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Edited Transcript of HWDN.L earnings conference call or presentation 27-Feb-20 10:00am GMT

Full Year 2019 Howden Joinery Group PLC Earnings Presentation

London Mar 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Howden Joinery Group PLC earnings conference call or presentation Thursday, February 27, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Livingston

Howden Joinery Group Plc - CEO & Director

* Mark P. W. Robson

Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director

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Conference Call Participants

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* Charlie Campbell

Liberum Capital Limited, Research Division - Housebuilding Analyst

* Christen David Hjorth

Numis Securities Limited, Research Division - Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Analyst

* Niraj Amin

UBS Investment Bank, Research Division - Equity Research Analyst

* Robert Eason

Goodbody Stockbrokers, Research Division - Head of Research

* Samuel Frost Dindol

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

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Presentation

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [1]

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Good morning, everyone. Thank you, and welcome to the Howden's results presentation through 2019. Thank you for taking the time to join us here in the room or to listening on the webcast. In addition to Mark Robson and me, Andy Witts, Rob Fenwick are, as usual, both here, as there are a number of the other exco members.

I'll begin by introducing our performance in 2019. Mark will then review our financial performance for the year. I will then share my perspective on our performance in 2019 and our plans for 2020, and then we'll take questions.

2019 was a year of progress for Howdens. And I'm pleased with how the business has performed. Both revenues and gross margin increased and profitability improved with operating profits increasing at a faster rate than revenues. This in part reflects the timing of the price increase, which in 2019 was implemented in January as compared to April in 2018. And the maintenance of improved depot margin discipline, which we exhibited in the second half of 2018. In the first half of 2019, we found a more profitable balance between volume and price as compared to the first half of 2018 when a significant increase in volume had some cost to margin. This trend continued in the second half against a strong margin comparator. In 2020, we will continue to evaluate how best to balance volume and price to the benefit of overall profitability in the light of prevailing market conditions as we see them.

Trading in the 2019 peak 11 weeks has set new benchmarks. Our depot teams are well incentivized and achieved record sales in the period, underpinned by the level of stock availability delivered by our supply chain and an IT infrastructure, which performed without incident. At the same time, we continue to make investments in the business during the year. We have in place a number of initiatives with the potential to increase volume and profits across the business. Based around our core building blocks of trade service, convenience, trade value and product leadership. These are evolving our depot network to use space more efficiently and to create the best depot environment in which to do business with our -- and support our customers. Improving range and supply management to help customers buying decisions and to access supply chain benefits to make productivity gains. And using digital to raise brand awareness to support the business model and to free up time for depot staff and customers to use more productively, together with our depot -- with our development of our operations in France by way of a city-based approach.

So I will talk about these after Mark has taken you through the financial results. Thank you, Mark.

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [2]

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Thanks, Andrew, and good morning, everyone. Reviewing the financials for the year, let me start by looking at some of the headline numbers for 2019. Moving from left to right on the top row, to begin with. As you can see, Howden Joinery's U.K. revenue rose by GBP 73 million to GBP 1,550 million, an increase of around 5% on 2018. Group sales also increased by 5%. Gross profit rose by GBP 54 million to GBP 986 million. The percentage gross margin of 62.3% was up from 2018, reflecting the impact of a price increase in January 2019.

Moving on to operating profit. After a GBP 34 million increase in operating costs, profit rose by GBP 20 million to GBP 260 million. Operating costs were impacted by continued investment across the business, including new depots, digital, additional depreciation and inflation. The closure of our Dutch and German depots also impacted these costs. Now moving down to the second row with net interest and other finance charges falling by GBP 2 million, mainly due to a decrease in the charge for pensions. There was a profit before tax of GBP 260.7 million, GBP 22 million higher than in 2018.

Looking at cash flow in the year, returns to shareholders totaled GBP 126 million, which included share repurchases of GBP 55 million. Capital expenditure was GBP 61 million, and there was a GBP 30 million contribution to the pension deficit. Overall, we had a net cash inflow of GBP 36 million, meaning that we ended the year with GBP 267 million of net cash.

I'll now go into some of the detail behind the headline numbers. Let me start by talking about revenue. Howden's U.K. turnover of GBP 1,550 million increased by 4.9% on a total basis and was up by 2.5% on a same depot basis. In Continental Europe, turnover of GBP 33 million was down by GBP 1 million, impacted by the closure of our depots in the Netherlands and Germany. Sales in our French and Belgian depots rose by 3.8% in euros.

Let me now talk you through the movement in PBT from GBP 238.5 million in 2018. Gross profit rose by GBP 54 million. This is the net effect of several features as shown on the chart on the right-hand side. If we bridge from 2018's gross profit of GBP 932 million, there was a sales benefit of GBP 72 million, which had 2 factors. Firstly, it reflects the GBP 61 million benefit from the price increase introduced in January 2019. Secondly, increased volumes and mix changes increased revenue by GBP 11 million, reflecting an improved balance between price and volume. Partly offsetting this, there were a number of factors that impacted the cost of goods sold. There were additional costs arising from the volume and mix changes, totaling GBP 4 million. We saw a GBP 3 million negative impact from exchange rate movements in the year, also affecting cost of goods sold. There were higher input costs resulting in a net decrease of (inaudible) of GBP 11 million.

