KGFHF (KGFHF) Q2 2027 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Kingfisher plc Half Year 2026-27 Results. [Operator Instructions] I'd like to remind all participants that this call is being recorded. I'll now hand over to Thierry Garnier, Chief Executive Officer, to start the presentation.

Good morning, and thank you for joining us for Kingfisher's half year results presentation. Bhavesh and I will take you through our performance for the first half, our upgraded outlook for the year and the continued progress we are making across our strategic priorities. We'll then answer your questions. So let me start with the highlights. First, our strategy is delivering with momentum building across our key growth drivers. Screwfix continues to perform strongly, while Trade, E-commerce and Marketplace are becoming increasingly important sources of growth. Second, our focus on execution continues to pay off, reflected in gross margin expansion, disciplined cost control and strong profit growth despite a mixed market environment. Third, our performance gives us the confidence to upgrade our full year guidance. We are building a stronger, more resilient Kingfisher with significant opportunities ahead while remaining committed to attractive shareholder returns. So let me now hand over to Bhavesh for the financial review.

Thank you, Thierry, and good morning, everyone. Overall, H1 was a solid delivery against our financial priorities. Sales, including GMS from our marketplaces, grew 1.6% in a mixed market environment. Adjusted profit before tax was up 9.9% to GBP 404 million, reflecting strong gross margin performance and disciplined cost control. Through our profit performance and share buyback program, adjusted earnings per share grew 16%. After investing in our strategic priorities, we generated free cash flow of GBP 339 million. Net leverage stands at 1.4x, and we maintain a very healthy balance sheet. Our top line performance was underpinned by resilient core and good seasonal sales, more than offsetting weakness in big-ticket categories. In the half, we saw growth in customer transactions in a mildly deflationary environment. Core sales saw broad-based growth across repair and maintenance categories, including tools and hardware, joinery and electrical. Our growing share of sales to trade customers supported resilience while DIY demand was softer. During the summer heat waves, core sales were impacted as the hot weather made it harder to undertake projects such as larger building works, tiling and painting. Within seasonal, demand for cooling and outdoor leisure products was strong, while categories such as plants, outdoor paint and fencing were weaker. We also saw a shift towards online purchases. Overall, seasonal sales grew in the half against strong comparators with all banners delivering growth in Q2. In big ticket categories, we continue to outperform the kitchen market in the U.K. and Poland, reflecting the investments we have made into our ranges, showrooms and in Poland, design studios. On the other hand, the bathroom market remained challenging across our geographies, and our ranges underperformed the market. In response, we have initiated a comprehensive range review with encouraging early results from the launch of our new bathroom furniture range, Imandra 2. In the U.K., the market continues to be soft, broadly consistent with recent quarters. B&Q performed in line with the market and outperformed when including Marketplace GMS. Marketplace contributed GBP 12 million of profit in the half. TradePoint continued to take share in a subdued trade market, capitalizing on investments we have made in our trade proposition. Screwfix delivered another outstanding performance with like-for-like sales growth of 5.6%, significantly outperforming the market. Growth was volume-led and supported by momentum from our rewards program with existing customers increasing their spend and new customers joining the platform. Screwfix's strong proposition of proximity, availability and speed makes us confident it can continue to gain share. U.K. and Ireland retail profit increased 4.9% to GBP 361 million. This includes a GBP 14 million business rates refund in the period. The French market was broadly flat in the period with strong seasonal demand in Q2. At Castorama, like-for-like returned to growth in Q2, a fourth consecutive quarter of sequential improvement, supported by our revamped stores, successful range reviews and strong seasonal performance. Like-for-like sales, including Marketplace GMS were plus 0.4% and performance was in line with the market. At Brico Depot, like-for-like sales declined 4.2%, reflecting weaker demand for building materials and larger projects during the summer heat waves as well as some temporary disruption in the customer experience following the implementation of our new website. Brico continued to make good progress in trade with sales up 21%. France retail profit increased to GBP 74 million, with retail margin improving 10 basis points, reflecting our continued focus on margin and cost discipline. Our strategy to transform Castorama is delivering tangible results. We have now addressed 24 stores across the network with encouraging results. Rightsized stores are delivering double-digit