HIGHLIGHTS

Financially and operationally the Group is now significantly stronger, more focussed and adaptable, reflecting the strength of the Howden Joinery business and the decision to divest MFI in 2006. However, the overall Group financial results for 2008 reflect the continued cost to the Group of MFI legacy issues as well as the pro-active decisions taken by management during the year to manage down those costs for the future.

Financial results

• Howden Joinery UK depot revenue increased by 1.9% to £782.9m (down 3.1% on same depot basis). As expected, Group revenue (£805.7m) fell as a result of the planned ending of product supply to MFI;
• Profit before tax and exceptional items fell by £5.5m to £74.3m, reflecting the £28.1m impact of adverse currency movements and 'residual' logistics costs (see Financial Review section note 1), which was partly offset by 'one off' cost savings of £6.5m;
• Exceptional charge of £108.8m, mainly in respect of provisioning for MFI legacy issues - cash element only of £11.7m;
• Basic earnings per share from continuing operations before exceptional items of 8.5p (2007: 9.1p);
• Basic 'loss' per share from continuing and discontinued operations of 8.6p (2007: 7.3p earnings);
• Net cash outflow from operating activities of £37.8m included a cash outflow of almost £46m in respect of a number of 'one-off' payments, primarily to MEP. Excluding these, there was a net cash inflow of £7.8m;
• Net debt of £61.2m at 27 December 2008 (29 December 2007: £3.3m).

Operating developments

Howden Joinery continues to strengthen its competitive position:

• 20 new Howden Joinery UK depots opened in 2008, bringing total to 454;
• Various new products introduced, including 10 new kitchen ranges;
• Steps taken to increase consumer awareness of Howdens.

In addition:

• Successful mitigation of legacy issues as a result of deals on seven guaranteed properties;
• The Group continues to focus on improving efficiency and managing cash flow:
  
  
  • employee numbers fell by over 10% in 2008;
  • capital expenditure, including depot openings, curtailed in 2008 and 2009.

Current trading

• Howden Joinery UK depot revenue* in the first two periods of 2009 fell by 9.1% (down 10.6% on a same depot basis) compared to the same two periods in 2008.

*Week 1 sales excluded because of distortion arising from New Year's Day falling on different days of the week (Monday in 2008, Thursday in 2009) which meant not only were there two fewer trading days this year, but there was also very limited trading on those days.

Galiform's Chief Executive, Matthew Ingle, said:

"We are very pleased with our performance last year, given the difficult circumstances.

Although it is still early days, trading conditions in 2009 have been resilient so far, with year-on-year sales levels consistent with those seen in the last three months of 2008. We believe we will benefit from reduced capacity in the market and increased end-user awareness of Howdens. We continue to stick to the principles that have enabled Howdens to achieve its pre-eminent market position, and will continue to manage our operations in light of the circumstances we encounter. In tough market conditions, we will benefit from the strength of our unique business model, and the scale and efficiency of our supply operations.

In 2008, we took early and decisive action to begin to deal with the MFI guaranteed property issue, and the costs of this are reflected in our reported performance. We are working to resolve the outstanding legacy issues and, meanwhile, other actions we have taken have improved our underlying operations and mean we are better placed to manage the business through 2009 and beyond, to ensure that Howdens can achieve its full potential."

SUMMARY OF GROUP RESULTS

The information presented below relates to the 52 weeks to 27 December 2008 and the 52 weeks to 29 December 2007, unless otherwise stated.

1 Details of exceptional items are given in note 3 to the Financial Statements.              

FINANCIAL REVIEW

The following discussion relates to continuing operations unless otherwise stated.

FINANCIAL RESULTS FOR 2008

The financial performance of the Group during 2008 benefited from the strength of the Group's competitive position and the characteristics of the end-users of its products. This includes significant exposure to the tenanted housing sector, both public and private, which are subject to different economic drivers than the owner-occupied sector, and very limited exposure to the new housing market.

Sales through our Howden Joinery UK depots increased by £14.5m in 2008. Total Group revenue fell by £170.8m to £805.7m, but this reflected the termination of sales to MFI at the end of 2007.

Howden Joinery UK depot revenue increased by 1.9% to £782.9m, declining 3.1% on a same depot basis. The strong total sales growth achieved in the first part of the year, to the end of spring, when it was over 10%, moderated during the summer and early autumn to around 2.5%. Sales declined in the latter part of the year by around 8% year-on-year, as markets responded to the financial crisis coming to a head in mid-September.

