Good morning, everyone, and welcome to Howden's 2020 results presentation. I will begin by introducing our 2020 performance. Paul Hayes, our new Group CFO, will then review our financial results for the year. I will then share my perspectives on our 2020 performance and our plans for 2021. Then we'll take questions.
Howden's has performed well during a challenging year that has been significantly impacted by COVID-19. We adapted to COVID trading conditions while investing in and progressing our strategic plans for the business.
Our performance demonstrates the strength of our trade-only business model and our ability to continue to evolve the business while prioritizing the health and wellbeing of our staff and customers. The result for the year reflects the Quarter 2 spring lockdown period, followed by a year-on-year increase in second half sales and profit.
U.K. sales in the first half were 29% lower than in 2019, with all of the shortfall attributable to trading in the second quarter. U.K. second half sales increased by 16% on 2019, with the increase in sales trending upwards across the second half, exceeding our expectations in latter periods.
I believe this performance reflects the measures that we've put in place to enable our people in all areas of the business to work safely together with those put in place to support our customers.
These measures comprised of new services, lower prices, combined with more margin flexibility for depots, high stock availability, and a safe environment in which to trade. With people by necessity spending more time at home and end user concerns about further lockdowns, we also believe people were choosing to spend more on their homes.
We flexed our traditional Period 11 sale period, when sales are typically more than double those of other periods across Periods 10 and 11. With signs of pent-up demand, reports of extended delivery times amongst our competitors, and concerns about further lockdowns, we flexed the sales period to help builders book in more kitchen fits over a longer period.
Sales across Periods 10 and 11 exceeded those targeted by the business, and Period 11 alone still returned a record result. It also benefited supply chain management and the ability of our depot teams to service demand, which in turn were incentivized for performance in Periods 10 and 11 combined.
A founding principle of Howden's is to be worthwhile for all concerned. In these difficult times for all, we have supported staff and customers and continued to conduct other stakeholder relationships in a fair and responsible way.
During the spring lockdown, we maintained an emergency provision to support the NHS, care workers, and vulnerable people, and we have continued to support charities. Throughout 2020, we paid our landlords in full and honored, and in some cases, increased our orders from suppliers, who in turn have supported us with high stock availability.
Similarly, given Howden's strong balance sheet and our trading performance, we repaid all of our 2020 furlough funding prior to year-end and settled a number of other payments that we previously deferred, including taxes, pension deficit contributions, and business rates waived by certain local authorities.
Today, we are recommending that we resume dividend payments. The marketplace remains challenging and may be further impacted by COVID-19, Brexit, and underlying consumer confidence. We believe we are well positioned in such a market with our trade only in-stock and local model.
Based around our core building blocks of service and convenience, trade value, and product leadership, we have initiatives in place to do this through evolving our depot model by improving range and supply management and developing our digital capabilities. I will update you on these and our operations based in France after Paul has taken you through our financial results. Paul.
Thank you, Andrew. Good morning, everyone. I look forward to meeting you face-to-face when conditions allow. I joined Howden's in November. Despite lockdown, the team has helped me get to grips with the business very quickly. I have visited our manufacturing sites, a number of depots and other locations, and met many of our people. I'm pleased to be announcing Howden's 2020 full year financial results.
You will be reassured to know that I will be presenting the financial results today in the well-established format used by the company. I believe that this will be the most effective approach in providing clear comparability.
Let me start by looking at some of the headline numbers. These are reported by us for the first time under IFRS 16, the new lease accounting standard. Moving from left to right on the top row to begin with.
As you can see, Howden Joinery's U.K. revenue fell by GBP 41 million -GBP 1,510 million, a 3% decrease on 2019. Overall, group sales decreased by 2% after including our growing continental European business. Gross profit fell by GBP 56 million -GBP 930 million. The percentage gross margin of 60.1% was down from 62.3% in 2019.
This included mix changes, and as we explained in the first half results, the impact of carrying fixed manufacturing costs during reduced levels of production. Howden has made an operating profit of GBP 196 million in the year, down from a GBP 260 million profit in 2019.
Now moving down to the second row. Net interest charges were up by GBP 11 million, predominantly due to the adoption of IFRS 16. As a result, there was a profit before tax of GBP 185 million. This compares to a profit of GBP 261 million in 2019.
The cash flow was particularly strong in the year, and this included significantly lower shareholder payments with a share repurchase of GBP 10 million in the early part of the year before this was suspended.
There were no dividend payments in 2020, and I will talk about recommencing dividend payments a little later in the presentation. There was capital expenditure of GBP 70 million and a GBP 30 million contribution to the pension plan deficit.
In addition, our cash flow was impacted by a GBP 60 million beneficial phasing from higher payables, despite payments being made in accordance with usual terms. The underlying cash balance is approximately GBP 370 million. I'll now go into some of the detail behind the headline numbers and start by talking about revenue. Howden's U.K. turnover was GBP 1,510 million and decreased by 2.6% on a total basis and down by 4.5% on a same depot basis.
In continental Europe, turnover was EUR 43 million, which was a 13% increase. This is after adding four more depots during the year, bringing the total to 30. Sales growth was 2.5% on a same depot basis. I will now show some more detail on the U.K. performance on the next slide. In Q1 pre-COVID-19, sales were up 1.1% on a total basis and down 0.8% on a same depot basis.
During Q2, we were most significantly impacted by the COVID-19 pandemic. With the initial phase of lockdown, sales were down 56% on a total basis and down 57% on a same depot basis. We improved period on period in the second quarter as we found ways to operate the business safely. In the second half, sales recovered, are up by 16%, and we believe that our performance was supported by our full stock availability.
