Eurocell plc (ECEL) Earnings Call Transcript & Summary

Thanks, and good morning, everyone. Welcome to Eurocell's 2023 Results Presentation. I'm Darren Waters, CEO; and alongside me is Michael Scott, CFO. Our presentation this morning will cover our 2023 results, followed by a run-through of our new strategy, and we'll be happy to take questions on both at the end of this presentation. So starting with our results. I'm pleased to report that despite a tough market and in particular, a further deterioration in the second half, we delivered profits in line with expectations with profit before tax of GBP 15.2 million. Sales finished the year down 4% at GBP 364.5 million with volumes down 6%. Given our exposure to new build, which accounts for 15% of group revenues and the market decline in RMI, this is a very resilient performance. If you cast your minds back to September when we announced our half year results, we flagged that due to further weakness in our end markets we were not anticipating the normal seasonal lift in demand, and that's exactly how things played out. In fact, sales through the autumn period were worse than we had assumed when we did our reforecast. Fortunately, though, we were able to offset that sales shortfall around GBP 5 million in the final four months through tight cost control and improved margins as input costs reduced, specifically recycled in feed and electricity. In terms of the things within our control, we took swift actions to remove GBP 4 million of annualized overhead, an exercise that was completed before the midyear. In addition, we optimize inventory levels to drive a GBP 17 million improvement in cash flow versus 2022. Our strong performance on cash resulted in us finishing the year cash positive, which paved the way towards announcing a GBP 5 million share buyback program, of which we completed 40%. The review of our business strategy was completed in Q3, and I'm delighted with the outcome. I think the team did a great job developing a very credible plan, but obviously more on that in part two. I'm now going to hand over to Michael who will run through the financials in more detail.

