Wickes Group plc (WIX) Earnings Call Transcript & Summary

Good morning, and a very warm welcome to Wickes' first set of results since its return to the public markets in April. My name is Chris Rogers, and I join David, Julie, and the team as Chairman, ahead of the demerger, stepping down from the Board of Travis Perkins where I have been Senior Independent Director and a nonexecutive Director since 2013. The demerger of Wickes was thoughtfully executed and well planned. David has built a strong team, and we have assembled a bench of experienced and relevant independent nonexecutive directors. And as a Board, we are very focused on creating value over the medium term for all our stakeholders. With its digitally led service-enabled approach, David and his team are building a business for the future. The continuous focus on improving the relevance of the Core for the customer and the emerging position in DIFM has created a uniquely balanced business, a business with a very clear and distinctive position in the market, which, with its newly found independence, can be even more agile and responsive to the ever-changing needs of its customers. The last 18 months has been a huge challenge. But as these results demonstrate, the team at Wickes have been equal to it, and I would like to thank each and every colleague for the part they have played. Thank you for listening, and I will now hand you over to David.

Thank you, Chris. And I'd also like to welcome everyone and thank you for taking the time to join us this morning. I'm here with our CFO, Julie Wirth, and we are delighted to share with you our very first half year results as a stand-alone business since we demerged from Travis Perkins back in April. Julie and I will spend the next half an hour or so taking you through the performance of the business for the 6 months to the end of June as well as highlighting our key levers for growth and outlook for the rest of the year. This has been a good first half with strong sales and profit performance across the business. And I would like to echo Chris' thanks to all our colleagues. During this period, our uniquely balanced business model has really come to the fore. We have benefited from our differentiated customer proposition and digitally-led, service-enabled operating model, which has allowed us to thrive throughout the pandemic. 2/3 of our sales were driven from digital channels in the first half of 2021, and retention of our digital shopper base was strong, having grown it substantially in 2020. Over the past 18 months, we have successfully transformed and innovated our business, swiftly adapting to changes in consumer behavior as people seek to improve their homes and gardens as they spend more time in them. Both our store and distribution environments handled record levels of throughput, driving strong operational leverage by continuing to develop and refine working practices. As we grew our customer base, we continued to deliver improvements across our key customer satisfaction measures and gained market share. And we were very pleased to win the DIY Week Retailer of the Year award earlier this summer. The last few months have seen many challenges in our sector with well-trailed global supply issues, constraints on raw materials, and subsequent cost inflation. Whilst we are not immune to these challenges, we consider that our strong supplier relationships, curated range, and operational agility has served us well to continue to provide customers with the products they need at competitive prices throughout this period. As a stand-alone business, we are better positioned than ever before to capitalize on our exciting growth opportunities. This morning, I'll take you through the great progress we have made across each of our growth levers as we continue to evolve and enhance our proposition through product and service innovation. I'll now hand over to Julie to take you through the numbers in more detail.

