Headlam Group (LSE:HEAD) — Investor Presentation

0:01 Good afternoon, and welcome to HEADLAM GROUP PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time by the q and a tab situated in the right hand corner of your screen. Simply click q and a, type to the scroll to the bottom, type your question, and press send. The company may not be in a position to answer every question received during the meeting itself. Have a review of questions submitted there and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Chris Payne, interim chief executive of HEADLAM GROUP PLC. Good afternoon, Chris.

0:32 Afternoon, and afternoon, everybody else, and thanks for joining the webinar today. Just on the first slide, just a short agenda here. So just give you a bit of an overview of HEADLAM, and perhaps I'll spend a little bit longer on that slide than perhaps I otherwise would do for for those who don't know the HEADLAM story. A brief summary of the trading update that we have produced last week, summary of the strategy, and an update on what we've been doing over the last year or so, and in particular on ESG, which we published for the first time in May 2021, and and then a summary at the end. So, yeah, interim chief executive at the moment. So I've been with the business for four and a half years, CFO. I'm double hating at the moment until the board has appointed a successor.

1:19 So, hopefully, that will be concluded and relatively short order. I've had a number of sort of commercial and finance roles over the years, most recently as part of the sort of IPO team at Biffer when I was in a group commercial role. So, yep, that's me, and I'll walk through the slides today. So HEADLAM overview. So this is us, HEADLAM on a slide, been listed and operating for thirty years. As I said, I'll take a little bit more time over this perhaps than I normally would. HEADLAM effectively is a market leading business which operates purely in the b to b space. We're a distribution business, and we bridge the manufacturing of floor coverings with retailers and fitters effectively. So we're that kind of middleman, if you like. And what does that mean for us?

2:06 So that means that we are national offer of of market leading. That means we have to have deep stocks across many, many different types of product ranges manufactured, mostly in The UK and in Western Europe. There's a little bit from further afield, but for the vast majority of our products, over 70%, in fact, are manufactured in The UK, Belgium, and Netherlands. And and why is that important? So it's difficult for manufacturers to to meet and reach the small kind of endpoints, the the the high street independent retail shops, the the men in van fitting type customer groups. And that accounts as to why we've got 25,000 different customers. They are typically quite small in nature. They may not have any premises at all, and we're that kind of key function really that that takes the mass kind of produce manufacturing down to the small independent retailer who maybe only wants one or two rooms cut for a particular customer.

3:04 So as I said, that's quite a compelling proposition for an independent retailer, and and some have said that perhaps that's why the independent carpet store in the high street has actually done relatively well in a in a retail environment, which has seen a lot of lot of high streets disappear. So, you know, we can offer credit terms to these these people who run these shops, and we offer a next day service. So anytime that from a from a consumer perspective, you do go into a high street carpet shop and and ask to look at some product, and they say, well, that would take three weeks, and they ask for a cash deposit. From their perspective, we can deliver next day across a a huge collection of different products and supply and will offer credit terms. So they've got a pretty good working capital position to work from.

3:52 That's so that's why it's important, and that's why it's been successful. I have talked about this sort of different customer groups, and this is something that's been emerging and I'll dwell on in our strategy slides later. We've been very good and very deep at servicing this sort of local high street independent retailer and the local fitters, but less less deep and and less a low much lower share of the other the other customer groups, and I'll talk a bit more about that in detail. We're a highly cash generative business, so we've got strong balance sheet. There's a slide I'll talk about balance sheet later, but, effectively, we've got strong cash generation, strong net funds on the balance sheet, and we own freeholds of our distribution center estate. We've got lots of long serving people with great industry knowledge and depth of knowledge. And there's a few facts and figures on the right hand side of the slide which talk to the scale of the business.

4:45 We've got a number of different sales brands and and we call them businesses, but they're effectively sales brands operating from twenty twenty one distribution centers. We offer a number of trade counters that we're looking to grow and double over the next couple of years, and I'll talk some of that a little bit more in the strategic slides. And the number of sort of commercial vehicles that we use to distribute products around the country has actually decreased. So that's the result of some efficiency measures that we've been carrying out. And, again, I'll cover that in in a later slide.

5:20 So just to turn to the trading update that that I distributed on Thursday. So we we updated the market on Thursday. Year end, December 31. So this is just a pre close, and we'll publish our results on the first week end of the first week of March. So we can see quite a positive bounce back from the COVID affected 2020 and a really strong bounce back in '21. Profits have returned pretty much back towards levels that we saw prior to the COVID impact, and and that's both in The UK and Europe. We have a couple of businesses, in fact, three businesses in two countries overseas, which is a relatively modest part of the business, and that's seen a strong bounce back as well as The UK. UK does very much dominate the business model.

