Headlam Group plc (HEAD) Earnings Call Transcript & Summary

I'm Chris Payne, the Chief Executive and I'm joined here by Adam Phillips, the Group CFO. So by way of introduction, this is a slightly different presentation format from that, that we've used in the past. Given our recent press releases around an acceleration of our strategy, and the transformation plan, I thought we could go for a slightly different format where Adam is going to take us through the first half performance and an outlook on market conditions. And I'm going to cover in more detail and update on our strategy and the 2-year transformation plan. So I'll hand over to Adam to get us started.

Thanks, Chris. I'll start with an update on the market before stepping through the results for the first half. So on this slide, we've set out a few of the indicators for the flooring and home improvement markets. And on the left-hand side there, firstly, consumer confidence, which has remained firmly negative and in particular, the major purchase index has significantly lagged the overall consumer confidence index. Housing transactions in the middle of the slide there, they are a key driver of home improvement spending, and these declined 20% in 2023 and a further 8% in Q1 of this year. And consumer spending on home improvements was negative throughout 2023 and hasn't shown any sign of improvement in 2024 so far. All of this has created a significant headwind for the flooring market, which is now in its third consecutive year of decline. And in the first half of this year, we estimate that it has declined 10% to 15%, taking the cumulative decline to at least 25% compared to 2019. The lead indicators are, however, looking more positive with real paying growth, disposable income is increasing and housing transactions returning to growth in recent months. This should provide a boost for consumer spending on home improvements, and Chris will talk more about outlook later on. We expect the flooring market to return to growth at some point during 2025, but there remains a lot of uncertainty around the timing and pace of that recovery. Turning to Headlam's revenue in the first half, and we continue to grow revenue in the strategic growth areas of Larger Customers and Trade Counters with revenue up 2.3% and 7.4%, respectively. Regional Distribution was most impacted by the weak market and revenue declined 18.8%. And in total, U.K. revenue declined 11.3%. In Continental Europe, the market has been even weaker and revenue there declined 15.9%. Looking at the three main revenue channels in the U.K. in a bit more detail, both in terms of revenue performance and operational highlights. And starting with Regional Distribution, where we launched Flexipod in the period, which is an important investment in customer service that enables our customers to track their deliveries online in real time. And we also optimized our logistical footprint in the Northwest of England with the conversion of our operations in the Manchester region into a cross-stock facility and the subsequent sale of our Stockport distribution center. The proportion of revenue generated from our own product brands increased in the period, reflecting strong relative performance from our Everyroom brand in particular. And towards the end of the first half, we launched new value ranges, which have been well received in the market. And over the last 4 months, the revenue decline in Regional Distribution has improved significantly, as illustrated by the chart on the bottom left-hand side. This is despite no sign of the market improving over the same period. Turning to Trade Counters where we have continued to deliver good revenue growth, now annualizing over GBP 100 million. We opened 9 new sites and refurbished a further 11, taking the total number of Trade Counters to 76, and we opened 1,600 new customer accounts in the period. The invested sites continue to perform in line with business case despite the market conditions. It's been a tough period for some of our multiple retailer customers due to weak consumer demand and 2 retailers have exited the flooring retail market in recent weeks: SCS, due to a strategic decision and Carpetright, which entered administration. Now we were a supplier to SCS, but not to Carpetright, and collectively around GBP 250 million of flooring retail revenue will move elsewhere in the market as a result of these exits, which is expected to be a net opportunity for Headlam. And finally, in recent months, we've won two new accounts, a multiple retailer and a contract to provide distribution services to a manufacturer. Taking a look at the income statement. I've covered revenue on the previous couple of slides. Gross margin of 30.6% was 86 basis points lower than last year, and this was principally due to heightened clearance activity towards the end of the period. And this clearance activity was in anticipation of some of the changes we're making as part of the transformation plan, which Chris will cover later. Operating costs increased by 6.2% mainly due to cost inflation and strategic investments and more on this on the next slide. Interest costs were higher year-on-year, reflecting the average borrowings and all of this resulted in an underlying loss before tax of GBP 16.4 million, reduction of GBP 22.4 million year-on-year, and this is before GBP 4.2 million of non-underlying items, and I'll break those down on a later slide. So looking at the year-on-year movement in operating profit, and the single biggest factor was volume. In the U.K., this drove a GBP 10 million reduction in profit and reflected the weak residential market. The movement in gross margin, which was principally due to clearance activity, had a GBP 3 million profit impact in the first half. And whilst not a factor in the year-on-year profit movement, it's also of note that this was the second year in a row that we've seen a lack of price inflation in the core distribution market as manufacturers hold price in an attempt to reduce volume decline. Strategic investments contributed GBP 1.4 million of profit impact, principally trade counters. And as previously guided, trade counters are profit dilutive during the investment phase as new sites are typically loss-making for the first 15 months or so, but these investments have performed in line with business case. Cost inflation was a GBP 3.3 million headwind, principally driven by people costs, including the 10% increase in the national minimum wage in the U.K. And moving along the chart, GBP 4.8 million of profit impact came from Continental Europe and the non-repeat of one-off items in the previous year, including insurance settlement income. And finally, mitigated actions provided GBP 1.5 million of offsetting benefit. So turning to non-underlying items. These totaled an expense of GBP 4.2 million but were actually a net cash inflow of GBP 4.9 million. And taking each row in turn, firstly, amortization of acquired intangibles was a GBP 0.7 million expense. There was then a GBP 0.9 million noncash expense from asset impairments relating to network optimization initiatives. Business restructuring and change related costs of GBP 4.9 million were incurred in respect of the transformation plan and principally comprised the noncash impact of stock write-downs. The surplus Stockport property generated GBP 7.4 million of cash inflow and a profit of GBP 3.2 million. And then finally, there were GBP 0.9 million of costs in relation to the development of the new ERP and as guided earlier this year, these are classified as non-underlying. Turning to cash flow. Good operating cash generation with underlying operating cash flow of GBP 18 million, broadly flat year-on-year, and this was supported by working capital inflows, partly due to lower receivables and partly due to tight control of stock levels. Capital investment of GBP 6.9 million principally comprised trade counters and the final element of the solar panel investment program, and we expect much lower CapEx in the second half. Lease payments of GBP 7.4 million were broadly flat year-on-year, and dividends of GBP 4.8 million were paid in June in respect to the final 2023 dividend. There was a GBP 7.4 million cash inflow from the sale of the Stockport property and a GBP 2.5 million outflow in respect of the other non-underlying items. And all of this resulted in a roughly GBP 1 million reduction in net debt. And on this slide, we illustrate the moving parts in net debt with working capital and property disposal inflows in the green bars, offsetting lease payments, CapEx and dividends, leaving net debt at GBP 28 million at the end of the first half. Headlam continues to have a strong balance sheet, underpinned by a property portfolio valued early last year at GBP 142 million. The group has significant liquidity headroom with cash and undrawn facilities of GBP 72 million at the end of June. And we have a supportive lender group and have recently agreed a revised covenant package through to the end of 2025. During the period, we also further strengthened the balance sheet by completing a pension buy-in. This significantly derisks the group's exposure to movement in pension assumptions and removes future contributions into the scheme. So to summarize, before I hand back to Chris, challenging market conditions with a further 10% to 15% decline in the market in the first half of this year, taking the cumulative market decline since 2019 to at least 25%. This has weighed on the group's performance, resulting in 11.3% revenue decline in the U.K. and a group underlying loss before tax of GBP 16.4 million. Despite the weak market, the strategic growth areas performed well, with revenue from Trade Counters and Larger Customers up 7% and 2%, respectively. Cash and working capital were well controlled with stock reduced significantly and net debt slightly lower than at the end of last year. And the group has a strong balance sheet underpinned by GBP 142 million of property assets and GBP 72 million of cash and undrawn borrowing facilities. I'll now hand you back to Chris.

