Good morning. Good morning, everyone. Thank you, and welcome to the Highlands Results Presentation for 2019. Thank you for taking the time to join us here in the room or to listening on the webcast. In addition to Mark Robson and me, Andy Witts, Rob Fenic, are, as usual, both here, as are a number of the other ex co members.
I'll begin by introducing our I will then share my perspective on our performance in 2019 and our plans for 2020, and then we'll take questions. 2019 was a year of progress for HIDens, and I'm pleased with how the business has performed. Both revenues and gross margin increased and profitability improved with operating profits increasing at a faster rate than revenues. This in part reflects the timing of the price increase, which in 2019 was implemented in January, as compared to April in 2018, and the maintenance of improved depot margin discipline re exhibited in the second half of twenty eighteen. In the first half of twenty nineteen, we found a more profitable balance between volume and price compared to the first half of twenty eighteen when a significant increase in volume had some cost to margin.
This trend continued in the second half against a strong margin comparator. In 2020, We will continue to evaluate how best to balance volume and price to the benefit of overall profitability in the light of prevailing market conditions as we see them. Trading in the 2019 peak 11 weeks has set a new benchmark. Our depot teams are well incentivized and achieved record sales in the period, underpinned by the level of stock availability delivered by our supply chain and an IT infrastructure with which performed without incident. At the same time, we continue to make investments in the business during the year.
We have in place a number of initiatives with the potential to increase volume and profits across the business based around our core building blocks of trade service convenience, trade value, and product leadership. These are evolving our depot network to use space more efficiently and to create the best depot environment in which to do business with our and support our customers. Improving range and supply management to help customers buying decisions and to access supply chain benefits to make productivity gains, and using digital to raise brand awareness to support the business model and to free up time for depot staff and customers to use more productively. Together with our depot with our development of our operations in France, by way of a city based approach. So I will talk about these after Mark has taken you through the financial results.
Thank you, Mark.
Thanks Andrew and good morning everyone. Reviewing the financials for the year, let me start by looking at some of the headline numbers for 2019. Moving from left to right on the top row to begin with. As you can see, Howden joinery's UK revenue rose by. 1,000,000 to 1000000, an increase of around 5% on 2018, group sales also increased by 5%.
Gross profit rose by 1,000,000 to 986,000,000. The percentage gross margin of 62.3 percent was up from 2018, reflecting the impact of a price after a 1,000,000 increase in operating costs, profit rose by 1,000,000 to 1,000,000. Operating costs were impacted by continued investment across the business, including new depots, digital, additional depreciation, and inflation. The closure of our Dutch and German depots also impacted these costs. Now moving down to the 2nd row with net interest and other finance charges falling by 1,000,000 mainly due to a decrease in the charge for pensions.
There was a profit before tax of $282,700,000 higher than in 2018. Looking at cash flow in the year, return to shareholders totaled 1,000,000, which included share repurchases of 55,000,000 Capital expenditure was 1,000,000 and there was a million contribution to the pension deficit. Overall, we had a net cash inflow of 1,000,000 meaning that we ended the year with $267,000,000 of net cash. I'll now go into some of the detail behind the headline numbers. Let me start by talking about revenue.
Hound's UK turnover of 1,550,000,000 increased by 4.9% on a total basis and was up by 2.5% on a same depot basis. In Continental Europe, Turnover of 1,000,000 was down by 1,000,000 impacted by the closure of our depots in the Netherlands and Germany. Sales in our French and Belgian depots rose by Let me now talk you through the movement in Gross profit rose by 1,000,000. This is the net effect of several features as shown on the chart on the right hand side. If we bridge from 20 eighteen's gross profit of 932,000,000, there was a sales benefit of 1,000,000, which had 2 factors.
Firstly, it reflects the million benefit from the price increase introduced in January 2019. Secondly, increased volumes and mix changes increased revenue by 1,000,000, reflecting an improved balance between price and volume. Partly offsetting this, there were a number of factors that impacted the cost of goods sold. There were additional costs arising from the volume and mix changes, totaling GBP 4,000,000. We saw a GBP 3,000,000 negative impact from exchange rate movements in the year.
Also affecting cost of goods sold, there were higher input costs resulting in a net decrease Together, this gave a net rise in gross profit of 54,000,000 to £986,000,000 Gross profit margin was is that contributed to the movement in PBT, reverting back to the chart on the left, operating costs, which what I will expand on in a few moments rose by 1,000,000. Net interest and other finance charges were broadly the same. The net result was that profit before tax rose by 22,000,000 to £260,700,000. Let me now explain in more detail the main movements in operating costs from £692,000,000 in 2018. Costs associated with the 44 depots opened in 2019, which includes 5 in France, and the incremental costs of the 33 UK depots that we opened in 2018 total £17,000,000.
