Headlam Group plc (HEAD) Earnings Call Transcript & Summary

Welcome to the Headlam Group Full Year 2022 Results [indiscernible] We'll now play a recording of the full year results presentation, given by Chris Payne, CEO. Chris is with us and will answer questions right after the presentation. [Operator Instructions] This webinar is being recorded.

Hello. I'm Chris Payne, the Chief Executive for the Headlam Group, and welcome to our 2022 year-end results presentation. So the agenda for the presentation, a little bit about Headlam, about us. Our 2022 results summary. A bit of an update on our strategy, both in terms of the revenue growth that we've been delivering and around our ESG strategy. A little discussion about the new changes we've made to the Board, an introduction to some of our operational team and then I'll summarize on the investments we're making in the business and a brief update on early trading for 2023. So Headlam on the page. This is a page of our Headlam. One of the features that I've noticed as I've been visiting all of the sites in the last year is the real passion and heritage we have in the business. Headlam has been in existence for 30 years, but many of the businesses that make up the group have been around for much longer, including some of the service of our colleagues. And it just demonstrates the strength and depth that we have as a business with long-term colleagues, very knowledgeable individuals in the business and customers who have been with us for many, many years. We do have a very broad and large range of products, I think the largest in the country, spanning all of the different product groups in the U.K. We have a nationwide service network. We have 67 businesses across the U.K. and overseas and we offer typically a next-day service for much of our products and many of our customers. And we have leading service propositions, and I'll come on to that later when I talk about the different customer types that we service. So just looking at the 2022 financials. Highlights page to start with. Many of these points, I'll pull out in a little bit more detail on the coming slides, but there's a handful of points here that we've pulled out, which is revenues remained pretty robust, relatively flat year-on-year. And that does disguise a bit of detail around some residential weakness, commercial sector being stronger, European markets being a little stronger than U.K. and I'll cover that in a little bit more detail on the revenue bridge in a moment. Gross margins have remained steady, and that's despite a stronger first half, where we saw the benefit of some of the price inflation, but it's ended up pretty much flat year-on-year. And again, we'll come back to the profit bridge in a moment. We also have a non-underlying credit in the year, and I'll put out a slide to talk about that in a little bit more detail. And then lastly, on this slide, we have seen a significant return to shareholders through the special dividend earlier in the year and then we're also announcing a final dividend, which we'll come on to shortly. So financial highlights, relatively short, but robust revenue, steady margins and control over cost, which has meant we've had a small uplift in profit before tax. So just turning to the income statement. Again, some of these numbers, I'll talk in a little bit more detail about in a moment. So we have a sort of revenue bridge, if you like, which goes from year-on-year explanation of where the revenue changes have come from and similarly on profit. So we'll come back to a little bit of detail on revenue and profit in the moment. But at the bottom of this slide, we also cover the dividend. So we're announcing a final dividend of 11.2p, which takes the year's dividend to 17.4p. What we have seen as a key feature of the year is this sort of ongoing weakness in the residential sector, as I mentioned, offset by sudden price inflation, some of the growth strategy coming through and delivering. And this sort of real, I suppose, change in mix between residential and sector. So the overall revenue numbers have remained relatively flat, and we'll bridge those numbers very shortly. Further down this page, we also see nonunderlying items actually as a credit. And as usual, I do pull out a slide just describing the nonunderlying items in a little bit more detail. So just turning to revenue, and I promise this sort of bridge, which takes us from 2021 revenue to 2022s. And I pull out the U.K. segment and the European segment has 2 items so that we can see the impact of both of those businesses in both those sectors on the overall performance. One feature we can see here, as I said in the highlights page, is the Continental Europe contribution is up. We've seen like-for-like growth in European businesses. And that's a contrast to the U.K. businesses, which we've seen a slight decline in like-for-like but that doesn't really tell the full story. In the U.K., we've seen, as I mentioned, this ongoing residential weakness in the core markets, but that's pleasingly been offset by the strengthening of the commercial sector and contributions from the growth strategy that we deployed in '21 and '22. And I'll talk a little bit more about that on the coming slides. But that's broadly offset the weakness in the underlying market. One number on here, which is a sort of change in working days, we had a couple of extra bank holidays in '22, which has seen a reduction in the contribution to revenue. And I do think that would then unwind a little bit in '23, but we've got an additional bank holiday in '23, which has been announced as well. So I suspect that will sort of stay where we are for 2023. So in summary, revenue relatively flat but a slight shift towards Continental Europe. Daily sales chart. Now in the past when we put this chart out, because we've had the significant decline that we saw on the 2020 line during the COVID affected year, the slide became a little tricky to read. So we've just collapsed the scale a little bit, so you can see a little bit more detail of the daily sales chart. As a reminder, this is a U.K. daily sales chart and tracks the month-to-month daily sales across a number of years so that you can see the consistency and seasonality that appears in the U.K. market. And one of the features that we do tend to talk to is the relative consistency of this chart. And over the last 2 or 3 years, that has been slightly different actually, and we've put on the right-hand side of the slide what a typical seasonality would look like. But during '21, which was still affected by some nonessential retail closures, we saw the Q1 and Q2 patterns being different. As January and February, there were some closures of retail environments, which meant that there was a suppression of revenue in January and February in '21 and a shift to Q2. 