Howden Joinery Group Plc

Good morning everyone and welcome to the Howdens results presentation for the first half of 2021. I'll begin by introducing our performance in the first half. Paul Hayes will then review our financial results for the period. I will then share my perspectives on the first half performance and our plans, and then we'll take questions. Howdens has delivered a strong performance in the first half with sales and profit before tax at record levels for the period. As reported in our update to the market on the 13th of July, UK sales in the first half increased significantly in 2019 and substantially so versus 2020 when trading was materially impacted by the onset of the spring lockdown at the start of the second quarter. The increase in sales trended upwards across the first half of 2021 with sales of everyday and promotional items being particularly strong. Our profitability improved with group profits before tax versus 2019 increasing at a higher rate than revenues. And we've continued to make good progress on our strategic plans for the business. I believe our performance is in no small measure due to our commitment to being worthwhile for all concerned. This is fundamental to the way we do business and is foundational to our ESG program, details of which are set out in the R&S announcement. The results demonstrate the strength of our local trade only model and reflects the measures we took in 2020 to enable our people in all areas of the business to work safely under COVID conditions, together with those put in place to support our customers, who in turn on average spent more with us in 2021, with the average value of a kitchen sale increasing. With people by necessity spending more time at home, and end-user concerns about further lockdowns, people have been choosing to spend more on their homes. In some cases, potentially spending earlier than they would otherwise have done. We have seen continued signs of pent-up demand with increased awareness of how it's primarily online, directing business to the trades. We've been advantaged in that some of our competitors in the retail side traded with their showrooms shut until mid-March. And we have also continued to receive reports of extended delivery times amongst our competitors. And with builders very busy, our in-stop model has served us exceptionally well. Having noted this, I believe our customers have an even greater level of trust in our own capabilities to have the right product available as and when they need it. The feedback we get from our regular online builder forums also cite many examples of how we are there for customers, not only on stock, but also on service generally, which helps them run their businesses. We also raised prices, which helped us defray the significant rises in input costs, which we have seen over the last six months. And Paul will be talking about the evolution of our gross margin in his review of our financial performance. Overall, we believe we are well positioned in the current market and for the future of our trade-only in-stock local model. And we have initiatives in place to strengthen further our market position. I will update you on our initiatives after Paul has taken you through our financial results. Paul.

Thank you, Andrew. And good morning, everyone. I'm pleased to be announcing Houghton's 2021 half-year financial results. We've had a strong start to the year when compared to the first half of 2020, it was materially impacted by the pandemic, but also against the first half of a pre-COVID 2019. Overall, group sales increased by 69% versus 2020, and were up 20% versus 2019. Gross profit rose by 205 million pounds to 481 million, and the percentage gross margin of 61.3% was encouraging and up from 59.4% in 2020. We believe that we are getting the balance right between volume and pricing with a higher sales mix of lower margin everyday items and promotional activity to support our customers and target increases in market share. As anticipated, we have experienced increases in commodity costs as well as higher freight that we have recovered through price increases. Operating costs at £357 million in the period were up 25% on 2020 and 9% on 2019. This included strategic investments to drive growth that I will describe a little later. As a result, Haldun's made an operating profit of £124 million in the first half, which compares to a £10 million loss in 2020 and a £78 million profit in 2019. Net interest charges were broadly in line with the first half of last year, so that there was a profit before tax of £119 million. This led to a tax charge of £22 million with an effective tax rate of 18.5% and a profit after tax of 97 million pounds. If we now look at the P&L account in more detail, our first turn to sales growth. Howden's UK turnover was 764 million pounds and increased by 69% on a total basis and was up by 67% on the same depot basis. Compared to the first half of 2019, UK sales increased by 20% and by 15% on a same depot basis. The UK results reflect both underlying growth across our depots and the benefit of additional growth from new and revamped depots. In the international depots, a good execution of the housing was a 77% increase in 2020, or 74% on the same depot basis. Compared to the first half of 2019, the international depot revenue increased by 45%, or 24%, on the same depot basis. Given the significant impact of COVID, on our 2020 performance, we thought it would be helpful to take you through a review of the 2021 performance in comparison to 2019 rather than 2020. We've also included a bridge to 2020 in the appendix. PBT has increased by 41 million pounds from 78 million pounds in 2019 to 119 million pounds in 2021. Overall, gross margin is increased by 77 million pounds, with growth in sales volumes and changes in mix. This increased margins by 61 million pounds compared to 2019. This additional volume includes an increase in the mix of lower margin everyday products, such as doors and joinery. These products are at good margins, but below the average of the group, and this, along with promotional activity, has supported a 110 million pound increase in sales. We have achieved a £22 million benefit