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Edited Transcript of HWDN.L earnings conference call or presentation 25-Jul-19 7:30am GMT

Half Year 2019 Howden Joinery Group PLC Earnings Presentation

London Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Howden Joinery Group PLC earnings conference call or presentation Thursday, July 25, 2019 at 7:30:00am 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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* Ami Galla

Citigroup Inc, Research Division - Senior Associate

* Aynsley Lammin

Canaccord Genuity Corp., Research Division - Analyst

* Harry J. Gowers

JP Morgan Chase & Co, Research Division - Analyst

* Howard David Seymour

Numis Securities Limited, Research Division - Director of Equity Analysis

* Robert Eason

Goodbody Stockbrokers, Research Division - Head of Research

* Samuel Berkeley Cullen

Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst

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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, and welcome to the Howden's results for the first half of 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, COO of Trade; and Rob Fenwick, COO of Supply, are both here.

I'll begin with my perspectives on the first half of 2019 and our plans for the rest of the year. Mark will then review our financial performance for the period. I'll then sum up and we'll take questions.

It's been a positive half for Howdens. Both revenue and gross margin increased, and profitability improved with operating profit increasing at a higher rate than revenues. This, in part, reflected the timing of the price increase, which, this year, was implemented in January as compared with last year in April, and maintenance of depot margin discipline, which we exhibited in the second half of last year.

In the first half of 2019, we found a more profitable balance between volume and price as compared with the first half of last year when a significant increase in volumes came at some cost to margin. At the same time, we've continued to make investments in the business. I will talk about these, in particular, depot openings, format developments, new product introductions and organizational structure in a moment.

But first, I'd like to talk about our customers. Our overall customer base in the period was stable at around 470,000 trade and cash accounts. These 2 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 core customers buying more kitchens and spending more with us.

With broadly the same number of new accounts as in the comparable period last year, new customer spend increased significantly as did profit per new account reflecting lower acquisition costs.

I believe these results show that Howden knows its objective: to help our trade customers achieve exceptional results from their customers and for them to profit from doing so. When our customers succeed, we succeed. Our model is a powerful combination of locally empowered depot management teams served by a dedicated supply chain, which is both cost-effective and critical to the success of our in-stock offer. A key feature of Howden's success is that we're trade-only. Building trusted relationships with trade customers is central to everything we do.

We have continued to hold our trade customer feedback sessions regularly, which enable us to identify any areas in which we need to improve our offer. Over 1,000 of our customers have now attended these sessions, which show that our builders appreciate that we're listening to them. They view the relationship as a business partnership, so it's in their interests to invest their time to help us make it even easier for them to serve their customers.

We've introduced a number of initiatives with the potential to increase volumes and profits across the business based around our core building blocks of trade service and convenience, trade value and product leadership. I will focus on the initiatives I went through at the 2018 results presentation in February, which were evolving our depot model to use space more efficiently and to create the best depot environment in which to do business with to support our customers, improving range management to help customers' buying decisions and to access supply chain benefits 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. All this together with our plans to develop our operation in France by way of a city-based approach.

Depot evolution. During the first half, we progressed our testing of a new depot format aimed at creating the best environment in which to do business with our customers at no material change to the fit-out cost of a new depot. Through new vertical racking 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. This format also provides the opportunity to reallocate space, providing a more open front area to bring depot staff closer to customers, improve both the visibility and the standard of our design facilities and nearly double the space available to wider range of kitchen displays.

There is also a space for a small goods picking area behind the counter with an improved everyday range of essential items, including hardware, as a way of encouraging footfall and therefore incremental kitchen sales.

In addition to the depots opened or refurbished in the new format, there are further 45 depots that have been reracked without further modifications, which means that we now have a total of 88 depots with vertically racked product, representing approximately 12% of the current estate. In the first 6 months, we've opened 14 new depots, including 5 in Northern Ireland, all in the new format. Depots opened up in the second half will also be in the new format. In total, we are on track to open around 40 depots in the U.K in 2019, including the 5 who we've opened in Northern Ireland.

