Howden Joinery Grp Ord

to Howden's results for the full year 2018. Thank you for taking the time to join us here in the room, or if you're listening on the webcast. In addition to Mark Robson and me, I'm pleased to welcome others from the team, including Andy Witts, our COO of Trade, and Rob Fenwick, our COO of Supply. I'll begin with an overview of 2018 and then some areas of the business that I'm particularly focused. Mark will then review the 2018 numbers in detail. I will then take you through our initiatives and then we have time for questions. I'm pleased with the results for the year and particularly how we traded in the second half. Underlying trading matched my expectations for when I took over 10 months ago in April. The significant increase in volumes in the first half of the year came at some cost to margin. And in the second half, following the April price increase and improved margin management at depot level, we found a more profitable balance between volume and price. Period 11 was a success. We incentivized the depot teams effectively on lead generation ahead of the peak. And our product offering was right for people's budgets. Our new distribution facility at Rons performed exceptionally well during its first period 11 with deliveries 100% on time in full, which underpinned high stock availability in these peak weeks. Given the high depot returns on investment and the right site opportunities, we were able to increase the number of depot openings to 33 with 19 in 2017 and 23 in 2016. Given the high depot returns on investment and the right site opportunities, we launched our new web platform ahead of period 11, raising visibility and awareness to the end consumer, thereby supporting our trade customer. And we achieved this with no traffic disruptions, which was no mean feat. The new format trade book was launched as an early initiative to make navigation around it easier and to show the extent of our full range more clearly. It's been well received by depots and trade customers and now has a run rate of over a million copies per annum. Three new issues each year creates a more effective business rhythm as new products are now launched in depots in synchronization with this book. The latest copy is on your seat. The aim of Haydn's is clear. We're here to help the trade create exceptional results for their customers and to profit from doing so. When our customers succeed, we succeed. A key feature of Haydn's success is that we're trade only. Building trusted trade relationships is central to everything we do. Our depot manager's attitude and entrepreneurship set us apart. They bring a determination to succeed, have a can-do attitude and are commercial. And you have to be all these things when dealing with entrepreneurial customers. We select and incentivize our managers and their teams to be so. We believe the builder is best placed to coordinate the kitchen project, backed by Houghton's support and resources throughout the entire process from design to after-sales support. This is more so the case as the scope of the kitchen project often extends to structural work in the home. We stand for key convenience and service for trade. The right kitchen designs at trade product quality and confidential trade prices. With around 700 stock depots, we provide help locally with the choosing, measuring, and planning of the kitchen, the coordination and delivery of product, and we provide trade accounts to builders. We view home visits as vital and do not charge for them. We ensure that through local stock that missing items are not an obstacle to the job being finished and the builder being paid. Our model is a powerful combination of locally empowered depot management teams served by a dedicated supply chain, which is both cost-effective and critical to our in-stock offer. The manufacture of quality cabinets in Runcorn and Howden is a cornerstone of our competitive advantage, both in terms of cost and security of supply. The trade has a preference for pre-constructed cabinets because they're quick to fit, they're square, and they're easy to adjust. They're made in our UK factories, and we have product leadership in the stocked ranges. We continue to hold our trade customer feedback sessions regularly, which enable us to identify any areas we need to improve our offer. These are proving popular with more customers turning up than invited on several occasions. And this just goes to show how our builders appreciate that we're listening to them. They view the relationship as a business partnership, so it's in their interest to invest their time to help us make it even easier for us to serve them in their serving of their customers. Their insights focus on the need for Hidens to ensure high local stock availability. It's a key part of our service. Provide an online accessibility, speed up our picking times, and improve our display environment for their customers. I meet with managers in regions weekly. Typically, Andy Witts and I meet in regions with groups of about 70 managers at a time. Andy and I have strengthened these meetings and made them more interactive and ensured that input on new product is given by managers. Through these sessions, operational focus of the business is maintained and sales and margin targets are confirmed and tracked. These regional meetings are critical to the heartbeat, energy and momentum of Howdens. And we always have discussions of our curry meal together after. We have a number of initiatives with the potential to improve volumes and profits across the business, and I will focus on three and then talk about our international operations. The first is to evolve our depot model to use space more efficiently. The second, improve range management to help customers buying decisions and to access supply chain benefits. The third, to use digital to raise brand awareness and support the business model. I've reviewed our international operations and we've reached some clear decisions. Now, I'm going to go through each of these four after Mark talks us through the numbers.

