Howden Joinery Grp Ord

Good morning everyone and welcome to the Howdens interim 2020 results presentation. Thank you for taking the time to join us on our conference call or to listen on the webcast. I'll begin by introducing our performance in the period. Mark will then review our interim financial results. I will then share my perspectives on our performance in the first half and our plans for the remainder of 2020 and then we'll take questions. Our performance was materially impacted by the changed socio-economic and trading environment brought about by COVID-19 and led us to making a loss of 14 million in the first half as a whole. Sales in the first half were 29% lower than in 2019, with all of the shortfall attributable to trading in the second quarter, which started on the 23rd of March and which for us was when UK lockdown commenced. During the second quarter, we initially closed all our UK depots and then undertook a phased reopening of them, at first with a skeleton staff and with restricted trading hours, as we established and developed ways depots could operate and be supplied safely in a socially distanced environment. By the final period, period six, we returned to all depot, if not full scale trading. Operating at closer to a full complement of staff, UK depot sales in period 6 were some 74% higher than in period 5, at around 74% of 2019 levels. And the business was trading profitably again following losses in periods 4 and 5, when on average under half our depots were trading, and total sales in these depots were around half those in 2019. Depots have reported that our policy of return to all depot trading earlier than some safely and with full stock availability is appreciated by our customers whose ability to work was curtailed by lockdown. In the first period of the second half, period seven, UK sales were up 38% on period six and increased 2% year on year. Kitchen surveys and the number of builders trading with us have been trending upwards in recent weeks, and we've seen some signs of pent-up demand. Sales of everyday items have represented a higher proportion of the mix than in normal times, and the lead bank ended period seven above pre-lockdown levels. I am pleased with how the business has responded operationally to the immediate challenges of COVID-19 and how we are preparing for a post-lockdown environment in which trading conditions and demand patterns may be at least periodically different to those in the past. During the period, our priorities have been to take care of our people's wellbeing, which is paramount during this difficult time. We have adopted a safety-first consensual approach when considering returning people to work, recognising the importance of employee involvement and safety at work issues in the context of COVID-19. Steps taken have always been by reference to prevailing government guidelines and guided by the recommendations of our health and safety team leaders. We have introduced a discreet online resource focused specifically on issues arising from COVID-19 and provided financial support to those on furlough. We reduced cash expenditure where it couldn't be deferred whilst protecting essential areas. We ensured that we had sufficient stock available for depots and continued with the works at our distribution facilities at Rons. We deferred new depot openings and some refurbishments and refits of existing depots. We supported our customers and local communities by reopening depots safely with new working practices as soon as possible, which required finding new ways of depot working and re-engineering how our factories operate and how we supply depots. by increasing our stock levels to ensure depots could supply customers with immediate needs, which has also meant we have supported our depot partners, with whom in many cases we have long-term relationships. By lowering prices, which also enables us to give the depots more flexibility and margin and be well incentivised to maximise sales. And by launching new services, call and collect, which enable us to trade in the second quarter and an online kitchen design service initially operated by our designers working from home. We are applying learnings from this period to the ways we do business and how we operate. Lockdown has, by necessity, increased people's propensity to shop online and the introduction of our call and collect and remote kitchen design services act as pathfinders for online upgrades. Operating under COVID conditions is helping us determine if there are surplus costs and inefficiencies in the business and how we can utilise IT to free up time for depots to use more productively and manage stock more effectively. Our learnings will help us deal with varying degrees of social distancing, which may affect inbound supply, manufacturing and distribution, and summer all of the depots at different times and ways. Looking forward, we believe that whilst overall there will be a more challenging and demanding marketplace, this can play to the advantage of our in-stock local model, provided we introduce the differentiation of offer and do so profitably. The initiatives we had in place prior to lockdown are in line with this objective, based around our core building blocks of trade service and convenience, trade value and product leadership. These are evolving our depot model to use space more efficiently and to create the best depot environment in which to do business with and to support our customers. Improving range and supply management to help customers buying decisions and to access supply chain benefits and to make productivity gains, thereby increasing service and availability at an economic cost. Using digital to raise brand awareness, to support the business model with new services and to free up time for depot staff and customers to use more productively. I will update you on these and our operations based in France after Mark has taken you through our financial results. Mark.

