U.S. Markets closed

Edited Transcript of TPK.L earnings conference call or presentation 31-Jul-19 7:30am GMT

Half Year 2019 Travis Perkins PLC Earnings Call

London Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Travis Perkins PLC earnings conference call or presentation Wednesday, July 31, 2019 at 7:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alan R. Williams

Travis Perkins plc - CFO & Executive Director

* John P. Carter

Travis Perkins plc - CEO & Executive Director

* Stuart John Chambers

Travis Perkins plc - Non-Executive Chairman

================================================================================

Conference Call Participants

================================================================================

* Ami Galla

Citigroup Inc, Research Division - Senior Associate

* Aynsley Lammin

Canaccord Genuity Corp., Research Division - Analyst

* Howard David Seymour

Numis Securities Limited, Research Division - Director of Equity Analysis

* Paul Daniel Alasdair Checketts

Barclays Bank PLC, Research Division - Director

* Robert Eason

Goodbody Stockbrokers, Research Division - Head of Research

* Stephen Joseph Rawlinson

Applied Value Limited - Director & Analyst

* Yves Brian Felix Bromehead

Exane BNP Paribas, Research Division - Analyst of Building Materials

================================================================================

Presentation

--------------------------------------------------------------------------------

Stuart John Chambers, Travis Perkins plc - Non-Executive Chairman [1]

--------------------------------------------------------------------------------

So good morning, ladies and gentlemen. My name is Stuart Chambers, I'm the Chairman of Travis Perkins plc. It's my great pleasure to welcome you to our 2019 half year results. I'm -- there is quite a lot to cover. There are a number of significant changes to the income statement, the balance sheet, and quite a few work streams to update you on. So -- but I'm not going to duplicate there, I'll leave Alan and John to do that, but I just want to cover 2 areas.

Firstly, I would like to acknowledge on behalf of the board, those work streams. The significant progress that the team has made in moving forward the strategic objectives that we laid out in our Capital Markets Day in December. That has involved, as I said, some very significant work streams involving a lot of resource and a lot of senior management time. And I think it's a great credit to the team that in doing so, they didn't fall into the trap of taking their eye off the performance ball of business as usual across the businesses. And I hope you all agree that if you look at the numbers, there's not much evidence of them having taken their eye off the ball.

That's the first thing. And the second thing before I hand over is of course to acknowledge. This is a quite an important week. The handing over the baton at the top of the company. This will be John's last set of results that he presents. And I'd just like to say what a -- how wonderful my time has been with John, albeit somewhat short, 2 years, because John has delivered 41 years of sterling service, committed and always dedicated to the company.

And I think the thing that earmarks John most of all is his passion. He puts his head, his soul and his heart into the company, and I think his loyalty and his commitment to the business has always been a great example to us all.

So we'll miss you, John. But of course, absolutely delighted to be welcoming Nick Roberts, who's sitting here this morning. And he takes over on Monday, is it? Next week. And we are really, really delighted to have been able to persuade Nick to come and join us and I'm absolutely confident that he's going to take this group and he's going to build on what's already been achieved. He's going to take it forward and grow it successfully for the benefit of all stakeholders, so a very warm welcome to Nick as well.

However, you're still in charge, John. I'll let you do some of the results. So without further ado, let me hand over to Alan, who's going to start off with the numbers.

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [2]

--------------------------------------------------------------------------------

Thank you, Stuart, and good morning, everyone. So the first half of 2019 has actually been very positive for the Travis Perkins Group. I think we've made some excellent progress on executing the strategy, which we set out at the Capital Markets event in December 2018, namely to focus on advantaged trade businesses and simplify the group.

We separated out the Plumbing & Heating businesses, and we're underway with the disposal process. And today, we've also announced our intention to pursue a demerger of Wickes. This process of simplification is reducing complexity in the group and it's enabling us to make operating cost savings.

The strategic progress has been underpinned by a strong H1 trading performance, despite ongoing uncertainty in our end markets. We've demonstrated outperformance across our merchanting businesses, continued to deliver outstanding growth in Toolstation and have delivered a very strong turnaround in Wickes.

Before I take you through the results in detail, I thought it might be helpful to draw your attention to some of the changes to the presentation of our results, which were in effect for 2019. So firstly, as we set out with our full year results at the end of February, we've redefined our reporting segments. As Plumbing & Heating is now classified as an asset held for sale and, hence, excluded from underlying results, we're reporting under 3 segments: merchanting, Toolstation and retail.

We have also applied IFRS 16 leases for the first time. We've not restated 2018 results on an IFRS 16 basis, due to its complexity. But we have provided for you some illustrative comparatives. H1 '18 is, however, restated to exclude Plumbing & Heating, as is required by the relevant accounting standard. And finally, we've redefined how we measure free cash flow, so as to better reflect the operating cash generation of the business. We, therefore, included all capital expenditure, both maintenance and investment CapEx, but have excluded freehold transactions, purchases and sales, as we view these as a financing decision.

So turning to the key financial highlights. It's been a good start to the year with 6.9% total sales growth or 8% growth on a like-for-like basis with our businesses demonstrating outperformance in their markets. Adjusted operating profit, excluding property profits was GBP 189 million, an increase of 18.1% on a comparable basis. Adjusted earnings per share were 19.9% higher, 50.1p on a comparable basis and the return on capital employed increased by 80 basis points to 9.8% on a comparable basis, driven by both strong profit growth and a disciplined approach to capital allocation.

As noted on the slide, we've recognized adjusting items of GBP 127 million. The vast majority of this amount, GBP 111 million, relates to a noncash write off of IT investments related to the ERP program. This is because it no longer meets the strict criteria under the relevant accounting standard. John will cover the decision process around that and the outlook for our future IT investments in more detail later.

