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

Good morning, and welcome to the Howdens 2023 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 2023 performance to date and our plans for the remainder of the year, and then we'll take your questions. The group performed well in the first half of 2023 against record prior comparators and in, as we anticipated, a more challenging marketplace. Sales and profits met our expectations for the period, and we are on track for 2023, and we are progressing with our investment program, which is focused on our key capabilities and giving us end-to-end a stronger business. Group sales rose by around 1.5% on 2022 and increased 42% on 2019 being the year prior to the onset of the pandemic, and we believe we gained market share in the period. Profit in the first half was lower than in 2022, when by historical standards, the first half contributed a significantly higher proportion of annual profit than usual, with first half profits increasing by 86% in 2019 versus a 40% increase in sales. First half profit this year increased by 43% on 2019 around the same rate of sales. We maintained an industry-leading gross margin with gross profit levels with last year's as we balance recovery of significant input cost rises with our commitment to provide competitive pricing across the board for our customers. Excluding investment in strategic initiatives, active containment of operating costs kept these levels to 2022 despite ongoing inflationary pressures. Our builders remain busy, and we made good progress on strategic plans, both for the U.K. and for our international operations whose sales continue to increase. The business delivered strong operating cash flow, and we maintained a robust balance sheet. This gives us the flexibility to continue 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 and a further GBP 50 million share buyback program, which followed on from the previous GBP 250 million program completed last year. You will see from the RNS announcement that we have moved our ESG agenda forward. Our focus remains on direct emissions reduction in our own manufacturing and working closely with suppliers to reduce emissions across our external supply chain, together with accelerating our product and packaging sustainability program, 2 significant milestones were reached in the period. We aim to achieve net 0 by 2050, having halved our direct emissions by 2030, and we've submitted our net 0 plan to SBTi for their approval 12 months ahead of schedule. We have also received carbon-neutral accreditation for the solid surface factory we acquired in Spaldington, and our factories at Howdens and Runcorns have also been recertified. The interim results demonstrate the strength of our local trade-only in-stock model, and we believe we increased our market share, consolidating the gains we made last year. A strong product lineup, high stock availability, industry-leading service levels and a very engaged team have all contributed to our performance, which benefits from the ongoing investments in our customer-focused strategic initiatives. In the period, average customer spend matched last years, and we had a record number of customer accounts as at the half year-end. We also increased some prices, which helped us defray most of the impact of significant rises in annualized input costs seen in the period and to sharpen our prices elsewhere, as well as maintaining an industry-leading gross margin, the business continued to deliver KPI volumes, which, in aggregate, were well ahead of pre-COVID times. And in the second half to date, overall sales trends have been similar to those in the first half. Given the prevailing macroeconomic circumstances, we're expecting a more challenging marketplace in 2023, and this has proved to be the case so far this year. However, we're prepared for this, and our customers, mainly self-employed people are adept at managing their businesses through such times. Delivered by our highly entrepreneurial and well-incentivized teams across the business, I believe that our service-orientated trade-only in-stock and local model is the right one to deliver sustainable market share gains across changing conditions. Our model is hard to replicate and difficult to compete with. And we have initiatives in place to make it more so in markets with significant longer-term growth opportunities for us. We continue to prioritize investments in the business on this basis. I will update you on our strategic initiatives, which are key to our long-term development of the business after Paul has taken you through our financial results in the first half. Paul?

