Howden Joinery Group Plc

Good morning, everyone, and welcome to Howden's 2020 results presentation. I will begin by introducing our 2020 performance. Paul Hayes, our new group CFO, will then review our financial results for the year. I will then share my perspectives on our 2020 performance and our plans for 2021, and then we'll take questions. Howden's has performed well during a challenging year that has been significantly impacted by COVID-19. We adapted to COVID trading conditions while investing in and progressing our strategic plans for the business. Our performance demonstrates the strength of our trade only business model and our ability to continue to evolve the business whilst prioritizing the health and wellbeing of our staff and customers. The result for the year reflects the quarter two spring lockdown period, followed by a year and year increase in second half sales and profit. UK sales in the first half were 29% lower than in 2019, with all of the shortfall attributable to trading in the second quarter. UK second half sales increased by 16% on 2019, with the increase in sales trending upwards across the second half, exceeding our expectations in latter periods. I believe this performance reflects the measures that we put in place to enable our people in all areas of the business to work safely together with those put in place to support our customers. These measures comprised of new services, lower prices, combined with more margin flexibility for depots, high stock availability and a safe environment in which to trade. With people by necessity spending more time at home and end user concerns about further lockdowns, we also believe people were choosing to spend more on their homes. We flexed our traditional period 11 sale period when sales are typically more than double those of other periods across periods 10 and 11. With signs of pent up demand, reports of extended delivery times amongst our competitors, and concerns about further lockdowns, we flexed the sales period to help builders book in more kitchen fits over a longer period. Sales across periods 10 and 11 exceeded those targeted by the business, and period 11 alone still returned a record result. It also benefited supply chain management and the ability of our depot teams to service demand, which in turn were incentivized for performance in periods 10 and 11 combined. A founding principle of Howden's is to be worthwhile for all concerned. In these difficult times for all, we have supported staff and customers and continue to conduct other stakeholder relationships in a fair and responsible way. During the spring lockdown, we maintained an emergency provision to support the NHS, care workers and vulnerable people, and we have continued to support charities. Throughout 2020, we paid our landlords in full and honoured, and in some cases, increased our orders from suppliers, who in turn have supported us with high stock availability. Similarly, given Howden's strong balance sheet and our trading performance, we repaid all of our 2020 furlough funding prior to year end, and settled a number of other payments that we previously deferred, including taxes, pension deficit contributions and business rates waived by certain local authorities. And today we are recommending that we resume dividend payments. The marketplace remains challenging and may be further impacted by COVID-19, Brexit and underlying consumer confidence. We believe we are well positioned in such a market with our trade only in stock and local model. Based around our core building blocks of service and convenience, trade value and product leadership, we have initiatives in place to do this through evolving our depot model, by improving range and supply management and developing our digital capabilities. I will update you on these and our operations based in France after Paul has taken you through our financial results.