Thank you, Darren. So let me start by going through the financial highlights on Page 5. Against the market that was down double digits in percentage terms, we delivered some resilience in our sales performance in 2023, with volumes 6% lower against a strong comparative period. As expected, adjusted profit before tax decreased by 47% compared to 2022. This reflects lower sales volumes and margin pressure as well as the impact of continued cost inflation which we partially offset with selling price increases and two major cost reduction programs. Adjusted earnings per share were 11.0p and with the proposed final dividend of 3.5p per share, total dividends for the year of 5.5p. In the light of deteriorating market conditions through last year, we prioritized cash flow and I am pleased to report net cash from operating activities up 50% on 2022 with efficient stock management driving a good working capital performance. As a result, net cash on a pre-IFRS 16 basis was GBP 0.4 million compared to net debt of GBP 14.4 million at the end of 2022. We have good headroom on our debt facility, which in line with our focus on enhancing shareholder returns, supported the introduction of a GBP 5 million share buyback program in January '24. Turning to the full P&L on Page 6. I'll explain the drivers of our sales performance and the other components of EBITDA in a moment. But first, just looking below that line. Depreciation and amortization was GBP 24.7 million, up slightly on 2022 due to ongoing capital investment and lease commitments. With our CapEx program and lease renewals, we expect D&A for 2024 to be in the region of GBP 25 million. And just to note that I've summarized all the guidance that I'll give today later in the deck. Finance costs were GBP 3.2 million, up 0.6% from 2022, reflecting the impact of successive interest rate increases, and I expect finance costs for '24 to be around GBP 3 million. The tax rate for 2023 was 19%, which is lower than the standard rate due to the benefit of Patent Box relief, but higher than 2022 due to the increase in the rate of corporation tax in April and we expect a rate of around 24% for this year. Moving down the P&L. Adjusted basic earnings per share were 11p and dividends have already covered. To the right of the slide, I've set out the impact of actions we've taken on cost in response to weaker markets and lower volumes, largely through head count reduction, which drive a GBP 9 million annualized cost savings. The non-underlying charge of GBP 3.5 million in 2023 includes termination costs of GBP 2.7 million for the head count reduction in Q2. It also includes implementation costs of GBP 0.8 million for strategic IT projects. These costs have been charged to the P&L rather than capitalized in accordance with the accounting rules for solutions, which are cloud-based. They've been treated as non-underlying on the basis that they are material multiyear projects, which underpin our digital strategy, and I'll pick up our systems replacement later in the presentation. Moving on to the components of sales growth on Page 7. Total sales were down 4% in weak markets and against a strong 2022 comparative period with overall volumes down 6%. As you know, RMI is being impacted by weak consumer confidence reflected in homeowners pulling back on discretionary spend in response to higher cost of living and reduced housing transactions. We've also seen a steep decline in new build housing activity reflecting successive interest rate increases and falling house prices. Profile sales down 4% with volume 7% lower, reflects this reduced RMI and weakened new build activity, partially offset by the benefit of recent market share gains. We acquired some new accounts following the closure of Duraflex in September, and our fabricator customers are benefiting a little from the collapse of Safestyle in October. Building plastic sales were also down 4%, including volumes 5% lower, with RMI activity in the branches subdued, although it is encouraging to report that we are still seeing reasonable volumes for made-to-order items such as garden rooms. On to adjusted operating profit on Page 8, which was down 41% as expected. Looking at the detail and moving left to right across the chart, the volume bar of 10.8 million includes the impact of volumes down 6% in the adverse effect of operational gearing. Moving to price margin of GBP 0.7 million, this is a net number with several components. We continue to offset input cost inflation, particularly for labor and electricity with selling prices and our program of operational improvements also reduces cost, but increased competitions for limited demand led to an increasingly difficult pricing environment and margin pressure in the branches. Continuing along the chart, as you know, we also mitigate raw material cost increases by using recycled material. However, 2023 profits were significantly impacted by feedstock prices 21% higher than 2022, leading to increased costs of GBP 1.9 million. Prices peaked in the first half, driven by reduced material availability following our contraction in the window replacement market. But we've secured additional sources of supply, which alongside reduced demand and lower virgin resin costs, saw feedstock stock prices fall back in H2, and that trend has continued into 2024. Looking beyond the chart, whilst the delta between production costs of recycled material and the buying price of virgin compound narrowed significantly in 2023 due to increased feedstock prices and lower virgin costs, it is important to confirm that the economics of recycling remain attractive. The 17,500 tonnes of recycled material we consumed last year delivered an absolute gross margin benefit of over GBP 2 million compared to the cost of using virgin material. Moving along the chart, labor inflation of GBP 3.2 million represents our April '23 pay award of 5%, with increased variable labor costs of GBP 1.4 million being higher share-based payment charges in 2023 compared to '22. And restructuring savings of GBP 6.5 million represents the benefit of the cost reduction program that I described earlier. In summary, profits are down in '23, but we believe the actions we've taken position the business well to benefit from positive operational gearing when markets recover. Moving on to CapEx on Page 9. Investment of GBP 8.9 million in 2023 was mostly maintenance CapEx, although it did include GBP 1.5 million to improve staff welfare facilities in the branch network. Our guidance for 2024 is the CapEx of approximately GBP 14 million. There are GBP 3 million to drive initiatives under our new strategy, including 10 new branches and we'll come on to the strategy shortly. There's also a further GBP 2 million for branch relocation and refurbishment and GBP 1 million for the development of our IT infrastructure. The remainder is largely maintenance CapEx. As I said earlier, implementation costs for IT solutions, which are cloud-based to charge to the P&L rather than capitalized, our new HR information system and ERP replacement fall into this category, of which GBP 0.8 million was charged to the P&L in 2023 as a non-underlying item on the basis that there are material multiyear projects, which underpin our digital strategy. As a reminder, our existing ERP system will be unsupported by SAP after 2027. We also believe that its age profile has become a limiting factor in the development of our business. The current system was implemented in 2006 when the group had only a small branch operation and no recycling. We have, therefore, started a project to replace that which we anticipate will be a 2- to 3-year process with implementation costs of approximately GBP 4 million expected in 2024. And I'll cover the total cost of the project and the benefits we expected to deliver in the strategy section of the presentation. Coming back to CapEx in [indiscernible] tables illustrate the significant investments we've made over the last few years to build out the infrastructure required to resolve operational constraints. As a result, we now have manufacturing recycling and warehousing capacity in place well ahead of demand, which is supporting the delivery of improved operating efficiencies now and will facilitate our strategic initiatives and further growth in the future when markets recover. Moving to working cash flow on Page 10, where the net inflow of GBP 13.4 million with the impact of the stock reduction program, which is the main driver of our strong cash flow performance in 2023. Stock days were 84 compared to 93 at December 2022. It is worth reminding you that following significant supply chain disruption, we built manufactured stocks in 2021 and early in '22 to protect against the impact of raw material shortages. However, once we established supply chain and operational stability, we began to reduce our stock position. This was driven by improved conformance to production plans and operating efficiencies, where our good performance is illustrated in the three charts to the right of the slide. As a result, stock levels fell by GBP 6 million in the second half of '22 and a further GBP 13 million in 2023, which does include the benefit of lower input costs, and we're very pleased with that outcome. On the sales ledger, debtor days were 27 compared to 30 at December '22, with the absolute balance of receivables down GBP 6 million in the year, reflecting the impact of lower volumes and good cash collection. Finally, the payables reduction of GBP 5.8 million since December '22 also reflects the impact of lower volumes. Looking ahead to 2024, we're guiding to an outflow for this year of around GBP 3 million. This reflects our ongoing work on stock optimization as well as the impact of our strategic growth initiatives, which we'll go through shortly. Turning to the full cash flow on Page 11, where we have all the components of a significant reduction in net debt. I've been through the fact that's driving the strong working capital performance, so now moving left to right across the chart, non-underlying costs were a cash outflow of GBP 3.2 million. Tax paid and other of GBP 0.5 million includes tax payments on account of GBP 1.4 million, offset by share-based payments and other noncash items of GBP 0.9 million. CapEx payments of GBP 9.1 million include the asset additions covered earlier, plus a small reduction in our capital creditor of GBP 0.2 million. There were financing charges of GBP 2.3 million, plus the cost of treasury shares repurchase that satisfy employee share program of GBP 0.7 million, which reflects the Board's decision that employee incentivization through equity should be through shares acquired rather than issued. Dividends paid is GBP 10.3 million, this all adds up to a pre-IFRS 16 net debt reduction of GBP 14.8 million, resulting in net cash of GBP 0.4 million at the end of 2023. IFRS 16 at GBP 59 million of debt, which as you can see in the table top right, is down GBP 5.1 million compared to 2022. This reflects the net impact of branch and other lease renewals of GBP 10.5 million, less cash payments on leases of GBP 15.6 million, which are accounted for within net cash from operating activities on the left of the chart. Overall, this leads us with good liquidity and significant headroom on our debt facility, thereby providing security, flexibility and options for the future, including, as I noted earlier, the introduction of a GBP 5 million share buyback program in January. Finally, on this slide, we extended our GBP 75 million sustainable RCF for a further year in May. The terms and pricing of the facility remain otherwise unchanged, and it now matures in 2027. To sum up on Page 12, our financial results in the short term have been significantly impacted by continued weakness in market conditions. In response, we've acted on costs securing significant annualized savings, continued our program of operational improvements and focused on efficient working capital management and cash flow management. As a result, our debt is low, and we have good headroom on our bank facility. We expect 2024 to benefit from the easing of input cost pricing that we saw in the second half of 2023. Our operating facilities are well invested with good levels of available capacity. Overall, therefore, we believe the business is now well positioned for a market recovery and to progress our new strategy, which we believe has the potential to create significant shareholder value and which Darren is now going to take you through. Finally, to the right of the slide, there was a summary of the 2024 technical financial guidance that I've provided, which I hope is helpful.

