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

Good morning, everyone, and welcome to the Howden's results presentation for the first half of 2021. I'll begin by introducing our performance in the first half. Paul Hayes will then review our financial results for the period. I will then share my perspectives on the first half performance and our plans, and then we'll take questions. Howden's has delivered a strong performance in the first half with sales and profit before tax at record levels for the period. As reported in our update to the market on the 13th of July, U.K. sales in the first half increased significantly in 2019 and substantially versus 2020, when trading was materially impacted by the onset of the spring lockdown at the start of the second quarter. The increase in sales trended upwards across the first half of 2021, with sales of everyday and promotional items being particularly strong. Our profitability improved with group profits before tax versus 2019, increasing at a higher rate than revenues. And we've continued to make good progress on our strategic plans for the business. I believe our performance is in no small measure due to our commitment to being worthwhile for all concerned. This is fundamental to the way we do business and is foundational to our ESG program, details of which are set out in the RNS announcement. The results demonstrate the strength of our local trade-only model and reflects the measures we took in 2020 to enable our people in all areas of the business to work safely under COVID conditions, together with those put in place to support our customers, who, in turn, on average spent more with us in 2021 with the average value of the kitchen sale increasing. With people by necessity spending more at home, more time at home, and end-user concerns about further lockdowns, people have been choosing to spend more on their homes; in some cases, potentially spending earlier than they would otherwise have done. We have seen continued signs of pent-up demand with increased awareness of Howdens primarily online, directing business to the trades. We've been advantaged in that some of our competitors in the retail side traded in their showroom shut until mid-March. And we have also continued to receive reports of extended delivery times amongst our competitors. And with builders very busy, our in-stock model has served us exceptionally well. Having noted this, I believe our customers have an even greater level of trust in our own capabilities to have the right product available as and when they need it. The feedback we get from our regular online builder forums also cite many examples of how we are there for our customers, not only on stock, but also on service generally, which helps them run their businesses. We also raised prices, which helped us defray the significant rises in input costs, which we have seen over the last 6 months. And Paul will be talking about the evolution of our gross margin in his review of our financial performance. Overall, we believe we are well positioned in the current market and for the future of our trade-only in-stock local model, and we have initiatives in place to strengthen further our market position. I will update you on our initiatives after Paul has taken you through our financial results. Paul?

