Headlam Group (LSE:HEAD) — Investor presentation

0:01 Good afternoon and welcome to the HEADLAM GROUP PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be answered at any time by the Q and A tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself. However, the company can review all questions submitted today and publish responses when it is appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Chris Payne, CEO. Good afternoon to you, sir.

0:30 Hi there, and thanks to everyone for joining the presentation today. I'm Chris Payne, the chief executive. So I'll be just taking through the year end results for 2023 for HEADLAM GROUP. I'm also joined by Adam Phillips, who who's online with me as well. So we were presenting separately just for ease of sitting us on screen together. So at the appropriate moment, I'll hand over to Adam to to cover some of his slides. So, yeah, just four four main areas. So I'll give a very brief introduction to the business and update on how we see the marketplace, and then Adam will cover the '23 financial performance in a bit more detail before handing back to me to pick up some of the updates on the strategy, how we're getting on operationally before we close with an outlook and summary. And as Alexandre said, there's plenty of opportunity for you to ask questions either through the presentation. What we'll probably do is just come back to it at the end and answer them at the end to save breaking up the flow of things. So without further ado, what what we might do is just probably do this slightly quicker quick canter through because some of you may have already seen this presentation before, and it's available on our website too. So I'll try and cover this in a in a reasonable canter, but say it should take about twenty five minutes, thirty minutes, something like that. So HEADLAM, this is a sort of HEADLAM on a page, if you like. And when I normally, in the past, have talked about HEADLAM, for those who are familiar with the story, we sort of talk about this long heritage, been around for thirty years or so.

1:57 Great UK presence. We were also in overseas territories in the in France and The Netherlands. And I think the theme this time is slightly slightly different theme where I've used the word broadening foundations, and that's the link to the strategy, which I'll come back to. But so we've been very focused on the independent retailer in The UK in particular and also the fitter market, if you like. So we've been broadening that out to cover other segments of the market in recent years, and we'll give an update on that shortly. But say, very strong presence in The UK in particular, good balance sheet, strong balance sheet, good product range across the country. And in particular, it's very sort of service oriented approach. And as we've been broadening this business out into other customer types, it's all sort of service and product led. So that's the theme of the business and certainly will be the shape of the investments that we can update you on shortly.

2:57 Just an overview, as Adam will cover this in a bit more detail shortly, but there's sort of four main chunks to the summary of 2023 as captured by those segments on the left hand side. So the first thing to say is, you know, encouraging delivery of some of the strategies. So we've seen the focus on larger customers and that broadening business into those new custom groups. So large customers trade counters were positive performance in the year, particularly given the market backdrop, which I'll come on to in a moment. So it's pleasing to see those elements of the business moving forward together with our own branded revenue, which is another area of the business that we're looking to pursue, showing an increase in revenue year on year. However, as I said, the market itself has been under pressure.

3:45 You know, there's a number of macro factors which I'll come on to and and you may have seen in the market more generally, which does point to a tough market and in particular in flooring space where, you know, residential property transactions, consumer confidence, and and spend on

4:02 home improvements has been under pressure. And we've seen that have a negative effect on our regional business, the the the longest serving part of the business where we've got a traditionally high element of our sales in there. So, you know, that's that's had a negative impact on the business in in that area. That in turn has result in some downward profit pressure. So as we've got a relatively sort of operationally geared business model, then we when we do see contraction in volume and revenue in one area. It's led to a reduction in profits, which has been exacerbated by the cost inflation that we've seen in the overhead basin. As I said, Adam will come on to that very shortly. So we saw sort of revenue overall relatively flat, but moving towards new areas of growth and the market weakness, which is affecting all of Europe, but obviously The UK business being the biggest part under pressure.

4:59 And then the third area is just to talk about cash performance, and again, Adam will cover that in a bit more detail, but pleased to see strong operational cash performance, which has meant that we've had the cash available and generated for a number of investments, whether it be returns to shareholders through buybacks and other means through dividends. But importantly, we've continued to invest in the business, whether it's in the strategic elements of of growth that we talked about or whether it's investing in this regional business, is so important for service and the majority of our business. So we've carried on investing in the capital of refreshing the equipment together with expansion into new areas. So a bit of a mixed bag there. And I'll I'll just come on to an an additional slide that I haven't normally talked to at length, but thought it was worth adding a slide just talking about the economic backdrop, which affects the flooring sector in The UK.

5:53 And there's a couple of slides at the end, which just sort of does that look forward. You know, what do we expect this to do? So just focused on this with three or four things on this slide that we look at. So, you know, what do we think influences the market, in particular, The UK for flooring demand? So two thirds of the market is is residential product and one third is contract flooring. So consumer confidence and spend on home improvements, which is shown in the top left and bottom left of this graph, shows we've had some pretty weak numbers both in terms of confidence, but also some quite big negatives actually and consistent and persistent negatives on spending on home improvements. And that that graph at the bottom left is Barclaycard data, which is segmented into the different categories of spend in The UK. And we can see some pretty pretty consistent negatives sort of close minus nine, ten over the last second half, really, and in particular, the last quarter.

