Travis Perkins H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 1, 2025

There are 9 speakers on the call.

Operator

Good morning. Welcome finally to the Travis Perkins results presentation.

Operator

For any of you who don't know me, I'm Jeff Drabble. I became formally the Chairman of Travis Perkins on the February 1 this year. So it's been an interesting first couple of months culminating, in today's results. But I'm gonna do a brief introduction and also just make a few observations before I hand over to Duncan who will take us through the majority of the presentation. But then obviously we'll get into Q and A, which I think will be the most interesting once that presentation is complete.

Operator

Oops. Sorry. There we go. So it's been a while since I did this. I'm I'm a little bit out of practice.

Operator

Look, once I started on the February 1, really, I I was working closely with Pete from the moment he joined. And look, we're all very disappointed that Pete is unable to build on the good work that he started in his brief tenure with us. But we he and I had very, very similar views of this business. And look, you'll be tired of us all telling you this because but the group does have incredibly strong fundamentals. It's got a great network, got good people.

Operator

It's got long standing relationships and some good brands. And I can promise you, the vast majority of our competitors in this industry would love to have all the strong fundamentals that we have as a business in Travis Perkins. Having said that, we have this unerring knack of scoring on goals and messing up the strong fundamentals that we have. And over the over recent years, in my opinion, there have been a number of strategic missteps and in particular around about a year ago where we had something of a management void, there were some quite serious tactical blunders which has resulted in us having way too much attrition in our staff. When I look through those strategic missteps or those tactical blunders, look, we can get into Q and A what they specifically were, but they all, in my opinion, have a very common theme.

Operator

And the common theme was there was a lack of clarity of what our business model was and what we were trying to achieve. And actually, I think the culture which existed within the business worked against our likely achievement of that business model. So what does that mean? Look, it's all written down here. It all sounds very MBA.

Operator

Look, what we need is a focused entrepreneurial local business. You win business in this industry on a postcode by postcode basis on a based on relationships. We are a relationship business. We will not ever replace those relationships with digital or the format of our locations. We are not a retail business, and we need to rebuild that trust back into the those core, relationships and that that core entrepreneurial flare out in the fields.

Operator

Having said that, that isn't the only thing we can do. So whilst there has been some strategic missteps, some of the things we've put in place to leverage our scale and differentiate ourselves from a lot of our smaller competitors really do have value. And there's been a lot of work done. I look at areas such as the apps and some of our digital data stacks where we clearly have market leading capabilities. I'm not convinced we have applied them terribly well, and I think there's some some work we can do to join up the dots to make sure that we we get benefit from them in the immediate term, but at least they're there.

Operator

And it would take us a lot longer to build those things than it will to work out how best to apply them. So with that in mind, what do we need to do going forward? Well, look, what we need to do going forward is refocus on the practical day to day running of this business. And I think we've made some good starts in that. We are carrying on work which Pete started.

Operator

So with it by the time we get to Easter, we will have reorganized the business into strong functional leadership with leaders in each of the key verticals within our business. So we will end up with a head of our contracts business with a number of MDs reporting to them. We'll end up with a head of Toolstation, and we will end up with a head of the green and gold merchanting business too. We have refocused the business as of yesterday. We we we launched a series of product initiatives across the business backed by far more flexible, far more immediate, short term bonus plans and sales commission programs.

Operator

And so again, we have just re energized the business and got it back to doing what it ought to do. Culturally, we're working very, very hard on the center, working far more closely with the people out in the field. And there's responsibility in both regards there. The field felt disenfranchised as they saw a number of initiatives taking place over recent years and stopped engaging with the business and stopped engaging with the center. The center got really, really frustrated because it was actually coming up with some very good ideas and things which will take this business forward in the long term and they weren't getting traction.

Operator

And again, what we're going to do and what we're focusing on in the short term is just joining up those dots that already exist. How is that happening in the absence of a CEO? Well, it's happening because what I have been really pleasantly surprised with over the last four or five weeks is the strength in-depth we have around our key leadership group. There's going to be a call later this morning with what we call the key leadership group, which we've been having regularly. And those people have really stepped up.

Operator

And actually, all of the initiatives I've just talked about, they have come up with those initiatives and they're the people who are implementing those initiatives. And so there's any goods going to come of this. I think that level of the organization hadn't been listened to, didn't feel empowered, prior to to all of this change. And now out of necessity, they're doing so and they're doing so well. So when I finally step back and become a chair again, this will have been a somewhat intense induction period.

Operator

But if as a result of that, I know an awful lot more about the business and the next level of the organization has stepped up and taken responsibility, it will create an environment where an incoming CEO will be inheriting the best possible business, going forward. So, look, as I said, I suspect we will cover quite a bit of that again in Q and A, which is the appropriate point at which to do it. But with that, I'll hand over now to Duncan to take us through the financial review.

Speaker 1

Good morning, everyone. So I'm going to cover the usual components of the financial review for 2024. But I want to start off, if I can, just by giving us some overall context for the year. It's clearly been a challenging year from a trading standpoint, but it's also been a year of significant change for the group. Change in action which orientates us more positively from a performance perspective as market conditions improve, but also change that has protected our balance sheet and ensures we retain a strong financial position on which to build the turnaround of this business.

Speaker 1

In Toolstation U. K, we saw a further step on in profitability as we continue to execute our plans to grow that business in line with our previous guidance. In Toolstation Europe, we took the difficult, but necessary decision to close Toolstation France and accordingly are reporting it as a discontinued operation in our year end numbers, eliminating a significant loss from our go forward performance and restating our prior year comparatives as is appropriate. Closing a business in France is not a straightforward exercise. And so I would like to recognize and thank the teams involved internally who have made that happen.

Speaker 1

In Toolstation Benelux, we have successfully repositioned the business from an ongoing growth strategy to a returns focused agenda with a clear focus on achieving sustainable profitability as soon as possible. Again, for context, that has been a million loss and million loss in the past two trading years. Across the business and in everything we do, we have applied more rigor and discipline in how we can generate cash and use that cash and that is reflected in our enhanced year on year cash position and reduced net debt. These efforts have underpinned our ability to partially refinance our 2026 maturing corporate bond through access to The U. S.

