Kingfisher plc (KGF) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us today. I'm Thierry Garnier, CEO of Kingfisher, and I am here with our CFO, Bernard Bot. We are still unable to meet in person today and are conducting this presentation virtually from our offices in Paddington. But we are happy to be with all of you this morning and are looking forward to updating you on our progress in 2020. Our agenda for today will start with an update on our operations and strategy. First, how we are managing the ongoing impact of COVID, then a progress report on our Fix and Focus in 2020 priorities, and finally a recap of the Powered by Kingfisher plan, which we laid out in June and some headlines on progress we have made in the first half of the year. Bernard will then present our financial performance and position before we open the meeting up for Q&A. On Slide 5, I would like to take a moment to reflect on the past few months. Starting with our industry, there can be no doubt that the very specific nature of this crisis has driven up demand within the home improvement market. We believe there are 5 reasons for this: Firstly, customers are spending more time at home; second, they've had fewer leisure options available to them and have traveled less and many have rediscovered the pleasure of DIY as a hobby; third, consumers have made more discretionary spend available for home improvement; fourth, more people are working from home, meaning finding new ways to improve or use space and, therefore, new needs for home improvement; and finally, the impact of lockdown measures temporarily depressed demand for do-it-for-me and favored do-it-yourself. The crisis has also clearly accelerated the trend of people shopping online. Kingfisher's e-commerce sales surged up to 4x in April and continues to see strong growth of above 2x compared to pre-COVID rates despite the restart of in-store purchasing. And finally, as people emerge from confinement into an economic downturn, we'll see a fresh surge for value for money. We already offer a price index of 100 or less versus closest competitors in all key banners, and we will use the power of our own exclusive brands, or OEB, and our discounter banners to do more. Our top line growth has been supported by the strong market demand. However, in parallel, through our new strategic direction, our retail banners have found new ways to meet the demand and serve their communities. They have played to their diverse strength. So whether you are a DIYer, a trade person, someone who wants choice, value, service of convenience, we have found a way to serve you. And doing so, we believe that we have strengthened our market position. Given all the challenges we have faced, we are pleased that our H1 performance was resilient with a strong sales recovery in Q2. Our profit and cash performance does also include benefits, which will reverse or not recur, and we'll be very transparent about this later in the deck. While it is still too soon to call a normalized pattern of demand and economic uncertainty must make us cautious, the past 4 to 5 months give us confidence. The fundamentals of our market are strong, and we have demonstrated our ability as a group to adapt and trade through challenging times. We are convinced that the crisis reinforces our strategic direction. In fact, it pushes us to be bolder in areas such as e-commerce, with stores at the center, the importance of a discounted banner and value for money through our OEB and being simpler and leaner. There is still much work to do. But as a team, we feel encouraged by these results and are confident in the opportunities ahead of us. So turning to Slide 6, and how we continue to manage the impact of COVID on our business and our stakeholders. Even much of this has been disclosed already, let me just remind you of the key points. From the outset of the pandemic, our priority was to act responsibly towards our colleagues, our customers, to our communities as a retailer of essential goods and making difficult decisions to protect our business for the long term. All stores in our largest market had essential status from day 1, but we decided to keep them shut at the start of confinement and reopen only when it was safe to do so. We have also been donating PPE to health care workers and charities. And in recognition of their hard work, we have paid additional bonuses to frontline colleagues. In addition to successfully implementing strict social distancing and safety measures, our teams were able to adapt our operating model quickly, rapidly accelerating IT, supply chain, logistics and process changes to meet unprecedented levels of online demand. This all took place against the backdrop of stringent cost control and cash mitigation actions, with a particular focus on the management of our orders and inventories. As a result, we have been able to limit the financial impact of COVID to date, and our business continues to be on a sound footing. We have access to over GBP 3.7 billion of cash resources, providing us with significant financial flexibility and liquidity headroom. Before I move on, I would like to say a huge thank you to all our colleagues, who have continued to go above and beyond throughout such a challenging period. Their drive and determination has been humbling to witness. When I joined Kingfisher in late September last year, my immediate priorities were to develop a long-term strategic plan, while also taking early decisions to focus and fix the business, which are summarized here on Slide 7. These actions have had a positive impact on our business, setting the path for the implementation of our new plan, while also helping us to respond to the challenges of the crisis. As we reported at full year results, we have a strong and experienced group executive team in place, and we have continued to strengthen the bench too with the new COO at Castorama France as well as key hires within our group data and digital teams. Next, one of the key enablers of our new strategy is rebalancing local and group responsibilities. Earlier this month, we launched a fundamental reorganization of our commercial operating model, about which I will say more later. And we have also started work on a new operating model for IT and digital teams. Before the onset of the coronavirus, we paused or stopped several group-wide initiatives to focus on doing fewer things rapidly and better. This involved cutting back on noncritical range reviews and pausing big and time-consuming projects. In France, we stopped all noncritical IT projects and paused our global SAP rollout at Brico Dépôt France, which allowed us to prioritize Castorama and focus on improving how SAP was working in that banner. This has contributed to an improved operational performance of Castorama France in H1 and allowed us to accelerate implementation of the group next-generation digital technology stack. This is a key enabler for our broader e-commerce strategy and was rolled out in H1 without disruption to the business. We are making good progress with our exit process for Russia. And as previously reported, we reversed the previous decision to exit Iberia. We believe we can build a profitable and sustainable business under the Brico Dépôt discounter banner. Moving on to France. I've already described the operational benefits of addressing our challenges with SAP. The performance of our supply chain in France has also stepped up with over 25 new recruits to the local team. And before the crisis, we were seeing solid underlying improvement in stock availability and inventory management. During H1, we reintroduced more local ranges in France, and we successfully conducted many promotion-based trading events. At Brico Dépôt, we have been increasing special promotions, or arrivages, as we seek to reignite this business' strong discounter credentials. These factors all contributed towards the clear improvement in performance of like-for-like sales in France versus the market. So while there is still much work to do and the crisis has had a significant impact on the French profit performance, I am encouraged by our commercial performance so far. During H1, we rapidly modified our operations and processes across the group to focus on orders picked in stores and fulfilled through either click & collect or home delivery. This is integral to our wider e-commerce strategy, which I will talk to shortly. In Q4 last year, we began implementing a new trading approach to address diverse customer budgets and needs and offering excellent value for money. During the first half, we made further progress. We're introducing more local ranges across the group, running more training events, making further investments in price at Screwfix and testing new service propositions. Finally, we know that there are significant cost reduction opportunities across Kingfisher over the longer term. The crisis has provided us with many additional learnings in this area. Turning to Slide 8. The chart on the left shows the evolution of group like-for-like and e-commerce growth over H1. As we reported previously, prior to any COVID-related store closures, trading in the first quarter was already reacting positively with the changes we were making. From late March to early April, you can see the significant impact of lockdown measures and our decision to close in-store shopping for several weeks. In Q2, group like-for-like trends improved significantly due to the phased reopening of stores in the U.K. and France. Sales growth, both in-store and online, was consistent throughout May, June and July as lockdown restrictions eased and customers spent more time on home improvement projects. In terms of the third quarter, trading has remained positive, with Q3 group like-for-like up 16.6% to date. All banners are growing like-for-like sales, and there is a broad-based demand across all categories. Our showroom sales and order book are also strong, which I will discuss more shortly. Screwfix has seen its growth accelerate in recent weeks, too. Turning to Slide 9, and let me take you through a brief recap of Powered by Kingfisher. The first key principle of the strategy