6:52 And also, RMI as a whole category for The UK was down 11% in the year. So some pretty difficult market backdrop numbers there for our space. But housing transactions is the other one, which is worth calling. And, of course, you know, what drives residential demand for flooring is is often when people move home, they do tend to replace floors shortly afterwards or indeed as they're getting ready for a house move. Sometimes people do replace floors in anticipation of a of a of a successful sale. So there is a bit of fluidity around this market and a bit of buoyancy bought by housing transactions, and we've seen that under pressure recently. Not necessarily new homes, which is obviously a feature of the market, but just the housing stock and number of transactions generally is really the biggest driver of our demand cycle in the residential market. So all of those things are are under pressure, which you no doubt will know about.

7:46 So just, just a bit of a backdrop there maybe for Adam to talk through the financial performance in a little bit more detail for 2023. Thanks, Chris, and good afternoon, everyone. I'll start with a bit of a summary slide that gives the overview on the key financial metrics. We do have a few slides. Many of you may have seen a few of them already. So I'll give an overview of a few of them and then happy to take questions at the end. So just this on one slide here, we've got all the key kind of P and L and cash flow metrics. So as Chris said, revenue pretty flat in the year. And in The UK, it was flat. So in UK, we were flat year on year.

8:33 And then in in Continental Europe, there's a 7.7% decline. And on the next slide, I've got a bit more of a breakdown of of that UK revenue with the sort of areas of strategic growth, as Chris outlined, in good growth in the year and that offset the residential market impacts on regional distribution. In terms of margin then, gross margin, so in 2023, that returns to the to the pre 2021 average of about 31 to 32%. And as we've talked about before and those of you who have been on these calls before, we've talked about the fact that in 2022, we had a temporary uplift from the manufacturer led price increases that worked through from manufacturers to distributors and onto the end end customer in 2022. So that that lifted our margin temporarily in in 2022. We've seen that unwind in 2023, but we're back to sort of the long term average of of just under 32%.

9:35 Profit then operating profit, and I've got a bridge on that in a moment which will break down those year on year movements and explain that a bit more clearly. So we'll come back to that in a minute. Operating cash. So operating cash generation was good. Underlying operating cash flow was up over a 100% year on year to 26,000,000 and was higher than the previous two years worth, and we'll come on to the cash flow also in a minute. Net debt then to net debt excluding lease liabilities was just under 30,000,000. That increased by 31,000,000 from the previous year, and that's after investment for for long term growth. So we spent 18,000,000 of CapEx. It was a peak year for us for CapEx in 2023.

10:20 Come on to that in a minute. We'll break that down in a bit of detail. And then also 6,000,000 of acquisitions in the year. And then on top of that, 17,000,000 of shareholder returns. So that was a combination of of ordinary dividends, which are 12,000,000, and then 5,000,000 share buyback program, which completed in March 2023. And then finally, final dividend of of 6p recommended, which takes the full year dividend to 10 p. And just the very bottom of this slide actually is leverage whereas we ended the year about 1.3 times leverage. So we've got a long term average leverage target that we target of of naught point five to one times, which we're we're sort of broadly in that in that range at the end of the year.

11:11 So revenue. I mentioned I've got a slide where we just break down the revenue in a bit more detail. So you can see on the chart on the left hand side, there you can see breakdown of our UK revenue. The the areas of the strategic growth initiatives of larger customers then and trade counts has performed well, as Chris mentioned, so up twenty six percent and eight and a half percent respectively. Regional distribution impacted, as we said before, by by the by the residential markets and spend on RMI and those factors that that Chris outlined on that slide. So that was down 7% in the year. And then Continental Europe, as I as I mentioned, down 7.7%. And on the bottom left hand side on this chart, we we do split there of the residential and commercial. So you can see the commercial side of the business actually held up a bit more was a bit more resilient in the year, and the market we saw there was was more robust and it was the residential side that that that declined reflecting the the market impact during the year.

12:20 If I just skip forward perhaps onto that operating profit bridge, then I mentioned so on here, this this bridge here, this waterfall moves from our 2022 operating profit of 39,200,000 and shows the movements then to the 16,100,000 of operating profit generated in 2023. So the key the key moving parts into volume. So we saw a volume decline in The UK business of 5% in 2023. That was, in line with the market, ever since slightly better than the market, but that itself, drove an an 11,000,000 adverse profit impact in the year. You've then got the unwind of the prior year price benefits. That's that's what I mentioned around temporary uplift in 2022 from manufacturer price rises that unwound in 2023, and it fully unwound by the end of q three. So that's no longer, a headwind going forward. That's washed that's washed its way through now.

13:21 The next bar along then, so 3,900,000 in strategic investments. So that is where we made cost choices to invest now for better long term benefit. The majority of that is trade counters. And when we open a new trade counter, it will it will it will, you know, it'll have an operating loss in its first twelve months. It takes somewhere between twelve and eighteen months to get to breakeven. So we're in the investments phase of those trade counters at the moment, and so they will dilute profit, and they have done in 2023. We expect that to happen again in '24, but to a lesser extent. And then as we get into 2025 and 2026, that trade counter business, we expect to be profit accretive. So cost inflation, next bar along there, so the 10,200,000.