Thank you, Andrew, and good morning, everyone. Reviewing the financials for the first half of the year, let me start by looking at some of the headline numbers from the income statement, which for the first time is reported under IFRS 16. Moving from left to right, on the top row to begin with, as you can see, Howden Joinery's UK revenue fell by £185 million to £453 million, a 29% decrease on 2019. Group sales also decreased by 29%. Gross profit fell by £128 million to £276 million. The percentage gross margin of 59.4% was down from 61.9% in 2019, reflecting mixed changes and, as you would expect, the impact of carrying fixed manufacturing costs during reduced levels of production. Howden's made an operating loss of £10 million in the half, down from a £78 million profit in 2019, with operating costs reducing by £41 million. These costs benefited from government furlough payments, lower variable costs associated with lower sales, IFRS 16 adjustments and the closure of our Dutch and German operations in 2019. These factors more than offset the costs of inflation and continued investment across the business. Now moving down to the second row, net interest charges were up by £5 million, reflecting the impact of the adoption of IFRS 16. As a result, there was a loss before tax of £14 million. This compares to a profit of £78 million in 2019. Looking at cash flow in the first half of the year, this included share repurchase expenditure of £10 million, capital expenditure of £22 million and a £3 million contribution to the pension scheme. We also benefited from various other receipts and deferrals connected with COVID. I will go into more detail on this later in the presentation. Overall, we had a net cash outflow of £14 million and ended the period with £253 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 £453 million decreased by 29% on a total basis and was down by 30% on a same depot basis. We have shown the performance split between quarter one pre-COVID when sales were up 1.1% on a total basis and down 0.8% on a same depot basis. In quarter two, sales were down 56% on a total basis and down 57% on the same depot basis. I will show more detail on quarter two performance on the next slide. In continental Europe, turnover of 12 million was down by 3 million pounds. Sales in our French and Belgian depots fell by 19% in euros. This slide gives more detail on the trading pattern during the first half and the first trading period of the second half. As you can see, steady progress has been made following the initial impact of COVID from an 87% reduction in sales in period four, 55% fall in P5, and a 26% reduction in P6. Period 7 saw further progress and moved positive, with sales up by 2%. I will come back to the second half outlook later on. Let me now talk you through the movement in PBT from £78 million in 2019. Gross profit fell by £128 million. This is the net effect of several features as shown in the chart on the right-hand side. If we bridge from 2019's gross profit of £404 million, there was a £4 million impact from pricing. Secondly, a large fall in volumes and mix changes compared to the first half of 2019 reduced revenue by £183 million. In addition, there were a number of factors that impacted the cost of goods sold. There were reduced costs arising from the volume and mix changes. As mentioned earlier, we were also impacted by carrying fixed costs at lower levels of production. The net effect was a reduction in costs totalling £60 million. Also affecting cost of goods sold, we saw higher input costs. This resulted in a net decrease to gross profit of £2 million. In addition, there was a £1 million impact from exchange rate movements in the first half. Together, this gave a net falling gross profit of £128 million to £276 million. Gross profit margin was 59.4%. 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 reduced by £41 million, which I will address on the next slide. Net interest and other finance charges were £5 million higher than in 2019, reflecting the impact of adopting IFRS 16. The net result was a loss before tax of £14 million. Let me now explain in more detail the main movements in operating costs from £327 million in 2019. Firstly, the incremental costs of the 44 depots that we opened in 2019 totaled £6 million. Costs in older depots decreased by £13 million, mainly reflecting decreased levels of activity. Cost increases incurred to support future growth, total £4 million. This included the cost of the Rawns development, which we have previously announced. There was a net reduction in other operating costs of £8 million, again, the result of reduced activity. we claimed £21 million in furlough payments in respect of the first half, £15 million of which was received in cash in the first half. Closure of our Dutch and German depots in 2019 benefited the first half result by £5 million. And finally, costs reduced by a further £4 million as a consequence of adopting IFRS 16. This meant that operating costs overall fell by £41 million to £286 million. Let's briefly turn to the remainder of the income statement. If we look at the second column of numbers on the table, the impact on the first half of adopting IFRS 16 was an increase in operating profit of 3.9 million pounds. This is more than offset by an increase in interest charges of 4.6 million pounds. As a result, as we've seen, our loss before tax was £14.2 million. This led to a tax credit of £3.3 million, the effective tax rate being 23.2%. This gave a loss after tax of £10.9 million. This result gives a loss per share of 1.8 pence compared with earnings of 10.3 pence in 2019. As previously announced, the dividend and share buyback programmes have been suspended until further notice. Shareholder returns will resume as soon as the Board has greater clarity about the impact on the business of COVID-19. Prior to the announcement I've just referred to, we spent 10 million pounds repurchasing shares. Let me now turn to cash flow. From a position of having net cash of £267 million at the end of 2019, we ended the first half with net cash of £253 million. Looking at the change since the end of last year, let me draw to your attention a number of items that explain the movement. Firstly, we took advantage of government support where appropriate to bolster our cash position. I will explain this further on the next slide. Networking capital decreased by £19 million, which, again, I will address shortly. Capital expenditure totalled £22 million and included spend on the next phase of our Rawn's warehousing strategy and also investments in digital. Corporation tax payments were £12 million. As I've already described, we spent £10 million repurchasing shares in the first half. And there was a £3 million contribution to the pension scheme. The net result of these and other movements was a cash outflow of £14 million, meaning that we ended the first half of 2020 with net cash of £253 million. At the start of the COVID crisis, we took a number of steps to secure our cash position including postponement of depot openings and non-essential capital expenditure, curtailment of operating costs, cessation of our share buyback and dividend programmes, and agreement with our pension trustees to defer deficit payments. In addition, we have taken advantage of available government support. As a result, our first half cash flow benefited from furlough receipts of £15 million and tax payment deferrals of £61 million. the closing cash without government support would have been £177 million rather than the £253 million reported. As I've already said, net working capital decreased by £14 million. Within this, stock increased by £34 million. This was impacted by COVID contingency planning and the introduction of new kitchen ranges. Debtors fell by £39 million, reflecting the pattern of trading that we saw in quarter two. Creditors increased by £9 million, partly as a result of the cash management actions just mentioned. Let me quickly bring you up to date with the balance sheet position of our pension scheme. At the end of 2019, the deficit stood at £57 million. A number of factors had caused this to change by the end of the first half. Firstly, from the P&L, there was the current service charge, administrative and interest costs, of 11 million pounds. Secondly, a decrease in the discount rate increased liabilities by 119 million pounds. Thirdly, the group made a cash contribution of 14 million pounds. Finally, with asset returns being 140 million pounds higher, the deficit at the end of the first half of the year was down by 23 million to 33 million pounds. This, of course, is the balance sheet deficit calculated under IAS 19. Our deal with the trustees, however, is on the technical provisions basis. This agreement, reached in June 2018, 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%. Let me finish with some brief comments about trading in the first period of the second half of the year and costs for the rest of the year. Period 7 saw total UK sales up by 2.2% for the first four weeks of the second half and up by 0.3% on the same depot basis. Regarding the full year 2020, clearly, there are currently many uncertainties and a number of factors that need to be considered. As highlighted in February, 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, as we announced, there will be further operating costs of around £20 million in 2020 compared to 2019, £6 million of which has been incurred in the first half. These costs include the impact of the dual running of old NDC and Phase 2 of our new distribution centre in Rawns, also 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 now expected to be around £60 million for 2020. This includes the next phase of RONs, digital investment, around 20 new depots, including four in France, and depot refurbishments. On that note, I'll hand you back to Andrew.