As I mentioned, like-for-like sales growth in the period was 8%, growth in Q1 was 11%, aided by a soft comparator and growth was 5.2% in Q2. Interestingly, if you look at the table on the bottom left-hand side of Slide 8, you will see that on a 2-year basis, like for likes were more even with 9.1% growth in Q1 and 8% growth in Q2, giving an overall like-for-like for the half on a 2-year basis of 8.2%.

Like-for-like revenue growth was led by volume, 6.8% volume growth in the half. In the merchanting segment, volume growth was 4.6% and cost of goods inflation was passed through. Toolstation, again, saw excellent growth from both mature branches and recent openings, while Wickes delivered recovery across both core DIY and the Kitchen & Bathroom showroom business.

So moving on to Slide 9, operating profit. I have broken out the drivers of the GBP 25 million growth in adjusted operating profit in the period. Firstly, the strong volume performance led to GBP 55 million growth in gross profit. Overheads on a net basis increased by GBP 26 million in the half. The vast majority of the increase is driven by investment, particularly the expansion of the Toolstation branch network and to a lesser extent investments in branch and sales staff in Travis Perkins, which has helped drive volume growth ahead of the market.

We delivered GBP 21 million of cost savings in the half, and I'll return to this topic in more detail on the next slide. These savings helped us broadly offset inflation headwinds, in particular labor costs with increases related to national living wage and also pensions auto enrollment.

Property profits were GBP 4 million lower in the half, which is driven by the phasing of completion of transactions compared to 2018. We still expect to deliver around GBP 20 million of property profits in the year on an IFRS 16 basis.

As you will recall, we delivered significant cost savings in 2018, in both Wickes and TP. The annualization benefits from these savings in the first half is around GBP 15 million. Remember, these savings were achieved in H2 '18 and do not form part of the GBP 20 million to GBP 30 million savings we announced at the Capital Markets event. Of that announced GBP 20 million to GBP 30 million savings, we've now completed actions that will deliver GBP 10 million of annualized savings, of which GBP 6 million are included in the first half results.

This sets us on a path to take the overhead sales ratio down further in the year to around 23%. We're also working on a plan to fully mitigate stranded overhead costs associated with the disposal of the Plumbing & Heating businesses.

I'll now turn to performance by reporting segment starting with merchanting. As I mentioned earlier, volume growth was 4.6% reflecting market share gains and driving the like-for-like sales growth of 6.4%. In TP, like-for-like sales grew by 5.2%, demonstrating outperformance of the wider merchanting market. Our specialist businesses continue deliver strong revenue growth, despite some signs of slowing in some end markets.

Adjusted operating profit growth of 5.3% to GBP 140 million was a little ahead of the growth in sales. This reflects the benefit of volume growth, pass-through of cost of goods inflation and cost initiatives helping us to offset overhead inflation and the additional investment in branch teams, I mentioned in TP.

Toolstation demonstrated outstanding revenue growth of 23.1% and 17.3% on a like-for-like basis. 21 further branches were added in the U.K. in the half, and their performance is exceeding our expectations. The like-for-like figure benefits from both strong performance in the maturing branches and the extension of the range, both in branch and online. Adjusted operating profit and margin, both grew despite the step-up in branch openings in the period. H2 will see further growth in openings with all sites identified and an overall target for the year of 60 openings.

In Europe, we continue the expansion of our Dutch footprint with a further 10 new branches taking the total to 42. Like-for-like revenue performance in Holland was really strong. The French trial continues to be encouraging, and we've opened the first physical branch in Belgium.

So turning now to the retail business in Wickes. Like-for-like growth in the period was 9.7% with total sales up 8.9%. This was a strong recovery following a very difficult first half in 2018. Growth came from across the Wickes business, with core DIY sales benefiting from a strong, clear and well-balanced trading plan, the addition of new ranges and improvements in product availability.

Kitchen & Bathroom showroom deliveries were strong throughout the half and the order book remains encouraging, despite subdued consumer confidence. Adjusted operating profit grew by GBP 17 million or 48.6% to GBP 52 million. This excellent recovery reflects both the strong trading performance and the well-controlled cost base, following the significant cost-reduction activities in 2018.

The 200 basis points improvement in EBITA margin of 7.5% reflects the operating leverage from improved volumes. While John will cover the proposed demerger in more detail later, I did want to highlight that we've made excellent progress on making the Wickes business more stand-alone, following similar principles and processes to those that we've used for the separation of the Plumbing & Heating operations.

As I mentioned earlier, we've updated our definition of free cash flow to better reflect the operating cash generation of the business. So the definition now includes both maintenance and investment capital expenditure. And as I said, excludes freehold transactions as these are a financing decision. On this basis, free cash flow generation improved versus H1 '18 despite a significant investment in inventory of a further GBP 50 million, ahead of the anticipated Brexit situation in March.

We've largely maintained this inventory position in order to protect customer supply in the event of a no-deal Brexit later in the year. As you all appreciate, it's difficult to predict at this stage what the year-end position will be, but we continue to act in the best interest of protecting customer service.

So looking at the group's capital expenditure on Slide 15, as we guided in December 2018, we're now beyond the peak period of investments with base CapEx over GBP 30 million lower than H1 '18 at GBP 51 million. The reduction has been achieved despite continued investments in the Toolstation estate, and is driven primarily by fewer store resets being required in Wickes.

Maintenance CapEx was modestly lower due to an H2 weighting on fleet renewals. We are maintaining our full year guidance for base CapEx spend of GBP 110 million to GBP 130 million, excluding freehold activity. It was a quieter period on the property front, as I said, due to the phasing of transactions, with both fewer purchases and fewer disposals completed in the period. We do, however, have a number of transactions we expect to complete in the second half.

As you are aware, balance sheet presentation has been heavily impacted by the application of the new lease accounting standard. Now, we have reported lease-adjusted metrics for a number of years. And whilst these are not directly comparable to IFRS 16 measures, they are broadly consistent. I think the key message is that the balance sheet remains strong, and is expected to continue to strengthen with strong cash generation from the group and lower spending requirements.