2022 and the pattern on 2022, which is represented by the yellow line on this slide, is a much more flat profile and the reason why that's flat profile is because of the macro points that I raised earlier. So the commercial sector being slightly more positive, the residential peaks being perhaps just slightly softened by the demand weakness we're seeing in the residential sector. So the typical uplift that you see in the spring didn't really happen. And there was a slight suppression to quarter 4 trading as the residential uplift was, again, slightly suppressed. So relatively consistent but a slightly different pattern and profile than that we've seen in previous years. So just turning to the operating profit bridge, and this is a similar sort of style of slide to the one I presented for revenue. So it takes the profit that we earned in 2021 and rolls it forward to 2022 and shows the different movements of various lines. I think one feature of this slide is you can see that the numbers are relatively small year-on-year, and that's despite some quite significant inflation headwinds in the cost base. So we've done a good job, I think, of holding back inflation by deploying some efficiency measures in the operating model. And what that means is that the operating cost inflation line, for example, is around about 2% year-on-year, which is a mitigation of the underlying cost base with some efficiency measures. We did see good cash collection in the year, and we've been able to, therefore, release some of the bad debt provision that we built up in previous years. So that's a credit on this particular chart. But other than that, it was a relatively static set of numbers. We did see people costs go down in the year as a result of some of the variable pay and incentives being released. But other than that, it was a relatively controlled year-on-year movement in the cost base. So nonunderlying items, I said that we typically do concentrate a slide on that, relatively quiet year again. So one of the things that we have seen and really the only material item on this slide is the credit that we received for the insurance claim related to the fire that we've previously discussed in one of our sites in Kidderminster. So this is disclosed in the previous year and indeed in the half year, we've now received much of the cash in the proceeds from that claim, which we've now taken as a nonunderlying credit. So a credit this year for non-underlying items. Turning to cash flow. So cash flow had some quite big movements in the year. We typically do generate some good operating and cash. And this year, we've had 3 major movements, so 3 items. The first one being the change in inventories and payables. And those 2 items should be viewed together. And the reason for that is we've seen quite a significant build in stock over the last couple of years, and that's driven by a number of reasons. There has been some significant supply chain challenges in the U.K. and across global markets. And you may recall that when we did the previous presentations, we talked about deliberately building stock to give ourselves a protection against supply chain risk. And secondly, inflation. Inflation has been a key feature in the market, whereby purchases are costing more and the stock that we're holding in inventory typically is at a higher price than it was last year. So those 2 features have led to a buildup of payables at the end of '21, which we then paid down in '22 and ultimately, a buildup of stock as well. So that's the first feature. The second feature is the capital investment, which has increased quite significantly year-on-year, and we would normally run GBP 4 million, GBP 5 million, GBP 6 million a year on capital investment. But as I've disclosed previously, one of the key features of the business is investing in the quality and upgrading the operating equipment around the different businesses and investing in the trade counter program, which I'll come back to shortly. But that has led to a higher level of investment in the business, which we can see in the capital investment line on this slide. The third feature of this particular slide is the return to shareholders through dividends, special dividends, the interim which is a significant number this year. And we can see it's just over GBP 37 million on this slide. And it really is that sort of return to shareholders of that cash that we've generated over the prior couple of years. So a significant sort of set of numbers and a significant set of cash flow movements that we've seen in the last 12 months. So what's that done to the balance sheet? So turning to the balance sheet. We've always stated and it's our desire to have a strong balance sheet and that's evidenced by the numbers you can see on the page in front of you. I think one of the things that we did this year and it was a triennial valuation of our freehold property portfolio, and we can see some key numbers on the right-hand side, which are not reflected in the balance sheet because we hold those at cost. But we can see a significant increase in the value of the U.K. freehold assets and for the first time, we've also valued the European freeholds that we own in our portfolio. So a significant level of freehold property underpin, if you like, to the balance sheet. The other thing that was pleasing on here is despite those big cash outflows that I've just described, we were able to be cash positive in net funds at the end of 2022, which you can see on this slide. So just talking about net funds, and we were able to successfully extend our revolving credit facility at the end of the year. So we've got a facility now that runs out for a number of years. This is a slide I typically do produce, which shows what the intra-year cash flow movements are on a net funds basis. And we can see 2 lines for 2022, the green lines, one of which is the actual net funds or net liabilities, which is the solid green line and the dotted one is an image of what the funds would have been had we not returned the additional cash to shareholders. The feature of that is that you can see after the first 5 months of the year, the cash flows have remained relatively static, which is a typical sort of profile we can see. And indeed, we saw that in 2021. The other 2 lines, the 2021 line and the 2020 line are unusual for a couple of reasons. 2020 line, you can see a general increase in cash in the second half, and that was very much a COVID affected period, and we saw the outflows followed by big inflows in the second half. And 2021 was affected by a couple of capital disposals. So we sold the Swiss business in May '21 and indeed, a freehold property that was surface requirements after our consolidation into the Ipswich site. That created a capital gain and some cash inflows in 2021, which would be a little unusual in our cycle. And therefore, you can see the profile of '21 and '22 have followed in a consistent pattern thereafter. So I think it's a really useful slide and shows the consistent nature of how operating cash typically is generated by the business. So just turning to strategy and update on what we've been doing in 2022. There are 4 main drivers of our strategy. So the 4 boxes on this slide talk to customers, which are broken out in more detail on the bottom of the slide. They talk to the growth strategy of targeting a GBP 3 billion market in the U.K. We talk to the targeted customer service propositions that we are looking to make for each of the customer segments outlined at the bottom of the page. And lastly, on the right, they talk about an efficient operating model. It's important that we remain efficient as we're delivering this growth strategy. Each of these 4 boxes, I'll cover in a bit more detail on the future slides. So those 4 drivers. This is an area that we're now looking at in a bit more detail, and this summary slide will be followed by an individual slide for each of these 4 areas. So the first area of growth is around our multiple retailer customers. So the multiple retailers and what makes our service offering to these multiple retailers compelling? And how is it that we're going to generate growth in this space? So we've always had a good track record of delivering service to multiple retailers, but we've never actually targeted that. And we've talked about this over the last couple of presentations, but we have successfully delivered a new team. We've hired a new team who are focusing on this area. We've invested in that customer service proposition by investing in some of the digital enabling work, sharpening our proposition. And that proposition really is about making life more simple for our customers, offering them a comprehensive service with exclusive products, managing their supply chain for them, holding stock and really being the flooring experts where perhaps they're offering flooring as one of many different services. And what progress have we made in this area. So on the right-hand side we talk about the progress that we've delivered. And we've won a number of customers, some of which we disclosed at the half year and not least, Homebase, which has become a meaningful customer for us over the last 6 months. And we've not only grown new customers, but we've also developed our customer base with existing customers, somebody like Tapi has increased with us significantly over the last 12 months. And when we do break into these customers, we typically tend to grow the number of products that we service with them. So we start with a few products, a few SKUs, and we grow that over time as we demonstrate our capability and we expand our offering into that customer group. The operating margins are relatively strong. And although the gross margins are lower and because we're delivering in scale, we're able to offer an efficient operational process and therefore, keep our operating margin strong. The second of those summary strategic developments is around trade counters. And this is an area that I've talked to at length over the last year or 2. And in overview, what we're trying to achieve is a more U.K.