Wickes Group PLC

LSE:WIX

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[David Wood, executive]

Good morning, and thank you for taking the time to join us this morning. And I'd also like to welcome everyone who is watching via the webcast. I'm here with our CFO, Mark George, and we are delighted to share with you our results for the 6 months to the end of June. We'll spend the next 20 minutes or so taking you through the performance of the business as well as highlighting the great progress we are making on executing our strategic plans.

I'm pleased to report we've had a positive first half sales performance within what continues to be a challenging market. This demonstrates that our strategy continues to deliver. Our uniquely balanced business model, which faces into all 3 routes to home improvement projects has seen strong performance in Local Trade and Do-it-for-me, compensating for a DIY market that is normalizing post COVID. We continue to grow our digital TradePro scheme with 17% growth in membership year-on-year and Do-it-for-me delivered sales up 5.8% with orders still in growth. We have delivered profits in the half as expected, and we are on track with the productivity and efficiency plans that we shared with you at our prelims in March.

Back in July, we announced a new capital allocation policy part of which was a share buyback program, which is now very much underway. Overall, it's been a positive first half as we continue to successfully execute our plans and remain confident in delivering the full year in line with expectations.

I'll now hand over to Mark, who will take you through the numbers in a little more detail.

[Mark George, executive]

Thank you, David, and good morning, everybody. So as David mentioned, it's been a good start to the year. Revenue has been up 0.7% on a like-for-like basis in a tough market with Core sales broadly flat and Do-it-for-me sales up 5.8%. Margin is 30 basis points higher, and I'll unpack that a little bit more in one of the later slides. With tight cost control, we've been able to deliver GBP 34.8 million of adjusted PBT on a pre-SaaS basis. Now that's lower than last year, but very much in line with our expectations.

And we continue to have a strong balance sheet, GBP 190 million of cash at the year-end -- sorry, at the half year point. Obviously, with our seasonal working capital flows that you're familiar with, that is the high point for us and will be lower at the year-end, and we'll come on to that in a moment. But a really strong level of cash. And it's that strong balance sheet plus the confidence that we have in the business model that enabled us to update on our capital allocation policy in July. And to reiterate 2 components of that. One is that we're going to continue to be maintaining the 10.9p full year dividend for 2023.

And the second, that we've started the GBP 25 million share buyback that we discussed in that update in July. So as part of that full year dividend, we're declaring today an interim dividend of 3.6p per share. So profitability has been very resilient in the first half. Sorry, just moving the slides. Click is a bit delayed. I might leave the Team to do that. Okay. Thank you.

So profitability is being resilient. Let's just go through the P&L in a little bit of detail here. So despite the inflationary backdrop, and softer market conditions, we've really delivered in line with our expectations. So starting at the top like-for-like of 0.7%. We've got a bit of a breakdown on the next slide, so I'll come to that in a moment. Now gross profit was 30 basis points up year-on-year for the first half. And the 2 offsetting factors here. First of all, distribution costs, which we include in our gross profit definition were lower, and that's really helped the margin year-on-year. couple of components within that. Productivity savings where we've taken capacity out of our network as volume has fallen. We've really driven through productivity benefits, which has been excellent and is in the plan from the beginning of the year.

And second of all, we change the mix slightly towards more customers coming for click and collect rather than home delivery. And by improving our offer, making a 30-minute click and collect now with record levels of customer satisfaction. That actually helps our cost to serve because it's cheaper for us to do click and collect than it is home delivery with the extra charges. So that's really improved our distribution cost.

Slightly offsetting that, the actual product margin of what we're buying and selling is slightly diluted in the first half. And the main driver of this is that we've got a higher proportion of TradePro mix, which, of course, is at a 10% discount. But overall, that's 30 basis points up year-on-year in the first half. We're expecting actually for the year as a whole for that to be broadly flat. So outside of distribution costs, we have seen quite a lot of inflation in other costs, particularly wages and energy and we'll come on to that in a little bit more in a moment. But that put together gives us our GBP 34.8 million of pre-SaaS adjusted profit before tax, down 15.7% on H1 last year.

