Howden Joinery Group Plc

Good morning and welcome to the Haydn's 2023 interim results presentation. I will begin by introducing our first half performance. Paul Hayes will then review our financial results for the period. I will then share my perspective on our 2023 performance to date and our plans for the remainder of the year. And then we'll take your questions. The group performed well in the first half of 2023 against record prior comparators and in, as we anticipated, a more challenging marketplace. Sales and profits met our expectations for the period and we are on track for 2023 and we are progressing with our investment programme, which is focused on our key capabilities and giving us end-to-end a stronger business. Group sales rose by around 1.5% on 2022 and increased 42% on 2019, being the year prior to the onset of the pandemic. And we believe we gained market share in the period. Profit in the first half was lower than in 2022, when by historical standards the first half contributed a significantly higher proportion of annual profit than usual, with first half profits increasing by 86% on 2019 versus a 40% increase in sales. First half profit this year increased by 43% on 2019, around the same rate as sales. We maintained an industry-leading gross margin with gross profit levels with last year's as we balanced recovery of significant input cost rises with our commitment to provide competitive pricing across the board for our customers. Excluding investment in strategic initiatives, active containment of operating costs kept these levels to 2022 despite ongoing inflationary pressures. Our builders remain busy, and we made good progress on strategic plans both for the UK and for our international operations, whose sales continue to increase. The business delivered strong operating cash flow and we maintained a robust balance sheet. This gives us the flexibility to continue to invest in our growth plans for the business and at the same time provide shareholders with enhanced cash returns in the form of an increased interim dividend for this year and a further 50 million share buyback programme which followed on from the previous 250 million programme completed last year. You will see from the R&S announcement that we have moved our ESG agenda forward. Our focus remains on direct emissions reduction in our own manufacturing and working closely with suppliers to reduce emissions across our external supply chain, together with accelerating our product and packaging sustainability programme. Two significant milestones were reached in the period. We aim to achieve net zero by 2050, having halved our direct emissions by 2030, and we've submitted our net zero plan to SBTI for their approval 12 months ahead of schedule. We have also received carbon neutral accreditation for the solid surface factory we acquired in Spaldington, and our factories at Huygens and Runcorn have also been recertified. The interim results demonstrate the strength of our local trade-only in-stock model, and we believe we increased our market share, consolidating the gains we made last year. A strong product lineup, high stock availability, industry-leading service levels, and a very engaged team have all contributed to our performance, which benefits from the ongoing investments in our customer-focused strategic initiatives. In the period, average customer spend matched last year's and we had a record number of customer accounts as at the half year end. We also increased some prices which helped us defray most of the impact of significant rises in annualised input costs seen in the period and to sharpen our prices elsewhere. As well as maintaining an industry-leading gross margin, the business continued to deliver KPI volumes, which in aggregate were well ahead of pre-COVID times. And in the second half to date, overall sales trends have been similar to those in the first half. Given the prevailing macroeconomic circumstances, we're expecting a more challenging marketplace in 2023, and this has proved to be the case so far this year. However, we're prepared for this, and our customers, mainly self-employed people, are adept at managing their businesses through such times. delivered by our highly entrepreneurial and well-incentivised teams across the business. I believe that our service-orientated trade-only, in-stock and local model is the right one to deliver sustainable market share gains across changing conditions. Our model is hard to replicate and difficult to compete with, and we have initiatives in place to make it more so, in markets with significant longer-term growth opportunities for us. We continue to prioritise investments in the business on this basis. I will update you on our strategic initiatives, which are key to our long-term development of the business, after Paul has taken you through our financial results in the first half. Paul.

