Howden Joinery Group Plc

Very good morning, ladies and gentlemen. Thank you for joining us for the Howden's 2018 Interims and welcome. In one sense, this will be a fairly typical set of Howden's results. You'll hear from Mark Robson that the numbers are in good shape. But perhaps on this occasion, more importantly, it's our first chance to hear from our new CEO, Andrew Livingstone. And I hope you'll be very encouraged by what you hear, not just in terms of Andrew having done a very thorough induction, but also the way that he's got up to running speed in a very short period of time. And I hope you're going to be very interested in what you hear from Andrew. That may take a little longer than the usual set of interim results, because I think it's important that we do hear those first impressions from Andrew. But there will be good time for Q&A at the end, and we'll aim to have you away from here sharply at 10. So, Andrew, start us off. Thank you.

Good morning, everyone. Welcome to Haydn's results for the first half of 2018. I'm really pleased to be here. Mark's going to discuss our financial performance, but before he does, I'd like to make a few points. A key feature in Howden's success has been our trade customer focus. Our teams have developed trusted working relationships with trade customers who find value in our product and service offerings. Howden's has been built by offering the convenience of local stock, personal accounts, an increasing number of local depots with high quality product at best local price. All of this has given us trusted position in the mind of our customers. I've admired Howden's as a competitor for space and trading estates as I built a business with similarities, not least similarities. the customers both businesses serve. A key difference that Howden's has from others, of course, is the vertical integration that the supply chain gives. Howden's manufactured around 4 million cabinets in our UK facilities at lowest factory-to-depot prices. All of this product distributed exclusively by our depot network to our 470,000 customers. I've called this phase pressing ahead in the business because it represents continuity from the past and at the same time it evolves forward into a new phase. I believe this business has opportunities and to take the best advantage of them, we can optimise more, develop the offer further and use digital to greater advantage for trade. We've delivered a positive first half. in revenue growth and profitability. And we have also showed good cash generation, one of the key metrics by which we view the business. We've shown that we can operate successfully in a challenging environment. And at the same time, we look to manage margin we put through a price increase in April. We're on track to deliver our plans for the year. There's a significant new development in our kitchen ranges and our contemporary offer with the launch of Linear, There's new shaker styles, there's new cabinet developments in the launch of our new grey, which offers a whole new combination of door cabinet choice, and there's new worktops. At the same time, we continue to expand our selection of joinery products, including pre-finished doors, extended range of fire doors, and fire-rated hardware packs. Haydn's Sweet Spot is a high-value, quality product at accessible prices to trade only. We continue to make investment choices for the long term of the business. Our new distribution centre, Rons 1, is now fully operational, delivering to depots, ready for period 11. And that's a huge and significant achievement to Rob Fenwick and his team. We've broken ground on Rons 2 and on Rons 3. We've launched an additional seven depots in the first half and are on track for around 30 this year. As you know, the revenue comparables become tougher as the year progresses. And we've yet to see the full impact of our April price increase. The business is now ramping up for the second half, which of course includes our important period 11. So I'll go into those plans in more detail once we've heard from Mark.