Now post-SaaS, that number is GBP 31.1 million, and I'll come on to explain SaaS again in a moment. And for this year, we're going to put both of those profit numbers. And then from next year onwards, it will just be the post-SaaS version. So overall, very resilient performance in profit and very much in line with our expectations.

So moving now to sales and the like-for-like trends. If we can move to the next slide, please. You can see here the breakdown of our sales in the first half between Core and Do-it-for-me. So within Core like-for-like was slightly negative. As you can see here, we had TradePro sales growing double digit and DIY remaining in decline, but on an improving trend. So as you can see on the table on the right, if you look at Core, the inflation volume mix is really changing between Q1 and Q2. So you can see here that inflation was Q -- 9% in Q1, falling to 4% in Q2. But our sales were minus 4% and Q1 moving to a positive 2% in Q2. So you can really see volume recovering there from minus 13% to minus 2%. And that really is encouraging that as we get deflation in some products, particularly like timber, we're seeing the volumes recover.

Then on Do-it-for-me, we had an encouraging first half. Delivered sales were 5.8% up, and we're working through the elevated order book, and that's given us a tailwind, of course, for delivered sales. But encouragingly, our ordered sales are also up 1.8% in the first half. Now our leads in the market are much softer, but what we're doing is we're converting at a higher rate, which really shows the power of what we are offering in our Do-it-for-me showroom business. We mentioned here that installation rates are higher than previously. So we're really making the most of our differentiated offer there where we can offer an end-to-end service, and that's really supporting the sales number. So overall, a robust performance on sales in the first half.

So the next slide talks about profit in a little bit more detail. And you can see here the components of what's driving profit. And the message here really is that this is very much in line with what we guided at the beginning of the year. Now in this chart, we've put distribution as part of overall cost base, slightly different from earlier on, where it was part of margin. And the reason for that is explaining some of the productivity savings that we've been getting. So if you look at the first 2 components on this bridge for Core and Do-it-for-me, this is effectively the effects of sales and product margin. You can see it's very slightly negative.

Then in the operating cost box, I wanted to remind you of what we guided at the beginning of the year. We guided that we would see a lot of inflation in some of our cost base and everything other than energy, we would be able to offset by productivity savings. And as you can see there, we've made a very good start in the first half along that line.

Then the 2 increases in costs that we wouldn't be able to mitigate with productivity in our guidance at the beginning of the year. First of all, energy costs, we expect it to be GBP 10 million higher. And as you can see here, that's GBP 2.7 million higher in the first half. And the reason why that's not closer to GBP 5 million for half a year is because our new energy contract came in, in Q2. So the effect of that year-on-year will be double in the second half. And then the second component, we guided to around GBP 5 million of additional costs for growth investment, investment in our growth lever initiatives. And as you can see, we're GBP 2.2 million at the half year point. So really very much in line. So the final component of this slide, I just wanted to draw your attention to, but this first period where we're reporting SaaS investment costs. We've guided to GBP 8 million to GBP 10 million for the year as a whole, and we've had GBP 3.7 million in the first half.

So turning now to cash and the balance sheet. As I mentioned, we continue to operate with a really strong balance sheet, and we ended the half with GBP 190 million of cash. And as you know, the shape of our working capital is that we have an increase in cash in the first half and then that unwinds in the second half. Now working capital inflow this half year is a little higher than it was last year due to a number of factors, some of which are permanent, some of which are timing. About half the impact year-on-year relative to the normal working capital movement is an improvement in our stock position. And you might remember last year, we talked about an investment in our stock which we are now able to unwind in a controlled way, and that was planned, and that's coming through, which is really good. We've got some slightly higher accruals, which are broadly timing. And actually, in a couple of cases, we've improved our supply terms as well, which is a benefit for working capital.

So as I said, some of these are timing, some of them are more permanent impacts. Overall, we expect to finish the year with slightly higher levels than we started the year of GBP 100 million. You can see that the GBP 99.5 million at the end of December '22. And that's after a record year of investment, maintaining a good dividend and starting our share buyback.

And then just wanted to briefly touch on the capital allocation policy. And as you can see on this slide, this is a reiteration of what we said in our update in July. And I just wanted to remind you of it. The 4 key pillars that we start with a strong balance sheet, and we also want to always operate with a strong balance sheet, always operating with net cash to make sure that our low point in the year, which comes in December, we always have at least GBP 50 million.

