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.
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. I've got a couple of things I'd like to just cover off before I hand over to John and Alan for the presentation. We'll touch on performance and also talk about some senior leadership changes. 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 rate for the fifth 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 in an organization, any organization, but certainly one involving quite a lot of machinery and activity, and branches, it's zero harm.
Until such time as we're causing zero harm to not only our own employees, but everybody we come into contact with in our daily business, we can never relax. Long may that continue. On the broader financial performance, I'm not gonna steal Alan's thunder or all 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 came to some conclusions, then the exec worked hard to actually bring those conclusions into workstreams and action plans, which we kicked off. Of course, this year is going to be busy too, guys.
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 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. Of course, it's onward and 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 world and with P&H planned for disposal, obviously that role ceases to exist and Tony will be leaving us.
I want to say a real word of thanks to Tony. Six years, initially as CFO and then as COO, and latterly leading the team that's been executing the turnaround in performance of our plumbing and heating division, which has been a real highlight and a success so far. A big thanks to Tony. I think with that, I'll hand over to John.
Thank you very much, Stuart. Good morning, everyone. I just want to sort of do a bit of scene setting. There will 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. 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. A very encouraging second half, but very much underpinned by the actions that we took in terms of the cost reduction activity. Really stellar performances coming through from our contracts team of BSS, CCF, and Keyline, and Toolstation UK continues to move forward, and we will 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. We have Simon King, who runs our Wickes business with us, and Julie Wirth, his new Finance Director.
Simon and the team took some early decisions on cost action in May, we saw some benefits come through on that line, we also saw some improvements in their trading line as the second half progressed. As Stuart's 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 two main themes that we talked around, talking around our purpose as a group, and that was going to be firmly having our colors nailed to the trade market and our trade customers. Equally, given the growth of the business and the relative 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?
If anyone's got the answer, I'd really appreciate it. It is creating a sort of the cliché 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 invest and grow our business. We are going to be even harder with our capital allocation and really target our advantage trade businesses as we go forward. 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's going to talk you through the financials, and I'll come back and talk to some of the businesses.
Thanks, John. Good morning, everyone. As you've heard from John in his introduction, the group's delivered a 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 GBP 6.7 billion, up 4.8% on 2017. At the adjusted profit, operating profit level, we delivered GBP 375 million, which was GBP 5 million or 1.3% below prior year as we continue to invest in the business. 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 GBP 1.145, benefiting from a lower financing charge and also a lower tax charge.
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 GBP 0.01, taking the total dividend for the year to GBP 0.47 per share. That's a distribution of approximately GBP 117 million for the year. Moving on to slide eight, here you can see a steady improvement in the like-for-like growth rate. 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%, 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 profits, I do that because it gives a clear view of the underlying performance of the business. This was GBP 348 million or GBP 3 million lower than in 2017. While EBITA was GBP 21 million lower in the first half, following the poor winter weather, significant competitive pressures in Wickes and cost investment elsewhere, the second half saw strong profit growth of GBP 18 million year on year. This reflected a better overall trading performance together with the benefit of cost reduction actions in general merchanting and Wickes, strong cost control in other businesses and very good operating leverage in the contract merchanting division.
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 Wickes and General Merchanting, in particular, have fully mitigated the inflationary impacts across the group from inflation on wages, rent and rates, and utilities. As you can see, we have continued to invest in the business to the tune of GBP 32 million, with this investment concentrated in our most advantaged businesses such as Toolstation, where we opened 40 new stores in the U.K. in 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 the future, notably, as I mentioned, through the expansion of Toolstation, the focus on cost reduction has borne fruit. There is plenty more still to be done. Indeed, we announced in December a target of a further GBP 20 million-GBP 30 million of annualized cost reduction activity, which we expect to be realized by mid-2020. Several actions were put in place towards the end of the year, GBP 5 million annualized. John will return to this topic later. 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 cost inflation, the business continued to use our pricing framework tool to provide more attractive and consistent prices in selected categories. 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 in H2 profits of GBP 7 million compared to 2017. 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 GBP 13 million lower on the year at GBP 69 million, which represented a GBP 16 million decline in H1, followed by a GBP 3 million improvement in the second half. In the Wickes 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.
