Howden Joinery Grp Ord

and welcome to the Howdens Results presentation for 2019. Thank you for taking the time to join us here in the room or to listening on the webcast. In addition to Mark Robson and me, Andy Witts, Rob Fenwick are, as usual, both here, as are a number of the other ExCo members. I'll begin by introducing our performance in 2019. Mark will then review our financial performance for the year. I will then share my perspective on our performance in 2019 and our plans for 2020, and then we'll take questions. 2019 was a year of progress for Howdens, and I'm pleased with how the business has performed. Both revenues and gross margin increased and profitability improved, with operating profits increasing at a faster rate than revenues. This in part reflects the timing of the price increase, which in 2019 was implemented in January as compared with April in 2018, and the maintenance of improved depot margin discipline, which we exhibited in the second half of 2018. In the first half of 2019, we found a more profitable balance between volume and price as compared to the first half of 2018, when a significant increase in volume came at some cost to margin. This trend continued in the second half against a strong margin comparator. In 2020, we will continue to evaluate how best to balance volume and price to the benefit of overall profitability in the light of prevailing market conditions as we see them. Trading in the 2019 peak 11 weeks has set a new benchmark for us. Our depot teams were well incentivized and achieved record sales in the period underpinned by the level of stock availability delivered by our supply chain and an IT infrastructure which performed without incident. At the same time, we continue to make investments in the business during the year. We have in place a number of initiatives with the potential to increase volume and profits across the business based around our core building blocks of trade service convenience, trade value, and product leadership. These are evolving our depot network to use space more efficiently and to create the best depot environment in which to do business with and support our customers, improving range and supply management to help customers buying decisions and to access supply chain benefits to make productivity gains, and using digital to raise brand awareness, to support the business model, and to free up time for depot staff and customers to use more productively. together with our development of our operations in France by way of a city-based approach. So I will talk about these after Mark has taken you through the financial results. Thank you, Mark.