Thank you, Andrew, and good morning, everyone. I'm pleased to be announcing Howden's 2021 half year financial results. We've had a strong start to the year when compared to the first half of 2020, it was materially impacted by the pandemic. but also against the first half of a pre-COVID 2019. Overall, group sales increased by 69% versus 2020 and were up 20% versus 2019. Gross profit rose by GBP 205 million to GBP 481 million. The percentage gross margin of 61.3% was encouraging and up from 59.4% in 2020. We believe that we are getting the balance right between volume and pricing with a higher sales mix of lower-margin everyday items and promotional activity to support our customers and target increases in market share. As anticipated, we have experienced increases in commodity costs as well as higher freight and we have recovered through price increases. Operating costs of GBP 357 million in the period were up 25% on 2020 and 9% on 2019. This included strategic investments to drive growth, that I will describe a little later. As a result, Howden has made an operating profit of GBP 124 million in the first half, which compares to a GBP 10 million loss in 2020 and a GBP 78 million profit in 2019. Net interest charges were broadly in line with the first half of last year, so that there was a profit before tax of GBP 119 million. This led to a tax charge of GBP 22 million, with an effective tax rate of 18.5% and a profit after tax of GBP 97 million. If we now look at the P&L account in more detail, I'll first turn to sales growth. Howden's U.K. turnover was GBP 764 million, an increase by 69% on a total basis and was up by 67% on a same depot basis. Compared to the first half of 2019, U.K. sales increased by 20% and by 15% on a same depot basis. The U.K. results reflect both underlying growth across our depots and the benefit of additional growth from new and revamped depots. In the international depots, a good execution of the houses model has resulted in turnover of EUR 24 million, which was a 77% increase in 2020 or 74% on a same depot basis. Compared to the first half of 2019, the international depot revenue increased by 45% or 24% on a same depot basis. Given the significant impact of COVID on our 2020 performance, we thought it would be helpful to take you through a review of the 2021 performance in comparison to 2019 rather than 2020. We've also included a bridge to 2020 in the appendix. PBT has increased by GBP 41 million from GBP 78 million in 2019 to GBP 119 million in 2021. Overall, gross margin has increased by GBP 77 million with growth in sales volumes and changes in the mix. This increased margins by GBP 61 million compared to 2019. This additional volume includes an increase in the mix of our -- of lower-margin everyday products, such as doors and joinery. These products were at good margins but below the average of the grid. And this, along with promotional activity, has supported a GBP 110 million increase in sales. We have achieved a GBP 22 million benefit from pricing over the last 2 years, which has more than offset the net increases of GBP 6 million of costs. This includes the net impact of higher input costs, including commodity and freight, partially offset by operational initiatives to reduce costs. There was also a small impact from changes in exchange rates. Together, this gave a net increase in gross profit margin to 61.3%, which compares to a gross margin of 61.9% in 2019. Operating costs increased by GBP 30 million as summarized on the next slide. In the first half of 2019, operating costs were GBP 327 million and they've increased by GBP 30 million over the last 2 years to GBP 357 million. Bridging from this, the incremental cost of the 61 U.K. depots opened over this period totaled GBP 10 million. Costs in older U.K. depots increased by GBP 7 million over the 2-year period. We've invested GBP 12 million in driving sustainable profit growth in line with our strategic plan. This has included increased warehouse and logistics spend to continue to improve our high levels of service and our in-stock model. The spend is predominantly in respect of our investment in XDCs, that Andrew will update you on later. We've also continued to differentiate ourselves with further investments in digital. The impact of our international expansion totaled GBP 6 million, and other operating costs increased by GBP 4 million, including 2 years' worth of inflation. These costs were partially offset by the non-repeat benefit of the closure of our Dutch and German depots in 2019 and from the adoption of IFRS 16. Overall, we believe that we have a strong business that has continued to gain market share and