improvements in sales densities, while revamped stores are generating a higher profit contribution than the Castorama estate average. Nine further stores are on track to be addressed in the second half of this year. Following the successful open of 2 franchise stores last year, today, we also announced the transfer of a third store to franchise. This year, we are reviewing 20% of our ranges. Those ranges already reviewed are growing 5.1% with some growing double digits. Alongside strengthening our stores and ranges, Castorama is making good progress on trade and e-commerce, enabling growth into new customer segments and categories. Trade penetration increased 6.5 percentage points. E-commerce sales grew 11% and Marketplace is profitable after only 2 years. Poland delivered a strong first half with total sales up 3.6% and like-for-like sales up 2.2%. We gained share in a growing market, supported by trade, e-commerce and design-led categories. Strength in core was driven particularly by internal building categories. Trade Sales grew 14%, E-commerce sales grew 39% and Marketplace reached breakeven. Retail profit increased 15.7% to GBP 60 million, with margin up 60 basis points. Iberia also delivered a strong market outperformance with like-for-like sales growth of 7.7%. Growth was supported by our competitive price position and strong momentum in trade and e-commerce. We also opened 2 stores, our first Iberia openings in a decade. Retail profit increased 17% to GBP 13 million, with retail margin increasing 30 basis points. Screwfix France continues to build momentum with store like-for-like sales increasing 48%. We are seeing progress in the key leading indicators with growing brand awareness, strong repeat customer purchases, around 55% trade penetration and an increasing network effect as density builds. Importantly, the earlier cohorts are showing continuous strong growth. This year, we have opened 2 stores. And in the second half, we'll be opening another 3, bringing our total store count to 37. We delivered solid profit growth of 9.9% in the half. Excluding the one-off business rates refund in the U.K., profit growth was 6.1%, reflecting good operational and financial discipline. To support future growth and enhance our e-commerce capabilities, we continue to invest in technology, including our Marketplace platform. We faced GBP 48 million of operating cost inflation, including 2 months of increased national insurance contributions in the U.K. These headwinds were more than offset by strong gross margin delivery and structural cost reductions. Gross margin added GBP 40 million delivered through the strength of our group buying and sourcing, Marketplace and Retail Media growth, foreign exchange tailwinds and the disposal of Romania last year, partly offset by freight headwinds and a higher trade mix. We delivered GBP 44 million of structural cost reductions, including distribution center space optimization, procurement efficiencies and store operating model improvements. Looking ahead, we continue to see further opportunities from buying and sourcing, Marketplace, Retail Media and supply chain optimization. In parallel, we continue to drive productivity across the group with additional opportunities across stores, head offices and global business services. We're also committed to generating strong free cash flow and to delivering attractive returns to shareholders. In H1, Kingfisher generated adjusted EBITDA of GBP 784 million. Working capital delivered a net inflow of GBP 5 million. We have made good progress on inventory since 2022 and see further runway for working capital improvement through multiple structural actions. Some examples of actions we are taking include reducing supplier lead times, negotiating lower minimum order quantities and moving slow-turning first-party ranges to Marketplace. We invested GBP 171 million in capital expenditure, prioritizing growth, including 9 new stores, new ranges and technology. Overall, we generated free cash flow of GBP 339 million, and our strong cash generation continues to support attractive shareholder returns. We returned GBP 333 million to shareholders through dividends and share buybacks during H1. Today, we also announced an interim dividend of 3.8p per share, in line with last year. And by the end of December, we will have completed GBP 175 million of our GBP 300 million share buyback program. When we set out our guidance at the start of the year, we observed a mixed consumer environment. We anticipated a limited impact from events in the Middle East on our energy and freight costs and rational pricing behavior across our markets. We also expected to continue our long track record of maintaining competitive prices while managing gross margin and cost effectively. Broadly, that is what we have seen in the first half. And so our assumptions for the second half remain largely unchanged. Reflecting our solid H1 performance, we are upgrading our adjusted profit before tax guidance to a range of GBP 595 million to GBP 635 million, an increase of GBP 20 million at the midpoint. We are also upgrading our free cash flow guidance by GBP 20 million and now expect free cash flow between GBP 480 million and GBP 520 million. With that, I'll now hand back to Thierry.

