Kingfisher PLC (KGFHF) CEO Véronique Laury on Q2 2018 Results - Earnings Call Transcript

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About: Kingfisher plc (KGFHF)
by: SA Transcripts

Kingfisher PLC (OTCQX:KGFHF) Q2 2018 Earnings Conference Call September 19, 2018 4:00 AM ET

Executives

Véronique Laury - CEO

Karen Witts - CFO

Analysts

Geoff Ruddell - Morgan Stanley

Richard Chamberlain - RBC

Nick Hawkins - Cenkos

Tushar Jain - Goldman Sachs

Tony Shiret - Whitman Howard

Anne Critchlow - SocGen

Andrew Hughes - UBS

Adam Cochrane - Citi

James Grzinic - Jefferies

Simon Irwin - Crédit Suisse

Charles Allen - Bloomberg Intelligence

Véronique Laury

Good morning, everyone. Welcome to all of you this morning. Today is an important moment in our transformation. We almost are halfway through. Today, I'm going to talk about 4 things. The first one is, why our transformation is vital, probably even more than when we started this journey. The second one is, why our transformation is going to deliver the expected benefit. The third one is, why our transformation is tough and what are the issues we are currently facing because we are facing issues. And the fourth one is, what are the decisions that we are taking to deliver this plan and to create long-term value.

The first idea I would like to share with you this morning is that our transformation is the survival of this organization. And to be fair, it's the same thing for every single retailer. Just it's not an evolution. It is a revolution that we are living in. Just few numbers. I'm sure you know this numbers, but I think it's time to remind them all together. In the U.K. over the last 3 years, 100,000 people lost their jobs in retail. Since the beginning of this year, 2,000 stores have closed. This is the reality we are living. It is starting in France, and it's far from over. And you need to look outside not to complain about anything, but just to understand how deep the trends to be outperform the revolution here.

So the change needs to be performed. We need to engage the right level of transformation. Does anyone in this room or outside this room to be fair is thinking that in 5 years, 6 years, 7 years, 8 years from now, I don't know. Customer will still be pushing big trolley in stores. I personally don't believe so. The number of SKU, the number of promotions, the number of stores are no longer retail fundamental. This is a huge structural change for all of us. This is a total paradigm shift.

If I go deeper in the home improvement sector, the customer experience hasn't changed over the last 20 years. You go to a shop right now and you've been to a shop 15 years ago, hasn't changed really from a customer point of view. No, it hasn't. The biggest change we had in our sector is the growth of Amazon and few other pure players. So of course, some companies are adapting, but very little are mobilizing the entire supply chain. What does that mean? Is that the first movers will win and they will win big. And you will be with me that simply starts with a journey [indiscernible] as I've just described.

We didn't know what we know right now. The outlook is tough as well and I hate to refer to it as you know, but it's there. We are living in it. So that is the first idea. The second idea I wanted to share with you today is that our transformation is going to deliver huge benefit. Why? Because we are creating a long-term competitive advantage for the company through 4 different elements. The first one being sell and purchasing power, the second one being a differentiated offer, the third one is strong digital capability and the fourth one is affordable prices. And you will see more of that in our presentation.

I am convinced we've got the right strategy. And that in fact, the benefit that we can expect are bigger than what is in this current plan. Even if we are doing it in a very challenging environment, as we all know. Why do I believe in it? The first thing, which is not the smallest one is that we are doing what we said we would. I remember when we started that journey, the investor asked me, it's not going to flow throw your numbers in the first period of that transformation, so what can you give us to make sure that we cannot control, but look at the fact that you are doing what you said, we would. And this is why we set up those strategic milestone, and I'm not sorry to say that for the third year in a row, we are going to deliver them. So we deliver against our plan. I'm not going to look to take all those milestones, you know them. They are written on the slide, but we've already achieved 42% COGS. Being really honest, you wouldn't believe me 2.5 years ago that we would do this. There were few, a lot of skepticism in the room. We almost rollout our unified IT platform in less than 3 years across 9 geographies.

I don't know many companies that have done that without any big car crash, someone told me SAP equal profit warning. And we have a much and I want to pick that one because it's really important. We have a much higher engagement than the retail sector. We are doing everything unopposed on how our organization is scaling and the last results were in June, so no months ago in the middle of this transformation, and we were 10 points higher than the average profits. These are facts.

The second reason why I believe in it is that our strategic pillar are now proven. Why I say now because it was not the case a year ago. I couldn't have said that a year ago. We didn't have the scale to be so sure about it. So let me take them. Operational efficiency. Our GNFR program is working. We are delivering sales improvement. The second one, digital. We are starting to deliver our plan. We are implementing that IT platform that is the base. We are creating new website. We've been launching the new B&Q app, and we are doing it in France as we go along. And our digital sector are growing.

The third one, the offer. It's, of course, the most important pillar of our plan £350 million out of the £500 million. So let me deep dive a little bit in this one as I'm sure it's important to you. So what are you seeing on the screen? The first thing is, as I said already, with unified over 42% of our sales. It's down. It is down. We are delivering positive sales growth now. It hasn't been the case in the first instance. And what you see on that chart, which is the most important thing is the trend. We are improving as we grow. The sales growth is getting momentum. And by the end of this year, we will have unified more than half of our sales.

Now it's an important slide, and I'm going to take a bit of time to take you through it. What does it tell us? First of all, it is the final piece of evidence, if any needed, that we can scale, we can sell the same, sorry, as I'm used to say, across different geographies. So please don't ask me at the end of this session, can you sell the [indiscernible] yes, we can. Yes, it works. Our Unique & Unified Offer is growing. In fact, it is growing much more, as you can see, than our old ranges. Again the other thing that you can see on this slide is the second category. I've been accused a little bit to do some cherry-picking in the numbers. This is not cherry-picking guys. Those 7 categories are representing the whole business. The business as a whole and we are getting strong positive growth in most category, as you can see.

The other element that is on this slide is that in first category out of 7, even if we are not generating growth, we are getting profit increase, profit growth. And this profit growth is a combination of sales growth and CPR. But you may notice that in one category, we don't get any sales growth, and we get profitability, which means that the CPR is there. What it tells you as well being very honest is we haven't get it right everywhere. So 3 categories are not growing, but we know how to do this, and we are going to get this right everywhere.

So I hope I have convinced you that our 3 pillar are now proven. Let me now look at our transformation with a different angle from a different angle. People often ask me why I am so confident into our plan. And from the beginning, we've been very confident in the size of the potential of this transformation and the fact that the benefit will be back-end loaded. Let me explain why in reality, it is going to be the case.

So bear with me for a moment. This slide is an illustration of the profit contribution by the end of this year for the 3 first year of our transformation. What you can see on this slide is that the benefit of ONE Kingfisher benefit we generated with the ONE Kingfisher plan are substantial. Let me give you more color with it. You know the GNFR and operational efficiency. It will be £90 million by the end of this year. What I can tell you is that the benefit from digital and from the new offer are considerably greater on top of those operational efficiency. I'll give you some indication about this bar. But there are 3 main reasons why this increased profit is not dropping through the bottom line, as I speak. The first one being clearance. As you know, by the end of the plan, we would have changed 90% of our offer. This means that we are managing an unprecedented amount of clearance.