The improved densities offered by reracking vertically also enables us to put our full offering into a smaller space of around 6,000 square feet. We expect to open around 16 smaller footage depots this year, including the 4 opened in the first half. With the new smaller-sized depots, the number of U.K. depots could potentially reach around 850.

As I explained at the 2018 results presentation, we're also testing to understand the rollback opportunity in the existing depot estate. We initially converted 3 older depots: Park Royal in 1995 when the business opened, Swansea and Guildford the year after in 1996. These have been trading in the new format for several months, and Andy and I are pleased with the early feedback that we're getting from both the depot teams and the customers.

We are on track to convert 8 more existing depots by the end of September. We are trialing several ways of doing this with different capital spends, so that we can continue to learn how best to apply this opportunity to the existing depot estate. We will then trade these 11 depots through Period 11 before drawing any conclusions to the sort of returns that we can expect.

Range management. New kitchens each year represents a significant portion of sales as a product's life cycle shorten. In the first 6 months of the year, we introduced 8 new kitchen ranges, which are performing well. 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, a cleaner look and checker-style kitchens and matte textures that benefit from the latest industrial and technological advances that prevent fingerprint marks.

During the period, we updated our light oak cabinet to a more natural tone, led the mass-market rollout of anthracite storage systems, which helped define our mid and premium ranges, extended our worktop range by 9 light-colored laminate worktops along with 3 new solid surface worktops to complement the increasing number of dark kitchen colors. We've introduced 25 Lamona appliances, adding new technologies in cooking, laundry and dishwashing products while strengthening our core Lamona oven choice with the introduction of a new low price point fan oven.

We've strengthened the Lamona brand through the introduction of a 3-year guarantee. From the hardware lines we are trialing, we have tested -- we have selected around 250 of the fastest sellers from that range for a full rollout across the estate. And we've continued to support our customers by introducing prefinished internal doors across different styles to helping them save time in fitting them.

In the second half, we plan to introduce 4 more new kitchen ranges in time for the peak Period 11 trading weeks, making the total of 12 new kitchens for the year. Managing the number of kitchen ranges efficiently is crucial for both best availability, which is highly valued by our customers, and profitability. And we intend getting back to the discipline of fewer deeply stocked higher-performing ranges. A key part of this is the timely discontinuation of underperforming ranges and the management of clearance from the business. In the first half of this year, 15 ranges have been cleared from the business and a further 6 will be cleared by the end of the year, making a total for this year of 21. By the end of 2019, we'd expect to have around 65 current kitchen ranges, which we think is an appropriate number for the current market.

As part of our focus on range management, we've combined the various commercial teams across the business into one single commercial structure organized by categories. This structure provides clearer accountabilities for ranging decisions and the accessing of supply chain benefits. The changes would remove duplication of effort, ease communication and bring our commercial team closer to the depot managers.

Through this structure, we aim 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 are being offered -- that we are offering the best value to our customers.

Digital. We see digital as a means to reinforce the Howdens model and the strong local relationship between depots, their builders. And we're building our digital capability with 3 objectives: to increase builder and consumer awareness of Howdens to help our customers sell the Howdies product; to improve the communication between Howdens tradespeople and their customers; streamline and improve operating processes, thereby freeing up time for depot staff and customers to use more productively.

In the first half, our new web platform, which can be viewed on desktop, tablet and smartphone and offers customers improved search and information, has moved howdens.com into more prominent positions, raising brand awareness with consumers. howdens.com impressions and search results has increased eightfold. Visits to the site has seen growth in traffic of 42% year-on-year. The contacting of depots through the website has increased by 30%.

We have also completed a program to enrich product content and make the products or styles the visitor wants to view easier and quicker to find. Around 80% of the visitors are now entering the site via the product pages rather than the home page. Views of underrepresented but in key categories -- key product categories have increased, for example, views of hardware have increased by 50%. Refining style and product selection is now easier, enabling a more focused discussion of consumers' needs with their builders and our designers.