Thank you, Mark. I will be talking about our performance in the first half and our plans for the second in the context of COVID-19 using the initiatives we had in place for 2020 as a framework. As a reminder, these revolve around depot evolution, range and supply management, digital development and international. But first, I'd like to talk about our customers. At the end of the first quarter, our overall account base was stable, with our core credit account holders as a whole spending more with us, and the total number of transactions and the number of customers trading both increasing at a higher rate than total spend. The onset of lockdown at the start of the second quarter clearly had a very material impact on our customers' ability to operate their businesses and to trade with us. And the overall level of activity is measured by total transactions declined in the second quarter at a similar rate as total sales. During the second quarter, however, the level of our engagement with customers improved from a low base period on period, materially so in period six, when all our depots were trading for the entire period once more. Whilst remaining below 2019 levels, total transactions in period six were more than 50% above the total for four and five combined. And the number of customers trading with us and the amount they spent with us also increased significantly. Building trusted relationships with trade customers is central to everything we do. And what remains a very difficult time for them, we aim to support them in the right ways where we can. We have helped them with lower prices and feedback from customers show that they appreciate that we reopened depots as soon as we could with new services and ways to trade, that we've remained in stock throughout the period and the COVID measures we took to enable them to trade safely with us. I will return to these as I update you on our performance in the context of the initiatives I mentioned earlier. First, our depot plans and ways of trading under COVID-19 conditions. While we always want to provide the best customer service we can, the welfare and safety of our staff and our customers is always our first priority. Throughout lockdown, we have followed prevailing UK government guidelines as the minimum standard we should apply as we consider how and when depots could recommence trading. We maintained an emergency provision to support the NHS, care providers and vulnerable people. With the number of depots trading and the ways of trading changing through different phases, our first step was to introduce a lockdown call and collect operation, initially operated by a skeleton staff in a limited number of depots and behind closed doors. We subsequently increased on a phased basis the number of depots trading in this way. We then reopened depots with closer to a full complement of staff once we were comfortable that we had additional safety measures and protocols in place to do this and that staff understood the standards we were working to. By the start of the final period of the first half, all our depots were trading once more. We believe the operating procedures and measures we put in place and ownership of these at depot level provided us with the best opportunity to trade safely in the period and will help us deal with subsequent lockdowns which may be instituted at short notice and which may be applied on a regional or a local basis in England and differently in Scotland, Wales and Northern Ireland. Turning to our 2020 depot reformat and depot opening plans. By the end of 2019, we'd opened 60 depots in a new format aimed at creating 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. We are confident that the updated format is an improvement at the same cost on the traditional one, and the improved densities offered by re-racking product vertically also enabled us to put our full offering into a smaller space, increasing the potential number of depots we could open in the UK. All new depots opened will be formatted in this way, and we had planned to open 30 depots this year. In the first half, we put our opening programme on hold as we prioritise maximising cash flow and finding ways depots could trade safely under COVID-19 conditions. In the second half, we now intend opening around 15 new depots. By the end of 2019, we converted 11 existing depots to the updated format as a test to understand the rollback opportunity of the updated format in the existing depot estate. In 2020, we were planning to convert around 30 more depots to the updated format across the country, so that we could continue to learn how best to apply this opportunity within the existing depot estate. We still intend to do this, having reduced the number of depots we were planning either to open or to re-rack without further modifications. In the first half, we completed the conversions of the 18 depots at which works were underway prior to lockdown. And in the second half, we intend to convert a further 11. This year, we are budgeting for an average reformat spend of £225,000 as we apply the learnings from depots converted to date. We now plan to re-rack around 25 depots without further modifications in 2020 versus our pre-Covid plan for 50, including five which were underway prior to lockdown and completed in the first half. At the end of 2019, we had a total of 71 new format depots, comprising 60 new ones and 11 refurbished depots, and had re-racked a further 62 without further modifications. By the end of 2020, assuming our revised depot plans for 2020 are implemented as I've described, we will have in total 115 new format depots comprising 75 opened in the new format plus 40 refurbished ones. And we will have re-racked a total of a further 87 without other modifications. Next, range and supply management. New kitchen ranges each year represent a significant portion of sales as product life cycles shorten. In the first half, we had new kitchen ranges launched and in stock with synchronized rooster promotional offers earlier than last year. 11 of the 13 new ranges were on sale in January prior to lockdown. First half MPI kitchen sales were ahead of last year's when new ranges were launched later. Earlier introductions meant we were well positioned with product as we turned to all depots trading. With the remaining five new ranges for the year launched by the end of the first period of the second half, we have all of our 2020 kitchen NPI on sale well ahead of our traditional peak period 11 period. 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, higher performing ranges and depots. A key part of this is the timely discontinuation of underperforming ranges and the management of clearance stock from the business. At the end of 2019, we had 67 current ranges, including initial stock of some ranges for launch in 2020. We are targeting 16 clearance ranges this year. By the end of 2020, we expect to have 66 kitchen ranges, including initial stock of some 2021 MPI ranges. We believe around 65 current ranges is the right number for our market at present. We continue to aim to remove at least the number of ranges we add. Our dedicated manufacturing and supply chain is crucial to the success of our in-stock offer. It supplies all product, whether manufactured by us or sourced externally, to all our depots, which each have individual and changing day-to-day requirements. It is structured to respond to these needs and to meet the demand of period 11 when sales are typically more than double the level of those in other periods. Operating under COVID conditions has meant finding ways to re-engineer how our factories operate and how we supply and distribute to depots. With the onset of lockdown, we initially closed substantially all of our manufacturing and supply facilities, running only with partial operational teams on each site. This ensured we could continue to receive inbound shipments from external suppliers so that the appropriate stock would be available in the business once we were comfortable that depots could recommence trading and we could supply them safely. We then designed, with employee consultation, a series of social distancing measures, work processes and practices to prepare for a phased return to work at the appropriate time. With additional safety measures in place, in April we were able to reopen our manufacturing sites in Howdens and Runcorn and associated distribution facilities, and we were able to maintain stock availability as demand and the number of depots trading changed. Since reopening supply, we have continued to work through processes with COVID bottlenecks. We can now manufacture all products whilst maintaining social distancing, and our efficiency whilst below pre-COVID levels is now much improved. We have continued with our policy of holding increased levels of safety stock when we believe this is necessary to protect our in-stock offer against potential disruptions to our supply chain and to accommodate irregular patterns of demand. We first did this as part of our Brexit planning and again ahead of lockdown. We