Second half EBITA grew by GBP 3 million, driven by the improvement in trading and also the full impact of the cost reduction program, which was put in place during the first half. From a Toolstation perspective, the Toolstation UK 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 investment in new space and the opening of a third 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 GBP 39 million. 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 GBP 107 million, approximately two-thirds relates to trade working capital, with trade debtors growing in line with credit sales and higher inventory resulting from some stock builds as a contingency in case the U.K. 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 purchasers and the phasing of payments around the year-end. Maintenance CapEx increased modestly to GBP 57 million, reflecting the timing of vehicle replacements across the group. From a net cash flow basis, you'll note from the table there, outflows of GBP 41 million related to adjusting items, and GBP 43 million related to the purchase of own shares to fulfill employee share schemes. If I return to capital expenditure in more detail on slide 17, base capital expenditure was GBP 23 million lower than in 2017, at GBP 143 million. This was driven by a reduction in growth CapEx of GBP 25 million, as we refitted fewer Wickes stores than in 2017, and with fewer new merchant and Wickes 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 five years, with two one-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 more focused capital allocation and enhanced cash flow generation. I'm sure you are 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 have included it in the appendix with a number of slides for you to understand this, and there are also several members of the finance team present who can go into much more detail than I can. Finally, if I turn to outlook and guidance for 2019. I'm sure you will all appreciate that the current uncertainty in the U.K. 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. With that, I'm now going to hand you back to John to provide an operational review and also the strategic update.
Thanks, Alan. Thank you. Okay. A slide that we've used on the 4th of December, our Capital Markets Day, is worth just 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. Three of the outputs, as I look at them, as we're trying to develop, is for all of our businesses to drive their business in front of the market and outperform 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. As Alan has said, we will increase our approach to disciplined capital allocation on the most advantaged businesses.
That slide for us really sets the scene for the coming period. As I know you've grown, we are going to go into a period where we are 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, we're seeking disposal of our plumbing and heating businesses during this year. As we move from right to left, we will be reporting our retail businesses of Wickes and Tile Giant, clearly Wickes being the dominant element of that sector. Then focusing on the trade-focused businesses, we are keeping Toolstation separate given its growing scale and importance to the group as we go forward. Recently, we announced the forming of a new trade merchant organization of the five principal trade merchant businesses.
That announcement of the trade merchant businesses will be head up by Frank Elkins, he's sat handsomely at the back. The aim here is very much around having central shared services at the center and resources within the business, but the removing of any divisional or cross in between the business units and the central shared service functions. The five businesses are all very well positioned. Frank's got an incredible track record over the period with Contracts and Keyline, BSS and CCF. Adding to that now, his responsibilities will be Benchmarx under the new MD of John O'Keeffe. 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. 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. Giving our branch colleagues more time to deepen those relationships with local customers. Angela Rushforth has just gone into BSS in the last four weeks as well. We've got, I think, an extremely strong lineup under Frank's stewardship. It's come under a lot of questioning in terms of, so what is general merchanting going to be different, or what is it going to do going forward? I've tried to capture it here on sort of eight points of feedback from our customers.
We passionately believe, I passionately believe, if we get these eight 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 consistent 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. It's about us as a business going that extra mile for our customers. They are the simple points of how we are going to measure how successful our mixed merchanting is as we go forward. We talked about the scales of balance of empowerment and how we actually want to run the business.
This is still in week eight, so please, it's still early doors. The new management team in general merchanting, 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. Getting very strong positive feedback from them. The whole message is centered around winning our local market. As highlighted, we've lifted Benchmarx from the general merchanting to give it its own space and its own area. 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 interests of our local customers. Pricing will be a big feature. We are not a retail business.
We are B2B, 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 the branch managers to widen and deepen their branch stock and align it to that of their local customers and local demand. Although, as we move through the year, we will tailor the branch manager's incentive sets 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 well-trodden 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 has got to be driven by the customer and not the center. We've made a number of small acquisitions that have been adjacent categories quite successfully. Frank bought an aircon business, TF Solutions, which is growing really fast and profitable, and we'll be seeking other opportunities for this business as we go forward. The most, for me, 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 leadership across its pricing. That needs to be maintained and developed.
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're seeing 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 U.K. with the addition of the third distribution center.
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. Equally, Toolstation, which is much of 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. We are getting really positive sort of performance from both the store performance and the online across Holland that's mirroring the U.K. performance. France is still in its early stages with 11 branches. We will gradually grow that and review that during 2019.
Although Belgium is proving good online, we will support the opening of Belgian branches delivered through the Netherlands distribution center during the year. In terms of the P&H and the numbers, obviously, that Alan showed have been really positive in quite a challenged sector. It's an outstanding performance in 2018, with clear outperformance in all three of the categories that Alan highlighted of 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 job in terms of optimizing both the City Plumbing network and the PTS to operate as one. We've continued to push the breadth and depth of branch stock in terms of the local markets and are embedding some electrical implants across the network to good effect.