Thank you, Andrew, and good morning, everyone. I'm pleased to be presenting Hounsland's financial results for the period ended 10th June 2023. We've performed well in the first half against record comparatives in 2022. Overall group sales increased by 1.5% as we supported our trade customers with a market-leading product range, excellent stock availability and outstanding customer service. We believe that we have made further market share gains in the period. Gross profit was similar to the prior year at £565 million against a particularly high margin percentage in 2022. You may recall that the first half margin last year benefited from early price rises ahead of cost increases. Despite high levels of ongoing inflation, we have continued to recover increases in commodity, freight and energy costs through price increases and productivity improvements. Operating costs were £448 million, with the increase entirely due to ongoing investments in our strategic initiatives to drive growth. We took action in the first half to fully offset inflationary cost increases in the order of £23 million, with productivity and efficiency gains. I will cover this in more detail later. As a result, we generated an operating profit of £117 million and our operating margins were 12.6%. After net interest charges, profit before tax was £112 million, which was 43% ahead of 2019. We incurred a tax charge of £27 million in the period, so after all these items, profit after tax was £85 million. So looking at revenue in a bit more detail. We face much more challenging macroeconomic conditions in the first half. Over the past 12 months, household budgets have been under far more pressure and we have continued to balance price and volume to support our trade customers. As a consequence, we have outperformed the market in the first half, which we believe is significantly down in volume terms. Our UK revenue increased by 0.6% to £895 million and was similar to last year on a same-depot basis. As you know, part of our strategy is to focus on leading the market with range innovation. We have accelerated new product introductions that Andrew will describe later, and these give our customers greater choice at every price point. Our in-stock model is the foundation of our business, and even with this range expansion, we continue to provide our customers with availability levels in excess of 99.7%. This has been possible from our investments in inventory and our cross-docking logistics network, or XTCs. The international depots include 60 depots based in France and six in Ireland. We generated revenue of 36 million euros, which was a 31.8% increase on 2022. That's excluding the impact of five depots closed last year. Our focus remains on building out the successful Howdens model in major cities, and we are making good progress with our strategy. Now moving on to profit before tax. Bridging from 2022 PBT of 145 million pounds on the left, you can see that PBT was 33 million pounds lower at 112 million pounds in 2023. Gross profit in pounds was similar to the record achieved last year. We were effective in implementing price increases early in 2023 that benefited the business by 47 million pounds. We have continued to invest in expanding our manufacturing capabilities with new kitchen lines and a second architrave and skirting line now fully operational at our Howden factory. We are also making good progress in upgrading and optimising our solid work surface capabilities to support increased demand which I will talk about in a moment. In addition, we have delivered a number of productivity improvements in our manufacturing operations, which helped partially offset increases in commodities, wage inflation and energy costs. Overall, we have managed the business effectively on lower volumes in the first half, including a change in mix. This includes successful sales growth of our everyday walk-in joinery business and further growth of solid work surfaces. On solid work surfaces, since the acquisition of the market leader, Sheridans, last year, the business has grown strongly as we rolled the service out across our depot network. We have added capacity and we are making improvements to our service model to match the best independent players, but at scale. To remind you, solid surface products have a lower gross margin percentage, but an attractive cash margin. Operating costs increased by £32 million as a net result of managing our costs tightly while continuing to invest in our strategic initiatives. We have broken this out on the next slide. The rise in operating costs in the first half was entirely related to our investment in our strategic priorities. Overall, inflationary cost increases in the first half of around £23 million were fully offset by productivity gains and efficiencies. Bridging from left to right, the incremental costs of the new UK depots, including 30 new depots opened in 2022, totalled £6 million. We invested in our international businesses with a continued focus on a city-based strategy. We're developing our business in Paris and also now expanding the depot network into other major cities such as Lyon and Marseille. The £8 million increase includes the costs of the 13 depots opened in France and five new depots opened in the Republic of Ireland in 2022. Other strategic investments include the full year impact of our investment in additional warehousing and our 12 regional XDCs that improve product availability across our ranges. Other actions include the rollout of work surfaces I mentioned earlier and further investments in digital, helping customers with new more flexible ways to trade with us now moving on to cash flow from an opening cash position of 308 million we ended the period with 118 million pounds of cash a net cash outflow of 190 million pounds