Well, good morning to you all, and a warm welcome to our 2023 full-year results presentation to everybody in the room and on the web. Before I start, may I introduce to you our new CFO, Duncan Cooper, known to many of you from his time at Crest Nicholson. I'm delighted to have him here with me today. Turning to today's presentation, in 2023 our teams demonstrated huge commitment to retaining our market leadership with their relentless customer focus and commitment to service excellence. It was a challenging year in weak market conditions, and we drove actions to really support profit recovery and cash generation. To be clear, the group's performance in 2023 was disappointing.
The continued macroeconomic uncertainty, weak market conditions clearly impacted our trading performance during the year with volume weakness across new house building as well as domestic RMI and very challenging deflationary dynamics on commodity products. Looking back at 2023, we saw overall revenue down 2.7% with a progressive downturn in new house building activity and domestic RMI demand. A combination of these lower volumes in our merchanting businesses, commodity deflation notably on timber, and overhead pressure have weighed heavily on our earnings with operating profit down 39%. Despite these challenges, throughout the year we have invested to protect and to grow our market-leading positions and made market share gains in both Toolstation and the Travis Perkins General Merchant. Our primary focus is the near-term performance improvement while we ensure we maintain a competitive advantage and differentiation in the market for the longer term.
We've taken robust measures to address the challenging market conditions, and we're also transforming our operating model to capitalize on our scale and create a simpler, more efficient business. These actions are underpinned by a highly disciplined approach to overhead management and capital expenditure that will enhance cash generation and ensure that the group continues to benefit from a strong balance sheet. GBP 35 million of annualized benefit has already been delivered from the first phase of this work with actions to address our cost base further including a reduction in central and regional overheads, closure of Benchmarx standalone branches, and the closure of Toolstation's Bridgwater DC and the closure of the Daventry DC as well. We've identified further opportunities to improve profitability simplifying our structures, lowering our supply chain costs, harnessing benefits from new technology. Finally, we're working on options to address our loss-making businesses.
Today we can confirm that work is underway on a potential plan to exit Toolstation France while we'll also be conducting a strategic review of the Benelux Toolstation business. Any decisions on these are prior to consultation procedures with the relevant employee representatives, and I'll come back to these in more detail later on. I'll now hand over to Duncan to run us through the financial performance in detail.
Thanks, Nick. Good morning, everyone. Apologies if I cough through this. I appear to have given both of us a cold just in time for Results Day. Very popular with the new boss. Some familiar faces and some I'm looking forward to getting to know as well. Thanks, Nick. Good morning. I'm pleased to be presenting my first set of results as CFO of Travis Perkins. I'll start by echoing Nick's opening comments that 2023 was clearly a tough year for the group. But the steps we took in Q4 last year and will continue to take this year represent decisive action to transform the group and position it strongly for the future.
I joined Travis Perkins because of its fantastic assets and brands, great people, and a strategy and a vision that is geared to take advantage of the structural opportunities and challenges that the UK built environment presents. Our strategy also strongly positions us to be the leading voice in driving the changes all stakeholders in this sector will need to embrace if we are to grasp these opportunities and overcome those challenges. After eight weeks in the job, that conviction has only deepened. I'm excited about what we can achieve, but we equally have to take into account the enduring challenges of the current market backdrop and recognize that future opportunity only exists if we accelerate the change in the way in which we operate. Both Nick and I will be outlining that in today's presentation. Coming first onto the financial overview.
Revenue was down 2.7% as the group saw lower volumes across the year and the erosion of a strong pricing position in H1 as we headed into H2 as commodity deflation started to feed through. I'll cover this in more detail on the next slide. Adjusted operating profit was GBP 180 million in line with our most recent guidance at the end of 2023 but down 39% on prior year reflecting that challenging trading backdrop but also other cost headwinds which again I'll come back to later. Adjusted earnings per share were down 52% on prior year impacted by the lower adjusted earnings and the higher rate of UK corporation tax. Lease-adjusted net debt to EBITDA was 2.6x at the year-end above our target range of 1.5-2 times.
This was driven by both an increase in financial indebtedness and an increase in lease commitments coupled with a lower EBITDA. I'll cover our leveraged position, working capital, and capital allocation in more detail later. Cash conversion was 81% in the year which is higher than last year with trade debtors and creditors broadly moving in line with declining revenues and volumes but with a reduction in other creditors year on year. Inventory was in line with prior year. Finally, we are proposing a final dividend of GBP 5.5 per share which in conjunction with a GBP 12.5 per share interim dividend payment makes GBP 0.18 for the full year. This represents a payout of 40% of earnings at the top end of our previously guided payout range. I'll come back to talking about the dividend again later on.