from pricing over the last two years, which has more than offset the net increases of £6 million of costs. This includes the net impact of higher input costs, including commodity and freight, partially offset by operational initiatives to reduce costs. There was also a small impact from changes in exchange rates. Together, this gave a net increase in gross profit margin to 61.3%, which compares to a gross margin of 61.9% in 2019. Operating costs increased by £30 million, as summarised on the next slide. In the first half of 2019, operating costs were £327 million, and they've increased by £30 million over the last two years to £357 million. Bridging from this, the incremental costs of the 61 UK depots opened over this period totaled 10 million pounds. Costs in older UK depots increased by 7 million pounds over the two year period. We've invested 12 million pounds in driving sustainable profit growth in line with our strategic plan. This has included increased warehouse and logistics spent to continue to improve our high levels of service and our in-stock model. The spend is predominantly in respect of our investment in XDCs that Andrew will update you on later. We've also continued to differentiate ourselves with further investments in digital. The impact of our international expansion totalled £6 million, and other operating costs increased by £4 million, including two years' worth of inflation. These costs were partially offset by the non-repeat benefit of the closure of our Dutch and German depots in 2019 and from the adoption of IFRS 16. Overall, we believe that we have a strong business that has continued to gain market share and deliver its clearly defined strategy despite the challenges of COVID. Earnings per share in 2021, a 16.4% in 2020 and earnings of 10.3 pence in 2019. As a result of this strong performance and our confidence in the outlook, the board has decided to pay an interim dividend of 4.3 pence, which is a 10% increase on the 2019 half year dividend. This also equates to one third of the 2019 full year dividend. The group is in a strong cash position also decided to restart the share buyback programme. The intention is to buy back £50 million of Howden's shares in the second half of the year. The board will also be reviewing the level of shareholder returns and the capital allocation priorities for the group and will provide an update for the four-year results. I'd like to now give you an update on our defined benefit pension scheme. The agreement reached with the trustees in June 2018 stated that deficit contributions would be suspended if the scheme reached a surplus on a technical provisions basis for two consecutive months. Payments would resume if the funding position falls below 100% for the same period. Pension scheme has recently moved to a surplus for two consecutive months and therefore since the half year, pension deficit payments to the scheme have been suspended. Simon Norris- due to the scale of the scheme with 1.5 billion of liabilities and assets, it is quite possible that the scheme reverts to a deficit position and contributions of 2.5 million per month recommence. Simon Norris- Now let me turn to cash. From an opening net cash position of 431 million at the end of 2020, we ended the half with net cash of 476 million pounds, a cash inflow of 45 million pounds. We invested 28 million pounds in working capital. The stock levels increased by 29 million pounds part of our COVID planning and protects against potential supply chain disruption. This investment in stock has allowed us to continue to provide great customer service when there have been shortages of building products in the market. This is particularly important for us ahead of our all important peak trading period. Due to the high levels of business activity, trade debtors were £42 million higher than at the end of the year with ageing in good shape This was offset by higher creditors of £43 million, reflecting our investments in inventory ahead of peak trading. Capital expenditure totalled £24 million and was focused on executing our strategy. It included further spend on delivering our digital capabilities and investments in new depots in both the UK and France. Full-year CAPEX is forecast in the region £90 million as we continue to invest in manufacturing and depots. Corporation tax payments were £40 million. Pension contributions over and above the P&L charging period were £16 million. I should remind you at this point that in the second quarter of 2020, In agreement with the trustees, pension deficit contributions were deferred and subsequently paid in the second half of the year. Finally, on cash flow, the final and special dividends announced for the 2020 four-year results and totaled 108 million pounds were paid shortly after the period end. So underlying cash was 368 million pounds. Let me finish with some brief comments about current trading and the outlook for the remainder of 2021. Since the end of the first half, the passion of trade has continued. In the first four-week period of the second half, period seven, total UK sales rose by 31%, up 29.5% on the same depot basis. On a local currency basis, international depot sales rose by 52.3%, up 48.3% on the same depot basis. We are very pleased with our strong first half performance, but are aware of the economic uncertainties that we face in the second half of the year. We are mindful of a strong second half to 2020, as well as the potential effect of the non-continuation of pent-up demand that we have seen so far. We've also benefited from competitors not being able to trade and unable to source product. We anticipate seeing ongoing inflation cost pressures and the run rate of costs will be higher as we continue to invest in our cost base to support the business at more sustainable levels. There is also a certain amount of uncertainty around future pandemic restrictions, which may impact our operation in the second half of the year, as well as changes in underlying consumer demand. In summary, Housens has achieved a strong first half performance and we remain confident as we move towards our all important peak trading period. Thank you. I'll now hand you back to Andrew.