Cost increases for older depots was £7,000,000, mainly reflecting increases in headcount and pay inflation. There were cost increases incurred to support growth which totaled £8,000,000. This included the ongoing costs of digital upgrades, costs associated with the closure of our German and Dutch depos was £6,000,000. We benefited to the tune of £4,000,000 from not being impacted by GMP equalization, which affected 2018. This meant that total operating costs rose to £726,000,000 Let's briefly turn to the remainder of the income statement profit before tax was £261,000,000 This led to a tax charge of £52,000,000, the effective tax rate being 19 point This gained profit after tax of £209,000,000.
This result gives earnings per on continuing operations, £35, compared with £31..3 in 2018. Turning to dividend. The board has recommended that a final dividend, 9.1p per This will be paid Let me now turn to cash flow from a of having net cash of £231,000,000 At the end of 2018, we ended 2019 with net cash of £267,000,000. Let me draw to your attention a few items that explain the movement. Net working capital increased by £6,000,000 more of which in a minute.
Capital expenditure totaled £61,000,000 and included new depots, digital upgrades, and investment in the next phase of our Rawne's distribution center. Tax payments were £46,000,000. As I've already said, we spent £55,000,000 repurchasing shares. There was a £27,000,000 contribution to the pension scheme over and above the charge through the P and L. The net result of these and other movements was a cash inflow of 36,000,000, meaning that we ended 2019 with net cash of 1,000,000.
As I've already said, net working capital increased by 1,000,000 within this stock increased by 1,000,000, mainly due to depot openings, Debtors grew by 7,000,000, reflecting the impact of the 5 days of period 11 trading, which in 2019, owing to November. This debt did not become due until after the year end. Partly offsetting these movements, creditors rose by 1,000,000. Before moving on from cash, as you know, we target a prudent capital structure. This means that it's our policy to operate throughout our annual working capital cycle without incurring bank debt.
In March 2018, we announced our intention to return £60,000,000 to shareholders via a 2 year share repurchase program. At the beginning of last year, we had 1,000,000 of that program remaining. In February 2019, we announced a further 50,000,000 2 year program. As I've already said, in 2019, we spent £55,000,000 repurchasing shares, thereby completing the March 2018 program, and we have 25,000,000 of the February 2019 program remaining. This means that in 2019, we have returned GBP 126,000,000 to shareholders, including dividends.
This compares to GBP 131,000,000 returned in 2018. Looking at our net cash at the end of 2019 of 1,000,000 we have surplus cash of around £85,000,000, which the board has decided it will return via a further share repurchase over the next 2 years. Let me quickly bring you up to date with the balance sheet position of our pension scheme. At the end of 2018, the deficit stood at 1,000,000, a number of factors had caused this to change by the end of 2019. Firstly, from the P and L, there was the current service charge, administrative and interest cost of 1,000,000 Secondly, the decrease in 1,000,000.
The group made a cash contribution of 1,000,000. Finally, with asset returns being 1,000,000 higher, the overall deficit at the end of 2019 was up by 1,000,000 to 1,000,000. This of course is the balance sheet deficit calculated under IAS 19, However, our agreement with the trustees announced in June 2018 is on a technical provisions basis. This agreement is to pay GBP 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%.
The next triennial valuation takes place later this year. Let me finish with some brief comments about trading in the first two periods of 2020 and the outlook for the rest of the year. The first two periods of the year saw total UK sales rise by 1.6% down 0.2% on a same depot basis, excluding week 1, which included 3.5 trading days in 2019, but only 2.5 in 2020, sales were up 3.5%. Clearly, there are currently various market uncertainties at a number of factors that need to be considered in forecasting this year's overall result, including the impact of foreign exchange rates. Regarding operating costs, compared to 2019, we will benefit from not bearing the £6,000,000 cost of closing our European operation in Germany and the Netherlands.
However, there will be further operating costs of around 1,000,000 in 2020 compared to 2019. These include the 1 year impact resulting from the dual running of our old NDC and phase 2 of our new distribution center in bonds, digital investment, increased pension charges, and additional depreciation. These cost increases are in addition to the impact and new depots, including further openings in France. Capital expenditure is expected to be around £80,000,000 for 2020, including the next phase of Rawne's digital investment and new depots. And on that note I'll hand you back to Andrew.
Thank you, Mark. I'll be talking about our performance in 2019 and our plans for 2020 using the initiatives I mentioned earlier as a framework. As a reminder, these are depot evolution, range and supply management, digital development, and international. But first, I would like to talk about our customers. Our overall customer base in 2019 was stable and ended the year at around 470,000 credit and cash accounts.
Two areas of focus were to improve our customer loyalty and the returns from our customer acquisition program. Sales per customer increased as total transactions and total spend grew, with our customers buying more often and spending more with us. With a similar number of new credit accounts being opened as last year, new customer spend increased significantly, as did profit per new account, reflecting the higher level of sales and lower acquisition costs. I believe these results show that Howden's knows what it stands for to help our trade customers achieve exceptional results for their customers and to profit from doing so. When our customers succeed, we succeed.