14:08 So 10,200,000 of cost inflation in the year, that's more than double that we'd expect in a in a normal year, and that's been driven by people and energy costs. So from a people's perspective, where pay inflation averaged around 7% in 2023. And then on energy, electricity costs, for example, were more than double year on year. So as we go into 2024, we expect that number to come down significantly, but it it is still a bit elevated compared to historic averages with with pay inflations still a little bit above long term averages. And then just moving through the rest of this chart here. So, Continental Europe, declined profit by about 3,000,000 in a year, driven by market weakness there and particularly in the in The Netherlands. So France, a bit more similar to The UK, but particularly weak residential market in The Netherlands during 2023.

15:05 And then all of those moving parts, they all of those were partially offset by by mitigating actions, and and we have we worked hard in the year to generate just over 10,000,000 of of benefit to to offset those headwinds around volumes in the market and cost inflation. And if I just comment to to a bit about what what those mitigation actions were. So they were a combination of volume and margin actions. So things like volume driving, promotional activity, putting a few a few targeted price increases through on own product brands, which we've done earlier in the year in q two. And then negotiations with suppliers to to to negotiate reductions in in the cost of goods sold. And then cost actions included flexing our operational headcount to reflect lower volumes, and that was that was achieved without needing to do, you know, major redundancy programs or anything. It was just simply not recruiting, vacancies.

16:03 And we successfully managed to flex headcount down about 5% in The UK in the operational roles, and that mirrored the volume reduction of about 5%. And then on top of that, we conclude you know, we continued to and then concluded on some of the transport efficiency projects. So there's been a multiyear project on transport centralization, and the final piece of that was concluded in the year with the dynamic route planning. So that takes out vehicle costs, driver costs, and it also reduces mileage and and CO two footprint, etcetera. And then there's a bit of a reduction in bad debt provision in the year which supports it. And then generally across the year, the kind of tight cost control and cost savings. That's all in all generating about 10,000,000 of benefit from those mitigating actions.

16:54 Non underlying items. So these are items that were not they're not in that p and l that we've we've kind of just talked through here. These are non underlying items. The key point from this this this slide here is that net there's a net significant credit from a cash point of view. So if you look at that first column, we said we've broken down the the nonunderlying items into cash and noncash. Significant cash credits in 2023, and that's because we settled the the final element of the Kiddominster insurance claim in the year, which is nearly 9,000,000 of of cash proceeds that came in. And then we also sold the land, the Kademista land as well, which is another nearly 2,000,000 of of cash proceeds. So net 6,500,000 cash credit from non underlying items.

17:41 There is a noncash expense as you can see in here, And largely, the large chunk of what that relates to is the bottom two bullet points on on the slide here. So during the year, we took the decision to replace the the ERP. So we've written off the the intangible software assets that are on the on the balance sheet. And then we also put some provisions in in in respect of network optimization. So linking back to the mitigating actions for 2023, as we look ahead to 2024, one of the actions that we are taking as well as continuing to flex variable costs as best we can to suit whatever the market environment is, we are slightly we are taking a couple of efficiency actions on the network and we are closing one, possibly two centers and replacing with crosstalk facilities.

18:33 One of those is Stockport. And so there's some provisions in at the end of the year in respect to that.

18:42 Just turning to cash flow then. And if you so I've talked about underlying operating cash flow. So that line in bold about a third of the way down the slide. So twenty six million of underlying operating cash flow, which was roughly double what it was in the previous year. And that's despite the reduction in EBITDA driven by the tailwinds from market volumes and cost inflation. And if you just look at the sort of working capital movements, so we successfully pulled down stock and receivables in the year. So those were cash inflows of about 13,000,000. That was offset by an outflow on payables. Now some of that outflow on payables is linked with the the movement in inventories. So as inventories comes down, payables comes down with it. But some of that was to do with timing oversupply payments. So 10,000,000 or so of that, we would therefore expect to reverse over time, and we should expect to see that unwind during 2024.

19:41 Just moving further down then the the cash flow, you can see below the underlying operating cash flow line, we've got the acquisition of subsidiaries. So 6,000,000 spend in the year, and that was on three acquisitions. There's Melrose for about 4,000,000 in January 2023 and a couple of small ones in the second half of the year. CapEx, 18,000,000. So that's our peak year, and I'll I'll quickly show you in a moment a slide that just shows how that's, moved over the last few years. So we'll come back to that in a second. Lease payments broadly flat year on year, slightly up as we as we roll out trade counters. Shareholder returns, 17,000,000 I've talked about. So that's 12,000,000 of ordinary dividends and 5,000,000 of share buybacks. Then you've got the non underlying items, the 10.4 and the 3.9 there. The net that's the net 6,500,000 cash credit I mentioned to do mainly to do with the Kiddomain's insurance settlement and the sale of the of the land.

20:38 So all in all cash so strong underlying operating cash flow and and net cash flow before moving in borrowings of of an outflow of 31,000,000 reflecting that busy year of investment combined with those shareholder returns. So CapEx, mentioned, and 2023 was a peak year for CapEx. You can see on the chart there, 18,000,000.

