Good morning, everyone, and welcome to the Hydens Intrum 2020 Results Presentation. Thank you for taking the time to join us on our conference call or to listen to the webcast. I'll begin by introducing our performance in the period. Mark will then review our interim financial results. I will then share my perspectives on our performance in the first half and our plans for the remainder of 2020.
And then we'll take questions. Our performance was materially impacted by the changed socioeconomic and trading environment brought about by COVID-nineteen, and that is to making a loss of CHF 14,000,000 in the first half as a whole. Sales in the first half were 29% lower than in 2019, with all of the shortfall attributable to trading in the second quarter. Which started on the 23rd March and which for us is when UK lockdown commenced. During the second quarter, we initially closed all our UK depots and then undertook a phased reopening of them.
At first, with the skeleton staff and with restricted trading hours, as we established and developed ways depots could operate and be supplied safely in a socially distanced environment. By the final period, period 6, we returned to all depot, if not full scale trading. Operating it closer to a full complement of staff, UK Depo sales in period 6 were some 74% higher than in period 5, at around 74% of 2019 levels. And the business is trading profitably again, following losses in periods 45 when an average, under half our depots were trading, and total sales in these depots were around half ways in 2019. Depots have reported our policy of return to all debit trading earlier than some safely and with full stock availability is appreciated by our customers whose ability to work was curtailed by lockdown.
In the first period of the second half, period 7, UK sales were up 38% on period 6 and increased 2% year on year. Kitchen surveys and the number of builders trading with us have been trending upwards in recent weeks, and we've seen some signs of pent up demand. Sales of everyday items have represented the higher proportion of the mix than in normal times and the lead bank ended period 7 above pre lockdown levels. I am pleased with how the business has responded operationally to the immediate challenges of COVID-nineteen and how we are preparing for a post lockdown environment, in which trading conditions and demand patterns may be at least periodically different to those in the past. During the period, our priorities have been to take care of our people's well-being which is paramount during this difficult time.
We've adopted a safety first consensual approach from considering returning people to work, recognizing the importance of employee involvement and safety at work issues in the context of recommendations of our health and safety team leaders. We have introduced a discrete online resource focused specifically on issues arising from COVID-nineteen and provided financial support to those on furlough. We reduced cash expenditure where it couldn't be deferred. While protecting essential areas. We ensured that we had sufficient stock available for depots and continued with the work at our distribution facilities at ROMs, we deferred new depot openings and some refurbishments and refits of existing depots.
We supported our customers and local communities by reopening depot safely with new working practices as soon as possible, which required finding new ways of depot working and reengineering how our factories operate and how we supply depots. By increasing our stock levels to ensure Depots could supply customers' immediate needs, which has also meant we have supported our depot partners with whom in many cases we have long term relationships. By lowering prices, which also enables us to give the depots more flexibility on margin, and be well incentivized to maximize sales. And by launching new services, call and collect, which enable us to trade in the second quarter and an online kitchen design service initially operated by our designers working from home. We are applying learnings from this the ways we do business and how we operate.
Lockdown has, by necessity, increased people's propensity to shop online, and the introduction of our call intellect and remote kitchen design services act as pathfinders for online upgrades. Operating under COVID conditions is helping us determine if there are surplus costs and inefficiencies in the business, and how we can utilize IT to free up time for depots to use more productively and manage stock more effectively. Our learnings will help us deal with varying degrees of social distancing, which may affect inbound supply, manufacturing and distribution, and summer all of the depots at different times and ways. Looking forward, we believe that while overall, there will be a more challenging demand in marketplace. This can play to the advantage of our in stock local model provided we introduced the differentiation of offer and do so profitably.
Down are in line with this objective, based around our core building blocks of trade service and convenience, trade value and product leadership, These are evolving our depot with model to use space more efficiently and to create the best depot environment that we should do business with and to support our customers, improving range and supply management to help customers buying decisions and to of supply chain benefits and to make productivity gains, thereby increasing service and availability at an economic cost. Muting digital to raise brand awareness to support the business model with new services and to free up time for depot staff and customers to use more productively. I will update you on these and our operations based in France after Mark has taken you through our financial results. Mark?
Thank you, Andrew, and good morning, everyone. Reviewing the financials for the first half of the year, let me start by looking at some of the headline numbers from the income statement which for the first time is reported under IFRS 16. Moving from left to right on the top row to begin with. As you can see, Hagen Drinery's UK revenue fell by 185,000,000 to $453,000,000, a 29% decrease in 2019. Group sales also decreased by 29%.
Gross profit fell by 1000000 to $276,000,000. The percentage gross margin of 59.4 percent was down from 61.9% in 2019, reflecting mix changes and as you would expect, the impact of carrying fixed manufacturing costs during reduced levels of production. Haudens made an operating loss of GBP 10,000,000 in the half, down from a GBP 78,000,000 profit in 2019, with operating costs reducing by 1,000,000. These costs benefited from government furlough payments, lower variable costs associated with lower sales, IFRS 16 adjustments and the closure of our Dutch and German operations in 2019. These factors more than offset the costs of inflation and continued investment across the business.
Now moving down to the 2nd row. Net interest charges were up by $5,000,000, reflecting the impact of the adoption of IFRS 16. As a result, there was a loss before tax of 14,000,000. This compares to a profit and million in 2019. Looking at cash flow in the first half of the year, This included share repurchase expenditure of 1,000,000, capital expenditure of 1,000,000 and a GBP 3,000,000 contribution to the pension scheme.
We also benefited from various other receipts into deferrals connected with COVID, I will go into more detail on this later in the presentation. Overall, we had a net cash outflow of 1,000,000 and ended the period with 1,000,000 of net cash. I'll now go into some of the detail behind the headline numbers. Let me start by talking about revenue Haron's UK turnover of GBP453,000,000 decreased by 29% on a total basis, and was down by 30% on a same depot basis. We have shown a performance split between quarter 1 pre COVID, when sales were up 1.1% on a total basis, and down 0.8% on a same depot basis.