Our trade only model is a powerful combination of locally empowered depot management teams served by a dedicated supply chain, which is both cost effective and critical to the supply of our into the success of our in stock offer. Deppant managers hire their yep. Local facing local customers. Profit sharing is calculated on local performance, Everyone is incentivized to grow a profitable local business. Whilst our supply operation serves only howden's, It is more than 700 Depper customers, each with individual changing day to day requirements.
Our supply operation has the scale, space and flexibility, to respond to the needs and meet demands of our peak weeks of period 11. When sales are typically more than double the level of those in other periods. A key feature of having success is that we're trade only. Building trusted trade relationships with trade customers is central to everything we do. We've continued to hold our trade customer feedback sessions.
Both regularly and across the country, which enable us to identify any areas where we need to improve our offer. These sessions are always fully subscribed, which shows our builders appreciate that we're listening to them. They view the relationship as a business partnership. So it's in their interest to invest their time with us to make it even easier for them to serve their customers. As I mentioned, we've put in place a number of initiatives with the potential to increase volumes and profits across the business.
The first is Depo Evolution. During 2019, we progressed our testing of a new depot format, aimed at increasing the best depot environment in which to 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. By reallocating space in the new format, We can provide a more open fronted area to bring staff closer to customers, improve both the visibility and the standard of our design facilities, and nearly double the space available to display a wider range of kitchen designs. There is also room for a small item picking area behind the counter with an improved range of everyday essential products, including hardware and Iron Mungry to add incremental profit as a way of encouraging foot full and incremental kitchen sales.
We are confident that the updated format is an improvement at the same cost as on the traditional one. It was adopted for all UK Depots opened in 2019, and all UK Depots opened in 20 will also be formatted in this way. The improved densities offered by rewriting product vertically have enabled us to put our full product offering into a smaller space. We opened 8 smaller footage depots this year and intend to open more such depots in 2020. With the smaller sized depots, we continue to believe that there's potential for around 850 UK depots.
In 2019, we opened a total of 39 UK depots, including 5 in Northern Ireland, with waitings with openings weighted towards the latter part of the year. This represents an increase in the number of openings as compared with an average of 25 in the previous 3 years. In 2020, we plan to open around 30 more UK depots. As I explained in the 2019 interim results presentation, we put in place a test to understand the rollback opportunity the updated format may have in the existing estate. We initially converted 3 older depots, Park Royal opened at 95, swanzi and Gilford both opened in 96 around about the time when the business started.
And these have now been trading in the updated format for 8 months or so. They continue to show encouraging signs of improved performance relative to similar depots vintage type and location since conversion. We subsequently converted to further 8 older depots, prior to the start of our peak trading period, deploying several capital spends. Managing the disruption of a reformat to a day to day's operation and path and trading patterns is a key part of the conversion process. Our experiences have been reformatting these depots have helped us improve our skill base, are planning for a reformat, and our understanding of when in the year to implement them.
Developed our thinking on about how to scope structure and execute a reformat, which we are now able to complete in under 8 weeks. We've also refined the format, which incorporates a smaller hardware area and reduces refurbishment and ongoing running costs. Andy Wittts and I are pleased with the feedback that we're receiving from both depot teams and customers at the converted depots, and we've been sufficiently encouraged by the performance to date and the expectations of the depot teams for them in 2020 to extend the test. This year, we intend to convert around 30 more depots across the country so that we can continue to learn how best to apply this opportunity within the existing depot estate. In 2020, we are budgeting for an average reformat spend of £225,000 as we apply the learnings from the Depots converted to date.
We also plan to re rack around 50 further depots without other modifications in 2020. At the end of 2019, we had a total of 71 new depot formats comprising 16 new ones. And 11 refurbished depots and had re racked to further 62 depots without other modifications. By the end of 2020, assuming our depot plans for 2020 are implemented as I have described, we will have a total of 131 new format depots comprising 90 opened in the new format, plus 41 refurbished ones. And, Molly, we will have reracked a further 112 without further modifications.
My second point is about range and supply management. New depot ranges each year represent a significant portion of sales as product life cycles shorten. During the year, we introduced 12 new kitchen ranges to all depots with an average sales per range above those of 2018. These ranges are characteristic of the trends that we're seeing for straight lines in modern kitchens, which accentuate the sense of space contrasting colors and cleaner look in kitchen shaker styles, and matte textures that benefit from the latest industrial technology advances that prevent fingerprint marking. During 2019, we updated our light oak cabinet to a more natural oak tone, led the mass market rollout of anthracite colored storage systems, which help define our mid and premium ranges.
Extended our worktop range by 11 laminate and 7 solid surface worktop styles. 9 of these are lighter decker worktops, which complement the increased number of darker kitchen colors. We added 25 lemona appliances to our range, introducing new technologies in cooking, laundry and dishwashing products, while strengthening our core lemona oven choice with the introduction of a new low price point fab oven. We strengthened the lemona brand through the introduction of a 3 year guarantee. From the new hardware lines we trialed, we selected around 250 of the fastest sellers for rollout across the estate, which principally comprises key products for the joiner and extensions to our core IronMungry range.