have already seen pop-up Covid outbreaks with the potential to disrupt inbound supply and we have navigated with safety stocks and backup sources of supply. And as we recommence all depot trading ahead of some, we have seen some evidence of shortage buying of some of our product lines, and we have had reports of extended delivery times being quoted by some of our competitors. Our ability to utilize our disaster recovery capacity has also helped us to remain in stock as depots have reopened. We also took temporary additional storage space pending some warehouse capacity at Ron's coming on stream, which we expect to be in September. We continue to keep under review what we believe is best to make or buy, both in terms of cost and overall supply chain resilience and flexibility. We have benefited from significant engagement with our supply base, both in support of our 2020 plans for improved product range, availability and price during lockdown. We have long-term relationships with many of our suppliers, And being a manufacturer ourselves has helped us have early sight of the potential COVID risks for our supplier factories. We also operate on xWorks rather than delivered terms with our suppliers, which enables us to work directly with our shipping partners to resolve logistical issues and provide us with earlier warning of orders that might be running late. Turning to our digital platform. We see digital as a means to reinforce the Houdens model of strong local relationships between depots and their customers. The first half, the digital investments that we've made were particularly instrumental in doing this at a time when relationships and ways of doing business were disrupted. We've continued to see increased activity on our web platform and growth in our social media presence, which also stimulates interest in viewing our products and services in Houdens.com. Houdens.com impressions were present in 1.4 million more organic search results a month. Visits to the website in the first half increased by 31% year on year. In the second quarter, average visitors exceeded 350,000 a week and then passed 500,000 a week for the first time. The proportion of our total range being browsed increased with page views for kitchens up 61%. The contacting of depots through the website has increased by 58% in the first half and brochure requests by 34% in the second quarter. Across social media sites, our follower base at 153,000 was up 136% by the end of the period. And we were reaching nearly 9 million users a month, with the percentage of those actively engaged with us up 255% year on year. With restricted movement in the UK, Howdens.com provided a key access point for customers to the business. And in the period, we extended the range of services we provided online. In January 2020, we rolled out the online account facilities, which we developed and then tested in the latter part of 2019. Prior to lockdown, user feedback of the online account service was favorable and usage rates were rising. Since then, the adoption rate has continued to increase. By the end of the first half, 19% or so of our credit account holders had been registered to use the service, with 38% using it out of our normal trading hours. Around 40% of the users made a payment or downloaded a document. Average payments per customer were also well above the company average level. Curated on our website, the first generation call and collect service we introduced provided a way in combination with our in-depot measures for customers to trade safely with us following the onset of lockdown. With planning meetings in our depots or in our people's homes not permitted, a new personal kitchen design service was also made available online. Users can send us design requests, attaching images and measurements of their current kitchen and indicate design and style preferences. Depot designers equipped with online design and conferencing tools to work from home could then plan kitchens and transmit submissions to the depots to deal with as they reopened. Feedback from users and the depots has been positive and we are making the service a permanent feature of our offer. In the second half, we will continue to improve content and add more capabilities to our platform. We will be adding further account, lead and project management features together with functionality, which assists local communications between depots and their customers. For new customers, we will be introducing a digitized account opening option in depots, and a new, more efficient online account opening process which reduce the time spent on and the costs of administering and processing applications. 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. We will be using CGI to extend the number of kitchen range layout options which can be viewed online and adding content which users have shared which showcase our kitchens in people's homes. Lastly, international. In 2019, we decided to focus our operations based in France by way of a city-based approach and we closed our operations in Germany and the Netherlands. We appointed a French national to lead the business and opened five depots, four around Paris and one in Lille. In France, lockdown occurred a little earlier than in the UK and all of our depots were closed on the 17th of March, at which point sales were up around 3% year on year. By adopting our safety first approach and taking similar measures to those in the UK, we then reopened for business with depots operating in a call and collect mode with depots starting to trade again on a phased basis during the first two periods of quarter two. The government ended lockdown in France on the 11th of May and depots were open to normal ways of trading with appropriate safety protocols in place. We are pleased with how our business in France performed during the first half and the start to the second half trading. Whilst first half sales were down around 19% year on year as a result of the onset of lockdown, sales increased significantly year on year in the final two periods. Sales expectations of the depots opened in 2019 are encouraging and sales in the first period of the second half increased by 46% year on year. We are now targeting four depot openings in the second half of 2020, taking the total number to 31, including two in Belgium. In summary, the loss for the first half overall was as a result of the level of trading in the second quarter, which was significantly impacted by onset of lockdown. The business returned to profit in the final period of the first half, following losses in the previous two. The business responded well operationally to the immediate challenges of COVID-19. We took care of our people with a safety-first, consensual approach to return to work, reduced cash expenditure but protected essential areas, supported our customers with lower prices, new services and safe ways to trade with us, reopened safely and quickly with new working practices as soon as practicable with all depots trading by the start of the final period with a full complement of stock. Turning to the second half, our first priority remains the safety of our people and customers, with the focus of the business on delivering our H2 plans and preparations for peak period 11 trading. We aim to retain a profitable balance in the light of prevailing market conditions between price and volume, whilst working with suppliers to keep product and input costs down. We will continue to manage our stock levels actively to protect availability both of manufactured and bought-in product, We have contingency plans to enable us to trade under the range of COVID conditions we have seen to date. We have all of our 2020 kitchen MPI on sale well ahead of period 11 and further rooster promotions planned to keep Howden's front of mind. We will continue to improve content and add more capabilities to our digital platform. In 2020, we intend to open around 15 depots in the UK, four in France and convert around 30 existing depots to the new format. Depots have reported that our policy to return to all depot trading earlier than some safely and with full stock availability is appreciated by customers whose ability to work was curtailed by lockdown. In the first period of the second half, period seven, UK sales were up 38% on period six and increased 2% year on year. Surveys and the numbers of builders trading with us have been trending upwards in recent weeks, and we have seen some signs of pent-up demand. Sales of everyday items have represented a higher proportion of the mix than in normal times, and the lead bank ended period seven ahead of pre-lockdown levels. We remain cautious on underlying market conditions given the ongoing COVID-related economic uncertainties and the impact of the outcome Brexit trade negotiations may have, on which more detail is set out in the R&S announcement. However, I'm confident in our business model through changing economic conditions and the benefits our initiative will bring to our performance. Thank you for listening. We will now take your questions.