In the second half of this year, we'll be making further improvements to our digital offering in line with our aim to put a tradesperson local depot in their pocket. We will be testing a secure customer area -- customer-only area of the website where builders can manage their accounts and interface more efficiently with their local depot and vice versa. Customers will be able to view their credit details and make payments and access account details and invoices at any time. We will also be testing more efficient account opening process for new trade customers.

International. In February, I explained why we believe there is potential for a viable business based in France. Since then, we've opened a new depot in June near Versailles. We expect to open at least 4 more in the target areas this year, that will be 3 around Paris and one in Lille. We have completed the rebranding of our international business from Houdan to Howdens, which should enable the business to gain advantage from the U.K. brand equity, online search reputation and business efficiencies. We've appointed a French national to lead our city-based business strategy in France. We've completed the closure of our operations in Germany and The Netherlands, with closure costs being in line with our expectations.

Thank you very much for listening. Mark will now take you through the interim results for 2019, following which I will sum up before taking questions.

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

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Thank you, Andrew, and good morning, everyone. Reviewing the financials for the first half of the year, let me start by looking at some of the headline numbers from the income statement.

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 33 million to GBP 638 million, a 5.5% increase on 2018. Group sales also increased by 5%. Gross profit rose by GBP 25 million to GBP 404 million. The percentage gross margin of 61.9% was up from 61.3% in 2018 following a price increase in January 2019. Operating profit was up by GBP 8 million to GBP 78 million as a result of a GBP 17 million increase in operating costs.

These costs were impacted in the first half by inflation and by continued investment across the business. This included new depots, digital and additional depreciation. The closure of our Dutch and German operations also impacted operating costs.

Now moving down to the second row, with net interest income and other finance charges broadly flat, there was a profit before tax of GBP 78 million, GBP 9 million higher than in 2018. Looking at cash flow in the first half of the year, this included share repurchase expenditure of GBP 46 million, capital expenditure of GBP 24 million and a GBP 10 million contribution to the pension scheme. Overall, we had a net cash outflow of GBP 14 million and ended the period with GBP 217 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 638 million increased by 5.5% on a total basis and was up 3.4% on the same depot basis. In Continental Europe, turnover of GBP 14.5 million was down by GBP 0.2 million as a result of the Dutch and German depot closures. Sales in our French and Belgian depots rose by 4% in euros.

Let me now talk you through the movement in PBT from GBP 69 million in 2018. Gross profit rose by GBP 25 million. This is the net effect of several features as shown in the chart on the right-hand side. If we bridge from 2018's gross profit of GBP 380 million, there was a benefit of GBP 37 million, which reflects the impact of the January 2019 price rise. Secondly, the small fall in volumes and mix changes compared to the first half of 2018 reduced revenue by GBP 4 million.

In addition, there were a number of factors that impacted the cost of goods sold. There were reduced costs arising from the volume and mix changes totaling GBP 2 million, also affecting cost of goods sold. We saw higher input costs and the impact of discontinued product write-offs. This resulted in a net decrease to gross profit of GBP 8 million. We also saw a GBP 2 million impact from exchange rate movements in the first half. Together, this gave a net rise in gross profit of GBP 25 million to GBP 404 million. Gross profit margin was 61.9%.

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 rose by GBP 17 million, which I will address on the next slide. Net interest and other finance charges were GBP 1 million better than in 2018. The net result was that profit before tax rose by GBP 9 million to GBP 78 million.

Let me now explain in more detail the main movements in operating costs from GBP 310 million in 2018. Firstly, costs associated with the 14 U.K. depots that we opened in the first half of 2019 and the incremental costs of the 33 depots that we opened in 2018 totaled GBP 7 million. Cost increases for older depots were GBP 4 million, mainly reflecting higher payroll costs. Other cost increases incurred to support growth totaled GBP 4 million. This included the cost of digital upgrades.

The closure of our Dutch and German depots cost GBP 5 million, and there was a net reduction in other costs of GBP 3 million. This meant that operating costs overall rose by GBP 17 million to GBP 327 million.