Thank you, Andrew, and good morning, everyone. I'm pleased to be presenting Howdens financial results for the period ended 10th of June 2023. We've performed well in the first half against record comparatives in 2022. Overall, group sales increased by 1.5% as we supported our trade customers with a market-leading product range, excellent stock availability and outstanding customer service. We believe that we have made further market share gains in the period. Gross profit was similar to the prior year at GBP 565 million against a particularly high margin percentage in 2022. You may recall that the first half margin last year benefited from early price rises ahead of cost increases. Despite high levels of ongoing inflation, we have continued to recover increases in commodity, freight and energy costs through price increases and productivity improvements. Operating costs were GBP 448 million, with the increase entirely due to ongoing investments in our strategic initiatives to drive growth. We took action in the first half to fully offset inflationary cost increases in the order of GBP 23 million with productivity and efficiency gains. I will cover this in more detail later. As a result, we generated an operating profit of GBP 117 million, and our operating margins were 12.6%. After net interest charges, profit before tax was GBP 112 million, which was 43% ahead of 2019. We incurred a tax charge of GBP 27 million in the period. So after all these items, profit after tax was GBP 85 million. So looking at revenue in a bit more detail. We face much more challenging macroeconomic conditions in the first half. Over the past 12 months, household budgets have been under far more pressure, and we have continued to balance price and volume to support our trade customers. As a consequence, we have outperformed the market in the first half, which we believe is significantly down in volume terms. Our U.K. revenue increased by 0.6% to GBP 895 million and was similar to last year on a same depot basis. As you know, part of our strategy is to focus on leading the market with range innovation. We have accelerated new product introductions that Andrew will describe later, and these give our customers greater choice at every price point. Our in-stock model is the foundation of our business. And even with this range expansion, we continue to provide our customers with availability levels in excess of 99.7%. This has been possible from our investments in inventory and our cross-docking logistics network or XDCs. The international depots includes 60 depots based in France and 6 in Ireland. We generated revenue of EUR 36 million, which was a 31.8% increase on 2022. That's excluding the impact of 5 depots closed last year. Our focus remains on building out the successful Howdens model in major cities, and we are making good progress with our strategy. Now, moving on to profit before tax. Bridging from 2022 PBT of GBP 145 million on the left, you can see that PBT was GBP 33 million lower at GBP 112 million in 2023. Gross profit in pounds was similar to the record achieved last year. We were effective in implementing price increases early in 2023 that benefited the business by GBP 47 million. We have continued to invest in expanding our manufacturing capabilities with new kitchen lines and a second architrave and skirting line now fully operational at our Howden factory. We're also making good progress in upgrading and optimizing our solid work surface capabilities to support increased demand, which I'll talk about in a moment. In addition, we have delivered a number of productivity improvements in our manufacturing operations, which helped partially offset increases in commodities, wage inflation and energy costs. Overall, we have managed the business effectively on lower volumes in the first half, including the change in mix. This includes successful sales growth of our everyday walk-in joinery business and further growth of solid work surfaces. On solid work surfaces, since the acquisition of the market leader, Sheridan's last year, the business has grown strongly as we roll the service out across our depot network. We have added capacity, and we are making improvements to our service model to match the best independent players, but at scale. To remind you, solid surface products have a lower gross margin percentage but an attractive cash margin. Operating costs increased by GBP 32 million as a net result of managing our costs tightly while continuing to invest in our strategic initiatives. We have broken this out on the next slide. The rise in operating costs in the first half was entirely related to our investment in our strategic priorities. Overall, inflationary cost increases in the first half of around GBP 23 million were fully offset by productivity gains and efficiencies. Bridging from left to right, the incremental cost of the new U.K. depots, including 13 new depots opened in 2022, totaled GBP 6 million. We invested in our international businesses with a continued focus on a city-based strategy. We're developing our business in Paris and also now expanding the depot network into other major cities such as Lyon and Marseille. The GBP 8 million increase includes the costs of the 30 depots opened in France and 5 new depots opened in the Republic of Ireland in 2022. Other strategic investments include the full year impact of our investment in additional warehousing and our 12 regional XDCs that improved product availability across our ranges. Other actions include the rollout of work surfaces, I mentioned earlier and further investments in digital, helping customers with new, more flexible ways to trade with us. Now, moving on to cash flow. From an opening cash position of GBP 308 million, we ended the period with GBP 118 million of cash, a net cash outflow of GBP 190 million. You will see from the slide that this was after shareholder returns of GBP 138 million, including dividends of GBP 88 million and GBP 50 million of share buybacks, which we completed in the first half. Overall working capital increased by GBP 109 million. Stock increased by GBP 40 million due to the normal seasonal stock build ahead of our peak trading period and ongoing inflation. We continue to reduce the levels of safety stock, which were necessary during the pandemic, and we are carefully managing stock levels given the level of new product introductions. In the first half, we also launched a Daily Traders initiative, which will fully optimize availability of our faster-moving SKUs in our depots. Andrew will cover this later in his presentation. Debtors were GBP 6 million higher than at the previous year-end with ageing in good shape. Creditors were GBP 63 million higher. Capital expenditure totaled GBP 47 million as we continue to focus on the execution of our strategic initiatives. Just under half of the investment was in depot expansion and revamps. Other initiatives included investments in our supply chain and manufacturing sites and expanding our digital capabilities. Now, turning to earnings per share and dividends. EPS in 2023 was 15.4p, which compares with 19.6p. Our dividend policy is unchanged. The Board has declared an interim dividend of 4.8p, an increase of 2.1%. This will be paid on the 17th of November to shareholders on the register on the 13th of October. Now, moving on to our technical guidance for the rest of 2023. Firstly, as previously indicated, this year we have a 53rd week. This falls during the Christmas period when our depots are closed. So there are around GBP 17 million of additional costs, but no incremental sales. We expect our effective tax rate to be around 23% in 2023, which includes the benefit of the patent box claim. The ongoing P&L impact of the patent box is worth around a 3% reduction in the tax rate. And the success of the claim is subject to review and confirmation by HMRC, which we anticipate before the end of the year. In 2023, we will continue to offset higher inflationary costs with productivity and efficiency actions where possible. This will underpin our ongoing investments in our strategic initiatives. With respect to foreign exchange sensitivity within our cost of goods sold, we have set out the potential full year impact of a 1 cent movement in the euro and the U.S. dollar on the slide. In terms of cash items, we expect capital expenditure at GBP 130 million to be broadly in line with last year as we continue to implement the strategy. And on pensions, you'll be aware that we have a large final salary scheme, which is closed for future accrual. The scheme moved to a small but deficit on a technical provisions basis at the end of 2022, and the level of the deficit has reduced by GBP 27 million to GBP 15 million on an IAS 19 basis. We're in the process of completing the triennial valuation of the scheme and will agree a level of contributions going forward. In the first half, we contributed GBP 2.5 million a month or GBP 12.5 million in total into the scheme. So in summary, we have performed well in the first half of 2023 in a more challenging marketplace. Our balance sheet and cash flow remain very strong and supports our continued investment in the business. We have invested in our strategic initiatives in the first half, and we plan to continue this in the second half of the year. We've been proactive in delivering productivity and efficiency savings, fully offsetting inflationary cost increases. The business is in good shape. And since the start of the second half, overall revenue trends have been similar to the first half. And we are on track with our plans for the business and our expectations for 2023 are unchanged. Thank you. I will now hand you back to Andrew.

