Headlam : 2023 Annual Report & Accounts

Investing for the future

Annual Report and Accounts for the year ended 2023

INTRODUCING OUR 2023 ANNUAL REPORT

The UK's leading floor covering distributor

Our Purpose

Our Vision

Creating great places for our communities to live, work and play

The leading, most trusted experts in flooring

Our Values

Every business in the Headlam group brings its own skills and expertise, built on a proud history of serving its customers. The 'Headlam Way' is an expression of the shared values that bring us together. It's why people choose to work with us.

Keep each other safe and well, always

Work together, with everyone

Keep improving, everywhere

Lead by example, we are all leaders

Act sustainably, use less, waste less, give back

Get it done, brilliantly

And always, do the right thing

Our Culture

Colleagues are at the heart of our business, and are our greatest asset. There are over 2,300 colleagues at Headlam within a variety of departments, including warehousing, transport, sales, and administration. We continue to focus on making Headlam a great place to work, and ensure colleagues share in the Group's long-term success.

Overview

Our investment proposition

Strong Financial Foundations

• Strong balance sheet
• Cash generative business model
• Low capital requirements

Financial Review

For more information see pages 32 to 39

Market Leading Position	Improving Future Performance
•	Market leader with established	•	Significant growth opportunity
	operational expertise and		from market recovery
	unrivaled scale	•	Building revenue streams
•	Opportunity to further broaden		from strategic initiatives
	market presence	•	Increasing efficiencies to
•	Large addressable market		support margins
Our Strategy	Our Marketplace
	For more information see		For more information see
	pages 18 to 23		pages 14 to 15

Contents

Overview		Governance		Financial Statements
Our Year in Review	02	Chair's Introduction	78	Independent Auditors' Report	148
Our Performance	03	Compliance Statement	80	Consolidated Income Statement	155
Our Business at a Glance	04	Board of Directors and	82	Consolidated Statement of	156
Chair's Statement	06	Executive Team	Comprehensive Income
Board Leadership and		Statements of Financial Position	157
Chief Executive Review	08	86
Company Purpose	Statement of Changes in Equity
Strategic Report		Q&A with Karen Hubbard	89	- Group	158
Market Overview	14	Division of Responsibilities	92	Statement of Changes in Equity	159
Composition, Succession and		- Company
Our Business Model	16	100
Evaluation	Cash Flow Statements	160
Our Growth Strategy	18
Audit Committee Report	102	Notes to the Financial
Our Strategy in Action	20	161
Nomination Committee Report	110	Statements
KPIs	24
Alternative Performance
Directors' Remuneration Report	116
Stakeholder Engagement	28	208
Directors' Report	140	Measures
Financial Review	32	Financial Record	212
Statement of Directors'
Sustainability Report	40	145	Additional Information	214
Responsibilities
Environmental	44
Social	48
Governance	54
Task Force on Climate-Related	56
Financial Disclosures (TCFD)
Streamlined Energy and Carbon	61
Reporting (SECR)
Risk Management	65
Principal Risks	68
Viability Statement	72
Non-Financial and Sustainability	74
Information Statement

Headlam Group PLC Annual Report & Accounts 2023

01

OUR YEAR IN REVIEW

Chris Payne, Chief Executive

• These are a few of the common questions we are asked by stakeholders "

Q

A

Q

A

Q

A

What has been the most challenging aspect of 2023?

2023 has undeniably been a very challenging year for the flooring market, reflecting a number of macroeconomic and industry headwinds, including lower RMI (residential maintenance and improvement) spend, a reduction in the number of housing transactions, and a decline in consumer spending. Home improvements has been one of the hardest hit categories of retail spend in 2023 as households cut back on discretionary spend. Added to which there was high operational cost inflation in areas such as energy costs and wages. This combination of lower demand and higher costs has weighed on profitability, although we worked hard to successfully offset a proportion of it by taking mitigating action.

What are your views on the timing of recovery in the marketplace after this suppressed period of time?

