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

Good morning, everyone, and welcome to the Howdens' 2022 interim results presentation. I will begin by introducing our first half performance. Paul Hayes will then review our financial results for the period. I will then share my perspective on our 2022 performance to date and our plans for the remainder of the year. And then we'll take your questions. Howdens has delivered a very strong first half performance with record sales and profits for the year, which for us comprised 24 weeks. Group sales rose around 16% on 2021 and 40% on 2019 being the year prior to the onset of the pandemic. Our profit before tax increased at a higher rate than revenues and our gross margin was ahead of last year as we mitigated significant input cost pressures with disciplined pricing. Our builders remain busy. We made good progress on our strategic plans, both for the U.K. business and our international operations whose performance continues to improve. You will see from our RNS announcement that we've moved our ESG agenda forward. In 2021, we achieved carbon-neutral manufacturing and 0 waste to landfill at our Howden and Runcorn manufacturing sites. And this year, waste avoiding landfill at our U.K. depots has reached 99.5%. We've committed to the science-based target initiative, signifying our intention to reduce significantly our emissions throughout the supply chain and to achieve net 0 by 2050. The business delivered strong cash flow, and we continue to maintain a robust balance sheet. This gives us flexibility both to invest in our growth plans for the business, and at the same time, provide shareholders with enhanced cash returns in the form of an increased interim dividend for this year, an accelerated execution of the GBP 250 million share buyback program announced in February, with around GBP 140 million completed in the period. The interim results demonstrate the strength of our local trade-only in-stock model, and we believe we gained market share in the period versus the same period last year. A strong product lineup, high stock availability and a very engaged team together with the ongoing investments in our customer-focused strategic initiatives, which include digital, have all contributed to our first half performance. We also increased prices, which helped us defray the significant rises in input costs, which we have seen over the year-to-date as well as protecting gross margin, the business delivered volumes ahead of record sales levels, record levels achieved in the same period last year. We believe our customers have an even greater level of trust in our own capability to have the right product available as and when they need it. The feedback we're getting from our regular builder forum conversations also cite many examples of how we're there for customers, not only on stock, but also on service generally, which helps them run their businesses. U.K. sales in the 7 -- in Period 7, being the first in the second half were in line with our expectations, and were around 8% up on 2021 and 44% up on 2019 with U.K. cumulative sales for the first 7 periods of the year, up around 14% on 2021. Prevailing macroeconomic circumstances may mean overall a more demanding second half trading conditions than those in the second half of last year when sales increased by 21% on 2020. We planned for this, and I believe that our service orientated, trade-only, in-stock, local model will deliver sustainable market share gains across changing market conditions. Our model is difficult to replicate and compete with, and we have initiatives in place to make it more so in markets where the longer-term opportunities for us are larger than previously thought and we are investing in the business on this basis. So I'll update you on our strategic initiatives, which are key to the longer-term development of the business after Paul has taken you through our financial results for the first half. Paul, thank you.