So before I hand over to John, just a word on outlook for the year. Despite the long-term fundamental drivers of our end markets remaining robust, I don't think you will be surprised to hear me say that the continuing political uncertainty is making it difficult to forecast market conditions in the near term.

Whilst we've been encouraged by the outperformance across our businesses in H1, this was against a soft trading comparator in H1 '18, and the comparators do strengthen in H2. The group's key lead indicators remain very mixed, and we maintain a cautious view of the short-term market outlook, although we do remain confident in making progress across 2019 as a whole.

Thanks for your time. I'll look forward to taking questions later and hand over to John for the operational review and strategic update.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [3]

--------------------------------------------------------------------------------

Thanks, Alan. Good morning, everyone. Let me thank Stuart for his kind words early on. It clearly is a sort of an emotional period. And let me take the advantage of the situation [of, in fact], welcoming Nick Roberts to the business. We've worked together now for sort of 4.5 weeks, fairly intensively as you'd imagine with the handovers and Nick, you've been a delight to work with and I wish you absolutely every success. I know you'll do well.

When we presented the Capital Markets Day back in December, we always knew it was going to be a busy '18 months and I'm delighted with the progress that the teams have made during this period as outlined by Alan earlier. We've made really good strategic progress on our strategic aims. I'm particularly pleased with the development of the merchant organization under Frank Elkins, which is trading really, really well. This whole area of simplification has moved forward nicely with us dismantling the divisional structure in the early parts of the year.

What a difference a year makes? The Wickes performance over the last 12 months has been truly outstanding. We've always believed that the business is competitively advantaged against its sector and it's trading extremely well. We have a new management team there with David Woods, who is the new Chief Executive. And Julie Werth is the new CFO, both really adding to the depth and strength of the management team.

And we'll touch on the disappointing delay in this long journey of upgrading our IT capabilities. This was a slide we used at the Capital Markets Day, and I'm really only using it in terms of refreshing our memories of what we said. 8 months, it feels a lot longer to me, actually. We've always believed the long-term drivers for our sector remain strong. And clearly, the short term is moving around. We were focused on the 29th of March as we came into this year, obviously, the uncertainty has moved to the 31st of October.

As we look back over the last 5-year period that I've been Chief Exec, we've grown the group, but sadly we did create some complexity in that. So when we presented last December, there were 2 really strong themes that -- the first one being around our purpose and that being focused on the trade and the trade customer and the other was to do everything to simplify the group.

The areas that we were sort of using as measurement, we're going to be driving outperformance, which I think, with the numbers we've delivered in the first half, gives us good confidence that we're making progress in that. This lean cost structure is a journey, but again, I think we can demonstrate some really good progress in that. And the disciplined capital allocation, which Alan showed, we're in a really strong position on all those 3 measures.

And forming the trade merchant organization under Frank Elkins, there were some certain characteristics that's set, I think, across all the businesses in that organization.

And I would really stress, given it's my last presentation, the importance of thinking and acting locally in merchanting. And we're a business-to-business organization and trading is very different than that of a retail or consumer-type business.

I think we should do everything to make it easier to do business with and really be focused on that. And a phrase coined by Kieran Griffin, who took over the green and gold Travis Perkins business earlier this year, he talks around if it matters to a branch manager, it matters to him. I have sort of plagiarized that and talk around if it matters to the branches, then it matters to us in the center.

Those 3 areas, I think, will hold us in extremely good stead as we go forward. The other sort of sub-bullet points, I think, are really important. The convenient branch location is more around the Travis Perkins brand. We know if we get good science, with good profile, well laid out that, that is an advantage in any of the catchments that we operate. This whole area of making it easier for branch managers has really gained momentum.

You can pull that up first. Thank you. And I passionately believe being an old merchant that actually a manager having an influence in the range of products that they have to serve that local market and having the authority to tailor-make a pricing structure for each individual customer is vitally important to being successful.

Over my years with the business, the companies that have the best relationships with the customers, surprisingly trade the best and being focused on account management and relationship management is critical. And when I talk around improved delivery proposition, I talk about keeping a promise and merchanting is no different. If you have a builder on-site, if you've promised to deliver it on Thursday afternoon, it's damn important that you do that.

And that leads through to actually helping the customer through sort of digital development of giving them visibility of where the product is and when things are going to happen. Putting the manager at the heart -- I've talked about a little bit in more depth, at the heart of the business is proving really positive. And the mindset that the center is there to serve the branches, not the other way around I think is a really important point. Keeping things simple and clear and communicating as well as you can without doubt helps in terms of the developing of the business.

If we look directly at the Travis Perkins brands, it goes without saying it is the biggest business in the group and it's critical that Travis Perkins is a brand to develop and grow and be successful. It is the evolution of revolution, it's been around a long time and been successful. It is -- it needs to be a customer-led proposition with the customer at the heart of what we're trying to do. And it's not as if we've got a 0 sales culture, but I think businesses that improve their sales culture and a stronger sales plan will always do better in our sector.

So we are building on strong heritage. And we've got a really strong culture for looking after the customer. I've always been pleased with our operational excellence, but all of these areas can and will be improved. And as you have seen over the last 5 years, the development of CCFP line and BSS under Frank's leadership, it is replicating some of the focus that those businesses have had and transferring them through Kieran and his management team into the TP business.

When I talk about targeting the best builder in town, I talk about catchment by catchment. And there are 10 to 15 great builders, they've got their boards outside, they're never short of work, they use the best materials, they're not as bothered about price, they're more bothered about service, and they are looking for a deep and meaningful relationship with a merchant. The merchant becomes the full emergency service to their customer and -- behind the police, ambulance and the fire, and they're really embedded in that customer's mind. If we target those and are successful, other customers gravitate towards the merchants that are supplying them.