You will see from the slide that this was after shareholder returns of £138 million, including dividends of £88 million and £50 million of share buybacks, which we completed in the first half. Overall working capital increased by £109 million. Stock increased by £40 million due to the normal seasonal stock build ahead of our peak trading period and ongoing inflation. We continue to reduce the levels of safety stock which were necessary during the pandemic. We are carefully managing stock levels given the level of new product introductions. In the first half, we also launched a daily traders initiative which will fully optimize availability of our faster moving SKUs in our depots. Andrew will cover this later in his presentation. Debtors were 6 million pounds higher than at the previous year end with Asian in good shape. Creditors were 63 million pounds higher. Capital expenditure totaled 47 million pounds as we continue to focus on the execution of our strategic initiatives. Just under half of the investment was in depot expansion and revamps. Other initiatives included investments in our supply chain and manufacturing sites and expanding our digital capabilities. Now turning to earnings per share and dividends. EPS in 2023 was 15.4 pence, which compares with 19.6 pence. Our dividend policy is unchanged. The board has declared an interim dividend of 4.8 pence, an increase of 2.1%. This will be paid on the 17th of November to shareholders on the register on the 13th of October. Now moving on to our technical guidance for the rest of 2023. Firstly, as previously indicated, this year we have a 53rd week. This falls during the Christmas period when our depots are closed, so there are around £17 million of additional costs, but no incremental sales. We expect our effective tax rate to be around 23% in 2023, which includes the benefit of the patent box claim. The ongoing P&L impact of the patent box is worth around a 3% reduction in the tax rate, and the success of the claim is subject to review and confirmation by HMRC, which we anticipate before the end of the year. In 2023, we will continue to offset higher inflationary costs with productivity and efficiency actions where possible. This will underpin our ongoing investments in our strategic initiatives. With respect to foreign exchange sensitivity within our cost of goods sold, we have set out the potential full year impact of a one cent movement in the Euro and the US dollar on the slide. In terms of cash items, we expect capital expenditure at £130 million to be broadly in line with last year as we continue to implement the strategy. And on pensions, You'll be aware that we have a large final salary scheme which is closed for future accrual. The scheme moved to a small but deficit on a technical provisions basis at the end of 2022 and the level of the deficit has reduced by £27 million to £15 million on an IAS19 basis. We're in the process of completing the triennial valuation of the scheme and will agree a level of contributions going forward. In the first half, we contributed £2.5 million a month or £12.5 million in total into the scheme. So in summary, we have performed well in the first half of 2023 in a more challenging marketplace. Our balance sheet and cash flow remain very strong and supports our continued investment in the business. We have invested in our strategic initiatives in the first half and we plan to continue this in the second half of the year. We have been proactive in delivering productivity and efficiency savings, fully offsetting inflationary cost increases. The business is in good shape and since the start of the second half, overall revenue trends have been similar to the first half. And we are on track with our plans for the business and our expectations for 2023 are unchanged. Thank you. I will now hand you back to Andrew.

Thank you, Paul. In reviewing our first half performance and our plans for the second, I will use our strategic initiatives for the business as a framework. fully aligned with our trade customer focus and entrepreneurial culture and based around our core building blocks of service and convenience, trade value and product leadership. These are to evolve our depot model, improve range and supply management, develop our digital capabilities and services and expand our international operations. So first, depot evolution. High service levels including local proximity and immediate availability are very important to our customers and we continue to see profitable opportunities to open depots. We are using our updated format in all depot openings. This enables us to provide the best depot environment in which to work and conduct business and to make space utilization and productivity gains in a cost-effective way by using vertical racking in the warehouse sections of the depot. Overall, we believe there's scope for around 1,000 depots in the UK versus the 808 trading at the end of 2022. We are well planned on depot openings, and we now expect to open around 33 new depots in 2023, having opened eight so far this year. And our pipeline for 2024 is also progressing well. These will include some more in the smaller format size we tested in 2022 using our next day XDC delivery service to supplement in-depot stock holdings. The smaller version enables us to open a depot in places lacking suitable properties to accommodate the standard one or open an infill depot to provide a more local service in less densely populated areas. We have progressed our revamp programme for existing depots. This continues to receive very positive feedback from depot staff and customers alike, and providing such a trading and working environment is important to our competitive position. By the end of 2022, including relocations, we had revamped 185 depots. The revamps are budgeted 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. As we revamp more of our estate, we are modifying the scale and scope of the revamp at depots with relatively lower catchment areas so as to maintain incremental returns. In the first half, including relocations, we revamped 28 of the 90 or so depots we are now planning to complete in 2023. 