Howden Joinery Group Plc

and welcome to the Howden's results for the first half of 2019. Thank you for taking the time to join us here in the room or to listening on the webcast. In addition to Mark Robson and me, Andy Witts, COO of Trade, and Rob Fenwick, COO of Supply, are both here. I'll begin with my perspectives on the first half of 2019 and our plans for the rest of the year. Mark will then review our financial performance for the period. I'll then sum up and we'll take questions. It's been a positive half for Howdens. Both revenue and gross margin increased and profitability improved with operating profit increasing at a higher rate than revenues. This in part reflected the timing of the price increase which this year was implemented in January as compared with last year in April, and maintenance of depot margin discipline, which we exhibited in the second half of last year. In the first half of 2019, we found a more profitable balance between volume and price as compared with the first half of last year when a significant increase in volumes came at some cost to margin. At the same time, we've continued to make investments in the business. I'll talk about these, in particular, depot openings, format developments, new product introductions and organisational structure in a moment. But first, I'd like to talk about our customers. Our overall customer base in the period was stable at around 470,000 trade and cash accounts. These two areas of focus were to improve our customer loyalty and the returns from our customer acquisition program. Sales per customer increased as total transactions and total spend grew, with our core customers buying more kitchens and spending more with us. With broadly the same number of new accounts as in the comparable period last year, new customer spend increased significantly, as did profit per new account, reflecting lower acquisition costs. I believe these results show that Howdens knows it's objective to help our trade customers achieve exceptional results from their customers and for them to profit from doing so. When our customers succeed, we succeed. Our model is a powerful combination of locally empowered depot management teams served by a dedicated supply chain, which is both cost-effective and critical to the success of our in-stock offer. A key feature of Howden's success is that we're trade only. Building trusted relationships with trade customers is central to everything we do. We have continued to hold our trade customer feedback sessions regularly, which enable us to identify any areas in which we need to improve our offer. Over a thousand of our customers have now attended these sessions, which show that our builders appreciate that we're listening to them. They view the relationship as a business partnership. So it's in their interests to invest their time to help us make it even easier for them to serve their customers. We've introduced a number of initiatives with the potential to increase volumes and profits across the business based around our core building blocks of trade service and convenience, trade value and product leadership. I will focus on the initiatives I went through at the 2018 results presentation in February, which were evolving our depot model to use space more efficiently and to create the best depot environment in which to do business with to support our customers. Improving range management to help customers buying decisions and to access supply chain benefits. and using digital to raise brand awareness to support the business model and to free up time for depot staff and customers to use more productively. All this together with our plans to develop our operation in France by way of a city-based approach. depot evolution. During the first half, we progressed our testing of a new depot format aimed at creating the best environment in which to do business with our customers at no material change to the fit-out costs of a new depot. Through new vertical racking in the warehouse section of the depot, we believe that there are ways to make space utilization improvements with the potential to make productivity gains from reduced picking times. This format also provides the opportunity to reallocate space, providing a more open front area to bring depot staff closer to customers, improve both the visibility and the standard of our design facilities, and nearly double the space available to wider range of kitchen displays. There is also space for a small goods picking area behind the counter with an improved everyday range of essential items including hardware as a way of encouraging footfall and therefore incremental kitchen sales. In addition to the depots opened or refurbished in the new format, there are further 45 depots that have been re-racked without further modifications, which means that we now have a total of 88 depots with vertically racked product representing approximately 12% of the current estate. In the first six months, we've opened 14 new depots, including five in Northern Ireland, all in the new format. Depots opened up in the second half will also be in the new format. In total, we are on track to open around 40 depots in the UK in 2019, including the five that we've opened in Northern Ireland. The improved densities offered by re-racking vertically also enables us to put our full offering into a smaller space of around 6,000 square feet. We expect to open around 16 smaller footage depots this year, including the four opened in the first half. With the new smaller size depots, the number of UK depots could potentially reach around 850. As I explained at the 2018 results presentation, we're also testing to understand the rollback opportunity in the existing depot estate. We initially converted three older depots, Park Royal in 1995 when the business opened, Swansea and Guildford the year after in 1996. These have been trading in the new format for several months and Andy and I are pleased with the early feedback that we're getting from both the depot teams and the customers. We are on track to convert eight more existing depots by the end of September. We are trialling