Travis Perkins plc (OTCPK:TVPKF) Q2 2020 Results Earnings Conference Call September 8, 2020 4:30 AM ET

Company Participants

Nick Roberts – Chief Executive Officer

Alan Williams – Chief Financial Officer

Conference Call Participants

Yves Bromehead – Exane BNP Paribas

Robert Eason – Goodbody

Will Jones – Redburn

Christen Hjorth – Numis Securities

Gregor Kuglitsch – UBS

Ami Galla – Citigroup

Charlie Campbell – Liberum Capital

Sam Cullen – Peel Hunt

Nick Roberts

A very good morning to you all, and thank you for joining us, and welcome to our first virtual results presentation. Alan and I are here in Northampton for only the second time since March the 18th. After my introduction and sharing a few thoughts, Alan will talk through the financial performance of the Group and then I will return with an operational and strategic update and look forward.

So the first half of 2020 was one marked by progress despite the challenges of the COVID pandemic. We’ve all been impacted by COVID and Travis Perkins and the Travis Perkins family has been no different. The company as a whole, plus all our valued colleagues and their families, the challenges we’ve had to overcome have been extraordinary. Arguably his has been the most tumultuous period in our over 200-year history.

But the measure of success for me of how the crisis is being navigated is not only about how and what decisions and moves we have made to operate through the lockdown and beyond, but actually how the culture of the business has stood up to the test and how we’ve harnessed that culture and the moral compass to adapt the business to be flexible and agile and ensure that we not only survive whatever befalls us, but actually we came out stronger and better prepared to outperform our markets.

Clearly there’s been a significant impact on the performance of the Travis Perkins Group with a 20% drop in sales which has led to a drop in profitability in the first half, but that’s only half the story though. Unlike many businesses we’ve worked very, very hard on our cash and liquidity management with real success and strong cash inflow and as Alan will outline a positive impact on our net debt position. Later on I’m going to talk you through the phases of how we adapted to the rapidly changing environment that we all found ourselves in pivoting our businesses to digitally enabled contactless operations very quickly, all the while continuing to serve our customers and provide them with the essential services that they need, being involved in the construction of the new NHS Nightingale Hospitals, as well as ensuring the critical infrastructure of the country remains operational and our homes remained warm and dry. But as a business we just simply didn’t stop there. It was very clear that our customers and we needed to change the way that we worked in order to access the materials that they needed. And we move at pace as a Group to accelerate the strengthening the core of our business to develop and improve our proposition for our customers. These changes stand the Group in good stead for the future, not just to trade through the crisis, but actually as a platform for future growth. We’ve made some great strides forwards and also there is still a huge amount to do as I’ll delve into later on, the business is strongly placed to outperform its markets.

But firstly, over to Alan.

Alan Williams

Thank you, Nick, and good morning everyone. Before I take you through the detailed financials, I thought it might be helpful to remind you that some of the presentational aspects of our 2020 interim results which should be borne in mind. Firstly, in terms of portfolio changes, Toolstation Europe has been fully consolidated since the 1st of October 2019, whereas we had previously accounted for the business as an associate company. And at the end of January 2020, we completed the disposal of the wholesale Plumbing & Heating activity PF&P. Wickes is included in 2020 and an all comparatives as the demerger was placed on hold in March.

Then in terms of impacts of the pandemic, these are included in the underlying adjusted operating profit as presented and I will try and highlight the details of some of these impacts as we walk down the income statement. We have however presented the cost of the significant restructuring announced in mid June as an adjusting item given its nature and its quantum.

So turning to the financial highlights, after encouraging start of the year with 2.4% revenue growth in the 11 weeks to the 18th of March, the impact of the pandemic and then lockdown was profound. Revenue for the half declined by 20.2% to £2.78 billion and declined by 19.3% on a like-for-like basis. Given the fixed cost base of the business, the revenue decline had a significant impact on Group profitability resulting in an adjusted operating profit of £42 million versus £220 million pounds in H1 2019.

The Group recognized adjusting items of £129 million pounds, principally the significant business restructuring program we announced in June. Adjusted earnings per share fell to 1.4 pence per share while basic EPS fell to 45.7p loss with the difference primarily driven by the cost of the restructuring program.

On the positive side, cash generation in H1 2020 was extremely strong reflecting the Group’s focus on liquidity management throughout the pandemic. The Group’s covenant net debt position fell by £322 million pounds from the position at the end of December 19 to £22 million pounds and by £392 million from the position at the end of June 2019.

Given the ongoing level of uncertainty in the UK economy and the Group’s end markets, the Board is not proposing the payment of an interim dividend. The Board recognizes the importance of dividends to shareholders and so will keep its position under review taking into consideration the trading environment in the Group’s end markets and the ongoing liquidity position and will provide a further update in due course.

On Slide 8 I’ve broken out the monthly revenue trends by reporting segments and have also split out Wickes core DIY and Kitchen & Bathroom showroom elements. As you can see, Toolstation has delivered a consistently strong performance throughout the half. While the lockdown had a significant impact on Wickes, you can see how quickly core DIY recovered reaching growth of almost 50% in June.

Kitchen & Bathroom revenue was close to zero during April and May as home installations were on hold during the lockdown. Since that time, both delivered sales and orders have recovered well and leads remain encouraging.

The Merchanting and Plumbing & Heating segment showed similar like-for-like patterns albeit Plumbing & Heating has remained weaker overall given the slower return of work in the home. Both segments remained open during the lockdown for essential works and have gradually recovered month by month since April.

Within Merchanting and Plumbing & Heating impacts differed by business units depending on the predominant end markets. Of note, both commercial and new build continued to lag while RMI is relatively stronger. Across the Group, like-for-like sales trends in July and August have returned close to prior year levels supported by domestic RMI and current strong trading in consumer DIY markets.

If we now look at the drivers of the 20% decline in revenue, as you would expect this is virtually all driven by volume. Overall changes in pricing were modest in the period and were offset by mix. Changes in the portfolio and branch network resulted in a net reduction to revenue with the disposal of PF&P and the branch closures in June more than offsetting the contribution from Toolstation Europe and now branches opened in the previous 12 months. There was one additional trading day in the period as well contributing £21 million pounds to revenue.

Year-on-year the gross margin percentage at the total Group level was unchanged and this despite the impact of the pandemic. Given the unprecedented circumstances in the period, there are a number of moving parts below the surface, which I think you want to understand. Firstly, there are some negative impacts due to the pandemic. These are, 1) a reduction in anticipated annual volume rebates from suppliers given the significantly lower stock purchases in the first half. 2), a higher proportion of customer orders delivered particularly in merchanting and 3), an inefficiency in our supply chain operations due to distancing and other measures to ensure the safety of our customers.

The second key factor is a small full in margin within certain segments due to sales mix. So for example, in merchanting heavyside volumes have held up better than lightside. In Toolstation and Wickes, we have experienced some drag from the strength of DIY and also seasonal sales as consumers have undertaken jobs in around the home and particularly in the garden during Q2. Conversely in Plumbing & Heating, we’ve see a positive customer mix within steadier [ph] sales holding up better than contract volumes.

The third factor is the overall segmental mix. Both Toolstation and Wickes are high gross margin businesses than merchanting and Plumbing & Heating and this factor outweighed the two earlier factors I described. At this stage it is quite difficult to predict how the second half will unfold, but I would expect broadly unchanged gross margin overall year-on-year.

With such significant effects from the pandemic, you would also expect there to be a number of complex moving parts below the gross profit line. Some of these will prove to be predominantly H1 items and we would expect some reversals in the second half. So on slide 11 I’ve tried to bridge the H1 2019 operating profit to H1 2020. You can see that of the 178 million fall in EBITA, £202 million is from the gross profit line given the low volumes, meaning that overheads overall have positively contributed.