In quarter 2, sales were down 56 percent on a total basis and down 57% on the same depot basis. I will show more detail on quarter 2 performance on the next slide. Incontinent of Europe, turnover of 1,000,000 was down by 1,000,000 sales in our French and Belgian depots fell by 19% in euros. This slide gives more detail on the trading pattern during the first half and the 1st trading period of the second half. As you can see, steady progress has been made following the initial impact of COVID from an 87% reduction in sales in period 4, 55% fall in P5 and a 26% reduction in P6.
Period 7 saw further progress and moved positive with sales up by 2%. I will come back to the second from 1,000,000 in 2019. Gross profit fell by 1,000,000 This is the net effect of several features as shown in the chart on the right hand side. If we bridge from 20 nineteen's gross profit of $404,000,000, there was a GBP 4,000,000 impact from pricing. Secondly, a large fall in volumes and mix changes compared to the first half of twenty nineteen reduced revenue by 183,000,000.
In addition, there were a number of factors that impacted the cost of goods sold. There were reduced costs arising from the volume and mix changes. As mentioned earlier, we were also impacted by carrying fixed costs at lower levels of production. The net effect was a reduction in costs, totaling £60,000,000. Also affecting cost of goods sold, we saw higher input costs.
This resulted in a net decrease to gross profit of 1,000,000. In addition, there was a 1,000,000 impact from exchange rate movements in the first half. Together, this gave a net fall in gross profit of 1000000 to 1000000. Gross profit margin was 59.4 percent. If I now turn to the other factors operating costs reduced by 1,000,000, which I will address on the next slide.
Net interest and other finance charges were 1,000,000 higher than in 2019, reflecting the impact of adopting IFRS 16. The net result was a loss before tax of Let me now explain in more detail the main movements in operating costs from 1,000,000 in 2019. Firstly, the incremental costs of the 44 depots that we opened in 2019 total GBP 6,000,000. Costs in older depots decreased by GBP 13,000,000, mainly reflecting decrease levels of activity. Cost increases in curve to support future growth, totaled 1,000,000.
This included the cost of the norms development, which we have previously announced. There was a net reduction in other operating costs of $8,000,000, again, the result of reduced activity. We claimed 1,000,000 in furlough payments in respect of the first half. $15,000,000 of which was received in cash in the first half. Closure of our Dutch and German depots in 2019 benefited the first half result by 1,000,000.
And finally, costs reduced by a further 1,000,000 as a consequence of adopting IFRS 16. This meant that operating costs overall fell by 41,000,000 to 1000000. Let's briefly turn to the remainder of the income statement. If we look at the 2nd column of numbers on the table, the impact on the first half of adopting IFRS 16 was an increase in operating profit of 1,000,000. This is more than offset by an increase As a result, as we've seen, our loss before tax was 1,000,000.
This led to a tax credit of 1,000,000, the effective tax rate being 23.2%. This gave a loss after tax of 1,000,000. This result gives a loss per share of 1.8p compared with earnings of 10 point the dividend and share buyback programs have been suspended until further notice. Shareholder returns will resume as soon as the board has greater clarity about the impact on the business Prior to the announcement I just referred to, we spent 1,000,000 repurchasing shares. Let me now turn to cash flow.
From a position of having net cash of 267,000,000 At the end of 2019, we ended the first half with net cash of GBP 253,000,000. Looking at the change since the end of last year, let me draw to your attention a number of items that explain the movement. Firstly, we took advantage of government support where appropriate to bolster our cash position. I will explain this further on the next slide. Net working capital decreased by 1,000,000, which again, I will address shortly.
Capital expenditure totaled 1,000,000 and included spend on the next phase of our own warehousing strategy and also investments in digital. Corporation tax payments with 1,000,000. As I've already described, we spent 1,000,000 repurchasing shares in the first half. And there was a million contribution to the pension scheme. The net result of these and other movements was a cash outflow of $14,000,000, meaning that we ended the first half of twenty twenty with net cash of million.
At the start of the COVID crisis, postponement of decal openings and non essential capital expenditure curtailment of operating costs, cessation of our share buyback and dividend programs and agreement with our pension trustees to deferred deficit payments. In addition, we have taken advantage of available government support. As a result, Our first half cash flow benefited from furlough receipts of 1,000,000 and tax payment deferrals of 1,000,000. The closing cash without government support, would have been 1,000,000 rather than the 1,000,000 reported. As I've already said, Network And Capital decreased by 1000000.
Within this, stock increased by 1,000,000 This was impacted by COVID contingency planning and the introduction of new kitchen ranges. Debtors fell by $39,000,000, reflecting the pattern of trading that we saw in quarter 2. Creditors increased by 1,000,000, partly as the result of the cash management actions just mentioned. Let me quickly bring you up to date with At the end of 2019, the deficit stood at 1,000,000 a number of factors had caused this to change by the end of the first half. Firstly, from the P and L, there was the current service charge, administrative and interest costs of 1,000,000.
Secondly, a decrease in the discount rate increased liabilities by 1,000,000. Thirdly, the group made a cash contribution of CHF 14,000,000. Finally, with asset returns being 1,000,000 higher with deficit at the end of the first half of the year was down by 1,000,000 to 1,000,000. This of course is the balance sheet deficit calculated under IAS 19. Our deal with the trustees, however, is on the technical provisions basis.
This agreement reached in June 2018 is to pay £30,000,000 per annum for up to 5 years, until June 2023. Also under the agreement, deficit contributions will be suspended If the scheme's funding position reaches 100 percent of the scheme's funding basis for 2 consecutive months and resumed if the funding position falls below 100%. Let me finish with some brief and costs for the rest of the year. Period 7 saw total UK sales up by 2.2% for the 1st 4 weeks of the second half and up by 0.3% on a same depot basis. Regarding the full year 2020, clearly, there are currently many uncertainties and the number of factors that need to be considered.
As highlighted in February, regarding operating costs compared to 2019, we will benefit from not bearing the million cost of closing our European operations in Germany and the Netherlands. However, as we announced, There will be further operating costs of around GBP 20,000,000 in 2020 compared to 2019. $6,000,000 of which has been incurred in the first half. These costs include the impact of also increased pension charges and additional depreciation. These cost increases are in addition to the impact of the ongoing growth of the business, inflation, and new depots, including further openings in France.
