Travis Perkins PLC

LSE:TPK

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Travis Perkins 2019 Q1 Trading Update. My name is Brita and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host Zak Newmark. Please go ahead.

[John P. Carter, CEO & Executive Director]

It's actually John Carter here with Alan Williams.Good morning, everyone. Look, we're really pleased with the positive start to the year and our Q1 trading. In many different ways, all our businesses across the group have performed well. A good start is set against a weak last year comparator and set against the continued uncertainty with the withdrawal process from the European Union. I'd encourage you to read both our in-year like-for-like and our 2-year like-for-likes in conjunction with that positive Q1 performance.If we look at the businesses, before we go to question and answers, clearly Toolstation is trading very well. And good progress and recovery from Wickes both in their core DIY categories and showroom Kitchen & Bathroom categories. But do only show plus 1.3% growth over a 2-year period, given the contrast between the 2 quarters and year over year. Merchanting is balanced and well over the 2 year -- we've done well over the 2-year period. And we are seeing continued good success coming from CCF, Keyline and BSS, and good early progress from the TP brand in the change of emphasis towards more branch manager empowerment. P&H is obviously annualizing the Beast of the East and a very strong trading period last year. And it's got respectable 2-year like-for-likes of 14.9%. We remain pleased with the progress we make in regarding the separation work for P&H and remain on target to have that work completed by the end of the second quarter. As I say, despite a positive start to the new year and against the backdrop of annualizing the weak Q1 last year and the uncertainty that remains across our sector, we still have 3 quarters of the year to complete and report and our guidance there for this moment is overall expectations similar to that of 2019. Should we open up for questions?

[Operator]

First up we have Paul Roger from Exane BNP Paribas.

[Paul Barry Roger]

Congratulations on the strong start. So I'll have 3 questions. I guess the first one, the obvious one is to push you bit more on the guidance. I mean clearly we hear what you're saying about the easy comp and the uncertainties. But I guess the 10.5% group 2 year like-for-like was better than you expected. So just really trying to understand the extent to which your business is being conservative and whether you now think that the risk to your guidance is clearly on the upside.So that's the first one. The second one is, can you give us a sense how you feel that the market performed in each of the different businesses so that we can get a sense of basically the magnitude of the share gains you're seeing? And then the final is on Wickes. Encouraging obviously to see a turnaround, particularly in K&B. I wonder if that could affect your thinking at all in strategy, and maybe accelerate a potential disposal.

[Alan R. Williams, CFO & Executive Director]

Paul, it's Alan. On the question around guidance and also the market performance -- out-performance, I'm going to take a little while to explain some of the moving parts from prior year. So last year we had a reasonable start in January and February 2018. We then had 2 calamitous months in March and April with the weather. And then May, June was sort of 11% on growth for the business. So my view is that until we get beyond that and into Q3, we won't have a really good read on where the year is going to end up. We had certain businesses last year with the weather which were out of action for 3 days from a delivery point of view or supply chain disruption, plus the softened ground that we saw for our customers during March and April. And so I get the point about saying, is this conservative, but when you look at what we were saying the last year, I think that puts some context around it. There's still that uncertainty around Brexit and worst housing transaction -- secondary housing market transactions have improved a little. It's sort of barely improved at this stage, a couple of thousand better. So I think it's a sensible thing to say at this stage, it's unchanged in terms of outlook. When we look at the individual businesses and where they're outperforming, I think you know it's contrary to what other people may say. This is not like a Nielsen or IRI read that you get in a food retail environment. We don't have that sort of market analysis. We think the independents continue to perform strongly in the market, but I think our businesses probably are on the merchanting side. I think they are at least holding their own if not gaining a little share at this stage. But that's just a gut feel rather than being able to point back to any data. When it comes to Toolstation, clearly there's strong outperformance there against a narrower competitor group and an acceleration in those like-for-likes, but if you look at last year in Toolstation how they [ fought ], the Toolstation business a softer Q1 to 2018. From a Wickes point of view, it -- we're pleased with the turnaround that we've seen in performance, but this is -- it's very early days. And as John was saying, again I'd point to that 2-year like-for-like being it's only 1.3%, which is probably reflective of a fragile consumer environment continuing.

