Earnings Call: Q1 2019

May 8, 2019

Earnings release

Ladies and gentlemen, welcome to the Travis Parking 2019 Q1 trading update. My name is Bika, and I'll be coordinating your call today. If you would like to ask a question, I will now hand over to your host, Jack Newmark. Please go ahead. It's actually John Carter here with Alan Williams. Good morning, everyone. Look, we're really pleased with the positive start to the year and our Q1 trade in In many different ways, all our businesses, across the group have performed well. A good start is set against a weak last year comparator and set against the continued uncertainty with the withdrawal process from the European Union. I'd encourage you to read both our in year, like for life and our 2 year life for likes in conjunction with that positive Q1 performance. If we look at the businesses before we go to question and answers, and clearly Toolstation is trading very well, good progress and recovery from Wix, both in their core DIY categories and showroom kitchen and bathroom categories. But do only show plus 1.3% growth over a 2 year period. And given the contrast between the two quarters, and year over year. Merchanting is balanced and, from well over the 2 year, we've done well over the 2 year period and we will continue, we've seen continued good success come from CCF key line and BSS and good early progress from the TP brand in the change of emphasis towards more branch manager empowerment PNH is obviously annualized in the beast of the East and a very strong trading period last year, but it's got respectable 2 year like for likes of 14.9 percent. We remain pleased with the progress we're making regarding the separation work PNH and remain on target to have that work completed by the end of the second quarter. As I say, despite the positive start to the new year and against the backdrop of annualized in the week Q1 last year, and the uncertainty that remains across our sector, we still have 3 quarters of the year to complete and report and our guidance therefore at this moment is overall expectations similar to that of 2019. Should we open up for questions First step, we have Paul Roger from Exane BNP Paribas. Please go ahead. Yeah. Good morning, everybody, and congratulations on on the strong start. So, I'll have three questions. I guess the first one, the obvious one is to push you a bit more on the guidance. I mean, clearly, we hear what you're saying about the easy comp for your uncertainties. But I guess the 10.5% group, 2 year like for like was better than you expected. So just really trying to understand to the extent to which your business has just been conservative and whether you've now seen that the risks to your guidance are clearly on the upper side. So that's the first one. The second one is, can you give us a sense of how you feel that the market performed in each of the different businesses so that we can get a sense of basically the magnitude of the share gains you're seeing. I think the final was on is on Wix, encouraging, obviously, to see a turnaround, particularly in K and V, Only if that could affect your thinking at all on the strategy, and maybe accelerate a potential disposal. Okay. Hi, Paul. It's Alan. On on the question around, guidance, and also the market performance outperformance, I'm going to, take a little while to explain some of the moving parts from prior year. So last year, we had a reasonable start in January February. 2018, we then had 2 calamitous months in March April with the weather. And then May, June was sort of 11% growth for the business. So my my view is that until we get beyond that and into Q3, we won't have a really good read on where the year is going to end up We had certain businesses last year with the weather, which were out of action for, 3 days from a delivery point of view or supply chain disruption plus the southern ground that we saw, for our customers during March April. So I get the point about saying, you know, if this conservative, but when you look at what we were saying last year, I think that puts some context around it. There's still that uncertainty around Brexit and whilst housing transactions, secondary housing market transactions have improved a little, it's sort of barely improved at this stage a couple of 1000 better. So I think it's a sensible thing to say at this stage it's unchanged. In terms of outlook. When we look at the individual businesses and where they're outperforming, I think It's contrary to what other people may say this is not like a Nielsen or IRI reads that you get in a food retail environment. We don't have that sort of market analysis. We think the independents continue to perform strongly in the market, but I think our businesses probably are on the merchanting side, I think they're release holding their own, if not gaining a little share at this stage. But that's just a gut feel rather than being able to point back to any data. When it comes to toolstation, you know, clearly there is strong outperformance there, against a narrower competitor group and an acceleration in those like for likes. But if you look at, last year, even Toolstation had a for the Toolstation business a softer Q1 to 2018. From a Wix point of view, we're pleased with the turnarounds that we've seen in performance, but this is It's very early days. And as John was saying, again, I'd point to that 2 year like for like being at only 1.3%. Which is probably reflective of a fragile consumer environment continuing. I think in terms of market share gains, we've been really pleased with all the businesses and plumbing heat and even though, in the period we're talking about of Q1 twenty nineteen, we've gone backwards on a like for like basis. 