Thanks, Andrew. And good morning, everyone. Reviewing the financials for the year, let me start by looking at some of the headline numbers for 2019. Moving from left to right on the top row to begin with, as you can see, Howden Joinery's UK revenue rose by £73 million to £1,550 million. an increase of around 5% on 2018. Group sales also increased by 5%. Gross profit rose by £54 million to £986 million. The percentage gross margin of 62.3% was up from 2018, reflecting the impact of a price increase in January 2019. Moving on to operating profit, after a £34 million increase in operating costs, profit rose by £20 million to £260 million. Operating costs were impacted by continued investment across the business, including new depots, digital, additional depreciation and inflation. The closure of our Dutch and German depots also impacted these costs. Now moving down to the second row, with net interest and other finance charges falling by £2 million, mainly due to a decrease in the charge for pensions, there was a profit before tax of £260.7 million, £22 million higher than in 2018. Looking at cash flow in the year, returns to shareholders totalled £126 million, which included share repurchases of £55 million. Capital expenditure was £61 million and there was a £30 million contribution to the pension deficit. Overall, we had a net cash inflow of £36 million, meaning that we ended the year with £267 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 £1,550 million increased by 4.9% on a total basis and was up by 2.5% on the same depot basis. In continental Europe, turnover of 33 million was down by 1 million pounds, impacted by the closure of our depots in the Netherlands and Germany. Sales in our French and Belgian depots rose by 3.8% in euros. Let me now talk you through the movement in PBT from £238.5 million in 2018. Gross profit rose by £54 million. This is the net effect of several features as shown on the chart on the right hand side. If we bridge from 2018's gross profit of £932 million, there was a sales benefit of £72 million, which had two factors. Firstly, it reflects a £61 million benefit from the price increase. introduced in January 2019. Secondly, increased volumes and mix changes increased revenue by £11 million, reflecting an improved balance between price and volume. 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 £4 million. We saw a £3 million negative impact from exchange rate movements in the year, also affecting cost of goods sold. There were higher input costs, resulting in a net decrease to gross profit of £11 million. Together, this gave a net rise in gross profit of £54 million to £986 million. Gross profit margin was 62.3%. 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. Net interest and other finance charges were broadly the same. The net result was that profit before tax rose by £22 million to £260.7 million. Let me now explain in more detail the main movements in operating costs from £692 million in 2018. Costs associated with the 44 depots opened in 2019, which includes five in France, and the incremental costs of the 33 UK depots that we opened in 2018 total £17 million. Cost increases for older depots were £7 million, mainly reflecting increases in headcount and pay inflation. There were cost increases incurred to support growth, which totaled £8 million. This included the ongoing costs of digital upgrades. Costs associated with the closure of our German and Dutch depots were £6 million and we benefited to the tune of £4 million from not being impacted by GMP equalisation, which affected 2018. This meant that total operating costs rose to £726 million. Let's briefly turn to the remainder of the income statement. Profit before tax was £261 million. This led to a tax charge of £52 million, the effective tax rate being 19.8%. This gave a profit after tax of £209 million. This result gives earnings per share from continuing operations of 35 pence compared with 31.3 pence in 2018. Turning to dividends, the Board has recommended that we pay a final dividend of 9.1 pence per share. This will be paid in June 2020 at a cost of £55 million. Let me now turn to cash flow. From a position of having net cash of £231 million at the end of 2018, we ended 2019 with net cash of £267 million. Let me draw to your attention a few items that explain the movement. Net working capital increased by £6 million. more of which in a minute. Capital expenditure totalled £61 million and included new depots, digital upgrades and investment in the next phase of our Rawns distribution centre. Tax payments were £46 million. As I've already said, we spent £55 million repurchasing shares. there was a £27 million contribution to the pension scheme over and above the charge through the P&L. The net result of these and other movements was a cash inflow of £36 million, meaning that we ended 2019 with net cash of £267 million. As I've already said, net working capital increased by £6 million. Within this, stock increased by £5 million, mainly due to depot openings. Debtors grew by £7 million, reflecting the impact of the final two days of period 11 trading, which in 2019 fell into November. This debt did not become due until after the year end. Partly offsetting these movements, creditors rose by £6 million. Before moving on from cash, as you know, we target a prudent capital structure. This means that it's our policy to operate throughout our annual working capital cycle without incurring bank debt. In March 2018 we announced our intention to return £60 million to shareholders via a two-year share repurchase programme. At the beginning of last year we had £30 million of that programme remaining. In February 2019 we announced a further £50 million two-year programme. As I've already said, in 2019 we spent £55 million repurchasing shares, thereby completing the March 2018 programme and we have £25 million of the February 2019 programme remaining. This means that in 2019 we have returned £126 million to shareholders, including dividends. This compares to £131 million returned in 2018. Looking at our net cash at the end of 2019 of £267 million, we have surplus cash of around £85 million, which the board has decided it will return 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 2018, the deficit stood at £36 million. A number of factors had caused this to change by the end of 2019. Firstly, from the P&L, there was the current service charge, administrative and interest cost of £21 million. Secondly, a decrease in the discount rate, net of longevity effects, increased liabilities by £197 million. The group made a cash contribution of £47 million. Finally, with asset returns being £150 million higher, the overall deficit at the end of 2019 was up by £21 million to £57 million. This, of course, is the balance sheet deficit calculated under IAS 19. However, our agreement with the trustees announced in June 2018 is on a technical provisions basis. This agreement is 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%. The next triennial valuation takes place later this year. Let me finish with some brief comments about trading in the first two periods of 2020 and the outlook for the rest of the year. The first two periods of the year saw total UK sales rise by 1.6%, down 0.2% on the same depot basis, excluding week one, which included three and a half trading days in 2019, but only two and a half in 2020. Sales were up three and a half percent. Clearly, there are currently various market uncertainties and a number of factors that need to be considered in forecasting this year's overall result, including the impact of foreign exchange rates. Regarding operating costs, compared to 2019, we will benefit from not bearing the £6 million cost of closing our European operations in Germany and the Netherlands. However, there will be further operating costs of around £20 million in 2020 compared to 2019. These include the one-year impact resulting from the dual running of our old NDC and Phase 2 of our new distribution centre in Rawns, digital investment, increased pension charges and additional depreciation. These cost increases are in addition to the impact of the ongoing growth of the business, inflation and new depots, including further openings in France. Capital expenditure is expected to be around £80 million for 2020, including the next phase of RONs, digital investment and new depots. And on that note, I'll hand you back to Andrew.

