Howden Joinery Group Plc

and welcome to the Howdens Results presentation for 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, Rob Fenwick are, as usual, both here, as are a number of the other ExCo members. I'll begin by introducing our performance in 2019. Mark will then review our financial performance for the year. I will then share my perspective on our performance in 2019 and our plans for 2020, and then we'll take questions. 2019 was a year of progress for Howdens, and I'm pleased with how the business has performed. Both revenues and gross margin increased and profitability improved, with operating profits increasing at a faster rate than revenues. This in part reflects the timing of the price increase, which in 2019 was implemented in January as compared with April in 2018, and the maintenance of improved depot margin discipline, which we exhibited in the second half of 2018. In the first half of 2019, we found a more profitable balance between volume and price as compared to the first half of 2018, when a significant increase in volume came at some cost to margin. This trend continued in the second half against a strong margin comparator. In 2020, we will continue to evaluate how best to balance volume and price to the benefit of overall profitability in the light of prevailing market conditions as we see them. Trading in the 2019 peak 11 weeks has set a new benchmark for us. Our depot teams were well incentivized and achieved record sales in the period underpinned by the level of stock availability delivered by our supply chain and an IT infrastructure which performed without incident. At the same time, we continue to make investments in the business during the year. We have in place a number of initiatives with the potential to increase volume and profits across the business based around our core building blocks of trade service convenience, trade value, and product leadership. These are evolving our depot network to use space more efficiently and to create the best depot environment in which to do business with and support our customers, improving range and supply management to help customers buying decisions and to access supply chain benefits to make productivity gains, 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. together with our development of our operations in France by way of a city-based approach. So I will talk about these after Mark has taken you through the financial results. Thank you, Mark.

Thanks, Andrew. And good morning, everyone. Reviewing the financials for the year, let me start by looking at some of the headline numbers for 2019. Moving from left to right on the top row to begin with, as you can see, Howden Joinery's UK revenue rose by £73 million to £1,550 million. an increase of around 5% on 2018. Group sales also increased by 5%. Gross profit rose by £54 million to £986 million. The percentage gross margin of 62.3% was up from 2018, reflecting the impact of a price increase in January 2019. Moving on to operating profit, after a £34 million increase in operating costs, profit rose by £20 million to £260 million. Operating costs were impacted by continued investment across the business, including new depots, digital, additional depreciation and inflation. The closure of our Dutch and German depots also impacted these costs. Now moving down to the second row, with net interest and other finance charges falling by £2 million, mainly due to a decrease in the charge for pensions, there was a profit before tax of £260.7 million, £22 million higher than in 2018. Looking at cash flow in the year, returns to shareholders totalled £126 million, which included share repurchases of £55 million. Capital expenditure was £61 million and there was a £30 million contribution to the pension deficit. Overall, we had a net cash inflow of £36 million, meaning that we ended the year with £267 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 £1,550 million increased by 4.9% on a total basis and was up by 2.5% on the same depot basis. In continental Europe, turnover of 33 million was down by 1 million pounds, impacted by the closure of our depots in the Netherlands and Germany. Sales in our French and Belgian depots rose by 3.8% in euros. Let me now talk you through the movement in PBT from £238.5 million in 2018. Gross profit rose by £54 million. This is the net effect of several features as shown on the chart on the right hand side. If we bridge from 2018's gross profit of £932 million, there was a sales benefit of £72 million, which had two factors. Firstly, it reflects a £61 million benefit from the price increase. introduced in January 2019. Secondly, increased volumes and mix changes increased revenue by £11 million, reflecting an improved balance between price and volume. 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 £4 million. We saw a £3 million negative impact from exchange rate movements in the year, also affecting cost of goods sold. There were higher input costs, resulting in a net decrease to gross profit of £11 million. Together, this gave a net rise in gross profit of £54 million to £986 million. Gross profit margin was 62.3%. 