6:09 What we've also seen is, and we report on regularly, is a split in the business between residential and commercial, and there's a slide that will illustrate that in little bit more detail on the on the next page. But in essence, what that means is our products are destined for use in the residential environment, and, typically, it's it's carpets, laminates, and the like. And some of our products are destined for more commercial use, whether it's offices, hospitality, doctor surgeries, and that kind of thing. And that might be a much harder wearing safety floor, or it might be carpet tiles and the like. And we tend to split our product into those two groups. We report them as segmental splits in our results. And what we have seen over the last year, two years, is definitely a continued positivity of the residential market. And we've all seen businesses who are retail facing residential and home related products doing very well, ourselves included, and we did very well on that side, double digit growth on the retail and residential side of our market. But on the on the contrast, we were held back by the commercial performance, which we've seen being quite difficult.

7:16 And we are an RMI business, so we're not in the big project end of the scale where sort of a a new hospital or big fit out would be done. Manufacturers would tend to sell those types of commercial products direct to the installers. So we are much more in the fit out refurbishments, room by room refurbishment. And that part of the commercial sector has been quite slow, and we've seen a sort of double digit softness in that market. And that really then talks to what's to come, we'll talk a little bit more about that in the future. But I think that the the outturn for '22 and beyond, everyone in the market on the commercial side is expecting that to bounce back at some point. But I think those two those two competing impacts on the retail and the commercial side largely offset.

8:07 And we've seen the, as I said, seen the revenue perform remarkably well and bounce back strongly. The there's a little just a one liner on here about the industry wide issues, and and you would have seen lots of this conversation in the public and in the press around driver sources, particularly distribution businesses. And that's something we've been able to mitigate. We've got a really very strong loyal driver community. We did take some vehicles out earlier in the year, which meant we were able to concentrate our numbers. And, also, we were able to largely pass on much of the inflationary pressures on the product side that we've seen to our customers. Now that's something that's not necessarily unusual in our industry. So products do go up, certainly after the sterling devaluation of a few years ago. And as consumers, you may only replace your flooring every five to ten years. So if there has been some price inflation, it's not necessarily something that you may notice.

9:01 Obviously, our customers are more concerned about price inflation, but typically as distributor, we can tend to pass those sort of price rises on. Just a short summary on early trading in '22, again, encouraging. I'll talk a little bit more about that at the end, but I think we have seen a good start to January. Last year was quite difficult. Soft comparatives as nonessential retail was closed in England and around the country. So I'm not surprised that we've seen but it has been encouraging start of the year. We've also talked about this sort of potential return of surplus capital to shareholders. We published our capital allocation priorities in 2021. And as I say, we are a cash generative business.

9:48 We don't have a high degree of capital intensity to what we do, and therefore, we think there is an opportunity to distribute some of that surplus capital that we've built up over the last year or two. And we will be announcing further information on that in March. So I've got a couple of slides which the last publicly available information that we've produced was really from the half year. So I did a set of slides and presented to the market in September, and these slides, a couple of slides from that deck, and obviously these will be rolled forward and updated in March. But it does give an indication of the shape and scale of the business and particularly those who are new to HEADLAM stories is worth dwelling on these things. Some of the comparatives are a bit difficult because of twenty twenty's weakness, particularly in the first half. So in some of our commentaries, we have used 2019 as a comparative because that's more of a sort of reference year, if you like, before the effects of COVID.

10:48 And the results that we've seen in '21 and, you know, '22 are much more aligned with the 2019 result. So you can see in this chart that we've got this sort of residential and commercial split. I've always, in the past, referred to that as two thirds, one third, but the relative strength of residential in the last couple of years has moved that dial a little bit further, so '68, 31, 68 and half, 31 and a half. And indeed, The UK and Continental Europe has also slipped towards The UK because we disposed our Swiss subsidiary during 2021. So, again, increasingly UK centric and a slight move towards residential. Operating margins are a big target and and indeed gross margin, but ultimately, operating margin are a big target for me and the business.

11:35 And it's something that we said that we are targeting and and looking to improve. And we set ourselves a challenge in the next year or two of getting to seven and a half percent operating margin, which is obviously a big step up on what we're currently doing and what we've seen in the last couple of years. But we've got a clear line of sight on how we're delivering that and the moving parts that are gonna get us there. So at the bottom of this slide, we do talk about the resumption of normalized dividends, and we're expecting that to be announced in March. And as I said, in addition to that, a sort of return of surplus capital as well. So I've left this chart in. So slide five. This is our daily sales chart. I think there there's two things really to pick out. I do spend a bit of talking to investors about this particular chart. So in one respect, you can say, well, that's remarkably consistent. All the lines are pretty close together, which is true. There have been some big changes that we've seen on the sort of COVID effect, and that big v shaped curve that you can see was during the lockdown period that we saw in 2020.