I'll leave it to the economists to predict the macroeconomic outlook for the years ahead, but what we do know is that volumes in the UK flooring market are around 20% lower than in

2019 and we would expect those volumes to come back over the next few years. There is a significant opportunity ahead, as and when those volumes recover. We have a relatively high fixed cost base, which means that declining volume can have a significant impact on profitability, but the reverse happens as volumes grow. Whilst the short-term outlook is uncertain, I feel optimistic about the medium-term prospects, with the recovery in the market combining with the results of our current strategic investments to create meaningful profit improvement.

What are your key focuses for 2024, including to recover financial performance?

The key focuses are to grow with new and existing customers and continue to deliver great service, whilst controlling costs and driving through efficiencies. By doing so we will drive volume growth whilst also supporting and improving margins. The macroeconomic conditions have been challenging, but we will continue to invest in the business to position it well for when the market improves.

02

Overview

OUR PERFORMANCE

Revenue

Statutory basic earnings per share

(1.1)%23

£656.5m 22

(2022: £663.6m)

21

	(76.1)%
656.5	23
		9.6p
663.6		22
			(2022: 40.1p)
667.2			21

9.6

40.1

23.5

Underlying1 operating profit				Total ordinary dividend2
(58.9)%						(42.5)%
23		16.1			23
£16.1m				10.0p
22			39.2	22
(2022: £39.2m)						(2022: 17.4p)
			37.3
Statutory operating profit:	21					21
£12.2m (2022: £43.9m)

10.0

17.4

16.4

Underlying1 profit before tax

Average net (debt)/funds3

(70.4)%23

£11.0m 22

(2022: £37.1m)

21

			(1,209.7)%
11.0			23	(34.4)
		£(34.4)m
37.1		22
			(2022: £3.1m)
35.8		21

3.1

38.3

Statutory profit/(loss)before tax

Net (debt)/funds including lease liabilities4

(83.0)%23

£7.1m 22

(2022: £41.8m)

21

			(103.3)%
	7.1		23	(73.0)
		£(73.0)m
41.8	22		(35.9)
			(2022: £(35.9)m)
27.6		21

17.7

The financial results for 2021 represent continuing operations only and exclude the contribution from the Swiss business, Belcolor AG, in 2021 following its disposal during 2021. Commentary on the Company's use of Alternative Performance Measures ('APMs') alongside International Financial Reporting Standards ('IFRS') Measures is given on pages 206 to 207.

1. To supplement IFRS reporting, we also present our results on an underlying basis to show the performance of the business before non-underlying items. These items are detailed in note 3 and principally comprise amortisation of acquired intangibles and other acquisition- related costs, impairment of intangibles, property, plant and equipment and right-of-use assets, insurance proceeds (following fire), profit on sale of property, plant and equipment and business restructuring and change-related costs.
2. Total ordinary dividend for 2021 includes the 2.0p nominal dividend announced in March 2021.
3. Average net (debt)/funds is calculated by aggregating the net debt position, excluding lease liabilities, for each business day and dividing by the total number of business days.
4. Net (debt)/funds is as at 31 December, and includes lease liabilities of £43.4 million in 2023 (2022: £37.7 million; 2021: £36.0 million).

Headlam Group PLC Annual Report & Accounts 2023

03

OUR BUSINESS AT A GLANCE

Who We Are

Operating for over 30 years, Headlam is the UK's leading floor covering distributor.

The Company works with suppliers across the globe manufacturing the broadest range of products, and gives them a highly effective route to market, selling their products into the large and diverse trade customer base.

The Company has an extensive customer base spanning independent and multiple retailers, small and large contractors, and house builders. It provides its customers with a market-leading service through the largest product range, in-depth knowledge, ecommerce and marketing support, and nationwide next day delivery service.

To maximise customer reach and sales opportunity, Headlam operates 67 businesses and trade brands across the UK and Continental Europe (France and the Netherlands), which are supported by the Group's network, central resources and processes.