Andrew will provide more details on this later. Overall, in H2, sales were up by 14% on a same depot basis. Let me now talk you through the movement in PBT from GBP 261 million in 2019 to GBP 185 million in 2020. Starting with gross profit, that fell by GBP 56 million, which is summarized in the chart on the right-hand side.
If we bridge from 2019's gross profit of GBP 986 million, there was a GBP 16 million impact from pricing. Secondly, a large fall in sales volumes compared to 2019 reduced revenue by GBP 20 million.
There was a negative impact from mix of GBP 9 million, a result of higher sales of lower margin products. This reflect changes in customer demand in the current environment, such as an increase in sales of appliances. These products were at good margins, but below the high average margin of the group.
Also affecting cost of goods sold, we saw higher input costs. This resulted in a net decrease to gross profit of GBP 5 million. As mentioned earlier, we were also impacted by carrying fixed costs at lower levels of production of around GBP 6 million as a result of COVID. Exchange rate movements in the year had a minimal impact on margin. Together, this gave a net fall in gross profit of GBP 56 million- GBP 930 million and a gross profit of 60.1%.
If I now turn to the other factors that contributed to the movement in PBT, reverting back to the chart on the left. Operating costs increased by GBP 8 million, which I will address on the next slide. Net interest and other finance charges were GBP 11 million higher than in 2019, reflecting the impact of adopting IFRS 16. The net result was a profit before tax of GBP 185 million.
I will now explain in more detail the main movements in operating costs. Operating costs increased from GBP 726 million in 2019. The incremental costs of the 38 depots that we opened in the U.K. in 2019 and the 16 depot openings in 2020 totaled GBP 10 million. Costs in older U.K. depots decreased by GBP 7 million, mainly reflecting reduced levels of activity and therefore variable costs, particularly in quarter two.
Cost increases incurred to support future growth totaled GBP 9 million. This included the costs of the Rotherhams development, which we previously announced, and digital developments. The impact of French depots totaled GBP 4 million. Other operating costs increased by GBP 6 million, and closure of our Dutch and German depots in 2019 benefited the full year result by GBP 6 million. Finally, costs reduced by a further GBP 8 million as a consequence of adopting IFRS 16.
This has meant that operating costs overall rose by GBP 8 million -GBP 734 million. I will now briefly turn to the remainder of the income statement. If we look at the second column of numbers on the table, the impact on 2020 of adopting IFRS 16 was an increase in operating profit of GBP 8 million. This is more than offset by an increase in related interest charges of GBP 10 million.
As a result, as you know, our profit before tax was at GBP 185 million. This led to a tax charge of GBP 38 million with an effective tax rate of 20.3%. This gave a profit after tax of GBP 148 million. This resulted in earnings per share in 2020, GBP 0.249, which compares with GBP 0.35 in 2019. Turning to dividends. As you know, the dividend and share buyback programs were suspended in 2020.
In November, we indicated that the board would consider recommencing payments of dividends subject to the company's trading performance and financial position continuing to meet the board's expectations. This would be subject to there being no further significant disruption due to COVID or otherwise. The board has recommended that we pay a final dividend of GBP 0.091 per share for 2020.
This is in line with the group's established dividend policy between 2.5 and three times dividend cover at 2.7 times. It will be paid in June 2021 if approved by shareholders at a cost of approximately GBP 54 million. The board has recommended a special dividend of a further GBP 0.091 per share, which will also be paid in June 2021. This is equivalent to the 2019 final dividend that was canceled. In respect of 2021, an interim and final dividend will be declared in line with our policy.
The 2021 interim dividend will be one-third of the 2020 full year dividend at GBP 0.03. The Group has a strong balance sheet that has positioned us well in these challenging times, and we face continued uncertainty. The Board regularly reviews its prudent capital structure against current trading and cash requirements to ensure it gets the appropriate balance between supporting the business and delivering appropriate shareholder returns.
This will include reviewing the level of shareholder returns once we see more stability. Let me now turn to cash flow. From a position of having net cash of GBP 267 million at the end of 2019, we ended 2020 with net cash of GBP 431 million. As I explained earlier, the underlying cash balance was GBP 370 million. The major movements since the end of last year were net working capital decreased by GBP 70 million, which I will address shortly.
Capital expenditure totaled GBP 70 million and was focused on growing our business and executing our strategy. It included spend on the final phase of our Raunds warehousing strategy, further delivering our digital capabilities and investments in new depots in both the U.K. and France. We also acquired solid surface worktop production facilities that strengthen our product portfolio.
Andrew will talk about these shortly. Corporation tax payments were GBP 32 million. As I've already described, we spent GBP 10 million repurchasing shares in the first half. There was a GBP 22 million contribution to the pension scheme over and above the P&L charge.
The net result of these and other movements was a cash inflow of GBP 163 million, meaning that we ended 2020 with net cash of GBP 431 million. Looking at the main movements in working capital. Net working capital decreased by GBP 70 million. Within this, stock increased by GBP 23 million.
This was largely impacted by increases in contingency stock to protect against potential supply chain disruption from COVID and Brexit. This approach has supported our business model well during COVID-19, with good stock availability differentiating us from many of our competitors. Debt has decreased by GBP 2 million, including a lower debtor book with good aging.
As I mentioned earlier, creditors increased by GBP 91 million, impacted by high levels of stock receipts later in the year. We have already seen this reverse in Q1 2021, and this should be taken into account when reviewing underlying levels of working capital. Let me now finish with some brief comments about current trading. The first two periods of the year saw total U.K. sales rise by 5.1%, up 4.5% on a same depot basis.
