Highlights

The first half of 2008 has seen good performance across the Group's operations in a difficult economic environment, with Howden Joinery UK depot sales continuing to grow.

Financial highlights

Good underlying performance on key measures:

• Howden Joinery UK depot revenue increased by 9.6%* to £342.6m (up 4.3%* on same depot basis). Group revenue (£354.6m) fell as a result of the planned ending of product supply to MFI;
• Profit before tax and exceptional items fell by £4.7m to £20.1m, but this reflected the £11.8m impact of adverse currency movements and 'residual' logistics costs **. Excluding these factors, profit before tax and exceptional items rose by £7.1m to £31.9m;
• Basic earnings per share before exceptional items of 2.1p (2007: 2.7p);
• Basic earnings per share of 2.4p (2007: 7.0p);
• Net cash outflow from operating activities of £26.9m included a cash flow of almost £35m in respect of a number of 'one-off' payments. Excluding these, there was a net cash inflow of £7.3m;
• Net debt of £40.9m at 14 June 2008 (29 December 2007: £3.3m) in line with expectations.

Operating highlights

We continue to strengthen our competitive position:

• 15 new Howden Joinery UK depots opened so far this year, bringing total to 451;
• Various new products introduced, including 7 new kitchen ranges;

while at the same time managing 'legacy' issues (post the ending of product supply to MFI **).

Current trading

• Howden Joinery UK depot revenue in the first period of the second half of the year (period 7) on a par with revenue achieved in the last period of the first half of 2008. Growth of 3.3% reflected strong performance in period 7 last year.

Galiform's Chief Executive, Matthew Ingle, said:

"Against a tough economic backdrop, the robustness of our business model has enabled us to deliver good results in the first half of 2008.  We continue to strengthen our competitive position and focus on providing our small builder customers with improved products and service refinement, while ensuring we prudently manage the business in these economic conditions."

*  See Financial Review section note 1
** See Financial Review section note 2

Enquiries

Summary Of Group Results

The information presented below relates to the 24 weeks to 14 June 2008 and the 24 weeks to 16 June 2007, unless otherwise stated. There were no discontinued operations in either period.

1 Details of exceptional items are given in note 7 to the Condensed Financial Statements.                  

Financial Review

FINANCIAL RESULTS FOR FIRST HALF OF 2008

The financial performance of the Group during the first half of 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 £28.1m in 2008. Total Group revenue fell by £74.4m to £354.6m, but this reflected the termination of sales to MFI at the end of last year.

Howden Joinery UK depot revenue increased by 9.6% (see note 1 at end of Financial Review) to £342.6m, up 4.3% on a same depot basis.  The strong sales growth achieved in the first five trading periods (20 weeks) of the year moderated in the last period of the first half of 2008. However, despite a background of general economic concerns and a strong comparative period, revenue still increased by 4.5% in the sixth period this year.

Sales in the first period of the second half of the year (period 7) were on a par with those seen in the last period of the first half of 2008. The rate of growth slowed to 3.3%, but this reflected the strong performance in period 7 last year.

Gross profit fell by £3.2m to £186.8m, 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 European suppliers (£1:€1.28 in H1 2008, £1:€1.48 in H1 2007). The impact of these factors was offset to a large extent by purchasing efficiencies and higher depot sales.

The gross profit margin was 52.7% (2007: 44.3%). The increase reflects the ending of product sales to MFI, which were supplied 'at cost'. These sales had no impact on gross profit and thereby reduced the gross profit margin in 2007.

Excluding exceptional items, selling and distribution costs and administrative expenses increased by £5.4m.

Within this, Howden Joinery UK depot operating costs increased by £10.9m, mainly reflecting costs associated with depots opened last year, most of which were not open in the first half of 2007. Other costs associated with Howden Joinery UK depot operations rose by £2.8m.

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 £5.9m – see note 2 at the end of Financial Review) fell by £4.5m. Indirect costs associated with the supply chain and corporate costs fell by £5.4m.

Operating profit before exceptionals was £20.8m (2007: £29.5m), reflecting the impact of the weaker pound against the euro and 'residual' logistics costs which together totalled £11.8m.

The net interest charge fell £4.0m to £0.7m, mainly due to decreases in the finance element of the pension charge and interest related to payments to MEP Mayflower Limited (MEP). The net result was profit before tax and exceptional items of £20.1m (2007: £24.8m).

There was an exceptional profit of £1.5m on property disposals, primarily related to a factory site in Hull.

The tax charge on profit before tax was £7.5m, an effective tax rate of 34.6%. This included a write-off of potential tax relief on share schemes. Excluding this, the underlying effective tax rate was 32.2%.

Basic earnings per share excluding exceptional items was 2.1p (2007: 2.7p) and including exceptional items was 2.4p (2007: 7.0p).

There were no discontinued operations in the first half of 2007 or 2008.

Net cash outflows from operating activities were £26.9m. This included cash expenditure in relation to the restructuring of manufacturing and logistics operations announced in June 2007 (£7.4m). It also included 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) and 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).

Payments to acquire fixed and intangible assets totalled £10.0m (2007: £6.6m). Cash receipts from property disposals totalled £3.5m.  There was a cash contribution to the Group's pension schemes, in excess of the operating charge, of £13.3m.