is that Kingfisher banners are not the same, and this is a strength. They each address diverse customer needs, operate different business models, and each is developing a clear positioning and plan. Our second key principle is that we will power these banners as a group. We believe that the role of Kingfisher Group is to enable our banners to serve their customers better, harnessing the scale of the group where it makes sense. And we have a clear vision to build the customer proposition of the future as you can see with our 7 priorities on the left-hand side of this slide, through e-commerce, more compact stores, OEB-led differentiation, a mobile-first experience and the compelling services offer. This will be enabled by a balanced local group operating model and an agile culture. We have already taken the first fundamental step here with our new commercial operating model, and our mindset of "done is better than perfect" and "test and learn" has served us well during the crisis. We want to be simpler and leaner, which means doing less, lending it faster and reducing our cost and inventory. At last, we want to build a responsible business culture at Kingfisher. We have established 4 new responsible business priorities focused around inclusivity, climate change, helping to make cleaner homes and fixing bad housing. And as part of our commitment to colleague engagement and inclusivity, we are very happy to announce the launch today of an all colleague share plan. It gives each and every one of our 77,000 colleagues around the world at Kingfisher the opportunity to become shareholders with 1 free share awarded for every share booked. We strongly believe in this program to allow our colleagues to share and to contribute to the success of our new plan as shareholders, too. At our full year results in June, we set out clear priorities for each of our banner. Although it is still early days, on Slide 10, I wanted to update you on some of the progress being made. There has been a lot happening, and conscious of time, I will just focus on B&Q, Screwfix and Castorama France. For B&Q, we have already discussed previously the steps taken to accelerate e-commerce, implement new trading approaches and focus on the customer. The business is in the process of strengthening its range, offering more choice to customers and meeting demand for products previously not available. For example, B&Q has brought back Sandtex and Leyland Paint and these have been big hit with customers. And we have seen the successful launch of our new kitchen range, which, along with popular ranges like in our bathrooms is proving our private label opportunities. Developing B&Q service proposition is also a key priority. We have tested kitchen installation services to support the new range, and I can confirm that we'll be relaunching this service across the U.K. by January 2021. We also have trials taking place for tool hire and self-checkout counters. In addition, we are trialing some smaller store formats to understand how we can extend distribution of our brands, for example, in Merton in Southwest London, which is performing well. And we have several other trials coming soon. We have also recently agreed to test 4 B&Q store-in-store concepts inside ASDA stores over the next few months, which we'll track with interest. The Screwfix business has been strengthening its range and continues to improve its price positioning versus peers during the period. I am also excited about the upcoming enhancements to its mobile experience to support its market-leading position. In terms of store expansion, while there was a pause during the first half, the business is on track to open around 30 stores this financial year in the U.K. In the Republic of Ireland, our first 5 stores have been performing very well, and we are on track to open 10 stores this year. We're also confident that this model can work outside the U.K., and we are now developing plans for asset-light expansion to start with. In France, the actions that we have taken over the last 12 months continue to have a positive impact on sales. Performance versus the market has improved, gaining market share in June, July and August. The major SAP issues highlighted 1 year ago have been addressed. Its underlying supply chain is stronger, and it has benefited from a new leadership team and the flexibility to implement new trading approaches, including running training events and strengthening their ranges. Overall, while there is still much work to do across banners, we are encouraged by the progress being made and by the commitment and energy of our teams. Turning now to Slide 11. We have already started to see the benefit, both before the crisis and our response to it, in rebalancing group and local responsibilities. Earlier this month, we announced the fundamental reorganization of our commercial operating model. The changes are aimed at leveraging the different positioning of our banners, enabling much greater speed, agility and local knowledge, while at the same time ensuring that we use the scale and knowledge of the group intelligently. On this slide, you can see the before and after position. Before, the group had responsibility for all range plans for our banners, whether OEB or brands as well as all supplier relations. The banners had limited decision rights. Under the new model, the group will retain the design, ranging, sourcing and supplier relations for all OEB and continue to manage supplier relations of the group's top 20 to 30 major international brands. We'll, therefore, continue to leverage the group's scale to achieve buying benefits where these really matter. I believe that the group's strong sourcing, design and engineering capabilities built up over the last 4 to 5 years is driving real product differentiation. This is a key driver for delivering sustainable and profitable sales growth. Our retail banners will gain new responsibilities, reflecting the fact that they are closest to our customers. They will define category strategies, overall product range, non-OEB buying, pricing, promotions, marketing and merchandising. As a result of this proposed new model, some roles within our group teams are expected to change, and we are currently in consultation with those we have impacted. It is a fundamental reorganization of how Kingfisher operates, and we are excited by the potential here. To Slide 12, over the next 2 slides, I want to go into a little bit more detail on 2 of the key medium-term drivers of our strategy: growing e-commerce sales and growing our OEB sales. The crisis turbocharged the long-term trend towards e-commerce. With very limited incremental CapEx, we accelerated plans that were already in place to create new solutions, sometimes overnight, to meet the spike in demand. Between April and July, we were averaging 1.5 million e-commerce orders per week, which is significant even when compared to some of the U.K. food retailers. In H1, overall e-commerce sales grew by 164% and by 173% when excluding Screwfix. Group e-commerce penetration increased by 12 percentage points to 19%. Excluding Screwfix, penetration increased 5 percentage points to 8%. These numbers are clearly supported by the specific nature of trading during the crisis. However, the more important takeaways for me are the potential for e-commerce in our industry, our ability to handle the demand and to manage the financial and operational consequences of e-commerce growth. The long-term growth strengths are clear, and we have made significant shifts in our strategy to leverage this opportunity. We have shifted to store-based picking and fulfillment as a priority and are redesigning the store operating model to support efficient delivery and click & collect with only certain categories delivered from fulfillment center. For the 7 months to August 31, 88% of all e-commerce orders, excluding Screwfix, were picked in stores, up 28 percentage points versus 1 year ago. And 80% of e-commerce orders, excluding Screwfix, were made through click & collect. B&Q is committed to delivering click & collect within 1 hour and for Screwfix in as little as 1 minute. We have also started to develop our last-mile home delivery capabilities from stores, enabling faster fulfillment. At B&Q, for instance, our partnership with DPD has enabled next-day delivery with 98% of the U.K. population. In addition, we are testing same-day delivery with Stuart, a DPD affiliate company. You have heard me talk about the group's next-generation digital technology stack, which we are rolling out as a priority. It is already in place at B&Q. And initial implementation was completed at Castorama front during H1. This means that we are migrating Kingfisher front-end IT architecture to cloud-based API components, which is a critical driver for more efficient and more dynamic digital capabilities, including scalable mobile apps, smarter search capabilities. The cost of this accelerated rollout fits within our existing IT budget envelope, and it leverages the work already completed over the last few years with a global SAP rollout. We will support this work with a more balanced local group operating model for IT and digital, the planning of which has already begun. Lastly, we are continuing to explore the potential for an e-commerce marketplace, but it is very early days. To Slide 13, and we believe that our own exclusive brands, or OEB, through differentiation and value for money are a key driver for Kingfisher's future sales and retail profit growth. We are seeing good progress recently with our new kitchen range selling well at B&Q. Outside the period when our showroom offer was closed, orders increased 23% year-on-year on a like-for-like basis, with takeaway sales up by nearly 8%. Our new lighting range is also lending well at Castorama France. To achieve our longer-term goal of higher OEB penetration, we have shifted the priority from the unification of ranges toward OEB. And will ensure that the OEB products and brands are aligned to the different banners proposition by tailoring them for DIY, for trade and for discounters. With my update now concluded, let me hand over to Bernard.