Speaker 1

Private placement market in Q1 twenty twenty five on an investment grade basis. However, there is no shying away from the fact that our merchant businesses have continued to underperform versus our expectations. And I'll talk more about that in more detail later. Finally, and as we outlined at the half year back in August, from the 07/01/2024, the group moved the General Merchant, CCF and Key Lime businesses onto Oracle Financials as part of a major technology upgrade. And as a reminder, Travis Perkins has not made any significant investment into ERP technology for over a generation.

Speaker 1

So this was never going to be a straightforward transition. And as is always the case, some elements are progressing well and some others are more challenging. So let me start off with what's going well. The first thing to say is the tech ostensibly works. We've taken the out of the box solution and customized very little.

Speaker 1

We now have a modern purchase ordering system with escalating sign offs. We have a sophisticated stock valuation engine that gives us true weighted average cost of stock. And we are starting to see the benefits of the enhanced data and insights Oracle will give us over the longer term. So what are the challenges? Well, the main ones have been in respect of our financial operations.

Speaker 1

Oracle places a much greater level of checking discipline over the detail required to pay an invoice. If the detail we receive on an invoice differs from the detail of the order we raised, then the order will go into a queue to be manually resolved. And in short, we have accrued a significant backlog of invoices, which has had an impact on our working capital position. And I'll come back to this in more detail. But it's also created frustration for our colleagues on the front line who have to interact with suppliers and customers.

Speaker 1

And I'd like to thank all three communities for their support and understanding as we have made this transition. In response, we've recruited additional resources into our central teams to address this backlog and are working with Oracle and we are starting to see this backlog reduce. In addition, our commercial teams are also actively working with our suppliers to ensure our data sets are better aligned to reduce the exceptions we create in the future. The second challenge is the operating speed and flexibility Oracle gives us in some parts of the business for certain order types. And again, we're continuing to investigate ways in which we can make this more efficient and user friendly for our colleagues.

Speaker 1

In summary, we are making good progress, but these adjustments have been difficult and they're going to remain a key focus for the business in 2025. So coming on to the financial overview. And all of these numbers are represented for 2023 on a continuing business basis only, I. E. With Toolstation France excluded.

Speaker 1

Group revenue was £4,600,000,000 down 4.7% on prior year with adjusted operating profit down 23.2% to £152,000,000 in line with the guidance we issued in our Q3 twenty twenty four trading update back in October. Adjusted earnings per share was 36.6p per share, down 32.7%, reflecting the lower earnings year on year and also the higher finance costs and effective tax rate. Net debt before leases was down 39.2% from £340,000,000 to £191,000,000 and that has driven a slight reduction in leverage despite the year on year reduction in adjusted operating profit from 2.6 times to 2.5 times. Finally, the Board is recommending a final dividend of 9p per share to go with the interim dividend of 5.5p per share making 14.5p for the full year. This payout is in line with the Group's policy to pay a dividend of 30% to 40% of adjusted earnings.

Speaker 1

So let me come on to discussing the trading environment and I'll reiterate some of the things I said at half year. The biggest revenue drivers for us are RMI activity, repairs, maintenance and improvement activity and new house building. Following two years of a cost of living crisis, household budgets are stretched and most major RMI projects will be financed by additional borrowing of some sort. We have remained in a suspended state for some time about the evolution of inflation and interest rates. The path to inflation normalizing and rates coming down keeps being pushed right.

Speaker 1

And at the same time, the geopolitical landscape remains uncertain. Both of these factors play into consumer confidence and risk appetite in making major or significant RMI commitments, and that has remained the case into the start of 2025. From a house building perspective, we have oscillated between one of the highest years for new housing starts ever recorded in 2023 to jointly the lowest along with the GFC year in 2024. Within this context, demand has been significantly impacted and volume share has been heavily contested through price as the competitive intensity has gradually risen, exacerbated by commodity price deflation. And against this backdrop, the self inflicted operational challenges both Jeff and I outlined at the start have put us in a weaker position to respond across all of our merchandising businesses.

Speaker 1

Specifically though, in the general merchant business, this saw us move from a position of holding market share through 2023 and into H1 twenty twenty four and then steadily start to seed share in H2. The next bar reflects the loss of revenue from the net branch closures across the group excluding Toolstation France and which are detailed in the appendix. And the trading day bar reflects three additional trading days in 2024 versus 2023. On the next slide, we've provided the usual operating profit walk year on year and I'll walk through these again each in term. The GBP 198,000,000 for 2023 is the GBP 180,000,000 we reported last year adjusted for Tour Station France as the starting point.

Speaker 1

The gross profit decline is a reflection of the operational performance dynamics I've already referred to on the previous slide and is by some margin the biggest variance year on year. Next is overhead inflation and this is predominantly driven by wage inflation, rent increases and general cost inflation during the year. And finally, the adverse variances conclude with a million lower contribution from property profits compared to prior year. Actions and impacts we have taken to offset these are as follows. Firstly, and as I outlined at the half year, we conducted a detailed review of discretionary expenditure at the start of the year and have maintained a disciplined stance towards this throughout 2024, and that equates to around million saving.

Speaker 1

The next bar is the annualized effect of the restructuring program we implemented at the end of twenty twenty three. As Jeff outlined at the outset with the benefit of hindsight, these changes have weakened our operational another million. And next is the margin effect of the trading day benefit outlined on the previous slide worth around million and then come the two Toolstation bars, the first being the additional contribution from the growth of Toolstation UK and the second being the effect of our change in strategy in Toolstation Benelux. As a reminder, we communicated at the start of last year that we were conducting a strategic review into the Benelux business and announced the outputs of that review at the half year. We considered all options for the business and concluded that given the invested capital to date, the right thing for the group and shareholders was to accelerate the path to profitability.