21:03 And actually, if you go back the last few years and you look at 2019 and 2020, those looked big years, but actually they were as big one off spend there for our Ipswitch distribution center. So if you took Ipswitch distribution center out of those two years, they'd be much more like a twenty eighteen year. So before we started the Trade Cancer investment program, which started properly in 2022, the business long terms of average, CapEx spend in the business was in the low to mid single digit millions. We're in the trade counter rollout phase now. So and that's been about 6,000,000 a year, and we spent 6,000,000 in 2023. That we expect to cease in 2025, and thereafter, then we'd expect a further drop off in CapEx.

21:48 But looking ahead to 2024, we're guiding to about 12,000,000 of CapEx. So reduction on the on the peak year of 2023. That still includes trade counters. Once trade counters drops out in future years, we'd expect that to drop then down into the mid to high single digits as a long term average kind of CapEx spend for the business.

22:10 Very briefly on on balance sheet, we've we've talked about this before, but HEADLAM's strong balance sheet position is underpinned by a freehold property portfolio. So it's on the books for about a 100,000,000, but it's valued at the start of last year at nearly 150,000,000. And I have just I will just take one of the questions now because it's relevant. I've seen one of the questions is around what do we think is the approximate value of the property holdings now compared to that appraisal that was done at the start of last year. And we think it's broadly about right that valuation is there's a couple of sort of test points on that that that have confirmed that. So one is where we sold some some land late last year, and we sold it actually quite significantly above the market valuation we previously had.

23:00 And then on Stockport, which is the the property I mentioned that is now up for sale. So with that is that is a property we're looking to sell. It will probably be in the second half of of this year. And the kind of sounding we're getting and the the view from the agents is is is bang in line with with the market valuation it's had. Obviously, we're yet to test the market fully and see what we get back, but that 150,000,000 of property valuation feels about kind of right at this stage. A final point on this slide then, just from a liquidity point of view, significant liquidity headroom. So at the end of December, there was just over 70,000,000 of cash and undrawn banking facilities available to the group, which point of view 1.3 times leverage at the end of December.

23:50 That's probably it for, I think, for now on the on the question on the the financials. I'll hand you back to Chris, but we'll clearly, we'll take some some some questions at the end. Thanks, Adam. So I talked about this sort of broadening business model and and how this is probably best illustrated. And those of you who've seen HEADLAM before will be familiar with this slide. We look at the market here, and and The UK market, we see as being around about £3,000,000,000 worth of sales at distributor prices. Now that number, interestingly, hasn't changed an awful lot. And and when we first started publishing this number a few years ago, it was a very similar number, 3,000,000,000,

24:29 and that's despite the market being 20 to 25% lower now as it was to twenty nineteen. The reason for that is that inflation has sort of kept pace with volume declines. So the volume the the revenue is broadly as it was a few years ago, which tells you two things. One one is that the revenue numbers are quite resilient and that we're reporting and market share numbers are relatively similar. But secondly is that there there is an, I suppose, a missing level of volume in the marketplace and and, you know, when and and how that comes back. We we maybe talk about in a in a moment. But there's sort of 25% of normal, if you like, demand reduction, volume reduction as opposed to pre COVID levels, and by no means pre COVID was sort of the height of the volume metric. So there there seems like there's a bit of pent up demand there. Now how it comes back and and what the shape of that customer segmentation looks like, we'll we'll find out. But traditionally, HEADLAM, as I mentioned at the start of these slides, has weighted its sales and energy towards the left hand side of this slide, so traditional retailers and independent fitters.

25:37 And that that's around about a third of the market. And then as you look to the right, with these other customer segments and multiple retailers is where our larger customers sit, for example. There's, you know, other significant elements of the market. So, again, over a billion pounds worth of sales done there, and HEADLAM has had very little share in that space. So broaden this business model out means going after as many of these customer segments as possible by offering a slightly different service model and the different ranging approach. So that's that's sort of underpinned to the strategy and where we see the size of the market. And clearly, regardless of the size of the market, you know, whether it is 20% down or not, our addressable market, if we can broaden that out and make it as broad as possible, clearly, it's gotta be good for opportunities to growth. And that's what we're seeing come through now in the larger customer growth and trade counters, which is aimed predominantly at the at the contractor market. So, yeah, that's that's the underpin to the strategy.

26:35 And and, again, in the past, what we talked about is sort of strategy on a page. These are the five columns of our strategy. Again, if you're new to the the model and the HEADLAM story, then on the left hand side, this is about service. That's a grout about great it's great service to our existing customers. And then as you move across to the right, the next column is about growth, opening up these new areas, these new customer types, new channels to service them

27:02 predominantly through organic growth. And then operational capability is again about being efficient, offering a good quality service in an efficient way, which has led to some of the improvements and mitigating actions to the market that Adam described earlier as well. And on the right, this is about our ESG credentials and and being a great place to work for our people. So strategy sort of covers five areas, great service and product, growth opportunities, efficiency, and then sustainability, and and people as a focus. We have got sort of three three divisions, really, to the to the group now, and this is something I've been developing over the last sort of year or so is, you know, we've got three main divisions now. And again, we're very much focused on the left hand side, the regional distribution business aimed at those independent retailers.