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, which I will expand on in a few moments, rose by £34 million. Net interest and other finance charges were broadly the same. The net result was that profit before tax rose by £22 million to £260.7 million. Let me now explain in more detail the main movements in operating costs from £692 million in 2018. Costs associated with the 44 depots opened in 2019, which includes five in France, and the incremental costs of the 33 UK depots that we opened in 2018 total £17 million. Cost increases for older depots were £7 million, mainly reflecting increases in headcount and pay inflation. There were cost increases incurred to support growth, which totaled £8 million. This included the ongoing costs of digital upgrades. Costs associated with the closure of our German and Dutch depots were £6 million and we benefited to the tune of £4 million from not being impacted by GMP equalisation, which affected 2018. This meant that total operating costs rose to £726 million. Let's briefly turn to the remainder of the income statement. Profit before tax was £261 million. This led to a tax charge of £52 million, the effective tax rate being 19.8%. This gave a profit after tax of £209 million. This result gives earnings per share from continuing operations of 35 pence compared with 31.3 pence in 2018. Turning to dividends, the Board has recommended that we pay a final dividend of 9.1 pence per share. This will be paid in June 2020 at a cost of £55 million. Let me now turn to cash flow. From a position of having net cash of £231 million at the end of 2018, we ended 2019 with net cash of £267 million. Let me draw to your attention a few items that explain the movement. Net working capital increased by £6 million. more of which in a minute. Capital expenditure totalled £61 million and included new depots, digital upgrades and investment in the next phase of our Rawns distribution centre. Tax payments were £46 million. As I've already said, we spent £55 million repurchasing shares. there was a £27 million contribution to the pension scheme over and above the charge through the P&L. The net result of these and other movements was a cash inflow of £36 million, meaning that we ended 2019 with net cash of £267 million. As I've already said, net working capital increased by £6 million. Within this, stock increased by £5 million, mainly due to depot openings. Debtors grew by £7 million, reflecting the impact of the final two days of period 11 trading, which in 2019 fell into November. This debt did not become due until after the year end. Partly offsetting these movements, creditors rose by £6 million. Before moving on from cash, as you know, we target a prudent capital structure. This means that it's our policy to operate throughout our annual working capital cycle without incurring bank debt. In March 2018 we announced our intention to return £60 million to shareholders via a two-year share repurchase programme. At the beginning of last year we had £30 million of that programme remaining. In February 2019 we announced a further £50 million two-year programme. As I've already said, in 2019 we spent £55 million repurchasing shares, thereby completing the March 2018 programme and we have £25 million of the February 2019 programme remaining. This means that in 2019 we have returned £126 million to shareholders, including dividends. This compares to £131 million returned in 2018. Looking at our net cash at the end of 2019 of £267 million, we have surplus cash of around £85 million, which the board has decided it will return via a further share repurchase over the next two years. 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 2019. Firstly, from the P&L, there was the current service charge, administrative and interest cost of £21 million. Secondly, a decrease in the discount rate, net of longevity effects, increased liabilities by £197 million. The group made a cash contribution of £47 million. Finally, with asset returns being £150 million higher, the overall deficit at the end of 2019 was up by £21 million to £57 million. This, of course, is the balance sheet deficit calculated under IAS 19. However, our agreement with the trustees announced in June 2018 is on a technical provisions basis. This agreement 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%. The next triennial valuation takes place later this year. Let me finish with some brief comments about trading in the first two periods of 2020 and the outlook for the rest of the year. The first two periods of the year saw total UK sales rise by 1.6%, down 0.2% on the same depot basis, excluding week one, which included three and a half trading days in 2019, but only two and a half in 2020. Sales were up three and a half percent. Clearly, there are currently various market uncertainties and a number of factors that need to be considered in forecasting this year's overall result, including the impact of foreign exchange rates. Regarding operating costs, compared to 2019, we will benefit from not bearing the £6 million cost of closing our European operations in Germany and the Netherlands. However, there will be further operating costs of around £20 million in 2020 compared to 2019. These include the one-year impact resulting from the dual running of our old NDC and Phase 2 of our new distribution centre in Rawns, digital investment, increased pension charges and additional depreciation. These cost increases are in addition to the impact of the ongoing growth of the business, inflation and new depots, including further openings in France. Capital expenditure is expected to be around £80 million for 2020, including the next phase of RONs, digital investment and new depots. And on that note, I'll hand you back to Andrew.