If we untick that overhead movement of a net £24 million positive you can see the following elements. Firstly, government assistance of £65 million pounds with £45 million from the furlough scheme and £20 million from the business rates holiday. As of 10 June, virtually all colleagues who had been furloughed had returned to the business, meaning there will be a negligible contribution in H2. On the other hand, the business rates holiday will run until March 2021 and we would expect around £40 million pounds of benefit in the second half.

Overhead related inflation and movements in stranded costs of £20 million pounds, together with £12 million pounds of investments in grow principally driven by the Toolstation branch opening program and then there are £9 million of losses in Toolstation Europe now fully consolidated. We’ve then realized £25 million of overhead savings in the half which is a combination of prior-year overhead reduction initiatives and savings made since lockdown.

I’ll cover future savings from the restructuring program announced in June on the following slide, and then within provisions and accruals it is important to note we recognized additional charges due to the impacts of the pandemic in line with our accounting policies. Of these, I would expect the number to unwind in part in the second half and we’ve estimated these reversing items at around £20 million pounds.

The amounts composed of three main items; one, holiday pay accruals, as colleagues had taken few days leave in the first half than their entitlement. Secondly, an increase in debt to provisions under IFRS 9 and thirdly increased provisions of slow-moving stock given lockdown. The final elements of the bridge is the year-on-year reduction in property profits of £5 million pounds given the lower completions in the period.

So turning to the restructuring program, as will you recall, we announced a significant restructuring program on the 15th of June. The program takes into account the lower volume outlook given the economic conditions and is designed to help mitigate the anticipated fall in gross profit contributions from the recession.

Around 165 branches have been closed primarily in the trade merchant businesses including Plumbing & Heating. Together with selling and administrative roles across the businesses and also in corporate functions, the total targets and reduction in roles is around 2.5 thousand, roughly 9% of the workforce.

In terms of cost savings, the program is expected to deliver an annual reduction in overheads of approximately £120 million. As the vast majority of actions were put in place by the end of August, we would expect to deliver a material saving in the balance of 2020.

While an adjusting item of £111 million has been recognized in the income statement, the gross cash costs of the program are around £85 million, of which approximately £35 million will be incurred in 2020. The remainder which will be incurred over future years, relates primarily to leasehold property payments, and should be offset by sales of freehold sites closed as part of this program and also hopefully reduced by finding sublet arrangements.

So I’m now turned to performance by reporting segments, starting with Merchanting. After an encouraging start to the year, the segment was of course heavily impacted by lockdown. Around one third of branches remained open during late March and April as the business pivoted to focus on essential projects only, including, as Nick mentioned, support to build the network of Nightingale Hospitals and to maintain key infrastructure.

Branches progressively reopened from late April onwards to support the steady recovery in construction and markets. The recovery has been strongest in domestic RMI markets, with the Travis Perkins general merchant recovering most quickly, and the specialist merchants, with a greater exposure to new house building and commercial construction, lagging somewhat as customers ramp up more slowly.

Despite good control of discretionary costs, and government assistance received, the fixed cost nature of the branch network, together with gross margin pressure from reduced annual volume rebate expectations, and the COVID related inefficiencies are referred to resulted in the 75% decline in operating profit.

And as I mentioned previously, the restructuring program is concentrated in the merchant businesses. In the Merchanting segment 140 branches were closed by the end of June. These closures, together with the restructuring of sales and above-branch support teams are expected to generate around £90 million of annualized cost savings in the Merchanting segment.

Moving to Toolstation, the businesses continue to deliver outstanding growth, outperforming their respective markets. Despite the disruption of lockdown, Toolstation UK delivered like-for-like revenue growth of 12.9% as it rapidly adapted its business model to run the branch network’s click & collect fulfillment centers and also ramped up home delivery capability.

As you would expect, distancing measures and the adaptation of the business model, resulted in higher operating costs in the period in the UK operation. Hence the fall in operating profit from £13 million to £10 million in the UK. While lockdown resulted in a pause in the branch opening program, with only nine new branches in the UK in the half, we remain committed to the plan to open 60 new branches in the year.

Nearly all of these sites are already identified, and we opened 90 new locations during July and August. In Europe, the impact and timing of lockdown was of course different from the UK. But the Toolstation proposition clearly responds well to customer needs, with its multi channel capability, its high stock availability and outstanding value.

Total Sales in the Netherlands and Belgium grew by 79% and by 56% on a like-for-like basis. In France total sales grew by 74% and by 61% on a like-for-like. Although the branch network expansion is behind the plan for the year, eight new branches were opened in Europe in the first half, with further openings in Netherlands, Belgium and France all planned for the second half.

And as disclosed previously, the additional operating costs of the European businesses will lead to the consolidation of around the £20 million loss for 2020, of which £9 million was recognized in the first half of the year.

Like Toolstation, Wickes also demonstrated its integrated digital capability and its ability to adapt rapidly to market conditions. From the end of March to mid May, Wickes stores operated as fulfillment centers for click & collect orders, alongside direct-to-home deliveries from the distribution network. Stores reopened to customers in late May, driving an acceleration in DIY sales, as the trend for consumers to carry out DIY projects continued strongly.

In June overall like-for-like growth was 22%, despite Kitchen & Bathroom sales not recovering fully, with core DIY sales up nearly 50%. For the half, despite lockdown, core DIY delivered like-for-like growth of 6% while our Kitchen & Bathroom showroom business declined by 40%. Gross margins were essentially flat year-on-year. With a mix shift towards DIY from K&B or Kitchen & Bathroom showroom sales offset by reduced promotional activity in the DIY categories through the busy spring bank holiday period.

As with other segments in the Group, the retail businesses delivered good control of overheads and this will be further underpinned by the June cost savings program. However, given the fixed cost base of the store network, operating profit declined to £32 million in the period. During lockdown, sales in the Plumbing & Heating segment, reduced to around one third of prior year levels, similar to the other trade focused businesses.

The recovery in sales has generally been slower than for the general merchant business, driven by slower recovery in new house building, a more gradual return to activity in the social housing sector and a careful return to operating in customers’ homes by larger contract installers. Gross margins were stable, with the impact of lower annual volume rebates offset by the shift in sales mix towards smaller installer customers and the positive business mix change following the sale of the PF&P wholesale business in January.

While absolute overhead costs reduced, the significant drop in volumes drove an operating loss for the business of £8 million in H1. As part of the restructuring program, 16 Plumbing & Heating branches were closed in June alongside is a streamlining of above-branch activities. This is expected to generate around £25 million of annualized cost saving.

So turning to cash and debt. As I mentioned earlier, our cash performance in the half was outstanding, with the generation of £305 million of free cash flow before property transactions and this despite the significant fall in operating profit. As you can see, the major contributor was the significant in flow in working capital. Inventory reduced by £154 million as stock purchases were reduced, and inventory was also moved around our network.

Receivables reduced by almost £400 million, given the contraction in credit sales during Q2. Our credit teams in conjunction with branch and sales colleagues have done an absolutely outstanding job throughout locked down in collecting receivables. Given reduced stock purchases, trade creditors also reduced during the period. And in other creditors the balance was assisted by the deferral of VAT payments, due from between March to June to March 2021. This total was approximately £100 million.

On Slide 18, looking at the Group’s Capital Expenditure, base CapEx totaled £47 million. This was an immodestly lower than H1 2019 as there was a significant capital accrual at the end of December 2019 paid in Q1 and as a number of Wickes refits had already been completed prior to lockdown.

New capital commitments were constrained from March onwards, and so expect to see lower cash CapEx in the second half, despite the Toolstation branch expansion program. Given the exceptional free cash flow generation, the business delivered a significant reduction in net debt. This was also aided by the £50 million inflow at the end of January from the disposal of PF&P and by the suspension of final dividend for 2019.

