Howden Joinery Group Plc (HWDN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Howdens Interim 2020 Results Presentation. Thank you for taking the time to join us on our conference call or to listen on the webcast. I'll begin by introducing our performance in the period, Mark will then review our interim financial results. I will then share my perspectives on our performance in the first half and our plans for the remainder of 2020 and then we'll take questions. Our performance was materially impacted by the changes to economic and trading environment brought about by COVID-19 and that is to making a loss of GBP 14 million in the first half as a whole. Sales in the first half were 29% lower than in 2019 with all of the shortfall attributable to trading in the second quarter, which started on the 23rd of March, and which for us, is when the U.K. lockdown commenced. During the second quarter, we initially closed all our U.K. depots and then undertook a phased reopening of them. At first with the skeleton staff and with restricted trading areas that we established and developed in ways depots could operate and be supplied safely in a socially distance environment. By the final period, Period 6, we returned to all depot, if not full-scale trading. Operating it closer to a full complement of staff, U.K. depot sales in Period 6 were some 74% higher than in Period 5 at around 74% of 2019 levels. And the business is trading profitably again, following losses in Periods 4 and 5, when on average, under half our depots were trading and total sales in these depots were around half of those from 2019. Depots have reported that our policy of return to all depot trading earlier than some safely and with full stock availability is appreciated by our customers, whose ability to work was curtailed by lockdown. In the first period of the second half, Period 7, U.K. sales were up 38% on Period 6 and increased 2% year-on-year. Kitchen surveys and the number of builders trading with us have been trending upwards in recent weeks, and we've seen some signs of pent-up demand. Sales of everyday items have represented a higher proportion of the mix than in normal times and the lead bank ended Period 7 above pre-lockdown levels. I am pleased with how the business has responded operationally to the immediate challenges of COVID-19 and how we are preparing for a post-lockdown environment, in which trading conditions and demand patterns may be at least periodically different to those in the past. During the period, our priorities have been to take care of our people's well-being, which is paramount during this difficult time. We have adopted a safety-first consensual approach when considering returning people to work, recognizing the importance of employee involvement in safety-at-work issues in the context of COVID-19. Steps taken have always been by reference to prevailing government guidelines and guided by the recommendations of our health and safety team leaders. We have introduced a discrete online resource, focused specifically on issues arising from COVID-19 and provided financial support to those on furlough. We reduced cash expenditure where it couldn't be deferred, whilst protecting essential areas. We ensured that we had sufficient stock available for depots, and continued with the works that our distribution facilities at Raunds. We deferred new depot openings and some refurbishments and refits of existing depots. We supported our customers and local communities by reopening depots safely with new working practices as soon as possible, which required finding new ways of depot working and reengineering how our factories operate and how we supply depots. By increasing our stock levels to ensure depots could supply customers' immediate needs, which has also meant we have supported our depot partners with whom, in many cases, we have long-term relationships. By lowering prices, which also enables us to give the depots more flexibility on margin to be well incentivized to maximize sales and by launching new services, call and collect, which enable us to trade in the second quarter and an online kitchen design service initially operated by our designers working from home. We are applying learnings from this period to the ways we do business and how we operate. Lockdown has, by necessity, increased people's propensity to shop online and the introduction of our call and collect and remote kitchen design services act as pathfinders for online upgrades. Operating under COVID condition is helping us determine if there are surplus costs and inefficiencies in the business and how we can utilize IT to free up time for depots to use more productively and manage stock more effectively. Our learnings will help us deal with varying degrees of social distancing, which may affect inbound supply, manufacturing and distribution and some or all of the depots at different times and ways. Looking forward, we believe that whilst overall there will be a more challenging and demanding marketplace, this can play to the advantage of our in-stock local model, provided we introduce the differentiation of offer and do so profitably. The initiatives we had in place prior to lockdown are in line with this objective, based around our core building blocks of trade servicing convenience, trade value and product leadership. These are: evolving our depot model to use space more efficiently and to create the best depot environment in which to do business with and to support our customers; improving range in supply management to help customers' buying decisions and to access supply chain benefits and to make productivity gains, thereby, increasing service and availability at an economic cost; using digital to raise brand awareness to support the business model with new services and to free up time for depot staff and customers to use more productively. I will update you on these and our operations based in France after Mark has taken you through our financial results. Mark?

