The information presented in this document relates to the 52 weeks to 25 December 2010 and the 52 weeks to 26 December 2009, unless otherwise stated.

HIGHLIGHTS

Chief Executive, Matthew Ingle, said:

“Against a tough economic backdrop, Howdens has produced outstanding results for 2010, reflecting the efforts of all our staff, and our unique and robust business model.

“The performance of all aspects of the business has underlined our assessment of the scale of the opportunities before Howdens. Along with the continued strength of the business and its resilient financial performance, these provide the foundations for us to increase our investments in the long term growth of the business.

”Nonetheless, we expect market conditions to continue to be challenging this year and we remain cautious about the outlook. As in recent years, we will continue to adapt our business model to the market and economic conditions we encounter.”

Financial results (see note 1 below)

• Howden Joinery UK depot revenue increased by 5.1% to £795.1m (up 3.6% on same depot basis).  Group revenue was £807.9m (2009: £769.5m);
• Gross profit margin rose from 56.2% to 59.8%;
• Operating profit increased to £107.4m (2009: £79.5m);
• Profit before tax rose by £32.2m to £100.9m;
• Basic earnings per share increased by 2.8p to 11.1p;
• Helped by a number of 'one-off' items, there was a cash inflow of £32.6m;
• Net cash of £35.0m at 25 December 2010 (26 December 2009: £2.4m net cash).

Business developments

• Continued focus on selling prices and purchasing costs has enabled the gross profit margin to increase by more than 6 percentage points in the last two years;
• Investment in the future growth of the business stepped up:


• 27 new depots opened in 2010, bringing total to 489;
• capital expenditure totalled £19.2m;
• £12.3m investment in operating costs to support growth, including over 180 additional staff in existing depots, and increased new product introduction and brand advertising;
• Further mitigation of legacy property liability, with termination of leases on four more legacy properties since the Interim Management Statement in November 2010;
• Subject to the continued progress of the Group, the Board intends that a prudent dividend should be paid with respect to the current financial year (FY 2011).

Current trading

• Comparative sales performance in the first part of 2011 was materially driven by the weather impact on trading at the start of 2010, Howden Joinery UK depot revenue in the first two periods of 2011 increasing by 14.2%, up 11.6% on a same depot basis.  In addition, 2011 sales benefitted from an initiative to capitalise on the busy post-Christmas trading period of the non-trade kitchen market. Excluding these factors, management estimate that underlying growth was around 5%;
• Management's expectations for the year remain unchanged, taking into account economic conditions.

Note 1: There were no exceptional items or discontinued operations in 2010. In 2009, there was an exceptional loss of £0.1m from continuing operations and an exceptional loss of £4.4m from discontinued operations. All figures from the Consolidated Income Statement are before exceptional items from continuing operations.
 

SUMMARY OF GROUP RESULTS       

1 There were no exceptional items in 2010. Details of exceptional items incurred in 2009 are given in note 3 to the Financial Statements.

FINANCIAL REVIEW

There were no exceptional items or discontinued operations in 2010. In 2009, there was an exceptional loss of £0.1m from continuing operations and an exceptional loss of £4.4m from discontinued operations. All figures from the Consolidated Income Statement are before exceptional items from continuing operations.

FINANCIAL RESULTS FOR 2010

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

Total Group revenue increased by £38.4m to £807.9m.

Howden Joinery UK depot revenue rose by 5.1% to £795.1m, increasing 3.6% on a same depot basis.  Trading conditions were stable throughout the year, although sales at the start of the year were impacted by severe weather conditions.

Sales by our ten French depots of £12.8m were up 12.6% in constant currency terms.

Gross profit rose by £50.9m to £483.0m. This primarily reflects the continuing focus in our depots on the gross profit margin of every sale and the benefit of a small price increase implemented early in the year. In addition, gross profit benefited from the impact on the cost of goods sold of purchasing and manufacturing efficiencies, with exchange rate movements only having a limited impact.

As a result, the gross profit margin for the year was 59.8% (2009: 56.2%), more than 6 percentage points higher than in 2008.