Capital expenditure is now expected to be around 1,000,000 for 2020. This includes the next phase of norms, digital investment around 20 new depots, including 4 in France and depot refurbishments. On that note, I'll hand you back to Andrew
Thank you, Mark. I will be talking about our performance in the first half and our plans for the second in the context of COVID-nineteen using the initiatives we had in place for 2020 as a framework. As a reminder, these revolve around debt or evolution range in supply management, digital development, and international. But first, I'd like to talk about our customers, At the end of the first quarter, our overall account base was stable with our core credit account holders as a whole spending more with us. And the total number of transactions and the number of customers trading both increasing at a higher rate than total spend.
The onset of lockdown at the start of the second quarter clearly had a very material impact on our customers' ability to operate their businesses, and to trade with us, and the overall level of activity is measured by total transactions declined in the second quarter at a similar rate as total sales. During the second quarter, however, the level of our engagement with customers improved from a low base period on period, materially so on period 6 when all our depots were trading for the entire period once more. Whilst remaining below 2019 levels, total transactions in period 6, when more than 50% above the total for 45 combined, and the number of customers trading with us and the amount they spent with us also increased significantly. Building trusted relationships with trade customers is central to everything we do. And what remains a very difficult time for them we aim to support them in the right ways where we can.
We have helped them with lower prices and feedback from customers share that they appreciate that we're reopened depots as soon as we could with new services and ways to trade, that we've remained in stock throughout the period, and the COVID measures we took to enable them to trade safely with us. I will return to these as I update you on our performance in the context of the initiatives I mentioned earlier. First, our depot plans and ways of trading under COVID-nineteen conditions. While we always want to provide the best customer service we can, the welfare and safety of our staff and our customers is always our first priority. Throughout lockdown, we have followed prevailing UK government guidelines.
As the minimum standard, you should apply as we consider how and when depots could recommence trading. We maintained an emergency provision to support the NHS, care providers, and vulnerable people, With the number of depots trading and the ways of trading changing through different phases, our first step was to introduce a locked down colon clack operation initially operated by a skeleton staff in limited number of depots and behind closed doors. We subsequently increased on a phase basis, the number of depots trading in this way. We then reopened depots with closer to a full complement of staff once we were comfortable that we had additional safety measures and protocols in place to do this, and that staff understood the standards we were working to. And by the start of the final period of the first half, all our depots were trading once more.
We believe the operating procedures and measures we put in place and ownership of these at depot level provided us with the best opportunity to trade safely in the period and will help us deal with subsequent lockdowns, which may be instituted at short notice, and which may be applied on a regional or a local basis in England and differently in Scotland, Wales and Northern Ireland. Turning to our 2020 depot reformat and depot opening plans. By the end of 2019, we'd opened 60 depots in a new format aimed at creating the best depot environment in which we do business with our customers at no material change to the fit out costs of a new depot. By racking product vertically in the warehouse section of the depot, we believe that there are ways to make space utilization improvements. With the potential to make productivity gains from reduced picking times.
We are confident that the updated format is an improvement at the same core on the traditional one, and the improved densities offered by re wrecking product vertically also enables us to put our full offering into a smaller space. Increasing the potential number of depots we could open in the UK. All new depots open will be formatted in this way. And we had planned to open 30 gateways this year. In the first half, we put our opening program on hold as we prior maximizing cash flow and finding ways depots could trade safely under COVID-nineteen conditions.
And in the second half, we now intend opening around 15 new depots. By the end of 2019, we converted 11 existing depots to the updated format It's a test to understand the rollback opportunity of the updated format in the existing depot estate. In 20 we were planning to convert around 30 more depots to the updated format across the country so that we continue to learn how best to apply this opportunity within the existing depot estate. We still intend to do this Having reduced the number of depots we were planning either to open or to re rack without further modifications. In the first half, we completed the conversions of the 18 depots at which works for underway prior to lockdown.
And in the second half, we intend to convert a further 11. This year, we are budgeting for an average reformat spend of GBP 225,000 as we apply the learnings from the Depots converted to date. We now plan to re rack around 25 Depots without further modifications in 2020 versus our pre COVID plan for 50. Including 5, which were underway prior to lockdown and completed in the first half. At the end of 2019, we had total of 71 new format depots, comprising 16 new ones and 11 refurbished depots and had reracked a further 62 without weather modifications.
By the end of 2020, assuming our revised depot plans for 2020 are implemented as I've described, we will have in total 115 new format depots, comprising 75 opened in the new format, plus 40 refurbished ones. And we will have re racked a total of a further 87 without other modifications. Next, range and supply management. New Kitchen range of each year represent a significant portion of sales as product lifecycle shorten. In the first half, we had new kitchen ranges launched and in stock with synchronized rooster promotional offers earlier than last year.
11 of the 13 new ranges were on sale in January prior to lockdown. 1st half MPI kitchen sales were ahead of last year's when new ranges were launched later. Earlier introductions meant we were well positioned with product as we turn to all depots trading. With the remaining 5 new ranges for the year, launched by the end of the 1st period of the second half, We have all of our 2020 Kitchen NPI on sale well ahead of our traditional peak period 11. Period.
Managing the number of kitchen ranges efficiently is crucial for both best availability, which is highly valued by our customers and profitability. We have made progress in getting back to the discipline of fewer, deeply stocked higher performing ranges in depots. A key part of this is the timely discontinuation of underperforming ranges and the management of clearance stock from the business. At the end of 2019, we had 67 current ranges, including initial stock of some ranges launched, for launch in 2020. We are targeting 16 clearance ranges this year By the end of 2020, we expect to have 66 kitchen ranges, including initial stock of some 2021 MPI ranges.
We believe around 65 current ranges is the right number for our market at present. We continue to aim to remove at least the number of ranges we had. Our dedicated manufacturing and supply chain is crucial to the success of a in stock offer. It supplies all product whether manufactured by us or sourced externally to all our depots which each have individual on to these needs and to meet the demand of period 11 when sales are typically more than double the level of those in other periods. Operating under COVID conditions has been finding ways to reengineer how our factories operate and how we supply and distribute to depots.