2 year is still strong and I think we're still performing well. I think Wix's turnaround has been, sort of 3 sort of areas I point to the good self help the management have put in place and operating the business effectively. I think BNQ, as we've called out, moving away from installed kitchens would have definitely helped our business and the the changes going on in Homebase and the store closures, is is also helping our core business. So I think we would call out taking share in that sector. Toolstation is trading extremely well, but it is the value proposition, low cost to operate and you know, we have stepped up our network expansion and feeling pretty positive about the future for Toolstation. TP, the green and gold brand, CP brand is definitely picking up pace from the actions that we took at the end of 2018. But we have a long way to go and, but pleased with the early progress. CTFBSS key line continue to perform well in the relevant sectors. So these are still early in the year and we're pleased with the progress that we've posted. And, but, you know, we're focused now on the half year. And clearly, we don't know yet how the second half will plan out. So so I think, you know, hopefully, Paul will cover what you wanted. Yeah. I mean, I guess the influence of what you're seeing on Wix, is it just too early, to think about any change in strategy, and we need to see what happens, you know, in the more medium term. I think we've committed to being a trade focused business. And, and, you know, for the timing is all important. And obviously, we will keep you posted. Paul, if you recall what we said at the Capital Markets event in December, the sentiment of what we're saying was you've got to improve the performance to create options. So step number 1 for us is to continue improving the performance. If you put things together and just look at like for like sales growth quarter on quarter, This is now a second positive quarter after a positive Q4 twenty eighteen. That was preceded by 6 negative quarters. So you build that step by step, don't you? Yeah. Okay. I'll take it. Thanks guys. Thank you, Paul. Next up, we have Pirao Malaji. Go ahead. Hi, it's Prital here from Jefferies. Hi, Prital. Hi. Good morning. I've got 3 relatively quick ones here. So that's 7.3%. I just wondered if we could get a volume and price split of that. The second question is, Obviously, you've talked about easy comparables, particularly in March. Have you any idea what the influence would be if we split out some of that poor weather from that 7.3. And then very lastly, obviously, we're getting closer to a potential disposal of plumbing and heating. When it does come to this, do you think you'll be prioritizing the price or given that it's such a small part of your group anyway? Will you be prioritizing the speed of the sale? Thank you. On the volume price mix, I'm not going to give a huge amount away at this stage. It's certainly been biased towards volume growth rather than price growth. Let's let's put it that way in terms of the the mix. I think we've we've seen 1 or 2 people reports slightly higher input cost inflation than maybe the sell side was anticipating or have been previously guided. We're not seeing it quite to that extent at this stage. So if you look back to the guidance we gave on pricing with the full year results. We're more in that zone at this stage. As I was trying to break down for Paul on the busy comps last year, we said the weather impact was in our Q1 trading statement. We pointed to 1000000 to 1000000 revenue impact from memory. And I think it was probably at least that that we saw from the disruption last year. Remember as well that that disruption continued into the April period as well. And you've also got the disruption from the timing of Easter. So My key message on that is this is quite noisy to read, and it's not till we get beyond the half year that you will get a a really settled comparator to know. On the, on the PNH disposal piece, I think with what we're saying today is we've made good progress on the operational and IT separation of the business, we expect to complete that during Q2, and then we will start to a disposal process on the back of that. I think it's too early to prejudge how that will go and it will be not something I want to comment on in detail at the stage for obvious reasons. We go to the next Hi, Emily. Hi, Emily. I've got 2 questions, please. And the first one, I just wanted to talk about weather, sorry. I appreciate not only as a comp piece, but presumably this year has also been an exceptionally good year for construction activity. And I was just wondering sort of how concerned you might be that that could represent a sort of pull forward from Q2 into Q1. And therefore, we might sort of expect some sort of incremental weakness through Q2 or into Q3. And sort of assume that John's seen a few good Q1s in his time and sort of what the experience has sort of been in the past would be interesting. And then just secondly, I just wondered whether the growth essence between general merchanting and contracts is sort of broadly similar to what it was sort of through 2018 or if there's any sort of change there or if the growth rate sort of gap has closed at all? I think, if Emily, we we do give the, TP quote. Yeah. As 8% like for like, in the TP brand compared to the 10.6 total like for like. And I think, Emily, sort of really drawing on any experience that I've had Q1 call to a candy. Both, delight and disappoint. And, that's why we've taken out sort of overall expectations for the year until we really do get into 2nd quarter 3rd quarter. As Alan said, we are tracking some quite tricky comparators. And then as I looked at sort of H1 and I think Alan sort of repeating what Alan said, but The 1st 2 months of last year, January, February, we would consider good. March April were really poor for slightly different reasons, and it's not just of snow, but the really some sites prevented us getting on some of the sites that we would have wanted to. And then we had a very strong May in June. So my sense is that so far so good. We're really focused on driving for outperformance, but it's really too difficult it's too early and difficult to call. Yes. Emily, I think my reflection on Q1 as well would be wealth you know, whilst the weather patterns were certainly very settled, and you know, from from a construction industry, I