Thank you, Bhavesh. Our first half performance reflects strong momentum across our 4 strategic priorities: growing our trade business, scaling our digital ecosystem, winning through our offer, own exclusive brands and services and growing our banners and format. So starting with Trade, an important high-value customer segment for us. Group Trade Sales reached GBP 2.1 billion and grew 16% when excluding Screwfix. Trade penetration increased more than 3 percentage points to 31% of sales. A key foundation of this is the rollout of dedicated trade zones within our existing stores with tailored ranges, faster service and specialist colleagues serving our trade customers. Outside Screwfix, trade zones are now present in 49% of our stores. At Castorama France, Pro zones are present across the estate, where Brico Depot France now has 14 Pro corners. The Pro zones are the starting point for building our relationship with the trade. It's where we identify and get to know them and where we educate them about our Pro-specific product and service offering over time, capturing more of their spend. 58% of our stores now host a trade sales partner. These colleagues provide a bespoke service to higher-value customers, helping them save time, adopt relevant services and consolidate more of their spend with us. At TradePoint, we are seeing tangible results from this model. Sales from customers covered by a trade sales partner grew 23%, allowing TradePoint to gain market share in the half. Poland is following a similar pattern. Across our banners, we now have 438 trade sales partners enrolled and see significant scope to scale this model through further recruitment, sales training and our trade credit solution. We believe that moving towards more relationship-based customer growth is our #1 lever to continue to take share in the trade market. As you heard from Bhavesh, Screwfix performed strongly in H1 as well as being a well-oiled machine with a dense store network, high availability and fast fulfillment, Screwfix is generating continued momentum with its rewards program and successfully growing customer share of wallet. Less than a year since launch, Rewards now has more than 2.3 million active customers and accounts for 44% of total sales. Rewards also allows us to personalize our offers with features such as recommendations based on trade type, brand affinity and local weather. And this is resulting in an increase in average order value of our highest value customers as they dedicate more of their spend to Screwfix. Screwfix is also seeing strong customer demand for a broader product range. Given the compact footprint of our Screwfix stores, it will not be practical nor economic to stock the full breadth of product our customers are looking for. So to address this, as an example, we have partnered with Footshore, one of our vendors to offer more than 12,000 footwear SKUs across a wide selection of styles and sizes. Products are picked, packed and shipped by Footshore directly to our stores with 70% of orders collected in stores. This partnership generated GBP 12 million of sales in its first year, demonstrating the opportunity to expand customer choice without adding complexity to our store operation. We are now ready to build on this success and scale the model. Our stores sit at the heart of a digital ecosystem that creates a virtuous cycle. Stores support fast and convenient first-party fulfillment, Marketplace broadens choice and attracts traffic, apps and loyalty programs generate valuable data and that traffic and data support personalization, retail media and further profit growth. Our investments in AI and technology also position us for the next phase of commerce, including natural language search and agent-enabled shopping. This ecosystem continues to scale across Kingfisher. E-commerce sales reached GBP 1.6 billion and grew 16%, excluding Screwfix, while penetration increased to 22% of sales. Screwfix remains the most digitally advanced banner with 60% of sales coming through digital channels, while the strongest digital growth in the half came from our other banners. B&Q reached 20%, Castorama France now 10%, and there is further opportunity, our target being 30% e-commerce penetration across Kingfisher. A key driver of our E-commerce growth is Marketplace, which complements our first-party offering. With a much broader range of third-party products, Marketplace GMV grew 42%, representing 18% of E-commerce sales and contributing more than GBP 13 million of retail profit. With a robust foundation in place, we also see good momentum in Retail Media, which grew 75% in the half. An important area of Marketplace progress has been the further extension of customer choice. B&Q Marketplace now offers close to 5 million SKUs. Growth is coming from categories that complement our offer. A good example is cooling products, which were in high demand during the recent heat waves. We already have strong representation from U.K.-based vendors on our Marketplace. In addition, we have now onboarded more than 80 international merchants, which today account for less than 10% of GMV. Mature marketplaces generate 70% of their business with cross-border trade. So you can see the further potential ahead of us. The strength of our model lies in combining the scale and choice of our Marketplace with the convenience and immediacy of our store network. Customers benefit from a broader product range and faster, more flexible fulfillment. And this includes Marketplace Click & Collect, 3-hour delivery direct to site at B&Q and the expanding reach of Screwfix 30-minute sprint delivery service. As we extend choice, we are also investing in making the shopping journey easier. With the introduction of Buybox, we are helping customers find the best available offer for products sold by multiple vendors. In addition to enhancing our in-house digital agents with voice capability, we are rolling out natural language search on our website based on our partnership with Google. In parallel, we continue to deploy AI selectively with a clear focus on investment returns. Our new content platform, Fabric, creates high-quality product content in minutes, improving speed to market, search engine optimization and conversion. Our own exclusive brands continue to combine affordability, quality and innovation. In the half, our new outdoor ranges grew sales 8%, leaning into the growing outdoor living trend. The launch of Imandra 2 marks the start of our comprehensive bathroom range review and is off to a good start. And in Power Tools, the sales of our expanded MacAllister and Titan ranges increased 11% since launch. The growth drivers I have outlined underpins Kingfisher's attractive investment story. We have leading positions in our markets. We operate a diverse portfolio of banners, each with distinct formats and proposition that address a wide range of customer needs. Our strategic growth drivers are allowing us to grow our market share and to move into new market segments, making Kingfisher a more resilient business and giving us confidence in our continued performance against our financial priorities, growing our sales ahead of our markets, increasing our profit ahead of sales and generating strong free cash flows. So to summarize, we delivered strong momentum across our strategic growth drivers, along with solid profit growth by controlling what is in our control, and we have upgraded our guidance based on our first half performance and the opportunities ahead. We are building a stronger and more resilient Kingfisher, and we remain confident in our sustained performance. With that, let us move to Q&A. Thank you, everyone.

