Kingfisher's (KGFHF) CEO Véronique Laury on Q2 2016 Results - Earnings Call Transcript

| About: Kingfisher plc (KGFHF)

Kingfisher Plc (OTCQX:KGFHF) Q2 2016 Earnings Call September 20, 2016 4:00 AM ET

Executives

Véronique Laury - Chief Executive Officer

Karen Witts - Chief Financial Officer

Arja Taaveniku - Chief Offer & Supply Chain Officer

Steve Willett - Chief Digital & Information Technology Officer

Sarah Levy - Director, Group Investor Relations

Analysts

Jamie Merriman - Sanford C. Bernstein

Anne Critchlow - Société Générale

Geoff Ruddell - Morgan Stanley

Simon Irwin - Credit Suisse

Andrew Hughes - UBS

Claire Huff - RBC

Anthony Shiret - Haitong Securities

Operator

[Abrupt Start]

Welcome to the Kingfisher Half-Year Results. I'm going to pass over to Véro to start off with the introduction and run through the agenda. We've got questions later on.

Véronique Laury

Okay. Good morning, everyone. It has been six months, and I just have some friends who remember me the catastrophe I made last time when I was saying August had been a disaster. I'm not going to do the same mistake again. I'm learning. So, I don't know for you but for me, those six months have gone like crazy. I think we will share that with you. A lot has gone into the business. So, let's start with the agenda of today. I'm not going to talk a lot. I'm going to hand over to Karen to go with you through the numbers and the financial, as well as operational efficiency.

The biggest chunk of the presentation today is going to be about the offer, and Arja is going to update you on what we've done. And of course, we are going to update you on digital with Steve. So, this is the plan for this morning.

Just a quick introduction, so, you remember that slide is a slide that we created for the Capital Market Day. And since we're starting the ONE Kingfisher plan, this is the way we are looking at our business with you, guys. It's the way to give you visibility of how things are going on what we call the business as usual. Actually, I'm calling it the business is what we do right now and the numbers and the result. And of course, it's the way for us to update you about our transformation plan, what is going on and how we deliver against that plan.

The three things that Arja is going to remind us, not only you but us, is the first that it's action not work. This is what I said last time when we presented the year-end results. We are doing this, guys, and you will see evidence of it today.

The second thing is about the fact that it is different. I will always remember your comment about why is it different this time. It is different, because, first, we start from the customer and you will see that whatever is in the offer or in digital we are building a deep knowledge about customer and their home improvement project and this is the starting point of everything we do.

This is not a synergy plan at all. This is a plan to create long-term sustainable growth for this business. It's based on an ambition to become the leading home improvement company. And a big part of this plan is about culture. It's about shifting the culture of the company and again, this is something that we work on every day and that you will see coming through as we walk along.

And the third thing that I will always remember, but I don't think I need, is that it will create huge value for our shareholders, as well as our customer. This presentation is going to be, let's say, about 80% to 90% about the transformation. And you should expect to have probably a little bit more about the result in such a presentation. I think this is a choice we've made because we think it's very important for you to understand where we are in terms of transformation.

But anyway, even if we are not going to spend awful lot of time about the business and the result, I would like to all highlight few things about it. First, we had an amazing growth in two of our big businesses. Screwfix UK and Castorama Poland have got for this first half an outstanding performance and this is very important to us.

The second thing is the fact that we have our new incubate businesses that are not doing well, not yet. I think it's too early to say that but better, and especially Romania as an example, but I think it's a good time as well for a big business like us because we need to incubate new things as it's important for us to follow around that.

And then, we have, of course, our three big mature businesses: B&Q in the UK, Brico in France, and Castorama in France, that have performed in line with the market, I would say, and of course, we will cover more of that. But I think we are really decent performance in an environment that has been tough for different reasons. UK, more uncertainty because of the Brexit; and France, we will see a volatile environment really.

And it is really good to say that and to have delivered that set of numbers alongside of really starting the real transformation, because – and I will come back on that and you will see in the different integration – we've really started. We are really at the heart on the transformation now, much more than where we were six months ago. So, to manage to deliver that set of result of business as usual as well as really entering into that phase of transformation I think is a good result.

And the last thing I want to share and, of course, Karen is going to cover that, is our kind of cash position. We are a strong cash generator. We have the means to invest in our business. We've been investing in our businesses. We open as many Screwfix as we can. We are investing on other part of the business as well, and we are starting to invest our transformation, even though it's really, really early days. But we can do everything, and as you know, we are getting cash back to shareholders as well. So, we have definitely the means of achieving the transformation, the plan that we started right now.

Talking about the transformation, I will come back to that in the conclusion, but really two messages for me today, guys. First, it has started really. It's a really complex transformation that we are starting right now and I will give you more details. But when I'm looking overall about what we do in IT digital on one hand and then, what does that mean to go to this 20% unified and unique offer next year is just a lot of work.

If you think our number is concrete, as you know, if you think that the number of square meter that we are going to impact in store is more than 20%, if you look at the number of SKU that we are going to touch, if you want to deliver 20%, you have to work on 30% of the sales, and we are going to touch 50% of the SKUs. We are going to rent some logistics place in order to bring those goods into the businesses. We need some labor costs to be able to implement those new products in-store. So, it is going to be a lot of work. So, first message.

And second message, we are only six month in a five-year plan. So, I listen to the call this morning and people say, are you changing your guidance? We are not changing anything, guys, because when you are six month in a five-year plan, we know what we know. We've made some assumption, and we stick to those assumption. So, in two words, I am confident and aware.

Now, I hand over Karen.

Karen Witts

Thank you, Véro. I've got some very important prop with me today which is my glass of water. I'll apologize in advance if I cough and splutter my way through. But good morning, everyone, and thanks for joining us today. As usual, I'm going to take you through our financial highlights for the first half of 2016/2017, along with the key developments in each of our major geographies, and then move to an update on the balance sheet and on uses of cash.

Let me start with the financial summary and focus on the highlights during the first half of the year. On a constant currency basis, group sales grew by nearly 3%, £5.7 billion, with like-for-like sales up just over 3%. Retail profit of £464 million grew by 9%, driven by good performances in the UK and Poland, and we also delivered on our Goods Not For Resale initiative a bit earlier than planned with a £12 million benefit coming through the first half of the year. And I'll cover this in the ONE Kingfisher update later in the presentation.

Just by way of reminder, all underlying metrics are before transformation costs. So, underlying profit before tax is before £18 million of transformation costs and was up 13.5% to £436 million. This included the £17 million of favorable currency impact. Our underlying earnings per share of 14.2 pence was up 15%. It was an overall £9 million exceptional gain in the first half of the year, which mostly related to the B&Q store closure plan, and I'll cover that later.

We generated £533 million of free cash flow after investing £141 million in the business. It was a £200 million working capital inflow, most of which was down to timing. Our first half net cash position after around £76 million of favorable currency movement was £898 million. And I'm also pleased to report that the board is declaring an interim dividend of £0.0325 as an increase of 2.2%.

We now have a quick look at the results by division. Retail profits in the UK and Ireland was up 8.8% to £211 million, with France up 1.6% to £187 million. Profits in our established other international businesses grew by 24% to £77 million and that was driven by the strong performance in Poland. And our new development countries of Romania, Portugal and Screwfix Europe incurred losses of £11 million in the first half of the year and that was in line with our expectations.

So, now, let's move on to the divisions in a bit more detail, starting with the UK and Ireland. In the UK and Ireland, we had a good half year with a continued strong contribution from Screwfix, supported by a decent UK backdrop. The half-year results included just over a month of trading following the outcome of the EU referendum, but we saw no clear impact from the demand on our businesses in that time.

Total sales of £2.6 billion were up 3% and like-for-like sales were up nearly 7%. Retail profit was up 8.8%. Our cash gross margins were slightly up, although the gross margin rate was down by 100 basis points and that reflected the continued mix effect from strong growth at Screwfix, some clearance related to the B&Q store closures and increased fulfillment costs driven by higher digital sales at B&Q.