Excluding week one, which has included two and a half trading days in 2020, but no trading in 2021, sales were up by 7.1% or 6.5% higher on a same depot basis. Clearly, there are currently various market uncertainties and a number of factors that need to be considered in forecasting this year's overall result.
We are seeing continued uncertainty as consumers are feeling more cautious in letting tradespeople into their homes in light of the continued COVID-19 pandemic and related restrictions. This is leading to variability in demand from our customers.
We have implemented price increases, but we are currently seeing pressure on commodity pricing and freight costs. We are also continuing to take other measures to protect our employees and customers and to de-risk our in-house supply chain.
We will closely manage the drivers around margin and focus on getting the right balance between pricing and volume in what remains an unusual market. We're continuing to roll out new depots and revamp existing depots. This reflects some initial success from the reformatted depots we have completed so far, despite a rather challenging trading environment.
We're continuing to invest in the business around its core strategic priorities and anticipate investing in the order of GBP 80 million this year in capital. This is consistent with the amount that we were expecting in 2020 before COVID.
In summary, Howden's has performed well through a challenging period and remains in a strong financial position. Although the business continues to face near term uncertainty, it is well positioned to deliver a clear organic growth strategy. Thank you. I will now hand you back to Andrew.
Thank you, Paul. I will start by talking about our performance in 2020 and our plans in 2021 using the initiatives we had in place for 2020 as a framework. Firstly, depot evolution. We are opening depots using our updated format designed to provide the best environment in which to do business with no material change to new depot fit out costs. In 2020, as a consequence of market conditions, we opened fewer than planned.
In the first half, we put our opening program on hold as we prioritized maximizing cash and finding ways depots could trade safely under COVID conditions. In the second half, we opened 16 new depots, mostly in the latter part of the year. We are now targeting around 35 U.K. depot openings in 2021, including some more in Northern Ireland.
We also reformatted some more of our older depots. We continue to learn how best to apply this opportunity to our existing estate. During 2020, we reformatted 30 depots, having reduced the number of depots we were planning either to open or to re-rack without further modifications.
These were completed in line with our budgeted average cost of GBP 225,000 per depot. In 2021, we plan to reformat 40 depots. We are budgeting for an average reformat cost similar to the 2020 level as we continue to refine the scope of the refurbishments.
In 2020, we also re-racked the warehouses of 17 existing depots without other modifications and plan to re-rack a further 20 in 2021. At the end of 2020, we had 117 U.K. depots trading in the updated format. We had re-racked the warehouses of a further 79 depots without further modifications.
By the end of 2021, we expect to have a total of around 192 U.K. depots trading in the updated format and to have re-racked a further 99 depots in total without further modifications at present. Range and supply management. New kitchen ranges introduced each year represent a significant portion of sales as product life cycles shorten and our customers want new product from us.
Our 2020 new product featured 18 new kitchens, including two new styles, plus more color options for existing families. We began using our new handleless cabinet platform to meet demand for a linear look at more affordable prices. Our new kitchen ranges were launched and in stock earlier than in 2019, and launches were synchronized with rooster promotional offers.
Earlier introduction meant we were well-positioned with product as we returned to all depots trading, and new product introduction kitchen sales were ahead of last year's. 2021 new product includes 16 new kitchen ranges. These include a more traditional style timber shaker range, Elmbridge.
Initially available in three colors, it complements our contemporary shaker range and strengthens our GBP 4,000 plus offering. We are adding colorways to our mid-priced families and to our modern style Hockley kitchens, which have performed well since launch.
We are also adding colorways to our entry-level kitchen offers. We have developed a number of new added value decorative accessories to both our modern and shaker ranges that will enable customers to create a more personalized look. Our 2021 brochure, trade book, and period one and two promotional materials were all in depots pre-Christmas.
All of our new kitchens for 2021 will be in stock by the end of the second quarter, well ahead of our autumn sales period, and four weeks earlier than last year. Disciplined range management is crucial for both best availability, which is highly valued by our customers, and profitability.
At the end of 2019, we had 67 current kitchen ranges, and we ended 2020 with 63, having cleared more ranges than we added during the year. We believe around 65 current ranges remains the right number for our market at present, and we will be managing range introductions and clearance to around this number in 2021. Howdens is an in-stock business, and the trade tell us that a high level of stock availability is one of the key reasons they buy from us.
Our traditional replenishment model is based on weekly delivery to depots, is cost-effective, and is particularly suited to replenishment of fast-moving product and product with relatively predictable demand patterns. We are making an improvement to our stock replenishment by supplementing the depot's core weekly delivery order by introducing a next-day service via regional cross-docking center or XDC.
By rebalancing where we hold stock and changing the delivery pattern of some lines to depots can, for example, allocate more warehouse space to faster-selling lines and can reduce contingent stocks of more slow-moving ones.
This makes it simpler and more efficient for depots to deliver superior service levels and improve product availability, including for abnormally sized purchases. We are freeing up time and resources spent on stock management, for example, on inter-depot transfers product.
We are developing this capability with third-party logistics partners, and in the main, we are utilizing their existing infrastructure. The service is available to 120 depots at present. We expect to increase this to around 250 depots during the second quarter. Our dedicated manufacturing and supply chain is critical to the success of our in-stock offer. It supplies all product to our depots, which each have individual and changing day-to-day requirements.