Selling and distribution costs and administrative expenses increased by £23.0m to £375.6m. This reflects the costs of new depots, investment in operations to support the growth of the business (see below) and the impact of inflation, particularly on payroll costs, as well as the reversal of 'one-off' savings that occurred in 2009.

Operating profit increased by £27.9m to £107.4m.

The net interest charge fell by £4.3m to £6.5m, due to the lower level of debt in 2010 and the reduced finance expense in respect of pensions. The net result was profit before tax and exceptional items rose by £32.2m to £100.9m.

The tax charge on profit before tax was £34.0m, an effective rate of tax of 33.7%.  This tax rate mainly reflects the impact of depreciation on capital expenditure that is disallowable for tax purposes and other non-deductible expenditure. It also reflects the impact of the reduction in the UK Corporation Tax rate to 27% on deferred tax assets and the resulting deferred tax charge to the Income Statement.

Basic earnings per share before exceptional items were 11.1p (2009: 8.3p).

At 25 December 2010, the pension deficit shown on the balance sheet was £135.7m (26 December 2009: £196.3m), the reduction mainly arising from a change in the inflation assumptions from RPI to CPI for determining the minimum increase to pensions earned between 1997 and 2006. This follows the UK Government's intention to change the statutory inflation measure. The impact of a decrease in the net discount rate (i.e. the difference between the discount rate and the assumed rates of increase in salaries, deferred pension revaluation and pensions in payment) was offset by an increase in the schemes' assets.

Net cash inflows from operating activities were £51.5m. This included payments relating to 'legacy' properties totalling £37.5m and a cash contribution to the Group's pension schemes, in excess of the operating charge, totalling £25.4m.

Excluding the 'legacy' property payments, underlying working capital movements generated a cash inflow of £3.4m.  Within this, stock levels at the end of the year were £19.2m higher than at the end of 2009, reflecting stock in new depots, new products and a higher level of sales anticipated in January 2011.  This was offset by an increase in creditors of £22.2m, the level of debtors being virtually unchanged.  In respect of debtors, we have seen an improvement in the age-profile of debtors and a reduction in the level of bad debt write-off.

Also included within net cash flows from operating activities was tax paid totalling £16.0m.

Payments to acquire fixed and intangible assets totalled £18.2m (2009: £8.1m).

As a result of the above, there was a net cash inflow of £32.6m in 2010, the Group having net cash of £35.0m at 25 December 2010 (26 December 2009: £2.4m net cash). Excluding the payments relating to 'legacy' properties and the pension deficit contribution, there was a cash inflow of £95.5m.

Looking forward, net cash flow in 2011 is expected to be significantly different from that seen in 2010 because of a number of factors:

• a £8m higher pension deficit contribution, in line with the three-year agreement reached in 2009;
• a larger tax payment to HMRC, which will include the impact of higher profits; and
• increased capital expenditure and investment in working capital, to support the growth of the business.

In addition, we will continue to pursue deals to terminate legacy property leases, which historically have delivered very high returns - we have already completed three deals so far this year (see below).

DIVIDEND

No dividend has been recommended for the year to 25 December 2010.  However, given the encouraging results and the strengthening financial position of the Group, the Board intends that a prudent dividend should be paid with respect to the current financial year (FY 2011), subject to the continued progress of the Group.

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”.

In July 2010, in our Half-Yearly Report, we said that the opportunity to transform the scale of the business was apparent and that, as the performance of the business was improving and legacy issues were diminishing, we were stepping up investment in the future growth of Howden Joinery.

During 2010, this investment in growth saw not only a step-up in capital expenditure but also increased expenditure in a number of other areas.

Depot network

During the course of 2010, 27 new depots were opened, bringing the total trading at the end of the year to 489. In addition, three depots were relocated and two depots were extended.

Staffing levels were increased in existing depots of all ages to facilitate their growth, numbers growing by over 180 during the year.