-wide trade counter network that follows a consistent blueprint that customers will recognize as they walk into one of our sites and be able to offer a sort of click and collect service and buy additional products as they walk in to our self-pick areas. So we've been developing this. We've been opening new sites. We've been investing in some of our old sites. And on this slide, we can see what our target profile will be over the next few years. So we're looking to completely refresh the estate and open additional sites over the next 3 to 4 years so that during 2025, we'll have completed that exercise. The idea here is that we should have a site within a half an hour drive time of the major conurbations around the U.K. and enable our enhanced customer service and potentially some new customers who are new to Headlam to come and collect product and I suppose, take advantage of this service and the knowledge that we have closer to where they're based. So a lot of the new sites are around filling in white space along and around the U.K. Typically, each of those sites will be around about GBP 300,000 of start-up investment in terms of fit out, although we are driving that number down as we start to do more of them. We would expect those businesses to start to generate contribution at the end of year 1 or 2. Some of them will be slightly earlier, some of them will be slightly later and reach a sales maturity after 5 years. That's what we're expecting to see and perhaps the maturity might be around about a couple of million pounds per site. The branding, typically, they will look and feel quite similar and we are looking at this sort of co-branding opportunity. And we discussed at the start, the heritage of many of our businesses and our customers respect and expect to see many of those local brands being represented. And in many cases, we're co-branding by using those local brands together with the Headlam brand at many of these sites. So early days in terms of generating these new sites, but the contributions that we've seen from those invested sites has been really positive and given us that confidence to continue on the rollout. The third area that we're going to cover is around our investment in products and brands. And Headlam has a number of product brands in its portfolio, and those are illustrated on the right-hand side of this slide. We are launching new products in 2022, not least the Everyroom product of which we've got a bit more detail later on. But the Everyroom product is an affordable range of flooring that was launched at the second half of 2022 and has created some really great traction in the marketplace. And we're running at GBP 1 million a month of sales at the moment, which is a real positive performance from a standing start in '22. And that's sort of an illustration of the power of the -- of Headlam and what we can do by devising new brands at the right time at the right price point that customers have really enjoyed buying. So one of the key features we're going to do here to take this forward is we're continuing to invest in the digital side of this business to make the brands more recognizable in the marketplace, have more brand presence on some of our websites that we're developing. So there's a lot to go here and part of the investment we're making is in the Tamworth site, which is where the home of many of these brands is and there's a nice picture later in the slide deck showing what we've done in Tamworth, and I'll come back to that shortly. Digital strategy. This is a real underpin of everything that we've talked about so far. And it's important that we get this right and invest in this sort of quality underpin for all of the growth areas that we've talked about. It's an absolute requirement for us to be successful, both in terms of the multiple retailers, but also in terms of the brand development that I just referred to. So this is around customer engagement, customer service and developing easy and recognizable products to customers' fingertips, whether that's through the app or whether it's on the website. And indeed, one of the things that we've been developing and have delivered successfully during the end 2022 was in the drop ship vendor solution for some of our big multiple retailers. And we've put a little diagram at the bottom of this page about what that actually means and how it's delivered but that's about us taking orders electronically. And the number of digital orders that we're taking is increasing all the time as a percentage of our sales. And those orders that are taken electronically, we then pick on behalf of our customers, use third-party shipping, and we ship those products direct to consumers' homes. So that still remains a B2B service offering but what we're able to do for our customers is fulfill their online orders through a seamless process, whereby shipping is made direct to consumers' homes. And that's a real important development that we've seen in the last 12 months. And that's just one of the things that we'll be continuing to invest in, in '23 and onwards. So I mentioned DSV and shipping to consumers' homes. And it leads me to talk about Melrose Interiors, which was an acquisition we made at the start of this year. So this is a real great acquisition for Headlam and we've seen some real benefits come through, both for us and for Melrose since the acquisition, and I'll come on to those shortly. But Melrose is predominantly an independent supplier of rugs. Most of its customers are in that large retail space. And they use that digital and DSV service offering in detail. So virtually all of their rugs are dispatched to their customers, consumers and homes via that process I've just described. And it's given us the ability to, I suppose, move more quickly into delivering that for Headlam. And also it gives us a great outlet for some of our surplus carpets and remnants because they typically work with that type of end of roll and damaged products to make the rugs that they then use to sell on. They've also developed a well-known brand of rug called [Re]lay, which tends to recycle and reuse much of the fabric in the flooring industry to, again, make rugs and sell them again in the marketplace. So a real strong set of characteristics, which we are working with and hoping to develop the business going forward. And I'll come on to a little bit about that at the end when I talk about what we've been doing in early '23. So this is the picture that I referred to, and this is the new interior of our Tamworth facility and just sort of shows what we're trying to achieve as a look and feel. We designed this very much sort of a manufacturer feel in mind. So it's a great place where we could showcase the products that we've developed across the brands that have formed part of the Headlam