[John P. Carter, CEO & Executive Director]

I think in terms of market share gains, we've been really pleased with all the businesses and Plumbing & Heating even though in the period we're talking about of Q1 2019, we've gone backwards on a like-for-like basis, 2 years is still strong and I think we're still performing well. I think Wickes turnaround has been sort of 3 sort of areas that point to the good at self-help that management have put in place and operating the business effectively. I think B&Q as we've called out, moving away from installed kitchens would have definitely helped our business. And the changes going on in Homebase and the store closures is also helping our core business.We would -- I think we would call out taking share in that sector. Toolstation's trading extremely well. But it is the value proposition, low cost to operate, and we have stepped up our network expansion and feeling pretty positive about the future for Toolstation. TP, the green and gold brand, TP brand, is definitely picking up pace from the actions we took at the end of 2018. But we've a long way to go, but pleased with the early progress. CCF, BSS Keyline both continue to perform well in the relevant sectors. So these are still early in the year and we're pleased with the progress that we've posted, but we're focused now on the half year, and clearly we don't know yet how the second half will pan out. So hopefully, Paul, we have covered what you wanted.

[Paul Barry Roger]

Yes, I guess the influence of what you're saying on Wickes is it's just too early to think about any change in strategy, and we need to see what happens there in the more medium term.

[John P. Carter, CEO & Executive Director]

I think we've committed to being a more trade-focused business. And the timing is all important and obviously we will keep you posted.

[Alan R. Williams, CFO & Executive Director]

Paul, if you recall what we said at the capital markets event in December. The sentiment of what we're saying was you got to improve the performance to create options. So step #1 for us is to continue improving the performance. If you put things together and just look at like-for-like sales growth quarter-on-quarter, this is now a second positive quarter after a positive Q4 '18. That was preceded by 6 negative quarters.And so you build that step by step, don't you?

[Operator]

Next up we have Priyal Mulji.

[Priyal Jitendra Mulji, Equity Analyst]

It's Priyal here from Jefferies.I've got 3 relatively quick ones here. So that 7.3%, I just wondered if we could get a volume and price split of that. And second question is, obviously, you've talked about easy comparables, particularly in March. Have you got any idea what the influence would be if we split out some of that poor weather from that 7.3%? And then very lastly we're obviously getting closer to a potential disposal of Plumbing & Heating. When it does come to this, do you think you'll be prioritizing the price or given that it's such small part of your group anyway, will you be prioritizing the speed of the sale?

[Alan R. Williams, CFO & Executive Director]

On the volume/price mix, I'm not going to give it a huge amount away at this stage. It's certainly been biased towards volume growth rather than price growth, let's put it that way in terms of the mix. I think we've seen one or two people report slightly higher input cost inflation than maybe the sell side was anticipating or have been previously guided. We're not seeing it quite to that extent at this stage. So you if you look back to the guidance we gave on pricing with the full year results, we're more in that zone at this stage. As I was trying to break down for Paul, on the easy comps last year, we said the weather impact was in our Q1 trading statement. We pointed to GBP 30 million to GBP 40 million revenue impact from memory. And I think it was probably at least that, that we saw from the disruption last year. Remember as well that, that disruption continued into the April period as well, and you've also got the disruption from the timing of Easter. So my key message on that is this is quite not easy to read and it's not till we get beyond the half year that you will get a really settled comparator to know. On the P&H disposal piece, I think what we're saying today is we made good progress on the operational and IT separation of the business. We expect to complete that during Q2, and then we will start a disposal process on the back of that. And I think it's too early to pre-judge how that will go and it will be not something I want to comment on in detail at this stage for obvious reasons.

[Operator]

Next up, we have Emily Biddulph from JPMorgan.