Thank you, Andrew, and good morning, everyone. I'm pleased to be presenting Howdens' financial results for the period to June 11, 2022. We delivered a strong financial performance in the first half, building on the record performance we achieved in 2021. Overall group sales increased by 16% as customers benefited from our trade-only in-stock business model. Sales were significantly above pre-COVID levels, and we believe that we have continued to take market share. We have managed inflationary pressures effectively and made further progress on executing our strategic initiatives. This has enabled us to retain a significant proportion of the increased sales we generated during the pandemic. Gross profit was GBP 84 million ahead at GBP 565 million. The percentage gross margin of 61.9% was strong and we have significantly recovered increases in commodity, freight and energy costs through price increases. Operating costs at GBP 416 million included increased variable costs to support the additional volume growth, inflationary cost increases and our ongoing strategic investments to drive growth. I'll give you some more color on this later. As a result, we generated an operating profit of GBP 149 million, which compares to GBP 124 million in 2021 and GBP 78 million in 2019. We were pleased with the increase in our operating margins to 16.3%. Net interest charges were broadly in line, so profit before tax was up GBP 26 million at GBP 145 million. We incurred a tax charge of GBP 31 million in the period, which is equivalent to an effective tax rate of 21.2%. After all these items, profit after tax was GBP 114 million. So looking at revenue in a bit more detail. Howdens' U.K. revenue increased by 16% to GBP 889 million on a total basis and was up 13.5% 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. As Andrew will cover in a minute, trading across our core entry-level ranges was good, and we continue to increase our sales of higher-priced kitchens. Our success in higher-priced kitchens reflects our great range of products, including solid work surfaces that we now offer from all of our depots. Solid work surfaces provide a good cash margin, but have a lower gross margin percentage than the group average. In the international depots, we generated revenue of EUR 28 million, which was a 30% increase on 2021 after adjusting for the closure of 5 French depots. Our focus here remains building out the Howdens model in major cities and we're making good progress with our strategy. Now moving on to profit before tax. Profit before tax increased by GBP 26 million to GBP 145 million in 2022. Gross margin increased by GBP 84 million, with growth in sales volumes and mix accounting for an extra GBP 34 million. This included the solid work surface business, which we anticipate will continue to grow strongly in the second half. We were very effective in implementing price increases early in 2022, ahead of ongoing product cost increases due to inflation. You can see on the slide that price and volume benefits of GBP 109 million have more than offset product cost increases of GBP 25 million. There was a good benefit to margin in the first half from these early price rises ahead of cost increases which contributed to a healthy gross profit margin percentage of 61.9%. We anticipate an element of catch-up costs coming through the P&L in the second half, which will be a headwind to gross margins. Cost increases have included higher commodity costs, freight and transportation and energy costs, and these were partially offset by operational initiatives. Operating costs increased by GBP 59 million as we continue to support the higher activity levels and our ongoing investment in our strategic initiatives. We have broken this out on the next slide. We have invested significantly in driving our strategic plan as well as supporting sales growth. Bridging from left to right, the incremental cost of the 10 new U.K. depots opened over this period and the 31 depots opened in the prior year, totaled GBP 7 million. Costs in older U.K. depots increased by GBP 27 million over the period to mainly support the additional volume. We have also invested significantly in additional staff, including kitchen sales designers, counter and warehouse staff. In addition, we brought forward the 2022 salary increases into the first half to support our employees, and we've seen some other inflationary costs in our depots. Warehouse and transportation costs were GBP 12 million higher as we continue to invest in our in-stock model. This includes our investment in warehousing to support high volumes and regional cross-stocking centers or XDCs. XDCs are delivering both productivity improvements in the depots and great product availability across our ranges. Given the rise in energy prices, we've also incurred higher transportation costs with increased fuel prices, and we took on more drivers to support higher sales volumes. We've also continued to make further investments in digital, helping customers with new, more flexible ways to trade with us. Commercial costs returned to pre-COVID levels as we increased our spend on brochures, trade books and advertising to support the demand increases. And we've invested in our international businesses with 7 new depots in France, and we opened our first depot in the Republic of Ireland. The GBP 7 million increase includes the cost of the 10 new depots opened in 2021. Now moving on to cash. From an opening cash position of GBP 515 million at the end of 2021, we ended the period with a cash of GBP 250 million, a net cash outflow of GBP 266 million. You can see from the slide that this was mainly due to shareholder returns from dividends and share buybacks of nearly GBP 230 million, which I'll talk about in a minute. Overall working capital increased by GBP 104 million to support high levels of business activity. Stock levels increased by GBP 112 million as we derisked our in-stock business model, particularly ahead of the peak trading period in the autumn. About 1/3 of the increase is inflation, and we've also increased investment in safety stock recognizing the difficult ongoing conditions in the Ukraine. Due to the high levels of sales, receivables were GBP 14 million higher than the previous year-end with aging in great shape. This was offset by higher creditors of GBP 23 million. Capital expenditure, totaled GBP 46 million and included investments in depot expansion and revamps, investing in our supply chain and manufacturing sites. This also includes expanding our digital capabilities in new depots in France. You can also see the cash outflow of GBP 25 million relating to the purchase of the Sheridan's Solid Work Surfaces business, which completed in February. This included GBP 10 million to acquire the site. There was a cash outflow of GBP 89 million for the 2021 final dividend, which was previously advised, was brought forward for payments in the first half for the first time. We also completed GBP 140 million of the GBP 250 million share buyback program, which we announced at the year-end, and the outflow of GBP 90 million relates to the payment of last year's final dividend in the period. Moving on to some other financial matters, which are worth highlighting. Earnings per share was 19.6p, which compares to 16.4p a year ago. As a result of the group's strong first half performance and our confidence in the outlook, the Board has proposed an interim dividend of 4.7p per share to be paid in November. Our dividend policy remains unchanged, although we are re-basing the split between the interim and final dividend to smooth the impact of the exceptional trading in the second half of last year. We will continue to operate within a dividend cover of between 2.5 and 3x. Moving on to pensions. At the half year, the Howdens pension scheme surplus on an IAS 19 basis was broadly unchanged at GBP 144 million. In July last year, the company suspended cash contributions into the scheme as it moved into a surplus position on a technical provisions basis. At the end of June, the scheme has remained in a small surplus on a technical basis. As previously advised though, there was a deficit -- if there was a deficit position for more than 2 consecutive months, cash contributions of GBP 2.5 million per month would resume until the scheme returns to a technical surplus. During the first half, we have brought forward our investment in some strategically important projects and have also seen some cost inflation. As a result, our CapEx guidance has increased by GBP 20 million to GBP 135 million -- GBP 130 million for 2022, including the investment of GBP 10 million in land that we advised with the full year results. Now turning to our performance over the last few years. This slide summarizes our performance over the last 5 years and shows the phasing of sales between the first and second half. You can see how we have grown strongly over the past 2 years as we have traded out of the COVID-19 pandemic. In the first half of 2020, our sales were 30% lower as we traded through the lockdown period and then rebounded strongly in the second half of 2020. Overall, we have grown sales from a peak of around GBP 1.5 billion pre-COVID to nearly GBP 2.1 billion last year. Sales in the first half of 2022 were 40% above pre-COVID levels and PBT was 86% ahead of 2019. The chart also shows the high levels of H2 phased trading in 2020 and 2021, which is unusual in our business. This illustrates the tough revenue comparatives going into the second half of 2022, particularly when compared to seasonal norms. We are likely to revert to normal H1/H2 trading patterns going forward. So in summary, we have made an encouraging start to 2022. We delivered strong financial results and are making good progress on our strategic initiatives. Our balance sheet is healthy and cash generation supports our continued investment in the business, and Howdens is in great shape. We remain confident in our business model for the future. Thank you, and I'll now hand you back to Andrew.