Let's briefly turn to the remainder of the income statement. As we've seen, profit before tax was GBP 78.1 million. This led to a tax charge of GBP 16.4 million, the effective tax rate being 21%. This gave a profit after tax of GBP 61.7 million. This result gives earnings per share from continuing operations of 10.3p compared with 8.9p in 2018.

Turning to dividends. The board has decided that we will pay an interim dividend of 3.9p per share. This is in line with our policy of paying an interim dividend that is 1/3 of last year's full dividend, which was 11.6p. This will be paid in November at a cost of GBP 24 million. This will give a total cash cost of ordinary dividend payments in 2019 of GBP 71 million. Let me remind you that in 2018, we returned a total of GBP 131 million in share repurchases and dividends. In March 2018, we announced a GBP 60 million 2-year program of share repurchases.

At the end of 2018, there was GBP 30 million of that program remaining. In February 2019, we announced that we would return an additional GBP 50 million via a further share repurchase over the next 2 years. So far, in 2019, we have spent GBP 46 million repurchasing shares thereby completing the 2018 buyback, and we have GBP 34 million of the 2019 program remaining.

Let me now turn to cash flow. From a position of having net cash of GBP 231 million at the end of 2018, we ended the first half with net cash of GBP 217 million. Looking at the change since the end of last year, let me draw to your attention a number of items that explain the movement. Net working capital increased by GBP 10 million, which I will address on the next slide. Capital expenditure totaled GBP 24 million and included new depots, spend on the next phase of our Raunds warehousing strategy and investments in digital. Tax payments were GBP 21 million. As I've already described, we spent GBP 46 million repurchasing shares in the first half, and there was a GBP 10 million contribution to the pension scheme.

The net result of these and other movements was a cash outflow of GBP 14 million, meaning we ended the first half of 2019 with net cash of GBP 217 million.

As I've already said, net working capital increased by GBP 10 million. Within this, stock increased by GBP 21 million. This was impacted by Brexit planning, new depot openings and new kitchen ranges. Debtors grew by GBP 17 million, reflecting the typical pattern of trading that we see in the first half. Partly offsetting these movements, creditors rose by GBP 29 million.

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 the first half. Firstly, from the P&L, there was the current service charge, administrative and interest costs of GBP 9 million. Secondly, a decrease in the discount rate increased liabilities by GBP 107 million. Thirdly, the group made a cash contribution of GBP 19 million.

Finally, with asset returns being GBP 126 million higher, the deficit at the end of the first half of the year was down by GBP 29 million to GBP 7 million. This, of course, is the balance sheet deficit calculated under IAS 19. Our deal with the trustees, however, is on a technical provisions basis. This agreement reached in June 2018 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%.

Let me finish with some brief comments about trading in the first period of the second half of the year and costs for the rest of the year. Period 7 saw total U.K. sales rise by 7.5% for the first 4 weeks of the second half and was up by 4.8% on the same depot basis. Our plans for the full year are unchanged. In forecasting this year's overall results, the margin for the full year, a number of factors have to be considered. These include market uncertainties and the impact of foreign exchange rates. As we said in February, there will be an additional GBP 15 million of operating costs in 2019 compared to 2018. These are in respect of the closure of our Dutch and German businesses, digital upgrades and additional depreciation.

These cost increases are in addition to the impact of the ongoing growth of the business, inflation and new depots.

We now expect capital expenditure to be between GBP 70 million and GBP 80 million for 2019. This includes digital upgrades, new depots and the next phase of Raunds.

On the subject of Brexit, we are mindful of the potential impact on our business. As a consequence, we are reviewing our stocking policy for at-risk items, currently resulting in an additional GBP 12 million of inventory held at the half year. We're also flexing our inbound supply routes, and we now have in place appropriate logistics accreditations, namely Authorized Economic Operator status.

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. It's been a positive first half for Howdens. We've increased revenues and gross margin and improved profitability with operating profit increasing at a higher rate than revenues. We continue to invest in people, infrastructure, depots and product.

