7 March 2017

Headlam Group plc

("Headlam" or the "Company")

Final Results for the year ended 31 December 2016

Headlam Group plc (LSE: HEAD), Europe's largest distributor of floorcoverings, is pleased to announce its final results for the year ended 31 December 2016.

Financial Highlights:

·      Total revenue increased by 6.0% to £693.6 million (2015: £654.1 million)

·     Significant outperformance of the 3.8% growth in the UK floorcoverings market* with UK like-for-like** revenue growth of 4.7% in 2016 (2015: UK like-for-like** growth 3.9%)

·      Underlying*** profit before tax increased by 12.6% to £40.1 million (2015: £35.6 million)

·      Statutory profit before tax increased by 7.3% to £38.2m (2015: £35.6 million)

·      Basic underlying*** earnings per share increased by 14.5% to 38.7 pence (2015: 33.8 pence)

·      Total ordinary dividend in respect of the 2016 financial year increased by 8.9% to 22.55 pence (2015: 20.70 pence)

·      Special dividend of 8.0 pence also declared in respect of the 2016 financial year (2015: special dividend of 6.0 pence)

·      Net cash position of £52.6 million as at 31 December 2016, an increase of 19.8% on 2015 (31 December 2015: £43.9 million)

Operational Highlights:

·      Improved operating performance as a consequence of increased revenue and leveraging of the extensive distribution network, with underlying*** operating margin of 5.9% (2015: 5.6% (after adjusting for one-off benefit))

·      No discernible impact on trading following the EU referendum in June 2016, and able to implement price increases to mitigate cost inflation due to a weakening of Sterling

·      Continued expansion of the distribution network with seven service centres opened in 2016, and one post the year-end, bringing the total number of service centres to 55

Post Year-End:

·      Tony Judge, who has worked at Headlam for more than 24 years, will be appointed to the Board as Chief Operating Officer with effect from 31 March 2017

·      Successful acquisition of Mitchell Carpets Limited, a floorcovering distribution business based in Poole, Dorset, bringing the number of wholly-owned businesses to 60

·      2017 to date has shown continued growth in both the UK and Continental Europe, and the Company continues to trade in line with the Board's expectations for the full year

Steve Wilson, Chief Executive, said:

"2016 was another successful year for Headlam and we were able to significantly outperform the steady growth in the UK floorcoverings market and thereby gain market share, further cementing our market leading position in Europe.  The 2016 financial results and overall financial strength of the Company have also allowed us to declare another special dividend, which supplements the Company's progressive ordinary dividend policy.

"We are dedicated to building on our existing business model which has achieved the strong financial results evident to date, whilst beginning to implement plans to further improve the operating performance of the business going forward. 2017 to date has shown continued growth in the UK and Continental Europe, and we look forward to the year with confidence."  

*Source: AMA Research Ltd - Floorcoverings Market Report UK 2016-2020 Analysis

**Like-for-like revenue is calculated based on constant currency from activities and businesses that were in effect in both 2016 and 2015 and adjusting for variances in working days

***Before non-recurring items

Enquiries:

Notes for Editors:

Headlam is Europe's largest distributor of floorcoverings having grown significantly via organic growth and acquisition since 1992.

Headlam provides the distribution link between suppliers and customers of floorcoverings, providing suppliers with the greatest coverage and customer penetration for their products across the UK and Continental Europe, and customers with the broadest range of products supported by next day delivery.

The Company is engaged with suppliers across 16 countries whose products cover a significant proportion of the floorcoverings market (including carpet, residential vinyl, wood, laminate, luxury vinyl tile, underlay and commercial flooring). The Company's customers are within the residential and commercial sectors and comprise principally independent retailers and flooring contractors.

The Company currently comprises 60 wholly-owned businesses in the UK and Continental Europe each operating under their own trade brand and utilising their individual sales team which achieves a greater reach into the customer base.

Each of the businesses is supported by the Company's centralised and financial resources and extensive distribution network across the UK and Continental Europe that comprises four distribution hubs, 18 distribution centres, 55 service centres and a corporate showroom.

Chairman's Statement

2016 was another successful year for Headlam, with total revenue and underlying profit before tax increasing by 6.0% and 12.6% to £693.6 million and £40.1 million respectively compared with 2015.  We were able to significantly outperform the steady growth in the UK floorcoverings market and thereby gain market share, further cementing our market leading position in Europe.  As a consequence of the increased revenue and leveraging of our extensive distribution network, we were also able to deliver an improved operating performance.

It was especially gratifying that we experienced no discernible impact on trading following the EU referendum in June 2016, and were able to implement price increases in August 2016 to mitigate cost inflation due to a weakening of Sterling.