Speaker 1

It is a far more mature business than France was with 110 stores offering high saturation and coverage in The Netherlands in particular and the customer proposition is more aligned to how the Dutch and Belgian trades already operate. Through a combination of underperforming store closures, central headcount savings, joining a buying group to enhance gross margins and outsourcing our logistics and supply chain operations to a third party, we've managed to reduce the loss by million year on year. And the teams are firmly focused on driving for breakeven and thereafter providing a positive contribution to Group profitability. That then brings us to the million for 2024 in line with the guidance we provided in the Q3 trading update when adjusting for France. On the next slide, we detail the adjusting items we have recorded during the year.

Speaker 1

The first line is a million charge in respect to branch impairments and million relates to the General Merchant and CCF businesses with the balance spread across the other businesses within the group. This is a non cash charge and arises from the application of IAS 36, where the group is required to adjust the carrying value of individual branches on the balance sheet to our latest view of the future discounted cash flows generated from these assets. The second line is a million charge in respect to Staircraft, again non cash and predominantly comprises goodwill. The full breakdown of these calculations and the assumptions used for them can be found in Note 29 to the accounts. Next is a GBP 26,000,000 charge arising from the restructuring activity conducted during the year, including GBP 9,000,000 of dilapidations and other property related items, million of stock impairments and million of other costs.

Speaker 1

And the final two lines reflect central and regional restructuring activity in the year amounting to million and the costs associated with closing 39 stand alone benchmarks branches amounting to million as we continue to refocus our proposition. Over on to the next slide. And I want to talk you through the actions we've taken to enhance cash generation and protect the balance sheet against this challenging trading backdrop. If I walk down the face of the table, you can see the headwinds we faced year on year. The first and most obvious being the lower level of cash inflow arising from underlying profitability and trading operations.

Speaker 1

The second line represents the cash outflows for the restructuring activity in the year and the cost of closing Toolstation France. We estimate around another GBP 15,000,000 of cash outflows to fulfill our remaining obligations for France phased across 2025 and 2026. The next line represents the impact of our first year end on Oracle. I've already talked about some of the implementation challenges at the outset. And since the cut over in July, a supply invoice backlog has arisen, which has seen us which we have been successfully working through since.

Speaker 1

This has seen us prioritize and pay a higher proportion of our suppliers on account because we can and because we value those relationships with a consequent lag in the time it is taking us to collect outstanding debt from some customers and hence the million working capital outflow million adverse to the prior year. As we continue to embed and optimize Oracle, we expect this working capital position to normalize during 2025. And we are already seeing in the first few months of this year that our cash collection rate is running ahead of our sales rate. The remaining lines all represent positive variances to prior year. And I'll start with stock.

Speaker 1

I talked to the half year about the focus we were placing on tighter inventory management across the group, and this has yielded a million lower stock position year on year. I'm really pleased with the way our operational and commercial which was million for the year, below our guidance of million. Which was million for the year below our guidance of million and million lower than prior year. To be clear, this is not a sustainable or desirable level of expenditure for us on a steady state basis. We want to invest in modernizing our fleet, upgrading our state and as Jeff already alluded to, we want to invest in the new tools and technologies that will make us more efficient and deliver a better customer experience.

Speaker 1

But given the current trading backdrop and our commitment to carefully manage our leverage back down, it's been the right thing to do. Finally, we obviously took the difficult decision in early twenty twenty four in respect of the final 2023 dividend to rebase the dividend to the top end of our payout ratio within our prevailing dividend policy. This is not a decision we took lightly. We understand the importance of the dividend to some shareholders. However, in light of the way the financial performance has evolved, the million favorable variance on prior year should be seen as a logical component of us protecting the balance sheet.

Speaker 1

So if I bring those parts together to explain the overall impact on net debt, which is down significantly on prior year on both an including and excluding lease basis. During the year, we unwound an SPV that had historically been used to fund the TP defined benefit pension scheme. On the basis that this scheme is no longer in deficit, we have collapsed the SPV and that has reduced net debt by million. The increase in lease debt arises from sale leaseback activity during the year and the electrification of our forklift truck fleet. So the overall impact of the actions we've taken have seen us deliver a moderate reduction in year on year leverage down to 2.5 times, notwithstanding the significant reduction in year on year earnings.

Speaker 1

And I reiterate the previous guidance I've issued and firmly subscribed to that this group should be operating inside a 1.5 to two times leverage range on a long run basis. So we will continue to maintain a vigilant focus on cash and capital allocation as you would expect. And we continue to review the balance sheet for non core assets and disposals that support this objective. Finally, and for information in 2025, we have successfully started to refinance the million corporate bond due to mature in 2026 with million of U. S.

Speaker 1

Private placement debt secured on an investment grade basis in Q1 this year. This debt has maturities ranging from $20.28 to 2,035 at an average coupon of 6.4%, the maturity and currency profile of which are detailed in the appendix. So let me summarize. On current trading and in merchanting, we have definitely moved out of the aggressive input deflation we were experiencing at the start of last year, specifically on timber. We are starting to see manufacturers price increases coming through and where possible we are seeking to pass those through.

Speaker 1

But the competitive landscape I referred to earlier on means there is limited sequentially improving pricing power at the moment. And therefore, it is best described as pricing having stabilized with volumes remaining in modest decline. By contrast, in Toolstation UK, we've made a solid start to this year and are in line with our expectations. There are some early signs of recovery in some elements of The UK construction sector. For example, housebuilding activity is definitely starting to increase as illustrated by the housebuilders own outlook guidance.

Speaker 1

But overall, there remains significant uncertainty in the timing and strength of The UK construction recovery, especially in RMI. Our focus, therefore, will remain on what we can control. It will be to continue to implement the actions that will rebuild this business, empower our frontline colleagues and deliver a better customer service. From a financial perspective, we'll continue to keep a tight grip on discretionary expenditure and look for further ways to enhance our cash generation. And so I'll conclude with our full year 2025 guidance.

Speaker 1

We expect base capital expenditure to be around million, property profits to be around million and an effective tax rate of around 30% on UK generated profits. And finally, we expect full year 2025 operating profit excluding property profits to be broadly in line with full year 2024 also on an excluding property profit basis. And with that, I will start Q and A.