Thank you, Paul. In reviewing our first half performance and our plans for the second, I will use our strategic initiatives for the business as a framework, fully aligned with our trade customer focus and entrepreneurial culture and based around our core building blocks of service and convenience, trade value and product leadership. These are to evolve our depot model, improve range and supply management, develop our digital capabilities and services and expand our international operations. So first, Depot evolution. High service levels, including local proximity and immediate availability are very important to our customers, and we continue to see profitable opportunities to open depots. We are using our updated format in all depot openings. This enables us to provide the best depot environment in which to work and conduct business and to make space utilization and productivity gains in a cost-effective way by using vertical racking in the warehouse sections of the depot. Overall, we believe there's scope for around 1,000 depots in the U.K. versus the 800 trading at the end of 2022. We are well planned on depot openings, and we now expect to open around 33 new depots in 2023, having opened 8 so far this year, and our pipeline for 2024 is also progressing well. These will include some more in the smaller format size we tested in 2022, using our next-day XDC delivery service to supplement in depot stock holdings. This smaller version enables us to open a depot in places lacking suitable properties to accommodate the standard one or open and infilled depot to provide a more local service in less densely populated areas. We have progressed our revamped program for existing depots. This continues to receive very positive feedback from depot staff and customers alike, and providing such a trading and working environment is important to our competitive position. By the end of 2022, including relocations, we had revamped 185 depots. The revamps are budgeted 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. As we revamp more of our estate, we are modifying the scale and scope of the revamp depots with relatively lower catchment areas so as to maintain incremental returns. In the first half, including relocations, we revamped 28 of the 90 or so depots we are now planning to complete in 2023, 10 more than our previous guidance for the year. By the end of 2023, we expect to have revamped around 41% of the 671 depots, which opened in the old format and to have around 53% of all U.K. depots trading in the updated one. Next, range and supply management. Managing the number of kitchen ranges efficiently is crucial for both best availability, which is highly valued by our customers and for profitability. In recent years, we've reorganized our kitchen architecture, removing duplications and improving the balance between new kitchen introductions and timely discontinuations. We have also introduced a more efficient way of testing new kitchen colors and finishes, which we call find the gap, which has enabled us to bring more proven new kitchen styles to market more quickly. This year, we have around 90 current ranges in stock and available to U.K. depots organized into 10 families. In recent years, we've upgraded our new product program and sales of new product making a significant contribution to our performance. Total sales of new product introduced in the current and the prior year were at the same levels as in the first half last year, representing around 16% of total U.K. sales as compared with around 13% in '21 and 2020. Sales of new products introduced in the first half of '22 alone increased by some 95% in 2023. And as in 2022, higher-priced kitchens have continued to contribute more of our kitchen mix by volume than previously, which is a positive impact on our average kitchen invoice value. We are committed to providing market-leading and competitively priced product for our customers to sell to theirs. For 2023, we have 23 new kitchen ranges, and enhanced worktop offering and a reinvigorated lineup with other product categories. Value for money is a consistent feature of purchasers buying decisions and is likely to be never more so in 2023, given prevailing pressures on household budgets, and we believe we are well positioned to take advantage of this. For 2023, we've increased the net number of ranges aimed at the entry and the mid-market segments, making more kitchen looks and styles accessible to all budgets. Sales volumes of such kitchens are also a major contributor to keeping our unit costs of manufacture low. We continue to develop our higher-priced kitchen offering, which now includes a new paint to order service. This is a large segment of the market, representing 30% plus of total market sales where we are underrepresented. For our entry ranges, we have added more color options, including Greenwich in Reed Green, Whitney in Pebble and Navy and Allendale in Dust Blue, and we have new frontals for Greenwich and Whitney to match the Croft Grey cabinet that we've introduced this year. We've refreshed the look of our best-selling shaker family, which we have named Halesworth and added new mid-priced beaded shaker range, Bridgemere, initially available in 3 colors. In recent years, introductions of higher-priced kitchens have proved very popular. And in 2023, we've refreshed our offer to these segments but kept to a similar in-stock range counter last year and the same number of families. New colors for our 2023 include Hockley, both in Black and Fir Green and Chilcomb in Marine Blue. And we have easier to fit handleless ranges, a look often associated with the High Street independents. For the second half, we've introduced a new paint to order service for customers buying our Chilcomb and Elmbridge timber ranges, which represent the top end of our offering. Priced at a premium to the 9 range colors available from stock, we are initially offering 15 new paint to order color choices from which customers can opt to have for either all or just part of their kitchen furniture. For buyers looking for a more bespoke look, we believe the paint to order service is very competitively priced with by market standards a short lead time between the order being placed and the kitchen being ready for delivery. A strategic priority for us is the development of a market-leading supply and fit capability for premium work surfaces. Solid surface worktops