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Half Yearly Report for the 24 Weeks ended 12 June 2010

21 July 2010

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Highlights

Galiform's Chief Executive, Matthew Ingle, said:

"We are pleased with these results, which reflect the strength of Howdens' business model and point the way to future growth. After a slow start to the year, we delivered a further improvement in gross profit margin and a substantial increase in operating profit. We also succeeded in further reducing our property liabilities. The 16 new depots we have opened so far this year are performing well, as are the new kitchen ranges we have introduced.

"We have identified further opportunities to develop the business and intend to continue to invest in its growth. We remain cautious about the economic environment, however, and will continue to manage the business in the light of economic conditions."

Financial results

  • Howden Joinery UK depot revenue increased by 3.2%* to £319.2m, up 2.5%* on a same depot basis (* see note 1 below). However, revenue increased by 6.0% year on year in the last four periods of the half, after the end of the cold weather that disrupted the start of 2010. Group revenue was £324.7m (2009: £316.8m);
  • Gross profit margin rose from 54.1% to 58.1%;
  • Operating profit before exceptional items increased to £24.5m (2009: £10.0m);
  • Profit before tax and exceptional items increased by £16.9m to £21.6m (2009: £4.7m);
  • Basic earnings per share from continuing operations2 increased to 2.3p (2009: 0.5p);
  • Basic earnings per share from continuing and discontinued operations3 increased to 2.3p (2009: 0.2p loss);
  • Net cash outflow of £5.1m included cash payments totalling £21.7m relating to 'legacy' properties and a payment, in excess of the operating charge, of £13.2m to the Group's pension schemes (the 'pension deficit contribution');
  • Net debt of £2.7m at 12 June 2010 (26 December 2009: £2.4m net cash).

Business developments

  • We continue to strengthen our competitive position:
  • 16 new depots opened so far in 2010, bringing total to 478 and in line with plan to open between 20 and 30 this year;
  • New product development and introduction well received.
  • Further mitigation of legacy property liability, with termination of leases on three more legacy properties since the Interim Management Statement, bringing the total so far this year to seven.

Current trading

  • Howden Joinery UK depot total revenue increased by 5.7% in the first period of the second half of the year (period 7) compared with the same period last year.

Note 1: Week 1 sales (2010: nil, 2009 £0.8m) excluded because of the impact arising from New Year's Day falling on different days of the week (Thursday in 2009, Friday in 2010).
Note 2: There were no exceptional items from continuing operations in H1 2009 or H1 2010.
Note 3: There were no items arising from discontinued operations in 2010.

 

Enquiries

Enquiries
Investors/analysts: Media:
Gary Rawlinson Brunswick: Kate Holgate
Head of Investor Relations
Kate Miller

+44 (0)207 404 5959 (21 July 2010 a.m. only)

+44 (0)207 404 5959
+44 (0)207 535 1127
+44 (0)7989 397527

Note for editors:

Galiform Plc is the parent company of Howden Joinery. In the UK, Howden Joinery is engaged in the sale of kitchens and joinery products to trade customers, primarily small local builders, through over 475 depots. Around one-third of the products it sells are manufactured in the company's own factories in Runcorn, Cheshire, and Howden, East Yorkshire. The business also has a small operation in France.

 

SUMMARY OF GROUP RESULTS

The information presented below relates to the 24 weeks to 12 June 2010 and the 24 weeks to 13 June 2009, unless otherwise stated.

£m unless stated 2010 2009
Continuing operations1:




Revenue
- Group
324.7 316.8
- Howden Joinery UK depots 319.2 310.1
Gross profit 188.8 171.3
Gross profit margin, % 58.1 54.1
Operating profit 24.5 10.0
Profit before tax 21.6 4.7



Loss from discontinued operations before tax

- including exceptional items2 - (4.4)



Earnings per share from continuing operations1

- basic 2.3p 0.5p



Earnings/(loss) per share from continuing and discontinued operations

- basic excluding exceptional items 2.3p 0.5p
- basic including exceptional items 2.3p (0.2)p



Net debt at end of period 2.7 50.3

1 There were no exceptional items in continuing operations in 2009 and 2010.
2 Details of exceptional items incurred in 2009 are given in note 6 to the Condensed Financial Statements.

 

FINANCIAL REVIEW

The following discussion relates to the 24 weeks to 12 June 2010 and the 24 weeks to 13 June 2009, unless otherwise stated.

FINANCIAL RESULTS FOR FIRST HALF OF 2010

There were no exceptional items in respect of continuing operations in 2009 and 2010. There were no items arising from discontinued operations in 2010. In 2009, there were exceptional items arising from discontinued operations (see note 6). In the following, all of the figures relating to the Condensed Consolidated Income Statement are in respect of continuing operations only.