Operating under COVID conditions meant finding ways to reengineer how our factories operate and how we supply and distribute to depots. Having initially closed substantially all of our manufacturing and supply facilities with the onset of the spring lockdown, we designed, with employee consultation, a series of social distancing measures, work processes, and practices which enabled us to reopen safely in April and maintain stock availability as demand and the number of depots trading changed.
Since then, we've continued to work with and develop appropriate COVID compliant processes. We can manufacture all product whilst maintaining social distancing, and our efficiency, whilst below pre-COVID levels, has progressively improved, and we were able to accommodate the significant rise in second half volumes.
We took measures to protect our in-stock offer against supply chain disruption and to accommodate irregular patterns of demand by increasing levels of safety stock and using backup sources of supply.
We did this first as part of our Brexit planning and again ahead of spring lockdown and enabled us to navigate local COVID outbreaks which had the potential to disrupt inbound supply. Our ability to utilize our disaster recovery capacity helped us to maintain stock availability.
We also took some temporary additional storage space, and we utilized immediately more of the warehouse capacity at Raunds than planned when this became available on schedule in September 2020. Our stock strategy has also benefited from significant engagement with our supply base. We have long-term relationships and agreements with many of our suppliers, and being a manufacturer ourselves has helped us anticipate potential COVID risks in our supplier factories.
We also operate on ex works rather than delivered terms with the majority of our suppliers, which enabled us to work directly with our shipping partners to resolve logistical issues and to provide us with early warning of orders that might be running late. Stock availability is fundamental to our offer. We've prioritized this in these uncertain times.
In 2021, we are extending our policy to hold additional safety stock as a contingency against unexpected demand patterns and interruptions to supply. We have broadened the range of SKUs that we protect in this way and increased the number of weeks cover we have on some lines.
We keep under review what we believe it is best to make or buy, both in terms of cost and overall supply resilience and flexibility. In 2019, investment in manufacturing technology enabled us to make the doors for our new Hockley kitchen ranges.
We've committed to further investment, which will enable us to make frontals for more of our kitchen ranges at the same quality as we can source externally, but at a lower cost and a reduced lead time to delivery.
We will retain the benefits of sourcing from external suppliers who will continue to provide around half our kitchen frontals. The new frontal facility will be located at our Howden site, and we expect it to come on stream in the second half of 2022.
We are also commissioning a second architrave and skirting line as our first line is now fully utilized and demand for these products has risen substantially in recent years. We expect the new line to be up and running during the first half of 2022. We identified the need to upgrade our solid surface worktop offer, which is a segment of the market in which we are underrepresented relative to the number of kitchens we sell.
We have partnered with three fabrication companies to develop a template and fit capability, and we took the opportunity to acquire the assets of a large U.K. fabricator of solid surface worktops. The assets were acquired at a competitive price with significant savings in the lead time to being able to manufacture versus building our own facility.
We expect the factory, which is located near our Howden site, to be operational during 2021. Turning to our digital platform. We use digital to reinforce our model of strong local relationships between depots and their customers.
During 2020, the digital investments we have made were particularly instrumental in supporting our model at a time when relationships and ways of doing business were disrupted. 2020 saw increased activity on our web platform and growth in our social media presence, which also stimulates interest in viewing our products and services on howdens.com.
howdens.com impressions were present in 48% more organic search results a month, and site visits increased by 53% year on year. Depot leads via the website increased by 88%, and brochure requests by 39%. Across social media sites, our follower base at 213,000 was up 119%, with 8 million users a month being reached, and those actively engaging up by 165%.
With restricted movement in the U.K., howdens.com provided a key customer access point to the business, and we extended the range of online services we provide. We rolled out online account facilities, which enable users to manage their accounts and to make payments at any time.
By the year-end, 30% of our credit account holders had registered for the service, and the service has seen significant out of hours usage. Around 43% of users use the service to make a payment, with 68% of the users viewing documents.
Curated on our website, we launched a call and collect service, which provided a way, in combination with our in depot measures, for customers to trade safely with us following the onset of the spring lockdown. A new personal kitchen design service was also made available online.
As well as enabling people to plan kitchens without the need for a depot or home visit, the service helps put Howdens front of mind earlier than in the procurement process. We continue to add new capabilities and content to our platform to support the local relationships depots have with their trade customers.
This week, anytime ordering became available for the first time through our trade platform. Representing a major upgrade of our call and collect service, it provides efficiencies for depots and customers alike.
Developed with input from customers, features of the service include bespoke pricing for each customer, which enables the account holders to see their confidential prices, order products, and quote for individual jobs out of hours, and a scheduler for them to select a collection depot and pickup time of their choosing.
The service is integrated with our lead management system, which assists depots in managing their local relationships in a digital way. The lead management system was introduced in mid-2020 and is now one of our most frequently used depot systems. Lastly, international.
In 2019, we refocused international onto a city-based approach based in France. We closed our depot operations in Germany and the Netherlands and appointed a French national to lead the business. We renewed the focus on trade customers and opened five depots, four around Paris and one in Lille.
International's 2020 performance gives us the confidence to open up more depots. International delivered a step change in performance post-lockdown, with second-half sales increasing significantly year on year. In France, lockdown occurred a little earlier than in the U.K., and we took a similar approach to reopening as in the U.K., with depots initially reopening in call and collect mode on a phased basis.
During May, as lockdown ended, depots were able to trade in more normal ways with appropriate safety protocols in place. Whilst with the onset of lockdown, total H1 sales were down around 18%, they increased significantly year on year in the final two periods of the half. Sales in the second half increased by around 38% in EUR terms and were up 13% for the year as a whole.