The second part is that we will invest in the growth initiatives in our business, both to maintain the business but also to grow as well. And we'll aim to always have a targeted blend ROIC of more than 15%. And this year, we'll be having record levels in investment in the business. We'll pay a good dividend, and the dividend cover would be between 1.5x and 2.5x in most cases. This year, actually will be slightly outside of that range because we've already agreed to maintain the cash dividend from last year, which will put us slightly outside of the range. But as profits increase, then obviously, we'll get back to that range quite quickly.

And then the fourth component is where we have excess cash, we will give that back to shareholders, and we've started the GBP 25 million share buyback that we announced in July. The second thing I just wanted to update you -- remind you all from the update in July was the impact on our accounting of SaaS investments and IAS 38. So if we could just move to that slide now, please. This is exactly the same as the slide we had in July, but really important to note here a few things.

When we separated from Travis Perkins and look forward to what we're going to be spending our tech investment on. A good proportion of that is going to be in SaaS, Software-as-a-Service platforms. Now previously, a lot of investment is capitalized. We now think that 50% to 75% of our IT project investment will be in SaaS platforms and under IAS 38, that needs to be expensed. So the impact of that is nothing in terms of cash impact, but we do see a higher charge on your expense line for IT expenses in the short term, which lowers profit. But over time, what also gets lower is amortization, and that builds, of course. So after 4 years, actually, the profit impact is neutralized. You can see that in the table below here.

In the cash part, at all times, the cash impact is 0 but the total impact on PBT, as you can see, will be about GBP 8 million to GBP 10 million this year. But as the amortization -- lower amortization number builds, the impact declines. So by 2027, the impact will be 0. But we just wanted to make sure everyone was very clear on that.

So I'm just going to end now on outlook and guidance. And after a good first half, we've continued to trade in line with our expectations for July and August. That means that we're comfortable with full year expectations from an analyst consensus perspective, which on a post-SaaS basis is between GBP 45 million and GBP 48 million for PBT. And we continue to expect that the productivity savings will come through in our plan. But do remember that the energy costs are going to be higher in the second half because that's when our contract comes through. And then we've got some technical guidance there for you, and we can pick up any questions of those if you have them.

So to summarize, the business continues to deliver. In a tough environment, we're delivering good sales numbers, strong market share growth and delivering against our profit expectations. We're returning cash to shareholders while still investing in future growth.

And with that, I'll hand back to David.

[David Wood, executive]

Thank you, Mark. As a reminder, our balanced business model affords us greater resilience to consumer trends and gives us sustainable competitive advantage. Our 3 customer propositions mean we can support all customers with their home improvement plans with the ultimate goal of achieving our purpose, which is to simply help the nation feel house proud. Beyond addressing a broad customer base, the key components of our operating model are highly curated product ranges, of which 2/3 is our own brand, providing ease of choice, value and greater availability for our customers. a truly digitally led approach that, in turn, drives a unique service model structured to meet the needs of each customer journey all across a low-cost, right-sized physical estate. The output of which is industry-leading performance on all key retail KPIs.

And underpinning all of this, we have a number of self-help strategic growth levers, which we continue to invest in to drive future growth opportunity. The strength of this business model can be seen in this chart on the left, illustrating our consistent market share outperformance over the past 5 years -- and this growth is despite a 5% decline in the number of Wickes stores. In that same time frame, we have doubled our TradePro membership and broadened our core DIY customer base appealing to a younger home improvers, including more women and rental tenants.

We continue to increase sales densities per square foot, and we're also seeing record scores across all our customer satisfaction measures. All of which gives us confidence in the opportunity for future investment in our proven growth levers and our ability to gain further market share.

If we look at the core part of our business, which incorporates Local Trade and DIY, what we see is that Local Trade continue to enjoy buoyant demand with close to 1 in 4 having a pipeline of over a year. As a reminder, these are our most strategically valuable customers, spending 10x more in a year than a typical DIY customer. They continue to turn to our TradePro scheme for the simplicity and efficiency it affords them as they look to save themselves both time and money. We are adding around 10,000 new members every month and now have north of 800,000 members, which is driving double-digit growth in TradePro sales. We're delighted to have maintained such a strong rate of acquisition and our target of 1 million members still remains. We will get after this by continuing to transform TradePro from a simple discount scheme to a loyalty scheme encouraging more members to spend more with us more often.

