash management

• Swift actions to close operations, limit headcount, and

manage variable costs to materially lower levels

• Strict centralised controls put in place, with operating

costs aligned with developing revenue profile

• Product purchasing limited and utilisation of existing

inventory, with added benefits of reduction in duplications and slow-moving stock across the network

• Non-essential operational and capital spend deferred,

and decision to suspend dividend to preserve balance sheet strength Financial Position

• Agreed revised covenant tests with banks for 30 June

2020 on the existing facilities which run to 30 April 2023

• In August 2020, agreed extended revised covenant

tests for 31 December 2020

• As at 30 June 2020, net debt was £22.4m (as at 30

June 19: £32.4m net funds), with available banking facilities of £110.7m and headroom of £88.3m

• Only £1.6m of outstanding PPE commitments as at 30

June 2020

8

H1 2020 Trading and Financial Summary

Q1 2020 April 2020 May 2020 June 2020 H1 2020 Total H1 2020 revenue shortfall as a % of that reported in H1 2019 UK 5.7% 95.7% 72.2% 14.0% 34.4%

• C. Europe

3.2% 33.4% 21.6% +7.4% 9.6%

• Total revenue 30.6% below H1 2019 at £242.1m
• Gross margin resilient and maintained at 32.5% due to continued pricing discipline
• Underlying distribution costs and admin expenses reduced by 16.7% (£15.9m), net of government job

retention grants

• Small underlying operating loss of £0.5m, underlying loss before tax of £1.2m, and statutory loss before

tax of £23.9m

• Inventory position reduced by £12.7m to £119.7m as at 30 June 2020
• Average net debt* of £16.6m (H1 2019: £1.6m)
• Cash collections exceeding expectations

H1 2020 Revenue

UK Continental Europe 79.8% (H1 2019: 84.5%) 20.2% (H1 2019: 15.5%)

* Excluding IFRS 16 ‘Leases’

9

UK Distribution Businesses Daily Sales*

£k Sales

* Calculated on a like-for-like basis, being based on activities and businesses that made a full contribution in both the current and previous year and adjusted for any variances in working days

000k 200k 400k 600k 800k 1,000k 1,200k 1,400k 1,600k 1,800k 2,000k 2,200k 2,400k 2,600k 2,800k Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 2017 2018 2019 2020

10

COVID-19: Mitigation Actions

Various mitigating actions in place to support effective operation and manage any future downside:

• COVID-19 Secure implemented across the network to enable continuing operations
• Improved contingency plans to support more immediate action and greater response to customer

demand

• Ability to immediately recommence the customer collection service for pre-ordered products that

was initiated in April 2020

• New infrastructure built to support increased working-from-home
• Enhanced e-commerce capabilities and increased digitalisation of processes
• A continuing more centralised approach to managing and limiting overheads and operating costs
• Ongoing Operational Improvement Programme to support improved performance and anticipated

changes to customer ordering / interaction preferences

Financials

12

H1 2020 Income Statement

H1 2020 £m

H1 2019 £m Change H1 2020 v H1 2019

Revenue 242.1 100.0% 348.7 100.0% (30.6)% Cost of sales (163.4) 67.5% (235.5) 67.5% (30.6)% Gross Profit 78.7 32.5% 113.2 32.5% (30.5)% Distribution costs (56.3) (23.3%) (68.4) (19.6%) (17.7)% Administrative expenses (22.9) (9.5)% (26.7) (7.7%) 85.8% Operating (loss)/profit (0.5) (0.2)% 18.1 5.2% (2.8)% Net finance costs (0.7) (0.3%) (1.1) (0.3%) 63.6% Underlying (loss)/profit before tax (1.2) 0.5% 17.0 4.9% (7.1)% Non-underlying items (22.7) (9.4%) (1.0) (0.3%) 22.7% Statutory (loss)/profit before tax (23.9) (9.9%) 16.0 4.6% (49.4)% Basic earnings per share - pence (29.3)p 15.7p (86.6)% Interim dividend - pence

• 7.55p

£9.6m of job retention grants claimed, but made enhanced payments to the UK workforce throughout the Period Provided for bad / doubtful debts at higher rate, resulting charge of 2.5% revenue, but cash collections exceeded expectations