A system enabling each depot to send its local marketing material by text message to their customers en bloc rather than individually was introduced in the autumn. A new depot 'information system' was introduced, making technical information more easily accessible for our staff and customers.

Manufacturing and logistics operations

A number of projects were undertaken to increase capacity and improve efficiency within our manufacturing and logistics operations. These included the automation of 'end of line' processes at our Runcorn factory and the introduction of voice automation for small parts picking in our warehouses.

Supporting this, the roll-out of new IT systems to all our manufacturing plants was completed and a new warehouse management system was implemented in our distribution centre in Northampton. These systems facilitate improved production planning and stock control.

Product and marketing

At the end of 2009, we developed the concept of the 'family' range of kitchens, which focused on a number of our best selling kitchens and the finishes that they were available in. During the course of the year, 12 new kitchens were introduced, broadening the appeal of four key ranges.  We also continued to develop and improve our 'own brand' Lamona range of appliances, sinks and taps; extended the range of Bosch appliances to cover all categories; and introduced a number of new internal doors.

These new product introductions were supported by a number of events to inform our depot employees about the new products and to seek their views on products being considered for future introduction. As well as regularly updating our Kitchens catalogue, we introduced a new Appliance, sinks and taps catalogue, a smaller A5 version of the Kitchens catalogue and a new Accessories catalogue. We also undertook a number of new advertising campaigns aimed at raising awareness of the Howdens brand, thereby supporting our small builder customers.

GROUP DEVELOPMENTS

Legacy properties

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

After November's Interim Management Statement, the lease of one property was terminated prior to the year-end. This meant that the leases of 12 properties were terminated during the year, at a cost of £19.4m, mitigating future liabilities that would have totalled nearly £75m. In addition, three leases expired during the year. Since the year-end, the leases of three properties have been terminated at a cost of £3.9m, mitigating future liabilities that would have totalled over £12m, with one additional lease having expired.

As a result, the number of legacy properties now stands at 36, compared with 55 at the end of 2009. Included within this are 17 properties that are fully or part occupied by tenants.  

The profile of properties remaining and the net annual rent and rates (current values) for the associated leases going forward, before any mitigating action is taken, is shown below.

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. All leases expire during the course of 2025.

CURRENT TRADING AND OUTLOOK FOR 2011

Howden Joinery UK depot total sales in the first two periods of 2011 (to 19 February) were up 14.2% on the same periods last year, with sales on a same depot basis up 11.6%. This increase was materially driven by the weather impact on trading at the start of 2010.  In addition, 2011 sales benefitted from an initiative to capitalise on the busy post-Christmas trading period of the non-trade kitchen market. Excluding these factors, management estimate that underlying growth was around 5%.

For the rest of 2011, we expect market conditions to continue to be challenging and we remain cautious about the outlook. As in recent years, we will continue to adapt our business model to the market and economic conditions we encounter.

As a result, our expectations for the year remain unchanged.

The Group remains committed to its view that the number of depots in the UK can be increased to at least 650 in the longer term. During the course of 2011, we are currently planning to open around 30 depots as part of our investment in the next stage of Howdens' longer term growth and development.

Since its inception in 1995, Howden Joinery has grown rapidly and has gained a significant share of the UK kitchen market. Today, it sells some 400,000 kitchens a year. Even in these challenging market conditions, we would expect our market share growth to continue, as the business continues to benefit from the growth of our depots that have yet to reach maturity and we open new depots.

RISKS AND UNCERTAINTIES

The Board considers that the principal risks to achieving its business goals are as set out below (not in any order of priority).

MANAGEMENT OF COMMERCIAL RISK AND UNCERTAINTIES

Defined benefit pension scheme

Accounting for pensions and other post-retirement benefits involves judgement about uncertain events, including estimated retirement dates, salary levels, mortality rates, inflation rates, rates of return on scheme assets and determination of discount rates for measuring plan obligations.  The assumptions used from year to year may vary, which will affect future results of operations.  Any difference between these assumptions and the actual outcome also affects future results of operations.  Pension assumptions are discussed and agreed with the independent actuaries in December each year.  These assumptions are used to determine the projected benefit obligation at the year-end and hence the liability or asset recorded on the Group's balance sheet.