In June, we introduced TradePro Rewards, and we're building a pipeline of new partner offers to give members access to exclusive lifestyle rewards such as discounted gym membership. And we're using our machine learning to send them highly targeted personalized communications based on what we know about their shopping behaviors and the type of jobs they undertake again, helping to save them both time and money.

Turning now to DIY. This market continues to normalize from its post COVID highs with a reducing rate of year-on-year decline. And surprisingly, the DIY customer is being a bit more cost conscious. Our research is certainly showing that whilst people are still doing the same or more home improvement projects, the nature of these projects has changed and they are shifting focus to smaller jobs, such as shelving, painting and energy saving quick wins. We've responded rapidly to these customer trends, with new in-store categories that are focused on the smaller DIY tasks and continue to innovate behind our strong own brand in these areas.

Unsurprisingly, the other thing that's been on every customer's mind is how to save energy in their home. We're getting ahead of the curve by building up our range of energy-saving products and services, everything from last installation to electric vehicle charges and solar panels to help customers reduce their consumption and bring down bills. Sitting within our Core business, we also have our more affordable ready to fit kitchen ranges which we've recently relaunched as Wickes Lifestyle Kitchens. Since the relaunch back in April, we've seen a 16% sales increase with the past couple of months seeing an even stronger performance. This, for me, is just a great example of how we are innovating with new ranges and the introduction of a free design service available to all customers.

And it's not just in our Core business that we're innovating, we are doing some exciting work in our Do-it-for-me showroom business. This, combined with our older, more affluent customer profile means that we are seeing good levels of conversion despite fewer leads in the market. Typically, a customer will start their new kitchen or bathroom journey by searching online. We use a platform called Similarweb to measure the total volume of digital visits to our website and competitor websites. Of all those visits, we hold a market-leading position and have grown our share by 12% year-on-year.

Over the summer, we've rebranded our showroom kitchens as Wickes Bespoke Kitchens. And with that, we've introduced 8 new ranges, including this lovely and quite stunning Natura 1 pictured here, along with new worktops, appliances, sinks, taps, et cetera. We've delivered around 300 new product launches in our bathrooms proposition, which is driving strong growth and which is now the most prominent bathroom brand in the U.K. We're also investing in new tech for both our design consultants and our installers to make their lives easier and the customer experience even better. Our installer base of over 3,000 approved installer teams nationwide sets us apart from the competition, and we're delighted this year to once again be awarded distinction by the Institute of Customer Service for our installation service.

We're making great progress on our store refit program with 6 out 11 refits for 2023 already completed, and the rest is on track to be done by the end of the year. The refit program continues to yield strong returns with an average ROCE of 25% of substantial sales uplifts across all channels. More than 70% of the estate is now in the new format. We're really pleased with the performance of our first new store in Bolton that opened last October. We're equally pleased to have opened a new store in Chelmsford this July and we will open in Turkey and witness in the second half with a plan for 20 new stores over 5 years.

So in summary, our strategy does continue to deliver. It's been a good first half with positive like-for-like sales and profit performance in line with expectations despite the challenging market conditions, which we do expect to prevail. We're on track with our productivity plans and these are successfully mitigating cost inflation, our accelerated refit and new store opening program is progressing well. We are confident in our distinctive proposition, unique service model and continued investment in our proven self-help growth levers that will drive further outperformance. And then our capital allocation framework will deliver an efficient capital structure and strong shareholder returns.

So thank you for listening. Mark and I will now be happy to take any questions you have. Thank you.