Thank you, Paul. I will be talking about our first half performance and our plans for the second, using our key strategic initiatives for the business as a framework. Based around our core building blocks of service and convenience, trade value, and product leadership, these are evolving our depot model, improving range and supply management, and developing our digital capabilities, together with the development of our international operations by way of a city-based approach. First, depot evolution. We continue to extend our UK footprint. High service levels, including local proximity and immediate availability, are very important to our customers. We are opening all depots in our updated format, which is designed to provide the best environment in which to do business and to make space utilization and productivity gains in a cost-effective way by using vertical racking in the warehouse section of the depot. In the first half of 2021, we've opened seven new depots and plan to open around 28 in the second half, making a total of 35 for the year versus 16 we opened in 2020. As compared with our previous guidance of 850 depots, we now believe there is potential for at least 900 depots in the UK including 20 to 25 in Northern Ireland. We've continued with our revamp programme for existing depots, concentrating on our older estate where sales per depot are above average and where the largest incremental sales uplifts are expected. By the end of 2020, we had reformatted 41 depots and the programme has received very positive feedback from depots and customers alike. The scale and scope of the revamps has been refined with an average cost per depot of circa £225,000 going forward. The revamps are planned to pay back costs in less than four years and depot P&Ls are charged a reformat cost which ensures depot teams are motivated to deliver incremental sales. Including relocations, we now plan to reformat a further 62 depots in total in 2021, including the 28 we revamped in the first half. At the end of 2020, we had 117 UK depots trading in the updated format, and by the end of 2021, we expect to have around 214 UK depots trading in the updated format, and in total to have re-wrapped the warehouses of a further 106 without further modifications. Next, is range and supply management. As product life cycles shorten and our customers want new products from us, range renewal and development are important contributors to our competitive position. New product launched in 2021 features 17 new kitchen ranges with 14 now in depots. These include a beaded style timber shaker range, Elmbridge, with accessories for use in pantries and larders to match. Initially available in three colorways, this more traditional style compliments our contemporary timber shaker range and strengthens our 4,000 plus offering. Customers can opt for standard cabinets or our new in-frame solution, a look often associated with high street independence. We've introduced a slate gray cabinet for use in our handleless kitchens. popular choice for high-end German branded kitchens. This new colour is accounting for half our handless kitchen sales. We have new colourways for our mid-priced families and to our modern style in-house manufactured Hockley kitchens, which have performed very well since launch. For our entry-level kitchen offer, we are adding new colourways and have brought forward from 2022 the launch of a new value-based shaker family available in three colours. Our first 2021 brochure, trade book, and period one and two promotional materials were all in depots pre-Christmas. Totally MPI sales in the first half were ahead of those in 2019. All of our new kitchens originally slated for launch in 2021 are now in stock well before our peak autumn sales period and four weeks earlier than in 2020, with three more launches added for the second half. and we've aligned our rooster promotions in the second half to keep Howden's front of the builders' minds. Disciplined range management is crucial for both best availability, which is highly valued by our customers, and profitability. In recent years, we have reorganized our range architecture, removed range duplications across our ranges, and improved the balance between new kitchen introductions and timely discontinuations. entry level kitchens have traditionally been our strongest performers and we continue to support this market segment with new product. However, recent introductions of higher price kitchens have proved popular and we are upscaling our offer to these market segments, where we believe we are underrepresented. Accordingly, we will be managing range introductions and clearances to around 75 in 2021 versus circa 65 in 2020. We have also introduced a more efficient way of testing new kitchen colours and finishes. Around 40 depots will have exclusive access to new colours and finishes of some of our most popular ranges for a limited period, following which we will choose which ones to roll out to all depots in 2022. This means we can bring more proven kitchen product styles to market more quickly. Huygens 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, is particularly suited to replenishment of faster