Thank you, Andrew, and good morning, everybody. Reviewing the financials for the year, let me start by looking at some of the headline numbers from the income statement. Moving from left to right on the top row to begin with, As you can see, Howden Joinery's UK revenue rose by £105 million to £1,477 million, an increase of around 8% on 2017. Group sales also increased by around 8%. Gross profit rose by £44 million to £932 million, the percentage gross margin of 61.7% being down from 2017 as we gave the depots more flexibility on margin from spring 2017 and did not increase prices until April 2018. Moving on, operating costs before GMP equalisation, more of which in a moment rose by £34 million. Operating profits were impacted by continued investment across the business, including new depots, investments in digital, the move to our new distribution centre in Rawns, additional depreciation and inflation. In respect of GMP equalisation, following a High Court ruling in October 2018, employers with defined benefit pension schemes have been required to adopt a method to equalise benefits for men and women in relation to guaranteed minimum pension provisions. This is for pre-1997 service. After this one-off charge of £4 million, operating profits were £240 million. Now moving down to the second row. With net interest and other finance charges of £2 million, mainly due to an increase in the charge for pensions, there was a profit before tax of £238.5 million, £6.3 million higher than in 2017. Excluding the 3.8 million GMP equalisation charge, profit before tax would have been £242.3 million, £10.1 million higher than in 2017. Looking at cash flow in the year, this included a £28 million contribution to the pension deficit, capital expenditure of £44 million and share repurchase expenditure of £62 million. Overall, we had a net cash outflow of £10 million, meaning that we ended the year with £231 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 £1,477 million increased by 7.7% on a total basis and was up by 6.3% on a same-depot basis. In continental Europe, turnover of 34 million was up by 2.2 million pounds. Sales in our French depots rose by 4.4% in euros. Let me now talk you through the movement in PBT from 232.2 million pounds in 2017. Gross profit rose by £44 million. This is the net effect of several features as shown on the chart on the right hand side. If we bridge from 2017's gross profit of £888 million, there was a net benefit of £107 million, which had two factors. Firstly, it reflects a £10 million impact from lower prices. This resulted from giving the depots more flexibility on margin, as well as not increasing prices until April 2018. Secondly, increased volumes and mix changes increased revenue by £117 million as we saw some positive volume 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 £55 million. We saw a modest impact from exchange rate movements in the year. Also affecting cost of goods sold, we saw higher input costs, resulting in a net decrease to gross profit of £10 million. Together, this gave a net rise in gross profit of £44 million to £932 million. Gross profit margin was 61.7%. If I now turn to the other factors that contributed to the movement in PBT, reverting back to the chart on the left... Operating costs, which I will expand on in a few moments, rose by £34 million, £38 million if we include the impact of GMP equalisation. Net interest and other finance charges were broadly the same. So the net result was that profit before tax rose by £6 million to £238.5 million. Let me now explain in more detail the main movements in operating costs from 2017, which you will remember included an additional £8 million of costs in respect of week 53. Costs associated with the 33 depots that we opened in 2018 and the incremental costs of the 19 depots that we opened in 2017 totaled £9 million. Cost increases for older depots were £20 million, mainly reflecting increases in headcount, delivery costs and pay inflation. There were cost increases incurred to support growth, which totaled £9 million. This included the costs of the first phase of our new distribution centre in Rawns and digital upgrades. Other operating costs increased by £4 million. This meant that operating costs before GMP equalisation rose to £688 million. As we've seen, a further £4 million one-off charge was incurred in respect of GMP equalisation, giving an overall increase of £38 million. Let's briefly turn to the remainder of the income statement. Profit before tax was 238.5 million pounds, including the one-off four million pounds of GMP equalization costs. This led to a tax charge of 48.1 million pounds, the effective tax rate being 20.2%. This gave profit after tax of 190.4 million pounds. This