Sales of our French depots grew by around 25% in local currency terms to £11.7m.

The gross profit margin was 53.1% (2007: 46.7%). The increase reflects the ending of product sales to MFI, which were supplied 'at cost'. These sales did not contribute to gross profit and therefore reduced the gross profit margin in 2007. The absolute level of gross profit fell, primarily because of the expected loss of delivery income from MFI (note: the corresponding and equal cost was in operating costs last year – see below) and the adverse effect of the exchange rate on the cost of goods purchased from overseas suppliers. The impact of these factors was partly offset by purchasing efficiencies and higher depot sales.

Excluding exceptional items, selling and distribution costs and administrative expenses decreased by £17.3m to £351.7m.

Within this, Howden Joinery UK depot operating costs increased by £17.1m, primarily reflecting costs associated with depots opened in the last two years.

These cost increases were offset by cost reductions elsewhere. Increased logistics (warehouse and transport) costs in relation to depot sales were more than offset by a reduction arising from the end of the supply contract with MFI. The net result of this was that logistics costs (including 'residual' costs of £10.9m – see note 1 at the end of Financial Review) fell by £14.2m. Indirect costs associated with the supply chain fell by £9.4m and corporate costs fell by £8.6m. Approximately £6.5m of this decrease was 'one off' in nature, mostly within the supply chain.

Operating profit before exceptionals was £75.9m (2007: £88.1m), reflecting the impact of the weaker pound against the euro and US dollar (£17.1m), and 'residual' logistics costs (£10.9m), which were partly offset by the 'one-off' elements of the cost reductions in indirect supply chain and corporate costs, referred to above.

The net interest charge fell £6.7m to £1.6m, due to an increase in the net finance credit in respect of pensions and a decrease in interest related to payments to MEP Mayflower Limited (MEP). The net result was profit before tax and exceptional items of £74.3m (2007: £79.8m).

There was an exceptional credit before tax of £4.8m relating to continuing operations (2007: £35.4m charge).

There was an exceptional charge before tax of £108.8m (2007: £11.1m) in respect of discontinued operations. Of this, £99.7m related to rent and other obligations payable on properties which had been occupied by the MFI UK Retail operations (the 'guaranteed' properties – see Group Developments section below), the remainder mainly relating to other legacy issues. Cash expenditure incurred in 2008 was £11.7m, the remainder of the charge being non-cash items, mostly provisions.

The tax charge on profit before tax and exceptional items from continuing operations was £23.3m, an effective tax rate of 31.4%. There was a tax credit of £2.6m in respect of the exceptional charge relating to discontinued operations.

Basic earnings per share excluding exceptional items from continuing operations was 8.5p (2007: 9.1p) and including exceptional items was 9.2p (2007: 8.8p). Basic (loss)/earnings per share including exceptional items from continuing and discontinued operations was (8.6)p (2007: earnings of 7.3p)

Net cash outflows from operating activities were £37.8m.

Within this, working capital changes meant a cash outflow of £89.5m. This included 'one-off' cash expenditure in relation to the restructuring of manufacturing and logistics operations announced in June 2007 (£10.8m). It also included 'one-off' payments to MEP in respect of the final payment due under the terms of Galiform's agreement with MEP in relation to the disposal of the MFI retail business (£12m), settlement of the 'closing cash adjustment' due in respect of cashflows generated by MFI between the effective date and completion date of the sale (£14.8m including interest), and settlement of MEP's net asset value claim (£8m). These 'one-off' payments totalled £45.6m. Stock levels at the end of 2008 were £19.3m higher than a year earlier, reflecting the sharp deterioration in trading conditions towards the end of the year (although stock levels subsequently began to fall in period 1 of 2009). Debtors fell by £22.4m, reflecting the termination of product supply to MFI at the end of 2007 and lower sales at the end of 2008. Trade and other creditors items were £47.0m lower. Included within this, a fall in trade creditors reflected the termination of product supply to MFI at the end of 2007.

Also included within net cash flows from operating activities was cash expenditure in respect of the £108.8m discontinued operations exceptional charge totalling £11.7m. This was mainly in respect of payments to landlords of guaranteed properties, including £5.8m paid for the Group to be released from all obligations arising from the leases of six of the 46 properties for which Galiform was guarantor (details of which were given in our announcement of 23 December 2008).

There was a cash contribution to the Group's pension schemes, in excess of the operating charge, of £24.3m and tax paid totalled £10.9m.