Together, this gave a net rise in gross profit of GBP 54 million to GBP 986 million. Gross profit margin was 62.3%.

If I now turn to the other factors that contributed to the movement in PBT, reverting back to the chart on the left, operating costs, which I will expand on in a few moments, rose by GBP 34 million. Net interest and other finance charges were broadly the same. The net result was that profit before tax rose by GBP 22 million to GBP 260.7 million.

Let me now explain in more detail the main movements in operating costs from GBP 692 million in 2018. Costs associated with the 44 depots opened in 2019, which includes 5 in France and the incremental costs of the 33 U.K. depots that we opened in 2018 totaled GBP 17 million. Cost increases for older depots was GBP 7 million, mainly reflecting increases in head count and pay inflation. There were cost increases incurred to support growth, which totaled GBP 8 million. This included the ongoing costs of digital upgrades, costs associated with the closure of our German and Dutch depots was GBP 6 million. We benefited to the tune of GBP 4 million from not being impacted by GMP equalization, which affected 2018. This meant that total operating costs rose to GBP 726 million. Let's briefly turn to the remainder of the income statement. Profit before tax was GBP 261 million. This led to a tax charge of GBP 52 million. The effective tax rate being 19.8%. This gave profit after tax of GBP 209 million.

This result gives earnings per share from continuing operations, 35p compared with 31.3p in 2018.

Turning to dividend. The Board has recommended a final dividend, 9.1p per share. This will be paid in 2020 at a cost of [GBP 55 million]. Let me now turn to cash flow from a (inaudible) of having net cash of GBP 231 million at the end of 2018. We ended 2019 with net cash of GBP 267 million. Let me draw to your attention a few items that explain the movement. Net working capital increased by GBP 6 million, more of which in a minute. Capital expenditure totaled GBP 61 million and included new depots, digital upgrades and investment in the next phase of our Raunds distribution center. Tax payments were GBP 46 million. As I've already said, we spent GBP 55 million repurchasing shares. There was a GBP 27 million contribution to the pension scheme over and above the charge through the P&L. The net result of these and other movements was a cash inflow of GBP 36 million, meaning that we ended 2019 with net cash of GBP 267 million. As I've already said, net working capital increased by GBP 6 million. Within this, stock increased by GBP 5 million, mainly due to depot openings. Debtors grew by GBP 7 million, reflecting the impact of the last few days of Period 11 trading in 2019 fell into November. This debt did not become due until after the year-end.

Partly offsetting these movements, creditors rose by GBP 6 million. Before moving on from cash, as you know, we target a prudent capital structure. This means that it's our policy to operate throughout our annual working capital cycle without incurring bank debt. In March 2018, we announced our intention to return GBP 60 million to shareholders via a 2-year share repurchase program. At the beginning of last year, we had GBP 30 million of that program remaining. In February 2019, we announced a further GBP 50 million 2-year program. As I've already said, in 2019, we spent GBP 55 million repurchasing shares, thereby completing the March 2018 program, and we have GBP 25 million of the February 2019 program remaining. This means that in 2019, we have returned GBP 126 million to shareholders, including dividends. This compares to GBP 131 million returned in 2018. Looking at our net cash at the end of 2019 of GBP 267 million. We have surplus cash of around GBP 85 million, which the Board has decided it will return via a further share repurchase over the next 2 years.

Let me quickly bring you up-to-date with the balance sheet position of our pension scheme. At the end of 2018, the deficit stood at GBP 36 million. A number of factors had caused this to change by the end of 2019. Firstly, from the P&L, there was the current service charge, administrative and interest costs of GBP 21 million. Secondly, the decrease in the discount rate, net of longevity effects, increased liabilities by GBP 197 million. The group made a cash contribution of GBP 47 million. Finally, with asset returns being GBP 150 million higher, the overall deficit at the end of 2019 was up by GBP 21 million to GBP 57 million.

This, of course, is the balance sheet deficit calculated under IAS 19. However, our agreement with the trustees announced in June 2018 is on a technical provisions basis. This agreement is to pay GBP 30 million per annum for up to 5 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 2 consecutive months and resumed if the funding position falls below 100%. The next triennial valuation takes place later this year.

Let me finish with some brief comments about trading in the first 2 periods of 2020 and the outlook for the rest of the year. The first 2 periods of the year saw total U.K. sales rise by 1.6%, down 0.2% on a same depot basis. Excluding week 1, which included 3.5 trading days in 2019, but only 2.5 in 2020. Sales were up 3.5%.