Thanks, Adam. So I'm going to do a couple of slides just giving an update on the strategy, a reminder about our strategy and then I look forward to how the transformation plan is going to work over the next couple of years. So as we said before, we've got a significant long-term market opportunity here. And the key to our strategy is becoming more and more customer focused. And this slide describes that there's a GBP 3 billion U.K. flooring sales opportunity, split 2/3 residential product and 1/3 commercial flooring. And the chart also shows our weighting that we have in different customer segments. So on this slide, we've identified seven key customer types and the weighting moves from a relatively high share of our sales and market on the left-hand side, where we service the independent retailers on the High Street, all the way through to the right-hand side where we have a much lower share and a lower weighting of our sales in larger contractors, the Tier 1 and 2 contractors as we call them and online pure-play customer types. And the key to our strategy is about becoming customer focused and delivering service and solutions to those different customers. So this is, again, a reminder of our strategy, and there are 5 main pillars to our strategy, and I'll talk through each of those in detail in a moment where I talk about the areas that we have delivered. And indeed, Adam has covered many of these. But the 5 pillars largely focus on service and product, and that's typically aimed at where we've already got a high share of our sales, so the retailers in particular. The next pillar talks about growing and this talks about new opportunities and expanding into those customer types where we've got relatively low share. The third pillar is around operational efficiency and capability. And then the last two pillars on the right-hand side, we talk about our sustainability credentials and our environmental responsibility and also making Headlam a Great Place to Work. So what have we been doing in those areas? So good progress has been made against all 55five of those pillars of our strategy. Some of these have been covered by Adam during his update on operational performance. But if I just pick out a couple of items from this slide, I think you can illustrate what we've been doing over the last 12 months and before. So on the left-hand side, where we're talking about offering great service and product and range too, particularly to existing customers, we've launched a number of new products, including Everyroom. And we've also pushed up as a result of that, sales and our own branded products to a large proportion of our revenue. We've been investing in our digital capability, and now 34% of our sales are generated through digital channels. In expanding our footprint into new customer types and focusing on different types of customer and the solutions that they need, we've seen an expansion of our trade counter network up from 53 sites to 76 and that will be an ongoing feature of our business as we go forward. And we're now seeing that annualizing at over GBP 100 million of sales. In fact, last month, we saw sales exceed GBP 10 million for the first time in Trade Counters. We've seen strong growth from Larger Customers, and that's despite the tough market that Adam mentioned in his section, where many of those multiple retailers are also suffering from consumer confidence weakness and weakness in footfall. But despite that, we've seen growth in those areas as well. And we've been able to add new account wins to those customer sets. On operational efficiency, I've got a slide in a moment, which gives a couple of examples of what we've been doing here, but we've created a national network for transport, and we've successfully integrated our transport offer across the country. And we've been investing in dynamic route planning and also WEBFLEET and Flexipod, which are much more customer focused and give customers the ability to track their deliveries in real time, much as you would for a parcel carrier. On sustainability, in these slides, I'm not going to be covering ESG and sustainability in any great depth. But rest assured, we've continued our investment in things like solar panels and decarbonizing much of our fleet and now nearly all of our vehicles that are non-HDV vehicles are actually low emission or hybrid or electric vehicles. An important development that we've had this year is also the evolving take-back scheme. We've been working with third parties and customers, looking at how do we trial recovering product from the market, and recycling and recovering that product rather than landfill, and that's an exciting development that we've been trialing this year, and there'll be more of that to come at the year-end. And then lastly on this slide, making Headlam a great place to work. There are 2 main features to this. And this is sort of a personal value point for me. I think, firstly, it's just making our environment a safe place to work. We want people to get home safely at the end of the day. And secondly, it's just treating people fairly, and we've been investing in training and development for people, launching well-being and mental health and inclusion training for people. So this is just all about creating a great environment for people to come and work. And also giving back to the community, and we've been launching a sort of fit to training program, and we've been investing in some of our community schemes as well. So all in all, great progress made in the last year. So I mentioned a couple of examples, and this is really just 2 examples we picked out from that previous slide of things that we've delivered and just to demonstrate really that when we set ourselves a task of implementing this change through the strategy, we can do it, we can do it well, and we can successfully deliver these items. So the 2 items that I've picked out on this slide is this national transport network. So previously, we were a network of individual distribution centers all running their own vehicles. And we successfully migrated that to a national post-go delivery network, where we've had a significant reduction in vehicle numbers and a significant reduction in mileage driven and as a consequence, a much more efficient network. And secondly, we have consolidated some of our network where we've closed our Stockport distribution center and we still offer the great service that we did before through a cross-dock network, and we've utilized our existing assets elsewhere in our network. And that's meant that we've been able to liberate significant cash return as a result of the disposal of that site. So I've mentioned before an acceleration of our strategy through this 2-year transformation plan. So what does that actually mean? So the existing strategy already articulates what we are going to do and what we have done to simplify our business and to move into new customer types. But this 2-year transformation plan really energizes that change. And it does so in 3 ways. So putting the customer at the heart of our strategy is the main driver of our strategy and being able to move more quickly to a simplified offer for our customers is key. Secondly, that network consolidation and simplification can be accelerated faster, and that's an area that we're also looking at. And as a result of those first two changes, it gives us an opportunity to simplify how we support our business and in particular, in some of the support functions. So let's talk about our simplification of the customer offer. Now this slide illustrates that we had 32 different regional brands operating around the country offering service, particularly to the independent retailers. And we're going to be consolidating those into a single business, which is Mercado, that's one of the brands that preexisted as a national supplier to customers. But we're going to move all of our business into the Mercado brand, which will offer nationwide service to that independent retailer customer base around the country. And that means 32 different sales teams, all coordinating and working together based on where they live, based on where their customers are, and they'll be territory driven. So from a customer perspective, you can imagine where you have multiple sales contact points, you need to have multiple accounts in order to place all your orders to get the best out of Headlam. From now on, you'll have one account, consolidated credit terms, one sales representative coming to meet you and one price list in order to order from. So a significant improvement in the simplification of how customers work with us. And the advantage of this also is that we can offer all of the great, great products that exist in the group in one place for customers to be able to order from. And the benefits to the customers that we can identify and we run through this in detail with our sales team and this is now being communicated to our customers, there's more time for our sales team to work with customers. They have less time driving, more time with those customers. And we have this unified product list with an expansive range of products that up until now, many of our customers have needed multiple accounts in order to access. It also means that we can order anywhere and collect anywhere from across the network. And our Trade Counters that I mentioned earlier, we now have 76 trade counters connect as collection points for customers for their convenience to collect products from wherever they wish in the country. We have focused our sales teams on both residential product experts and also commercial product experts to give our customers what they need. And that also has meant that we're able to consolidate our investments and offer new point-of-sale materials to the marketplace rather than fragmenting them across a large number of different brands. So there are really a number of benefits that we can bring to bear in a relatively short period of time. And that's what we've called as initial focus. So many of these elements have been delivered already, and they will take a few weeks to run through, but there's a degree of benefit that can be immediately released to our customers. That will then be enhanced in the next few weeks and few months with investment in new stands and materials. And that will also mean that we can consolidate our digital footprint onto a new platform website for our customers to order in one place on a B2B basis. And then ongoing, once we've got this single business in place, we can then start to invest in that customer proposition across one business, again, rather than fragmenting it across 32. So one interesting detail of this is, what does our team look like after these changes have been made? So up until now, it's been quite difficult for me to describe how our team operates across the country. But by simplifying the sales teams and offering one Mercado sales organization to our customers, we can for the first time really, describe what this looks like, both in terms of the residential team and the commercial sales team supporting our customers. And one of the things that I've been discussing with shareholders is the amount of experience that we've got within our flooring expertise that we -- that exists around the country. And we actually asked all of our teams to gather together their number of years of flooring experience they've got. And I think this slide just demonstrates the depth and knowledge and range of experience that exists in both the leadership team of our sales teams, but also in the individual sales managers that look after the country. And just in the Mercado business alone, we've got over 3,000 years' worth of flooring experience across the Mercado sales team. And I think that just demonstrates the depth and knowledge that Headlam has to draw from in the industry. So turning to the second element of our transformation plan. This really looks at the network. And the picture on the slide here shows the network as it's been for many years. And the distribution centers have largely been acquired through the M&A process the group went through some time ago. And where we've integrated the transport network onto more of a post code-driven analysis, the distribution network hasn't really been amended in the same way. And we've been making gradual changes over time. And a good example of that is the Stockport consolidation that we referred to in the earlier slides. But largely, the network hasn't really amended that much. And this provides an opportunity for us to accelerate this change. So what are we doing? We've got Phase 1, which we've already talked about, and that's the distribution center in Stockport, which we consolidated and moved into our other distribution centers and liberating a significant cash inflow, which was well ahead of the book value that Adam referred to earlier in his half year update. So Phase 2 is really an articulation of what we're announcing right now. We're opening a new distribution center in Rayleigh, in Essex. And that's all aimed at offering an enhanced customer service proposition to the Southeast. As part of that, we'll be opening a new cross-dock facility in the Ipswich area, which means our existing Ipswich facility will start to wind down and then become surplus to requirements and ultimately, a disposal in the coming months. Secondly, we're consolidating our 2 locations along the Central belt in the Glasgow area, where we can operate from a single site going forward, which again, frees up one of our two properties for a disposal process. Now the combination of those 2 sites are worth in excess of GBP 20 million on the valuation that we did in January 2023, and offers are already starting to come in for those 2 sites. And of course, our ongoing review of this, this is something that we'll continually look at and how to optimize our network as we move forward. Thirdly, I mentioned earlier that as a consequence of these changes, both in terms of the simplified customer offer and indeed how we're changing our network, it gives us the opportunity really to consolidate and simplify some of our support functions. And in particular, by moving to a single product file and a single business model, we're able to centralize and consolidate our buying operations and offer a single point of contact with our suppliers. And secondly, as you might imagine, there are a number of support functions that then support the business, and this simpler network also gives us the opportunity to simplify things like finance teams and some of the consolidation of the support functions as well. Now these changes will also benefit and make a far easier transition to our new ERP platform, which we're looking to go live on in the next couple of years. So I'm now going to hand over to Adam, who's going to talk us through the detailed objectives and to track the performance of the transformation plan.