With the onset of lockdown, we initially closed substantially all of our manufacturing and supplied facilities running only with partial operational teams on each site. This ensured we could continue to receive inbound shipments from external suppliers so that the appropriate stock could be available in the business. Once we were comfortable that depots could recommence trading, and we could supply them safely. We then designed with employee consultation, a series of social distancing measures, work processes and practices to prepare for a phased return to work, at the appropriate issuing sites and hydrants in Runkorn and associated distribution facilities, and we were able to maintain stock availability as demand and the number of depots trading changed. Since reopening supply, we have continued to work through processes with COVID bottlenecks, We can now manufacture all products whilst maintaining social distancing and our efficiency whilst below pre COVID levels is now much improved.
We have continued with our policy of holding increased levels of safety stock when we believe this is necessary to protect our in stock offer against potential disruptions to our supply chain and to accommodate irregular patterns of demand. We 1st in this as part of our Brexit planning, and again ahead of lockdown. We are already seeing pop up COVID outbreaks with the potential to disrupt inbound supply and we have navigated with safety stocks and backup sources of supply. And as we recommence all depot trading ahead of some, we have seen some evidence of shortage buying of some of our product lines, and we have had reports of extended delivery times being quoted by some of our competitors. Our ability to utilize our disaster recovery capacity has also helped us to remain in stock as depots have reopened.
We also took temporary additional storage space, ending some warehouse capacity at rooms coming on stream, which we expect to be in September. We continue to keep under review what we believe is best to make or buy both in terms of cost and overall supply chain resilience and flexibility. We have benefited from significant engagement with our supply base both in support of our 2020 plans for improved product range availability and price during lockdown. We have long term relationships with many of our suppliers and being a manufacturer ourselves has helped us have early sight of the potential COVID risks for our supplier factories. We also operate on X Rex rather than delivered terms with our suppliers, which in which enables us to work directly with our shipping partners to resolve logistical issues and provide us with earlier warning of orders that might be running late.
Turning to our digital platform. We see digital as a means to reinforce the hyden's model of strong local relationships between geppos and their customers. In the first half, the digital investments that we've made were particularly instrumental in doing this. At a time when relationships and ways of doing business were disrupted. We've continued to see increased activity on our web platform and growth in our social media presence, which also stimulates interest in viewing our products and services and hydrants.com.
Hydens dotcom impressions were present in 1,400,000 more organic search results a month, visits to the website in the first half increased by 31% year on year. In the second quarter, average visitors exceeded 350,000 a week, and then past 500,000 a week for the first time. The proportion of our total range being browsed increased with page views for kitchens up 61%. The contacting of Depots through the website has increased by 58% in the first half and brochure request by 34% in the second quarter. Across social media sites, our follower base at 153,000 was up 136% by the end of the period, and we are reaching nearly 9,000,000 users a month with the percentage of those actively engaged with us up 255 percent year on year.
With restricted movement in the UK, hydrants.com provided a key access point for customers to the business And in the period, we extended the range of services we provided online. In January 2020, we rolled out the online account facilities which we developed and then tested in the latter part of 2019. Prior to lockdown, user feedback of the online account service was favorable, and usage rates were rising. Since then, the adoption rate has continued to increase. By the end of the first half, 19% or so of our credit account holders have been registered to use the service for 38% using it out of our normal trading hours.
Around 40% of the users made a payment were downloaded to document. Average payments per customer were also well above the company average level. Created on our website, the 1st generation Corn Collect service we introduced provided a way in combination with our in-depth measures, for customers to trade safely with us following the onset of lockdown. With planning meetings in our depots or in our people's homes, not permitted. A new personal kitchen design service was also made available online.
Users can send us design requests, attaching images, and measurements of their current kitchen and indicate design and style preferences. Depot designers equipped with online design and conferencing tools to work from home, could then plan kitchens and transmit submissions to the depots to deal with as they reopened. Feedback from users on the depots has been positive, and we are making the service a permanent feature of our offer. In the second half, we will continue to improve content and add more capabilities to our platform. We will be adding further account, lead in project management features, together with functionality, which assists local communications between Depos and their customers.
For new customers, we'll be introducing a digitized account opening option in Depos. And a new more efficient online account opening process, which reduced the time spent on and the costs of administering and processing applications. Having digitized our product and marketing content in 2019, we can deploy these cost effectively across multiple channels, and programs and add fresh content efficiently. We'll be using CGI to extend the number of kitchen range layout options which can be viewed online and adding content, which users have shared, which showcase our kitchens and people's homes. Lastly, international.
In 2019, we decided to focus our operations based in France, by way of a city based approach, and we closed our operations in Germany and the Netherlands. We appointed a French national to lead the business, and opened 5 depots, 4 Ram Paris and 1 in Lille. In France, lockdown occurred a little earlier than in the UK, and all of our depots were closed on 17th March, at which point sales were up around 3% year on year. By adopting our safety first approach and taking similar measures to those in the UK, we then reopened for business with depots operating in a call and collect mode with depot starting to trade again on a phase basis during the first two periods. Of quarter 2.
The government ended lockdown in France on 11th May and depots were open to normal ways of trading with appropriate safety protocols in place. We are pleased with how our business in France performed during the first half and the start to the second half trading. Whilst first half sales were down around 19% year on year as a result of the onset of lockdown, sales increased significantly year on year the final 2 periods. Sales expectations of the depots opened in 2019 are encouraging, and sales in the 1st period of the second half increased 46% year on year. We are now targeting 4 depot openings in the second half of twenty twenty taking the total number first half overall was as a result of the level of trading in the second quarter, which was significantly impacted by onset of lockdown.
The business returned to profit in the final period of the first half following losses in the previous 2. The business responded well operationally to the immediate challenges in COVID-nineteen. We took care of our people with a safety first consensual approach to return to work, reduced cash expenditure for protected essential areas, supported our customers with lower prices, new services and safe ways to trade with us. Reopen safely and quickly with new working practices as soon as practicable with all depots trading by the start of the final period with a full complement of stock. Turning to the second half, Our first priority remains the safety of our people and customers with the focus of the business in delivering our H2 plans and preparations for peak period 11 trading.