Thank you, Paul. As I mentioned in my opening remarks, we believe the opportunity for the Howdens model are greater than previously thought, and we're investing in the business commensurately. Definitions and estimates of the size of the U.K. kitchen market vary. However, based on proprietary research we commissioned recently, we think it's a reasonable estimate for the market as we think about it where the market is now sized at GBP 6.5 billion by value. This is a larger value than we had assumed previously and gives us plenty of room to increase our market share, which is higher by volume than sales at present, reflecting the weighting of our sales towards the entry-level kitchens. Similarly, for other product categories, including joinery and hardware, we now think the value of our addressable U.K. market is some GBP 4.5 billion with our share of such categories lower than our share of kitchens. This gives us a total addressable market of around GBP 11 billion in the U.K. versus the GBP 2 billion or so of sales we achieved last year prior to any underlying growth in market volumes. Turning to our first half performance and our plans for the second. I'll use our strategic initiatives for the business as a framework. Fully aligned with our customer-centric trade-only focus and our entrepreneurial culture and based around our core building blocks of service convenience, trade value and product leadership. These are four and they are, to evolve our depot model, improve range in supply management, develop our digital capabilities and expand our international operations. So first, depot evolution. High service levels, including local proximity and immediate availability are very important to our trade customers as we see -- as we continue to see profitable opportunities to open depots. We are using our updated format for all depot openings, which enable us to provide for our depot teams, our customers and theirs, the best depot 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 sections of the depots. We're also testing a smaller-sized format using our next-day XDC delivery service to supplement in depot stock holdings. The smaller version may, for example, enable us to open a demo in places lacking suitable properties to accommodate the standard one or to open an infill depot to provide a more local service in less density population areas. Overall, we believe there is scope now for 1,000 depots in the U.K., including 25 in Northern Ireland versus the 778 trading at the end of 2021. We now have plans to open up around 20 new depots in 2022, having opened up 10 in the first half. We have progressed our revamp 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. The program continues to receive very positive feedback from depot staff and customers alike. By the end of 2021, including relocation, we had reformatted a total of 103 depots, the scale and scope of the revamps has been refined with an average cost per depot of around GBP 275,000 going forward. The revamps are budgeted to payback in less than 4 years and depot P&Ls are charged a reformat cost, which ensures depot teams are motivated to deliver incremental sales. We've revamped 34 depots in the first half, and we now expect to reformat, including relocations, a total of 90 depots in 2022 and to reracked the warehouses of a further 39 without other modifications at present. The end of 2021, we had 210 U.K. depots trading in the updated format, and we expect to end 2022 with around 330, having also reracked the warehouses of a further 137 depots without other concurrent modifications. By the end of 2022, such depots in aggregate will represent around 58% of our U.K. estate. Next, range and supply management. Disciplined range management is crucial for both best availability, which is highly valued by our customers and for profitability. In recent years, we have reorganized our range architecture into fewer families, removing duplications and improving the balance between new kitchen introductions and tiny discontinuations. In 2021, we introduced a more efficient way of testing new kitchen colors and finishes, which we call find the gap. We'll be running this program several times this year to promote more agile, informed ranging decisions. Around 40 depots had exclusive access to new colors and finishes in some of our more popular ranges for a limited period, following which we were able to select which ones to roll out to all depots. Several of the colors and finishes that we tested in this way, featuring our new kitchen lineup for 2022, we've been able to bring these more proven new kitchen styles to the market more quickly. In 2022, we'll be managing range introductions and clearances so that the concurrent -- so the current U.K. range count available to all depots is around 80, a similar number to the 2021 year-end total organized around 9 families versus 10 in 2021, and this was 11 in 2019. Range renewal and development are important contributors to our competitive position, and we are committed to providing market-leading product for our customers to sell to theirs. New product launch so far in 2022 included 19 new kitchen ranges with more emphasis on higher-priced kitchens and ensuring our more popular styles are accessible to all budgets. We have innovations in other categories, for example, joinery, which also attract footfall and can lead to incremental kitchen sales. Entry-level kitchens have traditionally been our strongest performers, and we continue to support this market segment with the introduction of new product in 2022. We have new ranges in both modern and Shaker styles including the introduction of our new entry-priced smooth Shaker Kitchen family called Witney, and it's available in 3 matte colors. Recent introductions of higher priced kitchens have proved very popular we are improving our offer to these market segments where we are underrepresented again this year. For the timber Shaker families introduced in 2021, we have added new colors, including Chilcomb both in reed green and the most popular color in our fine the gap tests and in charcoal together with Elmbridge in Sage Green. We have a new builder-friendly in-frame solution, a look often associated within high street independents for both modern and more traditionally styled kitchens. We're also refreshing our most successful families with new market-leading colors chosen from those tested in the find the Gap program for which we have made space by consolidating shade options within other colors. Solid surface worktops are frequently, but not exclusively, sold with higher-priced kitchen ranges. And earlier this year, we acquired Sheridan, a long-established and leading industry specialist for the manufacture, fabrication, laser templating and installation of premium work surfaces. The acquisition has helped us accelerate our plan to develop Howdens' work surfaces as a market-leading supply and fit business in a growing segment of the market in which we are underrepresented. This initiative supports our plans to increase sales in particular, of higher-priced kitchens for which we have an enhanced NPI program. Bringing more of our solid surface capability in-house, simplifies delivery of the service, gives us more control over it, and we are benefiting from the experience that Sheridan's team bring. Our manufacturing capability has increased by Sheridan and which will lower installation costs with associated margin benefits for these products. With the rollout of the Howdens work surfaces to all regions, the number of solid surface worktop orders significantly increased period-on-period in the first half. We continue to innovate in other categories with a significant number of product introductions in doors, including new gray laminate ranges to flooring, which includes new herringbone colors, and in appliances with further additions to our Lamona brand, which is a leading integrated appliance brand in the U.K. Sales of new product made a significant contribution to our first half performance. Total sales of new product introduced in the period and last year represented around 17% of U.K. product sales in the first half and was well up on last year. Sales of new product introduced in the first half of last year increased 200% in the period, and half on sales of 2022 new products were up some 48% on last year's new product sales for the same period. Higher priced kitchens combined with more of our kitchen mix by volume than in the same period last year. And the change in mix contributed to a significant percentage increase in average kitchen order value. Howdens is an in-stock business and the trade tell us that a high level of stock availability is one of the key reasons that they buy from us. We protect and facilitate high stock availability in several ways. This year, we have continued with our policy -- with our '21 policy of holding enhanced levels of safety stock as a contingency against unexpected demand patterns and interruptions to supply with heightened emphasis on manufactured -- stock manufactured in-house. We have long-term relationships and agreements with many of our suppliers, being the manufacture ourselves, this helps us anticipate potential issues in our supplier factories. We managed the inbound logistics for 75% of our bought-in SKUs from factory gate, which improves our visibility of how this stock is flowing through the supply chain, and we utilize multimodal freight routes to minimize disruption and optimize delivery times. We are improving stock replenishment by supplementing depot's core weekly delivery orders through a next-day service via a regional cross-stocking center, which we call XDCs and by rebalancing where we held stock. Feedback from the depots and customers using the service has been extremely positive. And we see XDCs as a key enabler to delivering the high levels of service and availability, which differentiate our offer. The improvements to stock replenishment enable depots to hold deeper stocks of faster-selling lines and make it simpler and more efficient for them to deliver superior levels of service and availability, backed by certainty over lead time. This also frees up time and resources spent on stock management, for example, on inter-depot transfer of stock, which we can be using more effectively with customers. We developed this capability with third-party logistic partners and in the main utilizing their existing infrastructure. By the end of period 6, the service was available to around 530 depots, up from 400 at the end and we