And all of the stuff around having deep understanding of what they want, but it is more importantly to bespoke the service to them. And the only way you can bespoke that service is by the branch manager really engaging with that customer. I talk around the deepened and wider branch stock, often it's around confidence in the customer but actually knowing that they can actually turn up at the branch and get what they want is -- it proves to be much more successful.

And again, sort of building on that sales culture, it's very much around aligning the external sales effort with the branch internal effort and making sure that we're aligned, and communicating with the data and what customers want and when they want it.

As I'm sure you'd expect, I've had a bit more time this year to wander around the business and catch up on a lot of the branches, and I've been particularly focused on Travis Perkins on the green and gold and these are sort of my observations. I've seen far better engagement from the branch manager community, much more confidence and a visible sort of reaction to Kieran's leadership in terms of the tone he set in. And we're starting to see that in the early stages come through in our numbers.

I talk about authority, information and localized decision-making because I do believe they make the difference. I talk -- I've lined -- put their streamlined approval process of pricing agreements in job and that's arranging customer special arrangements. And I'm not pleased to say that on some occasions it needed 8 authority levels to get a customer agreement authorized. That's now down to 2, the branch manager and their boss. And clearly, this is now speeding up decision making and making things much more, more easy to do business with the customer.

And we are trialing much more information to the best 100 managers we've got across the business with a view of extending that out as we understand how it's used. But the keyword that I hear now more and more across the business is trust the managers to make good commercial decisions. We've got good visibility of what they're doing, but don't overmanage them, set the framework and trust them to make good decisions.

We talked around best builders in town and the right stock in the right depth and the right breadth, but it is about getting back to trading catchment by catchment, customer by customer, rather than blanket central dictate in terms of the marketing and sales -- direction of sales.

Often overlooked by analysts and investors was our specialist businesses over the last 5 years. As a division, I think, Frank did a fantastic job. On the left-hand side is I'm sort of talking around the overall characteristics that exist within specialist businesses. They -- because they're specialists, they tend to attract and target large customers, large customers tend to be demanding, and they are seeking higher levels of bespoke service. And I think that's where the businesses in that area have responded really well. And these tailor-made propositions that fill customer requirements and particularly pleasing that we've driven an agenda of being a low-cost to serve business, therefore, we can drive good volumes and get good returns on capital and earnings.

The probably best example that I can give is Keyline. It has moved into, from my mind, a second rate merchant business into a fantastic specialist business in the last 10 years. And it is now clearly for me the sector leader in heavy civils and drainage products. It targets large customers really successfully. Not often picked up, but over 90% of its business is delivered. It is truly a distribution business and not a merchant. Its branch locations are not necessarily needing to be convenient, they need to be low cost, often out of town and driven more on stocking products for distressed situations when the customer needs products faster than when the manufacturer can deliver it.

So we -- Alan talked around the write-off of our computer project, ERP system, that we internally call Momentum. I'm using the slide, again, that we used in the Capital Markets Day back in December. And I just want to sort of remind people where we were then and where we are 8 months on. The current merchanting systems are old, and we've always called that out, they're north of 35 years and I was part of the team in 1986, that installed the original platform.

We cover most of the merchant businesses. So this does not impact Toolstation and in the mind, it doesn't impact Wickes other than its financials. They're stable, they're pretty robust, but they're highly complex and clearly limited in functionality. But I would sort of point to the fact that CCF and Keyline have operated off the same system and to the same period and been highly successful. And for our point of view, we clearly want to give our businesses, our colleagues, our customers the best systems possible.

During this period, we undertook a really, for me, delicate and important task of separating our Plumbing & Heating business. And on the 20th of May, it sits on its own computer system, which is a dead replica of the IT system that, obviously, CCF and Keyline operate with now.

That task was not to be underestimated, it was a really important step in separating or in the disposal of Plumbing & Heating and the teams did a great job with it. We're well on the way to separating the Wickes systems, which we would expect to complete before the end of this year, but we do have a complicated ecosystem with up to 400 applications, all actually serving the trade merchant businesses.

We took the decision in late November to delay the deployment of the new ERP system because of the challenges that we were facing. 6 or 7 months on, we're still facing those challenges. And as Alan explained, the accounting standards are extremely high. Therefore, we had to write off the whole project of GBP 111 million, which is clearly a disappointment and of deep regret. However, it was unequivocally had to happen because of the accounting standards.

As we look forward, what does that mean for the merchanting systems? Our systems operate and they operate well. And any major transition on an ERP level is without -- is not without its risk. And often, when it goes wrong, it can destroy a business so the decision to not deploy, I think, in my mind, was right, is right. We are embarking and working hard to improve and modernize the ecosystem, the IT technical system that we operate the business on today, effectively with a view of improving its performance and resilience for the future.

We have a high number of customer-facing and back-office applications as I've outlined and our aim over the coming period is to streamline those applications and processes to give us faster and better data-driven decision-making. There is every chance that we will move now to a lower risk modular deployment rather than a big bang ERP approach and focus on our core transactional and stock systems initially in that program.

What does that actually mean as we step all the way back? Well, the overall plan is likely to take 18 months longer than we would have anticipated and signaled back in December. It's delayed, not canceled. The cash impact, which I'm sure many of us are interested in, over that period will be not materially different than expected because we are operating our overall cost to serve of IT on a lower level as we move through this modernization program. So the message for us it's going to take a little bit longer, but overall, the cost is not going to be much different.

Okay. Moving on to Toolstation, which Alan sort of highlighted. It was a fantastic period in -- under James Mackenzie's leadership. Simply this is a lowest-cost, best-value, best-service model in the sector and I think it's demonstrating that with its overall performance. It's got price leadership, and it's learning and developing smarter sort of marketing and promotional techniques to drive footfall. The team has introduced 1,500 new products and introduced 20 known brands to underpin its trade credentials. It's driving good network expansion at 21 stores, and we're still targeting 60 for the full year.

