Earnings Call: H2 2018

Feb 26, 2019

Ladies and gentlemen, we are now going live into the presentation room for the Travis Perkins 2018 final results presentation. You will hear silence or background noise until today's call begins. Yeah. Yeah. So good morning, ladies and gentlemen. I'm Stuart Chambers, Chairman of Travis Perkins Plc. It's my great pleasure to welcome you here to our 2018 results presentation. Got a couple of things I'd like to just cover off before I hand over to John and Alan for the presentation. Touch on performance and also talk about some senior leadership changes. So first of all, performance and always as ever, starting with safety. We're very pleased to be able to report that again, last year, we managed to reduce our accident frequency rates for 5th year running, very pleasing. I would stress, however, that it's a constant vigil. And of course, the only objective you can ever have in safety and organization, any organization, but certainly one involving quite a lot of machinery and activity. And branches, it's zero harm. And until such time, as we're causing zero harm to not only our own employees, but everybody we come into contact within our daily business, we can never relax. So how may that continue? On the broader financial performance, I'm not going to steal Alan's thunder or the results you have in front of you, but I would like to just say one thing. It was a pretty busy year. We revisited strategy and did a fundamental strategic review in the first half of last year. Culminating in our kind of board strategy day where we, we changed some conclusions and then the exec worked hard to actually bring those conclusions into work streams and action plans, which we kicked off. And of course, this year is going to be busy. 2, guys. And the one thing I wanted to mention in that is what a great credit it is and how pleased the board is with the management's ability to not only do that, but in parallel, to keep focused on the day to day performance and to deliver on what the market was expecting last year. That of course, is something we must repeat this year as well because it's another busy year. And then of course, it's somewhat an upward and John will talk about that. Then just briefly on senior leadership changes, you'll have seen perhaps that we announced also this morning that Tony Buffin is stepping down from the board today and will be leaving the business. It's a redundancy in the new simplified group wells and with PNH planned for disposal. Obviously, that role ceases to exist and Tony will be leaving us. But, I want to say a real word of thanks to Tony, 6 years initially as CFO and then as COO and Lattily leading the team that's been executing the turnaround in performance of our Plumbing and Heating division, which has been a real highlight and the success so far. So, big thanks to Tony. And I think with that, I'll hand over to John. You very much, Stewart. Good morning, everyone. I just wanted to sort of do a bit of scene set in. There'll be a little bit of repetition in some of the messages. Alan's not going to do repetition. He's going to give you good numbers in terms of the financial review. And I'll come back and talk about some of the businesses the operational review and the strategic update. So the two sort of themes, the sort of overall performance of 2018 and in particular, the work we undertook in H1 that came through in the second half of the year. And then talking about the Capital Markets Day and the progress that we've been making since early December. Overall, I think 2018 turned out to be a pretty good year for the business, but very encouraging second half. But very much underpinned by the actions that we took in terms of the cost reduction activity really still a performance is coming through from our contracts team of BSS, CCF and Keyline and Toolstation UK continues to move forward and we'll talk a little bit more about that going forward. I've used solid performance for our General Merchanting. We've said 2019 is very much around a transition which we should see some progression under Kieran Griffin's leadership as we move through the 2019. And we have Simon King who runs our Wix business with us and Judy Worth is a new finance director. And Simon and the teams have some early decisions on cost action in May. And we saw some benefits come through on that line, but we also saw some improvements in their trading line as the second half progressed. And as Stuart already referred to, a stellar performance from Tony and the Plumbing and Heating team. In December, early December, our Capital Markets Day there were really 2 main themes that we talked around and talking around our purpose. This group and that was very firmly having our colors nailed to the trade market and our trade customers. And equally given the growth of the business and the relative sort of lack of growth of earnings, simplification of the group, we're going to say this a number of times, even over coffee this morning, I must have been asked four times, what does actually Brexit mean to us? Anyone's got the answer, I'd really appreciate it. But they it is creating a sort of a cliche of uncertainty We're just pushing on the best way we can and we'll deal with whatever comes at us during the year. The fundamentals for this sector remain extremely strong and gives us confidence to continue to to invest and grow our business. We are going to be even harder with our capital allocation and really target our advantaged trade businesses as we go forward. And this whole aim of simplifying the group, but also lowering the cost base and bringing our management teams closer to the customer is a real ambition. That's all around for us driving stronger earnings as we go forward, stronger cash flow generation and therefore leading to shareholder returns. Alan is going to talk you through the financials and I'll come back and talk to some of the businesses. Thanks, John, and good morning everyone. So as you've heard from John in his introduction, the group's delivered solid performance in 2018. In what continues to be a challenging market. Revenue growth was good at 4.9% on a like for like basis. With total revenue of over 1,000,000,000, up 4.8% on 2017. At the adjusted profit operating profit level, we delivered 1,000,000, which was 1,000,000 or 1.3% below prior year as we continue to invest in the business. But as I'll come on to cover in more detail, a much stronger second half, with profit growth of 10.7%. Adjusted EPS was 3.7% higher at 114.5p benefiting from a lower financing charge and also a lower tax charge. And given the cash generative nature of the business and our confidence in the long term, the board is recommending an increase in the final dividend of a penny taking the total dividend for the year to 47p per share. That's a distribution of approximately GBP 117,000,000 for the year. So moving on to Slide 8. Here you can see a steady improvement in the like for like growth rate. So like for like sales growth strengthened in the second half to 5.5%. With each of the general and contract merchanting and consumer segments improving on their first half performance. Of the like for like growth across the year of 4.9 percent just over half came from pricing activity to recover input cost inflation. Volume growth in 2018 