Earnings Call: H1 2021

Aug 3, 2021

Good morning to you all. Thank you so much for joining us. We hope that you, your colleagues, and your families remain safe and well. Welcome to our latest virtual market update. As we'll set out today, we'll be hosting an investor update on the 29th of September, and we very much hope to be able to do that with you in person. Virtual market update. As we'll set out today, we'll be hosting an investor update on the 29th of September, and we very much hope to be able to do that with you in person. A simple reminder of the format, Alan will talk through the financial performance of the group, and then I will follow up with an operational review and look forwards to the investor update. The group has enjoyed an excellent first half to 2021, driven by strong operational performance and resilient end markets, particularly RMI. Compared to 2019, like-for-like revenue has been up 14.5%, and adjusted operating profit for our continued businesses was 14% ahead. The merchanting businesses have benefited from a number of decisive actions taken by the management team over the last two years to really make the business more agile and competitive in all of its markets. These changes have enabled the business to negotiate a challenging period of very high demand, inflation, and material shortages very well indeed. In Toolstation, strong growth and market share gains continue across both the U.K. and Europe, and the branch rollout program continues at pace. Alongside the strong operational performance the group has delivered, I'm also pleased to say we have completed the portfolio action set out in 2018. The Wickes demerger was successfully delivered at the end of April with the plumbing and heating business sold shortly afterwards for GBP 325 million. We expect this transaction to complete in the third quarter. As you can see, not only have we traded hard, but we've completed some pretty heavy lifting at the same time, testament to the quality of the team here. Colleagues have been outstanding throughout the organization, serving customers, adapting quickly, being competitive, and staying safe, and I thank them all very much for their hard work. I'm also very pleased to confirm that we have reinstated our dividend, and our portfolio actions have reshaped the balance sheet with leverage reduced to 1.5 times. I'll now hand over to Alan, and who will take you through our financial performance. Thanks, Nick, and good morning, everyone. As Nick mentioned, it's been an excellent first half with many accomplishments. Before turning to the detail of financials, I wanted to draw your attention to the basis of preparation. Under the relevant accounting standards, both the retail and plumbing and heating segments have been treated as discontinued operations, and therefore are excluded from the 2021 income statement and also the 2020 comparatives. The first half has seen a strong revenue performance with momentum building from March onwards. The total revenue of GBP 2.3 billion is obviously significantly ahead of 2020 on both the like-for-like and total sales measures. More meaningfully, like-for-like sales were 14.5% ahead of H1 19, and adjusted operating profit is also significantly ahead of both H1 20 and some 14% ahead of H1 19. The improved performance, along with continued disciplined capital management, led to return on capital employed of over 12%. Covenant net debt increased by GBP 83 million to GBP 105 million. An excellent outturn considering the capitalization of Wickes and reflecting a strong working capital performance to which I'll return a little later. As Nick mentioned, the board is pleased to announce the reinstatement of the dividend following the suspension in March 2020 with an interim payment of GBP 0.12 per share. It is the board's intention to distribute between 30% and 40% of full year earnings as an ordinary dividend going forwards. If we look at the revenue performance in a little more detail, you can see the impact of volume movements in both H1 2020 and H1 2021. The volume recovery is broad-based across our end markets, but driven in particular by RMI spend. The contribution from price and mix in H1 21 is around 4%, principally the recovery of input cost inflation, with inflation having accelerated in the second quarter. I've also called out on the chart the contribution sales from new Toolstation space at GBP 24 million, the impact of the branch closure program in merchanting undertaken in June 2020. That was GBP 135 million. That's the principal driver of the difference between total reported and like-for-like sales. Taken together and compared to H1 19, total sales have grown by 10.7% with underlying volume growth of around 12%, price mix of 3%, and a net reduction in space of 4%. On slide 8, turning to operating profit, I've broken out the drivers of the strong performance at GBP 164 million. Versus H1 20, of course, the largest driver is the recovery in volume. Gross profit delivery has been bolstered by strong margin management, both the successful recovery of input cost inflation and the year-on-year recovery in volume-related supplier incentives. Those gross margin improvements contributed GBP 23 million in the period. I've highlighted cost increase elements, namely the benefit in H1 2020 from government assistance, which does not recur, inflationary elements, including the normalization of bonus programs after zero in the prior year, and also variable costs to service the incremental volumes. You can see the contribution of GBP 50 million from the branch closure program in mid-2020, along with investments in expanding the branch network, largely in Toolstation, of GBP 15 million. Finally, property profits amount to GBP 17 million in the half, and that's the theme to which I'll return to later. If we now turn to performance at the reporting segment level, starting with merchanting. The strong performance was driven by the initiatives put in place over the last 24 months to strengthen the business, underpinned by the recovery in our end markets. As you are well aware, the speed of recovery has caused some availability issues together with the return of input cost inflation. Both of these issues are being well managed by the teams but will continue to impact the second half. As Nick will cover later, a huge amount of effort has gone into improving the competitive position of the general merchant over the last couple of years across both service and capabilities. We also undertook, as I referred to, a significant branch closure program in June 2020, which was concentrated in smaller branches. These initiatives are driving the improved financial performance in the business. Actions were also taken across the specialist businesses to improve sales densities and service. Together with disciplined gross margin management, these initiatives have led to the improvement in EBITA and operating margin, which at 8.2% is some 70 basis points ahead of H1 19. Toolstation's outperformance continues. U.K. revenues were up 37% on H1 20 and 67% ahead on a two-year basis. The branch rollout program is