We aim to retain a profitable balance in the light of prevailing market conditions between price and volume, whilst working with suppliers to keep product and input costs down. We will continue to manage our stock levels actively to protect availability, both manufactured and bought in product. We have continued to plan to enable us to trade under the range of COVID conditions we have seen to date. We have all of our 2020 Kitchen MPI on sale well ahead of period 11 and further rooster promotions plan to keep headwinds front of mind. We will continue to improve content and add more capabilities to our digital platform.
In 2020, we intend to open around 15 depots in the UK, 4 in France and prefer to end, 30 existing depots to the new format. Depos have reported that our policy to return to all depot trading earlier than some safely and with full stock availability is appreciated by customers whose ability 38% on period 6 and increased 2% year on year. Surveys and the numbers of builders trading with us have been trending upwards in recent weeks, and we have seen some signs of pent up demand. Sales of everyday items have represented a higher proportion of the mix than in normal times, and the lead bank ended period 7 ahead of pre lockdown levels. We remain cautious in underlying market conditions, given the ongoing COVID related economic uncertainties, and the impact of the income Brexit trade negotiations may have on which more detail is set out in the RMS announcement.
However, I'm confident in our business model through changing economic conditions and the benefits our initiative will bring to our performance.
We will now take our first question from Alexander Ness from JP Morgan. Please go ahead.
Good morning, gentlemen. Thank you very much for that very comprehensive presentation. I have just a couple of follow-up questions, please. Just firstly, on the gross margin. I wonder if you could provide a little bit more color as to the drivers of the gross margin decline.
With regard to mix, is is this something that's likely to be sustained into the second half or or is it a feature of COVID? Secondly, I wonder if you can just comment on, your expectations around any further benefits from furloughing in H2. And just finally, I'm I'm interested in what you're planning in terms of the bad and doubtful debts in in the second half, whether you have any assumptions that you can share there? Thanks very much.
A bit in the first half, the majority of that was down to mix between, every day, sort of the counter items, stuff that we would consider like door is join, re flooring, Iron Munry, you know, in, in the next, against kitchens. I think, We've understand that most customers would not be interested in pulling their kitchen apart in lockdown periods. So, obviously, the mix is gone in towards some of the cancer type product. The other is, hogs from the factory, with additional operating costs and they're a little of, the impact on margin. Regarding the second half, we released, we released, a little bit more margin to the depot for a couple of reasons, to ensure that the records have got, full capability of taking whatever business is out there in the second half, and also, ensuring that, it affected their builders.
Can win business with end consumers. So we would see a little bit of, gross margin erosion in the second half,
not a lot, just
a bit, as we compete heavily in the market. Regarding the second question, I'll hand it over to Mark and then you just add on this one.
On furlough, we've, we've claimed a total of 22,000,000 and we received 16 of cash in the first half. So we're, we're due another 7, in H2. On bad debts, a few things going on. So the, the aging is going out at the mid. So the aging in particular, we look at the category we concentrate on is the over 90 days.
And that's extended, at the margins, nothing dramatic. We've had a number of customers a very small proportion, but a number of customers who got in touch about, difficulties settling their accounts So on an individual basis, we've agreed terms, so they can repay what that amounts to overall is we we calculate cost of accounts receivable, where we add debts written off to the costs of running the credit control department. That so forth for a number of years now has been running slightly below 1% of sales, first half of twenty it's very slightly over 1%. So to be precise 1.1%. That's partly the result obviously of reduced sales in the first half.
So we're, yeah, no reason to be anxious at all. In fact, the debts written off, in H1 20 or less with the debts written off in H1. That might, alter as we go forward. So, so we're watching it like a hawk. So overall, there has been some some major, a little bit of strain, but absolutely, nothing dramatic at all.
That's very helpful. Thank you.
Thank you. We will now take our next question from Christian Hoort from Numis. Please go ahead. Your line is open.
Hi, good morning guys. Just three questions for me if that's okay. The first one is just on the potential investment in price. And just the rationale from that, are you seeing, competitors being more competitive on price or is that more just to to drive market share gains in in what is an uncertain time? Secondly, just around the the planning for period 11, obviously, a very important period, but a lot of uncertainty around at the moment and just how you are thinking about that going forward.
And then just finally, you mentioned on the digital offering that some of these changes are structured and get to stay. Just how you see sort of how these roles develop, I suppose in supporting the job in Builder, as consumers increasingly buying and or shop for kitchens online? Thank you.
Thanks. I've got 3 questions there. So The production front tackling each one of them and marketing come in shortly. Our approach on price has been a very pragmatic lung. In fact, our approach around this whole crisis has been in a number of steps we're very clear in the exact, how we were going to bring the business through it in the first to secure stock from China initially, and then from Italy, we collected a lot of stuff stock X works, in our manufacturing operations, then take care of our people, which we furloughed topped up, safe working practices, both in factory and depot, faster time to work and then hard training.
If we find ourselves in the market in a position of strength where we're very well stocked, and we believe the right thing to do is support both our tempo teams with improved margins run through their P and L. We can make more money and be heavily incentivized around it. Also, the customers to ensure they've got a little bit more as they sell out to end consumers. I think it's more a pivot than anything stronger than that. And I think the erosion, as I said before, is around mix, which we would see come back.
I think as volumes grow through the factory, which is our intent, we'll see some gains, and we'll play it through. So we've released a little bit more on margins with the depots to local business, locally priced, Stephanies are incentivized around maximizing profit, on their local P and Ls, and that's gone down particularly well with FFO managers. Regarding period 11, our lead bank coming out of COVID, if you like, are certainly coming into period, out of period 7 is stronger than we went into COVID. So we're consentatively placed as we look now on grid land. There's a long way down the road to go.
So And there will be some pent up demand in what we're seeing, currently. But we bought, appropriately for period 11. We're not selling product here that will go date expires like food. We are investing in fast sellers, what we call A and B lines, We will sell through it, eventually. So we, the most important thing for us to do is to stay in a very firm and strong stock position.