[Ami Galla, analyst]

Ami Galla from Citi. Just a couple of questions for me. First one was on the order book levels that you had given, helpfully given in the slide. Can you give us some comparison as to how did that pipeline look for your trade customers versus last year? The second one was on the Lifestyle Kitchens versus Bespoke, is it right to understand it is essentially sort of rebranding of the Lifestyle Brand -- Lifestyle Kitchen. Historically, what proportion of your Do-it-for-me business was really the ready to fit flat pack kitchen market. And the third one was just one on outlook. As you kind of sit here and look at your business going forward, and the organic investments that you've made, is there any sort of opportunities out there which could look interesting to you from an acquisition perspective to expand the sort of range -- product range or the sort of offering that you have for customers?

[Mark George, executive]

Okay. So in terms of the order book and what our traders are turning is, it's actually been a very consistent position. David referenced that 20% to 25% have got 12 months or more, and that's been -- it's traded within that range ever since I joined the company actually 14 months ago. So they continue to have a long outlook and seem very positive. We have our monthly Mood of the Nation survey, which we -- so we get that number monthly. But we also talk to them in focus groups, and we join those calls as an executive team and they're still very positive about the outlook, and that's really encouraging. And as you've seen, we're seeing that in both the TradePro membership growth and also the sales growth.

[David Wood, executive]

And to your second question, you're absolutely spot on, Ami. We have looked at our kitchen business in totality and thinking through the classic lens of good, better, best and how to delineate between what sits in a showroom and what sits in the broader store. Hence, we have the -- now the Bespoke range, because it truly is, you come in, you truly design that kitchen and pull that kitchen together and we go with future installation. And Lifestyle is a re-expression of just something that is more affordable for people. And as we always say, from your first kitchen to your forever kitchen, we can service that need.

The new piece within the mix outside of the products because we've completely relaunched the Lifestyle range. I think we're at 11 new ranges in Lifestyle and 8 new ranges in the Bespoke business is with Lifestyle now, we're offering a free design service and making that more evident to the customer. So they can access, still access their dream kitchen designed by us a much more affordable rate. So we expect that business to grow. And we're fishing in a very large pond there because if you remember, the average price of a kitchen in our business is sort of like GBP 7,500, GBP 8,000. The average price in the market nearly is 70% of kitchen is GBP 4,000 and below for the dry product sort of thing.

So we're fishing in a market where almost 2/3 of the volume sits and you're seeing the responsiveness there of that proposition, 16% growth since launch and a more accelerated growth in sort of like recent weeks, months in the business. So we're really pleased with the start that we've got off to with the repositioning of that business and the volume that's coming through.

[Mark George, executive]

Can I just add to that just technically which sales appear in Core and which in Do-it-for-me. So traditionally, where we've had our ready-to-fit kitchens as we used to call them, they flat pack, they go through the tools. That was part of Core sales. Those are now rebranded as Lifestyle and with the improved range that David described that on the whole, still goes through Core sales. But if we've added the design component that one of our design consultants has actually built the package for our customers. That goes through as Do-it-for-me because it's kind of a showroom service that we've provided to them in terms of the design. So the component that comes with a design will now be in Do-it-for-me, but the bulk of it is still in our Core sales.

[Ami Galla, analyst]

Any proportion of meaningful was that a part of Core historically?

[Mark George, executive]

We've never given out the numbers, but it's a decent number. It's a material number, yes. And hopefully, we'll make it an even more so. I think your third question was then about whether we could use acquisitions to expand ranges and what we offer. I mean we -- as you know, we're not an active company in terms of acquisition. We tend to build our proposition organically. Never say never, but we'll see how opportunities come about. But we've got a lot of growth levers, as you know, that are organic in terms of range development, refitting stores to improve the way that we present to our customers, particularly in the showroom and improvements in the digital offer as well. So there's lots of things we can be getting on with before looking at acquisition.

[Shane Carberry, analyst]

Shane Carberry from Goodbody. Three, if I can. Firstly, just on TradePro, and obviously, the significant growth we've seen again this half. Is the target still 1 million? Or do you think you can go beyond that? And kind of secondly, within that as well, can you talk a little bit about what you mean in terms of going from a discount offer to more of a kind of loyalty scheme?

The second, just in terms of customers, are you seeing anything in terms of customers acting a bit more kind of price sensitively, i.e. on a like-for-like basis as your own brand stuff kind of outperforming some of the kind of higher value products or a little bit more color there would be helpful. And then thirdly, and kind of just going back on Ami's question as well, just in terms of the DIFM, in terms of the kind of conversion rate being much higher, can you talk to some of the things that you're doing there that's actually kind of improved that conversion rate over the last year? Or is it just the kind of rebranding sort of stuff there? That would be helpful.