several ways of doing this with different capital spends so that we can continue to learn how best to apply this opportunity to the existing depot estate. We will then trade these 11 depots through period 11 before drawing any conclusions to the sort of returns that we can expect. range management. New kitchens each year represent a significant portion of sales as the product's life cycles shorten. In the first six months of the year, we introduced eight new kitchen ranges, which are performing well. These ranges are characteristic of the trends that we're seeing for straight lines and modern kitchens, which accentuate the sense of space. contrasting colors and a cleaner look in shaker-style kitchens, and matte textures that benefit from the latest industrial technological advances that prevent fingerprint marks. During the period, we updated our light oak cabinet to a more natural tone, led the mass market rollout of anthracite storage systems, which helped define our mid and premium ranges, Extended our worktop range by nine light-colored laminate worktops, along with three new solid surface worktops to complement the increasing number of dark kitchen colors. We've introduced 25 Lamona appliances, adding new technologies in cooking, laundry, and dishwashing products, while strengthening our core Lamona oven choice with the introduction of a new low-price price point fan oven. We've strengthened the Limona brand through the introduction of a three-year guarantee. From the hardware lines we are trialling, we have selected around 250 of the fastest sellers from that range for full rollout across the estate. And we've continued to support our customers by introducing pre-finished internal doors across different styles, so helping them save time in fitting them. In the second half, we plan to introduce four more new kitchen ranges in time for the peak period 11 trading weeks, making the total of 12 new kitchens for the year. Managing the number of kitchen ranges efficiently is crucial for both best availability, which is highly valued by our customers, and profitability. And we intend getting back to the discipline of fewer deeply stocked, higher performing ranges. A key part of this is the timely discontinuation of underperforming ranges and the management of clearance from the business. In the first half of this year, 15 ranges have been cleared from the business and a further six will be cleared by the end of the year, making a total for this year of 21. By the end of 2019, we'd expect to have around 65 current kitchen ranges, which we think is an appropriate number for the current market. As part of our focus on range management, we've combined the various commercial teams across the business into one single commercial structure organized by categories. This structure provides clear accountabilities for ranging decisions and the accessing of supply chain benefits. The changes will remove duplication of effort, ease communication, and bring our commercial team closer to the depot managers. Through this structure, we aim to ensure that the business is well planned at least 18 months out with our suppliers, that we are being offered innovative product first, and that we are offering the best value to our customers. Digital. We see digital as a means to reinforce the Houdens model and the strong local relationship between depots, their builders, and we're building our digital capability with three objectives. To increase builder and consumer awareness of Houdens to help our customers sell the Houdens product. To improve the communication between Houdens, tradespeople and their customers. Streamline and improve operating processes, thereby freeing up time for depot staff and customers to use more productively. In the first half, our new web platform, which can be viewed on desktop, tablet, and smartphone, and offers customers improved search and information, has moved Houdens.com into more prominent positions, raising brand awareness with consumers. Houdens.com impressions in search results has increased eightfold. Visits to the site has seen growth in traffic of 42% year on year. The contacting of depots through the website has increased by 30%. We have also completed a program to enrich product content and make the products or styles a visitor wants to view easier and quicker to find. Around 80% of the visitors are now entering the site via the product pages rather than the homepage. Views of underrepresented but key product categories have increased. For example, views of hardware have increased by 50%. Refining style and product selections is now easier, enabling a more focused discussion of consumers' needs with their builders and our designers. In the second half of this year, we'll be making further improvements to our digital offering, in line with our aim to put a tradesperson's local depot in their pocket. We will be testing a secure customer-only area of the website where builders can manage their accounts and interface more efficiently with their local depot and vice versa. Customers will be able to view their credit details and make payments and access account details and invoices at any time. We will also be testing a more efficient account opening process for new trade customers. International In February, I explained why we believe there's potential for a viable business based in France. Since then, we've opened a new depot in June near Versailles. We expect to open at least four more in the target areas this year. That'll be three around Paris and one in Lille. We have completed the rebranding of our international business from Houdin to Howdens, which should enable the business to gain advantage from the UK brand equity, online search reputation and business efficiencies. We've appointed a French national to lead our city-based business strategy in France. We've completed the closure of our operations in Germany and the Netherlands, with closure costs being in line with our expectations. Thank you very much for listening. Mark will now take you through the interim results for 2019, following which I will sum up before taking questions.