We will now take our first question from Alexander Neff from JP Morgan. Please go ahead. The line is open.

Good morning, gentlemen. Thank you very much for that very comprehensive presentation. I have just a couple of follow-up questions, please. Just firstly, on the gross margin, I wonder if you could give a little bit more colour as to the drivers of the gross margin declines. With regard to mix, is this something that's likely to be sustained into the second half or is it a feature of COVID? Secondly, I wonder if you can just comment on your expectations around any further benefits from furloughing in H2. And just finally, I'm interested in what you're planning in terms of bad and doubtful debts in the second half, whether you have any assumptions that you can share there. Thank you very much.

Thanks, Alexander. It's Andrew here. The gross margin was down a bit in the first half. The majority of that was down to mix between everyday, sort of over-the-counter items, stuff that we would consider like doors, joinery, flooring, ironmongery, you know, in the mix against kitchens. I think you would understand that most customers would not be interested in pulling their kitchen apart in lockdown period. So obviously the mix has gone in towards sort of over-the-counter type product. The other is hogs from the factory with additional operating costs, and there will have an impact on margin. Regarding the second half, we released... A little bit more margin to the depots for a couple of reasons. To ensure that the depots have got full capability of taking whatever business is out there in the second half. And also ensuring that the builders can win business with end consumers. So we would see a little bit of gross margin there. erosion in the second half, not a lot, just a bit, as we compete heavily in the market. Regarding the second question, I'll hand over to Mark, and maybe you'd also add on as well. Yeah.

On furlough, we've claimed a total of 22 million, and we received 15 of cash in the first half. So we're due another seven in H2. On VAB debts, a few things going on. So the aging is going out a bit. So the aging in particular we look at, the category we concentrate on is the over 90 days, and that's extended at the margins, nothing dramatic. We've had a number of customers, a very small proportion, but a number of customers who've got in touch about difficulties settling their accounts. So on an individual basis, We've agreed terms so they can repay. What that amounts to overall is we calculate the cost of accounts receivable where we add debts written off to the costs of running the credit control department. That total for a number of years now has been running slightly below 1% of sales. First half of 20, it's very slightly over 1%, so to be precise, 1.1%. That's partly as a result, obviously, of reduced sales in the first half. So, yeah, no reason to be anxious at all. In fact, the debts written off in H1, 20 or less than the debts written off in H1, that might alter as we go forward. So we're watching it like a hawk. So overall, there has been some aging, a little bit of strain, but absolutely nothing dramatic at all.

It's very helpful. Thank you.

Thank you. We will now take our next question from Christian Hort from Numus. Please go ahead. The line is open.

Hi. Good morning, guys. Just three questions from me, if that's okay. The first one is just on the potential investment in price and just the rationale from that. Are you seeing competitors being more competitive on price, or is that more just to drive market share gains in what is an uncertain time? Secondly, just around the planning for period 11, obviously a very important period, but a lot of uncertainty around at the moment and just how you are thinking about that going forward. And then just finally, you mentioned on the digital offering that some of these changes are structural and here to stay. Just how you see sort of Howden's role develop, I suppose, in supporting the jobbing builder as consumers increasingly buy and shop for kitchens online. Thank you.

