Headlam Group (LSE:HEAD) — Half Year Results

0:01 Good afternoon, and welcome to the HEADLAM GROUP PLC Half Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time using the q and a tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses, which is appropriate to do so. Before we begin, I would like to submit

0:31 the following poll. And I would now like to hand you over to CEO, Chris Payne. Good afternoon to you. Hi there. Thanks for joining the presentation for the half year. So if we just turn the page, Adam, there's just a short introduction before I hand over to Adam who's gonna kick us off. So the four four main sections of the presentation, given we're already in October, the first half seems a little while ago, so we'll probably canter through that section. But what you'll see is this sort of I suppose the market conditions remain pretty challenging, which has affected our first half, but Adam will talk us through that. What you will see is that we've managed to navigate cash and working capital in a well controlled manner. And I'll give a little bit more of a detailed update on how our strategic initiatives are rolling out together with this acceleration by way of a transformation plan that we've announced. So I'll spend a little bit more time on providing an update on those elements.

1:31 So I'll just ask Adam to to sort of update us really on the first half performance and and that backdrop of the market context that I mentioned at the start. Thanks, Chris. Yeah. I'll I'll start with a couple of slides on the market just to give you the kind of context for how the market's been in the in the first half and as we look out over the second half and into next year. And then and then I'll cover off just in a in a handful of slides the the half one financial results.

1:58 So just looking at the market and and particularly the market in recent months and over the first half of this year. And if you look at the top half of this slide, this sets out a few of the key market indicators that we we track and that are relevant for the flooring market. And you can see on the top left hand side there, got consumer confidence, and in particular, the the orange line, is the major purchase index. And you can see that's been quite firmly negative throughout the last kind of eighteen months or so that we've shown on this chart, and particularly with the orange line, the major purchase index nagging the overall consumer confidence. And, you know, since we've published these slides, actually, we've now got the September consumer confidence data, which is actually showing a considerable lurch down actually in September on both that orange and that that that blue line.

2:52 Potentially on sort of pre budget fees the end of October, we'll see over the next couple of months as to how that consumer confidence index tracks. In the middle of the slide there, so housing transactions. So an important indicator for the flooring market because once you've got, you know, someone who moves house typically maybe six months or so later, that's when you might see some home improvement spend on kitchens, bathrooms, flooring, etcetera. And we've seen, I mean, on this chart, four consecutive months now of those being in growth. We're now in the fifth. It's now been five months in a row that that we've seen growth, but that has come off the back of a very negative period. So 20% decline in house transactions in 2023 and an 8% decline, in q one this year. So we won't see the benefit of that until maybe back end of this year or or or perhaps more likely into next year.

3:45 And then on the right hand side, this is the Barclays data on consumer spending on home improvements, which you can get from their their website. And as you can see, that was firmly negative through 2023. And and so far in 2024, it's shown no sign of improvement yet in terms of what consumers are spending on home improvements. And what that means for the flooring market in the first half of this year is that we we estimate that has declined 10 to 15% in the first half of this year, and cumulatively is now 25% plus decline in volume terms since 2019. So a a challenging backdrop to the market, but but the lead indicators are more positive. You know, with paying growth, consumer confidence, whilst it's lurched down except September has been on an improving trend.

4:33 Interest rates reducing, housing transactions in growth. So we do expect we do expect the flooring market to return to growth at some point during 2025, but the timing remains uncertain. So if if I just turn then to HEADLAM specific performance in the in the first half of the year, and on this table here, we show the the revenue performance by by channel, and we've broken out back broken out The UK into a bit of detail. And you can see there we've continued to to deliver good growth in the strategic initiatives of larger customers and trade counters, and they were up 27% respectively. Regional distribution at the third row in that table there was most impacted by the weak residential market, and that was down 18.8% in the first first half, but has been on improving trend in more recent months.

5:27 And then in in Continental Europe, so we we operate in France and The Netherlands, the market conditions there have been, more severe than in The UK, and revenue declined 15.9% in the first, half of this year. So just just looking at those three main UK channels in a little bit more detail, I won't go through all of this, but on this slide, and this is on our website, we've we've laid out some of the kind of some of the operational developments in the first half of this year. But we've made it on the left hand side of regional distribution, some service enhancements in the in the first half of the year of the year in terms of customers being able to track their deliveries online in real time. We've done a bit of network optimization, so we consolidated sites in the Northwest Of England, which is which has been successful.

6:16 And then towards the end of the period, we've launched some new value ranges, which were well received in the market as well as increasing our own own brand own product brand mix. And you can see the bottom left hand side there, we've seen an improving trend in recent months while still in decline, but we've seen a a lessening in the scale of decline in in the regional distribution market. Sorry. Our regional distribution sales despite the market not showing any signs of improvement yet. So moving to the middle there to trade counters. So 7% revenue growth in the first half, now annualizing over a 100,000,000 of revenue. And we took the the site count to 76 at the end of the first half, so that's nine new and then 11 refurbished.

