Welcome to the Headlam Group Full Year 2023 Results webinar. We will now play a recording of the full year results given by Chris Payne, CEO, and Adam Phillips, CFO. Chris and Adam are with us and will answer questions straight after the presentation, and written questions can be submitted at any time by clicking on the Q&A button. This webinar is being recorded.
Hello, and welcome to Headlam's 2023 year-end results presentation. I'm Chris Payne, the Chief Executive, and I'm joined in our lovely Tamworth showroom, which is for our branded business unit, by Adam Phillips, our CFO. So today, we're going to cover an introduction and an overview of the 2023 year, and a market update. Adam's going to cover 2023 financial performance in more detail. Then I'll pick up a strategic and operational update before finishing with an outlook to the years ahead and a summary of the performance. So, Headlam on a page, About Us. Been around for 30+ years now. We've got a market-leading position in UK distribution.
We're also based in territories in France and the Netherlands, and we've got this deep knowledge and experience of working with customers across a number of channels, and I've referred to a sort of broadening business base on this slide this year. So, we've been developing our business into trade counters and larger customers, as well as the traditional, independent retailers and fitters that we've serviced for, for many, many years. We have a market-leading stockholding and range of product that we offer to our customers. And as I said, we've been developing our trade counter and larger customer business over the last couple of years, and I'll provide a bit more of an update on how we're progressing with that area very shortly.
So just turning to 2023, an overview before Adam provides a bit more detail on the year we've just finished. There are really sort of four areas that I want to cover. Firstly, the strategic areas of growth into our trade counters and the larger customers has really delivered in 2023. We saw significant revenue increase in our larger customers at over 26% year-on-year, and we saw trade counters also delivering at over 8% growth year-on-year. Within the regional distribution business, I think that was a little bit more challenged as the cost of living crisis that we've seen in the U.K. and also the reduction in consumer spending in the U.K. market took its toll on the regional distribution business, and we saw that decline during 2023, but a strong performance in our own branded business.
The second area is just to reflect on the reduction in profits that were driven by that macro constraint that we saw in the UK and indeed overseas as well. So we saw a reduction in our underlying profit performance, driven by these sort of headwinds, and Adam will describe a little bit more detail about the reasons for those shortly. I think the third element, though, is a real strong operating cash performance. We saw operating cash of GBP 26 million in the year, which is much higher than we've seen in the last couple of years, and that was complemented also by the sale of freehold property at Kidderminster, where we received the proceeds from the insurance claim last year. That strong cash performance enabled us to do a couple of things, really.
One was invest in the business, invest for the future by continuing this rollout of trade counters, and indeed in improvements in the regional distribution business, which we'll come onto. But secondly, also to underpin some shareholder returns that we're able to offer this year and indeed offer, as we did at the half year, a stronger dividend cover, which we've just announced at GBP 0.06 for the final dividend for 2023. Additional slide this year. I just wanted to provide a bit more flavor about what's happening in the market and the macro for the flooring market for the UK in 2023. So this sort of backdrop of macro challenges that I referred to just now, there are three data points that we tend to try and follow.
Firstly, consumer confidence, and we can see that that's had quite a negative effect on the U.K. market in 2023. In fact, U.K. consumer confidence was at its lowest ebb since the financial crisis of 2008. Housing transactions, typically, there is quite a close affinity between the number of housing transactions that are happening in the U.K., and the demand for flooring and hence our performance. And again, we've seen the housing transactions at a relatively historic low for 2023, and when I look forward, I think that's also going to remain subdued for 2024. And then lastly, it's the spending on home improvements and RMI. And again, we follow people like Barclaycard data, which is shown for the final quarter of 2023 and continuing into 2024.
You know, -8%-9% year-on-year reduction in spend on home improvements and the RMI spend also down 11% in 2023. So it gives you a feel of the market constraints that we've seen, impacting flooring demand in the UK. I'm now going to hand over to Adam, who's going to cover our 2023 performance in a little bit more detail.
Thanks, Chris. I'll talk through a few slides on the P&L, cash flow, and balance sheet for the year, starting with an overview of the key numbers. Revenue declined very slightly at -1.1%. This comprised flat year-on-year revenue in the UK and a 7.7% decline in Continental Europe. On the next slide, I'll take you through a more detailed breakdown of those revenue movements. Gross margin was 31.7%, a return back to the pre-2021 average of 31%-32%, and that reflected the unwind of the temporary margin benefit in 2022 from the significant manufacturer-led price increases in that year.... underlying operating profit of GBP 16.1 million compared to GBP 39.2 million in the previous year, and I'll walk through the key movements on a later slide.
In summary, that reduction reflects lower volumes, the unwind of the temporary margin benefit in 2022, and high operating cost inflation, partially offset by mitigating actions. Cash generation was good, GBP 26 million of positive underlying operating cash flow, roughly double the amount generated in the previous year and higher than either of the previous two years. Net debt pre-lease liabilities of GBP 29.6 million increased by GBP 31.4 million from the end of the previous year, reflecting a combination of investments for the future, with GBP 18 million of CapEx and GBP 6 million of acquisitions and GBP 17 million of shareholder returns, comprising ordinary dividends and the completion of the share buyback program in March. Leverage at the end of 2023 was 1.3 times.
