Eurocell plc (ECEL) Earnings Call Transcript & Summary

Thank you, Kelly. Good morning, everybody. I'd like to warmly welcome you to Eurocell's update for the first half of 2020,i.e. to the end of June, This update is a little later than normal, but given the impact of COVID-19, we felt it was very important to have a reasonable delay so that we can update you with a sensible period of trading since emerging from lockdown. However, our normal format will prevail, and I will update on the business and its various parts and Michael will pull together all of the financial details. As Kelly has already told you, she is acting as a moderator on the line and there will be an opportunity to ask questions at the end of the presentation. The slide presentation and commentary will be made available on the Investor part of our website during today. The first half of 2020 is obviously overshadowed by 2019. In response to our interpretation of the government guidelines, we temporarily closed the business from the 23rd of March. We took great care to ensure the business was less in the state of readiness, and particularly in operations, we adopted protocols normally used to close down at summer and Christmas. Circa 95% of all starts were furloughed. The senior management remained in roll and work to ensure the plans are in place for us to get a head start on our competitors immediately with a charge of return to work. We started back on the 11th of May, albeit a phase start, right? Eurocell has been trading very well on all fast up until locked down. At the end of June, we found revenues down 31%. Michael will talk to the loss incurred but clearly, a lot of revenue and some prudent positioning given the lack of clarity during the next 18 months. We work very hard to preserve cash in the business and then work with our suppliers and customers to further strengthen this position as we emerged from lockdown. Since our return trading has been better than anticipated, New Build is slowly returning to last year's volumes, the RMI has been very strong with customers undertaking a lot of project type work. COVID-19 does not change our long-term strategy. But clearly, there are some short-term purpose, not least of which completing the warehouse, which is on track, returning to paying dividend and ensuring the continued deployment of our very successful commercial strategies to take market share. As previously stated, we moved very fast to close down, but then immediately move to planning what the return would be like within the COVID-19 context. To this end, we're fully engaged with workforce and the joint effort has ensured that all sites were ready to return to work and start production at the first opportunity. it is testament to our employees at all sites with our exception have seen an improvement in operating efficiencies, social distancing, continue monitoring, temperature checking, correct PPE are all to the highest standards. And for this time, we've not had a confirmed case of COVID-19 within our employees. Eurocell recycling launch was the last site to reopen as we had stocking capacity elsewhere. By the end of August, this site has ramped up to 70% of normal production levels. On the cash front, we raised our [ credit ] facility to GBP 75 million in March and then raised GBP 17.1 million in an [indiscernible] share placing with a view to continue with the warehouse fit-out whilst giving a little more headroom should the need arise. We immediately moved to preserve cash for the defer of all nonessential and discretionary expenditures. As you are aware, we canceled the final dividend of 2019 whilst making forward use of all government support, including the job retention payments, of which we used by [ GBP 6.3 million ]. At this time, it's not our intention to take advantage of the GBP 1,000 year-end grant. But I can confirm that only a handful of employees still remains furlough, and this is mainly because of shielding issues. So on to Page 4. And here, we get the first year of trading in H1, but also the trading in the first 2 months of H2. July and August have been very robust, with the branch is seeing excellent growth, but also a robust performance from profiles given that new bid, which is 35% of profiles mix started very slowly. Courting and investing in the right trade advocators have seen these guys take substantial share of our competitors in their fabricators have struggled. As illustrated on the slide, the sales transformation happened very quickly from the beginning to the end of June from 80% of prior year in week 1 to 105% by the end of the month. And that hasn't stopped. We believe we're through the period of pent-up demand, and we are seeing the consumer spending physical money to do out their homes and particularly trying to make more usable space to allow for homeworking, et cetera. We are still seeing considerable project type work come through and our make-to-order book is twice the size of last year. One of the major drivers of RMI expense in the past is house moves. So the recent and ongoing uptick in this area of the economy is most welcome. Moving to Slide 5. Now is time to briefly discuss the trading in our divisions, starting with profit. Through this period, we've continued to take share and believe we are still doing so. It's difficult to sign market indicators, but we believe now we have about 17% market share. Despite this, as we can see in the top right-hand graphics, revenues were hit very hard. We closed the door to everyone very smartly and our fabricator base follow directly. As previously said, the trade fabricators got up and running very early after lockdown and have taken share from a number of our competitors. In a market where order books are normally circa 2 weeks, most trades fabricators have order books out to 6 or 8 weeks. There are such a short quality of stores that windows requested now unlikely it's been stalled until the New Year. We've seen run rates from new build increased dramatically in the last 4 weeks, and we've won a significant amount of new work. Commercial work has only just recommenced, but it's starting to ramp up. Our initial thoughts were work in COVID-19 type environment would severely curtail operational efficiencies. But the opposite is true. Clear processes, better flows, clear delineation between workstations have all led to an increase in OEEs and they continue to improve. To confirm, we've not seen any of the costs associated within efficiencies in production list or logistics from prior years. And we continue to increase the amount of recycled used in our products. It's now up to 26%. And whilst it took a little time to pick up, we are now seeing free supply of infill [ level ]. Moving to Slide 6. It is our intention to increase the awareness to bring potentials to our customers given the heighten wares of single-use plastics and also corporate ESG requirements. We are in the process of ratifying the savings in carbon, so we're able to utilize this benefit to achieve further type specifications. To further grow market share, we will continue to develop while simplifying our product range. We will continue to invest in our customers, increase the level of pull-through for our products with specificational branch sales. It is also our intention to greatly raise awareness of the Eurocell brand with consumers. Indeed, anyone who's driven down the M1 part Junction 28 recently would have seen the branding on the new warehouse shining out. It's rather difficult to miss. Lastly, with operations and logistics really stepping up to the plate with nickel, which is our new warehouse opening in early 2021, we are determined to make ourselves the easiest profile house to do business with. Still a way to go, but our new CEO and his team are making considerable strides in this direction. A lot of work has to go in upfront and the improvement of processes and IT support. So it is some time before the customer may see the benefits. I should be clear that the direction of travel of what needs to be done. Moving to Slide 7. [indiscernible] Building Plastics for the brass network. As to be seen, the sales drop was not quite as bad as profiles, but we're already talking about small points of business. This reflects the fact that EBP was already performing very well in the run-up to shut down. However, upon reopening, we have seen sales climbed very strongly, up 20% on last year. Sales have been led by manufactured products and this for the reach the mix, but we are now seeing the mix returns to normal project and NPO order work really kick in and balances the portfolio. We are now at 208 branches and after trying 2 larger footprint stores, we've taken a learning from these and apply them to one of our smaller branches, which we have recently opened in [indiscernible]. As the showroom has been appreciably increased, we're able to show all of our products, and this has been very well received by [indiscernible]. The team spent a whole of lockdown planning the resumption of trading and came out all guns blazing with promotions, cash back days, customer reengagement activities, and we are very pleased with the reception from our customers. We've moved stock into the balance sheet to ensure availabilities and are currently finally efficient to make sure that our customers [indiscernible] queuing the cold in the rain at the night start to close in. Page 8, we are still planning on 300-plus sites, believing that we have started to really outstrip both our national competition, but also the independents. We've seen huge growth in Conservatory and Conservatory Roof. This growth have effectively reversed the slow declines, which have been happening in this sector for the last 10 years. COVID connected, we've lost a range of garden rooms for customers while thinking about long-term home working. We continue to see excellent growth in home rooms as replacements for the clusters conservatories and we have recently launched a Vega system with effectively flat [indiscernible] installed into the room to allow more lighting whilst maintaining the information properties of the room. Everyone is looking to make more space in their houses or bring the garden in towards the house, therefore, Garden Living products have increased importance. Lastly, we are 2 weeks into trial to sell windows and doors directly to consumers with products made for us by our satiated base. It looks very promising, but we will update at the full year. Now to Slide 9. Thanks for the support of our shareholders with the cash raised. We've pushed ahead with the quicking of the new warehouse site. We have managed to work through most of the lockdown period and the project is on track. Offices to be occupied from the end of September, which gives us space to adapt to social distancing and increase dramatically the amount of parking available, which has always been a problem at the Alphason site. The state-of-the-art 12 vintage high mobile racking is being erected and will be ready to transition from current warehousing facility over the Christmas period. The existing warehouse will allow us to increase our capacity on boiling in conservative routes and allow further expansion of extrusion capacity as we continue to take share. As you will all be aware, we believe this future-proof our business for the coming years. Now I'm going to hand over to Michael to run through the financials.