7:02 And you can see the the the chart in the middle there just shows the the the portfolio of tray counters we've got. So 76 in total, of which 67 now are in the new format, which are refurbished. And and collectively, those trade can sites are all performing in line with the business case, and that's despite despite the weak market. Right hand side, larger customers, tough period for multiple retailers due to the weak end consumer demand. And indeed, we've seen two multiple retailers exit flooring in in recent weeks, carpet rights and SCS. SCS is just a strategic decision to get out of flooring, but carpet right entered administration. And collectively, that's about £250,000,000 of flooring retail revenue, which now will dissipate elsewhere in the market and across other retailers, which provides an opportunity for HEADLAM. We weren't a supplier of of any scale at all to Carpet Right, So there's an opportunity there as those sales move elsewhere in the market.

8:03 And then finally, we've had two new customer wins in the first half of the year. One that was launched in q two, which was distribution as a service to a manufacturer, and one that's launching around now, which is a new multiple retailer customer. Income statement, I'll actually cover this through the profit bridge here. It's probably a neater kind of illustration of it. So this shows the year on year movement in our operating profit from an 8,000,000 profit in the first half of last year to the 13,000,000 loss in the first half of this year. Volume, as it was in 2023, with volume, it was by by far the single biggest driver of that reduction in profit, and that reflected the weak residential market. The next bar along is gross profit, and and gross gross profit percent dropped 86 basis points year on year, and that's predominantly due to increased clearance activity, particularly towards the end of the first half.

9:01 And and then the other point to note here is that there's actually been for the second year in a row, very limited price inflation in the market. So what normally happen is normally normally see manufacturers putting price through into distributors, which would go on to the end consumer. There's been very little of that in the past two years as manufacturers have sought to protect their own volumes in a in a particularly weak market. Just moving along the the bars here, strategic investments. So it's about 1,500,000 profit impact from from this, and this is predominantly trade counters. So trade counters, as we roll them out, they are profit dilutive in the rolling out investment phase, but then profit accretive as those trade counters mature. And we're we're obviously in the rollout phase at the moment, so we've seen a little bit more profit dilution.

9:48 And that will flip into accretion as we get into maturity kind of 2026 onwards. Cost inflation, 3,300,000 headwind principally driven by people costs, and that included the 10% increase in the national minimum wage in The UK early which came through early this year. And then finally, the final two bars, so market weakness in Continental Europe reduced profit by 1,400,000. And then there's a further 3,400,000 impact from other items, including non repeat of one off benefits in 2023, like insurance settlement, etcetera. And then there's one point the green bar there, 1,500,000 of of mitigating actions offsetting some of those some of those headwinds. Non underlying, I won't go through this in in any detail, but we've we've laid out the detail here on non underlying items. So these are these are the the bits that are stripped out of our underlying profit numbers that we report. The two big the two biggies are the the third and fourth row where we've got the the business restructuring and change related costs. So this links to the transformation plan, which Chris will talk more about later. And most of that 4,900,000 of p and l expenses is is noncash impact of stock write downs.

10:57 And then the fourth row is the profit on sale of property, which is the Stockport disposal, which happened in the first half of the year. So that was a 7,400,000 cash inflow and generated a profit of 3,200,000. So just moving on to cash flow. Good good operating cash generate generation. So if you look at this about a third of the way down that table on the left hand side, operating cash flow of 18,000,000. So broad despite, you know, despite the impact of the market on on the p and l, broadly flat year on year operating cash flow, and that was underpinned by by by working capital inflows, which he which was a combination of, you know, in part due to lower revenue, which has then generated lower receivables, but also tight control of inventories, which were down 6,500,000 in the first half, but actually down 23,000,000 year on year.

11:49 And if we move further down the cash flow capital investment, the capital investment is 6,700,000 in total, which which is principally trade counters and then the final element of the solar panel investment program, which ended in q one this year. There's then 4,800,000 of dividend payments when that was in respect of the 2023 final ordinary dividend, which we paid in June this year. And then we had a 7,400,000 cash inflow from disposal of Stockport in June this year. And all of that, if you look at the very bottom row, all of that meant a slight reduction in net debt of of just over 1,000,000 in the first half of this year. And that's illustrated on on this chart here, which is just a waterfall that shows the net debt at the start of the year through to where it was at the end of the first half of the year. The green bars show reduction in net debt, so that's kind of cash inflows. The gray bars are the outflows, and you can see the outflows on leases, CapEx, and dividends were offset by working capital and the, the property proceeds, so resulting in net debt broadly being held flat throughout the first half of this year.

12:56 Balance sheet. So just just before I wrap up overall, just just a note on on balance sheet and, you know, HEADLAM continues to have a strong balance sheet, and that's underpinned by property portfolio, which is valued at a £142,000,000, at the last valuation, which is January 2023. Significant liquidity headroom. So at the end of June, 72,000,000 of cash and undrawn banking facilities available to the group. An ongoing support from from the bank syndicate, including a a revised covenant package to give us the flexibility as we implement the transformation plan, which which Chris will talk about in a minute.

13:37 And the final point on here is with with this further balance sheet strengthening in the period, which was provided by the pension buying transaction, which we completed in March this year. And what that does is it removes exposure of the group to volatility and pension assumptions, and it also means that we remove the ongoing contributions into the scheme, which have been about £1,000,000 per year. So just to just to wrap up then, challenging market conditions with 10 to 10 to 15% decline we've seen in the market in the first half of the year. And that has weighed on HEADLAM's performance, and we've seen 11% revenue decline in The UK and 12% for the group in the first half of the year. But the strategic growth areas have performed well.