deliver its clearly defined strategy despite the challenges of COVID. Earnings per share in 2021 of 16.4p, which compares with a loss per share of 1.8p in 2020 and earnings of 10.3p in 2019. As a result of this strong performance and our confidence in the outlook, the Board has decided to pay an interim dividend of 4.3p, which is a 10% increase on the 2019 half year dividend. This also equates to 1/3 of the 2019 full year dividend. The group is in a strong cash position, and therefore, the Board has also decided to restart the share buyback program. The intention is to buy back GBP 50 million of Howden's shares in the second half of the year. The Board will also be reviewing the level of shareholder returns and the capital allocation priorities for the group and will provide an update for the full year results. I'd like to now give you an update on our defined benefit pension scheme. The agreement reached with the trustees in June 2018 stated that deficit contributions would be suspended if the scheme reached a surplus on a technical provisions basis for 2 consecutive months. Payments would resumed if the funding position falls below 100% for the same period. Pension schemes recently moved to a surplus for 2 consecutive months. And therefore, since the half year, pension deficit payments to the scheme have been suspended. Due to the scale of the scheme, with GBP 1.5 billion of liabilities and assets, it is quite possible that the scheme reverts to a deficit position and contributions of GBP 2.5 million per month recommenced. Now let me turn to cash. From an opening net cash position of GBP 431 million at the end of 2020, we ended the half with net cash of GBP 476 million, a cash inflow of GBP 45 million. We invested GBP 28 million in working capital. The stock levels increased by GBP 29 million due to our proactive strategic decision to increase our safety stocks as part of our COVID planning and protects against potential supply chain disruption. This investment in stock has allowed us to continue to provide great customer service when there have been shortage of building products in the market. This is particularly important for us ahead of our all-important peak trading period. Due to the high levels of business activity, trade debtors were GBP 42 million higher than at the end of the year with aging in good shape. This was offset by higher creditors of GBP 43 million, reflecting our investments in inventory ahead of peak trading. Capital expenditure totaled GBP 24 million and was focused on executing our strategy. It included further spend on delivering our digital capabilities and investments in new depots in both the U.K. and France. Full year CapEx is forecast in the region of GBP 90 million as we continue to invest in manufacturing and depots. Corporation tax payments were GBP 40 million. Pension contributions over and above the P&L charging in the period was GBP 16 million. I should remind you at this point that in the second quarter 2020, in agreement with the trustees, pension deficit contributions were deferred and subsequently paid in the second half of the year. Finally, on cash flow. The final and special dividends announced for the 2020 full year results, and totaled GBP 108 million, were paid shortly after the period end. So underlying cash was GBP 368 million. Let me finish with some brief comments about current trading and the outlook for the remainder of 2021. Since the end of the first half, the pattern of trade has continued in the first 4-week period of the second half period 7, total U.K. sales rose by 31%, up 29.5% on a same depot basis. On a local currency basis, international depot sales rose by 52.3% and up 48.3% on a same depot basis. We are very pleased with our strong first half performance, but are aware of the economic uncertainties that we face in the second half of the year. We are mindful of a strong second half to 2020 as well as the potential effect of the non-continuation of pent-up demand that we have seen so far. We've also benefited from competitors not being able to trade and unable to source product. We anticipate seeing ongoing inflation cost pressures and the run rate of costs will be higher as we continue to invest in our cost base to support the business at more sustainable levels. There is also a certain amount of uncertainty around future pandemic restrictions, which may impact our operations in the second half of the year as well as changes in underlying consumer demand. In summary, Howden has achieved a strong first half performance, and we remain confident as we move towards our all-important peak trading period. Thank you. I'll now hand you back to Andrew.