Thank you, David, and good morning. I, too, am delighted to be presenting our first set of financial results today. We have had an exceptional first half despite the ongoing impacts of COVID disruption. We added almost GBP 200 million of sales year-on-year, and we were particularly pleased with our Core sales performance where we continue to take market share. We have stepped forward from what would have been an underlying loss last year, excluding government support, which was subsequently repaid, to a profit of GBP 46.5 million with an operating margin of 7.6%. There was strong cash generation and balance sheet deleverage, albeit that investment is second half weighted. And there were also some timing benefits on working capital, which will unwind in the balance of year. We have announced a maiden interim dividend of 2.1p per share, which will be paid on the 1st of November. So let's now look at the results in a little more detail. First half sales were up by 32.5%. Within this, we estimate price inflation of around 3%, although much of the inflationary impact was only seen in the latter part of half 1, with this expected to be more marked in half 2. Space accounted for a reduction of 0.6% from our ongoing space optimization program. And we had 232 stores as at the half year, a reduction of 1 store from our year-end position. Our gross profit percentage, as expected, was down, declining by 60 basis points. As highlighted at demerger, we expected a normalization of promotional activity compared with the prior year when the focus across the industry was on handling the first lockdown. Local trade has performed strongly, which delivers a lower level of margin through category mix and also from TradePro participation. In addition, within Do-it-for-me, bathrooms and installation performed particularly well, both carrying a lower level of percentage margin. Our approach to price inflation is to recover cash cost increases through price. This protects cash gross profit, whilst ensuring we remain highly competitive, but clearly reduces percentage margin. As you may recall, distribution costs are recognized through our cost of sales. And the effect on gross margin from these factors was partially offset by operational cost leverage through our distribution activity, supported by strong volume growth. Customer delivery participation remains at elevated levels, indicating a more sustained change in customer behavior. In the first half of last year, we had taken the benefit of a number of elements of government support, which was subsequently repaid in the second half. If we exclude the impact of these, our cost-to-sales ratio improved by around 600 basis points, again, demonstrating strong cost leverage supported by volume growth. Adjusted PBT at GBP 46.5 million is slightly ahead of our GBP 45 million guidance. I also note the underlying tax rate of 21.1%, reflecting a lower level of disallowables than previously indicated. Overall, a very strong performance considering that our business continued to be impacted by COVID disruption. So let's look at how sales trends evolved through the first half. This graph shows the weekly ordered like-for-like sales trends year-on-year. And right now, it continues to be helpful in articulating sales performance through these dynamic times. It is worth noting once again that Do-it-for-me ordered sales move into reported sales only when deliveries and installations are completed. Our 1-year sales trends show Core, indicated by the blue line, performing well against pre-lockdown trading last year, and we delivered Q1 Core like-for-like growth of 38.5%. Core sales then accelerated against the lockdown 1 period last year when our stores operated for Click & Collect and home delivery only for a number of weeks. As we anniversaried the reopening of stores last year, Core sales for the last few weeks of the first half were in line with the strong post-lockdown trading period. And we delivered Q2 Core like-for-like growth of 34.2%. Within Do-it-for-me, indicated by the red line, our showrooms remained closed through to the 12th of April. Despite this and supported by our digital capability, together with our newly developed virtual showroom journey, we achieved a significant proportion of prior year sales through the key Q1 trading period. And as our showrooms reopened, sales recovered strongly. If we now look at delivered sales on a 2-year like-for-like basis. Core like-for-like sales growth remained strong throughout the first half, slowing into Q2, whilst continuing to deliver an increase of 38.4%. This performance has been achieved across a broad range of product categories where we continue to innovate through range reviews and is supported by both DIY and local trade. Within Do-it-for-me, like-for-like declined as a result of showroom closures in both the prior and current year. However, we still achieved over 70% of 2019 delivered sales supported by our virtual showroom journey. It is also worth noting that 2/3 of our sales continue to be driven from digital channels, demonstrating the strength of our digitally led capability, which also underpins the sales performance. I will come back and talk about current trading and outlook shortly. So moving on to the profit bridge. This slide shows the major movements in profitability on a year-on-year basis. In the first half of last year, adjusted pretax profit was GBP 14.5 million. As already noted, this included GBP 17.3 million of government support, which was subsequently repaid. Excluding this support, the first half of last year would have shown a loss of GBP 2.8 million. In the first half of the current year, the strong performance of Core sales and the high level of operational gearing generated GBP 52 million of incremental profit. Clearly, a significant driver of profit improvement year-on-year. Do-it-for-me contributed GBP 4.5 million, the result of delivered like-for-like sales growth of 20.5%. This reflects a lower level of operational gearing impacted by temporary showroom closures, lower margins on bathrooms which grew strongly, and installation participation which continues to grow. Investment in marketing has stepped up again year-on-year as we returned to more normalized levels of activity, notably to support Do-it-for-me. COVID costs continue to rise as we annualize the first quarter of unrestricted trading last year, and we have remained cautious in terms of changing our COVID policies to protect our colleagues and customers. We are, however, confident that, subject to further trading restrictions, COVID costs will start to fall away in the second half of the year. Additional PLC costs were GBP 1.9 million as we progress towards our guided figure of GBP 7 million on a full year basis. Overall, a strong step forward in profit terms, significantly benefiting from strong core sales growth combined with operational leverage. Our IFRS 16 net debt position at the end of the first half was GBP 564.8 million compared with a pro forma net debt position at demerger of GBP 665 million. The improvement of around GBP 100 million splits down as a GBP 21 million reduction in IFRS 16 lease debt and a GBP 79 million improvement in cash. IFRS 16 lease debt reduced as a result of fewer lease renewals in the period. This is consistent with the lease profile of our business, which sees a low level of renewals over the next few years, and IFRS 16 lease debt is expected to continue to decline modestly. This is clearly a timing factor as these leases will eventually be renewed, influencing the net debt position in the future. Cash balances, excluding the impact of the demerger, increased as a result of strong operating cash flow and a favorable working capital position. Stock recovered from unusually low level in the prior year, which was impacted by COVID disruption, noting that there was a further improvement in stock turn to 5.6x. Overall, our cash position in half 1 benefited from the second half weighting of capital and IT separation investment, together with timing impacts within payables, which will partially unwind in the balance of year. We will, of course, also pay dividends for the first time in half 2. As a reminder, we reiterate here our capital allocation priorities. You won't be surprised to hear that there are no changes to our capital allocation policies as set out at the time of demerger. The first priority is to continue to invest in organic growth and innovation. This includes a very successful story fit program, digital investment, and range development. Full year CapEx guidance of around GBP 30 million remains unchanged, and we continue to expect to invest around GBP 40 million in IT separation over the next couple of years. It is worth noting that in 2021, our CapEx and IT separation investment will be weighted to the second half of the year. We will continue to maintain a strong balance sheet, holding net cash as a partial offset against our lease liabilities and maintaining the GBP 80 million RCF for liquidity purposes. Our guidance remains for a full year dividend payout of 30% post-tax profit. We are in the early stages of life as an independent PLC and are comfortable with the current capital structure and capital allocation priorities. Moving forward, we will continue to review these and notably consider an appropriate IFRS 16 base leverage target as we emerge from these dynamic times. And finally from me, our outlook. As we expected, Core performance has now moderated as we continue to annualize strong comparatives in 2020. However, we continue to see strong Core sales on a 2-year basis. This is notably driven by buoyant demand from local trade and continues to be underpinned by our digital capability, demonstrating once again the resilience of our balanced business model. Following a strong Q2 from an order perspective, Do-it-for-me orders have normalized over the summer, and for Q3 are currently broadly in line with 2019. We remain optimistic about the future opportunity in Do-it-for-me, and a good example of this is in bathrooms, where we have seen particularly strong growth following the relaunch of our new bathroom ranges in stores over recent months. As a result of very high market-driven demand for installers and builders, combined with ongoing COVID disruption, we are, however, experiencing longer lead time to project completion which will result in a higher carryover order book into 2022. The combination of these factors, together with half year results ahead of guidance, is expected to deliver full year adjusted PBT towards the upper end of market expectations. This, of course, remains subject to any further COVID disruption or restrictions. Noted here also are some slightly amended technical guidance points on week 53 and the underlying tax rate as we continue to refine our modeling. I would now like to pass back to David, who will take you through the operational review. Thank you.