proceeding at pace, as Nick will cover. Despite the significant amount of new space opened recently, operating margin in the U.K. improved in the half to 5.8%, in line with where we would expect at this stage of the rollout and well set for further progression. In Europe, revenue was up by 52% and by 41% on a like-for-like basis against a very strong 2020 performance. In the Netherlands, the loss has narrowed further as the business continues to build towards real scale. We’ve therefore increased the investment in Belgium and France, while remaining within the guided range of around GBP 20 million of loss for the year as a whole. Going to turn to cash. On slide 11, we delivered another strong cash flow performance in the first half, with 88% of operating profit converted to cash. This is despite the strong rebound in volumes and large working capital inflow experienced in 2020. In fact, we recorded a further working capital inflow of GBP 22 million in the half as the credit management teams delivered another excellent performance with our debtor days now over three days better than at June 2019. The underlying value of stock increased in the period to support sales, but also reflecting the cost inflation which we are currently managing. This was, however, fully funded by the payables position, which also benefited from the rebate simplification program, which was undertaken during 2020. Looking at the breakdown of capital expenditure, the 1st half has seen an increase in growth-related CapEx, both in the rollout of Toolstation branches, but also more capable sites within the merchant network. Maintenance CapEx was lower in the period, reflecting longer lead times for new vehicles and redeployment of fleet from branches which we closed during 2020. I would expect base capital expenditure for the year as a whole to be around GBP 100 million. In terms of property activity, we increased the expenditure on freehold sites in the period. This was driven principally by the buy-in of the lease site at Battersea to ensure long-term tenure in a key London site, together with sites in key conurbations for future developments. Finally on property, I would like to highlight the fantastic job done by our property team to exit sites closed as part of the 2020 restructuring program. Already, over three-quarters of leasehold sites and 96% of freeholds which were closed have been sold or are under offer, terminated on the lease or transferred to another group company. I think that's a superb achievement when you consider the scale of the closure program. Turning to the balance sheet, I wanted to underline the impact from the portfolio actions undertaken recently on top of the excellent performance on cash conversion. As you can see, the demerger removed a substantial lease commitment from the balance sheet with a further GBP 90 million of lease commitments removed through the plumbing and heating disposal. Despite the transfer of cash to the Wickes balance sheet prior to demerger of GBP 130 million, the strong cash generation has left the group with covenant net debt of GBP 105 million and IFRS 16 net debt to EBITDA of one and a half times. This leaves the group in a very strong position, where the proceeds from the plumbing and heating disposal will be returned in full to shareholders via special dividend and a share buyback program. As part of the investor update in late September, I will set out our priorities for capital allocation alongside views on appropriate leverage targets and the potential for incremental shareholder returns over and above the reinstated ordinary dividend. In terms of outlook and guidance, the long-term fundamental drivers of our end markets remain robust, and these are underpinned by the government's commitment to decarbonization, infrastructure, and house building. While some uncertainty remains due to the ongoing pandemic, coupled with inflationary pressures and product availability issues, the group expects the RMI market to remain strong for some time to come, and house building is set fair. Given the additional property profits resulting from the highly successful post-restructuring disposal program, adjusted operating profit for the continuing businesses for 2021 is now expected to be at least GBP 310 million. With that, I'll now hand back to Nick for the operational review, and I look forward to taking your questions later. Excellent. Thanks, Alan. Just a quick overview first. As Alan has clearly laid out, there's been a huge amount of progress over the last six months, really building on the work undertaken across the business over the last couple of years. The performance in the first half of 2021 has been hugely encouraging and is reflective of how the business has really positioned to ensure it's been able to respond effectively to the ever-changing market dynamics, particularly the challenges posed by rising inflation and, as Alan mentioned, the shortages of raw materials in the face of surging demand, particularly over the last few months. In the General Merchant, we have changed long-established ways of working that we felt were slowing down our decision-making within our business, our operational agility, and this was impacting our winning customer service. I'm pleased to say that we're really now seeing the benefits of the actions that we've taken in both the performance of the business and the confidence in our colleagues across the business and in our branches. This also applies to our specialist merchants, enabling them to retain their market-leading positions and Toolstation continues to deliver a great performance, as Alan said, both in the U.K. and in the emerging European business. Sales growth is really strong, and that gives us great confidence to continue to invest in rolling out new branches at pace. With our businesses in good shape and the group's portfolio now slimmed down and focused to our leading trade advantage businesses, we're very well positioned for the future. Before I move on, let me just summarize what's happening in our end markets to build on the comments that Alan made there. Overall, the outlook for the construction sector remains very positive, and with well-directed government support during the pandemic, the resilience of the group's end markets is clear for everyone to see. As a measure of that, the construction PMI was 66.3 in June, its highest level for 24 years. In terms of specific sectors, domestic and commercial RMI, which provide over half the group's revenue, are expected to be strong for some time to come, driven by the short term, by the high level of housing transactions and modifications to support working from home. Over the longer term, the government's ambitious plans to decarbonize the U.K. economy should see continued high levels of activity in this sector, with substantial upgrades required to the U.K.'s aging housing stock. New housing, as Alan said, has recovered strongly. In 2020, we only saw 118,000 new homes completed, well below the current target of 250,000 a year. With the government's manifesto pledge to reach 300,000 new homes per annum by