Final Results

RNS Number : 1053E

Headlam Group PLC

09 March 2022

9 March 2022

Headlam Group plc

('Headlam' or the 'Company')

Final Results

2021 a very positive year

Headlam Group plc (LSE: HEAD), Europe's leading floorcoverings distributor, today announces its final results for the year ended 31 December 2021, and update since the year-end.

2021 Overview

Financials¹

· Total revenue up 15.4% at £667.2 million, a strong rebound from 2020 which was materially impacted by COVID-19 related closures of operations during the first half (2020: £578.1 million)

· Gross margin increased to a record 33.0% (2020: 30.8%) owing to the inflationary environment through much of the year, and other factors including actions under the business change strategy

· Underlying ^² operating margin improved to 5.6% (2020: 3.0%), and on track to reach the stated 7.5% target during 2023 through the increasing realisation of benefits from the business change strategy

· Underlying ^² operating profit and underlying ^² profit before tax of £37.3 million and £35.8 million respectively (2020: £17.4 million; £15.4 million respectively)

· Statutory operating profit of £29.1 million (2020: £12.2 million loss), and a statutory profit before tax of £27.6 million (2020: £14.3 million loss)

· Average net funds (excluding lease liabilities) ³ of £38.3 million, a strong recovery from the 2020 average net debt position caused by COVID-19 and demonstrating the cash generative nature of the business (2020: £8.6 million average net debt)

· Net funds position as at 31 December 2021 of £17.7 million (1 January 2021: £8.3 million), with a net funds position (excluding lease liabilities) of £53.7 million (1 January 2021: £51.6 million)

· Proposed final ordinary dividend of 8.6 pence in line with the capital allocation parameters, giving a total ordinary dividend payout in respect of 2021 of 16.4 pence

· Surplus capital return totalling £30.0 million announced in addition to ordinary dividend, return by way of a special dividend of 17.7 pence (total £15.0 million) plus share buyback programme (total £15.0 million)

Operational

· Company able to largely mitigate the industry wide issues, including supply issues, with inventory position maintained and levels of availability preserved

· Belcolor, the Company's Swiss operations, disposed of in the year allowing greater focus on operations presenting more meaningful growth opportunities and leveraging of group scale

· Business change strategy focused on substantial revenue growth opportunities and efficiency now largely embedded in the business, with benefits increasingly evident, albeit with disruptions arising from some implementation

· Success already being demonstrated from the active targeting of a larger share of the overall £3 billion⁴ UK market, and improved customer service propositions:

o Performance of new and improved Trade Counters under the national roll-out programme exceeding initial expectations, with good customer feedback and accelerating roll-out

o Several new customers won in the Multiple Retailer customer segment, with substantial scope to increase business with them

o Pleasing customer response to enhanced digital offer, including new industry-leading mobile app launched in November 2021

· Good progress in developing the ESG Strategy following initial report in 2021, including announcement of net zero emissions ambition, ESG Committee being established in 2022, and strategy planning to enhance diversity

Post Year-End and 2022 Trading

· Banking facilities refinanced and extended in January 2022, providing a flexible capital structure

· As announced on 8 March 2022, Chris Payne appointed permanent Chief Executive following an independent search process

· Trading in January and February 2022 in line with plan, with the strong margin performance in 2021 maintained into 2022

Commenting, Philip Lawrence, Non-Executive Chairman, said:

" 2021 was a very positive year for the Company on a number of fronts. Financial performance rebounded strongly from 2020, when the first half was materially impacted by the emergence of COVID-19; industry wide issues were able to be largely mitigated; and significant progress was made in implementing the business change strategy. Importantly, none of these achievements would have been possible without the commitment and support of the Company's people, and the Board wishes to express its thanks to them.

"The Company's strategy is meaningful organic revenue growth from an efficient and modernised operating base, with its successful delivery being demonstrated and benefits becoming increasingly evident. The Company enters 2022 a far more focused, capable and modern business, with greater opportunity and competitive advantage to support customers and grow financial performance."

This announcement contains information which, prior to its disclosure, was inside information as stipulated under Regulation 11 of the Market Abuse (Amendment) (EU Exit) Regulations 2019/310 (as amended).

The Company's final results presentation accompanying this announcement is available on its website at Reports & presentations | Headlam . A video of the presentation is also available to view on the website and via the following link, https://bit.ly/HEAD_FY21 .

Analyst presentation

The Company will be holding a webinar for analysts today (9 March 2022) at 9:30am GMT, consisting of the video presentation followed by a live Q&A. To register your interest, please email headlam@almapr.co.uk .

Investor presentation

The Company will also be hosting an online investor presentation, consisting of the video presentation followed by a live Q&A, today (9 March 2022) at 11:30am GMT. The presentation is open to all existing and potential shareholders. Investors can register to attend the webinar at the following link: https://bit.ly/HEAD_FY22_11_30 .

¹The financial results represent continuing operations only, and exclude the contribution from the Swiss business Belcolor AG ('Belcolor') in the year, and the comparator year(s), following its disposal in May 2021 (as detailed in the Financial Review and in Note 7 to the Financial Statements).

^² Underlying is before non-underlying items, which includes i) amortisation of acquired intangible assets, ii) impairment of goodwill and intangible assets, iii) property disposal profit, iv) business restructuring costs, and v) impairment of property, plant and equipment and inventory (following a fire) (as detailed in the Financial Review and in Note 2 to the Financial Statements) .

³ Average net funds / (debt) is calculated by aggregating the net funds / (debt) position, excluding the impact of IFRS 16 'Leases', for each business day and dividing by the total number of business days.

⁴ Source: LEK Consulting, 2020, calculated at distributors' selling price and inclusive of sales direct from manufacturers.

Enquiries:

Headlam Group plc	Tel: 01675 433 000
Chris Payne, Chief Executive	Email: headlamgroup@headlam.com
Catherine Miles, Director of IR and ESG

Panmure Gordon (UK) Limited (Corporate Broker)	Tel: 020 7886 2500
Erik Anderson / Edward Walsh / Ailsa MacMaster

Peel Hunt LLP (Corporate Broker)	Tel: 020 7418 8900
George Sellar / John Welch / Andrew Clark

Alma PR (Financial PR)	Tel: 020 3405 0205
Susie Hudson / Rebecca Sanders-Hewett / Lily Soares Smith	Email: headlam@almapr.co.uk

Notes for Editors:

Operating for 30 years, Headlam is Europe's leading floorcoverings distributor, providing the channel between suppliers and trade customers of floorcoverings.

Headlam works with suppliers across the globe manufacturing a diverse range of floorcovering products, and provides them with a cost efficient and effective route to market for their products into the highly fragmented trade customer base.

To maximise customer reach, Headlam operates 66 businesses across the UK and Continental Europe (France and the Netherlands). Each business operates under its own trade brand and utilises individual sales teams while being supported by the group's distribution network, central teams and resources.

The Company's extensive customer base covers both the residential and commercial sectors, with principal customer groups being independent retailers and smaller flooring contractors alongside other customer segments such as larger (multiple) retailers, housebuilders, specifiers, and larger contractors (including local government / authorities).

Headlam provides customers with a market leading service through:

· the broadest product offering;

· unrivalled product knowledge;

· tailored service propositions and solutions;

· sales team and marketing support;

· ecommerce support and digital applications;

· nationwide delivery; and

· trade counter and collection service.

www.headlam.com

Chairman's Statement

2021 was a very positive year for the Company on a number of fronts. Financial performance rebounded strongly from 2020, when the first half was materially impacted by the emergence of COVID-19; industry wide issues including supply issues were able to be largely mitigated; and significant progress was made in implementing the Company's business change strategy. It is important to say upfront that none of these achievements would have been possible without the commitment and support of the Company's people, and the Board wishes to express its thanks to them, as well as to all its stakeholders. Some challenges and disruptions arose from the implementation of certain actions under the business change strategy described in the Chief Executive's Review, and the Company would like to thank its people and customers affected. Additionally, a fire at one of the Company's sites in December 2021 caused significant disruption for the people and business based there and its customers, albeit pleasingly order taking and deliveries were quickly restored, and the Company wishes to thank everyone for their support.

During the year, many of the actions under the business change strategy were completed or integrated, with benefits flowing through both operationally and financially. Of particular note was the simplification and efficiency improvements through group restructuring, network and delivery consolidations, and the many improvements made to customer service propositions. This took the form of investment in the network, digitalisation, and creation of dedicated customer service and sales teams. There was also an increased collaborative approach across the group to better leverage the group's scale.

As a result of these actions, the Company is now more efficient with a strong foundation to focus on growth.

The Company's strategy is meaningful organic revenue growth from an efficient and modernised operating base, and the Company is now actively targeting a larger share of the overall £3 billion UK market with success already being demonstrated. New customers have been won in the Multiple Retailer segment of the market where the Company is underweight; the performance of new and improved Trade Counter sites under the roll-out programme are exceeding initial expectations; and there has been a pleasing customer response to the Company's enhanced digital offer, in particular the recently launched industry-leading mobile app.

Actions under the business change strategy contributed to an improved operating margin during the year, demonstrating good progress towards the Company's stated 7.5% underlying operating margin target during 2023. As referenced in January 2022's Pre-Close Trading Update, the Company's net funds position is comfortably above current capital requirements despite increased levels of investment, and the Company is now announcing a surplus capital return alongside the proposed final ordinary dividend. Full details of the return are given within the Chief Executive's Review, and in summary the Company is taking a blended approach and returning a total of £30 million to shareholders via a special dividend and share buyback programme to provide both income and value accretion. For the time being an element of capital is being retained on the balance sheet to allow for further investment in the business should the Company wish to accelerate growth projects, to provide flexibility including on the financing of any potential M&A, and also as a prudent precaution against unforeseen events.

The detailed Environmental, Social and Governance ('ESG') Report within the 2021 Annual Report and Accounts builds on the Company's initial report published in May 2021. The ESG strategy supports the long-term sustainability of the business with the Board committed to progressing its development, and will establish a new ESG Committee in 2022 to support this. Addressing the environmental challenge is much broader than reducing carbon emissions and will require close collaboration across the industry. The transition to a circular economy is a longer term challenge for the floorcoverings industry as there are both technical and market dynamic obstacles to overcome, with the Company prepared to work with partners to lead change. As a basis for its long term ambitions, the Company now has a net zero emissions ambition for 2035, with detailed planning to commence and details of a costed transition plan to be provided within the ESG Report in next year's 2022 Annual Report. Additionally, the Board believes that business has a positive role to play in society, and as detailed in the Chief Executive's Review has now embarked on a programme to support a more diverse workforce and the benefits that brings to the Company, as well as launching a locally focused community programme.

A number of changes have been made at Board level to support the effective implementation of all the Company's strategic and corporate objectives. The Non-Executive Director appointments of Simon King and Stephen Bird during 2021 brought highly relevant skills and experience on to the Board, with both having extensive executive experience leading growth and customer-led strategies.

