Interim Results 2024

17 September 2024

Headlam Group plc

('Headlam', the 'Company', the 'Group')

Half Year Results

Results in line with expectations; acceleration of strategy through a two-year transformation plan

Headlam Group plc (LSE: HEAD), the UK's leading floorcoverings distributor, today announces its results in respect of the first six months of the year to 30 June 2024 (the 'Period') and launches the acceleration of its strategy through a transformation plan to simplify the business and enhance the customer offer, generating at least £15 million of annual profit improvement and £70 million of one-offcash benefits.

FINANCIAL HIGHLIGHTS

H1 results in line with expectations

• Revenue declined 11.8% year-on-year with UK down 11.3% and Continental Europe down 15.9%
• Revenue growth in Trade Counters and Larger Customers of 7% and 2% respectively
• Underlying Loss Before Tax of £16.4m impacted by market volume decline and a lack of price inflation in the market
• Strong cash generation with positive Underlying Operating Cash Flow of £18.0m

Strong balance sheet; cash and working capital well-controlled

• Working capital well-controlled with stock levels down £22.6m on a year ago
• Reduction in Net Debt to £28.3m with £72.2m of cash and undrawn facilities available at the end of the Period
• Strong asset backing: the Group owns property valued at £142.1m
• Further balance sheet strengthening provided by completion of pension buy-in

STRATEGIC HIGHLIGHTS

Acceleration of strategy through two-year transformation plan

• Acceleration of existing strategy through a two-year plan to transform the business. This plan will simplify our customer offer, network and operations; improving profitability, increasing market share

and releasing capital from more efficient working capital management and the disposal of non-core property

• Each workstream is already underway, with the following key initiatives that will drive our operational and financial performance, creating long-term shareholder value:
• • Simplify our customer offer
  • • Consolidation of 32 trading businesses into one single, national business trading as Mercado, enabling customers to order from a broader, unified product list and to benefit from more time with our sales teams, who have smaller geographic territories
    • Dedicated sales teams with specialist expertise for each of the residential and commercial sectors of the market
    • Upgraded display stands and marketing support, helping our independent retailer customers to grow their businesses
  • Simplify our network
  • • Continued optimisation of our network, including opening a new distribution centre in Rayleigh (Essex) and a new cross-dock facility in Ipswich; resulting in the closure of our Ipswich distribution centre, which will be sold
    • Consolidation of two distribution centres into one in Scotland, creating another surplus property to be sold
    • Simplification will generate working capital efficiency through higher stock turn
  • Simplify our operations

• 1. Centralisation of back-office processes and support functions
  2. Unlocking operational cost savings
• The benefits of the two-year transformation plan are expected to be:
• • Release of at least £70m cash from disposal of surplus property and optimisation of net working capital
  • Ongoing profit improvements of at least £15m, with benefits starting to be realised during 2025 and fully achieved as a run-rate by the end of two years
  • Increase in market share from investment in customer proposition
• Anticipated c.£25m of one-off cash costs to deliver the plan
• Full support from lending banks, having recently agreed a new covenant package through to the end of 2025

Current trading and outlook

• Group revenue for July and August declined 8.4% compared to 11.8% decline for the first six months, supported by four consecutive months of reduced revenue decline in Regional Distribution
• Limited indication of any market improvement yet
• Looking ahead, the lead indicators for the market are more positive, but the timing of market recovery remains uncertain and looks to be later than previously anticipated, with a return to growth now expected at some point during 2025
• The long-term outlook for Headlam remains positive, reflecting the combination of:
• • Continued implementation of the existing strategy to broaden the base of the business
  • The two-year transformation plan
  • Market recovery, recognising that the market is now at least 25% lower than in 2019 in volume terms
• There is no change to the illustrative long-term revenue ambition for the Group that we set out in March 2024: a range of £900 million to £1 billion of revenue, driven by the combination of the above factors

ABUSE REGULATION (EU) NO. 596/2014 AS IT FORMS PART OF UK DOMESTIC LAW PURSUANT TO THE EUROPEAN UNION (WITHDRAWAL) ACT 2018, AS AMENDED. UPON THE PUBLICATION OF THIS ANNOUNCEMENT VIA A REGULATORY INFORMATION SERVICE, THIS INFORMATION IS CONSIDERED TO BE IN THE PUBLIC DOMAIN.