If we look at the performance of our two businesses, in B&Q, total sales were down around 2% to £2 billion reflecting store closures, while like-for-like sales were up 4.6%. Sales of outdoor seasonal products were up nearly 2%, whilst non-seasonal sales including showroom were up 6%.

As anticipated, sales transference from the B&Q store closures contributed around 2% to the first half like-for-like sales. That's a level which continues to support the business case. Click & collect is now available on over 18,000 products in B&Q and our online digital sales grew by 39%, albeit from a relatively low base. They now represent just over 3% of sales and Steve will talk later about what's driven this growth.

Finally, Screwfix had another strong half with total sales up 24%. Like-for-like sales were up nearly 15% and this is driven by strong growth from the specialist trade desks, also strong digital growth and new and extended ranges. We opened 20 new outlets in the UK, taking the total to 477 and we'll now open around 60 this year, which is an increase of 10 on our previous guidance.

Screwfix click & collect sales were up about 60% and now represent around 14% of sales, which is up from about 12% in the last full year. In France, we added 1% new space with one net new store and four revamps. Our total sales in France were flat at £2.2 billion, with like-for-like sales down by just under 2%.

This is slightly weaker than the Banque de France home improvement sales data, which reported a broadly flat position. There were some unusual factors during the first half. There was widespread industrial action in France, exceptionally wet weather and those created a more challenging external environment in the second quarter that we'd seen in the first quarter.

Private housing starts were up 2.5% and building permits were up 1.5% during the half. This is an encouraging development but we've yet to see a benefit to the home improvement market and to our businesses. Retail profit in France increased by 1.6% to £187 million as gross margins improved by 70 basis points, reflecting less promotional activity and good cost control.

Looking specifically at the performance of the two businesses, in Castorama, total sales declined by 1% to £1.2 billion with like-for-like sales down 2%. Like-for-like sales of outdoor seasonal products were down 6%, whilst the sale of indoor and building products was down 1%. In Brico Dépôt, our total sales of £987 million were up 2%, reflecting the timing of store openings last year, whilst like-for-like sales were down 1%.

Now, onto our other international businesses, starting with the look at our more established businesses of Poland, Russia and Spain, which together grew sales to £907 million, up by nearly 8% whilst the like-for-like sales grew by 6%, and that was driven by Poland. Combined retail profit was up 24%. Poland had a strong half with sales increasing to £587 million and like-for-like sales up 9%, benefiting from new ranges and a generally supportive market, which included the impact of new family benefits for all families with two children or more.

However, it should be noted that a new retail sales tax has been introduced effective since the 1st of September, although we're currently hearing that it is subject to EU challenge. And although it's hard to quantify, there's probably been some pull forward of sales in the first half.

Gross margins in Poland were up 140 basis points, driven by strong trading and better buying. And retail profit grew by 33% to £73 million, reflecting the sales growth and the higher gross margins.

In Russia, sales were down around 0.5% to £157 million, with like-for-like sales up by just over 1%. Profit declines to breakeven, reflecting a challenging environment and including also the impact of adverse currency movement from the cost base. Performance in Spain improved on prior periods, the sales up 3% and like-for-like sales up 1%, and retail profit of £3 million was £1 million ahead of last year.

Now onto our newer development businesses in Romania, Portugal and Screwfix Europe. Sales were £58 million, with losses of £11 million in line with our expectations. We opened a further three Screwfix outlets in Germany and we remain on track to open six more in the second half of the year which should take the total to 18 by the year-end.

We're continuing to forecast a loss of around £20 million for new country development. This is largely driven by investments in Screwfix Europe expansion, whilst we're halving the losses for Romania and Portugal and that's consistent with the first half performance improvement.

Now, let's take a look at the cash flow and what we did with our cash. Well, we generated £741 million of operating cash flow including a £200 million working capital inflow, which was largely down to timing and which will, therefore, tend to reverse out in the second half.

After capital expenditure of £141 million, the group generated £533 million of free cash flow. We returned £283 million to shareholders during the period by an ordinary dividend of £157 million and £126 million of share buyback. We also received net proceeds of £63 million from the sale of our residual 30% stake in B&Q China.

So, at the end of the first half, our net cash position after facing and after a favorable currency movement of around £76 million was £898 million. I increased it more. Our £12 million moving average lease-adjusted net debt to EBITDAR ratio was 1.7 times versus our year-end position of 2 times. This is lower than our target range of 2 to 2.5 times but reflects working capital phasing and CapEx phasing.

Now, let's turn to the capital expenditures. So, if we look at the inner circle of the chart on the slide, you can see that of the £141 million of CapEx in the half, 34% was invested on IT as we rolled out our unified IT platform, 30% was invested in refreshing and maintaining our existing stores, and 14% on new stores and relocations with 14% on other areas mostly ongoing investment in our supply chain. 4% of our spend is related to a transformation project principally reflecting the timing of digital CapEx.

Our guidance for the full year remains unchanged, up to £450 million. This guidance now, however, includes the purchase of the freehold of our highest turnover B&Q store. The proportion of transformation CapEx in the overall spend has reduced since our guidance in March as we've refined our digital plans and Steve will talk about this in the digital update later in the presentation.

So to summarize, we've delivered good business as usual performance, whilst managing the start of a complex transformation plan. Screwfix and Poland were strong growth contributors to our half-year results, and we've continued to focus on cost control, including good early delivery on our Goods Not For Resale plan which I'll cover later. Our balance sheet remained strong, and we've now returned £317 million of capital to shareholders year-to-date in the form of last year's final dividend and from our share buyback program.

Finally, whilst we've seen no clear evidence of an impact on demand in our businesses following the outcome of the EU referendum, it's clear that the outlook for the UK remains uncertain and we remain cautious on France.

We're now going to move to our ONE Kingfisher update. We will remind you about this year's strategic milestones. Arja will update on unified and unique offer, Steve will update on digital, and I'll update on operational efficiency.

So, I'd now like to hand over to Arja.

Arja Taaveniku

Thank you, Karen. So, ask. You stole it. So, I am here to update you on where we are as in the transformation of the unified and unique offer. And as a reminder from the Capital Markets Day, we are creating a unified and unique offer. And this is based on where everything starts with the customer needs because we do know that customer needs are similar no matter if you leave in Nottingham, or in London, or in Warsaw, in Kraków, in Paris or in Bucharest. We know that customer needs are similar across our markets.

We have started doing outsourcing in a very different way compared with what Kingfisher used to do as we are basing everything now on our group volumes. We are reorganizing as ONE, and we have been implementing from early this year the new ranges in our stores and are continuing the rest of the year.

We are gearing up for next year, and I am today confident in the plans we have to deliver on the sustainable profit uplift of £350 million on year five. Having that said, I will also introduce to you and tell you about the challenges that we are facing, especially for next year and the year after because we have challenges coming up.

This is a five-year journey. And we are six months into this five-year journey. We have the target of reaching 4% of unified cost of goods sold this year. To reach that, we are, as a matter of fact, working on 7%. So, it's 7% that has went through our internal processes, and those 7% will then affect the full year next year in terms of benefits.

They have started to land – ranges have started to land in the stores, but it is early days still because the launches are heavily H2-weighted. Likely, the forecast that I see today is likely that we will end up on somewhere between 3% and 4% by the year-end on the unified offers. It's H2-weighted because I think you remember that we started these projects in May last year. I have worked with product development for many, many years, and the timelines have been very short. So, this – why it's H2-weighted is because we have done a lot delisting of suppliers, and we have also been managing the clearing of old stock.

The sales and the cost of change are, to-date, in line with expectations. And the cost of change, as a reminder, these are mainly about clearance, it's about transformation, and it's about the CapEx. The result from these ranges that we have been working on in the first wave is that we are going from 28,000 SKUs on growth level down to 7,000. We are going from 842 suppliers down to 131, and it goes without saying that those 131 suppliers are, of course, given much better conditions to put up highly efficient production.

