Howden Joinery Grp Ord

Very good morning, ladies and gentlemen. Thank you for joining us for the Howden's 2018 Interims and welcome. In one sense, this will be a fairly typical set of Howden's results. You'll hear from Mark Robson that the numbers are in good shape. But perhaps on this occasion, more importantly, it's our first chance to hear from our new CEO, Andrew Livingstone. And I hope you'll be very encouraged by what you hear, not just in terms of Andrew having done a very thorough induction, but also the way that he's got up to running speed in a very short period of time. And I hope you're going to be very interested in what you hear from Andrew. That may take a little longer than the usual set of interim results, because I think it's important that we do hear those first impressions from Andrew. But there will be good time for Q&A at the end, and we'll aim to have you away from here sharply at 10. So, Andrew, start us off. Thank you.

Good morning, everyone. Welcome to Haydn's results for the first half of 2018. I'm really pleased to be here. Mark's going to discuss our financial performance, but before he does, I'd like to make a few points. A key feature in Howden's success has been our trade customer focus. Our teams have developed trusted working relationships with trade customers who find value in our product and service offerings. Howden's has been built by offering the convenience of local stock, personal accounts, an increasing number of local depots with high quality product at best local price. All of this has given us trusted position in the mind of our customers. I've admired Howden's as a competitor for space and trading estates as I built a business with similarities, not least similarities. the customers both businesses serve. A key difference that Howden's has from others, of course, is the vertical integration that the supply chain gives. Howden's manufactured around 4 million cabinets in our UK facilities at lowest factory-to-depot prices. All of this product distributed exclusively by our depot network to our 470,000 customers. I've called this phase pressing ahead in the business because it represents continuity from the past and at the same time it evolves forward into a new phase. I believe this business has opportunities and to take the best advantage of them, we can optimise more, develop the offer further and use digital to greater advantage for trade. We've delivered a positive first half. in revenue growth and profitability. And we have also showed good cash generation, one of the key metrics by which we view the business. We've shown that we can operate successfully in a challenging environment. And at the same time, we look to manage margin we put through a price increase in April. We're on track to deliver our plans for the year. There's a significant new development in our kitchen ranges and our contemporary offer with the launch of Linear, There's new shaker styles, there's new cabinet developments in the launch of our new grey, which offers a whole new combination of door cabinet choice, and there's new worktops. At the same time, we continue to expand our selection of joinery products, including pre-finished doors, extended range of fire doors, and fire-rated hardware packs. Haydn's Sweet Spot is a high-value, quality product at accessible prices to trade only. We continue to make investment choices for the long term of the business. Our new distribution centre, Rons 1, is now fully operational, delivering to depots, ready for period 11. And that's a huge and significant achievement to Rob Fenwick and his team. We've broken ground on Rons 2 and on Rons 3. We've launched an additional seven depots in the first half and are on track for around 30 this year. As you know, the revenue comparables become tougher as the year progresses. And we've yet to see the full impact of our April price increase. The business is now ramping up for the second half, which of course includes our important period 11. So I'll go into those plans in more detail once we've heard from Mark.