Thanks, Mark. So let me start by going through the financial highlights on Page 10. There are a lot of moving parts to these results. I'll pick up the major drivers on this slide before covering off the details and our progress in Q3 as we move through the deck. So revenue down 31% is equivalent to a decline of 4% on a like-for-like basis. That's taking into account the period of closure by comparing average sales per trading day in each half. Gross margin down 4.3% reflects reduced production volumes and therefore, a lower recovery of direct costs as well as an increase in our stock provision, which I'll cover later. Underlying overheads down 17% includes government support received under the job retention scheme of GBP 6.3 million and the impact of our cost reduction measures, partially offset by an increase to the provision for bad debts of GBP 2.9 million. Taken all together, that gets us to an underlying loss before tax of GBP 8.6 million. In summary, driven by lower sales volumes and the impact of operational gearing. The reported loss was GBP 16.5 million and as stated after a non-underlying or exceptional charge of GBP 7.9 million, the major component of which is a noncash goodwill impairment of GBP 5.8 million. Net debt at the period end on a pre-IFRS 16 basis was GBP 23.5 million, down GBP 11.1 million from year-end. This is a good performance and reflects the significant measures we've taken to preserve cash and the benefit of our share pricing in April. Finally, on this slide, we took the difficult decision in March to cancel the final dividend for 2019. We haven't proposed an interim dividend for 2020 because of the impact of COVID on our results for the first half. And we're also mindful of the substantial government support we received. However, I can confirm that it is our intention to return to paying dividends in 2021. Turning to the full P&L on Page 11. Mark explained the drivers of our sales, and I'll come on to the other components of EBITDA in a moment. But just looking below that line, D&A was GBP 9.9 million, up on 2019 due to the increased CapEx, reflecting our recent investments in operating capacity as well as the impact of operating lease rentals on new branches and our transport contracts, which has been replaced by depreciation and interest charges under IFRS 16 and with our CapEx program and new leases, we expect D&A for the full year to be in the region of GBP 21 million. Finance costs were GBP 1.2 million, up on 2019 with higher net debt through the first quarters as well as the increased IFRS 16 charges, and finance costs for the full year should be around GBP 2.5 million. We recognized a tax credit on the underlying loss for the first half of GBP 3.3 million. The effective tax credit rate of 38% for H1 is higher than the standard rate due to the benefit of Patent Box release whereas the effective tax rate on the exceptional charge, which I'll come on to shortly, is in line with the standard rate of 19%. With the return to profitability in the second half, we expect the full year tax charge rate on underlying profits of around 18%, unchanged from the original guidance and the tax credit rates on exceptional charges should be unchanged from H1 at around 19%. Moving down the P&L. Underlying basic losses per share were 5 pence and the position of dividends have already covered. Moving on to the components of sales growth on Page 12. Total group sales on a like-for-like trading day basis were down 4% for the period, which includes Profiles down 14 and Building Plastics up 3%. This reflects performance in the 11 weeks to the 20th of March, in line with expectations, with Q1 like-for-likes up 3% against a tough comparative from 2019. Then there's a period from late March to mid-May when the business is closed, followed by a good performance since reopening with June like-for-likes just down 6% on last year. The estimated impact of COVID-19 showing the chart to a reduction in sales of GBP 38 million reflects the close period, which resulted in 90 trading days in the first half of 2020 compared to 124 days in H1 2019. Finally, there's a small uplift of GBP 0.5 million from 7 new branches opened in 2019, '20. We have reduced the number of branch openings over the last 2 years from a peak of 31 in 2017 to allow us to focus on improving the profitability of the existing estate. And notwithstanding the COVID impact, this has been successful. Moving on, we've seen a strong start to the second half with group like-for-like sales for July and August, up 12% in 2019. Profiles that 2% includes good contributions from face fabricators who are substantially focused on the strengthening RMI markets. And although new build, which represents about 1/3 of our profile business, we started slowly run rates there are also now improving. Building Plastics Q3 like-for-likes up 20% include a strong performance across our range of manufactured products and traded goods as well as an excellent start for our new range of outdoor living products. So in summary, whilst COVID has had a very significant impact on sales for the first half, we prepared well during the closed period and it really hit the ground running in Q3. On to gross margin on Page 13, moving left to right across the chart. The volume impact of 310 basis points is driven by COVID and reflects reduced reduction and therefore, a lower recovery of direct costs. And I am pleased to say that gross margins have been improving in Q3 as volumes increase. Gross margin has also been impacted by 160 basis points as a result of an increase to our stock provision of GBP 1.5 million. Following a full review performed during the closed period, we have rationalized our product range and eliminated some of the least profitable and least popular views on the catalog. As a result, moving forward, these products will not be marketed so we increased our provision for slow-moving stocks. But this will create more space to promote the main runners and profit drivers and reduce complexity in the business. Moving along, we benefited from a small reduction in raw material costs of approximately GBP 0.7 million in H1 incorporating the impact of a price reduction for electricity and some other raw materials. Continuing left to right, there's a small adverse impact of 40 basis points from recycling, which reflects lower volumes in H1 this year as well as lower selling prices for recycled materials and a smaller price delta with virgin resin. But it's important to remember that recycling as a hedge against higher resin prices. So although there's a small year-on-year negative impact on gross margin here through the cycle, the economics of recycling are attractive. And the 4,700 tonnes of recycled material we consumed in H1 delivered an absolute gross margin benefit of well over GBP 1 million. So that's the gross margin. And as I said, at the start, now improving nicely as volumes increased in Q3. Turning to overheads on Page 14, where overall, we had a reduction of 17% or GBP 8.5 million. First, the volume caption at GBP 3 million primarily reflects the impact on direct labor and distribution of lower production and sales, but it is net of a small increase of GBP 0.3 million incurred in respect of new branches opened in 2019, '20 as well as the year-on-year impact of last year's April pay award, which is approximately GBP 0.6 million. We had originally planned the general pay award to be effective from April this year, too. However, with COVID, wage increases were restricted to those required by the minimum wage legislation, which in total are not significant. We have made use of the job retention scheme through which we received payments of GBP 6.3 million for the first half. There is also a further reduction in overheads of GBP 1.1 million because certain employees were paid at 80% of normal salary levels. We have approximately 1,900 employees at the height of lockdown in April, all top 100 were [indiscernible]. Employees have returned to work on a progressive basis since we began the reopening process in May. And as of today, with volumes running ahead of last year, there is going to be a small handful built to return. We also received government support of GBP 1 million of Building Plastics through retail property grants of GBP 700,000 and business rates release of GBP [ 300,000 ]. Finally, on this chart, IFRS 9 impairment of GBP 2.9 million represent an increase to the bad debt provision. With success closing down of roughly towards the end of March, receipts from customers fell sharply. Several accounts now have a significantly worse aging profile than it is pre-Covid and many are not yet back in fields. We therefore assessed a level of credit risk to have increased materially as a result of COVID. In profiles, the increase of GBP 1.6 million is largely a provision against a relatively small number of fabricators, whereas in Building Plastics, the charge of GBP 1.3 million reflects risk spread more generally across a larger number of small accounts. We are focused on working with customers to collect the outstanding balance but given the significant levels of risk and uncertainty, the increased provision is appropriate. Non-underlying or exceptional costs of GBP 7.9 million as set out on Page 15, which includes a noncash goodwill impairment charge of GBP 5.8 million in respect of Eurocell Recycled North or Ecoplas. It arises under an accounting model, which now includes lower projected cash flows from ERN, reflecting a prudent assessment of the impact of COVID on cost of demand and production volumes in the short term as well as on selling prices for recycled material and the price delta between virgin and recycled companies. We have a clear strategic objective to increase our use of recycled material, and we remain hopefully committed to that, building on our position as a leading U.K.