Clearly, there are currently various market uncertainties and a number of factors that need to be considered in forecasting this year's overall result, including the impact of foreign exchange rates. Regarding operating costs compared to 2019, we will benefit from not bearing the GBP 6 million cost of closing our European operation in Germany and the Netherlands. However, there will be further operating costs of around GBP 20 million in 2020 compared to 2019. These include a 1-year impact resulting from the dual running of our old NDC and Phase 2 of our new distribution center in Raunds, digital investment, increased pension charges and additional depreciation. These cost increases are in addition to the impact of the ongoing growth of the business, inflation and new depots, including further openings in France. Capital expenditure is expected to be around GBP 80 million for 2020, including the next phase of Raunds, digital investment and new depots.

And on that note, I'll hand you back to Andrew.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [3]

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Thank you, Mark. I will be talking about our performance in 2019 and our plans for 2020 using the initiatives I mentioned earlier as a framework. As a reminder, these are depot evolution range in supply management, digital development and international. But first, I would like to talk about our customers. Our overall customer base in 2019 was stable and ended the year at around 470,000 credit and cash accounts. Two areas of focus were to improve our customer loyalty and the returns from our customer acquisition program.

Sales per customer increased as total transactions and total spend grew with our customers buying more often and spending more with us. With a similar number of new credit accounts being opened as last year. New customer spend increased significantly as did profit per new account, reflecting the higher level of sales and lower acquisition costs. I believe these results show that Howdens knows what it stands for, to help our trade customers achieve exceptional results for their customers and to profit from doing so. When our customers succeed, we succeed. Our trade-only model is a powerful combination of locally empowered depot management teams served by dedicated supply chain, which is both cost-effective and critical to the supply of our -- to the success of our in-stock offer.

Depot managers hire their own (inaudible) local customers. Profit sharing is calculated on local performance. Everyone is incentivized to grow a profitable local business. Whilst our supply operation serves only Howdens, it has more than 700 depot customers, each with individual changing day-to-day requirements. Our supply operation has the scale, space and flexibility to respond to the needs and meet demands of our peak weeks of Period 11 when sales are typically more than double the level of those in other periods. A key feature of having success is that we're trade-only, building trusted trade relationships with trade customers is central to everything we do. We've continued to hold our trade customer feedback sessions, both regularly and across the country, which enable us to identify any areas where we need to improve our offer. These sessions are always fully subscribed, which shows our builders appreciate that we're listening to them. They view the relationship as a business partnership, so it's in their interest to invest their time with us to make it even easier for them to serve their customers. As I mentioned, we've put in place a number of initiatives with the potential to increase volumes and profits across the business. The first is depot evolution. During 2019, we progressed our testing of a new depot format, aimed at increasing the best depot environment in which to do business with our customers at no material change to the fit-out costs of a new depot. By racking product vertically in the warehouse section of the depot, we believe that there are ways to make space utilization improvements with the potential to make productivity gains from reduced picking times. By reallocating space in the new format, we can provide a more open fronted area to bring staff closer to customers, improve both the visibility and the standard of our design facilities and nearly double the space available to display a wider range of kitchen designs. There is also room for a small items picking area behind the counter with an improved range of everyday essential products, including hardware and ironmongery to add incremental profit as a way of encouraging footfall and incremental kitchen sales. We are confident that the updated format is an improvement at the same cost as on the traditional one. It was adopted for all U.K. depots opened in 2019, and all U.K. depots opened in 2020 will also be formatted in this way.

The improved density is offered by reracking product vertically have enabled us to put our full product offering into a smaller space. We opened 8 smaller footage depots this year and intend to open more such depots in 2020. With the smaller-sized depots, we continue to believe that there's still potential for around 850 U.K. depots. In 2019, we opened a total of 39 U.K. depots, including 5 in Northern Ireland, with openings weighted towards the latter part of the year. This represents an increase in the number of openings as compared with an average of 25 in the previous 3 years. In 2020, we plan to open around 30 more U.K. depots. As I explained in the 2019 interim results presentation, we've put in place a test to understand the rollback opportunity, the updated format may have in the existing estate.

We initially converted 3 older depots, Park Royal opened in '95, Swansea and Guildford both opened in '96, around about the time when the business started. And these have now been trading in the updated format for 8 months or so. They continue to show encouraging signs of improved performance relative to similar depots, vintage type and locations since conversion.

We subsequently converted further 8 older depots prior to the start for our peak trading period, deploying several capital spends. Managing the disruption of a reformat to a day-to-day's operation and trading patterns is a key part of the conversion process. Our experiences as we've been reformatting these depots have helped us improve our skill base, our planning for a reformat and our understanding of when in the year to implement them. Developed our thinking on about how to scope, structure and execute a reformat, which we are now able to complete in under 8 weeks. We've also refined the format, which incorporates a smaller hardware area and reduces refurbishment and ongoing running costs. Andy Witts and I are pleased with the feedback that we're receiving from both depot teams and customers at the converted depots. And we've been sufficiently encouraged by the performance to date and the expectations of the depot teams for them in 2020 to extend the test. This year, we intend to convert around 30 more depots across the country so that we can continue to learn how best to apply this opportunity within the existing depots estate.