Thank you, Andrew. And good morning, everyone. Reviewing the financials for the first half of the year, let me start by looking at some of the headline numbers from the income statement. As you can see, Howden Joinery's UK revenue rose by £65 million to £605 million, a 12% increase on 2017. Group sales also increased by 12%. Gross profit rose by £25 million to £380 million, the percentage gross margin of 61.3% down from 2017, as we gave depots more flexibility on their margin from spring 2017, and we did not increase prices until April of 2018. Moving on, operating costs rose by £22 million, meaning that operating profit increased by £3 million to £70 million. Operating profits were impacted in the first half by continued investment across the business, including new depots, digital, the move to ROMs, additional depreciation and inflation. With net interest and other finance charges of £1 million, mainly due to the charge for pensions, there was a profit before tax of £68.8 million, £3.2 million higher than in 2017. Looking at cash flow in the first half of the year, this included a £5 million contribution to the pension deficit, capital expenditure of £17 million, and finally, share repurchase expenditure of £38 million. We had a net cash outflow of £28 million and ended the period with £213 million of net cash. I'll now go into some of the detail behind the headline numbers. Let me start by talking about revenue. Howden's UK turnover of £605 million increased by 12.1% on a total basis and was up 10.7% on the same depot basis. In continental Europe, turnover of 14.7 million was up by 1.2 million pounds. Sales in our French depots rose by 5.5% in euros. Let me now talk you through the movement in PBT from 65.6 million pounds in 2017. Gross profit rose by 25 million pounds. This is the net effect of several features. If we bridge from 2017's gross profit of £355 million, there was a benefit of £67 million, which had two factors. Firstly, it reflects the £18 million impact from lower prices. This resulted from giving the depots more flexibility on margin as well as not increasing prices until April this year. Secondly, increased volumes and mix changes increased revenue by £85 million as we saw a positive impact from lower pricing. Partly offsetting this, there were a number of factors that impacted the cost of goods sold. There were additional costs arising from the volume and mix changes, totalling £34 million. Also affecting cost of goods sold, we saw higher input costs, resulting in a net decrease to gross profit of £8 million. We saw no impact from exchange rate movements in the first half. So together, this gave a net rise in gross profit of £25 million to £380 million. Gross profit margin was 61.3%. If I now turn to the other factors that contributed to the movement in PBT, operating costs rose by £22 million, more of which in a moment, net interest and other finance charges were broadly the same. The net result then was that profit before tax rose by £3 million to £68.8 million. Let me now explain in more detail the main movements in operating costs from 2017's £288 million. Firstly, costs associated with the depots that we opened in the first half of 2018 and the incremental costs of the 19 depots that we opened in 2017 total £3 million. Cost increases for older depots were £10 million, mainly reflecting increases in headcount, delivery costs and pay inflation. Other cost increases incurred to support growth totalled £8 million. This included the costs of our new distribution centre in Rawns and digital upgrades. With other costs increasing by £1 million, this meant that operating costs rose by £22 million to £310 million. Let's briefly turn to the remainder of the income statement. As we've seen, profit before tax was £68.8 million. This led to a tax charge of £14.3 million, the effective tax rate being 20.8%. This gave a profit after tax of £54.5 million. This result gives earnings per share from continuing operations of 8.9 pence compared with 8.4 pence in 2017. Turning to dividends, the Board has decided that we will pay an interim dividend of 3.7 pence per share. This is in line with our policy of paying an interim dividend that is one third of last year's full dividend, which was 11.1p. This will be paid in November at a cost of £22 million. This will give a total cash cost of ordinary dividend payments in 2018 of £69 million. Let me remind you that in 2017 we returned a total of £116 million in share repurchases and dividends. As you know, in February 2017, we announced our intention to return £80 million to shareholders via a two-year share repurchase programme. At the beginning of 2018, we had £32 million of this programme remaining. In March 2018, we announced a further £60 million two-year share repurchase programme. So far in 2018, we have spent £38 million repurchasing shares, thereby completing the February 2017 repurchase programme, and we have £54 million of the March 2018 repurchase programme remaining. Let me now turn to cash flow. From a position of having net cash of £241 million at the end of 2017, we ended the first half with net cash of £213 million. Looking at the change since the end of last year, let me draw to your attention a few items that explain the movement. Net working capital increased by £33 million, more of which in a minute. Capital expenditure totalled £17 million and included new depots and investments in digital. Tax payments were £21 million. As I've already said, we spent £38 million repurchasing shares in the first half. And there was a £5 million contribution to the pension scheme. The net result of these and other movements was a cash outflow of 28 million, meaning that we ended the first half of 2018 with net cash of £213 million. As I've already said, net working capital increased by £33.4 million. Within this, stock increased by £14.5 million, which is mainly due to new kitchen ranges, Debtors grew by 51.1 million, reflecting the typical pattern of trading that we see in the first half. Partly offsetting these movements, creditors rose by 32.2 million pounds. Let me quickly bring you up to date with the balance sheet position of our pension scheme. At the end of 2017, the deficit stood at £109 million. A number of factors had caused this to change by the end of the first half. Firstly, from the P&L, there was the current service charge, administrative and interest costs of £11 million. Secondly, an increase in the discount rate reduced liabilities by £69 million. Thirdly, the group made a cash contribution of £15 million. Finally, with asset returns being £10 million lower, the deficit at the end of the first half was down by 63 million to 47 million pounds. This, of course, is the balance sheet deficit calculated under IAS 19. As you know, in 2015, we agreed a funding programme with the plan's trustees. This was for payments equivalent to 35 million pounds per annum up to June 2017. It was agreed that the group would make an interim payment of £25 million over the period July 2017 to June 2018. Last month, we announced that we had reached a new agreement with our trustees to pay £30 million per annum for up to five years until June 2023. Also under the agreement, deficit contributions will be suspended if the scheme's funding position reaches 100% of the scheme's funding basis for two consecutive months. And it will be resumed if the funding position falls below 100%. Let me finish with some brief comments about trading in the first period of the second half of the year and costs for the rest of the year. Period seven saw UK sales rise by 5.3% for the first four weeks of the second half. Looking at the remainder of the year, our overall outlook remains unchanged. has already announced we expect capital expenditure of £60 million for 2018. We continue to expect, as we said in March, further operating costs of £20 million in 2018 from expenditure in areas across the business, including digital upgrades, moving from our older distribution centre to Roms, and additional depreciation. These cost increases are in addition to the impact of the ongoing growth of the business, new depots and inflation. And on that note, I'll hand you back to Andrew.

Thank you, Mark.