The teams are in good form. We've stayed in very close regular contact with the teams and you in tonight spoken to every depot manager, every week, right through further. And we've done that through a series of team calls where we do our regional, what we call regional boards As 80 Depper managers in the call, every time, we made a significant investment in time to keep up the communication. Likewise, our Depper managers have strong communication with, end customers as well, which I think will be appreciated as we come at the other side. Think on price, we noticed some other competitors putting up price.
You know, plastic board would be a good example, which has been a major shortage across the UK and it's delayed some work and kitchens and other items around the homes, and the prices have fluctuated quite dramatically. That's not the game you want to apply here. Regarding digital, the comment I would make, having led the business through, this crisis, it's just how strong the business model is, and how when we lean firmly into the principles of the business, what the business is, in fact, we performed well, versus our competitors. Digital as a role to play, there's no doubt, but I do not want it to undermine the business model in any way. So It's been extremely helpful in getting and securing payments from customers as they've gone online, short of digital log in, we deal with more capability around that, around that.
And I eventually want our customers to be able to go in and order any time they want. In the short term, we've been using call and collect, which has been a significant usage by our customers, through the lockdown period, we would eventually want to digitize that in the right way, for how things have to be private has to be individual to individual customers, and we will take our time and we will test it properly as we go through it. We're really encouraged by, end consumers becoming more aware of the brand. It was our initial step on digital. We wanted customers to understand our ranges better, search our website better, see more aspects on the website.
And I think the traffic that's driven off is a testament to the great work that the team have done there.
Thank you. We will now take our next question from Charlie Danwell from Liberum. Please go ahead. The line is open.
Hi, good morning guys. Yeah. Charlie Campbell here. A couple of questions really. First of all, just wondering what, builders are saying about customers appetite for, you know, work sort of on refurbishing kitchens, to understand some people might be reluctant to have that level of disruption in the house or whether that, you know, attitudes are softening.
And then secondly, just to get back on the furlough question, just to confirm, you've got everyone off furlough now, and there's no P and L benefit in the second half, just to confirm that, please.
Arthur, do you have
a further question for us? Yes.
Tall intensive purposes. Everybody of the split hairs we've got 1 or 2 minute numbers, that we regard as vulnerable given that range or given their, caring responsibilities. So, yeah, everybody, everybody back in, on furlough, no P and L effect in the second half. So we've, on a an accrual basis, if you like, in the first half, we had counted for the 22,000,000 that was claimed.
Thank you. Regarding builders, and what they're saying about the customer's appetite, so I would say, we haven't had many of our builders forums through the lockdown, but we have stated contact with a number of builders. I mean, we'd point to chaotic diaries of the donor, where the work patterns are changing. We see builders come in earlier into depots in the trading pattern board in AM rather than the PM. We've seen certainly initially out of lockdown smooth a bit since.
I think our stopped model, supports them incredibly well. As patterns change between working outside, working inside, David's report that customers and customers are active, and I think it's probably like what many of us have done time, we've been more interested in our homes. We're thinking about, where we live, and I think maybe some of the home improvers have seen people painting and, big, basic gardening and that kind of thing, the traits will have to come in and sort of pick up all the problems that the DIYs have created, I think, I think too, though, that what we've done very well in houses is ensure that we get people through our system quickly. You see a lot of queues outside of builders merchants, you don't see any headwinds, and we're keeping our builders very safe. So, yeah, I think, I think our builders are very, very busy.
And if anything, there'll be a shortage of their capacity.
Thanks, Ryan. Thank you. We will now take our next question from Clay Lewis from Peel Hunt. Please go ahead. Your line is open.
Yes. Good morning. It's, client Gilles at. A couple if I may. One probably for for Mark in terms of sort of trying to and how the, I suppose, the deferred tax payments to HMRC will evolve through the second half of the year and again, any help you can give us there would be useful.
The second one was I suppose trying to get a little bit of a flavor on how period 7 has evolved. I mean, you've very kindly given us, you know, period 4, 5, 6, and 7 in terms of the sales number. I suppose I'm trying to get a little bit of an idea as to how does that sort of 2% has evolved was the 1st week, a big minus number and weak 4, a very big positive number, or is it a much more narrower band? And the third one, I suppose, goes back to competitors again. And I think throughout your your comments, Andrew, our market both referred to some of the competitors obviously not being as organized as yourselves.
I mean, would you, I mean, I know it's hard to name names, but in terms of sort of where the weaknesses has been, would you say that has been more amongst the independents or the bigger companies just to get more of a flavor as to what's going on on the competitive front.
On a tag client, we've, as we've said, we've deferred 61,000,000 and the track we're on at the moment would say come the come the year end 27,000,000 of that will still be deferred. So we'll have we'll have settled the balance, in the second half but we'll still be benefiting from a 27,000,000 pound deferral from the year end.
I'm going to go to, the competitors, first, and then I'll come back to the period 7 question. I would say, yeah, we, I mean, we focused on playing our own game here, and we've obviously monitored a very carefully who was opening when we did get quite a lot of ground roots feedback that, a number of our competitors, certainly the staff has said that they had wished that we, that they were as organized in terms of getting back, back into depot and up and running as quickly as possible. Our health and safety team had done a fantastic job in Highlands on keeping us safe, which is, which is completely critical. I would say we were definitely the winners of the trade space, and I would say the independence too has the high street, driven slower again to, to come back to work. The problem has been in the showroom areas.
You know, we don't have very large showroom areas. In front of our our depot is, it's, we've been able to restrict entrance easily and get people through our system in a long way system through the depot. So Yes, I would say we've been up and running faster than the others. I think in terms of, period 7. We would have noticed, it's, it's not all coming the last week.
It was the first thing I'd say. Been steadily, building week on week as we've gone through. Which is an encouraging trend, and it's actually been improving in trend each week from period 6.
Okay. Thank you very much guys.
Thank you. We will now take our next question from Jeff Lowrey from Redburn. Please go ahead. Your line is open.