We're on track to open around 40 U.K. depots, including the 5 we've opened in Northern Ireland, all in our updated format, and around 4 in France. We are beginning to see the benefits from our ongoing digital upgrade program. And work continues on the next phase of Raunds distribution complex, which will replace our existing facilities in 2021, and we've reorganized our commercial team. I am pleased with the response of our people, customers and suppliers to the initiatives we've taken so far this year.

The focus of the business is now to deliver H2 and the preparations for the peak Period 11 trading weeks. We aim to maintain the margin discipline delivered in the first half, retaining a profitable balance between price and volume whilst working with our suppliers to keep costs down. We have a rightsized lineup of new product offering for the second half. Our lead bank and surveys are in line with where we'd want them to be. U.K. depot sales for the first period of the second half have increased by 7.5%. We remain cautious on market conditions given the economic uncertainties, particularly the impact that Brexit may have. The current date by which the U.K. must leave the European Union is 2 days prior to the end of our 4 peak weeks of Period 11 trading. However, I'm confident in our business operating model through the changes and any changes in economic conditions, and we're on track to deliver our plans for the year as a whole.

Thank you for listening. We'll now take questions. Please wait for the microphone and clearly state your name and your organization before asking your question.

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Questions and Answers

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

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Howard is quick off the mark.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [2]

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Howard Seymour from Numis. If I could just ask two, please, unrelated. The first one is, looking at the waterfall chart there, Mark, you could see that in the first half, the volume would have been down and the price up. And I just wonder how that tallies with the better price/volume mix that you alluded to. Are we still in the situation where we're sort of washing through what's happened over the past 2 years?

Assumingly therefore related to that, would you expect to see that wash through further in the second half?

I might just well ask the second question while I'm here. And Andrew, you alluded to the hardware lines, that the 250 lines across the estate. Just give us the sort of the timing on that as to when that will be introduced, please.

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [3]

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Yes. Good question, Howard. I think we're at the point as we get to midyear '19, where in terms of comps, we're getting to a more even keel. So the fact that in the first half, if you look at the mix between price and volume, although we were up 5%, that was plus 6% price, minus 1% volume. But bear in mind, Q1 '18 was plus 25% volume, minus 7% price. That itself -- I don't want to have everybody asleep, but that itself was a reflection of Q1 '17, where we ended the year with a 10% price rise and we have negative volumes and positive price. But as we get into the second half of 2019, we're much more on an even keel and the comps are on an even keel. So we'll see a much more even balance between price and volume in the second half. So we're expecting volumes to pick up, price still to make a contribution but a much more even mix between the 2 in the second half of '19.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [4]

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Regarding your second question, Howard, on the hardware lines. If you recall that we did a hardware test introducing a broad set of hardware lines into new depots and the revamped depots. So we've learned that there are fast sellers in that, around 250 that are being rolled out to the estate right now in our autumn/winter book that was presented at the start of the presentation.

I'd make the point that we'll be launching 3 trade books per annum to get the business into a nice trading rhythm through the year, so product launches will be lined up to those cycles and the 250 are being rolled out right into depots now as we speak.

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Ami Galla, Citigroup Inc, Research Division - Senior Associate [5]

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Ami Galla from Citi. Just 2 questions from me. The first one is on the cash guidance. If you could give us some color as to how -- what level of cash do you need to maintain for your normal working capital swings? And what is your perception of the surplus cash that is in the business today, also in light of the highest CapEx guidance that you've given us?

My second question is on the efficiency gains that you had booked in the first half. Firstly, if you could give us some color as to what were the key drivers of those cost reductions? And what should we expect for the full year?

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [6]

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Okay. Yes, working capital swings, we have a formula that we use to calculate the second part of the first part of your question, which was about the cash surplus. So the formula includes the working capital swing. So we get to the end of the year, whatever our closing cash balance is, we deduct GBP 100 million for the working capital swing. So we have quite a vicious swing around peak trading, October, what we call Period 11. And working capital moves by about GBP 100 million. We argue it's legitimate to stay out of bank debt during that swing because we currently have gearing, not on the balance sheet, chiefly through the depot leases and the pension fund deficit.