the mid-2020s, and with the requirement for those to be 75% more energy efficient, it really does underpin the huge potential this sector has for the group. The new commercial market's been slower to recover, with demand for new office space and projects like student accommodation really paused as future ways of working evolve. The public sector dropped off sharply in 2020, particularly in areas like social housing. The expectation is that there will be a push to clear that backlog, and that will be accompanied by additional investment in schools and hospitals, particularly in areas like ventilation. Infrastructure remains a strong market with a number of major projects underway, High Speed 2 and Hinkley Point to name two, and it's a growing area of activity for the group. Dean Pinner and the team in our Keyline business are really working hard to develop the proposition for our customers to win more work in this market. Let me turn then to the General Merchant business. I've discussed in previous updates some significant changes in the General Merchant over the last two years, and I'm pleased to say that we're really seeing the benefits of those actions during the first half. Our fundamental objective was to make the business leaner, more agile, and much more customer focused, able to offer simultaneously a national leading service for our larger customers, but also to compete effectively in local markets and to win the business of our smaller professional trade and general builder customers. To do this, firstly, we had to enable the branches to make decisions and to be agile enough to win locally, but with the backing and the firepower of the scale of the group. As we've outlined over the last year, this has evolved from simplifying our pricing architecture for customers and colleagues, ensuring the competitiveness of our shelf edge prices for our light side products in our branches, simplifying our commercial deals, and providing enhanced management information to facilitate quick and accurate decision-making at a local level. In short, we freed up those branches to compete hard and win business. We've backed this up by investing in our teams, adding colleagues to both branches and commercial teams to ensure that we're able to build the strong relationships with customers and suppliers to really drive growth. We've also invested in the skills in our colleagues through our apprenticeship program for both new and existing colleagues, and we've rolled out additional internal training to support colleagues as we implement new ways of working. Alongside investing in developing our people and upgrading our processes and simplifying our processes, we've also invested in technology and our physical network to really develop our service proposition. We've developed and launched our mobile customer app. Our delivery management system has been rolled out across about half of our estate, and that will be complete by the end of October. This is using technology to ensure that we are simpler, easier to do business with, more consistent and more convenient. Although we closed smaller branches in the last year, we continue to open larger, more capable sites, as we've discussed before, able to hold a greater depth of stock and operate much more safely and efficiently. We've added four in the first half with seven more in the pipeline in the second half, including a dedicated tool hire hub in London. Our focus remains on the top 50 conurbations, where we currently under index in terms of market share and therefore see the greatest opportunity for growth. We continue to invest in upgrading our other branches to be destinations for customers and safe and great places to work for our colleagues. Finally, I'm pleased to say that colleagues and customers are really seeing the benefits of the integration of Benchmarx within the general merchant aimed at simplifying the customer journey through things like shared credit facilities and really driving and winning a greater share of our customers' wallet. Let's turn to Toolstation. In the U.K., Toolstation continues to deliver an outstanding performance, as Alan outlined. To provide some context, in the first half of the year, sales were up 67% when compared to the same period in 2019. The increasing maturity of the network has enabled the top line growth to translate into a 54% growth in operating profit. The U.K. rollout remains on track with 30 new branches opened in the first half, with our 500th branch opened last week. We'll open at least 60 over the course of the full year. Much of the work in developing the offer this year has been focused on our trade customer base, where clearly we see the greatest opportunity. One of the key levers has been the introduction of trade credit, which has gone extremely well so far. We've seen the average order value of credit sales being more than 50% higher than our cash sales, and we're currently recording a Net Promoter Score of 75 for the digital account onboarding process. We've also added around 1,800 new SKUs to our range focused on our trade products, and we now offer six own exclusive brands focused on complementing our core trade brands. Toolstation in Europe, the rollout has progressed at pace, and we're seeing some really encouraging signs which shows that the business continues to build momentum. Across the Netherlands and Belgium, we saw sales up 50% in the first half, and in France up 74% as we really begin to gain a foothold in the French light side market. Buoyed by this performance, as Alan mentioned, we've continued to invest in our networks with 15 new branches, 7 in Benelux, 8 in France, taking the total now to 98. In fact, by the end of July, we were over 100. Customer feedback is incredibly important to us, and therefore it's great to see that Toolstation Netherlands is achieving an excellent rating on Trustpilot, 4.4 out of 5, and one of the key differentiators remains the 10-minute click and collect, which really leads the market in terms of efficiency for our customers. In France, a sign of our growing confidence in the business, we've invested in 100,000 square foot new distribution center just outside Lyon, which is now fully operational and will enable us to support up to 100 branches in that region. As you would expect, we are really applying the learnings, particularly in technology from our success in the U.K. to speed up the development of our European business. It's really encouraging. Turning to our specialist merchant businesses, they have operated arguably in the most challenging marketplace over the last six months, particularly in new housing and commercial markets, and they've done an absolutely sterling job. The key challenge for our business, CCF and Keyline in particular, is in a weaker market, has been to not chase volume, but to really have confidence in the recovery of these markets so the businesses are focused on the quality of our customer relationships, the quality of the business they win, and the long-term relationships that we enjoy with our customers. In BSS, due to the stronger recovery in commercial RMI, the