result gives earnings per share from continuing operations of 31.3 pence compared with 29.9 pence in 2017. Turning to dividends, the board has recommended that we will pay a final dividend of 7.9 pence per share. This will be paid in June 2019 at a cost of 47.6 million pounds. Let me now turn to cash flow. From a position of having net cash of £241 million at the end of 2017, we ended 2018 with net cash of £231 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 £50 million, more of which in a minute. Capital expenditure totalled £44 million and included new depots and our investments in digital. Tax payments were £45 million. As I've already mentioned, we spent £62 million repurchasing shares. there was a £16 million contribution to the pension scheme over and above the charge through the P&L account. The net result of these and other movements was a cash outflow of £10 million, meaning that we ended 2018 with net cash of £231 million. As I've already said, net working capital increased by £50 million. Within this, stock increased by £18 million, mainly due to new kitchen ranges and depot openings. Debtors grew by £48 million, reflecting the impact of the final three days of period 11 trading, which in 2018 fell into November. this debt did not become due until after the year end. Partly offsetting these movements, creditors rose by £16 million. Before moving on from cash, as you will know, it is our policy that we target a prudent capital structure. This means that we should be able to operate throughout our annual working capital cycle without incurring bank debt. In February 2017, we announced our intention to return £80 million to shareholders via a two-year share repurchase programme. At the beginning of last year, we had £32 million of this programme remaining. In March 2018, we announced a further £60 million two-year programme. As I've already said, in 2018 we spent £62 million repurchasing shares, thereby completing the February 2017 programme, and we have £30 million of the March 2018 programme remaining. This means that in 2018 we have returned £131 million to shareholders, including dividends. This compares to £116 million returned in 2017. Looking at our net cash at the end of 2018 of £231 million, we have new excess cash of around £50 million. The Board has decided that it will return £50 million via a further share repurchase over the next two years. 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 2018. Firstly, from the P&L, there was the current service charge, administrative and interest costs of £24 million. Secondly, GMP equalisation costs increased the deficit by £4 million. An increase in the discount rate reduced liabilities by £105 million. The group made a cash contribution of £42 million. Finally, with asset returns being £46 million lower, the overall deficit at the end of 2018 was down by £73 million to £36 million. 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 per annum to June 2017. It was agreed that the group would make an interim payment of £25 million for the period July 2017 to June 2018. In June 2018, 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 resumed if the funding position falls below 100%. Let me finish with some brief comments about trading in the first two periods of 2019 and the outlook for the rest of the year. The first two periods of the year saw UK sales rise by 4%, with one less trading day in 2019. Adjusting for this, sales were up by 5.1%. On the same depot basis, sales were up by 2.4% in the first two periods, adjusting for the one fewer trading day, sales were up by 3.5%. Clearly, there are currently various market uncertainties and a number of factors that need to be considered in forecasting this year's margin and overall result, including the impact of foreign exchange rates. There will be further operating costs of around £15 million in 2019 in respect of the closure of our Dutch and German businesses, digital upgrades and additional depreciation. These cost increases are in addition to the impact of the ongoing growth of the business, inflation and new depots. Capital expenditure is expected to be around £60 million for 2019, including digital upgrades, new depots and the next phase of RONs. We have also announced that the group has reached agreement to extend its existing bank facility until December 2023. On the subject of Brexit, we are mindful of the potential impact on our business As a consequence, we are adjusting our stocking policy for at-risk items, resulting in an additional £15 million of inventory. We're flexing our inbound supply routes and we're also pursuing appropriate logistics accreditations, including authorised economic operator status. On that note, I'll hand you back to Andrew.