-based recycler of PVC windows. Recycling delivered an economic advantage with the cost of recycled content, typically less than the price of virgin at the virgin equivalents. The environmental benefits are clear. Recycling enhances our products and business sustainability and commercially recycling resonates well with key stakeholders, including the new house builders and the consumers. Looking forward, we expect sales growth will increase our demand for recycled material and we will deliver that largely through the expansion plans for ERN or Ecoplas that we set out on acquisition. Non-underlying costs also include a further bad debt charge of GBP 0.8 million. This is in addition to the IFRS 9 impairment charges from the previous slide and represents the write-off of receivables in respective customers who have entered an insolvency process as a result of lockdown. The right-of-use asset impairment of GBP 0.5 million arises under IFRS 16 and represents the write-down of property leases to their value in there in use for a small number of medium-term loss-making branches. Also estimated using a prudent assessment of the impact of COVID-19 on future branch cash flows. Finally, new warehouse dual running costs represent rates, IFRS 16 lease charges and other property-related costs incurred before the new site becomes operational, which we expect will happen early in 2021. Moving on to CapEx on Page 16. For H1 CapEx was restricted to the new warehouses plus essential spend only. We invested GBP 4.6 million compared to GBP 8.8 million last year. That includes GBP 2.6 million on the new warehouse, GBP 0.7 million to increase recycling capability and GBP 1.3 million of other CapEx, which includes new and reservice branches, IT and other maintenance CapEx. It also includes the cost of our COVID related safety measures. We now expect full year CapEx for 2020 of GBP 15 million, down slightly on previous guidance. Taking out the key items, that's GBP 8.5 million to sit out the new warehouse split GBP 3 million on racking, GBP 3 million from mobile plant and GBP 2 million on systems and project management. With this investment, we are modernizing our storage and picking solutions, provide a 60% increase in capacity and a safer, more productive environment for our employees. The design has also been updated to ensure that it is COVID secure. CapEx guidance also includes GBP 2.5 million for manufacturing, which is mainly maintenance CapEx. Then there's GBP 1.5 million in recycling, including capacity expansion and maintenance CapEx. Demonstrating our ongoing commitment to this unique aspect of our business. And following the disruption 2020, we are now targeting incremental consumption of around 2,000 tonnes of recycled material in 2021 compared to 2019. That represents about 15,000 tonnes of consumption. And even at today's lower delta would drive absolute gross margin benefits of around GBP 4 million versus virgin [ compound ]. Finally, there's 1 million plans of distribution including new branches and branch refurbishments and a set of [ GBP ] 1.5 million of other CapEx, primarily IC and the cost of COVID-related safety measures. In summary, we are continuing to invest in our business to create capacity for [indiscernible] growth and drive improvements in operating efficiency. Moving to working capital on Page 17, where I'm very pleased with the net inflow of GBP 4.8 million. Looking at the individual components, stock days of 79 compared to 76 at last year-end, although stocks themselves are down GBP 3.4 million since December. A reduction of GBP 2 million in manufactured stocks reflects the impact of commercial selling activities restarting ahead of the phased manufacturing return. Traded goods are up by GBP 1 million which includes the impact of the new range of outdoor living products. And together, all other stocks are down at next GBP 2 million, which includes the highest stock provision I covered earlier. As a reminder, during 2019, we completed a stock build program adding approximately GBP 5 million in [ finished ] goods to improve availability in our branches and to protect against Brexit-related risks and looking ahead, it's important to note that this protection remains largely in place. On the [indiscernible] were 27 compared to 37 at last year-end, with the absolute balance of receivables down to GBP 8.6 million in December, reflecting the volume impact driven by COVID and the higher bad debt provision. The payables reduction of GBP 7.2 million since December is also a function of the COVID-related volume decline, but I'm also very pleased to say that in reporting this lower balance, all of our landlords and suppliers had been paid to terms as at 30 June. Looking ahead to the second half, we expect a small outflow from working capital as the business continues to ramp up through the busy season. And therefore, for the full year, working capital should be close to flat which is an improvement on our original guidance of an outflow of GBP 5 million. Turning to the full cash flow on Page 18 where we have all the components of a decrease in net debt of GBP 11 million on a pre-IFRS 16 basis. As through the factors driving the working capital inflow, so now moving left to right across the chart, tax paid and other payments of GBP 1.4 million includes the final settlement of our 2019 liability of GBP 1.9 million, offset by an increase to our warranty provision of GBP 0.5 million. Other outflows include payments for non-underlying costs of GBP 1.1 million, which primarily relates to the new warheads. CapEx payments of GBP 4.9 million includes the asset issuance covered earlier plus settlement of a year-end capital credit of GBP 0.3 million. And finally, there are financing charges of GBP 1.3 (sic) [ 1.2 ] million and cash received from shares issued of GBP 17.6 million which includes the net share placing proceeds of 17.1% and SAYE scheme cash received of GBP 0.5 million. But this all adds up to the pre-IFRS 16 net debt decrease for the period of GBP 11.1 million. IFRS 16 adds GBP 62 million to debt at 30 June, which is up to GBP 34 million at the end of last year due to the inclusion of our new transport contract and the new warehouse and I should say here that the old transport contract was not in scope for IFRS 16 in 2019 and had less than a year to run. Overall, I've been pleased with our cash flow management during this very challenging period. We increased our debt facility from GBP 60 million to GBP 75 million in March. And from the outset, we took decisive action to conserve cash, which has been effective. We were also grateful to receive support from investors for the share placing in April. So our balance sheet and liquidity position are strong, and we are operating well within the terms of our financial covenants. This provides the security, flexibility and options for the future. So finally, before handing back to Mark, I wanted to update our financial guidance for the new warehouse, which is very similar to the information we provided as a premium in March. I covered the CapEx for 2020 of GBP 8.5 million earlier, a small increase on last time due largely to an updated design to make the site COVID secure. In terms of the P&L for the full year, there will be extra costs of approximately GBP 2.5 million, including IFRS lease charges, rates, depreciation and interest. We expect GBP 2 million of that will be classified as non-underlying, which are the pre occupational costs. So that's a further GBP 1.2 million exceptional charge in H2. Occupation of the officers will be a little later than planned, again, due to COVID, but there's no change to the overall time line for operations, which are expected to commence early in 2021. Looking forward from next year onwards, the net operating cost of the [ recycle ] will be approximately GBP 1 million per annum. This is inclusive of labor and other savings arising from more efficient picking and transport operations. However, this net cost should be more than offset by the positive impact from efficiencies and longer-term sales growth unlocked by the investments. Finally, the table top right summarizes the other 2020 updated financial guidance I provided earlier, which I hope is helpful. And with that, back to Mark.