Let's be honest. We've been incredible diligent in this exercise really. We've managed bigger clearance, customer impact and P&L impact. You have to juggle a little bit with all those things, but still, it has a cost. Once the transformation is finished this profit drag will normalize. The second being price investment. Pricing is a core element of our strategy. We want to make home improvement accessible for everyone. This is key. In fact, we've applied little new investment into price. What we've done, we've achieved our price position improvement because we have improved massively by reducing promotion. We are going to talk a little bit about that when we're going to talk a bit about France later on.

So unless market worsen, we have no plan for price investment to increase significantly. We won't need to. The second profit drag are costs. The costs in OSC and digital are bigger than they need to be at this stage because we build capability for much higher volume. Part of this is intentional. When you build a motorway, you don't build one lane. Even though at the beginning, you don't have much traffic. As we deliver profit uplift, this cost will be more proportional to our benefit and equally, it will be both. We will look at efficiency as we always look, and we will scale those costs to our volumes. So what does that mean? That means that the overall result is that we generated significant financial benefits, but the absorbable profit of the transformation is small just as we had planned from the start.

If now, we move forward to the end of the transformation, what is going to happen? We will have further financial benefits, driving by moving from 42% of the new offer to 90% and the development of units that is going to be more growth and the digital sales growth. This is the plan. Again, this benefits. Clearance will reduce massively. We will have limited price investments even if we will have price investments, and we will start digital and OSC organization cost calling to the level of activity and the impact on the bottom line will be huge.

So, obviously, the picture we see in the result is more complex than this, as you know. There are other impacts outside the transformation, but both negative and positive to be fair. From ordinary cost management, which is positive, and we are used to it, to challenging trading of the old range as you have seen in this slide, minus 1.8%, this is life. And it brings me to the third idea I want to share with you. In fact, this transformation is [indiscernible] and it is done because of the scale of it. It's done because of the pace of it. We are delivering the milestone. We are halfway through it as I just started today with this.

We are out in the new world as in the old world. I promise you it's really difficult to manage. And even if we are delivering our milestone, we are facing some issue and there are areas we need to improve. So let me cover those areas. Margin, I'll touch a little bit on it. Karen will cover in more detail how this is going to work. What's our working capital? That was a big issue last time we spoke together. Karen will be covering in her session. What I want to do right now is to do a focus in France. So let me talk about France. And to be fair those issues were the same 6 months ago. It's not trending. In France, I told you last year there is no good sales, I was right.

The message I want to give you is we really understand the focus of that, which is the most these are the most important thing. If you want to sell something, you have to understand what is going on. We are lagging behind in all aspects of customer satisfaction in France, and the gap is even bigger when you look at who is the big spender? What are the big spender? They are the 25% of people that are generating 80% of the spend. This is where we are. Price, this is not good news.

I'm going to update you on the progress but price, as you know you will see that the first point are related, of course, price is one element of the customer perception. Digital proposition, we've always said that we were lagging behind in that space. And the one that is probably new is the level of transformation that [indiscernible]. Likewise, B&Q, Castorama in France has been the operating company this year that has been most affected by the transformation. It can be IT system, along the new digital website, we've move into the financial services, with some people impact all of it and, of course, like any other OpCo, they have to change a lot of ranges.

The second thing I would like to remind about France, is we have the right plan, as we said the ONE Kingfisher plan is addressing the France issue. Let me update you on where we are in terms of progress today. First of all, the unified offer is starting to generate growth. To date more in Brico than in Casto, but it's progressing more in Casto than the old ranges as well. Price, that has been for a very long time one of the biggest problem for Castorama in France. We are seeing there.

We started with price index of 108. We are, as we speak, at 101. So we're back in the market. We're back in competition, and we've launched our new website. We had some issue as well when you launch something new, but we are progressing, we are solving this issue, and we did a research in France with customer, and they can see that our website is faster than the rest of the competition. It has better ergonomy.

So that will come through and customer will notice it. I think the third idea I would like to remember about France is that we need to start to say what we've done with the customer. We haven't yet because to do this you need to be pretty prepared. We are right now. So we are going to start communicate and to give more visibility to our action. And meaning that it will improve in H2. Karen is going to take you through what are the details of the action plan for H2 income.

And the fourth idea I would like to share with you today is that we are taking any decision required to deliver this plan and deliver the long-term sustainable growth for this business. It's not or, and, it's and, it has to be and. This is our commitment as an executive team with the support of the Board. We are making this business more efficient as we grow and as the environment change.

Let me go through few decisions that we've been taking or we are going to take in the next coming months. As you may notice, I did some operational changes. I did some changes in the management in the operation and sales. I think I'm not going to comment on that, but you've seen that. We've published that beginning of September. And this morning, and I want to pose a little bit about this. You've seen the announcement that we're saying that Arja would be living Kingfisher and that she would be replaced by Henri Solère. But this is a positive move.

This is just the manifestation that we are taking the right decision as we move. Arja came in to lead OSC. She has done it. OSC is a machine that is working. She came to deliver those COGS numbers that I've been talking all along in this morning. 42%, it is down. Now we are moving on the second phase, and it's unified is almost finished. It's all about unique development. What do I mean?

Let me remind you what I mean by it. It's really creating a differentiated offer based on customer needs. It's about designing product care solution for the customer at affordable price and having from end to end. And we decided with Arja that OSC was unique space to do that. She has done it on our bathroom category, which is the most successful one. We get double-digit like-for-like growth and big margin improvement. And we are going to do that, is going to lead that on every category. We are moving on, guys. We are moving on. As we go along, as we evolve in our transformation, we are taking the right decision.

The second thing we are going to look at is we have losses in this business. This is not new news to you. We are going to look at them. Again, what does that mean? I'm not going to object you. Please don't ask a question about what it is, I'm not going to answer, but we are going to look at it. And what we are going to look at well is to try to bring more efficiency. We are delivering, I guess, our efficiency plan. We are going to look at with the teams saying that, can we do more. Why? Because we are committed to deliver this plan because we are going to look at everything we can do to deliver.

So my message is we adapt as we go. We are not staying still. We are taking the right decision. We could have increased prices guys, it will have make the margin looking better, I promise you, you note because this is not what we do. We deliver the plans and making this business sustainable for the long term that wouldn't be making this business sustainable for the long term. We are making the right judgment, clearance again. You stop clearance, margin is going up. You clear more, stock are going down, but is this the right decision? No, we are managing those things almost every week because we want to deliver this time. We are committed to it, but we want this business to be sustainable.

So in summary, we always knew it was going to be bloody difficult. It is. No question about this. You will be with me that the backdoor doesn't open, but it is what it is. Let's be honest, we scored on those as well. We haven't get it all right at the first time. We've always said we would make mistakes. We do big thing, and we don't have a lot of benchmark, but we are learning as we go. But our transformation is the right thing to do even more than when we start. We are delivering it at pace.

To power this transformation, the image I get is we've been in the case building the engine first, so not all the move have been invisible, but they were the right ones and they are making the difference. We are creating scale and momentum. So if there is one message I would like you to leave this room with is our pillars are proven, which was not the case even 6 months ago. Unique division worked for the customer, we had sales growth. CPR is real. We can be competitive and making own improvement accessible and generate more margin. Digital is even more than when we started the new way to shop, and we are building the engine to be a reference for the customer, and our business become more efficient. We are delivering on that front, and there is more efficiency to come.

Now I'm going to hand over to Karen for the financials. Thank you.