I've been an admirer of Howden's as a customer and a shareholder for many years. I saw the business grow when I ran the kitchen and bathroom business at B&Q about 15 years ago and I watched over the years with great interest. The business is a powerful combination of entrepreneurial culture, vertical integration, really close supplier partnerships and a customer-centric depot model. It's a quality business with greater opportunities ahead, and I'm really pleased to be here. In this part, I'm going to cover some observations and our business priorities. I've been here a short while, and I'll update further next time. Serving trade customers is demanding because those we supply need to profit from our product. and they're dealing with the most sensitive part of the home. The clock starts ticking the minute a kitchen is taken out because everything stops working. And so the pressure is on the trades to deliver the job. Installing a kitchen is complicated because there's so many parts. Changes in customer decisions can throw their jobs off track and add delays. And small part changes can include planning mistakes and can delay and stop the builder getting paid. And time is absolutely important for the builder. So being close to a supply of local stores is hugely advantageous for him. Hardens is judged by our ability to get the job back on track, completed on time, enabling the builder to get paid. And our teams understand this and are motivated to deliver. They own the local relationships and have the know-how of how to deal with unpredictable demand and unforeseen situations. Our staff know that if we don't get it right, we put it right immediately. Even if there's a customer error, we work hard to fix it. We create demand and offer services for their customer. Increasingly, we help the builder project manage the build, do site surveys, design, talk the end customer through the plans before handing over the job to the professional tradesman. Our incentives and bonus schemes encourage an entrepreneurial culture. Our managers treat the depot as it's theirs, trading in their local communities, building their own local reputations. Andy Witts and the team have nurtured this culture brilliantly at the same time as growing the business out at scale. Our teams understand that our customers are running businesses and that by helping our customers become more successful, Howden's itself becomes more successful. Since taking over in April, I've been getting to know Howden's, understanding the capabilities, understanding our activities and ensuring our plans are in place for the second half. I've also been meeting with many trade customers in a new initiative that we call Builders Forums. Over the last four months, we've been asking our builders how we're doing and understanding more their needs, their pressures, by sitting down with them in groups of 10 at a time. And I've heard firsthand their pressures, their opportunities, and their needs from us. And their feedback is positive. Of particular note is the relationship with the depot managers and many describe with pride how good that relationship is. The honesty and straightforward discussions have helped us understand opportunities. We have three business priorities built around our trade customer, all underpinned by our entrepreneurial culture. Trade convenience, what I mean is a depot close to where our customers need them, easy credit facilities, deep in-stock position. Product leadership, offering the right product styles, a trade quality designed with the builder's fit in mind, and value at the best local affordable trade price. This business really knows its purpose, is to help our trade customers achieve and profit from exceptional results for their customers. And I believe this model can be evolved further for more growth. So trade convenience. For the builder, we know time is money. So having a depot close by with the right stock ensures there's no wasted journeys. At the end of the first half, we had 668 depots and we're on track to roll out around 30 this year. Given the low cost to set up one, the early break-even point, I'm comfortable at this point with up to 800 and some potentially now in Northern Ireland. At the same time as investing in new depots, we're reviewing the investments in older ones. The next biggest driver for convenience is having the right stock at the right time for tradesmen. We're an in-stock business and we're good at getting stock to fulfil orders. There's an opportunity to improve the experience for both customers and depots by being clearer on our good, better, best architecture. and also by reviewing depot replenishment frequencies. Getting the right stock available first time leads to faster customer experience and reduced fulfillment costs between depots. Houdens is a consolidator and integrator of product to make life easy for the builder. Our world-class supply chain infrastructure has been built to support product launches at speed to market and to support peaks in our trading delivery, particularly period 11. The move from our old RONS distribution centre to our new facility, RONS 1, has now been completed, operating well and well underway for period 11. As we support our trade customers with new product availability and new product, the time is now right for us to develop our digital capability to make our offering even more convenient for the builder and their work with the end customer. Mobile technology is key for the builder who's always on the move. The phone is one of his most important tools. Digital technology is increasingly being used to do such things as, quote, invoice, find and secure stock. And it's clear to me that we can do more to support our trade customers in the way that they work with us. There's also opportunity for us to show our product offering more clearly to the end consumer, to their customers, to inspire, to generate leads, and to show the strength of the Howden's offering. We've been working hard to replatform our site. It's a significant step forward in our early digital journey, but it's an important one as we develop quality product content and good search. I'm very pleased that we've been able to appoint Andy Galt, who led the internet business for me at Screwfix, to lead our digital development here. But we've work to do, and it'll take time to get this right. The good news is the work started and the leadership is in place. So to summarise trade convenience, a depot rollout back on track with around about 30 a year, reviewing in the very early stages potential investments in older depots, more focus on in-stock position, supply chain