Thank you, Mark. A constant theme from both customers and depot managers is that builders are busy. They say they can currently see around two or three jobs ahead of them. And they appreciate the Howden service model stock designed to delivery and how it supports their business. These services mean reduced time for the builder selling the job, more time for them to do the work and to make money. Our strategy is to grow the business by developing Howden's core strengths, building customer scale and increasing frequency. So I'm going to take you now through the four initiatives. And the first is depot evolution. Houdens has reported year-on-year sales increases for a number of years using a depot format and layout, but has broadly remained unchanged since the business was founded in 1995. Following space constraint issues in one of our London depots we relocated last year, we began thinking about how we warehouse product in the most efficient way to maximize space. We found a way to re-rack product vertically and trialed it in that depot, and it led to significantly improved densities. We then went and re-racked a further 18 depots to validate the results. Each time, we found improved warehouse space utilization by around 25%, well above our expectations. We also noted reduced picking times. So given this new space opportunity, we broadened our thinking to consider how to best create a depot environment to do business with our customers. So we built two model depots in our old distribution space in Northampton. One on the right is our average 10,000 square foot format and the other significantly smaller at around about 6,000 square feet. And taking account of the builder and depot manager feedback, and of course, 23 years of Haydn's experience in trading, the priorities were to increase the space available to kitchen displays so that trade customers can confidently offer their customers the opportunity to visit, to see the range and to see the quality. We're not building big showrooms, but an effective environment. In this model depot here, you can see that we're showing six kitchen families. The second thing is to create an open office area where the manager and the business development teams are out in front and can communicate with customers more easily. We've located the coffee machine to help draw the conversations. We've introduced a picking area behind the trade counter where a broader kitchen-related hardware range has just started being tested in around 20 depots. And we're looking to see if we can bring in new trade customers and increase frequency of our existing customer base. We believe that more conversations lead to closer working relationships with customers and give us a better understanding of what work they're doing. But we also wanted to improve both the visibility and the standard of our design facilities. A window makes a lighter and more connected environment for the staff, and it reminds our customers that we offer a design service. In the warehouse, we've adopted the new racking methods, and it makes it considerably easier for the teams to get around the warehouse and reduce picking times. And these format improvements have been made with no material change to the fit-out costs of the depot, which still remain at £350,000. We are confident that the new format is an improvement on the current at the same cost. So it was adopted for 18 of the later depots that we opened at the end of last year. So we're now testing to understand the rollback opportunity into the main estate. We've recently completed the conversion of three of our older depots. Park Royal in North London was a 1995 depot. Swansea and Guildford, 1996 depots, both just completed conversion and are starting to trade. They didn't stop trading during the revamp. Six more existing depots will be converted by Andy and the team in August so we can continue to learn. And then we'll continue to trade these nine depots throughout period 11 and the rest of the year before drawing any conclusions to the sort of returns we can expect. They look great. And Andy and I are very pleased with the early feedback that we're getting from both the depot teams and the customers. The improvements in densities achieved from the re-racking vertically in this way also enables us to put our full offering into a smaller space of around 6,000 square feet. Our model shows that this small format increases the potential for both infill depots in rural locations and more in big cities. Our recent site search experience suggests that there are more smaller units available than larger ones in areas where we would want to open up a depot. Consequently, we now believe that there is an opportunity for around 850 depots in the UK compared with our previous view of 800. Moving on to range management. Our design facility at our Howden factory was created so we could keep innovating, testing product and understanding trends. And we see the trend for industrial look continuing and in fact growing in sophistication. We've developed a linear look, a minimal modern style with clean lines, and it's best illustrated by our Balem ranges, which combines a handless frontal with a choice of metal trims. Gray and navy colors remain popular, and we've introduced charcoal. These synthetic technologies continue to improve, offering affordable alternatives to real wood finishes. New emerging colors are blue, green, and warm neutral tones. So we are currently rolling out to depots sage green, denim blue, and pebble shaker ranges. Our own appliance brand, Lamona, is the largest integrated appliance brand by volume in the UK. 20 new products will be launched this year, offering new technologies and innovations in steam cooking and in induction hob cooking. And the hob picture that you see here has an integrated extractor. We've developed our thinking about how to best offer third-party branded appliances to customers and to have control over the service levels and provide a wider choice, we are developing a centrally stocked offer which the depots can draw upon. Kitchens are becoming more complex and consumers are expecting more choice. New kitchen ranges each year represent a significant portion of sales as product life cycles shorten. At the end of 2018, we had over 70 kitchen ranges on offer, each comprising around 100 SKUs within. Five years ago, we had around 40. Local in-stock availability has always been a key point of competitive difference, and our customers see reliable stock levels as vitally important to the running of their businesses. Managing the number of kitchen ranges efficiently is crucial for best availability and profitability. We've made some progress in this area. Last year we sold an increased amount of new product with the introduction of fewer kitchen ranges which performed better. 