In 2020, we are budgeting for an average reformat spend of GBP 225,000 as we apply the learnings from the depots converted to date. We also plan to rerack around 50 further depots without other modifications in 2020. At the end of 2019, we had a total of 71 new depots formats comprising 60 new ones and 11 refurbished depots and had reracked a further 62 depots without other modifications. By the end of 2020, assuming our depot plans for 2020 are implemented, as I have described, we will have a total of 131 new format depots, comprising 90 opened in the new format plus 41 refurbished ones. And we will have reracked a further 112 without further modifications.

My second point is about range and supply management. New depot ranges each year represent a significant portion of sales as product life cycles shorten. During the year, we introduced 12 new kitchen ranges to all depots with an average sales per range above those of 2018. These ranges are characteristic of the trends that we're seeing for straight lines in modern kitchens, which accentuate the sense of space. Contrasting colors and cleaner look in kitchen checker styles and map texture that benefit from the latest industrial technology advances that prevent fingerprint marking.

During 2019, we updated our light oak cabinet to a more natural oak tone, led the mass-market rollout of anthracite-colored storage systems, which help define our mid- and premium ranges. Extended our worktop range by 11 laminate and 7 solid surface worktop styles. Nine of these are lighter decor worktops, which complement the increased number of darker kitchen colors. We added 25 Lamona appliances to our range, introducing new technologies in cooking, laundry and dishwashing products while strengthening our core Lamona oven choice with the introduction of a new low price point oven. We strengthened the Lamona brand through the introduction of a 3-year guarantee. From the new hardware lines we trialed, we selected around 250 of the fastest sellers for rollout across the estate, which principally comprises key products for the joiner and extensions to our core ironmongery range.

We continue to support our customers by introducing prefinished internal doors across different styles, so helping them save time in fitting them. We introduced 3 new flooring decors manufactured with new technology, which makes vinyl flooring quicker and easier for builders to fit. In the first half of 2020, we launched -- we plan to launch 13 new kitchen ranges, of which 11 have already been launched to date. Features include 2 new styles, a modern slab range offering a trade-up from our entry price point Greenwich Gloss range. The new door has seamless edges and is available in 3 colors, all with a mirror gloss finish and 2 super matt finishes, again, with anti-fingerprint technology. An updated painted timber shaker range available in 2 new colors from January this year with an additional color to follow in April. It's a versatile design that can be addressed to achieve both modern and traditional looks. We've added more colors and more ranges, a new green color in our successful mid-price Fairford/Shaker range. Pebble and Navy colors extend across 3 kitchen families, including the addition of pebble to the Greenwich Gloss family, strengthening our entry price point offer. We've developed a new handleless cabinet platform to meet the demand for linear look. The cabinet can be used within our current ranges, which enables us to increase customer choice without a commensurate rise in range count. We now offer 27 styles and have the flexibility to change the number of styles and offer in response to customer demand. Using this new cabinet, we can now provide a more (inaudible) for our customers to achieve the straight-line look including in our entry price point Greenwich family. It has also enabled us to refine our range architecture into modern, linear and Shaker, making it easier for customers to choose the kitchen that suits them best. New worktops for this year focused on lighter shades and thinner profiles which, in particular, complement our new linear kitchen range. We are extending the range of Lamona new technology appliances, including self-cleaning ovens to a new lower price point. Design-led refrigeration is also being introduced at very affordable prices. Managing the number of kitchen ranges efficiently is crucial for both best availability, which is highly valued by our customers, and profitability.

We have made progress in getting back to the discipline of fewer deeply stocked ranges in higher-performing ranges in the depots. A key part of the range discipline is the timely discontinuation of underperforming ranges and the management of clearance of that stock from the business. During the year, 19 ranges were cleared from the business. At the end of 2019, we had 67 current kitchen ranges, including initial stock of some of the ranges that we were launching at the start of this year. We believe around 65 current ranges is the right number for our market at present. In 2020, we're aiming to remove at least a number of ranges that we've had. During 2019, as part of our focus on range management, we combined the divisional commercial functions into a single commercial team organized in categories. This structure provides clearer accountabilities for ranging decisions, the access to supply chain benefits, the changes removed duplication of effort, ease in communication and bringing our commercial [ovens] closer to the depot managers. We have seen the benefit of clearer accountabilities and closer working practices between trade, commercial and supply. This enabled our new kitchen brochure and trade book to be launched in week 3 of 2020, the first of 3 additions during the year, which was synchronized with our promotional Rooster offers and enabled stock for all new kitchens to be in depots before the trade book and brochure were published. Through this structure, we're also aiming to ensure that the business is well planned at least 18 months out with our suppliers, that we are being offered innovative product first and that we've been offered the best value for our customers. We have benefited from a significant engagement in our supply base in support of our 2020 plans for improved product range, availability and price. We keep under review of what we believe it is best to make or to buy. And in 2019, investment in manufacturing technology enabled us to make doors of our 5 new Hockley kitchen ranges reducing the cost of these doors and increasing supply chain flexibility. We also installed a small batch line to make lower volumes and -- but important SKUs, which third-party vendors cannot supply at competitive prices. During the year, we were awarded The Manufacturing Guild Mark, a reflection of the excellence of our manufacturing operations. And we were delighted to be reappointed as a Royal Warrant holder for a further 3 years.