developments on plan and delivering, work started on digital. My next point around the wheel is product leadership. Our builders and their customers want the latest product styles which are easy to install. As fashions are changing faster and faster, we're also increasing our rate of range change to keep up. We're constantly testing and learning, and we'll be even doing more of that. Our quality has to be trade quality. This means the trades need to have confidence that they can fit and forget the product. Our customers have long memories when things go wrong because revisits cost them time, cost them money, and cost them reputation. As the rate of change quickens, we need to ensure that we retain clear range architectures, ensuring that we remove older designs on a timely basis. This year, we'll be introducing 18 new ranges. In H1, we introduced 12 ranges, half of which are shaker styles across the price bands. We've introduced the new super matte greys and graphite frontals. And as I mentioned before, our oak grey cabinet. We will always be looking to optimise our stock range further by ensuring a clear product architecture, making it easier for our customers to choose, easier to stay in stock and, of course, easier to manufacture. We are developing our appliance and worktop categories too. In both cases, I believe there's room to trade customers up through the ranges. The business has done a fantastic job on the own brand, Lamona. Lamona is the biggest integrated appliance brand in the UK. So this year we will be rolling out an extended appliance range offering to further 400 depots following our 80-depot trial, and we're planning to have all depots with the extended range for the full year next year. And we're introducing more high-quality laminate work surfaces, taking advantage of new surface technologies. For example, this quartz-style worktop on the left shows and on the right, sorry, quartz on the right and concrete-style worktop on the left, both of which are performing. In our joinery and flooring category, we've introduced a range of pre-finished moulded and oak doors, saving trades valuable time on installation and finishing time. This benefit has been mentioned an awful lot in our trade forums. And we've launched an extended range of fire doors and fire-rated hardware packs, extending our successful vinyl flooring offer too when talking to builders in the forums one thing that they've said to me which is comes across loud and clear is you're a kitchen and joinery business that's why we come back to you that's but we would trust you for other things if it's at the right price and in stock of course i can put it on my account it saves me a journey Now, kitchens will always remain our number one priority in Howden's. But I believe there's more to do that we can do to support trades as they do the installation around the whole kitchen. We've always sold quite a volume of consumables and hardware. And I think the opportunity is now to extend the test and see if we can see if there's value in selling more of that type of product. We've been working hard to improve to how we are communicating our product range. The catalogue remains critical for the builder in his interface with the end customer. We've left one on your seats. And new this year is our trade book, the one with the index down the front also on your seats. This is quite a step change for us and it is a real step change in presentation and offer and it's useful in its easy to navigate look. So to summarise this section, whilst keeping up with the pace of new ranges, we're going to increase our discipline removing old. We're going to grow out our appliance offering and develop our worktop business further. And we're going to increasingly test kitchen product and joinery product. And we're now going to be extending our tests to include some more hardware. The final piece in our circle is trade value. And this business has been built on value. Haydn's sweet spot is high value quality product at trade prices. Confidential trade-only discounts remain critical to the builder and the builder's confidence in our proposition. Best local price allows our depot managers to side up alongside the competition and deal with on a case-by-case basis, not by using a blunt national pricing level. The scale of our vertical integration, long-term key supplier partnerships and our low-cost operating model underpin our ability to offer value. We continue to invest in our manufacturing and distribution, enabling us to deliver cost and economies of scale. And Rob Fenwick, COO of our supply division, will be hosting a site visit to Howden on the 12th of September. In addition to price, which also sits in value as our credit operation, which offers our trade customers the ability to compete on the job, to get paid before their bill is due to Houdens and helps them manage their cash flow, a critical part of our offer. Before I close, I just want to mention a few points on Europe. We continue to operate 24 depots under the Houdin brand in continental Europe, 20 in France, two in Belgium, one in the Netherlands, one in Germany. I've been to all operations and visited France three times now. I've met all the teams. I've spent one-to-one time with each of the managers to understand our capability, the market, and the opportunity in France. I'd say now that I will be reviewing the international operations during the course of this year, with, of course, the additional complication of Brexit outcome not being clear. In France, however, like-for-like sales up 5.5% in the first half and ongoing work to increase profitability. Trading in Belgium and the Netherlands progressing. Germany needing attention. So in summary, today, Howden's has leadership of the market, a deep understanding of kitchens, and has understood that the best way to get kitchens installed is by empowering trade only. It is an entrepreneurial culture and a cost-effective supply chain. It's been a positive first half, a half in which we increased revenue and profitability. We've shown that we can grow the business in what is a challenging consumer market whilst we continue to invest in the business. We're on track to open around 30 depots this year. We've got a good line-up of new product for the second half and the focus on the business is now everybody focusing on H2 and the critical period 11. We continue to invest in infrastructure, depots and product in order to generate more scale and deliver more value to customers and to shareholders. I believe this business has many opportunities and I'm really proud and pleased to be leading it. Thank you very much.