Thank you, Andrew, and good morning, everyone. Reviewing the financials for the first half of the year, let me start by looking at some of the headline numbers from the income statement, which for the first time, is reported under IFRS 16. Moving from left to right on the top row to begin with, as you can see, Howden Joinery's U.K. revenue fell by GBP 185 million to GBP 453 million, a 29% decrease in 2019. Group sales also decreased by 29%. Gross profit fell by GBP 128 million to GBP 276 million. The percentage gross margin of 59.4% was down from 61.9% in 2019, reflecting mix changes and as you would expect, the impact of carrying fixed manufacturing costs during reduced levels of production. Howdens made an operating loss of GBP 10 million in the half, down from a GBP 78 million profit in 2019, with operating costs reducing by GBP 41 million. These costs benefited from government furlough payments, lower variable costs associated lower sales, IFRS 16 adjustments and the closure of our Dutch and German operations in 2019. These factors more than offset the cost of inflation and continued investment across the business. Now moving down to the second row. Net interest charges were up by GBP 5 million, reflecting the impact of the adoption of IFRS 16. As a result, there was a loss before tax of GBP 14 million. This compares to a profit of GBP 78 million in 2019. Looking at cash flow in the first half of the year, this included share repurchase expenditure of GBP 10 million, capital expenditure of GBP 22 million and a GBP 3 million contribution to the pension scheme. We also benefited from various other receipts into deferrals connected with COVID. I will go into more detail on this later in the presentation. Overall, we had a net cash outflow of GBP 14 million and ended the period with GBP 253 million of net cash. I'll now go into some of the detail behind the headline numbers. Let me start by talking about revenue. Howdens U.K. turnover of GBP 453 million decreased by 29% on a total basis and was down by 30% on a same depot basis. We have shown the performance split in 2 in quarter 1, pre-COVID when sales were up 1.1% on a total basis and then 0.8% on the same depot basis. In quarter 2, sales were down 56% on a total basis and down 57% on a same depot basis. I will show more detail on quarter 2 performance on the next slide. In Continental Europe turnover of GBP 12 million was down by GBP 3 million. Sales in our French and Belgian depots fell by 19% in euros. This slide gives more detail on the trading pattern during the first half and the first trading period of the second half. As you can see, steady progress has been made following the initial impact of COVID from an 87% reduction in sales in Period 4, 55% fall in P5, and a 26% reduction in P6. Period 7 saw further progress and moved positive, with sales up by 2%. I'll come back to the second half outlook later on. Let me now talk you through movement in PBT from GBP 78 million in 2019. Gross profit fell by GBP 128 million. This is the net effect of several features as shown in the chart on the right-hand side. If we bridge from 2019's gross profit of GBP 404 million, there was a GBP 4 million impact from pricing. Secondly, a large fall in volumes and the mix changes compared to the first half of 2019 reduced revenue by GBP 183 million. In addition, there were a number of factors that impacted the cost of goods sold that will reduce costs arising from the volume and mix changes. As mentioned earlier, we were also impacted by carrying fixed costs at lower levels of production. The net effect was a reduction in costs totaling GBP 60 million. Also affecting cost of goods sold, we saw higher input costs. This resulted in a net decrease to gross profit of GBP 2 million. In addition, there was a GBP 1 million impact from exchange rate movements in the first half. Together, this gave a net falling gross profit of GBP 128 million to GBP 276 million. Gross profit margin was 59.4%. If I now turn to the other factors that contributed to movement in PBT, reverting back to the chart on the left. Operating cost reduced by GBP 41 million, which I will address on the next slide. Net interest and other finance charges were GBP 5 million higher than in 2019, reflecting the impact of adopting IFRS 16. The net result was a loss before tax of GBP 14 million. Let me now explain more detail the main movement in operating costs from GBP 327 million in 2019. Firstly, the incremental costs of the 44 depots that we opened in 2019 totaled GBP 6 million. Costs in older depots decreased by GBP 13 million, mainly reflecting decreased levels of activity. Cost increases incurred to support future growth totaled GBP 4 million. This included the cost of the Raunds development, which we have previously announced. There was a net reduction in other operating costs of GBP 8 million, again, the result of reduced activity. We claimed GBP 21 million in furlough payments in respect of the first half, GBP 15 million of which was received in cash in the first half. Closure of our Dutch and German depots in 2019 benefited the first half result by GBP 5 million. And finally, cost reduced by over GBP 4 million as a consequence of adopting IFRS 16. This meant that operating costs overall fell by GBP 41 million to GBP 286 million. Let's briefly turn to the remainder of the income