Thanks, Michael. So on to our new strategy there. We started working on this in the summer, it involved a number of people across our business, and this is culminated in what I feel is a highly focused plan that has genuine potential to transform Eurocell. We summarized the new strategy in the Eurocell house that you can see here, and it starts with our new purpose, which is about creating sustainable building solutions for the trade of today, the homes of tomorrow and the environment of the future. Through this new strategy, we see a clear pathway in the medium term to organically grow revenues to GBP 500 million, delivering an operating margin of 10% equivalent to GBP 50 million operating profit. The strategy is built on 4 pillars: customer growth, business effectiveness, People First and ESG leadership, underpinned by our 4 new values, Agile, Gritty , Proud and Decent. So let's start by talking about customer growth. And by far and away, our biggest single opportunity is the branch network. And this is already receiving a lot of focus through a number of initiatives. We are already the largest national network of specialist door and window trade counters in the U.K. with 214 branches. However, we haven't opened any branches in the last few years, but that is about to change as we see an opportunity to expand the network to 250 branches by opening 10 new branches every year for the next three years. In addition, we're also starting to relocate branches to better locations and larger formats. And the format is important because we need larger branches to support our new door and window proposition, which we're in the process of rolling out, following a really successful trial, and I'll talk more about that next. Larger format stores also allow us to showcase our extended living range of garden rooms and extensions, providing homeowners with a destination outlet where they can experience the product. Now as part of this network expansion, we will be specifically targeting a number of whitespace locations in the Southeast, a region where we are currently underrepresented. And to that end, we have 7 sites already identified and in-flight ready to be opened in the second half. We're also taking the opportunity to try new signage in which doors and windows will feature much more prominently alongside the Eurocell logo. So to summarize then, more branches in optimal locations and a shift towards larger format stores to support our new door and window and extended living proposition. Now let's move on to doors and windows. So when I joined the business in April last year, I was really surprised to discover that doors and windows only accounted for about 10% of our branch sales. We did some benchmarking and learned that if done well, it has the potential to be a lot more, become the centerpiece of our branch proposition. Therefore, in the second half of last year, we embarked on an initiative to transform the way that we supply and sell these products. We selected 6 trial branches spread throughout the U.K. and we trained branch staff, improved the quotation process, reduced lead times and sharpened our prices. Partnering with some of our major window fabricators, we commenced the trial at the beginning of November and immediately generated a significant uplift in sales, which has continued to grow week on week. Averaging the sales over the last 4 weeks, the increase is fivefold compared to the volumes that we were selling pretrial. So across the network, our goal is to grow sales from 1,100 window frames per week to 6,300 frames per week at maturity. Now to put that into context, that is broadly equivalent to the number of frames being sold by Safestyle at their peak. We've seen the same increase in sales on composite doors, which are manufactured in-house at our factory in Birkenhead. We already have the capability to meet the forecasted demand without having to invest in further space and machinery. So we have another 9 branches ready to go live after Easter, and we will have 54 branches operational by the end of this year with the balance to follow in 2025. Clearly, we'd like to go faster, but it will take another 12 months to put the required fabrication capacity in place to serve as the expected demand. Applying a degree of sensitivity at 50% of our objective, this generates incremental sales of GBP 35 million and based on the trial results, this feels more than achievable. The drop-through on the increased sales is margin enhancing as there is very little incremental cost associated with these sales. Within the current network, there are only 6 branches currently that are too small to be converted to handle doors and windows, but these will be addressed through relocations. As an example, we are currently relocating our smallest branch in Dewsbury to a new larger site. We're really excited by this opportunity. I think will significantly expand our share of wallet with existing customers and help us to acquire new branch of customers that we can then sell other ancillary products too. And for the new branches, it will also speed up the time to reach breakeven. So we then turn to our extended living range of garden rooms and extensions. This category has grown significantly since we entered the market two years ago as homeowners look to create more living space. We are aiming to be the best in the market by offering a high-quality product and a great installation experience. And if you look at some of our trust pilot reviews where we are averaging a 4.6 rating, you will see that we are delivering on this customer promise. We're also expanding our Garden Room range to incorporate new designs and greater optionality, which will allow us to take share from other players. Our Home Extensions range was launched in September last year and has proven to be very popular with homeowners by reducing build times and project costs through our use of modern methods of construction. In aggregate, we see this becoming a GBP 30 million revenue product category in the next five years, that we really start to leverage our digital sales activity and approved installer network. And after sixfold increase on our 2023 sales, but we are already on target to double that this year. We are, therefore, initiating a campaign to expand our installer network to meet this anticipated increase in demand. Next, digital. So digital is key to delivering many of our sales objectives as we look to build the work of our products and home improvement solutions. Based on research that was conducted by McCann, Eurocell is already the #1 trade brand with 85% prompted awareness. We aim to leverage that proposition by driving more relevant traffic to our website, thus improving conversion rates to drive more e-commerce sales. We will also offer the convenience of 1-hour click & collect through our branch network and a drop-ship facility for adjacent goods that may be relevant to our customer base. Last year, we completely revamped our website to improve navigation and searchability, and we have an opportunity now to mirror our leadership in trade counters by creating the strongest online building plastics proposition. For homeowners, where our brand awareness is low, we are targeting to become the place to go for garden rooms and extensions. Our digital activity through social media platforms is beginning to build real traction with inquiries now at record levels and strong conversion rates. As a result, we've recruited more sales consultants to ensure that we continue to service inquiries efficiently. Next, let's talk about fabricators. Now as the #1 profile supplier, we do not believe that it will be sensible right now to aggressively target further share growth given current market conditions, as this would inevitably lead to price erosion. Instead, our priority is to partner with our existing fabricators to help them grow by giving them the opportunity to supply our branch network, and leveraging our leading position in new build. For the branches, we've now partnered with 10 large fabricators who have the process capability and efficiency as well as the headroom to build further capacity as we ramp up sales. Growing our branch sales to 6,300 frames per week is the equivalent of winning three very large fabricators and we'll utilize their capacity in our extrusion facility. That said, we will look selectively at fabrication opportunities if they present themselves. We also plan to expand our aluminum offer with the aim of providing a one-stop shop for fabricators and installers to sit alongside our PVC door and window products. So later this year, we will launch a new aluminum roof lantern that will speed up installation times and reduce callbacks for fitters due to its innovative design, which includes the unique patented connection device. The feedback that we received from the customers that we've spoken to is extremely positive. Other products will follow, leveraging our design and technical expertise. I'm now going to hand over to Michael, who's going to talk about the business effectiveness.