Finally, as Chris mentioned, the board has recommended a final dividend of GBP 0.06, taking the full-year dividend to GBP 0.10, and this represents cover of 1.1 times, which is lower than our long-term average cover policy of around 2 times. In arriving at that decision to lower that cover, the board has considered the medium-term outlook, which is positive given the expected improvement in the market, combined with the maturity of recent strategic investments. The board has also considered the strong operating cash generated from the business and the cash proceeds from insurance settlement to property sales, both in the year just gone and the respective property sales opportunities planned in the year ahead.
Turning to revenue in a bit more detail then, and on this slide, we've broken down the UK revenue into the different channels, and Chris will talk more about the performance of each of these in a few minutes. The key headlines being that the strategic growth initiatives of larger customers and trade counters performed very well, with revenue up 26% and 8.5%, respectively. As Chris mentioned, this offset the 7% decline in revenue in regional distribution, which was impacted by the weak residential market, with consumer spending on home improvements in high single-digit decline through the year, particularly at the latter end of the year. Continental Europe was also impacted by weak residential volume, particularly in the Netherlands.
So on this next slide here, the chart shows the monthly year-on-year volume movement in our UK distribution business from the start of 2022 through to the end of 2023. And as you can see, there'd been an improving trend from Q2 2022 all the way through until about the autumn of 2023, and it had looked as though our volumes could return to growth in Q4. However, we saw a marked deterioration from September, which was mirrored in the flooring market, in consumer spending data on home improvements and across other related sectors. This weakness persisted for the rest of the year, and Chris will talk later about what we've seen so far in 2024. So moving on to the income statement, and I've covered the revenue and margin movements already.
Moving on to costs and the total operating costs, which is the combination of the distribution and administration lines in this table, grew by 6.3% in total and 3.8% on a like-for-like basis when you strip out the costs inherited from the three businesses we acquired in the year. This increase reflects the combination of cost inflation and strategic investments, offset by cost savings and efficiencies. Cost inflation was a GBP 10 million headwind in the year, which is more than double what we would typically expect to see in a normal year, and reflected elevated pay inflation of an average 7% and electricity pricing more than doubling year-on-year.
Operating profit declined by GBP 23.1 million to GBP 16.1 million, reflecting lower volume, the unwind of the temporary margin benefit in 2022, and also strategic investments in cost inflation. And all of that was partially offset by mitigating actions, and I'll show this on a year-on-year bridge in a moment. So moving down the P&L, interest costs increased GBP 3 million to GBP 5.1 million, reflecting higher average borrowings and increases in the base rate. Non-underlying items were a GBP 3.9 million expense, although were a significant cash inflow, and I've got a breakdown of those non-underlying items, which I'll take you through shortly. Finally, at the bottom of the table, as I mentioned earlier, the board has recommended a final dividend of GBP 0.06, taking the full year to GBP 0.10. Turning to a bridge of the year-on-year operating profit.
Volume in the UK business drove a GBP 11 million adverse impact in the year, and this is the net of volume growth from large customers and trade counters, offset by a decline in the regional distribution business. The unwind of the temporary margin benefit last year from manufacturer price rises had a GBP 5 million impact in 2023, and this had been fully unwound by the end of Q3 and is no longer a headwind going forward. Strategic investments introduced an incremental GBP 3.9 million of profit dilution, as expected, driven principally by the trade counter investment program. While the trade counters are performing in line with their business case, as planned, any newly invested site is loss-making initially and breaks even during year two. As such, the trade counter rollout is diluted to profit during the investment phase and becomes profit accretive thereafter.
The next bar on this chart is cost inflation, which was a GBP 10.2 million headwind, as I mentioned earlier, and this is double what we'd expect, as I said, in a normal year. As we look into the year ahead, pay inflation in 2024, while still above the long-term average, is lower than what we've seen in 2023. We should see a lower kind of cost inflation headwind, going into the next year. Continental Europe saw a significant volume decline, which drove a GBP 3.1 million reduction in profit generated by those businesses. And then finally, cost mitigations then. So all of these headwinds were partially offset by GBP 10.3 million benefit from mitigating actions.
Just moving on to those mitigating actions in a bit more detail, and these build on previous efficiency initiatives and were supplemented in the year by specific and decisive actions we took in response to the market conditions. These included volume and margin-related actions, including some targeted promotional activity, particularly during the peak November period, negotiations with the suppliers, and also some targeted price increases earlier in the year. Cost actions included flexing operational headcount to reflect lower volumes, and this was achieved by the non-replacement of vacancies rather than through redundancies. We completed the transport centralization and dynamic route planning projects during the year, which reduces transport costs and has an environmental benefit from lower emissions.
We renegotiated fuel contracts covering petrol, diesel, and electricity, and we also had a benefit from a reduction in the bad debt provision, partially reflecting the improvements made in the profile of receivables through good cash collection in the year. All of these actions are supplemented by general cost control actions throughout the year. As mentioned before, in total, these mitigating actions provided GBP 10.3 million of benefit in 2023. Moving on to non-underlying items, these totaled an expense in the P&L of GBP 3.9 million in 2023, but generated GBP 6.5 million of cash inflow. The first row in the table is the amortization of acquired intangibles and other acquisition-related costs, which we consistently reflect in non-underlying items. These were slightly higher year-on-year, reflecting the three acquisitions.
