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

Good morning, everyone, and welcome to Howdens 2020 results presentation. I will begin by introducing our 2020 performance. Paul Hayes, our new group CFO, will then review our financial results for the year. I will then share my perspectives on our 2020 performance and our plans for 2021, and then we'll take questions. Howdens has performed well during a challenging year that has been significantly impacted by COVID-19. We adopted to COVID trading conditions while investing in and progressing our strategic plans for the business. Our performance demonstrates the strengths of our trade-only business model and our ability to continue to evolve the business whilst prioritizing the health and well-being of our staff and customers. The results for the year reflects the quarter 2 spring lockdown period, followed by a year-on-year increase in second half sales and profit. U.K. sales in the first half were 29% lower than in 2019, with all of the shortfall attributable to trading in the second quarter. U.K. second half sales increased by 16% on 2019, with the increase in sales trending upwards across the second half, exceeding our expectations in latter periods. I believe this performance reflects the measures that we've put in place to enable our people in all areas of the business to work safely together with those put in place to support our customers. These measures comprised of new services, lower prices, combined with more margin flexibility for depots, high stock availability and a safe environment in which to trade. With people, by necessity, spending more time at home and end-user concerns about further lockdown, we also believe people were choosing to spend more on their homes. We flexed our traditional Period 11 sale period, when sales are typically more than double those of other periods across Periods 10 and 11. With signs of pent-up demand, reports of extended delivery times amongst our competitors and concerns about further lockdowns, we flexed the sales period to help builders book in more kitchen fits over a longer period. Sales across Periods 10 and 11 exceeded those targeted by the business, and Period 11 alone still returned to record results. It also benefited supply chain management and the ability of our depot teams to service demand, which in turn were incentivized for performance in Periods 10 and 11 combined. A founding principle of Howdens is to be worthwhile for all concerned. In these difficult times for all, we have supported staff and customers and continue to conduct other stakeholder relationships in a fair and responsible way. During the spring lockdown, we maintained an emergency provision to support the NHS, care workers and vulnerable people, and we have continued to support charities. Throughout 2020, we paid our landlords in full and honored and, in some cases, increased our orders from suppliers, who, in turn, have supported us with high stock availability. Similarly, given Howdens' strong balance sheet and our trading performance, we repaid all of our 2020 furlough funding prior to year-end and settled a number of other payments that we previously deferred, including taxes, pension deficit contributions and business rates waived by certain local authorities. And today, we are recommending that we resume dividend payments. The marketplace remains challenging and may be further impacted by COVID-19, Brexit and underlying consumer confidence. We believe we are well positioned in such a market with our trade-only, in-stock and local model. Based around our core building blocks of service and convenience, trade value and product leadership, we have initiatives in place to do this through evolving our depot model, by improving range and supply management and developing our digital capabilities. I will update you on these and our operations based in France after Paul has taken you through our financial results. Paul?