[David Wood, executive]

I'll take the first two then Mark can talk into the second. Yes, I think 1 million remains a sensible target at this moment in time. We've always had that ambition. I think well, when we very first started the demerger process, we're closer to sort of like 400,000 or 500,000. We said we want to get to 1 million. But the pace of growth at the moment suggest we might get there a lot quicker than we anticipated. So that's encouraging. But I think holding the million there is really important.

Within that, making sure as many as possible, remain active is where it links to how we build out and make the proposition more sticky. So as we shift it from not only the lines at mathematics, the sharpest price in town with a 10% discount with a digital interface, we'll pick it, pack it and put it in your van in 30 minutes, we're looking at doing other things, that says it's more than just that proposition. So how can we use our scale for good in getting you more affordable insurance for your tools, your van, access to better food and beverage sort of like [indiscernible], how do you do stuff like that? How do we give you gym membership? So how do we feed you, make you healthy, help with some of your cost in your business, that's sort of like where the loyalty and the rewards program builds out.

So it is 1 million. It's shifting it more from a discount. So as I like to say, being the indispensable tool in the TradePro box or the trade customers box in terms of what we can do to our TradePro scheme. Do you want to talk a little bit to Do-it-for-me?

[Mark George, executive]

Do you want to touch on price sensitivity, whether we're seeing any trends in that.

[David Wood, executive]

Of course, yes. Sorry, I missed that one, Shane. I launched ahead. I mean as you know, the cornerstone of our business in the first stance anyway is we are a very, very strong own brand business. And that is quite a distinctive part of our proposition. We've had the benefits of building the Wickes own brand over half a century now in the U.K. with the toughest audience, which is a trade customer because the quality of your product shares up in the quality of their work. And if it wasn't good enough, they wouldn't come back. And we still have a very strong own brand business.

And the only reason that's reduced over time in the first instance is as we broaden the appeal of the Wickes proposition. We needed to bring some brands into play to do that. So to get more DIY-ers into the business and so forth. What we have seen, though, and it's early, early indications is we are seeing own brands starting to tip into a little bit more growth for sure. But it isn't necessarily about customers trading down. It's definitely about customers trading into the business and buying into our own brand proposition. So as you can see 17% in terms of more TradePro customers on the scheme, double-digit growth in our trade business. Traders in the first instance are coming into the Wickes brand. So I see this very much as the strength and appeal of the brand encouraging customers to trade in rather than necessarily trade down, but what you are seeing -- just started to see own brand grow from a very strong position. 2/3 of your business is already owned brand, and we're starting to see some embryonic increase there from what's been quite a steady state for a number of years. Sorry, thank you for that Mark by the way.

[Mark George, executive]

So yes, on our showroom business, there's no one thing that makes a great. Kitchen and Bathroom business, there's a number of components. And let me tell you some of the things that we're doing. I mean it starts with product, and we've got some fantastic new ranges. We were out at getting about Chelmsford store in July, which got everything that's all the brand new ranges there, and it's just absolutely superb to see it, and we encourage you to get along to the store soon and see the amazing product that the team has put together. That's the starting point always is. You then got to present a great value, and we're absolutely focused on that with yes, our Bespoke Kitchens are at the better and best end of the range, but it's a competitive market and everyone wants value, and we offer that.

An important part of value is being able to offer finance for the approximately 50% of our customers that take kitchens on finance. And we've held our interest rates, even though obviously, the backdrop is a higher cost of money for us. So that's an investment from us to make sure that we're making it as sharp as possible for customers that need to take on finance. We then have our design component, we're training our -- continue to train our design consultants and making sure that they absolutely deliver first-class service. And then we have installation. We have the best installation team in the country, as David referred to, the Institute of Customer Service Distinction Award, we've now got a record number of installation teams, and they do an absolutely amazing job, and that's a real point of differentiation with a lot of other providers who will just hand you over to a local trader. So across all of those dimensions, we're really delivering for our customers.