12:46 And if anything, this our business probably did reflect the chancellor's desire for this sort of v shaped recovery, and it was pretty much quickly back to where it was in the past. I think the other takeaway from this slide for me is, yes, it's consistent, but it also reflects, I think, that there's there's a great opportunity for us to really drive some growth into the business. It would be quite flat for a number of years, and that plays out in the strategy and the focus of me and and my energy towards kind of growing the top line as a as a key objective and a key part of our strategy for the future. And and as market leader, we've got a great opportunity to grow share because of the way that the customer segmentation is is set, and I've got a slide in a couple of pages' time to to kind of illustrate that point.

13:33 But I said that we do spend a little bit of time talking to investors about this slide because of the consistency and the reliability of the demand curve, but I see that as an opportunity for more growth. I mentioned the strong balance sheet, and this sort of illustrates the point. Numbers clearly are out of date because they relate to June. But a couple of things worth dwelling on. The property, plant, and equipment dominated by the freehold properties. The distribution centers that we operate across the country are owned in freehold sites. And, therefore, when we have invested in new sites like Ipswich, for example, that was opened last year, and we were able to dispose of a couple of the free holds that we owned and became vacant as a result of that consolidation.

14:21 So it does mean it does mean that we've retained some flexibility and can return some cash when those become surplus requirements. The other thing to note in here is a strong cash position and and really strong balance sheet. So deep inventory position, is largely funded by the supplier credit terms and a good deal of cash that we set with the balance sheet because just simply the profit that we make on our on our business does tend to drop through to operating cash. Just literally, we renegotiated the banking facility. So on the January 17, we entered into a new facility, and that's a very good long tenure out to '26 plus one. So a good facility with a club arrangement, which we'll talk more about in our March results, but that's a refresh facility which gives us good firepower to take forward. I've had a question from Matthew r, which I'll perhaps pick up at the end, but I think that banking facility will play into the answer for for that particular question at the end.

15:26 So just turning to strategy and some of the business changes that we have been implementing and and what I see as the key objectives and and areas of focus going forward. We've had a a really strong shareholder register, and they've been patient with us where we've been talking about our plans to improve the quality of the business and indeed our share of the market. And this is an area that we've been able to talk in a bit more detail and really get some excitement into the customer segmentation work that we've done. So we focused our initial kind of change program on delivery cost savings, improving efficiencies, and I mentioned the reduction in the commercial fleet, and that was that was one of those changes. But really, the main prize for me is around growing our top line, getting some kind of organic growth back into the business, and seeing us take some more of the share.

16:17 Now given our market leading position, you may think that's gonna be a challenge, but as this sort of slide evidences, at the bottom of the slide, you can see the work that we've been doing to identify the different types of customers. I mentioned we're very strong in the traditional retailers, the high street independent shops that might only have one one store. And the green box next to it trades people and fitters who typically operate without retail premises. That's our kind of heartland and where we've been strong for many years. And where we've had less share and less of the of the market is more to the right hand side. So the large house builders, the major multiple retailers, the people like B and

16:58 Q, Homebase, Wix, and some of the DIY sheds are in those categories, and we've had very little share of that market. They've tended to go direct to manufacturers, but we do actually have quite a compelling offer for businesses at that end of that particular range. And this is where we feel we are significantly underweight and where a lot of our efforts around organic growth are now centered.

17:25 This is really a summary of the things that we have been doing, and I I mentioned the work on the efficiency and some of the cost reductions that we've seen. And, also, it starts to talk about the proposition builds on the right hand side of this slide, which are now starting to pay early dividends in sort of new contract wins and expansion into new territories and new customer segments. So we worked hard initially on consolidating our network and also integrating the transport. And this comes about because of the the past and the history that the HEADLAM has come from. So those who are new to the HEADLAM story, it's probably worth me just dwelling on that. So HEADLAM, thirty years strong, was built up through acquisition, and those acquisitions were only partly integrated.

18:12 And we were left with a collection of businesses operating from distribution centers that in some cases do and have competed with each other, and they compete for sales. But, also, we have or we did have a situation where our distribution networks overlapped, and we were sending the same product in many cases in different directions on vehicles across borders. So clearly some inefficiency and the opportunity for us to improve not only the kind of customer service, because in some cases, customers with multiple accounts would get multiple deliveries, but also reduce our cost base and improve the kind of carbon effect of the competing delivery networks. So we went through a process to to look at how do we consolidate our network, and now we have a situation where our customers are delivered to from the closest postcode.