Thanks, Chris. And we set out 3 key objectives as part of this transformation plan: Firstly, market share gains as a result of the sales transformation; secondly, unlock capital to delever and to fund the transformation; and then thirdly, to structurally improve profitability. And we've mapped out the actions over the next 2 years to deliver on those objectives. And on this slide, you can see an example of a few of those that we're focusing on over the next 12 months. And I won't go through these on the slide here, but we will update on the progress on those in due course as we progress. So looking at the overall benefits of the transformation plan after 2 years. And firstly, on the left-hand slide, we're targeting at least GBP 70 million of one-off cash inflow, and that will be from the combination of disposal of surplus property and also optimization of working capital. And we expect to achieve that within the 2 years from now. And we're targeting at least GBP 15 million of annual profit improvement once we've completed the transformation plan. And that is net of reinvestment in enhancing our customer proposition. And that product improvement comprises the combination of revenue increase from market share gains, margin improvements from centralized buying and stock control and cost efficiencies. And we'll start to realize those benefits in 2025 and we'll target achieving that GBP 15 million run rate at the end of the 2 years. And to fund that transformation plan, we anticipate around GBP 25 million of one-off cash costs, and that will be through the combination of restructuring and relocation costs, the cost of fitting out new sites, advisory and consultancy costs and then also the investment in point-of-sale materials such as display stands. I'll now hand you back to Chris to talk through outlook and summary.