statement. If we look at the second column of numbers on the table, the impact on the first half of adopting IFRS 16 was an increase in operating profit of GBP 3.9 million. This is more than offset by an increase in interest charges of GBP 4.6 million. As a result, as we've seen, our loss before tax was GBP 14.2 million. This led to a tax credit of GBP 3.3 million, the effective tax rate being 23.2%. This gave a loss after tax of GBP 10.9 million. This result give a loss per share of 1.8p compared with earnings of 10.3p in 2019. As previously announced, the dividend and share buyback programs have been suspended until further notice. Shareholder returns will resume as soon as the Board has greater clarity about the impact on the business of COVID-19. Prior to the announcement I just referred to, we spent GBP 10 million repurchasing shares. Let me now turn to cash flow. From a position of having net cash of GBP 267 million at the end of 2019, we ended the first half with net cash of GBP 253 million. Looking at the change since the end of last year, let me draw your attention to a number of items that explain the movement. Firstly, we took advantage of government support, where appropriate, to bolster our cash position. I will explain this further on the next slide. Net working capital decreased by GBP 19 million, which again, I will address shortly. Capital expenditure totaled GBP 22 million and included spend upon the next phase of our Raunds warehousing strategy and also investments in digital. Corporation tax payments were GBP 12 million. As I've already described, we spent GBP 10 million repurchasing shares in the first half. And there was a GBP 3 million contribution to the pension scheme. The net result of these and other movements was a cash outflow of GBP 14 million, meaning that we ended the first half of 2020 with net cash of GBP 253 million. At the start of the COVID crisis, we took a number of steps to secure our cash position, including postponement of depot openings and nonessential capital expenditure, curtailment of operating costs, cessation of our share buyback and dividend programs and agreement with our pension trustees to defer deficit payments. In addition, we have taken advantage of available government support. As a result, our first half cash flow benefited from furlough receipts of GBP 15 million and tax payment deferrals of GBP 61 million. The closing cash without government support would have been GBP 177 million rather than the GBP 253 million reported. As I've already said, net working capital decreased by GBP 14 million. Within this, stock increased by GBP 34 million. This was impacted by COVID contingency planning and the introduction of new kitchen ranges. Debtors fell by GBP 39 million, reflecting the pattern of trading that we saw in quarter 2. Creditors increased by GBP 9 million, partly as a result of the cash management actions just mentioned. Let me quickly bring you up-to-date with the balance sheet position of our pension scheme. At the end of 2019, the deficit stood at GBP 57 million. A number of factors had caused this to change by the end of the first half. Firstly, from the P&L, there was the current service charge, administrative and interest costs of GBP 11 million. Secondly, a decrease in the discount rate increased liabilities by GBP 119 million. Thirdly, the group made a cash contribution of GBP 14 million. Finally, with asset returns being GBP 140 million higher, the deficit at the end of the first half of the year was down by GBP 23 million to GBP 33 million. This, of course, is the balance sheet deficit calculated under IAS 19. Our deal with the trustees, however, is on the technical provision basis. This agreement, reached in June 2018, is to pay GBP 30 million per annum for up to 5 years until June 2023. Also under the agreement, deficit contributions will be suspended if the scheme's funding position reaches 100% of the scheme's funding basis for 2 consecutive months and resumed if the funding position falls below 100%. Let me finish with some brief comments about trading in the first period of the second half of the year and cost for the rest of the year. Period 7 saw total U.K. sales up by 2.2% for the first 4 weeks of the second half and up by 0.3% on a same depot basis. Regarding the full year 2020, clearly, there are currently many uncertainties and a number of factors that need to be considered. As highlighted in February, regarding operating costs compared to 2019, we will benefit from not bearing the GBP 6 million cost of closing our European operations in Germany and the Netherlands. However, as we announced, there will be further operating costs of around GBP 20 million in 2020 compared to 2019, GBP 6 million of which has been incurred in the first half. These costs include the impact of dual running of old NDC and Phase 2 of our new distribution center in Raunds, also increased pension charges and additional depreciation. These cost increases are in addition to the impact of the ongoing growth of the business, inflation and new depots including further openings in France. Capital expenditure is now expected to be around GBP 60 million for 2020. This includes the next phase of Raunds; digital investment; around 20 new depots, including 4 in France; and depot refurbishments. On that note, I'll hand you back to Andrew.