[Emily Louise Biddulph, Research Analyst]

I've got 2 questions, please. First one, I just want to talk about weather, sorry. I appreciate that not only is the comp easy, but presumably this year has also been an exceptionally good year for construction activity, and I'm just wondering sort of how concerned you might be that, that could represent a sort of pull-forward from Q2 into Q1, and therefore we might expect some sort of incremental weakness through Q2 or into Q3. And I've sort of assumed that John has seen a few good Q1s in his time and sort of what the experiences have been in the past would be interesting. And then just secondly, I just wondered whether the gross essence between general merchanting and contracts is broadly similar to what it was for this through 2018 or if there's any sort of change there, or if the growth rate sort of gap has closed at all.

[John P. Carter, CEO & Executive Director]

I think, Emily, we do give the TP growth.

[Alan R. Williams, CFO & Executive Director]

Yes, it's 8% like-for-like in the TP brand compared to the 10.6% total like-for-like.

[John P. Carter, CEO & Executive Director]

And I think, Emily, so really drawing on any experience that I've had, Q1 quarter can both delight and disappoint. And that's why we've taken our sort of overall expectations for the year until we really do get into the second quarter and third quarter. As Alan said, we are tracking some quite tricky comparators. And then as I looked at sort of H1 and I think I'm repeating what Alan said, but the first 2 months last year, January, February, we would consider good. March and April were really poor for slightly different reasons and not just the snow but the really sudden sites prevented us getting on some of the sites that we would have wanted to. And then we had a very strong May and June. So my sense is that so far so good. We're really focused on driving for outperformance, but it's really too difficult -- it's too early and difficult to call.

[Alan R. Williams, CFO & Executive Director]

Yes. Emily, I think my reflection on Q1 as well would be whilst the weather patterns were certainly very settled and from a construction industry, I think you couldn't have expected a better weather period, you still have a very fragile underlying market here. I mentioned the housing transactions. I think we all know that the continued uncertainty, that's the background, added to which we've got an inkling that some customers may have been stocking a little to be on the prudent side, particularly the larger customers, and pre-Brexit. Now clearly is the threat of 29th of March hard Brexit, we see that people were pulled back but you don't pull back quite that quickly. So I don't honestly know what the size of that impact is, but I do wonder if one or two customers are carrying a bit more inventory where they can.

[Operator]

Next up we have Arnaud Lehmann from Bank of America Merrill Lynch.

[Arnaud Lehmann]

Just a few brief question for me, please. Firstly, I hear everything you said about the -- it's early days, but have you mentioned anything about the trends you've seen in April? Are they consistent with the first quarter? Secondly, you said that the like-for-like growth was mostly driven by volumes, and which would imply with a modest price effect, potentially. What is the backdrop to that in terms of cost inflation? How should we think about cost inflation for the year? And I guess lastly, I appreciate this is just a Q1 trading update, but with this sort of like-for-like growth in the first quarter, do you get some positive operating leverage in terms of margins? I appreciate this year you also have some efforts regarding digitalization, and that's probably going to have an impact as well. But even if accounting for some fading of the gross in the coming months, you mentioned more challenging days effect in the next couple of months, do you expect to see a small either gross margin or operating margin improvement for the first half?

[Alan R. Williams, CFO & Executive Director]

Arnaud, if I start with your question on April, I think we gave a fairly broad hint that last year both March and April were extremely soft. So I think you can take from that, that April has been okay. On the like-for-like on the split with volume and then the inflation for the year, I think when we talked at the full year results, we were talking around something in the range of 2.5% to 4% say on input cost inflation. I don't think our views have materially changed on that at this stage. On the overall margin, we wouldn't normally comment at this stage. I'd say just a few things that should be taken into account. So clearly, you would expect a decent drop through if it's more volume weighted rather than price weighted in terms of your like-for-like growth.There are cost savings that we've got coming through, if we're focused on a net operating -- net margin number. But equally, we made some comments in the statements about we're seeing the larger customers growing more strongly at this stage than the smaller customers. So I think that should also be borne in mind.

[Operator]

Next up, we have Robert Eason from Goodbody.