Thank you, Mark. I'll be talking about our performance in 2019 and our plans for 2020 using the initiatives I mentioned earlier as a framework. As a reminder, these are depot evolution, range and supply management, digital development and international. But first, I would like to talk about our customers. Our overall customer base in 2019 was stable and ended the year at around 470,000 credit and cash accounts. Two areas of focus were to improve our customer loyalty and the returns from our customer acquisition program. Sales per customer increased as total transactions and total spend grew, with our customers buying more often and spending more with us. With a similar number of new credit accounts being opened as last year, new customer spend increased significantly, as did profit per new account, reflecting the higher level of sales and lower acquisition costs. I believe these results show that Howdens knows what it stands for, to help our trade customers achieve exceptional results for their customers and to profit from doing so. When our customers succeed, we succeed. Our trade-only 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 the success of our in-stock offer. Depot managers hire their own staff, manage their own relationships, set local pricing, manage their own stock levels to suit their own local customers. Profit sharing is calculated on local performance. Everyone is incentivised to grow a profitable local business. Whilst our supply operation serves only Howdens, it has more than 700 depot customers, each with individual changing day-to-day requirements. Our supply operation has the scale, space and flexibility required, to respond to the needs and meet demands of our peak weeks of period 11, when sales are typically more than double the level of those in other periods. A key feature of Howden's success is that we're trade only. Building trusted trade relationships with trade customers is central to everything we do. We've continued to hold our trade customer feedback sessions both regularly and across the country, which enable us to identify any areas where we need to improve our offer. These sessions are always fully subscribed, which shows 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 with us to make it even easier for them to serve their customers. As I mentioned, we've put in place a number of initiatives with the potential to increase volumes and profits across the business. The first is depot evolution. During 2019, we progressed our testing of a new depot format aimed at increasing the best depot environment in which to do business with our customers at no material change to the fit-out costs of a new depot. By racking product vertically in the warehouse section of the depot, we believe that there are ways to make space utilization improvements with the potential to make productivity gains from reduced picking times. By reallocating space in the new format, we can provide a more open fronted area to bring staff closer to customers, improve both the visibility and the standard of our design facilities, and nearly double the space available to display a wider range of kitchen designs. There is also room for a small items picking area behind the counter with an improved range of everyday essential products, including hardware and ironmongery, to add incremental profit as a way of encouraging footfall and incremental kitchen sales. We are confident that the updated format is an improvement at the same cost as on the traditional one. It was adopted for all UK depots opened in 2019 and all UK depots opened in 2020 will also be formatted in this way. The improved densities offered by re-racking product vertically have enabled us to put our full product offering into a smaller space. We opened eight smaller footage depots this year and intend to open more such depots in 2020. With the smaller size depots, we continue to believe that there's potential for around 850 UK depots. In 2019, we opened a total of 39 UK depots, including five in Northern Ireland, with openings weighted towards the latter part of the year. This represents an increase in the number of openings as compared with an average of 25 in the previous three years. In 2020, we plan to open around 30 more UK depots. As I explained in the 2019 interim results presentation, we put in place a test to understand the rollback opportunity the updated format may have in the existing estate. We initially converted three older depots. Park Royal opened in 1995. Swansea and Guildford both opened in 1996, around about the time when the business started. And these have now been trading in the updated format for eight months or so. They continue to show encouraging signs of improved performance relative to similar depots, vintage type and location since conversion. We subsequently converted a further eight older depots prior to the start of our peak trading period, deploying several capital spends. Managing the disruption of a reformat to a day-to-day's operation and trading patterns is a key part of the conversion process. Our experiences when reformatting these depots have helped us improve our skill base, our planning for a reformat, and our understanding of when in the year to implement them. Developed our thinking on about how to scope, structure, and execute a reformat, which we are now able to complete in under eight weeks. We've also refined the format, which incorporates a smaller hardware area and reduces refurbishment and ongoing running costs. Andy Witts and I are pleased with the feedback that we're receiving from both depot teams and customers at the converted depots, and we've been sufficiently encouraged by the performance to date and the expectations of the depot teams for them in 2020 to extend the test. This year, we intend to convert around 30 more depots across the country so that we can continue to learn how best to apply this opportunity within the existing depot estate. In 2020, we are budgeting for an average reformat spend of £225,000 as we apply the learnings from the depots converted to date. We also plan to re-rack around 50 further depots without other modifications in 2020. At the end of 2019, we had a total of 71 new depot formats comprising 60 new ones and 11 refurbished depots and had re-racked a further 62 depots without other modifications. By the end of 2020, assuming our depot plans for 2020 are implemented as I have described, we will have a total of 131 new format depots comprising 90 opened in the new format plus 41 refurbished ones. And we will have re-racked a further 112 without further modifications. My second point is about range and supply management. New depot ranges each year represent a significant portion of sales as product life cycles shorten. During the year, we introduced 12 new kitchen ranges to all depots with an average sales per range above those of 2018. These ranges are characteristic of the trends that we're seeing for straight lines in modern kitchens, which accentuate the sense of space. Contrasting colors and cleaner look in kitchen shaker styles and matte textures that benefit from the latest industrial technology advances that prevent fingerprint marking. During 2019, we updated our light oak cabinet to a more natural oak tone. Led the mass market rollout of anthracite coloured storage systems which helped define our mid and premium ranges. Extended our worktop range by 11 laminate and 7 solid surface worktop styles. 