opportunity has been greater and the team have done a great job in capitalizing on that. The long-term relationships that we enjoy with our customers. In BSS, due to the stronger recovery in commercial RMI, the opportunity has been greater and the team have done a great job in capitalizing on that. The development of the BSS customer proposition is enabling the business to drive own brand sales in key categories and use technology to simplify the customer experience. Great progress. I'm also pleased to say that our TF Solution business, which we acquired in 2017, is now growing really well. It's a specialist in air conditioning and refrigeration. Currently, the market is very strong, and we've sought to take advantage of that by doubling the network to 12 branches in the last 12 months. It's a great example of the type of business that we want to look at in the future. Keyline has recovered really well, and the management team are now focused on how they can support their customers right from the start of projects with advice on technical specification, sustainability, to really enable those customers to put forward winning tenders. CCF arguably has had the most challenging time, with end markets slower to recover and restrictions in product supply. The team have managed this situation really well and at the same time have looked at how we develop the service proposition and enhance to provide greater value to customers as the leader in efficient and reliable distribution. I touched on earlier, our delivery management system, which we're rolling out across the general merchant, is now fully operational across CCF and Keyline, bringing great customer service and efficiency benefits to the business. We've also made great progress over the last six months in our sustainable framework, and our ambition remains to really lead the industry in this area. On the 12th of July, we announced our commitment to 1.5 degree aligned carbon target by 2035. As part of that, our Scope 3 carbon target represents a 63% carbon reduction in the group's supply chain emissions by 2035. As we've said previously, for Scope 1 and 2, we've already set a target of an 80% reduction and a net zero commitment to offset any remaining Scope 1 and 2 carbon by 2035. This builds on already substantial progress with Scope 1 and 2 carbon intensity measured per million pounds of sales reduced by 45% since 2013. I'm also delighted to say that we're on target to have 1,000 new and existing colleagues on apprenticeship programs by the end of the year, and we've enrolled over 350 Kickstart colleagues with the ambition to have over 70% of those permanently with us by the end of the year. Finally, to achieve these challenging but absolutely crucial targets, we must engage with our colleagues across the group and all of our customers and our suppliers to find ways which together we will achieve these targets. To do that, we've created our Building for Better program, which we really launched across our own business in July with a series of communications from the senior leadership team on what sustainability really means to them and how we can bring it alive in our business. Everything from carbon and waste through to mental health and physical well-being. As previously mentioned, on the 29th of September, we'll hold an investor update which will focus on a number of topics. Firstly, how the group is evolving its customer proposition as the construction sector which we serve changes itself, and how we're using technology to enhance the customer experience and simplify internal processes, making life for everyone simpler, easier, more consistent, and more convenient. The journey of continued market leading growth in Toolstation across the U.K. and Europe, and we'll discuss the framework through which the group will lead the industry, as I've just mentioned, in developing a sustainable business framework with customers and suppliers. We'll also discuss the opportunity for the group's businesses to work closer together, really sharing knowledge and capability in a more effective manner to bring benefits in the service for all our customers. As Alan mentioned, we'll also outline the group's allocation policy alongside views on appropriate leverage and how we will have the potential for incremental shareholder returns. We feel that we're really well positioned for the future, and the first half of 2021 has demonstrated that. We're extremely proud of the performance through the first half. It's a strong performance underpinned by robust operational improvements in resilient markets with strong long-term fundamentals. A half where we delivered on our promises, rationalizing the portfolio to serve our trade customers through advantage businesses focused on the long term. All delivered by committed, hardworking colleagues. As I say, we're looking forward to talking more about the business on the 29th of September. Thank you very much for listening, and with that, we are happy to take questions. Our first question comes from Annelies Vermeulen from Morgan Stanley. Your line is now open. Hi, good morning. Thank you, Nick. Thank you, Alan, for the update. Three questions, please. Firstly, on pricing, which has clearly accelerated through the first half. I think you talked about 2% in Q1 and 7% in Q2. Can you give any commentary on how that's developed so far in the third quarter? How you expect that to fall in the second half relative to that 4% for the first half. Secondly, on residential RMI, in particular, I understand that's been very strong, partly bolstered by strong housing transaction data and so on. Again, do you have a sense of how that will develop over the rest of the year, particularly if those housing transactions slow following the end of the stamp duty holiday, and so on. Any color on that would be much appreciated. Lastly, just on the supply side of things. How has that developed since you last updated the market? Of those parts that you called out, I think back in June in terms of timber and cement and so on, are there any other areas where shortages have increased? Would you say the situation is stable or getting worse still? Thank you. Annelies, thank you very much for those questions. I'll perhaps take the second 2 and then, Alan, if you can pick up the 1 on pricing. Yes, we have seen, as we've said, real strength in the residential RMI sector. We anticipate that that will continue to be strong, even though government support in terms of stamp duty obviously has been progressively withdrawn. Those secondary housing transactions continue. Also we know that as typically in the 9 to 18 months following those, people choose to upgrade elements of their house or improve their house. We are also seeing the benefit of continued investment in the utility of space in homes to facilitate working from home, which we see really as progressively more of a structural shift. We anticipate that that will remain strong. As I mentioned, we can't escape the fact that the U.K.'s aging housing stock has been under-invested over many years. Really in terms of not just the utility of the