Thanks, Darren. Our objective here is to make Eurocell a lean and efficient business. And therefore, we are upgrading our business systems and streamlining processes to increase efficiencies and improve the customer experience. As I said earlier, we're in the process of replacing our ERP systems. The first stage of this process is to implement a trade counter system for the branch network. Having selected Intact IQ as our new system, we have now started the build and plan to transition to it in the first half of 2025. This will transform the way we interact and transact with our customers in the branches, including simplified processes and the use of electronic point-of-sale functionality. The second stage is to select and implement an ERP system to support all other functions of the business, including manufacturing, recycling, warehousing, distribution and finance. Here, the objective is to improve efficiency via the automation and integration of key business processes. For ERP, we expect selective system later in '24 with transition to be completed around mid-2026. Overall, as previously reported, we expect total costs of the system replacement to be GBP 8 million to GBP 10 million over a 3-year period. We will manage risk on this project very carefully with Board oversight and a highly experienced IT director already in place. We're also embedding a continuous improvement philosophy into the business, which is already highlighting significant opportunities for efficiencies, particularly in our manufacturing and recycling operations. Our initiative to sell more doors and windows through our branches will utilize spare capacity that we already have in our extrusion and composite door businesses, thereby helping to make us more efficient. We will also continue to target better use of our operational footprint and drive process innovation, where technologies such as digital printing have the potential to reduce costs and improve our environmental performance. Now back to Darren to cover People First.