9 of these are lighter decor worktops which complement the increased number of darker kitchen colours. We added 25 Lemona appliances to our range, introducing new technologies in cooking, laundry and dishwashing products, while strengthening our core Lemona oven choice with the introduction of a new low price point fan oven. We strengthened the Lemona brand through the introduction of a three year guarantee. From the new hardware lines we trialled, we selected around 250 of the fastest sellers for rollout across the estate, which principally comprises key products for the joiner and extensions to our core ironmongery range. We continue to support our customers by introducing pre-finished internal doors across different styles, so helping them save time in fitting them. and we introduced three new flooring decors manufactured with new technology, which makes vinyl flooring quicker and easier for builders to fit. In the first half of 2020, we plan to launch 13 new kitchen ranges, of which 11 have already been launched to date. Features include two new styles, a modern slab range offering a trade-up from our entry price point Greenwich gloss range. The new door has seamless edges and is available in three colours, all with a mirror gloss finish and two super matte finishes, again with entry fingerprint technology. An updated painted timber shaker range available in two new colours from January this year with an additional colour to follow in April. It's a versatile design that can be dressed to achieve both modern and traditional looks. We've added more colours and more ranges. A new green colour in our successful mid-price Fairford shaker range. Pebble and navy colours extend across three kitchen families, including the addition of pebble to the Greenwich Gloss family, strengthening our entry price point offer. We've developed a new handle-less cabinet platform to meet the demand for linear look. The cabinet can be used within our current ranges, which enables us to increase customer choice without a commensurate rise in range count. We now offer 27 styles and have the flexibility to change the number of styles on offer in response to customer demand. Using this new cabinet, we can now provide a more affordable way for our customers to achieve the straight line look, including in our entry price point Greenwich family. It has also enabled us to refine our range architecture into modern, linear and shaker, making it easier for customers to choose the kitchen that suits them best. New worktops for this year focus on lighter shades and thinner profiles, which in particular complement our new linear kitchen range. We are extending the range of Lamona new technology appliances, including self-cleaning ovens, to a new lower price point. Design-led refrigeration is also being introduced at very affordable prices. Managing the number of kitchen ranges efficiently is crucial for both best availability, which is highly valued by our customers, and profitability. We have made progress in getting back to the discipline of fewer deeply stocked ranges in higher performing ranges in the depots. A key part of the range discipline is the timely discontinuation of underperforming ranges and the management of clearance of that stock from the business. During the year, 19 ranges were cleared from the business. At the end of 2019, we had 67 current kitchen ranges, including initial stock of some of the ranges that we were launching at the start of this year. We believe around 65 current ranges is the right number for our market at present. In 2020, we're aiming to remove at least the number of ranges that we add. During 2019, as part of our focus on range management, we combined the divisional commercial functions into a single commercial team organized in categories. This structure provides clearer accountabilities for ranging decisions, the access of supply chain benefits, the changes remove duplication of effort, easing communication, and bringing our commercial team closer to the depot managers. We have seen the benefit of clearer accountabilities and closer working practices between trade, commercial and supply. This enabled our new kitchen brochure and trade book to be launched in week three of 2020, the first of three editions during the year, which was synchronized with our promotional rooster offers and enabled stock for all new kitchens to be in depots before the trade book and brochure were published. Through this structure, we're also aiming to ensure that the business is well planned at least 18 months out with our suppliers, that we are being offered innovative product first and that we're being offered the best value for our customers. We have benefited from a significant engagement in our supply base in support of our 2020 plans for improved product range, availability and price. We keep under review what we believe it is best to make or to buy. And in 2019, investment in manufacturing technology enabled us to make doors of our five new Hockley kitchen ranges, reducing the costs of these doors and increasing supply chain flexibility. We also installed a small batch line to make lower volumes, but important skews, which third-party vendors cannot supply at competitive prices. During the year, we were awarded a Manufacturing Guild mark, a reflection of the excellence of our manufacturing operations, and we were delighted to be reappointed as a Royal Warrant Holder for a further three years. Now turning to our digital platform. We see digital as a means of reinforcing the Huygens model of strong local relationships between depots and their customers, and we're building a digital capability with three objectives. to increase builder and consumer awareness of Howdens to help our customers sell Howdens product, to improve the communication between Howdens, tradespeople and their customers, and to streamline and improve operating processes, freeing up time for depot staff and customers to use more productively. Our new web platform offers customers improved product search and information, plus access to online advice and inspiration, and has moved Howdens.com into more prominent positions, raising brand awareness with customers. Since June 2019, Howdens.com impressions are presented in 1.5 million more search results a month. Visits to the website have seen a growth of 22% year on year, exceeding an average of 300,000 visitors a week