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. Moving from left to right on the top row to begin with, as you can see, Howden Joinery's UK revenue rose by £33 million to £638 million, a 5.5% increase on 2018. Group sales also increased by 5%. Gross profit rose by £25 million to £404 million. The percentage gross margin of 61.9% was up from 61.3% in 2018 following a price increase in January 2019. Operating profit was up by £8 million to £78 million as a result of a £17 million increase in operating costs. These costs were impacted in the first half by inflation and by continued investment across the business. This included new depots, digital and additional depreciation. The closure of our Dutch and German operations also impacted operating costs. Now moving down to the second row with net interest income and other finance charges broadly flat, there was a profit before tax of 78 million, 9 million higher than in 2018. Looking at cash flow in the first half of the year, this included share repurchase expenditure of £46 million, capital expenditure of £24 million and a £10 million contribution to the pension scheme. Overall, we had a net cash outflow of £14 million and ended the period with £217 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 £638 million increased by 5.5% on a total basis and was up 3.4% on the same depot basis. In continental Europe, turnover of 14.5 million was down by 0.2 million pounds as a result of the Dutch and German depot closures. Sales in our French and Belgian depots rose by 4% in euros. Let me now talk you through the movement in PBT from 69 million pounds in 2018. Gross profit rose by 25 million pounds. This is the net effect of several features as shown in the chart on the right hand side. If we bridge from 2018's gross profit of 380 million, there was a benefit of 37 million pounds, which reflects the impact of the January 2019 price rise. Secondly, a small fall in volumes and mixed changes compared to the first half of 2018 reduced revenue by £4 million. In addition, there were a number of factors that impacted the cost of goods sold. There were reduced costs arising from the volume and mix changes, totalling £2 million, also affecting cost of goods sold. We saw higher input costs and the impact of discontinued product write-offs. This resulted in a net decrease to gross profit of £8 million. We also saw a £2 million impact from exchange rate movements in the first half. Together, this gave a net rise in gross profit of £25 million to £404 million. Gross profit margin was 61.9%. If I now turn to the other factors that contributed to the movement in PBT, reverting back to the chart on the left, operating costs rose by £17 million, which I will address on the next slide. Net interest and other finance charges were £1 million better than in 2018. The net result was that profit before tax rose by £9 million to £78 million. Let me now explain in more detail the main movements in operating costs from £310 million in 2018. Firstly, costs associated with the 14 UK depots that we opened in the first half of 2019 and the incremental costs of the 33 depots that we opened in 2018 totaled £7 million. Cost increases for older depots were £4 million, mainly reflecting higher payroll costs. Other cost increases incurred to support growth totaled £4 million. This included the cost of digital upgrades. The closure of our Dutch and German depots cost £5 million, and there was a net reduction in other costs of £3 million. This meant that operating costs overall rose by 17 million to 327 million pounds. Let's briefly turn to the remainder of the income statement. As we've seen, profit before tax was 78.1 million pounds. This led to a tax charge of 16.4 million pounds, the effective tax rate being 21%. This gave a profit after tax of 61.7 million pounds. This result gives earnings per share from continuing operations of 10.3 pence compared with 8.9 P in 2018. Turning to dividends, the Board has decided that we will pay an interim dividend of 3.9 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 11.6p. This will be paid in November at a cost of 24 million pounds. This will give a total cash cost of ordinary dividend payments in 2019 of 71 million pounds. Let me remind you that in 2018 we returned a total of £131 million in share repurchases and dividends. In March 2018 we announced a £60 million two-year programme of share repurchases. At the end of 2018 there was £30 million of that programme remaining. In February 2019, we announced that we would return an additional £50 million via a further share repurchase over the next two years. So far in 2019, we have spent £46 million repurchasing shares, thereby completing the 2018 buyback, and we have £34 million of the 2019 programme remaining. Let me now turn to cash flow. From a position of having net cash of £231 million at the end of 2018, we ended the first half with net cash of £217 million. Looking at the change since the end of last year, let me draw