We are investing in its digital and IT side, and we've released a new platform at the end of last year, and we're seeing our click-and-collect growth grow 80% in this period. And ultimately, as it underpins this for me, is the strong service culture and drive and we monitor and measure positively a higher and growing Net Promoter Score.

With Wickes, we signaled quite clearly that what our purpose was as a group in December, and clearly at that time our overall trading performance would not have been right for us to signal any corporate action.

So that we made it very clear that the aim was to improve our performance and turn the business positively and to grow. That as you can see in the first half of this year has been extremely positive. We've maintained the value leadership in that DIY shed market. And again, we've strengthened our promotional activity with an aim of driving our footfall.

I think sometimes missed is the overall balance of our customers in Wickes, where we broadly have a third trade, a third do it for me and a third DIY, and that I think substantially helps the business in the sector that it's operating. We signaled last May a significant cost-reduction program at the center that was executed extremely well and has held it in good stead as we've gone through this trading period. It's got a compact 240-ish store network with the footprints of those still smaller and lower cost.

It's got, I think, a sector-leading Kitchen & Bathroom offer where now more than 50% of our kitchens that we sell we also go into the customer's home and install them.

And as you would expect, with a consumer-facing business, we continue to invest in the development of digital proposition, online range is expanding, and we've developed a much smarter delivery fulfillment system from the store rather from a delivery hub.

The rationale, as we said, about demerging was well signaled in December. We believe Wickes is a well-positioned stand-alone business, with a clear competitive advantage in the market it operates.

It also allows us to fulfill the strategy of having the Travis Perkins business focused on trade and trade customers.

Our aim is to demerge the business, all things going well by the end of -- the first half of 2020. As you would expect, there's been a lot of work going on behind the scenes to enable us to make this announcement with work streams already full -- in full flow, including the separation of the IT. But we've also instigated demerger work streams, including obviously the important areas of finance, governance and the legal and regulatory side.

So we're very confident that we can complete this, and now is the right time for us to announce it.

So my last slide and my last presentation as Chief Exec, and you're not going to expect it to be downbeat, are you? I genuinely believe the team has done a fantastic job in the last 12 months. Building through to the Capital Markets Day was really important and then we've made some substantial progress on the strategic aims.

I'm very fond of the P&H business, but it is the right thing to do in terms of disposing it. And Andrew Harrison and the P&H team have done an outstanding job so far, and we're still in -- and with the sale process under way, we're still positive or confident of disposing of it before the end of this year.

The Wickes recovery, I think, is truly positive and allows us to announce the demerger. Our trading across merchant businesses is absolutely solid, and it's good to see the TP green and gold returning to market share gains.

So progress in 2019. I think as we go forward, it is a little bit more of the same. I think Frank Elkins and the teams have done a great job informing the Trade Merchant Organization (sic) [Trade Merchanting Organisation]. A lot of the hard work is done, but still there's more to do as we go forward. And I -- probably my biggest legacy, if I'm allowed to say that, has been the -- is the quality of the merchant team that's actually installed at the moment. It's the best team I've ever worked with and I think holds us in good stead as we go forward.

I think you can't be anything other than delighted with Toolstation's progress. And I think again, I think the stage is set for it to continue to progress really well. And this whole area of simplification and having a leaner cost base puts us in a really good stead for the future.

So on that, no pressure, Nick. We'll open up for some questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [2]

--------------------------------------------------------------------------------

We're going to get you a mic, sorry.

--------------------------------------------------------------------------------

Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [3]

--------------------------------------------------------------------------------

Robert Eason from Goodbody. A few questions. Just on the merchant side of the business. Can you just go through like kind of the drop-through from sales down to profits and the strategy that you're pursuing there?

And maybe if -- asking the question in terms of what are you doing with gross margins to attract that market share gain, what is the strategy going forward given that markets, everything else being equal, could get a bit tougher in the coming months? So just the whole kind of drop-through in that business, especially just given the strong top line performance.

Alan, in your remarks, you were talking about the demerger process of Plumbing & Heating, and you used the words stranded costs. Can you just give us any guidance on what the scale of those stranded costs could be? And I'm assuming it's on top of the GBP 20 million to GBP 30 million that has been highlighted for a number of months.

And my last question, and it's probably been led by someone else who has reported this morning, so that's the background for this comment, they talked about softer conditions from the merchants in recent weeks, and it was Ibstock, the brick manufacturer. So my question is can you just give us a bit more flavor on the recent weeks in terms of trade for Travis.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [4]

--------------------------------------------------------------------------------

How much information do you want to give him, Alan?

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [5]

--------------------------------------------------------------------------------

Probably less than you do.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [6]

--------------------------------------------------------------------------------

Yes. Exactly. Alan could answer that then.

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [7]

--------------------------------------------------------------------------------

Just let me start with some recent trading. We certainly saw the market slow a little in June. But as I've repeatedly said, this has been an extremely difficult period to understand when you look compared to prior year: January, February '18 started well; March, April, a complete disaster; May, June, heat wave. We saw a bounce back with merchanting growing 11%, 12% during May and June.

So it's been a little difficult to navigate that. That's why we focused on those 2-year like-for-likes and what we've been talking about and the fact that we had seen 8%-or-so 2-year like-for-like if you look through that period.

So we haven't seen any different during July from that trend that we're already seeing on a 2-year sort of basis.

So I think there are indicators that the market is softening. Whether that is due to people having had a bit more stock and a bit of destocking, I've seen some people talk about that, I don't know. Whether it's people worried about where next for the economy, the housing market still being quite slow, not clear. I think that's why we've sounded the note of caution for the H2 outlook. So that unknown event that we have around the 29th of March has just moved out to the 31st of October. I think it would be really heroic for anyone to try and give solid guidance around that at this stage.