plan to have the service available to at least 725 depots around 90% of all U.K. depots by the end of this year. We keep under review what we believe is best to make or buy, both in terms of cost or overall supply chain availability and resilience and flexibility. In 2019, investment in manufacturing technology enabled us to make the doors for our popular Hockley kitchen ranges. Since then, further investments that we're making in new lines will enable us to make frontals for more of our kitchen ranges at the same quality as we can source externally, but at a lower cost and at a reduced lead time to delivery. We expect the new lines located at our Howden site to commence manufacturing frontals by the end of 2022. In the second half, our second architrave and skirting line will also be operational, enabling us to service in-house more of a substantial increase in demand that we've seen for these products. The supply of kitchens to the trade is Howdens' principal activity. And we make all of the cabinets and some of the other products we sell, which is a source of competitive advantage for us in several ways. Given our plans and ambitions for the business, we intend over the next 3 years or so to expand our kitchen manufacturing capability -- capacity and capability and to reconfigure some of the supporting infrastructure. Firstly, we intend to increase the scale and scope of our manufacturing operations at Howdens and plan to reconfigure the site so that it is dedicated primarily to manufacturing. We have acquired 5 acres of land outright and committed to acquiring a further 20 acres subject to planning, which will enable us to extend our factories and put in new lines to increase our cabinet manufacturing capability and to give us the capability to make kitchen frontals in more styles. With this investment, we will have capability to make doors for the majority of our kitchen ranges whilst retaining the benefits of sourcing from external suppliers, who will continue to provide around half of our kitchen frontals by volume. We expect to start manufacturing some of our -- or some of the other door styles currently sourced externally in early 2025. Secondly, we're investing in a new purpose-built warehouse and distribution center for Howdens' manufactured product, located 5 miles from Howden in Capital Park. Once built, the picking and dispatch for Howdens' manufactured products will migrate over time from Howden site to Capital Park. This will enable -- this will help facilitate Howden site to become dedicated primarily to manufacturing, allowing the site to flow and operate more efficiently with room for further expansion if needed. As a purpose-built facility, Capital Park enables us to improve how we deploy space for bulk storage and would also reduce our third -- our usage of third-party warehousing, which is becoming increasingly scarce and expensive to source. With the contractual arrangements from Capital Park now in place, we expect subject to planning for the work to complete over the next 18 months or so. Now turning to our third strategic initiative, which is our digital platform. We use digital to reinforce our model of strong local relationships, greeting depots and their customers by raising brand awareness, by supporting the business model with new services and ways to trade with us and to deliver productivity benefits for depots and their customers. As we enhance the capabilities of our trade platform, usage of our online account facilities, which provide efficiencies and benefits for our customers' endeavors like has continued to increase. New registrations exceeded 40,000 in the first half and the service is being used across the week, both in hours and out of hours. On average, around 40% of all customers trading with us are also logging in to our trade platform. So far this year, we've seen average weekly log-ins to our trade platform increase by 88% with around 69% of users regularly looking at price, their price. Customers with online accounts have an average trade with us more frequently and spend more significantly than nonusers and proportionately more of them bought across each of our product categories. In 2022, we are adding to our capabilities, including new app-based functionality, which take our digital offering up to the next level. The trade app, which puts more of the local depot in the builders pocket was launched in February this year. The app replicates core features of the online trade platform, including the user's account details and credit status, making these readily accessible for them whilst they're out about and working. Users could view their open orders and new features will include rapid check-in at any depot, order status updates, and an easy order collection function. Around 20% of our digital account holders are already using the app. Capabilities we added in 2021 are helping end users interact with Howdens online at each stage of their buying decision, creating higher quality leads for our designers and our customers. Images viewed of real kitchens, which utilizes user-generated content to showcase Howdens Kitchens and People's homes, totaled 10 million in the first half. And this content is being used by both customers and by our designers. Our Kitchen visualizer, which features multiple layers, styles and configurable options, is raising end user familiarity with our kitchens and our appreciation of their priorities, leading to a higher quality of contact for -- with our kitchen designers. The market-leading search functionality, which we now have has enabled users to find the product, advice and instruction and kitchen ideas that they're looking for in a much more efficient way, which is a benefit to the teams, customers and end users alike. We continue to see high levels of engagement with our web platform and growth in our social media presence, which stimulates interest in viewing our products and services on howdens.com. Impressions were present in 19% more organic searches a month and site visits totaled 10 million. The time that users spent looking at pages increased by 84% with a number of pages viewed per session also up. Across social media sites, our follower base at 432,000 was up 24%, with 1.3 million users actively engaging with us monthly. And the fourth part of our strategy is international. Our Continental European operations based in France continue to make progress. The ex appliance kitchen market in France is estimated to be worth around GBP 4 billion, with more kitchens purchased through kitchen specialists and specialists and DIY stores. As long-term followers of Howdens will know, we tested our ability to access this sizable market in several ways before adopting a city-based approach, serving solely trade customers, led and staffed by people who embrace the Howdens way of doing business. The performance of the refocused business gave us confidence to open up more depots. And by the end of 2021, we had a total of 40 depots trading in France and Belgium. We believe the appreciation of the advantages of our trade-only in-stock model, our service levels and our competitive pricing is growing, and our account base has grown by 31% this year-to-date. In the first half of 2022, total sales in local currencies increased by around 19% with a gross margin a little above the U.K.'s as our offer in France, presently is a higher kitchen content than in the U.K. We are opening more depots this year. And by the end of 2022, we expect to have increased the number of depots trading to around 60, including 35 located in the Paris area. We have opened 7 depots so far this year and closed 5, which didn't fit with our strategy going forward. We've also opened for business in the Republic of Ireland. We are using a similar approach to that of France to fit the population distribution of the Republic of Ireland and with the depot teams supported by the U.K. infrastructure and digital platform. Our initial phase of openings will be clustered around Dublin and in our Sandyford depot, which opened in April and 4 will follow in the second half of this year. Our arrival in the Irish market is attracting much attention locally, and we are encouraged by depot sales to date. For 2022, we are well planned on our strategic initiatives, which are aimed at increasing our market share profitably. Higher stock availability was a major contributor to our performance in 2021. And for the remainder of 2022, we will continue to hold enhanced safety stock levels, including heightened emphasis on manufactured product at Howdens. 19 new kitchen ranges were on sale by the end of June, well ahead of our autumn peak trading period, and we have a program of Rooster promotions in place to help keep Howdens front of mind in the trades mind. Howdens work surfaces is now available to all regions backed by recent investment. We will continue to invest in key capabilities, including improvements to service and availability by utilizing our cross-docking distribution centers, and we are increasing the range of services and functionality that we offer online. We'll be manufacturing more in the U.K. as our investments in our new kitchen doors and skirting capabilities come on stream and our solid surface business grows. During 2022, we plan to open around 30 depots in the U.K. and refurbish around another 90 existing depots to the updated format. In France, we plan to have around 60 depots trading by the end of 2022 and to have opened around 5 in the Republic of Ireland. Lastly, outlook. The business has delivered a strong first half performance, and we are confident of our business model across changing market conditions. We aim to retain a profitable balance between margin and volume whilst allowing operating costs and working with suppliers to keep product and input cost controlled. To date, the price increases we put through, underpinned by our differentiated and service-orientated offer have landed well. Sales in each of our Periods 1 to 7 continue to advance versus the comparable ones last year, and our lead bank suggests builders remain busy at present. Whilst paying last year's heightened demand for our product, we are up against record comparators, including for our peak trading periods. We have, at present, the momentum for another successful year in 2022 and plans in place to deliver one. So thank you for listening. We will now take your questions. If you could just introduce your business and yourself before asking the questions. So Christian, would you like to start? And then we'll...