for the first time. and the contacting of depots through the website has increased by 35%. We are also completing a program of restructuring and digitizing content. A new hierarchy, enriched product content, and new advisory and editorial material make it easier and quicker for the user to find the information they want to view. Around 80% of the visitors now entering the site via pages relating to specific search queries or terms underpinned by SEO improvements targeting search terms most relevant to our products. Views of product categories have both increased both in kitchens where entries and visits to kitchen pages have risen by 43%. and are in underrepresented product categories such as hardware, where they're up 76%, and doors, for which successful searches were up 77%. Refining styles and product selections is now easier, as we have provided the capability for each user to tailor their own requirements, enabling a more focused discussion of the consumer's needs with their builders and with our designers. In the second half of 2019, we will test ways of developing our digital offering further in line with our aim of putting a tradesperson's local depot in their pocket. Working with account holders to understand their key requirements, we developed and tested a secure trade customer-only area of the website where behind a secure login, they can manage their accounts and interfaces more efficiently with Houdens and their chosen depots in particular. They can view their credit details and make payments and access account details. They can download invoices and information at any time. During the test period, 44% of users logged in outside of depot hours, 60% made a payment and half downloaded documents. Average payments per customer were also well above the company level. In 2020, we instituted full rollout of these trade account facilities, which are now available to all customers. User feedback has been favorable with usage rates rising. We will be supporting our depots with onboarding their customers to the new platform, which we believe will enhance the strong local relationships the depots have with their builder customers. In 2020, we will continue to improve content and add more capability to this platform. We aim to further develop account management, account and project management features, together with functionality which assists local communications between depots and their customers. We aim to test a more efficient online account opening process for new customers. And having digitized our product and marketing content in 2019, we can deploy these cost-effectively across multiple channels and programs and add fresh content efficiently. And finally, international. At the results presentation last year, I explained why we believe that there is potential for a viable city-based business in France. And in 2019, we opened five new depots, four around Paris and one in Lille. We completed the rebranding of our international business from Houdin to Howdens, which should enable the business to gain advantages from UK brand equity, online search reputation and business efficiencies. We appointed a French national to lead our business based in France, who's now been in post since autumn 2019. We completed the closure of our German and Netherlands with store closures cost at budgeted levels. The 22 depots opened before 2019 are now sufficiently profitable to cover all central costs, which are scaled for a larger business. Total sales of the depots opened in 2019 are in line with expectations. We've identified further sites which would enable us to open more depots in France in 2020. Consistent with our policy of staffing new depots with Howden's trained teams and assuming our business in France continues to perform in line with our expectations, we are targeting around five openings in 2020. So let me summarize. 2019 was a year of progress for Howdens. We increased revenues and gross margins and improved profitability with operating profit increasing at a higher rate than revenues. We continued to invest in people, infrastructure, depots and product. We opened 39 UK depots, including five in Northern Ireland, all in our updated format and five in France. We began to see benefits from our ongoing digital development program. Work continues on the next phase of the RONS distribution complex, which will replace our existing facilities in 2021. We reorganized our commercial team, which assists in the delivery of our 2020 plans for improved product range availability and price. I'm pleased with the response of our people, customers, and suppliers to the initiatives that we've taken and our results for the year. Now, turning to 2020, we aim to retain a profitable balance in the lighter prevailing market conditions between price and volume, whilst working with suppliers to keep product and input costs down. We plan to open around 30 depots in the UK, five in France, and convert around 30 existing depots to the new format. We have a right-sized lineup of new product for the first half, which has been launched and is in stock earlier than in 2019, which we believe will benefit such sales across the year. And we have a well-planned program of second and third phase product introductions in place for later this year, together with a series of rooster promotions to encourage footfall. This year, we will be making more of the product we sell in our UK factories. Our new online trade facilities, trade account facilities are now available to all customers. And in 2020, we will continue to improve content and add more capability to our digital platform. Excluding the first week of trading, which had fewer days than last year, total UK depot revenue for the first two periods of the year increased 3.5% and 1.6% on the same depot basis. We remain cautious in market conditions given economic uncertainties, including the UK's exit from the EU, the impact forthcoming trade negotiations may have, and also the consequences of the coronavirus outbreaks in a number of countries. We are monitoring our supply chain closely and have increased forward stock levels for product source from China while reviewing alternative sources and means of supply. However, I'm confident in our business model through changing economic conditions and the benefits our initiatives will bring to our performance. Finally, before opening up to questions in the meeting, I would like to mention our 2020 Houdens Expo. In 2019, we held our Norgel Houdens Expo, which received very favourable results from staff, suppliers, customers and other visitors. And we've built a new expo for 2020, again located as part of our old distribution centre in Northampton. And we'd like to invite you to visit the expo on the 16th of April. Thank you for listening. Mark and I will now take questions. Please wait for the microphone and clearly state your name and your organization before asking your question.