was 2.2% and was driven by the Plumbing and Heating contracts businesses and also Toolstation. Looking at group adjusted operating profit, excluding property profit, And I do that because it gives a clear view of the underlying performance of the business. This was 1,000,000 or 1000000 lower than in 2017. While EBITA was 1000000 lower in the first half, following the poor winter weather, significant competitive pressures in Wickes and cost investments elsewhere, the second half saw strong profit growth of 1,000,000 year on year. This reflected a better overall trading performance together with the benefits of cost reduction actions in general merchanting and Wix, strong cost control in other businesses and very good operating leverage The impact of the cost reduction actions can be seen clearly on the bridge on Slide 10, from 2017 to 2018 adjusted EBITA. Cost reduction actions in Wix And General Merchanting in particular have fully mitigated the inflationary impacts across the group from inflation on wages rent and rates and utilities. And as you can see, we have continued to invest in the business. To the tune of 1,000,000 with this investment concentrated in our most advantaged businesses such as Toolstation. Where we opened 40 new stores in the UK and the year and also a new distribution center. At the Capital Markets update in December, I spoke about our overhead base as a proportion of revenue With revenue growth having slowed since June 2016 and given the investments we've made in the business, we struggled to show much operational leverage. I'm pleased to report a significant improvement in the overhead to sales ratio in 2018. Whilst we continue to invest in future, Notably, as I mentioned, through the expansion of Toolstation, focused on cost reductions, thorn fruits. There is plenty more still to be done. Indeed, we announced in December a target of a further million to million of annualized cost reduction activity which we expect to be realized by mid-twenty 20. Several actions were put in place towards the end of the year, million annualized and John will return to this topic later. So if I now take you through the divisions and taking a look first at General Merchanting, where like for like growth was driven predominantly by pricing activity to recover the input cost inflation. We saw an improving like for like revenue trend in H2 following the long winter with better volume performance later in the year. Gross margins were broadly stable in 2018 as well as recovering input costs inflation. The business continued to use our pricing framework tool to provide more attractive and consistent prices in selected categories, and this saw a good response from our customers. In the second half of the year, the business put in place a cost reduction program, which coupled with a stable gross margin, led to a strong improvement The Contract Merchanting division again delivered an outstanding performance in 2018, with all three businesses outperforming their markets with strong revenue and operating profit growth. Input cost inflation was pronounced but also successfully recovered. With tight control of costs and continued actions to improve efficiency the business achieved good operating cost leverage and grew both operating margin and the lease adjusted returns. Turning to Consumer, the Consumer division saw overall sales grow by 0.9% while like for like sales declined by 1.3%. In H1, like for like sales declined by 4.2% but grew by 1% in the second half on a like for like basis. Adjusted EBITA for the division was 1,000,000 lower on the year at 1,000,000, which represented a million decline in H1 followed by million improvement in the 2nd half. In the Wix business, the like for like trend improved considerably in Q4 with 4% growth as competitive pressures began to ease and with a much better performance in the Kitchen and Bathroom showroom. 2nd half EBITDA grew by 1,000,000, driven by the improvement in trading and also the full year sorry, the full impact of the cost reduction program, which was put in place during the first half. From a Toolstation, perspective, the Toolstation U. K. Business continued to outperform with overall growth of 18% and like for like sales of 11.4% with revenue performance continuing to strengthen through the year. As expected, profit growth was modest given the investments in new space and the opening of a 3rd distribution center to support that continued network expansion. The Plumbing and Heating division had an excellent 2018 all three business areas, wholesale, branches and online grew both sales and profits. Overall like for like revenue grew by 16.1% and total sales by 11.9%. Whilst gross margin was modestly lower due to changes in business mix and more intensive promotional activity, the higher sales and good control of costs led to a 26% increase in adjusted operating profits to 1,000,000. So moving to cash flow, the business continued to generate good cash in 2018, albeit not quite as strong as in 2017. A main driver of the cash performance was the change in net working capital. Of the increase of 1,000,000, approximately twothree relates to trade working capital with trade debtors growing in line with credit sales and higher inventory resulting from some stop bills as a contingent as a contingency in case the UK leaves the EU in a disorderly way at the end of March. An increase in non trade related working capital was primarily driven by higher rebate receivables impacted by both the high level of purchases and the phasing of payments around the year end. Maintenance CapEx increased modestly to 1000000 reflecting the timing of vehicle replacements across the group. And from a net cash flow basis you'll note from the the table there outflows of 1,000,000 related to adjusting items and 1,000,000 related to the purchase of own shares to fulfill employee share schemes. So if I return to capital expenditure in more detail on Slide 17, Base capital expenditure was 1,000,000 lower than in 2017 at 1000000. This was driven by a reduction in growth CapEx of 1,000,000 as we refitted fewer Wix stores than in 2017 and with fewer new merchant and Wix openings during the year. From a property perspective, you can see that the net cash flow from purchases and disposals was broadly similar to 2017. Effectively, we have sold and leased back retail space where we see little inflationary pressure which has freed up capital to invest in industrial properties for the trade merchant businesses. From a balance sheet perspective, the group's balance sheet remains strong with net debt on both a cash and lease adjusted basis broadly unchanged from 2017. Immediately post the year end, we refinanced our primary bank facility for a further 5 years with 2 1 year extension options on the same terms. This removes any Brexit related refinancing risk as the facility would otherwise have been due for renewal in late 2019. As we stated at the Capital Markets event in December, we expect to further strengthen the balance sheet in the coming years through Now I'm sure you were all very excited to understand the impact of the new leasing standard, IFRS 16, on our financial statements. However, I'm not going to talk about it right now. I've included in the appendix with a number of slides in for you to understand this. There are