Operator

We go, Michael, start with the Frontier. That's just a matter. We'll get to everybody.

Speaker 2

Okay. I'll start. Thanks. It's Ainsley Lammer from Investec. I think I've got three questions actually.

Speaker 2

Just first question on recent trade in, kind of you call it mixed trade in. I think you suggest that volumes may be down low single digit type level in Merchanting. How does that compare to the wider market? And if you're losing share still in this year, kind of how quickly can you start to move more in line with the market given the kind of issues you mentioned earlier? And second question, just appreciate some more color on pricing between Toolstation and Merchant in.

Speaker 2

You said some input cost inflation. Is it just more difficult, very competitive in the Merchant side? Interest here a bit more color there to pass those on. And then thirdly, on the implied your guidance, what's the implied kind of loss or is it breakeven in Benelux Toolstation for the 142 this year? Thanks.

Speaker 1

Yes. Ainsley, I'll be a little opaque and potentially frustrating on current trading because we're not far away from Q1 in terms of giving you giving you a bit more color on that. I think on the market share data, look, it's not that robust. So I think looking at it on a kind of month by month basis, we've talked about this previously, is not desperately useful. I think when you look at it across and as I've made the comment in the script about the second half, we had ceded share.

Speaker 1

I think on that basis, we're more confident that it's a robust measure. I'll maybe ask Jeff to comment around how quickly we think we can address that and turn that around and start moving it back. I think on pricing, look, generally in the it's a different split, isn't it, between the two parts of the business. In merchanting where also in the start in Toolstation where it's a retail model, that pricing power has a far greater degree of both control and ability to be passed through because of who the relative competitive set is. In merchandising, it's just it's far more intensely competitive at the moment and any kind of pricing power we're getting is being sort of hardly hard contested in thought.

Speaker 1

And I think your comment around low single digits is sort of right, indicatively, but I'll give you the more detail on the Q1. And then on Benelux, look, I think the market in particularly in Holland is very similar to The UK at the moment. That won't surprise you for me to say that to you. So I think it will be unlikely that we'll get Benelux to an absolute breakeven position for the full year 2025. I would still anticipate we'll still 13 significantly close from that.

Speaker 1

And I think we will be in a place where we're probably on an exit very close to an exit rate breakeven position in that business. It's to say in a very different base and sort of status to where France was.

Operator

In terms of market share, Duncan's right, I'm not sure the data is great. If you look at our data, it probably suggests over the course of the last two, last twelve months, we've lost around about 200 basis points of market share. I would caveat that with some feedback from suppliers who say, no, you're doing yourself a disservice. That's not as bad as it sounds. We have lost market share.

Operator

There's no question about it. We've lost market share because we've had a huge amount of attrition over recent years in terms of our sales force. If I look at the actions Pete started and we've reinforced over recent weeks, that attrition is largely come to an end. And indeed, positively, we're starting to see a growth in our sales force. We're making a lot of tasks for easier out in the field as Duncan said around reinvestment.

Operator

And he's on big financial sums, but how hard is it to get a replacement driver if your drivers are off sick? And the answer is, it was really hard. And guess what? Therefore, we couldn't deliver, and now it's really easy again. And so there are there are a series of things that we have done in the short term, including incentive plans, which I think we will start to see the benefit of through the next quarter.

Operator

Precisely how that works out net in this first quarter, I don't know because we have lost some salespeople and we will lose some sales revenue as a consequence. So I can kind of get my head around what we are doing and why how that will give us positively. There is stuff in the hopper which we've probably still got to lose, and I'm not quite sure how that all balances out. But these this is not rocket science, okay? These are not the Lionel Messi's of sales forces that we have lost here.

Operator

Most of them have a bag of business and they traipse around all the competition, on a fairly regular basis. What we need is stability and focus and a cultural awareness that people in the field, be they location managers or sales force, are important. And I think we'll turn around pretty quickly if we can get the confluence of short term incentive plans paying out with a modest recovery in the market. That change in momentum will change this business very, very quickly. I would reiterate, look, I have been reaching out to people who have left this business and life isn't great anywhere else.

Operator

So let's be absolutely clear. We have a lot of things which are very, very important and we're very, very strong at. And therefore, I would expect us in relative terms to be seeing an improvement within a quarter or two. Now what that means in financial terms will depend on what the broader macroeconomic environment is. But in relative terms, this is not this is basic operational management, which unfortunately has been lost in recent times.

Speaker 3

Arnaud Lehmann from Bank of America. I have three, if I may. Firstly, just confirm that the delay in the reporting is just an auditing issue, and there was nothing flagged specifically by the auditors that generated this delay. Second one for Geoff. I mean, I guess, you're the Chairman.

Speaker 3

You didn't expect to get involved, I guess, so quick, so much in the day to day operation. What's your actual role? Are you acting CEO? And I guess the broader question is what can you do in terms of improving the business for the short and the long term? And what would you leave to whoever will be CEO going forward?

Speaker 3

And then, the last one focusing on what seems to be good news around around Tour Station UK. You've done well in '24. You seems to expect to continue to do well in '25. UK macro is not great. So can you tell us a little bit more about why you think this business can continue to improve this year?

Operator

Do you start with the order, Joe?

Speaker 1

Yeah. I can that's an easy one. It's there's nothing that's in anything related to the fact just taking a bit longer to complete the audit process is frustrating and not lost on me. The optics, particularly with Peach News, created some questions, but they are entirely mutually exclusive events.

Operator

Look, what's my role? My role is to be whatever it needs to be. We haven't changed job titles. I'm not called interim CEO or anything. Intent time where you don't deserve your money and you do bugger all, and then there's periods of intense activity where you've got to step up and do what's required.

Operator

This falls into the category of stepping up and doing what is required. Mrs. Drabble has a significant influence in me turning this business around very, very quickly. Look, this is a sector I know fairly well. There there are decisions that need to be taken where I think I can create an environment where people can make those decisions.