Thank you, Andrew, and good morning, everyone. I look forward to meeting you face-to-face when conditions allow. I joined Howdens in November and despite lockdown, the team has helped me get to grips with the business very quickly. I've visited our manufacturing sites, a number of depots and other locations and met many of our people. I'm pleased to be announcing Howdens' 2020 full year financial results, and you'll be reassured to know that I will be presenting the financial results today in a well-established format used by the company. I believe that this will be the most effective approach in providing clear comparability. Let me start by looking at some of the headline numbers. These are reported by us for the first time under IFRS 16, the new lease accounting standard. 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 41 million to GBP 1,510 million, a 3% decrease in 2019. Overall, group sales decreased by 2% after including our growing Continental European business. Gross profit fell by GBP 56 million to GBP 930 million. The percentage gross margin of 60.1% was down from 62.3% in 2019. This included mix changes and, as we explained in the first half results, the impact of carrying fixed manufacturing costs during reduced levels of production. Howdens made an operating profit of GBP 196 million in the year, down from a GBP 260 million profit in 2019. Now moving down to the second row. Net interest charges were up by GBP 11 million, predominantly due to the adoption of IFRS 16. As a result, there was a profit before tax of GBP 185 million. This compares to a profit of GBP 261 million in 2019. The cash flow was particularly strong in the year, and this included significantly lower shareholder payments with a share repurchase of GBP 10 million in the early part of the year before this was suspended. There were no dividend payments in 2020, and I will talk about recommencing dividend payments a little later in the presentation. There's capital expenditure of GBP 70 million and a GBP 30 million contributions to the pension plan deficit. In addition, our cash flow was impacted by GBP 60 million beneficial phasing from higher payables despite payments being made in accordance with usual terms. The underlying cash balance is approximately GBP 370 million. I'll now go into some of the detail behind the headline numbers. I'll start by talking about revenue. Howdens U.K. turnover was GBP 1,510 million and decreased by 2.6% on a total basis and down by 4.5% on a same depot basis. In Continental Europe, turnover was EUR 43 million, which was a 13% increase, this is after adding 4 more depots during the year, bringing the total to 30. Sales growth was 2.5% on the same depot basis. I will now show some more detail on the U.K. performance on the next slide. In Q1, pre-COVID, sales were up 1.1% on a total basis and down 0.8% on a same depot basis. During Q2, we were most significantly impacted by the COVID-19 pandemic. For the initial phase of lockdown, sales were down 56% on a total basis and down 57% on a same depot basis. We improved period-on-period in the second quarter as we found ways to operate the business safely. In the second half, sales recovered are up by 16%, and we believe that our performance was supported by our full stock availability. Andrew will provide more details on this later. Overall, in H2, sales were up by 14% on a same depot basis. Let me now talk you through the movement in PBT from GBP 261 million in 2019 to GBP 185 million in 2020. Starting with gross profit that fell by GBP 56 million, which is summarized in the chart on the right-hand side. If we bridge from 2019's gross profit, GBP 986 million, there was a GBP 16 million impact from pricing. Secondly, a large fall in sales volumes compared to 2019 reduced revenue by GBP 20 million. There was a negative impact from mix of GBP 9 million, a result of higher sales of lower-margin products. This reflect changes in customer demand in the current environment, such as an increase in sales of appliances. These products are at good margins, but below the high average margin of the group. Also, affecting cost of goods sold, we saw higher input costs. This resulted in a net decrease to gross profit of GBP 5 million. And as mentioned earlier, we're also impacted by carrying fixed costs at lower levels of production of around GBP 6 million as a result of COVID. Exchange rate movements for the year had a minimal impact on margin. Together, this gave a net fall in gross profit of GBP 56 million to GBP 930 million and a gross profit of 60.1%. If I now turn to the other factors that contributed to the movement in PBT, reverting back to the chart on the left. Operating costs increased by GBP 8 million, which I will address in the next slide. Net interest and other finance charges were GBP 11 million higher than in 2019, reflecting the impact of adoption, IFRS 16. The net result was a profit before tax of GBP 185 million. I will now explain in more detail the main movements in operating costs. Operating costs increased from GBP 726 million in 2019. Firstly, the incremental costs of the 38 depots that we opened in the U.K. in 2019 and the 16 depots opened in 2020 totaled GBP 10 million. Costs in older U.K. depots decreased by GBP 7 million, mainly reflecting reduced levels of activity and therefore, variable costs particularly in quarter 2. Cost increases incurred for future growth totaled GBP 9 million. This included the cost of the Raunds development, which we previously announced, and digital developments. The impact of French depots totaled GBP 4 million. Other operating costs increased by GBP 6 million, and closure of our Dutch and German depots in 2019 benefited the full year result by GBP 6 million. Finally, costs reduced by a further GBP 8 million as a consequence of adopting IFRS 16. This meant that