Thanks, Adam. So just a couple of slides on outlook, and then I'll summarize at the end before perhaps we take questions. So first slide on outlook, this is really around the short term. So as Adam described in his update on the half year, we have seen a slight improvement in the trend in recent performance, although that is really just a reduction in the negative year-on-year performance. So an improving trend, but it still remains relatively weak. But I think that is a feature of the market, which has remained weak. And we're seeing some of the actions that we are taking given us a benefit against the market, and in particular, putting ourselves in a position to benefit from things like the Carpetright administration has meant that we've been able to take a little bit of additional market share from that. So little change in terms of consumer spending, but we are seeing, as I said, some of those lead indicators looking a little bit more positive. So things like spend on home improvements and the housing transactions slightly more positive in recent months, which does paint a perhaps more positive future picture. Now as to when that might happen, is a little uncertain. But we do expect that, that might then lead to an increase in demand and revenue at some point in 2025. But I think in the longer term, it's much more positive. I think we've got our existing strategic initiatives, which we discussed before, where we're moving into more and more customer areas, the acceleration of our strategy through this 2-year transformation plan. And at some point, the market recovery, which undoubtedly will need to happen does paint to a much more rosy picture in the longer term. So just to summarize then, we've seen a challenging market, and consumer confidence remains weak, and that's really weighed heavily on our performance in the first half. We have seen our strategic initiatives continuing to deliver with growth in both Trade Counters and key accounts, and we've seen a good control over cash and working capital. But I think with the acceleration of our strategy in the 2-year transformation plan, it does paint to a more positive picture in the medium and longer term, when we do expect the market to recover more fully. So thank you for listening to our presentation, and we'll now take some questions.