The financial performance of the Group during the first half of 2010 benefited from the strength of the Group's competitive position. It also benefited from actions taken during the course of 2009 and this year to improve financial performance, including pursuing opportunities to increase gross profit.

Sales through our Howden Joinery UK depots increased by £9.1m to £319.2m in 2010.

Revenue £m 2010 2009
Group 324.7 316.8
comprising:
Howden Joinery UK depots
Howden Joinery French depots
Hygena Cuisines*

* ceased in H1 2009

319.2
5.5
-

310.1
5.5
1.1

Excluding the distorting effect of trading in the first week of the year (see note 1 at end of Highlights section above), Howden Joinery UK depots' revenue was up 3.2%, rising 2.5% on a same depot basis. This performance reflects the previously reported impact of the cold weather seen in the first two periods of the year (to 20th February). Since then, trading has returned to more stable conditions, with total sales increasing by 6.0% year-on-year in the last four periods of the first half of the year.

Sales by our French depots of £5.5m were up 3.2% in constant currency terms.

Gross profit rose by £17.5m to £188.8m.  This primarily reflects the continuing focus in our depots on gross profit margin and the benefit from a small price increase early in the year. In addition, gross profit benefited from purchasing and manufacturing efficiencies, with exchange rate movements having only a limited impact.

As a result, the gross profit margin rose from 54.1% in the first half of 2009 to 58.1%, which was ahead of the 57.6% achieved in the second half of last year.

Selling and distribution costs and administrative expenses increased by £3.0m to £164.3m. This reflects the costs of new depots, the impact of inflation, particularly on payroll costs, increased marketing expenditure and higher logistics costs, which were partly offset by cost reductions in other areas.

Operating profit increased by £14.5m to £24.5m (2009: £10.0m).

The net interest charge fell by £2.4m to £2.9m, due to the lower level of debt this year and the reduced finance expense in respect of pensions. The net result was profit before tax from continuing operations rose by £16.9m to £21.6m (2009: £4.7m).

The tax charge on profit before tax was £7.4m, based on the estimated effective rate of tax on profit before tax for the 2010 financial year of 34.1%. This tax rate mainly reflects the impact of depreciation on capital expenditure that is disallowable for tax purposes and other non-deductible expenditure.

Basic earnings per share were 2.3p (2009: 0.5p)

Net cash inflows from operating activities were £2.1m. This included payments relating to 'legacy' properties totalling £21.7m and a cash contribution to the Group's pension schemes, in excess of the operating charge, of £13.2m.

Excluding the 'legacy' properties payments, underlying working capital changes generated a cash inflow of £8.4m. Within this, stock levels at the end of the period were £3.0m lower than at the beginning of the year, despite the requirement for stock in new depots. Creditors increased by £12.4m. Offsetting these, debtors increased by £7.0 million pounds. The movements in creditors and debtors reflected the seasonal difference in sales levels at the year-end and the end of the half year. In respect of debtors, we have seen an improvement in the age profile of debtors and a reduction in the bad debt write-off.

Payments to acquire fixed and intangible assets totalled £6.7m (2009: £3.8m).

As a result of the above, there was a £5.1m net cash outflow in the first half of the year, the Group having net debt at the end of the period of £2.7m (26 December 2009: £2.4m net cash). Excluding payments in respect of legacy properties and the contribution to the pension deficit, there was a cash inflow of £29.8m.

At 12 June 2010, the pension deficit shown on the balance sheet was £176.1m (26 December 2009: £196.3m). The decrease in the deficit in the period was driven by the Company's contribution (£13.2m) made as part of the 2009 agreement to clear the actuarial deficit (over a 10-year period) and the impact of changes in actuarial assumptions used to calculate liabilities, principally with respect to inflation.

No interim dividend is being paid (2009: nil).

 

OPERATIONAL REVIEW

The overriding strategic goal of Howden Joinery is “To supply from local stock nationwide the small builder's ever-changing routine kitchen and joinery requirements, assuring no call back quality and best local price”.

An unwavering focus on this goal, a unique business model and a readiness to test and learn from new ideas led to the rapid growth of Howden Joinery from the time it was founded in 1995. In recent years, the strength of the business has enabled it to continue to perform well, despite the severity of the economic downturn and the major challenges posed by the effects of the disposal of MFI. The business has continued to invest in areas that are critical to future growth, including product development and implementation of robust, scalable IT systems.