14:24 So trade counters up 7%, larger customers up 2%, and cash or working capital well controlled. Stock down 6,500,000 in the first half and 23,000,000 year on year, and net debt broadly held flat in the first half compared to the end of twenty twenty three. And as just covered on the previous slide, strong balance sheet, so 72,000,000 of cash and undrawn facilities available to the group at the end of June and £142,000,000 of property assets. And I'll hand it back to Chris now to talk through update and and transformation plan. Thanks, Evan. Right. So we've got a a couple of slides here just as some some somewhat of a reminder over the strategy and and how we've been progressing so far before we turn into a little bit more detail to cover the transformation plan. So the the first slide is just a heads up on the kind of customer and how we view the market scaling. So a little while ago, we articulated the size and scale of the market. Now given the recent weakness in the market that I just referred to, you know, this market might be slightly smaller than 3,000,000,000, but, poorly, that's the number we've been referencing.

15:35 And then we've identified these seven customer types, and this is really the underpinning, the fundamentals behind our strategy. Strategy. So the group has been very traditionally strong in the left hand side of these customer segments, the retailers and the independent tradespeople, unless strong and less representative of the market purchases as you move to the right. So the larger contractors and the pure play online customers typically would go direct to manufacturers for their purchases. So HEADLAM's exposure and and opportunity in these different customer types are different. And therefore, for our kind of thoughts around growth and where we could see additional sales coming from. Certainly, we need to develop our propositions for these customer types towards the right hand of the page. So very much product is the, focus behind how we've, addressed the market in in recent times on the left hand side and moving more to a solution and proposition related sales approach, for the right hand side of the page.

16:40 So that was the underpin to our strategy. And then if we we sort of expressed our strategy in these sort of five pillars. So the five pillars, how how are we going to achieve this sort of the the the the vision of being the the leading experts in flooring. Five pillars. The one on the left hand side is around our great service. So we remain the sort of market leader from a service perspective, and that's that's according to our customers. So we survey our customers every year, and they always tell us that we are the great service. So do not lose your service position in the market. So that's what we've been known for. That's what we're great at. But the second pillar over is about developing new areas. So I talked about the new customer types that we've been focusing on. So remain strong, remain market leading in service, but look at perhaps offering that proposition and service to new customer areas.

17:33 The middle middle pillar here is around operational capability, and I've got an example in my way of making it sharpening that up. That's particularly challenging in a in a declining market because you're trying to keep pace with a sort of falling demand curve. So you've gotta be operation efficient just to stand still, and and that can be tough when you've got a a sort of nationwide infrastructure to work with. So we've been focusing on how to be more effective over time, and that remains a key part of our strategy going forward. And on the right hand side, we we cover this less in these slides, but we've recently made a number of announcements on our sustainability. We we released sustainability report strategy as part of our year end update, and we've done a number of initiatives that that focus on on that, and I'll cover those in a moment. And making HEADLAM a great place to work is all about investing in communities, investing in our teams, training, development, safety, having that kind of inclusive culture, I suppose, of of of working at HEADLAM and that we've made great strides in that in the last couple of years.

18:40 So just some specific examples of where we've been delivering against these five strategic pillars. Again, I won't go through all of these. You may have seen these in the slides, and they're there to look at. But, you know, we have been launching new products to address, particularly where price points are increasingly important in the market at the moment. We've launched some well priced good quality brands such as Every Room in the marketplace. We've been exploring the digital investment of the business and trying to offer digital assets to our customers, and we've seen a significant increase of the in the revenue that's flowing through our digital channel.

19:25 I've talked about going into new areas of of customer engagement. We've seen our trade counts footprint increase significantly as Adam described up earlier up to 76, and that's that's in its investment phase at the moment where we are seeing some revenue coming in. But, obviously, the costs typically front loaded when you're opening new sites and investing in new people to run those tray counters. It's an investment for the future. Now that is running at a higher annualized run rate, but as I said, you have to invest before you get the maturity of those new trade counters. Despite that weak market, we're still seeing larger customers increasing their trading, and that's been despite the the challenging market where we see people like SCS come out of the market, Adam mentioned earlier, and and the footfall challenges of a of a declining market have affected the multiple retailers and our large customers in the same way. So people like B and Q, Homebase, and other customers have also seen challenges of of of footfall and demand reductions over a challenging period.

20:29 Operational capability, I'll come on to an example of that in a minute. Transport integration is something we've been working on for a good good period of time, and that's coming to an end now where we've got a national transport service moving away from those regional services that we used to operate. And and the final piece of that was, and I've I've referred to this before, sort of almost like a parcel mentality. So as a consumer, you get used to tracking your parcels in real time on an app. We now offer that kind of service to our customers who could track their deliveries, by by looking at our delivery tracker so that they get sent an email, for example, which they can click on that shows where their deliveries are. So we've been doing a lot around our service offer for for deliveries, not just around kind of cost reductions.

21:16 I mentioned sustainability on the right hand side now. Here, we have installed solar panels. We're looking at decarbonizing our fleets. We've we've nearly fully rolled out low low emission vehicles for our non non HGV fleets. As I said, we've reduced electricity load by by putting solar panels on, and this is something that's a long term plan for us to to go carbon neutral in the next decade or so. And then the the take back scheme is an interesting one where we've been looking at how do we take carpet in particular out of landfill, and we're looking at offering that as a service to customers who could bring their removed product back to one of our tray counters for reprocessing.