operating costs overall rose by GBP 8 million to GBP 734 million. I will now briefly turn to the remainder of the income statement. If we look at the second column of numbers on the table, the impact on 2020 of adopting IFRS 16 was an increase in operating profit of GBP 8 million. This was more than offset by an increase in related interest charges of GBP 10 million. As a result, as we've seen, our profit before tax was at GBP 185 million. This led to a tax charge of GBP 38 million with an effective tax rate of 20.3%. This gave a profit after tax of GBP 148 million. This resulted in earnings per share in 2020, 24.9p, which compares with 35p in 2019. Turning to dividends. As you know, the dividend and share buyback programs were suspended in 2020. In November, we indicated that the Board would consider recommencing payments of dividends, subject to the company's trading performance and financial position, continuing to meet the Board's expectations. This will be subject to there being no further significant disruption due to COVID or otherwise. The Board has recommended that we pay a final dividend of 9.1p per share for 2020. This is in line with the group's established dividend policy between 2.5 and 3x dividend cover at 2.7x. It will be paid in June 2021, if approved by shareholders at a cost of approximately GBP 54 million. In addition, the Board has recommended a special dividend of a further 9.1p per share, which will also be paid in June 2021. This is equivalent to the 2019 final dividend that was canceled. In respect to 2021, an interim and final dividend will be declared in line with our policy. The 2021 interim dividend will be 1/3 of the 2020 full year dividend at 3p. The group has a strong balance sheet that has positioned us well in these challenging times and we face continued uncertainty. The Board regularly reviews this prudent capital structure against current trading and cash requirements to ensure it gets the appropriate balance between supporting the business and delivering appropriate shareholder returns. This will include reviewing the level of shareholder returns once we see more stability. 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 2020 with net cash of GBP 431 million. Although, as I explained earlier, the underlying cash balance was GBP 370 million. The major movements since the end of last year were net working capital decreased by GBP 70 million, which I will address shortly. Capital expenditure totaled GBP 70 million and was focused on growing our business and executing our strategy. It included spends on the final phase of our Raunds warehousing strategy, further delivering our digital capabilities and investments in new depots in both the U.K. and France. We also acquired solid surface worktop production facilities that strengthen our product portfolio, and Andrew will talk about these shortly. Corporation tax payments, with GBP 32 million. As I've already described, we spent GBP 10 million repurchasing shares in the first half. And there was GBP 22 million contribution to the pension scheme over and above the P&L charge. The net result of these and other movements was a cash inflow of GBP 163 million, meaning that we ended 2020 with net cash of GBP 431 million. Now looking at the main movements in working capital. Net working capital decreased by GBP 70 million. Within this, stock increased by GBP 23 million. This was largely impacted by increases in contingency stock to protect against potential supply chain disruption from COVID and Brexit. This approach has supported our business model well during COVID-19, with good stock availability, differentiating us from many of our competitors. Debtors decreased by GBP 2 million, including a lower debtor book with [ good aging ]. As I mentioned earlier, creditors increased by GBP 91 million, impacted by high levels of stock receipts later in the year. We've already seen this reversed in Q1 2021, and this should be taken into account when reviewing underlying levels of working capital. Let me now finish with some brief comments about current trading. The first 2 periods of the year saw total U.K. sales rise by 5.1%, up 4.5% on a same depot basis. Excluding week 1, which has included 2.5 trading days in 2020 but no trading in 2021, sales were up by 7.1% or 6.5% higher on a same depot basis. Clearly, there are currently various market uncertainties and a number of factors that need to be considered in forecasting this year's overall result. We are seeing continued uncertainty as consumers are feeling more cautious in letting trades people into their homes in light of the continued COVID pandemic and related restrictions. This is leading to variability in demand from our customers. We have implemented price increases, where we are currently seeing pressure on commodity pricing and freight costs. We are also continuing to take other measures to protect our employees and customers and to derisk our in-house supply chain. We will closely manage the drivers around margin and focus on getting the right balance between pricing and volume in what remains an unusual market. We're continuing to roll out new depots and revamp existing depots. This reflects some initial success from the reformatted depots we have completed so far despite a rather challenging trading environment. We're continuing to invest in the business around its core strategic priorities and anticipate investing in the order of GBP 80 million this year in capital. This is consistent with the amount that we were expecting in 2020 before COVID. In summary, Howdens has performed well through a challenging period and remains in a strong financial position although the business continues to face near-term uncertainty, which is well positioned to deliver a clear organic growth strategy. Thank you. I will now hand you back to Andrew.