Covenant net debt was a modest £22 million with reported net debt including leases also some £400 million lower. During May, we prudently agreed a relaxation of covenants at the end of June and December 2020, but we also chose not to put in place additional facilities. As of the 30th of June, the Group had liquidity headroom of £855 million, composed of the undrawn revolving credit facility of £400 million, and cash on deposit of £455 million.

This position strengthened further during July and August by approximately £100 million. But given the uncertain outlook, we intend to maintain a very strong headroom position. If I look ahead, the long-term fundamentals of our end markets remain robust with ongoing demand for new housing and underinvestment in residential RMI. Since lockdown was lifted, we’ve seen a good recovery in the construction sector with strong RMI and DIY demand continuing.

While secondary housing transactions have been strong since lockdown, it’s not yet clear whether this is a sustained trend or a release of pent up demand. We also welcome the government stimulus package for UK construction. And given our broad end market exposure, we are well placed to service this demand.

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The near term outlook for the economy is however very uncertain, and an increase in unemployment will undoubtedly have a detrimental impact on consumer confidence. We therefore remain cautious on the volume outlook for building materials in the near term, but believes the Group remains very well placed to continue to outperform its markets and generate value for shareholders.

With that, I’m now going to hand you back to Nick for the operational review and strategic update, and then I look forward to taking questions with Nick later.

Nick Roberts

Well, thank you very much, Alan, and welcome back. I’m planning to talk to you through three sections today. Starting with the group’s immediate response to the pandemic and how I and my leadership team approach the challenges that presented themselves very quickly. We were all obviously, in completely uncharted territory.

As I mentioned earlier, this crisis period has been a lot about or a lot more than about survival for the Group. It’s been about how we accelerate our plan to improve our business and utilize wisely our people and resources to advance and improve, so I plan to give you some examples of how we, as a Group have done that and what we’ve achieved and how the culture and the people within our business have pulled together to achieve some remarkable feat in what has been a very short but a very stressful period for everyone.

Finally, and I think more importantly, I’d like to talk briefly about how we’re looking to the future. If the pandemic has taught us one thing, it is that our end markets really are changing, and that our customers will respond and indeed, actively seek different ways of working with us. And these structural changes are a huge opportunity for us to develop and grow our business. I don’t have a future strategy to share with you today, but I do have a framework for how we’re thinking through these opportunities and challenges and some different time horizons that we’re looking to.

So what has COVID meant for TP? Well, the answer, of course, is lots of things. So let me break it down for you in the way that we approach this as a leadership team, as we broke it down into three phases. The first thing to note, and this is always being stressed, is that whatever the decisions we’ve made at whatever point. The absolute number one priority has been the safety and well being of our colleagues. The first phase of the pandemic for TP really started to weigh pre lockdown back in January, as we started to look at the security and the impacts on the supply within our Far East supply chain.

And of course, as locked down hit places like Wuhan in China more generally, we began to think about and operationalized looking after our colleagues in our Shanghai operation, but we started to think carefully about how we could and would mobilize work our colleagues to work remotely, and then how we would do that fast and at scale and ensure everybody could work should the pandemic affect the UK. We call this getting out in front of the issue, and we started work on it very easily.

It was no easy task. Come early March, just after we spoke to you last, we mobilized thousands of colleagues to homeworking very, very quickly, and that necessitated some really quite highly complex processes around credit management and taking payment over phone to homeworking. very, very quickly and at real scale.

The second phase was lockdown itself and we used our voice with government immediately to position ourselves as an essential service through lockdown, so the business would not close. As Alan said, we supported the rollout of the NHS Nightingale Hospitals, which was incredibly important to us. We continue to support infrastructure projects and of course, we made materials available for the continued support of domestic maintenance at a time when we really needed to keep critical infrastructure operational and our homes warm and dry in a period of great national need.

We really established our role as an industry leader, being primary in developing safe working practices very, very quickly with the government for the government, with construction industry leaders and peers. We immediately pivoted our business to what we called our service like model. Branches were close to customers, but they pivoted to being fulfillment centers for delivery, where there was no contact with customers to keep our people safe, but indeed we moved to remote telephony based or digital contact solutions, as Alan mentioned.

We simply did not shut our branches and stores. We pivoted our model, and we did so instantly. With a third of our merchant branches closed and operating contactless models, Toolstation and Wickes pivoted to nearly 100% of digital operation. We had a short, but a very challenging peak with 15,000 of our colleagues on furlough, but we treated them with great dignity, fairness and respect and we kept them motivated by using video and home working methods. And then those colleagues returned rapidly.

We moved as lockdown started to ease from having within our TP General merchant 130 branches open to more than 600 branches open in less than a week. And as Alan mentioned, throughout all of this, we kept a really tight focus on cash and liquidity, ensuring the viability of the business; however, the crisis panned out. And of course, the future looked very uncertain at that stage.

Very quickly and in parallel, we moved our operations to phase two, and we started to consider what we called winning the piece would look like. So what do I mean by that? So that’s to us that meant what would we be – what should we be doing during this period of lockdown and operational constraints to ensure that we are; one, ready for whatever comes next, but two, we emerge stronger.

For us it meant using our time and resources really wisely to drive improvements in the business. And in many cases, these were improvements that we had planned already, but we massively accelerated them. We generally aimed towards improving our customer service, improving our customer propositions, either to suit the immediate and constrained trading conditions, such as improving dramatically the digital transacting capability within our merchant businesses, but actually looking towards building a stronger platform for future growth.

The key net recognition here is that COVID has not only been a crisis for us, it’s been an opportunity to really focus our time and resources and to achieve much more than we had planned to in a shortened timeframe. And to do this we adopted a whole new operating rhythm and drumbeat, being comfortable with making lots of suboptimal untidy decisions, experimenting, learning fast, measuring, and moving forward fast. It was a fundamentally different way of working for us, and we’ve learned a lot.

So what has this meant for our Group key priorities? I’ve described a huge amount of change, none of which was planned at the beginning of this year or actually, even when we last spoke to you at the beginning of March. In March, I presented four key priorities for the Group. Many of you will recognize this slide.

The first one, as part of simplifying the Group was obviously to successfully de-merge Wickes, which was an action that we paused at the beginning of lockdown and pre-lockdown. The board continues to believe that the demerger of Wickes will allow both businesses to fulfill their potential, and we’ll only pursue it when the market conditions are appropriate to do so. The other three priorities I think we can broadly group together under the banner of really strengthening the core of the business.

The regeneration of Travis Perkins general merchants, as I said in March, was well underway, but we’ve driven this much faster pace of change, and we’re ahead of where we plan to be. For Toolstation, it’s proven its strength as Alan has mentioned, both in the UK and Europe, with strong like-for-like growth during this – the most difficult circumstances.

The network expansion, as Alan mentioned, was paused, but we’ve made so many other really important operational changes and progress that I’ll set out, which really gives us a strong platform for the future. And we’ve made some excellent early progress in our broader operational platform for the business and a huge amount of planning is underway from the lessons we’ve learned during the pandemic to continue that progress.

So first, then to our TP General Merchant, and really accelerating the strategy. Our aim of course is to be the first choice general merchant in the UK and to sustainably outperform the market and that intent is as true today as it was six months ago. This slide will of course, look familiar. We were working on how we improve our range, our service, our supply and our estate. The difference, of course, between then and now is where we are in that plan and what we’ve achieved. COVID has fundamentally changed the way in which our customers wish to deal with us. They had change forced upon them and we’ve enabled it very, very quickly.