also several members of the financing present who can go into much more detail than I can. And finally, if I turn to outlook and guidance for 2019, so I'm sure you will all appreciate that the current uncertain in the UK makes forecasting rather challenging. As a group, we are planning for the current levels of uncertainty to persist in the short term. And we are focusing on self help initiatives to underpin performance in the near term and to position the business well for the long term. Given the uncertainty and at this early stage in the year, we would expect adjusted operating profit to be similar to 2018 with cost reduction activities, enabling us to offset overhead cost inflation. Despite the near term challenges, we believe the group remains well positioned for the future. And with that, I'm now going to hand you back to John to provide an operational review and also the strategic update. Thanks, Adam. A slide that we've used on the 4th December, our capital markets day is worth just sort of using to set the scene We've already said some near term uncertainty persists, but the long term drivers fundamentals are strong. Group has grown in sales and complexity and we feel that needs addressing. The two themes that we took away was this focus on the trade and simplify the group. 3 of the outputs as I look at them as we're trying to develop is to for all of our businesses to drive that business in front of the market and outperform and the sectors that they operate in. We are encouraging and driving the businesses to set themselves up with a lean cost structure and be agile. And as Alan has said, we will increase our approach to disciplined capital allocation on the most advantaged businesses. So that slide for us really sets the scene for the coming period. As I know you're grown, we are going to go into a period where we're redefining the group's reporting structure because I think it's important that we structure ourselves in the best way to create value for our shareholders On your right, we've highlighted and already declared and we're seeking disposal plumbing and heating businesses during this year. As we move from right to left, we'll be reporting our retail businesses, but Wix and Tile Giant, clearly Wix being the dominant element of that sector. And then focusing on the trade focus businesses, We are keeping Toolstation separate given it's growing scale and importance to the group as we go forward. And recently, we announced the forming of a new merchant, a trade merchant organization of the 5 principal trade merchant businesses. That announcement of the trade merchant businesses will be head up by Anne Kirkins is sat handsomely at the back. And the aim here is very much around having central central shared services at the center and resources within the business, but the removing of any divisional or cost in between the business units and the central serve central shared service functions. The 5 businesses are all very well positioned. Frank's got an incredible track record over the period with contracts and key line BSS and CCF adding to that now, his responsibilities will be benchmarks under the new MD of John O'Keefe. And as we've said before, Kieran was appointed in early January, so we're still in the early stages of Kieran's tenure in TP. This is very much around developing a flatter structure to make faster decisions and get closer to our customers as we move forward. As mentioned at the Capital Markets Day, a big emphasis is being put on the empowerment of our branch managers to act in the interest of our customers and you'll hear me talk very much around the local market. This is where I think all of our businesses have got to be focused to win the best builders in town. And given our branch colleagues more time to deepen that relationship or deepen those relationships with local customers. The Angela, Russia, just has gone into BSS in the last 4 weeks as well. But we've got, I think, an extremely strong lineup under Frank Stewardship. Come under a lot of question in terms of, so what is general merchants going to be different or what is it going to do going forward? And I've tried to capture it here on sort of 8 feedback or points of feedback from our customers. We passionately believe or I passionately believe If we get these 8 elements right, we will win in our local market. This is all around fast accurate quotes. It's about easy to do business, whether it's in the branch or online, competitive and system pricing with as much emphasis on the consistency as the competitive. It's about fast delivery on time in full It's around when we do make mistakes fixing them quickly. It's around actually employing people with great product knowledge it's actually having the right range in stock on the ground of the right quality and it's about our as a business going to extra mile for our customers. They are the simple points of how we are going to measure how successful our mix merchant is as we go forward. We talked about the balance of scales of balance. Of empowerment and how we actually want to run the business. This is still in week 8. So please still early doors, but the new management team in General Merchant Or Mixed Merchanting as we're calling it, is in place we've done, as you would expect, a lot of communication across the branch manager community and getting very strong positive feedback from them The whole message is centered around winning our local market. And as highlighted, we've lifted benchmarks from the general merger team to give it its own space and its own area. And we believe it's got really strong growth potential. In terms of still to come, I think this whole area of empowerment to make faster, better decisions in the interest of our local customers. Pricing will be a big feature, but we are not a retail business. We are B2B and that will be done customer by customer and bespoke and tailored to those individual customers in those individual local markets. And we've got the tools to do that effectively. We'll be encouraging the store managers or branch managers to widen and deepen their branch stock and align it to that of their local customers and local demand. And although as we move through the year, we will tailor the branch manager's incentive steps primarily to drive sales and earnings as we go forward. All of the central functions will be aligned to focus on serving their branches and customers more effectively. We said earlier how successful Frank and the contracts team have been This is very much a world driven and proven format. It is all about the focus on the customers and the relationship It's about talking to them and exploiting product categories that the customers are seeking on a local or national basis Our range is got to be driven by the customer and not the center. And we've made a number of small acquisitions that have been adjacent categories quite successfully. We Frank Alter an Aircomm business, TF Solutions, which is growing really fast and profitable. And we'll be seeking other other opportunities as for this business as we go forward. The most important part is managing our network and optimizing our branch network effectively to get the right deliveries, fast efficient on time convenient into that local market and looking after our national customers. Toolstation remains