Moving on to the point about the stranded costs. It was more in connection with the P&H disposal than a demerger that I was talking about, but you can imagine the same thing goes when we get around to the Wickes demerger.

Let me give an example of something that we mean. So when we report our central costs, you see around GBP 30 million to GBP 35 million of remaining plc-type costs which is not allocated to a segment. However, we do run a number of shared services across the businesses. So in our Northampton office campus, we are providing an accounts payable service, for example, to both P&H and Wickes.

So we're putting teams locally in the businesses so that we can eliminate the risk of stranded overhead for the people there. Sometimes, we need to reorganize slightly the way -- the shape of the teams to make sure that we don't leave any stranded overhead behind as we do that.

The second element is we're still -- if you do nothing, we'd still be operating the same footprint within the Northampton campus because we have so many thousand square feet and we still got those offices. Therefore, once we get to the end of this process, we've got to be agile about making sure that we shrink down the foot space -- the floorspace that we're operating from so that we can ensure that we have mitigated any risk of stranded overhead.

So there is a plan around that. Those costs will come out on top of the GBP 20 million to GBP 30 million. But on a net basis, think about net GBP 20 million to GBP 30 million of things that we're taking out and the fact that it's just something that we've got to do to make sure that we eliminate the risk of stranded overhead as we go through the process.

On your first question, Robert, the drop-through from sales to profits, what we're doing with gross margin, I think we said previously unashamedly what we're interested in doing is growing the earnings as a merchanting business. Now over time, that may mean a slightly different shape. So we have, as you know, we -- some of the areas where we score weakest when we talk to customers around pricing consistency and price perception.

So we've been addressing that over a number of years. We'll continue to do so. We think we can more than make that up by covering the -- any risk of gross margin dilution by getting a better amortization of the fixed-cost base. So we've got a certain amount of overhead. This is a fixed-cost sort of business, the trucks, the branches. You've got to make sure that you amortize that cost. If you don't grow your volume, you can't amortize the cost.

So what drives this is absolute operating profit delivery and growth in the business, and then trust the operators to know the best way to do that. So if you incentivize a branch manager, a regional director, the regional managing director in the right the way, they will manage that margin mix overall, which they've done successfully in the past.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [8]

--------------------------------------------------------------------------------

No. Absolutely. You okay, Robert? Good. Good. Go on, Howard.

--------------------------------------------------------------------------------

Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [9]

--------------------------------------------------------------------------------

Howard Seymour from Numis. Three from me, if I can, please, all in different areas. Firstly, Alan, you alluded to on the specialty side of things, the end user markets being a bit weaker. Again, I suppose the comment is, is that across the piece and [as you gained] in certain areas and towards the end of the period.

Secondly, the price leadership on Toolstation. What we have seen in specific is the like-for-like's still growing but at a lesser rate. Just wondering if you're starting to see any response to your price leadership from them in terms of pricing, if they're getting more aggressive on pricing.

And thirdly, 2 smaller businesses. Just thought process on those, please. Benchmarx, we just saw there's a couple more depos there but not many. And also Tile Giant because clearly, that is in the retail business. And I'm assuming when you talk about demerging Wickes that's just Wickes and not necessarily Tile Giant as well.

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [10]

--------------------------------------------------------------------------------

So on -- just knock the Tile Giant one on the head. The demerger is just Wickes. So we still have the Tile Giant business there.

In terms of the numbers for the avoidance of doubt, you can get the statutory accounts for Tile Giant from Companies House, around GBP 50 million of revenue and a very small profit contribution to the group.

On the specialist end user markets, it's not across the piece. I think you know there are -- that within the drylining market that are impacting CCF, there are currently capacity constraints in the market. So we've spoken about this at -- in our Q1 trading statement. The manufacturers have got an allocation process in place which is creating some restriction on the growth in that business at this stage.

If we talk about end markets, I've been most concerned about commercial and commercial RMI as the areas where we're seeing more slowing. I think the housing market, new house build is well controlled, and I think infrastructure remains buoyant. So I -- for those businesses, I think it's set fair, but there are some indicators where we could see the market slow a little, particularly around that commercial RMI piece.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [11]

--------------------------------------------------------------------------------

On the price leadership, I'm always quite concerned where you -- where prices sit between people. We should never forget what Bunnings did when they came in and were so reckless.

We track the differential between Screwfix and Toolstation, and it's been pretty consistent now, Howard, for a number of years. But the last thing you want to do is provoke a price war. We are a lower cost to serve business than Screwfix inherently. And therefore what, we don't want -- we want to preserve margin, not just destroy it.

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [12]

--------------------------------------------------------------------------------

So then on Benchmarx. So I think we're quietly pleased with the progress we're making in Benchmarx. We had a good like-for-like in the first half. We've got a new MD in the business, John O'Keeffe, who was previously Commercial Director for General Merchanting. I think he has made strong strides already with the business. We will be looking to continue to grow the footprint of the business over time, but John's rightly taking some time to understand what he's got and work out the plan as to how he goes about that with Frank.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [13]

--------------------------------------------------------------------------------

So if we go Ami first, and then we'll come over to you, Aynsley.

--------------------------------------------------------------------------------

Ami Galla, Citigroup Inc, Research Division - Senior Associate [14]

--------------------------------------------------------------------------------

Ami Galla from Citi. Just 2 questions from me. First is on share gains in the merchanting division. If you could give us some color as to the mix of customers where you're actually making more progress or whether it's large or midsize or smaller customers here.

The second question was really -- could you give us some color on what was the amortization on the IT spend that was going through the P&L last year? And should we expect that to be reversed this year given that you embedded that cost?

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [15]

--------------------------------------------------------------------------------

Okay. So if I take the sort of mix for the -- well, the mix merchant, the Travis Perkins brand. We have been marginally more successful with the larger customer. But clearly, the focus is on the balance. And the best builders in town, as I call them, are normally the midsized customers, so that's our target area. But over the sort of 9-month period, we've made progress with them all but marginally better with the larger customers.