Group, and we bring customers to show and talk through customer service propositions as well. So a real feature in the group and just illustrates the type of investment we're looking to make in the business. So just turning to ESG strategy. When we talk about ESG, people do think about environmental only, but ESG is about the environment, social and governance aspects of ESG. And I'm going to cover all of those 3 things separately. So firstly, the environmental column, and we made some statements around moving to Net Zero by 2035, and we're actually going to align ourselves with the SBTi targets in order to measure interim progress against that target over the coming years. So we're going to be aligning ourselves with Scope 1 and Scope 2 and looking at a 2030 interim target accordingly. We are now driving forward many decarbonization actions, not least deploying solar panels across our estate, and that's one of the features of owning our own freeholds. It gives us quick access to roof space, and it means that we can deploy solar panels to look to become self-sufficient for electricity. We've moved many of our vehicles to hybrid or low-emission vehicles, and that will be a continuation as we go forward. As more EVs become available, we'll migrate the estate including HGVs to low-emission vehicles of whatever form that takes. On the social column, this is something which is really important to the people within the business. And we've done a number of things to improve the quality and experience of the colleagues in the business, whether it be through recognition schemes, whether it be through mental health support, whether it be through moving people to a real living wage as an example. But there's a cohesive program of things that we've been doing to improve the lives and experience of colleagues within the business. And one of the things we've done there is also to be -- we've launched a Headlam Communities program where all of the businesses around the group can participate in sponsorship or donating time or product indeed to some local programs and community schemes around the country. So again, really aligning with our local businesses there. And then lastly, on the governance side of things, we have taken this forward. We've got an ESG committee within the business now where we're focusing on actions that straddle all of these 3 areas. And we have also invested in a kind of relaunch, if you like, on our values and behaviors, not least putting health and safety at the forefront and the #1 value that we're looking to get people home safe at the end of the day. So just turning to investment we've made in some of the team. Now we've announced a number of changes over the last few months in the Board and pleased to say that the Board will largely be complete in the next month. So Adam Phillips will join us on the 20th of March as the CFO. So that will complete the Board. And I think it's given us a much broader board dynamic, much more experienced in terms of some of the areas of strategy that we're developing, whether it be e-commerce or digital, or marketing and some really good commercial support that we're getting from the Board. So pleased to welcome the new Board members in the second half of '22. I'm looking forward to Adam joining me on the 20th of March. On the senior team within the business, 4 key hires that we've made in the last year and they really talk to pushing the strategy forward. So Chief Information Officer, Scott has joined us this year, it's a new role for us. But that's fundamental, or a fundamental underpin to IT, systems, digital, all those things I've talked about, having somebody on board to drive that forward is important. Growth is a key part of our strategy, and we have a new role of Chief Customer Officer, and that's very much aimed at driving that customer channel forward, supporting and driving some of the digital assets and some of the e-commerce engagement with some of those larger customers forward. And secondly, on growth, we've hired an MD of our trade counter business. So increasingly, we'll see trade counters becoming more of a division and a focus for the group. And as we start to roll out more sites, they'll take on a life and a feel of their own. And we thought it was important to invest in a team to drive that forward. And Kevin has joined us as the MD of Trade counters. Last but not least, the Chief People Officer. So we can't do all of these changes and growth agenda without investing in our people and engaging with them. So it's important that we've got investment in the right sort of team in HR and we've -- Clare has joined us as Chief People Officer, and we've expanded the investment in that team to deliver on that change integer I just outlined. Just dwelling on that slide before we move on. That's the Everyroom product that we launched in 2022, which is great to be nominated for an award in 2023. So we'll see how that goes, but worth dwelling on that page before I move to just talking about investments in the business. So just turning to investments in the business. On the right-hand side, we've reproduced the capital allocation priorities that we've talked about in the past of where we would typically deploy capital in the business, moving through investment and then ultimately ending in returns to shareholders and potentially in M&A. And I think we've seen all of those areas being deployed in the last 12 months. And some of those investments are shown in the middle of this page. Indeed, on the left-hand side, that picture is the new sortation unit within our Mercado distribution center in Leeds. So one of the things we have been doing, as I said, is investing in the quality of the business, whether it's operational equipment, as demonstrated by that picture or whether it's investment in things like solar paneling that I described earlier. So there has been a significant level of investment in the quality of the business to generate growth going forward or to limit operational costs. Not only that, we've seen a significant return to shareholders, as I described earlier. We've seen special dividends in the year. We've just announced the final dividend and proposed for the end of 2022. We've returned a significant level of surplus capital, not only in the special dividend but also in a buyback program, which is just completed. So I think that is a real effective use of capital, particularly while perhaps the market is constrained and we're seeing share prices at a relative discount to the averages over the last few years. So I think it's been a really useful use of our capital. So final slide from me, just turning to an update on what's happened post year-end and also on current trading. I mentioned Melrose earlier, really great start to life within the group. We've seen a real positive impact of introducing some of our customers to Melrose and seen some sales come through already. And indeed, some of their rugs are being made from Headlam's remnants as well. So a really good start to Melrose within the group. Transport integration project, that's something that's continuing. And I said that would complete in early '23 so that remains on track. And then lastly, the share buyback that I mentioned just now, that has now completed in the last few days. So pleased to see that complete. Current trading is more of the same really. And I think it's pleasing to see that robust revenue performance and revenue holding up with positive like-for-likes on 2022. But that sort of weakness of residential market and the strengthening of commercial market has continued. So that's the last slide for me. I think I'll just complete by saying that we remain extremely confident in the strategy and the future success of the business, and we can see some of that benefit coming through from the strategy already. So I look forward to the rest of '23 and beyond. And now I'll turn to questions. Thank you.