The 2016 financial results and overall financial strength of the Company have allowed us to declare a further special dividend, which supplements the Company's progressive ordinary dividend policy.  Therefore, dividends declared and proposed in respect of the 2016 financial year, which are a reflection of the cash generative nature of the business, total 30.55 pence, being a combination of a total ordinary dividend amounting to 22.55 pence per ordinary share (2015: 20.70 pence), an increase of 8.9% on 2015, and a special dividend of 8.0 pence per ordinary share (2015: 6.0 pence).

We would like to thank all our employees, without whom this success would not be possible, and again would like to express our appreciation to Tony Brewer who stepped down as Chief Executive during 2016 and was instrumental in building Headlam into the Company it is today.  The Board was delighted that Steve Wilson moved from Finance Director to Chief Executive ensuring continuity and also providing the skillset for the future development of the business.  We are advanced with our search for a Chief Financial Officer and are committed to securing someone of the calibre that Headlam deserves.  We are also pleased to announce that Tony Judge, 52, who has worked at Headlam for more than 24 years, will be appointed to the Board as Chief Operating Officer with effect from 31 March 2017.  Tony has held a number of senior operational roles at the Company, most recently as the UK's Commercial Director.  Tony has 35 years' experience in the floorcoverings industry and brings an abundance of knowledge and expertise to the role of Chief Operating Officer*.

The Board recognises the value derived from good corporate governance and the setting of high standards, not least in the confidence it brings to our shareholders, employees, suppliers and customers. The Board continues to encourage full participation and contributions from all its employees and promotes a culture of openness and transparency.  

We are dedicated to building on our existing business model which has achieved the strong financial results evident to date, whilst beginning to implement plans to further improve the operating performance of the business going forward.

2017 marks our 25^th year as a distributor of floorcoverings and we look forward to continue building on our success.  

Dick Peters

Chairman

7 March 2017

*No further information is required to be disclosed pursuant to LR 9.6.13
 

Chief Executive's Review

Strategy

Our strategic aim is to continue being the pre-eminent distribution link between suppliers and customers of floorcoverings, providing suppliers with the greatest coverage and customer penetration for their products across Continental Europe, and customers with the broadest range of products supported by next day delivery. This is facilitated by our 60 wholly-owned businesses across the UK and Continental Europe and extensive distribution network that comprises four distribution hubs, 18 distribution centres, 55 service centres and a corporate showroom. Each of the Company's distribution businesses operates under its own brand name and utilises its individual sales team, while being supported by the Company's centralised and financial resources, which allows greater reach into the customer base. The Company's customers are within the residential and commercial sectors and comprise principally independent retailers and flooring contractors with whom the Company's businesses typically have long-standing relationships.

Performance

The Company continued to experience better than anticipated trading throughout the year but particularly in the important fourth quarter which accounted for 26.0% of total revenue in 2016 (2015: 25.6%).

Total revenue for the year of £693.6 million was up 6.0% against 2015, approximately 4.5% in constant currency, with a strong performance from both the UK and Continental Europe operations. The second half of the year accounted for 52.6% of revenue (H2 2015: 52.1%) reflecting the traditional weighting of activity to the second half.

We experienced no discernible impact on trading following the EU referendum result in June 2016, and the Company was able to mitigate cost inflation due to a weakening of Sterling following the referendum by implementing price increases to our customers which mirrored those of our suppliers. The price increases were implemented in August 2016 on virtually all residential sector products sourced from Continental Europe. Purchases from suppliers in the Eurozone accounted for roughly 70% of the Company's residential sector purchases in 2016, and the price increases for those products averaged approximately 6%.  The Company's average selling price across the majority of its UK products rose by approximately 1.6% in 2016.

Gross margin was 30.60% versus 30.39% in 2015 (after adjusting for an one-off benefit in 2015) due to product mix variance and rebate benefit. The Company achieved an improved operating performance, with underlying operating profit and underlying profit before tax increasing 11.7% and 12.6% to £41.1 million and £40.1 million respectively against 2015, reflecting utilisation of the existing network and operational gearing from increased revenue.

UK

The UK accounted for 86.8% of total revenue in 2016, a marginal change from the 88.0% in 2015. There were no acquisitions in 2016, and UK like-for-like growth was 4.7%, a significant outperformance of the 3.8% growth in the market (Source: AMA Research Ltd - Floorcoverings Market Report UK 2016-2020 Analysis) and the 3.9% like-for-like growth in 2015.