In October 2021, Steve Wilson left the Company as Chief Executive following an extensive executive career with the group, with Chris Payne, Chief Financial Officer, acting as Interim Chief Executive and subsequently being appointed as permanent Chief Executive, as announced on 8 March 2022. Steve Wilson was instrumental in the Company's success throughout his 30 years with Headlam, including instigating the business change strategy, and the Board offers its heartfelt gratitude for his contribution to the Company.

The Board is delighted to welcome Chris as Chief Executive. Following an extensive independent search process, the Board believe that Chris is the best person to drive delivery of the business change strategy which as above is focused on substantial revenue growth opportunities across a broader segment of the market from a more efficient operating base following the actions taken during the last two years. In the five years since he joined the Company, Chris has been a highly effective and commercial Chief Financial Officer, and a key architect of the business change strategy. The Company has commenced the independent search process for a new Chief Financial Officer and intends to appoint an Interim Chief Financial Officer shortly while the search process is ongoing.

Also as announced on 8 March 2022, I shall be stepping down at the AGM in May 2022 having served seven years with the Company. During the last four years as Chairman, I have overseen the planning, implementation, and considerable development of the business change strategy, the strengthening of oversight and governance, and initiation of a comprehensive ESG strategy. I will leave the Company in a significantly better place to grasp the opportunities of organic growth and scale. It is the Board's intention to also appoint a new Independent Non-Executive Director, and will commence this search later in the year.

As a result of all these actions and progress so far, the Company enters 2022 a far more focused, capable and modern business, with greater opportunity and competitive advantage to support customers and grow financial performance. While the current inflationary environment may impact some end-consumer spending in the coming months, the Company is confident in its current expectations and the delivery of its strategy which should be able to mitigate any potential market softening in the residential sector, and looks forward to demonstrating further progress in 2022.

Philip Lawrence

Non-Executive Chairman

9 March 2022

Chief Executive's Review

The following financial results represent continuing operations only, and exclude the contribution from the Swiss business Belcolor AG ('Belcolor') in the year, and the comparator year(s), following its disposal in May 2021 (as detailed in the Financial Review and in Note 7 to the Financial Statements).

Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2021 and 2020 periods and is adjusted for any variances in working days.

Underlying is before non-underlying items, which includes i) amortisation of acquired intangible assets, ii) impairment of goodwill and intangible assets, iii) property disposal profit, iv) business restructuring costs, and v) impairment of property, plant and equipment and inventory (following a fire).

The Company has given detail within the Financial Review and accompanying appendix where it has used Alternative Performance Measures ('APMs'), the description of, and why it believes in each instance they are a more appropriate measure of performance than a corresponding IFRS measure.

Introduction

As described in the Chairman's Statement, 2021 was a very positive year with lots of progress made, not least in the increasing realisation of benefits from the business change strategy, expanded upon below. There were a number of external market effects and industry wide issues, not least from the ongoing impact of COVID-19, which the Company was largely able to mitigate and operate successfully throughout. Product supply issues during the year led to significant price increases. However, these were passed directly into the marketplace and absorbed owing to the relative infrequency of consumer purchases and proliferation of product at varying price points providing huge choice at every level. Additionally, through working closely with its suppliers, the Company was able to maintain its inventory position and preserve levels of availability.

Outside of the industry wide issues, the Company experienced very limited direct impact from COVID-19 during 2021, and operated effectively and uninterruptedly throughout the year despite lockdowns and restrictions. This is testament to the Company's effective operating procedures, but most of all to its people, customers and suppliers. Many of the Company's people, customers and suppliers have been part of the Company for years or even decades, and they are the backbone of the Company's operating and financial performance. Heartfelt thanks go to them, particularly in a year that gave rise to disruptions from the implementation of some of the actions under the business change strategy (notably arising from the network and delivery consolidations), and also from a fire at one of the Company's sites (detailed below) which occurred alongside ongoing COVID-19 related issues.

I am delighted to have now been appointed permanent Chief Executive. Over my five years with the Company, I have been heavily involved with operations and the business change strategy in addition to my role as Chief Financial Officer. I have seen many of our actions now come to fruition, and believe the Company is poised for greater success in the future, and I intend to drive through all the opportunities available.

Financial Performance

Revenue rebounded strongly from 2020 which was materially impacted by COVID-19 related temporary closures of the Company's operations during the first half, and was 15.4% higher at £667.2 million (2020: £578.1 million). Within this, the UK and Continental Europe both traded well and performed strongly compared with 2020, up 16.1% and 10.9% respectively, and supported by the Company's business change strategy. Against 2019, the UK performance was slightly down and Continental Europe performance slightly up.

A noticeable impact of COVID-19 has been on the relative fortunes of the residential and commercial sectors. While the residential sector has been a strong beneficiary of COVID-19 and its knock-on impact on consumer spending habits, the commercial sector has suffered, although it recovered to a degree during 2021. During 2021, residential sector revenue was up 2.9% and commercial sector revenue down 15.0% against 2019 on a like-for-like basis. Against 2020, 2021 residential sector revenue was up 15.3%, and commercial sector revenue was up 18.5%. Underscoring the strength of the residential sector, between 2019 and 2021 the proportion of revenue accounted for the residential sector increased from 64.2% to 68.5%.

Belcolor, the Company's Swiss operations, was disposed of in the year allowing a greater focus on operations that present more meaningful organic growth opportunities and leveraging of group scale in line with the Company's strategy. Detail on the disposal is given in the Financial Review and Note 7 to the Financial Statements, with Belcolor only accounting for 5.1% of revenue in 2020.

Gross margin rose to a record 33.0% in the year (2020: 30.8%) owing to the inflationary environment evident through much of the year, coordinated buying initiatives across the group, improved inventory management, and contribution from the higher-margin residential sector. This, combined with other actions taken under the business change strategy, helped deliver an improved underlying operating margin of 5.6% (2020: 3.0%).

Underlying operating profit and underlying profit before tax was £37.3 million and £35.8 million respectively (2020: £17.4 million; £15.4 million respectively). There was a relatively small amount of non-underlying items in the year compared with 2020, which as detailed was materially impacted by COVID-19. Non-underlying items are detailed in the Financial Review, with the largest contributor relating to a fire at one of the Company's sites in December 2021 detailed below, although this had little impact on overall underlying business performance. Another item relates to the Company's Northern Ireland based business CECO which continued to experience challenges due to COVID-19 impacting its business which is largely focused on bigger, commercial projects, and it was further impaired in the year. Statutory profit before tax in the year was £27.6 million (2020: £14.3 million loss).

The ongoing delivery of the Company's strategy detailed below will allow for further improvement in financial performance, not least from substantial revenue growth opportunities particularly in the areas of Trade Counters and Multiple Retailers. Incremental revenue is expected to benefit from an operational gearing effect to create higher margin on the partially fixed cost base.

Strategy and Operations

The Company's business change strategy* is now largely embedded in the business, with benefits increasingly evident. The strategy is now focused on revenue growth and modernisation, with operational efficiency through cost control remaining important. The latter has been most noticeably enacted through network and delivery consolidations, which has enabled a reduction in headcount, sites and fleet numbers while maintaining or improving the service proposition, albeit with some disruption to service from implementation experienced during the year. Increased investment has been made in the network and systems to optimise performance as well as support revenue growth.

In support of revenue growth, the Company has focused on improving the service propositions to various customer segments within the overall £3 billion UK market, and actively targeting those where it has historically been underweight. As part of the improvements, the Company has developed a suite of industry-leading digital products and applications, and commenced work on product and brand development. The main drivers of revenue growth and modernisation are: Trade Counter roll-out; Multiple Retailers focus; Digital and Ecommerce applications; and Product and Brand development.

Trade Counter roll-out

As announced at the Capital Markets Day held in July 2021, a plan has been developed to grow the existing trade counter network from 53 sites to over 90 new and improved sites by 2025. The accompanying new site 'blueprint' is designed to meet the needs of a broader range of customers (with trade counter businesses heavily skewed towards commercial) and capture greater market share. The sites offer pre-ordered collections, a larger selection of stocked products, as well as a newly launched own-branded flooring range exclusive to trade counter customers. Through the improved offer and expansion to additional sites, the Company is targeting revenue growth in this area of approximately £120 million upon the plan's maturity (from approximately £80 million in 2021). To date, 11 sites are now operating under the new 'blueprint', and their performance has been very pleasing with early achievement of financial targets and positive feedback from both customers and employees. In line with the accelerating roll-out, nine new sites / relocations are already scheduled for 2022, in addition to at least 11 refits, with a good pipeline of prospective new sites.

Multiple Retailer focus

The Multiple Retailers opportunity is worth approximately one-third of the £3 billion UK market, with the Company currently being significantly underweight in this customer segment, and having only approximately £60 million of 2021 revenue in this area. Having not traditionally targeted this area, the Company is now actively focused on enlarging its share. During 2021, the Company established a dedicated 'key accounts' team, developed tailored propositions, and put in place digital support and enabling work for customers. The Company is able to provide Multiple Retailer customers with a highly compelling often bespoke service through: product insight and exclusivity; competitive pricing; supply chain management; stockholding / storage solutions; processing expertise; and national distribution. Good progress has been made in winning initial orders with a number of new customers, with substantial scope to increase the number of SKUs with each and develop the revenue opportunity in 2022 and beyond. An example of a new customer is Oak Furnitureland, who has partnered with Headlam to launch its new engineered wood flooring proposition. Headlam is the sole supplier to Oak Furnitureland on a range of exclusive, premium engineered wood products after its customers expressed interest in a unique flooring offering following market research completed by the retailer. Oak Furnitureland now has dedicated flooring areas within four of its 70 stores.

Digital and Ecommerce applications

Ecommerce and digital applications were launched in 2021 to increase revenue opportunities across different customer segments, as well as increase efficiency and reduce the Company's overall cost to serve. Customers benefit from an enhanced service offering and more convenient ways of doing business with Headlam. Of particular note was the launch of the brand new myheadlam app, an industry-leading fully transactional mobile app allowing customers to trade with all their Headlam accounts 'on the go', in a quick and easy way. Customers are able to search for products, check real-time availability / prices, place orders, review order history, and track live orders. Over £1.4 million of sales have already been received via the app since its full launch in November 2021. Further enhancements are planned for the app, as well as the Company's B2B websites, during 2022, and the Company has an ambitious target of 30% of sales coming from digital channels (Jan 2022: 22%; 2019: 11%).

Product and Brand development

A key objective for 2022 is the investment in product development, with the refocusing of some of the Company's recognised product brands to keep them fresh, relevant, and increase the sales opportunity. There has also been investment in a dedicated team at one of the Company's main sites to support the product and brand development initiative.

In support of promoting sustainable products and increasing consumer awareness, the Company launched a sustainable 'Wool Britannia' product range in 2021 with the support of the British Wool Association which has been very well received.