We continue to support our customers by introducing pre finished internal doors across different styles, so helping them save time in fitting them. And we introduced 3 new flooring deckours manufactured with new technology which makes vinyl flooring quicker and easier for builders to fit. In the first half of twenty twenty, we launch we plan to launch 13 new kitchen ranges, of which 11 have already been launched to date. Features include 2 new styles, a modern slab range offering a trade up from our entry price point Greenwich gloss range. The new door has seamless edges and is available in three colors, all with a mirror gloss, finish and 2 Supermount finishes, again, with anti fingerprint technology.
An updated painted timber shaker range available in 2 new colors from January this year with an additional color to follow in April. It's a versatile it's a versatile design that can be dressed to achieve both modern and traditional looks. We've added more colors and more ranges, a new green color in our successful mid price Fair Fairford Shaker range, pebble and navy colors extend across 3 kitchen families, including the addition of pebble to the Greenwich Glass family, strengthening our entry price point offer. We've developed a new Handless Cabinet platform, to meet the demand for linear look. The cabinet can be used within our current ranges, which enables us to increase customer choice without a commensurate rise in range count.
We now offer 27 styles and have the flexibility to change the number of styles and offer in response to customer demand. Using this new cabinet, we can now provide a more for our customers to achieve the straight line look included, including in our entry price point Greenwich family. It has also enabled us to refine our range architecture into modern linear and shaker, making it easier for customers to choose the kitchen that suits them best. New worktops for this year focus on lighter shades and thinner profiles, which in particular complement our new linear kitchen range. We are extending the range of La Mona new technology appliances, including self cleaning ovens, to a new lower price point, Design Lead refrigeration is also being introduced at very affordable prices.
Managing the number of kitchen ranges efficiently is crucial for best of the 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 ranges and higher performing ranges in the depots. A key part of the range discipline is the timely discontinuation of underperforming ranges and the management of clearance of that stock from the business. During the year, 19 ranges were cleared from the business. At the end of 2019, we had 67 current kitchen ranges, including initial stock some of the ranges that we were launching at the start of this year.
We believe around 65 current ranges is the right number for our markets. At present. In 2020, we're aiming to remove at least the number of ranges that we add. During 2019, as part of our focus on range management, we combined the divisional commercial functions into a single commercial team organized in categories. This structure provides clearer accountabilities for ranging decisions, the access of supply chain benefits, The change has removed duplication of effort, easing communication, and bringing our commercial team closer to the debt of managers.
We have seen the benefit of clearer accountabilities and closer working practices between trade, commercial, and supply. This enabled our new kitchen brochure and trade book to be launched in week 3 2020, the first of 3 additions during the year. Which was synchronized with our promotional rooster offers and enabled stock for all new kitchens to be in depots before the trade book and brochure were published. Through this structure, we're also aiming to ensure that the business is well planned at least 18 months out with our suppliers. That we are being offered innovative product first and that we're being offered the best value for our customers.
We have benefited from a significant engagement in our supply base in support of our 2020 plans for improved product range, availability, and price. We keep under review what we believe it is best to make or to buy. And in 2019, investment in manufacture technology enabled us to make doors of our 5 new Hockley Kitchen ranges, reducing the costs of these doors and increasing supply chain flexibility. We also installed a small batch line to make lower volumes and but important SKUs, which third party vendors cannot supply at competitive prices. During the year, we were awarded a manufacturing guildmark, a reflection of the excellence of our manufacturing operations, and we were delighted to be reappointed as a Royal warrant holder for a further 3 years.
Now turning to our digital platform. We see digital as a means of reinforcing the heightened model on strong local relationships between depots and their customers, and we're building a capability with 3 objectives. To increase builder and consumer awareness of hygens to help our customers sell hygens product, to improve the communication between howden's tradespeople and their customers and to streamline and improve operating processes freeing up time for depot staff and customers to use more productively. Our new web platform offers customers improved product search and information plus access to online advice and inspiration and has moved hydrants.com into more prominent positions raising brand awareness with customers. Since June 2019, hydrants.com impressions are presented in 1,500,000 more search results a month.
Visits to the website have seen a growth of 22% year on year, exceeding an average of 300,000 visitors a week for the first time. And the contacting of Depos through the website has increased by 35%. We are also complete a program of restructuring and digitizing content. A new hierarchy of enriched product content and new advisory and editorial material make here and quicker for the user to find the information they want to view. Around 80% of the visitors now entering the site via pages relating to specific search queries or terms underpinned by SEO improvements, targeting search terms most relevant to our products.