Thank you very much, Michael. So we're now on Slide 20. We normally put the market data at the front of the presentation or the background of the prior 6 months. But in this presentation, the real call is what is going to happen to the end of through 2021. And we've used the CPA data. The CPA data comes from a mix of merchants and manufacturers and it's a fair representation of what is anticipated to happen in the marketplace. And if you look on the box on the right-hand side, the total disruption market, depending on when its the V-shaped, W-shaped or U-shaped return or even a swish sees that the whole restructure sector to be down between 6% and 14% on 2019 volumes. But we are exposed to RMI and the CPA's conclusion is that 2019 -- 2021 is likely to be down 10% through to 20% of 2019. Whilst new build is a big part of the profile sales across the rest of the business, we are dependent long line. We cannot deploy [indiscernible] and consumer confidence could become undermine under the next few months, but we do not hold with the lowest forecast of 14 or total decline or a 20% decline online. However, our planning is around of course, approved to 2021. Sure that we're able to take share where we can, but keeping the overhead low, so there are no unnecessary costs. You'll know that I scare around the issue where RMI will eventually run out for 2021. But that's because we really have the notion at this time. And your gets are as good as ours, probably better and more informed. We do think there will be a decline in 2019, but the size is still speak plan, and we will have a better eye here as we see the trading over the next couple of months. So moving on to Slide 21. In summary, we reacted very fast at the COVID-19 situation. We spend our time planning our return, which has been executed very well indeed. We are seeing an enhanced flexibility from our workforce, the real binding together to make the most of this opportunity developing from COVID-19. The H1 results were severely impacted, but we were proven and H2 is off to an excellent start with very strong sales in RMI and every business, including Vista doors, Recycling, S&S plastics and Hardware, all seeing excellent growth in playing that part. We are clear on our short-term imperatives. Continuing to drive market share and pulling through our product with specifications, ensuring we deliver the benefits of our new warehouse slate and returning to paying dividends as soon as reasonably possible. The outlook for 2021 is very difficult with increased unemployment and rising debt. However, house moves are up, and that always rises RMI and our order books are very strong and people still need to expand their houses. Where there have been expecting lockdowns, they haven't materially impacted our fabricators and they continue to trade very well through that period with the second lockdown basically just closing down social areas as opposed to industrial. The outlook is uncertain. Whatever gets through us, we believe we have the team to respond and continue to take share and will better our competitors. I'd like to thank your time and at this moment, I'd like to start taking questions which will be controlled by Kelly. Thanks again for listening in your time.

