Howden Joinery Grp Ord

Good morning, everyone, and welcome to Howden's 2020 results presentation. I will begin by introducing our 2020 performance. Paul Hayes, our new group CFO, will then review our financial results for the year. I will then share my perspectives on our 2020 performance and our plans for 2021, and then we'll take questions. Howden's has performed well during a challenging year that has been significantly impacted by COVID-19. We adapted to COVID trading conditions while investing in and progressing our strategic plans for the business. Our performance demonstrates the strength of our trade only business model and our ability to continue to evolve the business whilst prioritizing the health and wellbeing of our staff and customers. The result for the year reflects the quarter two spring lockdown period, followed by a year and year increase in second half sales and profit. UK sales in the first half were 29% lower than in 2019, with all of the shortfall attributable to trading in the second quarter. UK second half sales increased by 16% on 2019, with the increase in sales trending upwards across the second half, exceeding our expectations in latter periods. I believe this performance reflects the measures that we put in place to enable our people in all areas of the business to work safely together with those put in place to support our customers. These measures comprised of new services, lower prices, combined with more margin flexibility for depots, high stock availability and a safe environment in which to trade. With people by necessity spending more time at home and end user concerns about further lockdowns, we also believe people were choosing to spend more on their homes. We flexed our traditional period 11 sale period when sales are typically more than double those of other periods across periods 10 and 11. With signs of pent up demand, reports of extended delivery times amongst our competitors, and concerns about further lockdowns, we flexed the sales period to help builders book in more kitchen fits over a longer period. Sales across periods 10 and 11 exceeded those targeted by the business, and period 11 alone still returned a record result. It also benefited supply chain management and the ability of our depot teams to service demand, which in turn were incentivized for performance in periods 10 and 11 combined. A founding principle of Howden's is to be worthwhile for all concerned. In these difficult times for all, we have supported staff and customers and continue to conduct other stakeholder relationships in a fair and responsible way. During the spring lockdown, we maintained an emergency provision to support the NHS, care workers and vulnerable people, and we have continued to support charities. Throughout 2020, we paid our landlords in full and honoured, and in some cases, increased our orders from suppliers, who in turn have supported us with high stock availability. Similarly, given Howden's strong balance sheet and our trading performance, we repaid all of our 2020 furlough funding prior to year end, and settled a number of other payments that we previously deferred, including taxes, pension deficit contributions and business rates waived by certain local authorities. And today we are recommending that we resume dividend payments. The marketplace remains challenging and may be further impacted by COVID-19, Brexit and underlying consumer confidence. We believe we are well positioned in such a market with our trade only in stock and local model. Based around our core building blocks of service and convenience, trade value and product leadership, we have initiatives in place to do this through evolving our depot model, by improving range and supply management and developing our digital capabilities. I will update you on these and our operations based in France after Paul has taken you through our financial results.