Views of product categories have both increased both in kitchens where entries and visits to kitchen pages have risen by 43%. And are in underrepresented car product categories such as hardware, where they're up 76% and doors for which successful searches were up 77%. Refining styles and product sections is now easier as we have provided the capability for each user to tailor their own, their own requirements, enabling a more focused discussion for of the consumers' needs with their builders and with our designers. In the second half of twenty nineteen, we will test ways of developing our digital offering further in line with our aim of putting a tradesperson's local depot in their pocket. Working with account holders to understand their key requirements, we developed and tested a secure trade customer only area of the website where behind a secure login, they can manage their accounts and interfaces more efficiently with howden's and their chosen depots in particular.
They can view their credit to help them make payments and access account details. They can download invoices and information at any time. During the test period, 44% of users logged in outside of depot hours, 60% made a payment, and half downloaded documents. Average average payments per customer were also well above the company level. In 2020, we instituted full rollout of these trade account facilities, which are now available to all customers.
User feedback has been favorable with usage rates rising. We will be supporting our depots with onboarding their customers to the new platform which we believe will enhance the strong local relationships that Devos have with their builder customers. In 2020, we will continue to improve content and add more capability to this platform. We aim to further develop account management account and project management features, together with functionality that which assists local communications between depots and their customers. We aim to test a more efficient online account opening process for new customers and 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.
And finally, international. At the results presentation last year, I explained why we believe that there is potential for a viable city based business in France. And in 2019, we opened 5 new depots 4 around Paris and 1 in Lille. We completed the rebranding of our international business from Houlart to Howdens, which should enable the business to gain advantages from UK Brand Equity, online search reputation, and business efficiencies. We appointed a French national to lead our business based in France, who's now been in post since autumn 2019.
We completed the closure of our German and Netherlands with store closures budgeted, costs at budgeted levels. The 22 depots opened before 2019 are now sufficiently profitable to cover all central costs which are scaled for a larger business. Total sales of the depots opened in 2019 are in line with expectations. And we've identified further sites, which should enable us to open more depots in France in 2020. Consistent with our policy of staffing new depots with howden's trained teams and assuming our business in France continues perform in line with our expectations, we are targeting around 5 openings in 2020.
So let me summarize. 2019 was a year of progress for Howdens. We increased revenues and gross margins and improved profitability, with operating profit increasing at a higher rate than revenues. We continue to invest in people, infrastructure, depots, and product. We opened 39 UK depots, including 5 Northern Ireland, all in our updated format and 5 in France.
We began to see benefits from our ongoing digital development program, work continues on the next phase of the Ron's distribution complex, which will replace our existing facilities in 2021. We reorganized our commercial team, which assists in the delivery of our 2020 plans for improved product range availability and price. I'm pleased with the response of our people, customers, and suppliers to the initiatives that we've taken and our results for the year. Now turning to 2020, we aim to retain a profitable balance in the lighter prevailing market conditions between price and volume, whilst working with suppliers to keep product and input costs down. We plan to open around 30 depots in the UK, 5 in France, and convert around 30 existing depots to the new format.
We have a right sized lineup of new product for the first half, which has been launched and is in in stock earlier than in 2019, which we believe will benefit such sales across the year. And we have a well planned program of 2nd and third phase product introductions in place for later this year, together with a series of rooster promotions to encourage footfall. This year, we will be making more of the product we sell in our UK factories. Our new online trade facilities, trade accounts facilities are now available to all customers. And in 2020, we will continue to improve content and add more capability to our digital platform.
Excluding the 1st week of trading, which had fewer days than last year, total UK Depper revenue for the first two periods of the year increased 3.5% and 1.6% on a same debt basis. We remain cautious in market conditions given economic uncertainties, including the UK's exit from the EU, the impact forthcoming trade negotiations may have and also the consequences of the coronavirus outbreak in a number of countries. We are monitoring our supply chain closely and have increased forward stock levels for product sourced from China, while reviewing alternative sources and means of supply. However, I'm confident in our business model through changing economic conditions and the benefits our initiatives would bring to our performance. Finally, before opening up to questions in the meeting, I would like to mention our 2020
HIDons Expo.
In 2019, we held our inaugural, howden's expo, which received very favorable results from staff suppliers, customers, and other visitors. And we've built a new expo for 2020, again, located as part of our old Solutions Center in Northampton, and we'd like to invite you to visit the expo on 16th April. Thank you for listening. Mark and I, will now take questions. Please wait for the microphone clearly state your name and your organization before asking your question.
Good morning, everyone. Robert Eason from Goodbody. First question is probably similar one and some point of clarification. When you talk about, you know, continued better balance between price and volume, Should we take that, that's, you know, you are targeting to leverage down the P and L, I. E.
Continue to grow profits in excess of whatever the sales growth is, is that kind of the sort of framework we should have in our heads? Second, kind of the second question, It's just, you know, the competitive landscape. And one of your larger peers is separating out of business, over the next few months, And, you know, at the Capital Markets Day, I had moved that business. There was a heavy emphasis on on the kitchen. And my general question is just about the competitive landscape.
What are you seeing, and especially in that context of what I said about one of your and your
from the.
Relection.