[Operator Instructions] Our first question comes from Richard Chamberlain with RBC.

Two questions from me, please, if I can start things off. So first on trade sales partners, you talk about scaling the model, Thierry. And I just wondered how we should think about that in terms of the number of partners you're looking for across the TradePoint and Castorama banners or the percentage of sales you'd expect those partners to generate? That's the first one. And then second, on the gross margin outlook, obviously, very strong performance in the first half. How do you see those main drivers that you talk about in the first half evolving in the second half?

Thank you, Richard. Let me start with the first question. I think the sales is a combination of number of trade sales partners and somehow the sales per trade sales partner. So we see on the first part -- we see more trade sales partners in the future. We are really very happy with the results. So you can -- if I draw few years from now, you could have 1 to 2 trade sales partner in every store in the medium term. Then the other job we are doing is to -- and that's really a very, very important KPI of us is the sales per trade sales partner. So we are looking at the best trade sales partner in the network, the worst one. We are actively managing them. We are creating new bonuses to incentivize them. We have created specific software to help them to follow this portfolio of VIP customers. So a lot is going on training as well, a lot is going on in order to increase the sales per trade sales partner. So looking at this combination, in my view, you have a few years of growth ahead of you.

Richard, thanks for your question on gross margin. So again, really pleased with what we delivered in gross margin in the first half. A lot of it, things you heard me talk about before in terms of structural actions that we're taking. So what helped us in this first half was our buying and sourcing. So our group buying and sourcing scale, we continue to drive that. Marketplace, you heard us on our prepared remarks talk about the profitability of Marketplace. And what we delivered in the first half alone was more than what we delivered the entirety of last year in Marketplace profit. Retail Media, we had some FX tailwinds on our committed sort of purchases. So all structural things largely that helped us in the first half. I'd remind you that about 10 of the 70 bps was our sale of Romania last year. So you won't see that in the second half. And then we had some headwinds, freight and a growing share of trade. So when you look to our second half, it's the same structural actions that we'll continue to push forward, right, Buying and Sourcing Scale, Marketplace, Retail Media. We are getting a little bit of supplier inflation, so price request increases. Obviously, we're mitigating and pushing that back. Our OE business and the scale of our sourcing gives us the ability to push back against that, but that's something we're watching closely in H2.

Our next question comes from Timothy Ramskill with Bank of America.

I've got 3, please. Three questions, if that's okay. Just a little bit on big ticket observations around difference in performance on kitchen versus bathroom. Just maybe you can scale that kind of degree of outperformance and underperformance in those 2 categories, please. Secondly, Poland, perhaps we don't spend enough time focused on it, but clearly, very material improvement, both in gross margin and overall margin in the first half. So just really interested in more of a medium-term question about the recovery potential in Poland, clearly was a much more profitable business once upon a time. And then thirdly, just interested in your thoughts around Screwfix's performance relative to its closest peer, Toolstation. I might be wrong in saying this, but it feels like the gap in like-for-like performance between those 2 competitors is the widest it's been for a very long time. So maybe I'm sure you'll just focus on yourselves rather than them, but just interested in what you pick up in terms of feedback or anything else that you think explains that very meaningful advantage you seem to be enjoying there?

