Headlam Group PLC

LSE:HEAD

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, and welcome to the Headlam Group plc Half Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses which is appropriate to do so.

Before we begin, I would like to submit the following poll. And I would now like to hand over to CEO, Chris Payne. Good afternoon to you.

[Chris Payne, executive]

Thanks for joining the presentation for the half year. So if we just turn the page, Adam, there's just a short introduction before I hand over to Adam, who's connected [indiscernible]. So the formal sessions to the presentation given we're already in October. The first half seems a little while ago. So we'll probably cancer through that section. But what you'll see is this sort of -- I suppose the market conditions have remained pretty challenging, which is expected in our first half, but Adam will talk us through that. What you will see is that we've managed to navigate cash and working capital in a well-controlled manner.

And I'll give a little bit more of a detailed update on how our strategic initiatives are rolling out. Together with this acceleration, by way of a transformation plan that we've announced. So we're spending a little bit more time on providing an update on those elements.

So I'll just ask Adam to sort of update us really on the first half performance and that backdrop of the market context that I mentioned at the start.

[Adam Phillips, executive]

Thanks, Chris. Yes, I'll start with a couple of slides on the market, just to give you the kind of context for how the market has been in the first half. And as we look out over the second half and into next year and then -- and then I'll cover off just in a [indiscernible] the half one financial results.

So just looking at the market and particularly the market in recent months and over the first half of this year. And if you look at the top half of this slide, this sets out a few of the key market indicators that we track that are relevant for the [indiscernible] market. And you can see on the top left-hand side there, you've got consumer confidence and in particular, the orange line, which is the major purchase index, you can see that's been quite firmly negative throughout the last kind of 18 months or so that we've shown on this chart. And particularly with the orange line, the major purchase index lagging the overall consumer confidence.

And since we published these slides, actually, we've now got the September consumer confidence data which has actually shown a considerable lurch down actually in September on both that orange and that blue light. Potentially on sort of pre-budget fees at the end of October, we'll see over the next couple of months as to how that consumer confidence index tracks. In the middle of the slide there, so housing transactions, so an important indicator for the flooring market because once you've got someone who moves house typically maybe 6 months or so later, that's when you might see some home improvement spend on kitchens, bathrooms, flooring, et cetera. And we've seen -- I mean, on this chart, 4 consecutive months now of those been in growth. We're now in the fifth, it's now been 5 months in a row that we've seen growth. But that has come off the back of a very negative period, so 20% decline in housing transactions in 2023 and an 8% decline in Q1 this year. So we won't see the benefit of that until maybe back end of this year or perhaps more likely into next year.

And then on the right-hand side, this is the Barclays data on consumer spending on home improvements, which you can get from their website. And as you can see, that was firmly negative through 2023. And so far in 2024, have shown no sign of improvement yet in terms of what consumers are spending on home improvements. And what that means to the flooring market in the first half of this year is that we estimate that has declined 10% to 15% in the first half of this year and cumulatively is now a 25% plus decline in volume terms since 2019.

So a challenging backdrop for the market, but the lead indicators are more positive. With paying growth, consumer confidence, whilst it's lurched down set September has been an improving trend. Interest rates reducing having transactions in growth. So we do expect the flooring market to return to growth at some point during 2025, but the timing remains uncertain.

So if I just turn then to Headlam specific performance in the first half of the year. And on this table here, we show the revenue performance by channel, and we've broken out the U.K. into a bit of detail. And you can see there, we continue to deliver good growth in the strategic initiatives of larger customers and [indiscernible] and they were up 2% and 7%, respectively. Regional distribution at the third row in that table there was most impacted by the weak residential market, and that was down 18.8% in the first half, but has been an improving trend in more recent months.

And then in Continental Europe, so we operate in France and the Netherlands. The market conditions there have been more severe than in the U.K. and revenue declined 15.9% in the first half of this year.

So just looking at those 3 main U.K. channels in a little bit more detail. I won't go through all of this, but on this slide, and this is on our website. We've laid out some of the kind of some of the operational developments in the first half of this year. But we've made it on the left hand side of regional distribution and service enhancements in the first half of the year in terms of customers being able to track their deliveries online in real time. We've done a bit of network optimization. So we consolidated sites in the northwest of England, which has been successful.

And then towards the end of the period, we've launched some new value ranges, which were well received in the market as well as increasing our own brand, own product brand mix. And you can see in the bottom left-hand side there, we've seen an improving trend in recent months. while still in decline, but we've seen a lessening in the scale of decline in the regional distribution market -- sorry, our regional distribution sales despite the market not showing any signs of improvement yet.

So moving to the middle here to trade counters, so 7% revenue growth in the first half, now annualizing over 100 million of revenue and we took the site count to 76 at the end of the first half that of 9 new and then 11 refurbished. And you can see the chart in the middle there just shows the portfolio of trade counters we've got to 76 in total, of which 67 now are in the new format to refurbish.