The final row in the table relates to business restructuring. Most of this was non-cash, but if I take the cash element first of all, which totaled GBP 3.4 million, this comprised severance payments as part of some targeted cost savings. Vehicle lease termination costs, where we've been able to reduce vehicle requirements through transport efficiencies. And consultancy costs incurred as part of work performed on the long-term growth initiatives. The non-cash costs of GBP 7.9 million include GBP 5 million in respect of writing down the value of Catalyst software , following the decision to replace the ERP. I will talk more about that later.
The rest relates to provisions in respect of network optimization, and we're currently in the process of consolidating our Stockport distribution center into one of our other sites in the North of England and replacing the Stockport site with a small cross-dock facility. We own the Stockport property, and we expect to sell that during the second half of 2024. Turning to the cash flow, underlying operating cash flow was strong at GBP 26 million, and as mentioned before, that was significantly ahead of both the previous two years. Looking at working capital, stock and receivables were both well controlled and were down year-over-year. Payables decreased by GBP 24 million, partially reflecting that lower stock, but also reflecting timing of supplier payments, of which an element will reverse in 2024.
Just moving down the cash flow, moving below operating cash flow, acquisitions total of cash outflow of GBP 6.1 million in the year, comprising the acquisition of Melrose in January for GBP 3.7 million, followed by two small acquisitions in H2. Capital investment was GBP 18.2 million, and I'll cover that separately on the next slide. Lease payments of GBP 15.1 million were slightly up year-over-year, reflecting new leases for trade counters. There were GBP 17.4 million of shareholder returns in the period, comprising GBP 12.2 million of ordinary dividends and GBP 5.2 million in respect of the share buyback program that completed in March 2023. And finally, at the bottom of the cash flow are the non-underlying items.
We had a net GBP 6.5 million inflow on non-underlying items, which comprised a GBP 10.4 million of cash inflow from the Kidderminster insurance settlement and that subsequent sale of the land, offset by GBP 3.9 million of non-underlying cash costs, as set out on that previous slide. So the net cash flow before movement in borrowing was a GBP 31.3 million outflow, and that represented a combination of the strong underlying operating cash flow, principally offset by investments in CapEx, acquisitions, and shareholder returns. Taking a look at CapEx in a bit more detail then. So 2023 was a busy year for investment in in growth areas, in efficiencies, and in replenishment and improvement in our regional distribution business.
In total, we invested GBP 18.2 million, and we expect 2023 to be a peak year for CapEx, dropping to around GBP 12 million in 2024, and then to drop further over the medium term. We've been investing GBP 5-6 million a year in trade counters from 2022, and we expect this to be completed in 2025, culminating in a network of around 100 sites. Headlam's balance sheet strength is underpinned by a freehold property portfolio, valued in early 2023 at GBP 149 million, and net positive working capital of over GBP 100 million. And there's significant liquidity headroom, with over GBP 70 million of cash and undrawn facilities available at the end of December 2023. Net debt, excluding leases, was GBP 29.6 million at the end of December, and that represented 1.3 times EBITDA.
On this chart here. This is something we've presented before, and it shows the daily net debt balances, and this illustrates the relatively small peak-to-trough swing in the net debt balance within each month or full year period. I'll now hand you back to Chris, who'll talk you through the strategic and operational update.
Thanks, Adam.
... So a couple of slides which are really reminders. So firstly, to look at the market opportunity, which we see this as around GBP 3 billion worth of distributed priced opportunity in the UK market. And we've shown up here the different types of customers that we service. So on the left-hand side of the slide is our traditional retailers and independent fitters, where we've typically had a high level of market penetration, and then going across to the right, through the contractors, the multiple retailers, the larger house builders, and ultimately the online customers, where we've got a lower relative share. So GBP 3 billion worth of UK market opportunity. This slide, effectively strategy on a page for Headlam, and I've talked about this before, and again, as a reminder, there are five areas of our strategy.
The first one, on the left-hand side of the page, talks to service and product. So this is about offering great service to our customers, the right products at the right time. The second element of our strategy is around opportunity for growth, and this is where we've seen the broadening of our business into the trade counters and the key accounts and the other areas that I'll cover shortly. The third area of our strategy really talks to effectiveness and efficiency, and also utilization of digital capability to improve our offering to our customers. Then finally, the fourth and fifth areas of our strategy talk to sustainability and our ESG strategy, which I've spoken at length about previously, and Adam will cover shortly. Indeed, investment in people are making Headlam a great place for our colleagues to work.
So those are our five areas of strategy, and I'm going to provide some updates on the customer-facing elements and then hand over to Adam, who's going to talk about some of the digital developments we've been making, and our ESG and sustainability areas as well. So I mentioned this sort of broadening the business base, and that's a theme that I've mentioned before, and it will continue to be so. So in the past, as I mentioned, we typically were focused very heavily on the regional distribution businesses and the independent retailers, and we've been looking at broadening our business to offer services to other parts of the market.