So we hold on to GBP 100 million. We then deduct the final dividend in respect of the year just finished. And whatever is left, we deem to be surplus. So if you did that calculation, 2018 year-end cash, it will spit out round numbers, the number GBP 50 million, which we declared surplus for share repurchase.

Your question about cost savings in the first half, the efficiency gains. Within operating costs, they were a mix of savings that we made in the marketing department, would be a good example, where we save money in terms of what we call our expo, our kitchen displays that we show around the business. And we also saved money on marketing in terms of printing and brochures. The other part of the saving was the cost avoided in the European businesses that we closed. So we closed Germany and Holland. And clearly, following the date of closure, which was early in the year, we're not bearing their costs for the remainder of the year.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [7]

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Aynsley Lammin from Canaccord. Just 2, please. Obviously, big comp effect in your kind of numbers and I just wondered what your view is on the underlying market that you see in the first half. And some of the macro data and some of your peers have talked about June and the underlying trading kind of fell away a bit. I wonder if you saw any of those patterns.

And then secondly, I think you said you're on track for your plans for the market. Should we interpret that as being on track for some of the consensus? You're happy with where PBT consensus is. I think we've seen the first half, some of those SG&A savings definitely had a boost albeit in the consensus number.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [8]

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Yes. So I'll tackle the first question. I mean we've -- it is a tough market, there is no doubt. We're working hard to deliver at all regions across the business and making progress year-on-year, some more than others. But it's -- we've described it as a steady, and we wouldn't point to any particular period over the last 7. And we spoke to the volumes in the first few periods, strengthening then in the last few periods. I think the amount of time that Andy and the team and I spend in front of depot managers across the country, we've got a very strong feedback of how they're feeling and how they're feeling towards the back half of the year. We were with them in Tuesday night. And they would -- and this is a quote, they would say, "Uncertainty in the market but strong confidence in the Howdens brand, the product, the services."

We're adaptable business. We are a combination of over 700 local depots that act in their local markets. So we feel okay as things currently stand as we look forward to the back half of the year. We're confident in the lead bank and confident that our customers are busy. They talk to us about being busy quite a number of months out.

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [9]

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Yes. On consensus, I think there are a lot of positives based on the first half. We're very pleased with the balance restored between price and volume so good intelligence across the counter in the depots as Andrew has touched upon. But given the other factors around, given that 40% or more of our profit turns up in October, this side of October, you've got to be pretty bold to be very confident about increasing expectations for the full year. So we think, all things considered, consensus should stay where it is really sound.

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [10]

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Robert Eason from Goodbody. Just maybe just following up on Howard's question in terms of this price volume mix. You've described as how it's going to change in the second half quite clearly. But how should we think of that in terms of gross margin and evolution? Because obviously, you had good progress in the first half. The shift is back to volume in the second half, and I know there's a year-on-year comps behind that. But should we think differently about the gross margin progression in the second half as a result of that? So maybe just talk through that.

And I know it's early and I think this question will be kicked away pretty quickly, but I'll just ask it anyway. Can you just give us maybe a bit more sense of the new format stores that have opened? I know they are only up for 6 months. But are they maturing in those 6 months any differently from old depots format stores? The 4 -- the 3 stores that you've reformatted and from the old depots. Again, were their like-for-like significantly different from the average? I know it's only 3 out of over 700 depots. But maybe just talk through those changes a bit more and if there's any numbers you can give, that would be very helpful.

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

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You take the first one, and I'll kick off the second.

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [12]

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Yes. Gross margin second half, I think we're still expecting to make progress. A number of reasons for that. But although, as we said earlier, the balance between price and volume is more even, we're still expecting a price contribution. If you look at Period 7, I think that's confirmed our expectation.