Over onto the next slide and the 2.7% revenue decline from prior year. We started the year with the continuation of the strong pricing position seen at the end of 2022. But as the year unfolded, commodity deflation started to feed into several categories most notably and materially for the group in timber but also in other categories such as sandstone, landscaping products, and bricks and blocks. The net effect of these dynamics being reflected in the pricing and mix bar on the chart. Volume performance in the year was down 5% on a like-for-like basis. In merchanting, down 5.7%. And in Toolstation, down 1.4%. And again, I'll come back to each segment later on. From a network perspective, any changes and their contribution to revenue are reflected in the subsequent bars. The Toolstation network growth bar represents new stores in the UK and Europe.
And again, I'll come back to this. The new merchant branches bar reflects new branches opened in the year and any like-for-like contribution from an opening in 2022. The branch closures bar principally relates to the previous Benchmarx closures. And finally, the value-added services bar relates to the strong performance of our managed services and hire divisions which again I'll return to later. On the next slide is the usual profit walk we provide for 2022 to 2023. The gross profit decline is a product of the lower volumes and pricing backdrop I've already articulated. The next bar reflects the impact of overhead inflation which can be principally ascribed to the 6% average pay rise we gave to our colleagues in April 2023 which was weighted towards lower remunerated colleagues.
In recognition of the difficult economic environment, we also made a cost of living payment worth GBP 8 million to colleagues in January 2023. The strategic investment represents costs arising from the opening of the Toolstation DCs in the UK at Pineham and also Rotterdam, which services Benelux plus the ongoing expansion of the European network. Next is property profits, which were GBP 10 million lower year-on-year. The GBP 25 million cost actions represents the annualized effect of the actions we took in 2022. And next to it is the non-repeating effect of the GBP 15 million restructuring charge that was not recognized as an adjusting item. Volume-related savings and trading days complete the walk arriving at the GBP 180 million for 2023 on the right-hand side. I want to now come on to talk about the adjusting items we recorded last year.
The first item is a GBP 17 million restructuring charge which primarily represents the severance costs associated with the headcount changes we made in Q4 2024. It rolls predominantly in 2023 in central functions or regional sales and support teams. It also reflects costs associated with the closure of the Toolstation UK Bridgwater DC and the proposed closure of the Toolstation UK Daventry DC. Around GBP 7 million of this charge was paid out as cash items in 2023 with around GBP 9 million to be paid out in cash items in 2024. The balance are non-cash items. The next item of GBP 10 million relates to the closure of 39 Benchmarx standalone branches which were announced in February 2024 as part of our review of loss-making activities. Nick will come on to talk about the strategic rationale of this decision in his section in more detail later.
These closures crystallize a GBP 10 million impairment relating to property, tangible fixed assets, and the recognition of a dilapidation provision. Finally, in conducting our annual impairment review of Toolstation France under IAS 36 and assessing its discounted future cash flows against its carrying value on the balance sheet, we've also recorded a GBP 33 million non-cash impairment of our Toolstation France business. This technical accounting adjustment is in and of itself unrelated to our decision to explore a potential exit of Toolstation France. The impairment relates to the write-down of goodwill, property, and right-of-use assets. We would expect further charges to be recorded in 2024 relating to these areas but also arising from other changes that have been proposed or made to the group in the group operating model in the current year. I will give you a further update of these at the half-year.
Onto the next slide and the segmental performance for the merchanting businesses. Revenue was down 4.4% with adjusted operating profit down 32.5%. Adjusted operating margin down 210 basis points. Focusing first on the general merchant and I've already outlined the impact of an inversion in commodity pricing as we traveled through 2023 particularly timber. Against a backdrop of weak demand and poor volumes, our actions on pricing saw us win market share in the second half as we responded to these trading conditions. The private domestic RMI market remained weak throughout 2023 with consumer confidence impacted by the confluence of various geopolitical events, the cost of living crisis, and the turn in the interest rate cycle meaning home renovation work moved firmly down household priority lists.
In parallel, the private domestic build and new build market which is serviced by Keyline, CCF, and Staircraft also saw volume reductions in line with the contraction of house building output. All of this said, there were notable performance highlights and examples of greater resilience this year in the merchanting segment. We continue to roll out greater digital capability in our branches which has been well received by customers and increased our participation in higher margin value-added services such as hire which underpinned revenue growth of 6%. The long-term well-funded projects which characterize the commercial, industrial, and public sector markets saw a more resilient performance in BSS and in our managed services business which works with social housing providers and saw revenue growth of 5%. Looking next at our Toolstation segment and we saw continued good growth in the UK business with sales up 5.3%.
We opened seven net branches during the year and continue to see maturity benefits from the rest of the estate. In Q3, we opened Pineham which some of you will have visited last year as part of our Toolstation capital markets update. This facility provides 500,000 sq ft of capacity with semi-automation technology to help support the future growth of the UK business. As part of bringing Pineham on stream, we also announced the closure of the Bridgwater DC in Q2 2023 and have recently announced proposals to close the Daventry DC as well. Making Pineham operational has incurred some additional startup annual running costs in the year. These have been around GBP 13 million and are contained within the GBP 23 million operating profit generated in Toolstation UK. We expect to recover these costs over the next three years as efficiencies start to be realized.