Good morning, everyone. Robert Eason from GoodBuddy. First question is probably a simple one and a point of clarification. When you talk about continued better balance between price and volume, should we take that that you are targeting to leverage down the P&L, i.e. continue to grow profit in excess of whatever the sales growth is? Is that kind of the sort of framework we should have in our heads? Second, kind of the second question is just, you know, the competitive landscape. One of your larger peers is separating out a business over the next few months. And, you know, at the Capital Markets Day of that business, there was a heavy emphasis on the kitchen end. So my general question is just about the competitive landscape. What are you seeing, especially in that context of what I've said about one of your competitors? So they're kind of the two questions.

Thanks, Robert.

Yeah, I think on price and volume, I think some people in the room will know about our recent history where we went on a bit of a volume frenzy. from the start of Q2 2017 to the end of Q1 2018 on reflection that that hadn't served the business well in terms of more and more volume but reduced margin. So what we've been trying to do since Q2 2018 is to get the balance back. So we're getting a contribution from both. In 2019, you'll have seen that journey travelled in the sense that we got a contribution from price, much more so in the first half, and then the volume came through in the second half. For 2020, we're hoping and planning for a bigger volume contribution. So it would be, round numbers, if you look to 2019, it was... dominated by price we're hoping that the balance will be in the other direction for 2020 so it was for 2019 it was one volume for price we'd like to get to a more even level and ideally we're planning from a bigger contribution from volume than in price I think that's a healthier place to have the business

Regarding the second part of your question, Robert, I mean, it's always a tough market in the kitchen game. We think of the market being split in two, really, between trade and retail. And I think what you're referring to there is really some of the mix change that's going on in the retail space. I think we remain very confident about our business model, what we're doing within the trade space. We remain incredibly close with our customers. We saw over 1,000 customers in our builder conversations, and they are talking about being very busy, quoting a lot, and enjoying the working relationship they've got with us. There's great reasons why they continue to shop with us and why all these initiatives that I've just been through are about strengthening the moat of Huygens and trying to keep us in a very competitive advantage. So we see nothing that frightens us out there.

Charlie Campbell from Liberum. A couple of questions and sort of unrelated really. Just wondered if you had a builder forum since the election and sort of what the tone of that might have been from builders generally. And then the second, quite a broad one I'm afraid, but just trying to sort of put some numbers on some of the depot initiatives. It was unclear to me as to why you would re-rack a branch only and not kind of do the changes to the space. I'm just trying to understand that a bit. And if you could help us think a bit, perhaps, about some of the paybacks that you're getting from this, either in terms of incremental sales in new depots or efficiency gains, just so that we can understand the opportunity that's there, presumably, as you roll this out across the whole estate in due course.

Yeah. I'll go for most of these, Mark, and give me a hand on the third one. Okay. We have had a number of builder forums since the start of the year. And I would say the general theme of it has been that consistent theme of they are very busy, that there is some relief that the election is over and they get on and do stuff. And probably just a wee bit more certainty, I would say, would be the tone of what they've been talking about. But the general thing of them being very, very busy, quoting on a lot of stuff. I would say, too, that they've talked a lot about the wet weather. getting diggers into grounds and some of the kitchen development work would be dependent on some of that happening. So they do talk about delays around that, but they're certainly doing, you know, our sort of door joinery hardware business has been performing and We like that because we get to see them more often. I would say, too, I'm not bleating on about the weather, but a number of our depots have been impacted by that, as you would expect. It is our softer time of the year. And we've been very supportive, as you'd expect us to be in our local community, supporting builders, supporting end consumers. And while that might affect us now, we would hope there'd be a benefit some way down the line. We don't particularly quantify it. Your second question is about re-racking. And that was sort of where this all started when we went into Fulham and we worked out that we couldn't get the full range into a depot. So we re-racked it and ended up getting most of the range in and then realized there were other benefits involved. from doing things that way. And one of the big learnings that we've been able to get by reducing dramatically the refit time has been by doing the re-racking first. And that's sort of an operational thing. There's so much to do in a depot by almost taking everything out, toast racking and putting it back. It's a great cleansing opportunity. And we tend to do that, which we can do now within two weeks. And then we leave the depot alone. And then we go back and we do everything else from signage through to front end, through to the systems work that we do, the new counter space. So we sort of think of them as independent and it's a way of reducing impact for consumers. Your third question, which we're probably going to dodge a wee bit, and there's a good reason for it, not that we don't want to be clear about this. We started with three, and we've traded them for eight months, and they're settling down well, and we'd be, by and large, very happy with those. The next eight, we had various levels of capital spent. So we did one where we did a sort of skinny one to see what the impact was, and we didn't like it. We did one that was full-blown, and it was too expensive. So we found this sort of midpoint of 225. We like the look and the feel of that. We like the impact that we're getting from it. The job now is to see if we can do it at scale. So do 30 of them, of which Andy's in the process of doing 13. He's completed the first five. He's done them in under seven weeks. So he's not going to like me for saying that, but eight weeks on average is a fair judgment. And we are just watching very carefully to see the impact. But we like what the builders are saying because they're saying, I can now take my customer in here and I can show them the range properly. We like particularly the way our depot teams are interacting with the customers they come in. It's just completely open, almost like you're looking through the glass of a restaurant and you can see what's going in around the back. We like the picking process. What we're really trying to do here is build out a format for the next 10 years. So, you know, we're making a long-term investment play. And I don't want to go in and spend 60 grand and then wish I'd done the job properly. I want to do the job properly and leave us there for the next 10 years. We're sort of taking our time and being considered around it. But Mark doesn't allow me to spend money unless I get a decent return. Howard. Sorry, apologies. Yeah.

Hi, yeah, it's Neeraj from UBS. Go get two questions, please. First one's on gross margin and just thinking about the gross margin headwind that was present this year from selling down the discontinued ranges. Can you quantify that and maybe give us a steer on what that might look like next year, considering there's a little bit more to go on that? And the second one is more generally on OPEX. With national living wage ticking up over the next 12 months, and I appreciate that depot staff get a profit share, but are there any second-order implications we should be thinking about for Howden from that perspective and maybe some of your mitigating factors that you can do to offset that?