Thanks. I've got three questions there, so I'll try and tackle each one of them, and Mark can come and support me. Our approaches on price has been a very pragmatic one. In fact, our approach around this whole crisis has been in a number of steps. We were very clear as an exec how we were going to bring the business through it. The first was to secure stock. From China initially, and then from Italy, we collect a lot of stock X works in our manufacturing operations. Then to take care of our people, which we furloughed, topped up, safe working practices both in factory and depot, fast return to work, and then hard trading. We find ourselves in the market in a position of strength, where we're very well stocked, And we believe the right thing to do is support both our depot teams with improved margins, so it runs through their P&L. We can make more money, be heavily incentivized around it. Also, the customers to ensure they've got a little bit more as they sell out to end consumers. I think it's more a pivot than anything stronger than that. And I think the erosion, as I said before, is around mix, which we'll see come back. I think as volumes grow through the factory, which is our intent, we'll see some gains and we'll play it through. So we've released a little bit more margin to the depots, to local business, locally priced. Depots are incentivized around maximizing profits on their local P&Ls. And that's gone down particularly well with the depot managers. Regarding period 11, our lead bank coming out of COVID, if you like, or certainly coming into period, out of period seven is stronger than we went into COVID. So we're sensibly placed as we look now on period 11. There's a long way down the road to go. So there will be some pent up demand in what we're seeing currently, but We bought appropriately for period 11. We're not selling product here that will go date-expired like food. We are investing in fast sellers, what we call A's and B lines. We will sell through it eventually. So the most important thing for us to do is to stay in a very firm and strong stock position. The teams are in good form. We've stayed... in very close regular contact with the teams andy witts and i've spoken to every depot manager every week right through furlough and we've done that through a series of team calls where we do our regional we call regional boards 80 depot managers to the call every time, so we made a significant investment in time to keep up the communication. Likewise, our depot managers have kept up strong communication with end customers as well, which I think will be appreciated as we come out the other side. I think on price, we've noticed some other competitors putting up price. Plasterboard would be a good example, which has been in major shortage across the UK and has delayed some works in kitchens and other items around the homes, and prices have fluctuated quite dramatically. That's not the game we want to play here. Regarding digital, the comment I would make, having led the business through this crisis, is just how strong the business model is and how when we lean firmly into the principles of the business and what the business is about, we perform well versus our competitors. Digital has a role to play, there's no doubt, but I do not want it to undermine the business model in any way. So it's been extremely helpful in getting and securing payments from customers as they've gone online to a digital login. We feel there's more capability around that, and I eventually want our customers to be able to go in and order any time they want. In the short term, we've been using call and collect, which has been a significant usage by our customers through the lockdown period, and we'll eventually want to digitize that. in the right way for Housens and it has to be private, it has to be individual to individual customers and we will take our time and we will test it properly as we go through it. We're really encouraged by end consumers becoming more aware of the brand. That was our initial step on digital, we wanted customers to understand our ranges better, search our website better, see more aspects of our website. And I think the traffic that's driven off that is a testament to the great work that the team have done there. Thank you.

Excellent. Thank you very much, guys. Thank you.

Thank you. We will now take our next question from Charlie Van Vel from Librem. Please go ahead. The line is open.

Good morning, guys. Charlie Campbell here. A couple of questions, really. First of all, just wondering what builders are saying about customers' appetite for work sort of on refurbishing kitchens. I can understand some people might be reluctant to have that level of disruption in the house still, whether that attitudes are softening. And then secondly, just to get back on the furlough question, Just to confirm, you've got everyone off furlough now and there's no P&L benefit in the second half. Just to confirm that, please.

Mark, do you want to do the furlough question first?

Yeah. To all intents and purposes, everybody off furlough. The split house, we've got one or two minute numbers that we regard as vulnerable given their age. all given their caring responsibilities. So, yeah, everybody back in. On furlough, no P&L effect in the second half, so we've, on an accruals basis, if you like, in the first half, we've accounted for the 22 million that we've claimed.

Thank you. Regarding builders and what they're saying about customers' appetites, I would say we haven't had many of our builders' forums through the lockdown, but we have stayed in contact with a number of builders. I think we'd point to chaotic diaries of the builder where the work patterns are changing. We've seen builders come in earlier into depots and the trading pattern more in the a.m. rather than the p.m., We've seen, certainly initially out of lockdown, it's moved a bit since. I think our stocked model supports them incredibly well as patterns change between working outside, working inside. They would report that customers and customers are active. And I think it's probably like what many of us have done at home. We've been more interested in our homes. We're thinking about... you know, where we live. And I think maybe some of the home improvers have seen people painting and doing some basic gardening and that kind of thing. The trades will have to come in and sort of pick up all the problems that the DIYers have created. I think, too, though, that what we've done very well in Huygens is ensure that we get people through our system quickly. You see a lot of queues outside builders, merchants. You don't see any and we're keeping our builders very safe. So, yeah, I think our builders are very, very busy and, you know, if anything, there'll be a shortage of their capacity.

Thank you very much. Thank you.

Thanks, Johnny.

Thank you. We will now take our next question from Clade Lewis from Peel Hunt. Please go ahead. The line is open.

Yes, good morning. It's Clive Lewis at Peel Hunt. A couple, if I may. One probably for Mark in terms of sort of trying to understand how the, I suppose, the deferred tax payments to HMRC will evolve through the second half of the year. And again, any help you can give us there would be useful. The second one was on, I suppose, trying to get a little bit of a flavour on how period seven I mean, you've very kindly given us, you know, periods four, five, six and seven in terms of the sales number. I suppose I'm trying to get a little bit of an idea as to how that sort of plus 2% has evolved. You know, was the first week, you know, a big minus number and week four a very big positive number or is it a much more narrower band? And the third one, I suppose, goes back to competitors again. And I think throughout your comments, Andrew and Mark, you've both referred to some of the competitors obviously not being as organized as yourselves. I mean, would you, I mean, I know it's hard to name names, but, you know, in terms of sort of where the weakness has been, would you say that has been more amongst the independents or the bigger companies just to get more of a flavor as to what's going on on the competitive front?

Yeah. On the tax, Clive, as we've said, we've deferred $61 million. And the track we're on at the moment would say come the year end, 27 million will still be deferred. So we'll have settled the balance in the second half, but we'll still be benefiting from a 27 million pound deferral come the year ended.

I'm going to go to the competitors first, and then I'll come back to the period seven question. I would say, yeah, I mean, we focused on playing our own game here, and we've obviously monitored very carefully who was opening when. We did get quite a lot of ground roots feedback that a number of our competitors, certainly the staff, had said that they had wished that they were as organized in terms of getting back into depot and up and running as quickly as possible. Our health and safety team have done a fantastic job in Huygens on keeping us safe which is completely critical. So I would say we were definitely the winners in the trade space and I would say the independents too tend to be high street driven, slower again to come back to work. The problem has been in the showroom areas, you know we don't have very large showroom areas at the front of our our depots, we've been able to sort of restrict entrance easily and get people through our system in a one-way system through the depots. So, yeah, I would say we've been up and running faster than the others. I think in terms of period seven, we would have noticed it's not all come in the last week, would be the first thing I'd say. It's been steadily building. week on week as we've gone through, which is an encouraging trend. And it's actually been improving in trend each week from period six.