moving product and product with relatively predictable demand patterns. We are implementing an improvement to stock replenishment by supplementing the depot's core weekly delivery orders by introducing a next day service by a regional cross-stocking center. By rebalancing where we hold stock and changing the delivery pattern of some lines to depots, depots can allocate more warehouse space to faster selling lines and can reduce contingent stocks of more slower moving ones. This makes it simpler and more efficient for depots to deliver superior levels of service and improve product availability, including for abnormally sized purchases And we're freeing up time and resources spent on stock management, for example, on interdepot transfer of product. We are developing this capability with third party logistic partners and in the main are using their existing infrastructure. The service is available to around 250 depots at present, and we're expecting to increase this to around 400 by the year end, with the number of XDCs rising from four to six. We then plan to make the XDC service available to all depots during the course of 2022, subject to finding the right XDC locations to take the number of XDCs to 13 in total. 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. Stock availability is fundamental to our offer and we continue to prioritize protecting this in these challenging times for supply chains. For 2021, we've extended our recent policy of holding additional safety stocks as a contingency against unexpected demand patterns and interruptions in supply. We have broadened the range of skews we protect in this way and increased the number of weeks cover we have in some lines. The grounding of Ever Given in the Suez Canal in late March is illustrative of the importance of a resilient and flexible supply chain to a business such as ours. Whilst we had no stock on the vessel, our safety stock position enabled us to absorb the additional inbound delays it caused, leaving our immediate stock availability unimpaired. However, this incident placed further pressure on ocean freight capacity, as equipment and vessels were displaced, particularly impacting stock shipments of Chinese origin. To mitigate the risk of increased delays due to an increasing number of blank sailings, we have taken a leading position on a multimodal freight route out of China using rail and short sea crossings, which are deployed alongside our traditional ones. This route, whilst more costly, operates on a significantly reduced lead time to delivery relative to our traditional ocean one for Asian sourced product. and helps us to ensure we have enough capacity to maintain future availability and accommodate our stock build for peak trading. Our ability to utilize our peak manufacturing capacity enables us to maintain stock availability, and we are using all of our warehouse capacity at ROMS earlier than originally planned. Our stock strategy also benefits 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 issues in our supplier factories. We also operate on ex-works rather than delivered terms with the majority of our suppliers, which enables us to work directly with our shipping partners to resolve logistical issues and provides us with early warning of orders that might be running late. We keep under review what we believe is best to make or buy both in terms of cost and overall supply chain resilience and flexibility. In 2019, investment in manufacturing technology enabled us to make the doors of our new Hockley kitchen ranges. We have 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 lower cost, and at a reduced lead time to delivery. We will retain the benefits of sourcing from external suppliers who will continue to provide around half of our kitchen frontals. The new frontal facility will be located at our Houghton site and we expect that it will come on stream in the second half of 2022. We are also commissioning a second architrave and skirting line as our first is now fully utilised 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 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 in the second half of 2020, we took the opportunity to acquire the assets of a large UK fabricator of solid surface worktops, which we have branded as Huygens Work Surfaces. The assets were acquired at a competitive price with significant savings in lead time to being able to manufacture versus building our own facility. The factory, which is located near our Huygens site, is now operational and volumes are increasing. Turning to our digital platform. We use digital to reinforce our model of strong local relationships between depots and their customers by raising brand awareness, supporting the business model with new services, ways to trade and freeing up time for depot staff and customers. During 2020, the digital investments we've made were particularly instrumental in supporting our model at a time when relationships and ways of doing business were disrupted. In 2021, we have continued to see increased activity on our web platform and growth in our social media presence, which also stimulates interest in viewing our products and services on