Supplier Engagement and Buying

The Company's strong partnerships with its suppliers was demonstrated in the year through its ability to effectively mitigate the industry wide supply issues. Levels of engagement have continued to increase, including through more strategic and centralised ranging discussions, and on sustainability considerations as detailed in ESG Strategy below. The two substantial revenue stream opportunities of Trade Counters and Multiple Retailers also present opportunity to expand on the Company's current strategic conversations with suppliers.

Fire at MCD Kidderminister

In a devastating incident in which thankfully no one was hurt, the Company suffered a fire at its MCD Kidderminster business in December 2021, completely destroying the building. Colleagues and customers were quickly provided with support, and colleagues and operations transferred to the Company's main distribution hub in Coleshill. Within four days, MCD Kidderminster customers were again receiving deliveries from MCD Kidderminster which is testament to the Company's business continuity planning, and network, systems and collaborative approach.

Great thanks and appreciation go to those colleagues affected by the fire and the strength of character they showed in the face of adversity. In early January 2022, a temporary site was opened in Kidderminster with longer term options currently being examined. Notwithstanding the non-underlying items associated with the fire, there was no material impact from the fire on overall 2021 revenue and underlying profit, nor is there anticipated to be in 2022. Detail on the write-down of MCD Kidderminster PPE and inventory within non-underlying items and totalling £7.3 million is given within the Financial Review.

ESG Strategy

The Company published its first ESG Strategy Report in 2021, which outlined the Company's sustainability ambitions, and tangible progress has been made since the initial report. The 2021 Annual Report and Accounts being published shortly contains the Company's first full-form ESG Report, and the Company is committed to providing an update on ESG actions and future consideration on a bi-annual basis, with metrics, indicators, and targets to enable measurement of progress.

Through collaboration with its people and external stakeholders, the Company has identified three core focuses under its ESG strategy:

· Reduce the Company's contribution to greenhouse gas ('GHG') emissions and climate change;

· Become a more sustainable business, including through cultural development and by increasing oversight of ESG related risks and opportunities; and

· Increase the sustainability of the overall floorcoverings industry through engagement and example, and support the future transition to a circular economy.

Outlined below are the Company's main actions to date to address these focuses under the 'Environmental', 'Social' and 'Governance' pillars and also under 'People and Culture', all of which are expanded upon fully with the full-form ESG Report.

Environmental

Per the Chairman's Statement, the Board now has a net zero emissions (Scope 1 and Scope 2) ambition for 2035, a new and major milestone for the Company. This will require various steps including a transition strategy and interim targets which will be expanded upon within the Company's forthcoming bi-annual updates, with progress and measurement metrics documented. The Company already has a number of actions to reduce its emissions, which arise predominately from its transportation activities (both commercial and non-commercial fleet). These include:

Roll-out of the 'Transport Integration' cosolidation project resulting in more efficient delivery fleet (commerical vehicle) utilisation, and associated reduction in fleet number (currently a 32 reduction to 356);
Promotion of digital and trade counters developments thereby reducing the proportion of carbon intensive ordering and delivery options;
‘Good energy behaviours’ to be promoted across the group; and
Auditing and upgrading of sites with more energy efficient technologies and equipment.

Social

As part of a wider societal focus, the Company is launching an annual, centrally funded but locally focused community programme, with each site across the group allocated a certain monetary amount per employee on site, and each site donating to a voted-upon local cause.

Governance

One of the material ESG issues identified through consultation with stakeholders was 'Supply Chain Risk', and it forms an area of key near-term focus. Actions to mitigate risk in this area include the commencement of an engagement programme with suppliers on industry sustainability issues, including on changes to regulation and potential sustainability partnerships. Additionally, the Company has signed a contract with an independent party to conduct a full Supply Chain Risk Assessment, with the target of the top 50 suppliers (accounting for approximately 80% of purchases) assessed under the independent Supply Chain Risk Assessment by the end of 2022. The latter part of 2022 will see the implementation of a Supplier Sustainability Procurement Charter, which includes defining a common set of minimum standards and principles.

Importantly, the new Non-Executive Director appointments have increased evaluation and oversight of governance (including risk management), strategy, and corporate objectives, and in 2022 a new ESG Committee is being established.

People and Culture

The Company is focused on investing in and improving the support to its people, including through cultural development, engagement, and review of rewards and benefits. As part of this, various consultations and planning work took place in 2021, alongside workshops and training. Changes and improvements being implemented in 2022 include:

·Moving to one pension for all employees (Master Trust Pension, effective 1 April 2022), providing a more generous and flexible contribution structure, and creating consistency and fairness across the group;

·Introduced a common approach to bonus provisions for senior management and sales leadership roles, driving a more collaborative and 'group success' approach;

· Enhanced and harmonised holiday entitlement;

· Equal sick pay for all colleagues; and

· Cost of living pay increase for all employees.

Diversity, Equity and Inclusion ('DEI') is an integral part of the Company's objective of providing a safe and inclusive working environment where people are engaged, recognised and rewarded. The Company has partnered with a specialist consultancy who are carrying out an independent review (encompassing an employee survey, focus groups and interviews) before establishing a plan to enhance DEI across the Company.

Dividends and Surplus Capital Return

Dividends

Following a period of recovery from the impact of COVID-19 and as a sign of confidence in future trading prospects, the Company resumed dividend payments and announced a 2.0 pence per share nominal ordinary dividend in March 2021. This was followed by a 2021 interim ordinary dividend of 5.8 pence per share after a longer period of recovered trading.

The Company is now proposing a 2021 final ordinary dividend of 8.6 pence per share for approval at May's Annual General Meeting ('AGM'), giving a total annual pay-out for the interim plus final of 14.4 pence, being equivalent to a 2x earnings cover ratio and in line with the Company's published Capital Allocation Priorities, with the 2.0 pence nominal dividend being an additional payment on top.

Surplus Capital Return

As signposted in the January 2022 Pre-Close Trading Update, and confirmed within the Chairman's Statement, the Company is now announcing a surplus capital return in addition to the aforementioned ordinary dividends. Having recourse to the Company's Capital Allocation Priorities, and taking into account current and future considerations as described in the Chairman's Statement, the Company is returning a total of £30 million to shareholders. Having considered the most appropriate method of returning capital, the Company is returning £15 million in the form of a special dividend of 17.7 pence per share to shareholders alongside the ordinary dividend, with a further £15 million being directed towards a share buyback programme ('SBB'). It is the intention that this £15 million SBB will be completed within approximately 12 months, and commence on 10 March 2022. Details of the SBB have been announced separately today.

Post Period-End and Current Trading

Trading in January and February 2022, the Company's quietest trading months, was in line with plan, and pleasingly the strong margin performance in 2021 has been maintained into 2022. In addition, as referenced above, progress on driving additional revenue opportunities from multiple retailers and the trade counter activity is encouraging.

The industry wide issues of product supply and price increases are expected to persist in 2022, though as before, the Company believes it will be able to continue to largely mitigate them. However, the continuing inflationary environment may impact some end-consumer spending, leading to potential softening in the residential sector in the coming months. Early signs of recovery in the commercial sector from its severely impacted position in 2021 may help partially offset this. Notwithstanding this backdrop, the Company is confident in its current expectations and the delivery of its strategy, which provides additional revenue growth which would help mitigate any market weakness.

Chris Payne

Chief Executive

9 March 2022

*Prior to the business change strategy, the Company referred to the Operational Improvement Programme ('OIP'). The business change strategy replaced the OIP, being broader in scope, including encompassing significant revenue growth opportunities, changes to how the group operates as a whole going forward, and business restructuring which has now been completed.

Financial Review

Revenue

As detailed in the Chief Executive's Review, total revenue was £667.2 million (2020: £578.1 million), 15.4% higher than 2020 which was impacted by COVID-19 related temporary closure of operations. Both the UK and Continental Europe performed strongly against 2020. The UK accounted for 87.8% of total revenue (2020: 87.3%), and was up £81.1 million (16.1%) on 2020 at £585.8 million (2020: £504.7 million). Continental Europe revenue was up £8.0 million (10.9%) at £81.4 million (2020: £73.4 million) and accounted for 12.2% of total revenue (2020: 12.7%). On a like-for-like¹ revenue basis, the UK and Continental Europe were up 16.5% and 15.1% respectively against 2020.

The residential sector continued to account for a higher proportion of revenue when compared with pre-COVID-19 levels. This is owing to the strong spend on home improvements since the impact of the pandemic, with the commercial sector being impacted by COVID-related closures and deferrals. During 2021, the residential sector accounted for 68.5% of total revenue compared with 64.2% in 2019 (2020: 69.1%)) and the commercial sector 31.5% (2020: 30.9%). The residential sector accounted for 69.5% of UK revenue (2020: 70.2%), and 61.1% of Continental Europe revenue (2020: 61.2%), the balance being commercial sector.

	£M	%	£M	%
Revenue for the year ended 31 December 2020
UK	504.7	87.3
Continental Europe	73.4	12.7
			578.1	100.0
Incremental items during the 12-month period to 31 December 2021
UK:
Like-for-like^¹	82.5	16.3
Changes in working days	(2.0)	(0.4)
Acquisitions	0.6	0.1
			81.1	16.0
Continental Europe:
Like-for-like^¹	11.0	15.0
Changes in working days	(0.3)	(0.4)
Translation effect	(2.7)	(3.7)
			8.0	10.9
Total movement			89.1	15.4
Revenue for the year ended 31 December 2021
UK	585.8	87.8
Continental Europe	81.4	12.2
			667.2	100.0

^³Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2021 and 2020 periods, and is adjusted for any variances in working days.

No acquisitions were made during the year. 'Acquisitions' in the table above refers to the full year effect of the one acquisition made in 2020, Supertex.

Gross Margin

Gross margin increased 220 basis points in the year to 33.0% (2020: 30.8%), primarily due to the inflationary environment, as well as inventory management and product mix change due to the strength of the higher-margin residential sector.

Expenses

Underlying distribution costs and administrative expenses totalled £183.2 million in the year (2020: £160.7 million), an increase of £22.5 million on the prior year. When stripping out the prior year governmental job retention scheme ('furlough') grants, the increase was only £11.5 million (7.2% increase year on year) with 2020 additionally having reduced expenses due to the COVID-19 related closures. Benefits from the business change strategy during the year were able to offset wage inflation and performance related bonus payments. These benefits will increase in 2022 due to full period contributions, and help mitigate cost inflation in 2022. Pleasingly, underlying distribution costs and administrative expenses expressed as a proportion of revenue was steady at 27.5% (2020: 27.8%) despite the one off benefit of furlough receipts in 2020. The relative proportions of underlying distribution costs and administrative expenses as a percentage of total underlying expenses were 68.7% and 31.3%, respectively (2020: 70.9% and 29.1%). Statutory distribution costs and administrative expenses totalled £ 191.4 million in 2021 (2020: £190.3 million), with the increase in underlying expenses described above largely offset by the decrease in non-underlying items, as below.

Business restructuring costs of £2.3 million were incurred in the year, classified as non-underlying items due to being deemed out of the ordinary course of business, and defined below. No further additional costs are anticipated in 2022 in relation to the business change strategy currently in place.