I won’t talk through all the examples on this slide. We’ve speeded up our range and category reviews and enabled them to have much more local flavor very, very quickly. As I’ve mentioned, and as Alan mentioned, we pivoted our operations to call-and-collect and click & collect immediately, which has allowed us to give and allowed our customers to be much more organized and disciplined with plans, collection and delivery slots and organized over web and phone.

We’ve obviously made huge changes to our network and announced some deep cuts within our Merchanting businesses and within our TP General Merchant. We’ve closed 82 out of 650 branches, that’s 13% within our general merchant. As I touched on in March, we actually had a strategy over the few years ahead to close some of our smaller sub optimal branches, particularly in and around large conurbations. The reality was that many of these small branches couldn’t operate in a COVID compliant way and indeed, within the new ways of working that we had to bring in instantly post-lockdown.

And under those new ways of working which sustain and given the uncertainty that we see in the macro market, that Alan touched on, they were unlikely to be viable in the long-term and therefore we accelerated closure of those branches. We’ve really made tremendous progress through enhancing the merchants’ digital capabilities. Merchanting has long lagged retail businesses in the use of digital platforms for transactions, but as we all know for merchant businesses transacting through a digital means is only a fraction of the capability that arch core trade customers look for.

But as it happens, COVID accelerated and changed that game materially, so much so that we had to provide a contactless route to accessing materials and to transact in order to do so and that became a significant priority from March onwards and the business responded. We developed new and upgraded digital platforms for our merchant businesses very, very quickly, delivering click & collect propositions, greater visibility of stock and availability by branch, which has been hugely successful and allowed us to organize better delivery.

It’s been a real step change for our merchant businesses. And while some customers of course will return and are returning to branch based transactions and interactions, we see this as a sustained shift on an ongoing basis. So what we’ve done has put us a long way ahead of where we plan to be, there’s still more work to do, of course, and we are making great progress. The other leg of that work, which actually is more important to our trade customers is account management online and through an app.

And whilst we focused on the transaction piece through lockdown, that is now returning to be our number one priority based on customer feedback, which makes transacting with us much more easy for our customers. So great progress made in the digital space.

Our specialist businesses are extending their advantage propositions as well. They’re very much core to our business and we’ve made significant strides forward here too. They have too worked very hard on accelerating their digital platforms. Keyline have partnered with TP to provide a much broader, higher offering and we’ve rapidly developed new pricing frameworks for customers making quoting far more easy, quick and consistent. BSS have continued to develop their customer propositions as well as their digital capability, restructuring their tendering processes, and making great progress in developing BIM capabilities for the future.

Benchmarx have entered a much closer strategic partnership with TP to really integrate their back office systems and bring customer sets together to maximize the opportunity for these businesses. That sounds simplistic, but of course, in our customer base between these two businesses, there’s huge overlap. And now we will work towards getting a much more coherent one view of customer and drive shared, maximized share of wallet for these two businesses.

P&H as Alan outlined, we’ve made great progress in continuing to provide essential services for our installer customer base. We continued to improve the business. They have made again great progress in upgrading their web platform and developing their click & collect capability. And the strength of our pure-play online businesses like PlumbNation has really shone through, through the pandemic. We’re seeing good recovery in RMI post lockdown, and of course we’re entering the heating season now.

The disposal of PF&P obviously simplifies the business. And whilst we continue to retain the intent in the longer term to sell the business, we are focusing on operational improvement and improving returns.

For Toolstation, UK, we’ve made very, very significant development in the business. In recent years the key focus for Toolstation as Alan outlined has been on network expansion, and whilst the rollout was paused, of course, we opened 19 branches during July and August and as Alan said, we’re on track for 60 new openings this year, which in of itself is tremendous progress. But that really wasn’t the only area for development for the business. And we’ve achieved some really exciting things over the last few months.

Toolstation entered the crisis, of course, with really strong digital capabilities, which enabled a seamless transition to branch based – from branch based to wholly digitally based transacting and trading. But that kind of trading volume and the increase in trading volume that we saw in those early days really caused the infrastructure to creak. And I will never forget, sitting with James MacKenzie and the senior leadership team of Toolstation very early on Good Friday morning, seeing live, the web transactions increase hugely and to an extent that the website started to slow as it reached maximum capacity.

So what did the team do? Well, they simply rebuilt the website and they did it in one weekend and they did it over the Easter weekend. I mean tremendous performance, to execute that sort of change, and then deliver capacity, that allowed the business to continue to grow at that pace and obviously, that’s a change now that will last in the longer term.

The team then followed this up with re-platforming the wider business, which gives vastly improved operating capacity, and effectively future proofs, the IT platform for the years ahead and this was done in a matter of weeks. And it gives the business a much more a stronger platform for growth in the future. So the volume of web transactions obviously wasn’t the only challenge. Higher web sales becomes – comes the challenge of higher home deliveries and the home delivery distribution center really maxed out in capacity quite early on.

So another challenge was overcome in very short order. And in days, we repurposed the Redditch Distribution Center from branch replenishment to also be a direct-to-customer replenishment center and that was done as I say in days. With all this change going on and whilst operating drive through gazebo covered click & collect services for our customers, Toolstation delivered very strong like-for-like growth. So I think you’ll agree that is truly a remarkable performance.

Toolstation Europe continues to gain traction. Our European business was well placed as Alan mentioned with a combination of their multi channel capability, their value offer, excellent product availability, really winning formula in their markets, and DIY customers and trade customers sought them out during lockdown.

There’s been a significant increase in new customers, and these customers are proving very, very sticky. Once they’ve tried Toolstation, the rates of repeat custom is very high indeed and you can see that in the growth figures. Even during the lockdown period, volumes have grown considerably and that gives us really great confidence around our plans for continued expansion through 2020 and beyond.

For Wickes, I think the story is one of demonstration of the benefits of digital integration. Of course, David stood before many of you in January at the Wickes Capital Markets Day setting out why he and the team believes so strongly, that their strategy of a fully digitally integrated Home Improvement business model was so strong and seven months on, I think all they’ve done is demonstrated the benefits of that model very, very clearly indeed.

At the point of lockdown, the business instantly transitioned to a 100% digital transacting with the store network focused on it becoming fulfillment centers for customers for drive through click & collect, and it made a seamless transition for customers. Again, similar to Toolstation some of the stats for that period are truly mind blowing, over 60,000 orders for click & collect or home delivery process daily, six months of normal click & collect volume every six days, and more than 1 million new online customers registered with the business, that is more than the previous 11 years combined, so a phenomenal performance.

And of course, as Alan mentioned that was on the core DIY side of the business. The do it for me K&B showroom and installation service obviously had to be paused during lockdown as we couldn’t enter people’s homes, but as lockdown lifted, it was clear that there was pent-up demand for those services and those products. And so as we reopened the branches the team developed ways of working, both within people’s homes, but also placing a new digital visualization and surveying tool into the market which has allowed our DFIM [ph] business in a safe and controlled manner to reopen and meet the demand. And now it’s back up to speed with very, very encouraging lead generation over the last few weeks.

So we’ve learned some very, very important lessons from this period. It’s hopefully clear to you all that we’ve achieved a huge amount, both to enable our operations to navigate the crisis, but actually to drive some significant improvements in our business. We’ve really just have not wasted this crisis, and hunkered down to try and survive it. An important question that we regularly ask ourselves is what those important lessons that we’ve learned are, and what would we do differently next time?

And importantly, what have we done in this period that will embed in our ways of working going forwards? My first thought, which I mentioned earlier, is around the culture and the values of this business, as I mentioned that at the very start, but the strength of the culture and values in this business is what attracted me here over a year ago and really has served to guide us through these challenging times. We’ve prioritized safety and well being at all times and we’ve taken time to consider the moves that we’ve made and the pivots that we’ve made within the business, remaining committed to our customers, and committed to fulfilling the essential services that we provide them.