Thank you, Thierry, and good morning, everyone. To Slide 15 and an overview of the half. While Q1 sales were heavily impacted by COVID, we saw a strong recovery of sales in Q2, aided by strong demand and actions to serve our customers safely. The start of Q3 is also encouraging with Q3 group like-for-like sales up 16.6% to the 19th of September, with growth across all banners and categories. Overall, the group's financial performance for the half was resilient. Total sales in H1 were down 1.1% and like-for-like sales were down 1.6%, all in constant currency. Retail profit was up 17.7% in constant currency as a result of, in large part, temporary cost savings and a strong performance in the second quarter, in particular, by B&Q. Free cash flow was significantly higher year-on-year at over GBP 1 billion, to a large extent, driven by favorable working capital movement. We have and continued to actively manage the impact of COVID. As a result, we ended the half with net financial cash of over GBP 1.1 billion. We entered the second half against a favorable trading backdrop, and our focus is on enabling sales in a safe environment. However, the continued uncertainty and concerns of COVID and the wide economic environment limit our visibility. Given this uncertainty, the Board has decided not to declare an interim dividend. We recognize the importance of dividends to shareholders and will continue to evaluate the quantum and timing of any future dividend payment. Slide 16 is a dashboard of the key financials for the half. Let me touch on the profit measures here. Starting with gross profit, this was GBP 2.2 billion, down 1.5%. Gross margin for the half was down 10 basis points to 36.9%, with the decline in Q1 mostly offset by an increase in Q2. As mentioned, group retail profit increased by 17.7%, and our retail profit margin increased by 140 basis points to 9%. Adjusted pre-tax profit was up 23.1% to GBP 415 million and statutory pretax profit was profit was GBP 398 million after GBP 17 million of net exceptional charges. Statutory profit after tax was GBP 317 million. Moving to Slide 17 and the movements in group retail profit. This was up GBP 79 million to GBP 533 million, with the decline in gross profit of GBP 35 million, more than compensated by a reduction in costs of GBP 114 million. Let me unpack the gross profit decline. This was driven by a GBP 23 million adverse impact from a 1.6% decline in like-for-like and a GBP 20 million increase in supply and logistics costs, which was mostly COVID related. Lower clearance activities, partly offset by more trading initiatives and price investments, increased gross profit by GBP 8 million. The contribution from net store growth offset the negative contribution from Russia. And as mentioned earlier, while Q1 saw a gross margin decline, Q2 saw an increase that mostly offset this decline. Moving through the bridge. Operating costs were higher by GBP 28 million from higher store numbers and inflation and by GBP 22 million because of the shift in our French frontline employee profit share into H1. The latter partly reflects the structure of the French store staff bonus scheme, which is based on quarterly sales performance. Given the very strong sales growth in Q2, more had to be accrued in this quarter. There will, however, be an offsetting benefit in H2. In the half, we incurred direct COVID-related cost increases of GBP 28 million for PPE, additional store security costs and special bonus payments made to frontline store staff. While we incurred further costs for safe, in-store customer journeys, including additional marshalling, we were able to offset these with higher productivity and a reallocation of staff. A combination of business rates relief in the U.K. and furlough schemes in the U.K., France and Spain, provided a total benefit of GBP 100 million. Finally, we achieved a further GBP 92 million of cost savings. For example, we significantly reduced spending on advertising and marketing, goods not for resale, head office costs and travel during the crisis. In a large part, these reductions are specific to the period. Let me now take you through the net exceptional charges for the half of GBP 17 million. Asset impairment and exit costs of GBP 27 million were recognized during the period relating to Russia, reflecting the performance of the business in H1 and the anticipated net proceeds from the planned sale of Russian activities. The GBP 14 million liability that was held in relation to warranties as part of the B&Q China disposal in 2014 was released in the period following the expiry of the claims period. Of this amount, GBP 10 million has been recognized within exceptional admin expenses and GBP 4 million has been recognized within exceptional tax items. After these exceptional items, our statutory profit before tax was GBP 398 million. To Slide 19 and the performance of our major geographies. As slides in the appendices detailing the performance of each of our retail banners, but let me pull out some key points here. Starting with the U.K., like-for-like sales were up 2.4%, driven by a strong sales recovery in Q2. Like-for-like sales at B&Q grew by 28% in Q2 and by 4.1% in H1. Like-for-like sales at Screwfix were down 1.1% in the half. While sales also recovered in Q2, it did at a much lower pace of 2.4%, reflecting a slower pickup in demand from professional tradespeople than from DIYers. As tradespeople restarted their work in customers' home and we gradually reestablished in-store purchasing, sales trends have strengthened with Screwfix quarter 3 to date like-for-like up 9.9%. The business has also continued to improve its price position relative to its nearest peers. U.K. retail profit increased by 47.1% to GBP 411 million. This was driven by sales growth at B&Q, an increase in U.K. gross margin of 100 basis points and an 8.8% reduction in operating costs. The gross margin increase reflected higher full price sales and lower clearance in B&Q, partly offset by higher supply and logistics cost in Screwfix. Operating costs benefited from the cost reduction measures I mentioned previously, business rates relief and up to the 1st of July, the U.K. furlough scheme. These savings were partly offset by cost inflation, Screwfix base increase year-on-year and COVID-related cost increases. In France, like-for-like sales were down 5.9%, reflecting the significant impact from COVID-related store closures in Q1. France experienced a longer period of lockdown relative to the U.K. Q1 like-for-like in France was minus 41.5% compared to minus 