Karen Witts

Thank you, Véro. I'm not really sure how I will follow that. Let me try with the numbers here. So first of all, good morning, everyone, and thank you for joining us today. So I'm going to take you through the financial performance for the half year, and I'll provide the key headlines in each of our major geographies and we'll then spend a bit more time on France on both performance and actions. I'll then update you on our gross margin performance and finally, on our working capital position.

So let's start with an overview of the income statement. On the constant currency basis, total group sales was slightly up at £6.1 billion, but like-for-like sales down 1.1%. At the group level, gross margins were down 40 basis points as the benefits from unified and unique products were offset by a weaker performance in France and by higher logistics cost in the group. I will cover this in more detail shortly.

Retail profit of £404 million was down 14.3% on a constant-currency basis. This reflects the solid performance in the U.K. and Poland, offset by significantly weaker profits in France. To put this into context excluding France, the profits were down 4.2% with the profits from our 2 other major geographies, the U.K. and Ireland and Poland actually up 1.4%. Underlying profit before tax, £375 million, down 14.8% which was broadly in line with reported retail profit and included £4 million of favorable currency impact.

So we have reminder, our underlying metrics are before transformation costs. Our effective tax rate was stable at 27% and underlying earnings per share of 12.8p, down 11.7% driven by the decline in France profits and including the positive impact from the share buyback. Adjusted profit before tax of £323 million was down 18% in the half year and reincurred £52 million of transformation costs.

Statutory profit before tax is after both transformation costs and exceptional items and was down 30.1% to £281 million. We had a £42 million exceptional charge this half year compared to an £8 million exceptional credit last year. The charge was driven by plant restructuring activity in France and the U.K., including the costs of the move of finance transactional processing of shared service center in Poland, big benefits from our unified IT rollout. So I'll now cover the key results in our major geographies, starting with the U.K., Poland and Other International and then I'll focus on France.

In the U.K. and Ireland, like-for-like sales were slightly down by 0.5%, but the 2.5% like-for-like sales decline at B&Q mostly offset by a 4.5% growth at Screwfix. In the context of a weak U.K. consumer backdrop off the housing market and generally, uncertain environment, we think this is a credible sales result. B&Q's negative 2.5% like-for-like performance reflects the story of 2 very different quarters. Quarter 1 saw a like-for-like decline of 9%, driven by exceptionally harsh weather. This was followed by a decent recovery in quarter 2 when like-for-like sales grew 3.6%, helped by much better weather. Screwfix continues to take market share using its convenience model with growth driven by special trade desks and strong digital capability. We opened another 21 new outlets during the period, taking the total to 598. Although today, we are actually already above the 600 mark at 601. The U.K. and Ireland gross margin was down 30 basis points, mainly reflecting operating company mix and the opening of Screwfixs' fourth distribution center in Lichfield which is again operating at optimal capacity. This is largely offset by cost control, the retail profit was up by 1.2%.

I should also highlight that in the second half of the year, the discontinuation of B&Q showroom installation services is expected to negatively impact H2 like-for-like sales by about 1 to 2 percentage points, but with a broadly neutral impact on retail profit. Our Polish and other international businesses reflects very different operating realities. We had a good performance in Poland. Like-for-like sales were up 1.5%, despite the introduction of the Sunday trading ban. Although it's difficult to accurately estimate impact of the removal of 2 Sundays of trading a month, we believe that it's about 1.5 percentage points on sales.

We're now rolling out our unified IT platform in Poland, and this will give us the infrastructure to improve our digital capability and to allow customers to shop at their convenience. Gross margin performance was strong, up 120 basis points, reflecting improved product mix, including a good performance of new unified ranges, but this is partly offset by higher staff costs, resulting in a retail profit uplift of 1.9%.

And the rest of Other International, like-for-like sales declined by 1.2% and delivered a loss of £24 million. That reflected modest profits in Iberia and Turkey, but losses in Russia, Romania and Screwfix, Germany. In Russia, sales declined 1.6% on a like-for-like basis, and the business delivered a £9 million loss. Like-for-like sales in quarter 2 were up 2.1%, and we do expect a better overall performance in the second half of the year. It should be noted that the operating environment was challenging, but this is nevertheless a disappointing result.

In Romania, the business as a whole made a half year loss of £9 million, driven by the Praktiker stores. Like-for-like sales were up 3.5%, with the existing Brico Dépôt, Romania continuing to trade well with the new ranges. However, sales performance of Praktiker, Romania was weak reflecting low footfall of the stores have not yet been integrated with the Brico Dépôt business. In Praktiker, old stock has been cleared through and stores are now receiving unified product. So we expect an improved performance in H2.

Sales of unified offered across both businesses are growing very well, with a number of categories showing double-digit growth. In Screwfix, Germany, like-for-like growth is nearly 20%. The business made an £8 million retail loss, which was in line with expectations and was a slight improvement over the prior year. For those smaller businesses, excluding Poland, we expect a better performance in the second half of the year. As Véro said, we will update the full year with our plans to stop the losses in our portfolio.

Now looking at France. Véro also commented on the root causes of our weak performance in Castorama France. I'll focus on the financial impacts of this and the actions that we have in place to improve performance. In France, like-for-like sales were down 2.4%, with Castorama down 5.8%, but Brico Dépôt was up 1.7%. This compares to the French market that was flat overall in H1 but volatile from month to month. So from a sales perspective, we've actually narrowed the gap in the market versus last year.

Brico Dépôt sales results particularly reflected the good performance of the new unified ranges, supported by the phasing of investments in marketing Brico's 25th anniversary. However Castorama sales performance was disappointing, with continued weak footfall and some execution issues around transformational activity, which affected the offer in digital initiatives. Overall, France retail profit decreased by 31% reflecting the weak sales performance at Castorama France, a reduction in total France gross margin of 60 basis points, largely reflecting with the significancies and higher cost, notably relating to the phasing of marketing activity at Brico Dépôt. I'll explain the logistics and efficiencies when I speak about gross margin.

As Véro said, we remain convinced that the ONE Kingfisher plan is tackling the root causes of our underperformance in France. But in the shorter term, we've put some actions in place to support the second half of the year performance. And as Véro said, these are actions that absolutely fit with our strategy. We're accelerating the move towards everyday low pricing, accompanied by more effective customer communication. As well as this, we have improvements to make on the price architecture of new ranges.

So this work is already underway. We've also already started to deal with some of the additional logistics costs, which have been incurred as a result of taking on expensive, short-term phase to do with the increased stock in the system as a consequence of stock action in H2 last year and the slow sales in the first half of this year. Where we can we're consolidating high-cost temporary space into better-suited space, which lowers the cost per cubic meter and makes more efficient use of that phase and reduces transport costs. And over and above, our continued GNFR initiatives, we're tackling variable costs. For example, by flexing hours more efficiently. We did this effectively at B&Q last year, and we're taking the learnings from there.

And now let's look at the margin. Our reported net margin rates at the group level was down 40 basis points and that's not where we wanted it to be. We have plans in place to improve on this in the second half of the year. However, I wanted to use this waterfall chart to show what actually happened in the first half of the year when progress on our unified offer was offset by higher logistic costs, particularly in France.