In Toolstation Europe, our losses increased to GBP 37 million due to further network expansion and similarly weak demand as in the UK with a GBP 18 million loss in France and a GBP 19 million loss in Benelux. Nick is going to talk about both of these businesses in more detail later excuse me so I won't say much more now other than to outline that we expect losses in France in full year 2024 to be around GBP 20 million and Benelux around GBP 12 million reflecting the differing maturity profiles of those respective markets. Coming next to capital expenditure. So during the year, base capital expenditure came in at GBP 109 million in excess of our GBP 100 million guidance.
Within that, total strategic Capex reduced by GBP 24 million reflecting the reduced investment in the Toolstation network as we opened 23 branches across the UK and Europe in 2023 compared to 70 in 2022. Maintenance Capex increased by GBP 24 million as the group continued to catch up on overdue fleet replacement activity since the pandemic. The group generated GBP 15 million of property profits in the year with GBP 67 million of cash proceeds more than double the spend on new sites in the year as this area continues to be a source of cash generation for us. The main transaction in the year was the sale and leaseback of seven sites in March 2023 for GBP 23 million. I'll come on to talk about the net debt position and capital allocation framework in the next couple of slides.
But in closing this slide and in recognition of my desire to return the group's leveraged position to its target range as soon as possible, the group has a hard ceiling for base capital expenditure this year of GBP 80 million and we will not be exceeding it. So let me come on to talking about net debt. The first thing to say is despite the rising leveraged position this year, the group still has a very robust balance sheet.
The 2023 bond was repaid during the year and the GBP 375 million RCF was renewed which now matures in 2028. The group has no refinancing requirements until 2026 and had nearly GBP 500 million of liquidity headroom at the end of the year. Lease-adjusted net debt rose from GBP 890 million to GBP 922 million driven by an increase in financial indebtedness of GBP 44 million and increased lease commitments of GBP 59 million.
The lease increases predominantly relate to the investment made in the Toolstation UK DC at Pineham, a new manufacturing facility for Staircraft, and the sale and leaseback package of seven sites in March 2023. The combination of these factors has increased the lease-adjusted net debt to EBITDA ratio to 2.6x above our 1.5x-2x target range. In October 2023, the group's credit rating was affirmed by Fitch Ratings at BBB minus albeit on a negative watch. Whilst the group has access to ample liquidity and a strong asset-backed balance sheet, it is clear that the economic downturn has placed greater pressure on leverage. This is why I'm very focused on reducing leverage through a combination of maximum self-help and careful consideration of capital allocation. Let me come on to the next slide which I hope brings this all together.
To reiterate, a healthy and prosperous Travis Perkins for the long term will reduce its leverage back into the target range as soon as is sensibly possible. This will come through taking a disciplined approach to capital expenditure and property spend while maintaining our points of competitive advantage. Next, we have to deliver a sustained improvement in working capital management. We are in the early stages of mobilising an internal project on identifying and executing upon these opportunities. We've already started to make changes that consolidate our supply chain operations across the group which will help support this ambition and Nick will talk about this more in his section later.
Efficient cash utilization has to also consider any loss-making activities and that's why we've also taken the decision to close 39 loss-making standalone Benchmarx branches, have made the difficult decision to consider a potential exit of Toolstation France, and have commenced a strategic review of Toolstation Benelux. Finally, we recognize the importance of the dividend to shareholders. It is a key component of our investment proposition. Any dividend we pay has to be sustainable and appropriate within our defined capital allocation framework.
At our capital markets update in 2021, the group outlined that it would deliver returns to shareholders by achieving the best earnings number available given market conditions and in accordance with our values and long-term views, paying out 30%-40% of those earnings each year as an ordinary dividend, and ensuring that we fund this through strong cash conversion, disciplined capital allocation, and remaining within our published leverage targets of 1.5-2 times net debt to EBITDA. In this context, the board has declared a final dividend of GBP 5.5 per share, making a total dividend of GBP 0.18 and representing a payout of 40% of earnings for the full year at the top end of our guided range.
This reduction in overall dividend paid on prior year reflects this year's lower earnings as well as the board's clear commitment to capital allocation discipline, cash generation, and ensuring that the group returns to its target range. And so to summarise, we expect 2024 to remain challenging. On pricing, it is likely that some categories will not start to annualize some of the deflation I've referred to until the second half. Volumes are expected to remain weak throughout 2024. For the private and domestic RMI market as we're yet to see a meaningful improvement in real disposable incomes as we start to emerge from the cost of living crisis that characterized 2023. In addition, interest rates remain a barrier to taking on further debt to financing new projects. For national house builders, the picture is equally challenged.