Thank you, Julie. As you know, we have a clear framework to win, which is guided by our vision, mission and, importantly, our purpose, the why Wickes exists, to simply help the nation feel house proud. We have a strong portfolio of growth levers to win in this market that are relatively immature with more to go for. I'll spend the next few minutes taking you through the progress we are making across each of these levers and outline some of our key activities planned for the second half. But before I do that, it's worth setting our growth plans in context of the market in which we operate. The home improvement market in the U.K. is currently valued at around GBP 25 billion and projected to reach GBP 28 billion as we enter 2025. The market is underpinned by an aging housing stock, property transactions, and consumer confidence, which drive customers to improve and invest in their homes. COVID restrictions have further amplified this market through changes in working habits resulting in more time spent in the home, fueling the desire to renovate and refurbish. When taken together with the increased appetite from rental tenants to invest in their homes, interest from the millennial generation in DIY, combined with a higher level of savings, which supports pent-up demand, these factors continue to indicate strong growth opportunity in the home improvement market. The chart on the top right of the screen showing property transactions reflects the impact of the stamp duty holiday. And whilst that government initiative is ending, typically, it is several months after moving home that we seek to improve and invest in the larger-ticket projects, such as a new kitchen or bathroom. And consumer confidence is bouncing back as the country opens up. With solid market fundamentals and consumer trends continuing to support home improvement plans, the strength of our customer proposition and digital capabilities mean that we are well placed to capitalize on these market growth opportunities. Local trade is a key customer segment and represents around 1/3 of our revenues. At the heart of winning for trade is our TradePro membership scheme, which is a very simple, entirely digital scheme for local trade designed to save them time and money, offering a flat 10% discount across the store. Continuing to grow with our most strategically valuable customers is critical as a TradePro member will spend 10x more than a regular DIY customer. In the first half, we have continued to successfully grow our TradePro membership, enrolling over 50,000 new local trade customers, bringing total membership to around 600,000. This has helped drive TradePro sales, which you can see here are above 2019 and 2020 levels and is reflective of the confidence of this customer base. We conduct a monthly survey amongst trade customers, and they are telling us that they have a strong pipeline of work with almost 60% of tradespeople saying they have work lined up more than 3 months out. Our Do-it-for-me customer proposition was significantly impacted by the pandemic in the first half with all our sharerooms closed from January until the 12th of April when lockdown restrictions were eased. Our Do-it-for-me activity, therefore, relied entirely on our newly developed virtual journey, which was used by over 1 million customers within 6 weeks of launch, delivering a resilient level of sales despite showroom closes through our critical winter sale period. Do-it-for-me orders naturally increased following the reopening of our showrooms, indicating a level of pent-up demand and supported by the launch of new product ranges. In the first half, we redeveloped our entire bathroom range, which has driven strong sales growth. We also saw the launch of our new home office proposition, which notably demonstrates our ability to respond to changing consumer behavior and leverages our existing design and installation capability. We are delighted to see that our innovative new ranges are proving very popular with customers, accounting for more than 1/4 of all sales in the first half as we continue to see higher attachment rates of tiling and flooring sales to kitchen and bathroom projects confirming the opportunity to grow adjacent categories and increase overall project spend. installation solutions for new categories are progressing well with more pilots commencing later this year. We have seen a step change in our bathrooms performance following the development of an entirely new range, an example of which you can see here. We also took our new bathroom range above the line, launching our first ever bathroom TV ad in June. We completed a major refresh of our kitchen ranges, and these are performing well. We had planned to refresh our in-store kitchen ranges in 2020, but these were put on hold due to the pandemic. However, we have now started the work to roll out the new kitchen range and 80% of displays will be completed by the end of October. Now that we have launched our home office products, we have noticed that customers are also integrating this into their kitchen design. And you can see just how good this can look from the image on the screen. At Wickes, our strong installer base is a key differentiating factor and gives us a significant competitive advantage. We have recruited over 350 new installer teams in the first half, strengthening the capacity and quality of our installation capability. And we were delighted to retain our Distinction level of service from the Institute of Customer Service despite the challenging environment. Recognizing our need for a base of trusted quality installers and to ensure a future generation of skilled tradespeople, we took the step in 2019 to launch our own Wickes Installer Apprenticeship, and we were the first and only major retailer to do so. We were delighted when our first cohort of apprentices completed their apprenticeship in the end of July this year. And you can see here, Nathan, who has recently set up his own business and is now a Wickes-approved installer. And we are continuing to actively recruit new apprentices to this program. Within DIY, our highly curated range continues to work well, supporting strong levels of core sales growth and market share improvement with extended ranges available through our in-store online terminals, OLI, and through our website. As part of our strategy to get our fair share in underweight categories, range reviews were completed in garden maintenance, flooring, timber and sheet materials, and own brand power tools. These reviews have delivered strong sales growth in excess of 30% along with improved availability and stock turn due to an average 20% reduction of in-store range count. What's more, we've been able to successfully introduce these range reviews despite the macro market supply challenges. And we have lots of exciting plans coming in the second half for further range reviews, including doors and decorating. A good example of how our range reviews are performing is in the timber and flooring category. It's worth noting that our timber range review was conducted before supply constraints emerged. However, what has transpired is that the review puts us in good stead to mitigate these issues as we've been able to secure supply on the timber lines that matter most to our customers. Following the introduction of the new range of timber, we had achieved a 20% reduction in the number of SKUs in the timber aisle, which has meant that we've been able to reallocate the space that this generated to carry up to 50% more stock of high-volume product lines. We have seen significant year-on-year growth in transactions of key timber lines and our sales of timber to our TradePro members has grown by over 45% year-on-year. In the first half, we also conducted a comprehensive review of our flooring range and took the opportunity to truly innovate with 60% of the flooring range being new, including a new water-resistant laminate range, especially for kitchens and bathrooms. The strength of our digital and service proposition has led to the significant growth of our digital customer base to well over 5 million digital customers today and 2/3 of our sales emanating in the digital space. Continuing to build on these digital strengths is critical to enhancing our customer proposition, and we have delivered some exciting digital developments in the first half with more to come. Arguably, our most exciting and game-changing digital activity is the development of our missions motivation engine, which uses machine learning to combine the power of data with that of the customers' activity in the broader digital ecosystem, Pinterest, Instagram, Facebook, et cetera. It enables us to identify the missions that customers shop and gauge the commercial volume and value within those missions. With this information, we are then able to create more targeted personalized communications, increasing both the quality and the quantity of missions that customers shop with us. In the first half, we have focused our Missions Motivation Engine on gaining greater insight into the missions of our TradePro customers. In the second half, we will continue our ongoing program improvement features for the TradePro app, including further personalization and the ability to target promotional offers and give early visibility of offers to drive loyalty amongst our trade customers. For our DIY customers, we are making the Click & Collect journey even easier with faster store picking for colleagues through digital picking apps, which enables them to receive customer arrival notifications and prioritization so they can ensure the products are ready for collection. In those stores where we offer contactless park and collect functionality, this is now being used by 20% of customers with significant improvements in the customer satisfaction performance measures. We are continuing to optimize key areas of the website to improve the customer experience including improvements to the checkout journey and deploying a greater use of product videos where we typically see higher levels of conversion and average transaction values, up over 30% when customers interact with video. In the second half, we plan to launch our new customer app with improved functionality, including better account facilities, push notifications, and augmented reality capability, for example, within paint swatches. We will also be turning the focus of our Missions Motivation Engine on to our DIY customers. Turning to our Do-it-for-me customers. Digital development has delivered improved imaging, features and pricing illustrations for Do-it-for-me projects on our website. These enhancements have led to a 10% increase in design consultant inquiries and a 45% increase in brochure downloads. Building on success of the virtual showroom experience, we have created an online showroom tour, which has already had 2.6 million views. And we are creating a new area on the website to centralize and promote all our design and installation services as well as introducing a credit online eligibility checker. Our physical estate remains a truly integral part of the Wickes proposition. While 2/3 of our sales emanate in the digital space, 98% of all sales directly touch the store. During the first half of the year, 3 store refits were completed in Dundee, Ruislip and Stockport, together with a refresh in Taunton and a relocation in Sunderland. With an average uplift of 60% in Do-it-for-me and 10% in Core, these investments continue to deliver strong returns. This gives us confidence as we move into the second half, and we will be accelerating our store refit program with a further 8 store refits and refreshes, demonstrating our ability now that we are a stand-alone business to allocate capital to drive growth and further enhance our market-leading position. To date this year, we have also increased storage capacity in 35 of our highest volume home delivery and Click & Collect fulfillment stores. As a result, we've been able to remove storage of our home delivery in Click & Collect orders from the shop floor, allowing us to future-proof further volumes. In total, we have created 26,000 square feet of additional storage space without impacting store ranges and planograms or compromising the store format. We will continue this program throughout 2021. We continue to evolve our 4C store service model. And earlier this month, we relaunched our Dunstable store following a refit to represent the current best-in-class store service proposition. You can see from these before-and-after pictures the extent of the transformation. I'd like to share with you a short video of how our 4C model operates within the Dunstable store and importantly, how digital features in every part of the customer journey. [Presentation]