You'll see from this chart that margin progression on our unique and unified ranges continued and generated 30 basis points of improvement after absorbing cost inflations and after we had some price investments. We have experienced input cost inflations, partly price increases and some continued foreign exchange headwinds. Our unified approach has been critical, managing the impacts of this input cost inflation, helping us to continue to improve our price positioning, whilst growing the unified product margin. We continue to improve our price index and are now at just below 100 across the group, further progress being made in France in Castorama prices going from 108 when we started to 104 at the end of last year and now are 101. And with our EDLP work, communications already launched in B&Q and planned for France.

Like others, we're operating against challenging backdrop, so we have remained true to our pricing strategy. The margin on our non-unified offer was slightly down after absorbing similar headwinds in unified, but without the benefit of our unified approach. As expected, clearance levels are similar to last year's, so they are not impacting the H1 reported margin. As you'll see later in the presentation that we're doing what we said we would do to reduce the mitigation stock that we brought into our network last year when we wanted to reduce the impact of transformation-related disruption of customers.

We're not calling out availability issues as a significant factor in H1 performance because it has improved. However, elevated levels of stock and a slow start to the year in terms of sales has resulted in a 40 basis point margin drag coming from additional logistics cost and from stock inefficiencies, particularly in France where there's relatively expensive temporary space was secured to keep inventory moving in the network. We also opened the new warehouse facility in Screwfix and this is not yet operating at optimal levels. It's creating some cost absorption impact in the margin. It's also worth pointing out that as a relatively lower margin Screwfix and Poland businesses have grown in H1, this suffered a negative impact on group operating mix in the margin.

We do have plans in place to improve the second half of the year in order to deliver a positive reported uplift in margin rates, post clearance for the full year. We don't expect the macro backlog to improve. So we continue to assume similar input cost pressures to those we experienced in H1. In France, we have some changes that makeup of our architecture to make. So we do not expect an H2 drag on price investment. We will also benefit from seasonal mix, but the second half of the year was less weighted to lower margin outdoor categories. And with more range implementations planned in the second half of the year, we expect cost price reduction benefits to increase, and this is what happened last year.

Our categories have very different margins. And so if we grow strongly in a high-margin category, it positively skews the group margin. To just illustrate this point. The highest-margin category of the margin that's 25 percentage points above the category with the lowest margin. We've already started to address the logistics inefficiencies by reducing and optimizing warehouse requirement, by continuing to work on the mitigation stock levels that increased last year.

Moving on now to updates on operational efficiency. As you know, we're targeting £100 million of operational efficiency benefits by 2021, largely driven by our Goods Not For Resale initiative. Today, we have delivered £72 million of benefit, £14 million was achieved in the first half of this year. £8 million came from GNFR benefits, the savings achieved in areas of professional services in each billboards. As we said we would, we're starting to work on other areas. In H1, the remaining £6 million came from savings that related to restructuring in B&Q. Our financial service center in Poland was established in February 2018 and now has around 150 employees, mainly supporting B&Q. Activities will transfer in the second half of the year from France. We remain on track to deliver £30 million of benefit in the full year.

To-date, our focus has been largely on improved operational efficiency and driving down operating costs. And now we're also working on driving efficiencies and capital expenditures. So this could increase the addressable opportunity and should over time, provide stock to make our CapEx consumption more effective.

Now onto cash and returns. We generated £285 million of free cash flow and our half year net cash position was £99 million. This was after planned transformation costs of £52 million and £250 million in terms of returns to shareholders. This represents a modest increase on our year-end net cash position of £68 million. The Board is declaring a flat interim dividend of 3.33p, which is consistent with our full year target range of 2 to 2.5x dividend offer. In addition to ordinary dividends of £160 million, we returned £90 million to shareholders via share buyback.

Of the £600 million that we committed to return over the first 3 years of our 5-year plan, £550 million of shares have now been repurchased. So now let's look at the uses of cash. In the half year, we generated £460 million of EBITDA and there was a £77 million inflow of working capital. We paid tax and interest of £81 million out of this, and we invested £165 million back into the business. We returned £250 million to shareholders via ordinary dividends and share buyback. Our lease-adjusted net debt-to-EBITDAR ratio increased slightly to 2.5x from 2.4x [indiscernible]. The group continues to have financial whilst retaining inefficient costs spend.

Now let's look at our working capital. This has been a key area of focus for the business. As Véro explained earlier and as you would know well, our stock position at the year-end increased significantly, partly as a result of changes in our operating model, but also as we carried more stock to protect the customer experience during a time of disruption. We showed the equivalence of this chart since the year-end, and I'll break down the £77 million working capital inflow into the first, in the first half of the year into the same moving part.

So we saw a £27 million impact from growth. This is a normal aspect of our business, with more stock in the business relating to the new stores in Screwfix, Poland and our recently acquired business in Romania. The second element highlighted relates to the move to unified product ranges. In order to sustainably leverage the scale of our group, we're changing our operating model and controlling more of the supply chain than we used to. Cost which used to be in the cost of products that we bought from distributors are now in our supply chain.

As expected and as we unified more ranges, this element increased by £35 million. New unified ranges increased the stock by a further £25 million. This reflects ongoing first time purchases of new ranges, as we need to fill the displays to support official sales through our customers. We've been working hard on reducing, what we call, mitigation stock, which is our extra non-unified stock in fast-selling lines that we bought into inventory last year. Last year and this had increased our stock balance by £108 million. I'm pleased to say that the stock reduction plans that we've put in place are working effectively, and we've already reduced the stock by £90 million so far. Finally, the net of the change in payables and receivables was a positive £74 million and largely expected to be phasing, leading to £77 million overall working capital inflow.

If we now turn to H1 CapEx and our guidance on our total capital expenditure for this year, the left-hand circle represents £165 million that we invested in the first half of the year. This shows that we invested about 1/3 of our CapEx on refreshing and maintaining existing stores. And we invested about the same amount on IT projects. We continue to rollout a unified IT platform in Castorama France. We're starting to implement in Brico France. And we've completed the store rollout in Poland. We invested another 13% of total on transformation. This included store CapEx of our new ranges and digital spend. The right-hand block represents our new reduced guidance of up to £350 million for the full year and that's down from up to £425 million previously. The £75 million reduction equals to lower spend on new stores, but IT spend preserved and transformation only slightly reduced.

Now let's look at how we're tracking versus our total transformation costs in the 5-year plan. During the half, we spent £119 million of transformation costs, in addition to the £271 million we spent in the first 2 years of the plan. Our full year guidance for this year is £240 million, slightly higher than previously guided, reflecting small changes to P&L costs and exceptional costs. We continue to expect total transformation costs of our plan will be around £800 million. So this leads close to £300 million for years 4 and 5 of the plan. Although we don't expect to change to the total, we are likely to see some further rebalancing between transformational P&L costs and exceptional costs. And we'll update more fully on this at the year-end.

So to summarize. In the first half of the year, unified and unique sales and margins continued to grow. However, these margin benefits were outweighed by a weak performance in France and higher logistics costs. We have actions underway to improve our H2 performance in France and also deliver a better H2 margin performance at the group level. As we execute on these plans, we expect to grow the group's gross margins after clearance in the full year.

Our transformation costs are broadly as expected. And our stock reduction plans to deal with increased levels of non-unified stocks are progressing well. Our balance sheet remains strong, and we continue to return surplus cash to shareholders. We are operating in challenging markets, which make a tough plan tougher, but we are doing the things that we said we would do. And we are on track to achieve our strategic milestones for the third year.