space, but investing in homes to ensure energy efficiency going forward, we see that segment remaining strong, which is really exciting. In terms of supply, I think it's been well trailed in the media, certainly by us and other commentators for many months now. This is an ever-changing kind of landscape, and we anticipate that supply of some materials will remain a challenge for arguably the rest of this year. Locally in the U.K., there are challenges with cement, ongoing challenges with timber, although some of that is now easing. Given that manufacturing pauses and the impact of the pandemic on manufacturing bases around the world, particularly in China on some light side products, and some issues that are well understood by all around the transport of those goods to markets around the world, including the U.K., we would anticipate to see some particular shortages for the rest of the year. We are managing these with our suppliers really well and enabling ourselves to provide customers with the products that they need. Very much a dynamic space, one that we're managing really well, and obviously by dint of our relationship with suppliers and the scale of the group, we're able to ensure that we get those goods through to our customers as best we can. Very much a dynamic space, one that we're managing really well, and obviously by dint of our relationship with suppliers and the scale of the group, we're able to ensure that we get those goods through to our customers as best we can. It's something that we're monitoring very, very closely. Alan. Thanks, Nick. Yeah. Just one complimentary comment, Annelies. You asked on the availability, whether it was stable or getting worse. I'd say I don't see it getting worse, particularly from here, as Nick's described, I don't think it's going to improve quickly. It's a question of the time it takes for manufacturers to start to build some stock and then get that through again. On the pricing environment or let's start with the cost of goods inflation. First of all, again, we've seen significant increases come through. We've done well to manage that in conjunction with suppliers and customers. I think we've been very clear within the marketplace. I think the inflation, you'll certainly see an impact of that in our H2 numbers, I think that's largely increases, which have already been announced and passed through to customers. I think it will be a relatively elevated level for the second half, but I'd hope to see that start to subside as we get into the second quarter of 2022. Okay. That's very clear. Thank you both very much. Our next question comes from Emily Boadu from Credit Suisse. Morning, guys. I hope you're all well. Thanks for taking my questions. I've got 2, please. The first one, I just wanted to come back on the strong merchanting margin. At 8.2%, is there anything in there that you'd encourage us not to extrapolate? I'm conscious that you may have benefited when inflation has been coming through very quickly. You may have benefited from sort of stockholding gains or the sort of the blend of RMIs versus the new build exposed businesses, I would assume sort of margin mix positive in the first half of the year. Are those meaningful and do you want us to sort of remain mindful of those? As we look at that 8.2%, do you think that sort of conversely you can deliver sort of incremental margin to the positive on that with incremental volumes? Secondly, I just wanted to come back on the July growth rate. I realize you probably don't want to give us numbers on several weeks of trading, but we had talked previously that there might be some scope for either the market to be impacted by people being forced to isolate or builder demand capacity being constrained by people going away on holiday, et cetera. Are you seeing any of that at the moment that we need to bear in mind, or is the market broadly similar to what you were seeing in Q2? Thanks very much. Thanks, Emily. On the question on merchanting margins, first of all, I suppose my summary would be, I think that it has been a strong performance. I do see it as sustainable. You're right that there are one or two transitory benefits, if you like. There is something in there on inflation gains on stock, as people who've covered the sector for a while would know well. I'd characterize that as single digit GBP millions in the number, though. The other point I'd want to make is that, if you think about the balance sheet at the 31st of December 2020, there were a number of slightly more prudent provisions in there, given the economic conditions at the time and the extreme level of uncertainty. For example, bad debt reserves. Under the accounting standard, IFRS 9, we'd have been looking forwards and a bit more cautious at that stage. There are some small provision and accrual releases in the first half. Overall, I'd put that at GBP 8 million-GBP 10 million in total of movements on provisions, which I wouldn't expect to repeat in the second half. Hence, you can't just take the first half ex property profits and double that to get to a number for the full year. The guidance that we've provided there, with the strong upgrade that we gave on June 22nd. In terms of the blend of business, you're right, the RMI blend does help somewhat. I think you made the point that with volume growth, could we see the margins holding firm going forwards? I think that's certainly the case. We've had a really good drop through of operating profit, as I tried to demonstrate with the EBITDA bridge during the first half. I don't see why we can't hold the merchanting margins around operating margin around that 8% or so level. On your second question, we've not seen anything that particularly concerns us within the July performance. I'm not going to go into details because month-on-month things can move around. You reference self-isolation and all of those things. For the record, listen, we've been contending with workforce issues due to the pandemic for over 15 months now and continue to manage those astutely, I think. It's not having a material impact on the performance of the business. Thanks, Emily. That's great. Thanks so much. Our next question comes from Will Jones from Redburn Partners. Your line is now open. Thanks. Morning. 3 if I could please as well. Just in terms of the merchanting revenue expectation, I guess, in the second half that's implicit in your guidance, would it be fair to say that you're looking for a similar, I guess, 6-month rate of growth on 2-year view to what you saw in the first half? Kind of splitting the difference between first quarter and second quarter. 