13

H1 2020 Non-Underlying Items

H1 2020 H1 2019 £m £m Impairment of goodwill 21.3

• Amortisation of acquired intangibles

0.8 0.7 Acquisitions related fees 0.6 0.3 22.7 1.0 Non-cash impairment of goodwill

• The vast quantum arising as a direct consequence of the impact of COVID-19
• £20.9m in relation to Domus, reflecting a prudent full write-down of the remaining residual goodwill
• Domus’s reliance on larger scale projects with long lead-times in the London area causes its financial

performance to be highly sensitive to prolonged recessionary market backdrops

• Restructuring commenced at Domus to align the cost base to its revenue profile

14

H1 2020 Revenue Movement

£m £m £m UK

• C. Europe

Total Revenue for the six months ended 30 June 2019 294.5 54.2 348.7 Split 84.5% 15.5% Incremental items during the six month period to 30 June 2020 Like-for-like organic growth (105.5) (6.3) (111.8) LFL (35.8)% (11.6)% (32.1)% Acquisitions 2.7

• 2.7

Working day and translation effect 1.4 1.1 2.5 Revenue for the six months ended 30 June 2020 193.1 49.0 242.1 Split 79.8% 20.2%

15

H1 2020 H1 2019 £m £m Net cash flow from operating activities Profit before taxation (23.9) 16.0 Depreciation, amortisation and impairment 24.7 3.4 Depreciation of right-of-use asset 8.0 7.6 Profit on sale of property, plant and equipment

• 0.1

Net finance cost 0.7 1.1 Share-based payments 0.1 0.8 Working capital changes (25.1) (4.8) Cash generated from operations (15.5) 24.2 Interest paid (1.3) (1.5) Tax paid (6.3) (5.3) Pension contributions

• Net cash from operating activities

(23.1) 17.4 Net cash flow from investing and financing activities Acquisition of subsidiaries net of cash acquired (1.0)

• Repayment of acquired borrowings on acquisition

(0.2)

• Acquisition of property, plant and equipment

(10.1) (7.8) Share movements

• Net movement on borrowings

44.9 19.9 Dividends paid (6.3) (6.3) Principle elements of lease payments (8.5) (8.0)

Other

0.6 0.4 Net increase/(decrease) in cash and cash equivalents (3.7) 15.6

H1 2020 Cash Flow Movement

Strength of existing banking facilities enabled effective management of liquidity through the working capital transition Working capital changes driven by unwind in trade creditor position, although partly offset by limited purchasing and utilisation of existing inventory position

16

Balance Sheet as at 30 June

2020 2019 £000 £000

Non-current assets PPE 120.5 107.4 Right of use assets 41.0 46.1 Intangible assets 27.5 50.2 Deferred tax assets 1.4 0.6 190.4 204.3 Current assets Inventory 119.7 142.5 Receivable 89.1 125.9 Cash 30.7 60.7 239.5 329.1 Total assets 429.9 533.4 Current liabilities Bank Overdraft (0.5) (1.4) Loans (0.2) (0.2) Lease liabilities (13.0) (14.0) Payables (102.5) (206.7) Tax

• (4.5)

(116.2) (226.8) Non-current liabilities Other interest-bearing loans and borrowings (52.4) (26.7) Lease liabilities (29.1) (32.7) Trade and other payables

• (2.6)

Provisions (2.3) (2.2) Deferred tax liabilities (8.3) (8.0) Employee benefits (6.0) (6.9) (98.1) (79.1) Total Liabilities (214.3) (305.9) Net assets 215.6 227.5

Payables have halved in the period due to unwinding of trade creditors Balance sheet continues to be resilient, and inventory position remains substantial despite utilisation