The Company has maintained a prudent level of bad and doubtful debts provision at £6.7 million, being 1.0% of total revenue (31 December 2020: £8.1 million, 1.4% of total revenue but which includes £1.1 million attributable to Belcolor). This approach has been taken despite strong cash collections throughout 2021 as the impact of current inflationary and energy cost pressures on the economic environment, and the withdrawal of certain government support schemes, might cause this collection experience to lessen.

Alternative Performance Measures

The Company uses alternative performance measures ('APMs') to assess its financial, operational and social performance towards the achievement of its strategy. Such measures may either exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable statutory measure (where one exists), calculated and presented in accordance with IFRS. Such exclusions or inclusions give in the Company's opinion more normalised performance measures, and the Company believes that these APMs are also used by investors, analysts and other interested parties in their analysis.

The APMs have limitations and may not be comparable to other similarly titled measures used by other companies. They should not be viewed in isolation, but as supplementary information.

An explanation of each APM is provided below and a reconciliation of the adjustments made to the Income Statement to derive underlying profit measures is also shown below. Underlying items are calculated before charges associated with the acquisition of businesses and other items which by virtue of their nature, size or/and expected frequency require adjustment to show the performance of the Group in a consistent manner which is comparable year on year. These underlying measures are relevant to investors and other stakeholders, as supplementary information, to fully understand the underlying performance of the business. A limitation of underlying profit measures is that they exclude the recurring amortisation of intangible assets acquired in business combinations but do not similarly exclude the related revenue.

Non-underlying items

Non-underlying items before tax totalled £8.2 million during the year, much reduced from 2020 (£29.7 million) which had a significant level of non-cash items as a direct consequence of the impact of COVID-19.

The below table details the individual non-underlying items:

	2021 £M	2020 £M
Non-underlying items
Impairment of goodwill and intangibles	2.1	24.7
Amortisation of intangibles	1.6	1.6
Impairment of property, plant and equipment and inventory (following a fire, detailed below)	7.3	-
Movements and finance costs for deferred and contingent consideration	-	-
Non-underlying non-cash items	11.0	26.3
Property disposal profit	(5.1)	-
Business restructuring costs	2.3	2.4
Acquisitions related fees	-	0.7
GMP equalisation	-	0.3
Non-underlying cash items	(2.8)	3.4
Non-underlying items before tax	8.2	29.7

In December 2021 a fire completely destroyed the MCD Kidderminster distribution centre and, therefore, the property, plant and equipment and inventory at the site totalling £7.3 million has required a full write-down. An insurance claim is currently in progress. Any refunds cannot be recognised until they are virtually certain, so any credit would be recognised in non-underlying items in the year the claim is closed, hoped by the Company to be 2022. A contingent asset has been disclosed relating to the insurance claim.

The cash items relate to the profit on the disposal of two freehold properties under network consolidation activities (£5.1 million), offset by £2.3 million of business restructuring costs under the business change strategy and other events. The business restructuring costs related to material alignment of headcount with seasonal trading patterns and also with evolving customer servicing, along with executive settlement agreements. Cumulative non-underlying business restructuring costs since their initiation as part of the business change strategy amount to £4.7 million (all cash in nature), and cover the period July 2020 to December 2021. No further business restructuring costs are currently anticipated for 2022. Costs associated with the fire at MCD Kidderminster, disposal of properties and business restructuring do not reflect trading performance and, therefore, have been adjusted to ensure consistency between periods.

Operating Profit and Profit Before Tax

The Company has reported an underlying operating profit of £37.3 million (2020: £17.4 million), which equates to an underlying operating margin of 5.6% (2020: 3.0%), and anunderlying profit before tax of £35.8 million (2020: £15.4 million). After including the non-underlying items above, this gives a statutory operating profit of £29.1 million (2020: £12.2 million loss) and a statutory profit before tax of £27.6 million (2020: £14.3 million loss).

	Underlying £M	Non-underlying £M	Total £M
Operating profit/(loss) 2020	17.4	(29.6)	(12.2)
Gross margin movement in 2021:	42.4	-	42.4
Expense changes
Volume	(3.1)	-	(3.1)
Furlough grants	(11.0)	-	(11.0)
Bad debt provision	6.7	-	6.7
People costs (including pay increases and performance-related bonus payments)	(9.6)	-	(9.6)
Effect of acquisitions	0.4	-	0.4
Other	(5.9)	21.4	15.5
Total increase	19.9	21.4	41.3
Operating profit/(loss) 2021	37.3	(8.2)	29.1

Tax

The Company's consolidated underlyingeffective tax rate for 2021 was 25.8% (2020: 24.7%), which is higher than the standard rate of corporation tax in the UK of 19% primarily due to the effect of restating the opening UK deferred tax liability to reflect the change in the UK tax rate from 19% to 25%, from April 2023, which was substantively enacted in the year.

The Company is committed to being fully compliant with the relevant tax laws and compliance obligations regarding the filing of tax returns, payment and collection of tax. The Company maintains an open relationship with HM Revenue & Customs and currently operates within a level of tax compliance risk that is rated as 'low' (2020: 'low').

Dividend and Surplus Capital Return

The proposed final ordinary dividend of 8.6 pence per share, as outlined in the Chief Executive's Review, if approved by shareholders at the forthcoming AGM, will be payable on 27 May 2022 to shareholders on the register as at 6 May 2022, and equates to a cash outflow of £7.3 million. As additionally outlined in the Chief Executive's Review, as part of the return of surplus capital to shareholders, the Company has also declared a special dividend of 17.7 pence per share (not subject to shareholder approval) which will be paid alongside the final ordinary dividend to shareholders on the register as at the same date, namely 6 May 2022. This special dividend payment equates to a cash outflow of £15.0 million.

The other component of the surplus capital return is a share buyback programme ('SBB') which will be enacted by the Company's corporate brokers, and permits a cash outflow of up to a maximum of £15.0 million. Details are given in the separate announcement issued today.

Investments

Total capex in the year was £6.9 million (2020: £15.0 million), and primarily focused on the Trade Counter network improvement and roll-out, and replacing or upgrading warehouse equipment. 2020 was disproportionately high as it included the final tranche of spending on the Ipswich distribution centre (£9.7 million) which opened in 2020 on top of annual maintenance capex.

Investment in 2022 is estimated to be in excess of £15 million, with Trade Counters investment expected to be approximately £7 million as part of the accelerating roll-out which will see a total capital investment of approximately £18 million by the end of 2024 to reach the targeted 90 sites. The balance of the investment will be focussed on improving and replacing warehouse and material-handling equipment.

Cash Flows and Banking Facilities

During the year, the Company generated net cash inflows of £1.0 million (2020: £27.0 million) as shown in the table below.

	2021 £M	2020 £M
Cash flows from operating activities
Profit / (loss) before tax	33.4	(17.1)
Adjustments for:
Depreciation, amortisation and impairment	30.0	52.0
Finance income and expense	1.5	2.1
Change in inventories	(26.6)	15.3
Change in receivables	(16.6)	23.2
Change in payables	5.4	(4.8)
(Profit) / loss on sale of property, plant and equipment	(11.1)	0.1
Loss on sale of subsidiary	0.1	-
Share-based payments	1.2	(0.1)
Cash generated from the operations	17.3	70.7
Interest and Tax	(3.5)	(8.2)
Disposal proceeds	16.2	0.1
Capital investment	(6.9)	(15.0)
Lease payments	(15.0)	(15.7)
Dividends	(6.6)	(6.3)
Other	(0.5)	1.4
Net cash flows	1.0	27.0

Working capital movements generated a cash outflow of £37.8 million (2020: £33.7 million inflow), largely due to increasing inventory levels as trade returned to pre-pandemic levels, and also to mitigate any impact from industry supply issues by elevating levels of fastest moving products. During 2020, following the impact of COVID-19, the Company had limited product purchasing and utilised existing inventory to satisfy demand, before beginning to elevate purchasing levels in the second half. The Company's inventory position at 31 December 2021 was £130.9 million, similar to the £132.5 million at 31 December 2019 of which £4.9 million was attributable to Belcolor.

Cash collections were strong in the year but working capital saw a return to pre COVID-19 levels with a normalisation in receivables (resulting in an outflow) and payables (inflow) respectively.

The other main drivers of cash flow movements in the year were capital investment (£6.9 million), lease payments (£15.0 million) and disposal proceeds (£16.2 million). The disposal proceeds include the proceeds from the sale of two freehold properties under the network consolidation (£7.0 million) as well as proceeds from the disposal of Belcolor. Full detail on the Belcolor disposal is contained in Note 7 below.

The 2021 cash outflow in respect of dividends relates to the nominal ordinary dividend, totalling £1.7 million paid in May 2021, and the 2021 interim ordinary dividend, totalling £4.9 million paid in November 2021.

As at 31 December 2021, the Company had a net funds position of £17.7 million (1 January 2021: £8.3 million). The net funds position excluding lease liabilities was £53.7 million (1 January 2021: £51.6 million).

	At 1 January 2021 £M	Non-cash Items £M	Cash flows £M	Disposal of subsidiary £M	Foreign exchange movements £M	At 31 December 2021 £M
Cash at bank and in hand	60.8	-	4.5	(3.5)	(0.6)	61.2
Debt due within one year	(2.0)	-	1.2	-	0.2	(0.6)
Debt due after one year	(7.2)	-	-	-	0.3	(6.9)
Net funds excluding lease liabilities	51.6	-	5.7	(3.5)	(0.1)	53.7
Lease liabilities	(43.3)	(13.0)	15.0	5.5	(0.2)	(36.0)
Net funds	8.3	(13.0)	20.7	2.0	(0.3)	17.7

Average net funds in the year (excluding lease liabilities) were £38.3 million, a strong rebound from the 2020 net debt position caused by COVID-19 (2020: £8.6 million average net debt).

As at 31 December 2021, the Company had total committed banking facilities available of 76.6 million, of which £69.8 million was undrawn.

At 31 December 2021, the Company had a sterling committed facility of £68.5 million and a euro committed facility of €9.6 million. The Group also had short term uncommitted facilities of £25.0 million in the UK and €3.8 million in Continental Europe. The total banking facilities available to the Group at 31 December 2021 were £104.8 million (2020: £110.3 million). During the year, the disposal of Belcolor led to a reduction in the euro uncommitted facilities in Continental Europe of €5.0 million.

Following the year end, on 17 January 2022, the Company completed a refinancing of its banking facilities and now has an increased committed sterling facility with Barclays Bank, Bank of Ireland and Credit Industriel Et Commercial for £81.5 million, with the euro committed facilities now cancelled. The new facility matures in October 2026, with a one year extension exercisable (with the agreement of the banks) on the first anniversary. An additional uncommitted facility of €1.0 million was agreed in Continental Europe in January 2022. The Company's other uncommitted facilities remain unchanged, but will reduce by £10.0 million in May 2022.