Thank you, Paul. I will be talking about our first half performance and our plans for the second using our key strategic initiatives for the business as a framework. Based around our core building blocks of service and convenience, trade value and product leadership, these are evolving our depot model, improving range and supply management and developing our digital capabilities, together with the development of our international operations, by way of a city-based approach. First, depot evolution. We continue to extend our U.K. footprint. High service levels, including local proximity and immediate availability are very important to our customers. We are opening all depots in our updated format, which is designed to provide the best environment in which to do business and to make space utilization and productivity gains in a cost-effective way by using vertical racking in the warehouse section of the depot. In the first half of 2021, we've opened 7 new depots and plan to open around 28 in the second half, making a total of 35 for the year versus 16 we opened in 2020. As compared with our previous guidance of 850 depots, we now believe there is potential for at least 900 depots in the U.K., including 20 to 25 in Northern Ireland. We've continued with our revamped program for existing depots, concentrating on our older estate, where sales per depot are above average and where the largest incremental sales uplifts are expected. By the end of 2020, we have reformatted 41 depots and the program has received very positive feedback from depots and customers alike. The scale and scope of the revamps has been refined, with an average cost per depot of circa GBP 225,000 going forward. The revamps are planned to pay back costs in less than 4 years, and depot P&Ls are charged to reformat cost, which ensures depot teams are motivated to deliver incremental sales. Including relocations, we now plan to reformat a further 62 depots in total in 2021, including the 28 we revamped in the first half. At the end of 2020, we had 117 U.K. depots trading in the updated format. And by the end of 2021, we expect to have around [ 214 ] U.K. depots trading in the updated format and in total to have reracked the warehouses of a further 106, without further modifications. Next is range and supply management. As product life cycles shorten and our customers want new products from us, range renewal and development are important contributors to our competitive position. New product launched in 2021 features 17 new kitchen ranges, with 14 now in depots. These include a beated style timber shaker range Elmbridge, with accessories for use in pantries and larders to match. Initially available at 3 colorways, this more traditional style complements our contemporary timber shaker range and strengthens our 4,000-plus offering. Customers can opt for standard cabinets or our new in-frame solution and look often associated with High Street Independents. We have introduced a slate gray cabinet for use in our handleless kitchens, a popular choice for high-end German-branded kitchens. This new color is accounting for half our handleless kitchen sales. We have new colorways for our mid-price families and to our modern style in-house manufactured hot lead kitchens, which have performed very well since launch. For our entry-level kitchen offer, we are adding new colorways and have brought forward from 2022 the launch of a new value-based shaker family available in 3 colors. Our first 2021 brochure, trade book and Period 1 and 2 promotional materials were all in depots pre-Christmas. Totally NPI sales in the first half, we're ahead of those in 2019. All of our new kitchens originally slated for launch in 2021 are now in stock, well before our peak autumn sales period and 4 weeks earlier than in 2020, with 3 more launches added for the second half. And we've aligned our Rooster promotions in the second half to keep Howden front of the builders' minds. Disciplined range management is crucial for both best availability, which is highly valued by our customers and profitability. In recent years, we have reorganized our range architecture, removed range duplications across our ranges and improved the balance between new kitchen introductions and timely discontinuations. Entry-level kitchens have traditionally been our strongest performance, and we continue to support this market segment with new product. However, recent introductions of higher-priced kitchens have proved popular, and we are upscaling our offer to these market segments, where we believe we are underrepresented. Accordingly, we will be managing range introductions and clearances to around 75% in 2021 versus circa 65% in 2020. We have also introduced a more efficient way of testing new kitchen colors and finishes. Around 40 depots will have exclusive access to new colors and finishes of some of our most popular ranges for a limited period, following which we will choose which ones to roll out to all depots in 2022. This means we can bring more proven kitchen product styles to market more quickly. Howden is an in-stock business and the trade tell us at 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, is particularly suited to replenishment of faster-moving product and product with relatively predictable demand patterns. We are implementing an improvement to stock replenishment by supplementing the depot's core weekly delivery orders by introducing a next-day service via regional cross-docking center. By rebalancing where we hold stock and changing the delivery pattern of some lines to depots, depots can allocate more warehouse space to faster-selling lines and can reduce contingent stocks with more slower-moving ones. This makes it simpler and more efficient for depots to deliver superior level of service and improved product availability, including for abnormally sized purchases and we're freeing up time and resources spent on stock management, for example, on inter-depot transfer of product. We are developing this capability with third-party logistics partners and in the main are using their existing infrastructure. The service is available to around 250 depots at present, and we are expecting to increase this to around 400 by the year-end, with the number of XDCs rising from 4 to 6. We then plan to make the XDC service available to all depots during the course of 2022, subject to finding the right XDC locations to take the number of XDCs to 13 in total. 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. Stock availability is fundamental to our offer, and we continue to prioritize protecting this in these challenging times for supply chains. For 2021, we've extended our recent policy of holding additional safety stocks as a contingency against unexpected demand patterns and interruptions in supply. We have broadened the range of SKUs we protect in this way and increase the number of weeks cover we have in some lines. The grand [indiscernible] given and the Suez Canal in late March is illustrative of the importance of a resilient and flexible supply chain to a business such as ours. Whilst we have no stock on the vessel, our safety stock position enabled us to absorb the additional inbound delays cost, leaving our immediate stock availability unimpaired. However, this incident placed further pressure on ocean freight capacity as equipment and vessels were displaced, particularly impacting stock shipments of Chinese origin. To mitigate the risk of increased delays due to an increasing number of blank sailings, we have taken a leading position on a multimodal freight route out of China using rail and short sea crossings, which are deployed alongside our traditional ones. This route, whilst more costly, operates on a significantly reduced lead time to delivery relative to our traditional ocean one for Asian source product and helps us