Thank you. [Operator Instructions] So we have our first question from Robert Eason of Goodbody.

I hope you can hear me.

We can hear you, Robert. Thank you.

I hope all is well. Kind of 2 broad questions and the first is what are you generally seeing around pricing in the market and from your competitors? And how are your competitors positions you believe in terms of their own supply chain, their own ability to serve the customers in these difficult times? And is that resulting in different pricing strategy or more aggressive pricing? What are your expectations around that because my sense is with other industries, trade for May and June, the focus of businesses [indiscernible] closing and opening their respective businesses in an oddly fashion and health and safety was obviously paramed and pricing was almost put on the back corner. So it's just kind of a general question around pricing strategy for yourselves, competitors, what you're seeing on the ground, clear stress and strains among that competitive success. And kind of the second broad area is just around raw materials. What are you seeing conferred to resin pricing at the moment on part of your expectations for the coming period quarters? And in terms of the recycled material, are you -- with the improvement, I think you said on the call, you've seen improvement in collection rates. With that improving or seen any change in the pricing of recycled material?

Okay. Thank you for your question, Robert. Let's do the pricing one, first of all, in compared to supply. The market as we've come back, the fenestration industry has been very [indiscernible]. I think there's a lot of pent-up demand. The industry has struggled to cope with that demand and therefore, there has been no need to do anything exciting of pricing. In fact, pricing has been maintained. We haven't seen any listing of prices apart from one of our competitors in the door space who was absolutely vilified by year on and social metering that's like to such an extent that they lost a lot of customers. So the demand, I think that we can be robust on pricing. We haven't had to drop prices anywhere and a holding firm. We are being selective with new customers we take on because again, supply of all materials is pipelines. So we could definitely be supplying a lot more doors into the market like this moment, but we just haven't got a robust supply line. It's really struggling. I think all competitors are struggling right at this moment. Some has struggled just to come out of lockdown. I don't think they were very well prepared and maybe they didn't get the cash in and such like. So there's a couple of people have gone out of business. We picked up some good share from those, particularly from trade fabricators where we picked up some good share. As regarding raw materials, again, that is very tight. The resin market in the U.K. is the lowest price in Europe. So the resin suppliers have been deliberately constrained supply into the U.K. and things have been tight all the way along here. They are desperate to get a price increase through. It would be -- I have to be very cynical on this front, but -- probably cynical, our largest supplier of resin puts to force majeure this week, and that was to inform us that apply was going to be even more constrained because one of their BCM, which is the raw material for making PVC. The Norwegian site have had a lightning strike and have gone down, they've lost 5 or 6 days production. So they were disclaiming volume to everybody. So I think that will -- what will emerge in that is some general price hikes. It is hand to mouth on the supply of resin. We don't need huge amounts of uptick volumes rise at this moment, but we think we secured what we need to get by through to the end of the year. Clearly, recycling is in high demand for us, and we also supply the market elsewhere at the moment. We start to get in the supply at the start of the unlocking period and the reason for that was just people were fitting windows. So there wasn't the word those winners to come back into our business. But that has now been resolved, and we are managing to get everything we need back into the businesses. And we are effectively managing price to ensure that we get a bigger delta between the recycled product that we produce and the burden product that we're bringing in. But as Michael said previously, we think if this is a hedge. And I think as you've pointed out to me, Robert, there's not many businesses by doing green actually enhance their bottom line. So we are very mindful that we want to do as much recycling as we possibly can. Does that answer your question, Robert?