are often but not exclusively associated with the sale of higher-priced kitchens. And this product category is a growing segment of the market with a significant opportunity for us. Following the acquisition of the Sheridan's worktop business and our other investments, our in-house solid surface manufacturing capability is amongst the largest in the U.K. The number of solid surface orders taken by depots has increased significantly in 2023, and we continue to improve our offer. In 2023, we added 6 more entry-level decors to our solid surface template and fit service. And with the integration of Sheridan largely complete, we are now reducing the time between template and fit to an industry-leading 5 days. For 2023, we have also reinvigorated our offering in other categories. For example, indoors with more color and bolder styles at all price points. To flooring, including the launch of our new in-house brand, Oake & Gray. In appliances, with the further additions to our Lamona brand, which is the leading integrated appliance brand in the U.K. alongside extensions to our range of third-party branded product, and in sinks and taps, with more styles, colors and finishes. We are committed to providing competitively priced product for our customers, and we have reinforced our focus on price and promotions, which demonstrate the value we offer and promote footfall across the year. Howdens is an in-stock business and the trade tell us that high level of stock availability is one of the key reasons they buy from us. At the end of 2022, in tandem with our new stock management system, TED, we trialed a new initiative, Daily Traders, which we have subsequently rolled out to all U.K. depots. Daily Traders is an initiative to improve customer service levels and increase sales by optimizing in-depot stockholding of best-selling SKUs and associated range completers. Sales of these are outperforming those of our non-daily trader SKUs, and we are seeing improvements to other key metrics, including a reduction in customer back orders and a higher proportion of stock being replenished via depot's core weekly delivery order. This gives us efficiencies as it reduces utilization of our XDC service, which I'll talk about next. In recent times, we've improved stock replenishment by supplementing the depot's core weekly delivery order with investments in a next-day service via regional cross-docking center or XDC, combined with the rebalance of where we hold stock. XDC is now a key enabler to delivering the levels of high service and availability, which differentiate our offer. The improvements to stock replenishment enable depots to hold deeper stocks of faster-selling lines, for example, Daily Traders and makes it simpler and more efficient for them to deliver superior service levels and availability backed by certainty over lead time to delivery for items not held at depot, time spent and cost incurred on depot stock management, for example, an inter-depot transfer of product or exiting discontinued stock can be reduced, and it helps to derisk depot ranging decisions, which, if incorrect, can be costly to unwind. We've developed this capability with third-party logistics partners and in the main are utilizing their existing infrastructure. The service is now operating across all mainland regions supplied by a network of 12 XDCs and our focus is now on using these assets most efficiently. The improved depot stock mix following the introduction of a new reordering system and the Daily Traders initiative have enabled us to reduce annualized XDC capacity, leading to lower operating costs. We make all the kitchen cabinets and some of our other kitchen products we sell, which is the source of competitive advantage for us in several ways. We keep under review what we believe is best to make or by balancing the overall supply chain availability, resilience and flexibility. In 2019, investment in manufacturing technology enabled us to make the doors of our popular Hockley kitchen ranges. Since then, we have invested in new lines at our Howden site, which are amongst the most advanced of their type in Europe. These give us the ability to make a variety of kitchen furniture, principally frontals and panels for more of our ranges at the same quality as we can source externally, but at a lower cost and at a reduced lead time to delivery. Production on the new lines is scaling up, and we expect them to manufacture around 750,000 pieces in 2023 with a full-scale capacity of around 2 million pieces in subsequent years. Separately, we've also invested in 2 lines to facilitate our paint to order initiative located in a purpose-built facility near our Howden site. The lines give us an industry-leading production capability in this area. Lastly, our second architrave and skirting line is also now operational, enabling us to service in-house more of the substantial increase in demand that we've seen for these products and for which we are extending our offering in 2023. Now, turning to our digital platform. We use digital to reinforce our model of strong local relationships between depots and their customers by raising brand awareness, to support the business model with new services and ways to trade with us and to deliver productivity benefits and more leads for our depot teams and our customers. In the first 6 periods of 2023, using our online account facilities, which provide efficiencies and benefits to customers and depots alike has continued to increase. New registrations totaled some 36,000 and around 45% of customers had an online account by the half year-end. Following a substantial increase in 2023, average weekly log ins to our trade platform increased by 7%, with around 70% of users regularly looking at their confidential prices. Customers with an online account have an average continue to trade with us more frequently and spend more significantly than non-users and proportionately more of them bought across our product categories. We continue to see high levels of engagement with our web platform and growth in our social media presence, which also stimulates interest in viewing our products and services on howdens.com. Impressions in the first half were present in 18% more organic search results a month and site visits totaled 9.5 million. Our share of fitted kitchen site visits for which we are the market leader, increased and the time spent viewing pages and the