Do any first half, and then the volume second half, for 2020, we're hoping and planning for your volume contribution. So it would be round numbers, if you looked at 2019, it was, aided by price, we're hoping that the balance will be in the other direction for 2020. So it was for 2019, it was one volume for price. We'd like to get to a more even level. And ideally, we're planning from bigger contribution from volume than in price.
I think that's a healthy place to have the business.
Regarding the second part of your question, Robert, I mean, it's always a tough market in the, in the kitchen game. We think of the market being split in 2 really between trade and retail. And I think what you're referring to there is really some of the mix change that's going on in the retail space. I think we remain very confident about our business model, what we're doing within the trade space, we remain incredibly close with our customers. So over a 1000 customers in our builder conversations, they're talking about, you know, being very busy quoting a lot and enjoying the working relationship they've got with us.
There's great reasons why they continue to shop with us and why in all these initiatives that we I've just been through, are about strengthening the motor headings and trying to keep us, in a very competitive advantage. So, We see nothing that frightened has said there.
Charlie Campbell from Liberum. Sort of a couple of questions and sort of unrelated really. Wondered if you had a new build forum since the election and sort of what the tone of
that might have been,
from from builders generally. And then the second, quite a broad, just just trying to sort of some noise on, some of the depot initiatives. It was unclear as to why you would re rack a branch only if not to come through the changes of the space. I'm just trying to understand that a bit. And if you could help us think a bit perhaps about kind of, you know, some of the, the paybacks that you're getting from this either in terms of incremental sales in new depots or efficiency gains, just so that we can understand the opportunity that's there presumably as you roll this out across the whole estate in calls.
Yep. And, I'll go for most of these, Mark, and give me a hand on the third one. We have had a number of builder forms since the start of the year, and I would say the general theme of it has been, that consistent team up there are very busy that, there's some relief that the, you know, elections over and then get on and do stuff. And probably just a wee bit more certainty. I would say the tone of what they've been talking about but I don't think we'll be very, very, very, crucial on a lot of stuff.
And I would say too that, They've talked a lot about the wet weather, getting, digging into green and some of the kitchen development work would be depend on some of that happenings. They do talk about delays around that, but they're certainly doing, you know, our sort of door joinery hardware business has been performing and, that's because we get to see them more often. I would say too, you know, I'm not bleeding on about the weather, but a number of efforts have been impacted by that. As you would expect, it is our softer time of the year. And we've been very supportive, as you'd expect us to be in our local community supporting builders, supporting, and consumers.
And while that might affect us now, we would hope there'll be a benefit some way down the line with them, particularly quantifiers. The reason your second question is about reracking. Sort of where this all started to full and when we worked at, we couldn't get the full range into a depot. So we wrapped it and then getting
a range
in and then realized there's other benefits from doing things that way. And one of the big learnings that we've been able to get by reducing dramatically the reset test has been
by doing the reracking first.
And that's sort of operational thing that's too much to do in depot by almost taking everything out post racking and putting it back. It's a great cleansing opportunity. And we tend to do, which we can do now in a few weeks, and then we leave that alone, And then we go back and we do everything else signage to return through the systems work that we do the counter space. So we sort of think of them as independent, and it's a way of reducing impact tumors. Your third question, which we're probably going to dodge your rebates, but And there's a good reason for it, not that we don't want to be clear about this.
It's sort of we, we started with 3, and we've traded them freight they're settling down well, and we'd be by and large, very happy with those. The next eight, we had various levels of capital spend. So we did one where it is sort of skinny one to see what the impact was, and we didn't like it. We did one that was full blown, and we it was too expensive. So we found this sort of midpoint of 225.
We liked the look in feel of that, we like the impact that we're getting from it. The job now is to see if we can do it at scale. So, do 30 of them of which we're attendees in the process of 13. He's completed the 1st 5. He's done them in under 7 weeks.
So he's not gonna like me for saying that, but, 8 weeks on average is a fair is a fair judgment. And we are just watching very carefully to see the impact that we like what the builders are saying because they're saying I can now take my customer in here, and I can show them the range properly. We like particularly the way our debit teams are interacting to customers. They come in. It's just completely open on looking through, you know, the glass of electrons to see what's going in at that brand in the back.
We were taking process. What we're really trying to do here is build out flat for the next 10 years. So, you know, we're making a long term investment for rate. And I don't want to go spend $60,000,000 than wish I'd done the job I want to do the job properly and leave us there for the next year. So it's just taking our time and being considered around us.
Mark doesn't have to spend money unless I get a decent return
Sorry.
Apologies.
Two questions, please. First one's on gross margin and just thinking about the gross margin headwinds. That was present this year from settling down the discontinued ranges. Can you quantify that and and maybe give us a still on what might look next year, considering there's a little bit more to go on that. And the second one is on, more generally on OpEx, you know, with national living wage ticking up over the next 12 months.
And I appreciate that, you know, depo staff get a profit share, but there any second order implications that we should be thinking about for Howden, from that perspective? And maybe some of the mitigating factors You can do to offset that.