Notes to Editors

Operating for over 30 years, Headlam is the UK's leading floorcoverings distributor. The Group works with suppliers across the globe manufacturing the broadest range of products, and gives them a highly effective route to market, selling their products into the large and diverse trade customer base. The Group has an extensive customer base spanning independent and multiple retailers, small and large contractors, and housebuilders. It provides its customers with a market leading service through the largest product range, in- depth knowledge, ecommerce and marketing support, and nationwide next day delivery service. To maximise customer reach and sales opportunity, Headlam operates businesses, trade brands and product brands across the UK and Continental Europe (France and the Netherlands), which are supported by the group's network, central resources and processes.

Chief Executive's Review

Introduction and market update

The Group's financial performance for the first six months of the year reflected the challenging trading environment across the flooring market. Two-thirds of this market in the UK is residential and therefore reliant on consumers choosing to spend on home improvements. As a "big ticket", discretionary purchase, flooring has been one of the weakest performing categories of consumer spending, suffering from heavy decline1. This reflects both the impact of the cost-of-living crisis on disposable incomes and the decline in housing transactions (20% in 2023 and a further 8% in Q1 20242). This has resulted in a sustained decline in market volume over the last three years with the Group estimating a further 10-15% market decline so far in 2024, resulting in a cumulative decline of 25% since 2019.

After such a sustained period of decline, some tentative green shoots are starting to emerge. We have seen improvement in recent months in Headlam's UK business, albeit with revenues remaining in decline. Furthermore, whilst the market has not yet shown any indication of improvement, the lead indicators are looking more positive; housing transactions have been increasing year-on-year for four months in a row, inflation has declined, disposable incomes are rising3 and consumer confidence is picking up4. This is anticipated to translate into improved consumer spending on home improvements, albeit the timing of that recovery remains uncertain.

As the clear UK market leader, drawing on a heritage of over 30 years industry knowledge and expertise, a large and diverse customer base, and long-established supplier relationships, Headlam has a unique long- term opportunity. With the broadest and largest product range and the most comprehensive and scaled delivery and collection network across the UK, recent years have seen the Group strategically refocus to broaden the customer base of the business to provide incremental growth opportunities. This enables us to service an increasingly diverse range of customer types, spanning independent retailers, tradespeople, major multiple retailers, housebuilders, online retailers and contractors.

Good progress has been made in establishing these foundations for long term growth and robust sustainable financial performance, but the scale of the decline in the flooring market has weighed heavily on our core distribution business, offsetting the growth we have achieved in our Trade Counters and from Larger Customers. Consequently, we are accelerating our strategy with a 2-year transformation plan to make Headlam a more effective organisation by simplifying our offer to customers. As we unlock cash and costs from our business, we will further invest in the proposition across all our customer groups in order to grow market share.

Headlam's strategy

To maintain our vision to be the leading, most trusted experts in flooring, we have a five-pillar strategy, that was launched in 2022:

1. Maximising sales through great service, solutions, pricing and range
2. Developing new opportunities for future growth
3. Improving our operational capabilities and effectiveness
4. Leading on sustainability and environmental responsibility
5. Making Headlam a great place to work

1. Barclays Consumer Spending Report
2. UK residential property transactions data, provided by HMRC
3. Asda income tracker
4. GfK's Consumer Confidence Index

which we will maintain and enhance, including through growing the trade counter estate to around 100 outlets in the next couple of years.

The configuration of the network of distribution centres has developed through Headlam's acquisitions of regional flooring distribution businesses in the 1990s and 2000s. In recent years we have made good progress in optimising and integrating elements of this network by creating regional hubs and by consolidating transport operations. However, we will now be accelerating this element of our strategy, to more rapidly simplify our network.

Earlier this year we optimised our operations in North West England by transferring stock out of our Stockport distribution centre and opening up a cross-dock facility nearby. We subsequently sold the Stockport site for £7.5 million, a 10% premium to the most recent valuation undertaken in January 2023, and generated a £3.2 million profit on disposal.