Thanks, Michael. So another key initiative to unlocking value in Eurocell is the development of a strong cohesive culture. And we have some great people in our business who love their jobs, but we want them to love the Eurocell too. We've made significant strides in health and safety, halving our accident rate in 2023, but we still have a long way to go. Safety and business performance go hand in hand, and we are committed to driving towards a world-class safety culture. In January, we appointed a new people director to raise employee engagement, enhance our employee value proposition and improve the way that we recruit, develop and retain talent. In February, we cascaded our new strategy to all of our 2,000 employees through a series of webinars hosted by ex-com team members. We received some great feedback, and my sense is that like us, many of our employees are starting to believe in the potential of this business. Getting our employees aligned behind our strategic goals and embedding our new purpose and values will be a key enabler in shaping the future of Eurocell. In April, we will appoint our first-ever internal communications managers to improve the way that we cascade information across the business. Now I realize that much of this is standard practice in progressive businesses, but many of these initiatives are new to Eurocell, which is why we're getting on with it because it will drive discretionary efforts and improve the outcome across all of our strategic initiatives. Now I'm going to hand back to Michael to talk about ESG.

With ESG, we want to earn a reputation for being a truly responsible company. As you know, Eurocell is already a leader in PVC recycling, preventing 3 million waste windows being sent to landfill every year. We've now increased the proportion of recycled material used in our manufacturing up to 32%, which drives significant cost and carbon savings compared to the use of virgin materials, and we've set a new target to reach 40% by 2030. But that's just one aspect of ESG and looking ahead, we aim to excel in all areas. We covered the S with our People First strategy, so I'm going to focus on the E and the G. We are now working with a specialist ESG consultancy to support the development of our ESG strategy and improve our data collection and disclosures. The results of our work so far include a materiality assessment where we surveyed the selection of employees, suppliers, customers, banks and shareholders to help determine the most important sustainability topics for the business. We also completed a baseline carbon footprint, including scope 1, 2 and 3 emissions identifying key decarbonization levers. We've used the outputs from this work to define ESG objectives and targets and develop a sustainability strategy, supported by appropriate governance and internal controls monitored through our Board-led social values and ESG Committee. Looking forward, a key focus for our work in 2024 will be to determine a path to reach net zero by our target date of 2045. This will include science-based targets with SBTi and developing and publishing our net zero transition plan. Albeit at half year, we'll be heavily dependent on reduced emissions in our raw material supply chain. Finally, we will also continue to deliver on the other initiatives we have to drive carbon reduction, including further investment in on-site electricity generation through the installation of solar panels at our largest operating facilities. Finally, Page 24 summarizes our financial ambition with new strategy. We believe we've identified a clear pathway to good organic growth at improved margins. And our mission is to become a GBP 500 million revenue business, generating a 10% operating margin over a 5-year period. In terms of sales, as you've heard, the biggest growth drivers will be expanding the branch network up to around 250 sites, along with the Windows and Doors initiative, plus the extended living range, all underpinned by increased returns-driven investment in digital to raise awareness of our products of home improvement solutions and thereby acquire new customers. In terms of operating profit, the customer growth initiatives generally exploit our existing infrastructure and are relatively light in terms of CapEx and therefore, they have the potential to generate good operating margins. Investment is required for the strategic system replacement project. But alongside our other business effectiveness and continuous improvement initiatives, we think there is good potential to deliver major improvements in our customer experience and in the efficiency of our operations. With our one invested facilities and available operating capacity, positive operational gearing should kick in as we grow. And I note here that the operating margin target of 10% is broadly equivalent to Eurocell's immediate post IPO margin adjusted for mix changes and some natural dilution from raw material prices. Overall, therefore, we believe that this is an ambitious vision. But when we aggregate the growth opportunities and apply a degree of sensitivity, we think that it is an achievable target with the potential to create significant shareholder value. And with that, operator, that's the end of the presentation.