Paul. Thank you, Andrew, and good morning, everyone. I look forward to meeting you face to face when conditions allow. I joined Howden's in November, and despite lockdown, the team has helped me get to grips with the business very quickly. I've visited our manufacturing sites, a number of depots and other locations, and met many of our people. I'm pleased to be announcing Housland's 2020 four-year financial results, and you will be reassured to know that I will be presenting the financial results today in the well-established format used by the company. I believe that this will be the most effective approach in providing clear comparability. Let me start by looking at some of the headline numbers. These are reported by us for the first time under IFRS 16, the new lease accounting standard. Moving from left to right on the top row to begin with. As you can see, Howden Joinery's UK revenue fell by 41 million pounds to 1,510 million, a 3% decrease on 2019. Overall, group sales decreased by 2% after including our growing continental European business. Gross profit fell by £56 million to £930 million. The percentage gross margin of 60.1% was down from 62.3% in 2019. This included mixed changes, and as we explained in the first half results, the impact of carrying fixed manufacturing costs during reduced levels of production. Howden's made an operating profit of £196 million in the year, down from a £260 million profit in 2019. Now moving down to the second row. Net interest charges were up by 11 million pounds predominantly due to the adoption of IFRS 16. As a result, there was a profit before tax of 185 million pounds. This compares to a profit of 261 million pounds in 2019. The cash flow was particularly strong in the year and this included significantly lower shareholder payments with a share repurchase of 10 million pounds in the early part of the year before this was suspended. There were no dividend payments in 2020 and I will talk about recommencing dividend payments a little later in the presentation. There was capital expenditure of 70 million pounds and a 30 million pound contribution to the pension plan deficit. In addition, our cash flow was impacted by £60 million beneficial phasing from higher payables, despite payments being made in accordance with usual terms. The underlying cash balance is approximately £370 million. I'll now go into some of the detail behind the headline numbers and start by talking about revenue. Howden's UK turnover was 1,510 million pounds and decreased by 2.6% on a total basis and down by 4.5% on the same depot basis. In continental Europe, turnover was 43 million euros, which was a 13% increase. This is after adding four more depots during the year, bringing the total to 30. sales growth was 2.5% in the same depot basis. I will now show some more detail on the UK performance on the next slide. In Q1, pre-COVID, sales were up 1.1% on a total basis and down 0.8% on a same-depot basis. During Q2, we were most significantly impacted by the COVID-19 pandemic. With the initial phase of lockdown, sales were down 56% on a total basis and down 57% on a same-depot basis. We improved period on period in the second quarter as we found ways to operate the business safely, In the second half, sales recovered, were up by 16%, and we believe that our performance was supported by our full stock availability. Andrew will provide more details on this later. Overall, in H2, sales were up by 14% on a same-depot basis. Let me now talk you through the movement in PBT, from £261 million in 2019 to £185 million in 2020. starting with gross profit that fell by £56 million, which is summarised in the chart on the right-hand side. If we bridge from 2019's gross profit, £986 million, there was a £16 million impact from pricing. Secondly, a large fall in sales volumes compared to 2019 reduced revenue by £20 million. There was a negative impact from mix of 9 million pounds, a result of higher sales of lower margin products. This reflect changes in customer demand in the current environment, such as an increase in sales of appliances. These products are at good margins, but below the high average margin of the group. Also affecting cost of goods sold, we saw higher input costs. This resulted in a net decrease to gross profit of 5 million pounds. And as mentioned earlier, we were also impacted by carrying fixed costs at lower levels of production for around £6 million as a result of COVID. Exchange rate movements in the year had a minimal impact on margin. Together, this gave a net falling gross profit of £56 million to £930 million and a gross profit of 60.1%. 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 increased by 8 million pounds, which I will address in the next slide. Net interest and other finance charges were 11 million pounds higher than in 2019, reflecting the impact of adopting IFRS 16. The net result was a profit before tax of 185 million pounds, I will now explain in more detail the main movements in operating costs. Operating costs increased from £726 million in 2019. Firstly, the incremental costs of the 38 depots that we opened in the UK in 2019 and the 16 depot openings in 2020 totalled £10 million. Costs in older UK depots decreased by seven million pounds, mainly reflecting reduced levels of activity and therefore variable costs, particularly in quarter two. Cost increases incurred to support future growth totaled nine million pounds. This included the costs of the Rwands development, which we previously announced, and digital developments. The impact of French depots totaled four million pounds, Other operating costs increased by 6 million pounds and closure of our Dutch and German depots in 2019 benefited the four-year result by 6 million pounds. Finally, costs reduced by a further 8 million pounds as a consequence of adopting IFRS 16. This meant that operating costs overall rose by 8 million pounds