This plan will deliver significant customer benefits, which is the main thing with our plan. This is not a cost price reduction exercise entirely. The main thing is that it would deliver much better ranges for our customers. These photos show light bulbs out in the stores, the new unified light bulbs, and these photos are from our best practice – the four Big Box best practice. And Véro will come back and talk a bit more about those best practice stores later.

Well, we have the sales so far, it's not season for bulbs yet. I got the question, are bulbs really seasonal, and I understand that some of you are coming home so late every evening, so you always put on the lights in your homes. But as a matter of fact, it is seasonal because there are parts of the year when we are selling more bulbs and it's in the darker parts of the year.

So, the sales is picking up. We are also clearing some old stock. If you go into B&Q stores, you will see that we are clearing some old stock. But so far, the sales is up in Poland and it's good in the UK. It's just implemented in the UK.

These ranges are easier to shop for our customers in terms of how we have displayed the merchandising and how we created the packaging. But also how we have created the range composition, what we are really offering to the customers.

It's newer products. And as an example, two-thirds of these bulbs will now be LED and sold under our own brand, Diall, where we have really secured a good quality at the very low price. And I could recommend that you go to a B&Q stores and look for yourself because it's out in the stores. You would see it there.

We talked earlier this year when we met about prices. And I said at that time that we don't have big needs of investing in prices. You see on this picture our treatment that it's also unified ranges that we have been selling this year and we sold through in many operating companies to be fair. We did later in certain operating companies also lower the retail prices. And we could do this with retail margins because of the cost price reductions we achieved. These ones we have been able to put on the market at a higher quality and we have received very good customer feedback. And, for example, on our Web pages, it's easy to see how customers are rating us. It's direct feedback from customers and it has been very good on these ranges.

As a side note, we also updated you on the Capital Markets Day about the unique bathroom that we are developing right now, and the development is on track. This will come to the stores in early 2017 depending on operating company and the conditions we have in different stores. These new bathroom ranges – it's the new core range program that addresses the number one customer need that we have in all markets and that's the lack of storage and the limited space that people have.

And even if you don't have limited space, you always have lack of storage because you have a tendency of always filling up what spaces you have. We will be able to show you in the finals next year where we are at and maybe bring some even – show you some photos of the new ranges or even some real products.

Alongside those customer benefits, of course, the unified ranges are giving business benefits to Kingfisher. These are pictures on the unified sinks that are out in the stores. This is pictures from Poland and Romania, and we have seen – we have got higher sales as a result from it.

When doing this unification, we have been able to do this unification, but still continuing to address the local needs because there are some. And as an example, in Poland and Romania and I would say Russia as well, there's still a need of having light-colored sinks, meaning best sinks things. We can add that into the unified range. We're not removing that.

In the UK, you probably know about the Belfast sinks. We are still having that in the range, so we're adding that as a local need. We have also been able to add new good functions to markets that didn't have it. Example is scratch-resistant, linen finish sinks into the UK. We didn't use to have it here and we've been able to add that. Those local ranges, they are still benefiting from the cost price reductions that we're achieving on the unified ranges. In many of them, we can use the same supplier base. The Belfast sink is a porcelain sink and we are using the same supplier base as for the unified ranges.

We have also been able to negotiate with local suppliers where it's not the common supply. And that means that also the local ranges are benefiting. And then we will gain also on the local ranges.

On the sinks, well, it's a fewer SKUs you see on the screen, we're going from group SKUs from 516 to 113 and it's now 13 suppliers as compared with 36 before. And going back to this, they can now benefit themselves from having much higher volume in production. I do remain confident in delivering on the net 5% cost price reduction that we told about in the Capital Market Day.

And as a reminder, this is net 5%. This is after sales price reductions; this is after the cost of change. And I know that you will ask again about 5% you see in sinks, it's 15% cost price reduction. We told also in the Capital Market Day that we have started with the easier categories, the ones that are more straightforward to unify, and we also told about some favorable market conditions right now. The commodities are on a very, very low level. There has also been some technology developments, for example, in the bulbs that are helping us. So, we still think that 5% is the right ambition in our five-year plan.

We showed you this on the Capital Market Day that we will radically reorganize. The first ranges that we have been talking about, they have been delivered by project teams, temporary project teams that we assigned from late last year. This reorganization is a strategic key milestone and we have now a new organization in Kingfisher for the Offer & Supply Chain, OSC, which I have the big honor of heading up in Kingfisher.

So, how are we doing with this reorganization? Well, it's well underway. We have reorganized the activities around ranging, sourcing and a lot of the commercial activities. As I told you also in January that as a step two, we will look at the whole supply and logistics, and that's what we are currently planning. So, that's not done yet.

My own leadership team is in place, and I have a leadership team with great wide experience. Most of them are internally recruited in Kingfisher. There are also some external but most of them are internally recruited.

We have during this time, since we met, designed this ONE Offer operating model. We have done a reorganization, where we have been affecting almost 2,000 people. We have designed new ways of working. We have put in new reporting lines. We have designed job descriptions. It's been a rather big piece of work in the past six months.

We have done consultations with work councils and with our colleagues, and we have been able to offer new roles to our people. The new roles are permanently in place as from June this year. I can honestly tell you that we have really good people in Kingfisher. We have been able to fit almost everyone into the new roles.

This has the – not only from a competence point of view, but it also have the side effect that the exceptional costs are lower than we originally anticipated. And Karen will come back to that later because it didn't cost us much to do this first part of the reorganization. We are still in transition. I have to say that. We are still bridging from the old into the new Kingfisher. We are managing business as usual at the same time as we are moving into the new organization.

Overall, we have a stable head count. We have also started to recruit new competencies in functions where we simply have too few of, and I can mention functions like merchandising specialists, engineers, designers. And as an example, we are setting up the new design hub in London. Our new design director started just a few weeks ago. And if you wonder why we are doing that, recruiting those new competencies, while we used to do – we come from a culture of just buying the products from suppliers. So, we are moving into a world of Kingfisher where we're also designing our own products and owning our own IT rights. And we will do business directly with the factories.

So, for example, one part of that cost that suppliers used to have baked into their costs, the R&D, much of that we will carry ourselves. And that's why we need to also have those new competencies in Kingfisher. So, really, the new Kingfisher is built on the best from the old but added with the new that we are now bringing.

So, how does it work? Well, I showed you this in – part of this in the Capital Market Day and I thought I would symbolize that with how it works with the products. So, I brought one product. I'm not revealing any secrecy here because this, you will find it's a rather generic product. It is a – are you excited?

I hope you are as excited about taps as I am. Take this tap, in the new organization, who will do what with this tap? If we start with our operating companies today, what they will do – or are doing because it's effective, it's light, it's there. They are doing the trading. They are making sure that we are selling as much as possible of this in all the different channels, in the stores, online.

They are, of course, securing the range implementation in stores in terms of both how it looks like, but also making sure that our store colleagues are understanding everything about this tap, knowing what it's good for.

They are still doing the final, making sure that this tap is really retailed at a price that is competitive for their operating company. They have also, earlier in the process, been giving us in Offer & Supply Chain the relevant market and customer input about it. And this goes on in an interaction within the term process together with Offer & Supply Chain.

Then in the new organization, Offer & Supply Chain, the half of that are range teams. We are working through seven-range categories. I have recruited seven-range category directors. They're all internal recruitments. And there, we have range teams and we have the product leads that are starting every project we're looking at. First of all, of course, what are we selling today? What are the successes in the different operating companies today? But they are looking at what are the customer needs. And they would then review what are the customer needs when you're developing or when you're buying a tap and when you are using it.

They will base that whole range offer on those customer needs. They will also look on the range composition. How many taps do we need to offer for use where you want to have a relevant offer as a customer? And they will also look at what price targets should we put at on those products.