to ensure we have enough capacity to maintain future availability and accommodate our stock build for peak trading. Our ability to utilize our peak manufacturing capacity enables us to maintain stock availability, and we are using all of our warehouse capacity at Raunds earlier than originally planned. Our stock strategy also benefits 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 issues in our supplier factories. We also operate on ex works rather than delivered terms with the majority of our suppliers, which enables us to work directly with our shipping partners to resolve logistical issues and provides us with early warning of orders that might be running late. We keep under review what we believe is best to make or buy both in terms of cost and overall resilience and flexibility. In 2019, investment in manufacturing technology enabled us to make the doors of our new Hockley kitchen ranges. We have committed to further investment, which will enable us to make funds for more of our kitchen ranges. And the second quality is we can source externally, but at lower cost and at a reduced lead time to delivery. And we will retain the benefits of sourcing from external suppliers who will continue to provide around half of our kitchen frontals. The new frontal facility will be located at our heightened site, and we expect that it will come on stream in the second half of 2022. We are also commissioning a second architrave and skirting line as our first 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 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 in the second half of 2020, we took the opportunity to acquire the assets of a large U.K. fabricator of solid surface worktops, which we have branded as Howdens Work Surfaces. The assets were acquired at a competitive price with significant savings in lead time to being able to manufacture versus building our own facility. The factory, which is located near our Howden site is now operational and volumes are increasing. Turning to our digital platform. We use digital to reinforce our model of strong local relationships between depots and their customers by raising awareness, supporting the business model with new services, ways to trade and freeing up time for depot staff customers. During 2020, the digital investments we've made were particularly instrumental in supporting our model at a time when relationships and ways of doing business were disrupted. In 2021, we have 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 on howdens.com. Impressions were present in 51% more organic search results and month and site visits increased by 52% year-on-year. Depot leads via the website increased by 61% and brochure requests by 44%. Across social media sites, our follower base at 282,000 was up 89%, with 10.4 million users a month being reached, and those actively engaged up by 65%. We have added capabilities, which help end-users interact with Howdens online at each stage of their buying process. At the turn of the year, we launched Real Kitchens, which utilizes user-generated content to showcase Howdens kitchens in people's homes. It was total 9 million so far this year. And this content is being used by both consumers and our designers. We have recently added a kitchen visualizer, which features multiple layouts, styles and configurable options. Take-up of our online account facilities, which enable users to manage their accounts and make payments at any time continues to increase. Around 40% of our credit account holders have now registered for the service as compared with 30% at the year-end. The service is being used across the week, both in and out of hours. Account holders using the service to make payment increased by 57%, with the numbers viewing documents up by 62%. We continue to add new capabilities and content to our platform to support the local relationships depots have with their trade customers. During the first half, Anytime Ordering became available for the first time to our trade platform, representing a major upgrade on our Call and Collect service. It provides efficiencies for depots and customers alike. Developed with input from customers, features of this service include bespoke pricing for each customer, which enables account holders to see their confidential prices, order products and quote for individual jobs outside of hours and a schedule for them to select a collection depot and the pickup time of their choosing. With the service, we have seen average weekly log-ins on our trade platform increased by 166%, with 39% of users looking up at price. The service is integrated with our lead management system, which assists depots in managing their local customer relationships in a digital way. The lead management system was introduced mid-2020 and is now one of the most frequently used depot systems. For new customers, we introduced a new, more efficient online account opening process, which reduces the time and money spent on processing applications, whilst leaving the relationship with the Depo Manager. Since launch, around 15% of our new accounts have come from the applications made in this way. Lastly, international. In 2019, we refocused international onto a city-based approach based in France. International's performance over the last year gives us confidence to open up more depots. In the second half of 2020, sales increased significantly year-on-year, and the business has made further progress against our raised expectations this year. Sales in the first half of 2021 increased by 45% in euro terms on 2019, 77% on 2020 and were up 24% on the same depot basis in 2019. We believe customers are increasingly recognizing the advantages of our trade-only in-stock model, our service levels and our competitive pricing. We opened up 4 depots in the second half of 2020, ending the year with a total of 30. And this year, we're planning to open up 11 depots in France, and we're putting ourselves in a position to open more depots in France in 2022. We also plan to test demand for our trade-only offering in the Republic of Ireland. As in France, we will be using a city-based approach, which fits the population distribution of the Republic. Initially, we will have around 5 depots around Dublin, and we expect all of these to be opened by the end of the first quarter of 2022. The depot teams will be supported by our U.K. infrastructure and digital platform. In summary, for 2021, our first priority remains the safety of our people and customers, and we have contingency plans in place for the range of COVID conditions seen to date, the focus of the business on delivering our plans and preparations for peak autumn trading. We have increased prices 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 the first half, and we are continuing to manage our stock levels actively to protect availability both of manufactured and bought-in product. We have all our scheduled 2021 ranges on sale earlier than last year, with aligned Rooster promotions to keep Howden front of mind. And we continue to invest in key capabilities. We are making improvements to service and availability by utilizing XDCs. We are making investments in our kitchen doors, 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 are adding new capabilities to our digital platform with Anytime Ordering as the centerpiece. During 2021, we plan to open up around 35 depots in the U.K. and refurbish around 62 existing depots to the updated format. In France, we plan to open around 11 depots, and we are planning to open for business in the Republic of Ireland. In conclusion, we are pleased with how the business has performed so far this year. And with peak trading ahead of us, we believe we are well positioned in the current marketplace with our trade-only, in-stock and local model. Thank you for listening. We'll now take your questions.