a really exciting opportunity. As Alan sort of highlighted, with the performance with nearly 12% like for like growth. It is a low cost light capital model with value of leadership across its pricing. That needs to be maintained and develop. We've got a really strong core range, but with James Mackenzie who heads up the business, We are increasing our focus on trade credible products and extending the range of products to nearly 15,000 as we go through this year. We released a new website in early December to good effect and we see an increase in online sales on conversion as a result as we go forward. Although we've now had a number of years we've been opening 40 branches, we aim to increase that to up to 60 during this year. And if successful, we'll be close on 400 outlets as touched on before. We've already put the infrastructure in place to take that to 500 in the UK with the addition of the 3rd distribution center And as we grow, as for me, as important, is to build on better colleague engagement and continue to improve our staff retention This is a good story for us with really good opportunities. In equally, in Toolstation, which is much at Europe, is a much smaller operation, but we are now up and operational in our Netherlands DC, which has got the ability to grow or support 150 outlets currently in the Netherlands, we have 32. Our plans during 2019 across the three territories that we're looking at is to increase stores just over 25. And we are getting really positive sort of performance from both the store performance and the online across Holland that's mirroring the UK performance. France is still in its early stages with 11 branches. We will gradually grow that and review that during 2019. And although Belgium is proving good online, we will support the opening of Belgian branches and delivered through the Netherlands distribution center during the year. In terms of the P and H and the numbers obviously that Alan showed have been really positive in quite a challenged sector. It's an outstanding performance in 2018. We've clear outperformance in all three of the categories that Alan highlighted wholesale branches and online. You have to accept the rate of growth has got to moderate during 2019 as we start to annualize some stellar sales. The team has done a really good work job in terms of optimizing both the City Plumbing network and the PTS to operators. 1, we've continued to push the breadth and depth of branch stock in terms of the local market and are embedding some electrical implants across the network to good effect. And we're seeing advantages for having its own dedicated supply chain to that category as we move forward. And although still relatively small, we're seeing good growth on the online categories of plumbing and heating supported by the last mile from the Plumbing and Heating local branch network. For me, probably the best performance in 2018 has been the Wix business. And I don't think any of us should underestimate the impact that Bunnings actually had on our market in the 2 years that are here. They caused a lot of disruption, took their pound and went back to Australia, but left us with some real difficulty And I think Simon and the team took some brave decisions in terms of how to cope with this sort of disrupted market During that time, we maintained our value leadership on price and took some early decisions on reducing our cost base which allowed us then to focus on trading and to good effect. The heritage of Wix fits within trade and the small tradesmen And I'm really pleased with the work that we're doing on trade pro, which is our loyalty program for our small trade customers. And that is very much helping us grow our core business. The area that I think I'm most pleased that they focused on was in the kitchen area. And clearly, most of you remember Q4 and H1 of 'eighteen and 'seventeen were quite difficult for us I think the team have done extremely well of regrouping and building some confidence and momentum in that area. And focusing very much on the end to end as they design through the showroom, the delivery the install and if the customer does desire the ability to wrap that round a financial instrument and lending. 54% of the kitchens in 2018 were delivered and installed which is well up on the 44% of the year before. And as many of you will know that our major competitor of Kingfisher decided stop and delivered installed kitchens. And as we said at the Capital Markets Day, that should prove pretty positive for us and we've started to see our lead bank grow during Q2 to the second half and in particular, Q4. That puts us in pretty good stead for 2019. I've always believed and said that Wix is the most strategically advantaged business in its sector. The sector is challenging, but Wix has got a lot more advantages than its competition. So in summary, very much sort of picking up on the theme, 2018 was a challenging year, but I think the teams dug in and did really well and positioned the group well for what is an uncertain period. The fundamentals remain strong. Our aim is always to drive our sales line higher than outperform the markets we operate. As Alan said, I think we are looking At this early stage of the year for a very similar sort of outturn of earnings in 2019 against 'eighteen, but has to be underpinned by our activities of self help. And we are aiming really to set ourselves up to win in a low growth market. The strategy that we talked around in December is well underway and being executed effectively, it very much is around simplifying the group and reducing our cost structure. Focusing our capital allocation on those advantaged businesses and really aiming to drive over the medium term stronger earning progression better cash flow generation and ultimately stronger shareholder returns. So on that, and I know we've got some people on the wires later on, so I mustn't forget those. Can we go to the floor for questions? So, Andy? Good morning. Andy Murphy from Bank of America Merrill Lynch Just two questions from me. And just on the disposal process of plumbing and heating, can you talk a little bit about maybe not the timing of course, but about these or the temperature of the market and whether there's the level of activity, level of interest in there for that kind of activity? And then secondly, just on cost increases, the question for Alan, just in terms of labor IT, distribution, that sort of thing. Can you just talk a little bit about the rates of growth and what's driving those cost increases? Do you want to pick both of them? I'm happy to take those. So Andy, on the first one on the Plumbing and Heating disposal process, you'll appreciate, everyone will appreciate at this stage we're very focused on the separation activity. So the Plumbing and Heating businesses, heavily integrated with the rest of the group in terms of its back office. So IT systems, shared HR teams, shared purchase and general ledger. So our focus has been on separation there. On the specific We have seen indications of interest, as you'd imagine. We're not ready to launch a process yet. But hope to complete those separation activities during Q2 so that we can do. Obviously, there's an event on the 29th March, which may mean We're not able to launch a process. If it looks like there's very reduced