22:00 And that's been a a successful trial so far. We saved about 35 tons from landfill, and we're looking at how do we potentially roll that out to other sites. Customers like it because it gives them the ability to get rid of a of a product. They know they they'd rather not take that for waste. And interestingly, they actually purchased some more goods when they're visiting us at our tray counter. So it's got some merits as well as just the sustainability merits as well. And on the right hand side, I've mentioned a number of training and initiatives we've been developing both in terms of investing in our people with safety processes. But also the the one on the bottom right is an interesting one where we've we we have an apprenticeship scheme in place where we support fitters becoming trained in the industry, and they do a rotation around a number of our suppliers who are effectively partnering with us to give an opportunity for people to learn flooring fitting and getting into the industry. I think that's part of the of the future and the investment we're making as an industry.

23:03 So a couple of deep dives on some of the examples. How how do we know that we can do this well? So on the next slide, we've picked out a couple of examples. So I'll come on to the transformation plan in a minute, but we know we can do some of these things. So transport integration, I've I've given you an update on that already. That's something which we've developed over the last few years, which has taken a a regionally fragmented delivery network and turned it into a national network. So we now can deliver anywhere in the country across all of our postcodes, and we no longer send vehicles in opposite directions with the same product on it. So customers now get single deliveries as well. So it's an integrated model. It's reduced mileage, reduced the carbon, reduced our number of trucks and drivers, and maintained a national delivery network. So we we've had great success with that.

23:55 Consolidation of sites is something else that we've been looking at. So, again, the sort of network has been one of the regional distribution centers through acquisition. And now we've moved much more to a national service and national offer. It gives us an opportunity to look at our network and and perhaps leverage some of our national sites in in in a more comprehensive way and move more to a crosstalk structure around the east and west sides of the country. So we we announced the closure of Stockport. As Adam mentioned, we've had the cash in, and this is something that we can now do. We can leverage our other assets and still maintain that great service by using a different cross stock facility. So that's something that we've had success in, and there there's more to come.

24:47 So we've got our existing strategy, which I've just outlined, and I and we've now talked about this sort of acceleration, really. So this is not a new strategy. This is really a maturity of some of those pillars that I've just talked to. So putting the customer first. So I've I've talked about the customers underpinning our strategy, and that's something that we're looking to accelerate. The network that I just referred to where we're looking at sort of more of a national network and simplifying it, again, there's more that we can do there. And as a result of those two things, moving to a much more simplified cohesive structure, it means that we can finally improve the way that we act as a business as well. So simplifying, consolidating, and applying ourselves as one business rather than multiple businesses operating under a a kind of common

25:38 ownership structure. So a a much simpler operational process as well. So what what does that mean? So if I just take the first one, simplifying our customer offer, the the the brands on the left hand side are our wholesale brands that we've been using for many years as a result of acquisition. But the consequence of the customer is quite complicated, and you end up with many of those brands potentially competing, but at least presenting a different face to the customers. The customers will have multiple accounts with us. In fact, would need to have multiple accounts with us in order to get the best out of our product set.

26:15 And we're looking to consolidate all of those 32 brands on the left hand side into a single operating business, a single wholesaler, which is called Mercado. And we spent a bit of time deciding whether to to to dream up a new name or use HEADLAM, but in the end, we chose Mercado because it's an existing business. And more than half of our customers actually have a Mercado account already, so it was an obvious choice for us for us to move to. So what does that actually mean then, I suppose, for the for the customer? So what what does this mean? So our sales teams will be operating as a single business nationally. Now that means that they will have a a much smaller patch, and we focus them around a sort of geographic area rather than them having to spend time in their cars, driving across the country, seeing customers from out of out of their patch, if you like.

27:14 We've reprofiled the national sales team so that they focus on a tight territory close to where they live. And just as an example, they'll typically move from supporting on average six post coasts to more like two. So much less time driving, much more opportunity to spend time with their customers. Our single business will have access to the full HEADLAM range of products. I mentioned earlier that many of our customers would need multiple customer accounts to get access to the HEADLAM range of products, And now we can offer that under a single product list available for all customers. And similarly, geography, we can finally unlock the national the benefit of a national network. So if you're ordering from a a business in the North Of England and you might wish to collect it because you've got a job in the South Of England, you can do that now, and that's not been possible until recently. So, again, order anywhere, collect anywhere, and enhancement for customers.

28:12 This sort of national approach also means that we have enough density to to offer a sort of separation of expertise between our residential products and residential customers and our contract and commercial customers. So you really salespeople are really able to align themselves with their customers and their and the business that they're supporting. The the point of sale material, again, imagine you've got 32 businesses there, potentially all with different point of sale material and also potentially trying to compete for the same shop floor space in in in customer's premises. So again, it need it means that we can invest in common point of sale, common voice with customer, better quality as a result. The other the other implication of this is that as a as a as a result of having all of these businesses, when you do try and invest in those digital assets, and I refer to a significant increase in the amount of sales coming through a digital channel, every time you make an investment and every time you make a change to the digital offer, you have to replicate that across all of those different b to b websites.