[Operator Instructions] And we have a question here. Are you expecting the current and increased rollout of trade counters and increased level of servicing to the Man in the Van sector to cannibalize trade from bricks-and-mortar stores. For example, sales carpets, vinyl hard flooring and underlays. It could be argued that this service provision is making it harder for those stores to trade. Where do your loyalties lie?

Okay. Thanks for that question. I think it's safe to say that was one of our concerns when we went down this process was looking at where would this growth come from? Would it cannibalize? Would it be new growth? Would it be new customers? And we talked to customers about that, both before we embarked on the strategy and more recently. So we service -- survey our customers every 6 months when we talk to them. And I think that was perhaps a fear that they had. But the truth is, as it's borne out, it hasn't really had an impact on losing sales through our distribution channel probably because many of the customers who come to trade counters are independent fitters. They do typically service of hard flooring. They may be using it to collect product but mostly, it's for sort of half rolling, small jobbing builders and maybe we're taking a bit of share from people like the DIY sheds or the building material suppliers. So we haven't really seen a cannibalization in our core markets, if you like. And as we said in our strategy, it's important that we are representative of a market. We're not necessarily only focusing on the independent retail sector. Clearly, that's important to us. And it's very important that we remain the best service provider in that space and our customers say that we are. So it's important that we retain that but we shouldn't do that at the expense of neglecting the other parts of the market. All we're simply trying to do is be reflective of other parts of the market and other customer groups.