2 was maybe if you could explore the, I guess, the picture today compared to where you were when you made your branch closure and headcount reduction changes last year and to what extent you're needing to reinvest in either front, I guess, as we sit here with the higher demand picture a year later. If you can remind us of the relevant GBP million numbers there, please, given plumbing and heating having gone, et cetera. That would be great. Just the last one was really around Toolstation. I know you've been thinking ever more about France and how big the ambitions might be in the long term in that business. Maybe it's more for the CMD than for today. Is there any evolution of the thinking, I suppose, for France in the last six months, and to what extent, I guess, the platform might need further investment around logistics, DCs, management, et cetera, if you are going to go faster there? Thank you. Thanks, Will. On the merchanting revenue for the second half, I'm not going to get drawn into predicting in uncertain markets too much, Will. I would say that I think the Q2 performance was really exceptional when you look at the performance against Q2 2019. I don't see it quite at those levels in the second half. As Nick was explaining in the answer to Annelies, we think the RMI market will remain robust. The work we do in, for example, social housing or some of our other large contract customers was a little slower during the first half than RMI. We would expect that to be more robust going into the second half. In terms of how we think about the branch closure program, I think the key point I'd make is to reiterate that the branches that we closed were on average less than one acre in size. What we're looking to do is have larger, more capable branches in key markets with stock on the ground. Certainly the decisions that we took there. The right ones for the long term for the business. I think, again, as I tried to demonstrate on slide 8 with the operating profit bridge, there's been some reinvestment in the business related to volume on variable costs. What we've done overall is retain a good chunk of the restructuring benefit, and we've tried to move some of the cost base from being much more fixed in nature to a bit more variable in nature with the volume environment. Maybe I'll let Nick say a few words on Toolstation in France for his thoughts, and I can complement that. Absolutely. Yes, Will, I think it's something obviously we will be expanding on in September and look forward to that discussion. As I said, we've already had enough confidence to invest in the new DC facility in Lyon, 100,000 sq ft, as I mentioned, which supports up to 100 branches in that area. Look, we are really focused on rolling out our branches, establishing clusters, maximizing sales density, and really understanding the local market conditions such that we continue to build on the very, very strong performance in France. As I say, an area that we'll talk more on at the end of September in terms of our ambitions. Will, I'd just complement that in terms of management in Toolstation Europe, what we've done in each of the markets is get a blend of people who are local, so French staff, Dutch staff, Belgian staff in the support functions there with people from the U.K. who know the Toolstation model. Given it's a novel model in those markets, we need people who know how to operate the Toolstation uniqueness in each of those markets as well. We've gone for a really good blend, and I think that's working well for us at this stage. Thanks. Understood. Thank you. Our next question comes from David O'Brien from Goodbody. Your line is now open. Morning, guys. Thanks for taking my question. Just two, please. Firstly, on the app rollout in Toolstation and TP, can you give us a sense of, or put some numbers around what the uptake is like there amongst the active customer base and what is the feedback and benefits that are coming through? I suppose aligned to that as well with the delivery management system, how's the progress on that? I know it's 50% rolled out, but what are the learnings you're taking from it and ultimately the benefits that we should see as external observers? Finally, in terms of the market share you outlined for the top 50 conurbations within merchanting, can you give us a sense of what that market share is versus the remainder of the conurbations? Fantastic. Thanks, David. I think it's fair to say we'll talk a lot more in September about how we're using technology to enhance our customers' experience and our own business. The rollout of the Toolstation and TP apps has been very successful. We've seen customers engage very, very positively, and the feedback has been tremendous, and were you to go on the App Store or the Google Play Store, I think you'd see that in the ratings that we've achieved. So we will talk more about what that means in terms of the customer journey and how that benefits customers and the business in due course. Delivery management, as I said, it's fully operational across CCF and Keyline, and we are rolling it rapidly across the general merchant. Customers are seeing benefits in just notification of when their deliveries will arrive, which is perhaps to many of us a basic level of expectation in terms of web orders, but actually in our space, that really is proving very, very popular with our customers. Of course it has significant efficiency benefits for our business in terms of planning and in terms of maximizing the utility of our fleet. Again, an area that we'll talk more about in September. In terms of share, look, it varies from conurbation to conurbation. Typically, as I said, we under index compared to our national share of around 15% in the general merchant. Sometimes it's between 8% and 12%, and that's where we are really putting our business on the front foot, investing in larger, more capable branches, really ensuring we've got the right configuration of branches supported and invested with the right colleagues and the right fleet to ensure that we can continue to gain share in those markets. Very close focus on that. Alan, anything to add? No, I think you've covered it, Nick. Great. Thanks, David. See you in September. Super. Thanks a lot. Our next question comes from Rajesh Patki from JP Morgan. Your line is now open. Yes, good morning. Thanks for taking my questions. I've got 2. First one, if you could talk a bit more about 2 specific aspects for the specialist merchanting business. Firstly, where are those business versus 2019 level, and if there is any particular inflationary impact to note here? The 2nd question is on the buyback plan related to the proceeds from the plumbing and heating disposal. Do you have a tentative timeline in mind? Would it only start once the transaction is complete? Thank you. Alan? Thanks, Rajesh. On the buyback program, yep, the intention is to start once we complete the plumbing and heating disposal. We'll have to see dependent on turnover in the shares on the market how quickly we can get that done. It's obviously, I would anticipate it will span over the year-end. That's assuming a completion during Q3 this quarter, which we're well on track to see. In terms of the specialists and their revenue performance in like-for-like terms, we are ahead of what we'd have seen in 2019. On the total sales basis by business, it's a different picture. We've got one ahead and two slightly behind, given the space that we closed, so a large percentage of space. I think from a profit point of view, all three businesses are performing well, and that's reflected in the overall