18 new kitchen ranges in 2018 compared to 27 in the prior year 2017. So going forward, we will be reviewing the number of stocking points in each depot and in primary warehouse locations. By rebalancing our stock offer, we believe we can continue to offer the product options customers expect and make it simpler for depots to deliver the expected service levels demanded. And we'll also ensure timely discontinuation of underperforming ranges and the management of clearance from the business. My third point is digital. We see digital as a means to reinforce the HIDENS model and the strong local relationships that exist between depots and their builders. So we're building a capability in the coming years with three objectives. to improve communications between Houdens tradespeople and their customers. Secondly, to increase builder and consumer awareness of Houdens to help our customers sell the Houdens product and to streamline and improve operating processes in the business, freeing up time for depots and depot staff and customers to use more productively. During 2018, we launched our new web platform. It's a step change for Howden's. It's scalable. It's data driven. A key feature is that it's mobile friendly. Our customers are always on the move. The migration was completed with no adverse effects. Weekly traffic to the site, of which over half is now from smartphones, is growing on average by an annualized 17%. Online brochure requests have increased by 35%. The contacting of depots through the website has improved as we've simplified the process, which has led to a higher quality of leads in the depots. Whilst recognition of the Howden's brand is high within the trade, it's lower amongst consumers. And Howdens.com has not been well structured in the past for online kitchen searches. Our search engine optimization enhancements this year are starting to move Howdens.com into more prominent positions and thereby raising brand awareness within consumers. And it's not just about better visibility, it's also about better search. Our customers will be able to refine their style and product selections more easily, enabling a more detailed discussion of their needs with the builders and our designers. We've also significantly increased our social media activity. Many trades rely heavily on their mobile devices to manage their businesses. And it's arguably their most used tool every day, increasingly used to manage transactions, to manage invoices and to find stock. So we think mobile first. Our digital program aims to put the tradesperson's local depot in their pocket. Later this year, we will test a secure customer area of the website where the trade can manage their details, view account information, and pay bills at any time. Developments will also allow faster and easier access to information, supporting in-depot conversations, allowing us to streamline our operating processes so that we can respond more quickly to customers, freeing up time for depot staff and customers to use more productively, faster information, quicker transactions. And finally, turning to our international operations, We commenced trading in France in 2005 and subsequently opened further trial depots in France, Belgium, the Netherlands, and Germany. And at the end of 2018, we had 24 trial depots across four countries. Having reviewed our international operations, I believe there's potential for a viable business in France. The French market is different to the UK's today. It is a higher proportion of freestanding kitchens than the UK, and therefore the integrated kitchen market is slightly smaller than that of the UK. However, it is 1.6 billion in France versus 2.1 billion in the UK. But the proportion of kitchens sold via retail, DIY, and specialist shops is much higher. It's 91% in France and around 50% in the UK. When Howden started, however, the UK had a similar procurement of kitchens to that of France today. And given what I see, how our depots are performing in their local areas, we're confident that the French customer, the French trade customer and the consumer can see the price, the service and the cost benefits of buying a kitchen through the trade. Sales in our mature French depots are on average similar to those of their comparable UK counterparts at 2.1 million euros a year. These depots have an average gross margin of around 58%, and all make a positive contribution at depot level, albeit at a lower rate than the UK. Our trade customers in those depots appreciate the quality of the product, the price, its immediate availability, and the knowledge and service that our staff give them. Our historical approach has been to open one depot in a large city. And we've learned that clustering depots perform better together. This is because word of mouth between our customers and the ability to establish a quality, trusted brand locally is easier. Clustering also helps build the Howden's know-how and culture within our business teams. So we plan to develop France by clustering depots in cities. In particular, this targeted approach will test our ability to reach local scale and establish accounts more quickly, and our ability to develop Howden-trained teams locally and efficiently. Although timing is subject to the outcome of Brexit negotiations, we plan to open around four city depots in the target areas this year. After a recent successful test, the operations will now be rebranded from Houdin to Howdens to gain advantage from the UK brand equity, the UK online search and reputation, and the business efficiency benefits from one brand. and this branding will be completed by July of this year. In order to focus on France, we've decided to close our single depot operations in Germany and the Netherlands, and the depots ceased trading last month. The Belgian depots remain in place, making a positive contribution and are run from within the French field structure. I've outlined three longer term opportunities and are thinking on our French operations. So turning to this year, we've implemented a price increase in January and we aim to continue developing margin whilst working with suppliers and keeping product costs down. In 2019, we plan to open around 40 UK depots, including five in Northern Ireland. The latter group will all be opened on the same day, so we want the competition to be fully aware that we've arrived. We remain cautious on market conditions, given the economic uncertainties and particularly the impact that Brexit may have. We have increased stock levels in certain high volume products as part of our Brexit contingency planning, which includes options for supply via alternative ports. Comparative same day sales for the first two periods are up 5.1%. Our lead bank and our surveys are in line with where we would want them to be. I'm confident in our business model through any changing economic conditions. And I'm really pleased with the response to the initiatives that I've outlined by depot managers, by field teams and everyone else in the business. Finally, before I open up to questions, I'd like to mention our first Howdens Expo. To showcase our 2019 ranges and our plans to all our 9,000 staff, we've built the Howdens Expo in part of our old distribution center in Northampton. And we've done this to give our staff a full view of the product ranges we sell and also give our staff the opportunity to meet some of our suppliers. but also to show our staff the new formats, showing the relative sizes and how the new formats work in reality. So we'd like to invite you to the Expo on the 4th of April, if you could make it. I'd like to thank you very much for listening to me. And we'll now open up to questions for Mark and I. If you just wait for the microphone as we do this, if you could please state clearly your name and your organization before asking the question. Thank you. Great. Who's first? Hi.