Paul. Thank you, Andrew, and good morning, everyone. I look forward to meeting you face to face when conditions allow. I joined Howden's in November, and despite lockdown, the team has helped me get to grips with the business very quickly. I've visited our manufacturing sites, a number of depots and other locations, and met many of our people. I'm pleased to be announcing Housland's 2020 four-year financial results, and you will be reassured to know that I will be presenting the financial results today in the well-established format used by the company. I believe that this will be the most effective approach in providing clear comparability. Let me start by looking at some of the headline numbers. These are reported by us for the first time under IFRS 16, the new lease accounting standard. Moving from left to right on the top row to begin with. As you can see, Howden Joinery's UK revenue fell by 41 million pounds to 1,510 million, a 3% decrease on 2019. Overall, group sales decreased by 2% after including our growing continental European business. Gross profit fell by £56 million to £930 million. The percentage gross margin of 60.1% was down from 62.3% in 2019. This included mixed changes, and as we explained in the first half results, the impact of carrying fixed manufacturing costs during reduced levels of production. Howden's made an operating profit of £196 million in the year, down from a £260 million profit in 2019. Now moving down to the second row. Net interest charges were up by 11 million pounds predominantly due to the adoption of IFRS 16. As a result, there was a profit before tax of 185 million pounds. This compares to a profit of 261 million pounds in 2019. The cash flow was particularly strong in the year and this included significantly lower shareholder payments with a share repurchase of 10 million pounds in the early part of the year before this was suspended. There were no dividend payments in 2020 and I will talk about recommencing dividend payments a little later in the presentation. There was capital expenditure of 70 million pounds and a 30 million pound contribution to the pension plan deficit. In addition, our cash flow was impacted by £60 million beneficial phasing from higher payables, despite payments being made in accordance with usual terms. The underlying cash balance is approximately £370 million. I'll now go into some of the detail behind the headline numbers and start by talking about revenue. Howden's UK turnover was 1,510 million pounds and decreased by 2.6% on a total basis and down by 4.5% on the same depot basis. In continental Europe, turnover was 43 million euros, which was a 13% increase. This is after adding four more depots during the year, bringing the total to 30. sales growth was 2.5% in the same depot basis. I will now show some more detail on the UK performance on the next slide. In Q1, pre-COVID, sales were up 1.1% on a total basis and down 0.8% on a same-depot basis. During Q2, we were most significantly impacted by the COVID-19 pandemic. With the initial phase of lockdown, sales were down 56% on a total basis and down 57% on a same-depot basis. We improved period on period in the second quarter as we found ways to operate the business safely, In the second half, sales recovered, were up by 16%, and we believe that our performance was supported by our full stock availability. Andrew will provide more details on this later. Overall, in H2, sales were up by 14% on a same-depot basis. Let me now talk you through the movement in PBT, from £261 million in 2019 to £185 million in 2020. starting with gross profit that fell by £56 million, which is summarised in the chart on the right-hand side. If we bridge from 2019's gross profit, £986 million, there was a £16 million impact from pricing. Secondly, a large fall in sales volumes compared to 2019 reduced revenue by £20 million. There was a negative impact from mix of 9 million pounds, a result of higher sales of lower margin products. This reflect changes in customer demand in the current environment, such as an increase in sales of appliances. These products are at good margins, but below the high average margin of the group. Also affecting cost of goods sold, we saw higher input costs. This resulted in a net decrease to gross profit of 5 million pounds. And as mentioned earlier, we were also impacted by carrying fixed costs at lower levels of production for around £6 million as a result of COVID. Exchange rate movements in the year had a minimal impact on margin. Together, this gave a net falling gross profit of £56 million to £930 million and a gross profit of 60.1%. 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 increased by 8 million pounds, which I will address in the next slide. Net interest and other finance charges were 11 million pounds higher than in 2019, reflecting the impact of adopting IFRS 16. The net result was a profit before tax of 185 million pounds, I will now explain in more detail the main movements in operating costs. Operating costs increased from £726 million in 2019. Firstly, the incremental costs of the 38 depots that we opened in the UK in 2019 and the 16 depot openings in 2020 totalled £10 million. Costs in older UK depots decreased by seven million pounds, mainly reflecting reduced levels of activity and therefore variable costs, particularly in quarter two. Cost increases incurred to support future growth totaled nine million pounds. This included the costs of the Rwands development, which we previously announced, and digital developments. The impact of French depots totaled four million pounds, Other operating costs increased by 6 million pounds and closure of our Dutch and German depots in 2019 benefited the four-year result by 6 million pounds. Finally, costs reduced by a further 8 million pounds as a consequence of adopting IFRS 16. This meant that operating costs overall rose by 8 million pounds to 734 million. I will now briefly turn to the remainder of the income statement. If we look at the second column of numbers on the table, the impact on 2020 of adopting IFRS 16 was an increase in operating profit of 8 million pounds. This is more than offset by an increase in related interest charges of 10 million pounds. As a result, as we've seen, our profit before tax was 185 million pounds. This led to a tax charge of 38 million pounds with an effective tax rate of 20.3%. This gave a profit after tax of £148 million. This resulted in earnings per share in 2020, 24.9 pence, which compares with 35 pence in 2019. Turn into dividends. As you know, the dividend and share buyback programmes were suspended in 2020. In November, we indicated that the Board would consider recommencing payments of dividends subject to the company's trading performance and financial position, continuing to meet the Board's expectations. This would be subject to there being no further significant disruption due to COVID or otherwise. The Board has recommended that we pay a final dividend of 9.1 pence per share for 2020. This is in line with the group's established dividend policy between 2.5 and three times dividend cover at 2.7 times. It will be paid in June 2021 if approved by shareholders at a cost of approximately 54 million pounds. In addition, the Board has recommended a special dividend of a further 9.1 pence per share, which will also be paid in June 2021. This is equivalent to the 2019 final dividend that was cancelled. In respect of 2021, an interim and final dividend will be declared in line with our policy. The 2021 interim dividend will be one third of the 2020 full year dividend at 3 pence. The group has a strong balance sheet that has positioned us well in these challenging times, and we face continued uncertainty. The board regularly reviews its prudent capital structure against current trading and cash requirements to ensure it gets the appropriate balance between supporting the business and delivering appropriate shareholder returns. This will include reviewing the level of shareholder returns once we see more stability. Let me now turn to cash flow. From a position of having net cash of 267 million pounds at the end of 2019, we ended 2020 with net cash of 431 million pounds. Although, as I explained earlier, the underlying cash balance was 370 million. The major movements since the end of last year were networking capital decreased by 70 million pounds, which I will address shortly. Capital expenditure totaled 70 million pounds and was focused on growing our business and executing our strategy. It included spend on the final phase of our RONS warehousing strategy, further delivering our digital capabilities and investments in new depots in both the UK and France. We also acquired solid surface worktop production facilities that strengthened our product portfolio, and Andrew will talk about these shortly. Corporation tax payments were £32 million. As I've already described, we spent £10 million repurchasing shares in the first half. And there was a £22 million contribution to the pension scheme over and above the P&L charge. The net result of these and other movements was a cash inflow of 163 million pounds, meaning that we ended 2020 with net cash of 431 million pounds. Now looking at the main movements in working capital. Net working capital decreased by 70 million pounds Within this, stock increased by £23 million. This was largely impacted by increases in contingency stock to protect against potential supply chain disruption from COVID and Brexit. This approach has supported our business model well during COVID-19, with good stock availability differentiating us from many of our competitors. Debt has decreased by £2 million, including a lower debtor book with good ageing. As I mentioned earlier, creditors increased by £91 million, impacted by high levels of stock receipts later in the year. We have already seen this reversing Q1 2021, and this should be taken into account when reviewing underlying levels of working capital. Let me now finish with some brief comments about current trading. The first two periods of the year saw total UK sales rise by 5.1%, up 4.5% on the same depot basis. Excluding week one, which has included two and a half trading days in 2020, but no trading in 2021, sales were up by 7.1% or 6.5% higher on the same depot basis. Clearly, there are currently various market uncertainties and a number of factors that need to be considered in forecasting this year's overall result. We are seeing continued uncertainty as consumers are feeling more cautious in letting tradespeople into their homes in light of the continued COVID pandemic and related restrictions. This is leading to variability in demand from our customers. We have implemented price increases but we are currently seeing pressure on commodity pricing and freight costs. We are also continuing to take other measures to protect our employees and customers and to de-risk our in-house supply chain. We will closely manage the drivers around margin and focus on getting the right balance between pricing and volume in what remains an unusual market. We're continuing to roll out new depots and revamp existing depots. This reflects some initial success from the reformatted depots we have completed so far, despite a rather challenging trading environment. We're continuing to invest in the business around its core strategic priorities and anticipate investing in the order of 80 million pounds this year in capital. This is consistent with the amount that we were expecting in 2020 before COVID. In summary, Howdens has performed well through a challenging period and remains in a strong financial position. Although the business continues to face near-term uncertainty, it is well positioned to deliver a clear organic growth strategy. Thank you. I'll now hand you back to Andrew.