Alan, do you want to take the one on IT?

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [16]

--------------------------------------------------------------------------------

Yes. So on the IT, the asset was still in the course of construction, so it was held on the balance sheet. So we haven't actually started the amortization. So there's no underlying P&L impact.

--------------------------------------------------------------------------------

Stuart John Chambers, Travis Perkins plc - Non-Executive Chairman [17]

--------------------------------------------------------------------------------

We're going to go to Aynsley.

--------------------------------------------------------------------------------

Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [18]

--------------------------------------------------------------------------------

Aynsley Lammin from Canaccord. Just 3 questions, please. Firstly, wondered if you could comment on any changes you've seen in the competitive backdrop, particularly your reaction to competitors for the changes you're making in the merchant side.

Secondly, on the Wickes demerger, just a bit more kind of background to the rationale of going down the demerger route and not selling the business. Have you tried to do that? Lack of buyers there? Or any color you can give?

And then thirdly, on obviously some kind of rumors that there may be a cut to stamp duty at some point. If it's -- gets through, what would be your view on that? Would you be -- do you think that'll have a big impact?

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [19]

--------------------------------------------------------------------------------

So in terms of the backdrop, it is really difficult to see any major trends. I think the markets remain, in my mind, quite benign. It's because it's catchment by catchment, Aynsley, and we don't look at it in terms of geographical sort of regions or national. So not seeing anyone misbehave. I think everyone's sort of quite sensible at the moment now we've got Bunnings out of the market.

And did you want to pick up on...

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [20]

--------------------------------------------------------------------------------

I'll take Wickes. You do stamp duty.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [21]

--------------------------------------------------------------------------------

Stamp duty definitely took the London market of -- the shine off the London market. So you'd hope any reduction in stamp duty would have a positive effect on housing transactions. And as we've always said, the 2 big drivers for our RMI have been housing transactions and consumer confidence. And anything that helps those 2 lead indicators, I think, will help our business.

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [22]

--------------------------------------------------------------------------------

Aynsley, on -- so on the rationale around Wickes demerger and then picking up on demerger versus sale. I think the first thing to say is that the Board reached its decision as a follow-on from what we'd said at the Capital Markets Day in December. So we talked at the time about creating optionality for Wickes.

Importantly, we said we wanted to focus on the trade businesses going forward. So the fact that there will be some formal separation, however that was delivered, I don't think is particularly new news or shouldn't be new news at this stage.

Our rationale is that Wickes has a very different strategy that it's pursuing. It's a retail-focused business. And we want the Wickes business to allocate capital in its own way just as we want to allocate capital within the remaining merchanting business and Toolstation in the right way. So different priorities around the capital allocation will be a key driver.

We will always be minded by acting in the best interest of the owners of the business, the shareholders. And the decision we've taken to pursue the demerger is what we think is in the best interest of our shareholders.

We've considered the disposal route, but we think that given the recovery under way in Wickes, in the longer term that would deliver far more value to shareholders than a quick sale, particularly in the context of U.K. retail at the moment, the recovery that the business is going through and whether you'd see full value via that route via the demerger. So I'm very clear that the demerger is the best way forward.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [23]

--------------------------------------------------------------------------------

Stephen.

--------------------------------------------------------------------------------

Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [24]

--------------------------------------------------------------------------------

Stephen Rawlinson, Applied Value. Three from me, if you don't mind. Firstly, on the issue around Wickes. Could you just tell us whether that has any impact on the manufacturer rebating structures either in Travis Perkins or in Wickes?

Secondly, part of the presentation refers to increased credit lines to the builders. I mean obviously, it's tricky time in the building sector, and we're all aware of what's going on at [Kier] and what has been going on at Interserve. Can you just tell us how you might insulate yourself from bad debts that might occur over the next 6 to 12 months with regard to those increased credit lines?

And thirdly, on the appendix on Page 40, the Q2 sales in merchanting dropped off -- or the increase -- there was an increase in sales, but it dropped off quite sharply. Just talk a little bit more in depth about that. I know we've covered it already, but the tail-off in merchanting in Q2 was quite sharp, down to 2.9% growth compared with 10% in Q1. Can you just talk in terms of the volume and price/mix there and a little bit more about that, please?

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [25]

--------------------------------------------------------------------------------

So I think the Q2, Q1 is answered really against '18. So in '18, we obviously had a really low comparator because of the beast of the east. And as we came through March, May and June, they were very, very strong. What Alan pointed to, I think, if you look at the 2-year like-for-like, we were at 9% in Q1 and about 8% over a 2-year period. So the shape was different, Stephen, but it was more to do with last year was the most bizarre sort of -- it was 2 months -- January, February was its own little period, March and April and then May and June. It's just the way the numbers come through. I think read it -- we read it through on a 2-year like-for-like.

Can I just deal with the rebate side? And yes, it's all pretty sensitive, this area, and I would put it down to our excellent commercial negotiators but that we will do the best we can in terms of the synergies that potentially exist. But at the moment, manufacturers are being relatively supported.

--------------------------------------------------------------------------------

Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [26]

--------------------------------------------------------------------------------

On credit lines?

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [27]

--------------------------------------------------------------------------------

Yes. So the -- your comment is about higher debtors overall, trade debtors just because of the growth in credit sales in the business. It's not about -- so that's growing in line with the growth in the merchanting business, not extending further credit lines or credit towards the customers. The way in which we manage it is looking across all the business, at total exposure, and then we carry credit insurance on specific risk groups within that as well. So if you were to look in terms of debtor days of sale on the credit parts of the business, which is most of our merchanting, as you know, that's pretty similar days of sale to prior year.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [28]

--------------------------------------------------------------------------------

Any other questions? I've got to go to the wire? Is there any calls coming through from those on the wire?