Supported by there, you have in that range support, you will then have specialist functions like designers. If we decide that we will go on our own design, we will do a lot of that design ourselves. And I'm saying if because one part that is evaluated as well is the dependency on international brands. And when you really start with customer needs, we have realized that we are much less dependent on international brands than we have previously thought. So, you will have designers, you will have engineers that are constructing part of it. I can mention that taps, for example, are now quality-secured from Kingfisher because we have then constructed the cartridge that is on the inside to make sure that you have all this great quality on the tap you buy from Kingfisher.

You will have also people here in the range support function that works with packaging and the brand deployment, meaning that this white box, what they do, it will not be white when it comes out in the stores. They will decide what of the Kingfisher brands that we put on it, how does it fit, and what information do we put on the packaging. They will also do instruction. Because in here, you will also have instruction manuals telling how to install it. So these are also supporting on that one. There are also quality specification people here telling – saying that this is the quality requirement we have to set on this, and this is requirement we are setting on suppliers.

In the sourcing part, you will then have experts – you are having. I'm saying will, but we are already, since six months, having, buying experts here. They are handling, managing the whole tender process. So they are the ones who are putting out to suppliers and asking who wants to be part of this tender process. They are managing all the supplier relations and also deciding who is the supplier going to be that will supply these taps.

In the commercial part, we have other support functions, for example, people that are deciding the merchandising solutions in the stores, how would it be displaced in the stores. You will have people that are product data experts. And we are already, as from now, doing one set of product data for all the unified ranges that feeds all the Kingfisher operating companies and all the channels. It's one set of data, and that goes along with product communication. And we are now, for example, developing range catalogues for bathroom and outdoor and doing it once in Kingfisher and not in all different operating companies, more functions in there such as people also reviewing pricing and then managing the coordination of different sales activities.

In the supply and logistics, we have currently project people working on – deciding on what are the routes to market on this one. How do we supply it? Does it go directly to stores? Does it go through distribution centers or how do we supply it? They're also managing the forecast, trying to estimate how much of it sell of it? So this is the core function of how Offer & Supply Chain is working as from now because it's already in place.

These are areas which you can wonder why we have done this. Well, we have done this because we are rebuilding specialist and expertise in all these areas in our operating companies and in Offer & Supply Chain. This is about building specialist and expertise. We have moved from nine operating companies into ONE Offer & Supply Chain with maintained retail expertise in our operating companies. Our range teams are today placed in the UK and in France.

For example, the kitchen team operates from UK. Our bath team operates from France. Building and joinery, we have a street building – heavy building is in UK, joinery sits in France. This has meant we have less physical moves of people and we have had a much better internal recruitment base and having that also going forward.

I think the main thing here is that we're really rapidly moving to the culture ONE Kingfisher. We are – while doing this reorganization, there's no way back into the old Kingfisher. This is the culture over to new ONE Kingfisher where we do things based on customer needs.

Now less from me. Let's hear from some of the members of Offer & Supply Chain.

[Video Presentation]

We have hundreds of those kind of people. My job is not very difficult. We are already well progressed for next year for 2017. I can say that we have now moved into the new world and this is how we work now. This is now the business as usual for us. Offer & Supply Chain, the OSC, we are covering all the ranging and the sourcing decisions. That's not done in the operating companies any more.

We are covering all of that in Kingfisher. We are well progressed for next year for 2017 where we also already started to plan for 2018. And we know that for 2017, to deliver on that 20%, we have to actively work on 30% of our cost of goods sold. And in addition to that, we are also going to work on the 18 ranges and that starts now.

Having that said, we do know that we have big challenges ahead. This is not a straightforward easy journey we are into. We are aware of the challenges. In that Wave 1 which of course is covering, we'd almost say a small part, it's not 3% to 4% of the COGs, it's not a lot, even if we were to own 7%. But we have learned it has been great experience because we know that the benefits are coming through. But we have also had that as a learning case on things where we have to become better. And we are aware of the challenges in terms of clearing of old ranges, the cost of remerchandising in our stores. And we can also foresee new and different demand from our existing supply chain networks. And Véro briefly mentioned this in her startup that this year, we are touching roughly 3% of the store space. Next year, we will be touching 22% of the store space. So we have big genesis next year. However, having that said, it's worth it, it's really worth it.

Let me take you through some of the ranges that we are working on to bridge from this 4% to 20%. The first one being stick timber. Stick timber stands for one-third of the total company, wide timber sales, and we are big in timber in Kingfisher. It has four main product types, and this is a category that used to be seen as very difficult to unify. People were saying that that's impossible to unify. Well, as a matter of fact, we have discovered now in that process of really looking on customer needs and really analyzing the business, out of those four product types, we can do unification on three of them. Three of four can be unified because the customer needs are very similar in terms of stick timber.

The core SKUs are already similar across the different operating companies. The difference is that they have already been bought by different buyers in the OpCos. We will be able to go from – on group level from 1,360 SKUs to 720, and that's been covering the local needs in the different operating companies. One of those four which are more difficult to unify, that's very much based on local regulations, not on customer needs.

Specific regulations on colors, for example, on construction timber in the UK and in France, in France, it has to be yellow, in the UK, it has to be a different color and has to – we have a specific treatment. But what we have learned from this case is that the unification really can happen in different parts of the value chain. It can be either on that really final product but unification can also happen earlier in the value chain because what we can do is, for example, unified thesis, lengths, and of course, having that from the same source.

This is also good break to work on because the cost of change is not particularly big here. We have a high stock turn in these products and the merchandising is already very similar across our operating companies. We are in the development phase of this one and we are just putting this out to suppliers. If I can't inform you about the cost price reduction on it, but I have very good hopes for that we will have some good savings on this category.

The other one that I want to show you are the taps and kitchen taps. The commonalities on kitchen taps are really the type, brand, color and the finish, and on product commonalities. Because the product as such, well, you have the body and the sprout on the tap, there are product commonalities. And as a matter of fact, 94% of our sales come from three body types, only three body types. The customer needs are, of course, to secure quality because quality is the main thing in taps and durability. And we also see that what saving is coming up as a big demand from customers.

There are some local needs. I told you about the besh or light colored, as Richard was saying on the phone, light colored sinks that, of course, comes with besh first of all. So there are some local needs that we will be able to cover.

New trends are coming out while industrial taps are, of course, very big new trend. We can also see that it's coming more demand from colors, other colors than only stainless steel. We have been able to reduce the number of group SKUs with 84% on this brick. And, again, has been said earlier, on those local SKUs, we will be able to benefit on the cost price reductions because we use the same supply base.

So, as a summary, back to my opening remarks, we are creating a complete, unified, unique and leading offer, and it's happening now. We are sourcing in a very different way. We have done a big part of a reorganization, and we are continuing in that transition journey because it is a journey we are not done yet. And we are implementing the year one unified ranges. Our milestones are on track, and we are gearing up for next year.

Everything so far validates the £350 million sustainable profit uplift that we said in the Capital Markets Day that we're going to have on year five, but I want to emphasize that we do have big challenges for next year and the year after.

I would like then to hand over to Steve.

Steve Willett

Thanks so much, Arja. All right. I just like to take a few minutes to talk about the two milestones, strategic milestones that's in this year for digital which is the unified IT platform and the Brilliant Basics for digital. That's lovely.

Firstly, just on the unified IT platform. So what this chart is showing you basically is that effectively we haven't changed the plan. So this is what we previously communicated apart from one thing which is we've actually added the systems requirements for the Offer & Supply Chain organization into the overall plan. So, effectively, we're still working to the plan that we've communicated.

The next six months is particularly busy because we basically got to finalize the rollout of B&Q and we'll do complete most of the rollout of Castorama France. Where we then go in is the backend of 2017, is the implementations that we're talking about as cluster two which is effectively four countries. So it's Castorama Poland, Castorama Russia and then Iberia and Romania. So they're actually in two groups at the backend of that years and we're ramping up the implementation for that and basically have already started.

The plan is very tight. So there's an implementation across the scale that we're talking about for IT across all the OpCos. But again, I'll reiterate what I've already said before, we will not sacrifice quality for speed. So, if we need to stop, we need to slow down, then we will.