And then the final part is how do we display that in stores and online. In stores, we are refitting through the refit program. We've got up to about 70% of our estate now with the new format, which really shows off the showroom. As you may remember, when we go from a heritage store and we refit it to sort of the new format, showroom sales go up by between 50% and 60%. And then online, we're doing a great job through our own channels, through social media and really bringing it to life and you may have seen our TV ads as well. So the whole thing end-to-end is a plan of work that we're really pleased with and the team are doing a great job.

[Samuel Cullen, analyst]

Sam Cullen from Peel Hunt, I got 3 also. First 2 are a couple of two parts unfortunately.

[David Wood, executive]

So you got 5 questions.

[Mark George, executive]

You have 5, yes.

[Samuel Cullen, analyst]

Well, it's related. So you both kind of mentioned the elasticity on the demand side in terms of price inflation controlling back and volumes picking back up. Can you talk about whether you've seen variations in product categories and the rate of [indiscernible] you've seen for demand coming back. And also related to that, the capacity you have in your distribution network and whether we're at sort of operating at 95% utilization given the productivity savings. And if volumes recover by 5%, 10%, how much more cost do you need to put back into the distribution side? That's question one.

Question two is on how much more working capital might be seen in the second half of the year. And then you mentioned kind of improved supply terms with a couple of suppliers. Is that a function of supply weakness and a bit less volume around in the industry? Or is it a rolling over of contracts and a bit more autonomy from Wickes in terms of trying to go for a better deal than you might have under your former parent? And then lastly, on the TradePro platform, if we roll forward a couple of years, you've got 1 million customers, you're e-mailing them 2 or 3 times a week with various insurance offers and clubs and what have you. Could that become a profit center in terms of introduce the fees and almost like a mini price comparison website?

[David Wood, executive]

Let me talk to the elasticity of demand first and capacity. Do you want to go into working capital supply terms, then we'll divvy up that last one. So in terms of last year's demand, as Mark showed, as you can see, as inflation continues to reduce across the course of the half, you've seen volume respond back what I think is really encouraging for us to see. And I think on the way up with inflation, we were very disciplined and very focused. I think we played it very, very well in terms of cash maintenance to keep as much volume in the business as possible. As you come off from that, I think we're seeing the benefits of that as well in terms of how we're operating.

The vast majority of our inflation, the vast, does sit in timber-related category, so we saw timber go in first, but come out sooner as well. But if you think of our organization, lumber as a category is one of our largest categories, but we sell a lot of fences, a lot of deck in, a lot of kitchens, a lot of doors and set a lot of flooring. So timber really penetrates the entire organization. And as a consequence, that's what we're most exposed in terms of inflation. So realistically, what we are seeing across the piece is, as the inflation comes down, the volume is coming back in those areas, which is largely timber-related product. There's still some levels of inflation in energy-related products in terms of their production, so whether it's sort of insulation, pottery, anything it involves going into kiln or furnace and so forth in a lot of heat. There's a little bit of inflation in there.

But the trajectory you've seen the 9 to the 4 continues in terms of overall decline for the business and the responsiveness of the volume. Capacity-wise, I think short response is we're fine. We can flex the business up. We can flex business down, I think, very effectively. And particularly where we're different, if you think of the broader proposition of our business rather than just distribution and services as well. So whether it delivering to your door in terms of our home fulfillment business when volumes go up and down, we run that through CitySprint as a strategic line for a partner. So we're not exposed in terms of the fixed cost, you just flex the variable to suit that. And it's similar with installers as well. If volumes were to decline in terms of the installation process, you can dial up and dial down on that. So I think we're pretty nimble and agile around that cost base. And we've often shown the relationship between semi-variable and fixed costs in the business and how we can flex that in the organization.

[Samuel Cullen, analyst]

And working capital and.

[Mark George, executive]

On working capital. I think the best guide is overall cash position, we expect to be slightly higher than GBP 100 million at the year-end. There is a natural cycle, as you know, where we -- working capital is positive in the first half and negative in the second half. There are some permanent year-on-year improvements that were planned and are coming through around stock. And the other one that is permanent is the supply terms that you mentioned. So this is not a broad trend. This is a couple of specific situations where previously we were paying earlier and having a slight discount, and we're now paying later without the discount. And so it's a very small impact on margin and a small benefit in working capital, it's not a trend, nothing to expect for the future. It's just a one-off that shifts the numbers slightly. And then most of the other movements are really just timing effects.