Operator

I think some very good things have been done in the last five weeks, many of them carrying on from work that Pete started, but largely because I have been impressed by the quality of people who perhaps have not been listened to for quite some time and now I'm relying on very, very heavily. So yes, I can take away some roadblocks. I can create an environment in which they can make decisions and we can feel like a proper trading business. Again, we actually had this one or two of the people who were on the in the meeting yesterday with what's called the SLT, which is really the management team for the merchanting business. They launched some really good things yesterday, which I'm quite encouraged about.

Operator

I thought there was an energy in the business. If I had a pound for every time in this industry, I had seen in a budget preparation and different businesses a SWOT analysis where the threat was, what if Travis Perkins ever gets its act back together again? Well, we're going to be that tea for the foreseeable future. That is the threat for the other people within this industry.

Speaker 3

Tour Station UK.

Speaker 1

Yes. I mean, it's lots of what I just talked about, we both talked about in terms of some of the operational challenges, obviously, don't affect Toolstation, which is helpful. It's a really great quality business. It's got great experience and stable management team. And we were sort of firmly on with the plans we outlined back at the last Capital Markets update on that and don't feel we've got anything else to add.

Speaker 1

It remains on track.

Operator

I knew relatively little about Toolstation. It's not a model I knew particularly well, but I'm really quite excited by it. I think it has real structural tailwinds behind it. I think I'd quite like us to get out of the zero sum game of its either us or screw fix who wins because I think actually the whole sector can win and actually we can both profit from being a very good alternative traditional ways of acquiring light side equipment. I think we need to raise our aspirations in terms of what the profitability can be by individual location and the profitability can be as a whole.

Operator

But it is it's been fortunate that it's been relatively immune to some of the disruption which has affected the rest of the business. And you can see the benefits of that in its own performance. So I think as a benchmark of what we can be, I think it's a very good benchmark.

Speaker 4

Thanks. Will Jones from Redburn Atlantic. I'll try through as well, please. The first just on those hiring needs, perhaps you could help us just size what needs to be done. I think you've got seven twenty merchant branches.

Speaker 4

Any context as to how many of those need kind of new leadership or were lost through the attrition? Second is just when you think about that tension between the center and the field, I think you mentioned some sensitive initiatives that come from the center that weren't really taken up. What were those? And previously, I think you talked about potentially looking at taking some cost out of the center and redeploying it to the fields. Is that still the case?

Speaker 4

And are we is it still a net not a lot happening on a kind of cost savings basis as a result of those kind of flows? And the last one was just around pricing and gross margin. You mentioned the limited pricing power currently. Are you able to push that back to the manufacturers? Or are you taking a bit of a hit on the gross margin?

Speaker 4

Just whether there are any other mix factors in the gross to think about this year?

Operator

Yeah. Look, let me start with the levels of investment on a location by location basis. Look, we have location managers in pretty much all locations. I'm not saying we haven't got some vacancies. I'm not not following it by vacancy by vacancy basis.

Operator

We have been through the worst of the churn, and therefore we are now settling down a new management team. I checked this statistic in a meeting yesterday because there is a gentleman who runs our Northern Region, who has done this amazing job. And I was checking the statistic that he gave me once or twice before in case I happen to refer to it today to make sure it was accurate. And he basically, over a one year period, lost every single depot manager he had in that Northern Region. And over the course of the last twelve to eighteen months, he has replaced them.

Operator

Now he will tell you he is delighted that he lost some of them, and less delighted that he lost others, but he is very confident about his team. And if you look at the performance of his region, it is given that level of disruption, it is performing incredibly well, which just goes to show the innate robustness of our business. What he does need is few more salespeople and he has the ability to have some slightly younger trucks and he needs to be able to get replacement drivers so he can get deliveries out on time. These are not massive investments, but we are a cash generative business. And from an operating cash Duncan and team have done a very good job on cash.

Operator

So we will redeploy the cash we are generating on those operational needs. There are going to be no fancy new grandiose projects that we'll be announcing anytime soon. We will be reinvesting in the core delivery within our business. So I think from that perspective, we're in pretty good shape. In terms of the center in the field, let me let me try and give you a couple of examples.

Operator

Before I took this job, I signed up for all of the Travis Perkins apps because I wanted to see if they were any good. I have a disagreement with some of the people in the business who do who don't fully agree with me. I'm a great believer in apps. If you look at, how apps transform, like, in things like click and collect transformed the prospects of businesses like Ashdade and Ferguson, you know, that that utilization and making transacting with us earlier easier for the small to mid sized business. Our apps are really quite good.

Operator

Our data stacks in terms of how we can slice and dice different information, who we trade with, etcetera, is remarkably good. I would have said we are years ahead of other businesses I know in this industry. Because of all the disruption, are our depot managers accessing that information and getting any advantage from it right now? No. What we're doing is we're winning awards from functional, like, IT department saying we've got the best data stack, in the industry.

Operator

That's true, but that's of no use to me whatsoever unless we're using it out in the field. Now so what we are we started this mantra, which is if you're if you're on a central organization, I want you every day to wake up and say, what have I done to improve the life of the field and generate sales? I'm sort of banning us going to win awards. I want us to use the information we've got to improve the business. Now, it is going to be a way quicker to improve that communication flow than it is to build that.

Operator

It will take our competitors to build up to five years to build the quality of information. But again, I was happened to be out in a location where people will be mourning this. The key to running a sales force in this industry in The UK is something called a Glenigan report, which basically tells you where every construction site is, what's data. You've got to follow that information, get your sales force out on-site very, very quickly. The local depot managers were bemoaning the fact they didn't quite know how to get Glenigan reports anymore.

Operator

You can debate whether they should have done, but they were telling me they didn't. I then happened to bump into this gentleman who runs our data by pure chance in the location of the Palagon and asked him what he was doing. And he showed me the most impressive set of analysis of Glenigan reports I've ever ever had. It was it's there. We just weren't using it.