Thank you, Paul. I will start by talking about our performance in 2020 and our plans in 2021 using the initiatives we had in place for 2020 as a framework. Firstly, depot evolution. We are opening depots using our updated format designed to provide the best environment in which to do business with no material change to new depot fit-out costs. In 2020, as a consequence of market conditions, we opened fewer than planned. In the first half, we put our opening programme on hold as we prioritised maximising cash and finding ways depots could trade safely under COVID conditions. In the second half, we opened 16 new depots, mostly in the latter part of the year. We are now targeting around 35 UK depot openings in 2021, including some more in Northern Ireland. We also reformatted some more of our older depots, and we continue to learn how best to apply this opportunity to our existing estate. During 2020, we reformatted 30 depots, having reduced the number of depots we were planning either to open or to re-rack without further modifications. These were completed in line with our budgeted average cost of £225,000 per depot. In 2021, we plan to reformat 40 depots, We are budgeting for an average reformat cost similar to the 2020 level as we continue to refine the scope of the refurbishments. In 2020, we also re-racked the warehouses of 17 existing depots without other modifications and plan to re-rack a further 20 in 2021. At the end of 2020, we had 117 UK depots trading in the updated format and we had re-racked the warehouses of a further 79 depots without further modifications. By the end of 2021, we expect to have a total of around 192 UK depots trading in the updated format and to have re-racked a further 99 depots in total without further modifications at present. Next, range and supply management. New kitchen ranges introduced each year represent a significant portion of sales as product life cycles shorten and our customers want new product from us. Our 2020 new product featured 18 new kitchens, including two new styles, plus more color options for existing families. And we began using our new handle-less cabinet platform to meet demand for a linear look at more affordable prices. Our new kitchen ranges were launched and in stock earlier than in 2019 and launches were synchronised with rooster promotional offers. Earlier introduction meant we were well positioned with product as we returned to all depots trading and new product introduction kitchen sales were ahead of last year's. 2021 new product includes 16 new kitchen ranges. These include a more traditional style timber shaker range, Elmbridge. Initially available in three colours, it complements our contemporary shaker range and strengthens our £4,000 plus offering. We are adding colourways to our mid-priced families and to our modern style Hockley kitchens, which have performed well since launch. we are also adding colorways to our entry-level kitchen offers. We have developed a number of new added value decorative accessories to both our modern and shaker ranges that will enable customers to create a more personalized look. Our 2021 brochure, trade book, and period one and two promotional materials were all in depots pre-Christmas. All of our new kitchens for 2021 will be in stock by the end of the second quarter, well ahead of our autumn sales period and four weeks earlier than last year. Discipline range management is crucial for both best availability, which is highly valued by our customers, and profitability. At the end of 2019, we had 67 current kitchen ranges. and we ended 2020 with 63, having cleared more ranges than we added during the year. We believe around 65 current ranges remains the right number for our market at present, and we will be managing range introductions and clearance to around this number in 2021. Houdens is an in-stock business, and the trade tell us that a high level of stock availability is one of the key reasons they buy from us. Our traditional replenishment model is based on weekly delivery to depots, is cost effective and is particularly suited to replenishment of fast moving product and product with relatively predictable demand patterns. We are making an improvement to our stock replenishment by supplementing the depots core weekly delivery order by introducing a next day service by a regional cross stocking center or XDC. By rebalancing where we hold stock and changing the delivery pattern of some lines to depots, depots can, for example, allocate more warehouse space to faster selling lines and can reduce contingent stocks of more slow moving ones. This makes it simpler and more efficient for depots to deliver superior service levels and improve product availability, including for abnormally sized purchases. and we are freeing up time and resources spent on stock management, for example, on interdepot transfers of product. We are developing this capability with third-party logistics partners, and in the main, we are utilizing their existing infrastructure. The service is available to 120 depots at present, and we expect to increase this to around 250 depots during the second quarter. Our dedicated manufacturing and supply chain is critical to the success of our in-stock offer. It supplies all product to our depots, which each have individual and changing day-to-day requirements. Operating under COVID conditions meant finding ways to re-engineer how our factories operate and how we supply and distribute to depots. Having initially closed substantially all of our manufacturing and supply facilities with the onset of the spring lockdown, we designed with employee consultation, a series of social distancing measures, work processes and practices, which enabled us to reopen safely in April and maintain stock availability as demand and the number of depots trading changed. Since then, we've continued to work with and develop appropriate COVID compliant processes. We can manufacture all product whilst maintaining social distancing and our efficiency whilst below pre-COVID levels has progressively improved and we were able to accommodate the significant rise in second half volumes. We took measures to protect our in-stock offer against supply chain disruption and to accommodate regular patterns of demand. by increasing levels of safety stock and using backup sources of supply. We did this first as part of our Brexit planning, and again ahead of spring lockdown, and it enabled us to navigate local COVID outbreaks, which had the potential to disrupt inbound supply. Our ability to utilize our disaster recovery capacity helped us to maintain stock availability. We also took some temporary additional storage space and we utilized immediately more of the warehouse capacity at Rons than planned when this became available on schedule in September, 2020. Our stock strategy has also benefited from significant engagement with our supply base. We have long-term relationships and agreements with many of our suppliers and being a manufacturer ourselves has helped us anticipate potential COVID risks in our supplier factories. We also operate on ex-works rather than delivered terms with the majority of our suppliers, which enabled us to work directly with our shipping partners to resolve logistical issues and to provide us with early warning of orders that might be running late. Stock availability is fundamental to our offer. We've prioritized this in these uncertain times. In 2021, we are extending our policy to hold additional safety stock as a contingency against unexpected demand patterns and interruptions to supply. And we have broadened the range of SKUs that we protect in this way and increased the