[Robert Eason, Head of Research]

I think I have 3 questions. Just in relation to the volume backdrop, obviously it's been a lot stronger this year than last year, albeit weather effects, I get that. What impact is that having on kind of the gross margin environment in terms of people are not chasing their tails as much in the first quarter to get the volumes? So just general comments about gross margins. In the retail business, at the time of the full year numbers you were talking about a good order book in for the kitchens. So I was just wondering, can you just give us some commentary on what the order book looks like now? Just given what's happening at your competitors at the moment. And my last question, I'm sorry if it's a bit off key, but over the last few weeks, we've heard that you might have closed your build concept branch in Birmingham. I'm just wondering what are the -- what have been the learnings from that concepts that you can bring to the rest of the business? And so those are my 3 questions.

[Alan R. Williams, CFO & Executive Director]

Robert, on the first one, on the volume backdrop, I am tempted to say, I refer the honorable gentleman to the response I gave earlier to the previous question. On the other, I think our view would be, and I think you'd see this from others reporting today, the environment remains very competitive from a pricing perspective.I think on the K&B order book, it's in a reasonable position overall, so we're quite comfortable with the way the K&B showroom business is trading at this stage.

[John P. Carter, CEO & Executive Director]

And I think, Robert, on build, it'd be I think churlish of me to actually say what we learned.But whether you are successful with innovation or not, you always learn certain things that we will roll back into other parts of the business as a result of the experiment that we had in Birmingham.

[Operator]

The next question is from John Messenger from Red Bank.

[John Messenger]

Two for me, if I could as well, please. One, you mentioned just earlier about, I think it was Alan, the point about inventory build, possibly in terms of customers. But could you give us a bit of flavor? What have you had to do yourselves in terms of that inventory investment given what was expected at the end of March, and how is that likely to impact across the remainder of the year? And then the second one was just, when we think about that performance in retail, in terms of the strength of that kind of like-for-like growth, behind it all, is there a big difference in terms of gross margin in Wickes' core versus K&B? Just because obviously K&B is a reasonably sizeable part of that 10%. Just to understand if it comes with a structurally lower margin, because obviously the drop-through in Wickes of these kind of numbers has the most material impact on the group overall.

[Alan R. Williams, CFO & Executive Director]

John, on just starting on the retail one, the growth is actually quite balanced between core and K&B. And so I'd also say that there's not a huge difference in the gross margin points between the 2. Clearly, we offer an installation service on the K&B showroom. And you're going to make less margin on that. We are installing more kitchens than ever before. So I think at the full year, we said we were installing around 54% on the kitchens that we sell. That's ticked up a little in the first quarter. On the inventory build question, when we talked at the full year, we talked about building at the order of GBP 50 million to GBP 80 million of additional inventory, 10% sort of area we were talking about in case of a hard Brexit. We thought some of that inventory would still not fully have washed through by the half year, but it would have washed through by the year-end. The challenge we've now got is what do you do about that, given that we've still no idea when and what form of Brexit, if there is any Brexit, we're going to get. So at the moment our policy is to -- our bias is towards keeping a fuller inventory. So we will be carrying more inventory at the 30th of June than would have originally been anticipated. And I find it quite difficult to call when that will flush through, because that's somewhat dependent on Westminster making a decision.

[John Messenger]

Can -- sorry, just one further one was, Toolstations growth. It's quite difficult when you're outside, because of obviously the annualizing impact of those store openings and how they will drop into 2019. But when you look at that 19% growth, is that a number that sitting with James running the business and some of the stores, I don't know how they look across 2018 openings, but is there a chance of that number goes better still or is that 19% probably as good as it gets in terms of a like-for-like for Toolstation?

[John P. Carter, CEO & Executive Director]

So I think, John, when things are trading as well as Toolstation, James is pulling all the right levers, I think we'd like to go faster, but I think this is pretty strong. And 31.7% like-for-like for over 2 years, and we know last year was not the strongest period because of the weather impact. So I think we support him the best way we can. We're putting -- increasing the store opening program.We're trying to make a better business, more sticky for customers. And we'll be doing our best, but you have to be sensible about this. This is flying at the moment.