Today, the opportunity to transform the scale of the business is apparent. This can be achieved through: further significant growth in the size of the depot portfolio, beyond previous expectations; ongoing sales and profit growth in existing depots as they become mature, typically over 7 years or so; and the pursuit of further opportunities to improve performance that have been identified across the depot portfolio. The growth and development of the business takes place against a background of ever-increasing demand for sophisticated, functional, professionally fitted kitchens that represent value for money. In addition, there is the opportunity to develop Howdens' operations in France, at the appropriate time.

As the performance of the business is improving and legacy issues diminish, investment in the future growth of Howden Joinery is being stepped up. Already this year, a number of developments have taken place.

Depots

16 new depots have been opened so for this year, bringing the total to 478. This is in line with the plan to open between 20 and 30 depots in 2010. The stated target of 600 depots is being reviewed and is likely to be revised upwards.

Products

Following the review of our kitchen ranges undertaken at the end of 2009, the phased roll-out of new products continues. So far this year, this has included eight new kitchens that complement our most successful existing ranges. These new introductions are performing well. We have also launched new sinks and appliances in our 'own brand' Lamona range and extended our range of Bosch appliances to cover all large domestic appliances.

Supply operations

New IT systems for manufacturing have been successfully implemented in our factories at Howden, completing the roll-out in all our manufacturing plants, and a new warehouse management system has been implemented in our distribution centre in Northampton.  These systems facilitate improved production planning and stock control.

In the coming months, investment in the business to support its growth will continue, as new depots are opened, staffing levels in existing depots are increased to enable them to reach their full potential, and new machinery is introduced in manufacturing to increase its capacity and improve efficiency.

 

GROUP DEVELOPMENTS

Legacy properties

The Group continues to reduce its 'legacy property' portfolio.

The number of legacy properties now stands at 46, compared with 55 at the end of 2009. Included within this are 22 properties that are fully or part occupied by tenants.

Since the release of the Interim Management Statement, on 29 April 2010, the leases of a further three properties have been terminated, at a cost of £7.4m. This means that the leases of seven properties have been terminated so far this year, at a cost of £14.5m (of which £10.1m was incurred in the first half of the year), mitigating future liabilities that would have totalled over £50m.

With the leases of two additional properties having reached the end of their term, the profile of properties remaining and the net annual rent and rates (current values) for the associated leases going forward, before any further mitigating action is taken, is shown below.


Current As at 31 Dec
2011
31 Dec
2014
31 Dec
2019
31 Dec
2024
Number of properties1 46 43 24 13 33
Net annual rent and rates, £m2 14.6 14.3 8.0 6.3 0.4

Estimated future costs associated with these properties were provided for in 2009 and previous years.

  1. Vacant and tenanted.
  2. Gross rent & rates less payments by tenants.
  3. The leases on these properties expire during the course of 2025.

Group name

We intend to change the name of the Group to a variant of the Howden Joinery name, rather than Howden Joinery Group Plc, and are taking steps to effect the formal change.

 

OUTLOOK

With sales 5.7% ahead of last year in the first period of the second half of 2010, sales growth continues to be in line with management's expectations. We are seeing pressures on product input costs in a number of areas, although we would hope to be able to offset these.

In the second half, our cost base will be impacted by the non-recurrence of one-off cost savings last year that totalled around £4m and the increasing costs associated with new depots. Our year-end net cash/debt position will reflect any costs associated with terminating further legacy leases.

The key risk to performance in the second half of the year is the continuing uncertainty surrounding the general economic environment. Other risks to the business are discussed in the following section on 'Risks and Uncertainties'.

Although, we remain cautious about the macro outlook, we will invest prudently in the areas that present growth opportunities for the business. However, as in recent years, we will continue to manage the business in light of economic conditions.

 

GOING CONCERN AND RISKS AND UNCERTAINTIES

GOING CONCERN

The Group meets its day to day working capital requirements through an asset backed lending facility of £160m, which is due for renewal in May 2014. The current economic conditions create uncertainty, particularly over (a) the level of demand for the Group's products and, (b) the exchange rate between sterling and both the Euro and the US Dollar which would affect the cost of the Group's operations.

The Group's forecasts and projections have been stress-tested for reasonably possible adverse variations in trading performance. The results of this testing show that the Group should be able to operate within the level of its current facility and covenants. The Group's banking facility expires in May 2014 so at this stage the Group has not sought any written commitment that the facility will be renewed. We will open renewal negotiations with the banks in due course.

After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the half-yearly condensed financial statements.