It's Neeraj from UBS.

Hi, Neeraj.

Hey. I had three questions, actually, all on the new hardware range that you've been testing in some of the stores. The first one was, can you give us some color on how that range compares to what you would have in a traditional Howden depot? The second one is, so you've done about 20 stores so far. What's the early read on that in terms of customer reception and take-up? And the final one was, what is the cost of retrofitting a depot to host that extended range of hardware?

Thanks for your question. Houdens has always sold hardware. We've always had a good business in hardware. Over half our baskets that we sell have got a hardware item in them. So I like it as a category because it drives repeat business. And, yes, we've done a test, and that's all this is in the 20 depots is a test. And you'll see when you come to the new formats that you'll see we've created a space behind the depot counter so it's easy for the depot staff to go and pick it and bring it back, and it doesn't interfere with the rest of our operations. We cast our net wide on the number of SKUs, and we've done that purposefully. We do not expect all of the 3,000 SKUs we put in to be successful. Typically, we've got about 800 SKUs in our standard range, so we've spread the net wide, not expecting it all to work. We're learning. We've done it in 20 depots. The retrofit that I've shown up there for the three depots is around about, given it's our first three that we've done, and they are 1995-96 depots, so they've cost us the full whack money-wise. So they're £250,000 apiece where we've gone back and retrofitted. The answer to your question about just retrofitting hardware, we have no plans to do that just yet. I think what we'll try and understand is what sells from that range and then try and roll it back into the range. It may require some extra space. It may not. We may do something tactically. We're just not there at that point in our thinking.

Thank you. Good morning. Robert Eason from GoodBuddy. Two questions. First, just on the digital strategy, and I think it was your last slide on it, and you want to improve your connection with the consumer. How do you view the risks of that in terms of kind of just opening up Houdens more and more to the consumer and their expectations and what they're going to find, you know, pricing visibility and all that comes with that because that's the expectation on the consumer side. So just kind of your view on that and what that means for the consumer.

Yeah.

Secondly, just more kind of financial orientated, if you just go back to that operating cost bridge, can you just help us with what that operating cost bridge could look like in 2019? I know you've given us the 15 million associated with some of the investments, but just kind of old depot underlying growth in your cost base. If currency stayed where it is now, what sort of headwind, tailwind that is in terms of your gross profit bridge as well?

Great. So I'll do the first, and Mark, if you do the second, thanks. Yeah, I think we've been extremely clear in the business and in our digital development plans that anything we do in digital is only in support of how we currently trade. Right. So it's in support of our model. When a consumer is going to buy a kitchen nowadays, their first port of call is online generally. They may go around and collect brochures from depots, but they go online. They'll go on Pinterest. They'll go on social media sites. And I think we, well, I know we under-participate on natural search. We don't spend a lot on paid search with Google, but on natural search we are underweighted. So the work that Andy Galt and the team have been doing is to upweight our capability around natural search research. and the facets that we're able to offer. So end consumers will be able to go online and find what they want much easier. They won't see pricing. That would break the model. So we won't do that. It's about generating leads. And getting customers to come and perhaps visit a depot or make contact with us in some way or put an inquiry in that goes into the depot. The second piece was about making it easier for the builders to work closely with us. And I don't see that as any different from what we're doing now or where we go. So we're not breaking the model in any way. you know, we don't have click and collect, but we do have very trusted customer relationships where our customers phone up depots. You know, we're sort of almost, in an archaic way, very advanced on some of that. So, yeah, I see a space where our customers can go in and see, you know, how they're getting on with us in terms of accounts, accounts billing, settling up, and that sort of stuff. And then we'll build up the path as we go along and update you as we go. Marcus?

Yeah, bridging operating costs 2018 to 2019, I think the most helpful way to do it is probably to point out the things, the key movers. One will be the £15 million you referred to. We're increasing the number of depot openings, as Andrew's described. That will cost about £20 million. We've got a couple of cost reductions coming through, cost reductions in inverted commas. One will be in terms of a bridge, the GMP equalization won't feature in 2019. Neither will the ongoing costs of Holland and Germany, which are a similar scale by coincidence to that GMP equalization. Then you've got inflation. of about 3% to 4%. So it's more like 3% for the payroll and more like 4% for the rent roll and other things in between the two. So those are really all the bricks you need to get to, at the moment, what we expect Opcos 2019 to close at. In terms of forex, At today's rates, compared to 2018, we're more or less neutral. Maybe, as we all know, the last couple of days, sterling's been particularly strong, so we might even get a benefit of a million or so, but more or less flat. In terms of doing the calculation, a one-cent... movement in the euro moves our gross profit by 1.7 million sterling, and a one cent movement in the US dollar moves it by 400,000 pounds. Howard. Thank you.

Howard Seymour from Numis. Slightly taking up on Robert's question on the costs, but in a different way. Firstly, you allude to the 40, circa 40 of new depots. Andrew, you alluded to the sort of smaller formats. Is the incremental number of new depots, we assume, are the smaller formats or traditional? And secondly, sort of the rollout, the re-racking, et cetera, which is a pilot, How do we look on that, both in terms of the costs of that and the numbers going forward? Because obviously there's that fit-out cost dynamic in there as well.