So thank you for listening to us both. And now we'll take questions.

Question-and-Answer Session

Q - Geoff Ruddell

It's Geoff Ruddell from Morgan Stanley. Ma'am, can you talk us through please, you've got a gross margin benefit of 40 basis points on the unified ranges so far. Obviously, the target has been shared, it's 500 basis point improvement in the COGS when the unified range move ranges are fully implemented. That seems a big jump from where you are at the moment. Can you talk about how that's going to be delivered, please?

Véronique Laury

Sure. So actually, I think when we talked about equivalent 3 sets that the equivalent in terms of gross margin uplift to actually get to the £350 million with more like 300 basis points. And I think the first thing that I should really point out because you may or may not have this in your mind is thinking about what we said at the end of last year. When on a smaller base of unified COGS, we said that we had grown the margin by 180 basis points. And they were looking at something like plus 40. But the 2 figures aren't actually comparable. We will be able to give you a more comparable and cumulative figure at the year-end.

And the reasons for not being comparable because you're talking about different basis, the half year versus the full year and about 20% of COGS and about 40% of COGS. But that's just kind of the math of why you can't just add the 2 things up. So why are we confident? It's worth just sitting back and sort of thinking about what is important in terms of the things that need to happen in order to grow the margin. And what we're looking at is the question of maturity, question of fix, a question of clearance and a question of price.

Until you get all of these things kind of cleaned, you don't get to the full opportunities that you've thought that we believe in. When I start thinking about maturity, one of the things that gives us confidence is the way that we had seen our Wave 1 implementation from the early part of the plan actually mature through the plan. So what happens is when you start off, you don't actually get a lot of benefit because the benefit that you're getting from the cost/price reduction gets offset by clearance costs and any price reset that you might want to do.

Once you've positioned your price correctly and you've got through the clearance, then that leaves you with a cleaner number. And then just to give you an illustration of that, our Wave 1 implementations are already achieving more than 300 basis points of margins. So one thing globally, we need to get to the 300 basis point uplift, the early ranges that we've already unified are already showing up an uplift of that magnitude. And those sort of ranges actually have a small weight in the first half of the year. The first half of the year actually includes a small waiting of the matured, if you like, implementations and some less matured implementation, which you should be able to see the benefits of this in the second half of the year and into next year.

I think the second element that's important, again, when you're looking at the particularly at the first half of this year, it's what happens with mix. So the first half of this year has a very heavy mix of outdoor product in it. And as I said, across our 7 categories, there's actually 25 full percentage points of margin difference between the highest margin category and the lowest margin. So yet again, simpler way to tell you that if you're heavily weighted towards the lower margin then that is going to suppress what you see in the margin.

By the time we get to the end of this year, you will see a more normalized spread of categories and that in itself will improve the margin that we're getting. And then the third thing that I think it's worth remembering is that I've started talking about what we call the procurement maturity curve, and we are very low down still on the procurement maturity curve because we won't be unified 40% of our COGS. And what does that mean being low down on the procurement maturity curve. That means that all we are giving our suppliers at the moment are consolidated volumes. But for sure, we're getting cost price reduction and the cost price reductions that we are getting and we've given you some examples over the last 1.5 years are very much in line with what we needed to achieve to get 300 basis points.

But at the moment, we haven't moved on to, if you like, very far of the step 2 of the procurement maturity curve step 2 being, actually, I'm going to give you a more reliable sales forecasts and the more reliable I can make my sales forecasts, again, the better cost price reduction you get, the best stock management profitability you get. And then just to complete the picture of the procurement maturity curve, the higher end of that is when you really haven't established relationship with suppliers and established history and you start deconstructing your building materials and you know even better what things should be thought. So that was a pretty long answer from me. I was expecting the question. And I think what I'm hoping you're hearing is that we are already seeing through our very complicated spreadsheets and reporting systems that the margin uplift is coming through, but it just needs the time to mature to come through and we are only halfway through.

Geoff Ruddell

It was very comprehensive. And just a follow-up. What would your spreadsheets change at all if there is a [indiscernible] for Brexit because, obviously, then you'll move to WTO terms and then you could end up with a number of tariffs I would imagine on products coming into the U.K. as supposed coming into the France. Does that change anything?

Véronique Laury

Well, I mean, our spreadsheet could change because of a lot of reasons. We've already said that we're operating in quite a tough end market, and it's a tough operating environment. And also, I did refer to the cost price inflation. We tend to get lag effect when we're negotiating with suppliers on commodity price increases. And over the last 2 years, commodity price increases have gone up a lot. So it's not just Brexit that would, that could change our spreadsheet. It could be what's happening in commodity prices. It could be what's happening from the foreign exchange perspective. Brexit itself and we've had a look at kind of worst case scenarios. And actually, even if you kind of went to WTO tariffs on the kind of the basket of products and that we're actually selling to customers, they were at the lower end of the tariff range in general.

Geoff Ruddell

So would joint sourcing still make sense in...

Véronique Laury

Absolutely. Absolutely, yes.

Richard Chamberlain

Richard Chamberlain, RBC. A couple of questions, please. Véro, you talk about the plans to improve the performance of Castorama going forward. I think one of the things you mentioned is changing the custom communication approach from the third quarter. Can you give a bit more color on that? Is that about getting customers to sort of notice the new ranges more? Is that a new problem for...

Véronique Laury

I'm going to give you as much answer as I can to be to protect us from competition, because as you know, we have quite a strong competitor in France. And I don't want, I already gave away quite a lot in this presentation because I thought it was important to give you the confidence that we are doing. I think to be fair even more than anywhere else, but actually we started in the end. So it is, as I said, we've been in the case spending a lot of time. At a point in time, when you think you ready know, we are not really 100%, that's for sure. We just need to start to show to the customer what you've done and that things are improving.

So a part of that is, of course, showing more the new ranges, be there in communication and in store. We haven't talked till then, but we've appointed John Colley as the Trading Director. It's his role in the organization. He is sitting on the executive board. So he is dedicated to that. We magnify for the customer what we've been doing. We have a winning plan that he is really making the emphasis on what he knew. So this is to install, this is doing communication, this is to announce digital. But to do that in France, we needed to have all those things, which is in the line.

What is to push newness on a website that is not working? Now we are getting there, so we will. We are going to be able to communicate on prices as well because you need to be in the competition before you say, "Hello, I'm back. We'll be back right now." And I think again I think we are moving into that EDLP strategy, which has been what we want to do from the start. Remember, 2 years and then after that we can start with it. People are not buying a bath because there's a promotion on the bath, they are buying a shower because they need a shower. So how we are going to offer to every customer the shower at the right price all set along. At this is what we do right now, but we can start to talk about it. It was impossible to talk about it even 6 months ago. So this is what we're going to do.

Richard Chamberlain

The other one is on the other international side because in broad brush terms, can you talk about what needs to be done to get the losses down, like, specifically in Russia and in Romania...

Véronique Laury

I said I wouldn't answer this question. I'm sorry, Richard. I think there are different realities, as Karen said. I think...

Karen Witts

To give you a straightforward example then or perhaps around Romania, we actually have an integrated practical business into Brico Dépôt. We know that Brico Dépôt is continuing to do well. We're just starting to get the same offer into the practical stores. We've got the clear ideal stores, then get the new ranges in place and that is a plan for Romania.