It does indeed. And if you wouldn't mind, if I can have just one further question before I pass it on. In the statement, you talked about you have done -- you've optimized certain things and this period has given you the opportunity to do that. Would you care to kind of quantify what that means in terms of costs? And are they ongoing savings that we can assume?

What -- it's not often you get a chance in business to basically resculpture or lay out all of your lines on the first like. Because you've got 3 time and there's many production requirement on those. You get a period of Christmas, but that's a week or so. We had a much longer period here. So where we had senior management team, we then bought in some of the senior engineers. And we've laid out lines in a way that we've been wanting to do for a long part of really improving the flows through the line and also to increase what's the mileage of any product going through a product lines. And having very focused workstation. So it's just flowing from one end to the other as opposed to some of our processes were horrible in terms of out would have to double back a couple of times. So that is what has improved all the operating efficiencies. They're ongoing, and we'll definitely enhance returns in the future. We're expecting them to do so, but we haven't put a figure on it yet. Robert, Michael wants to comment further.

The only thing I would add in terms of a number, Robert, you will have picked up in the statement there is a small head count reduction, which has come out of improving the -- streamlining the organizational structures, if you will, that's around 50 heads. It is across the business. A significant proportion of it is will be fulfilled by vacancies, which will no longer be filled. Those 50 heads would give us ongoing fixed cost savings of circa GBP 1.5 million, let's call it that. So yes, that would recur you alongside the other operational efficiencies that Mark mentioned. And as Mark said, who knows where demand will be next year. But if there is to be a decline then those efficiencies will help mitigate some of the impact of that.

On Page -- on Slide 5, in the bottom right-hand corner, we showed the OEE of the operational equipment is on our extrusion plants. And you'll see in H1, we are up to 76%, which is the highest it has been in for some number of years. I can tell you that, that has increased still further, and we're around 78.2% at the moment. So that's increasing all of the time. I think when you look at various sort of returns, that is reflected in the door flailing everywhere around and then you also take into account the fact that we're not seeing the inefficiencies or the cost around inefficiencies that we've experienced in the last couple of years. It's a very good story on it.

Our next question comes from Ansley Lehman of Canacol.

2 questions from me, please. I start with the -- obviously, you had a stellar kind of recovery in July and August. So there is quite a big difference between the profiles and the plastics to 20%. Just wondered if you could explain that difference a bit more? I assume it's kind of new housing lagging behind. So any more color you've got on those recent trends and how you're managing to take good market share on Plastics. And then the second question, given that good start in the second half, would it be fair to assume that at this point, the visibility you've got the order book and the good start, you'd expect H2 profits to be at least as good as what they were in the prior year? And gross margins, you say they're recovering, should we expect them to get up to close to 50% in the second half?

Thank you, Ansley. So let's just talk about the difference between profile and EVP, and I'll let Michael talk to the second half. The profiles now has new build of about 35% of its total mix. Commercial is probably another 5% of that. Both of those sites are going at the part of the business. And it is RMI that has been really pushing on. So I think the fact that profiles have been able to achieve volumes in excess of last year without really new build coming to the past first. It just shows that we have really got and invested in the right pace frame fabricators who have picked up significant market share in our bar. I think as a new build continues to grow, we go forward, and we continue to see all the sales being driven by Help to Buy. We will see and we are seeing right at this moment, our new build fabricators taking the sort of stock from us as they would have done this time last year. So we're already starting to see that now and that will really feed through into the figures. The only other thing there is we manage the volume going through Plastics because it is significant, and we're seeing a big mix towards oil products to make sure we don't get any inefficiency we have been lengthening lead times on our products in line with the rest of the marketplace, which means that orders may be slightly depressed by that. But the underlying run rate is growing the whole time and we're pleased with that. EVP, I just think it's testament to the team and the great job that they've done. They spent a whole lot down to the preparation for their return. They came out very fast and very aggressively. We have not on price, I might say, just in terms of campaigns to entice our customers back to us very early. And although they've done an awful lot of work with new products and getting them locked very effectively into the marketplace and we've had customer acquisition team, which is a new [indiscernible] for us going well and picking up some of our competitors' fabricators. So we've done a great job on that front. And I can't see why we're going to back off that. I'm encouraged by what's happening with conservatories that has been a dining sector. We're now putting an awful lot of work. I mean, the conservative resector boats resulted about 50% up on last year. So we're now seeing the revival of this sector, we think there's an opportunity here to continue to drive that. So we're very pleased with that and we see that if things get a little bit tighter, it will be the independents that will struggle. There's still about 1,800 branches, which are owned by independent owners. They will struggle for cash and I think us having a fuller offering will just continue[ EBP ] growth. And I think sort of things like investing, I don't know those of you that would have been through Tool station or screw fixed sites recently. If you've been in the rain, you will see all of our customers queuing out in the rain at the moment. When we are trying a system in 7 or 8 branches right this moment, which basically means they've got virtual curing, and we just call them into the branch and they're able to come in, still maintaining social distancing guidelines. But effectively staying in their vans and working until we call them into their -- the frustration has been absolutely safe and freezing cold will be mitigated to all intent end purposes. Michael, do you want to talk to the second half please?

Yes. So 2 Points. I'll start with the gross margin. One, absolutely, entry, it would be fair to say that gross margins for H2 should be at around 50%. Actually, if you look back at the second half of last year, you say, well, maybe why not higher, but what we're doing in saying 50% is building in an element of prudence around red in pricing given the times of that market that Mark mentioned. And on that basis, yes, you're absolutely right. It would be fair to assume, based on the visibility that we have today, that PBT for the second half of this year should be a little bit ahead of the second half of last year.