to your attention a number of items that explain the movement. Networking capital increased by 10 million pounds, which I will address on the next slide. Capital expenditure totaled 24 million pounds and included new depots. Spend on the next phase of our Rawns warehousing strategy and investments in digital. Tax payments were 21 million pounds. As I've already described, we spent 46 million pounds repurchasing shares in the first half. and there was a £10 million contribution to the pension scheme. The net result of these and other movements was a cash outflow of £14 million, meaning we ended the first half of 2019 with net cash of £217 million. As I've already said, net working capital increased by 10 million pounds. Within this, stock increased by 21 million pounds. This was impacted by Brexit planning, new depot openings, and new kitchen ranges. Debtors grew by 17 million, reflecting the typical pattern of trading that we see in the first half. Partly offsetting these movements, creditors rose by £29 million. Let me quickly bring you up to date with the balance sheet position of our pension scheme. At the end of 2018, the deficit stood at £36 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 £9 million. Secondly, a decrease in the discount rate increased liabilities by £107 million. Thirdly, the group made a cash contribution of £19 million. Finally, with asset returns being £126 million higher, the deficit at the end of the first half of the year was down by £29 million to £7 million. This, of course, is the balance sheet deficit calculated under IAS 19. Our deal with the trustees, however, is on the technical provisions basis. This agreement, reached in June 2018, is 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 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 total UK sales rise by 7.5% for the first four weeks of the second half and was up by 4.8% on the same depot basis. Our plans for the full year are unchanged. In forecasting this year's overall result, the margin for the full year, a number of factors have to be considered. These include market uncertainties and the impact of foreign exchange rates. As we said in February, there will be an additional £15 million of operating costs in 2019 compared to 2018. These are in respect of the closure of our Dutch and German businesses, digital upgrades and additional depreciation. These cost increases are in addition to the impact of the ongoing growth of the business, inflation and new depots. We now expect capital expenditure to be between 70 and 80 million pounds for 2019. This includes digital upgrades, new depots, and the next phase of RONs. On the subject of Brexit, we are mindful of the potential impact on our business. As a consequence, we are reviewing our stocking policy for at-risk items, currently resulting in an additional £12 million of inventory held at the half year. We are also flexing our inbound supply routes, and we now have in place appropriate logistics accreditations, namely authorised economic operator status. On that note, I'll hand you back to Andrew.

Thank you, Mark. It's been a positive first half for Howdens. We've increased revenues and gross margin and improved profitability. with operating profit increasing at a higher rate than revenues. We continue to invest in people, infrastructure, depots and product. We're on track to open around 40 UK depots, including the five that we've opened in Northern Ireland, all in our updated format, and around four in France. We are beginning to see the benefits from our ongoing digital upgrade program and work continues on the next phase of Ron's distribution complex, which will replace our existing facilities in 2021. And we've reorganized our commercial team. I am pleased with the response of our people, customers and suppliers to the initiatives we've taken so far this year. The focus of the business is now to deliver H2 and the preparations for the peak period 11 trading weeks. We aim to maintain the margin discipline delivered in the first half, retaining a profitable balance between price and volume whilst working with our suppliers to keep costs down. We have a right-sized lineup of new product offering for the second half. Our lead bank and surveys are in line with where we'd want them to be. UK depot sales for the first period of the second half have increased by 7.5%. We remain cautious on market conditions, given the economic uncertainties, particularly the impact that Brexit may have. The current date by which the UK must leave the European Union is two days prior to the end of our four peak weeks of period 11 trading. However, I'm confident in our business operating model through the changes and any changes in economic conditions and we're on track to deliver our plans for the year as a whole. Thank you for listening. We'll now take questions. Please wait for the microphone and clearly state your name and your organisation before asking your question. Howard is quick off the mark.