29:17 So it means now we can have a single b to b website supporting all of those wholesale brands, and it means we can invest in-depth with good quality without repetition. So a much better service for customers. So a whole number of customer benefits there that also simplifies our business.

29:35 So that's sort of a summary of where we've got to. We we've announced this. We've now started embedding those businesses into the network. We've had the conversations with customers. Many of those things are already in place, and we're going through a process of converting those customers into that new account at the moment. Point of sale, and and I talked about that, that those new stands will take a little time to come, so those in the next few months. And then the b two b website, again, we have now got open, and we're in the process of migrating customers to it. So this is something that we're going to now have the ability to manage in a in a smaller number of places, and this is something that we can now start to review on a in a much more agile way rather than splitting and spreading our energy over so many sites.

30:29 Interestingly, I put this slide in here, and I I you you may have heard me talk about this before. Some of the questions that have come from shareholders and also from

30:39 chatter, I suppose, in the marketplace is that HEADLAM has perhaps not had so much experience in the sales team with competitors, people like, likewise opening up and others. You know, have we actually got the experience in our sales teams to engage with customers? And I I thought I just look I just put a slide up which shows the scale and size and experience in our teams. And there's a huge amount of expertise and knowledge of the industry in our business. And and I thought it'd just be worth showing how we're structured. So I I talk about our residential and commercial side of our wholesale business. And this is the structure that we operate through. So we've got, you know, managing director of each of the businesses. We've got regional sales directors around the country, all then underpinned with area sales managers, who are fronting into customers. So a huge amount of experience nationwide, across the whole country.

31:37 So the second section is the sort of simplification of our network, really. And I mentioned having a number of distribution centers that that's largely been inherited through acquisition. And there's an opportunity for us, therefore, to simplify our network, and and that might be a much more capital efficient program and indeed offer a more nationwide footprint. You know, we've got docks in on this map here, which are much more regionally focused than than you might imagine. And we've made some announcements already, which is logically moving some of these distribution centers into more central location, removing duplication, and where we are moving some of those distribution centers using cross dock capability to access the customers. So, again, now we've got a national offer from a sales perspective, a national offer from a transport perspective.

32:34 The next logical step is to look at a national network as well. So opportunity for us to accelerate the the the changes we'd already started. So timing wise, we've got a number of these phases already completed. So on the left hand side of the page, we talked about this site in in Stockport, which is now being replaced with a cross dock facility, which is the sort of the the blueprint that we follow when we do that, when we sold that particular site and returned some capital. We've now announced a number of changes as well. So we're opening a new facility, which is much closer to the London and Southeast marketplace

33:16 for our customer service to be offered into. So in Raleigh and Essex, that means the Ipswich distribution center that was servicing that part of the country will therefore become much more of a cross dock location. So we can move and shift our distribution service much closer to London and it saves significant journey time from there. We have two sites in in Glasgow, and again, duplication of effort, an opportunity to offer from a single site, and those properties are are now on the market. And that's something that we'll continue to keep under review, and there will always be opportunities for us to look at our footprint and look at how do we offer this sort of operationally effective nationwide service going forward.

34:06 So the third element of our change that we've that we've referred to is really as as a result of offering this sort of simpler customer offer with thirty two what was effectively 32 businesses into one and this sort of simplified network. It means that all of the support processes that go into supporting that arrangement can be simplified. What do I mean by that? So it means that we can offer instead of having 32 accounts receivables, for example, we only have one because we're billing our customers from one. Where we're deciding what stock to hold and where, we now have access to a nationwide geographic stock list, and and it means we can pick now where our stock is held around the country rather than very localized decision making.

34:54 So this sort of centralization of buying a stock holding as well as supporting individual businesses is now possible. So it gives us the opportunity, therefore, to simplify and reduce cost to support those businesses. Adam, it might be worth you picking up the next couple of slides because I think this this now starts to talk about the value and the benefits and the financial benefits of these changes that we've articulated. Yeah. Sure. So on this slide here, you can see we've set out the three kind of overall key objectives from this two year transformation plan. So those are market share gains in our core distribution business through the sales transformation, unlocking capital to delever and to fund the transformation, and then also to structurally improve profitability.

35:49 And on this slide and I won't go through it, but we've laid out you can see in the in the orange and the turquoise kind of colored bars or or columns. We've laid out the actions over the next twelve months. This is this is a two year program, but the ones that particularly that we're focusing on on over the next twelve months, we've laid out here, and we will update on progress as as we as we work through these. But a number of these well progressed already. So in terms of the overall benefits from from the two year program moving left to right, so we're targeting 70,000,000 plus of one off cash inflow, and that's from dispose of surplus property and working capital optimization, so specifically stock reduction.

36:36 And we expect to generate that 70,000,000 within two years, so kind of by September 2026. And then 15 at least £15,000,000 of of annual profit improvement. And it's important to note this is net of reinvestment in enhancing our customer proposition. So there's quite a number of areas of of reinvestment where this is where we've chosen to reinvest some savings to enhance the the customer proposition. That could be, for example, shrinking the the territories that our sales team are doing. So rather than covering six postal areas, they're covering two so they can spend more time with customers. And that profit that net profit improvement comprises it's a hybrid. It can it's not just cost. It's it comprises revenue, margin improvements, and cost efficiencies, recognizing that some of the gross cost savings we're making are being reinvested.