Now turning to our digital platform. We see digital as a means of reinforcing the Howdens model of strong real relationships between depots and their customers, and we're building a digital capability with 3 objectives: To increase builder and consumer awareness of Howdens, to help our customers sell Howdens product; to improve the communication between Howdens, tradespeople and their customers; and to streamline and improve operating processes, freeing up time for depot staff and customers to use more productively. Our new web platform offers customers improved product search and information plus access to online advice and inspiration and has moved howdens.com into more prominent positions raising brand awareness with customers. Since June 2019, howdens.com impressions are presented in 1.5 million more search results a month. Visits to the website has seen a growth of 22% year-on-year, exceeding an average of 300,000 visitors a week for the first time. And the contacting of depots through the website has increased by 35%. We are also completing a program of restructuring and digitizing content, a new hierarchy-enriched product content, and new advisory and editorial material, making it easier and quicker for the user to find the information they want to view. Around 80% of the visitors now entering the site via pages relating to specific search queries or terms underpinned by SEO improvements, targeting search terms most relevant to our products. Views of product categories have both increased both in kitchens where entries and visits to kitchen pages have risen by 43% and are in underrepresented product categories such as hardware where they're up 76% and doors for which successful searches were up 77%.

Refining styles and products sections is now easier as we have provided the capability for each user to tailor their own requirements, enabling a more focused discussion for of the consumers' needs with their builders and with our designers. In the second half of 2019, we will test ways of developing our digital offering further in line with our aim of putting a tradespersons' local depot in their pocket. Working with account holders to understand their key requirements, we developed and tested a secure trade customer-only area of the website where behind a secure log in, they can manage their accounts and interfaces more efficiently with Howdens and their chosen depots, in particular. They can view their credit to help them make payments and access account details, they can download invoices and information at any time. During the test period, 44% of users logged in outside of depot hours, 60% made a payment and half downloaded documents, averaging average payments per customer were also well above the company level. In 2020, we instituted full rollout of these trade account facilities, which are now available to all customers.

User feedback has been favorable with usage rates rising. We will be supporting our depots with onboarding their customers to the new platform, which we believe will enhance the strong local relationships that depots have with their builder customers. In 2020, we will continue to improve content and add more capability to this platform. We aim to further develop account management -- account and project management features together with functionality which assists local communications between depots and their customers. We aim to test a more efficient online account opening process for new customers. And having digitized our product and marketing content in 2019, we can deploy these cost-effectively across multiple channels and programs and add fresh content efficiently.

And finally, international. At the results presentation last year, I explained why we believe that there is potential for a viable city-based business in France. And in 2019 we opened 5 new depots, 4 around Paris and 1 in Lille. We completed the rebranding of our international business from Houdan to Howdens, which should enable the business to gain advantages from the U.K. brand equity, online search reputation and business efficiencies. We appointed a French national to lead our business based in France, who's now been in post since autumn 2019. We completed the closure of our German and Netherlands with store closures budgeted costs at budgeted levels. The 22 depots opened before 2019 are now sufficiently profitable to cover all central costs, which are scaled for a larger business. Total sales of the depots opened in 2019 are in line with expectations. And we've identified further sites, which should enable us to open more depots in France in 2020. Consistent with our policy of staffing new depots with Howdens trained teams and assuming our business in France continues to perform in line with our expectations, we are targeting around 5 openings in 2020.

So let me summarize. 2019 was a year of progress for Howdens. We increased revenues and gross margins and improved profitability, with operating profit increasing at a higher rate than revenues. We continue to invest in people, infrastructure, depots and product. We opened 39 U.K. depots, including 5 in Northern Island, all in our updated format and 5 in France. We began to see benefits from our ongoing digital development program. Work continues on the next phase of the Raunds distribution complex, which will replace our existing facilities in 2021. We reorganized our commercial team, which assists in the delivery of our 2020 plans for improved product range availability and price. I'm pleased with the response of our people, customers, and suppliers to the initiatives that we've taken and our results for the year.

Now turning to 2020. We aim to retain a profitable balance in the light of prevailing market conditions between price and volume whilst working with suppliers to keep product and input costs down. We plan to open around 30 depots in the U.K., 5 in France and convert around 30 existing depots to the new format. We have a rightsized lineup of new product for the first half, which has been launched and is an in stock earlier than in 2019, which we believe will benefit such sales across the year. And we have a well-planned program of second and third phase product introductions in place for later this year, together with a series of Rooster promotions to encourage footfall. This year, we will be making more of the product we sell in our U.K. factories.