And collectively, those trade count sites are all performing in line with the business case, and that despite the weak market. Right-hand side, larger customers, tough period for multiple retailers due to the weak end consumer demand. And indeed, we've seen 2 multiple retailers exit flooring in recent weeks, Carpetrights and NSCS. NSCS is just a strategic decision to get out of flooring, but Carpetright into administration. And collectively, that's about GBP 250 million of flooring retail revenue, which now will dissipate elsewhere in the market and across other retailers, which provides an opportunity [indiscernible] and we weren't a supplier of any scale at all to Carpetright. So there's an opportunity there as those sales move elsewhere in the market.

And then finally, we've had 2 new customer wins in the first half of the year, one that was launched in Q2, which was distribution as a service to a manufacturer and one that's launching around now, which is a new multiple retailer customer.

Income statement, I'll actually cover this through the profit bridge here is probably a [indiscernible] kind of illustration of it. So this shows the year-on-year movement in our operating profit from an 8 million profit in the first half of last year to the [ 13 million ] loss in the first half of this year. Volume as it was in 2023, with volume, it was by far the single biggest driver of that reduction in profit, and that reflected the weak residential market.

The next bar line is gross profit. and gross profit percent dropped 86 basis points year-on-year, and that's predominantly due to increased clearance activity, particularly towards the end of the first half. And the other point to note here is that there's actually been for the second year in a row, very limited price inflation in the market. So what would only happen is normally see manufacturers putting price through into distributors, which would go on to the end consumer. And there's been very little of that in the past 2 years as manufacturers have sought to protect their own volumes in a particularly weak market.

Just moving along the bars here, strategic investments. So there's about GBP 1.5 million impact from this, and this is predominantly trade counters. So trade counters, as we roll them out, they are profit dilutive in the rolling out investment phase but then profit accretive as those trade counters mature. And we're seeing the rollout phase at the moment. So we've seen a little bit more profit dilution and that will flip into accretion as we get into maturity 2026 onwards.

Cost inflation, GBP 3.3 million headwind, print specially driven by people costs and that included the 10% increase in the national minimum wage in the U.K. which came through early this year. And then finally, the final 2 bars, the market weakness in Continental Europe reduced profit by GBP 1.4 million and then there's a further GBP 3.4 million impact from other items, including non-repeat of [indiscernible] benefits in 2023 insurance settlements, et cetera.

And then there's one point, the green bar there, GBP 1.5 million of mitigating actions offsetting some of those headwinds. Non-underlying, i won't go through this in any detail, but we've laid out the detail here on non-underlying items. So these are the bits that are stripped out of our underlying profit numbers that we report, the two big [indiscernible] the third and fourth row where we've got the business restructuring and change related costs. So this linked to the transformation plan, which Chris will talk more about later. And most of that GBP 4.9 million of P&L expenses is noncash impact of stock write-downs. And then the fourth row is the profit on the sale of property, which is the stock port disposal, which happened in the first half of the year. So that's a GBP 7.4 million cash inflow and generated a profit of GBP 3.2 million.

So just moving on to cash flow. Good operating cash generation. So if you look at the -- about 1/3 of the way down that table on the left-hand side, operating cash flow of GBP 18 million. So broadly despite the impact of the market on the P&L, broadly flat year-on-year operating cash flow, and that was underpinned by working capital inflows, which is a combination of in part due to lower revenue, which was then generated lower receivables, but also tight control of inventories, which were down GBP 6.5 million in the first half, but actually down GBP 23 million year-on-year.

And if we move further down the cash flow, capital investment to capital investment of GBP 6.7 million in total, which is principally trade counters and then the final element of the solar panel investment program, which ended in Q1 this year. There's the GBP 4.8 million of dividend payments when that was in respect of the 2023 final ordinary dividend, which we paid in June this year. And then we had a GBP 7.4 million cash inflow from disposal of Stockholm in June this year.

And all of that, if you look at the very bottom row, all of that meant a slight reduction in net debt of just over GBP 1 million in the first half of this year. And that's illustrated on this chart here, which is just a waterfall that shows the net debt at the start of the year through to work was at the end of the first half of the year. The green bars show a reduction in net debt. So that's kind of cashing the gray bars and the outflows. And you can see the outflows on leases, CapEx and dividends were offset by working capital and the [indiscernible] proceeds, resulting in net debt broadly being held flat throughout the first half of this year.

Balance sheet. So just before I wrap up overall, just a note on balance sheet and Headlam continues to have a strong balance sheet, and that's underpinned by property portfolio, which is valued at GBP 142 million at the last valuation, which is January 2023. Significant liquidity headroom. So at the end of June, GBP 72 million of cash and undrawn banking facilities available to the group and ongoing support from the bank syndicate, including a revised covenant package to give us the flexibility as we implement the transformation plan, which will Chris about in a minute.

And the final point on here is there's further balance sheet strengthening in the period, which was provided by the pension buy-in transaction, which we completed in March this year. And what that does is it removes [ vol ] exposure of the group to volatility and pension assumptions, and it also means that we remove the ongoing contributions into the skin, which have been about GBP 1 million per year.