levels of M and A in the market, So we're watching that closely and we'll update during the year as we progress. On the topic of cost increases, we are still seeing a number of wage pressures. So we're seeing UK wage inflation creeping up, we are seeing we're due another increase in the national living wage. And we've also got the impact of auto enrollment stepping up further this year. So I'd say sort of 2.5% or so overall pressure from wage growth. I may as well, while I'm on the topic of inflation and on a roll, I'll cover cost of goods because I'm sure we'll get that question Otherwise, from a cost of goods point of view, it did the pressure did abate somewhat in the second half. But we are still seeing some commodity increases coming through. So I would imagine that the cost of goods inflation for the year will be a little ahead of UK CPI, probably a point or so ahead of CPI from a, an input cost point of view. In terms of central costs, things like, IT you referred to, Andy, I don't see any particular increase this year on year in those areas. I think they'll be fairly stable against prior year. Thanks. Aynsley Lammer from Canaccord Genuity. Firstly, on your expectation for adjusted operating to be similar? Could you just kind of flesh out the assumptions you've made about like flight volumes and prices at flat volumes up the price up 2% or so? And also just remind us what the incremental benefit from the cost savings from 2018 as well as the kind of cost cut your expected feature into 'nineteen? And then secondly, just on contracts, obviously, it's been performing very well like for like growth up about 8% for the last three quarters. You expect that kind of pipeline looking good? Do you expect that to hold up at that good level? And maybe just a bit more explanation how you've been performing so well in contract? So frankly say it's all down to him. But no, contracts has been on a roll now for a number of years and it is really taking share. All of three businesses are taking share. Inevitably that has to moderate, but I've been saying that to his to Frank for a few years and it's been outperformance. So I think we just need to be careful that we don't believe that that, that's going forever. On the expectation for 2019, Aynsley, I'd like you to give us a slack. Because we're 8 weeks into a year that we have no real idea. So we've modeled, as you'd expect, on flat margin, we've got our pricing and our costs coming through. And we've obviously got an element of investment. It's our best guess at the moment, but we are really early in the year And I'd much rather us update as the year progresses. Our next full more update is the 8th of my And we'll I think have a much better view of how we've moved through the 29th March or kick the can down the road, but it's our best guess based on looking into a very uncertain sort of boggy market. Yes. So, Aynsley, on the 2018 2019 cost savings, first of all, I showed a chart with 1,000,000 of cost savings coming through from General Merchanting and Wix they were roughly, half and half sort of thing. So in 2019, I would expect around, further million, which is the annualization of those activities given the phasing of them being in the first half in Wix. So there'll be 3 or 4 months worth of benefit to come through plus the H2X actions that we took in General Merchanting. I also referred to the 25 to 30 sorry, 20 to 30 1,000,000 further initiatives that we're looking to put in place, which we talked about on the 4th December at the Capital Markets event Of those million of actions were annualized were taken late in Q4. So I would expect a full year benefit from that. And clearly, we're on with some of the other actions as well. So there will be more benefits coming through in the year and we'll update at the half year on the phasing on those. Just adding to John's comments on the outlook 2019. If you look at some of the lead indicators, they are very depressed at the moment. So consumer confidence It's very low. Secondary housing market transactions remain at low levels and so did mortgage approvals. So added to which we've got a clear uncertainty around Brexit. So it is a hard one to read My assumption is, most of the divisions will be similar in terms of underlying performance from a revenue perspective. So, we will look to self help from those cost actions to ensure that we deliver on our objectives for the year. Hi, Sophia Sotomayo from Exane. My first question is on the Consumer division and how much, the Q4 acceleration reflects an easy base from last year. And if it's possible to give an estimate on the underlying volume run rate, And the second question is regarding the redundancy of the COO. If you could give a bit of more details on the thinking behind it and any management succession, generally any thoughts? That would be great. Thank you. So from my point of view, the we were expecting Q4 consumer and mainly driven by kitchens to be a bit stronger. As we've invested in the in some of the Kingfisher design consultants across the Wix network. We always thought that would come through later in the year. We I mean volumes were not much different. Than we were expecting, but obviously we've come in, we were annualizing a very soft number in 2017. Which really shone a light on the positivity. We fell away very sharply in the Q4 2017. So it was a good number, but made look much better because of the annualization. If I could add a couple of comments on that from a retail DIY outlook for that market. I think we saw some easing in the pricing pressure that we've seen. So I think the pricing pressure from Bunnings home base was probably as it's extreme in the around Easter time. That's not to say the issues have gone away. So I'd say some of you think at this stage on the pricing environment why don't I think it's going to work? I think they'll close more stores and they still have a number of clearance stores as well. And then I'd say secondly, we did a better job in terms of our Kitchen promotional program than we had done in the the winter, autumn winter 2017 early 2018 sale. So there were some elements that we had brought ourselves as well as changes in the marketplace. I think as John said earlier, the team dug in really hard in a really challenging environment. On the questions around the COO point, I don't know whether Stuart, you would like to make any comments on succession process or whether you want me to comment. So So on behalf of Stuart in the board, from a succession process, first of all, and then I'll come back to the the redundancy element. It was clear in the Nomination Committee report in the annual report in 2018. But the board was thinking about a succession process. That thinking continued. And I'm I understand the process will conclude during 2019. So I think you should bear with us. John is CEO and his 41st year and doing a pretty good job, I think, at leading the business forward. So that's where we are for now. On the redundancy element, you'll appreciate with the simplification of the group. We at this stage, we don't need a third executive director position with responsibilities spanning across different businesses in the way that we have previously. So we've simplified the structure and therefore the roles not needed at this stage. Amy or come over to the other