Our new online trade facilities -- trade account facilities are now available to all customers and in 2020, we will continue to improve content and add more capability to our digital platform. Excluding the first week of trading, which had fewer days than last year, total U.K. depot revenue for the first 2 periods of the year increased 3.5% and 1.6% on a same depot basis. We remain cautious on market conditions, given economic uncertainties, including the U.K.'s exit from the EU. The impact forthcoming trade negotiations may have and also the consequences of the coronavirus outbreaks in a number of countries. We are monitoring our supply chain closely and have increased forward stock levels for products sourced from China while reviewing alternative sources and means of supply. However, I'm confident in our business model through changing economic conditions and the benefits our initiatives will bring to our performance.

Finally, before opening up to questions in the meeting, I would like to mention our 2020 Howdens Expo. In 2019, we held our inaugural Howdens Expo, which received very favorable results from staff, suppliers, customers and other visitors. And we've built a new Expo for 2020. And again, located as part of our old distribution center in Northampton. And we'd like to invite you to visit the expo on the 16th of April.

Thank you for listening. Mark and I will now take questions. Please wait for the microphone. Clearly state your name and your organization before asking your question.

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Questions and Answers

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [1]

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Robert Eason from Goodbody. And first question is probably a simple one and a point of clarification. When you talk about continued better balance between price and volume, should we take that you are targeting to leverage down the P&L, i.e., continue to grow profits in excess of whatever the sales growth is? Is that kind of the sort of framework we should have in our heads? Second -- kind of, the second question is just the competitive landscape. And one of your larger peers is separating out a business and over the next few months. And at the Capital Markets Day, heading off that business, there was a heavy emphasis on the kitchen. And so my general question is just about the competitive landscape, what are you seeing? And especially in the context of what I said about one of your (inaudible)

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [2]

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(technical difficulty)

first half. And then the volume second half. For 2020, we're hoping and planning for your volume contribution. So it would be round numbers. If you look to 2019, it was aided by price. We're hoping that the balance will be in the other direction for 2020. So it was -- for 2019, it was one volume for price. We'd like to get to a more even level. And ideally, we're planning for a bigger contribution from volume -- I mean price. I think that's a healthier place to have the business.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [3]

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Regarding the second part of your question, Robert. I mean it's always a tough market in the kitchen game. We think of the market being split in 2, really, between trade and retail. And I think what you're referring to there is really some of the mix change that's going on in the retail space. I think we remain very confident about our business model, what we're doing within the trade space, we remain incredibly close with our customers. We saw over 1,000 customers in our builder conversations and they were talking about being very busy quoting a lot and enjoying their working relationship they've got with us. There's great reasons why they continue to shop with us, and why all these initiatives that I've just been through are about strengthening the mode of Howdens and trying to keep us in a very competitive advantage. So we see nothing that frightened there.

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Charlie Campbell, Liberum Capital Limited, Research Division - Housebuilding Analyst [4]

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Charlie Campbell from Liberum. Just a couple of questions and sort of unrelated, really. Just wondered if you had to build forum since the election and sort of what the term that might have been? From builders generally? And then the second question, just trying to sort of some notes on some of the depot initiatives, it's unclear to me as to why you would rerack brands shown that are not contributing to the space? So just trying to understand that a bit. And if you could help us think a bit perhaps about kind of some of the paybacks that you're getting from this, either in terms of incremental sales in new depots or efficiency gains, just so that we can understand the opportunity that's there. Presumably, as you roll this out across the whole of the estate in due course.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [5]

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Yes. And I'll go for most of these. Mark can give me a hand on the third one. We have had a number of builder forums since the start of the year. And I would say the general theme of it has been -- that consistent theme of they are very busy. That there is some relief that the election is over and they get on and do stuff. And probably just a wee bit more certainty. I would say the tone of what they've been talking about. But again, I think we've been very prudent on a lot of stuff. And I would say, too, that we've talked a lot about the wet weather getting (inaudible) and some of the kitchen development work will be dependent, some of that's happening. So you do talk about delays around that, but they're certainly doing our door, joinery hardware business has been performing. And that's because we get to see them more often. I would say to -- I'm not bleeding on about the weather, but a number of our competitors have been impacted by that. As you would expect, it is our softer time of the year. And we've been very supportive, as you'd expect us to be in our local community supporting builders, supporting end consumers and why that might affect us. Now we would hope there'd be a benefit someway down the line. We don't particularly quantify.

The reason -- your second question is about reracking. (inaudible) we couldn't get the full range into a depot, so we racked it and then getting the range in and then realize the benefits from doing things that way. And one of the big learnings that we've been able to -- by reducing dramatically the refit by doing the reracking first. And that sort of (inaudible) thing (inaudible) to do and depot by almost taking everything out post-tracking and putting it back into (inaudible). We tend to do, which we can do now in a few weeks, and then we leave that alone. And then we go back and we do everything else, signage, (inaudible) content, it's the systems work that we do in the counter space. So we sort of think of them as independent, and it's a way of reducing impact to the consumers.