number of weeks cover we have on some lines. We keep under review what we believe it is best to make or buy both in terms of cost and overall supply resilience and flexibility. In 2019, investment in manufacturing technology enabled us to make the doors for our new Hockley kitchen ranges. And we've committed to further investment, which will enable us to make frontals for more of our kitchen ranges at the same quality as we can source externally, but at a lower cost and a reduced lead time to delivery. And we will retain the benefits of sourcing from external suppliers who will continue to provide around half our kitchen frontals. The new frontal facility will be located at our Hyden site and we expect it to come on stream in the second half of 2022. We are also commissioning a second architrave and skirting line as our first line is now fully utilized and demand for these products has risen substantially in recent years. We expect the new line to be up and running during the first half of 2022. We identified the need to upgrade our solid surface worktop offer, which is a segment of the market in which we are underrepresented relative to the number of kitchens we sell. We have partnered with three fabrication companies to develop a template and fit capability, and we took the opportunity to acquire the assets of a large UK fabricator of solid surface worktops. The assets were acquired at a competitive price with significant savings in the lead time to being able to manufacture versus building our own facility. We expect the factory, which is located near our Hyden site to be operational during 2021. Turning to our digital platform. We use digital to reinforce our model of strong local relationships between depots and their customers. During 2020, the digital investments we have made were particularly instrumental in supporting our model at a time when relationships and ways of doing business were disrupted. 2020 saw increased activity on our web platform and growth in our social media presence, which also stimulates interest in viewing our products and services on howdens.com. Howdens.com impressions were present in 48% more organic search results a month and site visits increased by 53% year on year. Depot leads via the website increased by 88% and brochure requests by 39%. Across social media sites, our follower base at 213,000 was up 119%. with 8 million users a month being reached and those actively engaging up by 165%. With restricted movement in the UK, Houdens.com provided a key customer access point to the business and we extended the range of online services we provide. We rolled out online account facilities, which enable users to manage their accounts and to make payments at any time. By the year end, 30% of our credit account holders had registered for the service and the service has been significant out of hours usage. Around 43% of users used the service to make a payment with 68% of the users viewing documents. Curated on our website, we launched a call and collect service, which provided a way, in combination with our in-depot measures, for customers to trade safely with us following the onset of the spring lockdown. A new personal kitchen design service was also made available online. As well as enabling people to plan kitchens without the need for a depot or home visit, the service helps put Howden's front of mind earlier than in the procurement process. We continue to add new capabilities and content to our platform to support the local relationships depots have with their trade customers. This week, Anytime Ordering became available for the first time to our trade platform. Representing a major upgrade of our call and collect service, it provides efficiencies for depots and customers alike. Developed with input from customers, features of the service include bespoke pricing for each customer, which enables the account holders to see their confidential prices, order products and quote for individual jobs out of hours, and a scheduler for them to select a collection depot and pick up time of their choosing. The service is integrated with our lead management system, which assists depots in managing their local relationships in a digital way. The lead management system was introduced in mid 2020 and is now one of our most frequently used depot systems. Lastly, international. In 2019, we refocused international onto a city-based approach based in France. We closed our depot operations in Germany and the Netherlands and appointed a French national to lead the business. We renewed the focus on trade customers and opened five depots, four around Paris, one in Lille. International's 2020 performance gives us the confidence to open up more depots. International delivered a step change in performance post lockdown, with second half sales increasing significantly year on year. In France, lockdown occurred a little earlier than in the UK. And we took a similar approach to reopening, as in the UK with depots initially reopening in call and collect mode on a phased basis. During May, as lockdown ended, depots were able to trade in more normal ways with appropriate safety protocols in place. Whilst with the onset of lockdown, total H1 sales were down around 18%. They increased significantly year and year in the final two periods of the half. Sales in the second half increased by around 38% in Euro terms and were up 13% for the year as a whole. We believe customers are increasingly recognising the advantages of our trade-only in-stock model, our service levels and our competitive pricing. We opened four depots in the second half of 2020, ending the year with a total of 30. On the basis of current performance of our depots in France, we are planning 11 depot openings for 2021, which is around the number of depots we can staff with Howden-trained teams. Finally, prospects for 2021. Our first priority remains the safety of our people and customers, and we have contingency plans to enable us to trade under a range of COVID conditions that we've seen to date. We've increased our prices having lowered some during 2020 and aim to retain a profitable balance between margin and volume whilst aligning operating costs and working with suppliers to keep product and input costs controlled. We believe high stock availability was a major contributor to our performance in 2020 and we will continue to manage our stock levels actively to protect availability both of manufactured and bought in product. We will have all our 2021 kitchens on sale earlier than last year, with aligned rooster promotions to keep Houghton's front of mind. We will make improvements to service and availability by utilizing XDCs. We are making investments in our kitchen door, solid surface and skirting manufacturing capabilities. During 2020, with restricted movement in the UK, we increased the range of services we offer online. And in 2021, we will continue to add capabilities to our digital platform with anytime ordering as a centerpiece. In 2021, we plan to open 35 depots in the UK, 11 in France, and refurbish around 40 existing depots to the updated format. I am very pleased with our achievements in 2020, in particular how we both adapted to COVID trading conditions and progressed with our strategic plans, which make us well prepared for what we expect to be a challenging market in 2021. All of this is made possible by the character, skills and commitment of our people, and I thank them all for what they've done. Thank you for listening. We'll now take your questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. And we'll now take our first question. It comes from Ansley Lamnan of Canaccord. Please go ahead.