And indeed, at the bottom of this slide, I've expressed the sort of digital and e-commerce development that we've been going through in the last year and will continue to be a feature going forward as we offer new channels for our customers to engage with us. So this is really a reminder slide that there are three main parts to our business: the regional distribution business, which is utilizing the hubs and centers around the country, the trade counters, which Adam mentioned earlier, remain an investment focus for us going forward, and I'll cover the progress on that in a moment. And then larger customers, where we've seen the fastest growth in our business as we offer service and bespoke service to larger customers who need a different solution.
Focusing on regional distribution first, this is the area of the business where we've seen probably the most constraints driven by the market tightening and the consumer sentiment weakening that we referred to earlier. We saw a 7% decline in revenue in 2023, and I mentioned that's really driven by the market weakness. But within that period, we also did see the focus on our own branded business, and I mentioned we're currently in our Tamworth customer site aimed at branded businesses. In this area, we did see some growth, and this was our investment that we've made in our Everyroom business, in particular. Lifestyle is another one of our key brands that we've invested in this year, and you can see the benefits of that.
So we were able to actually generate some growth in our own brand business among the backdrop of a weak residential demand. At the same time, we were able to invest in this side of the business, so we've continued the investment in new equipment, and I've mentioned this before, but new cutting equipment, new sortation, this is all aimed at improving customer service, which is critical to success, in this space. And indeed, reflecting some of the investments in, solar panels and the telematics refers to, the investment in the vehicles and the transport network, which resulted in both cost reductions and a carbon reduction through the use of smart technology on our vehicles. So some investments made in regional distribution, despite the tough market that we've seen during 2023. So just turning to trade counters.
We've put a chart on here which shows you what the projected number of trade counters are likely to look like from the end of 2023 through 2024 and 2025. Adam mentioned we're targeting around about 100 at some point during 2025, and this is where we've seen a real solid level of growth as we put down more space. Now they are an investment. We have to fit them out before we take revenues. But remember, these trade counters also will incorporate the refurbishment or relocation of existing sites. So this isn't simply about putting new space down, it's also about investing in the people, the sites, the products, the look and feel of the trade counters for the existing estate as well.
We have seen these cohort of sites perform in line with the business case that we set out a little while ago, and that's despite the market weakness. So that's really encouraging that these new locations are performing in line with expectation. And as we indicated, it will take a number of years for these to reach maturity. And as we've rolled out these sites across 2023, we've learned as we've gone, so we've been able to reduce the capital spend at each of the locations. And also we've learned how to make quick impact on driving customers and get that revenue moving more quickly where we open up in new towns and cities across the country. So larger customers, as a reminder, we categorise sort of three main types of larger customer. We've got the multiple retailers, we've got the building merchants-...
Then the third area is the house builders, and we've talked about these before, and we've been developing our business in each of those three types of larger customer. This is really about defining and describing a service that makes sense for each customer on a customer-by-customer basis. Now, that could be as simple as offering a logistics service for some customers that need support around the type of flooring product that we distribute on their behalf. Other customers, it might actually be selecting products and ranges from multiple manufacturers and packaging them up for a U.K.-wide logistics service. Again, it can be different depending on the needs of each of the customers. We've had success in all three of those areas.
In the year, we've developed new customers in all three areas, the multiple retailers, the building merchants, and indeed, in house building, and we've increased our share of spend with each of those areas, hence the strong performance in year. Again, we've set ourselves some challenging targets for growth in 2024. I'm going to hand over to Adam, who's going to cover an update on digital and e-commerce development, and also the changes we're making in IT.
Thanks, Chris. As Chris has outlined, ongoing digital and IT investment are key to our overall strategy. During 2023, we made a number of digital and IT improvements, including launching the first Headlam brand website to better showcase Headlam's services, knowledge, and products. We also relaunched two B2B2C websites. Now, these are websites for our own product brands, where an end consumer can go and take a look at our products, order samples, and then find a retailer near to them. During the year, we also made the decision to replace the group's core IT system to a more agile and flexible platform to support future growth. This will be a three-year program using a modular approach to enable smooth transition and minimize disruption.
Moving on to ESG, where we've made good progress in the year, and taking each of the E, S, and G in turn, from an environmental perspective, we've made significant investments in technology to reduce our carbon footprint through the installation of solar panels and the introduction of dynamic route planning for deliveries, which, combined with a transport consolidation project, has reduced mileage by around 20% a year and saving around 1,300 tons of carbon emissions. We continued to transition our non-commercial fleet away from diesel and petrol, and over 85% of that fleet is now hybrid or full electric. We launched four sustainable product ranges during the year, and we conducted green energy and recycling workshops with our colleagues.
From a social perspective, we made progress in embedding a safety culture and introduced a new group health and safety director role during the year. There's also been considerable steps taken to develop training inductions, creating an inclusion and wellbeing strategy, and during the year, we conducted the first colleague engagement survey. Finally, onto the G, we have further strengthened the supplier review and onboarding process, and this has been supplemented by the addition of an ethical sourcing specialist. We actively engage with a wide variety of stakeholders, taking a leadership role in our market. Across all areas of the business, we've continued to test and improve our processes against external standards, including ISO, Sedex, FORS, et cetera. Moving on to an update on our continental European businesses.