We’ve been values led through all of this, from everything to safety to operations to how we conducted ourselves with furlough and this has retained great commitment for both our colleagues and our customers. Another thing that strikes me is obviously timescales. I regularly have to remind myself of what we’ve achieved in such a short period of time. Whilst I’ve referenced the last six months, many of the changes that we’ve put in, practically all of them have been done in days and weeks.

That demonstrates to me that when we focus, and we when we move at pace, we can achieve a huge amount. And acting was the key, acting in the knowledge that actually, our first attempt to the new operating model wouldn’t be perfect. We made lots of suboptimal decisions, but we learned from them, we shared them and we moved very fast to make improvements and that has been tremendous. Nothing, or many of the changes previously seemed too big or too complex, and we broke them down. We started small, we’ve piloted hard, we’ve learned and we’ve moved fast, with lots of decision making at pace.

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I think we’ve learned a lot about ourselves during this period. I think we’re a lot more technologically capable than we thought we were. And whilst we’ve made very early progress, in that regard, we’re really starting to understand how we utilize our capability, work with our customers, and use the data that’s available to us to provide a better service and a better business going forward.

I also think we realize as a business how much we can learn from each other. The crisis has created similar challenges for all of our businesses. And by sharing that knowledge, by sharing ideas, by sharing the results of pilots quickly and seamlessly across the business, we’ve become much more agile and much more successful as a business. And this collaboration between businesses is something that I’m really passionate about and we’ll be doing more of in the future. We’ve already seen the benefits of this. And more importantly to me, our colleagues have seen the benefits of this, and we move forward with that high on our agenda.

So what about the future then? We began to think about the future before COVID arrived on our shores, but it became very quickly apparent that our planning for the future couldn’t stop as a result of the crisis and we needed to push forward with our thinking. Indeed, some of our hypothesis that we were testing and talking about back in the autumn around customer behaviors and how they might change and how business models might change in the future, have been accelerated overnight. And therefore, we need to keep thinking about them, planning for them and delivering solutions to them.

So I think about the future across three horizons with clear strategic aims for each of those horizons. The first one, I think we discussed at length today, we call it strengthening the core of our business, getting the fundamentals right to deliver a successful best-in-market service to our customers today and just drive sustainable market outperformance. That includes three of our key priorities and as you’ve seen today we’ve made some really fantastic progress.

We’re actually, I think ahead of where we intended to be, but there’s still a huge amount of work still to do. The medium term horizon, we call this a staging post to create a modern merchant. What does that mean? It really means a leading business materials distributor, one that is truly customer intimate, but digitally enabled and completely integrated with its branch network. It means greater collaboration across our business, being more intimate with our customers, having a single view of that customer and how we can maximize our share of their wallet, and really maximizing the opportunity at group level. And it means leveraging our scale to develop leading customer propositions for the longer term.

And finally, of course, we need to look longer term. The construction industry landscape is changing. COVID has shown us that. And as a supplier to the industry, we need to be prepared to change with it of course. We ask ourselves some broader questions. How do we partner with the breadth of our customer base to enable our customers to do more, more easily? And how indeed do we help them grow their business and in doing so grow ours? So lots more thought to come over the months ahead.

So to sum up, then, I think to try and describe the first half of 2020 is actually quite difficult, but in short, I’d say that we have successfully navigated the COVID crisis so far, it’s still with us, and changes every day, and we’ve achieved a huge amount in improving our business. Meaning that I think we’re coming out stronger. We’ve done this by really focusing on a timely and clear purpose for our business, being true to our values, leading the industry and using our voice with government very, very clearly, looking after our people, our colleagues and our customers.

And we’re coming out stronger, because we didn’t just hunker down and waste the crisis. We innovated fast. We challenged ourselves. We knocked aside old barriers. We got out in front. We took tough decisions early, and we focused on winning the piece. We’ve still got an awful lot to do, but I feel very much as though as a business, we’re on the front foot.

With that, Alan and I would be very happy to take your questions.

Question-and-Answer Session


Our first question comes from Yves Bromehead of Exane BNP Paribas. Yves the line is yours.

Yves Bromehead

Good morning, gentlemen. Thank you for your presentation. A few questions on my side. Number one, I want to come back to the annualized cost setting measures and just wanted to know if you could clarify the timing of this between H2, 2020, but also what we should expect in 2021? I would also be interested to better understand the mechanics behind this given that you benefited from the furlough, but also business rate relief, and therefore what is exactly the net impact, probably in 2021.

Number two, looking more near-term into H2, 2020, so I’m just wondering if you could give us a bit more color in terms of the margin side of the business, especially on your comments with better activity levels, the cost saving measures that you’ve implemented and business rate relief, which should continue into H2, 2020. So any color on that would be helpful?

And maybe just a last question on the digitalization of your Merchanting business, given that you have seen a pickup in activity, can you comment on whether or not you’ve been seeing a switch back to the more traditional way? And what type of investment you will do in the IT side of the business in the future? Thank you very much.

Nick Roberts

Thank you, Yves. Perhaps for those first two, I’ll hand to Alan and then I’ll come back on the digital merchant.

Alan Williams

Yes, so Yves, thanks for the questions. On the savings from the restructuring program, so £120 million of gross benefit, I think I referred to the fact that the program was essentially complete by the end of August. So if you take that £120 million, and you take full 12s, that takes you to the number we’d anticipate for H2 2020 and therefore as you go through into 2021, I think you can basically assume on a gross basis £10 million a month for the first eight months before we start to cycle the saving from September onwards in 2020.

In terms of the furlough scheme, no anticipated benefit in the second half of 2020. I think that, that’s done from a business rates point of view, around £40 million in the second half, and then £20 million to come in the first quarter of 2021. I think we need to think, when we were thinking about the shape of the P&L about why we did the restructuring program, we undertook the restructuring because we’re acutely conscious of the volume environment in the short to medium term. So the design of the program was to offset some of the shortfall in gross profits that we’ll see because of reduced volumes going through the business.

As we think about your the second question, you had Yves on H2, 2020 margins overall, I think I referred separately to the gross margin element that I expect to see that, again, broadly unchanged. Overall, I think we tend to see a slightly stronger second half in terms of margin. There will be benefit from the fact that volumes have picked up, but it’s important to remember how uncertain the current environment is. So I think it’s, we we’ve deliberately not given detailed financial guidance today because we just think the environment remains pretty uncertain at this stage.

Nick Roberts

Good, thanks, Alan. And just on the digital merchant question, Yves, of course, we saw pick up through necessity. We closed our gates, but we served our customers through contactless means and of course, our customers pivoted to using technology as a means of accessing materials. Of course, as I mentioned, we have seen a transition back to as we’ve opened the gates of our branches, while remaining and retaining our safe working practices in a very controlled way, we’ve seen customers wanting to re-transact through the branch.

But we continue to develop our digital capability because we see a shift in our customers’ behavior and a willingness to use technology to work with us. It makes it simpler and easier for them in a number of different ways. So we continue to develop that. An awful lot of that development has been obviously, our people’s time and capability in developing these tools and deploying them very, very quickly.

So we’re still, as I said, working on how we plan the future of our digitalization of the business as part of our broader improvement in our technology underpinned for the business. And as we plan that, obviously, we’ll be thinking about the investment in that as we move forward, but broadly at the moment that is within our kind of OpEx line as we invest our time and work with our customers to develop that capability. I hope that answers your question Yves.

Yves Bromehead

Yes, thank you very much.


[Operator Instructions] We now have a question from Robert Eason of Goodbody. Robert, please go ahead.

Robert Eason

Good morning, everyone. Can you hear me?

Nick Roberts

Yes, we can, good morning, Robert.

Robert Eason

Good morning. Sorry, I’ve got five questions. So I don’t know if you want them all at once, or one-by-one.