Thank you, Tim. Maybe I will answer 1 and 3, and Bhavesh will answer on Poland. I think big ticket, a few considerations. We are happy with our kitchen business. We have had a lot of range reviews. We have a lot of action in stores from dedicated training, a lot of sales force management in the U.K. We are creating design studio in Poland. France as well has a lot of additional action and really overall, pleased with kitchen. Not happy with bathroom. I think the market is a bit softer than kitchen. But overall, we are not happy with ourselves. We believe we could do a better job on bathroom. We identified already months ago that our ranges were not modern enough. We were lacking some color, some design, and we have built a new range at group level called Imandra. You see that in the prepared remarks. We are now starting to roll out across the group this new range of bathroom, starting with Castorama in France, pleased with the early start of Imandra in France. Last comment that we do, you need to look at digital as well. When we look at our bathroom business on Marketplace, it's extremely strong. So having a very big online business now on Marketplace allows us to capture some of the shift of the market. We believe as well the bathroom is moving more online, and that's something we are getting through our marketplace. Screwfix U.K., really, I don't want to comment too much on competitor. I don't think it's for me to do that. I think we are really pleased with volume. We are really getting growth through the volume of items sold. And through new initiative, we are opening a few stores, but many is around share of wallet. I think that I said that in the past, we are broadly at 15% of share of wallet for Screwfix. So you see we have more to go after. We have -- you have seen in our remarks, we have launched very successfully a new loyalty program, Rewards. It's allowing us to be more -- to personalize our offer and some are to increase the share of wallet. We're increasing choices through this vendor to stores model. When you keep -- you stay in the Screwfix ecosystem, but to enlarge your number of SKUs, that's something we are looking forward to scale up in the coming months. We are as well doing more B2B business, selling more to larger companies. So lots going on at Screwfix at the moment. And indeed, we feel good around the competitive position of Screwfix at the moment.

Tim, thanks for your question on Poland. Look, really pleased with the performance of Poland, 3 quarters of top line growth is fantastic to see. When you look underneath the numbers, what's really encouraging is strong core performance. So we saw a consistent and strong core performance Q1 and Q2. Trade and e-commerce, our strategic levers are performing well. So really pleased with the execution from the Polish team. Significant outperformance in kitchen. We talked about design studios. So these are in shopping malls where we showcased some of our kitchen product, and that's really helping, early days, but really seeing meaningful impact from our design studio. So overall, really pleased. We outperformed the market. Over the medium term, we feel pretty optimistic about Poland. There's a lot of white space that we can go after the Tier 2 cities with our medium and compact format. So pleased with Poland against a supportive backdrop.

Where do you think the -- and just thoughts on launching now versus where it was before.

Yes. I think when you think about pre-COVID, Poland was above 10%. We felt probably was too much. I know we were in limited number of stores. The top line sales were not what it should be. So I don't think we'll ever come back at this level. But nevertheless, I agree with you that the profit margin of Poland will improve. You start to see that this year, and we expect Poland to improve its profit margin in the coming years.

Our next question comes from Izabel Dobreva from Morgan Stanley.

I had 3. The first one is just a follow-up on the bathroom range review. Could you tease out in a little bit more detail what you are changing in this offering? And do you currently offer a full project service in the same way you do for kitchens? And is that something you are studying? I guess the point of the question is to understand how quickly you expect to be able to turn this underperformance around? Then my second question is on the marketplace. It appears that the drop-through rates and the profitability have improved. So could you comment where you are on that customer acquisition curve for the U.K. business and whether you would expect the profitability in France and Poland to ramp up more quickly now for those 2 geographies than they did for the U.K. in the early stage? And then my last question is a quick one, just on the gross margin. We've heard you loud and clear on the structural initiatives. Is there anything seasonal or cyclical that you would call out, which might have helped the performance this half?