number of pages viewed per visit were at consistently high levels. Across social media sites, our follower base is at 480,000 and was up 11% with around 3.6 million monthly engagements. We have recently added a new trade YouTube channel for our account holders to share know-how and experiences. As our digital presence has grown, awareness of Howdens amongst end consumers has increased. In the period, our unprompted brand awareness amongst end consumers at 25% was more than twice what it was across 2019, and we see the potential to raise awareness to higher levels. In 2023, we are adding new services and capabilities to our platform, which collectively improved stock and account management, promote frequency and ease of trading and reduce time-consuming manual tasks in depots, including stock allocation. These include a new multi-list feature, which gives visibility of date saved for future projects, enabling depots to prioritize leads on a daily basis and customers to manage all their jobs and further trade up functionality to support credit management and payment. We have commenced the first phase of testing of a digitized in-depot stock management system to record and pick deliveries, check allocations and determine depot stock levels. We've also started using AI to support depot efficiency in several areas, including dealing with product queries. Capabilities we have added in recent times, including our kitchen visualizer and market-leading search functionality, help users interact with Howdens online at each stage of their buying decision. To facilitate more high-quality leads for depots, we've launched a new process for booking design appointments and increasing the visibility of the booking system on our website. We have also equipped our kitchen designers with an upgraded CAD tool, which features faster rendering, photorealistic imagery and is easier to use than the previous version. We have more digital content for end users, including kitchen trends and Howdens around the home. Features include insights from influencers and product spotlights and we have given such content more prominence on our website. And finally, international. Our operations based in France have continued to make progress in 2023. The kitchen market in France is estimated to be worth around EUR 4.3 billion, excluding appliances, with most kitchens purchased through kitchen 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 the confidence to open more depots. And by the end of 2022, we had doubled the depots trading in France and Belgium to 60 in the 2-year period, with around half of these located in the Paris area. We believe appreciation of the advantages of our trade-only in-stock model, our service levels and our competitive pricing is growing. And is around 90% of the product is common to our U.K. ranges. This helps us realize scale benefits. This year, we flexed peak trading, which in France is in the summer, over 8 weeks, adding period 6 to the traditional period 7 to the benefit of the sales in the first half. Having doubled the number of depots trading by the end of 2022, we now expect to open around 20 more depots over the next 18 months, including 5 or so in the second half of 2023. This would take the number trading to around 80 by the end of 2024 with some 35 located in the Paris area. In 2023, we are opening more depots in the Republic of Ireland. We commenced trading in the Republic of Ireland in 2022 using a similar depot location strategy to that in France with the depot teams they are supported by our U.K. infrastructure and our digital platform. During 2022, we opened 5 depots clustered around Dublin, and our arrival in the Irish market has attracted much attention locally, and we are encouraged by depot sales to date. We have opened 2 depots so far this year, including our first serving the Cork area and expect to have around 10 trading by the end of 2023. So for 2023, we are well planned on our interlocking strategic initiatives, which are aimed at increasing our market share profitably as we deliver value to customers across all price points. High stock availability is a major contributor to our performance. And in 2023, we will continue with our safety stock policies but at more normalized levels by volume. 23 new kitchen ranges are now in stock well ahead of peak autumn trading with more emphasis on entry and mid-price ranges, together with an enhanced very competitively priced premium kitchen offering. We have a program of Rooster promotions in place to keep Howdens at the front of the trades mind, together with other price initiatives. We will continue to make improvements to service and availability, including by utilizing XDCs efficiently and through our Daily Traders initiative. We are increasing the range of services and functionality we offer online to the benefit of our depot teams, customers and end users alike. We'll be making more in the U.K. as our new lines at Howdens move up to fuller scale manufacturing and our solid surface business grows. During 2023, we plan to open around 33 depots in the U.K. and refurbish around another 90 existing depots to the updated format. In France, we plan to have around 65 depots trading by the end of 2023 and have around 10 trading in the Republic of Ireland. Lastly, outlook. Howdens has performed well in the first half in, as anticipated, in a more challenging marketplace. Whilst we have peak trading ahead of us, we are confident of our business model across changing market conditions and our expectations for this year are unchanged. We aim to retain a profitable balance between margin and volume as we continue to maintain competitive pricing whilst aligning operating costs and working with suppliers to keep product and input cost controlled. We are mindful of the challenges current macroeconomic conditions, including ongoing inflationary cost pressures present. And we are trading against record prior year comparators in a market whose overall size as measured by kitchen volumes may well see a decline this year. Our customers, mainly self-employed people are adept at managing their businesses through such times. And in summary, we are well placed to outperform our competitors again in 2023 as we continue to invest in our key capabilities and growth opportunities, which are vital to the long-term development of the business. Thank you for listening. We'll now take your questions.