Thank you, Mark. I'll be talking about our performance in 2019 and our plans for 2020 using the initiatives I mentioned earlier as a framework. As a reminder, these are depot evolution, range and supply management, digital development and international. But first, I would like to talk about our customers. Our overall customer base in 2019 was stable and ended the year at around 470,000 credit and cash accounts. 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 customers buying more often and spending more with us. With a similar number of new credit accounts being opened as last year, new customer spend increased significantly, as did profit per new account, reflecting the higher level of sales and lower acquisition costs. I believe these results show that Howdens knows what it stands for, to help our trade customers achieve exceptional results for their customers and to profit from doing so. When our customers succeed, we succeed. Our trade-only 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. Depot managers hire their own staff, manage their own relationships, set local pricing, manage their own stock levels to suit their own local customers. Profit sharing is calculated on local performance. Everyone is incentivised to grow a profitable local business. Whilst our supply operation serves only Howdens, it has more than 700 depot customers, each with individual changing day-to-day requirements. Our supply operation has the scale, space and flexibility required, to respond to the needs and meet demands of our peak weeks of period 11, when sales are typically more than double the level of those in other periods. A key feature of Howden's success is that we're trade only. Building trusted trade relationships with trade customers is central to everything we do. We've continued to hold our trade customer feedback sessions both regularly and across the country, which enable us to identify any areas where we need to improve our offer. These sessions are always fully subscribed, which shows our builders appreciate that we're listening to them. They view the relationship as a business partnership, so it's in their interest to invest their time with us to make it even easier for them to serve their customers. As I mentioned, we've put in place a number of initiatives with the potential to increase volumes and profits across the business. The first is depot evolution. During 2019, we progressed our testing of a new depot format aimed at increasing the best depot environment in which to do business with our customers at no material change to the fit-out costs of a new depot. By racking product vertically 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. By reallocating space in the new format, we can provide a more open fronted area to bring staff closer to customers, improve both the visibility and the standard of our design facilities, and nearly double the space available to display a wider range of kitchen designs. There is also room for a small items picking area behind the counter with an improved range of everyday essential products, including hardware and ironmongery, to add incremental profit as a way of encouraging footfall and incremental kitchen sales. We are confident that the updated format is an improvement at the same cost as on the traditional one. It was adopted for all UK depots opened in 2019 and all UK depots opened in 2020 will also be formatted in this way. The improved densities offered by re-racking product vertically have enabled us to put our full product offering into a smaller space. We opened eight smaller footage depots this year and intend to open more such depots in 2020. With the smaller size depots, we continue to believe that there's potential for around 850 UK depots. In 2019, we opened a total of 39 UK depots, including five in Northern Ireland, with openings weighted towards the latter part of the year. This represents an increase in the number of openings as compared with an average of 25 in the previous three years. In 2020, we plan to open around 30 more UK depots. As I explained in the 2019 interim results presentation, we put in place a test to understand the rollback opportunity the updated format may have in the existing estate. We initially converted three older depots. Park Royal opened in 1995. Swansea and Guildford both opened in 1996, around about the time when the business started. And these have now been trading in the updated format for eight months or so. They continue to show encouraging signs of improved performance relative to similar depots, vintage type and location since conversion. We subsequently converted a further eight older depots prior to the start of our peak trading period, deploying several capital spends. Managing the disruption of a reformat to a day-to-day's operation and trading patterns is a key part of the conversion process. Our experiences when reformatting these depots have helped us improve our skill base, our planning for a reformat, and our understanding of when in the year to implement them. Developed our thinking on about how to scope, structure, and execute a reformat, which we are now able to complete in under eight weeks. We've also refined the format, which incorporates a smaller hardware area and reduces refurbishment and ongoing running costs. Andy Witts and I are pleased with the feedback that we're receiving from both depot teams and customers at the converted depots, and we've been sufficiently encouraged by the performance to date and the expectations of the depot teams for them in 2020 to extend the test. This year, we intend to convert around 30 more depots across the country so that we can continue to learn how best to apply this opportunity within the existing depot estate. In 2020, we are budgeting for an average reformat spend of £225,000 as we apply the learnings from the depots converted to date. We also plan to re-rack around 50 further depots without other modifications in 2020. At the end of 2019, we had a total of 71 new depot formats comprising 60 new ones and 11 refurbished depots and had re-racked a further 62 depots without other modifications. By the end of 2020, assuming our depot plans for 2020 are implemented as I have described, we will have a total of 131 new format depots comprising 90 opened in the new format plus 41 refurbished ones. And we will have re-racked a further 112 without further modifications. My second point is about range and supply management. New depot ranges each year represent a significant portion of sales as product life cycles shorten. During the year, we introduced 12 new kitchen ranges to all depots with an average sales per range above those of 2018. These ranges are characteristic of the trends that we're seeing for straight lines in modern kitchens, which accentuate the sense of space. Contrasting colors and cleaner look in kitchen shaker styles and matte textures that benefit from the latest industrial technology advances that prevent fingerprint marking. During 2019, we updated our light oak cabinet to a more natural oak tone. Led the mass market rollout of anthracite coloured storage systems which helped define our mid and premium ranges. Extended our worktop range by 11 laminate and 7 solid surface worktop styles. 