think you couldn't have expected a better weather period. You still have a very fragile underlying market here. You know, we mentioned the housing transactions. I think we all know that the continued uncertainty as the background added to which, you know, we've got an inkling that some customers may have been stocking a little to be on the prudent side, particularly the larger customers, and pre Brexit Now clearly as the threat of 29th March hard Brexit receded, people will have pulled back, but you don't pull back quite that. Quickly. So I don't honestly know what the size of that impact is, but I do wonder if 1 or 2 customers are carrying a bit more inventory where they can. Next up, we have Arnaud Layhnin from Bank of America Merrill Lynch. Please go ahead. Good morning, gentlemen. Just a few brief questions for me, please. Firstly, I hear everything you said about, you know, it's early days, but have you mentioned anything about the trend seen in April, are they consistent with the first quarter? Secondly, you said that the like for like growth was mostly driven by volume rooms, you know, and which would imply, I would say, modest price effect, potentially, what is the backdrop to that in terms of cost inflation? How should we think about cost inflation for the year? And I guess, lastly, I appreciate this is just a Q1 trading update, but with this sort of like for like growth in the first quarter, Do you do you get some positive operating leverage in terms of margins I appreciate this year. You also have some efforts regarding digitalization, and that's where we can have an impact as well. But, even if accounting for some fading of the growth in the coming months, you mentioned a more challenging base effect in the next couple of months. Do you expect to see a small, either gross margin or operating margin improvement for the first half? If I start with your question on April, I think we gave a fairly broad hint that, last year, both March April were extremely soft. So I think you can take from that that April has been okay. On the like for like on the on the split with volume and then the inflation for the year. I think when we talked to the full year results, we're talking around something in the range of 2.5% to 4% say on input cost inflation. I don't think our views have materially changed on that at this stage. On the overall margin, we wouldn't normally comment at this stage. I'd say there's a few things that should be taken into account. So clearly, you would expect a decent drop through if it's more volume weighted rather than price weighted in terms of your like for like growth, there are cost savings that we've got coming through if we're focused on a net operating net margin number. But equally, we've made some comments in the statement about we're seeing the larger customers, growing more strong, strongly at this stage than the smaller customers. So I think that should also be borne in mind. Very clear. Thank you very much. Thank you. Next up we have Robert Eason from Goodbody. Please go ahead. Good morning Robert. I think it's three questions. Just in relation to the volume backdrop, obviously it's been lot stronger this year than last year, albeit weather effects, I get that. But what is what impact is that having on kind of the gross margin environment in terms of people are not chasing their tails as much in the first quarter to get the volume. So just general comment about gross margins. And in the retail business, at the time of the full year numbers, you were talking about a good order book for the kitchens. So I was just wondering, you know, where, can you just give us some commentary around what the order book looks like now you know, just given what's happening, your competitor, your competitors at the moment. My last question, I'm sorry if it's a bit off piste, but Over the last few weeks, you know, we've heard that, you know, you might have closed your built concepts branch in, in burning them. I was just wondering, what are the what have been the learnings and from that concept that you can bring to the rest of the business And if, so there are my three questions. Robert, on the on the first one, on the volume backdrop, I am tempted to say I refer the honorable gentleman to the response I gave earlier to the previous question. On the, I think the, our view would be the, and I think you'd hear this from others reporting today. The environment remains very competitive from a pricing perspective. I think on the K and B order book, It sits in a reasonable position overall. So we're quite comfortable with the way they can be showroom business is trading at this stage. And I think, Robert, on build, if we I can surely should need to actually say what we learn. But but whether you're successful with with with innovation or not, you always learn certain things that we roll back into other parts of the business as a result of the experiment that we had in Birmingham. Okay. The next question is from John Messenger from Redburn. Please go ahead. Good morning, gentlemen. 2 for me, if I could as well, please. 1, you mentioned just earlier about I think, Alan, the point about inventory build possibly in terms of customers. But could you give us a bit of a flavor? What have you had to do yourselves in terms of that inventory investment given what was expected at the end of March and how is that likely to impact across the remainder of the year? And then the second one is just when we think about that performance in retail in terms of the strength of that kind of like for like growth, behind it all, is is there a big difference in terms of gross margin in Wix core versus KMB? Just because, obviously, I assume KMB is a reasonably sizable part of that 10%. Just to understand if it comes with a structurally lower margin because obviously the drop through in weeks of these kind of numbers has the most material impact on the group overall, that'd be great. Okay. So, John, on just starting on the on the retail 1, the growth is actually quite balanced between and core and can be. And