27:50 And that's still the biggest part of our business and still remains an important generator of revenue and profit for the group. But we had quite a high share in in that space and and therefore opportunity to do other things. And where it's important, as I said, that we preserve the focus on that area of the business. But I've I've effectively created new management team looking at these other parts of the market so that we can broaden our business into other areas. So, you know, these are the three ways we go to market, all underpinned with an improving and developing digital offer as I think it's important that whatever way we approach our customers, whoever they are, sort of digital and ecommerce engagement is gonna be an important part and a growing part of of the future business model.

28:37 So these are the the three areas and three divisions of the business. So if I just give you an update on each of those, regional distribution business, as I said, is the the biggest part of the market for us under, I suppose, under pressure from the market share, you know, the sorry. The the the market environment and the the the drag on on market demand. So challenging environment is affected by the macro. We've been offering and developing new ranges and new products, every room being a new one that was offered in 2022, which has really helped support the own brand revenue growth that we're able to report. But here, even here, and this is an area that I have sort of dwell on with our own teams interestingly, is that we've continued to invest in this part of the business.

29:23 Our our business model isn't simply about growing the new areas. It's also about offering this great service and brand and product into existing customers in the regional distribution business. So we've invested in new cutting tables, new equipment. The telematics that's gone on to our trucks has underpinned much of the improvement in efficiency in the business that that that Adam referred to earlier. So that's all part of the the regional distribution business, and it remains a key focus for the business and where we've got the majority of our people facing into. And that that's, I'd say, a challenging market, but I'm pleased to say that some of our brands that you can see on the right have continued to perform well. Tray counters. There's a picture of a tray counter there, it's an interesting couple of things worth picking out on here. So on that picture, you can see the signage that's on the side of the building.

30:15 It's sort a blue section, a white section that reflects the sort of co branding structure that we've gone for in our trade counter rollout because many of our trade counters represent local regional distribution brands in their communities, but also a nod to being part of the sort of HEADLAM floor covering family, if you like. So this is a HEADLAM branding supported by a local branding, and in some cases, it's the other way around where the local brands have got some brand resonance. Many of our customers in the regions value those local brands, so we've preserved those on the signage and supported by a HEADLAM brand. So that's the typical sort of size shape of a of a new facility. And the chart on the bottom right shows the progression of the total number of trade counters that we have or are going to deploy across the estate and the level on which they're with they're still in the original format or the sort of new invested format.

31:12 So we're starting to move that bar up, and you can see the number of sites has increased over the year. And, also, we've continued to refresh the the old format. So going well. Pleasingly, the the the revenue performance and the shape of that sort of new sales as a site comes online is is trading in line with our original plans, actually. So the original business case that we developed as part of the rollout strategy, we are meeting that. Now that's despite a pretty tough market out there, so that's encouraging to see. And I suppose it's important that we continue to track that. And I've said that all along that we'll continue to report this as we go because we know this is a fair chunk of investment. You know, it's £25,000,000 of capital over four years. We're gonna continue to monitor this performance of these sites relative to the rest of the business and to see that it continues to make sense. And so far, good on how these are performing, but we'll continue it under under watch. And you say we most of the time, we get these decisions right. So location, team, product range, quality, all been good. We've learned things along the way.

32:24 So as we've learned and and developed these, you know, we're now able to make some economies in terms of how the costs are to fit out. So we've made a bit of a reduction in cost to fit out. We've learned that we need to be in a really good locations and, you know, taking a perhaps, you know, a site that's off the main business part by one street just isn't worth it. So, you know, it's worth being in the right place and having good quality sort of site manager or trade counter manager who's able to treat it as a as a sort of sales opportunity and getting people in through the door is really important. So learned a lot along the way, and the rollout continues. We're looking to to maybe con complete the rollout in 2025. Large customers, couple of pictures here with some success that we've had in the year. So, again, as a reminder, there's sort of three main categories of of large customers that we group together as the house builders.

33:18 There are the building merchants and the retail retailers, the multiple retailers. Some of those are carpet specialists, some of those are not. And this is about a bespoke service. So we are able to tailor our service to meet those customers' needs. And this is where we're sort of stepping into relatively new space. So in some of these customers already have other distributors product in, but this is about a kind of value add service of trying to improve a service offer across the whole of the country on a consistent basis to a customer. So some of those images are from customer relationships that are either new or expanded to offer new products and ranges, as I said, across across the whole of The UK. So, you know, we're having success in terms of new customers and also starting to scale up customers. So this is about getting in, showing your service quality, and then expanding the ranges and the service that you offer to to those customers. So so far so good.

34:17 Again, seeing some really strong growth, albeit off a relatively low base. We say we're trying to get to £200,000,000 target sales here, which is less than 20% market share. So we think it's eminently achievable. We've got a new team who are having great success. So so far so good on this space. It's something that we will certainly look to continue this year. I'll just hand over to to Adam. He's got a couple of slides just to finish off the sort of operational update, you like, on what we do, particularly on the digital side. Thanks, Chris. Yes. So from a digital point of view, so in 2023, we saw 34% of revenue came through digital channels. Now that those that includes the electronic ordering coming from our larger customers, but also a good step up generally in terms of the amount of revenue that we drive them through their digital channels.