19:04 So that means the distribution centers are now effectively delivering to their customers that are closest to them regardless of which distribution center or which business originated the order. So that's had quite a big impact on our vehicle numbers, driver headcount, reduce the cost, reduce the emissions, etcetera. So that's quite a big project that we completed over the last eighteen months. Trade counters, I talked to, and there's a slide a little bit further on in this deck. But one of the areas that we noticed was particularly important during the COVID lockdown, and many of you would have experienced this in your home lives, is the ability to kind of continue to trade without a premises. So being able to order online, click and collect, and then turn up a site and collect order.

19:51 And that's something that our customers have also enjoyed doing and wish they could do more, and we saw a significant improvement in the kind of collection criteria for our customers. One of the things that we've noticed is that our trade counter offer is compelling and good and gets great feedback, but isn't in enough locations and doesn't offer kind of breadth of impulse purchases or products that maybe our fitters and customers need on the day. So adhesives and gripper rods and all those kind of ancillary products. So we've developed a new trade counter blueprint and a new rollout program, which is to double our trade counter network over the next couple of years. And that is with a much broader offering of product that's self pick.

20:37 We can offer an enhanced click and collection process for our customers and even sort of design and build areas for them to unroll their product to prepare it on-site under a covers canopy to keep it out of the weather. So a real kind of improvement in customer service. It goes hand in hand in that is the ecommerce and digital offer that we've had to invest in. So I inherited a business, I think, which was underinvested in the digital offer by a traditional customer base. But as we've seen in many parts of the industry and and different sectors, have seen a rush towards sort of ecommerce and digital offer. Probably flooring is a little bit left behind in some of those aspects, but certainly the COVID experience where we saw more people demanding online consumption and being able to see and feel products remotely with, you know, visualization software and the like, and that's all projects that we've invested in and delivered over the last twelve months. So there's a slide coming up where we talk about a new app that we've launched aimed at this particular customer group that does improve that that service and gives our customers the ability to place an order end to end source, look at products, look at prices, place an order, pay for product, and see what it might look like in a home.

21:57 Salesforce effectiveness. This is where we rebalance the sales cost that we address the market and looking at the new customers. So I mentioned earlier, we were very strong in the independent retail sector, and arguably over costed in that space as well. Too many heads selling into that space. We've been able to reduce those heads and actually invest more headcount in the areas of the customer groups where we were light. So we've hired a new sales team focusing on the key accounts areas and and going after those large retailers with some success that we'll talk about a little bit later on and also in our March update. So custom propositions, I mentioned those earlier. We've been working hard at building a bespoke offer rather than just rather than just a sort of one size fits all. Clearly, something that's that's being offered to a local high street independent retailer as a proposition will be completely insuitable for something like home base who needs a national offer with consistent product, consistent service, consistent pricing, and with a sort of covenant of somebody that they can work with and trust.

23:04 Just moving on. I mentioned this sort of industry leading ecommerce offer that we've got. We've developed a trade app over the last six months, which is now live with all of our customers. This is the first in the industry and is this sort of capable of being looked at on a tablet or an iPad or or an Android phone. And it gives our customers access to all of our different brands, all of our different stock holdings, price points, and they can check live stock holding for any particular order. So they can place orders through the app and get their terms that they've negotiated with us under their b two b contract setup. And it includes a sort of room visualizer. So a couple of the good features that the customers really enjoyed is being able to look at all of their stock holdings and and then understand what the delivery times might be and to be able to show their customers. Remember, this is a b to b offer. They can show their customers what the flooring would look like in the customer's home.

24:05 And even more than that, they can actually produce invoices with the customer's prices on using our cost as the as a sort of input cost, if you like. So all of that is is available on the app, and customers have been giving really positive feedback. What we have seen is a significant increase in the amount of online orders we've been able to take. The percentage of our orders taken digitally reached a high point in December of 26%. So that's the high point that we've seen, up from 11% or so two or three years ago. So a real significant step forward in our digital offer. This is the sort of large independent retail segment that we talked about, and this is a third of the market, believe it or not. So there's a billion pounds of the £3,000,000,000 market sat in this space, and we have very little share, and certainly we are underway. And this is where we are targeting.

25:04 So Mark W has asked me a question, which I'll say I would have answered at the end, but it's a good time for me to sort of address that while I'm looking at this slide. So, the these these types of customers would buy directly from manufacturers, and they would ship them into their own DCs, have to double handle, have to work with potentially a number of different suppliers, and then distribute around their own network. We can offer them a different type of service where we still source the product from manufacturers, but we step in the middle. We then offer a bespoke service where we can clearly source from multiple different suppliers, and we can actually break it and and offer a kind of store by store package for the for the retailers so they don't have to handle these big, bulky products in their distribution centers. It clogs up a lot of space.