Thank you, Mark. I will be talking about our performance in the first half and our plans for the second in the context of COVID-19, using the initiatives we had in place for 2020 as a framework. As a reminder, these revolve around depot evolution, range and supply management, digital development and international. But first, I'd like to talk about our customers. At the end of the first quarter, our overall account base was stable with our core credit account holders as a whole spending more with us. And the total number of transactions and the number of customers trading both increasing at a higher rate than total spend. The onset of lockdown at the start of the second quarter clearly had a very material impact on our customers' ability to operate their businesses and to trade with us. And the overall level of activity as measured by total transactions declined in the second quarter at a similar rate of total sales. During the second quarter, however, the level of our engagement with customers improved for the low base period-on-period. Materially so, in Period 6, when all our debtors were trading for the entire period once more. Whilst remaining below 2019 levels, total transactions in Period 6, were more than 50% above the total for the 4 and 5 combined, and the number of customers trading with us and the amount they spent with us also increased significantly. Building trusted relationships with trade customers is central to everything we do. And in what remains a very difficult time for them, we aim to support them in the right ways where we can. We have helped them with lower prices and feedback from customer share that they appreciate that we've reopened depots as soon as we could, with new services and ways to trade, that we've remained in stock throughout the period and the COVID measures we took to enable them to trade safely with us. I will return to these as I update you on our performance in the context of the initiatives I mentioned earlier. First, our depot plans and ways of trading under COVID-19 conditions. While we always want to provide the best customer service we can, the welfare and safety of our staff and our customers is always our first priority. Throughout lockdown, we have followed prevailing U.K. government guidelines as a minimum standard we should apply, as we consider how and when depots could recommence trading. We maintained an emergency provision to support the NHS, care providers and vulnerable people, with a number of depots trading in the ways of trading, ranging through different phases. Our first step was to introduce a lockdown call-and-collect operation initially operated by a skeleton staff, a limited number of depots and behind closed doors. We subsequently increased on a phased basis, the number of depots trading in this way. We then reopened depots, we're closer to a full complemental staff once we were comfortable that we had additional safety measures and protocols in place to do this, and that staff understood the standards we were working to. By the start of the final period of the first half, all our depots were trading once more. We believe the operating procedures and measures we put in place, and ownership of these depot level provided us with the best opportunity to trade safely in the period and will help us deal with subsequent lockdowns, which may be instituted at short notice and which may be applied on a regional or a local basis in England, and differently in Scotland, Wales and Northern Ireland. Turning to our 2020 depot reformat and depot opening plans. By the end of 2019, we've opened 60 depots in new format, aimed at creating the best depot environment in which to do business with our customers at no material change to the fit-out costs of a new depot. By racking product vertically in the warehouse section of the depot, we believe that there are ways to make space utilization improvements, with the potential to make productivity gains from reduced picking times. We are confident that the updated format is an improvement at the same cost on the traditional one. And the improved densities offered by reracking product vertically also enables us to put our full offering into a smaller space, increasing the potential number of depots we could open in the U.K. All new depots open will be formatted in this way, and we have planned to open 30 depots this year. In the first half, we put our opening program on hold as we prioritize maximizing cash flow and finding ways the depots could trade safely in the COVID-19 conditions. And in the second half, we now intend to opening around 15 new depots. By the end of 2019, we converted 11 existing depots to the updated format, as a test to understand the rollback opportunity of the updated format in the existing depot estate. In 2020, we were planning to convert around 30 more depots to the updated format across the country, so that we can continue to learn how best to apply this opportunity with the new existing depot estate. We still intend to do this, having reduced the number of depots we were planning either to open or to rerack without further modifications. In the first half, we completed the conversions of the 18 depots at which works were underway prior to lockdown. And in the second half, we intend to convert a further 11. This year, we are budgeting for an average reformat spend of GBP 225,000 as we apply the learnings from depots converted to date. We now plan to rerack around 25 depots without further modifications in 2020 versus our pre-COVID plan for 50, including 5 which were underway prior to lockdown and completed in the first half. At the end of 2019, we had a total 71 new format depots, comprising 60 new ones and 11 refurbished depots and had reracked a further 62 without further modifications. By the end of 2020, assuming our revised depot plans for 2020 are implemented, as I've described, we will have in total 115 new format depots, comprising 75 opened in the new format, plus 40 refurbished ones. And we will have reracked a total of a further 87 without other modifications. Next, range and supply management. New kitchen ranges each year represent a significant portion of sales as product life cycles shorten. In the first half, we had new kitchen ranges launched and in stock, with synchronizing Rooster promotional offers earlier than last year. 11 of the 13 new ranges were on sale in January prior to lockdown. First half NPI kitchen sales were ahead of last year's when new ranges were launched later. Earlier introductions meant we were well positioned with product as we turn to all depots trading. With the remaining 5 new ranges for the year, launched by the end of the first period of the second half, we have all of our 2020 kitchen NPI on sale, well ahead of their traditional peak Period 11 period. Managing the number of kitchen ranges efficiently is crucial for both best availability, which is highly valued by our customers and profitability. We have made progress in getting back to the discipline of fewer, deeply stocked, higher-performing ranges in depots. A key part of this is the timely discontinuation of underperforming ranges and the management of clearance stock from the business. At the end of 2019, we had 67 current ranges, including initial stock of some ranges launched -- for launch in 2020. We are targeting 16 clearance ranges this year. By the end of 2020, we expect to have 66 kitchen ranges, including initial stock of some 2021 NPI ranges. We believe around 65 current ranges is the right number for our market at present. We continue to aim to remove at least the number of ranges we had. Our dedicated manufacturing and supply chain is crucial to the success of our in-stock offer. It supplies all products, whether manufactured by us or sourced externally, to all our depots, which each have individual and changing day-to-day requirements. It is structured to respond to these new needs to meet the demand of Period 11, when sales are typically more than double the level of those in other periods. Operating under COVID conditions has been finding ways to reengineer how our factories operate and how we supply and distribute to depots. With the onset of lockdown, we initially closed substantially all of our manufacturing and supply facilities, running only with partial operational teams on each site. This ensured we could continue to receive inbound shipments from external suppliers, so that the appropriate stock could be available in the business once we were comfortable that depots could recommence trading and we could supply them safely. We then designed, with employee consultation, a series of social distancing measures, work processes practices to prepare for a phased return to work at the appropriate time. With additional safety measures in place, in April, we were able to reopen our manufacturing sites in Howdens and Runcorn and associated distribution facilities, and we were able to maintain stock availability at demand and the number of depots trading changed. Since reopening supply, we have continued to work through processes with COVID bottlenecks. We can now manufacture all products whilst maintaining social distancing. And our efficiency, whilst below pre-COVID levels, is now much improved. We have continued with our policy of holding increased levels of safety stock when we believe this is necessary to protect