16% in U.K. This was partly offset by a strong recovery in demand in Q2, with like-for-like at plus 27% ahead of the U.K., but not enough to return to growth for the half. Retail profit declined by 44.1% to GBP 63 million. This was mostly driven by the sales decline at both retail banners. Results were also impacted by a decrease in gross margin of 130 basis points, reflecting higher supply and logistics cost as a result of COVID and external disruptions at the start of the year. Next is the decision to upweight special promotions or arrivages sales in Brico Dépôt and also more trading events. Operating costs were 4.9% lower. Benefits from temporary cost reduction measures and the French furlough scheme were partly offset by COVID-related costs and additional payments to frontline staff and a GBP 22 million shift in employee profit share into H1 referred to earlier. Poland, which kept its stores open throughout the period, also saw stronger demand in Q2 with like-for-like up 15% in Q2 and 3.5% in H1. Total sales growth was 6.8%, reflecting the annualization of 4 store openings last year and 1 store opening in H1. Gross margin in Poland decreased 120 basis points, largely reflecting mix, better price positioning and more trading events. Retail profit in Poland declined by 7% in constant currency with gross profit growth more than offset by a 7.6% increase in operating costs. This was linked to the wage inflation, the increase in space year-on-year, incremental COVID-related costs and additional frontline staff bonuses. Iberia sales, with like-for-like sales down 22.3% in H1, were severely impacted by COVID restrictions during the half. Since reopening stores in Spain from mid-May onwards, we have seen strong demand with June like-for-like up 25.5% and July up 19%. Despite these weaker sales, the business made a retail profit of GBP 1 million in the half. Romania reduced its retail loss slightly to GBP 11 million for the half and Russia to GBP 5 million. Slide 20 provides an overview of cash flow and highlights a period of very strong cash generation for the group. We generated an EBITDA of GBP 769 million in the period. Working capital showed a largely timing-related inflow of GBP 656 million, driven by a GBP 208 million decrease in stock and a net GBP 448 million increase in payables. The stock reduction reflects lower purchases during lockdown and strong Q2 sales. We are working to structurally reduce our inventory levels; however, I anticipate some rebuilding of inventory in the second half as we improve our products availability. The increase in payables was driven by the deferrals of stock purchases and higher payroll and VAT creditors, again reflecting strong trading in Q2. After rental payments, tax and interest and gross CapEx, free cash flow for the period was a little over GBP 1 billion, up by over GBP 800 million year-on-year. The net cash movement, including -- excluding financing, was also a little over GBP 1 billion. As a result, net debt at the end of H1 reduced by over GBP 1.1 billion to GBP 1.4 billion. Given that working capital will, to a large extent, normalize in the second half, I would expect our net leverage ratio to increase in the second half. Now moving to Slide 21 and our current liquidity and financial position. As at 18th September, we had over GBP 3.7 billion of total liquidity available, including GBP 2.1 billion of cash which includes around GBP 540 million from a term facility guaranteed by the French state. To remind you, under the terms of this facility, the full amount was drawn down on the 18th of May. Subject to circumstances and to certain conditions being met, we will consider repaying this facility in H2. Furthermore, we remain eligible for the Bank of England CCFF program and an additional undrawn RCFs available for GBP 1 billion. As mentioned, our working capital position was very favorable in the first half. And while cash is a key focus area, working capital will, to a large extent, normalize as we rebuild inventories and settle our accounts payable. That said, we are in a very sound financial footing, given our strong cash generation and access to significant liquidity. Finally, moving to Slide 22, our outlook and technical guidance for the full year. There's a lot on here, so let me pick out some of the key items. Starting with the sales outlook. While Q3 trends to date have been encouraging, with sales up 16.6% to the 19th of September, visibility is limited by ongoing concerns over COVID and the wider economic environment. We expect incremental COVID-related costs to total around GBP 40 million in this year. This is slightly higher than previously anticipated, largely due to bonuses to frontline store staff. We expect central costs to be slightly lower than prior year at around GBP 58 million to GBP 60 million. In the U.K., business rate relief is expected to remain in place until the end of March 2021. Of Kingfisher's annual business rates bill of around GBP 140 million, around GBP 130 million is eligible for release. With regards to furloughing, since the 1st of July, we have not claimed under the furlough programs in the U.K. and France and will not claim the U.K. government Job Retention Bonus. Furthermore, we intend to repay the furlough benefit received in the U.K. of around GBP 23 million in the second half of the year, unless there are any material changes in the trading environment. Turning to cash flow. From a financing perspective, we have already paid back GBP 600 million drawn in June under the CCFFs. And as I mentioned earlier, given our solid liquidity position, we're also considering repaying the GBP 540 million French term facility in H2, subject to the environment and certain conditions being met. To repeat, we expect a very favorable working capital position at the end of H1 to a large extent to normalize as we rebuild inventory and settle outstanding creditors. With regards to capital expenditure, we continue to review our expenditure plans on a case-by-case basis and expect total CapEx of up to GBP 300 million with a further GBP 50 million earmarked development expenditure that is deferred into the next financial year. Finally, with regards to the previously announced 11 store closures in France, so far, 7 stores have been closed, of which 4 were in the first half. We expect to close 2 more Castorama stores in H2, but have decided to convert 2 Castoramas earmarked for closure into Brico Dépôt stores. Cash cost for the exits have been fully provided for in previous periods. With that, let me now hand back to Thierry.