so I'd also say that there's not a huge difference in the in the gross margin points between the 2. Clearly, we offer an installation service on the K And B showroom, and you're going to make less margin on that. We are installing more kitchens than ever before. So I think at the full year, we said we were installing around 54% of and the kitchens that we sell that's ticked up a little in the first quarter. On the inventory build question, when we talked the full year, we talked about building, of the order of 50,000,000 to 80,000,000 of additional inventory, 10% sort of area we were talking about in case of a, a hard Brexit we thought some of that inventory would still not fully have washed through, by the half year, but it would have washed through by the year end. The challenge we've now got is what do you do about that given that we still no idea, when and what form of Brexit there is any Brexit, we're going to get. So at the moment, our policy is to, our bias is towards keeping a full inventory. So we will be carrying more inventory at the 30th June than we've originally been anticipated. And I, you know, I find it quite difficult to call when that will flash through because it's somewhat dependent on Westminster. Making a decision. Sorry, just one further one was Toolstation's growth. It's quite difficult when you're outside because of obviously the annualizing impact of those store openings and how they will drop into 2019. But when you look at that 19% growth, is that a number that's sitting with James running the business and some of the stores I don't how they look across 2018 openings, but is there a chance that that number goes better still or is that 'nineteen probably a good get in terms of a like for like rental station? So I think, John, you know, when things are trading as well as toolstation and James is pulling all the right levers. I think we'd like to go faster, but I think this is pretty strong. I mean 31.7% like for like over 2 years is, and we know last year was was was not the strongest period because of the weather impact. So I, I, I think we, we support him, and the best way can, we're putting we would increase in the store opening program. We're trying to make a better business, more sticky for customers, And, you know, we'll be doing our best, but you have to be sensible about this. This is flying at the moment. John, when you think over the last 2 years, we've opened 40 branches a year in each of those 2 years on average. And you would you would expect to have a few sites which don't perform as well. I think we've been pleasantly surprised by the strength of the locations that those of the last 18 months, including going down into smaller, combinations, towns with a population of 10,000 to 15000, but drawing in and people from surrounding smaller towns and villages as well where the sales have been really robust. So I think the success in what James is doing lies in some of those, additional locations and how strongly that performing compared to what you may expect as a market matures. Cheers, Jim. We now have Ainsley Lammin from Canaccord. Please go ahead, Aynsley. Hi, good morning. 2, actually, first of all, on CCF, obviously you talked about market share gains. Just wanted to bit more color there. Are you kind of in a bit more aggressive recently in terms of pricing? And are you winning market share at good margins? And maybe just a bit more explanation. I think you said expect the growth to moderate due to some kind of supplier product availability constraints. Just wondered what they were And then second question, just on the commercial side, wondered if you had any more color in terms of any big projects Are you seeing more delays? What's the order book looking like for those bigger commercial projects? Thanks. So, immensely, I think we tried carefully each period with the commercial because it has held up remarkably well. And our 3 businesses that were the contracts division under Frank, as they've continued to trade well. We call that out because the CPA are predicting a slower period. We're very agile to volumes. The order book looks okay, but I continue to say that the draw the call offs against that order book, can fluctuate in different periods. And but it's steady as she goes. And was performing well. I am I don't believe CCFR the aggressor. We're seeing the business grow its earnings increase and return on capital improve. We're very mindful that we're in business to make profit and, and I'm really pleased with the way management is conducting their business. In terms of the supplier side, it's mainly around plasterboard. And on allocation. And as you will be aware, there are 3 suppliers of plaster to the UK predominantly. And British ships and which would be the largest canal, which would be the 2nd largest and Syneatt, the 3rd smaller player with a single factory down in Bristol. Product supply across all three of them is very tight and on allocation. You'd expect us being the largest plasterable distributor to get our fair share, but it was something that we call out when when material supply becomes difficult. We now have Howard Seymour from Numis. Please go ahead. Good morning. Question on the you alluded to the fact that the improving trend on TP was largely regional national customers and managed services. Can you talk me through that and specifically as well? Because you allude to the greater empowerment of branch level. Has this come through from branch managers doing more of the sort of the big contracts? Is it a function of market mix? I'm just, I'm just sort of slightly confused. I just thought the branch managers would do more at local levels as opposed to sort of regional, national customers. So I would call out a little bit of a timing, a point there, Howard, you know, we still are not even sort of 16 weeks into the project. And, we are making progress in Travis Perkins. I think Alan's right to have called out that in this period that we're looking at, We've done we've done, slightly better with the larger customers and managed