Christen Hjorth from Numis, I'll have 3 if that's okay. So first, just looking at the U.K. kitchen market. I'm just sort of trying to put in context maybe Howdens' does performance versus what the market has done since 2019. And if we strip out price, where do you think U.K. kitchen market volumes are now currently versus 2019? The second one is just based on your market size analysis and the new sort of target of 1,000 depots. What sort of share do you think that would get you up to? And is that a natural ceiling? Or is there potentially more to go for there? And the third one is just on France. And now -- I suppose by the end of the year, you'll have 60 depots. You'll have more people in terms of employees going through those depots and assistant depot managers. Is there scope to maybe accelerate the depot rollout in France as we move forward?

So let Paul do the U.K. Kitchen market share one. But I'll just -- I'll cover off the French one just to start, if that's okay. As you rightly say, we'll be up to 60 depots. And I've always made clear that one of the constraints could be the number of people we can get in to operate in the entrepreneurial way that we run our depots, we want the same in France as we do in the U.K. I think our experience is improving on that and the number of managers that we have brought in assistant managers then to go off to a depot close by. I think we're getting a higher success rate than I may have reported on a year ago. So that's good news. I don't think we would ever want to compromise on quality of location or team and of a scale of around 40 depots adding 25, that is some going already. Of course, the task gets easier going forward. Could I see the 25 going up to our U.K. run rate? We'll see how the team get on with that. But I would also just make the point that I'm really impressed with the quality of the French team we've now got in place. They're young. They're ambitious. They're working very closely as a team and they are driving the model as we would want them to in the French context. We were over there as a Board and the main board there last week doing our Board meeting. I don't think everybody is very encouraged with the progress that we're making there. So yes, we may tick it up a bit, but I think they've got a good amount of work on it at the minute. Yes.