Yeah, on the... headwind in terms of stock write-off. I think the step-up, we saw a step-up, particularly second half 18, full year 19, over the rate we'd been writing off up until the end of the first half of 18. So there was a pick-up. in terms of pinning down a number, it's cost us about 1% of gross margin across 2019. Now, when we go into 2020, we're expecting no step up. So we think now we've got the write-off knocking right where we want it we've said in the statement that for every range that comes in we're going to take another one out so we're not expecting any further impacts year on year in terms of living wage it will have a small impact the impact on us has already been swallowed and in fact it gets eaten up each year by our annual pay rise of three percent some That's a typical pay award for us. In terms of those type of costs, I think auto enrolment is the more significant step up. So our rate of contribution on auto enrolment is picking up. So that will cost us about three million going from 2019 to 2020. Howard.

I would say more from you, Miss. A couple of related questions in terms of the branch manager autonomy. Firstly, you mentioned before you sort of got it wrong that time that you forced the volume price situation. And just looking at it now, two dynamics. One, how do you judge the messaging to the branch manager in terms of the better price mix situation? And secondly related to that, you've alluded to digitisation. Is there any aspect of that that is more ERP related to the branch manager? And then secondly, just on the refit and choice of where refit goes, how do you determine that relative to the branch manager? Because I would have thought asking a branch manager if he wants 25% more space, et cetera, they're all going to jump at it potentially. And so is it a case of selection that's done from central or do they sort of vie for attention in terms of the capital allocation?

Yeah. Thank you. So... One of the key strengths of Haydn's is, as you well know, Howard, is our branch managers are businessmen. And they understand the balance between price and volume probably better than any business I've ever worked in. And they're driven by local depot profitability. And they and their teams are rewarded off the back of that. I think the volume frenzy that Mark referred to it as, you know, I think there was a number of depot managers, you know, would have called us out on that and said, you know, prior to my arrival and said, you know, I'm driving all this volume, the costs are going up, I'm making less money. And I think, you know, we would all jointly got to a conclusion. We run a very successful depot manager engagement process where we go around and do regional boards and our famous curry dinners in the evening. So we are in constant contact. Andy and I are at one nearly every week. And we're always talking about price and volume as they give forecasts. So if it's there in the natural market, they find it. Not everybody perfectly finds. If you run your depot margin down a wee bit, you'll get a tap on the shoulder. If you go over, you'll get a tap on the shoulder. But by and large, it finds its natural place as we go through the year. So I'd be very solid that we've got probably some of the most commercial managers out there in the trade space. I didn't quite get your question on digitization.

Well, I was just wondering, you alluded to the fact... Sorry, sorry. A lot of that relates to the customer, but whether there's been any element of greater investment in ERP in terms of into the branch and the metrics that you're getting from the branches.

I think it's very, very early days. So I think if you think of the impact on this work that Andy Galt has done on the new platform, we've certainly seen a few reduction of heads in our account management facilities that are held centrally. I think what it does is it empowers depot teams to understand what's going on properly with an account with an end customer. It helps them know the answer to the question is probably the most frequently asked question by our customers, which is how much credit have I got in my account? And the amount of times and investment that our depot teams make on printing out invoices and local bills is incredible. And all of that just goes away so long as we can encourage our customers onto the platform. I think what's exciting about all of this, though, is getting customers onto the platform makes it stickier with Houdens. And I think that's sort of the exciting bit about it. And the team have got all sorts of thoughts about where we can take it. Very smartly, they've given the best reason to go on the platform, which is financial. And the way they have the expression in the team is don't make me think. So we want the customers to be able to go on and understand it. We've got varying levels of capability amongst our customer base around computing skills. Some of them like it, some of them don't like it at all, but certainly a lot of them get support from their, you know, maybe their partner or business partners to do it. So it's gone down a treat, I would say. Yeah. The refit choice, which is your third question, Howard, I would say we're in quite early stages of this. And given that the estate, which started in 95, hasn't had an awful lot spent on it over the years. Now, I'm not... ever intending to make it all pretty. It's a trading estate. We like the balance that we've got between the trade field, the counter, a slightly smarter front-end area, but it is a trading environment. The language that we use is the best environment to do business with our customers. The 30 that we've done, you'd seen on the map, are quite spread across the country because we can see the impact. I think the balance will end up going towards the older part of the estate. It'll probably be more London-centric, southeast-centric than up north. But we will be looking individually at the return that we think we can get off the capital investment we'd make in a local depot and then weigh it in with where fitters are and how we'd organize the process. We've made no decisions on rolling this out across the estate yet. This is still a trial.