position. Inflationary elements, I think they're affected, Rajesh, like the general merchants and Toolstation. The inflationary aspects are broad based. There are specific product types, so specific commodity inflation that you'd see. In BSS, for example, we're heavily exposed on copper and steel pipes. In particular, on something like copper with our larger customers, we operate on a price index related to London Metal Exchange prices. That enables us to move pretty rapidly with the pricing there so that we can offset any impacts. I hope that helps. That's great. Thank you. Our next question comes from Gregor Kuglitsch from UBS. Your line is now open. Hi, good morning. I'd like to come back to the comments you made on the merchanting margins. If I look at, I think you kind of said 8%-10% on bad debt, I think the provision release plus a little bit of stock gains. If you do the math on that suggests your underlying margins are running at maybe 7.5%, if that's right. You, I think you also said you thought you could sort of run it around 8%, if I understood you correctly. I want to understand, firstly, where that step up is going to come from. Perhaps more broadly, obviously, kind of looking back, you took out a whole chunk of cost, and in the end, it's basically the same margin that it was 2 years ago. I suppose the question is, are you satisfied with that outcome, that you ultimately make the same level of profit that you kind of started with, obviously with ultimately markets that are probably relatively supportive? That's the first question. The second question is, could you just help us on the you gave us helpfully the U.K. profit and Toolstation. Just give us the margin on the U.K. so we can work out kind of what the margin progress is on that. I think, correct me if I'm wrong, but I think you'd previously in a previous call suggested that you thought the U.K., once it sort of hits maturity, call it 1 billion of sales, could make an 8% operating margin. Does that still stand? Thank you. Thanks, Gregor. Let's cover the Toolstation one first. If you look at the second bullet on slide 10 on Toolstation, you'll see the U.K. operating margin progressed to 5.8% in the half. As we said, in line with our expectations at this stage of the maturity of the business. I don't recall specifically saying 8%, but I do recall saying at maturity, I'd expect Toolstation U.K. to get towards a high single digit sort of operating margin, and I see no reason to change that guidance. Likewise, for the merchanting business, I'm very comfortable with the assumption around an 8% operating margin. I think you're taking some elements which are just H1 and then extrapolating across a half as a whole, if I may say. I think we're very satisfied with the restructuring program that we put in place. To emphasize the point, the sites that we were closing were smaller than average. Their revenue was, therefore, less than average as well, and we want larger, more capable sites within the network going forwards. I think it's been a strong performance, and we've got the business back into the shape where we wanted it. Brilliant. Thank you. That's helpful. Thanks, Gregor. Our next question comes from Christen Hjorth from Numis. Your line is now open. Thank you. Morning, everyone. 2 questions from me, if that's okay. The first one, just to follow up on that merchanting margin of 8%. I think the discussion's been more on the short term. If we look forward onto the longer term, is that 8% a normalized margin you think, going forward? Or is there scope for some upside to that on a sort of 3 to 5-year view? The 2nd one, just on sustainability and noting your Scope 3 targets. I was just wondering how that potentially impacts your relationship and how you deal with suppliers, particularly, I suppose, in some areas like bricks and cement, which are carbon intensive. Thank you. Can we do the first and I'll pick up the second? Thanks, Christen. It's a good observation of yours about the medium to long term. Certainly, when I'm answering the question on merchanting, I'm thinking more medium term, what is the sustainable operating margin for the segment? I do think aspiring to stay around that 8% level is the right level. Why do I think not beyond that? Well, 1, competitive intensity in the markets. I think secondly, the blend of business that we do there. Our specialist merchants tend to be lower gross margin, in the 20s, but also a lower cost to serve. You have to blend that with the general merchant position. It depends on volume growth, where that margin can go to, and then secondly, on competitive intensity within the markets. At this stage, I think it's a good modeling assumption to think around that 8% level. Excellent. Thanks. Christen, great to have a question from you on sustainability and Scope 3 carbon, in particular. I think it's fair to say that we all recognize that addressing Scope 3 carbon is a systemic industry-wide issue, and it requires us and all our partners, suppliers, and customers to work together to address how we eradicate carbon progressively from the construction supply chain. Actually, those who are more carbon intensive, like brick manufacturers, as you called out, are amongst the more progressive in this regard. So we're working with some of our key suppliers in that sub-segment, if you like, on how they are progressing their plans to remove carbon from their products. We will be broadening that obviously more widely across our supplier base. Actually, we're having very constructive conversations with everybody. Far from impacting relationships. If anything, it's an opportunity to build relationships and build the benefits for customers in the longer term, and us all, by addressing this issue. Actually a very progressive space, one we're excited to be working within, but very much an industry-wide effort required. Excellent. Thank you very much. Our next question comes from Chad Gex from Greenlight Capital. Your line is now open. Good morning, thanks for taking the question. I'm coming back to the previous discussion on Toolstation U.K. You spoke in the March call, as Gregor mentioned, the GBP 1 billion in annual revenue on about 600 to 650 branches in the U.K., so approximately GBP 1.6 million in annual revenues per branch. The business model also appears to be very high inventory and asset turnover once branches mature. Now that you have the operating track record to look at the branch maturity, what's the return on capital employed in Toolstation branches once they achieve that GBP 1.6 million in annual revenues? I have a follow-up. Thanks, Chad. You faded a little at the end there on the question, but I think the sentiment on the Toolstation U.K. question was around a mature return on capital employed at an individual branch level. Just one point to clarify. Obviously, the £1.6 million per branch, we're not there yet. That reflects the high level of mature space that we've got in the network. Typically, I'd expect the branches to be contributing to fixed costs within 12 to 18 months, and I'd expect them to get to a mid-20s return on capital employed