RISKS AND UNCERTAINTIES

The Board continually assesses and monitors the key risks of the business. The principal risks and uncertainties that could have a material impact on the Group's performance over the remaining 28 weeks of the financial year have not changed from those which are set out in detail on pages 16 to 17 of the Group's 2009 Annual Report, and which are summarised below:

  • Defined benefit pension scheme
  • Legacy properties
  • Market conditions
  • IT systems
  • Continuity of supply
  • Failure to implement Howdens' strategy
  • Product design leadership
  • Loss of key personnel

A copy of the Group's 2009 Annual Report is available on the Group's website, www.galiform.com.

 

Condensed consolidated income statement



24 weeks to
12 June 2010
unaudited

24 weeks to 13 June 2009
unaudited

52 weeks to 26 December 2009
audited

Notes Total
£m

Before exceptional items
£m
Exceptional items
£m
Total
£m

Before exceptional items
£m
Exceptional items
£m
Total
£m
Continuing operations:









Revenue - sales of goods
324.7
316.8 - 316.8
769.5 - 769.5
Cost of sales
(135.9)
(145.5) - (145.5)
(337.4) - (337.4)
Gross profit
188.8
171.3 - 171.3
432.1 - 432.1
Selling & distribution costs
(133.6)
(131.7) - (131.7)
(294.0) - (294.0)
Administrative expenses
(30.7)
(29.6) - (29.6)
(58.6) - (58.6)
Other operating expenses 6 -
- - -
- (0.1) (0.1)
Operating profit
24.5
10.0 - 10.0
79.5 (0.1) 79.4
Finance income 7 0.2
0.1 - 0.1
0.2 - 0.2
Finance expense 7 (0.7)
(1.7) - (1.7)
(3.0) - (3.0)
Other finance expense - pensions 7 (2.4)
(3.7) - (3.7)
(8.0) - (8.0)
Profit before tax
21.6
4.7 - 4.7
68.7 (0.1) 68.6
Tax charge for the period 8 (7.4)
(1.7) - (1.7)
(18.5) - (18.5)
Profit after tax
14.2
3.0 - 3.0
50.2 (0.1) 50.1











Discontinued operations:









Loss before tax 6 -
- (4.4) (4.4)
- (4.4) (4.4)
Tax on loss 6 -
- - -
- - -
Loss after tax
-
- (4.4) (4.4)
- (4.4) (4.4)











Profit/(loss) for the period
14.2
3.0 (4.4) (1.4)
50.2 (4.5) 45.7

There are no exceptional items in the current period. All profits and losses for all periods are attributable to the equity holders of the parent.

 

Condensed consolidated income statement (continued)



24 weeks to 12 June 2010
unaudited

24 weeks to 13 June 2009
unaudited

52 weeks to 26 December 2009
audited

Notes
Total
pence



Total
pence



Total
pence

Earnings per share:











From continuing operations











Basic earnings per 10p share 9
2.3


0.5


8.3
Diluted earnings per 10p share 9
2.3


0.5


8.3













From continuing and discontinued operations











Basic earnings/(loss) per 10p share 9
2.3


(0.2)


7.6
Diluted earnings/(loss) per 10p share 9
2.3


(0.2)


7.5

 

Condensed consolidated statement of comprehensive income



Notes 24 weeks to
12 June 2010
unaudited
£m
24 weeks to
13 June 2009
unaudited
£m
52 weeks to
26 December 2009
audited
£m
Profit/(loss) for the financial period
14.2 (1.4) 45.7
Items of other comprehensive income:



Actuarial gain/(loss) on defined benefit pension schemes 11 9.4 (18.7) (87.0)
Deferred tax on actuarial (gain)/loss on defined benefit pension schemes
(2.6) 5.3 24.4
Deferred tax on share schemes
(0.3) 0.1 2.1
Currency translation differences
(0.4) 0.1 (0.7)
Other comprehensive income for the period
6.1 (13.2) (61.2)





Total comprehensive income for the period attributable to equity holders of the parent
20.3 (14.6) (15.5)

 

Condensed consolidated balance sheet


Notes
12 June 2010
unaudited
£m

13 June 2009
unaudited
£m

26 December 2009
audited
£m
Non current assets






Goodwill

2.5
2.5
2.5
Other intangible assets

5.1
5.8
5.4
Property, plant and equipment 10
78.7
85.2
79.5
Investments

2.0
2.0
2.0
Deferred tax asset

68.4
56.9
73.6



156.7
152.4
163.0
Current assets






Inventories

83.3
99.5
86.3
Trade and other receivables

102.4
100.1
95.4
Other assets

0.4
1.0
0.7
Cash at bank and in hand

17.4
18.4
14.0



203.5
219.0
196.4








Total assets

360.2
371.4
359.4








Current liabilities






Trade and other payables

(127.1)
(122.4)
(119.4)
Current tax liability

(12.7)
(5.7)
(12.8)
Current borrowings

(1.9)
(2.6)
(2.3)