Operator

And that's why people are going to hear me talk about re empowering the field and entrepreneurial nature out in the field. And that is true. I fundamentally believe in that. And that is what will win us back market share in the short term. In the medium to long term, what will make us winners is the adoption of a lot of the technology and a lot of the investments that we've already made.

Operator

And that is where I believe together with a new CEO, we can bring some pace to the improvement in this

Speaker 1

business. Your last one, Will, on pricing. I mean, look, no, I mean, we are traditionally a pass through business. But what I would say is that, I mean, given the relative stress that's in the sector and has been in the last eighteen months, and I think we're getting benefits from kind of the changes we've made in terms of having a group commercial wide view across all of our businesses. We're having good quality conversations with a number of material suppliers who perhaps also not finding life particularly easy at the moment and continue to highlight the fact that as the largest player in this market, they want to support our recovery as much as we want to support those as well.

Speaker 1

So that is definitely something I'm seeing a lot of examples of at the moment.

Operator

Good purchasing is based around good selling. We have to convince our supply base again, which I think fundamentally they believe looking at the structure of our business that we are their best route to improve their business and to improve their market share. That they will grow quicker aligned with us than they will with anybody else. Again, perhaps I'm being overly optimistic. I don't think that's a tough sell.

Operator

But it's probably not a conversation we've had sufficiently in recent time. We have to demonstrate that we're going to be really good partners and then they will utilize our scale to help. These have to be mutually beneficial arrangements.

Speaker 5

Good morning. It's Charlie Campbell with Stifel. I've got two questions both on merchanting and broadly related, I think. I just wonder kind of when you look at the business model at the moment and you look at the kind of potential gross margins, what your views would be on a kind of couple of aspects? One would be sort of relative pricing against the industry.

Speaker 5

That's clearly been something that we've debated before in the past and whether that's the right level. And then secondly, you've talked a lot about incentivizing people. I wasn't quite clear if that's salespeople or branch managers, and whether you're going to have to give, basically, branch managers a bigger share of the economics to get a better result on the ground locally.

Operator

Yes, sure. Look, I believe that we ought to have value added services which ought to allow us to have some pricing power over our smaller competitors. We're not there now. We're just not. If we're kidding ourselves that we can price significantly better than anybody else with our recent experiences customer service, that's not true.

Operator

Now what we can be is selective in where we fight, but where we have regional strength, where we have product strength and where we have support from suppliers. So do I believe we offer a range of value added services, which ultimately people will be prepared to pay for? Yes. And that will particularly become true. Where you get a chance to gain market share and where you should really get a chance to add margin is at the inflection point.

Operator

Where a market starts to turn, instead of everybody just worrying about cost, they're worrying about getting it. There's a gentleman here who runs our managed service business tomorrow. We're having this very conversation only yesterday where so we need to get ourselves ready for that inflection point. I'm not 100% sure when it's going to come. I've lived through enough construction cycles to know it will come.

Operator

And what I will know is, and you can see it already, we are not alone in cutting costs and doing dumb things in this industry in order to survive and therefore the capacity in the marketplace to satisfy the market when that inflection point comes will be significant pricing point. Now in terms of how we have structured incentivizing our local teams and yes, we have done it as a combination of both the sales force and the local managers and that's really important. We need them get it working together to understand their patch and winning back local mid sized trade customers and they are best served to do that. We can have national teams who can hit big national house builders and big national infrastructures, but to win back that higher margin, mid sized builder requires, as I said, doing it on a depot by depot, postcode by postcode basis, a combination of building on those relationships that both salesmen and depot managers have, I believe that will be more than self funding. It may not be in the first month or the second month and that's okay because it will be in the short term, in the medium to long term.

Operator

So look, are our medium term margin aspirations any different to what they were? No. Is it going to would I trade volume for margin over the next two quarters? Yes.

Speaker 5

So just as a supplementary, just to clarify that. So do you see a sort of step change in basically the cost of branch managers, salespeople across the country to move the model maybe more into line with some of the other models that are out there?

Operator

Look, it is based you don't get sales commission unless you sell more from therefore to storage expenses. So proportionately, we shouldn't see a significant change. But yes, to your point, do I believe our core staff should share more in the business economics of this business? Yep, 100%.

Speaker 6

Thank you. Good morning. It's Ben Wilde from Deutsche Nummis. Three questions, please. Firstly, on the branch impairments, what exactly have you impaired there?

Speaker 6

Are the impairments impacting specific businesses or branch types within the group? More color would be helpful there. On Oracle and the disruption that you described, there's an emphasis on employee churn. But to what extent do you believe that the implementation of Oracle has driven volume underperformance in the last two quarters and into this year. How do you think about that fading hopefully?

Speaker 6

And then thirdly, on CapEx. Duncan, you made the point very clearly that the million is not a sustainable level of CapEx for this business. So what is a sustainable level of CapEx for this business? Thank you.

Operator

Would you do one to three? I'll do two in Chen.

Speaker 1

Fine. So I'm not going to go to all the branch of payments. It's all in NOK 29 to the accounts spend. You can see it in there. On CapEx for the business, look, I mean, we have on a medium term run rate historically been sort of north of 100,000,000 more probably more like 120,000,000 of capital expenditure.

Speaker 1

I'm not going to be I'm not going to be drawn on a specific number on that for obvious reasons because I think there is a I've got a view around how much I think we need to invest in our fleet and invest in our state, but also need and we're starting to formulate that thinking with Pete clearly, but that will also be a conversation for whoever replaces Pete as well to start thinking about. But we have requirements to invest in upgrading our fleet and our state. There's no two ways about that. We've been pretty open about it. So I think it will definitely come up north of AT and be some heading somewhere towards that original level of expenditure that we outlined.

Speaker 1

And I think, again, a growing proportion of digital and IT expenditure as well as we start to invest in some of the things Jeff's talked about that won't necessarily be capital expenditure, but it'll still be cash out the door.

Operator

In terms of the churn, look, the big period in terms of churn was the first half of last year. We found ourselves in a bit of a leadership void. We sort of said the CEO was going, but he wasn't gone. The chair had gone. There was a new chair being looked for, and therefore there was a very uncertain period.