So just to wrap up then. Challenging market conditions, 10% to [ 50% ] decline we've seen in the market in the first half of the year. And that has weighed on headwinds performance, and we've seen 11% revenue decline in the U.K. and 12% for the group in the first half of the year. But the strategic growth areas have performed well. The trade count is up 7%, larger customers up 2%. And cash and working capital well controlled stock down GBP 6.5 million in the first half, 23 million year-on-year, and net debt broadly held flat in the first half compared to the end of 2023. And as just covered on previous slide, strong balance sheet, so GBP 72 million of cash and undrawn facilities available to the group at the end of June. GBP 142 million of property outlets.

And I'll hand back to Chris now to talk through an update and transformation plan.

[Chris Payne, executive]

Thanks, Adam. Right, so we've got a couple of slides here just as somewhat of a reminder over the strategy and how we've been progressing so far before we turn into a little bit more detail to cover the transformation plan.

So the first slide is just a heads up on the kind of customer and how we view the market scaling. So a while ago, we articulated the size and scale of the market, and I'll give them the recent weakness in the market that I just referred to, this market might be size smaller than GBP 3 billion, but partly that's the number we've been referencing. And then we've identified 7 customer types. And this is really the underpin and the fundamentals behind our strategy. So the group has been very traditionally strong in the left-hand side of these customer segments, the retailers and the independent trade people and less strong and less representative of the market purchases as you move to the right. So larger contractors and the pure play online customers typically would go direct to manufacturers for their purchases.

So Headlam's exposure and opportunity in these different customer types are different. And therefore, for how we're kind of thoughts around growth and where we could see additional sales coming from, certainly, we need to develop our propositions for these customer types towards the right hand of the page. So but very much product is the focus behind how we've address the market in recent times on the left-hand side and moving more to a solution and proposition related sales approach for the right-hand side of the page.

So that was the underpin to our strategy. And then if we sort of expressed our strategy [indiscernible] saw 5 pillars. So the 5 pillars, how are we going to achieve the sort of provision of being the leading expert in flooring. [indiscernible] is the one on the left-hand side is around our great service. So we remain sort of market leader from a service perspective, and that's according to our customers. So we survey our customers every year, and they always ask that we are the great service, so do not lose your service position in the market. So that's what we've been known for, but that's what we're great at.

But the second pillar over is about developing new areas. So I talked about the new customer types that we've been focusing on. So remain strong, remain market-leading in service, but look at perhaps offering that proposition as service to new customer areas. The middle pillar here is around operational capability. And I've got an example in the many way [indiscernible].That's particularly challenging in the decline in market because you're trying to keep pace with a sort of fall in demand curve. You've got to be operational efficient just to stand still. And that can be tough when you've got sort of nationwide infrastructure to work with. So we've been focusing on how to be more effective over time, and that remains a key part of our strategy going forward.

And on the right-hand side, we covered this less in these slides, but we've recently made a number of announcements on our sustainability. We released a sustainability report strategy as part of our year-end update. And we've done a number of initiatives that focus on and I'll cover those in a moment. And making headwind a great place to work is all about investing in communities, investing in our teams, training development, safety, having that kind of inclusive culture, I suppose, of working Headlam that we've made ratios in that in the last couple of years.

So just some specific examples of where we've been delivering against these 5 strategic pillars. Again, I won't go through all of these. You may have seen these in the slides and they're [indiscernible] but we have launching new products to address particularly where price points are increasingly important in the market the way we've launched some well priced, good quality brands such as every room in the marketplace. We've been exploring the digital investment of the business and trying to offer digital assets to our customers, and we've seen a significant increase in the revenue that's going through our digital channel.

I've talked about it going into new areas of customer engagement. We've seen our trade count footprint increase significantly, as Adam described earlier, up to 76, and that's in its investment phase at the moment where we are seeing some revenue coming in. But obviously, the cost to be front loaded, where you're opening new sites and investing in new people to run those trade counters. It's an investment for the future.

Now that is running at a higher annualized run rate. But as I said, do you have to invest before you get the maturity of those new trade counters. Despite that weak market, we're still seeing larger customers increasing their trading. And that's been despite the challenging market where we see people like [ SES ] come out of the market, Adam mentioned earlier and the [indiscernible] challenges of a declining market have affected the multiple retailers and our large customers in the same way. So people like [ B&Q Home ] and other customers have also seen challenges of footfall and demand reductions over a challenging period.

Operational capability. I'll come on to an example of that in a minute. Transport integration is something we've been in for a good period of time, and that's coming to an end now where we've got a national transport service moving away from those regional services rate. And the final piece of that was, I referred to as for sort of almost like a parcel mentality. So as a consumer, you get used to tracking your parcels in real time on an app. We now offer that kind of service to our customers who could track the deliveries by looking at our delivery tracker so that they get in an e-mail, for example, which they click on it shows where the result. So we've been doing a lot around our service offer deliveries not just around kind of cost reductions.