Yeah. On the, headwind in terms of stock, I think the step up, we saw a step up, particularly second half 'eighteen full year 'nineteen, overlay. We've been writing off up until the end of the first half of 'eighteen. So there was a pickup In terms of pinning down a number, it's cost of about 1% of gross costs, 2019. When we'll go into 2020, we're expecting that to settle.
So we think now we've got the write off knocking right where we want it. We said in the statement that every range has come in, we're going to take another one out So we're not expecting any further impacts year on year. In terms of living wage, it will have a small impact. The impact on us has already been swallowed. And in fact, gets eaten up each year by our annual pay rise of 3% and, that's a typical pay award for us in terms of those type of costs, I think auto enrollment is is the more significant step up So our rate, of contribution on auto enrollments picking up.
So that will cost us about 3,000,000 going from 2019 to 2020.
Chris? The question in terms of the sort of the branch manager of autonomy. Firstly, you you made me you sort of got it wrong and that you forced the the volume price situation. I'm just looking at it now, 2 damage. 1, How have you bridged messaging to the branch management terms of the bidder about mix situation?
And secondly related to that, you believe digitization is really expected to see more guarantee related to the branch manager. And then secondly, just on this, the the risk and choice of where, if it goes, how would you determine that relative to branch manager crowd it's a hot African branch manager becomes 15 5% more space, etcetera. They're all gonna jump at each potentially. And so is is it a case of selection that's in the from central, or do they sort of vie for attention in terms of the the capital allocation? Yeah.
Thank you.
So, that's the one of the key strengths that happens is, you know, are branch managers of business. And they understand the balance would be approximately from better than any business type of roles that are driven by local So profitability and they and their teams are rewarded off the back of that. I think the the volume frenzy that Mark referred to it as I think there was a number of depot managers who would have called us out on that and said, as to prior to my arrival said, you know, Evinals volume. The costs are going well. I'm making less money.
And I think, you know, we would all jointly got to conclusion. We run a very successful depot manager engagement process where we go around and do regional boards and our famous curry dinners in the evening. So we are in constant contact, Andy and I are at 1 nearly every week. And we're always talking about price and volume as they give, forecasts. So, if it's there in the natural market, they find it, not everybody perfectly, you run your depot margin down and we get a tap of the shoulder.
If you go over, you'll get a tap of the shoulder, but by and large, it finds its natural, place as we, as we go through the year. So I'd be very solid that we've got from the most commercial managers out there in trade space. I didn't quite get your question.
A lot of that relates to the, to the customer, whether there's been any element of retro investment in pay in terms of it. It can't and the next is paying from the branch of
the past. I think it's very, very, very early days. So I think if you if you think of the impact on this, where Dan Gold has done on the new platform, we've seen rooms a few reduction of heads in our account management that are ahead of health. I think what it does is it empowers depot teams to understand what's going on properly with an account with an end customer. It helps them know the answer to the question is probably the most frequently asked question by our customers, which is I never got in my account.
And the amount of times and investments that our debt teams make on paying interest in local bills is incredible, and all of that just goes away. So long as we can encourage our customers onto the platform. I think what's exciting about all of this, is getting customers on the platform makes it stickier with hydrant. That and I think that's the the exciting bit about it. And the team got all sorts of thoughts out and take it, basically, they've the best reason to go on on the platform, which is financial.
So and we've and believe they have people don't make me think. So we want the customers to be able to go on and understand it. We've got very levels of capability amongst our customer base around computing skills. Some of them like it. Some of them don't like it at all, but certainly a lot of them get support from their, you know, maybe their partner or business partners, to do it.
It's gone down a tree, I would say. The refit choice which is your 3rd question, Howard, I would say we're in quite early stages of this. And given that the states which started 95, you know, it hasn't had an awful lot spent on us over the years. And I'm not ever intending to make it all pretty. It's a trading estate.
We like the balance that we've got between the trade field, the counter, a slightly smarter front end area, but it is a trading environment. The language that we use is the best environment to do business with our customers. And we the 30 that we've done, you'd seen on the map are quite spread across the country, so we can see the impact think the balance will end up going towards the older part of the estate. It'll probably be London, more London centric, Southeast Centric than than up north. But we will be looking individually at, you know, the return that we think we can get off the capital investment we'd make in a local depot and then weighed in with where fitters are and how we'd organized the process.
We've made no decisions on rolling across the estate yet, the system of trial.
I could Clyde Lewis at, Peel Hunt a couple
of if I may. Firstly, could you give us
a little bit of help on how you think the total market for kitchens, whether that's the number of boxes has evolved in, in 2019. And, and again, your best guess as to how sort of trade versus retail fluctuated within that overall picture. And also whether there was a sort of a bigger shift towards higher value products and what the trends were in terms of again, focus on appliances, just to understand, I suppose, the bigger picture for the total revenue in the overall kitchen market. The second was on customers and and the churn, and you indicated, I think there were 470,000 customers in there. It'd be interesting to to know how much and you've seen how many are sort of inactive, and and just sort of understanding, I suppose, the wider market for key infitters?