Secondly, typically, notwithstanding the sort of violent swings we had in price and volume since the start of 2017, in a typical year, the margin in the second half benefits from a richer kitchen mix in peak trading, so we get the benefit of that.

Thirdly, if you looked at our cost expectations, underlying costs within cost of goods sold, our saving programs, again, we think there will be a reasonable contribution there.

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

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Fair enough. Fair enough asking the question on the depot revamps. I mean, we're watching this closely. But I think as a Board, we are really not trying to draw any conclusions too quickly. We like the feedback the customers are saying to us. We like that they're saying some of the stuff that we would want them to say around the better display at the front for customers. They can see the design area in the depot. There is more convenient product to pick up, and stuff seems to come out of the warehouse a bit faster. So as for qualitative comments, we're very, very pleased about.

One of the things we're trying to learn as we do the next lot, this 8 lot that Andy is in the middle of rebuilding now, is can we do them faster and more efficiently than we've done in the first 3, and we're starting to do some of that. So you've got quite a bit of time out of the build and some of the cost out as well.

It is really dangerous in this business to draw conclusions too early, one way or the other. And it's -- you can't draw conclusions until you go through Period 11 so you can see how the lead banks build, what the customers are saying. So that's why we've laid out the time table to come back to us at the back end of the year and update you then.

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Harry J. Gowers, JP Morgan Chase & Co, Research Division - Analyst [14]

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It's Harry Gowers from JPMorgan. I'm wondering if you could try and quantify your outperformance versus the market or if you have a number for that. And the same depot growth in the first 4 weeks of H2, [I] was wondering what that was comping against in the first 4 weeks of H2 last year. And if you could just go into a little bit more detail on what your customers are saying a few months out from October and their expectations, given the uncertainty at the moment.

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

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Yes. Would you want to do the first couple and then...

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [16]

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I'll just define in terms of outperformance, do you mean us compared to the competition? Do you want to take that, Andrew?

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [17]

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I mean that I think what we do, we spend our time worried about Howden, and that is genuinely what we do in the business to ensure we're taking everything that we can. We do take a huge amount of feedback from the depot managers across the estate, whether we're getting any trouble from competitors in the local competitor set. And because we're [devolved] on price and responsibility down to the depots or depot managers who are operating within the local markets, so we get comments from some of the other competitors and we deal with them as appropriately in the local level. I don't think we're seeing too much that would worry us within our trade or retail split at the moment.

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Mark P. W. Robson, Howden Joinery Group Plc - CFO, Deputy CEO & Executive Director [18]

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Yes. If you look at Q3 as a whole last year, we were up 6%. We were getting 1% from price and 5% from volume. So I think the best way to describe Period 7 this year is to say, it's a real number. So the 7.5%, it's not a soft comp, it's not a strange comp. It's got a good volume contribution. So it's a -- yes, it's genuine progress is how we'd say it.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [19]

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The third part of the question around confidence and what our customers are saying just to expand on that a little bit more. I think our builders are busy. That's what they tell us. Their order books are full. We get quotes from the customers saying that they're busy right through to year-end in some cases. We're confident what our lead bank and surveys are saying. But yes, we've a bit of a cautious tone, but I think tremendous faith in the Howdens proposition and the Howdens offer.

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Samuel Berkeley Cullen, Joh. Berenberg, Gossler & Co. KG, Research Division - Senior Analyst [20]

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It's Sam Cullen from Berenberg. Just a couple of questions on the digital rollout evolution. Just kind of a definitional question really on the -- when you say from a 30x -- 30% increase in contract engagements, a, who's that with? Is that kind of builders? Is that consumers? Is that kind of new inquiries? Or is it just increased engagement with a particular project? For example -- and if it's the former new inquiries, what's the conversion rate you'll see? I know it's going to be early but it would interesting to get your thoughts.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [21]

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So yes, one of the things we've outlined clearly and why, I think most of the starting point for an end consumer when they're thinking about the kitchen is online now. They may well run around some of the retail operators or some of the trade operators and gather a lot of brochures, either they attain directly from the stores or from the builder. But search online is a common starting point. So in some cases, they're end consumers, in some cases, they're builders having a -- finding us and finding the product at the end. Then they can fill out inquiries and go direct to the depots. In some cases, they are end consumers and the depot will then take that lead and that lead will be connected to builder. We'd never trade with an end consumer when they're coming in. There's some concern around that. We would never do that.