The sector has contracted in size in response to the weaker demand environment but also because of the dysfunctional planning environment. Further consolidation and focus on delivering the efficiencies this brings appears a more likely backdrop for this sector in 2024 than a significant acceleration in the number of new homes being built. While we await the details of the March budget and policy commitments that may be revealed as we approach a H2 general election, it's hard to see there being much room for maneuver for the Chancellor that will deliver a rapid improvement in consumer confidence or for any party to implement any quick fixes to mend a broken planning system. With that in mind, we have to maintain a tight grip on what we can control. We've made a strong start in simplifying the group's operating model and delivered GBP 35 million of annualized savings.
We are going further in 2024 as we continue to transform the way we work. We've just concluded a detailed review of all discretionary spend and we've set clear parameters on this for the rest of the year. All headcount and vacancies are being tightly reviewed and controlled at either a divisional MD or even to Nick and I level where relevant. Finally, we are in the early stages of doing a full review of working capital which I'll come back and talk to you about in more detail at the half year. To close, I'll outline our guidance for 2024. Capital expenditure will be reduced to GBP 80 million for this year and we expect an effective tax rate of around 29% on U.K. generated profits.
As we look ahead to this year and recognizing it is still very early in the trading calendar, we are seeing a continuation of the weak demand backdrop we saw in the second half. There are no obvious or immediate catalysts that we see that will improve this situation quickly and therefore we expect full year 2024 adjusted operating profit to be in the range of GBP 160 million-GBP 180 million including property profits of GBP 10 million and including a forecast loss of GBP 20 million for Toolstation France. With th at, I will hand you back to Nick.
Fabulous. Thanks, Duncan. So let me now take you through how we are proposing to navigate 2024 and position the business to benefit from the recovery in due course.
So really just to recap on some of the points that Duncan made in his last slide there, uncertainty certainly remains over demand in some of our key end markets largely driven by customers' lack of confidence in the economy and seeing how the interest rate cycle evolves but also the forthcoming election and what that will bring in terms of stimulus for house building construction and just confidence in general. Taking that into account, it's our expectation that domestic RMI and new house building will remain subdued with the CPA recently downgrading their forecast for these sectors from flat to -4% in volume terms. Our other end markets are expected to remain more resilient in the longer term with projects funding in place. But against this backdrop, we have to focus on what we can control as Duncan said.
Our priorities for FY24 are to rebuild profitability and generate cash, reduce costs, and our leverage as Duncan outlined. We'll deliver these with focus on transforming our structures and capabilities to create a simpler, more efficient business while ensuring we maintain our long-term competitive advantage and differentiated proposition to the market. Our primary focus near term is the actions we will take but they will not risk the long-term differentiation of the business model and will always take decisions which enhance our business in the longer term for the benefit of shareholders. Long-term drivers of our end market demand remain attractive.
Indeed, the requirement for more affordable and sustainable housing in the UK and the need to improve the energy efficiency of the UK's built environment remains and it's grown if anything due to the slow progress on housing and planning policy from the low levels of activity in 2023. To ensure that we benefit from these long-term opportunities, we will continue to build our competitive advantage. We will continue to invest in technology, in our network of branches, and our people at a pace and scale that is reflective of market conditions. Let me come back to the actions we've taken in the near term. As we've said, GBP 35 million worth of annualized benefit has already been delivered. This was primarily achieved through a reduction in central and regional headcount within our businesses.
In February, we announced the closure of 39 Benchmarx standalone branches which were making a marginal contribution to our business. What we've learned with Benchmarx is that the showrooms work best when they are integrated alongside and are as part of our destination branches within the general merchant alongside our hire and managed services businesses giving a better branch proposition, deliver a lower cost model, and a much better customer experience and flow. The Benchmarx offer will evolve over time as we continue to put down more general merchant branches or relocate existing ones and there's the opportunity to take greater share in our local markets. We're also consolidating our supply chain within Toolstation UK with the closure of the Toolstation Bridgwater DC last year. We also announced yesterday the proposed closure of our Toolstation Daventry DC.
These follow the successful opening of our new Pineham Distribution Center which many of you will have seen in September. As Duncan summarized, these actions are underpinned by a highly disciplined approach to overhead management and expenditure. We continue to address loss-making activities within the group which is an area to which I will now turn. We have put considerable time, effort, and investment into our Toolstation Europe businesses over a number of years and we've made progress expanding the reach and the relevance of this model for our trade customers. We've announced this morning that we're working on a plan to potentially exit our French business and we've begun a strategic review of Benelux after it performed below expectations in 2023 albeit in challenging market conditions. In the last couple of years, we have been developing the proposition for the French market amid difficult market conditions.
But losses for 2023 have been GBP 18 million and we expect those to increase as Duncan outlined to GBP 20 million in 2024. While the French market represents a significant opportunity longer term, it has taken longer than we originally expected to build familiarity with the business model in the French market where customers are used to a much more service-led approach as opposed to the speed, the convenience, and the value that Toolstation offers. These factors have proven to be a challenge in building scale and shortening that branch maturity profile to much closer to the UK model in the near term. When we look at the investment required to establish a profitable business, it requires a major long-term investment and we have to think very carefully about whether this is the right deployment of our capital both now and over the next few years.