We're seeing advantages for having its own dedicated supply chain to that category as we move forward. 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 Wickes business. I don't think any of us should underestimate the impact that Bunnings actually had on our market in the two years that they were here. They caused a lot of disruption, took their pound and went back to Australia, left us with some real difficulty. 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 to good effect. The heritage of Wickes sits within trade and the small tradesman, 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. Clearly, most of you will remember Q4 and H1 of 2018 and 2017 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.
That's the design through the showroom, the delivery, the install, and if the customer does desire, the ability to wrap that around 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. As many of you will know that our major competitor of Kingfisher decided to stop in delivered installed kitchens. 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 the second half and in particular Q4, that puts us in pretty good stead for 2019. I've always believed and said that Wickes is the most strategically advantaged business in its sector.
The sector is challenging, but Wickes has got a lot more advantages than its competition. In summary, very much sort of picking up on the theme, 2018 was a challenging year, 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 and 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 2018. That has to be underpinned by our activities of self-help. We are aiming really to set ourself 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 advantage businesses, and really aiming to drive over the medium term, stronger earning progression, better cash flow generation, and ultimately, stronger shareholder returns. On that, and I know we've got some people on the wires later on, I mustn't forget those, can we go to the floor for questions? Andy.
Morning, Andy Murphy from Bank of America Merrill Lynch. Just two questions from me. Just on the disposal process of plumbing and heating, can you talk a little bit about, maybe not the timing of course, about the sort of temperature of the market and whether there's the level of activity, level of interest in there for that kind of activity. Secondly, just on cost increases, perhaps this is a 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.
Did you want to pick both of them up, Alan?
I'm happy to take both. Andy, on the first one on the plumbing and heating disposal process, everyone will appreciate at this stage, we're very focused on the separation activity. The plumbing and heating business is heavily integrated with the rest of the group in terms of its back office. IT systems, shared HR teams, shared purchase and general ledger. 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. There's an event on the 29th of March, which may mean we're not able to launch a process if it looks like there's very reduced levels of M&A in the market.
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. We're seeing U.K. wage inflation creeping up. 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. I'd say 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 our cost of goods because I'm sure we'll get that question otherwise. From a cost of goods point of view, the pressure did abate somewhat in the second half, but we are still seeing some commodity increases coming through.
I would imagine that the cost of goods inflation for the year will be a little ahead of U.K. CPI, probably a point or so ahead of CPI from an input cost point of view. In terms of central costs, things like IT, you referred to, Andy, I don't see any particular increases year-on-year in those areas. I think they'll be fairly stable against prior year.
Good. Thank you, Andy. Aynsley?
Thanks. Aynsley Lammin from Canaccord. Just two. Firstly, on your expectation for adjusted operating profit to be similar, could you just kind of flesh out the assumptions you've made about like flat volumes and prices there? Flat volumes, price up 2% or so. Also just remind us what the incremental benefit from the cost savings from 2018, as well as the kind of cost cuts you expect to feed through into 2019. Secondly, just on contracts, obviously it's been performing very well, like-for-like growth up at that 8% for the last three quarters. Do you expect that kind of pipeline looking good? Do you expect that to hold up at that good level? Maybe just a bit more explanation how you've been performing so well in contracts.
Frank would say it's all down to him. No, contracts has been on a roll now for a number of years, and it is really taking share. All the three businesses are taking share. Inevitably, that has to moderate, but I've been saying that to Frank for a few years, and he's been outperforming. I think we just need to be careful that we don't believe that this can go on forever. On the expectation for 2019, Aynsley, I'd like you to give us some slack, because we're eight weeks into a year that we have no real idea. 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 formal update is the 8th of May, and we'll, I think, have a much better view of how we've moved through the 29th of March or kick the can down the road. It's our best guess based on looking into a very uncertain, sort of foggy market.
Aynsley, on the 2018 and 2019 cost savings, first of all, I showed a chart with GBP 38 million of cost savings coming through from general merchanting and Wickes. They were roughly half and half sort of thing. In 2019, I would expect around a further GBP 10 million, which is the annualization of those activities, given the phasing of them being in the first half in Wickes. There'll be three or four months worth of benefit to come through, plus the H2 actions that we took in general merchanting. I also referred to the GBP 20 million-GBP 30 million further initiatives that we're looking to put in place, which we talked about on the 4th of December at the capital markets event. Of those, GBP 5 million of actions were annualized, were taken late in Q4. I would expect a full year benefit from that.