And then on the question around the market and the opportunity. We've done a fair bit of work looking at the market. As you know, there's sort of various sources of information advantage we have, there is a lot of proprietary information looking at things. And we've reassessed that market, looking at specific areas around definitions of kitchens and whether we're picking up the most smallest kitchens, which we don't think were picked up before, kitchens that are used in nondomestic areas, of which, again, we're experienced in selling into there as well as, I think, the independents sector, which is very difficult to assess, we think has generally been -- is larger than we previously thought. So we've assessed the market at about GBP 6.5 billion market, which gives us a little over 20% market share. We believe there's a good growth prospects over the coming sort of 10 years or so looking at really gaining that market share from that lower level and taking that up. We've announced 1,000 depots that's based on looking at a lot of regions where we feel there's opportunities to infill. We can do that without cannibalization. We've got a great track record in terms of doing that. And in terms of sort of looking at the market share, again, we've looked at all sort of published information out there, and I'm sure you had a keen eye on and anything listed that's been announcing. And we've basically seen sort of our growth rates versus theirs, and that gives us comfort that we're continuing to gain market share and continue to have a really strong offer across the product range, particularly with all the new ranges coming through that Andrew talked about.

I think 1,000 depots sort of feels about right for where we're going now is a good ambition for the business, and that will include -- we're progressing very well in London currently. We've reformed the team. We're trying out smaller depots. We think we can go much further inside London, where travel times are horrendous, and convenience is the name of the game there. So you will see us playing a smaller format depots utilizing the cross-docking distribution center to support it. And I don't think that's already just stops in London. I think it's contingent to Manchester and other bigger cities across the U.K. So I think 1,000 is a good figure to mark us on for now. Next question, please? Thanks, Christen.

Aynsley Lammin from Investec. Just two for me, please. First of all, on price and then the gross margin, obviously, went early, good gross margin performance in the first half. If you could just talk a bit more or perhaps give a bit more color on the kind of trends you're seeing in the commodity prices for the second half? And do you need another price increase? Have you got any plans to implement one to kind of maintain gross margins, at least in line with the prior year? And then secondly, just on product availability, just kind of update us on are there any issues there and your competitors suffering and maybe your picking up share because of your kind of in-stock model? Or is that all eased a bit more now?

Yes. I'll go second first. I think we've done an excellent job actually on stock availability over -- since 2019, and it is a unique feature of the heightened service proposition. And we've invested further in it through what we're saying around manufacturing, XDC availability and the allocation of faster-selling lines into depots to make sure customers are getting the right experience first off. So I think a lot of the buffer was the great work that the supply chain team have done with making sure that we have enough buffer stock there to cope with variability in demand. We weren't perfect last year during period '21. We would be even better than that this year. Our service levels into depots are almost near perfect. There's probably one supplier in appliances has caused us a bit of trouble, but our -- Lamona is such an important part of our range. We've got alternatives for them. So stock availability in the second half isn't a concern, and we do see extended lead times amongst our competitor sets still remaining. It's quite hard when you get behind in your supply chain to get back up on top of it, but the Howdens model has invested well. They are making sure that we've got the right stock available in local depots through the investment we made in Raunds for bought-in product, and yes, we'll continue to keep our stock levels sensible as stock turns running still around -- still running well in sort of at 2019 levels. Yes, we went early on pricing, seeing it coming, and we set it with the depots, and we put pricing centrally into depots and then depots are, obviously, incentivized to run the right level of gross margin as they see fit for the local area. So although we wouldn't be that keen to put any price increases through at this point in the year, we've been well planned and anticipating all of this. So the depots can still adjust and play into as they see fit, depending on market conditions, one of the beauties of the model, depot managers control their own local pricing. Yes, we are still seeing costs coming through from suppliers and the long-term agreements that we've got in place help with that. So I think we are well set as we currently are looking at it for the year, but there may be some local -- adjustments locally.

Yes. And I think it's an area we focus on very much in terms of getting that balance right between the margin and the volume and focusing very much on the margin by product. So when we are looking at our product range to make sure we're competitive in those sorts of various markets and that we're making an appropriate level of margin. So when you look at it as a margin percentage, we will have a change in mix as the business continues to grow. We mentioned the solid work surface, for example, great cash margin, but a lower percentage. So we feel comfortable that we're going to continue to generate sector-leading margins.