Just to say on that front as well, it is very unusual for trade fabricators to have order book for 2 weeks and I did tell you that you have windows of stores, a particular search groups, you'll struggle to get them done this side of Christmas, which rather suggest that our fabricators have got long order groups so that's surely encourage us to the end of the year even if it was like catastrophic. declining consumer [indiscernible].

Our next question comes from Clyde Lewis of Peel Hunt.

If I may, as well. Firstly, on the market share gains. Can you sort of -- I mean, obviously, you both on the percentage you think you're at now. I mean could you talk a little bit about, I suppose, how you can get that to 20% and can you get it up to sort of 25% over the medium term, just in terms of how I suppose the moving parts would sort of fit within your sorts? I mean clearly, it's a medium-term prospect. But if you could just talk a little bit about that. And the second one or the second and third ones ahead I suppose, the window sales that you're trialing up in, I think, the Northwest, again, what sort of scale do you think that could have? And how the fabricators that you're dealing with that in that market are sort of reacting to that? I mean, early days, but just would give us a little bit more sort of help in terms of sort of what sort of scope that could deliver for the business. And a similar sort of question, I suppose, in terms of the outdoor products in terms of the garden rooms, just in terms of what sort of scale that sort of business could deliver. And I think, Michael, you should have talked about some products that you've -- all stuff that wasn't moving quickly. Could you sort of just, I suppose, talk us through what sort of product those were and why were they moving? What changed on that front?

Okay. Thank you, Clyde, very much. Market share gains. So as you are aware, the strategy that Eurocell employs is basically what deploys is to create pull for our products. When we're talking about profile and what that is the architect and specifiers and making sure that they're using our products as opposed to our competitors. We have the largest sales force in this area, and we continue to invest in technical and CPD seminars and all that sort of stuff. So whereas most of our competitors have stopped doing that for the most part. So there are a number of new house build uses our product where the specification they put out for purchase is actually a Eurocell specification. They opened their own and they use outlets. So it's our materials that can go on to that. Other people can emulate them, but it's our specification of pull through. In commercial buildings, we have a case for using PVC windows, particularly in things like student account accommodations where they would normally use aluminum windows. And that's very, very successful as people like [indiscernible] trying to drag down the prices as much as they are able to. And PVC is a very interesting opportunity because it reduces the energy -- improves the energy efficiency of the building, but also lets more lighting as well. And we're also seeing that our -- where the squeeze -- so in that regard, there are a number of fabricators are moving across from competitors because Eurocell so widely specific particularly in new build. And that will continue. If you want to be a new build, you should be really making sure that you've got Eurocell available to you. We're also seeing some more installer communities come on, so there are installed out that all they do buy in windows at a moment placed by new build and those guys increasingly coming out and buying from our trade plant fabricator, seeing more growth. And then there was one significant pay this year so far, which was a custom-made who were a significant trade came fabricator who's a private equity partner run out of interesting, finding them any more and basically expose them to the marketplace when they promptly fell over. We just picked up a large majority of all the business they are supplied a strong margin. So I think we can just keep the pressure on. I don't think you reflect over here having too good a time it right at this moment. Another one of our competitors, I think most of you will know, had a significant lines, which means they're miles behind all the oil product. There's always opportunities here to keep the squeeze on our competitors and just deprive them at a little oxygen and then I think we will continue to gain share. Window sales, I'm going to take a different on this one. The trial is 2 weeks in right at this moment. We know what the margin development is. We know that what it's doing is developing more pull through our fabrication. Our fabricators are very used to supplying windows into the marketplace that they have -- they are the source of at the moment. And whilst that was controversial 4 or 5 years ago, it definitely is on reversion anymore. At the end of the day, all I have is 17% market share for 83% of all the windows that are installed in the U.K. not us. So it's very unlikely we're going to be causing too much collateral damage in the short term. Can we move to 25%? It would be nice to think not at the cost of price or margin like we'll buy by time on that. Our door products is just moving all of the decking products. We see huge demand on fencing products, particularly with the storms coming through first like people planning has the -- Garden Room is a product we launched about 6 weeks ago. We've sold plenty of them, selling prices are sort of a through to GBP 14,000, GBP 15,000, although there have been one closer to the GBP 33,000 also. There are -- but people are just getting their heads around how they move forward. And I think of also an outdoor products, but just room extensions. Is it possible to get a build an amount is an opportunity for us to deliver some extensions on cost, which is conservatory or stock used it [indiscernible] panels and stuff like and all of that is being worked on at the moment. Mike, could you just...

Just on the stock provision, yes. So if you went back to sort of 2016 and '17, we significantly increased the range of, particularly traded goods that we sell and that was all about, you'll remember the branch expansion program and in doing that, being a one-stop shop and taking as much of our customers' share of wallet as was possible. And unquestionably, that was successful. If you think of the sort of -- the traded goods side, is there anything that the roof line installer or the window installer or the jobbing builder typical branch customers need to do their job. And in addition to the obvious ones like silicons and [ Singles ], one of the products that we introduced was wood battening because Roofline is put up using wood battening and I think Eurocell, it has a sort of a problem with selling wood being a PVC business historically, and that seemed to us to be a bit of a nonsense and wood battening has been a very successful product since it was introduced. On the other hand, there are some products such as buckets, ladders, cleaning materials that haven't gone quite so well. And those are the ones I'm talking about now where we've got a sufficient history of sales per se, that actually -- these aren't going to drive profitability. They take up a lot of space, and that space would be better utilized, particularly with manufactured products. You've seen the sort of demand levels and sales levels that we are -- that we are driving for a moment. So there's a little bit of a simplification team going on here and taking out some of the things around the periphery and focusing on the core and I think you'd probably see that seeing running through our business going forward.