Thanks, Bernard. Let me now briefly summarize before we open for Q&A. First, we have delivered a resilient financial performance in the first half with a strong recovery of sales in Q2 following the significant impact of lockdown measures in Q1. The sales recovery has extended into H2 with good growth so far. The crisis has driven stronger demand for home improvement across our markets, prompting more people to reengage with DIY, become more comfortable with ordering goods online and seek value for money against a challenging economic backdrop. In parallel, we have benefited from our new strategic direction, with our retail banners finding new ways to meet the demand and serve their community. Our experiences through the crisis have reinforced this direction and have made us bolder in our priorities. While there is still a great deal to do, we have made good progress with the strategic plan that we announced in June, there has been a fundamental reorganization of our commercial operating model. We are continuing to improve our operational performance in France. We have accelerated our plans around e-commerce, and many encouraging new initiatives are being developed across our banners. Looking forward, there remains considerable uncertainty around the coronavirus crisis and the wider economic outlook, and managing the risk here remains a key priority for us. But while the near-term outlook is uncertain, as a team, we believe the longer-term opportunity for Kingfisher is significant, and we are committed to returning Kingfisher to growth. Thank you for your time. I would like now to invite any questions. So over to you, operator.

[Operator Instructions] Our first question over the phone comes from Richard Chamberlain from RBC.