Clyde Lewis at Peel Hunt, two, if I may. One, I think, Andrew, you referred to the lead banks still being pretty robust. It would be really helpful to get a bit more data around that. And I suppose sort of particularly around the sort of customers, the cheaper cushions, the more expensive ones, has there been a sort of shift there? Because I think we're all busy trying to work out if there's going to be a slowing, which part of the market? Is it happening already at the low end but not at the mid- to upper end? And the second question was really around, I suppose, the average kitchen value. Your estimate of, I suppose, how that's changed in the market and how you've changed your value as well, given in particular, the Sheridan's contribution and that sort of ability to pull in bigger kitchens into those order banks?

I'll give you as much color as I can on that. We operate -- we dominate really the sort of opening price, if you like, on 3 of our families. We keep a very, very careful eye because it drives so much cabinet volume through the factories. We've always been very strong in the mid as well with another 3 family ranges. And then a more recent feature of what we've done is have taken another 3 families in, and they're more at the top end. So they are high-end product manufactured in our factories, are bought in solid wood product. And margins are pretty consistent, actually, as you go right up and down and it is probably because the majority -- a lot of it is in the cabinet thing. Look, we sit with our teams. Andy Witts and I sit with our teams every week, and we're in front of 90 people, and we are getting a gauge of what they are saying about the customer base. And there's probably no better measure that we can get of that. And Andy and I've been out to a number of our regional boards asking the teams how they're feeling and how they're feeling about the second half. The heads are in a good place. They're motivated. I think they feel good about it. We wouldn't disclose what we said lead bank is at the minute, but there is good growth on the year. And I would say a feature of it is during the pandemic, the lead bank did grow quite considerably, but some of the quality wasn't as high. So we always look for the quality of what the trades are bringing us. I think a very big feature of no matter what comes across over the next 18 months is that builders will work hard to win the work in this kind of climate. And when they're up against it, they are entrepreneurs, and we see ourselves an entrepreneurial business supporting entrepreneurs. And I think a feature of this business during difficult periods is that our trade customers will do everything to count to win the business and the depot manager who's paid a percentage of his depot profit would also make sure they win the business. And the model is pretty spectacular actually when it's fighting against others. I wouldn't really point to anything around good, better and best in kitchens. We're, obviously, growing faster at the better end because the acquisition of Sheridan solid work surfacing and all those new ranges and colors that we're doing up there. But our volume end is still good. Do you want to say anything about average orders?

Yes. Sort of our average invoice value again has increased, as you would expect. It's probably increased by about 10% this year. If you take it back to 2019, it's increased more than that. So feel comfortable there in terms of the pricing and the mix as we talk about adding things like the solid work surface to orders and those sorts of things.

Charlie Campbell, Liberum. Two for me, please. You talked about doing more -- bringing more manufacturing in-house. Should we think of that as a margin opportunity over the next sort of 2, 3 years as that comes through? And secondly, sort of interested in your new work on the market and defining the market. Has that changed your view on the builders' share of the market? And could you remind us what that view is? How much -- what percentage of U.K. kitchens are builder installed by your sort of customers?

Yes, I mean we're doing the manufacturing in the U.K. for a number of good reasons. First is, we're extremely good at it. And we, of course, see margin opportunity in the business case and the investment and the CapEx that we're doing. We wouldn't be doing unless we saw a margin opportunity with it, but it also gives you better control, faster lead time to market. And you've got stock on the ground. And as we've seen such uncertain times over the last 3 years, in particular, having stock on the ground makes an enormous difference. And you'll know a feature of this business is going into period '21, we do 2.5x what we normally do in an individual period and having the flex in manufacturing, be able to do that and take the short quick decisions of turning raw materials into finished product, which we can do quickly, it is a great feature, and I think a strength of what we do. So I think you'll see, as our margin develops over the coming year, you'll see strengthening on that. You'll see some dilution from solid work surfaces, which bull-points to high cash, why wouldn't we take it. And yes, I think it's important that we keep our supply base in Italy and elsewhere highly engaged at this at the same time as doing some stuff. So we're finding a balance between the two and I think that's playing out quite well. You want to talk about market share?

Yes. I think when you look at the GBP 6.5 billion market, there's probably -- and if you sort of go through and look at the various retail players out there, they probably account for about 25% of that market if you look at the sort of the retail element of it. The rest of it, obviously, served by -- independents is another large group, which is probably in the order of about 35% of the market. So you sort of just gives you a feel of the sort of how that market breaks down. And obviously, all those are using builders to some degree in terms of fitting kitchens. And as people look at our offer, I think we compete very effectively in all of those niches.

Yes. Ami Galla from Citi. Just a few questions from me. The first one was really on capacity utilization in your existing operations. Can you give us some color of where it stands in cabinets and in the solid work surfaces? The second one was really on the timing of promotions. Has there been any changes in the timing in this year versus say the last 2 years? And the third one on the network size of 1,000 depots. How much of it in terms of your plans includes smaller formats?

Ami, as much color as we can on that. On the promotions one, without giving away too much competitive sensitive data, this has been a feature that we've brought in, in the last couple of years, which is creating the Period 11, which we had historically and spreading it over a 2-month period, which we call Period 21. And that we have done for a number of reasons. One is because the event was becoming quite big. We want to deliver absolute premium service all the way through it. And, to be frank, we wanted to put the teams under slightly less pressure by balancing it over two periods. Now that promotional period, if you want to call it that, is pretty unique to Howdens because I don't think anybody can really adequately compete against it in terms of getting kitchens out from stock locally into customers' homes. So that's a feature of it. I think the other thing I alluded to was a strong promotional program throughout the year which we call Rooster promotions that are everyday deals for builders that we use as a drumbeat of activity, and that's become quite a significant feature of Howdens throughout the years where we do 6 -- 5 or so Rooster promotions and the depots do their own local activity at the same time, but we're using the strength of our buying capability and landing it in the depots locally. You want to take the next one, capacity, yes.