side. Ami Galla from Citi. Just a copy from me. The first one, if you could comment on the gross margin move sequentially between H1 and H2? And is there any material moves that you've seen across your division? Second one, really a point of clarification. The exceptional costs that you've incurred in 2018, have all of them been come through the cash or is there any phasing of cash costs that we need to consider into 2019? And the third one on Toolstation is quite an ambitious expansion plan, could you give us some regional color as to where regionally are you looking at expanding your utilization footprint? And the last one, really, on the order intake for chins and bathrooms. I mean, you've talked about the lead indicators looking more encouraging. If you can give us some numbers around that, that'll be quite helpful. So the if we work backwards, the order intake for Kitchens it's good against a really challenged consumer market. So I think we're outperforming, but I wouldn't want to give the impression that is easy. So I think we're definitely taking advantage of Kingfisher withdrawing from the installed delivered but I think big ticket items are still a challenge. Toolstation has still got a lot of opportunity to grow its catchments. So classically like most operators, it's a gravity fed catchment analysis that we're working to and we have our top 100 sort of catchments that we're targeting primarily there is a bit of a bias towards the Southeast and London as you'd expect, but actually some of our more, more sort of market town and rural locations are doing really, really well. We continue to do very well in Bristol, for instance, which is the original town of Toolstation. So we feel we still got a lot of opportunity see and a lot of really good catchments. It is a step up from 40 to 60 as a target number. And that's why we wanted to execute it really well. So it's very much a focus of the physical side of finding the sites and identifying them and fitting them out always think it's the sort of a fairly easy bit, making sure we've got brilliant teams in each of the 60 that we're targeting I think is really the key to hear. So we're all very much supporting James and the team. It's quite ambitious. But actually we're feeling pretty confident that we can execute that well. Adjusting items, Amy, there are a number of those which were provisioned for the year end. So there will be cash to come through. So on the element labeled as restructuring costs, we had 1,000,000 related to the merchanting supply chain. So that is the consolidation of the, TP and benchmarks distribution centers, the restructuring in the range center in Tilbury. And also we've merged the car differential center with a timber supply center in South Wales as well. So GBP 16,000,000, most of that is cash still to camp. We recognized 1,000,000 from the closure of 27 branches Of that, we would have incurred the cash redundancy costs However, there are some of those properties with leases. So we have to provide for the leases The redundancies and reorganization costs in Wickes of 1,000,000, I'd say around 3 quarters of that was cash incurred in the year. And then the balance was largely cash incurred as well on that. So there will be additional disclosure around the remaining provision and the phasing of that when you get the notes to the annual report, which will be up on the website later today. On the gross margin element between H1 and H2, it was a little stronger in H2 on an underlying basis. I'd say year on year general merchanting largely unchanged in the contracts business, we were a little lower on gross margin percentage, the reason being, a shift towards larger customers and an increased number of direct shipments from a consumer business point of view, Toolstation stable, Wix was down given the pricing pressures that we talked about earlier. And in Plumbing and Heating, the main driver of slightly lower gross margin was around the mix between businesses. So the wholesale business having grown faster than the rest of the business overall clearly a lower gross margin activity than the branch based business. Frank Acuglitsch from UBS. So a few questions. The first one is on working cap. I think you flagged some sort of Brexit related stocking. Could you give us a figure of what you think kind of is essentially temporary of that $107,000,000 outflow? And is the growth essentially a reflection of the fact that the trade businesses are growing while the consumer business, which obviously has more favorable working cap dynamics isn't? Question number 1, question number 2, is there more restructuring to come? I'm guessing P and H separation costs, things like this. I think overall, it was a quite a hefty number last year, if you can give us sort of a steer where we're heading there. Toolstation profit, the 3rd question was flat with the DC opening. Do you think you can actually make progress in 2019 in terms of profit And then finally, I don't want to kind of bore people with IFRS 16, but you obviously given the detail in the accounts, I guess the question I've got is, could you give us a broad split of, I think, the $1,350,000,000 of lease liabilities by the main divisions and specifically how much relates to PNH and Wix, considering, the situation there? Thanks. So if I click on the 80 ones and leave the hard ones to Alan, Toolstation's profit, I think we've explained in 2018 was primarily putting the distribution center down and growing the network this year, we will look to progress the business, but obviously stepping up the investment from 40 branches of new branches to 60. We'll have obviously a depressing effect on its profits as well. So I think, Gregor, we're about growing the business and the network. And obviously, the investment levels are short term suppressing our gross margin. Alan, do you want to take the working capital because I've got a number in my mind as always higher than yours? So on the working capital, 1st of all, our inventory was about 1,000,000 or so up year on year. Some of that is natural growth in the business. So we have started the Brexit stock build. So I would anticipate that by the time we get to late March, we will have taken on between $80,000,000 $100,000,000 incremental inventory on a base of 1,000,000 or so of inventory. So we're concentrating that in, light side imported product that's coming a long way. Clearly, heavy side is more UK sourced. There are then a few areas like timber on the heavier end, which are also imported where we'll need to do some work. As to how much of the working capital will reverse during the year. I think I mentioned some phasing elements around the year end related to rebates. So I'd see some of that, reversing or getting better in the year. You're right. However, Gregor, that, a lot of that working capital build is due to the trade business overall growing faster than the consumer business. On the point around restructuring, there will be more, elements to come. So when we announced the 1,000,000 to 1,000,000 of cost savings on December 4th, we did point out that there'd be a roughly equivalent amount of investment in one off costs, to realize those savings. And then from a plumbing and heating separation point of view, there will be some more costs related to that and ultimately disposal costs