Operator

In that uncertain period, there were a number of things, all of which happened together, which was, I think we made some poor decisions around bonuses. There were one or two other decisions from the center which in the eyes of the field, rightly or wrongly, restricted their ability to do business in a manner in which they wanted to do business. And on top of all of that, here's a new system and the early implementation of that system just made their lives a little bit more difficult. Therefore, if you were in that period of uncertainty, a combination of all of those things and you got approached, I kind of understand why you'd probably be prepared to leave. So we were open season to be attacked by our competition.

Operator

Pete came in, and as I said, Pete landed really well out in the field. He talked very sensibly about where he wanted to take the business. I found Pete as well as being academically very intelligent to be emotionally intelligent too and you saw the improvement in those statistics. Look again, the given some of the decisions that were taken over the over a five year period, why had we not lost more people? Because people know as far as it is, we're probably the best show in town.

Operator

But we really tested that over a six months period. I it would be wrong to attribute it to Oracle. There was a combination of factors. I believe you can all do some due diligence and check this out with us that we have stopped the physical flow of people leaving us. And indeed, I think we're starting to rebuild the organization.

Operator

Whether we've stopped the negative sales impact of that or whether that there is a tail to that beyond them leaving, that is my uncertainty and precision around what's going to happen in the next quarter or so around revenue. But it'd be wrong to blame it on Oracle. It was just one of the range of combining factors.

Speaker 6

So in your view, Oracle, the system itself is not driving significant customer disruption?

Operator

Oh, no. It's causing some disruption. Look, there are two separate issues as I see it. Again, Duncan, you should look. There is the financial bit of matching invoices and paying suppliers and because of the quality of our database and matching orders with invoices.

Operator

Look, we are having to throw an inordinate amount of resource fixing it that it's one of the reasons why the audit was that they look when I started as an auditor, I don't know, forty odd years ago, what you spent your life doing was ticking supplier invoices to statements. No audit has done that for about thirty or forty years and that's what they were back down to doing again to some degree. So it's had a disruption to the business. In terms of trading, yes, it has had a disruption because we've been struggling with those invoices, statements have not been particularly accurate. And there's one particular area which is drop ship.

Operator

So if we if we place an order and it gets shipped directly from a supplier directly to a customer, Oracle is very inflexible and takes too long to process an order. Now you are talking to the person who was the chairman of Ferguson and Ferguson wrote off a hundred million dollars rather than implement Oracle because it was a slow, cumbersome process. We are not in the same position as that whatsoever. There will have to be a work around around the drop ship because it's getting better. Certainly, all of the administrative stuff is certainly getting better.

Operator

And, look over there was telling me yesterday, we'd cut another five minutes off the processing time of drop ship, which is great progress. It's still never gonna be quick enough. It's the truth of the matter in my humble opinion, because we get better margins when our customers change their mind. We react to their uncertainty of what they want and we charge them for it. So we can't have a system that says, no, you can't change your mind.

Operator

We need a system that allows them to change their mind. And whilst that seems odd, perhaps to finance people or IT people, that is how our business works and that is how we make money. And therefore, we will need to do something, but it's a minor tweak around the proportion of our business. And again, remember, you can see it, it hasn't touched Toolstation. There are huge it doesn't affect the audios.

Operator

There are significant swaths of our business where it's had no effect. That doesn't mean we shouldn't change it, but it will be a minor tweak. This is not a ripping out. Again, for all Ferguson and all of $100,000,000 their finance system remains on Oracle and it's a very good system. So there are tweaks.

Operator

But let's be clear, I'm conscious of the internal audience as much as the external audience. We know it needs to be a lot better and we know how important dropship is.

Speaker 7

Thanks for taking my questions. Zaim Pikau from JPMorgan. First question is just on The UK housing market. So can you just remind us what your new build exposure is there? Are you more geared to the smaller house builders?

Speaker 7

Obviously, the government's got a clear plan to build, so that should be impactful to your business. And then secondly, appreciate a lot has happened since, but the Toolstation UK targets, how can we think of that to effectively move that off the table? Thank you.

Speaker 1

Yes, Amy, UK housing, Mark, his aim is key line is probably the most obvious what you described as our canary in the coal mine reaction in terms of the kind of civils and groundworks where I said, I was referring to my comments around we're starting to see some early signs of some inflection in that, which you would expect. And we have I think in answering to your question around, we have relationships across all array of the house builders, small regional family owned through to the big nationals as well across all parts of our business. And those are all important relationships. I think on Toolstation UK, I wouldn't say take it off the table. As in I think that's a bit harsh.

Speaker 1

I mean, I think I made the comment, I think we are sort of firmly on track in terms of the targets that we've published previously and say got a very stable experience management team. But I think Jeff said at the outset as well. And it's an opportunity for a fresh perspective with whoever comes in to be new CEO as well, opportunities and ways in which we can take that business further forward. So I would say no, don't take it off the table, but I would say equally with some opportunities and rights to think about where we take the phase, the next sort of strategic phase of that business forward and how we take it forward.

Operator

I genuinely, as I said, it's a business of all the businesses in here I knew the least about when I joined. But I am genuinely excited. I think I've talked a lot about bad decisions over the last twelve months. A good decision that was taken over the last twelve months was to focus less on opening new locations and just getting growth through new stores and more looking at the profitability and potential of individual stores. And I think we can raise our aspirations about the mix of business, the margin of business.

Operator

Again, again, it comes down to is it a retail experience and do we need process relatively low paid order pickers in branch or is there a cross selling opportunity? If we look at our if we look at our stocking levels, do we have the appropriate range? Do we have the appropriate quantity of range to be able to satisfy projects? We have too many products and too few of each product to be a full project supplier. You know, basic upselling, we can do.

