Earnings Call: Q3 2020

Oct 22, 2020

Earnings release

Welcome to you all. Good morning. Welcome to our Q3 trading update. And I can't believe it's only been 6 very short weeks since our half year analyst briefing when we were last together. I'm here as normal with Alan Williams, Group CFO and Graham Barnes, our direct through Capital Markets. I hope that you all and your families and all your colleagues are remaining safe and well wherever you are. We'll keep this update brief and obviously invite questions in the normal way. Today, we report a positive Q3 performance with continued recovery in all parts of the business in the face of continued challenges caused by the pandemic, we know that as it continues to swirl around us. We saw positive signs in July as trade returns with domestic RMI as the key area of activity which included the continued strength of DIY as we discussed a few weeks ago. August saw a softening of our trade customers business as well as non trades as people to a holiday, but September's performance has been strong as trade returns to kind of more normalized patterns after that holiday period. Again, mainly domestic RMI, which really benefits, as you know, I'll try to spoken to general merchant business, City Plumbing supplies, Toolstation, and Wix. Our larger house builder, the kind of commercial segments Public and economic infrastructure remains slower, but gradual improvement continues, which is really encouraging. And we continue to drive our strategic agenda hard. We continue with our theme of simplifying the group with the sale of tile Giants in September after this disposal, obviously, as you'll recall, of PFMP back in January. And we continue to focus on strengthening the core of our business, driving operational improvements across the business, following what's been excellent reception of customers following the closure of some of our branches back in the summer. We continue to make excellent progress in the face of ever changing pandemic restrictions to clearly lockdown in Northern Ireland, the Republic of Ireland, and Wales plus the increase in the number of Tier 3 areas and restrictions around the country. But we retain our kind of relentless focus on keeping our colleagues and all our customers safe while trading hard and pivoting our operations as we move forward in the face of the pandemic. Our outlook provides guidance that we expect the full year 2020 to out turn within the upper part of analyst expectations. So with that, let me hand As a reminder ladies and gentlemen, if you would like to ask any questions today, please would you press star 1 on your telephone keypad now? And the first question from the phone lines comes from you from Exane BNP Paribas. Hope you Please go ahead. Good morning everyone and thank you for taking my questions. I'll keep it brief to two questions. First one, could you just comment on the trends that you have seen in maybe October? Should we extrapolate what you have been talking about on the September month into October? That's my first question. And second of all, could you also maybe comment on what is missing today for you to come back to any kind of update on the potential demerger of Wix, and also when do you expect to update the market on your dividend policy? Thank you. Hi, good morning. Good. Alan, do you want to tackle the first one and I'll come on the second one? Sure. So if on the on the trends in October, it said, clearly, we're only 3 weeks into October at this stage. And we are seeing more lockdown measures. But when you look by end market and also by each of the reporting segments, the trends that we're seeing so far are following what we saw in Q3. Very helpful. Thank you. Anis, just on your second point, I would refer you back. I won't read through it, but I would refer you back to the position we made clear just 6 weeks ago regarding Wix and the dividend 2 topics that obviously remain front of mind for the leadership team and the board. But as we said there, and as Alan just said, as as we faced into changing conditions in the ground and as we faced into what we continue to think will be a long and uncertain winter then we will make the appropriate statements at the right time regarding both of those issues. Thank you very much. Thanks, Pete. The next question we have comes from Pareal Wolf of Jefferies. Your line is now open. Please go ahead. Good morning, Chris. Good morning. Thanks for taking my questions. I've just got you to keep it brief. So Firstly, in terms of merchanting like for like, I just wondered if you could split it between what's going on in the general merchant. So TP versus some of the specialist businesses. I'm just trying to work out if some of those smaller trade focused businesses are back to growth now as well. And then the second question is you've obviously said there's no appreciable impact from price inflation. Can you give a little bit more color there with their pockets of price pressure coming through, either in terms of more competition or cost inflation as well. Thank you. So on the on the breakdown of the merchanting like for like, I think it's instructive to look at the end markets. Rather than the individual business units, and that helps you understand the position overall. So as we put in the statement, the the strength we're seeing is more in the RMI side and new house building and larger construction projects, in particular, in commercial, are still lagging. And so I think that helps you understand the underlying trends. The general merchant business is, heavily indexed towards RMI, our plumbing and heating business also has a significant exposure to the RMI side. So and that's helping the trends there. I'd say on the on the weaker side, given the new house building and, commercial project lagging, you'll naturally