Excluding the 'one-off' payments mentioned above, there was a net cash inflow from operating activities of £7.8m

Payments to acquire fixed and intangible assets totalled £19.4m (2007: £21.2m), of which £8.1m related to a new depot IT system (see below) that was fully paid for in 2008. Cash receipts from property disposals totalled £3.5m.

As a result of the above, net debt rose by £57.9m in 2008, resulting in Group net borrowings of £61.2m at 27 December 2008.

At 27 December 2008, the pension deficit shown on the balance sheet was £122.2m (29 December 2007: £83.5m). The increase in the deficit has been driven by lower than expected asset returns and changes in certain assumptions to calculate liabilities, principally with respect to mortality. This has been offset by the impact of a higher discount rate, lower inflation and the Company's contribution (£24.3m) as part of the 2006 agreement to clear the actuarial deficit (over a 10-year period).

DIVIDEND

With the marked deterioration in market conditions since the 2008 Half Yearly Report was issued, the Board is not recommending a final dividend for 2008 (2007: 0.5p).

FUNDING AND LIQUIDITY

As at 27 December 2008, in respect of the Group's £175m bank facility, which expires in May 2011, the Group had available £77.3m of undrawn committed borrowing facilities (£93.5m at 29 December 2007).

The Group's committed borrowing facility contains certain covenants which were met throughout the 2008 year. The covenants are tested every four weeks and are based around (i) fixed charges, (ii) tangible net worth and (iii) earnings before interest tax, depreciation and amortisation (EBITDA) for Howden Joinery.

In addition, our pension trustees, who carry a charge over the share capital of Howden Joinery Limited, have a separate covenant test around the EBITDA of Howden Joinery as a standalone business.

The current economic conditions create uncertainty around the Group's trading position, particularly over the level of demand for the Group's products and the exchange rate between sterling and both the Euro and the US dollar. In the directors' consideration of going concern, the Group's latest forecasts and projections, which include the full impact of the property guarantees relating to stores that were used by MFI Retail operations, have been stress-tested for reasonably possible adverse variations in trading performance and show that the Group will operate within the terms of its current borrowing facility and covenants for the foreseeable future. The covenant with lowest headroom is the EBITDA for Howden Joinery, which is calculated each period on a three or six month rolling basis, such that short term variability in trading performance would increase the risk of non-compliance. Nevertheless, whilst there can be no absolute certainty, after due consideration of the impact of a reasonably possible further decline on the recent trading performance experienced, it is not considered that this covenant will be breached in the foreseeable future.

Note 1: With the ending of product supply to MFI, a major restructuring of supply operations was successfully undertaken to bring the cost base into line with the Group's new requirements. In the logistics area, a legacy of 'residual' costs remained that it was not possible to deal with immediately, arising from areas such as transport and warehouse space utilisation, but these are steadily being addressed.

OPERATIONAL REVIEW

The overriding strategic goal of Galiform was first set out in the original Howden Joinery business plan and remains unaltered. It is "To supply from local stock nationwide the small builder's routine kitchen and joinery requirements, assuring no call back quality and best local price".

Against the background of weak consumer confidence and general concerns about economic prospects, the Group continues to focus on opportunities to grow sales through improving its products and service, and increasing awareness of Howdens. We continue to work to increase profitability through greater efficiencies and to prudently manage cash flow. Operations throughout the Group have been reviewed so as to ensure appropriate resourcing levels.

In pursuing these goals, numerous actions have been taken, the most significant of which are as follows.

Depot network

In 2008 20 new depots were opened in the UK, three depots were extended and one depot was relocated. A review of the prospects for two depots led to the decision being taken to close them. This meant that 454 depots were trading at the end of 2008.

Sales

We continue to take actions to improve sales.

Investment in product development remains key to our continued success. In 2008, we introduced ten new kitchens to our product range and extended the range of appliances we offer to include free standing appliances. In December, new kitchens to be introduced in the first part of 2009 were presented to depot managers, along with possible extensions to our ranges of doors, joinery, flooring, worktops and appliances.

We are pursuing a number of initiatives to increase awareness of Howdens as a supplier of kitchens. As well as advertising in trade and consumer magazines, we have been rolling-out a new Howdens livery across our fleet of lorries used to deliver goods to our depots. So far, over 450 of the 520 trailers in the fleet are sporting the new livery.