[Alan R. Williams, CFO & Executive Director]

John, when you think over the last 2 years, we've opened 40 branches a year in each of those 2 years on average. And you would expect to have a few sites which don't perform as well. I think we've been pleasantly surprised by the strength of the locations that opened over the last 18 months, including going down into smaller accommodations towns with a population of 10,000 to 15,000, but drawing in people from surrounding smaller towns and villages as well where the sales have been really robust. So I think that the success in what James is doing lies in some of those additional locations, and how strongly they're performing compared to what you may expect as the market matures.

[Operator]

We now have Aynsley Lammin from Canaccord.

[Aynsley Lammin, Analyst]

Just two, actually. First of all on CCF, obviously talked about market share gains, just wondering if you could give us a bit of more color there. You've kind of been a bit more aggressive recently in terms of pricing and you're winning market share, good margins. And maybe just a bit more explanation, I think you said expect the growth to moderate due to some kind of supplier product availability constraints. Just wondered what they were. And then second question just on the commercial side, wondered if you had any more color in terms of your new big projects. Are you seeing more delays? What's the order book looking like for those newer commercial projects?

[John P. Carter, CEO & Executive Director]

So Aynsley, I think we tread carefully each period with that -- the commercial, because it has held up remarkably well.And our 3 businesses that were the contracts division under Frank have continued to trade well. We called that out because CPA are predicting a slower period.We're very agile to volumes. The order book looks okay, but I continue to say the call-offs against that order book can fluctuate in different periods and -- but it's steady as she goes and we're performing well. I am -- I don't believe CCF are the aggressor. We're seeing the business grow, its earnings increase and return on capital improve. And we're very mindful that we're in business to make profit and I'm really pleased with the way management is conducting the business. In terms of the supplier side, it is mainly around plasterboard and on allocation. As you will be aware, there are 3 suppliers of plasterboard to the U.K. predominantly. British Gypsum, which would be the largest; Knauf which would be the second largest; and Siniat, the third smaller player with a single factory down in Bristol. Product supply across all 3 of them is very tight and on allocation.You'd expect us being the largest plasterboard distributor to get our fair share, but it was something that we call out when material supply becomes difficult.

[Operator]

We now have Howard Seymour from Numis.

[Howard David Seymour, Director of Equity Analysis]

Question on the -- you allude to the fact that the improving trend on TP was largely regional national customers and managed services. Can you talk me through that? And specifically as well because you allude to the greater empowerment at branch level. Has this come through from branch managers doing more of sort of the big contracts? Is it a function of market mix? I'm just sort of slightly confused about that. So I thought branch managers would do more at local levels, as opposed to sort of regional, national customers.

[John P. Carter, CEO & Executive Director]

So I would call out a little bit of timing point there, Howard. We still are not even 16 weeks into the project. And we are making progress in Travis Perkins. I think Alan's right to have called out that in this period that we're looking at, we've done slightly better with the larger customers and managed services. I think your intuition is right, we should also be building the smaller and medium-sized customers as this project progresses. And so I think this is sort of a moving part and we are just trying to sort of update the market to what's happening within the business. But as we move forward, my expectations will be that we are more successful with local and smaller customers, as I call them, the best builders in town.

[Howard David Seymour, Director of Equity Analysis]

John, on that basis, on the largest sales, has there been any sort of material change to how you're doing business there? Or would you say it is a function of that side of the market being stronger perhaps than the local market?

[John P. Carter, CEO & Executive Director]

I think there is a little bit of that. The other thing is when you actually are a large builder a you won a national deal. There are only a few companies you can actually truly go to. And at this moment in time, I think TP is the place to shop. And I think we've had success on that. To your point earlier, our focus is also on the best builders in town, and in each catchment against each town. Go on, Alan, you were going to say something.

[Alan R. Williams, CFO & Executive Director]

I was going to say how one thing you might be interested in as well is that London and the Southeast remains relatively weaker within the next overall [ still, ] which I think reflects the housing market as well whereas we see the Southwest and Midlands relatively stronger at this stage.