see key line and CCS, but it's, it's entirely reflection at this stage their end markets. On your second question, you know, the pricing environment overall at this stage is relatively benign. We'll have to see what impact Brexit may have on currency related elements. But it's, you know, at this stage, it's relatively stable. And as you'll see, when it comes to, underlying materials and commodity inflation. We've seen some increases coming back into the timber markets But the rest of the environment at this stage overall is relatively, benign, I'd say. From a commodity point of view. Thank you. The next question we have from the phone line comes from Annal Z Lammin from Canaccord Anzi, your line is open. Please go ahead. Great. Thanks very much. I'll stick to 2 as well actually. Just firstly, wondered if you could comment on kind of product availability given the surge you're seeing in some of the areas you're having any issues kind of meeting demand in any product lines? And has that been a constraint in anywhere across any of the businesses? And secondly, just on the net debt guidance you gave at the half year, I assume that hasn't changed, maybe a little bit better given the kind of upgrading group EBIT? Thanks. Yes. Thanks Lee. Just on if I start with the net debt and then move to availability. At the time of the, the interims on the 8th September, I gave a range of plus or minus 50,000,000 around the position that we're seeing at the time. And I think that we're more or less still there on here. I think the key message here is that the cash position and liquidity that we see continues remain strong. Credit teams are doing a a fabulous job collecting from trade debtors, but as the business starts to, recover more. You and in the in the trade businesses, in particular, you will see the trade data book increase commensurately. But as I said at the time, I'd expect a lot of that to be funded through increased EBITDA as we go through. From a product availability point of view, we are still seeing, impacts. So there are some heavy side materials, but it's it's more, for example, around, plastered, where we're still seeing some patchiness on on products like that. And then also in light side categories. It's not materially impacting our sales, but we would prefer to have greater depth in stock in some areas of products, particularly in Toolstation And Wix. And then from a merchanting point of view in the and categories like Bag plaster. Great. Thank you very much. Thanks, Andrew. We now have question from Robert Eason of Goodbody. So Robert, please go ahead when you're ready. Good morning, everyone. Good morning, Robert. Just my first question is around the retail business, specifically around Kitchens And Bathrooms business versus core. Can you just give us a bit of color how the Kitchen And Bathroom business is evolving and because obviously that went through a bigger shutdown in Q3 to and distinguish between what you're delivering and the what the order book looks like with that business? Well, also, like, you've alluded to, like, in terms of your collections is going well, but, and what I have, just a general question about bad debts. Like, is anything emerging in the system as, you know, people come under working capital strains and as, you know, the market picks up. And just your comments around the housing market, are you seeing any big regional differences as the housing market starts to get back up to a reasonable levels? And there are my kind of 3 areas of questions. Okay. Thanks, Robert. On the on the on the first one around the Kitchen And Bathroom Business versus Cool, the Kitchen and Bathroom delivered sales in Q3 were lower year on year. We've certainly stepped up significantly and, are back out, clearly, doing installations within that number. Lead metrics on the other hand are positive year on year. I think the we this is where we see the strength of which in digital in particular. So we've got a significant growth in web leads which are translating to, appropriately distanced store, conversations with customers, and also home visits. Now we'll have to watch how that evolves with, in particular, with regions going into Tier 3 of the government measures. But I would expect to continue to see for the time being that delivered element step up from a position we're in. So what does that mean? It means that the core numbers are extremely strong. So core would be in, you know, year to date probably into double digit, year to date growth, even including the lockdown period during April and On the bad debt side, at this stage, we are not seeing any particular change in pattern. From what we've seen earlier in the year or for that matter last year, as a reminder, in our half year results and under IFRS 9, we have looked forward to what we think may be a bad debt experience more in line with the recession. And that was reflected in the provisioning that we took at the half year. On your final question about regional differences in housing markets, we're not if if you're referring to new build and, the build out, we're not seeing material differences at this stage. I think from a house price point of view, we did see the updated stats in the in the last couple of days by by region, which were published and also have seen the number of housing transactions. And whilst housing transactions in August were getting back to a level in line with prior year, I would note that that will be a mix of, transactions that have taken, you know, been planned and taken place since lockdown lifted, but also a lag from Q2 year to date housing transactions in the secondary market in the UK, still down 20% at this stage. Okay. Thanks a lot for that, guys. We now have the next question from Arnold Lemmon from Bank of America. So please go ahead, Arnold. Whenever