At 25 December 2010, the Group's defined benefit pension scheme had a deficit of £135.7m (2009: £196.3m). Changes in this deficit are affected by the assumptions made in valuing the liabilities and the market performance of the assets. In 2010, there was a £64.4m reduction in the deficit arising from a change in the inflation assumptions from RPI to CPI for determining the minimum increase to pensions earned between 1997 and 2006.  This follows the UK Government's intention to change the statutory inflation measure.  The discount rate used for measuring the defined benefit liabilities decreased from 5.65% in 2009 to 5.50% in 2010.

As part of the secured lending facilities announced on 17 February 2006, the Company and the Trustees, together with the Pensions Regulator, reached agreement with regard to the funding of the remaining deficit.  The Trustees have been granted security over the Group's shares in Howden Joinery Limited.

As part of the triennial valuation, which was completed in 2009, the Group and its pension trustees agreed a schedule of contributions until April 2012. The payment schedule is based on the Group's profit performance, which means that payments will be reduced should performance deteriorate significantly.  The next triennial valuation will be completed in 2011 and a new payment schedule will then be agreed.

Legacy properties

At the end of 2010, the Group was responsible for a total of 40 properties. These properties included non-trading MFI properties excluded from the sale of MFI in October 2006 and properties guaranteed by the Group, the liabilities for which reverted to the Group following the administration of MFI and Sofa Workshops. We have already substantially reduced the total number of legacy properties for which we are liable and we continue to work to mitigate our current and future liabilities. As a result, total property provisions at the 2010 year-end totalled £54.4m, compared with £84.4m in 2009.  These provisions are reviewed on a regular basis to ensure that the Group is adequately covered in respect of reasonably foreseeable events.

Since the year-end, we have agreed with landlords to terminate three leases and one lease has expired. As a result, the Group is currently responsible for a total of 36 properties with a net annual rent and rates liability of £11.1m.

Market conditions

The Group's products are sold to professional fitters for installation in public and private housing, predominantly in the repair, maintenance and improvement market. The results are consequently dependent on levels of activity in these markets, which in turn are impacted by many factors including general economic conditions, consumer confidence, interest rates and credit availability, unemployment, demographic trends and, in the short term, weather. We monitor the market closely and can take swift management action as necessary to address any adverse change and ensure that the business is aligned to market conditions.

IT systems

The business involves high transaction volumes and complex logistics. We are therefore heavily dependent on the resilience of both the application software and the data-processing and network infrastructure in our depots, logistics operations and back-office functions. A serious failure could immediately and materially affect our business. The Group has a detailed disaster recovery plan in place. Our main data centre in Northampton has high levels of resilience built into it and we also have a physically separate third party disaster-recovery site in Harrogate.

Continuity of supply

Any disruption to the relationship with key suppliers or interruption to manufacturing operations could adversely affect the Group's ability to meet its sales and profit plans. With suppliers, the Group strives to maintain dual supply wherever possible in the event that a key supplier is unable to deliver goods or services. Good supplier relations are maintained by regular communication, an annual supplier conference and prompt settlement of invoices. Within our manufacturing operations, we adopt best practice health & safety and fire prevention procedures.

Failure to implement business strategy

The future success of Howden Joinery's business depends on the successful implementation of the Company's strategy and culture. In particular, if the Group fails to implement Howdens' business model in the locally enabled, decentralised manner envisaged, there may be an adverse affect on the Group's future financial condition and results of operations.

Product design leadership

If there was a misalignment between the products we offer and the requirements of our customers and the current trends in the market, there may be an adverse change on the Group's future financial condition and results of operations. Active engagement with suppliers, independent research and, critically, depot managers and their designers encourages and enables product development activity.

Loss of key personnel

The Group's success depends largely on the skills, experience and performance of some key members of its management team. The loss of any key members of the Group's management may adversely affect the Group's financial condition and results of operations. The Group utilises the Remuneration Committee to ensure that team members are appropriately compensated for their roles.