Thank you, Paul. I will start by talking about our performance in 2020 and our plans in 2021, using the initiatives we had in place for 2020 as a framework. Firstly, depot evolution. We are opening depots using our updated format, designed to provide the best environment in which to do business with no material change to new depot fit-out costs. In 2020, as a consequence of market conditions, we opened fewer than planned. In the first half, we put our opening program on hold as we prioritize maximizing cash and finding ways depots could trade safely under COVID conditions. In the second half, we opened 16 new depots, mostly in the latter part of the year. We are now targeting around 35 U.K. depot openings in 2021, including some more in Northern Ireland. We also reformatted some more of our older depots, and we continue to learn how best to apply this opportunity to our existing estate. During 2020, we reformatted 30 depots having reduced the number of depots we are planning either to open or to rerack without further modifications. These were completed in line with our budgeted average cost of GBP 225,000 per depot. In 2021, we plan to reformat 40 depots. We are budgeting for an average reformat cost similar to the 2020 level, as we continue to refine the scope of the refurbishments. In 2020, we also reracked the warehouses of 17 existing depots without other modifications and plan to rerack a further 20 in 2021. At the end of 2020, we had 117 U.K. depots trading in the updated format, and we had reracked the warehouses of a further 79 depots without further modifications. By the end of 2021, we expect to have a total of around 192 U.K. depots trading in the updated format and have reracked a further 99 depots in total without further modifications at present. Next, range and supply management. New kitchen ranges introduced each year represent a significant portion of sales as product life cycles shorten and our customers want new product from us. Our 2020 new product featured 18 new kitchens, including 2 new styles, plus more color options for existing families. And we've began using our new handleless cabinet platform to meet demand for a linear look at more affordable prices. Our new kitchen ranges were launched and in stock earlier than in 2019, and launches were synchronized with Rooster promotional offers. Earlier introduction meant we were well positioned with product as we return to all depots trading and new product introduction kitchen sales were ahead of last year's. 2021 new product includes 16 new kitchen ranges. These include a more traditional style timber shaker range, Elmbridge. Initially available in 3 colors, it complements our contemporary shaker range and strengthens our GBP 4,000-plus offering. We are adding new colorways for our mid-priced families and to our modern style Hockley kitchens, which have performed well since launch. We are also adding colorways to our entry-level kitchen offers. We have developed a number of new added value decorative accessories to both our modern and shaker ranges that will enable customers to create a more personalized look. Our 2021 brochure, trade book and Period 1 and 2 promotional materials were all in depots pre-Christmas. All of our new kitchens for 2021 will be in stock by the end of the second quarter, well ahead of our autumn sales period and 4 weeks earlier than last year. Disciplined range management is crucial for both best availability, which is highly valued by our customers, and profitability. At the end of 2019, we had 67 current kitchen ranges, and we ended 2020 with 63, having cleared more ranges than we added during the year. We believe around 65 current ranges remains the right number for our market at present, and we will be managing range introductions and clearance to around this number in 2021. Howdens is an in-stock business and the trade tell us that a high level of stock availability is one of the key reasons they buy from us. Our traditional replenishment model is based on weekly delivery to depots, is cost-effective and is particularly suited to replenishment of fast-moving product and product with relatively predictable demand patterns. We are making an improvement to our stock replenishment by supplementing the depots' core weekly delivery order by introducing a next-day service by a regional cross-stocking center, or XDC. By rebalancing where we hold stock and changing the delivery pattern of some lines to depots, depots can, for example, allocate more warehouse space to faster selling lines and can reduce contingent stocks of more slow-moving ones. This makes it simpler and more efficient for depots to deliver superior service levels and improve product availability, including for abnormally sized purchases. And we are freeing up time and resources spent on stock management, for example, on inter-depot transfers product. We are developing this capability with third-party logistics partners. And in the main, we are utilizing their existing infrastructure. The service is available to 120 depots at present, and we expect to increase this to around 250 depots during the second quarter. Our dedicated manufacturing and supply chain is critical to the success of our in-stock offer. It supplies all products to our depots, which each have individual and changing day-to-day requirements. Operating under COVID conditions meant finding ways to reengineer how our factories operate and how we supply and distribute to depots. Having initially closed substantially all of our manufacturing and supply facilities with the onset of the spring lockdown, we designed, with employee consultation, a series of social distancing measures, work processes and practices, which enabled us to reopen safely in April and maintain stock availability as demand and the number of depots trading changed. Since then, we've continued to work with and develop appropriate COVID-compliant processes. We can manufacture all products whilst maintaining social distancing. And our efficiency, whilst below pre-COVID levels has progressively improved, and we were able to accommodate the significant rise in second half volumes. We took measures to protect our in-stock offer against supply chain disruption and to accommodate irregular patterns of demand by increasing levels of safety stock and using backup sources of supply. We did this first as part of our Brexit planning and again ahead of spring lockdown, and has enabled us to navigate local COVID outbreaks, which had the potential to disrupt inbound supply. Our ability to utilize our disaster recovery capacity helped us to maintain stock availability. We also took some temporary additional storage space, and we utilized immediately more of the warehouse capacity at Raunds than planned when this became available on schedule in September 2020. Our stock strategy has also benefited from significant engagement with our supply base. We have long-term relationships and agreements with many of our suppliers. And being a manufacturer ourselves has helped us anticipate potential COVID risks in our supplier factories. We also operate on [ ex works ] rather than delivered terms with the majority of our suppliers, which enabled us to work directly with our shipping partners to resolve logistical issues and to provide us with early warning of orders that might be running late. Stock availability is fundamental to our offer, and we've prioritized this in these uncertain times. In 2021, we are extending our policy to hold additional safety stock as a contingency