to 734 million. I will now briefly turn to the remainder of the income statement. If we look at the second column of numbers on the table, the impact on 2020 of adopting IFRS 16 was an increase in operating profit of 8 million pounds. This is more than offset by an increase in related interest charges of 10 million pounds. As a result, as we've seen, our profit before tax was 185 million pounds. This led to a tax charge of 38 million pounds with an effective tax rate of 20.3%. This gave a profit after tax of £148 million. This resulted in earnings per share in 2020, 24.9 pence, which compares with 35 pence in 2019. Turn into dividends. As you know, the dividend and share buyback programmes were suspended in 2020. In November, we indicated that the Board would consider recommencing payments of dividends subject to the company's trading performance and financial position, continuing to meet the Board's expectations. This would be subject to there being no further significant disruption due to COVID or otherwise. The Board has recommended that we pay a final dividend of 9.1 pence per share for 2020. This is in line with the group's established dividend policy between 2.5 and three times dividend cover at 2.7 times. It will be paid in June 2021 if approved by shareholders at a cost of approximately 54 million pounds. In addition, the Board has recommended a special dividend of a further 9.1 pence per share, which will also be paid in June 2021. This is equivalent to the 2019 final dividend that was cancelled. In respect of 2021, an interim and final dividend will be declared in line with our policy. The 2021 interim dividend will be one third of the 2020 full year dividend at 3 pence. The group has a strong balance sheet that has positioned us well in these challenging times, and we face continued uncertainty. The board regularly reviews its prudent capital structure against current trading and cash requirements to ensure it gets the appropriate balance between supporting the business and delivering appropriate shareholder returns. This will include reviewing the level of shareholder returns once we see more stability. Let me now turn to cash flow. From a position of having net cash of 267 million pounds at the end of 2019, we ended 2020 with net cash of 431 million pounds. Although, as I explained earlier, the underlying cash balance was 370 million. The major movements since the end of last year were networking capital decreased by 70 million pounds, which I will address shortly. Capital expenditure totaled 70 million pounds and was focused on growing our business and executing our strategy. It included spend on the final phase of our RONS warehousing strategy, further delivering our digital capabilities and investments in new depots in both the UK and France. We also acquired solid surface worktop production facilities that strengthened our product portfolio, and Andrew will talk about these shortly. Corporation tax payments were £32 million. As I've already described, we spent £10 million repurchasing shares in the first half. And there was a £22 million contribution to the pension scheme over and above the P&L charge. The net result of these and other movements was a cash inflow of 163 million pounds, meaning that we ended 2020 with net cash of 431 million pounds. Now looking at the main movements in working capital. Net working capital decreased by 70 million pounds Within this, stock increased by £23 million. This was largely impacted by increases in contingency stock to protect against potential supply chain disruption from COVID and Brexit. This approach has supported our business model well during COVID-19, with good stock availability differentiating us from many of our competitors. Debt has decreased by £2 million, including a lower debtor book with good ageing. As I mentioned earlier, creditors increased by £91 million, impacted by high levels of stock receipts later in the year. We have already seen this reversing Q1 2021, and this should be taken into account when reviewing underlying levels of working capital. Let me now finish with some brief comments about current trading. The first two periods of the year saw total UK sales rise by 5.1%, up 4.5% on the same depot basis. Excluding week one, which has included two and a half trading days in 2020, but no trading in 2021, sales were up by 7.1% or 6.5% higher on the same depot basis. Clearly, there are currently various market uncertainties and a number of factors that need to be considered in forecasting this year's overall result. We are seeing continued uncertainty as consumers are feeling more cautious in letting tradespeople into their homes in light of the continued COVID pandemic and related restrictions. This is leading to variability in demand from our customers. We have implemented price increases but we are currently seeing pressure on commodity pricing and freight costs. We are also continuing to take other measures to protect our employees and customers and to de-risk our in-house supply chain. We will closely manage the drivers around margin and focus on getting the right balance between pricing and volume in what remains an unusual market. We're continuing to roll out new depots and revamp existing depots. This reflects some initial success from the reformatted depots we have completed so far, despite a rather challenging trading environment. We're continuing to invest in the business around its core strategic priorities and anticipate investing in the order of 80 million pounds this year in capital. This is consistent with the amount that we were expecting in 2020 before COVID. In summary, Howdens has performed well through a challenging period and remains in a strong financial position. Although the business continues to face near-term uncertainty, it is well positioned to deliver a clear organic growth strategy. Thank you. I'll now hand you back to Andrew.