In fact, actually below this level of plan, we have been moving milestones about in both the B&Q and the Castorama rollout to manage risk. But actually, the result of that is we're still confident that we think this plan is achievable. So that's what we're aiming for.

A bit more detail on the B&Q and the Castorama one. So ONE B&Q roll out, basically, the momentum in the progress is good. So, so far, we've implemented, in the note, it says back office, but we've implemented all the core HR and finance. We completed the store rollout ahead of plan. And from an accounting point of view, the unwritten accounts and the half year accounts were prepared in the new system. We're currently in progress with the in-store customer ordering functionality and enhanced click-and-collect functionality which is currently rolling out as we speak to the B&Q stores. The next big phase is actually converting all the supply chain and F&R functionalities over, and we're on target in B&Q to do that for the beginning of Q4.

What we are seeing from the rollout in B&Q is the system is enabling the colleagues to spend more time with the customers and serving the customers because we're making the tasks more efficient. What we've also done is we've step-changed the amount of information available to the colleagues in the aisles to serve the customers. We've now real-time stock data that also enhance product data that we're flushing out from the diy.com.

On the B&Q plan, we're confident at the moment that we'll complete it by the end of the year in line with the original plan. If we talk a bit about Castorama France, we're well into the Castorama France rollout, and we've actually made the changes to the systems from a legal and financial point of view to make it run in France. We will be starting the Castorama store pilot. In fact, it actually started this morning in the store near Leo. So that's actually progressing according to plan.

Right. Just moving a bit onto digital. So, when we were at the Capital Markets Day, we effectively said that our priorities on digital were in two areas. One was Brilliant Basics which I'm going to talk a bit more about in detail in a minute but that was effective about how can we become as good as the best in core e-commerce across the group. We've got pockets of it but we haven't got it across the group. And our benchmark internally for that would be Screwfix, but actually we're taking benchmarks from across the world in different industry sectors.

Customer journey's a bit more difficult, because basically, we said what we wanted to work on was end-to-end customer journeys. It's in the ambition which is we want to help customers all the way through their journey on doing a project. So what do we mean by that? So, if you take a bathroom project, effectively, it goes over about seven months going from inspiration all the way through to delivery. So we started work on customer journeys. In that, we see as a massive opportunity to step-change our customer experience. We also see it's very commercially sensitive. So we're deliberately not talking about it in any detail till probably when we get into next year.

At this point, I promised Karen that I'd hit myself with a stick over the back for not hitting the guidance on CapEx that we gave you in the beginning of the year. So, if we just talk about that for a minute, we're not changing any of the overall numbers. We're basically just saying that it's a phasing change. And actually, there's two different stories linked to this behind it. On Brilliant Basics, as we've got into the more detailed plans and we've looked at how to take down the amount of short-term tactical work and how to make the programs more efficient that we have to phase it out with the unified IT program. That's the most efficient way of doing it which has moved some of the things from this year into next year.

On the customer journeys one, effectively, this was new ground for us. We're actually putting new ground for the industry we believe, and actually, we took advice and we got some high level estimates from external partners that we initially gave up guidance. As we've been building the teams and we've been starting going through concepts into prototypes, we've actually now started to understand in much more detail what it actually takes to do this and the timing. So we've actually rephased parts of that. So, overall, we're not changing the numbers. We just moved some of the phasing in the five years.

If I then talk in a bit more detail about where we are on Brilliant Basics, so these are the headline things that we said was under that strategic milestone. So, on digital marketing, we've been running some upweight tests in B&Q. Basically, we've been moving up the volume of digital marketing for very positive results. We've got similar tests going on as we currently speak in France. And of the back of that, what we'll do and we'll take those results and then we'll look at what is the appropriate mix for offline, online marketing going forward.

In search, so, if you take our best practice in search which will be Screwfix, we know that good online search and good natural search out on the Internet drives both traffic and conversion. And in fact, some of that best practice has been applied to the early part of the year in B&Q which is why we're starting to see some of those numbers.

In the new search tool that we're implementing, so we're all going to implement a new search tool into the unified IT program, technically, that's under way, and actually, we're going for an implementation in B&Q in Q4 and then Castorama France in Q1. And then the rest of the group will get it as we roll out the group IT program.

On mobile, again, we're currently in build on a series of mobile apps and new mobile websites. But basically, I think it's fair to say our experience as a group at the moment is not great. So we're going to move it to leading class. So that's currently in build for implementation in the first half of 2017.

And then digital analytics, digital analytics is very important to us. Because actually if we can't analyze how people use our sites and shop at our sites, we can't improve properly. So, actually, in digital analytics, the group to be fair was a bit of a mess. We virtually add every digital analytics tool on the market, deployed somewhere.

So we've completely rationalized all the tools. We've come up with this common set of KPIs for the group and the common way of implementing it and we've now got a common digital dashboard that's actually across the group. So we're moving forward on that.

And then last but not least, checkout. We implemented a much simpler one-page checkout into Screwfix at the beginning of the year. And we've actually seen increase – that increased conversion by about 6% which is fairly large in the scheme of things. And the similar checkout to that, we are now – in fact, we will build for B&Q and we're just starting to build the Castorama. And we'll be putting that checkout into the group IT platform. So, in terms of Brilliant Basics, we're moving forward and we're on plan.

So that's it for me. And I'd like to pass over to Karen to do operational efficiency.

Karen Witts

Thank you, Steve. You've not done my reputation any good. Have you?

Steve Willett

No.

Karen Witts

Okay. So there are two milestones that I'm going to update on. The first being where we are in terms of the progress against closing our 15% of surplus space at B&Q. And the second one on where we are in terms of delivering benefits from the unified Wave 1 of our Goods Not For Resale program.

If we start with this space rationalization program, well, it's well advanced. Just as a reminder, 15% of space equated to 65 stores to be closed. And that program is now 80% complete. We've got 52 stores closed to-date. We did 30 last year, and they were mostly backend loaded. And we've done 22 closures in the first half of this year. That leaves us 13 stores to close in the remainder of the year.

We've got 50 exits secured to-date, so different from the closure. That's actually terminating our lease liability one way or another. And at the end of last year, we had completed 40 exits. We've now increased that by 10. You may remember that in quarter one, we announced that we were actually outsourcing the remainder of this activity to a specialist providers. And of the 10 exits that were secured in the first half of this year, they worked on six of them. Now the reason that we've done this is that, actually, our business isn't closing stores and exiting leases and we want to focus on the ongoing business. And so we've outsourced this.

And then important here is to say that the sales transfer terms, I referred to earlier, 2%, is supporting the business case assumptions, about 2% of sales transference supports the third assumptions that we said we would need to make the business case for store closures work.

Now we're not changing our view of the £350 million exceptional provision that relates to our store closure program for two reasons. One is that we still have 13 closures and 15 lease exits to deal with. And the second thing is that whilst we've announced two closures in France and we have closed one store in Russia, there's still a couple more that we are looking at in the rest of Europe.

No, have a look at the Goods Not For Resale program, and that is one of the pieces of news from this morning where we said that this program is delivering earlier than planned. The program, just to remind you, we still look at our £1.2 billion cost of goods and services that we consume ourself, and to find benefit both from cost price reductions by working in a more unified way across the group, and also by improving the way that we actually use the goods and services inside the group. So efficiency and effectiveness – cost efficiency and operational effectiveness are what this program is all about. And the program is a major part of, but not all of our £100 million operational efficiency pillar.

Now, because the £1.2 billion of cost is spread into many, many, many categories of spend, actually, I find it ironic rather than anyone else's, we put that into what we were calling three waves. So that the teams could focus on a certain set of categories at any one time. And while so our objective for this year, our milestone is to get to the implementation phase of Wave 1, that doesn't mean that we're not working on Wave 2 in particular and even a little bit on Wave 3. And as a result of this, we've got £12 million of benefit in our half year results. And we are now guiding up to say that in the full year, we expect £25 million from our GNFR initiative rather than the £20 million that we guided at the full year results.