Yeah. Hi. Morning team. A couple of a couple of questions. 1, Gritty, one high level, when I think Gritty, I tend to think Mark.
So we'll go there first if we can. When I look at your OpEx development, and I stripped out furlough and closure costs in Europe and so on. It looks like your OpEx was down about 6% year on year in response to a 30% sales line is 20% the sort of normal variability we expect in your cost base, now. And the second question in terms of bigger picture, I'm quite struck by the relative speed with which you've put sort of CapEx back into the business restarted the store opening program or depot opening program, etcetera. What does that really tell us?
Because at the same time, you're not confident enough to think dividend or buyback at this point, but you are confident enough to put quite big lumps of capital back in. And likewise, you'll end up with that you're not really appearing to put the business on any sort of recession footing in terms of people costs. It seems to be very much back to prior trends. Is that a fair read on how you're thinking about the future?
Thanks, Jeff. Yeah, I'm Dun And Associates. I think we've personally helped take that as a compliment. On the, on the OpEx, yet I think on the 20% variability, I think the background comment here is, as we say, in the long term, all costs are variable and in the short, well, costs are fixed. And I think over a short period, reflects, doesn't reflect how much variable cost is sitting in OpEx So if you look at the elements that have really moved, as a result of reduced volume, So there's a, a brick called, old demos on the graph.
And that the big move was that our delivering costs, payroll, and incentives, connected with payroll, and then in the other costs, central distribution and flex down and And then, bonuses for people that sit outside of the depot an incentive to people that are in the Define network. So I think over a short period, the flex hasn't been cap rates, but but over a longer period, I think you'd see a more, a split between fixed and variables in OpEx which is more representative of the sort of operational leverage of the business. So you'd see a much, a much larger the brilliant flexibility. Understood.
Yes, to
your second question, I think we are very confident in the business model. The effort openings that we've put back in or half the level that
they were
intended to be at the start of the year, largely in the process of finishing off where some half done works. And there's a lower level of, repeat work, but again, it has to be done. Those are put down halfway through processes. So, so it's sort of more, reading more is tidying up. In terms of, next year, we haven't decided yet, how much CapEx we would be able to see how that type of trading plays out through the balance of this year.
Brand people costs, we've obviously looked, looked across the business and be a little bit of tidying up and on the last needed. And we will play out, the appropriate productivity level in the depots. But we'll see how demand plays out.
But, I
think long term, we are very confident in the model. We want to do the right things in the short term, for the business, but sort of take the foot off the accelerator slightly in the short term.
Understood. And can I just add a quick third? Just in terms of your period 11 preparation, in a COVID socially distanced world, can you, in terms of manufacturing delivery to depots, depot volume, can you handle period 11 type absolute levels of volume in a COVID socially distanced world?
The short answer yet, yes. We take an extra space. My goodness, we've got, grants, which will be available the most, the shortest lead time of any product, is the rigid cabinet. And with the disaster recovery plan that we put in, number of years back, that's been utilized through the downturn. And it's about storing cabinet tree, ensuring the allocation of faster selling SKUs into depots We've modeled it.
We believe we can do it.
Thanks very much.
Thank you. We will now take our next question from Robert Eason from Goodbody. Please go ahead. Your line is open.
Good morning everyone and hope on as well. And just a few questions for me. Just around kind of the order book as you see us, Firstly, are you seeing any changes in the conversions when you're at design stage to an actual physical order being placed and it's almost committed. So any comments around that. And in terms of incremental design requests coming in or incremental orders coming in?
Has there been any changes that you've seen in terms of the pricing points of the kitchens that customers are looking for. And, my final kind of question is just around working capital. You clearly have released a bit more margin into the decals to give them more flexibility to go after volume. And is there any flexibility you've been given of working capital and you've talked about bad debts. There's some kind of workings going on with some individuals to help them along.
But is there general changes in working capital, or are you seeing any changes in working capital amongst your competitors in terms of extending days, etcetera, to builders?
Robert, thanks for that. I look on the, it's a live show if you like on the order book. We're pleased with the levels we're looking at right now. We wouldn't notice any particular difference in conversion rates, pre and post. I think there are some signs of people getting through the process faster, being more decisive we would interpret that as people having had more time to plan and think when they've been at home using the website more and evidence would point to, they seem to be clear about what they wanted before they sit down with one of our consultants.
Regarding price points, the heartland area of houses is the NOK type kitchen, that's got off to a stronger start than mid and higher ranges. I wouldn't read too much into that though. I think a lot of that is builders picking up cabinets, taking them away, you know, sort of, smaller type kitchen, the lead bank, really place to medium and better kitchens. I think we have moved our proposition on quite a lot on the business on the top end range with the introduction of our handlers ranges. And our new Shaker ranges, which look promising.
So, I, I think the things I would point to would be the conversion similar. People seem to be getting through the process faster.
Yes, thanks Robert. On working capital, I think we see things, normalizing as we move through the second half. So you would see a more representative, balance of the 3 factors. And notwithstanding clearly the reduced sales funnel in the first half. If you looked at our credit the days and our stock term, our stock term as week is a bit credit the days are very much in line, at the days, have weakened, for the reasons that that you've touched upon, in terms of the aging.
But all the indicators we watch, mean We should normalize during the second half. So, we are, reaching arrangements with people who are struggling to pay the, sort of COVID stock, strategic stock we've taken in. That's all fast moving product. So that will flow through, and, creditors of, yeah, of behaving, behaving normally throughout. So I think by year end, we've seen, yeah, our expectation is, more normal numbers for working capital.
Thanks. Just a follow-up on that, Mark, in terms of your competitors are you seeing extended terms being offered? At all as they try to, you know, eke out market share and volume?
No. We don't think so. There are other players that, offer interest free, but, the savings that they've always been in, you know, in, in terms of attracting some business that way, but we haven't seen any, any changes of behavior in that area at all.
Thank you guys.
Thank you. We will now take our next question from Amy Gala from Citigroup. Please go ahead. The line is open.
Thanks. Just a couple of questions from me. The first one is on incentives. I was wondering if you have modified depot incentives in in light of the current disruption? And how is the staff really incentivized to to chase sales in the second half?