[Operator Instructions] And the final question actually at the moment, but hopefully, we'll get a few more, is the reason behind -- sorry, the reason behind the cash movement is clear, but are you comfortable with the result in 2022 cash position versus 2021, which has changed considerably?

Yes. As I said, we explain the reasons for that. And if you look at those reasons, they're all 4 good reasons. So supply chain constraints, challenges, having stock, being able to sell stock that you've got clearly has been important and particularly in an inflationary environment, you don't want to be caught on the wrong side of the price increase when it comes to stock. So investing in stock, building stock had good sense. Now as we said earlier, much of that inflationary environment has largely passed through much of the cost base on stock. So I wouldn't necessarily expect that continued investment in working capital. So that's one feature. Clearly, capital investment, we're investing in the future of the business, and we've even given some indication and some guidance on FY to increase in '23 rather than decrease from '22's position. And indeed, then the return to shareholders was significant. And I'm pleased that we have completed the buyback program in Q1. So I think the numbers are the numbers, and they are for good reason. If you look forward to '23, and the guidance we've given for '23, as I said, we wouldn't see the same level of working capital absorption that we saw in '22 because the market, because the environment is different. But indeed, we will be spending cash on investments in the business. So I'm sure that will absorb cash in '23 in a different way.

And can you add some color on your target of revenue growth in excess of GBP 200 million within 5 years?

Yes. We -- by looking at the marketplace, we talked about a GBP 3 billion mark here, and we talked about where we're strong and where we've got an opportunity to grow. The 2 obvious areas for me are trade counters. The trade counter rollout, we're looking at targeting white space, the cannibalization point that we've just discussed means that we should see incremental growth from those new sites whether that's GBP 1 million to GBP 2 million a site. Clearly, we're going to be opening another 35 sites on average, and we'll be seeing an uplift from investment in the existing sites. And that's given us the confidence say that there's that half of that growth also is going to come from the trade counter deployment over the next few years. Similarly, if you look at the scale and size of the market for the multiple retailers and the building products side of the market, which is a third of the total market in the U.K., we've got so low share in there. We're deploying specific propositions, and we're looking to try and grow our share in that space. And there's no reason why we can't see GBP 100 million of growth from that GBP 1 billion of market. So again, we're not looking to try and take a third or half of the market, but we are looking to try and take meaningful share in the areas where we've got low current share. So that's why there is logic and targeted growth from those 2 areas in particular, which will generate that GBP 200 million of growth that we're looking for.