These contributed about GBP 80 million of revenue in 2023, and about two-thirds of that is in France and about one-third from our two businesses in the Netherlands. The revenue decline across these businesses was 7.7% in 2023, particularly driven by the Netherlands, where the market has been very weak. Our French business has a network of sites across the country that act like trade counters and showrooms, and the business has returned to profitability and has a strong managing director who joined during 2023 and has settled in well. And the performance of own brand ranges has been a highlight, and these now constitute over 40% of revenue in our French business. We've two businesses in the Netherlands, and Headlam BV, on the middle of the slide here, is based in the east of the country and has a residential focus.
It has an established curtain and blinds offer to complement flooring, and looking ahead, a key development in this business is the transition to a new IT platform, which will be shared with our other Dutch business, Dersimo, to facilitate closer working between those two businesses. Finally, on the right-hand side is Dersimo, and this is located in the west of the country and has a commercial focus. This business has traditionally had only a flooring focus but has been supplemented more recently with curtains and blinds through agency agreements and also through a small acquisition in 2023. There's a good opportunity in Dersimo to expand own brand ranges, which will be a key focus for the year ahead. I'll now hand you back to Chris for the summary and outlook.
Thanks, Adam. So outlook, there are three components really to the outlook. The first one is very short term and the trading that we've seen since the end of 2023, and I think, not surprisingly, many businesses who are facing into the U.K. consumer are seeing this effect of a continued weakness, which has affected trading in the early weeks of 2024, and we've seen negative volumes continue from the end of 2023. I think the second element of the outlook is really the effect on 2024, and we've seen a number of the macro factors that I described earlier continue to show weakness now forecast for the rest of 2024, and it sort of feels like a delayed recovery that had been expected during 2024. Feels now as if it's moving to the right and a bit later in 2024...
I think the third element of our outlook remains the medium-term positivity of this business, you know, where we can see some of the volume recovery that we anticipate happening in RMI spend, and also the maturity of our strategic investments in both trade counters and key accounts, and our own branded business unit, all supported by that digital channel development that Adam described. I think that's where the real value and growth is going to come from in this business over the medium term. Lots of reasons why that medium-term recovery remains positive. In the past, we've talked about, and indeed in these slides, we've talked about the ambition to drive the larger customers and the trade counters to GBP 200 million worth of revenue. What would the recovery of the regional business look like?
We've showed a slide here, which shows what that model might look like with some recovery, not full recovery, but some recovery in RMI spend in the UK across the regional distribution business, and thus achieving the target revenue that we set out for large customers and trade counters. So you can see us approaching GBP 1 billion worth of sales, which we think Headlam can achieve. So just in summary, then, I think, you know, the business remains incredibly resilient in a very challenging market, and that challenging market has continued into 2024, and we expect that to remain subdued for a period, as many businesses have been reporting in recent times. But I think it is important for us to reflect that the business remains well-positioned. We've got this strong balance sheet behind us.
The broadening of the business that I described earlier will serve us well for the future. When the recovery happens, the recovery will happen across not just the traditional areas that Headlam has been strong in, but also the new areas of the business that we've been developing. It will show some meaningful revenue and profit growth over the medium term. Thanks for joining the presentation today, and I will now take some questions.
To ask your question, click on the Q&A button and type your question. The first question is: Can you describe the components of the distribution segment and the degree to which they have leverage to higher volumes?
Yeah, morning, everybody. Yeah, I suppose the distribution segment is relatively simple. I mean, it's take an order, cut it, process it, ship it, and then collect the cash. As we've described over the last few years, we've done a couple of things. One is to flex our ability and cost base to meet that sort of drop in demand level. So we've been able to flex our cost base down, but also we've applied a degree of efficiency metrics, in particular around the transport network. So becoming a nationwide network, nationwide delivery network was an important step, and to use technology in order to do that has meant that we've retained the ability to flex up when demand does recover.
So taking that answer in the stages, you know, we've got now two or three methods of taking the order. We can now take orders digitally in a way that we couldn't before. So we've got capacity to take and expand our order-taking requirement. We've retained our sales offices, the traditional way of receiving orders, so that's flexible. Processing the orders, so cutting and wrapping the product for distribution. Now, we've consolidated our network, but we've invested in capacity, and I think that's an important point to note, that we've got capacity in the network to flex up for scale. We've invested in new sortation and cutting equipment so that we can scale as required. And then, as I said, the transportation element, I've covered through the use of technology and dynamic routing.
It means that we can scale when the demand requires it. Effectively, we've got a more efficient network than we had before. Now, clearly, that comes with its challenges. You still need to, where you've reached capacity constraints, you need to be able to flex up, variable labor and potentially take on additional vehicle assets, but for the most part, we're able to flex the capacity as demand recovers.
Great. Thank you very much. Moving on to net debt, what was the true average net debt in half two?
Hi. Good morning, everyone. Yeah, so our average net debt last year was GBP 34 million. So, you know, and as we outlined on that chart, that shows the movements during the year, we have a relatively small peak-to-trough movement, so the average pretty close to our year end. There were a couple of moving parts as we approached the year end. Obviously, had about GBP 11 million of cash inflow on the Kidderminster insurance and then the sale of the land, which was an inflow. And then on the other side, we had some timing supply and payments, which moved the other way, but all in all, very close year-end net debt to our average net debt position.