Earlier this year, we laid out our ESG focus areas, together with our ambition to grow a responsible, sustainable business. Since April, we have established a Board-level ESG Committee, appointed our first-ever Head of Sustainability and embarked upon a comprehensive ESG strategy review. As you can see from this slide, we have made great progress with a tremendous amount of activity taking place across each of our focus areas. I'd just like to highlight a couple of initiatives that I'm particularly proud of. Our inclusion and diversity program goes from strength to strength. We have been focused on ensuring our store managers receive training and development in areas such as disability, allyship and mental health to ensure they are able to support our colleagues so that everybody feels welcome at Wickes Group. We have now raised over GBP 1 million for YoungMinds, our charity partner, after strong fundraising in the first half of this year, and we have pledged to raise a further GBP 1 million by the end of 2022. And we are on a mission to reduce the amount of plastic in our packaging. We have begun work to eliminate polystyrene from all our packaging. We are now using over 90% recycled content in the packaging of many of our own label products. And we have launched plastic-free packaging for door handles, power tool accessories and bathroom accessories. ESG is completely embedded within our culture and DNA at Wickes. But we're not stopping here, and we absolutely intend to build upon this position into the future. As I said, we have embarked upon a review into our ESG strategy, and I look forward to updating you on this and further progress we have made. So in summary, we have delivered a strong set of results, which has been achieved in part due to our digital strength and the quality of the products and service we provide. We are excited by the growth opportunity for Wickes in home improvement, and we continue to successfully advance and evolve our model to win in the market. We are a growing cash-generative and profitable business with a highly distinctive and differentiated proposition to the competition. At the heart of this is the unique balance of our business in which revenue is split between our 3 customer segments of local trade, Do-it-for-me and DIY retail. This not only allows us the best exposure to the fastest-growing sectors in the market, but also means we are not overtly dependent on one area. We have a low-cost, efficient and totally integrated operating model, all powered by data-driven insight. And our proven levers for growth remain valid with more to go for. All of this results in a business which will continue to deliver good earnings growth with strong cash generation, giving capacity for increased shareholder returns through a progressive dividend policy. Thank you for listening. Julie and I will be very happy to answer any questions you have.

[Operator Instructions] We will now take our first question from Shane Carberry from Goodbody.