Okay. Thank you very much, guys.

Thank you. We will now take our next question from Jeff Lowry from Redburn. Please go ahead. The line is open.

Yeah, hi morning team. A couple of questions, one gritty, one high level. When I think gritty, I tend to think Mark, so we'll go there first if we can. When I look at your OPEX development, and I strip out furlough and closure costs in Europe and so on, it looks like your OPEX was down about 6% year on year in response to a 30% sales decline. Is 20% the sort of normal variability we expect in your cost base now? And the second question in terms of bigger picture, I'm quite struck by the relative speed with which you've put sort of CapEx back into the business, restarted the store opening program or depot opening program, et cetera. What does that really tell us? Because at the same time, You're not confident enough to think dividend or buy back at this point, but you are confident enough to put quite big lumps of capital back in. And likewise, joined up with that, you're not really appearing to put the business on any sort of recession footing in terms of people costs. It seems to be very much back to prior trends. Is that a fair read on how you're thinking about the future?

Thanks, Jeff. Yeah, I'm done. I'm associated with gritty. I'll take that as a compliment. On the OPEX, yeah, I think on the 20% variability, I think the background comment here is, as they say, in the long term, all costs are variable, and in the short term, all costs are fixed. And I think over a short period, the flex doesn't reflect how much variable cost is sitting in OpEx. So if you look at the elements that have really moved, as a result of reduced volume. So there's a brick called Older Defos on the graph. And the big movers there are delivery costs, payroll, and incentives connected with payroll. And then in the other costs, central distribution has flexed down and Again, bonuses for people that sit outside of the depot and incentives for people that aren't in the depot network. So I think over a short period, the flex hasn't been that great, but over a longer period, I think you'd see a more, a split between fixed and variable within OPEX, which is more representative of the sort of operational leverage of the business. So you'd see a much larger degree of flexibility.

That's your second question. Your second question, I think we are very confident in the business model. The depot openings that we've put back in are half the level that they were intended to be at the start of the year, largely in the process of finishing off works. There were some half-done works, and there's a lower level of refit work, but again, they had to be done. Tools were put down halfway through processes, so it's sort of more, read it more is tidying up. In terms of next year, we haven't decided yet how much capex we will do. We'll see how trading plays out through the balance of this year. Around people costs, we've obviously looked across the business. There'll be a little bit of tidying up, not a lot needed, and we will play out the appropriate productivity level in the depots but we'll see how demand plays out. But I think long-term, we are very confident in the model. We want to do the right things in the short term for the business, but sort of take the foot off the accelerator slightly in the short term.

Understood. And can I just add a quick third? Just in terms of your period 11 preparation in a COVID socially distanced world, Can you, in terms of manufacturing, delivery to depots, depot volume, can you handle period 11 type absolute levels of volume in a COVID socially distanced world?

The short answer, Jeff, is yes. We've taken extra space. Thank goodness we've got ROMs, which will be available. The shortest lead time of any product is the rigid cabinet. And with the disaster recovery plant that we put in a number of years back, that's been utilized through the downturn. And it's about storing cabinetry, ensuring the allocation of faster-selling SKUs into depots. We've modeled it. We believe we can do it.

Thank you very much.

Thank you. We will now take our next question from Robert Eason from Good Buddy. Please go ahead. The line is open.

Good morning, everyone. Hope all is well. Just a few questions for me. Just around the order book as you see it, firstly, are you seeing any changes in the conversions when you're at design stage to an actual physical order being placed and it's almost committed? Any comment around that? In terms of incremental design requests coming in or incremental orders coming in, has there been any changes that you've seen in terms of the pricing points of the kitchens that customers are looking for? My final question is just around working capital. You clearly have released a bit more margin into the depots to give them more flexibility to go after volume. Is there any flexibility being given on working capital? You've talked about bad debts. There's some kind of workings going on with some individuals to help them along. But is there general changes in working capital? Are you seeing any changes in working capital amongst your competitors in terms of extending days, et cetera, to builders? Yes.

Robert, thanks for that. Look, it's a live show, if you like, on the order book. We're pleased with the levels we're looking at right now. We wouldn't notice any particular difference in conversion rates pre and post. I think there are some signs of people getting through the process faster, being more decisive, and we would interpret that as people having had more time to plan and think when They've been at home using the website more. And evidence would point to they seem to be clearer about what they wanted before they sit down with one of our consultants. Regarding price points, you know, the Heartland area of houses is an 0 to 2K type kitchen. That's got off to a stronger start than... mid and higher ranges. I wouldn't read too much into that, though. I think a lot of that is builders picking up cabinets, taking them away in that sort of smaller type kitchen. The lead bank really plays to medium and better kitchens. I think we have moved our proposition on quite a lot on the top end range with the introduction of our handle-less ranges and our new shaker ranges, which look promising. So I think the things I would point to would be the conversion's similar. People seem to be getting through the process faster.

Yeah, thanks Rob. On working capital, I think we see things normalising as we move through the second half. So you would see a more representative balance of the three factors and notwithstanding clearly the reduced sales level in the first half if you looked at our credit the days and our stock turn as stock turn as weakened a bit credit the days are very much in line That the days have weakened for the reasons that you touched upon in terms of the aging, but all the indicators we watch mean we should normalize during the second half. So we are reaching arrangements. with people who are struggling to pay. The sort of COVID stock, strategic stock we've taken in, that's all fast-moving product. So that will flow through. And creditors are behaving normally throughout. So I think by year end, we'd see, yeah, our expectation is more normal numbers for working capital.

Thanks. Just to follow up on that, Mark, in terms of your competitors, are you seeing extended terms being offered at all as they try to eke out market share and volume?