Two questions for me, please, to start things off. The first one is on the U.K., obviously, very strong performance in the first half, Thierry. You talked about reintroducing kitchen installations going forward. And I wonder what changes we should expect compared to last time? Because, I guess, it was used to be quite helpful for sales, but not so good for profits. That's my first question.

Yes. Thank you, Richard. In fact, first part of this answer is, we have been testing 4 different ways early Q4 last year, different ways, partly, let's say, fully managed by B&Q and some of the tests, let's say, really managed in a different way. We have had very good results overall. And we have chosen one of the 4 ways, and now we are rolling out this installation services across the store and will be ready by end of January. To summarize, we consider we should have a small number of trade people by stores that are actively managed, but with a way through which we can guarantee to the customer that the quality of the job is indeed there. And that, overall, the cost of the installation could be paid to B&Q and, let's say, could be part of other, let's say, services offered by B&Q. So that we are very clear now after those tests rolling out in all our stores. And I think we'll do it in a different way versus what we have done previously where it was for a large part B&Q employees.

Okay. Got it. Yes. Okay. And on -- second one on Poland. I wondered how much the performance has been held back by the new ranges coming in a little bit later? I think you mentioned, the kitchens are still to come in or are coming in right now. And also in Poland, do you see some of that price investment that you've made to become more competitive, it's starting to ease off in the second half?

Yes. Thank you. I think on Poland, we are pretty happy with the sales trend, to be honest. We are -- the range reviews are on time. We, from the beginning, planned to have these kitchen range reviews in the coming months. It's coming as planned with early good results. So no, I would not say we have disruptions linked to that. I think last year, probably our price positioning was okay, but we consider we should do a bit better this year. I don't expect any material additional investment in the coming months, but we thought we had to do this small price repositioning in the past months. But overall, very happy with the trade in Poland. The countries have kept all the stores open across the crisis, very often taking initiatives, a lot of good practices around safety measures. So -- and a lot of agility on e-commerce. So we're relatively happy with Poland, indeed. Thank you, Richard.

And just to add, Richard, Bernard, here. I mean if you look at the like-for-like for Q2 for Poland, plus 15%. Trading in this quarter also very strong at 10.3%. So I think that reinforces the approach and the strategy that we have in Poland.

Our next question comes from Anne Critchlow from Societe Generale.