Thank you, Paul. I will start by talking about our performance in 2020 and our plans in 2021 using the initiatives we had in place for 2020 as a framework. Firstly, depot evolution. We are opening depots using our updated format designed to provide the best environment in which to do business with no material change to new depot fit-out costs. In 2020, as a consequence of market conditions, we opened fewer than planned. In the first half, we put our opening programme on hold as we prioritised maximising cash and finding ways depots could trade safely under COVID conditions. In the second half, we opened 16 new depots, mostly in the latter part of the year. We are now targeting around 35 UK depot openings in 2021, including some more in Northern Ireland. We also reformatted some more of our older depots, and we continue to learn how best to apply this opportunity to our existing estate. During 2020, we reformatted 30 depots, having reduced the number of depots we were planning either to open or to re-rack without further modifications. These were completed in line with our budgeted average cost of £225,000 per depot. In 2021, we plan to reformat 40 depots, We are budgeting for an average reformat cost similar to the 2020 level as we continue to refine the scope of the refurbishments. In 2020, we also re-racked the warehouses of 17 existing depots without other modifications and plan to re-rack a further 20 in 2021. At the end of 2020, we had 117 UK depots trading in the updated format and we had re-racked the warehouses of a further 79 depots without further modifications. By the end of 2021, we expect to have a total of around 192 UK depots trading in the updated format and to have re-racked a further 99 depots in total without further modifications at present. Next, range and supply management. New kitchen ranges introduced each year represent a significant portion of sales as product life cycles shorten and our customers want new product from us. Our 2020 new product featured 18 new kitchens, including two new styles, plus more color options for existing families. And we began using our new handle-less cabinet platform to meet demand for a linear look at more affordable prices. Our new kitchen ranges were launched and in stock earlier than in 2019 and launches were synchronised with rooster promotional offers. Earlier introduction meant we were well positioned with product as we returned to all depots trading and new product introduction kitchen sales were ahead of last year's. 2021 new product includes 16 new kitchen ranges. These include a more traditional style timber shaker range, Elmbridge. Initially available in three colours, it complements our contemporary shaker range and strengthens our £4,000 plus offering. We are adding colourways to our mid-priced families and to our modern style Hockley kitchens, which have performed well since launch. we are also adding colorways to our entry-level kitchen offers. We have developed a number of new added value decorative accessories to both our modern and shaker ranges that will enable customers to create a more personalized look. Our 2021 brochure, trade book, and period one and two promotional materials were all in depots pre-Christmas. All of our new kitchens for 2021 will be in stock by the end of the second quarter, well ahead of our autumn sales period and four weeks earlier than last year. Discipline range management is crucial for both best availability, which is highly valued by our customers, and profitability. At the end of 2019, we had 67 current kitchen ranges. and we ended 2020 with 63, having cleared more ranges than we added during the year. We believe around 65 current ranges remains the right number for our market at present, and we will be managing range introductions and clearance to around this number in 2021. Houdens is an in-stock business, and the trade tell us that a high level of stock availability is one of the key reasons they buy from us. Our traditional replenishment model is based on weekly delivery to depots, is cost effective and is particularly suited to replenishment of fast moving product and product with relatively predictable demand patterns. We are making an improvement to our stock replenishment by supplementing the depots core weekly delivery order by introducing a next day service by a regional cross stocking center or XDC. By rebalancing where we hold stock and changing the delivery pattern of some lines to depots, depots can, for example, allocate more warehouse space to faster selling lines and can reduce contingent stocks of more slow moving ones. This makes it simpler and more efficient for depots to deliver superior service levels and improve product availability, including for abnormally sized purchases. and we are freeing up time and resources spent on stock management, for example, on interdepot transfers of product. We are developing this capability with third-party logistics partners, and in the main, we are utilizing their existing infrastructure. The service is available to 120 depots at present, and