Tremendous. Thank you very much. Do you insure your debt?
Do we insure it? No, we don't, no.
Thank you. Regarding the interest charge, how much of the GBP 3.8 million H2 cash interest charge was interest on borrowings? Does the GBP 3.8 million include a fee for waiving the interest cover covenant?
So on our interest cash costs, just on about half of that is around interest on leases. So we've got leased equipment and sites, and then the other roughly a half is then interest on borrowings. In terms of covenants, we haven't waived any covenants in years, so there's no costs associated with that.
Thank you very much. Looking at working capital, it's indicated that about GBP 10 million of the cash outflow into creditors will reverse in 2024. Should we assume that about GBP 10 million of total net working capital inflow in 2024?
... So that's about right. On payables, therefore, we'd expect probably somewhere around the GBP 10 million inflow. The question is then what happens on stock and receivables, and note that partly depends on where the market is and the shape of the market recovery. But overall, I would expect that to be broadly about right, and I could expect a small working capital inflow for the year.
Great, thank you very much. And looking at the ERP system, what's the level of ERP investment? The questioner says that there was an exceptional GBP 3 million in 2024. What do you expect in 2025 and 2026?
Yeah, pretty much the same. So I'd expect somewhere, it might be slightly higher, GBP 25-GBP 26, but around that sort of mark. So GBP 3-GBP 4, you know, maybe GBP 5, depending on timing of the investment. But that's, there's no change to our expected IT cash kind of cost over the next few years from what we were previously expecting. So we were previously expecting some level of CapEx, and it's broadly in line with that. It'll show up as a non-underlying expense in the P&L rather than a capitalized cost, just the way the accounting works, as it's a cloud-based software as a solution, but as a service. But yeah, very similar to what we were previously expecting around IT spend.
Great, and that includes all IT spend, there's no other IT spend?
Yeah. So we've got development costs. So that GBP 3 million in 2024 is specifically around development of the new platform. We've obviously got ongoing IT, running costs as well. But that GBP 3 million particularly is around developing the new platform. But we already had in our plans some assumed spend on, ongoing kind of development of existing and any new platforms. So, it's all broadly in line with what we previously expected.
Great, thank you very much. The liquidity in Headlam shares is limited, and your brokers don't distribute via Research Tree so retail investors were in the dark when your brokers changed the profit and earnings per share forecasts. Would you consider a broker with their notes available to private investors via a search tree which might help liquidity? If not, why not?
Yeah, it's a good question. Obviously, coverage has undergone changes over the last two years as the wider kind of equity research market has changed. You know, and we've sought to address that through retail webinars. We do a number of those a year. We try and make ourselves accessible and available. We know we've got a contact email address. People do contact us and email in, and we do take the time to reply. So, but, you know, we'll keep that under review. And we do endeavor to update the consensus on our website if there are any changes to broker forecasts so that, you know, everyone can have sight to those.
But, you know, we'll keep it under review, and we'll keep doing these retail webinars and making ourselves available.
Great. Thank you very much. OpEx to sales is today above 29% versus the historical levels of 25%-26%. What long-term OpEx to sales do you expect in different scenarios?
Yeah, we've mentioned this a couple of times in the past. There has been one or two shifts, I suppose, in the shape, the overall shape of the business as demand moves and changes. So going back to the last financial crisis, I think the operational cost base versus revenue was at a different level again. And I think there is an inbuilt level of whether it's compliance or wage inflation, that has resulted in a larger level of OpEx. And indeed, as volumes have declined, of course, with being an operationally leveraged business, it's despite all of the things I've said around capacity, clearly you are slightly less efficient as demand falls away.
So, the guidance we've given in the past has been that as volume comes back, we would expect our operational leverage to give us the benefit, and therefore, operational cost as a percentage of sales would drop. Now, I question whether it would get back to that longer-term historical past, just because the structure of the market and the way that wage inflation has worked through the system and indeed, the cost of compliance in modern-day living, whether that will mean that we do see a permanent reduction in that leverage ability, but we should see an improvement nonetheless as demand comes back.
Great, thank you very much. Was the CapEx in, for example, cutting tables for the regional trade, a routine replacement of end-of-life equipment, or does it offer a genuinely enhanced service in some way?
A bit of both. I've again mentioned this before. I think in the past, the business has not necessarily kept pace with the replacement cycle on much of its equipment, whether it's sort of forklift trucks, operational equipment, or whether it's sortation or cutting tables. So there is a degree of the need for us to replace existing equipment in the estate. Now, of course, when you make those replacements, you can also look to the future, and some of the sortation developments that we've put in place are aimed around efficiency and capacity. So I think there's a bit of an opportunity therefore for us to not replace like for like and to expand the opportunity to offer a more efficient and indeed accommodate more capacity. So it's some and some is the answer on that.
And indeed, of course, when you replace equipment, you also put in new safety features and, you know, guarding and various other things. So yeah, a bit of both.