you're ready, your line's open. Thank you very much. Good morning, gentlemen. Two questions on my side. Firstly, on let's say, lockdown measures. So can you operate properly in both tier 2 and tier 3 arrears related to that how prepared are you for, potential to take on national lockdown? I would expect you to be much better shape to deal with that this time around. And, and secondly, on merchant team, quite impressive recovery in Q3 like for like down 3% to which extent was that supported by the stock closure? I mean, if you did you calculate, if you didn't have the stock closure, would have been worse because, I guess, you are focusing on the most efficient, efficient tools. Thank you. Yep. I know. Oh, sorry. Should I start off as long as you pick it up? Yep. I know. Thanks for your question and obviously very pertinent. We are extremely well placed to operate through the ever changing conditions that we see around the country. As you will recall, we successfully navigated the first lockdown by pivoting our model very, very quickly in all of our branches and stores across the whole business. And since then, we haven't stopped working out the best way of keeping customers and colleagues safe while being able to operate our branches as close to normal as we can and obviously deploying technology in the right way. So we are well able and have been well able to navigate the Tier 3 restrictions in Merseyside and obviously that's increased through Lancashire now into Yorkshire over the last couple of weeks, we are well able to navigate Tier 2. And we consider ourselves very well placed to navigate a national lockdown were wanting to come to pass. And obviously in Wales, we are seeing what is akin to a sort of national lockdown over the next 2 weeks. We're extremely well placed to operate our branches. We have a well defined and well rehearsed operating legitimacy, that we really honed through the first phase of lockdown back in March April, which has an essential service to ensure the maintenance of critical infrastructure and to keep homes warm and dry as we move into winter, we have absolute operating legitimacy to make sure that we can remain open and we know how to operate in fact, I think we can operate better than we did back a few months ago. So we're really positive about that, which means that, we're ready whatever the environment throws at us, but absolutely with the focus on retaining, safety and well-being of colleagues and customers at all time. Alan, do you want to comment on Merchanting Life like? Sure. So Arna, thanks for the question on that. I think if you did at a group level, and we put this in the second page of the statement, the retention of sales from closed space adds about 3 percentage points and to the, to the like for like number. So if I translate that through to where we saw the branch closures, they were concentrated in merchanting and plumbing and heating. We we talked at the half year about plans that the the various businesses had about retaining those sales. And as a reminder, where they are, the larger regional customers or national customers, and we have, longer term arrangements with those customers, that tends to be, much more on the delivered side of the business. So where we are delivering to customers, and they are on the largest side, we've got a much higher retention rate the lower retention rates you'd see in some of the, more local trade, whether that's in the Travis Perkins general merchant or in plumbing and heating, if there, if there isn't a branch as proximate and there's an alternative supply available to the customers, we will lose some of that business. But the, you know, at that 3 percentage points added back level. It's pretty much in line with the expectations that we talked about at the half year. Results presentation on retention. Very clear. Thank you very much. Thanks, Ana. The next question from the phone line comes from Kristen Horth from Numis. So please go ahead, Kristin. Your line is open. Thank you, and good morning. I just linked to that, well, the question for last, I assume when we look at that September plus 8% like for like, we should should also assume that there's a 3% benefit from from that retention. And then looking forward to your guidance, I assume when you sort of point to current volume trends continuing, that's a reference to Q3 overall. Continue to Q4 rather than sort of what you've seen more recently perhaps in that strong September. And then just the final one from me, you have pointed to sort of house building and commercial, being somewhat behind 2019 levels. I was wondering if you could just put a little bit more color on that. Are we high single digits, low double digits, behind just just, any sort of more color you could give there would be greatly appreciated. Thank you. Okay. Thanks, Kristen. So on the, if if we talk about q3 overall versus September. So your second question there and the trend that we're referring to in the outlook, it is more a a reflection of the Q3 overall. I think it's it's quite, I I don't think it's appropriate to base things off just 3 or 4 weeks trading. So we have considered the overall, impact that we'd have seen the retention rates, you know, I'd I'd expect to see them continue with these sorts of levels And then on the question about new house building and commercial, it's more the it's it's in the 10% to 15% down sort of range at this stage. You'll have to get very specific on that. Thank you very much. We now have a question from Charlie Campbell from Liberum. So please go ahead, Charlie. Morning. Thanks very much for taking the question. Just sort of a big picture question for me. Lots detox ones have gone, but just sort of wondering, what if you can say anything about sort of order books on the CCF and BSS Industrial