against unexpected demand patterns and interruptions to supply. And we have broadened the range of SKUs that we protect in this way and increase the number of weeks cover we have on some lines. We keep under review what we believe it is best to make or buy, both in terms of cost and overall supply resilience and flexibility. In 2019, investment in manufacturing technology enabled us to make the doors for our new Hockley kitchen ranges. And we've committed to further investment, which will enable us to make frontals from more of our kitchen ranges at the same quality as we can source externally but at a lower cost and a reduced lead time to delivery. And we will retain the benefits of sourcing from external suppliers who will continue to provide around half our kitchen frontals. The new frontal facility will be located at our Howden site, and we expect it to come on stream in the second half of 2022. We are also commissioning a second architrave and skirting line as our first line is now fully utilized, and demand for these products has risen substantially in recent years. We expect the new line to be up and running during the first half of 2022. We identified the need to upgrade our solid surface worktop offer, which is a segment of the market in which we are underrepresented relative to the number of kitchens we sell. We have partnered with 3 fabrication companies to develop a template and fit capability and we took the opportunity to acquire the assets of a large U.K. fabricator of solid surface worktops. The assets were acquired at a competitive price with significant savings in the lead time to being able to manufacture versus building our own facility. We expect the factory, which is located near our Howden site, to be operational during '21. Turning to our digital platform. We use digital to reinforce our model of strong local relationships between depots and their customers. During 2020, the digital investments we have made were particularly instrumental in supporting our model at a time when relationships and ways of doing business were disrupted. 2020 saw 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 48% more organic search results a month and site visits increased by 53% year-on-year. Depot leads via the website increased by 88% and brochure requests by 39%. Across social media sites, our follower base at 213,000, was up 119%, with 8 million users a month being reached and those actively engaging up by 165%. With restricted movement in the U.K., howdens.com provided a key customer access point to the business and we extended the range of online services we provide. We rolled out online account facilities, which enable users to manage their accounts and to make payments at any time. By the year-end, 30% of our credit account holders have registered for the service, and the service has seen significant out-of-hours usage. Around 43% of users use the service to make a payment with 68% of the users viewing documents. Curated on our website, we launched a call and collect service, which provided a way, in combination with our in-depot measures, for customers to trade safely with us following the onset of the spring lockdown. A new personal kitchen design service is also made available online, as well as enabling people to plan kitchens without the need for a depot or home visit, the service helps put Howdens front of mind earlier than in the procurement process. We continue to add new capabilities and content to our platform to support the local relationships depots had with their trade customers. This week, Anytime Ordering became available for the first time through our trade platform. Representing a major upgrade of our call and collect service, it provides efficiencies for depots and customers alike. Developed with input from customers, features of the service include bespoke pricing for each customer, which enables the account holders to see their confidential prices, order products and quote for individual jobs out of hours and a scheduler for them to select the collection depot and pickup time of their choosing. The service is integrated with our lead management system, which assists depots in managing their local relationships in a digital way. The lead management system was introduced in mid-2020 and is now one of our most frequently used depot systems. Lastly, international. In 2019, we refocused international into a city-based approach based in France. We closed our depot operations in Germany in the Netherlands and appointed a French national to lead the business. We renewed the focus on trade customers and opened 5 depots, 4 around Paris and 1 in Lille. International's 2020 performance gives us the confidence to open up more depots. International delivered a step change in performance post lockdown with second half sales increasing significantly year-on-year. In France, lockdown occurred a little earlier than in the U.K., and we took a similar approach to reopening as in the U.K. with depots initially reopening in call-and-collect mode on a phased basis. During May, as lockdown ended, depots were able to trade in more normal ways with appropriate safety protocols in place. Whilst with the onset of lockdown, total H1 sales were down around 18%, they increased significantly year-on-year in the final 2 periods of the half. Sales in the second half increased by around 38% in euro terms and were up 13% for the year as a whole. And we believe customers are increasingly recognizing the advantages of our trade-only in-stock model, our service levels and our competitive pricing. We opened 4 depots in the second half of 2020, ending the year with a total of 30. On the basis of current performance of our depots in France, we are planning 11 depot openings for 2021, which is around the number of depots we can start with Howden trained teams. Finally, prospects for 2021. Our first priority remains the safety of our people and customers, and we have contingency plans to enable us to trade under a range of COVID conditions that we've seen to date. We've increased our prices, having lowered some during 2020, and aim to retain a profitable balance between margin and volume whilst aligning operating costs and working with suppliers to keep product and input costs controlled. We believe high stock availability was a major contributor to our performance in 2020, and we will continue to manage our stock levels actively to protect the availability, both manufactured and bought-in product. We will have all our 2021 kitchens on sale earlier than last year, with aligned promotions to keep Howdens front of mind. We will make improvements to service and availability by utilizing XDCs. We are making investments in our kitchen door, solid surface and skirting manufacturing capabilities. During 2020, with restricted movement in the U.K., we increased the range of services we offer online. And in 2021, we will continue to add capabilities to our digital platform with Anytime Ordering as a centerpiece. In 2021, we plan to open 35 depots in the U.K., 11 in France and refurbish around 40 existing depots to the updated format. I am very pleased with our achievements in 2020, in particular, how we both adapted to COVID trading conditions and progressed with our strategic plans, which make us well prepared for what we expect to be a challenging market in 2021. All of this is made possible by the character, skills and commitment of our people, and I thank them all for what they've done. Thank you for listening. We'll now take your questions.