which we will separately identify, if and when we get to that point. On the IFRS 16 point, the leases in the business, and we'll have seen that from the previous lease adjusted debt figures that we've given as well. The leases are concentrated, particularly in Wix. And we also have a number in Plumbing and Heating, but it's nowhere near as material as the Wix number. So Wix number would probably be over half of the total lease debt, within the business. There will be some more disclosure on that when the annual report is published later on. Where's Mike come? So we'll take carel and then we'll move on to the left. I've got you guys on that front. Hello, it's Pareal from Jefferies. Just two questions. The first one, it's just clarifying on the operating profit guidance being flat year on year. Is that including or excluding property profits given those were slightly higher than the usual 1,000,000 this year? And the second one is just the strategy in PP to widen and deepen the stock range through the branch managers. Is there a risk that that gives too much power back to the branch managers and you go back to a situation where you end up with quite a lot of static stock and Could you replicate what you did in Wix where certain products were available online only in that general merchanting business? So I think you asked a good question about balance. And I guess I put a lot of faith in Kieran, his management team, Frank, to get that right. And I think if we're seeing good sales growth, good profit growth, then you'd assume that things are going well locally So I think there are a number of measures that we would put on that for, but we would be very careful that it wouldn't be a free for all. And there will be an element of core range that we would expect the managers to support, but give them more freedom to talk to individual customers about servicing them. It will come out in the performance. But I'm pretty confident that is the right thing to do locally with the right framework. On the operating profit, pre l, the guidance is for the total adjusted operating profit number, so including property profits. And therefore, by implication, if you take similar to me, exactly the same, 375, you've got a 7,000,000 year on year improvement in the underlying if property profits were 1,000,000. Thank you. Howard Seymour, a couple from here from here. Firstly, just are you alluded fact that general merchant teams saw volume gains in the second half, John, just sort of looking at that in the context of was that market move or was that market share as your initiatives are taking place? And secondly, Alan mentioned the COGS dynamic. As the year is starting, are you seeing any specific pricing, patterns emerging heavyside, light side? Obviously, international products as opposed to UK products. So I think we'll have to see we're quite early in the reporting. So we'll have to see where the others report. My sense is Howard, that it's mainly a little bit of share. Volumes were flat to negative in some areas. And therefore, pricing comes through, but the volumes we would have taken a bit of share. I think there is no pattern other than you've got to watch the manufacturers for being opportunists during this whole period. So you end up with a bit of an arm wrestle on price. We're obviously building stock And one of the other points, which is an add to Alan, it's not just in our on our balance sheet. Obviously, we're working closely with a number of our suppliers that they're building their stock to be able to feed us through our timber supplier from some Southern Sweden has doubled their stock on the docks and in anticipation of finding things difficult. But like always, there's no pattern, other than, I think, you know, it's a manufacturer being opportunist. Robert Eason from Cubotti. If you don't mind, I'll just pick on 2 bullets that you had in your presentation. One of them was, you were talking about winning local market share how should we view that in the context of how you're going to manage gross margins across the business in terms of winning that local market share? And secondly, you talked about tailored branch manager incentives to drive sales and earnings. Can you just give us a bit of an insight how you've changed them if you have? And just broad structures and I know it can vary from business to business, but just give us a sense of how the people on the ground are being incentivized? So I think they're quite linked. We're incentivizing our branch managers to grow their business grow their own ins. And what we've looked at is where we're not lifting the the bar on what they can earn in terms of profit share approach to earnings. So So I think the incentives are revolving. We need to make them attractive for managers to drive to the low end and deliver the best earnings that they can and often that means taking local share. The local share is more around it's not going to come from group or national intervention. It is the branch manager and their catchment. Identifying the best builders in town and winning their share of wallet locally. And we've got tools coming out of our ears, Robert, to watch margin, yeah, by product, by category, by branch. So if the incentives are right to grow earnings, then the managers tend to understand that. And they're not going to get rewarded just for sales. It's Charlie Campbell from Liberum. I've got 2 on quite a similar theme, I think. So looking at appendix 8 and the new reporting structure, I just wanted to sort of understand the margins a bit. So within merchants, I think the margin comes out, sort of high 7s. And looking forward, I would guess that we should think of that as being pretty hard to advance because, whatever progress is made in the in what used to be contracts is probably offset by some softening in general merchanting going forward. So the question is whether you think it's plausible that that merchanting margin can advance from here? And then the second, just to follow-up Robert's question on general merchanting incentivization. My understanding is that that used to be a lot of focus on return on capital. Has that now gone? And it's really all about sales and earnings? So it's definitely decreased in its element, Charlie, but not gone. And I think that's what Frank and Kieran will be looking at in terms of refining the incentives as we move forward. I have to stress, so I don't think that broken when we talked to the branch managers but that doesn't mean that we shouldn't have a continuous improvement to try and tailor them to better performance. So So there'll be more emphasis on earnings than just return on capital. I forgot your first question now. Sorry. Sorry. My foot was wrong a long actually. So, the margin in the new merchant. So, I think as a proxy. And Alan may just have a slight view that the move in the operating margin is not easy if you want a sustainable business. And I think if we take what Frank's done with contracts over the 5 years, is growing the top line disproportionately and outperformed the margin because of mix and chase and as the sort of somewhat compressed, but it's actually net operating margin in good periods is fractionalized this cost and slightly increased it. So I think that the one thing he has done is drive his absolute earnings and his return on