Belcolor Disposal

On 28 April 2021, the Group entered into a sale agreement to dispose of its Swiss business, Belcolor. On 29 April 2021, as a condition of the sale agreement, Belcolor undertook a sale and leaseback of its property for gross proceeds of £12.4 million and paid a dividend of £11.1 million to its parent company, Headlam Group plc. Cash consideration before costs of £0.9 million was received on sale of the subsidiary.

The subsidiary was sold on 28 April 2021, with effect from 17 May 2021, and is reported for the year ending 31 December 2021 as a discontinued operation, with the sale and leaseback treated as a discrete pre-disposal transaction.

Pensions

The accounting valuation for the legacy UK defined benefit pension scheme showed a surplus of £12.1 million as at December 2021. However, as the Company does not have an unconditional right to a surplus refund, the pension scheme is recorded as a deficit of £4.3 million as at 31 December 2021 reflecting the level of UK deficit recovery plan payments that the Company committed to following the last actuarial valuation as at 31 March 2020. The Company no longer has a liability for the Swiss pension scheme following the disposal of Belcolor.

Viability and Going Concern

Updated principal risks and uncertainties, to those published in the 2020 Annual Report and Accounts, are detailed within the 2021 Annual Report and Accounts being published shortly. No new Principal Risks have been identified. The level of risk of two Principal Risks is considered to have changed, detailed below.

The Board reviewed the Company's resilience to the principal risks and uncertainties by considering stress testing forecasts through adverse scenarios, which involve a reduction in market demand - (A) a sustained recessionary environment characterised by a long period of underperformance throughout the assessment period, and (B) an economic crisis with a sharp decline in demand in the first year before a recovery.

The testing indicated that the Company would be able to operate within its current facilities and meet its financial covenants in both scenarios. A further, less likely, not plausible, more severe scenario (reverse stress test) was also considered, where the Company experiences a revenue year on year decline of 23% in 2022. In 2020 when the Company had COVID-19 related temporary closures of operations, revenue in the year only declined by 15% against 2019. In this scenario, the Company would be able to operate within its current facilities and meet its financial covenants. However, should the reduction in revenue be greater than this, the Board would need to take mitigating actions to remain within its banking covenants.

Mitigating actions, which are within the Board and management's control, include a reduction in the cost base to better align it with market demand and revenue performance, suspension of ordinary dividend(s), and a freeze on non-critical capital spend. These actions are not included in any of the scenarios modelled, but were effectively implemented during 2020 following the initial impact of COVID-19, and therefore proven to be enacted.

As above, as at 31 December 2021 the Company had a net funds position excluding lease liabilities of £53.7 million, and as at 2 March 2022 has an undrawn refinanced banking facility of £109.7 million. The Board was, therefore, comfortable that the Company would maintain resilience in the event such scenarios occurred and concluded that there was a reasonable expectation that the Company would continue to operate and meet its liabilities over a three year period. Based on the results from these scenarios, and having considered the available mitigating actions, the Board can have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period of this assessment. In particular, the Board believes there are reasonable grounds for stating that the Company has adequate resources to continue in operational existence for a period no shorter than twelve months from the date of this Financial Review, and it is appropriate to adopt the going concern basis in preparing the Company's Financial Statements.

Principal Risks

The level of risk of two Principal Risks is considered to have changed as compared with the 2020 Annual Report and Accounts, summarised below. No new Principal Risks have been identified, and none of the existing removed.

· Healthy and safety - level of risk: decreased - as a result of the mitigating actions undertaken during 2021, the level of risk has been judged to have decreased.

· Environmental (incorporating climate change) - level of risk: increased - given the increasing regulation / legislation in relation to the environment, and increased focus on climate change (including regulatory disclosures in relation to climate-related risks and opportunities), the level of risk has been judged to have increased.

Chris Payne

Chief Financial Officer and Chief Executive

9 March 2022

Appendix

Alternative Performance Measures ('APMs')

Glossary of Alternative Performance Measures	Closest equivalent statutory measure	Definition and purpose
Underlying administrative expenses	Administrative expenses	Calculated as administrative expenses before charges associated with the acquisition of businesses and other items which by virtue of their nature, size and expected frequency require adjustment to show the performance of the Group in a consistent manner which is comparable year-on-year. See Adjusted Results Reconciliation below.
Underlying operating profit	Operating profit	Calculated as operating profit before charges associated with the acquisition of businesses and other items which by virtue of their nature, size and expected frequency require adjustment to show the performance of the Group in a consistent manner which is comparable year-on-year. See Adjusted Results Reconciliation below.
Underlying operating margin	None	Calculated as underlying operating profit divided by revenue. This measure is used to assess how effective the Group is at converting revenue into underlying operating profit.
Underlying profit before tax	Profit before tax	Calculated as profit before tax before charges associated with the acquisition of businesses and other items which by virtue of their nature, size and expected frequency require adjustment to show the performance of the Group in a consistent manner which is comparable year-on-year. Underlying profit before tax is used in the determination of Executive Directors' annual bonuses. See Adjusted Results Reconciliation below.
Underlying profit after tax	Profit after tax	Calculated as profit after tax before charges associated with the acquisition of businesses and other items which by virtue of their nature, size and expected frequency require adjustment to show the performance of the Group in a consistent manner which is comparable year-on-year. See Adjusted Results Reconciliation below.
Underlying basic earnings per share	Basic earnings per share	Calculated as basic earnings per share before charges associated with the acquisition of businesses and other items which by virtue of their nature, size and expected frequency require adjustment to show the performance of the Group in a consistent manner which is comparable year-on-year. See Adjusted Results Reconciliation below.
Underlying diluted earnings per share	Diluted earnings per share	Calculated as diluted earnings per share before charges associated with the acquisition of businesses and other items which by virtue of their nature, size and expected frequency require adjustment to show the performance of the Group in a consistent manner which is comparable year-on-year. See Adjusted Results Reconciliation below.
Net funds / debt	None	Calculated as cash and cash equivalents less other interest- bearing loans and borrowings and less lease liabilities. This is used as a measure of liquidity.
Net funds / debt excluding lease liabilities	None	Calculated as cash and cash equivalents less other interest- bearing loans and borrowings. This is provided for use by investors, who used this metric before the adoption of IFRS16 and continue to do so.
Average net funds / debt	None	Calculated by aggregating the net funds / debt position excluding lease liabilities for each business day and dividing by the total number of business days. This is used as a measure of liquidity maintained throughout the year.
Like for like revenue growth	None	Calculated as year-on-year revenue growth, expressed as a percentage and adjusted to normalise currency and for consistent working days, for businesses making a full year's contribution. This allows a consistent measure of year-on-year performance.
Underlying selling, general and administrative costs	None	Calculated as distribution costs and underlying administrative expenses divided by revenue and expressed as a percentage. This measure shows how effective the Group is at converting gross profit into underlying operating profit.
Return on capital employed	None	Calculated as underlying operating profit measured as a percentage of average capital employed, being total equity less non-current other interest-bearing loans and borrowings less cash and cash equivalents. This demonstrates the relative level of profit generated by the capital employed.
Cash conversion	None	Calculated as cash generated from the operations divided by operating profit and expressed as a percentage. This cash conversion measure demonstrates the success of the Group in converting profit to cash, which underpins the quality of earnings and reflects the effectiveness of working capital management.


Adjusted Results Reconciliation
31 December 2021

	Total Results	Impairment of goodwill and intangibles	Impairment of property, plant and equipment and inventory following fire	Amortisation of acquired intangibles	Business restructuring	Property disposal	Profit from discontinued operation	Adjusted Results (underlying)

Continuing operations	£M	£M	£M	£M	£M	£M	£M	£M
Revenue	667.2	-	-	-	-	-	-	667.2
Cost of sales	(446.7)	-	-	-	-	-	-	(446.7)
Gross profit	220.5	-	-	-	-	-	-	220.5
Distribution costs	(125.9)	-	-	-	-	-	-	(125.9)
Administrative expenses	(65.5)	2.1	7.3	1.6	2.3	(5.1)	-	(57.3)
Operating profit/(loss)	29.1	2.1	7.3	1.6	2.3	(5.1)	-	37.3
Finance income	0.4	-	-	-	-	-	-	0.4
Finance expenses	(1.9)	-	-	-	-	-	-	(1.9)
Net finance costs	(1.5)	-	-	-	-	-	-	(1.5)
Profit/(loss) before tax	27.6	2.1	7.3	1.6	2.3	(5.1)	-	35.8
Taxation	(7.7)	(0.2)	(1.0)	0.2	(0.4)	(0.1)	-	(9.2)
Profit/(loss) from continuing operations	19.9	1.9	6.3	1.8	1.9	(5.2)	-	26.6
Profit/(loss) from discontinued operation	4.5	-	-	-	-	-	(4.4)	0.1
Profit/(loss) for the year attributable to the equity shareholders	24.4	1.9	6.3	1.8	1.9	(5.2)	(4.4)	26.7
Earnings/(loss) per share for profit from continuing operations
Basic	23.5p	2.3p	7.5p	2.2p	2.2p	(6.2)p	-	31.5p
Diluted**	23.2p	2.3p	7.4p	2.2p	2.2p	(6.2)p	-	31.1p
Earnings/(loss) per share for profit from discontinued operations
Basic	5.3p	-	-	-	-	-	(5.1)p	0.2p
Diluted**	5.2p	-	-	-	-	-	(5.0)p	0.2p


Adjusted Results Reconciliation
31 December 2020 (re-presented)
	Total Results	Impairment of goodwill	Amortisation of acquired intangibles	Acquisitions related fees	Business restructuring	Other	Adjusted Results (underlying)

Continuing operations	£M	£M	£M	£M	£M	£M	£M
Revenue	578.1	-	-	-	-	-	578.1
Cost of sales	(400.0)	-	-	-	-	-	(400.0)
Gross profit	178.1	-	-	-	-	-	178.1
Distribution costs	(113.9)	-	-	-	-	-	(113.9)
Administrative expenses	(76.4)	24.7	1.6	0.7	2.4	0.2	(46.8)
Operating profit/(loss)	(12.2)	24.7	1,6	0.7	2.4	0.2	17.4
Finance income	0.8	-	-	-	-	-	0.8
Finance expenses	(2.9)	-	-	-	-	0.1	(2.8)
Net finance costs	(2.1)	-	-	-	-	0.1	(2.0)
Profit/(loss) before tax	(14.3)	24.7	1.6	0.7	2.4	0.3	15.4
Taxation	(3.1)	(0.1)	(0.1)	-	(0.5)	-	(3.8)
Profit/(loss) from continuing operations	(17.4)	24.6	1.5	0.7	1.9	0.3	11.6
Profit/(loss) from discontinued operation	(2.9)	3.3	-	-	-	-	0.4
Profit/(loss) for the year attributable to the equity shareholders	(20.3)	27.9	1.5	0.7	1.9	0.3	12.0
Earnings/(loss) per share for profit from continuing operations
Basic	(20.7)p	29.1p	1.9p	0.7p	2.3p	0.4p	13.7p
Diluted**	(20.7)p	29.2p	1.9p	0.7p	2.3p	0.3p	13.7p
Earnings/(loss) per share for profit from discontinued operations
Basic	(3.4)p	3.9p	-	-	-	-	0.5p
Diluted**	(3.4)p	3.9p	-	-	-	-	0.5p

Other comprises: movements in deferred and contingent consideration (£0.1m credit within total administrative expenses); finance costs on deferred and contingent consideration (£0.1m cost within total finance expenses); and GMP equalisation (£0.3m cost within total administrative expenses).