Thanks for the presentation. And three, if I may. Just firstly, looking at the kind of like-for-like trends as we kind of have run into kind of July, August and midway through September now. Can you talk us through the kind of moderation in Core and maybe give us kind of some sense in terms of trade versus DIY? Similar question then from the perspective of DIFM, and if you could kind of help us give a little bit more color in terms of the ordered sales growth that you flagged in the July update, kind of up 30% on a 2-year basis, and kind of how we should think about that flowing through in terms of actual sales for the second half? And the third question really was just on gross margin, and you did give a little bit of color in terms of the kind of 60 bps of margin decline. Can you just help us kind of decipher kind of what proportion of that is mix versus inflation? And you mentioned promotional activity as well, kind of returning to more normalized levels. So if you could just give us a little bit more color there, that would be helpful. And sorry, just one more, and it's a bit more of a technical question, just surrounding the lease debt. You gave a little bit of color talking about the lease debt declining in the short term before kind of picking back up in the medium term. Could you give us some sort of kind of range in how we should be thinking about lease debt over the medium term, that would be helpful.

Well, Shane, that's a super list of questions. Thank you very much. What I will do in the first instance is just hand you to Julie to start to cover those off and I'll add a bit of color as we go.

Okay. Thanks, David. So in terms of like-for-like trends, if I take Core, first of all, clearly, over the course of the first half, we've seen very strong like-for-like growth through our Core side of the business. And if I take the year on 2-year growth figures, Q1 51.5%, Q2 38.4%. And what we're signaling here today is a continued trend of strong year on 2-year growth, albeit that, that has now moderated as we work through into the second half. It's also worth mentioning we will update on Q3 the actual performance in due course. So some moderation against the very strong levels we've seen in the first half, but still strong year on 2-year. From a Do-it-for-me perspective, we've reported through our last trading update very strong levels of order growth through the back end of the first half. We've seen that moderate over the summer, but I'm pleased to say that we're seeing order levels in line with 2019, and 2019 was a particularly strong year for us from a Do-it-for-me perspective. So the key thing, though, that impacts our second half performance in Do-it-for-me is that ability to take those ordered sales and move those through into a delivered and installation completion -- completed project status. And that's where we are signaling, as part of our outlook statement here today, that, that has extended out and will push some of the Do-it-for-me sales, ordinarily we would have recognized in this year, into the second half. So Core, overall, compared to previous guidance, performing more strongly than we expect in the second half. Do-it-for-me, impacted by timing, shifting some of that sales into 2022.

And Shane, from my perspective, I guess, this is where we see our sort of uniquely balanced model in full flight. Because if I was to characterize the last sort of 18 months of the pandemic, as we came into the pandemic, as Julie quite rightly said there, a very strong Do-it-for-me form as we exit 2019 into 2020. As we came through the pandemic, it was very much a story of DIY. And that was a real uptick in terms of DIY. As we start to come out the other side, we've got a real surge in terms of local trade. But obviously, the encouraging thing as a business in the way that we're shaped and organized is we serve all 3 routes to home improvement. So it leads with a very strong position in the first half and gives us great confidence as we look forward in terms of growth for the business.

Okay. I'll pick up the margin point next. So again, we've reported a 60 bps decline in margin rate. That's absolutely as we would have expected. That has seen a return to more normalized promotional activity through the course of the first half, and that's consistent across the market. Mix, which is a combination of strong local trade and particularly participation through our TradePro customers, together with mix impact through Do-it-for-me continue to see very strong levels of installation participation and a particularly strong participation through bathrooms. If I was to just comment on the key influences though, on that margin decline, mix would probably be the main factor that I would call out there. And it's something we've continuously signaled really in terms of the shift of our business, particularly into our service-based proposition, which carries lower levels of margin. So absolutely, as expected, mix perhaps the more prominent feature in the first half and noting that the impact of cost price inflation, relatively low in the first half, likely to increase moderately in the second half because we saw those strong inflationary forces coming towards the back end of half 1.

In terms of lease debt.

And then lease debt. Yes. So in terms of lease debt, very much a very strong position at half year, somewhat flattered by an unusual profile, whereby capital investment will flow strongly in the second half. IT separation, clearly, we mobilized in the first half of the back of the demerger. And we do expect to see some unwind of working capital. So certainly, we'll see some moderation in that cash position as we move through to the full year. I think that answers your question, Shane.

Yes, my only other build with you, Julie, on that, I mean pertaining to the gross margin, Shane, was -- obviously, it's a strategic imperative of ours to build out our installation service business because it means we get more of the cash within the project. So we will continue to do this. We will continue to build out the suite of installation services we have, but recognize that does come at a lower margin, but an overall cash improvement to the business.

Yes, perfect. That makes a lot of sense.

We will now take our next question from Clyde Lewis from Peel Hunt.

David, Julie, I think I've got 3, apologies. But the first one, I suppose, was on pricing. And obviously, I understand completely the drive to recover the cost pressures. And I suppose I'm sort of wondering, at what point do you actually start to sort of change that position and maybe start to actually look to recover the gross margin aspect of all the sort of cost pressures from higher building cost materials prices? That was the first one. And the second one was on kitchens and the Do-it-for-me. I mean, you've obviously had a big drive on bathrooms. And it sounds very much like you've taken a fair bit of market share there. And I'm just wondering in kitchens, whether you've done the same in kitchens or whether you expect the refresh that you're bringing through now will help you in terms of market share going into '22. And the third one was around -- I think, David, you put up the comment about millennial sort of DIY -- DIY is sort of growing and improving. I mean, I'd love to know more about that in terms of the data that you've sort of picked up there because, obviously, that's going to be a fairly important part for your DIY story over the next sort of 3 to 5 years, in particular.