10 more than our previous guidance for the year. By the end of 2023, we expect to have revamped around 41% of the 671 depots which opened in the old format and to have around 53% of all UK depots trading in the updated one. Next, range and supply management. Managing the number of kitchen ranges efficiently is crucial for both best availability which is highly valued by our customers and for profitability. In recent years we've reorganized our kitchen architecture removing duplications and improving the balance between new kitchen introductions and timely discontinuations. We've also introduced a more efficient way of testing new kitchen colours and finishes, which we call Find the Gap, which has enabled us to bring more proven new kitchen styles to market more quickly. This year we have around 90 current ranges in stock and available to UK depots, organised into 10 families. In recent years we've upgraded our new product programme and sales of new product making a significant contribution to our performance. Total sales of new product introduced in the current and the prior year were at the same levels as in the first half last year, representing around 16% of total UK sales, as compared with around 13% in 2021 and 2020. Sales of new product introduced in the first half of 2022 alone increased by some 95% in 2023, And as in 2022, higher priced kitchens have continued to contribute more of our kitchen mix by volume than previously, which has a positive impact on our average kitchen invoice value. We are committed to providing market leading and competitively priced product for our customers to sell to theirs. For 2023, we have 23 new kitchen ranges, an enhanced worktop offering, and a reinvigorated lineup with other product categories. Value for money is a consistent feature of purchasers' buying decisions and is likely to be never more so in 2023, given prevailing pressures in household budgets, and we believe we are well positioned to take advantage of this. For 2023, we've increased the net number of ranges aimed at the entry and the mid-market segments, making more kitchen looks and styles accessible to all budgets. Sales volumes of such kitchens are also a major contributor to keeping our unit costs of manufacture low. We continue to develop our higher priced kitchen offering which now includes a new paint to order service. This is a large segment of the market representing 30% plus of total market sales where we are underrepresented. For our entry ranges, we have added more colour options, including Greenwich in Reed Green, Whitney in Pebble and Navy, and Allendale in Dust Blue, and we have new frontals for Greenwich and Whitney to match the Croft Grey cabinet that we've introduced this year. We've refreshed the look of our best-selling Shaker family, which we've named Halesworth, added new mid-priced beaded shaker range Bridgemere, initially available in three colours. In recent years introductions of higher priced kitchens have proved very popular and in 2023 we've refreshed our offer to these segments but kept to a similar in-stock range count to last year and the same number of families. New colours for our 2023 include Hockley both in black and fair green and Chilcombe in marine blue and we have easier to fit handle-less ranges, a look often associated with the high street independence. For the second half we've introduced a new paint to order service for customers buying our Chilcombe and Elmbridge timber ranges which represent the top end of our offering. Priced at a premium to the nine range colours available from stock, we are initially offering 15 new paint-to-order colour choices from which customers can opt to have for either all or just part of their kitchen furniture. For buyers looking for a more bespoke look, we believe the paint-to-order service is very competitively priced, with by market standards a short lead time between the order being placed and the kitchen being ready for delivery. A strategic priority for us is the development of a market leading supply and fit capability for premium work surfaces. Solid surface worktops are often but not exclusively associated with the sale of higher priced kitchens. And this product category is a growing segment of the market with a significant opportunity for us. Following the acquisition of the Sheridan's worktop business and our other investments, our in-house solid surface manufacturing capability is amongst the largest in the UK. The number of solid surface orders taken by depots has increased significantly in 2023, and we continue to improve our offer. In 2023, we added six more entry-level decors to our solid surface template and fit service. And with the integration of shared and largely complete we are now reducing the time between template and fit to an industry-leading five days. For 2023, we have also reinvigorated our offering in other categories. For example, indoors with more colour and bolder styles at all price points. To flooring, including the launch of our new in-house brand, Oak & Grey. In appliances, with the further additions to our Limona brand, which is the leading integrated appliance brand in the UK, alongside extensions to our range of third-party branded product and in sinks and taps with more styles, colours and finishes. We are committed to providing competitively priced product for our customers and we have reinforced our focus on price and promotions which demonstrate the value we offer and promote