This is why we're working on a potential plan to exit the French business. Any decisions would be subject, of course, to prior consultation and procedures with the relevant employee representatives. Turning to our businesses in Belgium and the Netherlands. While the businesses in Belgium and the Netherlands have excellent long-term potential, performance in 2023 was significantly below our expectations with losses increasing to GBP 19 million due to the weak end market conditions in those countries, cost inflation, and further investment in the network and infrastructure. We forecast that losses will narrow next year, this year 2024, to GBP 12 million and we expect the Netherlands to reach annualized break-even in 2025 with Belgium expected to reach break-even by 2028.
With end market conditions expected to remain challenging in the near term and the extended period to reach profitability, we have started a strategic review of the business and will provide an update as soon as possible. Across the rest of the portfolio of businesses, there are a number of more fundamental changes underway to make our business more efficient, improve our customer proposition, and take the opportunity to truly capitalize on our scale and simplify our organization. You will understand that the details of these remain competitively sensitive but here are some headlines of changes underway and we'll share more on the progress of these over the next 12 months. Firstly, supply chain consolidation that Duncan mentioned. The group has grown by acquisition over many years leading to most of the businesses having separate supply chains.
We're reviewing the right model to maximize our scale and capabilities and we'll unlock efficiencies in our supply chain assets. Secondly, simplifying our structures. Simplifying the way our businesses interact with each other and our customers. For example, we're integrating BSS and TF Solutions into one entity and combining separate functional support teams into one. Thirdly, combining procurement functions. Similar to our supply chain, we have historically had separate buying teams across our business units. While this has some benefits, it fails to really take advantage of our scale and we are going to simplify this and in the process of doing so by combining our purchasing power, we can negotiate better deals with suppliers and reduce our costs. Finally, technology and data enablement. Something we've spoken about several times over the last few years.
This year, we will implement our new Oracle Financials system which will significantly improve processes, data, and control in our operations. We are embedding data and digital capabilities to make most of our processes and improve our customer service and be more efficient particularly in our branches in terms of time, cost, and actually reduce carbon. These are all actions underway and we believe that other opportunities across our businesses will emerge as we continue work in 2024. Taking stock of where the business then stands today, our merchant businesses benefit from leading market positions and strong customer relationships and we continue to protect and grow market share. Continued execution of our strategy is creating long-term competitive advantage in our merchanting businesses.
Our branch network including our destination branches in the general merchant and the specialist expertise is unrivaled in the market, and with hire and managed services offers growing well despite the subdued market conditions. As we set out in September, Toolstation UK remains on track to a pathway to GBP 1 billion worth of revenue with an 8% operating margin in 2027, and we remain confident in delivering this. Toolstation Europe losses and cash outflow will be significantly reduced as we take the actions that we've outlined today. And as we've set out today, the decisive actions we're taking will reduce overheads and deliver a more efficient business model in the future. And as Duncan has said, in terms of our outlook for 2024, recovery in the UK construction sector is unlikely, we think, before the next general election.
Customers are waiting for post-election stimulus packages as well as some confidence to return to the market and particularly around interest rates. We've seen a continuation of the weak trading environment in early 2024 and then therefore we're planning for another year of weak demand in our market which will continue. We will continue to monitor closely through both our data and customer feedback. Our best estimate for FY24 adjusted operating profit is in the range as Duncan has outlined of GBP 160 million-GBP 180 million. Though the recovery, the timing of the recovery, forgive me, is uncertain, long-term growth drivers in our industry remain positive. The proactive steps we're taking, growing market share, cutting costs, and strengthening our balance sheet position us well to emerge stronger as markets recover.
So with that, I'm more than happy for Duncan and I to take your questions. There is a mic roving. We have a webcast on so if you wouldn't mind just waiting for the mic to come to you before you ask a question. Ainsley, if we can come down first and then just say your name and where you're from for the webcast please and then we'll answer the question.
Thanks. Ainsley Lammin from Investec. Just three questions please. Wondered if you could provide a bit more color on the Toolstation France decision. Just interested in the word kind of potential exit. What's it conditional on? Would you close the business down if you couldn't find a buyer or are you any kind of considering exit if you do find a buyer? Secondly, just on your guidance the GBP 160 million-GBP 180 million for the full year.
What's underlying that in terms of your assumptions around price inflation and kind of like flight volume? And then just coming back you obviously reiterating the GBP 1 billion of sales and 8% margin for Toolstation UK. On the merchanting division, if we look out to the medium term, is 7%-8% margin still a kind of reasonable view of where that margin could get to as markets normalize? Thanks.