25:56 It's a bit of a specialist product to handle, and we can offer that as a bespoke service. So the manufacturers still get to still get to make ship the product, but actually, they're doing it in bulk via us, and we act as an intermediary. That offers a sharper, more compelling service to the retailer, unclogs their DCs. Yes. They have to pay a bit more than they would have done to the manufacturers, but they get a better quality service, and they avoid quite a considerable amount of cost. So that's how hopefully, that answers your question, Mark. In essence, that means that we're able to sit in the middle, take some value out of that that chain, and offer a really good leveraged operationally geared service to our customer groups. Slide talks about the trade counters, and there's a little picture down there of the types of ancillary purchases that I was describing. So up until now, our trade counters have been rather a sort of last minute addition to our distribution centers rather than a professionally run, dedicated, you know, make no bones about it. This this is designed to be a screw fix or a tool station or

27:07 a more of a building product type feel. So you walk in, it'll feel like a retail environment. You'd have ordered your product for collection. You can see and self pick a lot of the other products that you've forgotten to buy, like adhesives and and screen and the like. And we also have some dedicated kind of ranges of products that are available on sample boards, which you can just see if you look carefully on the left hand side of this slide in the picture. So there are dedicated trade offers, and it's been extremely well received by our customers so far. And we've got such a broad range of different trade counter experiences out there. What we're looking to do is standardize and double the size of the tray counters and also look to double the turnover and the contribution that that makes to the group over the next few years.

27:53 So the early feedback and the early performance of those tray counters that we have opened and we have refurbished is really positive in line with the business case, in line with the step up in performance that we would have expected. So this is not just a case of doubling the numbers of trade counters. We're also refurbishing the existing 50 sites. We did 12 during 2021, and we've got 20 on the list for 2022. So it will take a few years, and we're going to increasingly run fast faster as we get more practiced and we start to hone in on on the thing that works the best and the blend of product and range. We're getting towards the sort of end of the slide deck now. This is just a slide I popped in because one of the things that has been a change in the last year or two is around improving the depth and range and quality of the board.

28:46 And I say I've been in the business four and a half years, there's been quite a few changes around the board table since then. We've appointed two new non executives in the year, both of whom come from the commercial side of of the world. So they're Simon Simon's case. He was the chief executive of Wix, and I mentioned the DIY sheds as being a key customer segment for us to grow into. So he's providing some great insight into the propositions that will work for that particular category. And Steven joins us. He's an acting chief executive at the moment in the footsie business. So he's provided some great kind of support to me as well personally as I as I take on the role on the interim basis just to kind of get my head around what is what it is to be a chief exec and and provided some good feedback and and some ideas on some of the commercial side of of business as well. So great teams coming together, forming a strategy, and the strategy is something that I've been running with for a couple of years. So it's been great to sort of road test and mount it off the the new board as they've joined. Just the last bullet there I mentioned, it's worth sort of dwelling on that.

29:54 The board felt it was important to do a sort of independent search for the next chief executive, which I'm I'm part of, and hopefully, we'll conclude that in a matter of weeks. So just a couple of slides to go. Capital allocation. I mentioned that we've published the capital allocation priorities in twenty twenty's annual reports and accounts. So that sort of talks to the order of where we spend our cash, should there be any. So, obviously, we wish to maintain the strong balance sheet that we've got. We are investing our core business. The trade counter rollout clearly is is a good example. We're also refreshing a good deal of our plants and equipment around the country, but again, that's not capital intensive.

30:41 We will continue to offer an ordinary dividend, and we've sort of stated our dividend policy as being twice covered on earnings. So that's in line with a pretty good upper quartile place in the market, our shareholders, they're comfortable with that. M and A, I do have a question on M and A which been raised, so perhaps I can answer that now. I think there are one or two things that that we would look at in M and A. The question around whether they're weaker during COVID, I think you have to look at the objectives and what we're trying to achieve as a business. I think we've got really good share, and you look at where we're strong. We're we're targeting different customer segments. I think the other thing where we are targeting is there's around, you know, bits of the market, bits of the products there that we're perhaps not as strong in. We're traditionally very strong in carpet and less so in other areas, things like ceramics and artificial grass and the like, where we've got a relatively low share. I think there are perhaps some acquisition opportunities in those spaces which are more aimed at our sort of objectives of infilling that kind of complete customer service offer where we could see some opportunities rather than kind of taking advantage of weak competitors doing things that we can't really do.