We believe customers are increasingly recognizing the advantages of our trade only in-stock model, our service levels, and our competitive pricing. We opened four depots in the second half of 2020, ending the year with a total of 30. On the basis of current performance of our depots in France, we are planning 11 depot openings for 2021, which is around the number of depots we can staff with Howden trained teams.
Finally, prospects for 2021. Our first priority remains the safety of our people and customers, and we have contingency plans to enable us to trade under a range of COVID conditions that we've seen to date. We've increased our prices, having lowered some during 2020, and aim to retain a profitable balance between margin and volume whilst aligning operating costs and working with suppliers to keep product and input costs controlled.
We believe high stock availability was a major contributor to our performance in 2020, and we will continue to manage our stock levels actively to protect availability, both of manufactured and bought in product. We will have all our 2021 kitchens on sale earlier than last year, with aligned rooster promotions to keep Howden's front of mind. We will make improvements to service and availability by utilizing XDCs.
We are making investments in our kitchen door, solid surface, and skirting manufacturing capabilities. During 2020, with restricted movement in the U.K., we increased the range of services we offer online, and in 2021, we will continue to add capabilities to our digital platform with anytime ordering as a centerpiece. In 2021, we plan to open 35 depots in the U.K., 11 in France, and refurbish around 40 existing depots to the updated format.
I am very pleased with our achievements in 2020, in particular, how we both adapted to COVID trading conditions and progressed with our strategic plans, which make us well prepared for what we expect to be a challenging market in 2021. All of this is made possible by the character, skills, and commitment of our people, and I thank them all for what they have done. Thank you for listening. We will now take your questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We'll now take our first question. It comes from Aynsley Lumsden of Canaccord. Please go ahead.
Hi. Morning. Yeah, just wondered if you could comment a bit more on the kind of cost pressures you're seeing and the expectations for gross margins. Would you expect to still see a significant improvement in gross margin this year, maybe up to the 62% level? Any comments around that.
Secondly, just your thoughts on the share buyback, especially dividends, something that we should expect to see more of rather than share buyback. Lastly, just obviously the pound has strengthened against the dollar and more recently against the euro. Any kind of thoughts on the impact there on cost of goods sold and the benefit you might see? Thank you.
Yeah, thanks, Aynsley. I guess one and two link in a way, as part of your questions. We put through a price increase of around 4% at the start of the year. At this point, given what's happened with kitchen demand and perhaps some kitchen demand being pushed out into later periods from what we've seen, we are retaining some margin, but it's not clear enough yet to us where we're at.
Cost pressures that we're seeing from suppliers are significant. We were pricing way around about 2% to 3% at the start of the year, but I don't think that's the end of the story for this year. We have seen significant pressure on softwood and joinery products around about 10%-12%, steel through appliances, raw materials, glues and resins that occur in chipboard and so on, the 5%-10%.
We would expect to see more price pressure coming through, and we will deal with that as we sort of see appropriate coming through the year. We look to move the margin forward, but we also look to keep a right balance between price and volume going through.
We ended out the year last year at 60%. We'd love to see an improvement on that, but I wouldn't comment on whether the figure you quoted is right or not. Yeah. I'll just hand to Mark for comment on the buyback.
Yeah. In terms of share buyback and dividends, then clearly our strong balance sheet has helped as well as we've gone through this uncertain time. We will continue to sort of review our level of dividend payments as a result of that. If you look at our underlying cash position, it's nearer GBP 370 million.
We normally keep a sort of working capital balance of around GBP 100 million to manage the business. With our dividend announcement, clearly we have more headroom than we'd normally have.
We will continue to look at our dividend strategy and the level of shareholder returns as we see more stability in the marketplace. It's something we're very conscious of and we'll continue to review. The other side of things, obviously, is the foreign exchange.
Andrew talked to the pressures we have from commodity side of things, we're obviously looking at our pricing and our price increases to manage that. We will have some benefit from a stronger pound, if that was to continue.
Just to give you a few numbers, a sort of full year benefit of a EUR 0.01 improvement on the euro is worth about GBP 1.3 million, a $0.01 on the dollar is worth about GBP 0.4 million. You can see the sort of the level of benefit that we would get if we see the exchange rates stay where they currently are.
All very helpful. Thank you very much.
Thank you. Next question.
Our next question comes from Christen Hjorth of Numis. Please go ahead.
Thank you. Morning, guys. Three questions from me, if that's okay. First of all, you ended the year with 748 U.K. depots, with 35 to come in 2021. You've got that target of 850 out there. Clearly that still remains the target. I was just wondering as we stand today, do you feel like there could potentially be some scope for upsides to that?
The second one is just on the competitive landscape and what you're seeing there. You touched on, perhaps some stock availability issues around competitors and just any further update you have there would be great.
Just finally, as we stand today, conversations with tradespeople, what you're seeing in terms of order intake, whether you've seen perhaps an uptick as some of the positive vaccine news has continued, just any commentary around that would be greatly appreciated. Thank you.
Thanks, Christen. I increased the number of depots that we targeted from 800 up to 850 when we introduced our new format that included better ways of managing stock in the depots and reducing some space. I still think around about 850 is the right sort of number, and I think it'll get increasingly difficult as we roll out to find those depots, as we get towards the end of the rollout program.
I think it is important to note, though, that our refit program, which is making progress, gives good reason to believe that we can continue to grow like for like sales. Yeah, I think about 850 is the right sort of number. In terms of the competitive landscape, I think in our immediate competitor trade set, I think we played a very strong positioning on stock during the second half of last year.