And that takes us to questions. You're all familiar with webcasts, and if you'll bear with us, that does mean that we need you to have a microphone in front of you before asking your question. Please give us your name and company, again for the purpose of the recording, and we'll get underway. So do we have mics that can come around, please?

Thank you. Howard Seymour from Newmys. A couple, if I may, please. Could I start, firstly, with the overall kitchen market? Because obviously what we're seeing in Howden's is various sort of flow-throughs of like-for-like sales and volume over the past two years feeding through. So just your thoughts, firstly, on the underlying kitchen market, both in the first half and looking out. And secondly, you alluded to competition. Are you suggesting there that there's a more competitive market that's emerging now, or it's a comment that's been made before, and therefore it's just a continuation of the same? That's the first question.

Given the breadth of the question, both Andrew and Mark, I want to have a go at that. Andrew, do you want to start?

The greatest way we get feedback from what the market feels and looks like is through our... We call them regional boards where we get 60 managers together at a time. And I would say the market is challenging. We're working hard to win business. But we're not scared of a fight. I have no view on whether it compares last year because I wasn't around. But I would say it's a challenging market. And we're doing okay. In terms of competition around the table, particularly in the trade sector, I don't hear any particular name that comes up that causes us problems. I think we're continuing to grow a bit of share.

We're taking it from a wide selection of operators across the business, some independents and some chains.

Yeah, I think it's important, Howard, to bear in mind the journey we went on last year. which was much more dramatic than a typical Howden year in terms of the balance between price and volume. And I think that matters because we are the market leader. There have been various estimates of how much of the market we've got, but it's clearly the largest part. The number two player is a fraction of our position in the market. And last year... We entered 2017 on a 10% price increase. We didn't reduce it actually at the end of November. By Q2, we'd set that aside because our volumes were going backwards. And as I mentioned, we gave the depots margin freedom. We cut prices in order to correct that slide in volume. Now, in a sense, that was famously successful. The volumes poured in, clearly achieving lower prices. So I think the sort of market we're in now... you've got to bear that context in mind. So the sort of behavioral pattern we went through is clearly going to affect the competition as we're trading this year. But yeah, I'd underline Andrew's point that when we talk about a competitive market, there's definitely no particular player. that we detect at all that's being particularly aggressive or accumulating market share. Everybody behaving as normal. We're clearly accumulating share and we're taking it from everybody, including the independents, as we've typically done.

Yeah, thank you. And secondly, you mentioned on the digital side, there's obviously, again, a big discussion, so I'm not expecting to go into all that. Andrew, just to be clear, you alluded to what looks to me like the front end in the context of the builder and the end client.

Yeah.

As you look at the ERP within the business, do you perceive that that is also something that you need to look at, i.e. how the business talks to each other? Is that also an area that requires a significant level of investment? I don't know what you mean.

I'm talking about SAP, effectively, aren't I?

Absolutely. So to me, everything you alluded to there was the capability to sell the product on, but the internal systems as you look at them on IT, does that similarly require reviewing and et cetera?

I would say this business has invested very well on the IT platforms of which all of our digital work will lay on top.

and actually everything that I've seen is very encouraging, and the program that's gone through is very encouraging. The systems are strong and good. Yeah. Thanks, Harry.

Do you have another one, Harry? No. Thank you. Keep the microphone moving backwards. We'll come over to this side in a moment.

Yes, it's Charlie Campbell at Liberum. I've got two, really. So first of all, in terms of depot openings, you've said you're happy with the overall picture of 800. But just as notable over the last few years, that Screwfix have been able to grow their branch network much faster than Howden. So are there any lessons that you can take from that into Howden to accelerate the progress of those branch openings? Thank you.

Thanks, Charlie.

Sorry, I've got another one. Sorry. And then just on the range, thanks very much for the trade book. Just wondered what is in there that you haven't sold before because we've never seen anything like this before, so we don't know what was there before. But just the sorts of things that are new in there that just give us an idea of what you're widening over and above the kitchen range.

I'll take the second part first. So the trade book, it is largely a re-representation of what's currently in the offer. I think some of the offer may have been a wee bit hidden, a wee bit difficult to shop. And it's quite interesting to see all the categories that the business does actually sell when you see it on the front of the book. So we've done it for that reason. We've done it because we wanted that book to appear on the dashboard of... every white van across the UK. And that will be what we'll be going about next year. In terms of extra range, I think to a lot of customers, it'll probably appear like there's some new range. It's not new range. Actually, what has gotten a new range is what I outlined in my speech. some worktops and some core categories. But I think it gives us a platform for when we do want to launch some new things in the future, we can add in modules, put good content in, and get that discipline in of explaining what the content is and what the features and benefits are very well. Your first question around Screwfix, when I was there, we opened a consistent drumbeat of 60 a year. And I think... In both cases, you never want to compromise a property. So you always want to pick the best trading property in the B8 estate with the greatest features. So I think that always is a limiting case in either business's example. The businesses are quite different, though, because... You know, ours is relationship driven. It's manager relationship driven with a key number of customers that takes time to build. And I would also point to this business is different because you've got to learn the culture and you've got to feel the business and understand how it works before you're in any kind of position to go off and run your own depot. That's quite a contrast to Screwfix, which is more transactional, more web-driven, more catalogue-driven, and actually it does not take long to turn up, work the systems and offer. We offer a completely different level of service because our product offering is narrower and deeper, if you like.