Two questions for me, please. The first on product availability. Could you comment on how your availability rates have been improving? Or otherwise, particularly in France, where I think there were some problems previously? And then the second question is about rental costs. What sort of rent reductions are you getting on rent renegotiations? Where are they taking place? And how does it differ between countries? What's the outlook there?

Yes. Thank you, Anne. So let me first comment on the French supply chain. Again, the -- we did many, many actions and very early last year and starting with a team, and we consider the team was -- we had to strengthen the team. So we recruited 25 additional people in the team through our IT progress. Through the SAP implementation at Casto, we indeed supported our supply chain operations. We did a lot of job last year. And therefore, I would say, end of 2019, we went back to 97.5% to 98% of availability, which was probably up by 4 to 5 points versus the year before. So really underlying improvement, and if I look at the French supply chain in France in the past weeks, we have a low level of inventory. One of our key criteria is the occupation ratio of our DC. They are at a good level. So -- and I must say that you probably remember that we had a strike in the French harbors for many months up to February. So we started the crisis with a lot of containers in the French harbors, and we cleaned all that. We solved all those issues. So therefore, today, already the French supply chain is in -- operationally in a good shape. Maybe 1 comment on the COVID. We, overall, consider we have a supply chain well under control. But with some issues in some specific categories, we have a very polarized demand today when you speak about the outdoor, paint, paint brushes. Sometimes, we have such strong demand that our suppliers have issue to deliver products. So we are well under control with a few challenges for some specific categories. Maybe I'll leave it to Bernard on the list of it.

Sure. Anne, so obviously, our property cost is a key area of focus, and to some extent, the crisis has enhanced our reputation as a high-quality tenant. And obviously, with that, we engage with our landlords. So last year, we did about 35 regears. This year, we're also pretty active. We've got about 7 approved with a reduction of about 20% in the rents. It is a little bit skewed towards the U.K. because that's where we've got the biggest part of our rentals. But obviously, we're also looking at other markets and engaging with the landlords there.

Our next question comes from Geoff Ruddell from Morgan Stanley.

Could I ask 2 questions, please. The first of which relates to the change in the commercial organization that you announced this morning, with the banners getting control of the non-OEB ranges. I was just wondering how's that going to work in practice? I mean are we going to get another round of range reviews, which were obviously very disruptive to the business last time around? Or is the range change is going to be very slow and gradual? And then the second question, completely different topic. I think the very final bullet point of the summary slide talks about Kingfisher being committed to returning to growth. I was just wondering what sort of growth that means? Is that top line growth? And is that -- if it is top line growth, is that going to be driven by space growth? And if so, in what markets and in which banners you would expect to grow space?

Yes. Thank you, Geoff. I think, first of all, when we speak about reorganization, I think, first, it's how we reallocate responsibilities. I think, for me, the structural point is the group was in charge of the ranges, the range strategy and really the detail ranging by banners. And we discovered it was not efficient because even if you are extremely smart, it's very difficult in -- for one person to manage all the different ranges of B&Q, Screwfix, Brico Dépôt, Castorama in France, in Poland, et cetera. And that's why we consider to be closer to customers and to use a banner to decide on the rent strategy is critical. I do not expect material range reviews. I think, over time, gradually, maybe we'll need us -- over 2 years, we'll adjust the ranges. If you take the B&Q or Castorama in France, we consider the choice is not large enough. We -- especially what we call in the upper category, the Q3 and Q4 upper premium choices that we are -- we don't have enough ranges. When you look at Brico Dépôt, we should probably come back to a more discounter DNA in the range strategy. So it will come over time. I don't expect material range reviews. Now to come back to your second question, when we say bringing Kingfisher back to growth, I think, first, our strong belief is that as a retailer, everything starts from the top line. And I would say, like-for-like top line to answer clearly your questions. We have opportunities, especially with Screwfix, with Poland, and maybe over time, other opportunities, but we want to improve our like-for-like operations. We are as well committed to grow the absolute retail profit, as you remember, we were very clear in June. But all this story, all this new strategy should start from the top line. And for us, it's like-for-like sales.

Our next question comes from Geoff Lowery from Redburn.

Two questions as well. You've obviously thought very hard about the structure of the commercial and sourcing organizations. Given that and your mix of businesses, what do you think is a realistic aspiration for your inventory, pound million inventory turn relative to sales, however, you think about it, what's realistic there? And secondly, given the step change in multichannel that's going on in your business, if your sales split, say, ended up 35% digital, 65% stores, what would your gross margin OpEx to sales and the EBIT margin look like in that scenario?