9 of these are lighter decor worktops which complement the increased number of darker kitchen colours. We added 25 Lemona appliances to our range, introducing new technologies in cooking, laundry and dishwashing products, while strengthening our core Lemona oven choice with the introduction of a new low price point fan oven. We strengthened the Lemona brand through the introduction of a three year guarantee. From the new hardware lines we trialled, we selected around 250 of the fastest sellers for rollout across the estate, which principally comprises key products for the joiner and extensions to our core ironmongery range. We continue to support our customers by introducing pre-finished internal doors across different styles, so helping them save time in fitting them. and we introduced three new flooring decors manufactured with new technology, which makes vinyl flooring quicker and easier for builders to fit. In the first half of 2020, we plan to launch 13 new kitchen ranges, of which 11 have already been launched to date. Features include two new styles, a modern slab range offering a trade-up from our entry price point Greenwich gloss range. The new door has seamless edges and is available in three colours, all with a mirror gloss finish and two super matte finishes, again with entry fingerprint technology. An updated painted timber shaker range available in two new colours from January this year with an additional colour to follow in April. It's a versatile design that can be dressed to achieve both modern and traditional looks. We've added more colours and more ranges. A new green colour in our successful mid-price Fairford shaker range. Pebble and navy colours extend across three kitchen families, including the addition of pebble to the Greenwich Gloss family, strengthening our entry price point offer. We've developed a new handle-less cabinet platform to meet the demand for linear look. The cabinet can be used within our current ranges, which enables us to increase customer choice without a commensurate rise in range count. We now offer 27 styles and have the flexibility to change the number of styles on offer in response to customer demand. Using this new cabinet, we can now provide a more affordable way for our customers to achieve the straight line look, including in our entry price point Greenwich family. It has also enabled us to refine our range architecture into modern, linear and shaker, making it easier for customers to choose the kitchen that suits them best. New worktops for this year focus on lighter shades and thinner profiles, which in particular complement our new linear kitchen range. We are extending the range of Lamona new technology appliances, including self-cleaning ovens, to a new lower price point. Design-led refrigeration is also being introduced at very affordable prices. Managing the number of kitchen ranges efficiently is crucial for both best availability, which is highly valued by our customers, and profitability. We have made progress in getting back to the discipline of fewer deeply stocked ranges in higher performing ranges in the depots. A key part of the range discipline is the timely discontinuation of underperforming ranges and the management of clearance of that stock from the business. During the year, 19 ranges were cleared from the business. At the end of 2019, we had 67 current kitchen ranges, including initial stock of some of the ranges that we were launching at the start of this year. We believe around 65 current ranges is the right number for our market at present. In 2020, we're aiming to remove at least the number of ranges that we add. During 2019, as part of our focus on range management, we combined the divisional commercial functions into a single commercial team organized in categories. This structure provides clearer accountabilities for ranging decisions, the access of supply chain benefits, the changes remove duplication of effort, easing communication, and bringing our commercial team closer to the depot managers. We have seen the benefit of clearer accountabilities and closer working practices between trade, commercial and supply. This enabled our new kitchen brochure and trade book to be launched in week three of 2020, the first of three editions during the year, which was synchronized with our promotional rooster offers and enabled stock for all new kitchens to be in depots before the trade book and brochure were published. Through this structure, we're also aiming 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're being offered the best value for our customers. We have benefited from a significant engagement in our supply base in support of our 2020 plans for improved product range, availability and price. We keep under review what we believe it is best to make or to buy. And in 2019, investment in manufacturing technology enabled us to make doors of our five new Hockley kitchen ranges, reducing the costs of these doors and increasing supply chain flexibility. We also installed a small batch line to make lower volumes, but important skews, which third-party vendors cannot supply at competitive prices. During the year, we were awarded a Manufacturing Guild mark, a reflection of the excellence of our manufacturing operations, and we were delighted to be reappointed as a Royal Warrant Holder for a further three years. Now turning to our digital platform. We see digital as a means of reinforcing the Huygens model of strong local relationships between depots and their customers, and we're building a digital capability with three objectives. to increase builder and consumer awareness of Howdens to help our customers sell Howdens product, to improve the communication between Howdens, tradespeople and their customers, and to streamline and improve operating processes, freeing up time for depot staff and customers to use more productively. Our new web platform offers customers improved product search and information, plus access to online advice and inspiration, and has moved Howdens.com into more prominent positions, raising brand awareness with customers. Since June 2019, Howdens.com impressions are presented in 1.5 million more search results a month. Visits to the website have seen a growth of 22% year on year, exceeding an average of 300,000 visitors a week for the first time. and the contacting of depots through the website has increased by 35%. We are