Keep it on the right-hand side of the screen. How about that?

Amigala from Citi. Just two questions for me. The first one is on price increases. You mentioned that you've increased prices in April. Could you give us some color as to were these increases more gradual and what sort of order book were you holding at the end of April? My second question is on your market share. What is your sense of the market share that you've gained over the last two years? Thank you.

Thanks. Andrew?

Yeah, I'll take the second part first and then Mark and I will probably jointly handle the first one. The second question, I mean, obviously new and sort of back into this industry, you want to understand what market share the business has. It's a pretty obvious question, isn't it? It is so poorly recorded. There's one organisation called KMDR who... JKMR. JKMR, who... report us as having a third of the market. You might want to add some colour to that, but that's in kitchens and cabinetry and doors, not covering appliances and doors. In terms of price increase, we put it through in April, and it's probably just worth...

Yeah, it's very early days, so to your point on the order book, certainly a couple of months after the price increase, we're honouring. that were quoted on the back of the previous price list. So we won't get a sense. It was a 5% price increase round numbers, and we won't get a sense how much of that we're retaining for a period yet. In terms of market shares, as Andrew said, it's a poorly researched market, nothing like ONS numbers. And people have had various runs at it, but there's all kinds of variances about are appliances in or out, is VAT in or out, is fitting in or out. So it's all a bit shaky. But the last one, which was a recent one, was February JKMR, which reckoned by volume we had 35.5% of the market, to be precise.

Simon Dennison-Smith, Metropolis Capital. Quick question for Mark. Just on the decision last year to give the depots more price flexibility, I'm intrigued to know whether that is quite a significant event in Howden's history to have made that change, or whether this is something that you kind of periodically do as a reaction to market conditions. It's a Yeah.

It's not part of the norm. Having said that, that's how the business started, with depots having full flexibility on their prices. There is a barrier to it, a healthy barrier, in the sense that the depot manager gets a share of his profits and depot staff... get a share of the margin. So there is a natural inclination to maximize profit. Having said that, the way we ran the business for round numbers, the 10 years running up to this one was to have barriers in terms of incentives. So depots had to achieve certain levels of gross margin and that served us very well. So if you look at the period from 2009 to 2013, middle of 2013, our volumes were actually declining, but we were growing top line, growing margin every year. From the middle of 2013, volumes picked up, but we continued that healthy pattern, top line up. more margin up. So this 2017 was, other than the origins of the business, was a unique experience, really, to abandon those margin barriers in the pursuit of volume.

Thank you. One more on the right-hand side of the room.

Thank you. Michael Mitchell from Davie. Firstly, just as a follow-up from the last question, I'm just interested in the spread or the spectrum of the flexibility that you saw across the depots when you gave the depots greater flexibility. And as part of that, what were the key learnings and what do you take from that going forward in terms of kind of consistent price increases at a group level?

Yeah, that's a very good question. It was fascinating at one level that, as you'd expect with a sort of sample size of about 650, you got clusters of behaviour. So some depots really embraced the new freedom and they managed to grow volume and command healthy margins. Other depots... at the other end of the spectrum, slightly discombobulated, I think, by the new freedom and, if we're being frank, pursued volume at margins that were not at the level we would have liked to have seen. And it was about improving the lower clusters up to the higher levels. I think the big learning is hence the price rise this April. And what we're doing with these hurdles is that that process and system that served us well is going to serve us well in the future. So I think it was a reaction that was necessary last year because our volumes were sliding quite significantly. But I think it's reinforced the fact that we give... depot's freedom on margin and pricing, but within healthy boundaries.

Thank you. And then secondly, if I could just ask in terms of the potential product extension going forward, just to clarify, are all options on the table or are you still thinking specifically within the kitchen?

I couldn't quite hear that. It's about product.

Sure. In terms of the product extension over the medium term, are you still focused on the kitchen or actually could this extend beyond the kitchen?

100% focused on the kitchen. Kitchen is core. The cabinet's core. The doors are core. But we do sell quite a lot of other things around the kitchen. We sell quite a lot of flooring, joinery. My point that I mentioned in my speech was whether there was opportunity to do more. We'll always trial. Our heartland is kitchen and joinery, and it will always remain kitchen and joinery.

Okay. Thank you. Thanks to your patience on the left-hand side of the room. Can we start at the back and work forward?

Thanks. It's Alex Muse here from JP Morgan. Three, please. Firstly, on your new ranges you've introduced so far this year, I wonder if they are weighted to any particular part of the price architecture, good, better, or best. Secondly, you alluded, Andrew, to reviewing the business in Europe over the course of the year, and obviously I don't want to ask you to second-guess what your conclusions will be, but I wonder what options you will be considering. And then finally, the extended appliance range going to 400 depots. I just wonder about the working capital implications of that, please.

Why don't we take the working capital first, Mark, and knock that one off and then pick up the other two. So, Mark. Do you want to do the working capital?