MANAGEMENT OF FINANCIAL RISK AND UNCERTAINTIES

The Group holds financial instruments for one principal purpose: to finance its operations. The Group does not currently use derivative financial instruments to reduce its exposure to interest or exchange rate movements.  The Group finances its operations by a mixture of cash flows from operations and longer term loans from banks.  Treasury operations are managed within policies and procedures approved by the Board.

The main risks arising from the Group's financial instruments are funding and liquidity risk, interest rate risk, counterparty risk and foreign currency risk discussed below.

No speculative use of derivatives, currency or other instruments is permitted.  The Treasury function does not operate as a profit centre and transacts only in relation to the underlying business requirements.

Funding and liquidity

The Group's objective with respect to managing capital is to maintain a balance sheet structure that is both efficient in terms of providing long-term returns to shareholders and safeguards the Group's ability to continue as a going concern. As appropriate, the Group can choose to adjust its capital structure by varying the amount of dividends paid to shareholders, returns of capital to shareholders, issuing new shares or the level of capital expenditure.

During 2010, the Group had a £160m asset-backed bank facility which is due to expire in May 2014.

The Group's committed borrowing facility contains certain financial covenants which have been met throughout the 2010 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 Limited.

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 Limited.

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. The Group's latest forecasts and projections have been stress-tested for reasonably possible adverse variations in trading performance and show that the Group will operate within the terms of its borrowing facility and covenants for the foreseeable future.

The cash drawdown against the bank facility at the year-end was £5.5m and, after taking into account other utilisation of the facilities for terminable indemnities, the Group was left with £149.9m of available funds.

Interest rate risk

The Group's exposure to interest rate fluctuations on its borrowings may be managed when necessary by borrowing on a fixed rate basis and entering into rate swaps, rate caps and forward rate agreements. The Group's policy objective has been to undertake transactions of this nature only when net debt exceeds £150m.  Net debt has not exceeded £150m during the year.

Counterparty risk

Group Treasury policy on investment restricts counterparties to those with a minimum Standard and Poor's/Moody's long term credit rating of AA- and a short term credit rating of A-1/P-1.  Investments mainly consist of bank deposits and certificates of deposit.  The Group continuously reviews the credit quality of counterparties, the limits placed on individual credit exposures and categories of investments.

Foreign currency risk

The most significant currencies for the Group are the US dollar and the Euro.  It is difficult to pass the prescribed tests under IAS 39 'Financial Instruments: Recognition and Measurement' to ensure the ability to hedge account for derivative currency transactions.  As the resultant volatility cannot be avoided in the profit and loss account, it is the view of the Board that routine transactional conversion between currencies are completed at the relevant spot exchange rate.  This policy is reviewed on a regular basis.

The net favourable impact of exchange rates on currency transactions in the year, compared to the previous year, was to reduce cost of sales by £2.4m to £324.9m. The Group does not have many overseas assets/liabilities, so the impact of currency translation is not material.

Set out in the table below are the principal exchange rates versus the UK pound affecting the Group's profits.

No new accounting standards which have an implication for the Group came into effect during the year.

DIRECTORS' RESPONSIBILITY STATEMENT

The directors confirm that to the best of their knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings including the consolidation taken as a whole; and
• the review of operations and finance along with other documents which are incorporated into the directors' report, together include a fair review of the development and performance of the business and the position of the Company and the undertakings including the consolidation taken as a whole together with a description of the principal risks and uncertainties they face.

By order of the Board

The ESOP Reserve includes shares in Howden Joinery Group plc with a market value on the balance sheet date of £26.2m (2009: £22.5m), which have been purchased in the open market and which are held by the Group's Employee Share Trusts in order to satisfy share options and awards made under the Group's various share-based payment schemes.

For the purpose 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 at bank and in hand disclosed on the balance sheet. There were no such overdrafts at the current or prior period ends.

Cash flows from discontinuing operating activities are shown in note 9. There are no cash flows from discontinued investing or financing activities.