as they approach a maturity level. I hope that helps. Yeah, absolutely. Mid-20s as they approach. When you talk about your midterm aspirations for the business, you think a GBP 1 billion revenue business medium term for Toolstation U.K., generating a high single-digit margin in a mid-20s return on capital employed? The mid-20s capital employed is on the branches. You've then got the distribution assets that you need in order to fulfill those branches and the stock held within those. Overall, blended return on capital employed is going to be a bit lower than the branch level, but still a very attractive level. Just coming back to on page 6 in your release today, you mentioned the investment in Toolstation U.K. in the network in the past 12 months. If I look on comparing your branch Toolstation U.K. in first half of 2019 versus the first half of 2020, it looks as though you have an increased investment of somewhere between GBP 7 million-GBP 10 million. If you were as profitable per branch, and these are more mature branches now, if you were as profitable per branch in 2021 first half as you were in 2019 first half, you would have generated about GBP 7 million-GBP 10 million more in adjusted operating profit. Is that about the level of increased investment that you saw in Toolstation U.K. in the first half of 2021? It's a tricky picture, Chad, to understand because of the opening profile. If you go back to the first half of 2020, we only opened 9 in the first half, whereas normally we'd be looking to do at least 30 in a half. If you look at that on a trailing 12-month basis, we did about 50 openings in the second half of 2020, plus the 30 or so in the first half of 2021. There's a more pronounced drag. In the presentation, I did pull out for you on the chart H1 21 versus H1 20, GBP 15 million of incremental Toolstation investment. Now that's Toolstation segment, so including Europe At least, say two-thirds of that is in the U.K. That's H1 21 versus H1 20. That will give you an idea of the order of magnitude. Thank you. That is about that GBP 10 million? Yep. Okay. Thank you very much. I appreciate your taking the question. Our last question comes from Ami Galla from Citigroup. Your line is now open. Yeah. Good morning, guys. Just three questions from me. The first one was, if you could talk about the regional trends that you're seeing in the markets. Are there any differences between how the London markets are recovering versus some of the others? The second one was on the potential energy efficiency upgrades to housing. Do you expect any material subsidies coming from the government to support that upgrade over the next few years? Third one, just a follow-up on the sustainability question. You've talked about the sort of conversations you've had with suppliers. I was wondering if you could give us some color as to how many of your large competitors are also following a similar route and adopting such sustainability targets. How critical is that for the large customer base that you supply into? Thank you. Fantastic. Let me answer the last two first. I'll leave you ask our competitors how they're progressing. They will be having to consider the same issues. What's really interesting is that with our larger customers, Ami, this is, again, a really progressive conversation. Many of our larger customers, social housing organizations, for example, are placing carbon and a broader sustainability within a broader ESG agenda very highly in terms of discussions with us about work that we wish to win. That's actually very positive for us because we are working together to ensure that we help them decarbonize their business and decarbonize their supply chain, and that's having a really positive impact more broadly. We'll have to see what the government does to promote further investment in energy efficiency in homes. Clearly, over the last year or so, we saw another green deal for insulation, which really suffered again in terms of uptake more broadly. I think it will be on individual householders predominantly to invest in efficiency upgrades to their homes, but we expect many to do so, and we're already seeing a different expectation from end customers in terms of the materials that they're using within their projects, and that's reflected through our trade customers into our business. Alan, any comments on regional trends? Yeah. On regional trends, Ami, I think the first point I'd make is obviously because the Scottish and Welsh governments had different restrictions from the restrictions in England, you've got different trends from that. Broadly, things have caught up. I think if we think about London in particular, London and the Southeast were slower during the first quarter than other regions, I think that's improved quite well in recent months. I don't think at this stage there are large, discernible differences in trends in the end markets that we're seeing. Improved quite well in recent months. I don't think at this stage there are large, discernible differences in trends in the end markets that we're seeing. Thanks, Ami. Thank you. We have no further telephone questions, so I'll hand it over to Heinrich. Thank you. We have a question from Charlie Campbell at Liberum. It's a three-part question. What sort of impact have you seen from building material shortages, and can you quantify the loss in revenues at all? How quickly should we expect Toolstation Europe to reach break even? Finally, slide eight shows a GBP 50 million saving from H1 to H1. What should we expect in H2 versus H2? Charlie and Heinrich, maybe I'll start on some of those. On the material shortages, I don't think they've had a significant impact on revenue overall. It's been more an impact in our safety stocks. That's with the exception of some of the specialist businesses where clearly we have had challenges with allocation. If we're talking about light side shortages, we've tended to manage those using the inventories that we carry in the warehouses. From a Toolstation Europe point of view on the break-even point, I think overall there are losses to come for a while yet. What we're doing is, we're seeing very good progress in the Dutch business. I think that business will approach a break-even point in, say, 24 months, something like that. That will enable us to go faster in other markets. I'm not going to change the guidance at this stage for Toolstation Europe overall from the GBP 20 million of loss, because I think you need to trust us that we're going to drive the investment to get the incremental returns. If we're not seeing that, we will, of course, change tack on that. In terms of the H2 to H2, I suspect you're referring specifically to the restructuring program savings. Remember, some of that started to deliver benefit in the second half of 2020, so you would expect the number naturally to be lower than the GBP 50 million gross that we're showing on the slide there. Thank you. Good. Well, thank you for those questions. We really appreciate you joining us this morning, and we look forward to seeing you, hopefully in person in London on the 29th of September.