services. I think your intuition is right. We should also be building the smaller and medium sized customers as this project progresses. So I think this is a sort of a moving part, and and we we are just trying to sort of, update the market to to to what's happening within the business. But As we move forward, my expectations will be that we are more successful with local and smaller customers as I call them, the best builders in town. Yes. And John, on that basis, on the larger sales, has there been any sort of material change to how you're doing business there, or or would you say it is it is a function of that side of the market been stronger perhaps than the than the local market? I think there's a little bit of that. The other thing is when you actually are a large builder and you want a national deal, there are only a few companies you can actually truly go to. And at this moment in time, I TP is the place to shop, and I think we've had success on that. To your point earlier, our focus is also on the best builders in town. And in each catchment against each town. Ron Allen, you were going to say? Yes, I was going to say how one thing you might be interested in as well is that London And the Southeast remains relatively weaker within the mix overall still. Which I think reflects the housing market as well, whereas we'd see the Southwest And Midlands relatively stronger at this stage. Great. Cheers Howard. We now have Gregor Klugich from UBS. Please go ahead. Squeezing me in. A couple of questions, please. So just remind us on the cost savings, please, kind of the incremental, just maybe a single number for the group and how the phasing is, because obviously, it's going to be quite important, I guess, for the kickoff and profits in the first half, and then I guess I want to figure out if it is, I guess, more H1 weighted. That's question 1. Question 2 is just to be clear on your messaging with the kind of customer mix shift. Are you kind of implying that as a result of that for the group gross is perhaps down a little bit gross margin I appreciate that's more mix driven than you taking any pricing action, but is that what you're trying to get across? And then finally, if you can give us some color on how home base has been acting in the marketplace sort of, since the change in older ships, obviously, now a bit more settled down. If you could give us some color, how they, how they're, you know, how they're, I suppose, behaving? Thank you. Okay. Greg, I'm going to I'm at risk of disappointing you here because this is a Q1 trading update, not the a review of margins across the business. On the cost saving question, we will, as a reminder, we will have some, flow through from H2 cost actions, which we'll get the benefit of in H1. So benefit in the 1st 4 months in Wix because we put the cost saving program in place in Wix in May of 2018. And then in general merchanting, the cost saving program was mainly weighted towards the second half. So as we've previously said we'll get an H1 benefit from that. You've then got the further $20,000,000 to $30,000,000 of cost savings over the 18 months from Q1 2019 through to the end of Q2 2020. Some of that's dependent on the portfolio activities that we're we're taking and shaping things for the future. But in the statement, we did refer to the removal of the divisional structure and there'll be some cost saving benefits from that. But I think there would be more second half weighted given the timing of that then first half. On the customer mix shift, I think we're at danger of over analyzing a statement, which is that the bigger customers during the first quarter have grown faster than the smaller customers. I think from a home based point of view, we see a rather than being specific on home based, maybe if I'm talk generally about the DIY market. We're seeing a more rational pricing environment. Than we've seen over the previous 18 months or so, within core DIY. We now have Amy Gala from Citi. Please go ahead. Just two questions from me. The first one is on Toolstation. I mean, if you could give us some color as to what percentage of the business of the sales today are driven by your online platform. And it could be interesting to understand what sort of growth have you seen in the in store side of Toolstation? And the second one is on renovation. The overall RMI trends that you've seen in Q1 so far, Is there anything that you would pick up in addition to the weather benefit? Is there anything that you've seen that indicates there's a bit more improvement going into the system? So I could say on, RMI Amy that there are more sort of risk than than upside. I think the weather has been helpful. I think that's right. I don't think the underlying market trends have changed at this stage. I think we're it's still relatively subdued. On the Toolstation question, Amy, the growth has been across the board, whether that's online in store, click and collect, the business continues to perform really strongly in all areas. Our final question today comes from Clyde Lewis from Peel Hunt. Please go ahead. Hi, Clyde. I think I've only got one left now. One was sort of really on, I suppose sort of where you are in terms of sort of A, capital decisions and I suppose B, can you update us a little bit on sort of property disposals and weigh your expectations and after for the full year, but whether you eventually do anything in the first quarter? Okay. So on on capital, I think we're bang in line with what we've said previously, we're looking to, continue to invest in the Toolstation business, I think we've got our priorities around the merchanting business and IT alongside that. On property, relatively quiet first quarter, but we're maintaining the guidance that we gave previously. So ladies and gentlemen, thank you very, very much for your time and, catch you up on the 31st July for our half year results. Thank you. If you have missed any part of this call or would like to hear it again, a recording will be ready shortly. Thank you for joining today's call, and have a lovely day.