No. We don't think so. There are the players that offer interest-free, but they're the same as they've always been in terms of attracting some business that way. But we haven't seen any changes of behavior in that area at all.

Thank you, guys.

Thank you. We will now take our next question from Amy Gala from Citigroup. Please go ahead. The line is open.

Thanks. Just a couple of questions from me. The first one is on incentives. I was wondering if you have modified depot incentives in light of the current disruption and how is the staff really incentivized to chase sales in the second half? Also on the point on price flexibility, is there a flow level of gross margin set for individual depots? giving them relative flexibility rather than absolute levels. And lastly, on trade account users, has there been any changes or shifts in the number of accounts that are trading with you on an ongoing basis?

Incentives, as I'm sure you're aware, is a key part of what makes Hizen's work. If anything, we've leaned heavier into incentives as we've come out of this crisis. And the feedback that we get from the regional boards I mentioned earlier has been that the staff are absolutely delighted with what we've done in terms of rewarding them for specific activities that we would target on a monthly basis. The second part has been increasing the gross margin at the depot level, i.e. apportioning a little bit more centrally into the depot pots, and that benefits everybody in the depots. The depot staff are bonus of the gross margin, the managers bonus of the net margin of the depot. So all of their eyes are focused on cash, pounds, profit, because it relates directly to their pay packets. We've been generous around the annual pay awards as well, all cited. I would say our staff are highly engaged currently. There's always been that in Houdens. It feels amazing when you walk around the depots currently. Yeah, if we've got a strong area field management team that look at gross margin across the piece. We take quotes from, we take estimates from the area managers at the regional boards every month. And if anybody's far out on the gross margin, they will be picked up on it. But the way the business is constructed, depots tend to know where to be at. And yes, there is a floor below which you won't get paid if it goes too low. In terms of trade accounts, Mark, go to...

Yeah, in terms of trade accounts, we're off a bit. So the total number of accounts, so that's credit plus cash. We finished last year at around 470,000 accounts. And we're about 15,000 lower come the first half of 2020. So I don't think that's a significant weakening given the circumstances.

Thank you.

Thank you. We will now take our next question from Olivia Towsend from UBS. Please go ahead.

Hi, everyone. Yes, I have two questions. Firstly, just in terms of the additional operating costs, that 20 million, I'm just wondering how much of it are you expecting to occur or continue into next year, just so we can think about the bridge for FY21 as well? And then, Secondly, is there any way to quantify the benefit from that pent-up demand that you were mentioning? Or do you have any sense from the builders on how long that pent-up demand could last? Thank you.

Yeah, if we look at the elements of that 20 million, So the ones we've alluded to are this dual running impact. Of the 20, it's about half of that and that will vanish effectively in 2021. So that's not ongoing. The other elements, so if you like, the other half of the 20 will continue. So the increased pension charges and the additional depreciation they'll be built into OPEX for ongoing. So it's about half and half, half enduring and half will fall away in 2021.

Olivia, regarding your second question, it is incredibly hard to work out what's pent up, how long it could last. I think what we're doing in the business is just focusing on bringing great product, amazing prices, and delivering great service and just trying to make as much of whatever market is there and take as much share as we possibly can. You know, we are seeing new accounts. We are seeing new faces and some old faces given stock and price. It's just too early to tell, only having done period seven in a couple of weeks and period eight.

Great. Thank you.

Thank you. We will now take our next question from Simon Denson-Smith from Metropole Capital. Please go ahead.

Good morning. I've got some questions around the reverb and sort of reshelfing plans you've got. I'm just wondering how you measure the return on that investment, what sort of hurdle you're putting on yourselves and whether you're seeing that in the depots that you've implemented in? And whether, as a result of that, the intention is to roll it out to the entire state?

Yeah, in terms of the metrics, we're looking at a number of factors. So what we do is, when we do a refurb, we line it up in a sort of quasi-scientific way. against similar depots that haven't been referred to try and track the increment. So we look at sales level. We look at margins. So we have seen some hiccups in pricing in some of the depots. We look at payback. and we look at the return on spend, and one of the comparisons we do is we've been tracking for years what it costs, what you have to invest in capex and working capital for a brand new depot, and for the additional spend, again, in terms of those two elements, capex working capital what sort of return we're getting and we've got they vary but we're getting a positive result from all of them but it is horses for courses so some of the full refurb. We look at the size of the depots, where they are for summits. We just introduced the improved racking system. So yeah, a number of metrics. And again, watching it like a hawk, really.

How much do you look to get?

Yeah, well, if you looked at We're not sharing that just yet in terms of specifics, but if you looked at a new depot as a comparison, it takes about four to five years in cash terms to get the payback on a new depot. It turns profitable on average after about 15 months. And your total investment in a new depot is about 700 grand, and that includes capex, working capital, and losses, as I say, for about 15 months. So that's the thing we compare it against. But I think we need a bigger sample size, really, on the refurbishments before we want to share numbers more specifically.

But you're looking for something along those lines, is that fair to say?

I think that's That's a marker, but I think if we're getting a good return, we ought not to be too religious and say, well, if it doesn't exactly match the return of the new demo, then we abandon it. If we're getting positives, then we're net ahead. If it's beyond our cost of capital, that's a plus.

You touched on the fact that the new shelf design could result in smaller formats and therefore potentially other openings that weren't in the original plan. Is that your thinking beyond the numbers that you've given currently as to where you cap out in terms of number of depots?

Two years ago when I joined, we upped the number by about 50. that was driven by the density improvements of toast racking. It gives us more flexibility in inner city areas. And in quite rural catchments where we put a small depot, it seems to make more sense. And we do think there's some picking benefits from that, and we've learned to do it well now.

OK, so that 50 incorporated the effects of this shelving design.

Yeah. I think we're out of time now.

Thank you for the call and if you have anything else please come back to us outside of the call. Thank you.