Operator

The the the speed should we be offering same day delivery to site and what are the logistics and cross docking requirements? Or that we built this great big distribution center, which currently is a massive drag on our costs and makes no sense whatsoever, and it's never going to be used for the reason it was built. However, I think it will prove to be an excellent investment in terms of our ability. If in major conurbations like here in London, we can offer same day delivery to site and docking solution. So I think a new CEO coming in can reimagine and be very, very bullish about the potential in Toulon Station.

Operator

Shane Carberry from Goodbody. Just one follow on to Charlie's question, if I could. Just, Geoff, when you talk about kind of empowering the branch managers and becoming more of a localized business, is it fair to call that a little bit of a change in strategy versus the last kind of six to twelve months where we've heard a lot about kind of centralization? Yes. Absolutely.

Operator

100%. Look, we just got it a bit wrong in terms of again, I will stress this is a relationship business and those relationships are important. Is the world slowly changing and do we need to be at the forefront of that? Yes, we do. So again, look at the proportion of our business that are using apps.

Operator

Now again, look, businesses I've been involved in, Astead, Ferguson, Houghton's have all got apps. Now how people use the apps is relatively unimportant early on. Like more often than not, they'll sit at home and clear invoices on it. And then we'll start placing orders for collection by the click and collect or for delivery the following day. So you need that technology.

Operator

A growing proportion of our business ought to be click and collect. Ultimately, a person needs to be on-site, place an order as they can do with Ferguson, as they can do with Ashdade, track where that order is in the system, and see it being delivered to their site. Hell, I can do that if I order a curry at home. Why can't I do it if I want to if I want to place an order? Ultimately, as I said, a lot of the strategy does make sense.

Operator

Ultimately, people shouldn't care where we deliver it from, whether it comes from a CCF location, a tool station location, or a Greenigo. They should be able to go on an app on-site, place an order, and we ought to be able to satisfy either that we need to set parameters next day or same day. So so all of the things we were heading towards have a logic. I am not saying that a lot of them have not been applied as well as they should and none of them there was a disregard to how that was not mutually exclusive to the culture we have out in the field with the Depo manager. What we are doing needed to be complementary to what we already had and it became substitution.

Operator

And it became substitution most importantly in the minds of our associates. And that's what we've got to change. And in changing it, I don't want to piss off everybody in the center who says, I don't want you to keep developing this stuff. I just want you to be more aware of how hard what you need to do to make it useful in the hands of our associates. So there are they're really frustrating, but you can see bits everywhere you thought if you could just join up the dots and if you could actually apply some of the capabilities that we have right now, this would be very swiftly a much better business.

Speaker 8

Thanks. Ami Galla from Citi. A few questions from me. The first one was on working capital. Could you help us on the stock side?

Speaker 8

Do you think this is the optimal level or is there scope to optimize the stock levels in the business further? The second one was just on the cost reductions that have been implemented last year. Are there any tailwinds from annualization that we should consider in 2025? We hear your point on the investment side, of course, but is there an offset there in the short term? And the last one was just on the scenarios that you have probably budgeted in for this year.

Speaker 8

If the underlying market conditions are worse than what you are currently expecting as a base level, you know, what are the what is the scope to protect your balance sheet? You've touched upon that you will be you're constantly looking at non core. When you look at the portfolio today, is there anything that sits in that non core bucket at all?

Speaker 1

Yes. So on working capital, I think in let's be sunny side up for a bit for a second and assume the market does start to improve across the course of this year, then I think we'll end up with some relative probably neutrality on stock in the sense that some parts of the business will probably start stocking up a bit more in anticipation of that. But I alluded to it in the bit earlier on there are parts of our range still where we think we've got opportunities to take further stock out and there are still some stock reduction targets within the business for this year. And I don't think anything we've done in there has been kind of finance imposed to the point where it's ended up hobbling our ability in a recovery. I think actually it's been getting our house in order and discipline led by our commercial teams, which they've been great at doing.

Speaker 1

On the cost reduction, look, I guess the easy answer is it's implicit in the guidance in respect of kind of what we need to do to reinvest in the roles that we think we need to take on. But you can rest assured in the current market, we're going to keep a strong focus on discretionary spend where we don't need to be spending things. And at the same time, they want to give oxygen to things that Jeff's alluded to in terms of incentives and structures to in order to get us on the front foot and winning. So there's a careful balancing out there. Of course, there is.

Speaker 1

But ultimately, we're not going to save our way to solving some of the problems that we've talked about at the outset. And so we've got to be sensible and it's implicit in the guidance. And look on the scenarios on the balance sheet, look, there is a lot of optionality we've got. I don't say this in a complacent sense, but the balance sheet isn't the thing that keeps me awake most at night, certainly not in the last three or four weeks. It's not been the thing that's kept me awake at most at night.

Speaker 1

We've got a really strong balance sheet. We've got a really good quality property portfolio. We've got means and ways of creating more cash if we need to. And candidly speaking, even in the kind of really doomsday scenario and the market in a market got much, much harder this year, we're still far lower levered and got a far lower cost of financing than virtually all of our peer group that are either in private equity ownership or in any other form of ownership. Actually being a PLC in this market and having refinanced in Q1 on investment grade debt is a point, I think a point of relative strategic advantage, which we've worked hard to create the space to do.

Speaker 1

And we'll continue to run the business in a careful and thoughtful way. You come back to that leverage position and the improvement we've made in terms of the overall net debt, you don't need a lot of improvement in underlying profitability just on the way that leverage count works and you start to see quite a sharp downward movement on leverage. So we're doing all the right things on that. We have got further options and we continue to look at them.

Speaker 8

And can I add just one follow-up on the leverage point? What are the sort of lease liabilities that you're currently carrying for Toolstation France?

Speaker 1

They're negligible, but they're wrapped up in the overall cash closure costs for running into next year and have come out of the discontinued operation as part of the year end count, they're out as part of the discontinued component.

Operator

All right. That seems to be all of the questions. As I say, look, it has been an uncertain time. Appreciate you spending the time with us today. And, hopefully, I won't be doing this in three months' time, but who let's let's let's let's wait and see.

Operator

Thank you very much.

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Earnings Conference Call
Travis Perkins H2 2024
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