32:00 So I think there is a kind of a half an eye on keeping perhaps capital for opportunities that arise in that space. And then after that, then we will clearly return surplus cash to shareholders. And that's what sits behind the statement that we've made last week, and we will announce a bit further information on that in March. Really, the last slide before I summarize is around ESG. We published our ESG strategy in May, and this is something that, as distributors is we're in a slightly unusual place from an environmental perspective in that we are here to service the market. And manufacturers will make a range of products, and and our customers demand a range of products. So primarily, we're here to to service that particular need.

32:48 But I think we also, as market leader, have an opportunity to influence and play a part in improving the sustainability of the industry, really. And I think that's something that we've been talking to, in particular, to manufacturers about. Some of our customers have got more insight and more skin in the game in that particular space, particularly some of the local authorities and some of the large multiple retailers. This is a key focus for them. But the manufacturers and the suppliers are very much working with us to see how we can move products into a sustainable space and also what kind of role we can play in end of life recovery of product, for example. So that's something that we talk about in our ESG strategy and we'll increasingly see aligned with our business strategy going forward. There are some specific actions we've taken and will be announced on social side of our community support that we offer to our businesses. But certainly, we we've made announced already some improvements in the way that we go about the environmental side of our business. So moving our fleet, certainly our company car fleet, be hybrid, reducing energy consumption, and moving to sustainable energy production, that kind of thing. So that's within our control. It's something that we'll be announcing more on in our March results. So it's something that's incredibly important for us, and we'll see it as an increasing part of our discussion and strategy going forward.

34:14 So just in summary then, I think, as I said, for for those new to the HEADLAM story, you know, we are market leaders. We are distributors, and we act in that sort of middle middle place. We've got an extremely strong business, extremely strong business model. But we are going through this change program. You know, we're not sitting on our laurels. Apologies for some background noise there. Not sitting on our laurels, and and we've got a huge change agenda that we're halfway through. And I think the exciting thing for me is around the growth story. We've got great opportunity in new customer segments that we've not targeted, and there's a large market for us to go at. ESG is clearly an increasing commitment for for lots of businesses, not least us. And I think, again, as industry leader, we're we're perfectly placed to coordinate the manufacturer's efforts in that way and work with some of our key customers.

35:03 So that kind of brings me to the end of the slides. What I'll perhaps do is end of the questions. Fantastic, Chris. Thank you very much indeed for your presentation. Ladies and gentlemen, do please continue to submit your questions using the q and a tab situated in the top right hand corner of your screen. Just while Chris takes a few moments to review those questions submitted today already, I'd like to remind you the recording of the presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. Chris, as you can see, we've had a number of questions that you've currently answered a couple of on the way through, but there's a few more just on that q and a tab. If I just may ask you just to click on q and a, start at the top, and where appropriate to do so, just read out the question and give you a response, please. Yeah. I will do. No problem. Thank you. So Scott Thames asked a question around divesting of European assets. I think that that's a question that we have been asked. I think it's something we're looking at. As I mentioned, we dispose of the Swiss business, and and you think about what the capital deployed and the capital return is, you know, we are predominantly a UK business.

36:00 What we have said is that we'll we'll look at the performance of those overseas assets, and where appropriate, they may be better off in in others' hands. And the Swiss business was sold to management. And I think we'll look at each market in turn. So we remain in France, we remain in Netherlands. The French business has underperformed for a while, and we spent a little bit of time trying to improve the quality and returns of that business. And I'm pleased to say that they are moving back into profits and generate return. So I think it's something that we're keeping under watch, but we're looking to improve the quality of those businesses before we do anything more in the short order. Simon c has asked with a compelling digital offer, would I would we ever look at b two c?

36:48 I did use a sort of screw fix analogy earlier, and and they've neatly sort of straddled the b two b and b two c offer. I think from a board perspective, it's something that we're aware is an opportunity for us. You know, increasingly, people are looking for digital consumption and looking online. Remember, of course, our customers are b to b customers. They're retailers, so we wouldn't want to necessarily alienate our customer groups. But I think there's also, you know, an increasing willingness for people to participate in all areas of the marketplace. So I think it's, again, not something for now, but we are certainly making sure that our digital offer is relevant, is right, has got a consumer feel, and that's something that we're gonna continue to develop over the next twelve months or so.

37:39 Yeah. Scott HEADLAM. Good question. What are the expectations on margins for this sort of emerging key accounts and large retail sector? Now we do have a a large customer in that space. Big Q is is is one of our big is in fact our biggest customer and pretty much the only one that we've got in that very large space. It does come with a lower gross margin, that's safe to say, as you might imagine. But because of the scale of the service and the sort of what unique way in which we service the customer, I think we can make decent operating margins out of that. So as I said, it comes at a different sort of shape and scale, but gross margin's a bit lower, operating margin's a bit higher. So I think we can offer a compelling solution to those customer groups and still make a reasonable return.