Thank you, Izabel. On bathroom, what we changed is things like new colors, new design for cheaper price. So we are able to offer the new Imandra 2 collection for same quality of product, cheaper and as well introducing new color and new design. We already have a relatively full service. We have a team of designers in all our stores. We have software to create 3D design. We offer installation, we offer credit. So already a lot going on here. If you ask me, I am fully happy with the way we do installation, et cetera. I think we can grow further, and we are growing this business. Then when you roll out across thousands of store, big showrooms, it takes a few months. You have to change part of the showrooms. So we have an approach step by step, starting with Casto France, Brico Depot, then you will see Poland and then B&Q in the coming months. Quickly on -- maybe on Marketplace. First, potential to grow the sales. We are -- you probably heard that we are now pushing hard on non -- if you take the B&Q non-U.K. vendors, we are pretty happy with the U.K. vendors. We only have 80 non-U.K. vendors. It's less than 10% of our Marketplace sales. When we look at very mature marketplaces in the world, they are more at 70%. So we really are seeing a very strong traction on non-U.K. vendors. Functionality like Buybox increases, in fact, the price index and the price competitiveness because you allow competition on the same SKU of multiple vendors and somehow we organize this competition. So that's very helpful. Then the profit is a combination of your fixed cost and your marketing cost. So the more you grow your sales, the more you reduce your fixed cost. Fixed costs are not very large, but that's still a consideration. And that is how much marketing you want to invest. What I said in previous calls, you usually start the first year of marketplace around 10% marketing cost. In the long run, you're probably around 3% marketing cost. And so we are on this journey, and we expect more could drop through in the future. Another consideration is the take rates. We have between 10% and 15% of the take rates. One of the actions we are doing is increasing the services we can sell to vendors from retail media to fulfillment. We are as well testing fulfillment for vendors. There are many services you can offer to your vendors to increase their sales, and that will go through the take rates in the coming years. Now...

And then just on gross margin. So things that may not repeat, FX. So that obviously was a tailwind in the half. But as currency rates change, that can be another tailwind. As I said, Romania, 10 of the 70 bps in the first half is from our disposal of Romania last year. And then as I flagged, we are seeing a little bit of inflationary pressure. So a price increase request from suppliers. Obviously, we'll push that back. What helped us in the first half as we benefited from some earlier purchasing of inventory last year, which we sold in the first half. But as we get that inflationary pressure, we'll see some of that. But look, confident in what we're doing. Our structural actions, you've seen us not just this half, but last year deliver it, continue to focus on that. That underpins our discipline on margin and cost as we look ahead.

Our next question comes from Mia Strauss with BNP Paribas.

I just wanted to maybe ask about sort of sourcing conditions maybe for 2027 and whether you've been doing any prebuying on the oil derivative. And then secondly, just looking at the core performance of B&Q, and it's pretty weak. So I just wanted to know what's driving that? And then thirdly, just on Marketplace, maybe in France and Poland, have you seen any changes in the market post the EU de minimis threshold being removed?

Let me take the first and the third question. I think Bhavesh will answer on the core U.K. I think sourcing, remember, we have -- broadly half of our sales is private label. So we have a long-term relationship with partners sometime in Asia. So we are able to really plan with them in advance. So somehow, you can expect to see some of the raw material increases now into 2027, but we are relatively confident that with a strong partnership with those vendors, that would be manageable. Marketplace France Poland, we are seeing good traffic to our website. Good progress in our marketplace. I would not predict if it's coming from the de minimis EU new rules. You probably have access to traffic data to other marketplaces. There are some public information here, but we are very happy with the progress of our marketplaces for Casto France and Poland.

I think to your question on core, Mia, I think when we look at the U.K., core was down at 2.7%, a little bit more down in Q1, less in Q2. That's against a backdrop of a market that was also down low single digit. So core was sort of similar against what we saw in terms of the U.K. market. When you look at our banners, 2 very different models. So B&Q generally serves sort of general builders, more outdoor work. Some of the DIY traffic is also impacted by weather patterns. And so it was an interesting half, right? Q1, we saw quite a little bit of weakness because of the later start to spring, impacting some outdoor projects. And then Q2, you saw a different impact because of heat wave. So there, we saw people shifting to online, real concentration of demand in cooling, outdoor and leisure and impacted store footfall, people going more online than into stores. And then when you look at Screwfix, actually, they tend to serve more electricians, plumbers who generally work more indoor. And I think that helped underpin their performance. But when you look at trade, TradePoint did well in the half, again, a function of the nature of trade, the resiliency of trade, and that was pretty positive in B&Q. So we're pleased with that.

If I could just follow up on the sourcing conditions. If you could just remind us about your energy and your freight hedging, that would be useful.