Indeed, thank you, Clyde. From a pricing position, of course, it's that delicate balance between the commercial reality and the customer attraction isn't it? So we've taken a pricing stance that in the first instance ensures that we maintain our market-leading price position in the market. So we're cautious in how we move through and make sure that we maintain a market-leading position. Why do we do that, Clyde? We do that because retail is a volume business. As we get the real operational leverage, it starts to improve the net profit performance of the business. So we want to focus on driving as much volume through the business as possible. We also recognize that some of the inflation that we've seen more recently is definitely transitory. It's not structural change. So to structurally change your price position, I think, will be far higher risk to the overall performance of the business in the long term rather than actually provide the right balance between the commercial reality and the customer traction basically. And we're already seeing that. I mean, I'll use a good example. A top 5 setting line for me in the business at the moment is Blue Circle Cement. It went from [ 450 ] up to [ 460 ]. Today, it's back down to [ 430 ]. So I think we're taking the right strategic approach with our pricing perception at the moment to maintain and engage customers. And as you know, we have a reasonable heavy site to the business and price is clearly working because of our sign-ups with local traders reaccelerating in recent months. I mean, you've seen a good performance over the first half in terms of growth of our TradePro base. I can say we're confident in recent weeks that is accelerating. And I think our price strategy around the lines that matter most to those customers is driving that. Kitchen is interesting. I think you're absolutely right. We are having a good time, a very good time in our bathrooms business. We've completely reset the range and it's performing tremendously well. We are in the rollout of our new kitchen ranges. So that was somewhat delayed through the COVID period, but we are now absolutely moving forward in angle with that. So by the end of October, our new kitchen ranges will be in all of our stores and we're confident that they're resonating well with customers. We're already seeing, if we look at our new ranges in our Do-it-for-me business, 25% of the growth in the first half was due to new lines listed in the first half. So we know when we get new ranges right, we get it very right, and it really appeals to customers. So I'm confident as we move forward, particularly around kitchens, as we get the presence and visibility of those into our physical estate that we will see exactly the same response as we have done with bathrooms. And then finally, I think you had a question around millennial DIYers. I mean the data we really have, and as you know, we research every month with a couple of thousands of customers through the lens of DIY and 2,000 to 3,000 through the lens of local trade through our TradePro base. There still is a really high intent to take on DIY projects through the customer base and through all sort of like demographics and ages. I mean, interestingly, millennial DIYers still actually show the highest intent to continue to do a DIY project over the next 12 to 24 months. But putting that down to a bit of date, last month alone in August, 80% of households in the U.K. took on a DIY project. That particular project definitely had a very outdoor bias to it, probably not a surprise given the month we're talking to. But I think the penetration of the amount of customers taking onboard outdoor projects really signals to us how the garden and outdoor space is becoming much more of an extension to the square footage of the home as people still plan to spend more time in their gardens and entertain more in their gardens going forward, which is why it's right for us, and we're testing and learning or just about to start of test and learn at the moment in terms of the design and installation service around landscape and in garden because we do see that almost as an extended room in the home as we move forward.

We will now take our next question from Adam Tomlinson from Liberum.

Just a few. A couple of questions for me. Firstly, on availability. So having been into your Taunton store a few times, you revamped one there. Last few weeks, it seems like availability is still in a pretty good place. So it would be useful just to get any overview on that. And I guess, in terms of stock coming into the business, any visibility you have on how far out that goes in terms of availability? That's the first question. Secondly, just a reminder on TradePro, on the TradePro apps, so looking like continued momentum in terms of people downloading that. Can you just remind on the stats around -- and the customer behavior around the TradePro customer versus a non-trade per customer. Then on fitters as well, it looks like you've added a good number there. Just anything you can say around how hard you've had to kind of fight to get those fitters the availability in the marketplace. And finally, if I can, just one on outlook for 2022. And cognizant, there's a lot of moving parts and uncertainties here. But I think I got the impression this morning that got some confidence around profit stepping up in 2022 helped by that DIFM order book. So just keen to understand the other kind of assumptions and pushes and pulls that you're sort of baking into that guidance, if that's okay.

Yes. No, thank you, Adam. A good suite of questions there. Look, I think we all know that some of the challenges more recently around availability have been pretty well trailed at an industry level in the marketplace. For us, I would say we're in a very good place, Adam. And of course, that starts with the fact that we have a highly curated range. So we make sure we have a curated range, we make sure we've got -- we're holding good stock on the lines that matter most to our customers. And our availability on balance is in very good shape. Interestingly, from last month's TradePro [ mood renovation ] research reports, more than 90% of our TradePro customers are telling us they can get the materials they need out of about only 3% said they had a bit of a challenge. So we can call it in the round sort of 97% are comfortable in terms of their ability to get the tools and the products they need to get the job done. So I think we're increasingly in a much better place, and that data certainly highlights it. In terms of TradePro app, the data point, I guess, is most helpful is we can see through the lens the strategic value of a TradePro customer. They, on balance, are worth sort of like 10x that of what we call a non-TradePro or a DIY customer. So their strategic value is critical. It's meaningful, which is why accelerating our recruitment, engagement and retention of those guys through having a proposition that is all about saving time and saving the money is so important to the growth strategy across that pillar. And then finally, on the fitters. I mean, I'd almost link that question to the point around save me time and save me money. What we provide an installer and installer team in our business is just the simplest way of doing what they do best, which is to fit bathrooms, fit kitchens, tiling and flooring projects. They don't have to worry about any of the lead generation, any of the design, any of product securement, any of the invoicing, any of the paperwork. We just then have them pointed at doing what they do best, which is their artisanal skill. So I think the volume of work that we have in our business, the simplicity with which they can engage and work with us and the support they get from us to do all of the things that they don't like to do means in actual fact, which is an attractive proposition for fitters. So getting another 350 teams in over the course of the last half of year isn't without effort on our part, of course. But we're a very sticky proposition for the installation population, and we can see that working. And we see that working through our own apprenticeship program as well in terms of some of the uptake that we're getting there. So I feel very confident that we will continue to successfully build our installation teams as we move forward and expand our services.