Is there a diminishing pool from where you see, of people able to install kitchens in the UK? Is there a threat from the new build market sucking some of that labor out of the renovation market, which obviously you guys focus on?
Yeah. Okay. I'll tackle the first and then Mark will tackle the second. I think probably most of us in the room know that this market is not that well, measured, and it's not straightforward and it depends on the definition of the number of cabinets, which are not used in kitchens for example. It's quite a lot of our catering to utility rooms, lots of bathrooms, bedrooms, and so on, but there's an organization called JKMR who estimates there's about 1,200,000 domestic kitchen installations, most of which were replacements and they believe the market fell a wee bit last year.
Not a lot, but a bit. And that they forecast that the market may decline a wee bit further in 20. We think that the purchases, via the trade in aggregate account for about half of the replacement market would probably a wee bit moving in our favor there, but not a huge amount. We think our share is somewhere between 28 34 that space. And that overall trade is growing, and offset it by some sort of aggregate decline in retail.
I would say we'd point to there's probably a few fewer cabinets within each kitchen because of different storage solutions that are coming along with less sort of cabinets on the walls and more open space being given to walls and more cabinets used on the ground. And I would say we'd point to the average value of the kitchen going up, particularly driven by worktops, smarter lighting, higher performance appliances and solid surface worktops. Obviously, they're all pointed towards a little bit. We all want to live a little bit better. Customers like that?
Yeah. In terms of, churn rate, so 2019 Clive, we had a, we opened a 135,000, and we closed 132,000. So an an a net 3 on the face of it, that is an increase in churn because 2018 was a 131,000 in and a 120 9000 out, but I don't think it's of of any real significance because 2017 was slightly higher than 2019, a 136 1000 in 135,000 out. So I think it's it's not. It's all I've technically a pickup insurance.
I don't think we've picked up anything from new build, taking away from our customer base. I would see it this year. You know, so it's a totally different contractual market.
Hi, Kristen York from Numis. Just two for me. First of all, obviously, FX has moved in your favor. Maybe bit of color on the potential benefits on gross margins if to retain where it was. And the second one, just on the sort of refurbishment program, obviously, the test has been extended.
If we look forward, do you think it will continue as sort of a piecemeal type refinance or will, at some point, you perhaps press the button and do significantly more over a couple of
years or something like that. Yes.
On ForEx, if today's rates, didn't move, for the rest of the year, we'd get a benefit of 1,000,000 to gross margin. So yeah, we've had you'll know the history of this. We've had a few years with it hitting us around the back of the neck before that years where it helped, but where we famous last words, but where we sit now, yeah, we'd get a benefit of 1,000,000. Yes.
I think on the test and whether we'd roll it out and we don't do anything really piecemeal in howden's, we would Always balance, how much we think the estate could take from a disruption amount in a year but this would if we decided to go ahead of it, it would take quite a long time to do via state, it could be 5, it could be 6 years, and I'm making that up without but it's it's not you don't do this in a couple of years. The estate is so big, and so wide, you know, and I think it would potentially, we would hope it would be a source of new revenue growth as we start reinvesting in older debtors, particularly. But The second thing I would say to it is there's only certain times that we can revamp the estate. So I think we were verging too close last time when we started doing the 8 pre period 11, because you do not want manager distracted from lead generation, building his plans for period 11. So we give him a rest after period 11.
We do work through Christmas, and I wouldn't see us passing really June, July time in the year. So you've only got a window of sort of downtime to do it in. Think we're nearly out of time, but if there is another question, you take it yet.
Hi. Sandy Hill from Stifel. Just a couple on digital, if I may. You say leads by the website are over 35 percent. Are you able to give any color if the conversion rate from those website either similar to the rest of the business?
And if, secondly, if say a website visitors, perhaps not as aware of the Howden pricing model as perhaps other customers. Is there a So the need to give more price transparency to them, or do you lose sales because they're not willing to price for a builder? Any interest on that?
Yeah. No. It's a good it's a good question because, as you do this, you get close to, you know, the core of what heightens is all about. And the way we are tackling it is by being very clear with end consumers who naturally find us, you know, they naturally walk into our depots. It's no different online than it is if somebody walks into a depot, we've got to explain the process If you've not got a builder, you can't interact with us.
And we explain all the benefits of your local stock working with your local tradesmen to to buy with us. They, so, yeah, that being very clear about the process up front there will be no time at all for or any consideration about price transparency for us. We it is between us and the builders who we serve. And the builder runs, the agreement with the end customers. We'd never we'd never cross over that.
The digital lead conversion, I would say, is in its early stages. It's, great growth on a small number. We're getting very good at fielding the inquiries, the quality of inquiries look high. But not quite as high as we would get through our normal mechanisms of, you know, developer on the road or a developer on the phone through unknown lead to us. But, yeah, we'd say it's encouraging.
Yeah. Great. Thank you very much for all your time.