I mentioned sustainability on the right-hand side now. We have installed [indiscernible] panels. We're looking at decarbonizing our fleet. We've nearly fully rolled out low-emission vehicles for our non HDV fleet. As I said, we've reduced electricity lowered by [indiscernible]. And this is something that's a long-term plan for us to get a carbon neutral in the next decade or so. And then the take-back scheme is an interesting one where we've been looking at how do we take [indiscernible] particular out of landfill and we're looking at offering that as a service to customers who can bring their move product back to one of our trade counters for reprocessing. And that's been a successful trial so far. We'll save about 35 tonnes from landfill and how do we potentially roll that out to other sites.

Customers like it. gives them the ability to get rid of a product. They know they'd rather not take that for waste. And interestingly, they actually purchase some more goods when they're visiting us at our trade counter. So it's got some merits as well as just the sustainability merits as well.

And on the right-hand side, I've mentioned a number of training and initiatives we've been developing, both in terms of investing in our people with safety processes but also the one on the bottom right is interesting while where we have an [indiscernible] in place where we support fitters becoming trade in the industry, and they do a rotation around a number of our suppliers who are effectively partnering with us give an opportunity for people to learn flooring fitting and getting into the industry. I think that's part of the future and the investment we're making as an industry.

So a couple of deep dives on some of the examples. How do we know that we can do this well. So on the next slide, we've picked out a couple of examples. So I'll come on to the transformation plan in a minute, but we know we can do some of these things. So transport integration, I've given you an update on that already. That's something which we've developed over the last few years, which has taken a regionally fragmented delivery network and turned it into a national network. So we now can deliver anywhere in the country across all of our post codes, and we no longer send vehicles in opposite directions with the same product on it. So customers now get single deliveries as well. So it's an integrated model. It's reduced mileage, reduce the carbon, reduced our number of trucks and drivers and maintain a national delivery network. So we've had great success with that.

Consolidation of sites is something else that we've been looking at. So again, the sort of network has been one of regional distribution centers for acquisition. And now we've moved much more to a national service and national offer. It gives us an opportunity to look at our network and perhaps leverage some of our national sites in a more comprehensive way and move more to a cross-dock structure around the east and west sides of the country. So we announced the closure [indiscernible] as Adam mentioned, we've had the cash in, and this is something that we can now do, we can leverage our other assets and still maintain that great service by using a different cross-stock facility. So that's something that we've had success in, and there's more to come.

So we've got our existing strategy, which I just outlined, and we've now talked about this sort of acceleration really. So this is not a new strategy. This is really a maturity of some of those pillars that I just talked to. So putting the customer first. So I talked about the customers underpinning our strategy, and that's something that we're looking to accelerate. The network that I just referred to where we're looking at sort of more of a national network and simplifying it again, there's that we can do there. And as a result of those 2 things, moving to a much more simplified, cohesive structure, it means that we can finally improve the way that we act as a business as well. So simplifying and consolidating and applying ourselves as one business rather than multiple businesses operating under a kind of common ownership structure. So a much simpler operational process as well.

So what does that mean? So if I just take the first one, simplifying our customer offer, the brands on the left-hand side, our wholesale brands that we've been using for many years as a result of acquisition. But the consequence of the customer is quite complicated and you end up with many of those brands potentially competing but at least presenting a different face to the customers. So customers will have multiple accounts with us. In fact, they would need to have multiple accounts with us in order to get the best out of our product set. And we're looking to consolidate all of those [ 32 grams ] on the left-hand side into a single operating business, a single wholesaler, which is called Mercado and we spent a bit of time deciding whether to dream up a new name or use Headlam but in the end, we chose Mercado because it's an existing business. And more than half of our customers actually have a Mercado account already, so it was an obvious choice for us for us to move to.

So what does that actually mean then, I suppose, for the customers? What does this mean? So our sales teams will be operating as a single business nationally. Now that means that they'll have a much smaller patch. We focus them around a sort of geographic area around on them having to spend time in their [indiscernible] seeing customers out of their patch, if you like. We've reprofiled the national sales team that they focus on a tight territory, close to where they live. Just an example, they'll typically move from supporting on average 6 post costs to more like 2. So much less trying driving, much more opportunity to the time with their customers.

Our single business will have access to the full -- had long range of products. I mentioned earlier that many of our customers would need multiple customer accounts to get access to the Headlam range of products. And now we can offer that under a single product list available for all customers. And similarly, geography, we can finally unlock the national -- the benefit of our national network. So if you're ordering from business in the north of England, and you might wish to collect it because you were a job in the south of England, you can do that now. And that's not been possible until recently. So again, order anywhere, collects anywhere and enhancement for customers.

This sort of national approach also means that we have enough density to offer a sort of separation of expertise between our residential products and residential customers and our contracts and commercial customers. Do you really salespeople really able to align results with their customers and the business that they're supporting. The point-of-sale material, again, imagine you've got 32 businesses there, potentially already different point of sale material and also potentially trying to compete the same shop floor space in customers' premises.

So again, it means that we can invest in common product sale, common voice of the customer, better quality as a result.

The other implication of this is that as a result of having all of these businesses, when you do try and invest in those digital assets and I referred to a significant increase in the amount of sales coming through a digital channel. Every time you make an investment and every time you make a change to the digital offer, you have to replicate that across all of those different B2B websites. So it means that we can have a single B2B work so supporting all of those wholesale brands. And it means we can invest in depth good quality with our repetition. So a much better service for customers. So a whole number of customer events there that also simplifies our business.