If I just maybe put a little bit of color around this to show what we have been doing in the half year, when I last spoke to you, I was talking about forklift trucks and prints and paper. And that won't go through those examples again. But if I give you another couple of examples to try to bring this to life, and it also shows that we don't necessarily have to do everything across all geographies in this space, we're looking for efficiency and effectiveness.

We relooked at all of our cleaning contracts across the group, and we found some particular areas of opportunity in France. The cleaning contracts are distributed on a very, very fragmented basis. And basically, we've looked at what we believe as better practice in our group. And we've actually zoned the cleaning activity. And as a result of the zoning, we've actually gone down from having 13 suppliers to three in France.

And we're doing some things quite similar actually in maintenance. We're now gathering together for the quest for maintenance from the stores so that lets us see actually where our activity needs to be focused. And we are looking for preferred suppliers who can work often on a national basis. And an example of that would be that we found one supplier across France. We can actually deal with repair and maintenance on automated stores. So this stuff isn't rocket science, but clearly, we weren't doing it before and the benefits are now coming through.

And next, I'm now going to summarize before I hand over to Véro, really not good with this clicker.

Okay. So this is the – the slide shows the bridge that takes us from underlying PBT to statutory PBT. You've seen the format before. This is the first time that we've actually had real numbers in this. So you can see we reported underlying PBT of £436 million. And within that £436 million, we've had £12 million of GNFR benefit. That's where we said we would show GNFR benefit. We get to £418 million of adjusted PBT after £18 million of transformation costs. And those transformation costs today have come from the digital setup costs and also implement – range implementation activity in our Offer & Supply Chain.

And then our statutory PBT of £427 million is after a net exceptional gain of £9 million. And I've deliberately divided the exceptional into two parts because they're both very different. So, if I start with the £1 million charge which relates to a transformation program, as Arja commented on, at the moment, we're spending less on exceptional costs than we had originally planned to do at this stage. But I think you can understand that we have just started the transformation and there are likely to be other costs that will come in as we go through the rest of the year. The £10 million exceptional gain actually relates to the estate transformation program. Now we said we would close 65 stores. And in fact, we are going to close 65 stores, but there have been 2 relatively small changes.

One is that we have decided not to close one of the stores that we'd originally intended to close. We've really – since we always do the economics and the potential for sales transference, we decided not to close that store. Conversely, there's another store that we haven't been intending closing which the landlord has decided he doesn't want to renew the lease for it because the site is going to be redeveloped.

Now, if we take a look at that same format and what this means for these two years in 2016, 2017, this is where you can see that we're changing some of the guidance around our overall transformation cost. So our underlying profit before tax will now have around £25 million of benefit from our GNFR program rather than the £20 million that we said before. So guiding up by £5 million there. Our transformation cost of there and thereabout, we said to you up to £70 million. We're now seeing around £60 million for the full year, but maybe about £10 million change in there.

And a change to the exceptional charge that we expect to see for this year, we're only going to expect to see around £10 million of transformation, exceptional cost. And we said before, we would see up to £50 million. Now I wouldn't get too hung up on the other exceptional gain. I've just frozen that at £10 million. That still just represents the decision not to close the stores that I referred to.

And then, the summary of the summaries I guess. In the first half of this year, our overall transformation costs, whether they are transformation through the P&L, exceptional or transformational capital expenditure, are £25 million. And you can see the breakdown, £18 million through the P&L, £1 million of exceptional and £6 million of transformational CapEx.

In the full year, our original guidance was £190 million, and that's come down quite significantly, so £100 million, but that's what I've just described. So the P&L transformation costs £60 million rather than £70 million, the exceptional charge around £10 million rather than £50 million, and the CapEx, which Steve has explained, thank you, around £30 million rather than £70 million. We're not going to change our overall guidance. Our £800 million of total transformation cost is still pretty much what we think the total cost of achieving a £500 million sustainable uplift in EBIT will be.

And I'll now pass over to Véro.

Véronique Laury

So we are now going to the end of the presentation. You will remember that slide as well. That's the one we showed you at the Capital Markets Day. As you can notice, if you have the old one, it hasn't changed. We have a very clear and ambitious plan over five years. As we are used to say and actually they are telling me more than I'm telling them, it's a marathon, not a sprint. And that's why there is a lot of faith in the business right now as I hope you've seen it today. A lot is happening. But at the same time, we always have that long-term perspective. And as Steve said, of course, we are moving at pace. But if anything is happening, we won't sacrifice quality for time. And this is very important.

We've update you on those, on the three pillars, unified and unique offer, digital, operational efficiency. There is one that we haven't been talking that much since we started. And I just want to highlight the fact that Jean-Paul Constant has joined us for really two weeks. He has done some store induction for over summer. But he has really started two weeks ago. So we are going to talk more about retail operation.

But meanwhile, I just wanted to update you about, one, if you remember the first time we met each other, it was what we call first shop initiative. There was one shop initiative about the four big box stores. And we haven't been updated you since then because we wanted them to be open, to be able to say something. So those four stores have opened.

I visited three of them. The only one that haven't visited yet is Elektrostal in Russia because it has opened last week and we are going to be there in two weeks from now. What I can tell you is those store are open. They are really good stores. We've been working – if it's not the store I'm visiting, we've been working on best practices. We've taken the best of what we are able to do in the group and we've put the best of our knowledge in those stores and it looks very good. The customer feedback so far is very good. It's too early to give you any number about from a sales perspective because the latest one has been opened for two months. I can encourage you to at least see the [indiscernible] Wave 1 which is in the UK.

I think before having any question about the big recent program or whatever, this is kind of business as usual for any good retailer to work on the store, on the store proposition and to improve constantly each store. And this is what we do. This is nothing more than that.

So here we are. I think I hope it was very clear. We have a good set of results in terms of business as usual. Solid. It's where we want to be. I think we will – and this is very important, we remain cautious from an outlook perspective. Karen has been talking a lot about France. We remain cautious on France. UK, no sign so far for the Brexit, but we don't know what is going to happen. So we're not going to talk but we remain cautious.

I think I hope that after having those presentations from both I and Steve that you will be with me in the fact that we've made good progress in terms of transformation. And as I said, as an intro, it's really not worth. It's really action. The company has moved really. And as I said, we are very confident with the plan. This is absolutely what this business is needing, but we are very aware of the challenges ahead of us. And to be fair, the acceleration starts now, guys.

And for your questions.

Question-and-Answer Session

A - Sarah Levy

[Indiscernible], face the audience for questions. Identify yourselves [indiscernible]. Jamie?

Jamie Merriman

Thanks. Jamie Merriman from Bernstein. Two questions for me. The first is at the last set of results and also a little bit today, Arja, you gave us a little bit of a peek at what some of the cost price reductions were on the unified products that you have done. Can you give us a sense of how much of that is getting realized in terms of have you reinvested that back in the price of those new ranges?

And then the second one is, as you think about touching more than 20% of floor space next year, how do you mitigate the risk? Is it the speed of the rollout? Is it doing it regionally? What are the things that you think about in terms of mitigating risk for the business?

Arja Taaveniku

First question and the second question, as well, just to make some early comments on. Thank you for the question. It's a – we have realized one thing with these events, it's that we have many, many different groups that are listening to us. It's not only you. We have realized that we have a lot interest from competitors from the market and from suppliers. There are things that we are not telling from commercial sensitivity.

On the price, I knew that that question was going to come. And I can just reconfirm that when we're saying the 5% net savings on the cost price reduction, it is after price reductions, and that's the only way we will comment that.

Then in terms of implementing for next year, we have started with group leadership on this one. It's different than we have done before in Kingfisher where we are looking on different work streams to be able to manage that implementation. And with focus on those challenges that we have mentioned, for example, the clearance of stock that we do that in a proper way, but also how it – we will physically do in the stores with that change of – and I've said again, this 22% of the store space it's other days, but we have targeted a focus group on it with the best competencies in the company to deal those work streams.