Over the next six months we will be undertaking further optimisation activity including:

• Opening a new distribution centre in Rayleigh (Essex) and a new cross-dock facility in Ipswich to enable us to better serve our customers in the South East of England. As a consequence of this, our Ipswich distribution centre will become a surplus property and will be sold. This results in an improved network for customer service at slightly lower operating cost.
• Consolidating our two distribution centres in Scotland, resulting in our Uddingston site becoming a surplus property.

Headlam owns both the Ipswich and Uddingston properties, and both sites have recently been put on the market. We are actively engaging with buyers and offers are already being received. Collectively these properties were valued in January 2023 at £20.7 million.

Our simplified network planning is aligned with, and continues to prioritise, our commitment to leading customer service, unparalleled scale, growth ambitions and anticipation of market recovery. We will continue to review, and provide regular updates on, our network as we continually look to enhance customer service and improve operational efficiency.

3. Simplify our operations

The simplification of our sales structure and our network significantly reduces complexity in supporting processes and functions. This reduces the cost of those operations as well as improving quality and control. It also benefits the ongoing ERP replacement programme, by simplifying processes before transferring over to the new platform in the next 2-3 years.

For example, by customers having fewer accounts with Headlam, due to the simplification into the single Mercado proposition, they will have consolidated credit limits and invoices, and more dedicated ASM support, making Headlam easier to do business with. In turn, this simplification results in less complicated back-office operations.

By consolidating 32 trading businesses into a single, national Mercado business, we have also developed a unified product file. This will be supported by a centralised buying and stock control team, which enables us to maintain a unified, national product file (whilst retaining flexibility for local range requirements). The benefits of this are a reduction in product duplication, simplification of supplier interaction, optimisation of stock ordering (by centrally co-ordinating how much to buy and where to locate it) and optimisation of stock holding (for example, by holding slower-moving ranges in a small number of central locations rather than across all distribution centres).

Milestones and targets for the 2-year transformation plan

This transformation plan has significant benefits for our key stakeholders:

• Transforms the business by simplifying the market approach, network and operations, improving our profitability and releasing capital from more efficient working capital management and the disposal of non-core freehold property.
• Leverages our track record of success in integrating and consolidating operational practices that have delivered cost efficiencies and improved service; in recent years we have successfully consolidated our transport operations and simplified our distribution network in the North West of England.
• Combined with the ongoing implementation of our long-term strategy, provides multiple opportunities for market share growth.

Our overall objectives for the transformation plan, along with specific milestones and targets are set out below:

The targeted £70m of one-off cash benefit comprises proceeds from the disposal of surplus property and optimisation of working capital and is before c.£25 million of one-off cash costs of implementing the transformation programme.

In summary, by the acceleration of our strategy through this 2-year transformation plan, we are committed to delivering continued growth, maintaining our position as the UK's number one flooring distributor, and positioning the business to be at the forefront of market recovery and future growth opportunities as we remain focussed on delivering value to our shareholders and wider stakeholders.

Financial performance in H1 2024

Group revenue was down 11.8% year-on-year at £292.5 million (H1 2023: £331.8 million); UK revenue declined by 11.3% and Continental Europe declined by 15.9%. Revenue continued to grow in Trade Counters and Larger Customers but this was more than offset by the impact on our core business of market weakness in the UK, France and Netherlands. The impact of this decline in volume, combined with a lack of price inflation and elevated cost inflation (albeit lower than in the previous year) resulted in an Underlying Loss Before Tax of £16.4 million (H1 2023: £6.0 million profit).

Cash generation was strong with £18.0 million of positive Underlying Operating Cash Flow (H1 2023: £19.8

million) and Net Debt reduced slightly to £28.3 million (31 December 2023: £29.6 million). The Group had £72.2 million of cash and undrawn facilities available at the end of the Period.

Full detail of the Group's financial performance is given in the Chief Financial Officer's Review, including a breakdown of the movement in year-on-year profit.

Operational and strategic progress in H1 2024

We have made good progress in the first half of the year, although the outputs have been masked by the impact of the external headwinds on overall financial performance. We have continued to invest selectively and carefully in people, in the network and infrastructure, and in customer-facing improvements; all supporting growth, efficiency, and customer service.