Can I pick up the outlook question?

Yes, please, Julie.

So in terms of outlook for 2022, whilst we've not provided any specific guidance today, the key dynamic that is changing those that carry over point on Do-it-for-me. So we fully expect now our carryover order book is going to be higher and would ordinarily be the case. And that will have a positive impact on profits for 2022. Aside from that and really consistent with the messaging we've given before, we remain cautiously optimistic around Core. So generally speaking, we'd be looking at continuing to expect moderation, of course. So we, again, annualize that COVID impacted period. And of course, we will be looking to closely monitor and manage some of the cost inflationary pressures that we can see out in the market. But the key change today that we're signaling is around that carryover timing point on Do-it-for-me. So that's a key step change here.

Great. That's very helpful.

Thanks, Adam.

Thanks, Adam.

We will now take our next question from Jon Bell, Deutsche Bank.

A couple from me, actually. Just interested in any supply chain bottlenecks that you see. I know that cement was an issue the last time you spoke. It doesn't sound like it is now particularly, but anything else that's emerged is particularly difficult to get hold of? And then just on the Do-it-for-me side where you've had the installations postponed into next year. Could you just give us a sense of whether that's been at the behest of the installer or at the behest of the consumer, some kind of broad split, if there is one? And then finally, just is there any risk where something gets pushed into next year that it can disappear completely or are they on the hook already, contractually?

Thank you, Jon. Look, on the supply chain point, we are -- as I said previously, we are definitely in a much stronger position. Of course, there are still some more broader industry-wide challenges. Funny enough, around cement in certain areas of timber, it's getting much better. For us, we're in good shape. I'll come back to it. Our curated range and our operational agility ensures that we get what we need for our customer base and they're telling us that as well. So that's good news. Installations, it is an interesting one because, obviously, every kitchen or bathroom that we sell, we don't necessarily install, although we have a high propensity to do that. So there is some shift in terms of the availability of our installer network because they're very busy. I think I mentioned in the update on our latest round of research with our TradePro customer base, more than 60% of them have got work up to Christmas and beyond. So you can see how busy they are, which is great, by the way, because we feel that benefit through our business on the TradePro and trade category side of the business. But there are also consumers ringing us up quite genuinely just saying, "Look, can we push it back a little bit because I can't get my installer lined up." So for those that are doing where we are a supplier only, with our kitchens and bathrooms, we can supply everything between 7 to 14 days. So there's absolutely no issue in our ability to get the product to the customer, but customers are telling us they're still struggling to potentially get an installer over the line. And not surprisingly, I think with the kitchen, kitchen tends to become -- it's a bigger project. It might be more part of their broader remodeling of the home. And unlike bathrooms where you typically need one trader to do the job. In a kitchen, you're going to need a joiner, electrician, a plumber, et cetera. So there's a more complex team that you've got to organize around that. So in the round, it's some and some. It's some of us and it's some of customers sort of like pushing back in terms of the installation times.

Yes. And just on...

And any risk -- yes, go on.

Sorry, on your final question. We monitor levels of refunds quite carefully across the business. And as we stand today, we are seeing no uptick in trends. The level of refunds we get is very low in our Do-it-for-me business. I think that reflects -- it comes back to what David said, really, in terms of a lot of this delay is market-driven, sometimes at the customer's behest. And actually, they're more than happy to defer those installations to post-Christmas and are quite comfortable with that. So of course, we continue to monitor that. But absolutely no indication that, that -- or the profile is going to go away.

And Jon, putting it bluntly, I think this reflects the strength of our overall service proposition that customers will absolutely want to stay with us, and they're willing to wait.

We will now take our next question from Ami Galla from Citi.

Just a couple for me. The first one was on the branch resets. I mean, if you could give us some color as to the resets that you've made in the last 12 months, how have they traded, and what's the sort of sales uplift that you're seeing? And also at what point do these refitted stores actually achieve maturity? Is that -- is there some visibility that you have on that? And the second one is just a clarification. Is it right for me to understand that the GBP 17 million of government grants that you have received in H1 '20 was reversed in the second half? So when we look at the H1, H2 numbers, there is a reversal implied within the sort of H2 numbers and on the full year, it's kind of neutral?

Okay. Thanks, Ami. In terms of branch refits, over the last 12 months, the refits has been relatively low. We're now accelerating that program as we come into the second half of the year. But here, at least, we see, are absolutely consistent with the profile we've shared before, which is plus 60% on Do-it-for-me, on average, plus 10% on Core, on average. And the refits are doing -- are consistent with that, if not a little bit stronger. In terms of maturity, the answer to that really is they get to maturity very, very quickly, certainly within the first year. So we see that uptick almost immediately and then that is sustained as a store annualizes. So it's a very, very quick maturity curve for those stores. And we work hard to launch them in the right way so that customers become aware of that new proposition very quickly. Sorry, is there anything -- you want to add anything to that, David?

No, I was just going to say, I mean, that it's really rare in retail that you continue to move through your network and get such consistency of delivery around the refit program. And I'm delighted, as you saw in the video this morning, actually, we showed you the Dunstable store, which sort of like we launched 3 weeks ago, and it's the best performing store in the network now over the course of the last 3 weeks. So we know how to get this right. We continue to sharpen the execution as we move forward. And with that, performance comes. And I'm delighted to say that the stores that we've got planned, the other 7 that we got planned for the remainder of the year in flight, macros opens this Saturday, the rest are underway. So across the course of November and December, we'll have the rest of the refit program landed for this year, which is a step change up in the second half versus the first. We'll be doubling the amount of refits that we do.