So that's sort of a summary of where we've got to. We announced this, we've now started embedding those businesses [indiscernible]. We've had the conversations with customers. And many of those things are already in place, and we're going through a process of converting those customers into that new account at the moment. Point of sale and I talked about that, that those new stands will take a little time to come. So those in the next few months. And then the B2B website, again, we have now got output, and we're in the process of migrating customers to it. So this is something that we're going to now have the ability to manage in a smaller number of places. And this is something that we can now start to review in a much more agile way rather than splitting out and spreading our energy over [indiscernible] sites.

Interesting, I put this slide in here you may have heard me talk about this before. Some of the questions that have come from shareholders and also from [indiscernible], I suppose, in the marketplaces that Headlam has perhaps not had so much experience in the sales team with competitors, people likewise opening up and others. Have we actually got the experience in our sales teams to engage with customers. And I thought I'd just look -- just put a slide up, it shows the scale and size and experience in our teams. And there's a huge amount of expertise and knowledge of the industry in our business. And I thought it'd just be worth showing how we're structured to, I talk about our residential and commercial side of our wholesale business. And this is a structure that we operate through. So we've got Managing Director of each of the businesses. We've got Regional Sales Directors around the country or then underpinned with area sales managers who are fronting into customers. So a huge amount of experience nationwide across the whole country.

So the second section is the sort of simplification of our network really. And I mentioned having a number of distribution centers. There's largely going to inherited through acquisition. And there's an opportunity for us, therefore, to simplify our network, and that might be a much more capital-efficient program and indeed offer a more nationwide footprint. We've got dots on this map here, which are much more regionally focused than you might imagine. And we've made some announcements already, which is logically moving some of these distribution centers into a more central location, removing duplication and where we are moving some of those distribution centers using cross-stock capability to access the customers.

So again, now we've got a national offer [indiscernible] sales perspective and national offer from a transport perspective, the next logical step is to look at a national network as well. So opportunity for us to accelerate the changes we'd already started.

So timely wise, we've got a number of these phases already completed. So on the left-hand side of the page, we talked about this site in Stockport which is now being replaced with a cross-dock facility, which is sort of the blueprint that we follow when we do now and we sold that particular site and returns on capital. We've now announced a number of changes as well. So we're opening a new facility, which is much closer to the London and Southeast marketplace for our customer service to be offered into. So [indiscernible], that means the switch distribution center that was servicing that part of the country will therefore become much more idn locations. So we can move and shift our distribution service much closer to London near the site, significant journey time from there.

We have 2 sites in Glasgow and again, duplication of effort and opportunity to open from a single site, and those properties are now on the market. That's something that we'll continue to keep on the review. And there will always be opportunities for us to look at our footprint and look at how do we offer this sort of operationally effective nationwide service going forward.

So the third element of our change that we've referred to is really as a result of offering this sort of simpler customer offer with 32 what was effectively 32 businesses into one and the sort of simplified network, it means that all of the support processes that go into supporting that arrangement can be simplified. And what do I mean by that? So it means that we can offer instead of having 32 accounts receivables. For example, [indiscernible] because we're building our customers from oen where we're deciding what to where we now have access to a nationwide geographic. It's not least, and it means we can peak now where our stock is held around the country rather than very localized decision-making.

So this sort of centralization of buying stock holding as well as supporting the individual businesses is now possible. So it gives us the opportunity, therefore, to simplify and reduce cost to support those businesses.

I mean, Adam, it might be worth you picking up the next couple of slides because I think this now starts to talk about the value and the benefits and the financial benefits. All these changes that we've articulated.

[Adam Phillips, executive]

Yes, sure. So on this slide here, you can see we've set out the 3 kind of overall key objectives from this 2-year transformation plan. So those are market share gains in our core distribution business through the sales transformation, unlocking capital to delever and to fund the transformation and then also to structurally improve profitability.

And on this slide, and I won't go through it, but we've laid out, you can see in the orange and the turquoise kind of colored bars or columns, we've laid out the actions over the next 12 months. This is a 2-year program, but the ones that particularly that we're focusing on over the next 12 months, we've laid out here, and we will update on progress as we work through these with a number of these well progressed already.

So in terms of the overall benefits from the 2-year program and moving left to right, so we're targeting GBP 70 million plus of one-off cash inflow, and that's from disposal of surplus property and working capital optimization. So specifically stock reduction. And we expect to generate that GBP 70 million within 2 years, so by September 2026.

And then 15-- at least GBP 15 million of annual profit improvement. And it's important to note this is net of reinvestment in enhancing our customer proposition. So there's quite a number of areas of reinvestment where we've chosen to reinvest some savings to enhance the customer proposition that could be, for example, shrinking the territories that our sales team are doing. So rather than covering [indiscernible] they're covering 2, so they can spend more time with customers.

And that profit, that net profit improvement comprises -- it's a hybrid. It's not just cost. It comprises revenue, margin improvements and cost efficiencies, recognizing that some of the gross cost savings we're making are being reinvested. And we expect to start making those benefits in 2025 and achieve the GBP 15 million as a run rate at the end of the 2 years.