The key strategic growth initiatives delivered good results: revenue from Larger Customers and Trade Counters in the UK was up 2% and 7%, respectively, compared with 2023. This was offset by the impact of the heavy market decline, resulting in Regional Distribution revenue declining 19%, taking the overall UK revenue decline to 11.3%. In Continental Europe the market was even weaker in the Period and our revenues declined 15.9%.

More detail on the performance and operational progress in set out in the Chief Financial Officer's Review. A summary of the key points is set out below:

Digital & IT transformation

Following the successful launch of the new Headlam Group website last year, we have further optimised it during the Period, to acquire new customers and sales, and showcasing the best of what Headlam has to offer across our products, services and solutions. We have also enhanced our transactional B2B websites, to improve our capability in clearance and product up-selling and cross-selling.

In recent weeks the focus has been on preparation for launch of our new Mercado website and accompanying App, featuring the widest range of products and exciting new features.

We have also developed a new product information portal for our colleagues; providing easily accessible information on our ranges, to help our customers make informed purchasing decisions.

To support the digital improvements, and to provide a more agile and flexible IT platform to support the future growth of the business, we made the decision last year to replace the core IT system used in the UK. This is progressing well and will take place over the next 2-3 years. After a thorough tender process we expect to select the software and systems integrator in the coming weeks. The transformation plan outlined above provides significant benefits for the ERP change, by simplifying our business processes prior to transitioning across to the new platform.

Sustainability and our people

We have made good progress on our sustainability agenda during the Period. From an environmental perspective, we completed our solar panel investment programme in Q1 with the installation at our largest distribution centre, in Coleshill. We have seen a meaningful reduction in electricity consumption in the Period. The implementation of dynamic route planning in 2023 has also enabled us to optimise the mileage driven for customer deliveries, resulting in a reduction in fuel consumption in 2024. We have commenced a trial of a flooring take-back scheme in our Northampton trade counter working with a waste management and recycling partner. The trial has provided valuable information about volumes, product mix, logistics and customer behaviours which we will use to assess the options for a nationwide take-back programme.

We have rolled out leadership / management development training and continued our comprehensive safety training; with the majority of our managers having now attended our "See it, Say it" programme.

In response to an industry shortage of flooring fitters, we have commenced our first trainee fitter programme with the support of trainers across our supply chain. This programme is based in Leeds and involves Headlam employing trainee fitters for a period of six months whilst they become fully trained. We will then work with our customers to find them a permanent role in their businesses. By taking this industry- leading role we are helping to provide our customers with a talent pool of skilled individuals in order to sustain and grow their businesses.

Current trading and outlook

Group revenue for July and August was 8.4% below last year, compared to 11.8% in the first six months of the year. This slight improvement appears to be principally due to actions we have taken, rather than the market, which has remained very weak. The UK data on consumer spending on home improvements during the summer has showed little change compared to earlier in the year and in Continental Europe the market appears to have weakened more recently.

Looking ahead, the lead indicators for consumer spending on home improvements are more positive, with housing transactions back in growth, consumer confidence improving and inflation and interest rates declining. However, the timing of recovery remains uncertain and recent market data suggests this recovery will, again, be later than previously anticipated. We now expect limited change in market conditions throughout most of 2024, with a return to growth at some point during 2025, albeit it remains difficult to forecast consumer spending on home improvements.

We expect the transformation plan benefits to start to take effect in 2025, with the full annual profit benefit to be achieved as an exit run-rate at the end of the two-year programme.

The Board remains confident in the long-term outlook for Headlam, which is underpinned by a combination of:

• Continued implementation of the existing strategy to broaden the base of the business to address more customer segments, whilst continuing to invest in providing leading service to our independent retailer customers.
• The transformation plan, with benefits starting to take effect in 2025 and a full annual profit benefit to be achieved as an exit run-rate at the end of the two-year programme.
• Market recovery, recognising that the market is now at least 25% lower than in 2019 in volume terms.

There is no change to the illustrative long-term revenue ambition for the Group that we set out in March 2024: a range of £900 million to £1 billion of revenue, driven by the combination of the above factors.