Huygens.com. Impressions were present in 51% more organic search results a month and site visits increased by 52% year on year. Depot leads via the website increased by 61% and brochure requests by 44%. Across social media sites, our follower base at 282,000 was up 89%, with 10.4 million users a month being reached and those actively engaged up by 65%. We have added capabilities which help end users interact with Hidens online at each stage of their buying process. At the turn of the year, we launched Real Kitchens, which utilizes user-generated content to showcase Houghton's kitchens and people's homes. Image views total 9 million so far this year, and this content is being used by both consumers and our designers. We've recently added a kitchen visualizer, which features multiple layouts, styles, and configurable options. Take-up of our online account facilities, which enable users to manage their accounts and make payments at any time, continues to increase. Around 40% of our credit account holders have now registered for the service, as compared with 30% at the year end. The service is being used across the week, both in and out of hours. Account holders using the service to make a payment increased by 57%, with the numbers viewing documents up by 62%. We continue to add new capabilities and content to our platform to support the local relationships depots have with their trade customers. During the first half, Anytime Ordering became available for the first time to our trade platform, representing a major upgrade on 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 account holders to see their confidential prices, order products, and quote for individual jobs outside of ours, and a scheduler for them to select a collection depot and the pickup time of their choosing. With the service, we have seen average weekly logins on our trade platform increased by 166%, with 39% of users looking up at price. The service is integrated with our lead management system, which assists depots in managing their local customer relationships in a digital way. The lead management system was introduced mid 2020 and is now one of the most frequently used depot systems. For new customers, we introduced a new, more efficient online account opening process, which reduces the time and money spent on processing applications, whilst leaving the relationship with the depot manager. Since launch, around 15% of all new accounts have come from the applications made in this way. Lastly, international. In 2019, we refocused international onto a city-based approach based in France. International's performance over the last year gives us confidence to open up more depots. In the second half of 2020, sales increased significantly year-on-year, and the business has made further progress against our raised expectations this year. Sales in the first half of 2021 increased by 45% in Euro terms on 2019, 77% on 2020, and were up 24% on the same depot basis in 2019. We believe customers are increasingly recognizing the advantages of our trade-only in-stock model, our service levels and our competitive pricing. We opened up four depots in the second half of 2020, ending the year with a total of 30 and this year we're planning to open up 11 depots in France and we're putting ourselves in a position to open more depots in France in 2022. We also plan to test demand for our trade-only offering in the Republic of Ireland. As in France, we will be using a city-based approach, which fits the population distribution of the Republic. Initially, we will have around five depots around Dublin, and we expect all of these to be open by the end of the first quarter of 2022. The depot teams will be supported by our UK infrastructure and digital platforms. In summary for 2021, our first priority remains the safety of our people and customers and we have contingency plans in place for the range of COVID conditions seen to date. The focus of the business on delivering our plans and preparations for peak autumn trading. We have increased prices 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 the first half, and we are continuing to manage our stock levels actively to protect availability, both of manufactured and bought-in product. We have all our scheduled 2021 ranges on sale earlier than last year, with aligned rooster promotions to keep items front of mind. And we continue to invest in key capabilities. We are making improvements to service and availability by utilizing XTCs. We are making investments in our kitchen doors, 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 are adding new capabilities to our digital platform with anytime ordering as the centerpiece. During 2021, we plan to open up around 35 depots in the UK and refurbish around 62 existing depots to the updated format. In France, we plan to open around 11 depots and we are planning to open for business in the Republic of Ireland. In conclusion, we are pleased with how the business has performed so far this year. And with peak trading ahead of us, we believe we are well positioned in the current marketplace with our trade only in stock and local model. Thank you for listening. We'll now take your questions.