35:13 And there's been a number of investments and improvements we've made in the year. So we've we've launched the first HEADLAM brand website. There's a screenshot on the page there and and the link, headlamgroup.com. So this is this is an opportunity where you can learn about the whole of the HEADLAM GROUP, what we have to offer, product services, etcetera. Previously, we faced into the market a bit more in terms of our regional businesses, our regional brands. This is an umbrella HEADLAM HEADLAM kind of website. And we also launched a couple of b to b to c websites for two product brands. So these are websites where you can go on you can go on as an end consumer, and you can you can look at the product. You can order samples that will be delivered to your home that'll be delivered to your home that you can go and find a retailer to go and buy those from.

36:02 And we launched two of those, making it much more user friendly customer journey. And then during the year, we took the decision to replace the the ERP. So ahead of for quite a number of years, bespoke coded system at the moment, and we're looking to move over the next three years to a to a more agile and flexible cloud based platform to support future growth. And that'll be a three year program, modular, which will hope will, you know, help it to be to to to make it smoother and minimize disruption. And we're not expecting any significant change to kind of previous cash expectations, IT cash costs that we'd expected over the last few last few years.

36:51 Sustainability in ESG, I won't I go through this in detail, but the key point just being here that there's been quite a lot of good progress on ESG. So some of the cost efficiency program that we've had over recent years have also had an environmental benefit. So the transport projects that we've had have taken out 20% of mileage, for example, in 2023. I forget the number, but think it's over a thousand tons of c o two. So good for, you know, make financial sense, but also good environmental impact. And there's been further progress across each of the e s and g that we set out on this page. Continental Europe then. So this these well, three businesses and they make up about 80,000,000 of revenue across the group.

37:44 The largest individual of those is is the French business, LMS, on the left hand side. So that's about two thirds of that. And LMS operates from a series of sites that act like trade counters and showrooms across across France. It's a national business and three distribution centers. We've got a new manager director there who settled in, you know, settled in well, and the business has returned to to to profitability. And a particular highlight of the last year or so has been the development and growth of the own brand ranges, and they're now over 40% of the revenue in our French business. And then our two Dutch businesses, one in the East of the country, one in the West of the country. One's typically had a residential focus, one more of a commercial.

38:31 Key developments there have been in Dursima, which is on the right hand side. The key development has been adding curtains and blinds to that offer to to complement the flooring offer, and that's been through agents' agreements and also an acquisition. And then the other development that we're working on is is moving both of those businesses onto a common IT platform. So they operate separately at the moment, but we're looking to move those onto a common platform, which yields some some synergies and and better ways of working going forward. And that's it on on Europe. I'll hand you back to Chris for for a wrap up. Thanks, Adam. Okay. Well, just a couple of slides left. So in terms of our outlook and summary, I I I promised a bit of detail here. So, yeah, we sort of segmented this into three areas, really. There's the what's happening with sales right now, so it's a short term performance.

39:25 How do we see the rest of this year playing out? And then maybe a bit more of the medium term outlook on the business. There's a couple of slides here. So, you know, what's happening now, not surprising, pretty pretty tough trading continues, and lots of other businesses have been publishing trading updates since we did actually. So the last couple of weeks has been quite a lot, whether it's SIG or Travis Perkins or Grafton or and there's a whole host of people coming out at the moment on building materials and also consumer facing stocks all showing pretty weak continuation of performance from from the end of last year into this. So, yeah, that remains the case. And and I think for us, that still is the case and and but with the the positives that we saw in large customers and trade counters continuing as well.

40:10 So we're seeing more of the same from last year, really. And then what do we think for this year? So, you know, the outlook for the rest of the year. I think a couple of things have probably changed since November time, which we've we've reported on, you know, some of the sentiment of when will the great shoots come, you know, when will this sort of positive bounce in the market happen and the and the recovery commence. You know, some some businesses have started to see that already, you know, things like the mortgage application starting to to become positive, which is a great thing for the market, and and and hopefully, we'll end up with some positive impact later in the year. But if anything, you know, this sort of continuation of the weak demand feels like it's it's here for a bit longer. And those stats and those metrics that we refer to the RMI spend and the flooring spend outlook both at the end of the year, forecast to turn from positive to negative. So that sort of negativity around volumes continuing for a bit longer perhaps for '24, albeit with some green shoots showing that there might be some recovery later in the year, which just talks to the medium term. You know, this sort of 25% volume shortfall and recovery that that that one anticipates.

41:22 Now whether it's all of it or whether it's some of it, just that sort of feeling of it coming back. Now whether it's as a result of this market recovery, the maturity of our broadening business model into these other areas, you know both of those are gonna work together to give us a material improvement in performance, profit, and cash, all to get and and adding in that sort of reduction in the longer term capital requirement following the completion of the trade council rollout. So so positive outlook in the medium term, but I think it's gonna be a little tricky maybe for the rest of this year. And then we we we were encouraged to put this slide together, an extra slide on, know, what does that medium term recovery look like? What could it look like for our business? You know? And some of this information's already in the public domain that we've that we've shared in the past. You know, our trade counters already at a 100,000,000 effectively of sales looking to go to 200. That's based off of of growth in numbers and also maturity of that curve of of revenue growth that we talked about, and that looks on track. Larger customers, as I mentioned, that's less than 20% market share.