37:27 And we expect to start making those benefits in 2025 and achieve the £15,000,000 as a run rate at the end of the two years. And then on the right hand side, 25,000,000 of one off cash costs. So this this, again, pretty pretty evenly spread really over the two years, but it's it's over the next two years. And this is from things like restructuring and relocation costs, so the cost of of moving the Ipswich operation into Raleigh, which is ongoing at the moment, fitting out new sites, advisory, consultancy costs, and then investment in point of sale materials such as display stands, which which Chris mentioned earlier. So overall, two two year program, 70,000,000 plus of cash, 15,000,000 plus of annual profit improvement.

38:17 Okay. Thanks, Adam. So just just a couple of slides to bring us to conclusion before we look at questions. So I've sort of split the outlook into two, really. One is around the short term, and and one is a slightly longer term. In short term, no surprise here that we've, you know, we've been relatively cautious, I think, about the about the outlook in the short term. Adam mentioned at the start that some of the macro indicators have been weak, maybe slightly improving, and then, of course, you know, consumer confidence has taken a little turn for the worst in September. So we remain pretty cautious around what the short term outlook might might show. And there are different views over the speed of recovery. When will the market come back to normality? When will there sort of the the the the decline in foreign demand in particular recover?

39:06 You know, it's difficult to say, but we we do think that perhaps it's perhaps we've seen the worst of it, but, you know, it's difficult to know when that outlook is is going to improve. So we are we are being cautious about 25, and we do expect perhaps the market might return to growth at some point in the year, but it's difficult to know when. So I think it gives us an opportunity for us to make these changes, implement the changes that we've outlined, and get ourselves ready for that recovery when it does come. So when you look at the medium term, the longer term outlook on the next slide, what we can see is that we've seen some growth coming through our existing initiatives to broaden the business out into these other customer types. When you overlay the transformation plan, which is gonna accelerate some of those benefits that we've talked to. And in particular then, when the market recovery does come, you can see a much stronger business emerging, a much more efficient, a much more capital, a leaner capital structure behind our business. So it does give you much more confidence for the future, particularly when that market recovery does come in.

40:14 So that's the end of that. And just to summarize then, I think, as I said at the start, you know, this this short term challenging market remains in place and and is likely to be there for a little while longer and perhaps start to improve, next year. In the meantime, we've been keeping a lid over our working capital. We've been, staying close to cash and keeping our business and balance sheet in in good order, and we're starting to see those strategic initiatives, delivery, which can only now be accelerating with some of the changes we've announced. So, look, short term, I think it does remain a difficult position, but I'd say much more confidence around the medium term. So thank you for listening in on the presentation. And now we've got some some questions that I think some of some of you have already submitted. So we'll start to look at those now and answer those.

41:04 Perfect, Chris. Adam, thank you very much indeed for your presentation. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the top right corner of your screen. Accessed via your investor dashboard. Chris, Adam, as you can see, we have received a number of questions throughout today's presentation. And if I may now hand back to you and kindly ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you both at the end. Thank you. Okay. Thank you. So first question, I've got Adam's our partner. So it says, please comment on where the competitors are exiting the market. So Adam mentioned earlier, we've had a couple of businesses go into administration and and somebody else withdraw from the market. So carpet rights and the floor rooms, and it's it's one of the companies owned by the same owner.

42:02 I've gone into administration and and they're direct to consumer businesses. So they've come out of the market. SCS withdrawn from flooring. In the b to b environment, we've also seen two other businesses go into administration who were not flooring specialists, but but do in fact sell flooring. So it's CTD, the tile business, and IDS, also a services business that happen to to sell flooring. So there's been a fair bit of distress, I think, in the sector. And as Adam described, I think it will allow more sales to move into other parts of the market. So that demand will be satisfied elsewhere. You know, we we are well placed to pick up and support our customers who are benefiting from the direct to consumer sales coming into the market.

42:51 And then in the b to b space, no doubt, there will be a little bit of an overflow as well. So that that sort of thing is helpful in both the direct to consumer and the b to b non flooring specialist. Specialist. We haven't seen any anyone else exit the market who are flooring specialists in the b to b market. Adam, perhaps the next one's for you. Yeah. Sure. So next question is about return on investment on the trade counter investments we're making. So if let let me answer that as a as a collective of trade counters overall to start with, and then and then I'll give you the set the unit economics of a single site just to give just to bring that to life for you. So overall trade counters then. So when we started this program, we had about 50 sites at the in 2021, end of twenty twenty one, generating about 85,000,000 of of revenue.

43:42 And we're targeting about 200 sites, doing about 200,000,000 of revenue upon maturity. So it takes a number of years, takes 5,000,000 five years or so for the each site to reach maturity, but on maturity, 100 sites, 200,000,000 of of revenue. But we expect that to generate about 10,000,000 incremental profit compared to where where we started. And the cost of that, from a CapEx point of view, is is up to about 25,000,000. I think we originally guided 25. It might come in a bit below that. So you've got about 25,000,000 of investment generating 10,000,000 recurring profit stream. Now in the in the medium in the short term, you do get some profit dilution. So compared to 2021 where we are now, because what happens on a sync let me give you the example of a single site. So a single site, when you open that, it will be loss making for its first fifteen months or so, and then becomes breakeven and then starts generating a return on investment that exceeds our cost of capital once you get to kind of year three or or or so. And on a five year average basis, you'd expect a new trade counter to to generate a good double digit return on investment over the average on five years basis.