our in-stock offer against potential disruptions to our supply chain and to accommodate irregular patterns of demand. We first did this as part of our Brexit planning, and again, ahead of lockdown. We are already seeing pop up COVID outbreaks and the potential to use up inbound supply and we have navigated safety stocks and backup sources of supply. And as we recommence all depot trading ahead of some, we have seen some evidence of shortage buying of some of our product lines, and we have had reports of extended delivery times being quoted by some of our competitors. Our ability to utilize our disaster recovery capacity has also helped us to remain in stock as depots have reopened. We also took temporary additional storage space, pending some warehouse capacity at Raunds coming on stream, which we expect to be in September. We continue to keep under review what we believe is best to make or buy both in terms of cost and overall supply chain resilience and flexibility. We have benefited from significant engagement with our supply base, both in support of our 2020 plans for improved product range, availability and price during lockdown. We have long-term relationships with many of our suppliers. And being a manufacturer ourselves has helped us have early sight of the potential COVID risks for our supplier factories. We also operate on ex works rather than delivery terms with our suppliers, which enables us to work directly with our shipping partners to resolve logistical issues and provide us with earlier warning of orders that might be running late. Turning to our digital platform. We see digital as a means to reinforce the Howdens model of strong local relationships between depots and their customers. In the first half, the digital investments that we've made were particularly instrumental in doing this at a time when relationships and ways of doing the business were disrupted. We've continued to see increased activity on our web platform and growth in our social media presence, which also stimulates interest in viewing our products and services in howdens.com. Howdens.com impressions were present in 1.4 million more organic search results a month. Visits to the website in the first half increased by 31% year-on-year. In the second quarter, average visitors exceeded 350,000 a week and then passed 500,000 a week for the first time. The proportion of our total range being browsed increased with page views for kitchens, up 61%. The contracting of depots through the website has increased by 58% in the first half and brochure requests by 34% in the second quarter. Across social media sites, our follower base at 153,000 was up 136% by the end of the period, and we are reaching nearly 9 million users a month with the percentage of those actively engaged with us, up 255% year-on-year. With restricted movement in the U.K., howdens.com provided a key access point for customers to the business. And in the period, we extended the range of services we provided online. In January 2020, we rolled out the online account facilities, which we developed and then tested in the latter part of 2019. Prior to lockdown, user feedback for the online account service was favorable, and usage rates were rising. Since then, the adoption rate has continued to increase. By the end of the first half, 19% or so of our credit account holders have been registered to use the service, with 38% using it out of our normal trading hours. Around 40% of the users made a payment or downloaded a document. Average payments per customer were also well above the company average level. Curated on our website, the first generation call-and-collect service we introduced provided a way, in combination with our in-depot measures, for customers to trade safely with us following the onset of lockdown. With planning meetings in our depots or in our people's homes not permitted, a new personal kitchen design service was also made available online. Users can send us design requests, attaching images and measurements of their current kitchen and indicate design and style preferences. Depot designers equipped with online design and conferencing tools to work from home could then plan kitchens and transmit submissions to the depots to deal with as they reopened. Feedback from users and the depots has been positive, and we are making the service a permanent feature of our offer. In the second half, we will continue to improve content and add more capabilities to our platform. We'll be having further account lead-in project management features, together with functionality, which assists local communications between depots and their customers. For new customers, we'll be introducing a digitized account opening option in depots and a new, more efficient online account opening process, which reduced the time spent on and the cost of administering and processing applications. Having digitized our product and marketing content in 2019, we can deploy these cost effectively across multiple channels and programs and add fresh content efficiently. We'll be using CGI to extend the number of kitchen range layout options, which can be viewed online, and adding content which users have shared, which showcase our kitchens in people's homes. Lastly, international. In 2019, we decided to focus our operations based in France, by way of a city-based approach, and we closed our operations in Germany and the Netherlands. We appointed a French national to lead the business and opened 5 depots, 4 around Paris and 1 in Lille. In France, lockdown occurred a little earlier than the U.K. and all of our depots are closed on the 17th of March, at which point sales were up around 3% year-on-year. By adopting our safety first approach and taking similar measures to those in the U.K., we then reopened for business with depots operating with call-and-collect mode, with depot started to trade again on a phased basis during the first 2 periods of quarter 2. The government ended lockdown in France on the 11th of May and depots were open to normal way to trading with appropriate safety protocols in place. We are pleased with how our business in France performed during the first half and the start to the second half trading. Whilst first half sales were down around 19% year-on-year as a result of the onset of lockdown, sales increased significantly year-on-year in the final 2 periods. Sales expectations of the depots opened in 2019 are encouraging and sales in the first period of the second half increased by 46% year-on-year. We are now targeting 4 depot openings in the second half of 2020, taking the total number to 31, including 2 in Belgium. In summary, the loss for the first half overall was as a result of the level of trading in the second quarter, which was significantly impacted by onset of lockdown. The business returned to profit in the final period of the first half, following losses in the previous 2. The business responded well operationally to the immediate challenges of COVID-19. We took care of our people, with a safety first consensual approach to return to work, reduced cash expenditure for protected essential areas, supported our customers with lower prices, new services and safe ways to trade. We opened safely and quickly with working practices as soon as practicable, with all depots trading by the start of the final period with a full complement of stock. Turning to the second half, our first priority remains the safety of our people and customers with the focus of the business in delivering our H2 plans and preparations for peak Period 11 trading. We aim to retain a profitable balance in the light of prevailing market conditions between price and volume, whilst working with suppliers to keep product and input costs down. We will continue to manage our stock levels actively to protect availability both of manufactured and brought in product. We have continuity plan to enable us to trade under the range of COVID conditions we have seen to date. We have all of our 2020 kitchen NPI on sale, well ahead of Period 11 and further Rooster promotions plan to keep Howdens front of mind. We will continue to improve content and add more capabilities to digital platform. In 2020, we intend to open around 15 depots in the U.K.; 4 in France; and convert around 30 new existing depots to the new format. Depots have reported that our policy to return to all depot trading earlier than some safely and with full stock availability is appreciated by customers, whose ability to work was curtailed by lockdown. In the first period of the second half, Period 7, U.K. sales were up 38% in Period 6 and increased 2% year-on-year. Surveys and the numbers of builders trading with us have been trending upwards in recent weeks, and we have seen some signs of pent-up demand. Sales of everyday items have represented a higher proportion of the mix than in normal times. And the lead bank ended Period 7 ahead of pre-lockdown levels. We remain cautious in underlying market conditions, given the ongoing COVID-related economic uncertainties and the impact of the outcome of Brexit trade negotiations may have on which more detail is set out in the RMS announcement. However, I'm confident in our business model through changing economic conditions and the benefits of our initiatives we bring to our performance. Thank you for listening. We will now take your questions.