Nick Roberts

Why don’t we take them all at once and then we’ll decide how we answer them.

Robert Eason

Okay, just my first question is on rebates. And you call those has been an impact in H1, which is totally understandable. But I just want to understand, what are your assumptions in terms of coming up with the rebates, in H1, like are you making assumptions about H2, in terms of where volumes would end up? And you’d come up with our figures and just have a debate about how much of it you’ve already bought in rebates and the assumptions that that is based on?

Second question is just around bad debts. Quite clearly, there’s increased provisions being put through in the H1, which is totally understandable. But just generally, what are you seeing on the ground as you chase around your customers to pay, is there any particular areas where it’s harder and smaller customers versus bigger customers in different sectors? So just a general discussion around that. And you talked about July and August is back to previous years levels.

Obviously, when you broke out the monthly figures for April, May and June, there was big variance between the businesses, mainly reach out being a big plus positive outlier. And on that, can you just give us a bit more detail of the mix within that July, August, back to kind of 2019 levels? And my last question, so sorry, this four, my last question is just on the store closures. When you’re analyzing this, I understand it’s only a couple of months so far, how much of the sales are you capturing and how should we think about that and And as we model going forward? Thank you.

Nick Roberts

Alan, I’ll take the last one, and you pick up the rebates and debt.

Alan Williams

And so yes, Robert, quite a financial, financially focused set of questions more than the strategic focus. So on rebates, assumptions, H1 and H2, the element that I was referring to on rebates that we’ve looked at differently of course is the any annual volume rebates, so growth incentives that we receive from our suppliers. We’ve made a fairly prudent assumption at this stage, given the lower expected level of purchases for the year, we’ve reflected that as we accrue for the expected benefits for the first half, we thought about where some of the second half volumes, in terms of purchases would lie, and then formed the view on that.

From a bad debt perspective, the increased provisions are largely what you’re required to do through the accounting standard IFRS 9, so you have to look forward to your expected credit loss. How do we do that? Well, we based it on previous recessions and what we’ve seen. At this stage on the ground, I referred to the job the credit teams have done with say also and with branch colleagues, they’ve done an absolutely outstanding job, and have worked tirelessly with our customers to collect. So there are, of course, a few customers who have gone under during the second quarter. But we’ve not seen a large step up at this stage in business failures amongst our customer base. But that’s the point of provisioning for the future in case that were to arise.

In terms of July and August details on mix, I’d say it’s largely a continuation of the trends that we’re seeing in June. So we’re seeing continued robustness in, in DIY in retail, across Wickes and Tile Giant. The Kitchen & Bathroom business in retail is recovering well. Toolstation remains a consistent strong performer. We’ve seen the merchants, I think you have to break it down a little by end market to really understand what’s going on there. So, more softness in new starts and in commercial, but the RMI pace remaining pretty robust at this stage.

Nick Roberts

Fabulous. And just on your last question, Robert, around store closures and the retention of customers and custom. Clearly there’s a mixed picture here. Within our general merchants, I think, as I said, we focused on the smaller, typically rural or small market town branches that proved to be suboptimal for us going forward. And of course, with the smaller local, typically local customer base there, we’ve seen some loss of that customer, whilst not all, within our urban – within the urban areas we’ve seen and would expect again a typically larger customer base retention of more than 80% of those customers.

Within our specialist merchants the picture is slightly different of course, where we see very high retention, within CCF within Keyline, within BSS, their larger relationships, larger customers we typically deliver. And so actually they’re less reliant on coming into the local branch and so we see very high retention rates there. So, a mixed picture, depending on which part of the business and which part of our customer set we’re looking at. I hope that answers your questions, Robert.

Robert Eason

Yes, if you – if I could just one more, just sorry, just on Benchmarx, and strategically aligning it more with Travis Perkins, is it just too much of a big assumption to assume, we could see that in the five year periods being fully integrated within the General Merchanting branch network, getting the crossover in a customer base or is that just a step too far?

Nick Roberts

Well, as I said, we are we’re looking at full integration in terms of our — many of our back office systems and processes because, the businesses share a customer base that is very common. And we aim, as I said, to maximize the opportunity and the proposition, the integrated proposition we give to those customers and of course, the share of their wallet. So, how we, what we find as we move those businesses together will determine the decisions we make going forward. But it will be a close integration of the businesses and that process has already started.

Robert Eason

Okay, thank you.


Our next question comes from Will Jones of Redburn. Will, the line is yours.

Will Jones

Thanks. Good morning. Yes, a few from me as well, please. I think mainly we’re revolving around gross margin and mix. But would it be possible I think the operating margin declined in General Merchants about 500 basis points. I know you don’t like to split out exact details on gross margin anymore, but could you give us a broad feel as to how much of that came with the gross line potentially?

Within the gross margin pressure are you hopeful to see, you obviously highlighted various moving parts, but none of them were actually around kind of industry competition, per se, although one of your competitors did refer to that as an issue but back earlier in the year, could you just give us a bit of a feel on them, on that point around the industry competitive backdrop, please?

And then there’s just a couple of questions. Yes, couple questions on mix, I suppose, it was always quite intrigued by your points on collect versus delivered. But if we look in 2019, I think 34% of merchant sales were collected and it was 42% in the first half of this year, so it’s actually gone up, which surprises me, given them the pandemic. So could you clarify the point please around kind of collect versus delivered within the mix?

And then actually, so the last was really just kind of jumped into it slightly, but Plumbing & Heating, obviously there’s been a lot of change in that business in the last few years around branch closures and disposals and now cost savings, and it’s probably going to be worth as much money as any in 2020. But could you give us a broad feel for what you might see as the right margin, a sustainable level of volume, but some points in the future for that business because obviously a lot has changed? Thanks.

Alan Williams

Thanks, Will. If I start with the points on Merchanting operating margins, you’re right, I’m not going to provide a breakdown at this stage. Overall, the gross margin drop is a relatively modest part of the movement. I don’t think it’s helpful to focus on a 500 basis point decline in margin given the severe impacts of the lockdown on volumes. Just thinking about the competitive backdrop, I’m not sure we’ve seen a huge amount of change to be honest, during the period.

I think all competitors have rightly been focused on health and safety and on supporting their customers through unprecedented conditions within the marketplace. I’d say we’ve not seen intensity on pricing during that period. It wouldn’t surprise me if there is some pickup on the competitive landscape from a pricing point of view, given the volume shortfalls people have seen over the year. When I look at our overall trends, I’d say we’re pretty comfortable with where we’ve been going there in terms of our relative share. And as both Nick and I said, we think we’re well placed to continue to outperform in the medium term.

From a Plumbing & Heating point of view, yes a huge amount of change. If we think about the different drivers, we started from a point where the business on last year’s volume was making around 3% operating margin. There is some benefit from the disposal of PF&P, given it as a wholesale business, and therefore lower margin albeit around £250 million to £275 million of revenue. So think of that as an upwards point. And we’ve carefully said in the statement, there’s lots more that we can do to continue to improve the business over time. And so, for competitive reasons, I’m not going to go into the detail of what those initiatives are, but we are optimistic that we’ve got some good plans.

And when we look through the impact of the pandemic, we’re positive that we can continue to improve that business a little further from this stage. I’ll have to get back to you on the detail on the collected versus delivered. I think intuitively you’re quite correct. So I would expect that to be more delivered overall within the period, but we’ll come back to you on that.

Will Jones

Anyways, thank you.


We now have a question from Christen Hjorth of Numis. Christen, the line is yours.

Christen Hjorth

Thank you and good morning. Just three questions from me if that’s okay. And the first one is on the stock availability. We’ve heard that certain products have been less available over time. So I know obviously, you’ve had quite a significant inventory inflow in terms of working capital over the period. Just any thoughts on being able to restock into the products and stock availability in general?