Hi, morning. Yeah, I just wondered if you could comment a bit more on the kind of cost pressures you're seeing and the expectations for gross margins. I mean, would you expect to see a significant improvement in gross margin this year, maybe up to the 62% level? Any comments around that? Secondly, just your thoughts on the share buyback. It's a special dividend, something that we should expect to see more of rather than share buybacks. And then lastly, just obviously the pound has strengthened against the dollar and more recently against the euro. Any kind of thoughts on the impact there on the cost of goods sold and the benefit you might see? Thanks.

Yeah, thanks, Anthony. I guess one and two link in a way as part of your questions. We put through a price increase of around 4% at the start of the year. And at this point, given what's happened with kitchen demand and perhaps some kitchen demand being pushed out into later periods from what we've seen, We are retaining some margin, but it's not clear enough yet to us where we're at. Cost pressures that we're seeing from suppliers are significant. We were pricing way around about 2% to 3% at the start of the year, but I don't think that's the end of the story for this year. We have seen significant pressure on softwood and joinery products around about 10% to 12%. steel through appliances, you know, raw materials, glues and resins, you know, that occur in chipboard and so on, the five to 10%. So we would expect to see more price pressure coming through and we will deal with that as we sort of see appropriate coming through the year. You know, we look to move the margin forward, but we also look to keep a right balance between price and volume going through. So, you know, we ended out the year last year at 60%. We'd love to see an improvement on that. but I wouldn't comment on whether the figure you quoted is right or not. I'll just hand to Mark for commenting.

yeah so uh in in terms of uh share buyback and um dividends then clearly our strong balance sheet has helped as well as we've gone through this uncertain time and um so you know we will continue to sort of review our level of dividend payments as a result of that if you look at our underlying cash position it's near 370 million um and uh we normally keep a sort hundred million to manage the business. So with our dividend announcement, clearly we have more headroom than we normally have. And we will continue to look at our sort of dividend strategy and the level of shareholder returns as we see more stability in the marketplace. So it's something that we're very conscious of and we'll continue to review. The other side of things, obviously, is the foreign exchange. Andrew's talked to the pressures we have from commodity side of things, and we're obviously looking at our price increases to manage that. We will have some benefit from a stronger pound if that was to continue. Just to give you a few numbers, a four-year benefit of a one cent improvement on the euro is worth about 1.3 million. and sort of one cent on the dollar is worth about $0.4 million. So you can see the sort of the level of benefit that we would get if we see the exchange rates stay where they currently are.

All very helpful. Thank you very much.

Next question.

Now our next question comes from Christian Hurth of Numist. Please go ahead.

Thank you. Morning, guys. Three questions for me, if that's OK. First of all, you ended the year with 748 UK depots, 35 to come in 2021. You've got that target of 850 out there, and clearly that still remains the target. But I was just wondering, as you stand today, do you feel like there could potentially be some scope for upsides to that? The second one is just on the competitive landscape and what you're seeing there. You touched on perhaps some stock availability issues around competitors and just sort of any further update you have there would be great. And then just finally, as we stand today, conversations with tradespeople, what you're seeing in terms of order intake, whether you've seen perhaps an uptick as some of this positive vaccine news has continued. Just any commentary on that would be greatly appreciated.

Thank you. Thanks, Christian. Yeah, I increased the number of depots that we sort of targeted from 800 NAFTA up to 850 when we introduced our new format that included better ways of managing stock in the depots and reducing some space. I still think 850, around about 850 is the right sort of number. And I think it'll get increasingly difficult as we roll out in our rollout to find those depots as we get towards the end of the rollout program. I think it is important to note though that our refit program, which is making progress, gives good reason to believe that we can continue to grow like for like sales. So yeah, I think about 850 is the right sort of number. In terms of the competitive landscape, I think in our immediate competitor trade set, I think we've played a very strong, positioning on stock during the second half of last year. When we were seeing that some of our competitors were stitching off intakes from suppliers, we were doing quite the opposite and piling in. And when we made those decisions back in March, we had an eye firmly on coming back out strongly out of the lockdown and having a very strong period 11, which takes time to build stock for and obviously having capability of manufacturing our own gear put us in a strong position. But yeah, I don't know that an awful lot has changed within the immediate trade space next to us. And we carry on playing our own game and that's what we keep focused on. We have continued to your third question, Christian, on trade, tradesmen, tradespeople, what they're sort of seeing. We've kept in touch with them a lot through the lockdown. We've even used Teams calls. So it gives you a sense of how close we get to some of our customers. They're happy to come on Teams calls with us and talk. And they're busy. Their mix of business has certainly changed. And we would note that in periods one and two, they're busy with joinery, they're busy with flooring projects, that kind of stuff. And we probably noticed in period two that You know, there have been some instances of kitchens going out into periods three and four where customers have just been a wee bit uncomfortable at this point, having the key part of their home being pulled apart. So I'd say the trades are busy.