Véronique Laury

And again, I think we have been emphasizing that it was about other internationals. I think what we said, we would do as we did. We closed some stores in the U.K. We've closed few stores this year in France. Is that we are tracking losses everywhere in the business. And this is just to show our commitment as an executive team to deliver this plan. And in this changing environment to do everything we can do to commit to our...

Richard Chamberlain

I just wondered, in Russia, for example, is there any are there any sort of quick fixes or any of these self-help that you can bring in the second half?

Véronique Laury

I would tell you in 6 months from now.

Véronique Laury

Good try, Richard, good try.

Nick Hawkins

It's Nick Hawkins at Cenkos. Just want to follow up on Richard's question on pricing, which you say is 1 of the 3 main drivers of underperformance in France. But you've managed to get the index down to 101 and still lost a chunk of market share. So I wonder to what extent you need to push your pricing down further to reengage with customers? Or you think you can do it by better communication in store and websites and stuff? Do you have backlog of negative pricing sentiment amongst the key customers that you need to address more aggressively?

Véronique Laury

I think we will do what needs to be done. I think what is very important to us is, in fact, this is not only towards France. I think we have our starting point in France was in Castorama, actually, not in France, was worse than what it was when we started the journey anywhere else. I think our commitment to the customer is to make home improvement accessible for everyone. We have a very clear pricing policy that I'm going to tell publicly, which is different. If you talk about commodity products, if you talk about international brand products and if you talk about own brands, I think the percentage of home brands we started this journey we were around 20.

We are now over 35. It gives you the opportunity to create price difference and price preference without reducing all prices. So we are on a journey. We are not where we need to be, but we are progressing. And to be fair, it takes time for the customer, and you need to tell the customer that you've been improving. It's not like food, no? We are not you are not buying coffee or you're not buying a shower every week like you're buying coffee. So the price perception of customer in our improvement sector is built in a very different way than it is in clothing or food retail. So it takes time.

Tushar Jain

This is Tushar from Goldman Sachs. Just on Castorama. How many Castorama stores are now loss making for you? And on a group level, I mean, on Castorama level, when do you see the trading sort of stabilizing on a like-for-like? Is it next year? Or is it in the second half you'll start to see things really shaping up for Castorama?

Karen Witts

I think on the trading stabilizing, I think we can put a date on that. I think Véro said, it's not a quick fix. But we certainly the action plan that we thought that we've describe is to improve the performance in the second half of the year. And on the stores, we don't have a lot of loss-making stores.

Tushar Jain

And just deposit doesn't change the shape of unification of products in terms of execution, I mean exit rate is still 90%, but does it change anything?

Véronique Laury

No, no.

Tushar Jain

And just one question on digital. The digital growth was only 8% in B&Q. Is that in line with your expectations, the digital sales growth that's happening in the business? Or do you think you can accelerate the online channel a little more?

Unidentified Company Representative

Sorry. No, we're actually, we're slightly behind what we think we can do, to be fair. We're pushing, sorry, in every country, there is a different story to be fair. So if you take B&Q, basically we're pushing to pour on new generation platforming, so which is effectively step changing. So it's already in for the mobile, mobile app, it's been for tablet. We're about halfway through desktop as I speak. We should have finished it by the end of week.

Now that actually will be a step change in B&Q, but we're slightly behind where we thought. So we believe we can push B&Q much harder. If you go back to sort of B&Q is still only a 4% penetration. So if you look at France and Poland, it's circa 1%. So we still got a long, long way to go on digital, and we are pushing very hard.

Véronique Laury

We never got the 1 hour click & collect everywhere in B&Q. In the click & collect, sales went up 55%.

Unidentified Analyst

Easy question. I just wonder, bearing in mind your comments, if I'm not pushing big trolleys around the stores in 5 years' time, you've got lots of big stores and lots of trolleys. Just wondered, if you are currently doing any sort of property reviews, I think, clearly, one might think about that in France, but also may be the U.K. and maybe comment on the Screwfix [indiscernible] possibly talk about that?

Véronique Laury

Yes. This is [indiscernible]. I think we are doing property review as always, I would say, but I think in real time. I think we and we will continue to do this. I think what we are doing as well is a proper work on formats, which we are not really to talk now as we speak, but we've been and I've been talking about this even 6 months ago, we've launched work, internally, and as I said, looking outside of the well, which is happening outside on to what is going to be the right format for the customer in the future. I think, again, without talking too much about it, I think I'm not saying that I'm saying that, that's all are going to be disappear.

Actually, it's really interesting to see that in the U.S., the kind of normal old retailer are seeing the sales boost up, going up, again after that very difficult period. So I think the future is a combination of store and digital. I think we are very well placed in that format work with profits in our portfolio as well because as we know what the convenient format is. We know how it works, and we know what it does to the customer when it works well. And to be fair as well, we know how to go big store. So I think with that probably unique combination in the home improvement sector, I think we can think of something that will be relevant to the customer in the coming years.

Tony Shiret

And so just a follow up on that, when will you tell us on what the results of your deliberations are? And secondly, bearing in mind you've got over 1% of sales in France online 4% in the U.K., do you feel that you're properly positioned for the new digital age and should you may be or a bit more grump behind your digital presence?

Véronique Laury

So I will we will update you after you head in next year, normally, that's the plan. And are we thinking about that, might be April, yes, let's see, but not in, not that long. We are not going to wait for ages before a date. So I think on the digital side, it's going to, I think we have to, I think we're starting from nearly nothing except profits. I think we're using our knowledge, our digital knowledge that is proven exclusive to the rest of the group. We are pushing as hard as we can. We are where we are. To be fair, if you look at Europe, we have not that, we are not dissimilar from the rest of the competition. And we're pushing really hard, that's why the CapEx, the investment in digital are not reducing. And if we are having to look at that I'll keep going, if you want to say something.

Unidentified Company Representative

Yes, sure. I'll think it's fair. There is an enormous amount of grants already from digital, I think is the point. I think one of the problems with digital that people don't recognize is actually the hard stuff, it isn't the presentation stuff. It's actually all the plumbing behind the scenes, you got the content and whatever. So taking Véro's point from earlier, what we're trying to do is make sure that actually we've got all the right infrastructure and the right processes behind the scenes that says, when you actually get a market-leading proposition then it's sustainable, and it will be market leading. So and if you go and look at the mobile app that I was talking about in B&Q or mobile web in B&Q that is market leading in terms of navigation, speed. And I won't say it's better than Amazon, but it could be.

Véronique Laury

But as you know, Tony, this is a [indiscernible] change internally as well.

Unidentified Company Representative

But I think the point is, Tony, you're absolutely right. But we're at the start of a journey, have we gone far enough with digital? No.

Véronique Laury

But we're pushing.

Anne Critchlow

Anne Critchlow from SocGen. I've got a question on the unique ranges. And where is the price of those settling compared to the closest branded competitors now? And also, looking at the 3 categories, that we aren't seeing sales growth. And what sort of actions do you need to take specifically to be able to fix both to turn those brands, and what have you learnt so far?

Véronique Laury

So first, I was seeing, I'm not going to disclose our pricing strategy. But as you haven't excluded I think in the unique offer, we are really, be true to our promise to the customer, which is really making home improvement accessible. So there is a gap between what would be the standard proposition in the market and our proposition. From a price point of view, but not only from a quality perspective, from a design perspective and from a functionality point of view, this is what's unique is about. I think that was the story we think about this bathroom furniture. They are, I would say, cheap because they are cheap. They are functional, they are high quality and they are really bringing something to the customer that didn't exist in the market, and that's why they are flying.