[Operator Instructions] We'll now take our first question from Christen Hjorth at Numis.

3 questions from me, if that's okay. The first one, just on the outlook statement, Andrew, that you just gave there. Just a bit more color on how you're feeling about H2 and P21, particularly given the high level of macro noise that is out there? The second one, you pointed to having taken market share in the first half. Just any sort of color on what you think the U.K. kitchen market did in H1? And then thirdly, just specifically on XDC, I think mostly that investment has now gone in. How should we think about increased sales or incremental sales from XDC [Technical Difficulty].

Sorry, Christen, you broke up there, but I've got your 3 questions. Look, there is work out there. Builders are busy. We've just completed an internal road show around every single manager in the business at the first half. Morale is really high in Howdens. We're on the front foot. We're well prepared for Period 21. Our managers understand what we're doing around investing in growth. You pointed towards XDC there. And they take those costs in their P&L, understanding the benefits that it brings to them. We talked about -- it's almost -- the market -- it's certainly higher than it was last year, and it's a bit like cycling uphill. And we talk about the gains that we're making versus our competitors, and there's much more distance between us and them. And I think our builders really appreciate working with a trusted brand like Howdens and see us and quote it regularly through our builder forums that we are far and by far, the best in the U.K. market around product offering, availability and on value. I think people need to remember how the strength of our business model as we go into Period 21. Being in-stock, being local, our competitors can't compete in getting kitchens available to customers in time for a fit pre-Christmas. So that's a sort of a strength that we've got versus our competitors. But our strong sense is the market is down somewhere between 10% and 15% in volume in the first half. It's not a well recorded market, but we take a strong sense from what our key suppliers are doing with us and others in the market, and we get a sense from our manager where we're at. That's our best guess around 10% to 15%. So we are definitely picking up significant market share versus our competitors. But I suppose as I look into the second half, and I think about Period 21, we are absolutely on form for it, the lead banks where it needs to be as we build into the second half. But our product offering and our offering in general is in an excellent place. We've made a position that I spoke about in the update around making available our top end look at mid-end prices. Customers may choose to do different things and go for mid-priced doors with and invest in solid surface work surface, which we'd see as a theme. Our non-kitchen business, our day-to-day business, flooring, joinery, architraves all strong with some good volumes coming through. So we feel the first half, we've put in another range. We're well positioned on price, having had adjusted a few. The team morale is an excellent place, and we're just really confident in the business model. XDC has been a significant investment for us, but it distinguishes this business from everybody else in the market by a considerable degree. And it gives us capability around introducing new product areas, maybe even new categories. It brings an on-time and full availability for our builders that enables them to get jobs done, get paid and the cycle continues as they pay us. It also, in time, will reduce the discontinued product in the business because we're not putting stock in that you've got less probability of clearing through. But we've done this availability and excellent service for our customers and also the range extensions that will bring in time.