Thank you, Andrew. And good morning, everyone. Reviewing the financials for the first half of the year, let me start by looking at some of the headline numbers from the income statement. As you can see, Howden Joinery's UK revenue rose by £65 million to £605 million, a 12% increase on 2017. Group sales also increased by 12%. Gross profit rose by £25 million to £380 million, the percentage gross margin of 61.3% down from 2017, as we gave depots more flexibility on their margin from spring 2017, and we did not increase prices until April of 2018. Moving on, operating costs rose by £22 million, meaning that operating profit increased by £3 million to £70 million. Operating profits were impacted in the first half by continued investment across the business, including new depots, digital, the move to ROMs, additional depreciation and inflation. With net interest and other finance charges of £1 million, mainly due to the charge for pensions, there was a profit before tax of £68.8 million, £3.2 million higher than in 2017. Looking at cash flow in the first half of the year, this included a £5 million contribution to the pension deficit, capital expenditure of £17 million, and finally, share repurchase expenditure of £38 million. We had a net cash outflow of £28 million and ended the period with £213 million of net cash. I'll now go into some of the detail behind the headline numbers. Let me start by talking about revenue. Howden's UK turnover of £605 million increased by 12.1% on a total basis and was up 10.7% on the same depot basis. In continental Europe, turnover of 14.7 million was up by 1.2 million pounds. Sales in our French depots rose by 5.5% in euros. Let me now talk you through the movement in PBT from 65.6 million pounds in 2017. Gross profit rose by 25 million pounds. This is the net effect of several features. If we bridge from 2017's gross profit of £355 million, there was a benefit of £67 million, which had two factors. Firstly, it reflects the £18 million impact from lower prices. This resulted from giving the depots more flexibility on margin as well as not increasing prices until April this year. Secondly, increased volumes and mix changes increased revenue by £85 million as we saw a positive impact from lower pricing. Partly offsetting this, there were a number of factors that impacted the cost of goods sold. There were additional costs arising from the volume and mix changes, totalling £34 million. Also affecting cost of goods sold, we saw higher input costs, resulting in a net decrease to gross profit of £8 million. We saw no impact from exchange rate movements in the first half. So together, this gave a net rise in gross profit of £25 million to £380 million. Gross profit margin was 61.3%. If I now turn to the other factors that contributed to the movement in PBT, operating costs rose by £22 million, more of which in a moment, net interest and other finance charges were broadly the same. The net result then was that profit before tax rose by £3 million to £68.8 million. Let me now explain in more detail the main movements in operating costs from 2017's £288 million. Firstly, costs associated with the depots that we opened in the first half of 2018 and the incremental costs of the 19 depots that we opened in 2017 total £3 million. Cost increases for older depots were £10 million, mainly reflecting increases in headcount, delivery costs and pay inflation. Other cost increases incurred to support growth totalled £8 million. This included the costs of our new distribution centre in Rawns and digital upgrades. With other costs increasing by £1 million, this meant that operating costs rose by £22 million to £310 million. Let's briefly turn to the remainder of the income statement. As we've seen, profit before tax was £68.8 million. This led to a tax charge of £14.3 million, the effective tax rate being 20.8%. This gave a profit after tax of £54.5 million. This result gives earnings per share from continuing operations of 8.9 pence compared with 8.4 pence in 2017. Turning to dividends, the Board has decided that we will pay an interim dividend of 3.7 pence per share. This is in line with our policy of paying an interim dividend that is one third of last year's full dividend, which was 11.1p. This will be paid in November at a cost of £22 million. This will give a total cash cost of ordinary dividend payments in 2018 of £69 million. Let me remind you that in 2017 we returned a total of £116 million in share repurchases and dividends. As you know, in February 2017, we announced our intention to return £80 million to shareholders via a two-year share repurchase programme. At the beginning of 2018, we had £32 million of this programme remaining. In March 2018, we announced a further £60 million two-year share repurchase programme. So far in 2018, we have spent £38 million repurchasing shares, thereby completing the February 2017 repurchase programme, and we have £54 million of the March 2018 repurchase programme remaining. Let me now turn to cash flow. From a position of having net cash of £241 million at the end of 2017, we ended the first half with net cash of £213 million. Looking at the change since the end of last year, let me draw to your attention a few items that explain the movement. Net working capital increased by £33 million, more of which in a minute. Capital expenditure totalled £17 million and included new depots and investments in digital. Tax payments were £21 million. As I've already said, we spent £38 million repurchasing shares in the first half. And there was a £5 million contribution to the pension scheme. The net result of these and other movements was a cash outflow of 28 million, meaning that we ended the first half of 2018 with net cash of £213 million. As I've already said, net working capital increased by £33.4 million. Within this, stock increased by £14.5 million, which is mainly due to new kitchen ranges, Debtors grew by 51.1 million, reflecting the typical pattern of trading that we see in the first half. Partly offsetting these movements, creditors rose by 32.2 million pounds. Let me quickly bring you up to date with the balance sheet position of our pension scheme. At the end of 2017, the deficit stood at £109 million. A number of factors had caused this to change by the end of the first half. Firstly, from the P&L, there was the current service charge, administrative and interest costs of £11 million. Secondly, an increase in the discount rate reduced liabilities by £69 million. Thirdly, the group made a cash contribution of £15 million. Finally, with asset returns being £10 million lower, the deficit at the end of the first half was down by 63 million to 47 million pounds. This, of course, is the balance sheet deficit calculated under IAS 19. As you know, in 2015, we agreed a funding programme with the plan's trustees. This was for payments equivalent to 35 million pounds per annum up to June 2017. It was agreed that the group would make an interim payment of £25 million over the period July 2017 to June 2018. Last month, we announced that we had reached a new agreement with our trustees to pay £30 million per annum for up to five years until June 2023. Also under the agreement, deficit contributions will be suspended if the scheme's funding position reaches 100% of the scheme's funding basis for two consecutive months. And it will be resumed if the funding position falls below 100%. Let me finish with some brief comments about trading in the first period of the second half of the year and costs for the rest of the year. Period seven saw UK sales rise by 5.3% for the first four weeks of the second half. Looking at the remainder of the year, our overall outlook remains unchanged. has already announced we expect capital expenditure of £60 million for 2018. We continue to expect, as we said in March, further operating costs of £20 million in 2018 from expenditure in areas across the business, including digital upgrades, moving from our older distribution centre to Roms, and additional depreciation. These cost increases are in addition to the impact of the ongoing growth of the business, new depots and inflation. And on that note, I'll hand you back to Andrew.