And then on the right-hand side, GBP 25 million of one-off cash costs. So this, again, pretty evenly spread any over the 2 years, but over the next 2 years. And this is some things like restructuring and relocation costs. So the cost of moving the Ipswich operation into Rayleigh, which is ongoing at the moment, fitting out new sites, advisory [indiscernible] costs and then investment in point-of-sale materials such as display down, which Chris mentioned earlier.

So overall, 2-year program, GBP 70 million plus of cash, GBP 15 million plus of annual profit improvement.

[Chris Payne, executive]

Okay. So just a couple to bring us to conclusion before we look at questions. So I'd sort of split the outlook into two really. One is around the short term and one is a slightly longer term. In short term, no surprise here that we've been relatively cautious, I think, about the outlook in the short term. I mentioned at the start that some of the macro indicators has been weak, maybe slightly improving. And then, of course, consumer confidence is taking the term for the worst in September. So we remain pretty cautious around what the short-term outlook might show. And there are different views over with the speed of recovery when will the market come back to normality, when will there sort of the decline in [indiscernible] in particular recover, it's difficult to say, but we do think that perhaps it's the house we've seen the worst of it, but it's difficult to know when that outlook is going to improve.

So we are being cautious about '25 and we do expect perhaps the market might return to growth as important in the year, but it's difficult to know when. So I think it gives us an opportunity for us to make these changes, implement the changes that we've outlined and get ourselves ready for that recovery when it does come. So when you look at the medium term and the longer-term outlook on the next slide, what we can see is that we've seen some growth coming through our existing initiatives to broaden the business out into these other customer types. When you overlay the transformation plan which is going to accelerate some of those benefits that we've talked to. And in particular, when the market recovery does come, you can see a much stronger business emerging, a much more efficient, much more capital, a leaner capital structure behind our business. So it does give you much more confidence for the future, particularly when that market recovery does come in.

So at the end of that, just to summarize then, I think as I said at the start, the short-term challenging market remains in place and is likely to be there for a little while longer and perhaps start to improve next year. In the meantime, we've been keeping a lead over our working capital. We've been staying close to cash and keeping our business and balance sheet in good order. And we're starting to see those strategic initiatives delivering, which can only now be accelerated with some of the changes we have announced. So look, short term, I think it does remain a difficult position, but I'd say, much more confidence around the medium term.

So thank you for listening in on the presentation. And now we've got some questions that I think some of you already submitted. So we'll start to look at those now and answer that.

[Operator]

Perfect. Chris, Adam, thank you very much indeed for your presentation. [Operator Instructions]

[Chris Payne, executive]

Okay. So first question, we've got Adam [indiscernible] says please comment on where the competitors are exiting the market. So Adam mentioned earlier, we've had a couple of businesses go into administration and somebody else withdraw from the market. So Carpetright and the floorings. This is one of the companies owned by the same owner going to administration and their direct-to-consumer businesses. So they've come out of the market. SCS withdrawn from flooring. In the B2B environment, we've also seen 2 other businesses go into administration who were not flooring specialists, but do, in fact, sell flooring. So it's CTD, the title business and [ IVS ] also a services business that have to sell flooring.

So there's been a fair bit of distress, I think, in the sector. And as I have described, I think it will allow more sale to move into other parts of the market. So that demand will be satisfied elsewhere. We are well placed to pick up and support our customers who are benefiting from the direct-to-consumer sales coming into the market. And then in the B2B space, but there will be a little bit of an overflow as well. So that sort of thing is helpful in both the direct-to-consumer and the B2B non-flooring specialists. We haven't seen any anyone else exit the market who are flooring specialists in the B2B market.

Adam, perhaps the next one for you.

[Adam Phillips, executive]

Yes, sure. So next question is about return on investment on the trade counter investments we're making. So let me answer that as a collective of trade counters overall to start with, and then I'll give you the certainly unit economics at a single site just to bring out to life for you. So overall trade counter then. So when we started this program, we have about 50 sites in 2021, end of 2021, generating about GBP [ 85 million ] of revenue. And we're targeting about 100 sites doing about GBP 200 million of revenue upon maturity. So it takes a number of years, takes 5 years or so but at each site to reach maturity, but on maturity, [indiscernible] of revenue. But we expect that to generate about GBP 10 million incremental profit compared to where we started.

And the cost of that from a CapEx point of view is up to about GBP 25 million. I think we originally guided 25, it might come in a bit below that. So you've got about GBP 25 million of investment, generating GBP 10 million recurring profit stream.

Now in the medium -- in the short term, you do get some profit dilution. So compared to 2021, where we are now because what happens on -- let me give you the example of a single site. There a single site, when you open that, it will be loss making for its first 15 months or so. And then we come to [indiscernible] then starts generating a return on investment that exceeds our cost of capital. Once you get to kind of year 3 or so. And on a 5-year average basis, you'd expect a new trade counter to generate a good double-digit return on investment over the average on a 5-year basis.