[Operator Instructions] We will now take our first question from Alexander Mees from JPMorgan.

Thank you very much for that very comprehensive presentation. I have just a couple of follow-up questions, please. Just firstly, on the gross margin. I wonder if you could provide a little bit more color as to the drivers of the gross margin decline with regard to mix. Is this something that's likely to be sustained into the second half? Or is it a feature of COVID? Secondly, I wonder if you can just comment on your expectations around any further benefits from furloughing in H2. And just finally, I'm interested in what you're planning in terms of bad and doubtful debt in the second half, whether you have any assumptions that you can share there.

It's Andrew here. On the gross margin, it was down a bit in the first half, and the majority of that was down to mix between every day to over-the-counter items and stuff that we consider like doors, joinery, flooring, ironmongery in the next against kitchens. I think we would understand that most customers would not be interested in putting their kitchen apart in lockdown periods. So obviously, the mix has gone in towards sort of over-the-counter type product. The other is cogs in the factory with additional operating costs and that have an impact on margin. Regarding the second half, we've released a little bit more margin to the depots for a couple of reasons to ensure that the depots have got full capability of taking whatever business is out there in the second half and also ensuring that depth of the builders can win business with them and consumers. So we would see a little bit of gross margin erosion in the second half, not the largest a bit as we compete heavily in the market. And regarding the second question, I'll hand over to Mark, and maybe you'll add so…

Yes. On furlough, we claimed a total of GBP 22 million and we received GBP 15 million of cash in the first half. So we're due another GBP 7 million in H2. On the bad debts, a few things going on. So the aging is going out a bit. So the aging, in particular, we look at the category we concentrate on the over 90 days. And that's extended at the margins, nothing dramatic. We've had a number of customers, a very small proportion, but a number of customers who got in touch about difficulties settling their accounts. So on an individual basis, we've agreed terms so they can repay. What that amounts to overall is we calculate cost of accounts receivable, where we add debt written off to the costs of running the credit control department. That total for a number of years now has been running slightly below 1% of sales. First half of '20, it's very slightly over 1%, so to be precise 1.1%. That's partly as a result, obviously, of reduced sales in the first half. So we're -- yes, no reason to be anxious at all. In fact, the debts written off in H1 '20 are less than the debts written off in H1. That might alter as we go forward. So we're watching it like a hawk. So overall, there has been some aging, a little bit of strain. But absolutely, nothing dramatic at all.

We will now take our next question from Christen Hjorth from Numis.

Just 3 questions from me, if that's okay. The first one is just on the potential investment in price and just the rationale from that. Are you seeing competitors being more competitive on price? Is that more just to drive market share gains in what is an uncertain time? Secondly, just around the planning for Period 11, obviously, a very important period, but a lot of uncertainty around at the moment. And just how you are thinking about that going forward? And then just finally, you mentioned digital offering, that some of these changes are structural and here to stay. Just how you see sort of Howdens roles develop I suppose, in supporting the job and builder as consumers increasingly buy and sort of shop for kitchens online?