Yeah. I think in working capital terms, the extended appliance range is not too challenging. So we're working through trade place. So we take stock as we need it. So this is not a case of having all the brands together. with all the models in all the depots. There are features at the end of this year on working capital because of the pattern of the year and week 53 last year and how October trading ends. It ends in November and we can dig into that after the meeting or if anyone is interested. But in terms purely of appliances and the extended range, that's not a significant challenge.

I'll do the price architecture first.

The kitchen you see on the front of our catalogue is one of our faster selling doors and what we've done with it is we've created the linear look from it. So the linear look is normally at the top end of the market, and what we've done in True Howden style is taken a volume line to make it accessible widely, so I think that bolsters our mid-price well. We've two ranges in there called BALM that are more on the top end of the range, and the rest is really at the opening price point. Our hotland is at that opening early mid. That's our space. That's our sweet spot. And particularly now, you'll see us trading through our depots, quite a lot of opening price, landlord packs, real value kitchens, as people churn through universities and so on at the moment. So I'd say the answer to your questions is fair spread, but more towards the open mid. Regarding Europe, I think all open options are open. I would give credit to the team, though, for what they've done so far. It's been a long trial. And, you know, it's a subscale business that has done quite well. And they've landed the brand very well in the country. So it's fair that we take time to review it properly. And so that's what I'm going to do.

Quite helpful to know what the tariff ratio might be as well in due course. Thanks. Can we bring the microphone forward?

I'm Ainsley Laman from Canicle. Just two from me, please. I just wondered, Andrew, if you could comment on your view on the balance sheet and what you would consider to be a kind of optimal level of leverage for this type of business, and maybe in that context, share buybacks as well. And then secondly, just following on the kind of French business, Screwfix obviously rolled out the business across Europe. Is it fair to say that you've become a bit more cautious having visited France on these kind of rolling out the model across France? You just sounded a bit more cautious.

I sounded a bit more cautious.

Yeah, maybe I was wrong in that impression.

No, I think I'll take that second question first, if you don't mind. Going into new culture into new country is challenging. There's no doubt. And I think what you've got to do in any business's case my old business or this business. You've got a few things to do. You've got to understand the local culture. And you've got to have somebody in running it that really understands your business too. And that person needs to understand the local culture. So I think that's a key thing in terms of landing your business in your country. Haydn's needs to have a distinct competitive advantage in another country if it's going to work. And that's the question that we will work through to answer. I'm not cautious, though. I would be carefully considered, and I certainly won't be allocating capital if I don't see a positive return on it when we go into another country. But as I say, France has made progress. So review that. Regarding the share buybacks, it's a program that's been well supported. It's in place. We'll be reviewing it. My focus for now is really on making this business even better. I don't know if Mark wants to say anything on that, but...

Yeah, perhaps if I remind people of how we approach the balance sheet and leverage. So we have a formula that we go through, but before we engage the formula, we have to satisfy two things. Firstly, we want our ordinary dividend to be at 2.75% of earnings. The second hurdle is that we look across the year in question to see if there are any particular things that we need cash for. So in the case of 2018, we do that, and then we look at the closing cash for 2017. And we'd say, of that closing cash position, we need to retain... £100 million because of the vicious working capital swing we have around peak trading. Now, why is that justified? Well, we say... It's justified because we have a pension fund deficit in terms of off-balance sheet finance. And whilst the deficit at the moment you've seen is about £50 million, that's the classic tip of the iceberg. So you've got £1.3 billion of liabilities and £1.25 of assets. Second feature, we have depot leases. Come IFRS 16... We'll be taking half a billion of liabilities onto the balance sheet in respect of debtable leases, very round numbers. We'll also have half a billion of assets. Incidentally, I won't bore you with the accounting just at the moment. And we used to say we also have legacy liabilities, but they're very small. So it is therefore... justifiable to retain 100. We then take that year-end number, having deducted 100, and we say, take off the final dividend in respect of that year. Whatever's left, we distribute at the moment through share repurchase. So we don't think we're retaining any cash within the business beyond what we need.

Okay, thank you very much. Finally. Appreciate your patience.

I just have to change my tactics where I sit in the room. Just in terms of my questions, if you don't mind, I'm just going to delve... For the recording, do you mind just naming... Oh, sorry, Robert Eason of Goodbody. Excellent. If you don't mind, I'll just delve a bit deeper on the pricing, and I understand your comments that it's early days, et cetera, but two specific questions is, as you've gone on the journey from implementing or announcing a price increase in April to now, have you tactically changed anything in that implementation over that period, whether it's at some pricing point you've changed more than another or any tactical change? Because obviously this time, well, not quite this time last year, 18 months ago, you had to make a tactical change in your pricing. And what has been, and related to that, what has been the competitive reaction to your price increases? Because although you're saying they're not fully being implemented, I'm sure your competitors know what you're implementing at this stage. So what has been their reaction? How varied has that reaction been from the larger independents to the smaller independents? And so that's kind of a question around pricing. My second question is just around the operating costs. Absolutely, your guidance is unchanged in relation to that 20 million, and we all know about underlying cost inflation. How rigid is that 20 million if the second half or period 11 becomes a bit tougher than you're currently anticipating? So just give us a sense of the flexibility around those investment decisions. And if you don't mind, third question. We did make you wait. Obviously, currency volatility is pretty prevalent. Can you just remind us how currency does influence, particularly your COGS, given that you import a lot of product? Just a sensitivity on that.