Clearly, we're on with some of the other actions as well. 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 for 2019. If you look at some of the lead indicators, they are very depressed at the moment. Consumer confidence is very low. Secondary housing market transactions remain at low levels, and so do mortgage approvals. Added to which, we've got a clear uncertainty around Brexit. 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. We will look to self-help from those cost actions to ensure that we deliver on our objectives for the year.
There's a lady just in front of Aynsley.
Hi, Sofia Sotto-Mayor from Exane. My first question is on the consumer division and how much the Q4 acceleration reflects an easy base from last year. If it's possible to give an estimate on the underlying volume run rates. 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.
From my point of view, we were expecting Q4 consumer, and mainly driven by kitchens, to be a bit stronger. As we'd invested in some of the Kingfisher design consultants across the Wickes network. We always thought that would come through later in the year. Volumes were not much different than we were expecting. Obviously, 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. It was a good number, but made it 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'd seen. I think the pricing pressure from Bunnings Homebase was probably at its extreme in around Easter time. That's not to say the issues have gone away, so I'd say some easing at this stage on the pricing environment. Why don't I think it's gone away? I think they'll close more stores, and they still have a number of clearance stores as well. I'd say, secondly, we did a better job in terms of our kitchen promotional program than we had done in the autumn, winter 2017, early 2018 sale. 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. On behalf of Stuart and the board, from a succession process, first of all, and then I'll come back to the redundancy element. It was clear in the nomination committee report in the annual report in 2018, that the board were thinking about a succession process. That thinking continued. I understand the process will conclude during 2019. I think you should bear with us. John is CEO, and in his 41st year and doing a pretty good job, I think, at leading the business forward. That's where we are for now.
On the redundancy element, you'll appreciate with the simplification of the group. 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. We simplified the structure and therefore the role is not needed at this stage.
Ami at the back. I'll come over to the other side.
Ami Galla from Citi. Just a couple from me. The first one, if you could comment on the gross margin move sequentially between H1 and H2. Is there any material moves that you've seen across your divisions?
Yeah.
Second one, really a point of clarification. The exception costs that you've incurred in 2018, have all of them come through the cash, or is there any phasing of cash costs that we need to consider into 2019? The third one on Toolstation, it's quite an ambitious expansion plan. Could you give us some regional color as to where regionally are you looking at expanding your Toolstation footprint? The last one, really on the order intake for kitchens and bathrooms. You talked about the lead indicators looking more encouraging. If you can give us some numbers around that'll be quite helpful.
If we work backward, the order intake for kitchens is good against a really challenged consumer market. I think we're outperforming, but I wouldn't want to give the impression that it's easy. 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. 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 Southeast and London, as you'd expect. But actually, some of our more sort of market town and rural locations are doing really well. We continue to do very well in Bristol, for instance, which is the original town of Toolstation.
We feel we've still got a lot of opportunity 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. It's very much a focus. The physical side of finding the sites and identifying them and fitting them out, I always think is 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 here. 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.
On adjusting items, Ami, there are a number of those which were provisions at the year-end, so there will be cash to come through. On the element labeled as restructuring costs, we had GBP 16 million related to the merchanting supply chain. That is the consolidation of the TP and Benchmarx distribution centers, the restructuring in the range center in Silbury, and also we've merged the Cardiff range center with a timber supply center in South Wales as well. GBP 16 million, most of that is cash still to come. We recognized GBP 16 million from the closure of 27 branches. Of that, we'd have incurred the cash redundancy costs. However, some of those properties were leases, so we have to provide for the leases.
The redundancies and reorganization costs in Wickes of GBP 13 million, I'd say around three-quarters of that was cash incurred in the year, and then the balance was largely cash incurred as well on that. There will be additional disclosure around the remaining provision and the phasing of that when you get the notes for 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're 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, Wickes was down given the pricing pressures that we talked about earlier.
In Plumbing and Heating, the main driver of slightly lower gross margin was around the mix between businesses. The wholesale business having grown faster than the rest of the business overall, clearly a lower gross margin activity than the branch-based business.
[audio distortion] Gregor Kuglitsch, please. Thank you.
Gregor Kuglitsch from UBS. 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 is essentially temporary, that GBP 107 million outflow? 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? That's question number one. Question number two, is there more restructuring to come? I'm guessing P&H separation costs, things like this. I think overall, it was quite a hefty number last year. If you can give us sort of a steer where we're heading there? Toolstation profit, the third question, was flat with the DC opening. Do you think you can actually make progress in 2019 in terms of profit?
Finally, I don't want to kind of bore people with IFRS 16, 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 GBP 1.35 billion of lease liabilities by the main divisions? Specifically, how much relates to P&H and Wickes, considering the situation there? Thanks.