Depot IT system

During the course of 2008 and following an extensive trial, we commenced the roll-out of a new IT system in our UK depots, replacing a 20 year-old system that was costly to maintain and provided limited functionality. The new point-of–sale system, K8, is the market leading trade depot system and is used to manage sales and stock within the depots. By the end of 2008, it was operational in over one third of depots and it is now live in almost three quarters of all depots. Rollout to all depots is on plan to be completed in April 2009. Later on, it is planned to introduce additional functionality that is available as standard within K8.

Operating costs

Following a decision to curtail the number of depot openings in 2008 and with the onset of more difficult market conditions, resource levels in Howden UK depots and depot support functions were reviewed. As a result, the number of employees in these operations at the year-end was 9% lower than at its peak. This was mostly achieved through natural wastage and the ending of temporary contracts.

Following completion in early spring 2008 of the major reorganisation of manufacturing and logistics operations after the ending of product supply to MFI at the end of 2007, further steps have been taken to improve operational efficiency and flexibility. A new transport sharing agreement with third parties means that some 60% of return trips by our lorries are carrying goods instead of being empty, thereby helping to reduce the 'residual' logistics costs referred to above. Improved productivity has enabled a further streamlining of manufacturing and warehousing operations. New progressive labour agreements mean that we are able to better schedule working hours of employees to match demand.

The number of employees (FTEs) in the Group at the end of 2008 was 5,782 (2007: 6,548).

Raw materials and finished products

We continually look to miminimise the cost of raw materials and finished products that we buy-in, regularly benchmarking the cost of existing suppliers against alternatives. If necessary, we change product design and specifications, when acceptable to our customers, so that lowest cost can be accessed. In doing this, we look not just at the direct purchase costs of raw materials and products but also the indirect costs of using different suppliers, such as freight costs. In 2008, this generated purchasing gains of over £7m.

GROUP DEVELOPMENTS

The Group's strategy also involves the proactive management of MFI 'legacy' issues.

Guaranteed and excluded properties

The number of 'guaranteed' properties from the MFI estate now stands at 39. In January 2009, the lease of one store was terminated at nil cost to Galiform. So far, the leases of seven properties have been terminated at a cost of £5.8m, mitigating future rent and rates that would have totalled over £27m, at current rates.

For the outstanding 39 guaranteed properties, the profile of properties remaining and the net annual rent and rates (current values) for the associated leases, before any mitigating action is taken, is shown below, along with the situation when this liability crystalised last September.

The future costs associated with these properties have been provided for in the £108.8m exceptional charge discussed above.

For the retail properties that were excluded from the sale of MFI in 2006 (originally 33, but now 18), tenants have recently been found for a further three, meaning that only seven remain vacant.

Pensions

The triennial actuarial review of the Group's pension schemes as at 1 April 2008 that is being carried out on behalf of the trustees continues. Details of the outcome of this will be announced when the review is completed.

CURRENT TRADING AND OUTLOOK FOR 2009

Howden Joinery UK depot total sales* declined by 9.1% in the first two periods of the year (to 21 February), with sales on a same depot basis falling by 10.6%. This reflected the impact of heavy snowfall in early February that disrupted business in a number of regions, most notably London and the South East. Without this disruption, it is estimated that sales performance would have been on a par with that seen in the last three periods of 2008, when total sales fell by around 8%.

We expect market conditions to continue to be challenging and will manage the business accordingly. Comparative sales figures for the remainder of the year will reflect the changes in sales performance that were seen during the course of 2008, as well as any change in market conditions that may occur.

We are not planning to open any new depots in 2009 and other capital expenditure will be managed prudently, but the Group remains committed to its view that the number of depots in the UK can be increased to more than 600 in a more stable economic environment.

Since its inception in 1995, Howden Joinery's share of the UK kitchen market is estimated to have grown to almost one-fifth in just 13 years and it now sells some 400,000 kitchens a year. Even in these challenging market conditions, we would expect our market share growth to continue, as competitors disappear from the market and the business continues to benefit from the growth of its depots that have yet to reach maturity.

Week 1 sales excluded because of distortion arising from New Year's Day falling on different days of the week (Tuesday in 2008, Thursday in 2009) which meant not only were there two fewer trading days this year, but there was also very limited trading on those days.

For the purposes of the cash flow statement, cash and cash equivalents are included net of overdrafts payable on demand. These overdrafts are excluded from the definition of cash and cash equivalents disclosed on the balance sheet.

Cash flows from discontinuing operating activities are shown in Note 10. There are no cash flows from discontinued investing or financing activities.