Thank you. Okay. Thanks. Well, the currency point is relevant because it's now sitting at a slightly different level to what we had in our budgets. So Mark can address that one plus the op costs, I would have thought. Yeah. And then come back to Andrew for another go on competitive reaction to our pricing.

Yeah, on the operating costs, to begin with, good question. I think if things get tough in the second half, then all the op costs, in our view, are legitimate targets. So not just that 20 million of, if you like... extras or particulars that we're investing in like digital and we are constantly having cost review meetings so I think we wouldn't hesitate and we've got a good record in the past of taking out costs if we need to. Slight health warning would be as the year wears on the effect you can have on operating costs diminishes for the obvious reason of timing. But the second reason is, say, if you're taking out headcount, the costs of taking out the headcount, you don't get enough time to recover, if you like, that investment in cost reduction. So that sort of exercise is always best done on the 1st of January to give you time to get a benefit. But absolutely everything will be up for challenge, including the 20 million. On Forex... to nail it right down. A 10 cent movement on the euro costs us, if it's negative, costs us 1.3 million. 10 cents on US dollar, 0.3 of a million.

Other question around pricing. It's quite a straightforward one on the pricing approach. It's the same as last time. It's a very standard price increase across our product ranges, new implementation differences from last time. I think to answer your second question, you point to one of the great strengths of this model, which is it's very hard to see what we do on a pricing point of view because we operate... About 667 pricing files in local environments. So if I was competing as a competitor against Howden, you may see that we've done something on our list price. You'll certainly not be able to track it on an individual basis. So I go straight back to what are our depot managers saying? Is there anything wrong or right around what we've done in our price increase? They're in a good place. They're comfortable.

Thank you very much. We've probably got time just for two more. Can we ask them to be single questions if possible?

Just one question really. Just to look at and try to understand the gross margin relationship on the initiatives where you're effectively going outside the group, there's no vertical integration. If you if you grow more aggressively, things like worktops, appliances, et cetera, is that essentially just a pass-through trade at a much lower gross? And inherently, if that expansion is quicker than the core, is there going to be a natural decline in the gross margin going forward?

So if we have a mixed change, will it be dilutive to margin? Is that effectively your question? Exactly, yeah.

Yeah, in terms of our in-house manufacture, you can get a sense, just to remind everybody, if you look down our product categories, very round numbers, we make 100% of our cabinets. That's not a round number, that's an actual number. We make, again, by value, 90% of our skirting. That is a round number. Now, these are the interesting categories. We make 20% of our frontals by value. but by volume, it's over 30%. We make, again, by value, 40%. Let me just... Yeah, by worktops, we make by value 60%, by volume, 90%. So you can see if we move the balance towards in-house, what the margin effects are.

I mean, explicitly, in the areas you've identified to broaden the product range, maybe I'm wrong, but the impression I had were that these were more likely to be externally sourced products than internally manufactured. And therefore, I guess my question was around that. If that part of the business, top line, grows quicker than... the own manufactured part of the top line, would it be natural to expect to see any erosion of the gross margin over the next two to three years?

Yeah, it's difficult to generalise, but the rule of thumb would be we make a higher margin in internally manufactured product. Thank you.

Thank you. Last question, please.

Yeah, hi. Two questions. I'll flout the rule. One, it looks like commodity inflation in the first half was 4.5%. Assuming Rob didn't work, sort of massive magic in the mitigation. What does that number look like for the second half post-mitigation? And second question, slightly more high level. Around price, why really have you reversed the strategy and gone for volume? Because simultaneously with going for volume, you're landing big chunks of new distribution, investing in systems, ballooning your capital employed. And at the same time, you've put stress into your own system by putting much more aggressive volume versus price characteristics. Your EBIT margin is going to be back down to the 2013 level. Why is that the right strategy at this moment? Yeah.

You want to do the commodity price, Mark?

Yeah, I can do that. In terms of input prices, as you say, about 4% in the first half. I think... 3% is more typical. It's what we've experienced in recent years. Rob's famous record of achieving savings on various projects we've got plans for in the second half. So difficult to say exactly, but I think three might be a more typical number than four on the full year.

OK, thanks, Mark. Andrew, to finish up. We...

I think we're looking to make a bit more money, not reverse the strategy. We are continually focused on driving volumes, given the manufacturing capacity we've put down. And we've been driving volumes, which we believe is a flat market, is pretty good. So we've taken some price increase to offset some of the costs.