(141.7)
(130.7)
(134.5)
Non current liabilities






Non current borrowings

(18.6)
(67.1)
(10.0)
Pension liability 11
(176.1)
(131.2)
(196.3)
Deferred tax liability

(5.5)
(5.5)
(5.5)
Provisions 12
(70.1)
(107.5)
(86.8)



(270.3)
(311.3)
(298.6)
Total liabilities

(412.0)
(442.0)
(433.1)








Net liabilities

(51.8)
(70.6)
(73.7)








Equity






Called up share capital

63.4
63.4
63.4
Share premium account

85.1
85.1
85.1
ESOP reserve

(25.9)
(25.3)
(27.5)
Other reserves

28.1
28.1
28.1
Retained loss

(202.5)
(221.9)
(222.8)
Total deficit

(51.8)
(70.6)
(73.7)

 

Condensed consolidated statement of changes in equity

24 weeks to 12 June 2010 Share capital
£m
Share premium account
£m
ESOP reserve
£m
Other reserves
£m
Retained earnings
£m
Total
£m
As at 26 December 2009 - audited 63.4 85.1 (27.5) 28.1 (222.8) (73.7)
Profit for the period - - - - 14.2 14.2
Net actuarial gain on pension schemes - - - - 6.8 6.8
Deferred tax on share schemes - - - - (0.3) (0.3)
Currency translation differences - - - - (0.4) (0.4)
Net movement in ESOP - - 1.6 - - 1.6
As at 12 June 2010 - unaudited 63.4 85.1 (25.9) 28.1 (202.5) (51.8)

During the current period, the Group did not issue any shares.

24 weeks to 13 June 2009 Share capital
£m
Share premium account
£m
ESOP reserve
£m
Other reserves
£m
Retained earnings
£m
Total
£m
As at 27 December 2008 - audited 63.4 85.1 (27.1) 28.1 (207.3) (57.8)
Loss for the period - - - - (1.4) (1.4)
Net actuarial loss on pension schemes - - - - (13.4) (13.4)
Deferred tax on share schemes - - - - 0.1 0.1
Currency translation differences - - - - 0.1 0.1
Net movement in ESOP - - 1.8 - - 1.8
As at 13 June 2009 - unaudited 63.4 85.1 (25.3) 28.1 (221.9) (70.6)

During the period above, the Group did not issue any shares.

52 weeks to 26 December 2009 Share capital
£m
Share premium account
£m
ESOP reserve
£m
Other reserves
£m
Retained earnings
£m
Total
£m
As at 27 December 2008 63.4 85.1 (27.1) 28.1 (207.3) (57.8)
Profit for the period - - - - 45.7 45.7
Net actuarial loss on pension schemes - - - - (62.6) (62.6)
Deferred tax on share schemes - - - - 2.1 2.1
Currency translation differences - -
- (0.7) (0.7)
Net movement in ESOP - - (0.4) - - (0.4)
As at 26 December 2009 63.4 85.1 (27.5) 28.1 (222.8) (73.7)

During the period above, the Group did not issue any shares.

 

Condensed consolidated cash flow statement

 

Notes 24 weeks to
12 June 2010
unaudited
£m
24 weeks to
13 June 2009
unaudited
£m
52 weeks to
26 December 2009
audited
£m
Net cash flows from operating activities 14 2.1 13.5 71.4





Cash flows from investing activities



Interest received
0.1 0.1 0.2
Redemption of investment
- 2.0 2.0
Payments to acquire property, plant and equipment and intangible assets
(6.7) (3.8) (8.1)
Receipts from sale of property, plant and equipment and intangible assets
- 1.0 1.2
Net cash used in investing activities
(6.6) (0.7) (4.7)





Cash flows from financing activities



Interest paid
(0.6) (1.9) (3.1)
Increase/(decrease) in loans
9.0 (13.2) (69.7)
Repayment of capital element of finance leases
(0.8) (0.8) (1.7)
Decrease in other assets
0.3 0.3 0.6
Net cash from/(used in) financing activities
7.9 (15.6) (73.9)





Net increase/(decrease) in cash and cash equivalents
3.4 (2.8) (7.2)
Cash and cash equivalents at beginning of period 14 14.0 21.2 21.2
Cash and cash equivalents at end of period 14 17.4 18.4 14.0

Cash flows from discontinued operating activities are shown in note 14. There are no cash flows from discontinued investing or financing activities.

 


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