As a result of the above, net debt rose by £37.6m in the first half of 2008, resulting in Group net borrowings of £40.9m at 14 June 2008. At the same date, in respect of the Group's £175m bank facility (see note 22 of 2007 Annual Report and Accounts), the Group had available £102.2m of undrawn committed borrowing facilities (£93.5m at 29 December 2007).

A new triennial actuarial review of the pension schemes as at 1 April 2008 is being undertaken on behalf of the trustees. At 14 June 2008, the pension deficit shown on the balance sheet was £112.0m (29 December 2007: £83.5m).  The deficit was reduced by a reduction in liabilities arising from an increase in the discount rate and the Company's contribution to clear the actuarial deficit (over a 10-year period) that was agreed in 2006. These were offset by the effect of lower than expected asset returns and changes to assumptions used to calculate liabilities.

DIVIDEND

Based on current market conditions, we are not paying an interim dividend (2007: nil), but will expect to pay a final dividend unless conditions deteriorate markedly.

Note 1: Based on 2007 'adjusted' sales, to take account of additional day's trading in first week of 2007.

Note 2: With the ending of product supply to MFI, a major restructuring of supply operations was successfully undertaken to bring the cost base in to 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 weakening consumer confidence and general concerns about economic prospects during the first half of the year, the Group continues to focus on opportunities to grow sales through improving its products and service. We continue to work to increase profitability through greater efficiencies and 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

So far this year, 15 UK depots have been opened, bringing the total to 451, and one depot has been extended. Given the uncertainty surrounding the economic outlook, we have decided to take a more cautious approach to our immediate expansion programme, and now plan to open 20 depots in total this year.

We continue to be of the view that the total number of depots can be increased to more than 600 in the UK and are ready to accelerate the opening programme at the appropriate time.

Product

We continue to review arrangements with suppliers, the benefits from which have helped offset cost pressures within our supply chain.

Investment in product development remains key to our continued success. So far this year, we have introduced seven new kitchens to our product range, improved the range of appliances on offer and enhanced the structure of our rigid cabinets. An improved range of doors and associated hardware serves to augment our existing joinery offering, in line with our customers' needs.

'Residual' costs

We continue to focus on opportunities to reduce the 'residual' logistics costs which arose from ending product supply to MFI. These costs will be reduced through the introduction of a 'traffic sharing' agreement which enables a more efficient use of our transport fleet.

Surplus property

The leasehold of a major warehouse in Northampton has been assigned to a new tenant.  Two factory sites in Hull have been sold, generating proceeds of £3.5m.

Banking arrangements

A two-year extension to the Group's £175m asset-backed bank facility was agreed earlier this year, the interest rate on the loan being unchanged. Under the terms of the extension, the facility (which now expires in May 2011) can also be used more efficiently, thus increasing the amount of the facility which is available at any one time.

In addition to taking these specific actions, the Group continues to believe that the Howden Joinery business model is particularly resilient for the following reasons:

• it has a significant share of all end user markets, with the exception of new build;
• it commands exceptional customer loyalty from over 234,000 registered customers, around a third of whom have traded with us in the last month;
• its local margin drivers and 'in stock' model enable increased profit focus and effective credit control.

MEP claims

During the period, Galiform paid a total of £13.3m plus interest to MEP in final settlement of the amount due in respect of cash flows generated by MFI between 5 August and 18 October 2006. This issue was referred to in the 2007 Preliminary Results announcement, the total comprising an agreed adjustment of £4.9m, together with a further amount of £8.4m determined by an independent expert (compared with an amount of £23.4m originally claimed by MEP).

Legal proceedings relating to MEP's net asset value claim, also referred to in the 2007 Preliminary Results, are progressing. MEP has reduced its gross claim from approximately £57m to £52.9m. The claim consists of some 88 individual items, each of which has been examined in detail on Galiform's behalf by external lawyers and forensic accountants. In making its claim, MEP has only included revaluations of assets and liabilities that work in its favour (ignoring any adjustments that would reduce its claim). MEP has now conceded that offsetting items should be considered.

Unless previously settled, the matter is unlikely to come to Court until spring/summer 2009. The Board considers that MEP's total claim is grossly inflated and remains firmly of the view that only a small fraction of the amount claimed, if any, will ultimately be payable.

Guaranteed properties

At the time of the transaction to sell MFI, the Group was the guarantor on leases in relation to 56 properties occupied by MFI. By 14 June 2008, the number had reduced to 46 (50 at 29 December 2007). The current net annual rent payable on these remaining properties is £15.5m, with associated business rates of £6.5m. The leases on a further seven properties will expire by the end of 2011, the associated current net annual rent and rates totalling £3.0m.

Current Trading and Outlook

Howden Joinery UK depot sales in the first period of the second half of the year (period 7) were on a par with those seen in the last period of the first half of 2008. The rate of growth slowed to 3.3%, but this reflected the strong performance in period 7 last year.

We are not expecting the economic environment to improve in the short term and will continue to manage the business in light of prevailing conditions.

The key risk to performance in the second half of the year is the uncertainty surrounding the economic environment and, in particular, the effect this could have on trading.

Condensed Consolidated Income Statement

Exceptional items are analysed in note 7.

Condensed Consolidated balance sheet

Condensed Consolidated cash flow statement

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.

Condensed Consolidated statement of recognised income and expense