Anne Critchlow

Thanks. It's Anne Critchlow from Société Générale. It's another question on price I'm afraid. On page 28, I can see that you've given responsibility to the OpCos for pricing and market positioning. So I'm wondering how the Offer & Supply Chain Organization is going to work with the OpCos? And does that mean there's any risk for the 5% CPR gains that you hope to make?

Arja Taaveniku

So this is how it works. The Offer & Supply Chain, what we do is already from the start when starting a project, we decide what is the price we want to put it on the market up. And then we designed that product, meaning that we take – we look on all the different cost components. For the taps, for example, that I showed you, we will look on all the different product components but we'll also look on distribution cost for example and other costs.

And in the development phase, we removed everything that is unnecessary that doesn't add value to this, and trust me, we have a lot. We have a lot to remove in that phase. So, when we are delivering that product to an operating company, they have a recommended retail price where we have done that exercise. Then we have still the mechanism that every retail company would still secure that this is the best price. So it's the final confirmation that we are reselling it at the best price that the operating companies will do. But again, we are, again, looking at this theory mechanism and the follow-up [indiscernible] I would say, we are in the same boat. The operating companies have the same – they want the same as we want. We all want to retail it at the best price whilst maintaining margins. So I'm not concerned about that part. I'm not.

Anne Critchlow

Does the operating company talk to you before you start designing the product to talk about price?

Arja Taaveniku

Yes, of course.

Anne Critchlow

Okay. Thanks.

Arja Taaveniku

It's a collaboration process. We haven't built an organization – first of all, with the internal goals, these people that work now in Offer & Supply Chain, they used to work in the operating companies eight weeks ago. So it's not like – they haven't forgotten everything in eight weeks. And then we have really build collaboration processes. We are not building headquarters somewhere where we don't speak with anybody. It's built on input, output. It's built on collaboration, the whole structure we are putting in place.

Geoff Ruddell

Hi. So Geoff Ruddell from Morgan Stanley. I think maybe I have another for you Arja I’m afraid. Do you think it's still going to be possible to get the £350 million profit uplift if the UK leaves the single market?

Arja Taaveniku

If the UK leaves the single market, that's first of all, yes, I do think so. I think there are other, again, on the Wave 1 that we have started to implement this year, as we speak in September now, we are doing a lot of the sourcing validations for the almost 50 categories that they're working on for next year. In those, there's nothing that says that we will not be able to deliver that £350 million even if UK decides to leave the single market.

Geoff Ruddell

But does that not mean that you would – I obviously don't know very much about it, but if you suddenly find yourself with a 10% tariff on all the product coming to the UK and no tariff into, say, France or vice versa, does that not change how you would source and you wouldn't still want to source the same contract from the same supplier?

Arja Taaveniku

If that would happen, which again, that's a big if. First of all, every retail in the UK will be exposed to the same which means that you will have a different, probably, price picture on the market. I would say that we are in a better position than any other retailer just because of the work we are doing with the unification. We are negotiating – I mean, all those numbers that we have given you that we are working on, we're saying that we're delivering 20%, we are working on 30%. When we're having on the [18 ranges] [ph], by the end of next year, we have negotiated two-thirds of the group spend. And we are in that business case validation stage. We are also evaluating, for example, the currency risks. And we will also put in, if there come in tariffs into it. So I will say that we are probably in a better position than many other retailers in terms – if all of these happens. But I still have a very firm belief in that the £350 million, we can offset those things without a thing.

Geoff Ruddell

Great. Thank you.

Simon Irwin

Hi. Simon Irwin from Credit Suisse. Some questions for Karen. It's about inventory. If you could just give us a bit more color on where are we on cut the tail? How much of the working capital change through the first half was underlying in terms of, say, inventory days?

And generally, what the response is going to be over the next, say, 12 months or so to inventory? Are you going to run inventory down in categories that are being changed in order to minimize the risk, and is there concern that that availability might be impacted as you kind of go into that risk mitigation exercise?

Karen Witts

Right. That's a lot of questions there. Let me start with where we are on cut the tail which was taking out the delisted SKUs. And we – I didn't talk about it just because we've had so many other things to talk about. So, when we updated on that at the end of last year, we said that we intended to do this in a managed fashion over the next three years. And that in the year that's just gone, we've taken the delisted SKU zones from about £80 million to £50 million.

And so we're doing that we started to change the processes in the business, the processes around range management and rules around clearance of delisted stock. And therefore, the activities have continued.

And in the first half of this year, there is a further benefit that's come through from taking out delisted SKUs. And this time, in this first half of the year, we've actually focused on the oldest ones. So we were looking at it generally last year. We're now focusing on the oldest ones.

This does become – and we'll update on this at the full year results. It does start to get a little bit murky, because as we're bringing in new ranges, we are naturally delisting products. And that's why I'm emphasizing the rules because what we had to have in place was a system, a process to actually manage this on an efficient business. So that long answer was to say, yes, the progress is continuing.

Now your question around the working capital. And in the overall net cash position, at the end of the half year, we've got £200 million inflow of working capital. I am expecting a significant part of that to reverse in the second half of the year. Now there are lots of reasons why we have the inflow and why it will reverse. But actually, we are changing the way that we do a lot things in the business, and it actually changes the timing somewhat, and naturally what we're seeing coming through. But I've gone through that working capital in a lot of detail, and I think a significant portion of that will reverse.

With the amount of activity that's under way for bringing in the next slot of unified range, and certainly, that gives us some challenges on managing inventories and working capital. And that is actually why we've set up the implementation team that we we've set up so that we can manage it in the most efficient and effective way.

And to the question on whether or not we were working in silos or together on unifying our ranges, actually, the teams work together on preparing business cases. And part of that business case will be to take a case-by-case assessment on whether it's better to run down your stocks gradually or whether it might be better to clear faster, but it's so much case-by-case.

Simon Irwin

Are the overall inventory levels, so to say, the group level at year end aren't going to be wildly different the message at the end of that?

Karen Witts

At the end of this year, I shouldn't think so.

Simon Irwin

Thank you.

Sarah Levy

Andy here maybe.

Andrew Hughes

Thanks. Andy Hughes from UBS. I got three different questions. First, on cost price reduction where you have reinvested some of that to give you net gain. Have you seen any volume uplift yet in categories?

Secondly, any way you can quantify the benefit of home about closures, given you had 2% from your own closures? And third, just in terms of Screwfix European expansion, where are we with possible rollout in France and Poland, and might that keep the European losses from Screwfix higher for longer?

Sarah Levy

Okay. So we'll do the first question is for Arja, similar question. The second one for Karen and then Steve for the last question.

Arja Taaveniku

Yes. We have seen volume uplift from those where we have invested in price.

Andrew Hughes

Keep going.

Arja Taaveniku

We have some volume uplift in accordance to what we are going to deliver on the 5%. I'm sorry on the – I wish we could reveal everything for you but there's a lot of people listening to us. Yes?

Véronique Laury

And as well it's early days, I think...

Arja Taaveniku

It's early days as well.

Véronique Laury

The range has been – the most eldest range has been lending in store by the end of March and most of them has been lending for a month like the Big Box store.

Arja Taaveniku

And we're still clearing some old ranges. So, it's early days and I'm not sure we will give you a lot of numbers on it also going forward because we have a lot of people listening.

Andrew Hughes

With that volume gain, where does that come in the £500 million or is it on top of the £500 million planned benefit?

Arja Taaveniku

Again, we are saying what we have guided on. It's the £350 million of this on year five. That's what we are saying now.

Sarah Levy

I think, Andy, what we said was we [indiscernible] at the Capital Markets Day to CPR, just CPR, and we weren't giving out targets to sales volume, so that was a more cautious message. So, intrinsically, yes, it's in addition, but at the moment, it's – CPR is the message that we're going with. Karen?

Karen Witts

Have I – can I quantify the benefits of Homebase closures? In fact, they stopped their closure plan. So, there was a bit of an impact last year which was enough for us to quantify, there's nothing to quantify. I don't know.