[Operator Instructions] Our first question is from [ Gary Phillips ]. How will eradicating the Regional Distribution businesses, the only profitable part of the group results in an increase in market share?

Gary, thanks for asking that question. I think it's -- one point of clarity that's probably worth me just dwelling on, so I don't think we're not looking to eradicate the Regional Distribution businesses. It's more alignment and allow them to work in combination and collaboration. So a key feature of the acceleration of the strategy is being able to operate as a single business. So it's around certification rather than eradication, so just to be clear on that. And as you rightly say, this is an important part of the business and an important part of the group. So it's us reinforcing our investment in that area, giving our customers access to the broadest range of products that we can offer them and that simplification rather than having to have multiple accounts that perhaps they have today.

The next question is also from [ Gary Phillips ]. The transformation plan purports to deliver a GBP 15 million improvement in profit. What uses this when the business is losing GBP 30 million a year?

Yes. Sure so you've seen on that slide towards the end where Chris talked about long-term outlook. So there's 3 components to the profit recovery as we look out over the next 2, 3, 4 years. So firstly is the existing strategic initiatives. So growing in Trade Counters, Larger Customers, increasing our mix of our Own Product brands. Second is the transformation plan, and that's where the GBP 15 million fits in and it's at least GBP 15 million of profit improvement that we're targeting. And then thirdly is market recovery, recognizing that the market is now 25% lower in volume terms than it was in 2019. So it's a combination of those 3 things together that drive a material profit uplift opportunity over the next few years.