When we were seeing that some of our competitors switching off intakes from suppliers, we were doing quite the opposite and piling in. When we made those decisions back in March, we had an eye firmly on coming back out strongly out of the lockdown and having a very strong period 11, which takes time to build stock for, and obviously having capability of manufacturing our own gear put us in a strong position.
Yeah, I don't know that an awful lot has changed within the immediate trade space next to us. We carry on playing our own game, and that's what we keep focused on. We have continued, to your third question, Christen, on tradesmen, tradespeople, what they're sort of seeing. We've kept in touch with them a lot through the lockdown.
We've even used Teams calls, so it gives you a sense of how close we get to some of our customers. They're happy to come on Teams calls with us and talk. They are busy. Their mix of business has certainly changed, and we would note that from periods one and two. They're busy with joinery, they're busy with flooring projects, and that kind of stuff.
We probably noticed in period two that there have been some instances of kitchens going out into periods three and four, where customers have just been a wee bit uncomfortable at this point, having the key part of their home being pulled apart. I'd say the trades are busy.
Excellent. Thank you very much.
Our next question comes from Geoff Lowery of Redburn. Please go ahead.
Morning team. I'll break with tradition and ask two questions. First, can you talk a bit about becoming more vertically integrated? You've clearly given us some sense, but making frontals, making hard surface tops feel like new departures. How vertically integrated do you think you're going to end up? Second, a question for Paul.
I appreciate you've only been in the business a few months, but what do you think of the financial model at Howden? How comfortable are you with running with 60+ gross margins, mid-teens EBIT margins? Is that the right shape for Howden as a business, do you think?
Thanks, Geoff. I think we do a good job of reviewing on a consistent basis what's right to make versus buy. I don't think we've got a particular view on trying to make everything or trying to buy everything. I think the balance, we look at each individual case. There were two very obvious moves directly in front of us.
The first was, and it had been in our thinking for some time, we make some of our basic frontals, some of our entry price frontals, but not quite a lot of the mid-range. We're building some capability to do more of that.
I think it's important that we've got a good mix between what we make and some of the fashion elements that we get coming out of Italy. There's a very big strength of manufacturing capability in Italy.
We want to keep that very interested in Howden too. It's a rebalancing. We think about 50/50 is the right sort of balance between the two. The skirting and architrave move was another obvious one. We put down some capability.
It's been a very strong element for us. It's been running 24/7 right the way through last year, and the volumes are so big, we just have to put more down. That's not a particularly big investment. If we make about a third of everything, we'll probably be moving it up to around about 40%. I probably wouldn't want to comment any further beyond that.
I think there's a good mix between what we make, what we buy, and get the benefits of having supply close to us, and the flexibility, which has really been shown to have been a huge benefit during COVID when the teams can switch on, particularly around when you get a strong peak in demand, like in period 11.
The work surfacing thing, we've had a very strong laminate work surface business offer. We think the market is moving more towards solid surfacing, and we introduced our modular range. It started off with us providing a modular range that we thought builders might want to fit. I think a lot of our builders actually don't want to fit it, so we've got a fitting service that works for it. It's limited in its scope. You can't do some elements of the kitchens.
We'd always intended to extend out and work with third-party fabricators to do a solid surface kitchen as we move our kitchen ranges into slightly better areas, like the plus 4,000 category with the ranges that we've launched. The initial work and the trials that we've been doing with the three fabricators has been going very well.
The opportunity came up to buy the largest solid work surface, a business that had gone bankrupt, called Rotherhams, and we picked it up for very little money during COVID. Had a brand new kit from Italy, the best kit that we would have wanted to buy ourselves.
We bought the freehold for the land, and we bought brand new buildings as well. The team that had been in there, the family that had been running it, couldn't get it operational and ended up running out. We bought the whole lot for GBP 7 million, which we felt was very good value, and we're getting it operational now.
And then handing over to Mark for the second question.
Paul.
Oh, I'm so sorry.
Paul even.
You're up next.
Morning, Geoff. Just on the financial model and my initial reactions, clearly Howden has a very strong business model and a real clear focus on the customer. I think the decentralized model works very effectively in that way, and a really clear growth strategy. When you look at our, we've got sector-leading margins, I feel we're in a good shape to really continue to focus and deliver those.
Clearly, in the near term, there are some challenges around commodity prices, et cetera. I do feel confident that, yes, we can continue to make good, strong margins, particularly as Andrew's talked to with our sort of vertically integrated model and that focus on the customer. I think it's a strong business, and we'll continue to obviously drive the business and balance that margin percentage versus the volume and the growth prospects of the business.
Understood. Thank you very much.
Thanks, Geoff.
Our next question comes from Clyde Lewis of Peel Hunt. Please go ahead.
Morning, Andrew. Morning, Paul. Apologies. I think I've got three, if I may. One was looking back at, I suppose, at the second half of 2020, and obviously 16% growth is a big number. How much of that do you think was catch-up from obviously the weak second quarter, and how much do you think was sort of, I suppose, underlying growth of the market on the back of all the extra saving from a lot of homeowners?
That was the first one. The second one was on, I suppose, what have you been trying to do with regards to the product design to try and improve or make it easier for installation? One of the capacity constraints for kitchen fitting is obviously labor, and that obviously stops you from selling more units and as you highlighted with the trade customers having good order levels.
How have you been trying to sort of develop areas and products that speed up the installation process? The last one was on the number of active accounts, I suppose that you've sort of seen over the last 6-12 months in particular, how that's evolved, and whether the sort of the bad debt element has deteriorated in any way.