Yes. On capacity, as Andrew touched on earlier, we manufacture all of our cabinets and a number of the joiner products. We're continuing to invest in capacity. I think we have sufficient to support our growth. What we've also done is invested in things like warehousing and XDC. So that allows us to utilize our capacity very effectively. It allows us to move product around. We actually are with the stock turn, that's sort of a similar level to previous years with the growth in the business. But what we do is we make sure we have -- we can move products quickly and it's particularly the more lower-margin products quickly to depots in terms of the demand for those. But -- so I feel we're well positioned, and we'll continue to invest as the business grows.

I think another feature of capacity is we are growing our French business with a peak trading period of Period 7 which we like to balance out against Period 21 the last thing I'd want is then putting more pressure on the U.K. business. And that seems to be working very well in France. And they've had a record Period 7 that they've just completed brilliantly. Your other question was around how many of the small formats? I don't know is the answer. But we are -- the shape and sort of structure of what you can get in the B8 trade counter, industrial space that we like to trade out of with others like plumbing businesses and so on. We can't often get what we want in terms of 10,000 square feet unit. And that's one of the many reasons why we built the XDC capability. So we can go into smaller spaces, stock up on fast sellers, be clever around how we display product. And we've been experimenting with spaces of half that size, and they've been doing incredibly well. So I think in London, it just gives us another bow to get into spaces that we couldn't have historically thought of. I don't think that reason. I think also in some of the infill catchments where we probably wouldn't want to put down a 10,000 square foot unit, but we can put something smaller and still service the infill catchments. So I don't know the overall balance between the two, but we keep it very careful eye on what we pay from a rent point of view, and we like to optimize every dapper that we put down.

Sam Cullen from Peel Hunt. Also, I've got, I think, it's really 2.5. But kind of an extension of Clyde's question around lead times. And just trying to get a sense of your comfort given the kind of the order book you're seeing and the level of inventory you're building into the final quarter of the year and relative kind of risks around being caught with too much stock should things materially worsen in Q4? Secondly, on price, if we were to see some of the cost inflation abates. How quickly do you guys need to adjust price? Or is it the fact that the kitchen market is so dark in terms of price that you have a period of supernova margin in that period? And then the last one is really on the growth of the market and your move into kind of higher price point kitchens? Is it impossible question to answer the first part of it, but in terms of the growth you've seen in the last 18 months, can you disaggregate your view of what the aggregation is between kind of organic growth in that segment versus lower to mid-market shopper who just has an extra GBP 5,000 in their back pocket because they've not gone on holiday for 2 years and so have spent a bit more? And then going forward, how do you access the upper end of the market or the mid-to upper end of the market who are perhaps not used to a builder led depot shopping experience and want to be shopping with a few more arms around the shoulder and cups of cappuccino?

Yes, good question. Thank you. Look, I'm pretty happy with our stock position at the minute. I mean we are in a very fortunate position in that whilst we talk a lot about range change and innovation and bringing new product to market, the brilliant part of the model is all built on the common [ Caracas ] platform. So whilst we stock up on stuff and it is not going to go date expired by the time we get to the back end of the year, the worst thing I can do is tie up too much cash, but I can turn it into cash at the start of next year. I think the worst thing we could do is not be available for our depot teams and not have full stock availability as we go through that critical trading period. So that's why we have protected it in such a way. But I think also we've changed the mix quite considerably of what we would consider A, B, C and D selling SKUs, As being the fastest. And we've, in depots, really reversed that quite considerably over the last 4 years where we're far more in stock of As and Bs sellers. So our investment in the overstock has been in fast-selling SKUs, not in the tail and the XDC supports the tail by keeping stock that is more risky to sell, but we're holding at one location, not in 780 locations. So that would probably answer the first question. Look, on the cost inflation point, we've got to be competitive there for kitchens and no matter what end of the market we're in and what we're primarily after is finding a good balance between price and volume. And if I think of cost debate, I'll wait for that when it comes. We are constantly adjusting stuff for the builders, particularly on everyday product. And then a lot of our kitchens are done on deals with customers. I think the third piece that you asked around the sort of top end of the market, not quite sure how to answer it. But I think what we're doing so well here is we're taking the power of this model, and we're building high-quality doors, work surfaces, good lighting, good flooring, and we can surprise what you can do in the top end of the market. And when people go out and get a quote for a $60,000, $70,000, $80,000 kitchen and then you come and compare it to what we're doing. There's plenty of money in it for us and the builder. I don't know how to answer your question about holidays versus [ you ], I could only give you a reflection on it, but what I would say is a common theme is that people are spending more time at home. They're spending more time around the kitchen table. The wall is coming down between the kitchen and the living space. We're using more home office. We're seeing Howdens' product appear in other parts of the home. And I think that all kind of plays -- I don't think that's a short-lived theme. I think that will just carry on. The more time we spend at home, the more time we're looking at our product and we're looking at the fashion of our kitchen doors and the more time we're spending on social media, we're seeing what's in fashion, what's not in fashion. That means we've got to have our ranges absolutely there for customers. So I don't know what's going to take place over the coming months, but we feel ready. That's it. I think we'll conclude it there, thanks very much for everybody turning up. It's good to see you all face to face.

Thank you all.