Excellent. Thank you very much.

Our next question comes from Jeff Lurie of Redburn. Please go ahead.

Yeah, morning team. I'll break with tradition and ask two questions. First, can you talk a bit about becoming more vertically integrated? You've clearly given us some sense, but making frontals, making hard surface tops feel like new departures. How vertically integrated do you think you're going to end up? And second, a question for Paul. I appreciate you've only been in the business a few months, but what do you think of the financial model at Howden? How comfortable are you with running with 60 plus gross margins, mid-teens EBIT margins? Is that the right shape for Howden as a business, do you think?

Thanks, Jeff. Look, I think we do a good job of reviewing on a consistent basis what's right to make versus buy. So we've got a particular view on trying to make everything and trying to buy everything. I think the balance, we look at each individual case. There were two very obvious moves directly in front of us. The first was, and it had been in our thinking for some time, we make some of our basic frontals, some of our entry price frontals, but not quite a lot of the mid-range. So we're building some capabilities to do more of that. I think it's important that we've got a good mix between what we make and some of the fashion elements that we get coming out of Italy. There's very big strength of manufacturing capability in Italy. We want to keep that very interested in Howden's too. So it's sort of rebalancing. We think about 50-50 is the right sort of balance between the two. The skirting and architrave move was another obvious one. We put down some capability. It's been a very strong element for us. It's been running 24-7 right the way through last year. And the volumes are so big, we just have to put more down. That's not a particularly big investment. But if we make about a third of everything, you know, we'll probably be moving it up to around about 40%. You know, it's not, and I probably wouldn't want to comment any further beyond that, but I think there's a good mix between what we make, what we buy, and get the benefits of having supply close to us, the flexibility, which has really been shown to have been a huge benefit during COVID when the teams can switch on, you know, particularly around when you get a strong peak in demand, like in period 11. The work surfacing thing, was you know we've had we've had a very strong laminate work surface business offer we think the market is moving more towards solid surfacing and we introduced our modular range and it started off with us providing a modular range that we thought builders might want to fit and I think a lot of our builders actually don't want to fit it so we've got a fitting service that works for it but it's limited in its scope doesn't you can't do some elements of the kitchens So we'd always intended to extend out and work with third-party fabricators to do a solid surface kitchen as we move our kitchen ranges into slightly better areas, like the plus 4,000 category with the ranges that we've launched. And the initial work and the trials that we've been doing with the three fabricators has been going very well. The opportunity came up to buy the largest solid work surface, a business that had gone bankrupt called Rotherham's, And we picked it up for very little money during COVID. A brand new kit from Italy, the best kit that we would have wanted to buy ourselves. We bought the freehold for the land and we bought brand new buildings as well. But the team that had been in there, the family that had been running it, couldn't get it operated and ended up running out. So we bought the whole lot for 7 million, which we felt was very good value and we're getting it operating now.

Handing over to Mark for the second question. Just on the financial model and my initial reactions, clearly Howden's has a very strong business model and a real clear focus on the customer. And I think the decentralised model works very effectively in that way. and a really clear growth strategy. So when you sort of look at our sector-leading margins, I feel we're in a good shape to really continue to focus and deliver those. Clearly, in the near term, there are some challenges around modest prices, et cetera. But I do feel confident that, yes, we can continue to make good, strong margins, particularly as Andrew's talked to with us on the customer so you know i think it's a strong business and we'll continue to obviously drive the business and balance that margin percentage versus the sort of the volume and the growth prospects of the business understood thank you very much thanks jeff our next question comes from clyde lewis of seal hunt please go ahead

Morning, Andrew. Morning, Paul. Apologies, I think I've got three, if I may. One was looking back, I suppose, at the second half of 2020, and obviously 16% growth is a big number. How much of that do you think was catch up from obviously the week, second quarter? And how much do you think was was sort of, I suppose, underlying growth of the market, you know, on the back of all the extra saving from a lot of homeowners. That's the first one. The second one was on, I suppose, sort of what have you been trying to do with regards to the product design to try and improve or make it easier for installation? You know, one of the capacity constraints for kitchen fitting is obviously labour, and that obviously stops you from selling more units, as you highlighted with, you know, The trade customers having good order levels. Have you been trying to sort of develop sort of areas and products that speed up the installation process? And the last one was on the number of active accounts, I suppose, that you've sort of seen over the last six to 12 months in particular, how that's evolved and whether the sort of the bad debt element has deteriorated in any way.