[Operator Instructions] We will now take our first question from Charlie Campbell from Liberum.

Only a couple for me, if I could. Just on the cross docking initiative. I just sort of wondered, I mean it feels a bit like it's double handling there. So I wonder what the impact is on the gross margin or what the offsets are to maintain the gross margin? And also sort of why not use your own rather than a third-party provider? And then secondly, just in terms of ongoing conversations with builders that you have all the time, what's their sense in terms of the outlook for leads and their business going forward? Do they think that the sort of COVID rush has passed and people who wanted to change their lives around have done that? Or is there still sort of plenty more where that came from? I just wondered how the builders are seeing things on the ground in terms of orders and leads?

Charlie, thanks for your question. It's probably just worth going back and talking about why we're doing this cross-docking arrangements. We spent quite a lot of money on inter-depot transfers to make it right for customers because the range size versus depot space would mean our depos need to be a lot larger to cope with pulling together on average 100 SKUs for every customer on time in full. Since we put in the cross-docking centers and those depots that have had it, the on-time and full availability has dramatically increased, and we've noticed an improvement in discontinued product write-off and reduced labor costs in depots in terms of letting depot teams get on with what we want them to do, which is sell more product versus chasing product around. It is an initiative that is hugely appreciated by the depot teams. I think in the short term from a cost point of view, we optimized the costs by ensuring recover -- the delivery recovery of the vehicles from depots is there and stock between the 2, but we're comfortable with where we're at in terms of the cost versus the overall proposition of the business. It's worth remembering, too, that this is -- fundamentally underpins our Anytime Ordering offer, where the stock's not in a depot in the quantities of the customer wants when they order it for the previous day, we can make it turn up the following day. It's not double handling of stock, and that's why we've designed it as a cross-docking center. Stock comes from 3 locations. We do not double handle gear in the business. The current supply chain goes straight from factory where we manufacture the depots, and we're comfortable with how we've built it. In terms of how the builders are feeding -- feeling, I think they're busy. And when customers are citing that they've got hold of the builder at the minute, it's about making sure that the stock is there. Otherwise, you lose your slot with your builder. And I think one of the things that's really played into our hands so far this year has been -- we've had the stock. Builders do not get paid if the job is not completed. And that sort of circular of Howden works very, very well, and which is probably why we're not running any bad debts abnormally than we currently would. So from our builder conversations with our builder forums, they're certainly busy into the back end of this year. I can see them all taking a break at Christmas time and do what they do and taking holidays. So I would feel okay about this year, but I think service will start resuming a bit more back to normal as people spend sort of less time in terms of spending money outside the home. Your -- I didn't cover your question around third-party providers. The reason for that is on XDC. The reason why we use third-party providers is this service largely operates through the night and do not operate dead space during the day. So that's why we contracted that this reduces our CapEx investment as well.

We'll now move to our next question from Ami Galla from Citigroup.

Can you hear me?

Yes. Thank you. Go ahead.

Yes. So I have a couple of questions. One was really on the sort of -- have you seen any mix shift in terms of buying patterns of customers over the last 6 months that can indicate is there a shift more towards buying more premium kitchens in this market? The second was really, if you could give us some color in terms of what proportion of the kitchen sales have solid surfaces in place to understand the scale of that exposure? And the third one really is broadly around the sort of labor availability point. I mean as you flex your operations towards the sort of Period 11 trading and you do employ more temporary workforce, is there any tightness in the labor side that you anticipate, which could be a challenge for the business?

Yes. Thanks for your 3 questions. In terms of mix shift, my sense is we've taken share given how we played [ COVID ] both in the trade and in the retail sector. I think we have sold -- our average value of kitchens has certainly gone up. Our spend per customer has increased as well. And I think that's partly because of where we've gone on our ranging. We've introduced more premium woods. We've got better at the shaker top and the linear look top and we've put more investment in. So I think we've attracted some customers in there. My sense is we've taken a bit of share out of the independents, which would be a big chunk of the market that would be of interest for us. And solid surface is a part of that, but not entirely. And I think the way we've developed our range, we've moved it up. We've moved our average transaction value up but never forgetting our heartland, which is opening price, kitchen below GBP 2,000 that sort of walk-in business is very, very important to us. But we believe we can stretch both ends. Solid surface remains a small part of our mix. We are still working out how to work that business. We're pleased with the acquisition that we've made. We're operating well. There's good demand coming through initially, and we'll update as we go forward on solid surface. But if you take a Howdens cabinet, one of our solid wood doors and a solid surface, it really is an excellent kitchen and really challenging to the independent sector. Regarding your question on Period 11, it's live. The pandemic is not helping anyone. We have a number of people off both in the factories and depots of the numbers who have or in isolation have 70% of them are because of the app, 30% of them have the virus. It does make it complicated in the factory. Our mix of temporary versus full-time labor is more in favor of full time as we've gone into this peak. That's been a trend we've been playing into. And from my point of view, I'm just conscious of the incredible work the teams have done and making sure that fatigue doesn't hit both our teams. So we have a number of people off because of the pandemic at the minute. And -- but it's what we do, we will work through it, and we will hit. We're well ahead in our planning for Period 11.

And can I have 1 last follow-up. When I think about the sort of reformatting that you've done to your existing depots and the sort of the network of new format stores are increasing. While the sort of demand backdrop has been quite strong, is there any sense that you can give incrementally of the growth that we are tracking versus '19? What proportion of that potentially is really coming from the incremental sales from the new formats?

Yes. I think we're comfortable -- very comfortable with the reformats and how they're performing. We watch them very, very carefully. And we're seeing, particularly the ones that we sort of revamped earlier are clearly performing strongly. So we feel very comfortable that it's meeting our sort of strict financial metrics of paying back in less than 4 years, and we'll continue to do that. But I think it works well in terms of the format of the depot when a builder brings the consumer into that depot, and that is obviously supported by our digital strategy as we reach more out to the consumer and continue to increase the awareness of the Howdens brand. So yes, I'm very comfortable with how that's working, and that's why we're continuing to work more on that strategy.