also completing a program of restructuring and digitizing content. A new hierarchy, enriched product content, and new advisory and editorial material make it easier and quicker for the user to find the information they want to view. Around 80% of the visitors now entering the site via pages relating to specific search queries or terms underpinned by SEO improvements targeting search terms most relevant to our products. Views of product categories have both increased both in kitchens where entries and visits to kitchen pages have risen by 43%. and are in underrepresented product categories such as hardware, where they're up 76%, and doors, for which successful searches were up 77%. Refining styles and product selections is now easier, as we have provided the capability for each user to tailor their own requirements, enabling a more focused discussion of the consumer's needs with their builders and with our designers. In the second half of 2019, we will test ways of developing our digital offering further in line with our aim of putting a tradesperson's local depot in their pocket. Working with account holders to understand their key requirements, we developed and tested a secure trade customer-only area of the website where behind a secure login, they can manage their accounts and interfaces more efficiently with Houdens and their chosen depots in particular. They can view their credit details and make payments and access account details. They can download invoices and information at any time. During the test period, 44% of users logged in outside of depot hours, 60% made a payment and half downloaded documents. Average payments per customer were also well above the company level. In 2020, we instituted full rollout of these trade account facilities, which are now available to all customers. User feedback has been favorable with usage rates rising. We will be supporting our depots with onboarding their customers to the new platform, which we believe will enhance the strong local relationships the depots have with their builder customers. In 2020, we will continue to improve content and add more capability to this platform. We aim to further develop account management, account and project management features, together with functionality which assists local communications between depots and their customers. We aim to test a more efficient online account opening process for new customers. And having digitized our product and marketing content in 2019, we can deploy these cost-effectively across multiple channels and programs and add fresh content efficiently. And finally, international. At the results presentation last year, I explained why we believe that there is potential for a viable city-based business in France. And in 2019, we opened five new depots, four around Paris and one in Lille. We completed the rebranding of our international business from Houdin to Howdens, which should enable the business to gain advantages from UK brand equity, online search reputation and business efficiencies. We appointed a French national to lead our business based in France, who's now been in post since autumn 2019. We completed the closure of our German and Netherlands with store closures cost at budgeted levels. The 22 depots opened before 2019 are now sufficiently profitable to cover all central costs, which are scaled for a larger business. Total sales of the depots opened in 2019 are in line with expectations. We've identified further sites which would enable us to open more depots in France in 2020. Consistent with our policy of staffing new depots with Howden's trained teams and assuming our business in France continues to perform in line with our expectations, we are targeting around five openings in 2020. So let me summarize. 2019 was a year of progress for Howdens. We increased revenues and gross margins and improved profitability with operating profit increasing at a higher rate than revenues. We continued to invest in people, infrastructure, depots and product. We opened 39 UK depots, including five in Northern Ireland, all in our updated format and five in France. We began to see benefits from our ongoing digital development program. Work continues on the next phase of the RONS distribution complex, which will replace our existing facilities in 2021. We reorganized our commercial team, which assists in the delivery of our 2020 plans for improved product range availability and price. I'm pleased with the response of our people, customers, and suppliers to the initiatives that we've taken and our results for the year. Now, turning to 2020, we aim to retain a profitable balance in the lighter prevailing market conditions between price and volume, whilst working with suppliers to keep product and input costs down. We plan to open around 30 depots in the UK, five in France, and convert around 30 existing depots to the new format. We have a right-sized lineup of new product for the first half, which has been launched and is in stock earlier than in 2019, which we believe will benefit such sales across the year. And we have a well-planned program of second and third phase product introductions in place for later this year, together with a series of rooster promotions to encourage footfall. This year, we will be making more of the product we sell in our UK factories. Our new online trade facilities, trade account facilities are now available to all customers. And in 2020, we will continue to improve content and add more capability to our digital platform. Excluding the first week of trading, which had fewer days than last year, total UK depot revenue for the first two periods of the year increased 3.5% and 1.6% on the same depot basis. We remain cautious in market conditions given economic uncertainties, including the UK's exit from the EU, the impact forthcoming trade negotiations may have, and also the consequences of the coronavirus outbreaks in a number of countries. We are monitoring our supply chain closely and have increased forward stock levels for product source from China while reviewing alternative sources and means of supply. However, I'm confident in our business model through changing economic conditions and the benefits our initiatives will bring to our performance. Finally, before opening up to questions in the meeting, I would like to mention our 2020 Houdens Expo. In 2019, we held our Norgel Houdens Expo, which received very favourable results from staff, suppliers, customers and other visitors. And we've built a new expo for 2020, again located as part of our old distribution centre in Northampton. And we'd like to invite you to visit the expo on the 16th of April. Thank you for listening. Mark and I will now take questions. Please wait for the microphone and clearly state your name and your organization before asking your question.