42:30 Again, this year, we'll be getting close to a 100 with a good opportunity list of of things to go after. So, again, you know, you can see that even on the subdued levels of volume being achieved. And then, you know, what happens in the regional parts of business and sort of European recovery, and that's based much more on market recovery and how we see that maturing. You know, just assuming there's some recovery in that market performance, you can see the group getting back and hitting sort of the numbers of 900 to 1,000,000,000 sales or or something of that nature once the market does recover. So, yeah, just a couple of shareholders have said, you know, what do you what do you see this looking like once all these bits have matured? So that's the slide that we put together to help with that conversation. So it just points to this sort of medium and longer term recovery of what the group could look like.

43:19 So summary then just before we perhaps look at some of those questions even though Adam's answered one already, but just as a of summary, just a handful of bits here, sort of four, five points on the left. You know, it is this resilient business model. We are broadening the business out to help offset market weakness, but also be ready for when the market recovers because we want to be able to capture as much of the market now, but also the recovery when it happens in the medium term. I think, as I said, you know, there's likely to be a bit of continued weakness for a while until that happens. But we've got a business model that is resilient and well invested with good stockholding, good facilities, good foundations, which means that it will recover and generate that kind of medium term revenue and profit growth together with the cash in the future.

44:07 So reasons to be cheerful in the future, I think, together with some short term improvements in the way that we're broadening the business out in the meantime. So maybe we could go to some questions, and we've we've had some coming during the course of the presentation. So maybe if I just sort of I'll go through them from the top if that's okay. And either myself or or Adam will answer them. So the the first couple of questions are around buybacks, so I'll perhaps ask Adam to to answer these in a moment. But the first question is, you know, what's what's what's the estimated benefit to shareholders from the HEADLAM buyback? Can it be quantified? And and why has the board not pursued buybacks more recently?

44:56 Yeah. Sure. So in terms of that first question then around the the estimated benefits to shareholders. So the buyback program that's starting 2022, it concluded about this time last year, actually. And there's 15,000,000 in total of shares bought back. And what that's done has that's actually reduced the number of shares in issue by about 5%, which is then increased, all else equal, increased EPS and increased dividends per share by about five by about 5%. So that's the quantifiable impact. If you're an existing shareholder as a result of this buyback program, your your your, you know, your dividend per share will be about 5% higher than it would have been had that program not taken place. And the main reason for the the question around, you know, the board main reason the board's not pursuing share buybacks more aggressively recently.

45:48 So we've we've set out a a capital allocation framework. And within that, we set out what we consider to be the right long term average leverage range for the group. So that and that is naught point five to one time. So that's what we as a board have have concluded is where we think it's the right kind of long term average leverage for the group. And and as part of that, what we've said is if if we are below that range, so we leverage is lower than the bottom end of that range, then that would indicate that we have surplus capital. And at that point, we would we would evaluate either returns to shareholders such as buybacks or other growth investments such as m and a, and they'd be ranked prioritized equally depending on what was the best return to shareholders at that time, taking into account things like, the share price, the prevailing share price at the time. So, you know, given that framework, what I thought that I've just outlined in the in the capital allocation framework, a long term leverage target, given that we're slightly over the top end of that range at the end of December.

46:53 You know, we would expect really to be considering share buybacks if we're at the bottom towards or below the bottom end of that range, and that's when we will consider what we would do with that surplus capital that's available. And I think it's worth sort of adding in there that's, you know, the stated kind of leverage ranges where the board are comfortable in the capital allocation. So, you know, there's one or two questions in that have been asked me in the past that, you know, why would you do something a bit more material to the balance sheet and restructure it? But it said, you know, it's all to do with the way that the capital allocation policy is laid out and the adoption of it. So I think those those those answers are are covered as well. Just in terms of so another question to do with property, Adam's arms are the one around the market valuation.

47:40 But there there's also another question that says, is there a substantial opportunity to close or downsize our needed space apart from the one in Stockport that that was mentioned on the presentation? But I think this is something that we are mindful of and, opportunistically, looking at the efficiency of the network. And I mentioned one of the key kind of five pillars on the strategy was looking at efficient operation and how we structure our business. And that's constantly under review and indeed sometimes requires some technology in order to liberate space and efficiency, and that's certainly what we've seen with the transport network. And Adam alluded to one or two other sites that may become free as a result of deployment of technology and and new operating structure and network. So that is something that may well happen later in this year as we as we see it mature. So, yeah, it'll probably be something, but maybe in the one or two sites rather than something more comprehensive.

48:45 Okay. Adam, maybe a question for you. You sort of half answered this, think, but how much you how much would you estimate maintenance CapEx is going forward? Yeah. So you you recall that slide I put up where we showed the CapEx over the over the last few years and prior to the investment phase we're in now with with trade counters and also and also with solar panels that we'll be investing in 2023. So price of that phase, we're about $45,000,000 a year of of CapEx. And we're guiding to 12,000,000 this year. And then once we get through the investment phase on trade counters, we expect that to drop further. And I I mentioned, probably drop into the kind of mid to high single digit CapEx numbers going forward on a long term basis. So that's that's kind of about, you know, an good estimate for maintenance CapEx going forward. There might might be a little bit of growth in there, but you're kind of in the slightly above the historic average of four or five, but kind of in the the five to eight range on a long term basis going forward.