Continental Europe

During 2016, the Company's three businesses in the Netherlands were amalgamated into one trading name, Headlam BV, so that the Company now has a total of three Continental European businesses located in each of the Netherlands, France and Switzerland. Continental Europe revenue grew by 3.6% to £81.5 million in constant currency, strongly reversing the decline of 3.8% in 2015, and, following translation, accounted for 13.2% of total revenue in 2016 (2015: 12.0%).

Suppliers

We continue to engage with suppliers around the world to provide them with unique access to market for their products and are now engaged with 107 significant suppliers in 16 countries. Our suppliers' products cover a significant proportion of the floorcoverings market (including carpet, residential vinyl, wood, laminate, luxury vinyl tile, underlay and commercial flooring) and we continue to look to supplement product lines either by engaging with suppliers or via acquisition.

Customers

Our customers are within the residential and commercial sectors, and the revenue split between the two sectors has remained broadly similar over the past few years. In 2016 the residential sector accounted for 67.5% of total revenue (2015: 67.2%) and the commercial sector for 32.5% (2015: 32.8%).  The residential sector revenue is principally comprised of sales to independent retailers, and as a consequence is characterised by many smaller orders. In the UK, the Company's average order cut value for residential carpet and residential vinyl in 2016 were £127.44 and £68.03 respectively.

Operational Gearing and Investments

One of the focuses for 2017 and beyond is the operational gearing of the business above and beyond that which comes from additional revenue and growing our market leading position. In relation to this we are looking at the refinement and more effective and efficient utilisation of our distribution network.  Initiatives already undertaken at negligible cost include merging IT platforms and de-duplication of inventory in instances where two distribution centres are located in close proximity to each other, which has effectively created growth capacity.   This can be replicated across other parts of the network in 2017 and 2018 and it is our intention to examine other straightforward initiatives as well as longer-term plans. No job losses are anticipated as part of these future initiatives and they will also improve service for customers.

We have re-examined the plans for our proposed purpose built distribution centre in Ipswich for Faithfulls Floorcovering, one of our regional multi-product businesses which has experienced good growth and has outgrown its existing premises in nearby Hadleigh.  Whilst we have received planning permission for our initial proposed site we are now considering an alternative site also in the Ipswich area that will better suit our needs and is more in line with our strategy of making our network ultimately more efficient while creating growth capacity. This potential new site is in a purpose-built distribution park, offers a quicker build and operational timeline, and 33% more cubic capacity in the same footprint as the initial site.  The anticipated total cost, including land cost and warehouse equipment, is slightly higher at £17 million compared with the approximate £15 million for the initial site, but it is hoped that, due to its simpler nature, the distribution centre can be operational during the first half of 2018. There is also scope in the future for the new Ipswich site to support other Company businesses in the area.

Customer service is of paramount importance to our business model and we continue to develop our low-cost service centre network allowing ease of customer collection and ordering. Seven new service centres were opened in strategic locations in 2016, six in the UK and one in the Netherlands, and a further one in the UK post the year end bringing the total to 55 across the Company. This service centre network has led to the number of customer collections in the UK increasing by 29,528 in 2016 to 953,428 (2015: 923,900) which has the added benefit of reducing distribution costs.

Acquisitions

We continue to pursue growth both organically and via bolt-on acquisitions to build on our market leading position, and assess acquisitions on a continual basis utilising strict criteria.  While no acquisitions were completed during 2016, since the year-end the Company has completed the acquisition of Mitchell Carpets Limited, a regional floorcovering distribution business based in Poole, Dorset. This has brought the total number of wholly-owned businesses in the UK and Continental Europe to 60, and all our businesses benefit from being part of the Company through our continued financial and centralised support and purchasing economies of scale.

Ordinary and Special Dividends

With the existing capital expenditure plans largely aligned with previous guidance, coupled with the robust financial performance and strength of the business, we are pleased to be able to declare a further special dividend. The special dividend is our mechanism of returning surplus cash to shareholders when it is not currently required due to our strong cashflow, cash balances and already well-invested extensive distribution network. Therefore, total dividends in respect to the 2016 financial year increased by 14.4% to 30.55 pence per ordinary share (2015: 26.70 pence). We shall continue to consider future special dividend payments in conjunction with potential acquisitions and future capital expenditure plans.

Current Trading

2017 to date has shown continued growth in both the UK and Continental Europe, and the Company continues to trade in line with the Board's expectations for the full year. UK like-for-like revenue growth was 0.23% and 2.10% in January and February 2017 respectively, with January and February 2016 being particularly strong comparators having recorded like-for-like growth of 9.18% of 3.33% respectively.

Continental Europe grew by 0.25% and 4.63% in January and February 2017 respectively in constant currency continuing the positive performance seen in 2016.