45:04 K. Thank you. Next question is it says, price of the current downturn in the market, you had an expectation of achieving a net profit margin of 7.5%. Given the change in your reach of market, we'll focus on large customers and trade counters and less on retail distribution. What's your current expectation on target net profit margin? And there's a second question then that's very similar, which says if the market returns to growth in '25 and normalizes in '26, when do you expect a return to sort of optimum net margin? So if I if I combine those two, there's a couple of ways of answering that. I think firstly, Adam has mentioned there that the maturity profile for things like tray counters, we we don't expect the operating margins of a mature tray counter to be dilutive.

45:52 Now what is true to say is that when you get the marginal sales from a wholesale or retail distribution model, they are rich and and and because you're leveraging your existing cost base. So by by removing those sales, losing that kind of market demand, you you end up with a a lower set of margins. But the the key accounts, the large customers, and the trade councils themselves should still have margins which are in line or exceed the historic margins the group has come to. So there's nothing inherently dilutive about, us growing into those other areas of the market. But what it does need, therefore, is a recovery of our regional business, the one that leverages the investment and the cost base that we have as a group in order for us to see a return to the higher margins that we've seen in the past.

46:46 So, again, you know, we've lost perhaps 25% of that margin if that market is gone. So, you know, we've not necessarily assumed what we're gonna get that back in in the short term. And therefore, it's difficult to answer when that might that margin might might come back. Now if the if all of that if all of that comes back, then we can see us getting back up to the mid to high single digit margins. You know, some of the analysts have sort of speculated as to whether that might be, and that sort of got us in a, you know, well above 6% in the sort of next few years just assuming the maturity of the trade counters, the maturity of the key accounts business, and some recovery of market share. But I think it would need to be a much a much fuller recovery of that market that's gone to get back up towards that sort of seven, seven and a half.

47:41 Okay. Next question, I think, is probably one for you, Adam. I'm just looking at the Yeah. Sure. Yeah. Approved. Yeah. Next question is about clarification on timing of the profit improvements from the transformation plan, that a million pound profit improvement would mean no profits for over three years. So I think the kit so the key thing to to note here is in your if we remind if you reflect back on that slide that Chris showed, talked about the medium term profit outlook, there's kind of three drivers of that. There's the implementation of the existing strategic initiatives. So growing into the larger customers, growing in trade counters, and particularly maturity profile of those trade counters.

48:27 That middle box then was a £15,000,000 attributed to the trade to the transformation plan, and I'm on the right hand side market recovery and, you know, reflecting on the fact that the market is now over 25% down on where it was in 2019. So there are, you know, we expect some significant market recovery to come. So the £15,000,000 is just the middle box. So of the three drivers of profit over the medium to long term, just the middle bit of that. And we as we talked about, the £15,000,000 is a run rate coming out of the two year transformation program. So by September 26, at a run rate of about £15,000,000. There's a follow on question in there, which is about the 25,000,000 of one off costs that I can see that, and it asks when so how much of those one off cash costs will hit the p and l account over this period? So that twenty five million pounds of one off cash costs are all in this two year window over the next two years, but they'll all be they'll all be nonunderlying.

49:23 So they won't hit the underlying p and l. They're all nonunderlying exceptional costs in the same way that any profit on disposal of of properties, as we showed in half one, that was also a non underlying income that was an exceptional income. So that those costs will be in in the middle column of our p and l as non underlying items. And then there's a linked question of income here, which is around how many employees are required to be made redundant to produce the £15,000,000 of profit improvement. Well, the key thing here is that that the transformation plan and and the £15,000,000 is a hybrid around with quite with with quite some significant reinvestment. So the the headcount impact is actually pretty modest. If you look at the sales transformation, for example, we've been reinvesting quite a significant chunk of that of those savings in making smaller territories for each of our sales team. So we could we could have had a a higher headcount reduction, left the size of territories the size that they were, but we've shrunk those territories, reinvesting some of those savings to allow ourselves to spend more time with customers. So headcount impact is is relatively modest from this.

50:35 The next one might be for you, Chris. Yeah. Thanks, Adam. So the question reads, every business before that's consolidated and rationalized trade brands has lost turnover and market share. So why do you assume an increase in market share? What increase in turnover are you assuming in your project projections? So I think the answer to that question is that we're not necessarily rationalizing our our our trade brands as such. These these are multiple, I suppose, overlaying customer visits, trying to sell sometimes the same product to the same customers in the same way. So what we're trying to do is is focus on that customer simplicity. What do customers want? What do they need? What are they asking for? And what they're asking for is that I just want everything in one go. I don't want to see three or four of your salespeople to get access to your products. I just want simplicity. I haven't got a lot of time. And therefore, you know, what we are doing is is allowing our salespeople more time.

51:36 We're not we're not taking out so many salespeople that they're spending just the amount same amount of time as they are now traveling. They're gonna have more time to spend with customers, and they're gonna have access to the the the broadest range of products that we can offer. So this is about leaving salespeople in the business in order to meet customer needs and therefore not lose products from the portfolio, not lose customer contacts. So the salespeople are are keeping most of the and the customers will have the same relationship they had before, but they've just been on a much smaller patch. So that's why I think it's a bit different perhaps to what we've had we've had before. And as a result of having more time and more customer focus, we think there's a good chance that we that we may increase our share of sales as a result. But that isn't a big feature of our plans. This is just about making ourselves simpler to do business with and giving customers access to products in one go.