And what's your expectations around manufacturers' pricing intentions for this year? Will we see price deflation coming through in light of reduced demand?

Well, we saw quite consistent price inflation since '21 really from manufacturers. And interestingly, for a long time, the way that the sectors works, is that we've seen supplier cost of goods inflation, which has been enough to cover overhead inflationary pressures. And I think actually, we got a little bit out of kilter in recent times. So we've seen cost-of-goods sold inflation coming through and a bit of a lag for overhead inflation. We're probably in the reverse cycle now where we've got overhead cost inflation running higher than cost-of-goods sold inflation. But that will also be the case for some of our supply chain. And I've seen some announcements from some of the manufacturers recently where they're under pressure from wage inflation, for example, Belgium, which has got an index-linked labor cost. And therefore, price inflation on cost-of-goods sold is an inevitable factor. Deflation, typically in our space hasn't really been a feature. What normally happens is the sort of reengineering of product, new products get launched perhaps at lower price points. So it's a different way of handling that challenge. So I think what we'll probably see where we saw in '22 sort of first half cost-of-goods sold inflation and then overhead inflation in the second half. I suspect it might be the other way around where we're still seeing the effects of cost inflation coming through on overheads and perhaps sort of price inflation coming through a bit later in the year.

Can you please explain how reductions in housing transactions since September or October '22 feeds through into your demand?

Yes. We've had -- the 2 areas where housing transactions affects us, in the past, we've really only focused on RMI. So housing transactions we've seen is a sort of the cream on top, if you like, of where people who are replacing individual rooms when they move home, they typically replace more rooms and it happens in a chain, as you might imagine. So that's really been a kind of a premium and a top-up to demand on the residential side. Now if that drops away, then clearly, some of that top-up demand also drops away. But it's not the main feature of our business. The main feature of our business is just normal RMI, room-by-room spend. The second feature, I think, which has been introduced as a result of our strategy is a focus on sort of new homes and new house builders. And again, that's gone through some cycle changes and some of the recent information would suggest that new home releases are under pressure and perhaps reducing. But we've got relatively different share in there. So sales that we do achieve and new business that we do secure through the house builders will be growth. Even though perhaps year-on-year, the total number of plots might be down because we've got such a low base and low comparatives, that will still be seen as growth. So they were probably for the first time for Headlam, 2 features to the market both in terms of housing transactions for people moving home, but also new plot releases to the marketplace.

And we still see a lot of inflation in the market. Can we expect some pricing increases from your products?

As I said earlier, I think just to reflect you on that point earlier, yes, is the short answer because I think manufacturers will be looking to put prices through to accommodate their overhead cost inflation. Yes, of course, some features in the market are perhaps under less pressure, whether it's energy, diesel costs or whether it's some of the container cost price inflation that we've seen in recent times. But I come back to wage inflation being still significant in the marketplace, both here and the overseas. And it's inevitable there will be some price inflation coming through on cost-of-goods sold, as I described earlier.

And what sort of revenue levels would need to be achieved to realize a 7.5% operating margin target?

Yes. Well, we've seen -- going back to when we talked about that target back to pre-COVID volume levels. We've seen double-digit declines in volume since then. So I think that sort of level of recovery is what we would expect to see coming back to give us that real scalability in the operational model. So it's great that we're able to sort of stand still, if you like, on revenue, but that's a number of features causing that, as I described in the slides. But the underlying volume still remains a bit weaker. So that's sort of double-digit that we lost since that statement. It will be good to see that coming back I think.

And what are the expected levels of inventories this year?

Well, the guidance we've given, which some of the analysts have picked up is just around trying to maintain working capital where we are. We said we've made our investment in inventory, partly that's been driven by inflation as well, so not just stock hold. The price of the stock has gone up as well so there's a couple of features there. I think we're now in a phase where we should be looking to make that work harder. Some of the supply chain risks have diminished, albeit obviously some of the -- the tragedy that we've seen in Turkey is likely to have some impact on supply chain, not least yarn manufacture, which typically is done in Turkey. But that aside, I think we should see a little bit more stability on stock. And therefore, a relatively modest working capital movement this year is what we've guided to.