[Operator Instructions] And we'll now take our first question. It comes from Aynsley Lammin of Canaccord.

Just wondered if you could comment a bit more on the kind of cost pressures you're seeing and expectations for gross margins. I mean would you expect to see a significant improvement in gross margin this year, maybe sort of 62% level? Any comments around that? Secondly, just your thoughts on the share buyback, special dividend is something that we should expect to see more of rather than share buyback. And then lastly, just obviously, the pound has strengthened against the dollar and more recently against the euro. Any kind of thoughts on the impact there on cost goods of sold in the sense that you might see?

Yes. Thanks, Aynsley. I guess 1 and 2 link in a way, as part of your question. We put through a price increase of around 4% at the start of the year. And at this point, given what's happened with kitchen demand and perhaps some kitchen demand being pushed out into later periods from what we've seen, we are retaining some margin, but it's not clear enough yet to us where we're at. Cost pressures that we're seeing from suppliers are significant. We were pricing way around about 2% to 3% at the start of the year, but I don't think that's the end of the story. For this year, we have seen significant pressure on softwood and joinery products around about 10% to 12%, steel through appliances. Raw materials, glues and resins, other current chipboard and so on, the 5% to 10%. So we would expect to see more price pressure coming through, and we will deal with that as we sort of see appropriate coming through the year. We look to move the margin forward, but we also look to keep the right balance between price and volume going through. So we ended out the year, last year, at 60%. We'd love to see an improvement on that. But we can comment to whether the figure you close is right or wrong, yes. I'll just hand to Mark for commenting it.

Yes. So in terms of a share buyback and dividends, then clearly, our strong balance sheet helped us well as we've gone through this uncertain time. And so we'll continue to sort of review our level of dividend payments as a result of that. If you look at our underlying cash position, it's nearer GBP 370 million. And we normally keep a sort of working capital balance of around GBP 100 million to manage the business. So with our dividend announcement, clearly, we have more headroom than we normally have. And we will continue to look at our sort of dividend strategy and the level of shareholder returns as we see more stability in the marketplace. So something we're very conscious of, and we'll continue to review. The other side of things, obviously, is the foreign exchange, and we've talked to the pressures we have from commodity side of things, and we're obviously looking at our pricing -- price increases to manage that. We do -- we'll have some benefit from a stronger pound, if that was to continue. Sort of just to give you sort of a few numbers, sort of full year benefit of a GBP 0.01 improvement on the euro is worth about GBP 1.3 million. And sort of GBP 0.01 on the dollar is worth about GBP 0.4 million. So you can see the sort of the level of benefit that we would get if we see the exchange rates stay where they currently are.

So our next question comes from Christen Hjorth of Numis.

Three questions for me, if that's okay. First of all, you ended the year with 748 U.K. depots, 35 to come in 2021. You've got that target of 850 out there, and then clearly, that still remains the target. But I was just wondering as you stand today, do you feel like there could potentially be some scope for upside to do that? The second one is just on the competitive landscape and what you're seeing, you touched on some stock availability issues around competitors. And just sort of any further update you have there would be great. And then just finally, as you stand today, conversations with trade people, what you're seeing in terms of order intake, whether you've seen an uptick as some of the sort of positive vaccine news has continued. Just any commentary around that would be great, I appreciate it.