The next question is from [ Bill Wilson ]. The decision to pursue the strategy of Trade Counters and selling through Larger Customers has not been well received by Headlam's independent retailer segment, leading to some migration. Alongside this, the actual results from Trade Counters, 7%; and Larger Customers, 2%, can only be described as lackluster, even more so when comparatives are weak. Has Headlam backed the wrong horse?

I think one of the key elements of the strategy that I laid out some time ago was seeking to offer as much of a broad service offer to as much of the market as possible. And what was clear is Headlam's focus purely in an independent retail area of the marketplace presents an opportunity for us to expand that into other customer types. And that's given us the ability to grow into those other areas at a time when the market is obviously weak anyway. Your point around whether that's had an impact on the independent retailer, I think it's important that we do understand and explain the rationale behind our service offer to customers. And in many cases, we've had an opportunity to describe and explain that on a one-to-one basis with customers. And I, myself, have had that opportunity. And I've met many customers who, as you might imagine, needed that explanation to try and understand the purpose of a trade counter. And I think many of the independent retailers now utilize the trade counter network for convenience and indeed, where perhaps some of their fitters have run out of underlying or gripper rods, they've got a convenient location where they can access to top up their orders. So it does require explanation, and we've had the time and the ability to communicate that with those independent retail customers. So I think that's well understood. As to your second part of your question, there has been, as you might imagine, a very difficult marketplace. So for us to be able to see growth in the key accounts and Larger Customers areas is despite that market weakness. And some of our large customers are seeing significant reductions in footfall as many retailers have seen over the past month. So us offering that new service area, expanding our share of wallet where we have with certain customers has meant that we've been able to not only offset that market weakness, but also grow sales with the trade counters. As I said, that's still high mid- to high single-digit growth we are taking more space on but also seeing an increase in basket size. And many, many, many new customers joining us through that trade counter rollout program indeed. The majority of the growth in the sales and trade counters is actually coming from new customers, not simply customers switching channels to collections.

The next question is from [ Gary Phillips ]. Why are you acquiring more facilities in the Southeast when you have only just opened the Ipswich distribution center? What is the point opening another DC with its back in a sea, i.e., Rayleigh?

Yes, the network itself, as I've described in the presentation, has been effectively inherited from a number of regional acquisitions in the past. And it's important that we look at the network to hold and try and offer this national service that indeed, the Mercado moving to a single Mercado selling business for those regions now gives us that ability. And we'll constantly look at the location of the distribution centers. And it's -- we don't have the luxury of a blank sheet of paper where we could simply locate those sites at will. But what we do have is the ability to look at the customer, both the customer service requirements today and the customer opportunity and just feel that the Rayleigh site, for example, does give us a much better access to another great opportunity for our store for customer service in terms of the Southeast and in a better way. And the network just has a better configuration by having a location there and across opportunity in Ipswich rather than the DC we had in Ipswich, which replaced a regional facility we had in Hadleigh nearby. So yes, this is about the maturity of the business into a national distribution network, one of regional sites.

The next question is from D Lynch from ContraCapital. What is the likely impact on revenues of consolidating 32 trading brands into 1? Won't the greater transparency this affords cause many customers to [ bork ] at the percentage of their business they are giving to a single supplier. How much of the cost savings will be dissipated by lost sales? If consolidation of trading businesses was just upside, it would surely have been affected many years ago.

Yes, we -- as I described in the past, customers have evolved over time, and our understanding of their needs and requirements have also evolved. And we've been carrying out customer surveys for a number of years now. And I think there has been a change in the dynamic over recent times where customers perhaps in the past didn't have clarity over perhaps who was supplying their products. But 2 or 3 things have happened in recent times. During the course of those surveys, one of the things that's emerged is customers are fully briefed, fully aware of the shape and scale of head of businesses and who their ordering product from. But as I said, it's a simple feature of the structure of our organization, which meant that they needed to have multiple accounts in order to get the best out of us, which is a shame. So it's a simplification. So it's easier for customers to access their product through us rather than having this complexity. So I think that's one element that's changed. I think the second element that's changed is customers were starting to say to us, it doesn't seem right that we've got these multiple versions of the same product set. So multiple books, for example, of very similar products when they could have one. And that listening and listening to customers and changing what we can offer them and simplify what we can offer them is really the essence behind the change. Now clearly, when we do these type of simplifications, we need to make sure that customer service is maintained and customers fully understand that migration to the new model. So one of the features of that is that each customer will be visited by their salesperson who will explain that process and how and what might be changing for them. And in doing so, we feel that we'll mitigate that risk of perhaps any downside in sales. But more than that, our sales team have an opportunity to talk to customers with a single voice accessing a broader range of product and less time in the call, more time selling. So quite the opposite of us fearing any reduction in sales, I think it gives us the ability and the salespeople to talk to perhaps be able to increase sales for those customers.