Yes. And just coming back to the government support. Absolutely right. I mean, in terms of the GBP 17 million benefit that somewhat flatters the first half of last year, that was completely reversed and repaid in the second half of 2020. So you'll see that come through in the second half. Thank you.

We will now take our next question from Saranja Sivachelvam from Peel Hunt (sic) [ UBS ].

I have 2 questions, if I may. So the first one is, how do you see the split between stores and online evolving? So I noticed during the call, you said that 98% of all sales still touch the store. But kind of post-pandemic, how do you see that evolving? And is kind of your social media reach also helping with interest amongst millennials? And the second question is on share gains. I might have missed this earlier, but where is it that you see your share gains kind of coming from? What's driving it? Is there a particular part that's kind of doing better on the share gains side?

Thank you. The evolution of online, I mean, a great question. You're absolutely right. If you look across the course of the first half performance, we've grown the overall business by 33%, but we've maintained the penetration at close to 66% or so in terms of our sales of our digital channels. So you can see how they're growing with the business. That's a highly penetrated suite of digital channels, to be fair, I think, in any retail business. But over time, we would still expect to see some penetration growth as we move forward. We do see some change in those channels. We can see TradePro really stepping forward. As our stores have opened up, whilst home deliveries remain very, very high, you might see a little bit lower Click & Collect. But what compensates that is our online in-store facility, which is really stepping back up now. Now colleagues and customers are still a little bit closer or the ability to get closer in terms of proximity running our online in-store digital lever is now really sort of like coming back to the fore again. So there's some movement across the digital channels. But overall, that penetration is very high, and it will probably step forward in time at a more marginal rate as we go forward. And I agree with you, by the way, our social presence, Pinterest, Instagram, how we engage our own customer base in generating the content onto our website, which in itself drives greater sales when people participate in that content is a really good and virtuous circle. So I think we're doing a brilliant job there. More specifically around share gain. I mean, broadly, we see good outperformance across all of our major categories. So we're moving forward as a business at large. But we do recognize, and we've laid this out strategically when we look through the lens particularly DIY, that there are some larger categories that we undertrade in and our strategy is to make sure that we overperform in these underweight categories. And certainly, in the first half, just to reflect that, garden maintenance, flooring, sheet materials, own brand power tools are some good examples of some category refreshes that we've done to address that very strategy. And I'm delighted to say their growth has been nothing short of phenomenal since we've reset those categories. So we think our strategy of curated range, hold the volume and confidence on the lines that matter most to customers, combined with addressing those underweight categories through innovation and category resets is working really well.

We will now take our final question from Sam Cullen, Peel Hunt.

I've got three, I think. The first one is just going back to the margins. And if we look at operating margin first and I assume that you're not changing I think what you said at the demerger of looking to return to operating margins in line with the kind of 7.5% you did in 2019. When I think about the split there between kind of gross and operating, is sounds to me like you still expect kind of further pressure on gross margin going forward. Should we then expect that to be made up, I guess, in the overhead recovery in the selling cost line in that you're shifting towards kind of more online sales, which come structurally lower gross margin, but the cost to serve is lower from selling -- from a selling cost line perspective? Is that how we should think about the kind of change in those 3 lines of the margin profile of the business? And then the second one is the chart that you gave helpfully on, I think, Slide 18 about the percentage of trades to people who work lined up for more than 3 months. Do you have any idea what that may have looked like 18 months ago, for example, to give us an idea of the transition there? And just the last one is just on the tax rate. It's clearly going to be better this year. Maybe early to say, but should we extrapolate that performance into 2022 and beyond relative to what you've guided previously?

Okay. If I take the sort of operating margin point first. I think we've consistently said that we expect, through a function of mix and particularly as we grow and evolve our service-based model, to see moderation through our gross margin percentage combined with operational leverage that will come back through our selling and administration cost line to drive improvement at the bottom line. So that message remains consistent, and there's no reason to change that based on what we see to date. So hopefully, that answers your question. If I take the tax rate question, because I think that's a very straightforward one. Again, around about 21% absolutely should stand into the future, subject, of course, to the headline rate that does change in 2023.

Super. Thank you, Julie. Specifically to the chart, I think you said on Slide 18 that shows the progression of the buoyant pipeline of work. So the percentage of TradePro customers telling us that they've got 3 months-plus work in their pipeline. Typically, the normal balance would be that the up to 3 months would be the higher percentage, typically. So you can see that growth from January, right about to nearly 60%, they're saying I've got 3 months plus. Typically, the more material side of that have gone back 18 months, probably would have been a little bit more sort of like I'm up to 3 months' worth of work. So I think the balance has shifted that their pipelines are getting longer and they're more confident about their workflow. And we're certainly seeing that in our engagement with our TradePro customers, their narrative and how they took thinking about the outlook as they move into 2022. So they remain very confident.

Thank you. I will now pass the call back to your host, Mr. David Wood, for closing remarks.

Super. Thank you. Look, thank you, everybody, for joining us this morning, and thank you for your questions. It's a really good suite of questions, and I really -- we really do appreciate that. Really just to wrap up, I mean how do we reflect on the first half? Look, we have delivered a very strong set of results, very much driven, at the heart of this absolutely is this uniquely balanced business model that we have across not just local trade, DIY, but also Do-it-for-me. And that has really enabled us to thrive over the last like year to 18 months. But also that being underpinned by digital scale and capability. And of course, most importantly, our 8,000 amazing colleagues that deliver wonderful service to our customers every day and innovation at the heart of that. As we look forward and we look through the lens of our levers for growth, they do remain valid with more to go for. So I think we face the second half and into 2022 with real confidence that this is a successful growing cash-generative business that will continue to take share in the very large and growing home improvement market in the U.K. So thank you for listening and look forward to speaking with you soon. Do take care. Have a great day.