Yes, I can do that. On energy costs, it's a large -- it's a small part of our cost base, and we're pretty well hedged, so fully hedged this year. We tend to decline -- hedge on a declining basis to give us more sort of flexibility in the outer years as prices move up and down, but we're well hedged this year on energy. And freight, again, we typically sign annual contracts. We've seen a modest increase. All the contracts have what we have like a fuel-linked inflation clause. So that drives a little bit of increase. But again, it's a small percentage of our cost of goods.

[Operator Instructions] Our next question comes from Yashraj Rajani with UBS.

A couple for me, please. So firstly, on gross margin, it seems like a couple of your peers have sounded a bit more cautious about inbound freight and also last mile. Can you give us an idea of, do those things affect you in the second half and also potentially how your negotiations are going for that for the next year maybe? The second question is on Screwfix. So it did seem like a lot of that performance is being driven by your initiatives, namely the loyalty program. Given there's no change to the external market condition, is that like-for-like performance a good representation of what you're seeing in Q3 till date as well? Or do you think something has changed there? And then the last one is on franchise stores. Can you please help us on how much that's potentially helped you in the first half or maybe how those economics mature in the second half and into next year as you do the transfer to franchise stores?

Thank you, Yash. Maybe I'll start and Bhavesh will complete on a few points. I think on the first question, we have a store-based model. So we are really using store to prep our orders over 90%. We have a high penetration of Click & Collect. And we try to use as much as we can a model whereby we deliver home from our stores. Therefore, yes, there is last-mile delivery cost, but that's not necessarily a big consideration for us. Screwfix, H1, H2, remember, the peak of Screwfix is now starting September to end of November. That's a season for plumber, electrician, change of time in October. So that's a big part of the Screwfix season, and there are heavy preparation every year for peak. So we will anniversarize the Rewards loyalty program early October. But I'm very happy and confident in the Screwfix plan this year for peak with Black Friday and this preparation of the season. So I'm relatively optimistic for Screwfix in H2. Last comment on franchise. We, by the way, have announced this morning in France, a third Castorama store franchisee. So it will be 3 for Casto, for Brico. And so far, the economics are very encouraging as expected. We see some are good top line, in line with expectation for Casto, probably above our expectation for Brico. Remember, Brico, it was a former Mr. Bricolage stores, becoming the Brico Depot stores. So we have seen a very, very significant sales increase. And we see overall a better profit by several points, between before and after. So very encouraged by this early start. I think franchise in France is very strategic. It's not a tactical action. That's a way to manage better some stores that are difficult stores, especially for Casto. That's as well a way to open new stores quickly with very low or no CapEx involved. So we take franchise very seriously. That's several years of action, and I have high expectations in the future.

Yes, nothing much to add other than the 2 that we did were loss-making stores or -- and so by moving to franchise, that helps our profit margin. I think I'd just caveat, look, these are 2 stores, another one today. We're learning as we go. These are the first franchise stores that we are moving into. So encouraged by early results, but lots of learning, testing, trialing that the team are working through.

Our next question comes from Arthur Peel with Berenberg.

Just a couple from me. Just how to think about the operating cost environment into H2, particularly with the national insurance headwinds sort of annualizing out? And then just secondly, on Screwfix France and the phasing of profitability there through the different cohorts and just how that's looking going forward?

Maybe I'll start with Screwfix and Bhavesh will come back on cost. You have seen we have given you already in March and now after H1, the like-for-like per cohort. I'm really impressed by the fact we are able to keep even for 3 to 4 years old cohorts, the same level of very strong like-for-like. So that's very encouraging. When you think about the P&L of Screwfix France, we have relatively significant fixed cost. We have established a DC in France. We have established a proper tech system for our Screwfix business in France. We have a small head office. So therefore, we have started this venture with relatively heavy or significant fixed cost. But that's not our focus. Really, the focus is the sales density of the store and the maturation of the store to the point they are breakeven and making profit. Because if you reach that point, then you can scale the business massively in the future. So that's really our focus. Really pleased with H1 delivery on like-for-like on sales density. And we are on the right trajectory. We are very -- we find those sales very encouraging for the future.

Arthur, on cost, structural cost reductions is a strong focus in our business and things we will continue to look at in the second half. I'd just remind you, last year, remember, we had GBP 145 million of headwinds, national insurance, social taxes. And through our structural actions, we mitigated those and we grew profit last year. And we continue to look at those structural initiatives across a range of things, as you heard me in my prepared remarks, distribution center space rationalization as we use our stores differently, operating model changes, whether it's at B&Q or in Casto, store simplification, logistics, procurement. So there's an ongoing engine of structural cost initiatives that we continuously look at, and you can expect us to keep doing that as we look forward.