Andrew Hughes

No. No. I don't think you needed that. You've had the last 12-month benefit from closures that took place over the last 12 months.

Karen Witts

There'll be a little bit in there but I mean, the main drivers of the B&Q sales growth were the sales transference with an uplift from the increase in digital sales. And then, the remainder was really core range, I guess, that would be in that core range but the two big drivers were the sales transference and digital uplift.

Steve Willett

Sorry. On Screwfix Europe, we're still working on the plans for France and Poland. We haven't made the decision on farming and phasing yet. We thought we've got that discussion to happen.

Andrew Hughes

Okay. Thanks.

Sarah Levy

Oh. Claire, down the front here.

Claire Huff

Hi. It's Claire Huff from RBC. Three questions, please. Firstly, just leading on from Andy's question about the UK competitive landscape. Just wondering whether aside from the store closures, whether you're seeing any disruption from the Bunnings takeover of Homebase and any change that you've seen there.

Second question, just slightly broader actually about the trading environment in France, just wondering if you could maybe give a bit of color on what you think explains the underperformance of the DIY category, and if there's anything that you can see at the moment that might reverse this trend.

And then third one, maybe one for you, Véro, just on the best practice stores, the Big Box stores, just why they're different, what changes will be made to those and whether there's plan to roll that out across a wider state.

Sarah Levy

Okay. Véro, I think all questions are for you.

Véronique Laury

So, on Bunnings, I think nothing that is not visible right now on our current performance. On Bunnings, I'll stick to where I've been since the beginning. I think they are very valid competitors and we are really looking at what they do. We value what they've done in Australia and – but the context is very different.

As you may notice, they've already slowed down a little bit their plan about their investment, how many store they are going to open and all of them. And I think what is important is that we are not fighting against Bunnings. Of course, we have those competitors, but we are sticking to our plan.

And we are in a much better position, having new competitors in the UK with the plan that we have, because by definition, the ONE Kingfisher plan is going to renew the offer in the B&Q store and the customer proposition as well. And when I'm talking about the customer proposition, I'm talking about it includes digital as an example.

So, nothing that we can see. They've done a little bit of price activity over summer on certain lines. But again, I think the starting point was that they were owned, they were 15% more expensive than B&Q. So, even with what they've done, we are still much cheaper than what they are.

So, this is for the first one.

Sarah Levy

France is the second.

Véronique Laury

So, France, my favorite topic. As you know, I think why we remained cautious on France is just because about the volatility that we've seen in the numbers. And which shows us that nothing is fixed. Q1 was much better than what we thought but it was almost good. Q2 we have the strike. So, there are lots of things happening. We have the terrorist attack, then we have the strike. I'm not even talking about the weather. That was exceptional, but it's a topic, it's not going to come again. But I think there is too much uncertainty. We have the election coming in April next year and we all know that in the first – in the months before an election, customer confidence is sometimes very low and this is happening right now in France.

So, I think we have two indicators that might be more positive, which is about how many permits have been delivered and it's a growth of 1%, as well as the new stock housing. It's around 3%. But we always know that we have a lagging effect and that it impacts our results almost six months after. And you know what? It is more positive, but this is not double-digit numbers. So, I think we'll see, but I think that we are going to be present.

On the four Big Box store, what is different? I think we have looked at the customer. It depends what is your starting point. It depends when you start – for B&Q, there are differences that are not the same. It depend what is the starting point in each company. But what I will say are the big element that from a customer point of view are better. I think we have a customer pathway which is much better. We have the flow, so we don't have those kind of doubling trends. So, you have really flow, that when you enter as a customer, you discover the overall proposition from a category perspective.

I think we've improved a lot. All the decoration and showroom from a merchandizing point of view, I think the offer of merchandizing is allow you to have a much clearer view of the range. I think we've improved as well from what we call the self-service point of view that you can, as a customer, you can navigate the offer in the range in an easier way on yourself. Yeah, I think this is basically what it is.

Sarah Levy

Okay. Any more questions? Tony down the front here.

Anthony Shiret

Yeah. Tony Shiret from Haitong. On the question of – on the subject, B&Q, bearing in mind that if you do decide to run with this new format, it's probably going to take quite a long time to push it into the store base in total. I just wondered whether you felt any need to make any more tactical interventions in B&Q because it just sort of strikes me looking around B&Q, it's not very good at the moment and the performance, do you agree?

The sales growth is coming from the things you mentioned, but it looks like you're missing a bit of a trick in B&Q and you could be doing quite a lot better. So [indiscernible] that great? Just wondered if you could comment on that.

And the second area, you mentioned in the presentation various times about international brands and putting on sort of central cost to support own brand development. I just wondered if the own brand percentage of what you're planning to do in the unified offer has actually increased compared with where you started? Could you comment on that as well?

Sarah Levy

Okay. Véro, if you want to answer the question about B&Q then Arja on the international brand.

Véronique Laury

Just as a general comment, Tony, it can always be better. I think this is a principle wherever we are. I think our aim is always to improve.

I think the performance on B&Q, I will be less harsh than what you are on the performance of B&Q. I think the performance of B&Q is okay actually, and I think to have so many quarter of positive like-for-like is not what happened in the past.

Anyway, having said that, we are conscious that we need to improve our customer proposition in our B&Q store. I think part of that, I was talking about the fact that, next year, we are going to touch 22% of the footages across the group. It will be true as well for B&Q.

So, I think there is two ways to improve. I think that the offer that is going to arise in the B&Q store, to be specific about that, is going to be much better than what we had in the past. So, this is one way and I'm sure that the customer will notice it. As we are going to implement those new ranges, we are going to improve the merchandising as well that is associated to those ranges. So, effectively, a fifth of the B&Q store are going to be revamped next year.

In addition of that, as we have done in all our other geographies, whatever, it's France or Poland, we are going to continue to revitalize stores. As you said, there are many stores, so it will take time. But again, I started the rationalization program in France 10 years ago. It's not finished yet, but I don't think that's an issue. I think it's an ongoing thing and you are going to revamp the stores. So, I think we are going to be in a much better place than what we've been in the past.

Anthony Shiret

Where do you think the sales trends in B&Q should be compared with where it's now?

Véronique Laury

I think, overall, this is part of what we did. When we started that strategy, we looked at what we call the fact base and we all knew that not only in B&Q but across the group, we haven't had the sales density that we should have compared to other benchmarks. So, I think it's not only about B&Q. I think B&Q can at least be at the same level and we're the best in the group. But I think our overall goal is to improve our sales density across the feast. This is why we do all of that.

Sarah Levy

Arja?

Arja Taaveniku

In terms on the own branded, slightly more than 20% of our sales today that is own brands, on all the different product brands that we have in the operating companies and they are quite many. So, ongoing forward, as a matter of fact, we haven't put a goal on it. And that's because I'm a fan of the fact-based positions and we take now every range break that we're working with. And we are doing that firm analysis on all the customer needs for an international brand.

I can tell you that I have many suppliers that are trying to come in says that my brand is the most normal in the market and every customer knows this and it's a real need of it. This is not true. It's a lot of brands that are not known by customers. And I'm absolutely sure that the customers will trust also the retail brands that we operate under – as equally to international brands.

We will still have international brands. We will. Absolutely. There are parts of the development that we don't want to do ourselves that we want to buy. But we are doing that firm analysis on each category. Will it be bigger than 20%? Yes, it will. Much bigger. But we will never – I don't think we will be in a position where we'll go 100% own brands. No, I don't think so.

Anthony Shiret

The question was whether your expectation had actually increased own brands since you started the program?

Arja Taaveniku

Yeah. It has.

Anthony Shiret

Thank you.

Arja Taaveniku

Oh, we have a – it's not expectation. I think we have validated through those range validations we're doing now that we can have a much bigger share of our own brands. Yeah.

Sarah Levy

Okay. We'll need to wrap up there. So, thank you very much for coming and we will see you next time. Bye.

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