Thank you. Clyde Lewis at Peel Hunt. A couple if I may. Firstly, could you give us a little bit of help on how you think the total market for kitchens, whether that's the number of boxes, has evolved in 2019? And again, your best guess as to how sort of trade versus retail works? you know, fluctuated within that overall picture. And also whether, you know, there was a sort of a bigger shift towards higher value products and what the trends were in terms of, again, focus on appliances. Just to understand, I suppose, the bigger picture for the total revenue in the overall kitchen market. The second was on customers and the churn, and you indicated I think there were 470,000 customers in there. It would be interesting to know how much churn you've seen, how many are sort of inactive, and just sort of understanding, I suppose, the wider market for kitchen fitters. Is there a diminishing pool from where you see of people able to install kitchens in the UK, and is there a threat from the new-build market? sucking some of that labour out of the renovation market, which obviously you guys focus on.

Okay, I'll tackle the first and Mark will tackle the second. I think probably most of us in the room know that this market is not that well measured, and it's not straightforward, and it depends on the definition of the number of cabinets which are not used in kitchens, for example. So quite a lot of our cabinets go into utility rooms, home office, bathrooms, bedrooms, and so on. But there's an organization called JKMR who estimate there's about 1.2 million domestic kitchen installations. most of which were replacements. And they believe the market fell a wee bit last year. Not a lot, but a bit. And they forecast that the market may decline a wee bit further in 2020. We think that the purchases via the trade in aggregate account for about half of the replacement market. Probably a wee bit moving in our favor there, but not a huge amount. We think our share is somewhere between 28 and 34 of that space. And that overall trade is growing and offset by some sort of aggregate decline in retail. I would say we'd point to there's probably a few fewer cabinets within each kitchen because of different storage solutions that are coming along with less sort of cabinets on the walls and more open space being given to walls and more cabinets used on the ground. And I would say we'd point to the average value of a kitchen going up, particularly driven by worktops, smarter lighting, higher performance appliances and solid surface worktops. I would say we're all pointing towards a little bit. We all want to live a little bit better.

Customer smart. Yeah. In terms of churn rate, so 2019... Clive, we opened 135,000 and we closed 132,000, so a net three. On the face of it, that is an increase in churn because 2018 was 131,000 in and 129,000 out. But I don't think it's of any real significance because 2017 was slightly higher than 2019, 136,000 in and 135,000 out. So I think it's noise, although technically I'd pick up insurance.

I don't think we've picked up anything from new build. Taking away from our customer base, I'd see it as a totally different contractual market.

Kristen York from Numis. Just two from me. First of all, obviously FX has moved in your favour, maybe a bit of colour on the potential benefit on gross margins if it retained where it was. And the second one, just on the sort of refurbishment programme, obviously the test has been extended. If we look forward, do you think it will continue as sort of a piecemeal type refurbishments or will at some point you perhaps press a button and do significantly more over a couple of years or something like that? OK.

Yeah, on Forex, if... Today's rates didn't move. For the rest of the year, we'd get a benefit of £10 million to gross margin. So, yeah, we've had... You'll know the history of this. We've had a few years with it hitting us around the back of the neck. Before that, years where it helped. But where we... Famous last words. But where we sit now, yeah, we'd get a benefit of £10 million. Yeah. I think on the...

test and whether we'd roll it out. We don't do anything really piecemeal in Houdens. We would always balance how much we think the estate could take from a disruption amount in a year. but if we decided to go ahead with it, it would take quite a long time to do the estate. It could be five, it could be six years, and I'm making that up without... But it's not... You don't do this in a couple of years. The estate is so big and so wide, and I think it would potentially... We would hope it would be a source of new revenue growth as we start reinvesting in older depots particularly, but... The second thing I would say to it is there's only certain times that we can revamp the estate. So I think we were verging too close last time when we started doing the eight pre-period 11, because you do not want managers distracted from lead generation, building his plans for period 11. so we give them a rest after period 11 we do work through Christmas and I wouldn't see us passing really June July time in the year so you've only got a window of sort of downtime to do it in I think we're nearly out of time but if there is another question we take it yep

Hi, I'm from Stiefel. Just a couple on digital, if I may. You say leads for the website are up 35%. Are you able to give any color if the conversion rate from those website leads is similar to the rest of the business? And secondly, if, say, a website visitor is perhaps not as aware of the Howlum pricing model as perhaps other customers, is there a need to give more price transparency to them, or do you lose sales because they're not willing to price for a builder? Just any interest on that?

Yeah. It's a good question because as you do this, you get close to the core of what Hidens is all about. And the way we are tackling it is by being very clear with end consumers who naturally find us. They naturally walk into our depots. It's no different online than it is if somebody walks into a depot. We've got to explain the process. If you've not got a builder, you can't interact with us. And we explain all the benefits of local stock, working with your local tradesmen to buy with us. So, yeah, that's being very clear about the process up front. There will be no time at all for any consideration about price transparency for us. It is between us and the builders who we serve. And the builder runs the agreement with the end customers. We'd never cross over that. The digital lead conversion, I would say, is in its early stages. It's great growth on a small number. We're getting very good at fielding the inquiries. The quality of the inquiries look high, but not quite as high as we would get through our normal mechanisms of a developer on the road or a developer on the phone through a known lead to us. But yeah, we'd say it's encouraging. Yeah. Great. Thank you very much for your time.