49:52 And Chris may have frozen, so I'll just pick up the next next couple of questions. I don't know, Chris. Why don't I do the there's one on bad debt. So the question is, how much was the bad debt expense or benefit in 2023 and 2022? And approximately, much is this typically in an average year? So bad debt expense for for HEADLAM has been tracking about nore point one nore point 1% of of sales. It's quite good. I was quite pleased that when I joined a year ago and despite some you know, despite the market impact and some sort of, you know, potential distress in in some of the smaller customer base actually holding on to that naught point 1% of bad debt expenses, it it has been a good result.

50:40 That, though, that's our underlying expense before any changes in provision movements and things like that. So there's an underlying expense of about naught point 1%, which is about naught point six, naught point 7,000,000 a year on on bad debt. So that's an expense. But there's a one off benefit in 2023 and to a lesser extent in 2022, but a one off benefit in 2023 from the reduction in the provision, which which I mentioned earlier. So that was about 2,000,000 reduction in the provision, and that's because the the the the overall level of receivables has come down and the aging profile of that. We worked hard in the year on cash collection. The So aging profile came improved in the year as well. And as a result, the the provision came down in 2023. Thank you. There are a couple of questions on I think you lost me there for a while. I came back on. But couple of questions about our sort of relative strength of our regional distribution offering and how competitive is it when you compare it with other distributors and manufacturers maybe with their own national distribution networks.

51:45 So, I mean, the answer for for that question there is that, you know, we what we've got is a bit of a blend. So we can offer UK wide distribution across multiple kind of manufacturers, product brands. We can white label some brands for customers. So I think the ability for us to bespoke our service. Now, you know, our service isn't unique either in terms of of of product or indeed coverage. But what it does is it has this sort of combination of consistency, UK wide coverage, and their ability to curate products for a bespoke service for customers. I think that's the that's the difference for us. So, you know, as as the the the question alludes to, some manufacturers have their own service into UK customers, and that and that will be fine for some. But as I said, what we're trying to do is identify an area where we can add a value add, you know, distribute to wrap or a bespoking to a customer. That makes it hard for manufacturers to do that at a sort of granular level in a consistent way across the country.

52:48 Last question that we've got, are you looking to deploy learnings from The UK operation improvement program into continental European business to potentially underpin future acquisitions? So that's sort of two questions. One there, I think. So if I if I try and answer that in two ways. So the first one is learnings from UK operations into Europe. So how relevant is The UK distribution model, if you like, to the overseas territories. And I think, you know, there are some learnings. There are some learnings from the deployment of technology, which I think helps. And we do operate the models in Europe in a slightly different way, you know, whether it's some some of the territories we don't operate our own transport network, it's something we do. Certainly access to products and the way in which products are innovated, certain technologies and warehouse scanning solutions and things do get deployed across the European market to improve efficiency. So I think there are some learnings where they're relevant, and indeed, we have a a kind of European the European leaders come together. They come to The UK. They see how we operate things, and vice versa. If there's any learnings to be had from the European market in The UK, we look at that too.

53:58 I think in respect of underpinning future acquisitions, there's certainly not nothing planned at the moment. So the markets are quite different. We do see the the biggest opportunity for us in sharpening the offer in The UK, really. The you know, as Adam said, the the French business is the largest in Europe, but that market is very different in nature and size and scale to The UK, very much dominated by the larger retailers, much less so distributors. The Dutch market is slightly different. Dutch market is a bit more of a distribution of a smaller territory. Density of population is better. So I think there there's more opportunity for us to consolidate our own businesses and offer a more cohesive structure business in there. And there might be opportunities that come along, but as I said, there's nothing on the table at the moment.

54:50 And, Alessandro, I think that brings us to the end of the question. So I think it's probably back over to you. Perfect. Chris, Adam, thank you very much for answering those questions from investors. And, of course, the company can review all the questions submitted today, and we'll publish those responses on the investor meet company platform. But just before redirecting investors to provide you with their feedback, which is particularly important to the company, Chris, could I just ask you for a few closing comments? Yeah. Thank you. And and thanks to everyone on the call for joining the call, taking the time to to meet with us, look at our slides, and ask those those valuable questions. So thank you for that. Now in summary, it's just as I said, that's we've held on the last slide here, which is helpful. You know, the business is resilient and and has got a great balance sheet and a great range and and legacy of customers and heritage with customers. And and the growth, you know, growth plan is is we're doing well to grow into these areas despite the marketplace.

55:43 But, know, you the market is challenging, and and it's likely to remain so for a little longer. But I think we are starting to see some green shoots in the macro, which hopefully will help speed up that sort of recovery in demand. And at the same time, the maturity of our strategic growth areas will will mean that we should have a more positive medium term outlook to to share and a recovery in in revenue, profits, and cash as well. So, yeah, it it tough tough short term, but the medium term outlook is certainly more positive. So thanks for joining the call today. Perfect. Thank you once again for updating investors' day. Could I please ask investors not to close this session? As you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations.

56:28 This will then take a few moments to complete, and I'm sure will be greatly valued by the company. 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.