[David Wood, executive]

And then I think on TradePro, I'd like to keep these things very, very focused. At the end of the day, the strategic value of the TradePro customer is at the much higher end in our organization. So just keeping focused on acquiring those customers using our AI, using our machine learning to make us the most compelling proposition for them and building out their loyalty is where the focus is. So more of them more often shopping more with us is the cornerstones of retail. I'm not up for making it a separate profit center. I think that's where we just keep things focused.

And of course, the scale of our trade business is attractive to others that also want to talk to trade partners, which is where we will leverage those rewards. So it's less about our investment. It's more about leveraging our scale to generate value on behalf of our TradePro customers, but I'll not be looking to have a separate sort of like business model behind there. I just think more of them more often buying more is the good model at the moment. It's working.

[Kate Calvert, analyst]

Kate Calvert from Investec. Three for me. The first question is what is your view on inflation in the second half and going into next year? The second question is your thoughts on the number of refurbs and new stores you might do next financial year? And the third question is just coming back to TradePro, amongst your TradePro customers, are you seeing any changes in average basket size frequency of visit?

[Mark George, executive]

Yes. Why don't I cover the inflation and David, the last two. So what you saw on the slide was first half trend, 9% in Q1 and 4% in Q2. I think flat broadly in the second half is what we're expecting. We're starting to see that come through now. Much harder to call next year, obviously, we start annualizing the point at which timber was coming down. So I would expect that deflationary impact to slow down and if not stop. And the things that are going up at the moment, which are largely driven or products where there's a lot of energy consumed in the production. Again, that will soon go through the annualization time and energy obviously is coming off slightly.

So I think flat to low flattish, I think, is all we can say for 2024, certainly a very different environment from what we've seen in the last couple of years. Will that be -- could there be significant deflation? There could be deflation, but hopefully not significant. I think something closer to flat would be what we would expect.

[David Wood, executive]

I think, Kate, on the sort of like the pace and cadence of the refit program, around 10 to 12 stores a year, I think, is a good working assumption, which probably gives us a runway of sort of another, 4 or 5 years on that growth lever. Notwithstanding the fact that you will start to come back and do some lighter touch refresh into the estate over time as well. But that will be combined with an emphasis to start to ship on new stores as well. So in addition, you'll start to get up to that run rate. So 3 stores this year, we're moving to the 4 and 5 for you in terms of new stores as well. So those 2 things combined I think for the quality of the team we have against that activity in the business, I'll refit our new store opening team, that just means we will deliver phenomenal execution of those projects.

You could put a little bit more pressure in the system, and there may be opportunity to do that. But the most important thing is we're setting these up right in the first instance in our best possible way for the long-term benefit of that investment. So you can tick the balance if you try and go too fast. I think will be the headline.

In terms of TradePro customers, the good news is they're growing. So that's the really good news. We have definitely got more of them in the business. In terms of their shape of frequency, they're visiting us a little bit more, which is good. And the basket size is a little bit less, but that's not surprising to see the inflation you're seeing. But I think that in the first instance, they're sort of like showing a steady pattern of frequency, a reasonably steady pattern of basket size, but we've got more of them in the business will be where we are at this moment in time. And inflation is curbing that basket size a little bit, particularly when you think that timber is our largest category, and that's where you've seen the greatest deflation in there.

[Unknown Executive]

There are currently no questions on the conference call. So I hand back to the team.

[David Wood, executive]

Super. Thank you, everybody, for watching and be attending. We really, really appreciate that. As you can see, it's been a good solid first half. As I said at the start of this presentation, our strategy continues to deliver. We firmly believe in our ability to deliver in line with expectations in the full year as a consequent of that, notwithstanding the fact that this is definitely a more challenging marketplace but a marketplace that through our positioning, our proposition and our investment, we continue to outperform, and we expect that to be the case as we move forward into 2024. So many thanks for your time this morning. Have a super day.