side, because obviously there are some order books there. Just what that's sort of telling you for sort of Q4 and into next year, And also kind of what the branch managers are telling you about some of the residential RMI trades, Paul, what they're saying about their order books and their activity levels. Thanks, Charlie. Morning. Yeah, I think, let me start with CCS and BSS. Because the 2 are quite different. I think as Alan commented over the last couple of questions and I at the beginning around CCF, clearly the commercial market and the house builder market remains subdued, but it's where the recovery is continuing. There's no particular patterns of but that is steadily improving. The BFS industrial, of course, through the kind of summer period, there was an awful lot of seasonal school and hospital work. As that finished in its natural course, we have seen just slower pickup through again that commercial, but there's some really good activity that sustains around sort of student accommodation and projects like that. So as we look forward, we remain, positive about both of those businesses, but the recovery, as we've said in the statement, has been slower in some of those commercial and industrial segments. But we believe we've got strong market leading businesses, notwithstanding the common Alan made if you to go around product availability in some areas in some categories. We remain positive obviously as we look forward continued recovery as we hope into next year generally in the market. Interesting question, Charlie, around branch manager sentiments. And and I'll extend that around all of our businesses in the domestic RMI segment because of course that does touch into local trades in our in our Wix business as well as our trade customers in Toolstation, CPS and the general merchants. What are our customers, smaller trade customers are telling us is that they are, you know, they have, they have good, positive order books over the coming weeks months. Generally, they're pretty optimistic about the domestic RMI market. Lots of, conversion of spaces within houses, lots of extensions as people rethink, and, yeah, rethink the, the layout of their home and the use of the space. For obvious reasons. We're spending more time in them during the day, and as well as the evening. So, the sentiment there is positive. Obviously, that's a qualitative measure that we keep very close to across the full spread of domestic RMI. And we hope to see that continue. The caution I just injected to that is of course coming back to Arnaud's question around the spread of Tier 2, Tier 3 and indeed hopefully the distance or low risk prospect of a national lockdown. And that's the impact on people getting into customers homes. So where is their sentiment deposited? They've got good order books and practicality of them getting into at home that people might, might lack confidence in them doing so, whether that's for a boiler refits or heating up grade or indeed a painting and decorating or indeed a continuation of a lock conversion, whatever it might be, actually getting into customs homes might be the constraints over the the weeks and months ahead as opposed to their order book. So we watch it very carefully. We stay very close to them, but at the moment, that's looking, a as positive as it has been over the next last few months. Alan, anything to add to that? No, I think that's because I think Thank you. Thank you. We now have the next question from John Bell of Deutsche Bank. So please go ahead, John. Your line is now open. Good morning, John. Good morning, John. I think I've got 2. Just wondering what your kind of thinking is on the year end cash figure. Obviously, you've updated us fairly recently, but any thoughts there? And the second one is in in Europe And Toolstation, to the extent you can commercially, could you update us on the competitive environment and how you see the opportunity? Thank you. Yes. Thanks, John. I think on the year end, cash you know, I've I've not changed the guidance from the plus or minus 50,000,000. Versus what we had when we reported the the half year. Clearly, that continues to go well at at this stage but I can't get much more precise than that at this stage. We continue to be really encouraged by the performance of sulfation in Europe, whether that's the Benelux or French operation, despite the increased lockdown measures in each of the three markets over the last month or so that we've seen and the business has continued to trade really strongly. That says to me that the the multichannel, operation that we have within, Toolstation. It's valued to customers and the very high service level that they get continue to resonate strongly. So when our our biggest challenge is always to recruit customers and get them to file the format, when they do, we see very good retention rates, within customers. So we're we're encouraged to continue to press ahead within the continental European markets where we're present currently. Thanks, John. Thank you for that, John. We now have next question from Gregor Kuglitsch from UBS. So please go ahead Your line is open. Hi. Good morning. Couple of quick ones, please. Firstly, maybe just housekeeping, pal Giant, whether you were sold just checking if there was any proceeds. I guess it was probably negligible, but still, second question is on gross margins. Personally, I'm a little bit surprised that that kind of growth, in terms of top line appreciate, obviously, there's some, flowback on the on the store closures considering some of the tailwinds you've got. I think you like few, right, which were, the provision reversal, the, the business rate holiday that, that you wouldn't be higher on profit, basically on a year over year basis. So I guess the underlying question, is there anything else going