Sorry, just one more thing, just thinking about selling window to consumers. That project is called Eurocell Home. You're right taking place in the Northwest. Just for clarification, we've included the cost for Eurocell, which are not significant, but we're doing it properly, but we've included no upside of sales either in this year or in our forecast for 2021 because we don't really want to be doing -- we don't have to be driven to this any faster than we think we can do and doing a great job on it. So we're going to see what we've got, and we'll report back to all of you guys at the end of the year and where we think we can take this.

Can I just follow up on the outdoor products? Could you give us some sort of idea as to what sort of revenue you're generating from that? Because it's potentially a very different sort of customer decision for some of those sort of projects. I mean, would it be...

I don't know another numbers. I'm not sure, I'll come back to you on the absolute number. I don't want to give you numbers that I'm not comfortable with.

Thank you, Clyde. And just to follow up on the stock side slowly. I think the ones that we're taking out here, I think our customers are getting them on Amazon, things like cleaning materials and buckets and the like. I think that's why those products have slowed down.

We now have 2 questions from our webcast audience. The first question is from Andy Hansen. He has 2 questions. The first one being, I just wanted to be clear on the dividend, do you mean it will be resetted in calendar year '21 of financial year? And the second question is, can you provide some color on volume and pricing in July and August and also input cost pressures and the potential to pass these on?

So just on the dividend, what we mean by that is the default assumption should be that we would start to pay dividends with an interim for 2021, which would be paid in October. We will, of course, react as circumstances change and keep a watching brief over all of that.

On pricing, Andy, as explained earlier on, the market is very tight for raw material supply. And there's a lot of mass product with a number of people are struggling to keep up. Indeed, we're being very tested, but we've made some lead times to make sure that we don't pick up any inefficiencies. I think there's an opportunity to put pricing into the marketplace and to reflect raw material increases if necessary. I just think it's not empathetic to do live this month. There's a number of people out there. Our customer base is struggling to get their cash in and struggling with pricing they put in the full lot and things like that. And these are the very customers that should there be a catastrophic for in consumer confidence, for example, these will be the customers that we'll be calling upon to support us through some more difficult times. So if there were -- I don't think there's a problem of moving price increases to the marketplace on faster. I just think it's an appropriate and intensive to do right this mode, and we'll wait to see how next year pans out when obviously, we'll be looking to recover any costs that we incur. Thank you, Kelly.

Okay, the next question is from Toby Thornton. He has 3 questions. The first one being ex insolvencies what criteria are being used to determine preemptive that debt provisioning? The second is, are there any supply chain constraints in either traded good or recycled materials? And the third is, are there any outstanding government cash payout outstanding, for example, solo receipts in and tax deferrals out?

Right. Well, just on the bad debt provisioning. To give the full answer there, the exceptional charge of GBP 0.8 million is customers who have gone bust or staff solvency proceedings during the lockdown period or as a result of the lockdown period. So that one is pretty clear, and there is one account that Mark mentioned custom-made is the substantial majority of that GBP 18,000 write-off. In terms of the increased bad debt provision of GBP 2.9 million, which has gone through the underlying P&L. That is a large degree of that is driven by the underlying accounting rules. We use an expected credit loss model under IFRS 9 to estimate bistatic experience based on history, but we also take a step back and look at the state of our ledgers and unquestionably here we've been influenced by the deterioration in '18 that we've seen as a result of the -- as a result of the COVID situation. So I think I mentioned in the presentation, if you look at the profiles business, overall in profiles, we've got around 400 customers. And 30 of those customers would give you more than 50% of the business. The increased bad debt provision in Profiles is probably more driven by that, just taking a step back and looking at the individual cancer making an assessment of them. And I would emphasize that it is a prudent assessment of them. GBP 1.6 million is in the profile of bad debt provision. Again, around half of that is in respect of a single account. On the Building Plastics side of the business where we have literally thousands of customers. The provision is much more driven by the statistical analysis underpinned by the expected credit loss model. And there, we are really looking at a deterioration in aging as a result of the COVID -- the COVID situation. I would put all of these incremental bad debt -- at the heart of all of them is what's happened through COVID. It's just the way that the accounting rules work, you'll be aware that the FRC has been all over this kind of stuff. It's only those that have gone bust that we are allowed to put in the exceptional column. And where it is just a change in our risk assessment driven by the ECL model that goes in underlying. I would stress that it is -- it is a prudent approach taken here, one that we believe is absolutely appropriate. But one also that our auditors encouraged us to adopt.

On the supply chain, I would just say that all parts of the supply chain are accretive talking about it's ready supply oil, chemical additives, lower supply. It doesn't matter -- your hardware everybody is creaking. They went from total shutdown to the market seeing huge volumes landing with us very, very quickly and huge demand. It is a real pain trying to keep up with all of the customer orders we just mean from the point of view of managing the supply line. We're doing pretty well at that, but it's not without its difficulties. I think you'll gradually ease as people get on top of this volume, but there was a degree of reticence to unfurlough too many people in case the demand that we saw was just a pent-up demand and it was all going to collapse. I think where we are now is because not everybody has been live into the marketplace at a timing matter, lead times have been linked, there's not enough installers around and such like -- that should give us all hope that this order book will carry on through until at least the end of the year and maybe into the early part of next year. Mark, could you just want to [indiscernible].

Yes. So in terms of support income, whether it is government grants or further income, all of that has been received. So there are no outstanding receivables in respect of that government support. In terms of taxes, the only payment that we would still need to make is we deferred our Q2 that payable as allowed by the government, and that fits within the current creditor balance and will be paid in accordance with the government's rules in the first quarter of 2021. So we have a clear position with respect to all of the support.

Thank you, Kelly, is there any question? Coming back to you.

[Operator Instructions]It doesn't look like we have any further questions.

Okay. Thank you very much indeed, everybody, for your participation, and spending time with us, and we look forward to catching up with you further during the coming week on the [indiscernible]. Thank you very much for your help as well.

Thanks, everyone.