38:37 Mark w, I think, has asked a very similar question, asking the same question as the previous one, but saying it does might attract large grow grow lower gross margin. So I think, yes, that's right. It does. But I think we can offset that with a more efficient delivery service. Okay. Mark W. Yeah. Product areas use so Mark W asked a question, what might you consider other product areas in The UK leveraging your distribution strengths? I think that's something that the board and I have discussed about whether they're sort of adjacent products that we could service. And, certainly, some of the ceramic businesses do strain to bathroom products and the like. But I think there's there's certainly, at the moment, enough for us to go at the the relative share that we've got in those new customer segments is relatively modest. And I mentioned some of the products that we consider floor covering or absolutely within our suite of spotlights, ceramics, and and arguably wood and artificial glass.

39:42 I think there's so much of an opportunity for us to to target growth in those spaces that do have a close alignment with our operational handling skills and the way that we store product, it makes sense for us to focus on that first and and before we perhaps diversify elsewhere. Yeah. Matthew d has has asked a key question that some of our shareholders have asked. What are the big moving parts required to take this to seven and a half percent margin? And is that seven and a half percent margin a sort of stage in post rather than an angle? So that's I'll I'll try and answer that as best I can. I think the I've got good line of sight over what the moving parts are, and I've talked about a couple of them on on the slide deck. So by delivering some growth into the large accounts and the key accounts and the large house builders, clearly, we're able to use our operational gearing to our benefit. So we'll see drop through improvement in margin. So there's some growth through new customer segments in that type of space. Trade counters, we're looking to double the size of. And, again, that comes with an enrichment in margin as a result.

40:53 Specifically on some other areas, I suppose cost efficiencies, we do think that there might be benefit in gross margins to be had. And I suppose acting as a as you get more growth, you're able to buy a little better. And as you start to consolidate some of the product ranges and supply, again, that's an area that we could perhaps do a little better on gross margin. And that's part of the strategy and part of the slide deck that you may have seen from capital markets and other and other presentations. So there is a little bit of a contribution from from that. And, yes, that means that we seven and a half percent, clearly, won't just be a cliff. You know, this is a glide path, and it may well mean that we do get carried carried beyond that. So I think with more growth and and top line, I can see that the gross margin and therefore the operating margin would hopefully exceed that.

41:54 Well, I think on the there's a question around growth. So there's a question. Apologies if I pronounce your name wrong, but Oligario s. In light of all the initiatives, what type of organic growth should we expect for 2022? Well, I think all I can do at the moment is point to guidance that's in the market at the moment. They do have us with relatively modest growth for '22. So, you know, who knows what the market is gonna be? What we are doing, I suppose, is trying to focus on areas that we can step into. So both in those customer segments, we've been liked. Our home segment, if you like, our traditional segment will will be subject to whatever the RMI and and the consumer spend patterns do this year and also, indeed, on on the commercial demand curve. So who who knows? We've we've had a go at that, and some of the consensus has got us with some some organic growth in there.

42:50 Scott m's asked a question around, can you talk around any success you've had with new key accounts? Not yet is the answer. We'll publish that in our March update. So we we have got contracts, we've signed a new customer up, which is going well and is in the early stages. So what I'm intending to do is is kinda wrap that up. It's early days and wrap that sort of story up in the March announcement with a bit more color and hopefully talk about what it's meant and try and get some good quotes in there. Has asked another question around sort of the twenty twenty two hour term. Again, I'm gonna have to point you and refrain to Bloomberg and the consensus that you can see on there. Then we we contend that the board contend that the the numbers in the market are are broadly where we'd expect to see for 2022.

43:48 Matthew d has asked a question around the kind of equation of how do you define I'm paraphrasing, but how do you define what surplus cash is? And we we have published, as I said, our capital allocation priorities about what that might mean and in terms of sort of leverage and debt. But, obviously, I'm also conscious that we don't want to necessarily do everything in one go and hence our kind of conversation in the in the trading update that we'll we'll perhaps announce a bit more detail in March. But as you might imagine, we have got a number of options ahead of us and also function of time. And one of the interestingly, one of the analysts sort of quoted to us was, well, failure to distribute something doesn't mean you've lost it, it's still there in the balance sheet.