Yes. Maybe let's start with the second question, and Bernard and I will comment on the first one. I think there is obviously always this question around the potential impact of the digital sales on our profit. And you already see that we announced a critical change. We moved from 7 to 19 points of digital sales, and you can still see the profit of the company. I think, and coming from food retail and looking at this -- the situation of Kingfisher as well with those fresh eyes, we are in a high-margin environment. We are -- we have high margin in DIY. And as soon as you give the priority to store picking, you have -- you're already operating with marginal additional CapEx, marginal additional fixed costs. You're already on marginal -- you just add additional costs that you have limited fixed cost. So I think it's really a very powerful model. We have been able to prepare 88% of the number of the group orders who are store picking. And then is click & collect, 80% of our orders who click & collect. Click & collect is the most profitable channel. And we have many additional ideas that they will not develop today because it's a bit too early to improve our online P&L looking forward. On inventory, and I will leave the floor to Bernard, we believe and we said it clearly in June that we believe we have significant opportunities to reduce inventory. We started the job end of 2019. We have structural programs in place. Obviously, the crisis is helping us. And that said, now we will rebuild part of it, but indeed, we have a program in place, and we believe the opportunities are strong.

Yes. So let me just add a little bit of color there. And obviously, GBP 200 million-plus contribution to cash flow in the half from the inventory reduction, now I'm looking to hold on to part of that. But obviously, we also need to rebuild stock and ensure that we've got availability across the banners. But I think more structurally, as Thierry highlighted, if you look over -- in the past 5 years or 4 years, we increased stock by GBP 500 million, where in '18-'19, we took off about GBP 130 million; last year, we took off about GBP 90 million, but there is more to go. And we think the -- there's a meaningful further reduction to be had. I think, as we highlighted in June, there are probably 3 main areas. It's around better planning and forecasting. It's looking at we do -- what we do in stores in terms of display levels but also things as ranging and deployment, where I think we can be a little bit smarter with some of the very small moving or nearly not-selling items. And that's the -- and plan, which is -- that's one of the powers of the group where we're working in terms of the supply chain expertise and working very closely with the banners to follow up on that.

Our next question comes from Warwick Okines from Exane BNP Paribas.

I've got 2 questions. Firstly, could you give a little bit more color on your thoughts about Screwfix outside the U.K. and Ireland? You mentioned it in your prepared remarks. Just roughly what time frame are you also thinking about it? And then secondly, you talked a fair bit about Brico Dépôt and its discounting proposition. Could you give us a sense of what proportion of sales you made in the first half on arrivage? I think I'm right in saying that they got -- it got to as low as only about 5% of sales 1 year or 2 years ago, has that rebuilt to the sort of 15% that more historically has been the right level?

Yes. Let me start with the second one to go fast on this one. We indeed really strongly believe that Brico Dépôt is a unique model, really our discounter. And I remind you that before we discuss arrivage, in this model, you should have very low, every day low price, and we have a very good price index, and that's critical in this model. Then when we organize promotion, what we call arrivage is really a onetime promotion. And when this promotion is over, you don't keep really the SKU at your assortment. So I would say, in the past -- in 2019, arrivage went at a very low level, probably slightly above 5%. And we are currently, let's say, in the range, 8% to 10% when we look at the Q2. Well, that's to describe the current trading strategy for Brico. For Screwfix, you remember, we started in Ireland. We had trial of Screwfix in Germany. One was successful in Ireland. The other one, not in Germany, which we spent some time to understand what we can learn from those 2 experiences. And that's why when I say we want to start in an asset-light ways, we really believe the way we started in Ireland 2, 3 years ago is the right one. So with a pure online start, building the brand, building an online proposition, gradually advertising the brand, and after a few years, when we consider we were ready to open the few first stores, and we are very happy today with the first Irish store of Screwfix. I think the other direction would be to look at countries where you already have Kingfisher, when you are in a country for years, you have your team, you know the supplier, you have your -- the relationship with suppliers, you have a supply chain, you have stores, you have professional teams. So that, for me, are the 2 directions, looking at Kingfisher countries and looking at the Irish success to build plan for Screwfix. I don't want to comment on timing. I prefer to tell you when it's done rather than to give you a promise, and we are working on plans with Screwfix to start international expansion outside the U.K. and Ireland.

Our next question comes from Georgina Johanan from JPMorgan.

I've got two, please. The first one is just on the gross margin. Apologies if I've missed it somewhere, but I think you often provide some guidance for the full year outlook. So if you could just give us a sense there, that would be helpful, please. And then my second question was just around the French market and availability in the French market, in general, how has that been in recent months? I guess I'm just trying to get a sense if your share gains have been supported in part by a lack of availability of products at some of the smaller players, et cetera, in terms of sort of difficulty managing it over the COVID crisis?

Let me start with the second one, on French availability. As I just answered, we had structural actions to fix our supply chain. I don't come back to that. I think it's part of our improved like-for-like sales in Q4 and up to March is linked to this availability improvement. Obviously, as I mentioned, COVID crisis impacted availability all across the group, and I guess, that's as everyone. And indeed, we are gaining market share in France in June, July and August. Now I think we respect very much our competitors in France. You know that ADEO is a strong and organized company. I do not believe that ADEO situation is worthiness and availability. So I think it's probably more linked to a better brand positioning of Casto and Brico of our e-commerce strategy, and we have been probably agile with the ranges improvement, et cetera, however, what we described this morning rather than on only availability, in my view, for the French market. Now I'll come back to the margin reserve, Bernard.