Yeah, we were pleased with second half performance and, you know, it's sort of frustratingly very poorly tracked market in terms of market share, but, you know, our sense from the amount of conversations we had with our depo managers, we were certainly winning a lot more than we would have lost in terms of kitchens in the second half of last year and we've got tremendous momentum coming out. I'm sure there was some pent-up demand and all of that. I wouldn't really hazard a guess. We were also up against competitors being out of stock of of appliances, not being able to get a hold of some chipboard, which would certainly have worked in our favor. So as we're thinking about sales in the second half of this year, we've got to bear that in mind. But I think in terms of the trade game, we would have clearly won. I think kitchens is slightly different in a lockdown scenario versus home improvement, DIY. Everybody's prepared to put up a shelf and take out a paintbrush. um and actually coming in and unplugging the core part of your house is a very difficult thing to do and i think a lot of people didn't want to do that so for us to grow at that sort of level in a market that i don't think really went very very much up last year it was pretty good uh paul in terms of the active account side of things um we see a similar level to

we sort of saw, you know, a very variable year, but we finished the year with about 465,000, which compares broadly over the last two years, or 466 and 469,000. So we see a pretty similar level of active accounts. And as you as you're aware, we constantly monitor and make sure that they are active in terms of what we account for.

I didn't quite get the second question. Could you ask that again about product installations?

Yeah, Andrew, I mean, obviously, sort of anybody who sort of follows the building industry is aware that, you know, there are a lot of sort of middle-aged to older-aged sort of builders and kitchen installers. And, you know, speed of installation is a capacity constraint. So I'm wondering, what are you sort of trying to do as an overall business to design ways to make kitchen installation quicker and easier? Yeah, I think the volumes can be installed.

Yeah, your question is a good one and it goes right to the heart of what Haydn's does, particularly out of our manufacturing capability in Runcorn and to a degree in Haydn. So every cabinet in our range is pre-built and many of them come pre-installed with fitted accessories, which is an unbelievable time saver for the builder. The other thing that we focus on hugely with our builder customers is the accuracy and squareness of our cabinets that make speed and ease of fit a big deal. That's why a lot of builders in the UK want to buy a Huygens cabinet. So I'd say that the pre-built nature of it all really speeds things up. We've been very thoughtful around appliances and appliance installations. And there are many, many features in our Lamona ranges that make them just much faster and more reliably fitted for general builders, almost without the need to contact electrical installers to put normal plugs on them. So I wouldn't do the answer justice now, but we've been very thoughtful around ease of fit. We work very closely with builder customers to improve it all the time. Thanks, Andrew.

We'll now take our next question. It comes from Charlie Campbell of Liberum.

Hi, Charlie. Morning, everyone. Yeah, a couple from me, really. I suppose just thinking about the gross margin, and you've talked about kind of mix, and I suppose you have more joinery, less kitchens. Are there any signs of that reversing when you talked about some kitchen orders being deferred into period three, four? You know, what are the kind of quotes and the sort of design activity, is that leading you to think that you might see that kitchen activity restarting, or do you think you need to see kind of lockdown kind of unwound before that happens? Just sort of thoughts around that. And the second question, I think it's two parts, sorry, so maybe stretching into three, but thinking about the overhead bridge from 20 to 21, There's an older depot number of minus seven last year. Does that reverse out in full in 21, do you think? And then also just on France and just wondering kind of the maturity curve, is that the same as it was in the UK as we start to think about kind of modeling that out? Thank you.

Thanks, Charlie. I think probably the first point to pick up is periods one and two. Periods one particularly is not, it's probably one of the weaker periods of Huygens in the annual calendar because we've built our period 11 peak trading to try and take kitchens out of the market ahead of January's peak, which is a retailer peak. So I would have no question the retailers would have had a difficult challenge this January with showrooms closed. But, you know, we did sell kitchens. When we talk about the kitchen joinery mix, you know, it's not that far out. We do see good activity in our lead banks. We see a good level of design activity. I think it just makes it a wee bit easier when lockdown comes back, when we come out of lockdown. So we're not pointing to anything that would really concern us here at Phasing.

If I can take the question on overheads, as you appreciate, yes, there was some cost reduction in our older debt hoses. That was more predominant in the first half, if you look at the split, and then there was actually an increase in spending in the second half. So I think we will see that reverse as you picked up. cost base. I think the third question was around the maturity model of France. Again, we've looked at that and we're gaining more experience on that and we feel it follows a similar profile to the one we see in the UK. As you can see, the French business appears to be progressing well.

Thank you very much. Thank you.

Thanks, Charlie.

Our next question comes from Sam Dindle of Stifle. Please go ahead.

Morning, guys. Three questions from me. Firstly, on the medium-term growth margin, sort of referring to Jeff's question, if you are vertically integrated more, manufacturing more, does that mean growth margins may get above the 60%, 60% on a sort of three to five year view of just how you see that progressing? Secondly, on the digital initiatives, are you able to give any colour on the conversion rates you're seeing from customers who go through the digital channel? And is there any initiatives you can do to strengthen that going forward? And then finally, on the French business, are the new 11 depots in new cities in 2021? And what would you need to see to take a bigger bang approach to expansion in France? Thanks.