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

We have a question registered from Yves Bromehead of Exane.

--------------------------------------------------------------------------------

Yves Brian Felix Bromehead, Exane BNP Paribas, Research Division - Analyst of Building Materials [30]

--------------------------------------------------------------------------------

Just 2 questions on my side. The first one is on the P&H. Just wondering, what will you do with the disposal proceeds on that business? And also for Wickes, if it does go next year, is this more of a buyback story? Or could you increase investments elsewhere? And second on merchanting margins. They were flat in H1 because of the mix synergies you have seen. Is this also likely to be the case in H2? Or will cost cutting lead to margin expansion in the second part of the year?

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [31]

--------------------------------------------------------------------------------

All right, pal. That's your...

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [32]

--------------------------------------------------------------------------------

Yes. Yes. So Yves, on the -- first of all, on the disposal proceeds with Plumbing & Heating. We've had for while a target on leverage within the business that's previously been expressed as lease-adjusted net debt-to-EBITDAR. Post IFRS 16, it's a similar calculation, as I was saying earlier. So -- but now, net debt-to-EBITDA from the financial statement directly, we're at 2.8x. That target that we're working towards is 2.5x. So we're very aware that once we reach the target, we'll need to give an update on where we go next. But that is a target that we think is the right level for this business. So I think you can draw conclusions from what I'm saying there.

On the Wickes side, to be clear it's a demerger, so it doesn't necessarily lead to a buyback story or anything like that. I think we've said previously the business is very cash generative. So when you look at the remaining merchanting and Toolstation group, the Travis Perkins, in H2 2020, assuming that we've disposed of P&H and demerged Wickes, that will have a radically different balance sheet shape because there is a fair amount of lease debt within the Wickes balance sheet. So we will come back and have a look at overall what's the right capital structure.

The businesses are very cash generative in that group. So in order to fund their future development, we don't need to use any of those funds from the P&H disposal to reinvest within the merchanting business. We can generate the cash in merchanting and Toolstation that we need very happily from the operations.

On the operating margins within merchanting in the second half, you're right, relatively stable or stable in the first half. I wouldn't expect any different trends at this stage going into H2.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

We have no further questions on the phone lines.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [34]

--------------------------------------------------------------------------------

Okay. Thank you.

--------------------------------------------------------------------------------

Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [35]

--------------------------------------------------------------------------------

It's Paul Checketts from Barclays Capital. I've got 3, if you don't mind. The first is if you look at the retail strength that's coming through from the core DIY side and the kitchens and bathrooms. Could you give us a sense of the split of that and then if you're thinking about how the kitchens and bathrooms benefit is going to unfold over the next 6 to 12 months given the comp? Can you give us a bit of a feel for that?

The next one is every day as well, the pound is sliding. To what degree is that causing you some concerns because of some of the transactional exposure?

And then lastly, I just want to ask you about the ERP write-off. Can you actually explain exactly what went wrong there? And if you're looking at that merchanting system now, how well equipped is it to support e-commerce and the changes that are happening in the market?

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [36]

--------------------------------------------------------------------------------

So if we work backwards. On the ERP, Paul, it is subject to fairly delicate discussions with our provider, and I'd rather not at this stage talk about it. We've declared where we are. And obviously, as we move forward, we'll explain a little bit more.

The delay is about opportunity -- missed opportunities rather than our businesses are trading really well at the moment with the systems we've got. All the investment and what we were trying to achieve was a competitive advantage in our sector. So it does put us back a little bit but not 0 because with the modernization, we can actually get some benefits to come through. So around the delivery visibility, we can still create some digital enhancement to the customers from our existing system. As we go forward, we want a modernized and effective system. So we've still got to address that. But it's a setback rather than completely ruined. And we've learned an awful lot through that process, as you -- but the accounting standards are pretty defined in the sense that they've been structured to write the whole lot off.

Pound exposure, my take on it for what it's worth is that when everyone is exposed to the same criteria, it's painful but manageable. If you remember back to June 2016, as we saw that sort of devaluation of 15%, it affected most people. And it's not helpful because it drives, unfortunately, a bit more inflation into the market. But then, it's really around making sure that we've got good stocks and we've got good trading arrangements.

So annoying -- and then on retail, I think when we talk about those 3 segments of trade, DIY, and do it for me, I can put an argument all 3 have moved forward and not 1 disproportionately.

Alan?

--------------------------------------------------------------------------------

Alan R. Williams, Travis Perkins plc - CFO & Executive Director [37]

--------------------------------------------------------------------------------

Yes. No, the -- within the mix, the Kitchen & Bathroom showroom is clearly one that moves around a bit more. And as each of them around 1/3 of the revenue, it would have been double digit on Kitchen & Bathroom showroom in the first half. We are going into a more difficult comparator as we get into the second half because we had already seen the recovery coming through in H2 '18 of that business and we have a competitor pull out of the installation market. I think we may not have talked enough about the real strength of offering that installation service. We just won yet another award for how good we are at doing the installation, and going to someone's house and ripping out the heart of the house and replacing it out over a week to 2-week period is a pretty major change, as anyone who has been through it will know in the house and living with that. So to go in and create that amount of disruption and do it successfully. If you go back 3 or 4 years, we're maybe installing 20% of them. We're now installing over half, and that continues to grow. So that is one of the bits that we're most proud of with the business. I think customers realize that, and that's why the business performed, so strongly. So John is right, it's a balanced recovery across the portfolio within Wickes.

--------------------------------------------------------------------------------

John P. Carter, Travis Perkins plc - CEO & Executive Director [38]

--------------------------------------------------------------------------------

Okay. One last one? No? Good.

From my point of view, thank you very, very much for all your support, and wish you all the best. Thank you.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's call.

If you missed any part of this call or would like to hear it again, a recording will be ready shortly. Thank you for joining.