So Duncan might you come to second and third. I'll just maybe I'll start with merchanting actually. I'll come to the Toolstation France position Ainsley. We absolutely have confidence in our merchanting businesses being able to return over time to our 8% guidance for those businesses. But there is no doubt that actually what is required is a recovery in market conditions.
We are certainly in the region of 10% down in terms of volume versus 2020-2019 if 2019 was a normal year which is what everybody seems to refer back to. There is no doubt that what we do have in our merchanting businesses is an absolutely market leading network, market leading proposition, and we've continued to invest in that. What that gives us in terms of our branches, in terms of our fleet, in terms of our digital channels is a relatively high fixed cost base which we recognize. What we need actually is the market to start to recover and in so doing we are confident that our merchanting businesses will return to that 8% margin position.
Just pivoting to France, what we have announced, obviously subject to consultation with colleagues in France, particularly through the works council, is a potential exit. We'll be looking at various options, and it's too early to say what the ultimate option might be. But what we're being clear about is that we are working on a plan to potentially exit Toolstation France, and obviously we'll give some more details on how that might play through in due course. Duncan, do you just want to comment on the guidance?
And. Yeah. Ainsley, just come for, maybe I'll answer it two ways. The first one on your point, I think we continue to see pricing being a headwind in H1 until we start to see that lap out, as I mentioned in the script, and volume sort of in mid single digit decline.
I think the way I would characterize how we have arrived at that number, as I say, relatively early in the year. If you take the second half trading performance of the group and strip out the property profits which we see as being quite characteristic of how we've started the year this year and double that, add on the GBP 35 million annualized cost savings, and then add on the property profit guidance we've given you for this year, you get somewhere into the middle of that range that we've just outlined. There are other puts and takes no doubt other people will ask me the questions on but that broadly is the thinking that we've got in the guidance.
Thanks Ainsley. Will.
Thank you. Will Jones from Redburn Atlantic. Three please. The first is whether you could just update us on the competitive dynamics in the merchanting industry generally.
We know they intensified through 2023, but any update there would be great, please. The second, maybe just exploring the decision to review Benelux as well. You referenced 2023 being below expectations, but how much of that was just the macro versus your own execution, and given that you see a positive delta on the numbers this year and next in Benelux, I guess why the review, particularly given I think in the past you've talked about that being having fairly similar characteristics to the UK business. And then the last one was maybe just around the kind of future efforts and the stuff you're looking at for 2024. Which of the working capita l ratios, Duncan, do you think you've got most to go after, and is there any way of quantifying what the various efforts might pull together as, or is it too early? Thanks.
Thanks, Will.
I'll start the first two, shall I, Duncan? And then pick up the third. Yeah, we appreciate you guys haven't got many listed peers anymore to benchmark against on the competitive dynamics. That must be pretty difficult actually. But I think from what you can see in our comments this morning about our outlook guidance, the market remains pretty dismal. What we know is that in our two biggest businesses we continue to successfully take market share and the feedback from our customers remains really positive on our performance. We remain confident as well that our other three merchanting businesses continue to at least hold their market share positions in their respective markets. And so the competitive dynamics are pretty difficult.
Other organizations we know are finding trading in these conditions very difficult indeed, and you will understand their models as well as we do in terms of what that means for them and the way in which they're having to price to win volume. We remain really disciplined. We talked about this at the half year actually. We remain really disciplined in making the right balances between price and volume to make sure that we as best we can in what is a very difficult market protect our margin and serve our customers and continue as I say to gain market share particularly in our biggest business, the general merchant. So I think competitive dynamics remain really challenging. People are really hungry because they've got some pretty big debts to pay. Perhaps I'll leave it there. Benelux, absolutely. Look, we continued to invest in that business.
Well, let me just spit it out actually. Two businesses, Netherlands and Belgium. The macro was weak in those markets. We know that reflective of conditions in the UK actually and we saw cost inflation as well. We also invested, Duncan mentioned it, in a new DC to support growth in the Netherlands in Rotterdam. And that business is in a very different place in the Netherlands and very close to reaching maturity, slightly different in Belgium. But the fact of the matter is this is that last year we lost GBP 19 million in those businesses. And it's absolutely right that we take a really long hard look at those businesses and ensure that we are doing whatever is necessary as we have been doing but we're going to look again to accelerate the path to profitability. They are mature businesses particularly in the Netherlands.
We remain very positive about the progress those businesses have made but it's absolutely right what we've announced today in terms of a strategic review and obviously we'll update you in the outcome of that in due course. Duncan, on working capital.
Yeah, just building in, put echo Nick's comments in full on Benelux. Well, on inventory, sorry, on working capital, GBP 727 at the end of 2022 and the same number at the end of 2023 with significantly lower volume and deflation probably tells you which pond I'm going to go fishing in first. We have an opportunity for sure. We're holding too much stock as a group and we need to we need to we need to look at that. But I think the project that we'll kick off will look across all parts of our working capital cycle.