Consolidated Income Statement

For the year ended 31 December 2021

					Re-presented*
			Non-			Non-
			underlying			underlying
		Underlying	(Note 2)	Total	Underlying	(Note 2)	Total
		2021	2021	2021	2020	2020	2020
Continuing operations	Note	£M	£M	£M	£M	£M	£M
Revenue	1	667.2	-	667.2	578.1	-	578.1
Cost of sales		(446.7)	-	(446.7)	(400.0)	-	(400.0)
Gross profit		220.5	-	220.5	178.1	-	178.1
Distribution costs		(125.9)	-	(125.9)	(113.9)	-	(113.9)
Administrative expenses		(57.3)	(8.2)	(65.5)	(46.8)	(29.6)	(76.4)
Operating profit/(loss)	1	37.3	(8.2)	29.1	17.4	(29.6)	(12.2)
Finance income		0.4	-	0.4	0.8	-	0.8
Finance expenses		(1.9)	-	(1.9)	(2.8)	(0.1)	(2.9)
Net finance costs		(1.5)	-	(1.5)	(2.0)	(0.1)	(2.1)
Profit/(loss) before tax		35.8	(8.2)	27.6	15.4	(29.7)	(14.3)
Taxation	4	(9.2)	1.5	(7.7)	(3.8)	0.7	(3.1)
Profit/(loss) from continuing operations		26.6	(6.7)	19.9	11.6	(29.0)	(17.4)
Profit/(loss) from discontinued operation		0.1	4.4	4.5	0.4	(3.3)	(2.9)
Profit/(loss) for the year attributable to the equity shareholders		26.7	(2.3)	24.4	12.0	(32.3)	(20.3)
Earnings/(loss) per share for profit from continuing operations
Basic	5	31.5p		23.5p	13.7p		(20.7)p
Diluted**	5	31.1p		23.2p	13.7p		(20.7)p
Earnings/(loss) per share for profit from discontinued operations
Basic	5	0.2p		5.3p	0.5p		(3.4)p
Diluted**	5	0.2p		5.2p	0.5p		(3.4)p
Ordinary dividend per share
Interim dividend for the financial year	6			5.80p			-
Final dividend declared	6			8.60p			-
Declared special dividend	6			17.70p			-
Declared dividend	6			-			2.00p

* The results for the year ended 31 December 2020 have been re-presented to reflect the presentation of the Belcolor business as discontinued.

**For the year ended 31 December 2020, diluted earnings/(loss) per share are reported the same as basic earnings/(loss) per share, as a result of the earnings being negative so the impact of them is anti-dilutive.

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2021

	2021	2020
	£M	£M
Profit/(loss) for the year attributable to the equity shareholders	24.4	(20.3)
Other comprehensive income/(expense)
Items that will never be reclassified to profit or loss
Remeasurement of defined benefit plans	(2.6)	(0.3)
Related tax	0.8	0.1
	(1.8)	(0.2)
Items that are or may be reclassified to profit or loss
Exchange differences arising on translation of overseas operations	(1.2)	0.9
Reclassification of foreign currency translation reserve on disposal of subsidiary	(4.8)	-
	(6.0)	0.9
Other comprehensive (expense)/income for the year	(7.8)	0.7
Total comprehensive income/(expense) attributable to the equity shareholders for the year	16.6	(19.6)
Total comprehensive income attributable to the equity shareholders for the year arising from:
Continuing operations	16.9	(17.5)
Discontinued operations	(0.3)	(2.1)
	16.6	(19.6)

Statements of Financial Position

At 31 December 2021

		2021	2020
	Note	£M	£M
Assets
Non-current assets
Property, plant and equipment		113.3	122.9
Right of use assets		35.0	42.1
Intangible assets		18.1	21.1
		166.4	186.1
Current assets
Inventories		130.9	118.5
Trade and other receivables		114.0	101.6
Cash and cash equivalents		61.2	60.8
		306.1	280.9
Non-current assets classified as held for sale		-	0.4
		306.1	281.3
Total assets	1	472.5	467.4
Liabilities
Current liabilities
Other interest-bearing loans and borrowings		(0.6)	(2.0)
Lease liabilities		(10.5)	(12.5)
Trade and other payables		(178.0)	(178.4)
Employee benefits		(1.0)	-
Income tax payable		(1.0)	(0.2)
		(191.1)	(193.1)
Non-current liabilities		(6.9)
Other interest-bearing loans and borrowings		(6.9)	(7.2)
Lease liabilities		(25.5)	(30.8)
Provisions		(2.7)	(2.1)
Deferred tax liabilities		(10.3)	(8.7)
Employee benefits		(3.9)	(5.5)
		(49.3)	(54.3)
Total liabilities	1	(240.4)	(247.4)
Net assets		232.1	220.0
Equity attributable to equity holders of the parent
Share capital		4.3	4.3
Share premium		53.5	53.5
Other reserves		(1.6)	3.4
Retained earnings		175.9	158.8
Total equity		232.1	220.0

Statement of Changes in Equity

For the year ended 31 December 2021

			Capital
	Share	Share	redemption	Special	Translation	Treasury	Retained	Total
	capital	premium	reserve	reserve	reserve	reserve	earnings	equity
	£M	£M	£M	£M	£M	£M	£M	£M
Balance at 1 January 2020	4.3	53.5	0.1	0.5	6.8	(6.1)	186.0	245.1
Loss for the year attributable to the equity shareholders	-	-	-	-	-	-	(20.3)	(20.3)
Other comprehensive income/(expense)	-	-	-	-	0.9	-	(0.2)	0.7
Total comprehensive income/(expense) for the year	-	-	-	-	0.9	-	(20.5)	(19.6)
Transactions with equity shareholders, recorded directly inequity
Share-based payments	-	-	-	-	-	-	(0.1)	(0.1)
Share options exercised by employees	-	-	-	-	-	0.2	(0.1)	0.1
Ordinary shares issued	-	-	-	1.0	-	-	-	1.0
Deferred tax on share options	-	-	-	-	-	-	(0.2)	(0.2)
Dividends to equity holders	-	-	-	-	-	-	(6.3)	(6.3)
Total contributions by and distributions to equity shareholders	-	-	-	1.0	-	0.2	(6.7)	(5.5)
Balance at 31 December 2020	4.3	53.5	0.1	1.5	7.7	(5.9)	158.8	220.0
Balance at 1 January 2021	4.3	53.5	0.1	1.5	7.7	(5.9)	158.8	220.0
Profit for the year attributable to the equity shareholders	-	-	-	-	-	-	24.4	24.4
Other comprehensive income/(expense)	-	-	-	-	(6.0)	-	(1.8)	(7.8)
Total comprehensive income/(expense) for the year	-	-	-	-	(6.0)	-	22.6	16.6
Transactions with equity shareholders, recorded directly inequity
Share-based payments	-	-	-	-	-	-	1.2	1.2
Share options exercised by employees	-	-	-	-	-	1.0	(0.3)	0.7
Deferred tax on share options	-	-	-	-	-	-	0.2	0.2
Dividends to equity holders	-	-	-	-	-	-	(6.6)	(6.6)
Total contributions by and distributions to equity shareholders	-	-	-	-	-	1.0	(5.5)	(4.5)
Balance at 31 December 2021	4.3	53.5	0.1	1.5	1.7	(4.9)	175.9	232.1

Cash Flow Statements

For the year ended 31 December 2021


	2021	2020
	£M	£M
Cash flows from operating activities
Profit/(loss) before tax for the year:
Continuing operations	27.6	(14.3)
Discontinued operations	5.8	(2.8)
	33.4	(17.1)

Adjustments for:
Depreciation of property, plant and equipment, amortisation and impairment of intangible assets	9.2	35.8
Depreciation of right-of-use assets	13.5	16.2
Impairment of investment	-	-
Finance income	(0.4)	(0.8)
Finance expense	1.9	2.9
(Profit)/loss on sale of property, plant and equipment	(11.1)	0.1
Impairment of property, plant and equipment and inventory, following fire	7.3	-
Loss on sale of subsidiary	0.1	-
Share-based payments	1.2	(0.1)
Operating cash flows before changes in working capital and other payables	55.1	37.0
Change in inventories	(26.6)	15.3
Change in trade and other receivables	(16.6)	23.2
Change in trade and other payables	5.4	(4.8)
Cash generated from the operations*	17.3	70.7
Interest paid	(0.5)	(2.7)
Interest received	0.5	0.8
Tax paid	(3.5)	(6.3)
Net cash flow from operating activities	13.8	62.5
Cash flows from investing activities
Proceeds from sale of property, plant and equipment	19.7	0.1
Acquisition of subsidiaries, net of cash acquired	-	(1.0)
Repayment of acquired borrowings on acquisition	-	(0.2)
Disposal of discontinued operation, net of cash disposed of**	(3.5)	-
Acquisition of property, plant and equipment	(6.1)	(15.0)
Acquisition of intangible assets	(0.8)	-
Net cash flow from investing activities	9.3	(16.1)
Cash flows from financing activities
Proceeds from the issue of treasury shares	0.7	0.2
Proceeds from borrowings	-	50.9
Repayment of borrowings	(1.2)	(48.5)
Principal elements of lease payments	(15.0)	(15.7)
Dividends paid	(6.6)	(6.3)
Net cash flow from financing activities	(22.1)	(19.4)
Net increase/(decrease) in cash and cash equivalents	1.0	27.0
Cash and cash equivalents at 1 January	60.8	33.4
Effect of exchange rate fluctuations on cash held	(0.6)	0.4
Cash and cash equivalents at 31 December	61.2	60.8

*Cash generated from the Group operations for the year ended 31 December 2020, includes an amount of £11.0 million cash received under governmental job retention schemes in the UK and France (Company £0.1 million). These are discussed in more detail under Government Grants in Note 1.

**For cash flows of discontinued operations see Note 7 below.

Notes to the Financial Statements

1 Segment reporting

As at 31 December 2021, the Group had 63 operating segments in the UK and three operating segments in Continental Europe, following the disposal of the Swiss operating segment in May 2021. Each segment represents an individual trading operation, and each operation is wholly aligned to the sales, marketing, supply and distribution of floorcovering products. The operating results of each operation are regularly reviewed by the Chief Operating Decision Maker, which is deemed to be the Chief Executive. Discrete financial information is available for each segment and used by the Chief Executive to assess performance and decide on resource allocation.