Our last question comes from Kate Calvert with Investec.

Just 3 for me. So first of all, just on Poland, Thierry, we've had plenty of sort of full storms in the past here. You had a great first half. It feels more like that was self-help driven rather than market driven. Is that a fair assessment? And in terms of the second question, I think, for Bhavesh, you've talked about the sort of ability to continue taking working capital out. How should we think about the opportunity going forward? I mean, sort of any thoughts on what good might look like? And a final question, just on back to Screwfix France. Can I try and pin you down on when you think the business might become profitable? I mean, how many stores do you need to cover that fixed cost? Because I assume it's probably more than the stores you've got today. That's my 3 questions.

Thank you, Kate. May I start with the first and the 3. I think -- it's a combination of market and self-help. I think the market has been better in H1. But as well, we gained clearly market share in H1. And that's kitchen and kitchen delivery, strong growth in trade, strong growth in e-commerce, a lots going on, on range review. And you're right to say, I'm very impressed by the innovative spirit of the team. We launched our new loyalty program a few days ago, a lot of new ideas on design studio in shopping mall, lots going on to create quickly e-commerce hub across Poland. So lots going on. Now, my view is, if you think medium term, Poland is a good country to be in. It's strong GDP, one of the strongest or maybe strongest in Europe. We expect that to continue. We have -- we are #1 in this country. We have a really strong foundation. We can open more stores. There are more to go after on Trade. Somehow, we feel the big-box model for Trade in Poland is very relevant. There is more space to grow on Trade. Allegro is super strong, but we could be a #2 clearly on online business. So a lots going on in Poland. It's true that it's a country where the changes can be relatively violent and that will stay the same. But if you think around the medium-term trajectory, it just makes me very optimistic. Screwfix France quickly. The fixed cost is not really our key consideration for now. That's all around sales per stores. And we are really looking very much at the first 2, 3 cohorts because you want to reach breakeven and having store sales density and profit in the right place before scaling up meaningfully. And we are, I think, in a good trajectory. I'm really encouraged by like-for-like of the cohort 1 at plus 39% and then cohort 2 at plus 39% as well, et cetera. So that's very strong after 4 years, and we are expecting a reasonable number of stores reaching breakeven and then profitability. And when we'll be there, we'll press a button to have a more significant expansion. I think we need to be a bit patient looking at the improvement of sales density. But up to now, I must say the trajectory is really good. And we are very encouraged by seeing those very old cohorts now because some of those stores opened in Q4 2022 keep growing 40%. So very, very encouraging, but we consider we need to be patient because if we start the expansion is to open 600 stores broadly. So before going there, we need to be absolutely sure that the sales density is in the right place. Now moving to our...

Let me just add to Thierry's points on Screwfix France. I think as I said, we're seeing encouraging performance across all our cohorts on top line growth. The best stores do give us confidence. We are not solving for store count. We're solving for economics. So we're looking to prioritize proof over pace, repeatable, profitable economics. And we're encouraged by what we're seeing in our best stores, and we'll continue to progress in a disciplined way. So it's not store count only that we solve for. On working capital, yes, look, well controlled in H1, a lot still to go after. You've heard me talk previously around inventory. We're far from best-in-class in inventory. So for us it's looking at structural actions, not tactical actions. You've heard me talk about some examples in my prepared remarks. If you look at the last 3 years, we've taken about 9 days of stock out, and we'll continue to focus on that whilst being mindful of sales and the impact that stock reduction has on sales. Payment terms, another area of focus by the banners. So I would say that it's an area that we look at closely, and you'll expect us to continue to look at working capital as we look forward.

There are no further questions. I'll now hand over to management for closing remarks.

Thank you. First of all, thank you for being with us. Thank you for all your questions, and it's always a pleasure to discuss. I would say I'm very proud of the job done by the team during this H1. We are pressing ahead at pace with our strategic delivery. We speak about E-commerce, Trade, Marketplace, Retail Media, Screwfix France. At the same time, we have been very disciplined on managing gross margin, cost and cash flow efficiently. And I think I'm very proud of the job done by the team. We are building a stronger, more resilient company by pushing and pressing on those strategic priorities, and that makes me very, very confident. So thank you, everyone, and talk to you soon. Bye-bye.

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