44:37 So I think we're taking a a kind of progressive, pragmatic view to that. So we'll update a little bit more detail around what we're intending to do, and we'll announce the distribution and our thoughts on that in March. Has asked, do I see any change in the competitive landscape in in in light of the consolidating efforts on the competitors? Yes and no is the answer to that. I think the one of the features of the market has been consolidations happen for for many years, and we've been the beneficiaries of that in the past. I think there have been one or two in recent times where I suppose the that competitive situation exists already. So some of the businesses are looking to combine a number of buyouts in recent times. Those mark those businesses have already been competitors of ours.

45:34 One or two have now obviously joined forces. Now that will undoubtedly lead to some changes, but I think in general terms, those those people have always been competitors of ours in some shape or form. And I suspect that will remain the case going forward. So it does mean that we do need to be on our toes, and I think it makes good competition is healthy, and and I think it's good for us to to have to keep fit and and keep sharp in the market in order to remain successful. So, yeah, I think that's that's probably the changes we'll see is that we just have to sharpen our sharpen our approach. Commercial RMI. There's a question here about commercial RMI. Can I please talk about the buckets within this?

46:25 So you've listed out in your question schools, hospitals, office offices. And, yes, all of those are indeed in that category. As I said, we focus more on the products than the end destination of where it's going. So we tend to define our commercial sector as products that are commercial in nature rather than where they go. So the outlook for each of those segments is obviously difficult to predict, but the conversations I've had with manufacturers and competitors and and other businesses is that I think there is a general expectation that schools might get back on to some refurb work, so they spent a lot of their budgets in the last couple of years on health and safety measures and protecting against infection and the like. So I think we're rather hopeful that that some of that spend will now go back onto the refurb work that's that's overdue. And the same goes for hospitals and and sort of health institutions generally, that budgets and quality of flooring should now sort of be addressed rather than going on the screens and PPE and the like. So that's the sort of general thought that we might actually have a bit of an education season, typically happens in August, for example, might actually happen this year, and it's been very, very muted the last couple of years. Offices.

47:39 Again, on the RMI, there is a there is a view that offices might now start to come back a little bit, and and it's been very difficult over the last eighteen months with hybrid working, remote working. It's it's simply people have been handed offices back rather than continuing to use and refurb them. So I think those deferred spend ideas may well now start to come back on the table. There's some some space has been repurposed, which again is is fine for us because it means we get the opportunity to to refloor the the site. So I think there was a bit of quiet enthusiasm about the office refurb market, Certainly, perhaps in the second half of the year. And it's it's yeah. It it's it's been better than it was last year, put it that way. Matthew Dees asked another question about inflation.

48:28 Are we able to recover materials and labor across inflation? And what price rise do does HEADLAM need to push that through in 2022? So the feature of the floorway market is that typically nonproduct inflation is difficult for for us to to pass on. So in years where there's been very little product inflation, we've ended up having to absorb overhead cost inflation, labor inflation, or try and create efficiencies to offset that. In quite contrary this year and indeed towards the end of last year, raw materials and product prices have been increasing across the board, and you would have seen that in other sectors and your home lives, which has meant that we're able to to pass those on and therefore cover the cost inflation that we're seeing. So the labor inflation is probably the most interesting one where there is a general labor inflation, but, of course, that's that's also dialed up in certain areas and job types. So things like drivers, we've seen double digit wage inflation, which we've already covered and had to to find. Now we've been able to offset some of that with the efficiencies that we saw last year and the driver reductions I mentioned.

49:43 But that is a feature of our sector. As I said, the the product supply prices that we've been able to push into the market as everybody has in the sector has meant that this year, we've been able to offset the cost inflation we've seen in other areas. Chris, thank you very much. You you you've answered every single question we've had come through. And, of course, there are any further questions that come through. You will have the opportunity to review those. And we have public responses all those questions Chris has answered on the investor me company platform. Chris, perhaps before we redirect investors to provide you with their feedback, which you know is particularly appreciated by you and the company, I could ask you just for a few closing comments, please. Yeah. I think that, you know, the long short of it is we've got a great business with great heritage. We've been market leading for many years. But, actually, strangely for a market leader, I think the growth opportunity remains ahead of us.

50:31 You know, we've we've we're stepping into new territories. We're deploying new technologies. We've got new skills in the business. So it remains an exciting place to be, and I'm really encouraged by the sort of start that we've had both in terms of the customer segment penetration and also just the trading. Start to the year has been great. So it just put a a kind of lift in the step for the people in the field. So, yeah, I think that's the the the takeaway for me is that we've got a a great solid business, but one that that's gonna get better. That's fantastic. Chris, thank you for updating investors today. Can I please ask investors not to close this session? It should be automatically redirected to provide your feedback in order Chris and the team 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. On behalf of the management team of HEADLAM GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all. Thank you.