31	67
Years operating	Businesses and
	trade brands
2,338	22	67
People	Distribution	Trade
	hubs and	counters
	centres

Revenue

88%	65%
12%	35%

UK	Residential
Continental Europe	Commercial

04

Our Customer Segments

Traditional Retailers

A mix of large and small stores, independently owned

Key needs:

• Product availability
• Next day delivery
• Customer service and strong relationships with fast response to queries
• Reliable quality
• New product launches, sampling and promotions

Tradespeople, Fitters and

Small House Builders

Often self-employed with or without a delivery address

Key needs:

• Nearby trade counter for collection
• Quick, one stop shop
• Product advice and sampling showcase for end-consumer
• Ability to check stock and order out of hours and on the move

Progressive/Lifestyle Retailers

Showroom style stores, selling other home decor items

Key needs:

• On trend, design-led products and brands
• Advice and insight into end-consumer buying trends
• Point-of-salematerials to showcase options to end- consumer
• Digital ordering and stock checking

Contractors

Large scale, with premises and contracts that span sectors

Key needs:

• Quick ordering and delivery lifecycle
• Able to supply nationwide and to site
• Account management and contracts all in one place
• Sustainability credentials

Overview

Major Multiple Retailers

Flooring specialists and generalists with nationwide premises

Key needs:

• Fast and accurate delivery nationwide
• Digital systems, real-time data sharing and automated ordering
• Supply chain management and stockholding
• Sustainability credentials, exclusive products and insight

Large House Builders and Housing Associations

Nationwide with multiple developments

Key needs:

• Single account management with contracts in place
• Able to supply nationwide at scale and to site
• Product insight, with tailored ranges, point-of-sale materials and showcase options for end-consumer

Online Retailers

Online business only (with no physical retail premises)

Key needs:

• Delivery to fulfilment centre or DSV
• Well recognised product brands with social media appeal
• Direct to customer sample fulfilment
• Digital systems, real-time data sharing and automated ordering

Headlam Group PLC Annual Report & Accounts 2023

05

CHAIR'S STATEMENT

Keith Edelman, Non-Executive Chair

• Despite 2023 being a difficult year for the industry, we made good progress with the implementation of our strategy to enhance the growth potential of the business, improve customer service and deliver efficiencies "

06

Overview

2023 proved to be a difficult year for the industry as a whole, and for many businesses exposed to consumer discretionary spend. Financial performance was hampered not just by the cost-of-living crisis, but also

by high operational cost inflation. These combined to meaningfully reduce industry volumes and put significant pressure

on margins.

Despite this backdrop, we made good progress with the implementation of our strategy to enhance the growth potential of the business, improve customer service, and deliver efficiencies. However, due to the roll out and maturity cycles of certain initiatives, coupled with the upfront investment required to deliver them, the impact was more than offset by the economic and industry headwinds. Additionally, the Company's regional distribution business, which is heavily weighted to smaller residential sector orders, was particularly impacted by both the trading environment and competitive pricing.

As a Board, despite the backdrop and considerable pressure on financial performance, we decided to continue investing in the strategy and for the future. This is aligned with our fundamental belief that the long-term success of the business and the expansion of its market-leading position is of most benefit to all stakeholders. Therefore, despite our profit performance in the year, we are pleased with progress and remain committed to our strategy.

As a business, we have achieved a lot over the past few years as we have sought to modernise the business, grow revenue opportunities through broadening our presence in the marketplace, and invested in associated people

capacity and infrastructure. However, this has also meant our colleagues having to contend with considerable change, and doing so in a very challenging trading environment. So, on behalf of the Board, I thank them for their commitment and hard work.

During 2024, we will continue with the implementation of our strategy whilst also undertaking particular scrutiny of operational performance, efficiencies, and the cost base. As a Board, we constantly appraise the strategy and its performance. We believe our strategy is the right one, and whilst the short-term outlook for the market is forecast to remain challenging, the business is fundamentally in

a much better position. Once volumes improve from the unprecedented current lows, we will be able to restore and build profitability, particularly given the ongoing execution and maturity of our strategy.

I would like to thank all our stakeholders for their support during what has been a difficult year for most.

Keith Edelman,

Non-Executive Chair

5 March 2024

Headlam Group PLC Annual Report & Accounts 2023

07

CHIEF EXECUTIVE REVIEW

Chris Payne, Chief Executive

• Whilst the short-term outlook remains difficult to forecast, the medium-term market recovery, combined with the impact of our current investments
  to broaden the base of the business, provide opportunity for material profit improvement "

08