So we'll now take questions. Probably, there's a couple who -- that have come through on the website that go back to the start of the presentation. So I'll deal with those first. From Robert Chantry at Berenberg. Firstly, can you provide some more detail on the raw material cost position, i.e., how much risk remains open for 2024 and 2025 versus how much is locked in? Can you comment on the cost recovery lag to end customers? So if I think here of our three sort of major inputs, we've got virgin resin, electricity and recycled material. Electricity is substantially locked in for 2024. That's a little bit open for the fourth quarter. And first quarter 2025 is hedged not much after that at lower prices than for 2023. Recyclate is a market that moves slowly. And it often lags virgin resin and we saw that in spades in 2023, when recycled prices were still going up when virgin resin was falling. So this one does move slowly. However, we now have over 40% of our requirement for 2024 locked in at favorable prices. Now some of those prices are indexed, but the indexation is to virgin resin so that the two would move in conjunction with each other, which is good. Virgin resins is the last one. This is a market that moves month to month. It's very difficult to find correlation, at times, it will move with ethylene, at times the dollar, at times euro, at times oil. We're assuming a small increase in virgin resin prices this year, and that is built into our selling price assumptions at this point in time. So in summary, Robert, the easing that we saw in raw material prices in the second half of last year, we expect to benefit from that in 2024. And where we know there are cost increases we've taken that into account in our pricing. There's one here for Darren, If I read it out, you referred to ongoing margin pressure in the branch network due to ongoing increased competition, could you comment on the relative intensity of that competition versus history and how you can fight back against it?

Yes. Thanks, Robert. I mean, I think it's kind of normal activity in a kind of a flat market where you've got players that are kind of competing for share. In terms of how we're fighting back, I mean number one, we deliver a fantastic service. And again, you just look at our Trustpilot rating and the feedback we get through the branches, I think our teams are doing a fantastic job. So that's one way how we defend and build value. And I think the second thing is with our new door and window proposition, we're offering the professional installer a true one-stop shop where they can source everything efficiently, which I think will stop to take price off the table because our core offer, the door and window proposition, we know we're competitive based on the trials that we've done through the 6 branches and I think when you look at everything, the service we provide, the new click and the 1-hour click and collect facility that we're about to roll out, which I think will also be very attractive, then I think we've got a great proposition. So Yes, it's a normal run of events, I think, in terms of a market where you've got kind of no growth.

So next one on the webcast. The chart on Page 24 lays out directional bridge to 500 million sales in 2028. But with the exception of windows and doors, which on Page 16 shows GBP 35 million incremental sales at 50% capacity, this doesn't seem to involve any recovery in volumes from depressed levels. I also note that Michael said the largest component is new branches. So could you discuss your expectations for price and volume contribution to this bridge? I mean, Darren will give you some more context here. But just in terms of the math of this, this is all volume units. There's no pricing built into this other than the prices that we put into the marketplace for 2024. We said, yes, GBP 35 million at 50% capacity for windows and doors, and note at 50% capacity, we also said GBP 30 million for the extended living range. And we've talked about getting to 250 branches, which is at least 30 up to sort of 35, 36 branches, which if you worked on the current level of sales, you would say it's around about GBP 1 million per branch. So you add all of that together, you're looking if all goes to plan at least GBP 100 million before we build in anything there digital and certainly towards the end of the maybe years 3 and 4 of the period, a little bit more significant market growth in terms of volumes coming back. So for me, that really lends strong credibility to the sales bridge.

Yes, I'll agree, couldn't put anything more to that. I think you missed one extra one from Rob, Michael. So Robert of Berenberg said you referred to on -- sorry, can you talk about how many of the current 214 branches will need to be upgraded or relocated in order to be able to actively sell the improved door and window proposition and garden rooms and how long will it take to get to that? And maybe you didn't pick it up Rob, but there are currently 6 branches that are not big enough to manage the door and window proposition. I think I mentioned Dewsbury is one of them. Dewsbury, our smallest branch, is actually only 1,000 square feet, whereas the vast majority of our branches sit between 3,000 and 5,000 square feet. So it's like only 6 branches out the 214 that currently are not suitable. In terms of the other relocations, we're doing a study right now, which will be completed by the midyear which is overlaying the impact of the Door and Window proposition and looking at where we may have opportunities to relocate to better sites. And there's one example of that right now, where we've chosen to relocate a couple of small branches in London to a new site in Wembley. So that process is ongoing. I think it's, again, a normal course of events for anybody running a trade counter network. But this exercise, we will go at some pace with over the next 2 to 3 months, and we'll have a much better idea in terms of the 214 that are likely to be relocated once we've done that.