The second one is just on Toolstation. So firstly, there’s some extra COVID-19 overheads you referred to, I was just wondering if that’s expected to continue in the second half or the productivity in that regard can improve as time goes on? And then also with regards to Toolstation Europe, whether you can give any guidance to the stage to perhaps how the losses in that business trend is obviously going on for this year, but perhaps looking into the next year as well?

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And then finally, just coming back to the restructuring point are £120 million of cost savings you’ve run through, just if we look back to like a normalized basis in I’d say 2019, would that be a net neutral impact on EBIT? I’m just trying to sort of understand what that potential impact on revenue and gross margin would be on a normalized basis from that restructuring. Thank you.

Nick Roberts

Thank you, Christen. Should I start and…?

Alan Williams


Nick Roberts

On stock availability, yes I think it’s well known and anecdotal in the market, that very quickly some materials, particularly plasterboard, and plaster, for example and some parts of the timber category quickly became pretty scarce. I mean, I think some of that was related, for example, to the very rapid deployment of materials to construct partitions for Nightingale Hospitals, for example, as well as the completion of work that was ongoing. That stock whilst, it some parts of some items have remained in short supply through recent months, actually, an awful lot of that availability has improved, and we’re seeing a return to more normal levels. So, overall, the stock levels are as I say, improving and availability is improving.

On Toolstation, the extra overheads as we both mentioned, quickly pivoting as successfully as Toolstation did to operating a car park base, gazebo covered click & collect model, obviously, we have to invest in colleagues time to manage that model safely for our customers and for our colleagues. And as we move through that we’ve — we’re experimenting with different technology to help us manage customer movements within or around our stores. And obviously now in recent weeks as we returned within Toolstation to our stores being opened fully, those costs obviously will normalize to pre-COVID levels. So that was a short term issue. There were some increased costs associated with home delivery. But again, as we return that business to more normalized levels, we’re looking at ways to take those costs back in.

Alan Williams

Let me do the last two, Nick. So Christen on Toolstation Europe and the loss trend and I think the level of loss will depend on the — to some extent on the scale of our ambition and how quickly we go after the business. So, clearly when you open, as indeed in Toolstation UK when you open new branches you incur the overheads before the sales come through, and it tends to be about 18 months until they get to contribution positive to the central overhead.

So, in other words, if we see an opportunity to go much more quickly, and to accelerate the branch opening program in the European market, that will actually increase a loss in the short-term. But on the other hand, we’ve got a Dutch business which is maturing rapidly. So, we’ve made fantastic progress in the Netherlands. I think we have a real winning business there. And I would expect to see that business over the next 18 months move towards being more EBITDA neutral rather than loss making. So that will offset some of the numbers in other markets.

On the restructuring and how to think about that, it’s actually a pretty difficult question at this stage. That £120 million is a gross figure. Will we get to net neutral? Well, I think it depends on how you model out what happens on revenue. So if I start from a total revenue for the group, somewhere between £6 billion and £7 billion and take a percentage point on that, you can see that on an annual basis, but 1% volume shortfall is a 30% gross profit if you did nothing, could be up to a £20 million impact to profit.

There are some overheads which are more variable with volume, so you’d expect those to come down, so it’s not fully a £20 million impact for 1% on a full year basis, but depending on where you see the volume panning out, you can see the importance of having taken out some of the capacity within the business overall.

Just one point to add on mix around stock availability and restocking, given the ongoing Brexit uncertainty, do expect to see us investing a little in rebuilding some of that inventory in the next four months, given that we were carrying around an £80 million level of inventory at the end of 2019 in case of no deal, we will be looking to rebuild some of that, given the ongoing uncertainty.

Christen Hjorth

Excellent, thanks very much guys.

Alan Williams

Thanks Christen.


We now have a question from Gregor Kuglitsch of UBS. Gregor, please go ahead.

Gregor Kuglitsch

Hi, good morning. I hope you can hear me well.

Nick Roberts


Alan Williams

Fine Gregor.

Gregor Kuglitsch

Good, thank you. So I Just want to come back, I guess to maybe Slide 11, which kind of breaks out the earnings movements, obviously lots of pluses and minuses and you’ve given us some help, overhead savings, I think you were suggesting £40 million, £20 million on the reversal provision and indeed, business rates being I think, another £40 million. So there’s quite a lot of positives there. Right, if you tally those up, so the question, I guess, is obviously, there’s a volume equation, but then there’s lots of stuff like, £20 million overhead costs inflation in Toolstation, can you just give us some picture on some of these other moving items like the £20 million for instance on the investment — and the overhead costs in Toolstation, just so we can get a little bit of a sense for the — I guess for the second half?

And then maybe just to be crystal clear, I mean, the reason that you not chosen to give any kind of second half earnings guidance over here, obviously Q3 is almost over, does that suggest you’re perhaps not quite clear at this stage whether it will be basically flat compared to last year just to be clear? And then a couple of questions maybe just a little bit technical, but on the like-for-like sales do you’re saying you’re close to — on a like-for-like basis, but then obviously your sub branches, which I believe if memory serves me right cost 4% to 5% of sales, is that the way to read it, so you you’re slightly down like-for-like and then we have to knock off the basic store closures?

And then maybe on cash, so obviously you had a great performance in H1. I think you’re saying the £100 million of that comes next year. Do you expect debt to rise from here? Obviously absence of that repayment to that — to next year, but this year, do you think it will or do you think overall the increased working cap investment will be offset by basically earnings and your dislike lower CapEx as well, just to understand the debt trajectory? That would be helpful. Thank you.

Alan Williams

Okay, Greg, let me begin. Actually, I may end as well because they were all quite financial. So, overheads and how we should think about that. I think you could take the inflation that we saw in the first half and assume that — that’s an annual event, so you could continue that through into the second half. On Toolstation, from an investment point of view, clearly there was a slowing in branch openings, but we’re now reaccelerating the branch openings to complete the 60 for the year, so there’ll be some ongoing investment there on a gross basis within the overhead movement, and we’ve given very explicit guidance on Toolstation Europe at this stage.

I think you did identify all of those savings elements on the other side quite clear. You asked a question about second half guidance and said Q3 is almost over. I’d say Q3 from what we’ve recorded is two thirds of the way through actually, and moreover, July and August from a trade point of view are slightly weaker months than September as people take their summer holidays and the trade come back in.

So I think we need to see how that pans out through September and October to have a clear view on where things head. The reason we’re not giving guidance today on the balance of the year beyond what we’ve said in the statement is because the external environment is so uncertain at the moment. And you might find other people being a bit more bullish on things or a bit less bullish.

But at this stage, I think we need to wait and see how things play out. What the impact of local lockdowns may be or if we get towards a second set of national measures, not suggesting a national lockdown, but those measures may be tightened at some stage given the increasing incidence of cases per 100,000 that we’ve seen over the last couple of days.

On your point on like-for-likes, I think we’ve been clear today and previously that a number of those branches that we’ve closed are much smaller than the average. So there’s not as pronounced a gap between like-for-like and branch closures. Take the like-for-like at this stage is essentially flat when you’re thinking that through. And then from a cash perspective, do I expect debt to rise and the let’s play that out to the 31st of December, 2020. Plus or minus £50 million I think we’re going to stay about where we were at the end of June.

We reported this morning that liquidity had increased by £100 million over two months in July and August. But as we start see the trade come back and the debt to book rebuild, I would expect to see some investment there. In the debt to book, I’d expect to see creditors and stock broadly offsetting them each other from here. And I’d expect to see some — the growth in EBITDA versus H1 and in H2, offsetting the cash impacts of the — on the debt side. So that’s how I get to roughly staying around the level that we reported at 30th of June.