17

UK Sterling Net Debt Daily Balances

(60,000) (50,000) (40,000) (30,000) (20,000) (10,000) 10,000 20,000 30,000 40,000 50,000 01-Jan 08-Jan 15-Jan 22-Jan 29-Jan 05-Feb 12-Feb 19-Feb 26-Feb 04-Mar 11-Mar 18-Mar 25-Mar 01-Apr 08-Apr 15-Apr 22-Apr 29-Apr 06-May 13-May 20-May 27-May 03-Jun 10-Jun 17-Jun 24-Jun 01-Jul 08-Jul 15-Jul 22-Jul 29-Jul 05-Aug 12-Aug 19-Aug 26-Aug 02-Sep 09-Sep 16-Sep 23-Sep 30-Sep 07-Oct 14-Oct 21-Oct 28-Oct 04-Nov 11-Nov 18-Nov 25-Nov 02-Dec 09-Dec 16-Dec 23-Dec 30-Dec UK sterling bank balance 2018 UK sterling bank balance 2019 UK sterling bank balance 2020

£Thousands

Average net debt* of £16.6m in H1 2020 (H1 2019: £1.6m)

* Excluding IFRS 16 ‘Leases’

18

H1 2020 Resilience

• Difficult trading but quick response to

government guidance

• Cautious approach with collections and

cash

• Stopped purchasing early, and unwind of

trade creditors using facilities

Resilience and Going Concern

Ready to act

• COVID safe working practises established
• Process learning will enable customers to

trade more effectively

• Purchasing focus on fast-moving products
• Trade debtor collections strong – ready to

service

Going Concern

• Reviewed various trading scenarios,

plausible downside modelled second-wave and significant 11% revenue reduction for 2021

• Liquidity headroom strong, trade creditors

up-to-date

• Original covenants for FY21 remain

unbreached

Supportive Stakeholders

• Engaged with suppliers, all payments

current by July 20

• Banks engaged early, with regular dialogue
• Agreed revised June and December 2020

covenants – no additional restrictions

Operational Improvement Programme

Key enabler of the Strategic Objectives and aimed at:

20

Being more customer focused with greater insight Focus on sustainability and the longer-term

Operational Improvement Programme

Driving revenue and margin performance Improving the customer service proposition

• Continued with the planning and accelerated implementation of some projects during H1 2020
• Continuing acceleration and roll-out in H2 2020 and 2021
• 4 current primary projects
• Will additionally support anticipated ongoing changes to customer ordering / interaction preferences

21

New Ipswich Regional Distribution Centre

• Opened in July 2020 following COVID-19 delay, successfully

rehoming 2 businesses

• 190,000 sq ft state-of-the-art facility
• Completed on budget at a total cost of c £26m (including land

acquisition and internal fit-out costs)

• Key features:
• 10.6 million cubic feet of capacity and substantial new

warehousing

• 30,000 rolls warehousing capacity and 9,000 pallet locations
• 2 cutting tables able to do a combined 100 cuts per hour
• Sortation unit with capacity to hold 2,500 cut length pieces
• Large trade counter, c 150 SKUs in the self-pick area
• Focus on reducing environmental impact - brownfield site,

and use of solar panels and other energy efficient technologies

• Designed and built to improve service to customers throughout

the South East, and support network optimisation / consolidation

22

Ipswich Network Consolidation Opportunity

• Proposed that 4 further businesses in the wider area be

consolidated in during H1 2021

• Creating simplification of the network, and meaningful
• verhead and operating cost efficiencies
• Improved service to customers through:
• Increased warehousing and order processing capacity
• Greater depth and breadth of product
• Integrated delivery operations
• Greater collaboration between businesses
• 4 existing sites expected to close (2 freehold and to be

sold)

• Trade counters and sales reps retained in areas
• Following build-up of operations, Ipswich expected to be

profit enhancing in 2022

• Provides capacity for future growth

23

Enhanced Trade Counter Proposition

• Will support development of a national trade counter

network, and broaden offer to all trade customers with flooring needs

• Improved configuration to improve customer service
• Key features:
• Greater product range and new own brand ranges
• Larger self-pick areas, and increased self-pick SKUs
• Retail focussed – top selling products, impulse and

feature ends

• More efficient collection and service process
• Responds to customers’ increasing preferences
• Increased national coverage of collection points will

reduce delivery costs

• Blueprint to be trialled in 1 new and 2 existing sites, with

refits completed in early 2021

• Roll-out in 2022 following trialling

24

Transport Integration

• Each distribution site delivers to their local

geographical region on behalf of all businesses that have customers in the area

• Delivery routes no longer duplicated by different

businesses

• Improves service proposition / operating and financial

performance / environmental impact

• Successfully completed trial in South Wales during

2019 validated the project

• Project accelerated and expanded to much larger

area in H1 2020 (North of England)