[Operator]

We now have Gregor Kuglitsch from UBS.

[Gregor Kuglitsch]

A couple of questions, please. So just remind us on the cost savings please, incremental just maybe in a single number for the group? And how the phasing is? It's obviously going to be quite important I guess for the tick-up in profits in the first half.Then I guess I want to figure out if it is, I guess, more H1 weighted. That's question one. Question two is just to be clear on your messaging with the kind of customer mix shift, are you kind of implying that as a result of that for the group growth is perhaps down a little bit, gross margins? I appreciate that's more mix driven than you taking any pricing action, but is that what you are trying to get across?And then finally if you can give us some color on how Homebase has been acting in the market place, sort of since the change of ownership is obviously now a bit more settled down? If you could give us some color how they are trading -- how they are behaving.

[Alan R. Williams, CFO & Executive Director]

Okay, Gregor, I'm going to -- I'm at risk of disappointing you here because this is a Q1 trading update, not the review of margins across the business. On the cost saving question, we will, as a reminder, we will have some flow through from H2 cost actions which we will get the benefits of in H1, so benefit in the first full month in Wickes because we put the cost saving program in place in Wickes in May of 2018. And then in general merchanting, the cost saving program with mainly weighted towards the second half. So as we've previously said, we'll get an H1 benefit from that. You've then got the further GBP 20 million to GBP 30 million of cost savings over the 18 months from Q1 '19 through to the end of Q2 2020. Some of that's dependent on the portfolio activities that we are taking and shaping things for the future. But in the statement we did refer to the removal of the divisional structure. And there will be some cost saving and benefits from that, but I think they would be more second half weighted given the timing of that than first half. On the customer mix shift, I think we are at the danger of over-analyzing a statement, which is that the bigger customers during the first quarter have grown faster than the smaller customers. I think from a Homebase point of view, we see a -- rather than being specific on Homebase, maybe if I talk generally about the DIY market, we're seeing a more rational pricing environment than we've seen over the previous 18 months or so, living core DIY.

[Operator]

We now have Ami Galla from Citi.

[Ami Galla, Senior Associate]

Just 2 questions from me. The first 1 is Toolstation. I mean if you could give us some color as to what percentage of the business -- of the sales today are driven by your online platform?And it could be interesting to understand what sort of growth have you seen in the in-store side of Toolstation.And the second one is on renovation. The overall RMI trends that you've seen in Q1 so far? Is there anything that you would pick up in addition to the weather benefit? Is there anything that you've seen that indicates there is a bit more improvement going into the system?

[John P. Carter, CEO & Executive Director]

So I would say on RMI, Ami, that there's more sort of risk than upside. I think the weather has been helpful.

[Alan R. Williams, CFO & Executive Director]

I think that's right. I don't think the underlying market trends have changed at this stage. I think it's still relatively subdued. On the Toolstation question, Ami, the growth has been across the board, whether that's online, in-store, click-and-collect, the business continues to perform really strongly in all areas.

[Operator]

Our final question today comes from Clyde Lewis from Peel Hunt.

[Clyde Lewis, Analyst]

I think I've got one left now. One was really on sort of where you are on, a, capital decisions; and I suppose, b, can you update us a little bit on sort of property disposals and where are your expectations and for the full year but whether you can actually do anything in the first quarter?

[Alan R. Williams, CFO & Executive Director]

Okay. So on capital I think we're bang in-line with what we said previously we're looking to continue to invest in the Toolstation business. I think we've got our priorities around the merchanting business and IT alongside. On property, a relatively quiet first quarter, but we're maintaining the guidance that we gave previously.

[John P. Carter, CEO & Executive Director]

So ladies and gentleman, thank you, very, very much for your time. And we'll catch you up on the 31st of July for half year results. Thank you.

[Alan R. Williams, CFO & Executive Director]

Thank you.

[Operator]

If you have missed any part of this call or would like to hear it again, a recording will be ready shortly. Thank you for joining today's call, and have a lovely day.