... Great, thank you. In the last 5 years, CapEx has averaged GBP 13.5 million a year, a very substantial increase from less than GBP 4 million in the last 5 years. What's the reasonable run rate expectation for CapEx over the next 3-5 years? You might have referred to this, but has something structurally changed to make the business more capital intensive?
Maybe Adam can cover the kind of guidance on the future, but there have been two or three specific changes, and comments that I've provided in the past. We had, going back a few years, we had the one-off investment in the Ipswich development, which totaled GBP 26 million. And Adam's covered that in his CapEx slide, but that was a significant investment that was sort of out of the ordinary, if you like, in terms of run rate. So that's one item to note. The second item is, it comes back to that point I mentioned, which is, I think in the past, the business did not replace its equipment in a kind of timely way. So we've ended up with the need to replace a significant level of equipment over a relatively short period.
So there's a sort of slightly tightened level of replacement spend. And again, I've talked about that in the past. And I think the third element then is the investment in the expanded business space. And as we deploy the trade counter rollout program, we've again, previously quoted the number of around GBP 25 million worth of investment in trade counters over a multiple number of years. So those are the reasons why our run rate on capital spend has increased, and also why Adam published that slide on CapEx, because it talks to a rising profile which will decline, and then there is a long-term kind of, replacement cycle, if you like, of equipment, perhaps that, that Adam can give some guidance on.
Yeah, sure. So, I mean, the GBP 18 million in 2023 was very much a peak year, and you'll see on that slide that we presented, we expect that to come down to GBP 12 million in 2024. But that 12, as Chris explained, it still includes the investment phase on trade counters, and that's about GBP 5 million a year, GBP 5-6 million a year. So, and that will at the moment, the expectation is that will conclude in 2025, when we get to around about 100 sites, and then that GBP 5-6 million or so of CapEx will then drop out of that number. So you can kind of get a sense then that the ongoing run rate after we're out of that investment phase is in the single digits, on CapEx.
Great. Thank you very much. You report that competition in your core regional distribution business has heightened. Is this going to get worse, and should we be concerned about the growth of competitors?
There's no doubt that the market is competitive. I mean, all the data points that I've referred to and generally available in the marketplace, and I've used Barclaycard as a good kind of proxy for people's attitude to DIY, home improvement spend and RMI. You know, that has remained in negative territory, and it's opened this year in negative territory. So the market as a whole and flooring spend, as one of those categories, has declined in the year. Now, what we commissioned some market share analysis to complement that, and we can see that our market share has broadly remained flat. It's slightly positive, actually, for 2023, but it's broadly flat.
As you know, that probably highlights that, you know, we've grown a bit because of our expansion into larger customers and deployment of trade counters, which suggests that we may have shrunk a little bit in the regional distribution business, partly by the market and partly due to competition, I'm sure. That area has always been competitive, will remain competitive, and yeah, I don't see that changing as the market remains constrained. You know, people will be continuing to chase down those sales.
But as I said, our overall market share has increased, and that's part of the reason why the strategy is important, because as the spend returns to the market, you know, we're growing into new areas, and therefore we'll get the benefit of not only the recovery in the regional distribution business, but also in the expanded areas of our, of our contacts as well. And I think, you know, some of our competitors also have been putting down space. They've been opening in new sites, new territories, opening new trade counters as well. So of course, when a competitor opens in a new territory, a new area, they start with zero, and if they get some sales, then that's share growth. So I'm not surprised, and it's just a testament of the shape of the market at the moment.
Thank you very much. Because Likewise, in their last two updates have been very positive, saying high sales volumes in November and early December, excellent organic growth.
Yeah.
That's different to the macro that you're seeing. Is it down to the fact that they've got a smaller base to grow from?
Yeah, look, as I said, I think all we can do is point to the macro and what spend is happening in the marketplace. And as I said, you know, other public listed businesses, whether in flooring or outside of it, or outside of flooring, that are consumer-facing, have reported similar sort of weakness in demand, particularly on the residential space. As I said, our commission research shows that our market share is flat or growing slightly. People like Likewise, and I'm sure some of the others, will have a different feel based on their own market dynamics. As I said, they'll be putting down new space, new territory, which means they can get some growth, not just those guys, others as well. And other people, public announcements have shown that their markets are shrinking.
So, from our perspective, we can see that our market share is holding up and moderately positive. And we'll be taking some share in certain areas, like the larger customers, we'll be taking some of that share from distributors, including Likewise and others, I'm sure. And we'll be maybe losing a bit around the regions where competitors open up. So for us, as an established player, you know, we win some, we lose some, and as I said, as a whole, we're just moderately growing. And other businesses in different phases of the cycle and different geographies will be seeing a different impact.
Tremendous. Thank you very much. What's the correct figure for sales via, versus digital sales? Both 38% and 34% are cited in the statement.
Yeah, 34% is the number. We've seen that significantly increase. I think it was something like 11% in 2019. And, yeah, we're maybe getting ahead of ourselves. 38 will be a nice target for this year, but, it's. Yeah, 34% is what we've seen. It's as a result of a bit of a focus on, by highlighting the opportunity for customers to use digital engagement, the growth in larger customers who, typically would always place their orders, electronically. And then thirdly, I think there is a bit of a shift. Customers are recognizing the opportunity to engage with us digitally. As we put down, more digital capability, it gives customers more choice on which channel they wish to use to place orders. So yeah, it's encouraging to see that growth.