capital. So I think this is a paradigm now that if we can outperform the market, we can be sensible with our gross margin, augment the cost base. It's growing our absolute profit and our absolute return on capital. Ask any questions, John. I've got 1. I'll come back to you in a minute, John, because you have 2 slides. It's Paul Cheggett from Barclays Capital. I've got 2 I think I'm returning to Charlie's question really maybe phrasing it slightly differently. If you look at the general merchant exec that you've got, sector leading margins, but they have been trending down. If I try and marry up what the message is around the evolution of the strategy, what do you think it's going to mean for gross margins and operating margins in that business this year and next year? And then the second one is just on the kitchen and bathroom side. Could you give us a sense for what the seasonality of your sales of the kitchens and bathrooms across the corners? That'd be really brilliant. Clearly, and I'm watching Simon, I have a smile on that. The strongest period we've created really on the back B and Q starting it as the winter sale for about 8 weeks. I'm going through So back end of December through January February. And Easter is a really important, the second, and then we And then we've created, I mean, obviously the May bank holidays are good, but then September time, we focus around the big 7 or 8 Yes. So in fairness, people tend to buy kitchens for an ACI stuff and, and straight after Christmas for Easter. And then they'll try and get them in pursuit for Christmas. Jon, if I can, Paul, there's an 8 to 10 week lag from a revenue recognition point of view between the points of which the Kitchen is ordered and delivered. On average. So when we report our what we've just reported from a P and L perspective is mainly sales up to the end of October, broadly. So from 1st November to 31st October, roughly, on that point on operating margins. More into It's the lag that's simple. So on general merchanting operating margin outlook, you're right that General Merchanting is sector leading in terms of its margins. So I think that's the first point to stress we were 8.4% net operating margin in 2018 and picking up on Charlie's point at the same time contract 6.4% net operating margin. So it does blend to 7.5% to 8% the contract merchanting piece, remember that there in particular, we have a large exposure to large customers, large contractors nationals. And therefore, that has an impact on the gross margin, but because it's a very low cost to serve, and because of the operating cost leverage that we've generated within the business, as long as we're growing that business at least in line with the market, I think we can hold if not slightly increase the net operating margin there from a general merchanting point of view, I think overall having a net operating margin around 8% would be a reasonable assumption. And so where do I think the pressures are coming? I think there are there is a greater concentration growing generally in the market of bigger contractors. I think clearly market pricing remains very competitive, but we have emphasized the self help measures and taking overhead out of the business to ensure that we can hold if not progress the net operating margin And you would expect that as we get the engine moving again on the mix merchant, you will see some drop through from the gross margin such that we can at least hold that operating margin. So that's the ambition. Let's watch the results over the next 2 to 3 years. Sure. 2, if I could. 1, just on Kitchen And Bathrooms, just to understand the quantum of it within the revenues of Wix, just is it 20% of sales? That's 30. It's 30 of that. And would it be more profitable on the way you're striking numbers today than the the overall Wix number on less profitable in terms of its EBIT? Slightly equivalent. Alan gave me away. Well, we've had financial here. It's a it's a good business. Got you. And then just clearly the trading stance and the behavior is going to change with the strategy that we heard about in in November, December. But when we think of gross margin, just to understand where we go, if we strip out plumbing and heating, obviously, the gross margin last year, 29.6 28.6% just reported. Would I be right? Because there isn't a kind of an ongoing disclosure here, taking out plumbing and heating. But if I think of Plumbing and Heating as being like a 21% gross margin business because the wholesale get 2 thirds of the like for like group sales came from there, is the core around about 30.5 percent, 31% gross margin, just when we all understand the kind of leverage of what the group will look like? That kind of quantum. It hasn't moved 50 basis points in the last 4 or 5 years. Or stripping up P And H. I've got Graham at the back. You're not going to do friendly fire, are you? Is this over the wire? Yes, I've got a couple of questions from Paul at Exane. First is, are you continuing to explore any new formats like fixed price heavyside merchanting or digital simplification strategy suggests things like filter off the agenda? We will we've we opened our 2nd branch, Bill, probably April, I'm looking at Frank. And I think we'll update the market in August but we're certainly not investing in a new format, but obviously we are still working with the build format. Okay. And the second one is Alan Focused. I think, what drove the big improvement in the pension now in surplus And does this mean payments in 2019 will be lower than last year? Right. So, it goes to the 1st patient IS19. So the assumptions that go into the balance sheet are somewhat divorced from the cash that's required in the pension scheme given the way it works. So we had a good and dealing with those balance sheet numbers. First of all, We had a reasonable performance on the assets on the year, but the changes were more experienced based on the liabilities. So it was the way that the liabilities move, which are heavily linked to AA corporate bonds with a similar duration to the liabilities within the pension scheme. Completely separate from that in the real world of cash We had a triennial review on the 2 main pension schemes, which was dated September end of September 2017 on an actuarial basis. So on a technical provisions actuarial basis, on both schemes, we saw a reduction in the liabilities. So the go forward position in this is set out in in notes to the accounts for the legacy TP scheme, the funding requirements is about GBP 500,000 a year for the next 4 years. And on the legacy BFS scheme, which on a technical provisions basis, is something like 92% funded, But 10,000,000 in 2019, 8,000,000 a year after then down to 5000000 for 18 months. And then that covers the deficit on that scheme. So in 2019, the cash requirements gone down $2,000,000 or $3,000,000. And then it will go down further in 2019, 2020. And by mid-twenty 1, in theory, depending on future movements in actuarial assumptions of schemes, are back in balance. Okay. Graham, is there any other on the wires or is that it's done? Any last one? Good. Great to see you all. Thank you very much for your patience, and thank you very much again for Alan and myself. Ladies and gentlemen, that does conclude today's call. Thank you very much for joining and enjoy the rest of your day.