Next one from Andy at [indiscernible]. Could you provide a little more color on trading in the first few weeks of the year, please? Also, what are the market volumes down in FY '23? And has the demise of Safestyle changed the industry landscape materially? Probably divide this one between us a little bit. Trading in the first few weeks of the year. If I just give you some context here in terms of how we're thinking of trading for the full year and then our comments on the early part. So what we're guiding to is sales for 2024 in the range of flat to up 1% on 2023. The components of that are underlying volumes, something similar to what we were seeing in the sort of September to November period of last year, which would had volumes down maybe 2% versus 2023. But then offsetting that, we have the impact of new business that we mentioned and then the strategic initiatives, including garden rooms, which net-net, will probably leave us about flat, and then we'll see the benefit of pricing maybe taking us into that kind of 1% growth rate. So if they're the individual components, in the first two months of this year, we see sales down sort of 1% to 2%, which is entirely consistent with that guidance because the benefit from strategic initiatives will begin to kick up as we move into Q2. So we're in line with our expectations here. And in profitability terms, what I said in the presentation around expecting to benefit from lower material costs this year, that is playing out. So in profitability terms, we're on track to deliver the increased profitability that's in the marketplace for 2024.

Well, I think in terms of Safestyle, I don't think it has really changed the landscape because I think if you look at Safestyle, they always talked about having a market share of around about 10%, but that was based on fence statistics, which is only a proportion of the market. There's a huge gray market out there, which is not picked up by fence. So their market share was not as big as they were claiming, and I think a lot of those installers that were working for Safestyle are still active, but are buying from fabricators and trade counters like ours. So we have indirectly seen some benefits as a result of Safestyle disappearing. But given the state of the market, it's -- I wouldn't say it's been a massive impact.

Next one, why do you think windows and doors have been so underrepresented historically? Who you're expecting to take market share from in this area, considering how competitive the space is already? That's from Matt at [indiscernible].

Yes. So I think there's a couple of factors at play here. I think, first of all, within Eurocell, I think there was a fear that we would potentially going to be treading on the toes of some of our fabricators. And clearly, we don't want to do that. We don't want to cannibalize existing sales. We think we're about an 18 -- well, we had about an 18% share of the profiled market through our current 400 fabricators based on the number of frames that we've sold so far, which is a large number through the 6 branch trial. I think we've only had one instance where we unknowingly took a customer from one of our existing fabricators, and that was quickly sorted out. So I think that -- and when we talk to our fabricators, and I've been involved in a number of those discussions, there is a huge appetite to partner with us in this project because it's incremental volume for them. And look, the 80% of the market that we don't service that is being supplied by some of our competitors and that's within our sites. And as I said, I think the other factors are that historically the way that we manage the quotation process was inconsistent across the branch network. So some branches, you might get a quote same day, other branches you might wait 2 or 3 days. We've got that down to a maximum of 2 hours. And the other thing is they get -- the installer will get a professional PDF quotation e-mail to them. So the whole process is a lot slicker. And as a result of that, our conversion rates have come off massively. So I think those are the main reasons that, yes, we think it's a project that's got massive potential.

So Operator, I think that covers all the questions on the webcast. Could we open questions to people on the phone as well now, please?

Sure. [Operator Instructions] It appears no further questions over the phone. Thank you.

So we've also got Clyde in the room here with us. So Clyde fire away.

In terms of door manufacturing capacity, if we're going to see a big step up in sales through the branches. Have you got enough basically?

Yes. We absolutely have.

Is it to the sort of scale that you indicated in terms of some of the profile where you've got 71,000 against the 31,000 tonnes, is it that sort of upside potential in terms of...

It's -- I would say we've got sort of capacity to double the output of composite doors, and whilst clearly, when the -- because we are a big supplier into new build, obviously, when that comes back, that will take up some of that capacity, but it leaves plenty to service the expansion of the branch network sales.

In terms of the extended living offer, I mean, and I suppose sort of just trying to sort of think through what you've currently got in terms of manufacturing products versus what you'd like to have, what extras that you can do on that side, too. So you can, I suppose, grab more of the value chain.

So I think the kind of proposition that we've got, garden rooms, as you know, we're still involved with for at least two years and all we've done there is expanded the range to compete with some of the, I suppose, one of the grander designs that are out there. So we've now got really 4 offerings, which we think will cater for 90% of the market. In terms of extensions, as I said, that's a relatively new product that we're kind of just feeling our way, but early feedback again from customers and projects that we've done has been fantastic. They love the product, the fact that they're not suffering from a lot of disruption that is being done in a short space of time and is also highly competitive against a traditional build. So look, I think extensions will continue to evolve that product. But I think in terms of our garden room offer, we've got that spot on.

And in terms of sort of -- if I'm a consumer rather than the trade customer and that sort of ties in a little bit with the digital [indiscernible] how are you going to try and control, if you can, the quality of the installation? Because if it's installed badly, does it have an implication for you and the Trustpilot reviews, et cetera.