[Operator Instructions] We'll now take our next question from Emily Biddulph from Crédit Suisse.

I've got 2, please. The first one is, just given the strong profit performance in the first half of the year, your GBP 300 million PBT guidance for the full year, it looks to imply that profits would be flat year-on-year -- or sorry, flat in H2 versus the second half of 2019. You obviously helpfully gave us that list of risks that you face into the second half and the sort of high level of uncertainty. But if we're prepared to sort of assume that you're able to trade relatively normally through the second half of the year, do you sort of see -- would you automatically see upside as opposed to your profit guidance? And what -- when you give us that list in terms of those risks? Like in terms of quantifying them, are there things that we could be missing in here like, do you think that at the moment, you're taking sort of significant share from competitors that are sort of unable to trade normally or have sort of supply chain issues? Or are there sort of positives that you're benefiting from at the moment that might not roll forward? And then secondly, just on Ireland, yes, essentially sort of why now, I guess. And you previously guided on France and said that you think that France looks like the U.K. did sort of 20 years ago. How should we think about the competitive situation in Ireland and sort of what's the market structure like?

Yes. Thanks, Emily. I'll just start off. Paul and I will come back to Irish questions. So I think the first half of this year has been a perfect storm in a way. We were very well set up from a stock point of view, new ranges, availability very high. And importantly, we were able to trade when all our competitors were shut between January and March, which is, of course, their peak trading time. Now for certain them having missed that peak trading time, they'll be coming back in the second half, and we'll be ready for them. But that is to be borne in mind when we go into the second half. I think there are some uncertainties in the second half as well, and Paul will build on that.

Yes. Absolutely. And I think you picked up the sort of the risk that we put in the statement. Clearly, to be direct with your question, if things were to go well, we could move through the 300. We have to put momentum in the business but we've talked through a number of the risks around availability of staff. And we're also very conscious and agree with the sort of the mathematics. But clearly, we're sort of -- we've got the main trading period ahead of us, but we feel we're on a comfortable run rate, particularly in the sort of perfect storm of the factors that are really helping us this year. I think as we then move into 2022, I think we're probably anticipating more sort of business as usual. So we would have seen ourselves work through this pent-up demand and we'll be back to more of our sort of trajectory as we've seen sort of over a number of years. So I think that would be my observation. And clearly, I think we sort of absorb the main factors that we're trying to double and understand as we anticipate where the profit will land for this year and specifically.

Southern Ireland, I think the timing is right now. We've studied the market carefully. We've learned a lot from expansion in France. But we've also learned quite a lot from how we've landed in Northern Ireland, very successfully, got around Belfast to move into other territories. We'll open more depots, we see 20 to 25 there. The market is obviously bigger in the [ site. ] It will be run by the U.K. team. We're very capable of doing that. We feel the timing is right in the first quarter of next year. And we think that we will play very well there with our stocked model locally traded. We think we've got a price differentiator to make over there. And I think our ranges will stand up very well in that local market. Ranges will largely be the same. There's some adaptation around door sizes and our everyday-type product. But we know already that we sell a little bit of product in the Southern Ireland through some of our [ Welsh ] depots. So we can see initially there's already some demand.

We'll now take our next question from Sam Cullen from Peel Hunt.

I've got 2 -- or 3 really, one just on gross margin -- on the gross margin. Can you just give some comments maybe about the mix in gross margins between the everyday products you flagged and kitchens and how that might evolve as you continue to increase the percentage of kind of everyday items you're selling? And then the second one is on digital. Clearly, you're seeing a good increase in the digital-lead generation. What's the number -- the absolute number of leads you're generating digitally versus by the builder or kind of the few walk-in that you get? And then secondly, do you have any numbers around the ordering habits of your digital account use, are they ordering significantly more than the cohort that aren't using digital? Are they paying better or more on time and have a fewer bad debts, et cetera?

Yes. Great. Thank you for your question. Paul, you go first...

Yes. Sam, if I can start with the gross margin question. What we've seen in the first half of the year is, as you picked up a higher mix of everyday items, I think that really -- what we're talking about there is things like doors, skirting, you've also seen sort of a higher mix of appliances, I think that's driven by sort of the good offer that we have in those areas. And I think we sort of gained market share. I would anticipate that we'll continue to want to build on that, but as you would appreciate, the percentage of those as a margin looks lower. It's still good margin -- good cash margin, but as is like a high material content. And these are products that you can very simply sort of look at where the competitive pricing is on them, then the percentage is actually lower. But I'm comfortable with that, and that's something that we will continue to evolve as we move forward.