footfall across the year. Houghton's is an in-stock business and the trade tell us that high level of stock availability is one of the key reasons they buy from us. At the end of 2022, in tandem with our new stock management system, TED, we trialled a new initiative, Daily Traders, which we have subsequently rolled out to all UK depots. Daily Traders is an initiative to improve customer service levels and increase sales by optimising in-depot stockholding of best-selling SKUs and associated range completers. Sales of these are outperforming those of our non-daily trader SKUs and we are seeing improvements to other key metrics including a reduction in customer back orders and a higher proportion of stock being replenished via Depo's core weekly delivery order. This gives us efficiencies as it reduces utilisation of our XDC service which I'll talk about next. In recent times, we've improved stock replenishment by supplementing the depot's core weekly delivery order with investments in a next day service via a regional cross-stocking centre, or XDC, combined with a rebalance of where we hold stock. XDC is now a key enabler to delivering the levels of high service and availability which differentiate our offer. The improvements to stock replenishment enable depots to hold deeper stocks of faster-selling lines, for example daily traders, and makes it simpler and more efficient for them to deliver superior service levels and availability, backed by certainty over lead time to delivery for items not held at depot. Time spent and cost incurred on depot stock management, for example on interdepot transfer of product or exiting discontinued stock, can be reduced and it helps to de-risk depot ranging decisions which, if incorrect, can be costly to unwind. We've developed this capability with third-party logistics partners and in the main are utilising their existing infrastructure. The service is now operating across all mainland regions supplied by a network of 12 XDCs and our focus is now on using these assets most efficiently. The improved depot stock mixed following the introduction of a new reordering system and the daily traders initiative have enabled us to reduce annualized XDC capacity leading to lower operating costs. We make all the kitchen cabinets and some of our other kitchen product we sell, which is the source of competitive advantage for us in several ways. We keep under review what we believe is best to make or buy, balancing the overall supply chain availability, resilience and flexibility. In 2019, investment in manufacturing technology enabled us to make the doors of our popular Hockley kitchen ranges. Since then, we have invested in new lines at our Haydn site, which are amongst the most advanced of their type in Europe. These give us the ability to make a variety of kitchen furniture, principally frontals and panels for more of our ranges at the same quality as we can source externally, but at a lower cost and at a reduced lead time to delivery. Production on the new lines is scaling up and we expect them to manufacture around 750,000 pieces in 2023 with a full scale capacity of around 2 million pieces in subsequent years. Separately, we've also invested in two lines to facilitate our paint-to-order initiative, located in a purpose-built facility near our Howden site. The lines give us an industry-leading production capability in this area. Lastly, our second architrave and skirting line is also now operational, enabling us to service in-house more of the substantial increase in demand that we've seen for these products and for which we are extending our offering in 2023. Now 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, to support the business model with new services and ways to trade with us, and to deliver productivity benefits and more leads for our depot teams and our customers. In the first six periods of 2023, using our online account facilities, which provide efficiencies and benefits to customers and depots alike, has continued to increase. New registrations totaled some 36,000, and around 45% of customers had an online account by the half-year end. Following a substantial increase in 2023, average weekly logins to our trade platform increased by 7%, with around 70% of users regularly looking at their confidential prices. Customers with an online account have on average continued to trade with us more frequently and spent more significantly than non-users, and proportionately more of them bought across our product categories. We continue to see high levels of engagement with our web platform and growth in our social media presence which also stimulates interest in viewing our products and services on howdens.com. Impressions in the first half were present in 18% more organic search results a month and site visits totaled 9.5 million. Our share of fitted kitchen site visits for which we are the market leader increased and the time spent viewing pages and the number of pages viewed per visit were at consistently high levels. Across social media sites, our follower base is at 480,000 and was up 11% with around 3.6 million monthly engagements. We have recently added a new trade YouTube channel for our account holders to share know-how and experiences. As our digital presence has grown, awareness of Haydn's amongst end consumers has increased. In the period, our unprompted brand awareness amongst end consumers at 25% was more than twice what it was across 2019, and we see the potential to raise awareness to higher levels. In 2023, we are adding new services and capabilities to our platform, which collectively improve stock and account management, promote frequency and ease of trading, and reduce time-consuming manual tasks in depots, including stock allocation. These include a new multi-list feature which gives