I'm not going to be drawn on giving a number at this stage because I just haven't had the time and we haven't had the opportunity to pull that together. But I would hope I would think we'll be in a position to be able to come back at the half year and talk about that in more detail.
Thanks Will. Ami.
Thanks. Ami Sherbin from Citi. Just three questions from me. First, just following up from Ainsley's question. I appreciate there are the potential exit of Toolstation France. You have a few options in place at this stage. But in terms of timing, can you give us some color how long do you think that whole process would run through? The second one, if you could give us some sense on the net debt profile of Toolstation France and Toolstation Benelux, that could help us.
The last one, I mean you've mentioned supply chain consolidation as an opportunity area as well. When you look at this current merchanting footprint and the DCs associated with individual businesses, is there more scope to actually look for integration and to rationalize the cost base there?
Thank you Amy. Look, on Toolstation France, we'll update you on the process in due course. Clearly there are rules and regulations we will need to step through in France as well as looking at various options. We will update you in due course on the timing of that. I think you can draw your own conclusions though for anybody who knows a business in France. We'll come back to net debt if I may.
Supply chain consolidation, if I understood your question, look this is an enormous opportunity given that we've got parallel supply chains in several of our businesses to look at how we can optimize not just our supply chain but our customer proposition as well. And certainly that is part of the work that's underway.
Yeah, I'll give you I'll give you the numbers in the spirit of being helpful but would offer the caveat on the basis of whatever assumptions you want to make around the loss making element of both of those segments and any decisions we take just in relation to everything that Nick's just said. Obviously the speed at which you would unwind any lease commitments and any associated net debt impact would potentially be even longer than that in terms of the benefit coming back in.
So for France, about GBP 15 million; for Benelux, about GBP 30 million in terms of those lease components. They're not going to in and of themselves materially contribute either way in terms of any decision we may make on those two parts of the business but they just give you some size and context. More question here.
Thank you Ami.
Thank you. Harry Goad from Berenberg too please. So firstly just continuing with that point on leverage. I think you talked about targets get to 2x net debt to EBITDA. Was that a target for 2024 or if not can you give us a feel for where that trajectory may be given what you said on some of the cash items?
And then secondly, pricing, I think you said negative headwind in H1 if you look at things as they stand today and I appreciate they can change but couldn't we think about that turning to being a positive contributor in the second half of the year or is flat more realistic? Thank you.
No, you want to. So leverage, I don't think we will be getting to 2x in 20 at the end of 2024. I think we would have to make some very dysfunctional decisions to get there and you'd have to see, I mean, the principal driver of that recovery is clearly a significant improvement in the underlying operating profit performance of the group. That's the driver that we need to get us to get that moving in the right direction. Clearly the cut in CaPEX contributes. Clearly the cut in the dividend contributes.
But also, anything that we identify in working capital will also help contribute. So, I'm confident we will be moving back down in the right direction. But one has to set against those things, Harry, the option that some of the things we've just talked about and any other choices we might make this year may also require some cash outflows in terms of other decisions in terms of business activity as well. So, I think we are, and maybe that in some ways gives you some context around the decision on the dividend as well. So, I wouldn't be drawn into giving any specific guidance for 2024, but just because there are lots of moving parts, but you can hopefully get the sentiment and intent. It is a priority to get that down into the range as soon as possible. On your question on pricing, look, it's possible.
All I would say is we're not seeing any evidence at this stage of any pricing increases or inflation coming through and therefore hence why we've taken the decision to give the guidance we have as proactively as we have.
Thanks Harry. Ben.
Hi, Ben Walsh from Deutsche Bank. Three questions for me. Firstly, can you just help split out the impact of volume and pricing within the GBP 88 million gross profit decline? For 2024, are you expecting a similar level stripping out GBP 35 million cost saving? Are you expecting a similar level of overhead cost-based inflation? And can you give us any color on the kind of wage increases you're putting through the business? And then thirdly, thinking strategically about the medium-term future, you are obviously announcing some decisive action today.
As operating conditions normalize, what are you planning to do with the cash that you generate having clearly removed some of the obvious investment areas?
Duncan, do you want to start the first two?
Y eah, I'm not going to get into breaking out the gross margin mix, Ben. I think on the cost inflation piece, I think that we would expect to see a lower level of cost inflation. We'll give a full breakdown in the annual report when it's published from a remuneration perspective around how colleagues will be rewarded. I don't want to comment much more on this stage but I think some of that cost inflation flowing into 2024 is also part of what features into our guidance for this year. That's not to say we do not have further cost reduction and embedded activities that are in the budget for this year.
But they're not of the size and scale of the 35. Some of the bigger unlockers of those that Nick's talked about in terms of supply chain consolidation, procurement, et cetera, I think are more medium term projects which we're starting to pull together the thinking on now and we'll bring back in more detail later on. But there are definitely some significant cost efficiency opportunities there for sure.