Question regarding digital. Everything we do in digital is about supporting the Howdens model. We're not trying to cut across what we did here. And by and large, our builders are the ones that are selling our products on our behalf. So anything we do is about supporting them and bringing more leads to that. The quality of a lead brought by a builder into us is of very high quality. It's generally a conversation a dealer has with the customer. If dealer won the business, he brings it into us. So when we get a lead from the builder, the probability of us converting it is very, very high. The quality of a lead rolled in from an end consumer that we've found online is interactive with all the new content that we've done. The quality of lead will be about half of that in terms of conversion rates, but it's still very interesting to us. And we've been working on improving the quality of that lead, and this has improved dramatically over the period. So when we're in our regional boards, and I'm in front of 90 managers at the time, which I do every week, the conversation around number of leads and quality is growing dramatically in the business. So that's encouraging. In terms of sort of patterns, it's new to -- Anytime Ordering is new to us. It was a huge step change on from us. And we are seeing it's a live [ show ] of what's going on. We are seeing customers being able to quote for end consumers work outside of hours, weekends, that's a huge future they've been asking us for. They are building baskets, which are generally larger. It improves frequency. The services like managing their accounts is being used significantly outside of ours. And so we're modernizing the business in a very sensitive way to how we work. We work very closely with the depot managers to ensure that we're empowering the builders as it's core to our model. So I'm conscious -- I slightly avoided your question, but I think it is a bit commercially sensitive, but we're very encouraged by what's going on here from modernizing and digitizing Howdens.

And there are no further telephone questions. We'd like to hand back now for any questions from the web.

I do have 2 questions from the webcast. First question is from John Munge from Highclere International, and he has 3 questions. His first question is, are you able to provide information on how your market share has changed in the U.K. during the quarter? And if this is positive, what do you believe has been the primary driver behind market share change? And lastly, are you seeing any impact to your business as a result from staff isolating due to COVID?

Yes. I think probably I'll answer the first one -- the last one first. It has just been a constant -- just being on the front foot around managing staff in depots and moving people between depots to ensure we optimize service, facilitating some of our teams, either work from home with laptops, all our credit control teams have been working from home. So it has been a massive impact, isolation has been a massive impact and continues to be so long as the pandemic is around. Right now, as I mentioned on [indiscernible] is we've quite a number of people out from the factory and quite a number of people out across the divisions, but our teams are highly motivated to make sure they work even when they're in isolation. So we're just consciously watching that. Look, market share in this kitchen game is poorly audited. We believe that we have taken share if we look from what we hear from suppliers, what we read from other company data as they report, but probably more importantly, what our depot managers are saying to us, how they're winning work and not winning work. I think we have won share because we are doing the basics incredibly well. We're in stock. We're launching ranges on time. We're playing our game on the front foot and we'll continue to do that as we go into the second half. But also as price pressure is there for our customers, we're being very careful about managing our customers in an appropriate way. It's very uncomfortable for them. We're pushing price pressure on them, and they're trying to quote customers at the same time. So we are giving [ ample ] warning to our customers so they can quote in the right way for their customers. And I think as we've taken care of our account base, whether it's credit or whether it's a trade cash account, we've taken care of them rightfully through this pandemic, ensuring that they are in stock, fairly priced and taking care of them in all the services that we provide them.

For our last question of today, it's from [ Terrance Perdue ] from [indiscernible]. And it's a short question. They're wondering can you manufacture all products? Is this just in the U.K.? Or do you have other sites abroad?

We always are reviewing what makes sense to buy and make. We've definitely got a competency around wood-based product. We currently make 1/3. That will increase. We're taking a big volume of our kitchen doors that are manufactured in Italy back to the U.K., but we'll keep a nice balance between what's supplied from Italy and what's made in the U.K. I think having U.K. manufacturer is a significant strength for us around availability and price and gives us some distinct advantages around margin, as you know. But there's always a balance between the 2. I want the teams to be commercial. They can always have a pitch between whether they buy it from us, whether they go at site, we're always very disciplined around what we're paying for product. But no, we will not be manufacturing all goods because there's stuff that were outside our competency like appliances, which we would never touch.

Thank you. That concludes our Q&A session. I'll hand back to yourself, Andrew for some closing remarks.

Thank you very much. Really appreciate the questions that have come through today, and we will be doing our best in the second half. Thanks very much.

Thanks everyone.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.