Yeah. I think we haven't fixed a view yet on the 40 in terms of sizes between the two. I think what Andy and the team are really pleased about is that we've got two options, and we can go into B8 industrial estates and, you know, have our choice, being there being more important than not being there, if that makes sense. I suspect there will be more of a weighting towards the smaller size. The fed-out cost is similar between the two. The smaller format, when you see it on the 4th of April, has got a sort of more detailed mezzanine in it, which takes up some cost. And there's sort of similar tech put in between both size depots. We'd say both. I don't think we're able to give a bit of colour on the proportion between the two at this point. Regarding the rollback, yeah, we said it's about £250,000 to do the full refit, as you've seen it in the pictures up there. To re-rack is a lot less money. But it is disruptive for the depot, so we continue to learn how to do that. And I think, Harrod, yeah, we've done these three. We're pleased with what customers are saying as initial feedback. They're saying it's very much Howden's. It's up to date. The teams absolutely love it. But it's such early days, and obviously it's all proved in the numbers and whether we can get a return on the capital that we're spending. But we look optimistically at how that goes about. In terms of doing it, this business, because of period 11, you've only got a certain window to get in and do stuff. So we wouldn't do any more this year, even if we wanted to. We just wouldn't. We'd back off around July time. The business is entirely focused on delivering period 11. And then we pick up tools again post period 11 through the Christmas period and in January should it look different.

Thanks. Morning. Ainsley Lamen from Canicle. Just two, please. First of all, I wondered if you could give any kind of numbers in terms of the depot targets you'd have in France on a three- or five-year kind of medium-term view. And then also just on the kind of light flights, obviously held up nicely on 3% for the first few weeks of this year. I just wonder if you could give any more colour on kind of what the depot managers are saying about consumer confidence, what their customers' expectations are for the four years.

Yes, I'll do the second one first. Brilliant thing about this business is getting out in front of depot managers, which you do every week or twice a week. So you're in front of 70 and it's not dissimilar to a room like this where you hear the live feedback and it's not generic feedback. It's local market feedback about how depot managers are feeling. So it is real stuff. And I think they feel good. You know, I think they feel they're not missing anything. They feel the builders are busy, you know, despite all the economic uncertainty. And I think they're confident in the proposition, you know, even more so, confident in the range and our ability to price. You know, and that would be, you know, evidenced in the lead bank. In terms of your question on France, we've started off by saying that we will tackle Paris. And we're not putting a three- to five-year view on it. I think we'll open that out more as we see. The constraint about opening in France, if you like, is about building capability in the teams. to Haydn standards. And what I don't want to do is build a business in France that is not absolutely Haydn's culture through and through. And to be fair to the team that have developed it there, when I go out and spend time with depot managers in France, I feel the Huygens culture. Really, quite evident. I come back on a Friday night from it, and I feel quite excited by having been there with them. We know we can get properties. We know the prices. We know the trading patterns. We've got to make sure that we can build the culture and the business in the right way, and that's why I'm sort of holding back on the question with you, and that's really what I want to test by building it out in a viral way in France, if you like.

Thanks. It's Alex Meese here from J.P. Morgan. Two questions, please. Just firstly, the like-for-like performance so far this year, 3.5%, I think, underlying. I just wonder, given the price increase in January, whether you could break out how much of that is price and how much volume. And secondly, I wonder if you can just comment, give some color on the competitive environment at the moment. How are you seeing your competitors' price against you?

I think if you take the normal sort of rule of thumb of breaking down our sales, you take that 3.5% of like for like and very round numbers, you'd knock off about another 2% to get to mature like for like. So you're left with a small number, you know, 1, 1.5%. Now, we are keeping quiet for the time being about what proportion of the list price rise we've retained because it's too early to say. But I think what you can say is if there is volume increase at the moment, it's inevitably small because we've only got one and a half to play with and some of that could well be price. Jeff over there in the corner.

Sorry, was there a limited environment?

Yeah, sorry, you're right. I didn't answer the second part of the question, which is the trading environment. Yeah, I honestly don't think we're seeing anything different than in July. There's very few names popping up in the room when we talk to depot managers. I think it's pretty consistent, to be fair.

Jeff? Yeah, two questions, please. Firstly, a grungy one, going back to your gross profit flow chart. Mix and volume looks to have been quite a different gross margin profile to the 62% or so you run at. What's going on there? And second, one for Andrew. You've been in the business a year. How comfortable are you with the P&L structure of the business? 60-something gross, 16 EBIT, super high return on capital. Are you comfortable that you're well enough invested? Is there some change in economic model that you would engineer if you could?