Thanks, Christen. Yes, we -- I increased the number of depots that we sort of targeted from 800 after -- up to 850 when we introduced our new format that's included better ways of managing stock in the depots and reducing space. I still think 850, around about 850 is the right sort of number. And I think it will get increasingly difficult as we roll out -- in our rollout to find those depots as we get sort of towards the end of the -- sort of the rollout program. I think it is important to note, though, that our refit program, which is making progress, gives good reason to believe that we can continue to grow like-for-like sales. So yes, I think, about 850 is the right sort of number. In terms of a competitive landscape, I think in our immediate competitor trade set, I think we've played a very strong positioning on stock during the second half of last year when we were seeing that some of our competitors were switching off intakes from suppliers, we were doing quite the opposite and piling in. And when we made those decisions back in March, we had an eye firmly on coming back out strongly out of the lockdown and have a very strong Period 11, which takes time to build stock for and obviously having capability of manufacturing around here put us in a strong position. But yes, I don't know that an awful lot has changed within the immediate trade space next to us. And we carry on playing our own game, and that's what we keep focused on. We have continued to, your third question, Christen, on tradesmen, trades people, what they're sort of seeing. We've kept in touch of them a lot through the lockdown. We've even used Teams calls, to give you a sense of how close we get to some of our customers. They're happy to come on Teams calls with us and talk, and they're busy. Their mix of business has certainly changed, and we would note that from Periods 1 and 2. They're busy with joinery, they're busy flooring projects, that kind of stuff. And we probably noticed in Period 2 that there have been some instances of kitchens going out into Periods 3 and 4 where customers have just been a wee bit uncomfortable at this point, having the key parts of their home being pulled apart. So I'd say the trades are busy.

Our next question comes from Geoff Lowery of Redburn.

I'll broke with tradition and ask two questions. First, can you talk a bit about becoming more vertically integrated? You've clearly given us some sense. But making frontals, making hard surface tops feel like new departures. How vertically integrated do you think you're going to end up? And second, a question for Paul. I appreciate you've only been in the business a few months, but what do you think of the financial model at Howden? How comfortable are you with running with 60-plus gross margins, mid-teens EBIT margins? Is that the right shape for Howden as a business, do you think?

Thanks, Geoff. Look, I think we do a good job of reviewing on a consistent basis what's right to make versus buy. So I think we've got a particular view on trying to make everything or trying to buy everything that in a balance, we look at each individual case. There were 2 very obvious moves directly in front of us. The first was -- and it'd been in our thinking for some time, we make some of our basic frontals, some of our entry price frontals, but not quite a lot of the mid-range. So we're building some capability to do more of that. I think it's important that we've got a good mix between what we make and some of the fashion elements that we get coming out of Italy. There's a very big strength of manufacturing capability in Italy. We want to keep that very interested in Howdens, too. So it's sort of a rebalancing. We think that 50-50 is the right sort of balance between the 2. The skirting and architrave move was another obvious one. We put down some capability. It's been a very strong element for us. It's been running 24/7 right way through last year, and the volumes are so big. We just have to put more down. That's not a particularly big investment. But if we make about 1/3 of everything, we'll probably be moving it up to around about 40%. It's not -- I probably wouldn't want to comment any further beyond that. But I think there's a good mix between what we make, what we're buying, get the benefits of having supply close to us, the flexibility, which has really been shown to have been a huge benefit during COVID when the teams can switch on, particularly around when you get a strong peak in demand like in Period 11. The work surfacing thing was -- we've had a very strong laminate work surface business offer. We think the market is moving more towards solid surfacing, and we introduced our modular range. And it started off with us providing a modular range. We thought builders might want to fit. And I think a lot of our builders actually don't want to fit it. So we've got a fitting service that went for it, but it's limited in its scope. Doesn't -- you can't do some elements of the kitchen. So we, those, intended to extend out and work with third-party fabricators to do a solid surface kitchen as we move our kitchen ranges into slightly better areas, like the plus 4,000 category with the ranges that we've launched. And the initial work and the trials that we've been doing with the 3 fabricators has been going very well. The opportunity came up to buy the largest work -- solid work surface, a business that have gone bankrupt called [ Rotherham's ], and we've picked it up for very little money during COVID, a brand-new kit from Italy. The best kit that we would have wanted to buy ourselves. We bought the freehold for the land, and we bought brand-new buildings as well. But the team that have been in there, the family that have been running it couldn't get it operated and ended up running out. We bought the whole lot for GBP 7 million, which we felt was very good value, and we're getting it operating now. Handing over to Mark for the second question -- Paul, I'm so sorry.