• Planning for further roll-out
• Expected to create significant cost savings when fully

rolled-out due to less vehicles needed to service areas and associated reduction in costs

Before After

25

E-commerce Capabilities

• Increasing efficiency and generating cost savings through

enhanced capabilities

• E-commerce infrastructure development to improve systems

integration and customer service

• Recently relaunched B2B websites with improved functionality,

key features:

• Easier for customers to place and track orders
• Order history
• Able to showcase product and advise on availability with end-

consumers

• Manage accounts and payments online
• Latest promotions, and easier search facility
• Real-time bespoke online price lists
• Increased digitalisation of processes introduced, including

paperless invoicing

• Responds to customers’ increasing preference for this channel

Dividend Policy and Current Trading

27

Dividend Policy and Current Trading

Dividends

• No interim dividend declared given uncertain trading environment and need to prioritise cash

management

• Committed to progressive dividend policy, will look to resume dividends once there is a

stabilised environment and period of more normalised trading

• To preserve Balance Sheet strength and expedite the resumption of dividends, all non-essential
• perational and capital spend will continue to be limited, and costs tightly controlled

Post Period-end and Current Trading

• Net debt reduced to £7.3m as at 31 July 2020
• Pleasing post Period-end performance given the economic backdrop
• July 2020 revenue above July 2019 driven by strong residential sector performance, and August

2020, traditionally more weighted to commercial activity in the educational sector, only marginally below prior year

• Cash collections continuing to exceed expectations
• Q4 historically the most important trading period due to redecoration in residential

accommodation prior to Christmas Seen a return to profitability in H2 2020 to-date

Questions

Appendices

Our strategy is to build a successful company, positively impacting all stakeholders, and delivering sustainable long-term value

30

Our Strategy

Mission

Provide our customers with a market leading service with unparalleled product knowledge and solutions across the broadest range of floorcoverings by working in partnership with our suppliers.

Vision

To build on our market leading position by offering excellent customer service and solutions across all areas of the floorcoverings industry, and work with suppliers to support the manufacture and marketing of innovative and sustainable products.

31

Our Strategic Objectives

Strategic Area Strategic Objectives

Industry position

• Grow leading position through

improved performance and increased sales across all customer groups.

• Broaden presence in the industry

through growing in underweight product categories, customer groups and market segments.

• Ongoing investment in the network

and people to support future growth and the sustainability of the Company.

Operational Performance

• Roll-out of the operational

improvement programme to improve both the operational and financial performance of the Company.

• Improve inventory management and

product availability, while creating capacity for growth.

• Continued collaboration between the

Company’s businesses and greater network optimisation.

Customers and Service

• Continue to improve the customer

service proposition through greater insight into the differing customer groups’ preferences and requirements.

• Continue developing tailored

propositions specific to each customer group in both the residential and commercial sectors.

• Enhance e-commence support for

customers, including an improved transactional B2B website.

Product and Expertise

• Remain leaders in product

knowledge and expertise, with improvements in sales force development and CRM systems.

• Enhance the product offering

through increased product differentiation and exclusivity.

• Grow sustainable product offerings

and support recyclable products.

Suppliers

• Build upon existing partnerships with

suppliers through increased engagement and a shared value proposition.

• Work with suppliers to improve

production scheduling and buying.

• Support suppliers in new product

development and the marketing of innovative and sustainable products.

People and Communities

• Continue to develop a positive

workplace culture through colleague engagement, and embed a clear set

• f values and behaviours in the

business.

• Focus on the provision of a safe and

inclusive working environment where everyone can fulfil their potential.

• Reduce the Company’s direct

environmental footprint including through transport efficiency initiatives and energy efficient technologies.

Headlam Group plc PO Box 1 Gorsey Lane Coleshill Birmingham B46 1LW Tel: 01675 433000 Fax: 01675 433030 E-mail: headlamgroup@headlam.com Sat Nav: B46 1JU To find out more visit us online at www.headlam.com