we expect to increase this to around 250 depots during the second quarter. Our dedicated manufacturing and supply chain is critical to the success of our in-stock offer. It supplies all product to our depots, which each have individual and changing day-to-day requirements. Operating under COVID conditions meant finding ways to re-engineer how our factories operate and how we supply and distribute to depots. Having initially closed substantially all of our manufacturing and supply facilities with the onset of the spring lockdown, we designed with employee consultation, a series of social distancing measures, work processes and practices, which enabled us to reopen safely in April and maintain stock availability as demand and the number of depots trading changed. Since then, we've continued to work with and develop appropriate COVID compliant processes. We can manufacture all product whilst maintaining social distancing and our efficiency whilst below pre-COVID levels has progressively improved and we were able to accommodate the significant rise in second half volumes. We took measures to protect our in-stock offer against supply chain disruption and to accommodate regular patterns of demand. by increasing levels of safety stock and using backup sources of supply. We did this first as part of our Brexit planning, and again ahead of spring lockdown, and it enabled us to navigate local COVID outbreaks, which had the potential to disrupt inbound supply. Our ability to utilize our disaster recovery capacity helped us to maintain stock availability. We also took some temporary additional storage space and we utilized immediately more of the warehouse capacity at Rons than planned when this became available on schedule in September, 2020. Our stock strategy has also benefited from significant engagement with our supply base. We have long-term relationships and agreements with many of our suppliers and being a manufacturer ourselves has helped us anticipate potential COVID risks in our supplier factories. We also operate on ex-works rather than delivered terms with the majority of our suppliers, which enabled us to work directly with our shipping partners to resolve logistical issues and to provide us with early warning of orders that might be running late. Stock availability is fundamental to our offer. We've prioritized this in these uncertain times. In 2021, we are extending our policy to hold additional safety stock as a contingency against unexpected demand patterns and interruptions to supply. And we have broadened the range of SKUs that we protect in this way and increased the number of weeks cover we have on some lines. We keep under review what we believe it is best to make or buy both in terms of cost and overall supply resilience and flexibility. In 2019, investment in manufacturing technology enabled us to make the doors for our new Hockley kitchen ranges. And we've committed to further investment, which will enable us to make frontals for more of our kitchen ranges at the same quality as we can source externally, but at a lower cost and a reduced lead time to delivery. And we will retain the benefits of sourcing from external suppliers who will continue to provide around half our kitchen frontals. The new frontal facility will be located at our Hyden site and we expect it to come on stream in the second half of 2022. We are also commissioning a second architrave and skirting line as our first line is now fully utilized and demand for these products has risen substantially in recent years. We expect the new line to be up and running during the first half of 2022. We identified the need to upgrade our solid surface worktop offer, which is a segment of the market in which we are underrepresented relative to the number of kitchens we sell. We have partnered with three fabrication companies to develop a template and fit capability, and we took the opportunity to acquire the assets of a large UK fabricator of solid surface worktops. The assets were acquired at a competitive price with significant savings in the lead time to being able to manufacture versus building our own facility. We expect the factory, which is located near our Hyden site to be operational during 2021. Turning to our digital platform. We use digital to reinforce our model of strong local relationships between depots and their customers. During 2020, the digital investments we have made were particularly instrumental in supporting our model at a time when relationships and ways of doing business were disrupted. 