We implemented further price increases in January 2017 averaging approximately 3% across the majority of our residential sector products purchased from Continental Europe, again mirroring those of our suppliers and with no detrimental effect on trading to date. We will continue to monitor movements in currency and pricing and endeavour to implement price increases accordingly.

As stated above, a focus of 2017 is the network's effectiveness and efficiency, and also overheads so that incremental revenue has a greater impact on operating margin going forward, and we look forward to the year with confidence.

Steve Wilson

Chief Executive

7 March 2017

Financial Review

Revenue

During the year, revenue increased by £39.5 million from £654.1 million to £693.6 million, an improvement of 6.0%.

The Company's UK organic like-for-like growth of 4.7% once more outperformed forecasted annual market growth (Source: AMA Research Ltd) with the like-for-like performance of 5.1% during the second half accelerating ahead of the first half performance of 3.4%. UK residential revenues accounted for 70.1% of total UK revenues in 2016 and achieved an annual like-for-like performance of 5.3% benefiting from the stronger showing during the second half of 5.8%, compared with the first half of 4.7% as markets strengthened during the course of the year.

Commercial revenues in the UK, representing 29.9% of total UK revenues in 2016, increased by 1.9% on a like-for-like basis with a second half of 3.4% versus 0.4% in the first half.

The revenue from the Continental European businesses improved during the year with the first half like-for-like improvement of 2.8% increasing to 4.3% during the second half giving rise to an annual increase of 3.6% in constant currency. 

Both the Netherlands and France businesses contributed to the increase, with the Swiss business in line with its performance in 2015.

The weighting between combined residential and commercial revenue in Continental Europe showed a slight movement to commercial with 49.3% of revenue (2015: 48.8%).

Gross Margin

Gross margin decreased marginally during the year from 30.7% in 2015 to 30.6%.  However, the gross margin achieved during 2015 included a one-off benefit amounting to 31 basis points and totalling £2.0 million, which arose during 2015 because of the rapid appreciation of Sterling against the Euro during the first quarter of the year. After adjusting for this one-off benefit, underlying gross margin in 2016 improved 21 basis points against 2015, attributable to product mix variance of 9 basis points and a rebate benefit of 12 basis points.

Expenses

Combined distribution and administrative expenses increased by 5.9%, up by £9.7 million, from £163.7 million to £173.4 million. The percentage proportions of distribution and administration expenses of total expenses for 2016 remained largely unaltered compared with 2015, with 2016 being 73.8% and 26.2% respectively (2015: 73.3% and 26.7%).

The increase in people cost, £5.6 million (2015: increase of £3.0 million), was once more the largest component increase, being 78.4% of the gross expenses increase before currency translation.  The increase was fuelled by the cost of living increase of 2.5% awarded to all UK employees, a modest increase in people numbers, incentive awards relating to annual performance targets, and non-recurring costs relating to personnel changes of £1.9 million.

Costs relating to the currency translation of the Continental European businesses amounted to £2.5 million, reflecting the degree to which Sterling depreciated against the Euro and Swiss Franc in 2016.

The remaining expenses movements were directly linked to the increase in revenue during 2016 compared with 2015.

Operating profit

The underlying operating profit for 2016 increased by 11.7% compared with 2015 and the underlying operating margin improved to 5.9%, up from 5.6% (after adjusting for the one-off benefit), reflecting the absolute gain in gross margin due to the volume benefits on the additional revenue, product mix variance and rebate benefit. The operating margin generated by the incremental year-on-year revenue improvement amounted to 10.9% compared with 28.2% in 2015 due to a substantial increase in overhead costs primarily related to people and the cost of living award.

Tax

The underlying effective tax rate for 2016 was 18.9% which is lower than the headline rate of corporation tax in the UK of 20%. The main reason for this difference is due to a release in provisions for uncertain tax positions following a reassessment of the level of tax risks in the Company. The anticipated effective underlying rate for 2017 is expected to be 19%.

The Company is committed to being fully compliant with the relevant tax laws and compliance obligations regarding the filing of tax returns, payment and collection of tax. The Company maintains an open relationship with HM Revenue & Customs and currently operates with a level of tax compliance risk that is rated as "low".

The Company does not undertake any form of artificial tax planning but, does seek to maximise tax reliefs available, for example by making capital allowance claims on fixed asset expenditure.

Earnings and dividend

Ordinary dividends

The Board's ordinary dividend policy is aimed at improving dividends annually, such that the total of the interim and final dividends for any particular financial year increases in line with the basic earnings per ordinary share for that year.

When declaring the interim and recommending the final dividend, the Board considers the Company's cash resource, adequacy of distributable reserves and the expected cash requirements of the Company.