[Chris Payne, executive]

Okay. Thank you. Next question is price to the current downturn in the market year, you an expectation of achieving a net profit margin of 7.5% given the change in your rate to market? Focus on large customers and trade counters and less on retail distribution, what's your current expectation on target net profit margin? And there's a second question then that's very similar, which is that the market regrowth in '25 and normalizes in '26, when do you expect a return to sort of optimum net margin?

So if I combine those two, there's a couple of ways of answering that. I think firstly, Adam has mentioned there that the maturity profile for things like trade count is, we don't expect the operating margins of a mature trade count to be dilutive. Now what is true to say is that when you get the marginal sales from wholesale or retail distribution model, they are rich and because you're leveraging your existing cost base. So by removing the sales by losing that kind of market demand, you end up with a lower set of margins. But the key accounts, the large customers and the trade counters themselves should still have margins, which are in line or exceed the historic margins the group has come to.

So there's nothing inherently dilutive about us growing into those other areas of the market. But what it does need, therefore, is a recovery of our regional business, the one that leverages and the cost base that we have as a group in order for us to see a return to the higher margins that we've seen in the past.

So again, we've lost [ 25% ] of that margin if that market is gone. So we've not necessarily assume we're going to get that back in the short term. And therefore, [indiscernible] when that margin might come back now, if all of that, if all look at that comes back, then we can see us getting back up to the mid- to high single-digit margins, some of the analysts that are sort of speculated as to whether that might be and have sort of got us well above 6% in the sort of next few years, just assuming the maturity of the trade count is the maturity of the [indiscernible] business and some record rate of market share.

But I think it would need to be a much fuller recovery of that market that's going to get back up towards that sort of [indiscernible].

Okay. Next question [indiscernible] probably on for you Adam, just looking at [indiscernible].

[Adam Phillips, executive]

Yes, sure. The next question is about clarification on timing of the profit improvements from the transformation plan, noting that a GBP 15 million profit improvement would mean net profits for over 3 years. So I think -- so the key thing to note here is in your mind -- if you reflect back on that slide that Chris showed talk about the medium-term profit outlook. There's kind of 3 drivers of that. There's the implementation of the existing strategic initiatives. So growing into the larger customers growing in trade counters and particularly maturity provide of those trade counters, that middle of [indiscernible] was the GBP 15 million attributed to the transformation plan. And on the right-hand side, market recovery and reflecting on the fact that the market is now over 25% down on where it was in 2019. So we expect some significant market recovery to come.

So the GBP 15 million is just the middle box. So 3 drivers of profit over the medium to long term, just the middle a bit of that. And we -- as we talked about, the GBP 15 million of run rate coming out of 2-year transformation program. So by September '26 at a run rate of about GBP 15 million.

There's a follow-on question there, which is about the GBP 25 million of one-off costs that I can see and it asks when -- so how much of those one-off cash costs will hit the P&L account over this period. So that GBP 25 million of one-off cash costs are all in this 2-year window over the next 2 years but they will be monetize. They won't hit the underlying P&L. They're all on underlying exceptional costs in the same way that any profit on disposal of properties as we showed in half one, that was also an non-underlying income that was exceptional income. So those costs will be in the middle column of our P&L [indiscernible].

And then there's a linked question on income here, which is around how many employees are required to be made redundant to produce the GBP [ 15 million ] of profit improvement? Well, the key thing here is that the transmission plan and the GBP 15 million is a hybrid around with quite some significant reinvestment. So the headcount impact is actually pretty modest. If you look at the sales transformation, for example, we'll be reinvesting quite a significant chunk of that of those savings in making smaller territories for each of our sales team. So we could have had a higher headcount reduction left the size of territories besides that they were, but we've shrunk the territory reinvesting those savings to allow ourselves seems to spend more time on customers. So headcount impact is relatively modest from this.

[indiscernible], Chris.

[Chris Payne, executive]

Yes. Thanks, Adam. So the question reads, every business before that's consolidated and rationalized trade brands as or turnover market share. So while you assume an increase in market and what increase in turnover are you assuming projection? So I think the answer to that question is that we're not necessarily rationalizing our trade [indiscernible]. These are multiple was overlaying customer visits, trying to sell sometimes the same products to the same customers in the same way. So what we trying to do is focus on that customer simplicity, what do customers want? What do they need? What are they asking for? And what they're asking for is that I just want everything in one go. I don't want to see 3 or 4 of your salespeople to get access to your products. I just want simplicity and I haven't got a lot of time.

And therefore, what we are doing is allowing our salespeople more time, we're not taking out so many salespeople that they're spending just in that same amount of time as they are now traveling. They're going to have more time to spend with customers, and they're going to have that access to the broadest range of products that we can offer. So this is about leaving salespeople the business in order to meet customer needs and therefore, not lose products from the portfolio and not lose customer contacts. So the salespeople are keeping most of the house people and the customers will have the same relationship they had before, but they'll just be in a much smaller patch.

So that's why I think it's a bit different perhaps to what we've had before. And as a result of having more time and more customer focused, we think there's a good chance that we may increase our share of sales as a result. But that isn't a big feature of our plans. This is just about making ourselves simpler to do business with and giving customers access to products in one go.