And what are the CapEx expectations for next year?

Yes, we've given some guidance that we expect that will increase even over the year that we've just seen. So we've got the ongoing trade counter rollout program, which will take GBP 7 million, GBP 8 million worth of capital. We've had the normal sort of underlying operational spend, which we've increased to invest in the business, as we described before. And we are deploying solar panels on our roofs that I mentioned in the slides. So that's sort of GBP 4 million or so this year that will also be deployed. So we've guided more to the sort of GBP 20 million worth of capital spend this year, which is up on '22 and up on our historic run rates.

Is there any other operational capability left to fill?

We're in deployment phase for our implementation. And now inevitably, there are going to be areas of expertise that we need to fill as the strategy implements. And I think the area for us is the underpin of the strategy on digital and the asset development. Clearly, that's still relatively early days so that will continue to roll out. But what we don't want to do is invest too early in too much capability before the revenue appears. Now there's going to be a scalability we need to get into, and that can come in time. We've already made some investments up front, as I said, in the underpin on digital, but also an investment in the sort of infrastructure for setting up trade counters as a business unit. I think we've got that about right. Now as I said, as that influences and starts to generate revenue in the future, no doubt, we'll make further investments at that point.

Two questions about Europe. How do you see the strategy for Continental Europe? And the second question, are you looking for M&A in Continental Europe?

Yes. I think it comes back to the market dynamics and the opportunity. The European business is modest in size and scale, and we've made no secret of the fact that there's lots of potential in the U.K. to grow our scale, become a more efficient and go after more of the market. We turn to the Continental European market. The Dutch business that we've got, we've got 2 entities in the Netherlands, which does present an opportunity, I think. We've got good cross-country coverage and the density of demand in the Dutch market is good. And given we've already got a presence there, it does make sense for us to try and improve that business, whether it's through M&A or some organic growth. So I think that's an area that has still got some potential in it. The French market and the French business, in particular, has been in recovery for a couple of years, and it's great to see that business returning to profitability after a difficult period. So that business is still going through its own improvement in performance. We've got a new team in there. They're doing a great job. So I think that business is still developing its own strategy and what the guys are doing now is good, and it's led to an improvement in that performance. So I think the European business for now is doing a good job. Clearly, it's contributing towards the results and there remains some opportunity for us to do a bit more out of it.

And regarding trade counters, it's hard to find good prospective trade counter. Is it hard to find good prospective trade counter sites? And who do you come up against?

Yes. That market has been relatively hot. That sort of light industrial sort of semi retail park environment has been in high demand. We've got a number of sets of property finders on our books. And one of the things that we've been able to scale up through having the sort of benefit and experience of doing this now for a year, is that we've been able to spread our search criteria across a number of sites. We've got a number of builders and architects now on retainers to do that work for us. So we've been able to scale that up a little bit. And it's great to be able to find sites in the next to the Greggs, next to the Screwfix and the like, but they are in demand. So the good thing about us, of course, is that we don't have many sites. So there are lots of places in the U.K. where the demographics and the chimney pot simply mean that we should have sites. So we're not coming up against massive challenges on finding the sites, but it is quite a hot market. So when we do find sites, we have to move quickly to secure them.

Tremendous. And the question, which was covered in the presentation, but the question asked, is there an intention to repeat the share buyback program?

Yes. I think we've tried to lay out our capital allocation priorities, and there was a discrete set of circumstances in that time that led us to return capital in the way that we did. We've also laid out there is a fair bit of investment in the business to do this year. Now we've made an acquisition. We've completed the buyback in Q1 '23, plus also, we've outlined an increase in the level of capital spend on the business for '23. So I think that probably takes care of '23 based on the dynamics that we see ahead of us. So possibly not for this year, but it remains one of the priorities for us going forward.

Great. And I'm afraid that's all we've got time for. Chris, do you have any closing remarks?

No, I think as I said at the end, we've seen a really encouraging start to the implementation of the strategy. It seems to be generating the sorts of returns that we were looking for. And it's pleasing to see revenue in January and February seeing some positive like-for-like. So encouraging early starts of the year and we remain confident we've got a good team around us and look forward to the rest of '23. So yes, I think taking the time to join the webinar.

Many thanks, Chris. And to everyone listening, you'll now be taken to a web page to give some anonymous feedback on today's presentation. If you are unable to complete it now, you'll receive a follow-up e-mail. 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.