We'll now take our next question from David O'Brien from Goodbody.

A few for me, please. I'm sorry, I broke up to the answer of -- one from Christen. So sorry if I'm getting you to repeat. But firstly, just on volume trends, I guess, because of pricing and the timing of the Easter and the comparative periods, the volume trends are a little lumpier than usual. But if we step away from that, can you give us a sense that, look, if we look at Period of 1 to 3 relative to 4 to 7, do you feel like the volume environment is still deteriorating? Or are we kind of more stable at a lower level? If you could just give us a sense around this? The market share gains are exceptional. And I think could you maybe give us a little more color, is this the new product lines? Is it the higher pricing point? Or where specifically you think you're taking share? Or is it simply across the board? And last one for me, just on pricing. Every consumer environment clearly difficult and pricing competition is manifesting itself everywhere. I was just wondering if you guys have had to adjust your pricing strategy at all, either reduced pricing model increase as you anticipated? Or have to up promotional activity or anything, can you give us a sense around the pricing dynamic?

Sure, David. On the -- on your first question around volumes, I think we will see a more leveling of volumes versus last year as we go into the second half, partly driven by how the product offering and the business momentum going to the second half and comparables last year. So I expect it will be better than the first half from that point of view. On product, our emphasis has been on midrange in kitchens. At the top end, we've introduced our pain to order, which really will be quite distinctive. But our emphasis and our big value has been on midrange shaker and upgrading that look. So customers can get a mid-priced look -- sort of top end look at mid-price cost. That we feel very strongly about. Our open value [ not to 2K ], buy-to-let, [ council ] housing, all that kind of stuff is very stable. I would say from a share point of view, yes, we're pleased with what we're doing. We're not at all -- we want more, we want more all the time, and we think that will come in the second half. We don't think the competitors are as organized as we are currently. On price, we're always adjusting. We put in for 10, we got sort of 5, that sort of felt back to normal levels of what would happen on the price increase. We protected the bottom end on value on mid. We adjusted on the top, we adjusted [ we bid ], but we do that all the time. And remember how it works in Howdens, our depot managers are the ones empowered to set prices locally for customers. So when I'm going through my regional Board meetings through the year, I'm always testing for confidence around price through our builder forms we're testing when we're at with customers. But I think the pricing implementation is -- we feel we're really well set up. And when I mentioned that I went around and did road shows, we saw every depot manager over the last 3 weeks, and we're in our process of regional Boards, price is not being raised. When it is, we deal with it, but it's not being raised. We think we're well placed. In fact, one of the managers summarized it beautifully. When we got to the road show, the final end of the road show, and they said, Andrew, we've done everything we need to do now business-wise, we've got this for the second half.

We'll now move on to our next question from Emily Biddulph at Barclays.

I've got 3, please. On the efficiencies that you drove in OpEx in H1 that sort of offset the inflation, am I right to think that's largely around the sort of better use of XDCs driving efficiencies in depot sort of in combination with the reduction in XDC capacity? Or were there other things driving that as well that we sort of need to bear in mind going forward? Is there more that you can do? And sort of how should we think about OpEx for the full year? On gross margin, better than you delivered in the second half of last year. Is there sort of scope to sort of see that drift up again due to sort of increase in, in-house manufacturing and potentially sort of lower timber and steel price feeding through? Or are there sort of offsets against that, that we need to think about? And then thirdly, on the XDCs and sort of Daily Traders initiatives that you've sort of pushed through in H1, do you think that you've sort of effectively done all that you would ever want to do there in the sort of schemes as big as it could be? Or is there more of a sort of rebalancing that you might look at and the sort of success that it might inspire to look at other things?

I'll get Paul to do 1 and 2 and I'll do part 3.