2020 saw increased activity on our web platform and growth in our social media presence, which also stimulates interest in viewing our products and services on howdens.com. Howdens.com impressions were present in 48% more organic search results a month and site visits increased by 53% year on year. Depot leads via the website increased by 88% and brochure requests by 39%. Across social media sites, our follower base at 213,000 was up 119%. with 8 million users a month being reached and those actively engaging up by 165%. With restricted movement in the UK, Houdens.com provided a key customer access point to the business and we extended the range of online services we provide. We rolled out online account facilities, which enable users to manage their accounts and to make payments at any time. By the year end, 30% of our credit account holders had registered for the service and the service has been significant out of hours usage. Around 43% of users used the service to make a payment with 68% of the users viewing documents. Curated on our website, we launched a call and collect service, which provided a way, in combination with our in-depot measures, for customers to trade safely with us following the onset of the spring lockdown. A new personal kitchen design service was also made available online. As well as enabling people to plan kitchens without the need for a depot or home visit, the service helps put Howden's front of mind earlier than in the procurement process. We continue to add new capabilities and content to our platform to support the local relationships depots have with their trade customers. This week, Anytime Ordering became available for the first time to our trade platform. Representing a major upgrade of our call and collect service, it provides efficiencies for depots and customers alike. Developed with input from customers, features of the service include bespoke pricing for each customer, which enables the account holders to see their confidential prices, order products and quote for individual jobs out of hours, and a scheduler for them to select a collection depot and pick up time of their choosing. The service is integrated with our lead management system, which assists depots in managing their local relationships in a digital way. The lead management system was introduced in mid 2020 and is now one of our most frequently used depot systems. Lastly, international. In 2019, we refocused international onto a city-based approach based in France. We closed our depot operations in Germany and the Netherlands and appointed a French national to lead the business. We renewed the focus on trade customers and opened five depots, four around Paris, one in Lille. International's 2020 performance gives us the confidence to open up more depots. International delivered a step change in performance post lockdown, with second half sales increasing significantly year on year. In France, lockdown occurred a little earlier than in the UK. And we took a similar approach to reopening, as in the UK with depots initially reopening in call and collect mode on a phased basis. During May, as lockdown ended, depots were able to trade in more normal ways with appropriate safety protocols in place. Whilst with the onset of lockdown, total H1 sales were down around 18%. They increased significantly year and year in the final two periods of the half. Sales in the second half increased by around 38% in Euro terms and were up 13% for the year as a whole. We believe customers are increasingly recognising the advantages of our trade-only in-stock model, our service levels and our competitive pricing. We opened four depots in the second half of 2020, ending the year with a total of 30. On the basis of current performance of our depots in France, we are planning 11 depot openings for 2021, which is around the number of depots we can staff with Howden-trained teams. Finally, prospects for 2021. Our first priority remains the safety of our people and customers, and we have contingency plans to enable us to trade under a range of COVID conditions that we've seen to date. We've increased our prices having lowered some during 2020 and aim to retain a profitable balance between margin and volume whilst aligning operating costs and working with suppliers to keep product and input costs controlled. We believe high stock availability was a major contributor to our performance in 2020 and we will continue to manage our stock levels actively to protect availability both of manufactured and bought in product. We will have all our 2021 kitchens on sale earlier than last year, with aligned rooster promotions to keep Houghton's front of mind. We will make improvements to service and availability by utilizing XDCs. We are making investments in our kitchen door, solid surface and skirting manufacturing capabilities. During 2020, with restricted movement in the UK, we increased the range of services we offer online. And in 2021, we will continue to add capabilities to our digital platform with anytime ordering as a centerpiece. In 2021, we plan to open 35 depots in the UK, 11 in France, and refurbish around 40 existing depots to the updated format. I am very pleased with our achievements in 2020, in particular how we both adapted to COVID trading conditions and progressed with our strategic plans, which make us well prepared for what we expect to be a challenging market in 2021. All of this is made possible by the character, skills and commitment of our people, and I thank them all for what they've done. Thank you for listening. We'll now take your questions.