52:35 There's just a just before I pass over to you, Adam, on the gross margin one, there's another couple of questions that have come in where we talk about DOMA. So you never mentioned DOMA nowadays. What percentage of annual loss could be attributed to DOMA? So DOMA is a small business, and for those who don't know, it's a ceramic and engineered wood business that focuses on specified projects, typically in Greater London area. But it sort of represents two or 3% of the group turnout. So it's a pretty small business, and it it doesn't actually contribute anything to losses. It's it's not a material item of the group, and it isn't got a significant loss for us to to report on. So that's an easy one for for us to knock off. So, Adam, perhaps you wanna pick up the the gross margin for?

53:26 Yeah. Sure. So the question that we've had is gross margin fell by 86 basis points in the first half. How much of this was due to a fall in purchase rebates? So from a from a margin gross margin percent perspective, actually, purchase rebates are pretty pretty flat year on year, that's not not a factor. Pound margin is is a factor because we've held the rebates as a percentage of sales pretty much flat year on year. So it's it doesn't impact on the gross margin percent, but it it does impact on the pound gross profit number just as revenue drops or cost of sales drops than the rebate number does. But it's not a margin percent factor year on year in the first half of the year. There's another one that's kind of related, which maybe I'll take now, actually, which is around transformation plan creates a need for stock write downs.

54:22 What why is this? So there's a couple of factors here. So one is from a network optimization point of view, we're obviously moving. We've gotta create space to move operations around. We're obviously moving Ipswich operations into Raleigh. Ipswich is a 190,000 square foot. Raleigh is about 125,000 square foot. In the mix of all that, there'll be some stock write downs where there's maybe some slower moving items that we've held onto for two or three years that we will just accelerate the write off through accelerated clearance. Then, also, as part of the simplification from the of the back office operations that Chris talked about, we're centralizing the buying function, which is creating and we're creating one product list, centralizing the the buying and ranging functions.

55:11 And as a result of this, there were we anticipate there'll be some there may be some ranges that perhaps we bought three years ago that that will be surplus to requirements. So it's those that are written down as a result of the of the transformation plan. Thank you. And then and then the last question. So we we talked about putting customer first and aligning the sales approach. Can you share with us how customers are responding to that and how our sales team are also responding to the changes we put in place? So when I made these announcements, someone asked me what what were my what were my concerns? What what were the things that were going to worry? And I think the two things, as I saw, the most important features of having a successful change like this. One is the response of customers, and secondly, it's the response of of your own people and your sales team, and your sales team are incredibly important in that relationship with the customer.

56:10 So to to communicate that effectively, if I if I cover our sales team first so we pulled them all together. We talked about moving to a single business and a single brand. And as you can imagine, there was a bit of a a surprised response, particularly when some of them felt like they've been competing with this particular brand for some time. But we explained the features, the benefits, the benefits to them as individuals of reduced time in cars, more time with customers, access to broader broader product ranges than they've had before. And also, even though we'd eliminated much of the internal competition, not having to worry about being the first person, the first HEADLAM person through the door to show a new range to a customer, fearful that one of the other businesses would get there ahead of them. You know, that sort of simplification and having customers being able to deal with them solely as part of the group is was really persuasive and has really, given them a positive view on on this.

57:06 So we've had no no fallouts, no no one leaving us as a result of that communication. And then secondly, for customers, as I said, we are migrating through our customers at the moment, and we've seen a significant level of customers now trading through the new way of working. And again, I would say the overriding response is, I can't believe it's taking you this long to do it. It's that kind of a feeling and that kind of response. And say at the Harrogate Flooring Show, which was last month, we we showed up as a sort of team Mercado, if you like, with a number of sites and number of stands or commonly branded. And, again, the overwhelming response for all the customers I talked to was, you know, about time. What does it mean for me, really? It was kind of like, well, who's my salesperson gonna be?

57:53 And that was about it. So a very positive response. No no negatives that we've seen so far. So a bit of surprise from the industry, I'd say, but probably an overwhelming, I can't believe it's taking you this long to do it. Perfect. That's great, Chris. Adam, thank you for addressing those questions for investors today. And, of course, the company can review all questions submitted today, and we will publish those responses on the investment company platform. But before we redirect investors to provide you with their feedback, which is particularly important to the company, Chris, could I please ask you for a few closing comments? Yeah. Of course. As I said earlier, you know, it it it is a tough market out there and and as evidenced by some of these businesses going into into administration. So, you know, these changes we've announced, important, needed.

58:39 I feel the response from customers and our teams has been really empowering. So, you know, it's important that we get this stuff done now so that we're ready to be in an efficient place for for when the market does recover at some point next year. So, yeah, it's it's gonna be, you know, a tough period, and it's gonna be into next year, but I I feel confident that we're gonna have a better quality business that comes out of it as a result. So, yeah, I look forward to a a much stronger kind of medium term outlook. Thanks for joining the call today. Fantastic. Chris, Adam, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected provide a feedback in order that the board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company.

59:28 On behalf of management team of HEADLAM GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.