Yeah, great. Thanks to those three. I think on the gross margin medium term question, there's a number of moving parts. Sure, we'll make more on some of the kitchen elements that we make, it's Heartland territory, it's core margin driving stuff for us. I think that improves. There are some other things that are going on that reduce the mix. We are becoming increasingly good. It's all cash driving. We're becoming increasingly good at our over the counter business. So everything around hardware, joinery, flooring, uh where we're seeing you know significant growth as well so there'll be a mix uh slight mix difference over the period of time but we would see you know an improve a slight improvement over that sort of medium term uh time on the digital initiatives um i mean it's very live stuff for us so um we are seeing um a lot of leads coming from end consumers into the business. And they come through at a lower conversion rate than if a builder brings a lead to us. A lead from a builder, we convert at a very high rate, sort of plus 90. If a cold lead comes in off the web, it could be half that in terms of conversion probability. Also leads that we get off the web, we wouldn't be doing anything other than appropriately introducing them to a builder. And sometimes those leads disappear and turn up with a builder and we see them coming back later on. So there's quite a mix that goes on. We feel good about making the brand sort of more aware to end consumers. It's a very well-known brand, of course, in trade. We have quite a low awareness amongst end consumers. So we see it all as opportunity. And the business, as you say, in terms of trying to strengthen it, the business is learning how to deal with dealing with cold leads and doing very well at it. The 11 depots in France, we've signed leases on eight already, and we feel confident to get the other three done. We're following a city-based approach in France, so we feel we've got quite a lot of work to do around Paris, where the majority of the openings have been. but there are a number of big other cities that we're looking to do, so Lyon will get another depot on the other side. But we feel there's strength in our approach around building capability in our people around the city and also awareness amongst our customers so the model gets understood. And it's not that dissimilar to how Haydn started, where he used London as a strength to build reputation. The sort of hold back, it's not a capital question for us. It's not about finding sites. We think we're doing a very good job finding sites. We think that customers are understanding the format. To be a Hidens Depot manager, you've got to be entrepreneurial. You've got to be able to drive the margin. You've got to run your business. We think we've developed people of high enough quality to do that for 11. And we're working very hard beyond that to find more capability. But Big Bang sort of is difficult when you need commercial leaders. But yeah, we're doing a good job of growing it.

Many thanks.

We'll now take our next question. It comes from Dudley Shanley of Goodbody.

Good morning, gentlemen. Two questions for me, if I may. First of all, to follow up on the French question. Obviously, as you mentioned, the Holbeck is commercial leaders. If we were to assume you could find the people over the long term, what are the sort of numbers you'd be thinking in terms of the depots, given the city-based approach? And then the second question is... the depot conversions, the 30 that you did in FY20. Could you give some more colour on the kind of initial success of that?

Why don't you start off with that one, Paul?

Okay, so why don't I start on the depot conversion and then I'll let Andrew talked about France more. In terms of the depot conversion, obviously, we've got a lot of experience over the last couple of years. And that, although we've been in a rather uncertain sort of economic situation, but we've looked basically at how we reformat them, how we get the best out of them. And I think what we've now sort of refined is the way of doing that. and getting the balance right between the type of depot we're looking at, whether it's a sort of a larger or smaller depot and its level of sales. What we are finding is that it is paying for itself the advantage of, you know, refitting a mature depot as you get that you get through it. So we are seeing, you know, prospects of a good payback. So, you know, we're in the order of a four-year payback on the investment. We feel it's something we can achieve on balance when we look at the portfolio. So we'll continue to appraise, but we feel that it's actually producing early success. I'll hand over to Andrew for the next question.

I think the best way to answer the French question is give a little bit of context of what's been going on there. So we've put a really good leader in place called Arnaud Bretin, who's both French and experienced in the sector, who has rebuilt the team, rebuilt out the business, and really aligning it nicely to Huygens in the UK. around product and processes and so on. And he's also done a fantastic job of driving the culture and the competitive nature between the depots over there. We have thought beyond the 11 next year, but it is a step-by-step approach. And I think that's appropriate at this stage because we've got to get reassurance that we can build out the depot managers. I think any of the guesses is sort of theoretical and that would be sort of my hold back on it. You know, there's a big population in France. I think it would be more city-based approach than perhaps here, never really tested infills between cities. So yeah, city-based approach.

Great, thank you.

Once again, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We'll now take our next question. It comes from Amigala of Citi.

Yeah, thank you. Just two questions from me. My first question was on the stock availability initiative of yours to improve them at the depots. I'm wondering if that measure involves further stock investment in 21 that we should be thinking about. And my second question is on the demand that you've seen since the start of the year. Is there any regional differences that you can highlight at this stage?

just repeat your second question again please yeah it's just on the regional demand trend on the current trading data that you've seen so far a regional demand trends yeah i think so far the regional demand trends i'm sorry yeah no i've got it now thank you very much uh i look business has been okay solid i would say for the first um two periods of the year. I think we're encouraged by what we've seen. Scotland has been challenging given that it's really only remedial repairs going into houses. So we've had a hold back in Scotland without doubt. And I think London's a little bit softer, certainly for the first two periods, but looking strong with this period. So that's probably all there is to report with everybody else performing. On stock availability, no, XDC, just going back and sort of going over the reasons why we're doing this, it is to ensure that we find the easiest way of on-time, in-full kitchens for our builder customers. This is not in any way a destocking exercise. This is about depots being in stock more and more of fast-selling SKUs, particularly top 200 SKUs and cabinets and so on. and XDC performs around the tail of the range. It does give us some options to trial some ranges without deploying stock before we're certain about doing it. It may give us some opportunities around clearing out stock at the end, but we see the particular benefit and the reason for doing it is to be on time in full for builder customers. You know when an initiative is good in this business because you get a huge amount of pull from the depot managers who are a commercial bunch as you'll ever come across. And there is huge demand for XDC, particularly when you line it up with any time ordering and the opportunities that that brings too.

Thank you.

It appears we have no further questions at this time. I'd like to hand the call back to Andrew for any additional comments.

Thank you very much for your time. Thanks, everyone.