Yeah. We were pleased with second half performance and it's sort of frustratingly very poorly tracked market in terms of market share. Our sense from the amount of conversations we have with our depot managers, we were certainly winning a lot more than we would have lost in terms of kitchens in the second half of last year, and we got tremendous momentum coming out.
I'm sure there was some pent-up demand and all of that. I wouldn't really hazard a guess. We were also up against competitors being out of stock of appliances, not being able to get a hold of some chipboard, which would certainly have worked in our favor. As we're thinking about sales in the second half of this year, we've got to bear that in mind. I think in terms of the trade game, we would have clearly won.
I think kitchens is slightly different in a lockdown scenario versus home improvement DIY. Everybody's prepared to put up a shelf and take a paintbrush. Actually coming in and unplugging the core part of your house is a very difficult thing to do, and I think a lot of people didn't want to do that. For us to grow at that sort of level in a market that I don't think really went very much up last year was pretty good. Paul.
In terms of the active accounts side of things, we see a similar level to what we had the previous year. Obviously, we sort of saw a very variable year, but we finished the year with about 465,000, which compares broadly over the last two years sort of 466,000 and 469,000. So we see a pretty similar level of active accounts, and as you are aware, we constantly monitor them and make sure that they are active in terms of what we account for.
I didn't quite get the second question. Could you ask that again about product installations?
Yeah. Andrew, obviously, anybody who follows the building industry is aware that there are a lot of middle-aged to older aged builders and kitchen installers and, speed of installation is a capacity constraint. I'm wondering, what are you trying to do as an overall business to design ways to make kitchen installation quicker and easier?
Yeah.
The volumes can be installed.
Yeah. Your question's a good one, and it goes right to the heart of what Howden does, particularly out of our manufacturing capability in Runcorn, and to a degree in Howden. Every cabinet, in our range is pre-built, and many of them come pre-installed with fitted accessories, which is an unbelievable time saver for the builder.
The other thing that we focus on hugely with our builder customers is the accuracy and squareness of our cabinets that make speed and ease of fit, a big deal. That's why a lot of builders in the U.K. want to buy a Howden's cabinet. I'd say that the pre-built nature of it all, it really speeds things up. We've been very thoughtful around appliances and appliance installations.
There are many, many features in our Lamona ranges that make them just much faster and more reliably fitted for general builders, almost without the need to contact electrical installers to put normal plugs on them. I wouldn't do the answer justice now, but we've been very thoughtful around ease of fit. We work very closely with builder customers to improve it all the time.
Okay. Thanks, Andrew.
We'll now take our next question. It comes from Charlie Campbell of Liberum.
Hi, Charlie.
Morning, everyone. A couple from me, really. I suppose, just thinking about the gross margin, and you've talked about mix and, I suppose, more joinery, less kitchens. Are there any signs of that reversing when you talked about kitchen orders being deferred into period 3, 4? What are the quotes and the design activity?
Is that leading you to think that you might see that kitchen activity restarting, or do you think you need to see lockdown unwound before that happens? Just thoughts around that. The second question, I think, it was 2 parts, sorry, so maybe stretching into 3. Thinking about the overhead bridge from 2020 to 2021, there's an old depot number of minus 7 last year.
Does that reverse out in full in 2021, do you think? Also just on France, I am just wondering, the maturity curve, is that the same as it was in the U.K. as we start to think about modeling that out? Thank you.
Thanks, Charlie. I think probably the first point to pick up is periods one and two. Periods one particularly it's probably one of the weaker periods of Howden's in the annual calendar because we've built our period 11 peak trading to try and take kitchens out of the market ahead of January's peak, which is a retailer peak.
I would have no question the retailers would have had a difficult challenge this January with showrooms closed. We did sell kitchens. When we talk about the kitchen joinery mix, it's not that far out.
We do see good activity in our lead banks. We see a good level of design activity. I think it just makes it a wee bit easier when lockdown comes back, so when we come out of lockdown. We're not pointing to anything that would really concern us here. It's phasing.
If I can take the question on overheads. As you appreciate, yes, there was some cost reductions in our older depots. That was more predominant in the first half if you look at the split, and then there was actually an increase in spending in the second half.
I think we will see that reverse as you picked up, as well as we continue to invest in new depots, and the growth sides, opportunities of the business in terms of looking at the cost base.
I think the third question was around the maturity model of France. We've looked at that and we're gaining more experience on that, and we feel it follows a similar profile to the one we see in the U.K. As you can see, the French business appears to be progressing well.
Thank you, Paul. Thank you.
Thanks, Charlie.
Our next question comes from Sam Dindol of Stifel. Please go ahead.
Morning, guys. Three questions from me. Firstly, on the medium-term gross margin, referring to Geoff's question. If you are vertically integrating more manufacturing orders, does that mean gross margins may get above the 60%-64% on a three to five-year view, or just how do you see that progressing? Secondly, on the digital initiatives
Are you giving any color on the conversion rates you're seeing from customers who go through the digital channel? Is there any initiatives you can do to strengthen that going forward? Finally, on the French business, are the new 11 depots in new cities in 2021? What would you need to see to take a bigger bang approach to expansion in France? Thanks.
Great. Thanks for those three. I think on the gross margin medium term question, there's a number of moving parts. Sure, we'll make more on some of the kitchen elements that we make. It's heartland territory, it's core margin driving stuff for us. I think that improves. There are some other things that are going on that reduce things.
We're becoming increasingly good. It's all cash driving. We're becoming increasingly good at our over-the-counter business. Everything around hardware, joinery, flooring, where we're seeing significant growth as well. There'll be a slight mix difference over the period of time. We would see a slight improvement over that medium term time. On the digital initiatives, it's very live stuff for us.