But we have a high conversion rate when customers come in to depots. It's way too early to say what this is doing. We've relaunched our, what we call, our [Mega One] business some 6 weeks ago, and we're pleased with the results of what that is showing. So we're testing with natural search and we're testing with spend with Google. We've got some trials going in the business, and we'll be updating more at the back end of the year in that.

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Unidentified Analyst, [22]

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Just one question on the smaller format depots versus the larger format depots. What kind of level of sales by depot do you get from the smaller one? And by considering you've got the same amounts of range in both depots, do the economics not work better for a smaller depot and therefore what's the kind of thinking between deciding?

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [23]

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Yes. I think, again, the sample part is small and it's early as well. I suppose the way we think of it as a Board is we want to get into catchments because we've got 2 size options. We've got another tool to deploy more readily. So there's catchments in London that we want to be in. And because we can toast rack and squeeze ourself into a smaller space, we'd rather be in that catchment and not be in that catchment. The rural catchments, you might expect a lower turnover per depot. Again, we want to be there and keep our footage lower.

The cost difference between the 2 sizes is not that much because the mezzanine that goes into the smaller one has got a higher cost. But I'm not actually sure I'll ever be able to answer your question in a way because we have smaller depots that perform out of their skin because it's the right sort of catchment and then we've got bigger depots in rural areas that don't. So for us, it's about getting into the catchments and serving the customers.

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Harry J. Gowers, JP Morgan Chase & Co, Research Division - Analyst [24]

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Harry from JPMorgan, again. A few follow-up questions. I was wondering, obviously, it's early days in both Northern Ireland and the new France city-based strategy. I was wondering if there's anything that you see that's fundamentally different or niche about those markets.

And I think previously, maybe at the start of the year, we're talking about early days again on sampling some kind of new bathroom trials in your bathroom ranges. I was wondering if there's an update on that and any feedback from customers on them.

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Andrew Livingston, Howden Joinery Group Plc - CEO & Director [25]

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Yes. So I mean they're quite different things. Northern Ireland is always quite a natural extension for Howdens to go over there and we've launched 5 depots pretty close to the same day. We're very pleased with how they've landed, very pleased with how the proposition has landed in Northern Ireland and pleased with the early growth of those depots.

In Howdens, it's about getting the right team in place and getting the right manager. One of them is an existing manager and 4 have been picked up locally in the market. And I would say we're particularly impressed with the standard of people that we've been able to bring in and how they're operating, how they fitted into the company to extend the strong culture over there. The depots look fantastic. We were out just a couple of weeks ago looking at them trading quite well, so that's good.

They look and feel very similar to the U.K., and I suspect they'll mature in a similar way to the U.K. even though we're not known that well over there because we don't benefit from any national type of advertising.

France is different, very different. And we do believe that builders see the benefit of the Howdens proposition, the unique product, the way of buying it, the opportunity to make money and particularly the in-stock position in France.

Just to go over a wee bit, what we have seen in France is a benefit from depot is being closer together, so they build up the capability of customers around an area and teams around an area. So there's not a lot more to add in terms of our France development versus this time versus February except new depot's opened and it looks good. The new leader we put in place looks like he's settling in well. And we're finding sites and connecting the teams back to the U.K. better and removing some cost from the business that was there.

Bathrooms. We've always done bathrooms in Howdens. We've always had a good range. It's largely been repurposed. Kitchen cabinetry moved into the bathroom, moved under some modular range that's been in trial. And we've rolled it out to an increased number of depots in that catalog I was showing earlier. So it goes out to 350 depots right now, so it's progressing.

That is perfect. Thank you very much for your time. Much appreciated.