Okay. So I'll kick off on one. In terms of the operating costs, you're right to pick up on XDC, that does offer some efficiencies for us in the depots. And if we look at really the people within the depots and how we're now operating, that reduces the amount of sort of any inter-depot transfers of product. And therefore, there's an efficiency, and we see that in terms of the labor within our depots, looking at it before we put in XDC of around about a 5% improvement. So that's one positive from XDC, as well as the -- as Andrew has already explained in terms of the revenue advantages in terms of level of service. In terms of other activities we are doing, we're keeping a tight eye on managing the costs across the business. So that's just also looking at support functions and what we're doing there, exploring efficiencies within the factory in terms of how we manufacture product, which obviously improves and helps in the gross margin. So it's, again, a focus across that in a way of doing business, and we anticipate maintaining that through the remainder of the year. And as you pointed out, that's helped us offset inflationary increases, particularly in operating costs. In terms of the margin, you're right, the margin in the first half last year was particularly high. As you recall, we put in price increases ahead of commodity increases as they hit the business. So that helped us significantly in the first half of last year. This year, we have a more normalized position. And as a result of that, we see a margin that has improved on the second half of last year. And I think we're in good shape for the second half of the year. Often there is a slight benefit in the second half because of Period 21 and the higher mix of kitchens, which can offer some small variability in the margin. But you're right, there were other activities in terms of efficiency, what we manufacture in the factories where we've invested on that, that we'll start to assist us. In terms of commodity costs, yes, we see some more sort of stabilization as we come into the second half. As we carry inventory, it takes a while to work through the cost of goods sold. But I think what it does is it reassures us that we're in the right place in terms of pricing and well positioned for margin for the second half of the year. And I'll hand it back to Andrew to cover the Daily Traders.

On XDC, XDC will be a feature of Howdens going forward. Our managers I think it's one of the best things that we've done for customer service and availability, but it also has improved productivity of staff. To give you a sense, to complete kitchen orders, we moved quite a lot of product internally between depots, around about 8 million pieces that we have nearly extinguished. We're down to 1 million pieces moved between depots that completes the offers. So factory-fresh product is another feature of XDC, meaning that complete orders, unmoved product between depots, customers are getting exactly what they want. It does offer the opportunity around range extensions, which are in the early journey of and potentially new categories. But we've done it for efficiency reasons and customer availability reasons.

We will now move on to our next question from Geoff Lowery at Redburn.

2 questions really. The first is, when you look at your business sort of holistically, you've been through a period of very significant step change investments as you've outlined today. When you look forward in your medium-term plans, are there certain things of similar scale ahead of us? Or should we think about those step change costs coming to an end and some of the benefits being more visible? I'm not really talking about this year, I mean, more the direction of travel. And second question, just about France and Ireland. Can you add a little bit more about what you're seeing? Because, obviously, we can see some big sales growth numbers, but it's quite hard to segregate what's going on in existing depots. What sort of trends you're seeing in terms of maturity curve and so on? Any color you could add around that would be very kind.

Thanks, Geoff. Yes, we've got a revenue cost this year in the first half, particularly around XDC, that I think will normalize into next year. And we will continue to push forward with new depot openings. So I think what we've got in our 5-year plans, XDC was a big part of it. I think where you'll see us investing further will be about bringing more manufacturing back to the U.K. and bringing our capabilities there. You'll remember, Geoff, we've now acquired and got planning for 20 acres or so on the back of the factory and another 3 or 4 acres on the left-hand side of the Howden factory that gives us options, which we're working through right now. We believe the competencies there to make more in the mix, we'd like to see ourselves getting up to more sort of 45% or 50% of our offering being made in the U.K. because of the opportunities that exist there as opposed that is the amount of color that I'd add to that one. In France and Ireland, in France, there is the new depots we're pleased with the new depot openings in terms of their plans and the maturity growth, we did a chunky number last year of 25 that we opened and have guided to another 20 over the next 2 periods. And it's just operationally making sure that the team can cope with that amount of growth, which they're doing well with. But we're pleased particularly around the cities where depots are working close to each other. They seem to be doing better than when our depots are out on their own. Ireland, too, we're in early stages of being there, but we are absolutely delighted with the sort of property strategy that we've had. We think our new recent depot opening in Cork is one of the best we've done, full stop. The team, very strong in Southern Ireland, and I think we'll have a good business there with 10 depots this year, and we'll keep continuing to press on into next. The competitions, not what it is in the U.K. and Ireland, and people haven't been able to buy rigid cabinets for quite a long time, actually. So being in stock of 3 colors, 100 sizes, it's a pretty unique proposition for them.