We are seeing a lot of leads coming from end consumers into the business, and they come through at a lower conversion rate than if a builder brings a lead to us. A lead from a builder, we convert at a very high rate, +90. If a cold lead comes in off the web, it could be half that in terms of conversion probability.
Also, leads that we get off the web, we wouldn't be doing anything other than appropriately introducing them to a builder. Sometimes those leads disappear and turn up with a builder, and we see them coming back later on.
There's quite a mix that goes on. We feel good about making the brand more aware to end consumers. It's a very well-known brand, of course, in trade, but we have quite a low awareness amongst end consumers.
We see it all as opportunity. The business, as you say, in terms of trying to strengthen it, the business is learning how to deal with dealing with cold leads and doing very well at it. The 11 depots in France, we've signed leases on eight already, and we feel confident that we can get the other three done.
We are following a city-based approach in France. We feel we've got quite a lot of work to do around Paris, where the majority of the openings have been. There are a number of big other cities that we're looking to do.
Lyon will get another depot on the other side. We feel there's strength in our approach around building capability in our people around the city and also awareness amongst our customers so the model gets understood.
It's not that dissimilar to how Howden started, really used London as a strength to build reputation. The sort of hold back, it's not a capital question for us. It's not about finding sites. We think we're doing a very good job finding sites.
We think that customers are understanding the format. To be a Howden depot manager, you've got to be entrepreneurial, you got to be able to drive the margin, you got to run your business.
We think we've developed people of high enough quality to do that for 11. We're working very hard beyond that to find more capability. Big bang sort of is difficult when you need commercial leaders. Yeah, we're doing a good job at growing it.
Many thanks.
We will now take our next question. It comes from Dudley Shanley of Goodbody.
Good morning, gentlemen. two questions from me, if I may. Just first of all, to follow up on the French question. Obviously, as you mentioned, the holdback is commercial leaders. If we were to assume you could find the people over the long term, what are the sort of numbers you'd be thinking in terms of the depots, given the city-based approach? The second question is, the depot conversions, the 30 that you did in FY 2020, could you give some more color on the kind of initial success of that?
Do you want to start off with that one, Paul?
Okay. Why don't I start on the depot conversion, and then I'll let Andrew talk about France more. In terms of the depot conversion, obviously, we've got a lot of experience over the last couple of years, and that although we've been in a rather uncertain sort of economic situation.
We've looked basically at how we reformat them, how we get the best out of them. I think what we've now sort of refined is the way of doing that and getting the balance right between the type of depot we're looking at, whether it's a sort of a larger or smaller depot and its level of sales. What we are finding is that it is paying for itself the advantage of refitting the mature depot as you get a sort of good operational gearing on the incremental sales that you get through it.
We are seeing prospects of a good payback. In the order of a 4-year payback on the investment, we feel is something we can achieve on balance when we look at the portfolio. We'll continue to appraise, but we feel that it's actually producing early success. I'll hand over to Andrew for the French question.
I think the best way to answer the French question is give a little bit of context of what's been going on there. We've put a really good leader in place, called Arnaud Cvetan, who's both French and experienced in the sector, who has rebuilt the team, rebuilt out the business, and really aligning it nicely to Howdens in the U.K. around product and processes, and so on. He's also done a fantastic job of driving the culture and the competitive nature between the depots over there.
We have thought beyond the 11 next year, but it is a step-by-step approach, and I think that's appropriate at this stage, because we've got to get reassurance that we can build out the depot managers. I think anything else is theoretical, and that would be my hold back on it. There's a big population in France.
I think it would be more city-based approach than perhaps here, because we've never really tested infills between cities. Yeah, city-based approach.
Great. Thank you.
Once again, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We will now take our next question. It comes from Ami Galla of Citi.
Yeah, thank you. Just two questions from me. My first question was on the stock availability initiative of yours to improve them at the depots. I'm wondering if that measure involves further stock investment in 2021 that we should be thinking about. My second question is on the demand that you've seen since the start of the year. Is there any regional differences that you can highlight at this stage?
Just repeat your second question again, please, Ami.
Yeah, it's just on the regional demand trends on the current trading.
Please
data that you've seen so far.
Regional demand trends, yeah.
The regional demand trends. I'm sorry.
Yeah, no, I've got it now. Thank you very much. Look, business has been okay, solid, I would say, for the first two periods of the year. I think we're encouraged by what we've seen. Scotland has been challenging given that it's really only remedial repairs going into houses. We've had a hold back in Scotland without doubt.
I think London's a little bit softer, certainly for the first two periods, but looking stronger this period. That's probably all there is to report with everybody else performing. On stock availability, XDC, just going back and going over the reasons why we're doing this, it is to ensure that we find the easiest way of on-time, in-full kitchens for our builder customers. This is not in any way a de-stocking exercise.
This is about depots being in stock more and more of fast-selling SKUs, particularly top 200 SKUs and cabinets and so on. XDC performs around the tail of the range. It does give us some options to trial some ranges without deploying stock before we're certain about doing it. It may give us some opportunities around clearing out stock at the end.
We see the particular benefit and the reason for doing it is to be on time, in full for builder customers. You know when an initiative is good in this business because you get a huge amount of call from the depot managers who are a commercial a bunch as you'll ever come across. There is huge demand for XDC, particularly when you line it up with any time ordering and the opportunities that that brings, too.
Thank you.
It appears we have no further questions at this time. I'd like to hand the call back to Andrew for any additional comments.
Yep. Thank you very much for your time.
Thanks, everyone.