on maybe on gross margin something like that that offsets some of the some of the tailwinds there. And then, finally, I guess it's too early comment, but perhaps if you can, is there any impact you're seeing from the Green Home grant or is that actually not flowing into business I'm not quite sure on the timing. Obviously, it's launched in September. I'm not sure that the money is actually really flowing and whether it's even working at all. If you have any color on that, that would be helpful. Thank you. Yeah. Thanks, Greg. I'm on the last one. It it is a little early to comment on a Green Homes grant at this stage. I think there's, there's been a relatively slow pickup and talking to, trades people a relatively low awareness generally on an unprompted basis of the the scheme. So our our businesses are working with, customers to to point that out, to them. On the question on tile Giant, you'll be delighted to hear that work proceeds, the, but it's not material overall to the group bearing in mind and sub 50,000,000 of revenue and a breakeven sort of business there. And the clearly, they I'm not gonna give a a number on that, but the details will be fully disclosed in the in a full year results in the normal course. There's nothing to draw your attention to in changes in trends in gross margin or overheads versus what we said, with the interim results on the 8th September. Thank you. Thanks, Maria. Thank you. We now have an question from Ami Galla of Citigroup. So please go ahead, Ami. Your line is open. Yeah. Thank you. Just two questions from me. The first one on RMI strength, as you look at the sort of order intake in trend, demand trends in Q3, has the level of work moved from outside at outside out of the home activity to more indoor activities. How are you seeing that shift up and in terms of the RMI work? And my second question is on plumbing, you think, demand that you've seen in Q3. Can you give us some color as to where is the strength within that broader plumbing heating base? Yeah. Hi. Hi, Madit. The in a way, the two questions are interrelated to the RMI strength that we're seeing, all the trends that we've seen during Q3 particularly through September, will be more supported by indoor work. And that would be particularly in an area like plumbing and heating. So what we've seen, in plumbing and heating is a recovery actually across all of the different subsegments of the business. So whether that's the, the bathroom, showroom piece, the local install the business within city plumbing, but also social housing refurbishment returning rather than just the breakdown work. And then also some of the larger national, installers who we work with. We've seen their levels of activity pick up somewhat Thank you. We now have the final question from the phone is registered from James Rose of Barclays. So please go ahead, James, whenever you're ready. Hi there. Morning. I wondered if you've got any KPIs internally, that would tell you whether the better trading you're seeing in the non retail businesses is coming from existing accounts, or is it coming from? Or is is there an element of new customers in there sort of neutral new trade account openings? And related to that, think you've taken share, market share over this downturn? And then lastly, but not but not least, M and A and sort of consolidation opportunities across the trade focused space. I wonder if you could talk more broadly around that. Bear in mind, balance sheet might be in pretty pretty reasonable shape by the end of the year. Thanks. Yeah. James, on the M and A 1, first of all, we are not particularly acquisitive. We will look at opportunities in white space, catchments where we don't have a presence. We will also continue to look at, product categories or or markets where we we have limited presence, and we see that as additive to the whole. So, you know, if I give an example of what I mean about that, if you go back to 2017, the acquisition Solutions within the BFS business giving us an air conditioning offer that we didn't have previously. So we'll continue to look at things like that, but I don't think anything more large scale would be on the agenda for us. Really interesting question about the existing versus new account openings. We are seeing a number of new account openings as well as existing customers. So that that will be a a trend that is largely in line with what we'd seen over the the, the 2019 financial year as well. In terms of taking share or losing share, it's actually really difficult to read those trends at the moment because of the, the different times during Q2 at which players opened or closed around lockdown, the exposure they have to end markets. So you would expect someone who take a a local competitor in Merchanting who hasn't, exposure only to local trades people doing RNI jobs, they would be faring better than someone who has large exposure to National House Builders Or New House Building And Commercial. So it's quite patchy. That that state of that is then made, even less clear by the number of branch closures that we've done where naturally we'll have seeded some revenue to competitors in those local markets where we've we've closed. All of that said, I feel like as a business, we continue to, recover well, we have good support from our customers. And I'm, you know, I'm very confident in our ability to continue to outperform our markets and generate value for shareholders in the medium term. Great. Thanks very much. Thanks James. We have had no further questions related to that time. So we'll hand back over to you. Well, listen, thank you, Lisa, and thank you all for joining us this morning and, and to everybody who asked those really good questions and enjoy the discussion. So thank you all and look forward to seeing you, in March Thank you.