Yes. I mean -- so what we have is our Select install scheme, which is effectively an approved in-store scheme where we train people on how to install these products. That's both garden rooms and extensions and indeed conservative roofs as well. And we also obviously track carefully to make sure that the install is being done on time. So we're in control of that. And then we also do a kind of post-project review, getting feedback from the customer to make sure they're happy. Where we have had the odd issue, we obviously jump on that, and we put that right. And again, if you read some of the Trustpilot reviews, customers have reacted well, the kind of the whole service is I think we walked them through the whole project. We're keeping close contact with them. And the end results are extremely positive.

I want to touch on new housing whether you didn't explicitly flag anything in the strategy about trying to chase some extra work in new housing. Is there some ideas, things that you're kicking around where labor party and maybe we will see a big step up in affordable housing could be extra volumes in that sort of market in due course?

Yes. No, we do touch social housing and in fact, we -- probably social housing, there's going to be a lot more timber frame. We've got a product called Insight, which is specifically designed timber frame that is kind of ready to go. And so that's number one. Second thing is we're kind of, I suppose, overweight with the big national house builders, that's certainly an opportunity with some of the smaller regional and independent house builders, and we are proactively targeting those both on doors, our composite door offering and windows, which obviously, ultimately, the windows get sold through our trade fabricators.

And then coming back to digital, how would you describe the strategy of building that brand, the awareness and getting people to use the [Indiscernible]? Is it very much trade first, second and can -- may be third and then consumer sort of further down the pecking order in terms of sort of how you're thinking about our brand and awareness and...

Yes. So it's definitely trade first kind of call it our core proposition of building plastics, obviously, doors and windows. For consumers, it is really specifically the extended living range of extensions and garden rooms where it is really more of a B2C type proposition. Now in the future, I wouldn't rule out as kind of managing potential window projects, but we wouldn't -- we have no intentions of fabricating ourselves. We fabricate obviously, through one of our partners, but we -- the product will get installed through one of our select installers. So in other words, we facilitate sales to a homeowner that routes it through one of our fabricators in terms of the manufacturing, but through a select install or in terms of the install.

Yes. And then my last one was, how are you going to step up 32% of 40% recycled resin? I mean that's a big increase. Do you need more recycling capacity? Do you need to tweak the product range? And where can you do that? Because you're already industry-leading in that 32%.

Yes. I mean a lot of this is when we're manufacturing new tools for sections of profile, we're making sure that those are ready to be able to use recycled products. And equally with the standards prevent you from using recycled material on the exterior phase of the profile, whether that will change in the future, I don't know. I don't think so. but there is still scope on the bits that you don't see to increase the amount of recycled product that we're using. And that's where that additional 7% to 8% comes from.

And there's enough supply of recycled windows to get there?

We believe there is. And we're working hard on our supply chain. If you look at what we've been this year already 45% of our '24 requirement is under contract where we're going direct to the source. So we're doing a much better job there. And we're finding new sources as we see. So yes, we think...

And you don't think there would be a [narrow] gap between virgin and recycled product because, obviously, you get a -- there's a healthy improvement in costs for you between the two. And probably we'll have a [indiscernible] exercise as to how much if we were. But you don't think that would push up the recycled price? So the gap is now and then you don't financially benefit environmentally, but you don't benefit financially?

The key thing here, Clyde, is bypassing the aggregators. And that's what we've been doing when we've been securing these contracts this year is to go direct to source where we're paying a sensible price that allows us to make a margin.

It is -- a lot of that source is new supply that we weren't in two years ago, that was part of the strategy to help get this price down with uncover new sources of supply. And if you think back 2 or 3 years ago, we weren't contracting this sort of stuff lightly, it was very much a spot market or so, so yes. I've got one more on the web here, which is -- what are the inventory implications of new branches and stocking more windows and doors in 2024 and beyond? And related to what sort of ROCE level could you achieve at your revenue and profit targets? New branch economics effectively, you see the CapEx associated with the new branch is in the GBP 150,000 to GBP 200,000 range depending on the size of the branch. As Darren said, there is going to be an emphasis towards the larger format stores to support these initiatives. And a new branch would consume inventory of around about GBP 70,000. Now specifically for windows and doors, these are made-to-order products. So there aren't any significant step change, not a significant step change in inventory related to that initiative. In terms of ROCE, well look, it's down at a very low level in 2023, about 13%. On the path that we're on here, you would expect that to more than double. And in no small part, that is because putting the system investments on one side, the CapEx associated with these initiatives is relatively modest because the whole underlying theme is making more from what we've got in exploiting the existing infrastructure, whether that's branches or spare capacity. So ROCE should show very healthy path in the same way as the profitability should too. I think that's all I've got on the website, just to check again on the phone. Any other questions on the phone?

No questions over the phone. Thank you.

Okay. Well, that, at this point, then thank you, everybody for listening in and participating today. And wish you all good day. Thank you.