Basic underlying earnings per share for the year increased to 38.7 pence, representing an improvement of 14.5% on basic earnings of 33.8 pence for 2015.  Total ordinary dividends declared and proposed in relation to 2016 have increased by 8.9% from 20.7 pence to 22.55 pence which represents a cover ratio of 1.63 based on basic earnings per share of 36.8 pence.

The Board believes that whilst there is a continuing underlying risk relating to potential volatility around future growth in European floorcovering markets and, as a consequence, a lack of predictability around future earnings, it is nonetheless of the view that the current dividend policy will continue during the medium term. Additionally, and subject to the nature and term of any adverse movement in earnings, financial strength, cash resource and the assessment of future trading, the Board has the option to allow a temporary fall in the cover ratio in order to maintain the dividend.

In implementing the policy, the Board ensures the parent company has sufficient distributable reserves available from which to make the distribution. Details of current year distributable reserves are shown in the retained earnings column in the Statement of Changes in Equity.

Dividend announcements, approvals and payments are typically expected to be as follows:

Special dividends

The Board gives consideration to the distribution of surplus capital by the use of special dividend payments. As first stated in the 2015 Annual Report, the circumstances that apply to any special dividend declaration are: firstly, the Company's forecast average net debt in the year in which the special dividend is paid should be approximately equal to or less than 0.5 of earnings before interest, tax, depreciation and amortisation; secondly, the cover ratio of the aggregated ordinary and special dividends when expressed in terms of dividend cover will not be less than one; and thirdly, the payment must be made from available distributable reserves. The Board believes this approach provides a flexible mechanism for managing the maintenance and expansion of the Company's asset base.

The Board have decided to declare a special dividend of 8.0 pence per ordinary share (2015: special dividend of 6.0 pence per ordinary share).  The payment will be made on 24 April 2017 to shareholders on the register at 31 March 2017.

Employee benefits

The liability attaching to employee benefits is as follows:

Whilst the liability relates to both the UK and Swiss defined benefit pension plans, its composition is dominated by the UK plan. The year-on-year increase in the deficit amounts to £3.9 million. This was mainly caused by the increase in the liabilities of the UK defined benefit pension plan resulting from the decrease in the discount rate assumption from 3.7% per annum to 2.7% per annum over the year. This decrease was a consequence of the significant fall over the year in UK corporate bond yields, which are used to derive this assumption.

Cash flow

Net cash flow from operating activities

During the year, net cash flow from operating activities decreased by £3.9 million from £36.5 million to £32.6 million. The elements contributing to the movement are shown in the table below.

As with previous years, two key contributors to the year-on-year movement were the operating profit increase of £2.4 million and the net working capital investment of £5.9 million.  In addition, there was a significant increase in the tax payment during the year.

The working capital movement of £5.9 million is due to a cash inflow of £3.9 million reported in 2015 and the more normal working capital profile of 2016 giving a cash outflow of £2.0 million.  The increase in inventory and receivables, £5.9 million and £6.5 million respectively, was driven by the revenue activity and supported by a £10.4 million rise in payables.

The increase in the tax payment is solely due to the timing of tax payments.

Cash flows from investing and financing activities

The table below summarises the cash flow movements arising from investing and financing activities during the year. The overall net cash outflow from the two activities was £38.0 million, with the two main factors being a reduction in debt through the repayment of borrowings and the additional dividend payment as a result of last year's maiden special dividend payment.

Net debt

As detailed in the table below, Company net funds at the end of the year increased by £8.7 million, 19.8%, from £43.9 million to £52.6 million.

Funding and going concern

The Company completed a refinancing of its UK banking facilities, which were due for renewal on 8 March 2017, on 14 December 2016. The Company has entered into two separate agreements with Barclays Bank PLC and HSBC Bank Plc and include both Sterling and Euro term facilities. The new banking arrangements, which run to 14 December 2021, increase the level of Sterling committed facilities from £40 million to £47.5 million, and have additional Euro facilities of €8.6 million.  The Company also has short-term uncommitted facilities which amount to £25 million, and are renewable on an annual basis.  In addition, the group has existing facilities of £7.8 million in Continental Europe.

The Company maintains sufficient banking facilities to fund its operations and investments, and as at 31 December 2016 92.3% of the total facilities were undrawn as shown below.

Having reviewed the Company's resources and a range of likely outcomes, the Board believes there are reasonable grounds for stating that the Company has adequate resources to continue in operational existence for a period no shorter than twelve months from the date of this financial review and it is appropriate to adopt the going concern basis in preparing the Company's financial accounts.