Next question again is from D Lynch. What is the optimum number of Regional Distribution centers in the U.K.? And how long will it take to get there?

Like I said in the earlier response, we don't have the luxury of a blank sheet of paper. And therefore, it's not possible for me to say what the ideal number of sites is. I think we will continually look at the service load, the volume of sales and activity that we have across the existing network. And where there's opportunities for us to take efficiencies and designing a better solution for customers, we will do so. And that might mean that we end up with less or perhaps even more cross docks in certain sizes and less distribution centers or it may not. So I think it's a question of us looking at the demand and sales as we move forward, taking the opportunities when they arise as we are right now.

We have another question from D Lynch. What is the effect of Carpetright's collapse for Headlam? It could be a decent market share opportunity for your customers. But how much market share did Carpetright have over the last few years? Hard to know as no accounts filed since 2021 year-end.

Yes. Look, as I said in my presentation, we're not of any significant supplier to Carpetright. And as you say, it's difficult sometimes to tell the scale and size of businesses, particularly when they're privately owned. Perhaps they've got a couple of GBP 100 million worth of sales at retail prices in the marketplace, which if you convert that to something similar to our distributor prices, perhaps that's GBP 100 million of sales, maybe a little more. So with that coming out of the market, clearly, that demand is going to be serviced somewhere. And that will either be serviced by another multiple like a Tapi, for example, or indeed by the independents. So one would expect and hope that we benefit as from as many of the other independents and our competitor distributors will benefit from that sale moving into other channels. So yes, I agree. I think it would be likely that we'll benefit in some shape or form from that. And our positioning of our business in a way where we can access these multiple customer types means that we can benefit from the sales that we're likely to get through the Tapi acquisition of some of those sites as well as servicing the independent retailers who will have undoubtedly also picked up from some of those -- so acquisition has meant that we can take advantage in both customer channels as a result of that change.

Another question from D Lynch. More broadly is the absence of a significant nationwide retailer with national TV advertising actually a significant negative for the whole floor-covering sector as much reduces consumer awareness? As in, yes, we really could do with a new carpet.

Yes, that's a difficult one to answer, isn't it? I think Tapi might suggest that they do actually have nationwide presence than they do invest in advertising. So Tapi might well suggest that they have got a national coverage with the consumer -- will be aware of their existence. So time will tell. As we've said in the past, I think having large retail is at the forefront of consumers' mind, typically is good for the whole sector. And in many respects, the loss of Carpetright from that consciousness is a shame. But as I said, Tapi is there to pick up some of those sales, they've acquired some of their sites through the administration process. And the independent retail space or the high street is still going strong. So I think consumers will recognize that they have access to products when they need it. And of course, we've seen the emergence of online players as well. So I think there is quite a strong representation in the consumer's mind of flooring as a general thing whether Carpetright is a part of that equation or not.

Another question from D Lynch. We all understand what's going on in the U.K., but why are European results so awful? Some color there would be helpful.

Yes. So I mean, we've seen the market in Continental Europe, in France and Netherlands has been quite a bit weaker than in the U.K. And it seems the consumer in terms of -- when it comes to big ticket is maybe a bit further behind than in the U.K. And we see it elsewhere. If you saw the [ Kingfish ] results this morning, the French business -- the decline in their French business is about 6% worse than their U.K. business. So it just feels a bit further behind, a bit more hit from a consumer perspective. I think as we look out over the next 6 months or so, in particular, when we look at our Dutch business towards the end of the first half of this year, we did secure some distribution agreements on an exclusive basis, which we're starting to see come through from now onwards to which is providing some revenue uplift in the Continental Europe numbers. But market, really, really weak; underlying market, weak in Europe at the moment.

And the last question from D Lynch regarding trade counters. What proportion of additional sales through this channel are truly incremental? Do you know this definitively?

Yes. So we do analyze this quite carefully, and it's about an 80-20. So 80% of the revenue growth in Trade Counters is purely incremental. And how do we know that? Well, we know that by looking at the customers, so their new customer accounts that haven't previously traded with the Headlam Group. And when we asked them where they previously bought their product from, it will typically be through other distribution channels. So it's a share shift into Headlam. The 20% then typically comes from existing customers that might be, for example, an independent retailer who likes the convenience of having a trade counter nearby, they can send their fitters out in the morning with the vans collecting product and then go straight on to a customer site. But the vast majority, 80% is truly incremental revenue to Headlam.

Next question is from [ Domenico Finelli ]. How do you intend to use the proceed from the dismissal of the real estate? Do you see any room to buy back shares given they are trading at a historical low price?