Your third question, which we're probably going to dodge a wee bit. But -- and there's a good reason for it, not that we don't want to be clear about this. It's sort of we started with 3 and we've traded them for 8 months, and they're settling down well and we'd be, by and large, very happy with those. The next 8, we had various levels of capital spend so we did one where it is sort of a skinny one to see what the impact was, and we didn't like it. We did want that was full-blown. And we -- it was too expensive. So we found this sort of midpoint of 225. We liked the look and the feel of that. We like the impact that we're getting from it. The job now is to see if we can do it at scale. So do 30 of them, of which we'll then use in the process of doing 13. We've completed the first 5. We've done them in under 7 weeks. So you're not going to like me for saying that. But 8 weeks on average is a fair judgment. And we are just watching very carefully to see the impact. But we like what the builders are saying because they're saying I can now take my customer in here. And I can show them the range properly. We like particularly the way our depots teams are interacting with the customers that come in. It's just completely open, enormous, looking through the glass of (inaudible) to see what's going in, in fact, around on the back. And we like picking process. What we're really trying to do here is build out a plant for the next 10 years. So we're making a long-term investment. And I don't want to go send people around there and wish I'd done the job properly. I want to do the job properly and leave it there for the next year. So we're just taking our time and being considered around this. But (inaudible) unless I get a decent return.

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Niraj Amin, UBS Investment Bank, Research Division - Equity Research Analyst [6]

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Niraj from UBS. I got 2 questions, please. First one's on gross margin. And just thinking about the gross margin headwind that was present this year from settling down the discontinued ranges. Can you quantify that? And maybe give something on what you expect next year, and assuming there's a little bit more to go on that? And the second one is on -- more generally on OpEx, with national Living wage ticking up over the next 12 months. And I appreciate that your depots staff get a profit share, but are there any second-order implications that we should be thinking about for Howden from that perspective and maybe some of your mitigating factors, continues to offset that?

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [7]

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Yes. On the headwind in terms of stock. I think the step-up -- we saw a step-up certainly second half '18, full year '19. Overall, we've been writing off up until the end of the first half of '18. So there was a pickup in terms of pinning down a number, its cost was about 1% of gross (inaudible) across 2019. When we go into 2020, we're expecting that step up. So we think now of -- the write-off knocking right where we want it. We said in the statement, every range of (inaudible) out. So we're not expecting any further impacts, year-on-year. In terms of living wage, it will have a small impact. The impact on us has already been swallowed and in fact, it gets eaten up each year by our annual pay rise of 3%. And that's a typical pay award for us. In terms of those type of costs, I think auto-enrollment is the more significant step-up. So our rate of contribution on auto enrollment's picking up. So that will cost us about GBP 3 million going from 2019 to 2020.

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Unidentified Analyst, [8]

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(inaudible) On the same of the question in terms of the sort of the branch management autonomy. Firstly, you meant -- you sort of got it wrong on the [default] volume price direction. I'm just looking at it now [2] damage. One, how do (inaudible) to the branch management in terms of a better price mix situation? And the second is related, but you believe in digitization. Is there any perspective that is more (inaudible) related to the branch manager? And then secondly, just on the [region] choice of where it goes, how have you determined that relative to branch management (inaudible) cost asking the branch manager (inaudible) 65% more space, et cetera. They're all going to jump at this potentially. And so is it the case of selection stems from Central? Or do they sort of vie for attention in terms of the capital allocation?

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [9]

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Yes. So one of the key strengths of Howdens is our branch managers are businessmen. And they understand the balance to be priced above and (inaudible) better than any business like growth driven by local profitability. And they and their teams are rewarded off the back of that. I think the volume trend that Mark referred to it as, I think, there was a number of depot managers who would decide on that and said, prior to my arrival, said, they have no expiry, the costs are going (inaudible) we can invest money. And I think we would all jointly got to a conclusion. We run a very successful depot manager engagement process where we go around and do regional boards and our famous curry dinners in the evening. So we are in constant contact, Andy and I are at one nearly every week. And we're always talking about price and volume as they give forecast. So if it's there in the natural market, they find this, not everybody perfectly. You run your depot margin down, and we get it (inaudible), you get a tap on the shoulder. But by and large, it finds its natural place as we go through the year. So I'd be very solid that we've got from some of the most commercial managers in the trade space.

I didn't quite get your question on allocation?