Yeah, Jeff, you're right. If you look at those two bricks together and do the maths, you're coming in at a lower margin than you'd expect. And that is the effect of discontinued product. So some of the product we moved through in 2018 was ranges that were exiting. This will be more of a feature as we go forward addressing the issue that Andrew described, that we're trying to reduce our range. for a number of reasons, again, that Andrew described. So it will be more of a feature, moving discontinued product, but we think it will be within the normal band of our margin movement. So it will be, you know, about half a percent effect sort of thing. So it's not going to be overly dramatic.

That answers your second question, Jeff. Yeah, we've been around a year now, And I am comfortable with the P&L structure the way it is. I think if I was sitting in a room in front of a group of depot managers and I didn't think they could take on their competitors in their local market setting, I'd be concerned. But I don't sense that they've got room to take business as they see profitable business. And I think there's enough room in all of that for us to develop other product categories as well. But this business is absolutely about moving kitchen volume and kitchens. I think I'd be intrigued to see how we get on with the depot revamps and how far we want to take that. Yes, and more to report on that later.

It's Charlie Campbell at Liberum. I'm afraid I've got three, if I may. The first question is in terms of the range. Why not electric drills, for example? The second question, you talked about in 2018 particularly about the gross margin slipping as branch managers were given more freedom to price. Do you think we've seen the end of that effect? Or do you think we should be thinking about further effects to come as people make further decisions to narrow that growth? Or has that already happened? And on the capital return, one might argue that it's a bit cautious given the strength of the balance sheet. And is that caution a function of the stocking that you see that you need around Brexit, or is it that you can see the scope for CapEx increasing as you reconfigure branches and so on going forward?

OK. To go to the range things, I don't think Haydn should compete in product categories where it doesn't have a competitive advantage. I don't think we would have a competitive advantage selling electric drills. I think that market is served very well by others. But you've brought me towards that category in the answer to my question. I would say I would see a business in power tool accessories. Because it's consumable. Builders need them from time to time. And if they're doing the job, it's a completer. And why wouldn't I take it if they're in, finding out about their kitchen, and they just want an update? We're trade only. And a number of the other formats, there's a mixture between trade and retail customers going into the other formats. We're trade, dedicated to trade. So why wouldn't I take that? So I think the short answer to your question is where we have competitive advantage. We're trialing bathroom furniture at the minute. I think we have something to offer in that space. I think we've got a lot to offer in the kitchen space, worktop space, and so on. The consumable test, and I wouldn't want anybody to get distracted around it. The consumable test is a test. And it's a test to drive frequency. And that's what it is. Second part of the question.

Yeah. It was on the effect of gross margin, relaxation of the hurdles within the depots, really. As we see it at the moment, that phase is behind us. So we're on the, if you like, back on the horse now of developing margin with annual price rises, controlling our costs, enhancing the services. On the balance sheet, yeah, I think our caution is the ongoing issue that we have for the time being off balance sheet financing through the depot leases. So in our case, by 2020, that will be on balance sheet. But hideously crude numbers. We've got about half a billion pounds worth of liabilities through those leases. We've also got a pension fund deficit, as you've seen, which, you know... swings around fairly violently. So I think that's how we would justify the caution around staying out of bank debt through the working capital cycle.

We're actually out of time, but we'll take one more. And there'll be more opportunity on the 4th of April as well.

Amigala from Citi. Just a couple of quick questions. Firstly, on the point of clearance of ranges, you're talking of a bit quicker refresh. Does this mean that there could be a potential price benefit from deploying newer ranges more frequently? My second question is on COGS inflation. If you could give us some broad numbers as to what is the underlying level of inflation you expect in 2019. And third one, really on fit-out costs for depots in France. How different is it versus the UK depot?

Yeah. The third one's very easy because there's very little difference between the two. Your first question around price benefits from new range changes. Range change is costly. I mean, it does serve enhanced margins at the start of the range. But I wouldn't particularly point to any margin enhancement from additional new ranges coming through. I think what it does do, it means you're on the front foot with customers. You've always got the right type of product available. for them. Yeah, but I think the range cycle that we're pushing in at the minute feels about right. I feel we've probably got a few too many ranges, but not massively off. We want to have a well-stocked, broad range in the offer, but I don't like duplication across range, so that's really what I'm pointing to. The third part, I can't remember what your question was.

Yeah, on cost of goods. Yeah, 2018, you can see a net number there of 2% up on cost of goods. That's, if you like, hiding a 4% underlying increase, but 2%, half of it, very round numbers. addressed through Rob's team and the various savings projects. So underlying for savings of net 2%. Typically, we've seen 3% to 4% upward pressure, and very often we make good progress on the various savings projects. So, yeah, 3%, 4% I think would be a good rule of thumb.

Okay.

Thanks very much indeed.

Thank you.