There's just a -- just before I pass over to you, Adam, on the gross margin one. There's another couple of questions that have come in where we talk about [indiscernible] nowadays, what percentage of [indiscernible] could be attributed to [indiscernible]. So [ Denis ] is a small business. And for those who don't know, it's a ceramic and engineered wood business that focuses on specified projects typically a [indiscernible] area, but it sort of represents 2% or 3% of the group turnout. So it's a pretty small business it doesn't actually contribute anything to the losses. It's not a material item of the group, and it hasn't got a significant loss for us to report that's an easy one for us to knock off.

So Adam, [indiscernible], do you want to pick up the gross margin for?

[Adam Phillips, executive]

Yes. Sure. the question that we've had is the gross margin fell by 86 basis points in the first half. How much of this was due in purchase rebates. So from a margin -- gross margin percent perspective actually purchase rebates are pretty flat year-on-year. So that's not a factor. The pound margin is a fact. So as we held the rebates as a percentage of sales pretty much flat year-on-year. So it doesn't impact on the gross margin percent but it does impact on the pound gross profit number, just as revenue drops or cost of sales drops then the rebate number does, but it's not a margin percent factor year-on-year in the first half of the year.

There's another one that's kind of related to which one maybe I'll take now, actually, which is around transformation plan creates a need for stock write-downs. Why is this? So there's a couple of factors here. So one is from a network optimization point of view, firstly moving. We've got to create space to move operations around. We're obviously moving Ipswich operations into Rayleigh which is [ 10,000 ] square foot, Rayleigh is about 125,000 square foot. In the mix of all that, there will be some stock write-downs where there's maybe some slower moving items that we've held on call 2 or 3 years that we will just accelerate the write-off through accelerated clearance.

Then also as part of the simplification from the -- of the back office operations that Chris talked about, we're centralizing the buying function, which is creating a [indiscernible] list, centralizing the buying and ranging functions as a result of this, we anticipate there will be some -- maybe some ranges that perhaps we bought 3 years ago that will be surplus to requirements. So is those that are written down as a result of the transformation plan.

[Chris Payne, executive]

And then the last question. So we talk about quick customer first and aligning the sales approach. Can you share with us how customers are responding to that and our sales team are also responding to the changes we put in place? So when I make these announcements someone asked me, what might say what were the things that were going to worry. I think the 2 things, as I saw the most important features of having a successful change like this. One is the response of customers? And secondly, it's a response of your own people and your sales team and have your sales team incredibly important in that relationship with the customer.

So to communicate that effectively. If I cover our sales team first. So we pulled them all together. We talked about moving to a single brand. And as you could imagine, there was a bit of a surprise response, particularly when felt like they've been competing with this particular brand for some time. But we explain the features, the benefits, the benefits to them as individuals have reduced timing cars, more time with customers access to broader product range than they've had before. And also, even though we've eliminated much of the internal competition, not having to worry about being the first person, the first head of person through the door to show a new range to a customer fear for the one of the other businesses would get there ahead of them. That sort of simplification and having customers being able to fill with them solely as part of the group as it was really [indiscernible] and has really given them a positive view on this. So we've had no fallouts, no one leaving us as a result of that communication.

And then secondly, for customers, as I said, we are migrating to our customers at the moment, and we've seen a significant level of customers now trading through the new way. And again, I would say the overriding responses, I can't believe it's taking you this long to do. It's that kind of a feeling that kind of response. And I say at the [indiscernible] flooring show, which was last month, we show up as a sort of team Mercado, if you [indiscernible] with a number of sites and a number of [indiscernible] or commonly branded. And then again, the overwhelming response to all the customers I talked to was about time.

What does it mean for me really? It was kind of like who's my salesperson going to be? And that was about it. So a very positive response, no negatives that we've seen so far. So a bit of a surprise in the industry, I'd say probably an overwhelming, I can't believe it's taking you [indiscernible] to do it.

[Operator]

Perfect, that's great. Chris, Adam [indiscernible] question investors today. And of course, the company can review all questions submitted today, and we will publish those responses on the investment company platform.

But before we redirect investors to provide you with their feedback, which is particularly important for the company, Chris, could I please ask you for a few closing comments.

[Chris Payne, executive]

Yes. Of course, as I said earlier, it is a tough market out there. And as evidence some of these businesses going into administration. So these changes we've announced imported needed. I feel the response from customers and our teams has been really empowering. So it's important that we get this stuff done now so that we're ready to be in an efficient place for when the market does recover at some point next year.

So yes, it's going to be a tough period and it's going to be into next year, but I feel confident that we're going to have a better quality business that comes out of it as a result. So yes, I look forward to a much stronger kind of medium-term outlook.

And thanks for joining the call today.

[Operator]

Fantastic. Chris, Adam. Thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide a feedback and also that the Board can better understand your views and expectations. This will only take a few moments to complete. And I'm sure will be great value by the company.

On behalf of the management team of Headlam Group plc. I would like to thank you for attending today's presentation, and good afternoon to you all.