The operating segments have been aggregated to the extent that they have similar economic characteristics. The key economic indicators considered by management in assessing whether operating segments have similar economic characteristics are the products supplied, the type and class of customer, method of sale and distribution and the regulatory environment in which they operate.

As each operating segment is a trading operation wholly aligned to the sales, marketing, supply and distribution of floorcovering products, management considers all segments have similar economic characteristics except for the regulatory environment in which they operate, which is determined by the country in which the operating segment resides.

The Group's internal management structure and financial reporting systems differentiate the operating segments on the basis of the differing economic characteristics in the UK and Continental Europe and accordingly present these as two separate reportable segments. This distinction is embedded in the construction of operating reports reviewed by the Chief Executive, the Board and the executive management team and forms the basis for the presentation of operating segment information given below.

Continuing operations
	UK		Continental Europe		Total
	2021	2020	2021	2020	2021	2020
	£M	£M	£M	£M	£M	£M
Revenue
External revenues	585.8	504.7	81.4	73.4	667.2	578.1

Reportable segment underlying operating profit	37.0	15.5	3.1	1.6	40.1	17.1

Reportable segment assets	280.6	296.5	30.3	47.8	310.9	344.3
Reportable segment liabilities	(196.4)	(200.9)	(27.1)	(31.3)	(223.5)	(232.2)

During the year there were no inter-segment revenues for the reportable segments (2020: £nil).

Reconciliations of reportable segment profit, assets and liabilities and other material items:

	2021	2020
	£M	£M
Profit for the year
Total underlying operating profit for reportable segments	40.1	17.1
Non-underlying items	(8.2)	(29.6)
Unallocated (expense)/income	(2.8)	0.3
Operating profit/(loss)	29.1	(12.2)
Finance income	0.4	0.8
Finance expense	(1.9)	(2.9)
Profit/(loss) before taxation	27.6	(14.3)
Taxation	(7.7)	(3.1)
Profit/(loss) from continuing operations	19.9	(17.4)
Profit/(loss) from discontinued operations	4.5	(2.9)
Profit/(loss) for the year	24.4	(20.3)

	2021	2020
	£M	£M
Assets
Total assets for reportable segments	310.9	344.3
Unallocated assets:
Properties, plant and equipment	97.5	105.4
Right of use assets	0.7	0.7
Non-current assets classified as held for sale	-	0.4
Cash and cash equivalents	63.4	16.6
Total assets	472.5	467.4
Liabilities
Total liabilities for reportable segments	(223.5)	(232.2)
Unallocated liabilities:
Lease liabilities	(0.7)	(0.8)
Employee benefits	(4.9)	(5.5)
Income tax payable	(1.0)	(0.2)
Deferred tax liabilities	(10.3)	(8.7)
Total liabilities	(240.4)	(247.4)

			Reportable
		Continental	segment		Consolidated
	UK	Europe	total	Unallocated	total
Continuing operations	£M	£M	£M	£M	£M
Other material items 2021
Capital expenditure	5.7	0.4	6.1	-	6.1
Impairment of goodwill	1.2	-	1.2	-	1.2
Impairment of intangible assets	0.9	-	0.9	-	0.9
Impairment of property, plant and equipment and inventory (following fire)	7.3	-	7.3	-	7.3
Depreciation	2.3	0.4	2.7	2.5	5.2
Depreciation of right of use assets	11.6	1.9	13.5	-	13.5
Non-underlying items (excluding finance expenses and impairments)	(1.1)	(0.1)	(1.2)	-	(1.2)

Other material items 2020
Capital expenditure	9.1	0.7	9.8	5.6	15.4
Impairment of goodwill	23.4	1.3	24.7	-	24.7
Depreciation	2.8	0.7	3.5	2.7	6.2
Depreciation of right of use assets	14.0	2.1	16.1	0.1	16.2
Non-underlying items (excluding finance expenses and impairments)	4.8	0.1	4.9	-	4.9

In the UK the Group's freehold properties are held within Headlam Group plc and a rent is charged to the operating segments for the period of use. Therefore, the operating reports reviewed by the Chief Executive show all the UK properties as unallocated and the operating segments report a segment result that includes a property rent. This is reflected in the above disclosure.

The Chief Executive, the Board and the senior executive management team have access to information that provides details on revenue by principal product group for the two reportable segments, as set out in the following table:

Revenue by principal product group and geographic origin is summarised below:

	UK		Continental Europe		Total
	2021	2020	2021	2020	2021	2020
	£M	£M	£M	£M	£M	£M
Revenue
Residential	407.2	354.3	49.7	44.9	456.9	399.2
Commercial	178.6	150.4	31.7	28.5	210.3	178.9
	585.8	504.7	81.4	73.4	667.2	578.1

2 Non-underlying items

In order to illustrate the underlying trading performance of the Group, presentation has been made of performance measures excluding those items which it is considered would distort the comparability of the Group's results. These non-underlying items are defined as those items that are associated with the acquisition of businesses or other items which by virtue of their nature, size and expected frequency require adjustment to show the performance of the Group in a consistent manner which is comparable year-on-year.

The following are the principal items classed as non-underlying:

· Impairment of intangibles, fixed assets and right of use assets as they are significant, non-recurring items;

· Amortisation of acquired intangibles as they relate to the acquisition of businesses;

· Property disposal profits as they are not generated from the normal course of business;

· Acquisitions related fees and deferred and contingent consideration items as they relate to the acquisition of businesses;

· Impairment of property, plant and equipment (following a fire) as it is a significant, non-recurring item; and

· Business restructuring cost which is a significant cash item that falls across 2020 and 2021, and for which no further costs are expected.

See the Financial Review for details on alternative performance measures.

Non-underlying items for continuing and discontinued operations after tax of £2.3 million (2020: £32.3 million) relate to the following:

	2021	2020
	£M	£M
Continuing operations:
Impairment of intangibles, fixed assets and right of use assets	2.1	24.7
Amortisation of acquired intangibles	1.6	1.6
Property disposal	(5.1)	-
Acquisitions related fees	-	0.7
Movements in deferred and contingent consideration	-	(0.1)
Finance costs on deferred and contingent consideration	-	0.1
Impairment of property, plant and equipment and inventory (following a fire)	7.3	-
Business restructuring costs	2.3	2.4
GMP Equalisation	-	0.3
	8.2	29.7
Taxation on non-underlying items	(1.5)	(0.7)
	6.7	29.0

Discontinued operation:
Impairment of goodwill	-	3.3
Disposal of subsidiary (including Swiss property disposal)	(4.4)	-
	(4.4)	3.3
	2.3	32.3

The business restructuring related to aligning overall headcount with trading patterns and evolving customer servicing, along with executive settlement agreements, and were all cash in nature. Cumulative non-underlying business restructuring costs since their initiation as part of the business change strategy amount to £4.7 million and cover the period July 2020 to December 2021. No further business restructuring costs are currently anticipated for 2022.

See the Financial Review for details on alternative performance measures.

3 Impairment tests for cash-generating units containing goodwill ('CGU')

Goodwill is attributed to the businesses identified below for the purpose of testing impairment. These businesses are the lowest level at which goodwill is monitored and represent operating segments.

The aggregate carrying amounts of goodwill allocated to each CGU are as follows:

	Reported	2021	2020
	segment	£M	£M
Joseph, Hamilton & Seaton	UK	4.4	4.4
Crucial Trading	UK	1.4	1.4
McMillan Flooring	UK	0.1	0.1
CECO (Flooring) Limited	UK	-	1.2
Ashmount Flooring Supplies Limited	UK	0.4	0.4
Telenzo	UK	0.3	0.3
Other	UK	1.0	1.0
		7.6	8.8

Impairment

Each year, or whenever events or a change in the economic environment or performance indicates a risk of impairment, the Group reviews the value of goodwill balances allocated to its cash-generating units.

An impairment test is a comparison of the carrying value of the assets of a business or CGU to their recoverable amount. The recoverable amount represents the higher of the CGU's fair value less the cost to sell and value in use. Where the recoverable amount is less than the carrying value, an impairment results.

During the year ended 31 December 2021, all goodwill was tested for impairment, which resulted in an impairment charge on goodwill attributable to CECO (Flooring) Limited of £1.2 million. The recoverable amount of CECO (Flooring) Limited was its value in use, which amounted to £nil.

Value in use was determined by discounting the future cash flows generated from the continuing use of the CGU on a basis consistent with 2020, and applying the following key assumptions.

Key assumptions

Cash flows were projected based on actual operating results, the approved 2022 business plan and management's assessment of planned performance in the period to 2026. For the purpose of impairment testing the cash flows were assumed to grow into perpetuity at a rate of 2.0% beyond 2026.

The main assumptions within the operating cash flows used for 2022 include the achievement of future sales volumes and prices for all key product lines, control of purchase prices, achievement of budgeted operating costs and no significant adverse foreign exchange rate movements. These assumptions have been reviewed in light of the current economic environment.

The Directors have estimated the discount rate by reference to an industry average weighted average cost of capital. This has been adjusted to include an appropriate risk factor to reflect current economic circumstances and the risk profile of the CGUs. As the CGUs in the UK, have similar characteristics and risk profiles, a single discount rate has been applied. The pre-tax weighted average cost of capital of 11.2% (2020: 11.7%).

Climate-related risks have been considered in relation to the impairment testing, including possible end-of-life disposal tax (extended producer responsibility), the transition to electric vehicles and significant changes in consumer preferences towards more sustainable products, with the latter able to be mitigated by the Group reflecting this in its product offering. A high degree of uncertainty surrounds the likelihood, timing and quantum of any possible end-of-life disposal tax. This risk is not included in the base case models due to the high levels of uncertainty whilst other risks have been assumed not to have a material impact. Sensitivity analysis has been performed assuming an end-of-life disposal tax equating to 0.6% of revenue, taking effect after year 5 in the model. The Directors have assessed that end-of-life disposal tax based on this assumption, would not cause further material impairment.

Sensitivity analysis

The Group has applied sensitivities to assess whether any reasonable possible changes in these key assumptions could cause a further impairment to goodwill and subsequently intangible assets, property, plant and equipment and right-of-use assets that would be material to these Consolidated Financial Statements.

The Directors performed sensitivity analysis on the estimated recoverable amounts focusing on a reasonably possible change in key assumptions:

(i) sales growth decrease of 1% in first five years;

(ii) gross margin decrease of 1%; and

(iii) pre-tax discount rate, used to convert the cash flow forecasts to present values, increase of 1%.

One CGU is materially sensitive to the gross margin sensitivity and would require a £1.4 million impairment should gross margin decrease by 1%. Three CGUs are materially sensitive to a combination of all three sensitivities above and would require an impairment of £6.9 million should all three sensitivities occur as above, simultaneously.