Yes. So the priority at the moment is around deleverage and the transformation plan and using the proceeds that we generated to fund the transformation plan. Clearly, there's a material cash inflow coming through the end of this and we'll revisit the capital allocation policy and framework when we get to the end of it, and the long-term outlook on free cash flow generation is positive. So we'll take a look at that in due course. But in the meantime, next sort of 18 months or so, focus on implementing this transformation plan.

The next question is from David Stang from Coface. Are the GBP 25 million one-off cash costs spread over 2 years? Or are they front loaded to the beginning of the transformation program?

Yes. So they are -- they're spread and quite nicely matched actually against the anticipated inflows coming in from property and from working capital, spread over the next 24 months or so. So you could probably anticipate GBP 6 million, GBP 7 million maybe over the next 6 months, but pretty neatly spread over and matched with inflows.

The next question is from David Stang again. Whilst a smaller part of the group's overall activities, does the group remain committed to its European operations?

I've spoken about this many times. We continually look at both the network in the U.K. and also our overseas businesses. And as Adam described, we have some really good developments here the last few months where we've been able to see some growth in our Dutch businesses through the expansion into new areas. And I think that's something we'll always consider, how do we come supportive of those sites, those businesses and their current state? So working with the French business at the moment about sort of improving the underlying performance of the business. So I think it's just a matter of time. We'll keep reviewing that business, keep reviewing the shape of things both here and overseas. So that's the commitment we've made, and there's no change in that.

The next question is from [ David Casey ]. How likely is it that the dividend will be suspended given that the company may not be profitable again until 2025 or beyond?

So you would have seen in the announcement that we've not -- we're not announcing an interim dividend for this year. And if you look at consensus as well, consensus so that the analyst expectations is then for no dividend this year or next year. And again, we'll kind of revisit that as we progress and implement the transformation plan and consider the appropriate time to reinstate the dividend. I think we'll probably come to the next question. I see there's that question around reinstating dividend. I think we probably kind of covered that with that answer.

The last question is from David Stang. First half working capital management was positive. Will you be expecting a similarly positive working capital improvement in H2?

Yes. So we had about -- it's about a GBP 20 million inflow from working capital in half 1. And if you look at the components of that, you've got about 1/3 of that was from stock where we've taken action to reduce stock and improve stock turn. And then you've got the rest of that pretty much from receivables. So as I look out over the full year, I'd expect full year to be a positive number on working capital overall, so I'd expect an inflow. But maybe for its pare-back a little from the half year number. Now I'd expect us to hold on to the stock reduction and we're endeavoring to grow that stock reduction. So the inflow from that should stay. But we had about GBP 12 million inflow in half 1 from receivables. And depending on the shape of revenue market recovery, et cetera, we could see a little bit of that come back in half 2 as revenues grow. So in answer, still a positive working capital, a good positive working capital number for the full year, but maybe not the GBP 20 million that we saw in half 1.

Another question has just come in from D Lynch. Is the Ipswich site to be closed, the very large 190,000 sf one, but only opened in 2020 at a cost of GBP 26 million?

Yes, that's the same site. So the cost that you referred to there is a mixture of the development of the building and also the fitting, fixtures and equipment that's gone inside. And obviously, some of that is available to be reused. That is the same site that we're referring to.

And another question that has come in from [ Domenico Finelli ]. Would you expect your return on capital to increase significantly after this transformation plan? Could you elaborate, please?

Yes. I mean is your answer -- you look at -- if you lay out the long-term outlook, that slide that Chris talked about around those 3 components for long-term profit outlook through the combination of implementing the existing strategy, the transformation plan and in market recovery. Those 3 factors combined, combined with the action we're taking on the network and in terms of the brand shape from a property point of view and a network point of view then, yes, absolutely, those things combining, we'd see it have quite a material increase on return on capital.

We have no further questions. I will hand it back over to you.

Well, thanks for the questions. It's a really good set of questions. It enabled us to get into a bit of detail around some of the components of the items that we've been talking about today. So I think just a summary and to close off the presentation. At this point at the end, is absolutely right, current trading remains challenging. The market remains challenging. And I think the expansion into new customer areas, the broadening of the business space is really giving us some -- a helping hand where we've seen some growth in Trade Counter revenue and in large accounts, which is helpful. And I think this acceleration of the strategy to simplify our offer and simplify the network as well, it just does accelerate some of that performance improvement as well. So as I said, when the market perhaps returns and we've got the maturity of this transformation plan, we do expect that performance to be much more rosy going forward. So yes, thanks for joining the presentation and asking those questions today.