Also, on the point on price flexibility, is there a flow level of gross margin set for individual depots? Giving them relative flexibility rather than absolute levels. And lastly, on trade accounts users, has there been any changes or shifts in the number of accounts that are trading with you on an ongoing basis?
Yes. Incentives as you as sure you're aware, is a key part of, of what head makes Highlands work. If anything, we bleed heavier into incentives as we've come out of this crisis. And the feedback that we get from the regional board that I mentioned earlier has been, that the staff, are absolutely delighted with what we've done in terms of, rewarding, for specific activities that we retire with on a monthly basis, The second part has been, increasing the gross margin at the depot level, Ie, forcing a little bit more centrally into the depot pot, and that benefits everybody in the depots. The depot staff will benefit our bonus of, the gross margin, the managers burn us off the net margin of the depot.
So all of their eyes are focused on cash Pounds profit, to, because it relates directly to their payback We've been generous around, the annual pay awards as well, all of all sizes. I would say our staff are highly engaged, currently. There's always been that in Highlands, it feels amazing when you walk around the depot is currently. Yes, we've got a strong area deals, management team that look at gross margin, across the piece. We take, we take quotes from, we take estimates from the area managers at the regional boards every month.
And if anybody is far out on the gross margin, there will be you know, there will be paint up on us. But the way that this is constructed, depot tends to know where to be at. And yes, there is a floor, below which you won't get paid if it goes too low. In terms of trade accounts, Mark, go to
Yeah. In terms of, trade accounts, we're off a bit. So the total number of accounts. So that's credit plus, cash that we were We finished last year around 470,000 accounts, and we're about 15,000 come, the first half of twenty twenty. It's all about child.
I don't think that's, significant, a significant weakening given the circumstances.
Thank you.
Thank you. We will now take our next question from Olivia Talend from UBS. Please go ahead. Hi,
everyone. Yes. I have two questions. Firstly, just in terms of the additional cost that 20,000,000. I'm just wondering how much of it are you expecting to recur or continue into next year, just so we can think about the the bridge for FY21 as well.
And then secondly, is there any way to quantify the benefit from that pent up demand that you were mentioning, or do you have any sense from the builders on how long that pent up demand could last?
Yeah. If we look at the, the elements of that, 20,000,000 So the ones we've, alluded to, are this dual running impact, of the 20 that it's about half of that and that will, vanish effectively, in 2021. So that that's not ongoing. The other elements. So if you like, the other half of the twenty will continue.
So we need, increased pension charges, and the additional depreciation they'll be built into OpEx where I'm going. So it's about half and half, half engineering, and half will fall away, in 2021.
Olivia, regarding your second question, it is incredibly hard to work out. What's, what's pent up on it could last. I think what we're doing in business is focusing on bringing great product, amazing prices and delivering great service. I'm just trying to make as much of whatever market is there and take as much share as we possibly can. You know, we are seeing new accounts.
We are seeing new faces and some old faces, given stock and price. It's just too early to tell. I think I've been done period 7 on a couple of weeks, period of days.
Great. Thank you.
Thank you. We will now take our next question from Simon Denson Smith from Metropolitan Capital. Please go ahead.
Good morning. I've got some questions around the revert and sort of reshuffing plans you've got. I'm just wondering how you measure the return on that investment. Whether what sort of hurdle you're putting on yourselves and whether you're seeing that in the depos that you've implemented in? And whether as a result of that, the intention is to roll it out to the entire state?
Yeah, in terms of the, the metrics we're looking at a number of factors. So what we do is, when we do a refurb, we lined it up in a, in a sort of quasi scientific way, against, Civil of DevOs that haven't been referred to, try and track, the increments So we look, we look at sales level. We look at margin. So we have seen some hiccups, some pricing in some of the depots. We look at payback, and we look at the return on spend And one of the comparisons we do is, we've been tracking for you as what it costs, what you have to invest, in CapEx, and working capital for a brand new Tahoe and for the additional spend Again, in terms of those developments, CapEx and working capital, what sort of return we're getting, and we've got They vary.
But, we're getting a positive, results from all of them. But it is horses, of course, there's some, some, of the full, refurb. We look at the the size of the depots where they are for Sonix, we, we just introduced the improved racking system. So, yeah, a number of metrics and, again, watching it like a whole group.
And what kind of payback do you look to get?
Yeah. Well, we, if you looked at, we're not sharing that just yet in terms of specifics. But if you looked at a new depot as a comparison, we it takes about 4 to 5 years in cash terms, to get the payback, on a new depot. It turns profitable on average about 15 after about 15 months. And you've told the investment in a new demo is about $700, and that includes CapEx, working capital, and losses, as I say, for about 15 months.
So that's, that's the thing, we, compare it against, but I think we need it biggest sample size really on the refurbishments before we want to, share numbers, more specifically.
But you're looking for something along those lines, is that fair to say?
I think that's That's a market. And I think if we're getting a good return, we ought not to be too religious and say, well, if it doesn't exactly match, the, the new demo, then we abandon it. You know, if if we're getting positives, And, yeah, if we're we're we're net ahead, you know, good to see on our cost of capital. That's a that's a plus
And you touched on the fact that, the new sharp design could result in smaller formats and therefore, potentially other openings that weren't in the original plan. Has there been any sort of is that Is that your thinking beyond the numbers that you've given currently as to where the way you cap out in terms of number of depots?
We, we, think 2 years ago, and I joined me up to the number, by that safety,
that was driven by
events of the improvements of test tracking. It gives us more flexibility in sort of intercity areas And, in, we're quite rural catchments where we've put a small debt, but it seems to make more sense immediately if there's some picking benefits, promising that to do it well now.
Okay. So that 50 incorporates would be effects of of this show in the event?
Thank you.
I think we're out of time now.
Thank you.
Yes, great. Thank you for the call and, if possible, if anything else, please come back to us, outside of the call.
Thank you.
Thank you very much, everybody.
Have a good day.
Ladies and gentlemen, that will conclude today's conference and you may now all disconnect.