4 Taxation

Recognised in the income statement

	2021	2020
	£M	£M
Current tax expense:
Current year	6.4	2.7
Adjustments for prior years	(0.3)	(0.9)
	6.1	1.8
Deferred tax expense:
Origination and reversal of temporary differences	-	0.1
Effect of change in UK tax rates	2.7	0.9
Adjustments for prior years	0.2	0.4
	2.9	1.4
Total tax	9.0	3.2

Total tax continuing operations in income statement	7.7	3.1
Total tax discontinued operations in income statement	1.3	0.1

	2021	2020
	£M	£M
Tax relating to items credited/(charged) to equity
Current tax on:
Income and expenses recognised directly in equity	-	-
Translation reserve	-	-
	-	-
Deferred tax on:
Share options	(0.2)	0.2
Deferred tax on other comprehensive income:
Defined benefit plans	(0.8)	(0.1)
	(1.0)	0.1
Total tax reported directly in reserves	(1.0)	0.1

Factors that may affect future current and total tax charges

The UK headline corporation tax rate for the year was 19.0% (2020: 19.0%). In the Spring Budget of 2021, the UK Government announced that from 1 April 2023 the rate of UK corporation tax will increase from 19% to 25%. This new law was substantively enacted on 24 May 2021. UK deferred tax assets and liabilities have therefore been calculated at a rate of 25% (2020: 19%).

In addition, an increase in the Dutch corporation tax rate to 25.8% (2020: 25.0%) was enacted in December 2021 which has also been taken into account in the calculation of the related deferred tax balance.

Reconciliation of effective tax rate

	2021		2020
	%	£M	%	£M
Profit/(loss) before tax on continuing operations		27.6		(14.3)
Profit/(loss) before tax on discontinued operations		5.8		(2.8)
Total profit/(loss) before tax		33.4		(17.1)

Tax using the UK corporation tax rate	19.0	6.3	19.0	(3.2)
Effect of change in UK tax rate	8.1	2.7	(5.3)	0.9
Local tax incentives	(0.5)	(0.2)	-	-
Non-deductible expenses/non-taxable income	1.0	0.4	(2.9)	0.5
Non-deductible non-underlying costs	-	-	(31.0)	5.3
Effect of tax rates in foreign jurisdictions	-	-	0.1	(0.1)
Impact of losses not recognised	(0.3)	(0.1)	(1.7)	0.3
Adjustments in respect of prior years	(0.1)	(0.1)	2.9	(0.5)
Total tax in income statement	27.2	9.0	(18.7)	3.2
Add back tax on non-underlying items - continuing		1.5		0.7
Add back tax on non-underlying items - discontinued		(1.3)		-
Total tax charge excluding non-underlying items		9.2		3.9
Profit before non-underlying items		35.9		15.9
Adjusted effective tax rate excluding non-underlying items		25.8%		24.5%

5 Earnings per share

	2021	2020
	£M	£M
Continuing operations earnings
Earnings/(loss) for basic and diluted earnings per share	19.9	(17.4)
Earnings for underlying basic and underlying diluted earnings per share	26.6	11.6
Discontinued operations earnings
Earnings/(loss) for basic and diluted earnings per share	4.5	(2.9)
Earnings for underlying basic and underlying diluted earnings per share	0.1	0.4

	2021	2020
Number of shares
Weighted average number of ordinary shares for the purposes of basic earnings per share	84,484,084	84,228,880
Effect of diluted potential ordinary shares:
Weighted average number of ordinary shares at 31 December	84,484,084	84,228,880
Dilutive effect of share options	1,070,830	543,732
Weighted average number of ordinary shares for the purposes of diluted earnings per share	85,554,914	84,772,612
Continuing operations earnings per share
Basic	23.5p	(20.7)p
Diluted*	23.2p	(20.7)p
Underlying basic	31.5p	13.7p
Underlying diluted	31.1p	13.7p
Discontinued operations earnings per share
Basic	5.3p	(3.4)p
Diluted*	5.2p	(3.4)p
Underlying basic	0.2p	0.5p
Underlying diluted	0.2p	0.5p

* For the year ended 31 December 2020, diluted earnings/(loss) per share are reported the same as basic earnings/(loss) per share, as a result of the earnings being negative so the impact of them is anti-dilutive.

At 31 December 2021, the Company held 1,013,991 shares (2020: 1,211,073) in relation to treasury stock and shares held in trust for satisfying options and awards under employee share schemes. These shares have been disclosed in the treasury reserve and are excluded from the calculation of earnings per share.

6 Dividends

	2021	2020
	£M	£M
Interim dividend for 2019 of 7.55p paid 2 January 2020	-	6.3
Dividend of a nominal amount of 2.00p paid 28 May 2021	1.7	-
Interim dividend for 2021 of 5.80p paid 29 November 2021	4.9	-
	6.6	6.3

The Board of Directors have declared a final dividend of 8.60p per share which if approved by shareholders at the forthcoming AGM, will be payable on 27 May 2022. As part of the return of surplus capital to shareholders, the Company has also declared a special dividend of 17.70p per share (not subject to shareholder approval) which will be paid alongside the final ordinary dividend on the same date.

The total value of dividends proposed or declared but not recognised at 31 December 2021 is £22.3 million (2020: £1.7 million).

7 Discontinued operations

On 28 April 2021, the Group entered into a sale agreement to dispose of Belcolor AG ('Belcolor'). Belcolor is a floorcoverings distribution business based in St. Gallen, Switzerland, and represents the entirety of Headlam's Swiss operations. Headlam's Continental European operations (including Belcolor) accounted for 17.2% of total revenue in 2020, with Switzerland being the smallest reflecting the small landmass and population of the country. For the year ended 31 December 2020, Belcolor reported revenue of £31.1 million and underlying profit before tax of £1.1 million (£0.5 million after pension costs incurred under IAS19), with fairly uninterrupted operations during 2020 in contrast to the Company's UK and French operations which were subject to stringent COVID-19 related lockdown measures.

While Belcolor was highly established and industry-leading in its country, there were limited avenues for meaningful organic or acquisitive growth. Additionally, the Swiss market varies significantly from the Company's other geographic markets in terms of supplier base and product mix, and therefore there was limited ability to leverage group synergies. The disposal allows the Company to more effectively focus its activities and investments on its operations which offer greater opportunity.

On 29 April 2021, as a condition of the sale agreement, Belcolor undertook a sale and leaseback of its property for gross proceeds of £12.4 million and paid a dividend of £11.1 million to its parent company, Headlam Group plc. Gross assets disposed of were £18.8 million. Cash consideration before costs of £0.9 million was received on sale of the subsidiary.

The subsidiary was sold on 28 April 2021 with effect from 17 May 2021 and was reported in these financial statements for the year ending 31 December 2021 as a discontinued operation.

Financial information relating to the discontinued operation for the period to the date of disposal is set out below.

Financial performance of discontinued operation

		Period ended 17 May 2021			Year ended 31 December 2020
	Underlying		Non-underlying	Total		Underlying	Non-underlying	Total
	£M		£M	£M		£M	£M	£M
Revenue	9.1		-	9.1		31.1	-	31.1
Expenses	(9.0)		-	(9.0)		(30.6)	(3.3)	(33.9)
Other gains/(loss) (profit on sale of building)	-		5.8	5.8		-	-	-
Profit/(loss) before tax	0.1		5.8	5.9		0.5	(3.3)	(2.8)
Attributable tax expense	-		(1.3)	(1.3)		(0.1)	-	(0.1)
Profit/(loss) after tax of discontinued operation	0.1		4.5	4.6		0.4	(3.3)	(2.9)
Loss on sale of subsidiary after tax	-		(0.1)	(0.1)		-	-	-
Profit/(loss) from discontinued operation	0.1		4.4	4.5		0.4	(3.3)	(2.9)


Exchange differences on translation of discontinued operation				4.8				-
Other comprehensive income from discontinued operation				4.8				-

	Year ended 31 December	Year ended 31 December
	2021	2020
	£M	£M
Consideration received:
Cash	0.9	-
Costs of disposal	(0.1)	-
Net disposal consideration	0.8	-
Carrying amount of net assets sold	(5.7)	-
Loss on sale before tax and reclassification of foreign currency translation reserve	(4.9)	-
Reclassification of foreign currency translation reserve	4.8	-
Tax expense on loss	-	-
Loss on sale after tax	(0.1)	-

Cash flows from discontinued operation

Net cash outflow from ordinary activities	(1.8)	1.2
Net cash inflow from investing activities	12.4	(0.5)
Net cash outflow from financing activities	-	(0.2)
Net increase in cash generated by the subsidiary	10.6	0.5

Effect of disposal on the financial position of the Group

			£M
Property, plant and equipment			(1.4)
Right-of-use-assets			(1.2)
Inventories			(8.7)
Trade and other receivables			(3.2)
Cash and cash equivalents			(4.3)
Employee benefits			2.8
Current tax liability			1.5
Trade and other payables			3.0
Deferred tax liabilities			0.3
Lease liabilities			5.5
Net assets and liabilities			(5.7)

Net disposal consideration			0.8
Cash and cash equivalents disposed of			(4.3)
Net cash outflow			(3.5)

The net cash consideration of £0.8 million represents the residual consideration following the £11.1 million dividend previously paid up to the parent company. Cash balances of £4.3 million were held by Belcolor on disposal.

8 Contingent asset

At December 2021, the Group identified a contingent asset relating to an insurance claim for losses, as a result of the Kidderminster fire, arising from damage to the Group's property, stock and contents, and trading losses. The claim was in progress at 31 December 2021 and its outcome, whilst probable given the insurance contracts in place, was not certain and therefore not recognised in the financial statements as an asset. It was not practicable to estimate its financial effect.

9 Contingent liability

There are no contingent liabilities for the year ending 31 December 2021. In November 2020, the Group provided evidence for an investigation by the Netherlands Authority for Consumers and Markets ('ACM') concerning possible anti-competitive behaviour in the industry. In July 2021, the ACM notified the Group that they had terminated their investigation and no further action has been taken.

10 Subsequent events

Management have given due consideration to any events occurring in the period from the reporting date to the date these Financial Statements were authorised for issue and have concluded that there are no material adjusting or non-adjusting events to be disclosed in these Financial Statements with the exception of the following:

On 17 January 2022, the Group completed a refinancing of its existing banking facilities which will expire in October 2026. At 31 December 2021, the Group had two revolving credit facility agreements with Barclays Bank PLC and HSBC Bank Plc, with a sterling committed facility of £68.5 million and a euro committed facility of €9.6 million. These were replaced with a single revolving credit facility agreement with Barclays Bank PLC, The Bank of Ireland and Credit Industriel Et Commercial (London Branch) for £81.5 million.

11 Additional information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2021 or 2020 but is derived from those accounts. Statutory accounts for 2020 have been delivered to the registrar of companies, and those for 2021 will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The Company anticipates that the Company's statutory accounts will be posted to shareholders during March 2022 and will be displayed on the Company's website at www.headlam.com during March 2022. Copies of the statutory accounts will also be available from the Company's registered office at Headlam Group plc, PO Box 1, Gorsey Lane, Coleshill, Birmingham, B46 1LW.

This final results announcement for the year ended 31 December 2021 was approved by the Board on 9 March 2022.

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Headlam Group (HEAD)

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