So there is a substantial price differentiation in the unique offer. And this is our strategy. It has always been the strategy. I think what can we do is still question is, can we figure out the category? Yes, definitely we can. I think those 3 category hadn't a lot of uniqueness, to be fair. As we said, the unique story is just at the beginning and why is that? Because it takes more time that is unify. Unify is, you reduce your number of supplier, you reduce the number of [indiscernible], you take the one that are not working and you increase the volume.

It was not easy to do, but it takes less long. The unique when you're the unique, you have to start from the customer needs, really understand what the customer, you need to understand the market, you need to design to cost, you need to saw it differently. We are as we say, and with all the implication, we are really going from the very beginning to the end journey. It takes time. So we're going to do more in this category like everyone else, but definitely we can figure them.

Andrew Hughes

Andrew Hughes from UBS. Another one on the unified, if I may. Kind of just going back to your answers, just a question at the start, I mean, it sounded pretty positive. I just wanted to check a couple of things there. Those Phase 1 ranges where you're getting the 300 basis points, are they representative? There's no bigger reason why...

Véronique Laury

No, no, no. We were, they are representative, yes.

Andrew Hughes

No, okay. And it sounds good. And on the second thing on that, in terms of the whether you need to get sales gains to get to that £350 million, I mean, it was all implying that you might need to get some sales gain to get there. Well, I think, at the start of the program £350 million was like a steady state improvement. Is there any sort of, like, moment in the goalposts there?

Véronique Laury

No. I think, when we and again, I think we need to come back to the origin of this journey. I still remember very well my first meeting with investors when I started. If I would have said that we were getting sales growth from that new offer that let me remind you, no one was believing that we can sell the same stuff across geographies. That was the common starting point. If I would have started this journey, I'm going to get to the £350 million with sales growth, people would have laughed. So what we said is, if you want an equivalent, is it £7 billion of purchasing power multiplied by 5% CPR.

That was the easiest way to make people to give, to see it was a confident that we can deliver it because it was cost reduction. We are seeing this cost price reduction coming through. We've explained hopefully, clearly, why this was not coming through as we speak. We've always said that this and would be backend loaded. And to be fair, you see as both coming in. And that's why we talk about it. It's not because we need it to deliver the £350 million it's because, first, it's there, so why you wouldn't talk about it. And it's making the proof that we can sell the same stuff across. This is the only reason why we are talking about it. And to be fair, these people thought "Oh, the old rent is lot better. The old local rent is a lot better." They were not. They are declining. The new stuff is growing.

Andrew Hughes

So it's fair to say the £350 million we should get hung up with that 300 basis points of gross margin, because we don't we might get premium sales growth in those ranges. Is that...

Véronique Laury

You know what, with everything happening outside I'm not going to bet to more than £350 million delivery. It's flat. I'm sorry, but you know what I mean. Then you do what you want, but I don't know. I'm going to stick to this plan and really work hard to deliver it.

Karen Witts

Just very simplistically though, our plan say that we can get there with a price reduction, but lots of things are changing, and I've said there's been there's quite a lot of cost price increase so we will need to manage through. So plan say, we'll go there with cost price reductions, but what you're also seeing is some sales stuff coming through as well.

Unidentified Analyst

Just one other. I think, kind of which result meeting it was you've alluded to the fact that you might not need 2 separate chains in France when they're selling unified ranges. Now given more type of the Casto, and if you were thinking of pushing the button on removing one of the brands, are you closer to hitting the button?

Véronique Laury

As I said, and that was my first point in this presentation, we will do what needs to be done, when it's needs to be done. I think to date, we have an issue in France, we are addressing it. We want to show you the progress. We know that the ONE Kingfisher plan is addressing the problem that we have in France. As we go as I've tried to explain to date, as we go along as this environment is evolving, we will take any decision that is required to deliver this plan. At this stage, I'm not going to say more than that. What you can be sure of we are not afraid of anything. We've demonstrated it since we started this journey.

Adam Cochrane

Adam Cochrane, Citi. On the unique, which fairly generates a sort of a big opportunity for you. Given the long lead times, can you give us a sort of guidelines to how much you need the product, you would expect to be sort of coming in through the ranges in the next couple of years? And then in terms of unique, can you just remind us how sort of tails uplift versus the unified product. I think, previously they were saying much better customer reception than just unified products. Is that continuing?

Véronique Laury

Yes. It is. I think I can't give you numbers about how much unique, and when unique is going to reach the floor for the customer. I think what we've seen, and what we've done. And I think this is the biggest thing in this presentation at this moment, at this stage of this transformation is, we have enough evidence and enough scale. So which means, this is not generally speaking about what works. And that was the mistake what doesn't work. We've been very, as ever, very transparent about that. I think what we can see is that and to be fair, that was already expecting from the style.

We were not expecting sales growth from unification. From unification, you expect CPR. Where we were expecting sales growth, without telling, it was around unique. What I can tell you is in the unique program that we've been launching, we get that growth. Actually, I spent some time on the categories because you've seen one of those categories is differentiated growth. Honestly, guys, in this environment with everything happening in retail and/or to get double-digit growth in one full category, this is meaningful. As I've said, the second category is the wool business. And then if you were looking at, you have few other, which were high single-digit growth. I think it's good stuff.

And as I've said, some of them are not good enough, and we're going to fix it, but we know how to deliver it. I think we will get unique as we go, because some of the unique development has been hitting the floor especially in last one, but not only. I think, we were in Hambro last week with all the leadership team to the event you have been invited to Europe, but we are doing that every year internally. And we saw all the new developments that are going to hit the floor next year. There is some unique products, I'm not going to tell, but there are some amazing in categories that you would be surprised, you will discover that as we go along.

And it's not going to finish. I was reading an article in the press, I think this week, I can't remember which and I'm not going to say, which newspaper is saying that we are not ICR. Our products are not unique enough to generate growth. Hey, that's not true. The scale obviously is not big enough and to be fair to those people who wrote that article. From a customer point of view, is it really visible? No, it's not. Next year is the year with this trading plan, with John Colley coming in and taking that in charge, with the trading commercial the Trading Director within the operating, we're going to shout about it.

Adam Cochrane

You mentioned that double-click on that category chart, I wasn't quite sure if some of those categories were benefiting from external market conditions through that plus 11% or...

Véronique Laury

If you see from a positive market condition, I'm asking to wear that...

Adam Cochrane

I though the warm weather might help seasonal, for example, and that may have been...

Véronique Laury

And I see, seasonal, for example, by the market condition, because if you take of course, we have a very good Q2 and still some good sales in the end of the season for seasonal that [indiscernible] have been the driver. So all in all, I don't think seasonal has being helped.

Adam Cochrane

So when you look at them as category numbers, the positive ones would probably reflect market share gains you'd expect?

Véronique Laury

Yes, of course. Yes, of course.

James Grzinic

Over here. It's James Grzinic, Jefferies. I had one very quick one and a second one, perhaps, requiring a lengthier answer. Can you perhaps disaggregate that half 1 into Q1 and Q2. You said Q2 was better. So what did the gross margin do in Q2 rather than Q1? It may help in terms of...