visibility of dates saved for future projects, enabling depots to prioritise leads on a daily basis and customers to manage all their jobs. And further trade app functionality to support credit management and payment. We have commenced the first phase of testing of a digitised in-depot stock management system to record and pick deliveries, check allocations and determine depot stock levels. We've also started using AI to support depo efficiency in several areas, including dealing with product queries. Capabilities we have added in recent times, including our kitchen visualizer and market-leading search functionality, help users interact with HIDENS online at each stage of their buying decision. To facilitate more high-quality leads for depots, we've launched a new process for booking design appointments and increasing the visibility of the booking system on our website. We have also equipped our kitchen designers with an upgraded CAD tool which features faster rendering, photorealistic imagery and is easier to use than the previous version. We have more digital content for end users, including kitchen trends and houdens around the home. Features include insights from influencers and product spotlights, and we have given such content more prominence on our website. And finally, international. Our operations based in France have continued to make progress in 2023. The kitchen market in France is estimated to be worth around €4.3 billion, excluding appliances, with most kitchens purchased through kitchen specialists and DIY stores. As long-term followers of Haydn's will know, we tested our ability to access this sizeable market in several ways before adopting a city-based approach, serving solely trade customers, led and staffed by people who embrace the Haydn's way of doing business. The performance of the refocused business gave us the confidence to open more depots, and by the end of 2022, we had doubled the depots trading in France and Belgium to 60 in the two-year period, with around half of these located in the Paris area. We believe appreciation of the advantages of our trade-only in-stock model, our service levels and our competitive pricing is growing. And as around 90% of the product is common to our UK ranges, this helps us realise scale benefits. This year we flexed peak trading, which in France is in the summer over eight weeks, adding period six to the traditional period seven to the benefit of the sales in the first half. Having doubled the number of depots trading by the end of 2022, we now expect to open around 20 more depots over the next 18 months, including five or so in the second half of 2023. This would take the number trading to around 80 by the end of 2024, with some 35 located in the Paris area. In 2023, we are opening more depots in the Republic of Ireland. We commenced trading in the Republic of Ireland in 2022, using a similar depot location strategy to that in France, with the depot teams there supported by our UK infrastructure and our digital platform. During 2022, we opened five depots clustered around Dublin, and our arrival in the Irish market has attracted much attention locally, and we are encouraged by depot sales to date. We have opened two depots so far this year, including our first serve in the Cork area, and expect to have around 10 trading by the end of 2023. So for 2023 we are well planned on our interlocking strategic initiatives which are aimed at increasing our market share profitably as we deliver value to customers across all price points. High stock availability is a major contributor to our performance and in 2023 we will continue with our safety stock policies but at more normalised levels by volume. 23 new kitchen ranges are now in stock well ahead of peak autumn trading, with more emphasis on entry and mid-price ranges, together with an enhanced, very competitively priced premium kitchen offering. We have a programme of rooster promotions in place to keep Howdens at the front of the trades mind, together with other price initiatives. We will continue to make improvements to service and availability, including by utilising XTC sufficiently and through our daily traders initiative. We are increasing the range of services and functionality we offer online to the benefit of our depot teams, customers and end users alike. we'll be making more in the UK as our new lines at Haydn's move up to fuller scale manufacturing and our solid surface business grows. During 2023, we plan to open around 33 depots in the UK and refurbish around another 90 existing depots to the updated format. In France, we plan to have around 65 depots trading by the end of 2023 and have around 10 trading in the Republic of Ireland. Lastly, outlook. Houdens has performed well in the first half in as anticipated a more challenging marketplace. Whilst we have peak trading ahead of us, we are confident of our business model across changing market conditions and our expectations. for this year are unchanged. We between margin and volume as we continue to maintain competitive pricing whilst aligning operating costs and working with suppliers to keep product and input costs controlled. We are mindful of the challenges current macroeconomic conditions, including ongoing inflationary cost pressures, present. And we are trading against record prior year comparators in a market whose overall size, as measured by kitchen volumes, may well see a decline this year. Our customers, mainly self-employed people, are adept at managing their businesses through such times. And in summary, we are well-placed to outperform our competitors again in 2023, as we continue to invest in our key capabilities and growth opportunities, which are vital to the long-term development of the business. Thank you for listening. We'll now take your questions.