Thanks. I've got 3 questions there. So I think I'll tackle with each one and then Mark can come in to support me. Our approach on price has been a very pragmatic one. In fact, our approach around this whole crisis has been, in a number of steps, we're very clear on exactly how we were going to bring business through it. And the first is to secure stock from China initially and then from Italy, we reflect a lot of stock ex works in our manufacturing operations. Then to take care of our people, which we furloughed. Topped up, safe working practices, both in factory and depot, faster going to work and then hard trading. If we find ourselves in the market in a position of strength, where we're very well-stocked. And we believe the right thing to do is support both our depot teams with improved margins, so it runs through their P&L. We can make more money to be heavily incentivized around it. So the customers, to ensure that they've got a little bit more as they sell out to end consumers. I think it's more a pivot than anything stronger than that. And I think the erosion, as I said before, is around mix, which we've taken back. I think as volumes grow through the factory, which is our intent, we will see some gains, and we'll play it through. So we've released a little bit more margin to the depots to local business, locally priced, depots are incentivized around maximizing profit on their local P&Ls, and that's gone down particular well with depot managers. Regarding Period 11, our lead bank coming out of COVID, if you like, are certainly coming into period -- out of Period 7 as stronger than we went into COVID. So we're sensibly placed as we look now on Period 11. So there's a long way down the road to go. So there will be some pent-up demand in what we're seeing currently. But we bought appropriately for Period 11. We're not selling product here that will go date expires like food. We are investing in fast sellers, what we call A and B lines. We will sell through it eventually. So we -- the most important thing for us to do is to stay in a very fair and strong stock position. The teams are in good form. We stayed in very close and regular contact with the team. Andy Witts and I have spoken to every depot manager every week, right through furlough. And we've done that through a series of team calls, where we do our regional -- what we call regional boards, the depot managers to the call every time as we've made a significant investment in time to keep up the communication. Likewise, our depot managers have kept up strong communication with end customers as well, which I think will be appreciated as we come out on the other side. I think on price, we noticed some other competitors putting up price. Plasterboard will be a good example, which has been a major shortage across the U.K. and it delayed some works in kitchens and other items around the homes, and the prices have fluctuated quite dramatically. That's not the game you want to play here. Regarding digital, the comment I would make having led the business through this crisis, it's just how strong the business model is and how, when we lean firmly into the principles of the business, what the business is about, we performed well versus our competitors. Digital has a role to play, there's no doubt. But I do not want to undermine the business model in any way. So it's been extremely helpful in getting and securing payments from customers as they've gone online toward digital log in. We feel there's more capability around that. And I eventually want our customers to be able to go in and order any time they want. In the short term, we've been using call and collect, which has been a significant usage by our customers through the lockdown period, and we'll eventually want to digitize that in the right way for Howden. It has to be private, it has to be individual-to-individual customers, and we will take our time, and we will test it properly as we go through it. We're really encouraged by end consumers becoming more aware of the brand as our initial step on digital. We wanted customers to understand our ranges better, search our website better, see more aspects of the website. I think the traffic that's driven off that is a testament to the great work that the team have done there.

We will now take our next question from Charlie Campbell from Liberum.

Yes, Charlie Campbell here. A couple of questions, really. First of all, just wondering what builders are saying about customers' appetite for that work sort of online furbishing kitchens? I can understand some people may be reluctant to have that level of disruption in the house, so whether that attitudes are softening. And then secondly, just to get back on the furlough question. Just to confirm, you've got everyone off furlough now, and there's no P&L benefit in the second half, just to confirm that, please.

Mark, [ do you want to do ] the first question first or…

Yes. To all intents and purposes, everybody off furlough. The split has got 1 or 2 minute numbers that we regard as vulnerable, given their age, or given their carrying responsibilities. So yes, everybody has [ been wanting ] back in. On furlough, no P&L effect in the second half. So we -- on an accruals basis, if you like, in the first half, we've accounted for the GBP 22 million that we've claimed.

Regarding builders and what they're saying about customers' appetite. So I would say we haven't heard many of our builders' forums through the lockdown, but we have stayed in contact with a number of builders. I think we can point to chaotic diaries of the builder, where the work patterns are changing. We see builders coming earlier into depots and the trading pattern more in the AM rather than the PM. We've seen, certainly initially out of lockdown, smooth a bit since. I think our stocked model supports them incredibly well as patterns change between working outside or at the inside. Builder report that customers -- end customers are active. And I think it's probably like what many of us have done as we've been more interested in our homes. We're thinking about where we live. And I think maybe some of the home improvers have seen people painting and things in basic gardening and that kind of thing. The trader will have to come in and to pick up all the problems that the DIYs have created. I think too, though, that what we've done very well in houses is ensuring that we get people through our system quickly. You see a lot of queues outside of builders, merchants, you don't see any at housings, and we're keeping our builders very safe. So yes, I think our builders are very, very busy. And if anything, there'll be a shortage of their capacity.

We will now take our next question from Clyde Lewis from Peel Hunt.