Karen Witts

What happened to the gross margin in Q2 rather than Q1?

James Grzinic

Yes.

Véronique Laury

Yes. So what I said was, we're not assuming that the backdrop of cost pressure will go away. So that we'll have a [indiscernible] there, and we are able to deal with that. But what we will see is some price. We've got a decent work on the price hierarchies in France, which means that we didn't get all our pricing right. So that means whereas we took a net profit place, a cost investment hits in the first half of the year, all other things being equal not that you're expecting that in the second half of the year. The phasing of the implementations is actually more heavily weighted the second half of the year. So the cost base reductions will come through more in the second half of the year than the first, and that's what we saw last year. The mix will be a richer margin mix in the second half of the year. And then we are working on those logistics and efficiencies.

James Grzinic

My question was actually what the half 1, the minus 40 basis. Are you splitting that into Q1 and Q2? You indicated that Q2 was better, just trying to understand how much of an inflation was there.

Véronique Laury

Q2 was better. I'm just saying, nothing any more than that, but since we've started this, we've seen in Q1, Q progression.

James Grzinic

Okay. Just going back to Casto France, 108 to 101. It's such a big improvement in pricing. But I'm still puzzled as to how market share get worse for the fair share when pricing gets so much better. So I'm just wondering if you can explain, whether there were issues, execution issues or else customer had to suffer in the stores, may be linked to the first attempts, like, costs out of those. Just give me that reassurance because I don't think I've seen a parallel, but I've seen pricing improved so much, and actually customer behavior pitching off even more?

Karen Witts

When I'm talking about price, I'm talking about price index.

Price deception hasn't moved yet accordingly. Because, to be fair, we haven't communicated properly about this. And as I said, it takes long. In this sector, it takes long for customer to realize that we are back in terms of competition. And to be fair as well, we couldn't try before, because we were not all at that point. This 101 is just the most recent research analysis that we've been doing. Honestly, from an execution in store. And I'm on the ground, as you know, quite often, there was nothing that, I would say, is worse in Casto than it has been in any other operating company.

And I think, to be fair, we are looking at the customer perception in stores. So let me be very clear. Customers that are going into store, they're happy with the service. They're happy with everything. We don't have enough. The problem we've got is the traffic. And this is why I started my presentation by the brand perception. It's because people are not considering us as the first choice, they go somewhere else. So this is what we need to achieve. We need to bring them back, the one that are there.

They think the service is better than it was. The pricing are better. The quality of the product is better. So again, there is no problem as I've read in some of the press as well, about the fact that the new offer is not working, that is not the point. We don't sell enough. And the problem we've got is the traffic. And the traffic is, I would say, was on the web because it is improving on the web, that was digitally and in-store. And that's what we need to improve. Simon?

Simon Irwin

It's Simon Irwin. Just a follow-up on France. Can you give us a bit of help around phasing in France in the second half of the year, given the cost through the first half? And obviously, Casto seems to be in a slightly unique position of kind of getting harmed by weather in the first half, but not getting any benefit from weather in the second half because of rain. I mean, how much of the footfall declines do you think in this kind of market are environment related? How much do you think are format related?

Véronique Laury

I'll answer the first one on the cost phasing. So maybe 2 points to link to that. We did say that the increase in the costs in the first half of the year, a large part of that was attributed to the advertising, phasing to support the Brico Dépôt anniversary. But that doesn't mean that we are not going to do any advertising in the second half of the year, but that was phased into the first half. The positive that will be phased the other positive that will be phased into the second half comes from the France action plan, and that's around the point that I made about -- and store was better. I've been taking people out of stores to better reflect what's being told has already started. Those are the 2 things.

Simon Irwin

And generally, I mean, do you think from the [last piece] is simply a kind of an element of this was being a victim of circumstance in the first half of the year, or you do you actually think in terms of profits deeper?

Véronique Laury

As I said previously, I tried not say. But our underperformance is because I think the overall environment in France is not as positive as it was. I think I was [indiscernible] as you may see the customer confident [indiscernible]. But I think it's just the end of the situation that has been going on for quite a while. And I think, as I said, this customer perception thing is, people are not doing to us, especially those [indiscernible] that's what we need to change. But to be able to change this, you need to have that with the customer. I don't think it was worse in the first as in at any time. But it's just that more you go, the less you are relevant. And I think we are where we are.

Simon Irwin

Karen, can I just ask about the cost-reduction program. Actually, you've done some big chunk going into Poland. But France become what are the next couple of years look like? Do we have kind of more departments and more functions going into [indiscernible] equivalent, is it recurring, like another next chunk?

Karen Witts

You're talking about the finance shared services. So at the moment, what's gone in is mostly B&Q and a bit of inter [cost] center. France was in shortly and then Poland would follow because what we want to do is take advantages that are more consistent, more safeties that you get from the unified IT system. So the financial transactional work will go in after on the back of the IT. We're always looking for new things to do. In fact, I mean, it's a very small number of people.

But we've put in some people because actually we thought that as we move to the GNFR program. There was some opportunity that we had from looking at the long tail of spend. And actually you work on that long tail of spend through compliance. It's not very sexy. You get people to fill in their purchase orders properly, et cetera. And we created a business case for that employee, getting some more people into Poland. So the things are going well there just now, and we're looking for opportunities that we're not making any commitments right now.

Unidentified Analyst

Sorry, just a follow up. Again, if you could, please, Karen. On the Kingfisher website which is showing consensus figures, there is a very big increase in adjusted profit before tax next year by about £200 million. The largest increase mainly coming from transformation cost coming right down. I think from the £135 million, you guided this year to about £20 million next year. Can I take it from your comments earlier about, having sort of reallocate some of that £800 million, but those numbers need to change quite significantly?

Véronique Laury

We're not making any comment on that at the moment. We still got £300 million of cash transformation costs left to use of the transformation to go. We think that's enough, exactly how they will be phased and split, we'll update on that more at the year-end.

Charles Allen

It's Charles Allen, Bloomberg Intelligence. I think at the beginning of the program, you said you wanted to take about 200,000 SKUs out of the business and out of the 400,000 that were at that time. Can you say how many of those have now being completely cleared?

Karen Witts

I think on what has been unified, we've decreased by 80% the number of SKUs. On the 42% that has been unified, we've reduced by 80%.

Charles Allen

So that would still be less than 100,000 that has been taken out of the business?

Karen Witts

It will be what it will be. But I think we are doing it on the base of the trend and the customer needs, but it should reduce.

Véronique Laury

I don't think we actually gave a number. We pointed out just how many SKUs we had, but not an objective to...

Charles Allen

There was a pie chart in one of the things that said that I think it was 197,000, to be exact. That said that you're going to take out.

Véronique Laury

I don't remember that. What I remember me saying...

Karen Witts

Payment stuff.

Charles Allen

It was the [indiscernible]

Karen Witts

It was delisted.

Véronique Laury

All delisted.

Karen Witts

We said of the SKUs that we had in the system, we actually have this tale of old and delisted stuff and one of our "first sharp" initiatives was to get that out of the system. And we finished that about 18 months ago and actually changed the processes in the business to make sure that didn't come back again. So that's quite important because even though at the moment, we've got higher levels of inventory, with inventory it's doesn't have that kind of layer of delisted in it.

Véronique Laury

Anymore? Good. Thank you very much for your time this morning.