It will be nice to see that continue to grow further, I think.
Tremendous. How are the recent acquisitions performing?
Yeah, there are three relatively small acquisitions. I think the largest of which is the rug specialist in Melrose. And in fact, one of the slides that we presented, which talks to larger customers, and I'll just grab the slide number for everyone. But on slide 25, one of the pictures in there has actually got some of the Melrose rugs pictured in it. So they've had some really good engagement with access to our customers, selling a rug product into our customers, larger customers, for example. So that's been good. And that business has performed pretty well under the circumstances of the market demand. The other acquisitions are really small and quite early stages of their acquisition, so a bit early for those.
But I said the biggest, the biggest one is Melrose. Going through that changes, we're, we're investing in the business model, and giving them access to a larger portfolio of customers. So hopeful for, for some good growth in there in years to come.
Tremendous. I think you've covered this, but, I will ask it. You explained well that Headlam depends on the market environment. So what self-help measures do you have to improve profitability and cash flow in the meantime?
Well, yeah, sure, I'll take that. So obviously, we covered a load of those in when we talked about the GBP 10 million mitigation actions that we took in 2023. I mean, the key one, obviously, is just flexing as much as we can the variable costs in our business to suit the volume profile. On top of that then, and building on those actions in 2023, in 2024, we are doing a little bit of network optimization work, and as I outlined in the presentation, we are in the process of closing down our Stockport distribution center.
We've replaced that with a small cross-dock facility, and we've moved everything out of Stockport and into the cross-dock and into one of our other sites, and we'll sell that property in the second half of this year. And combined with potentially another property, we'll have about GBP 5 million-GBP 10 million of property disposal proceeds in the second half of this year. So really, it's about flexing costs where we can, looking for opportunities around network, whilst being cognizant of capacity we're going to need as the market comes back, so that we can service that growth. And then it's around ongoing efficiencies like the transport consolidation and the dynamic route planning that we've done.
You know, just to complement that, I think the other thing that self-help really is around demand. So, you know, Adam's covered efficiency and cost control, but I think the other thing that we can do and should do, and are doing is around implementing the strategy and taking some tactical growth opportunities where we can. So, you know, pushing the own brand product that I mentioned earlier, I think is a good self-help measure. It's something that we've got exclusivity to in the UK and something that we should be pushing in the marketplace. So I think that it covers a number of areas.
Tremendous. Thank you very much. And someone's corrected their earlier question, which was about the interest charge. Does the GBP 3.8 million interest charge include a fee for changing the covenant from EBIT to EBITDA? They were talking about a covenant with their earlier question, but they meant the covenant from EBIT to EBITDA.
Oh, okay. Okay. No, it doesn't, no.
Tremendous. Thank you very much. And with enterprise value to sales of less than 3x sales, would you consider prioritizing share buybacks over other uses of surplus cash?
Yeah, I mean, this is something that we've spent a lot of time talking about with, with shareholders and indeed in some of our presentations in the past. You know, capital allocation policy and how we see capital and what the definition of surplus cash is, is something we've covered at length, in previous presentations and indeed in our, reports and accounts that we've published. And I think given, as, as the, questioner rightly says, you know, given your view over the future value of the business and indeed where we sit historically, buybacks have got perhaps more of a attraction than, than other means of distribution of, of surplus funds. I think at the moment we've got, as we've outlined, the capital requirements of the business, are, significant. We're in that point of the cycle.
Indeed, ordinary dividends as a sort of first line of is in the sort of normal, everyday needs of the business, if you like. Different channels have got different views on that, of course. But I think beyond that, as the questioner says, you know, buybacks are attractive on the longer-term accretive nature of their function. So something we've used in the past, and it's something I think we would use again, and the capital allocation policy that we've stated gives us that flexibility to make that decision at the time of surplus funds. So yeah.
Tremendous. Thank you very much. We have a final question about whether the share price accurately reflects the value of the business, but in my experience, management don't really comment on their own share price. They just get on with running the business. Thank you very much to both of you. That's the end of questions. Chris, do you have any closing remarks?
Well, I've sort of said it in the summary. You know, I'm pleased with the development of the strategy and the way that that's had traction in the market. And we had a good debate there with some good questions around market share, I think. So it's good to be able to talk about our market share holding up. So as I said, I'm pleased about the way that the strategy's rolled out. Market's tough. I think it's gonna remain tough for this year. But a really strong business model that we've got. We've got a broadening base of customer service that does point well for the sort of medium-term recovery in revenue and profitability.
So yeah, there's lots to look forward to, but I think it's gonna be, you know, that market demand is gonna take a little while to come back, unfortunately. But thank you for taking the time to join the session today.
Well, thank you for being so generous with all your time on the questions asked. Many thanks, Chris and Adam. And to everyone listening, you'll now be taken to a webpage to give some anonymous feedback on today's presentation. If you're unable to complete it now, you'll receive a follow-up email. We'd be really grateful if you could take a few minutes to complete. Many thanks for joining. This is the end of the webinar.