Yes. It's Clyde Lewis of Peel Hunt. A couple, if I may. One probably for Mark in terms of sort of trying to understand how the, I suppose, the deferred tax payments to HMRC will evolve through the second half of the year. And again, any help you can give us there would be useful. The second one was on, I suppose, trying to get a little bit of a flavor on how Period 7 has evolved. I mean you very kindly given us Period 4, 5, 6 and 7 in terms of the sales number. I suppose I'm trying to get a little bit of an idea as to how that sort of plus 2% has evolved. And was the first week, a big minus number and weak for a very big positive number or is it a much more narrower band? And the third one, I suppose, goes back to competitors again. And I think throughout your comments, Andrew and Mark, both referred to some of the competitors obviously not being as organized as yourselves. I mean would you -- I mean I know it's hard to name names, but in terms of sort of where the weakness has been, would you say that has been more amongst the independents or the bigger companies? Just to get more of a flavor as to what's going on in the competitive front.

You first?

Yes. On the tax, Clyde, we've -- as we've said, we deferred GBP 61 million. And the track we're on at the moment would say come the year-end, GBP 27 million of that will still be deferred. So we'll have settled the balance in the second half, but we'll still be benefiting from a GBP 27 million penned deferral from the year ended.

I'm going to go to the competitors first, and then I'll come back to the Period 7 question. I would say, yes, we -- I mean we're focused on playing our own game here. We've obviously monitored very carefully who was opening when we did get quite a lot of [ brand routes ] feedback that a number of competitors, some of the staff has said that they had wished that we -- that they were as organized in terms of getting back into depot and up and running as quickly as possible. Our health and safety team have done a fantastic job in houses on keeping us safe, which is completely critical. So I'm saying we were definitely the winners in the trade space. And I would say the independence to tend to be highly [ rooted ] driven slower again to come back to work. The problem has been in the showroom area. You know we don't have very large showroom areas in front of our depots. It's -- we've been able to sort of restrict entrants. Easy to get people through the system, in the one-way system through the depots. So yes, I would say we've been up and running faster than the others. I think in terms of Period 7, we would have noticed. It's not all come in the last week is the first thing I'd say. It's been steadily building week-on-week as we've gone through, which is an encouraging trend. And it's actually been improving in trend each week from Period 6.

We will now take our next question from Geoff Lowery from Redburn.

A couple of questions, one gritty, one high level. When I think, gritty, I tend to think, Mark, so I will go there first, if we can. When I look at your OpEx development, and I strip out furlough and closure costs in Europe and so on, it looks like your OpEx was down about 6% year-on-year in response to a 30% sales decline. Is 20% the sort of normal variability we expect in your cost base now? And the second question in terms of bigger picture. I'm quite struck by the relative speed with which you've put sort of CapEx back into the business, restarted the store opening program or depot opening program, et cetera. What does that really tell us? Because at the same time, you're not confident enough to seeing dividend or buyback at this point, but you are confident enough to put quite big lumps of capital back in. And likewise joined up with that, you're not really preparing to put the business on any sort of recession footing in terms of people costs. It seems to be very much back to prior trends. Is that a fair read on how you're thinking about the future?

Geoff. Yes, I'm done on associating with gritty, I'll take that as compliment. On the OpEx yes, I think on the 20% variability, I think the background comment here is, as we say, in the long term, all costs are variable, and in the short term, all costs are fixed. And I think over a short period reflects -- doesn't reflect how much variable cost is sitting in OpEx. So if you look at the elements that have really moved as a result of reduced volume so there's a brick called all depots on the graph. And that -- the big movers there are delivering costs, payroll and incentives connected with payroll. And then in the other costs, central distribution is flexed down and again, bonuses for people that sit outside of the depot and incentives of people that aren't in the depot in that network. So I think over a short period, the flex hasn't been upright, but over a longer period, I think you'd see a more split between fixed and variable within OpEx, which is more representative of a sort of operational leverage of the business. So you see a much larger degree of flexibility.

Geoff, to your second question, I think we are very confident in the business model. The depot openings that we've put back in are half the level that they were intended to be at the start of the year, largely in the process of finishing of work, some half-done works and there's a lower level of repicked work. But again, it had to be done, tools have put down halfway through processes. So it's sort of more reason -- more is tidying up. In terms of next year, we haven't decided yet how much CapEx we would do. We'll see how that -- how trading plays out through the balance of this year. Around people costs, we've obviously looked across the business. There'll be a little bit of tidying up, not a lot needed, and we will play out the appropriate productivity level in the depots but we will see how demand plays out. But I think long term, we are very confident in the model. We will do the right things in the short term for the business, but sort of take the foot off the accelerator slightly in the short term.

Understood. And can I just add a quick third? Just in terms of your Period 11 preparation in a COVID-socially distanced world, can you -- in terms of manufacturing, delivery to depots, depot volume, can you handle Period 11-type absolute levels of volume in a COVID-socially distanced world?

The short answer Geoff, is yes. We take an extra space. Thank goodness we've got Raunds be available. The most -- the shortest lead time of any product is the rigid cabinet. And with the disaster recovery plans that we put in number of years back that's been utilized through the downturn, and it's about storing cabinetry, ensuring the allocation of faster selling SKUs into depots. We've modeled it, we believe we can do it.

We will now take our next question from Robert Eason from Goodbody.