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Unidentified Analyst, [10]

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Well, I was just wondering, we flew (inaudible) a lot of that relates to the question of whether there's been any element of better investment in -- simply in terms of (inaudible) from the branches.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [11]

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I think it's very, very early days. So I think if you view the impact (inaudible) has done on the new platform, we've seen a few reduction of heads in our account management process that are heads of (inaudible). I think what it does is it empowers depot teams to understand what's going on properly with an account with an end customer. It helps them know the answer to the question is probably the most frequently asked question by our customers, which is, [the level I got] in my account. And the amount of [timed] and investment that our debt teams make on (inaudible) in this local build is incredible. And all of our [debt] goes away, so long as we can encourage our customers onto the platform. I think what's exciting about all of this is getting customers onto the platform makes it stickier with Howdens. And I think that's sort of the exciting bit about it. And the team got all sorts of thoughts about and take it (inaudible) the best reason to go on the platform, which is financial. So -- and we've -- and (inaudible) they have a (inaudible) team that don't make me think. So we want the customer to be able to go on and understand that. We've got various levels of capability amongst our customer base around competing skills. Some of them like it. Some of them don't like it at all, but it's certainly -- a lot of them get support from their -- maybe their partner or business partners to do it. So it's gone down a treat, I would say.

The refit choice, which is your third question, [Howard]. I would say we're in quite early stages of this. And given that the estate, which started in '95. It hasn't had an awful lot spent on us over the years, and I'm not ever intending to make it all pretty. It's a trading estate. We like the balance that we've got between the trade field, the counter at slightly smarter front end area, but it is a trading environment and the language that we use is the best environment to do business with our customers. And we -- the 30 that we've done, you've seen on the map are quite spread across the country, so we can see the impact. I think the balance will end up going towards the older part of the estate, it'll probably be London, more London-centric, Southeast-centric, then up North. But we will be looking individually at the trend that we think we can get off the capital investment we've made in the local depot and then weigh it in with where fitters are and how we'd organize the process. But we've made no decision on rolling across the estate yet. This is still a trial.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [12]

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Clyde Lewis at Peel Hunt. A couple for me. Firstly, could you give us a little bit of help on how you think the total market for kitchens, whether that's the number of boxes has evolved in 2019? And again, your best guess as to how sort of trade versus retail fluctuated within that overall picture. And also whether there was sort of a bigger shift towards higher-value products and what the trends were in terms of, again, focus on appliances?

Just to understand, I suppose, the bigger picture for the total revenue in the overall kitchen market. The second was on customers and the churn, and you indicated the think there were 470,000 customers in there, it'd be interesting to know how much churn you've seen? How many sort of inactive and just sort of understanding, I suppose, the wider market for kitchen fitters? Is there a diminishing pool from where you see of people able to do in-store kitchens in the U.K.? And is there a threat from the new build market, sucking some of that labor out of the renovation market, which obviously you guys focus on?

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [13]

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

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [14]

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Yes. In terms of churn rate. So 2019 Clyde, we had a -- we opened 135,000, and we closed 132,000. So net 3,000. On the face of it, that is an increase in churn because 2018 was 131,000 in and 129,000 out. But I don't think it's of any real significance because 2017 was slightly higher than 2019, 136,000 in and 135,000 out. So I think it's not -- technically a pickup in churn.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [15]

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I don't think we picked up anything from new build taking away from our customer base, I would say that it's a totally different contractual market.

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [16]

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Christen Hjorth from Numis. Just 2 for me. First of all, obviously, FX has moved in your favor. Maybe a bit of color on the potential benefit on gross margins if retained where it was and the second one, just on the sort of refurbishment program. Obviously, the test has been extended. If we look forward, do you think it'll continue as sort of a piecemeal type [refit] or will, at some point, you perhaps press button and do significantly more over a couple of years or something like that?

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [17]

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Yes. On ForEx, if today's rates didn't move for the rest of the year, we'd get a benefit of GBP 10 million to gross margin. So yes, we've had -- you'll know the history of this, we've had a few years with it hitting us around the back of the neck. Before that year is where it helped but where we -- famous last words, but where we sit now, yes, we get a benefit of GBP 10 million.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [18]

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Yes. I think on the test whether we'd roll it out and you don't do anything really piecemeal in Howdens. We would always balance how much we think the estate could take from a disruption amount in a year. But this would -- if we decided to go ahead of it, it would take quite a long time to do the estate. It could be 5, it could be 6 years, and I'm making that up but it's not -- you don't do this in a couple of years, your estate is so big and so wide. And I think it would potentially we would hope it would be a source of new revenue growth as we start reinvesting in early depots, particularly. But the second thing I would say to it is there's only certain times that we can revamp the estate. So I think we were verging too close last time when we started doing the 8, pre Period 11, because you do not want managers distracted from lead generation, building his plans for Period 11. So we give him a rest after Period 11. We do work through Christmas, and I wouldn't see us passing really June, July time in the year. So you've only got a window of sort of downtime to do it there.

I think we're nearly out of time, but if there's another question, we'll take it. Yes?

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Samuel Frost Dindol, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [19]

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Sam Dindol on from Stifel. Just a couple on digital, if I may. You say leads for the website are up 35%. Are you able to give any color if the conversion rate from those website are either similar to the rest of the business? And if -- secondly, if, say, website visitors, perhaps not as aware of the Howden pricing model as perhaps other customers, is there a sort of need to get more price transparency to them? Or do you lose sales because they're not willing to price rebuilder? Any interest on that?

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [20]

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

Great. Thank you very much for all your time.