Paul. Just on the financial modeling, my initial reactions. Clearly, Howdens has a very strong business model and a real clear focus on the customer. And I think the decentralized model works very effectively in that way and a really clear growth strategy. So when you sort of look at our sector-leading margins, I feel we're in a good shape to really continue to focus and deliver those. Clearly, in the near term, there are some challenges around modest price, et cetera but I do feel confident that, yes, we can continue to make good strong margins, particularly as Andrew's talked to with us with vertically integrated model and that focus on the customer. So I think it's a strong business, and we'll continue to obviously drive the business and balance that margin percentage versus the sort of the volume and the growth prospects of the business.

Our next question comes from Clyde Lewis of Peel Hunt.

Apologies, I think I've got three, if I may. One was looking back at, I suppose, at the second half of 2020, and obviously, 16% growth is a big number. How much of that do you think was catch-up from, obviously, the weak second quarter? And how much do you think was sort of, I suppose, underlying growth of the market on the back of all of the extra savings from a lot of homeowners? That's the first one. The second one was on I suppose, sort of what have you been trying to do with regards to the product design to try and improve or make it easier for installation. One of the capacity constraints for kitchen fitting is obviously labor and that obviously stops you from selling more units, and as you highlighted with the trade customers having good order levels. Have you been trying to sort of develop sort of areas and products that speed up the installation process? And the last one was on the number of active accounts, I suppose, that you've sort of seen over the last 6 to 12 months, in particular, how that's evolved? And whether the sort of the bad debt element has deteriorated in any way.

Yes. We were pleased with second half performance and so frustratingly, very poorly tracked market in terms of market share. But our sense from the amount of conversations we have with our depot managers, we were certainly winning a lot more than we would have lost in terms of kitchens in the second half of last year, and we've got tremendous momentum coming out. I'm sure there was some pent-up demand in all of that, I wouldn't really hazardly guess. We're also up against competitors being out of stock of appliances, not being able to get a hold on some chipboard, which would certainly have worked in our favor. So as we're thinking about sales in the second half of this year, we've got to bear that in mind. But I think in terms of the trade game, we would have clearly won. I think kitchens is slightly different in a lockdown scenario versus home improvement, DIY. You're not really prepared to put up a shelf and take a paint brush. And actually, coming in and unplugging the core part of your house is a very difficult thing to do. And I think a lot of people didn't want to do that. So for us to grow at that sort of level in a market, where that I don't think really went very much up last year, it was pretty good. Paul?

In terms of the access accounts side of things, we see a similar level to what we have through the share obviously due to the store, a very variable year. But we finished the year with about 465,000, which compares broadly over the last 2 years where we were 466,000 and 469,000. So we see a pretty similar level of active accounts. And as you're aware, we constantly monitor and make sure that they are active in terms of what we account for.

I didn't quite get the second question. Could you ask that again about product installations?

Yes. Andrew, I mean, obviously, sort of anybody who sort of follows the building industry is aware that there are a lot of sort of middle-aged to older aged sort of builders and kitchen installers. And speed of installation is a capacity constraint. So I'm wondering what are you sort of trying to do as overall business to design ways to make kitchen installation quicker and easier so the volumes can be installed.

Yes. Your question is a good one, and it goes right to the heart of what Howden does, particularly out of our manufacturing capability in Runcorn and to a degree in Howdens. So every cabinet in our range is prebuilt, and many of them come preinstalled with fitted accessories, which is an unbelievable time saver for the builder. The other thing that we focus on hugely with our builder customers is the accuracy and squareness of our cabinets that make speed and ease of fit a big deal. That's why a lot of builders in the U.K. want to buy a Howdens -- want to buy a Howdens cabinet. So I'd say that this -- the prebuilt nature of it all really speeds things up. We've been very thoughtful around appliances and appliance installations. And there are many, many features in our Lamona ranges that make them just much faster and more reliably fitted for general build. There's almost never a need to contact electrical installers, but normal plugs on them. So there's -- I wouldn't do the answer justice now, but we've been very thoughtful around ease of fit. We work very closely with builder customers to improve it all the time.

We'll now take our next question comes from Charlie Campbell of Liberum.