Ben, I'll just add to that that as I think you will have seen from our track record on this, we remain really disciplined in the way that we think about cost inflation but salary and wage inflation in our business. But we want to make sure that we retain the people that we have who are the best in the industry, who work in our branches. And so we think very, very carefully about that.
Your point about strategically medium term, what are you going to do with the cash? Well, look, I think we've laid out many times the strategy for the business. As we've said today, those areas where we have invested like hire, like managed services, destination branches are all continuing to perform well and grow our business. The MD of our TP general merchant is in the audience. You can speak to him afterwards. Those investments are bearing fruit and that enables him and his team to continue to grow market share in what is a really difficult market. I've also mentioned technology. We continue to invest in our technology, Oracle Financials this year, which those of you around who have known us long enough will know those are major steps forward in upgrading our technology backbone for our long term future.
And we continue to invest in operational investments in digital technology both for our customers and for our colleagues. So there's plenty of opportunity and we have plenty in our plan. As we've outlined, Duncan and I, today, the first job this year is to absolutely stabilize profits, absolutely generate that cash and control our cost base and take and implement the decisive measures that we have done today.
Thank you Ben. Sam.
Hi, morning. Sam Cullen from Peel Hunt. I've got a couple if possible. I think Nick, you referenced the fixed cost in the business with respect to the branches. Can we talk about the non-branch cost base and opportunities to A, what the scale of that is and then B, what the scope is to reduce that going forward with some of your investments?
Sorry, you just dipped out on the final part of that question.
And what the scope is to reduce that, the cost base in the non-branch area of the business.
OK.
And then the second one is just kind of probing a bit more on France and your decision to exit. Is this a decision mainly related to the time scale of any return and the scale of investment you need to put into it or is it that the Toolstation format you have in the U.K. just simply doesn't work in France and it's better with a different owner, with a slightly different model?
Fantastic, thank you. Let me come to that second one first and maybe Duncan, you pick up the first. The Toolstation format absolutely works. It works in the UK, works in Benelux, and it works in France.
We've talked many times and I've presented to you many times about how it's been more challenging to learn how to acquire, attract, acquire, retain, and grow the French trade customer. So there is definitely a longer term kind of maturity profile and a different style of engaging those customers in France. But the format absolutely works. We, with difficult markets back here at home, have to just be really disciplined in terms of how we think about our investments of capital and obviously the profit drag on our business. And therefore it's not a decision that we make lightly nor it has been a decision that we've made in a hurry either.
But it's absolutely right that we put this in the context of the long term requirement to invest in that business, to achieve the scale, and to achieve the maturity that is required to make it profitable in France. And therefore we've decided that actually the exit or potential exit is the right approach for us.
Sam, I think on the above branch cost, look, I mean the group's already taken into account and done a very detailed review of that as part of the GBP 35 million annualized cost savings that we announced at the end of last year. That's not to say we can go further. I referenced in the opening bit around discretionary spend and headcount generally. We have to be tighter on that for sure.
But at the same time, some of the heads and the cost we have directed at an above branch level are directed into activities and points of differentiation which we have to look through the cycle and beyond to say have some value or merit in the longer term. And when you look at because eventually these things will become back and become more valuable and more important again in the future. So I think we're continuing to review that scrupulously. I think that we do and we do have further cost savings embedded in our budget for this year across those functions. But at the moment I think we're happy with the size of what that looks like and the capabilities it gives us for now and also for the longer term.
Thank you Sam. Any other questions? There's one at the back.
Sorry, I can't see who that is. Say, Shane Carberry from Goodbody. The first one's kind of just following on from Sam's question with regard to Toolstation Europe. And I suppose when I think about the market dynamics in France versus the market dynamics in some of the other regions in Europe, what are kind of the key learnings I suppose in France that you can take across to some of the other regions or is it just that the market dynamics are so different that there isn't really any? And then the second one is just regarding the DCs and the closure of the latest one yesterday. Is that it in terms of closures now? You're kind of happy with the distribution centers network from here?
Thank you Shane.
The market dynamics in France, as I outlined in my answer to Sam's questions, are different but they weren't by any stretch insurmountable. We were able to attract and retain and grow our French trade customer base. As we've said, the journey to sustainable profitability is significant and therefore we've had to take the decision to look at a potential exit so that we can actually focus on our core businesses. So the dynamics are different. We've talked about that before but actually not in a way that actually caused us difficulty. There are other factors at play. Look, on the DC closure, yes, we announced yesterday that our Daventry DC and Toolstation will be likely to close. We've opened that consultation.
We constantly look at our distribution center network and we will consistently look at how we can optimize it but I'm not going to speculate on any further changes to our network at this stage. Thanks Shane. Anything to add Duncan?
No.
OK, well listen, thank you very much for your questions and for your attendance this morning. We appreciate it's a pretty busy morning in the market. So thank you very much and we look forward to seeing you soon at the half year.