Gregor Kuglitsch

That’s very clear. Thank you.

Nick Roberts

Thank you, Gregor.


Okay we’ve got a question from the webcast from Sukumar from [indiscernible]. It’s a two parter.

Unidentified Analyst

There’s a history of R&D [ph] upgrades going wrong at Travis Perkins. Could you please talk about some of the actions the company has taken to avoid any missteps this time around? And then the second part, could you also please provide some color on some of the actions taken to improve the operational performance of the B&H segment?

Nick Roberts

Good, okay. Well, I’ll start. Thank you, Sid. We are taking a fundamentally different approach to addressing how we work through and with technology. And as I think both Alan and I outlined, we’ve rapidly developed and deployed tools, from our web offer to digital transacting and account management capability that we developed, both in-house and with partners, but we’ve done so in a thoughtful, incremental way, using capability as I say that we have in-house and with partners, and done so as small agile teams working between our technology function and our business together and very close to customers.

That’s a fundamentally different way of developing capability in an agile way, learning and learning and measuring success and moving very quickly than typically the large scale, planned ERP type programmatic approach that many companies, not just Travis Perkins have taken in the past. And we know that there are substantial risks in – working that way. That being said, we are obviously planning very carefully the way in which we will upgrade and replace some of our legacy transactional systems.

But again, we’re taking a fundamentally different approach. We’re learning the lessons from the past. We’re working in a very agile way with both business and technology teams working together. So I think our approach this time is fundamentally different. What we’ve been able to learn through the crisis has been substantial, and it’s informing our approach. And currently we’re making good progress.

Alan Williams

Let me answer Sid’s question there on operational performance improvements in Plumbing & Heating. I did get a question earlier on this and said, for competitive reasons, I don’t want to give too much detail, but I’ll try and help on some of the elements. So firstly on the cost saving program, we’ve closed some more branches in Plumbing & Heating given the impacts that we anticipate from the recession. So those cost savings £25 million annualized.

We’ve also started looking at some further supply chain efficiencies that we can get by consolidating volumes within the Omega warehouse. So that’s our large center in Warrington. We’re getting benefits from the simplicity of the business having removed some of the, I call it a bit of a distraction from having a wholesale business within there.

I think if Andrew Harrison and Dave Evans who run Plumbing & Heating were with us this morning, that the single thing they would identify is, since we created the separate standalone functions to support a potential disposal of Plumbing & Heating, they’ve had a much greater accountability for the cost base and much greater visibility, then if you’ve got a load of shared central functions. So that’s given them line of sight to be able to put in place some further changes within the business, which were part of the cost saving program.

There are some gross profit initiatives, but I don’t want to go into the detail of those. We are looking at supply based partnerships and how we can make those more effective in the future. But I’m not going to go into detail for competitive reasons. Thank you.

Nick Roberts

Hopefully that answers your questions Sid. I think we have time for one more from the phone.


Our next question comes from Ami Galla of Citi. Amy, please go ahead.

Ami Galla

Yes, thanks. Just two questions from me really, on Toolstation. I remember last year, we talked quite a bit about the products in extension that you you’d implemented in that brand. I’m wondering if you could give us some color of where we stand on the journey and what’s the plan forward in terms of the product ranges in the business?

The second question I had was on Wickes and Toolstation, could you give us, could you update us of where we stand in terms of ecommerce penetration in both these channels, maybe both online and click & collect how far that progressed, after all of your branches are now operating in full service?

Nick Roberts

I’ll start Ami. Just on range extension, the Toolstation team are continuing that journey with an extended and deeper range, both with own brand products which are proving very popular with our trade customers, but also continuing to enhance the range of a great professional range of tools and products for our professional — for our core kind of professional trades people customer segments as well. So continue journey. I mean, we will continue to look at what our customers want and how we serve them best and we’ll continue to expand our range. So that’s an ongoing piece of work for the team. So good progress made so far and that journey continues.

Alan Williams

Yes, just to add on Toolstation if I can first Nick. The new catalog launch is in the next week or so in Toolstation, UK. If you were to compare that catalog with the previous one, and the size of it with the catalog over the last three years, you’ll see that getting thicker and thicker each time. So, that gives you an indication that the skew base is still increasing.

From the Toolstation Europe point of view where we are a smaller range at this stage, the pattern will be to follow the UK in each of those markets as appropriate to the local demand. On the question around e-commerce penetration in Wickes and Toolstation, I think I mean the sense of the question you’re asking is, with the branch network now fully up and running again or almost fully up and running and I’ll explain that from a Toolstation perspective, what are the levels of home delivery, and click & collect that we’re seeing.

From a Wickes point of view, we still have a much higher level of home delivery, and also click & collect. And remember we’ve got the online in store capability as well. And so they’re still running significantly ahead of prior year levels. From a Toolstation perspective, my comment is that not all of Toolstation branches at this stage have gone back to things like taking cash and also having customers in the branch for operational reasons where they’re quite small and it is difficult to implement distancing. So those sorts of branches would still be 100% ecommerce, if you like on the definition. Again, take that to one side, significantly higher level of home delivery continues within Toolstation as well.

Nick Roberts

Great, thanks, Alan. I think we have time, we have for two further questions.


Our next question comes from Charlie Campbell of Liberum Capital. Charlie, please go ahead.

Charlie Campbell

Yes, good morning, everyone. Thanks for taking my call. Just a couple of fairly short ones from me, I think. Just on the — just a question on the overheads, I’m trying to work through that overhead bridge on Slide 11. Alan, you could tell us kind of what the overhead saving was from the PF&P disposal, just help us square some of that circle? And then secondly, on material pricing, obviously a couple of things in short supply, but are we right in thinking that the material price is generally fairly neutral or are there some pockets of inflation at all sort of specifically thinking about currency maybe?

Alan Williams

Yes, Charlie on the PF&P saving it is basically the broadly equal and opposite, so the impact from Toolstation Europe overheads within the mix overall. At this stage, we’re not seeing significant cost of goods inflation coming through. But, we’re about to enter that round of calendar year annual negotiations, so let’s see where that plays out. I’m not anticipating significant changes at this stage.

Charlie Campbell


Nick Roberts

Thank you, Charlie.


Our next question comes from Sam Cullen of Peel Hunt. Sam, please go ahead.

Sam Cullen

Hi, good morning every one. I’ve just got a couple. With respect to the kind of guidance or lack of guidance for this year, can you remind us how big September and October are in profit terms in a normal year? So we can take that into the equation. And then also just you give some comparable color early on in the presentation about the trading in Kitchen & Bathrooms, so could you give us any comments on recent weeks there and also some color on how important that is to profitability of Wickes relative to the core business?

Alan Williams

Yes, hi Sam, it’s Alan. Just on the K&B point first, in terms of profitability at the moment, the strength we’re seeing in core DIY is more than offsetting any impact from shortfall on Kitchen & Bathroom showroom sales. Remember that on the showroom sales we book the revenue when we ship the goods. And so typically, and we talked about this previously, there’s an eight week lag between receiving a confirmed order and actually shipping, so or six to eight weeks, so that gives you, what we saw coming out of lockdown was we had shipments when tradesmen could get back into the home during June, which came before the orders picking up. We’ve then seen a strong recovery in the order pattern and we’d expect to see those sales go through over the next couple of months.

So from a profit generation September and October together are a little more than 20% of the full year profit for the group. What you tend to see in the group overall is December, January and February being relatively light overall with the exception of Plumbing & Heating depending on how cold the weather is. You then see a strong period from March to June profitability drops a little from that June level normally during July and August, and then picks back up September, October, November.

Sam Cullen

Okay, thank you.

Nick Roberts

I think that’s all the questions we have.



Nick Roberts

Super. Well thank you for joining us this morning and we look forward to seeing you again next time.


Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.