If I pick on the easy ones and leave the hard ones to Alan. Toolstation's profit, I think we explained in 2018 was primarily putting the DC down and growing the network. This year, we will look to progress the business, obviously stepping up the investment from 40 branches or new branches to 60 will have obviously a depressing effect on its profits as well. I think, Gregor, we're about growing the business and the network, obviously the investment levels are short term suppressing our gross margin. Alan, did you want to take the working capital? I've got a number in my mind that's always higher than yours.
On the working capital, first of all, our inventory was about GBP 35 million or so up year-on-year. Some of that is natural growth in the business, though we hadn't started the Brexit stock build. I would anticipate that by the time we get to late March, we will have taken on between GBP 80 million and GBP 100 million incremental inventory on a base of GBP 750 million or so of inventory. We're concentrating that in light side imported product that's coming a long way. Clearly, heavy side is more U.K. sourced. There are 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. When we announced the GBP 20 million-GBP 30 million 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. 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 Wickes. We also have a number in Plumbing and Heating, but it's nowhere near as material as the Wickes number. The Wickes 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's published later on.
Okay.
Did we cover all the questions?
Yeah. Well done. Next one. Where's the mic gone? If we take Priyal, and then we'll move on to the left. I've got you guys on that front.
Hello, it's Priyal from Jefferies. Just two questions. The first one is 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 GBP 20 million this year? The second one is just the strategy in TP 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? You go back to a situation where you end up with quite a lot of static stock. Could you replicate what you did in Wickes, where certain products were available online only in that general merchanting business?
I think you asked a good question about balance, I guess I put a lot of faith in Kieran, his management team, and Frank to get that right. I think if we're seeing good sales growth, good profit growth, then you'd assume that things are going well locally. I think there are a number of measures that we would put on that, Priyal, we would be very careful that it wouldn't be a free-for-all, 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. I'm pretty confident that it's the right thing to do locally with the right framework.
On the operating profit, Priyal, the guidance is for the total adjusted operating profit number, including property profits, and therefore by implication, if you take similar to mean exactly the same, GBP 375, you've got a GBP 7 million year-on-year improvement in the underlying if property profits were GBP 20 million.
Thank you.
Great. If we try and be patient with it.
Thank you. Howard Seymour . A couple from here.
Yeah.
Firstly, just you alluded to the 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? Secondly, Alan mentioned the COGS dynamic. As the year is starting, are you seeing any specific pricing patterns emerging, heavy side, light side, obviously international products as opposed to U.K. products?
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 opportunist during this sore period. You end up with a bit of an arm wrestle on price. We're obviously building stock. One of the other points, just to add to Alan, it's not just 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 Southern Sweden has doubled their stock on the docks in anticipation of them finding things difficult. Like always, there's no pattern other than I think it's the manufacturers being opportunist.
Okay. Thank you.
Robert Eason from Goodbody. If you don't mind, I'll just pick on two 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? 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?
Yeah.
Just broad structures, I know it can vary from business to business, just give us a sense of how the people on the ground are being incentivized.
I think they're quite linked. We're incentivizing our branch managers to grow their business and grow their earnings. What we've looked at is whether or not lifting the bar on what they can earn in terms of profit share approach to earnings. I think the incentives are evolving. We need to make them attractive for managers to drive to the line and deliver the best earnings that they can. 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. We've got tools coming out our ears, Robert, to watch margin by product, by category, by branch.
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 two on quite a similar theme, I think. Looking at appendix eight, the new reporting structure, I just wanted to sort of understand the margins a bit. Within merchants, I think the margin comes out sort of high sevens. Looking forward, I would guess that we should think of that as being pretty hard to advance because whatever progress is made in what used to be contracts is probably offset by some softening in general merchanting going forward. I suppose the question is whether you think it's plausible that that merchanting margin can advance from here. Then the second, just to follow up Robert's question on general merchanting incentivization. My understanding is that there used to be a lot of focus on return on capital. Has that now gone and it's really all about sales and earnings?
It's definitely decreased in its elements, Charlie, but not gone. 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, I don't think they're broken when we talk 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. There'll be more emphasis on earnings, than just return on capital. I forgot your first question now. Sorry.
Sorry. My thought was rather long, actually. The margin in the new merchant segment.
I think it, as a proxy-
Yeah.
Alan might just have a slight view.
Yeah.
That the Moving the operating margin is not easy-
Yeah
if you want a sustainable business.
I think if we take what Frank's done with contracts over the five years, he's grown the top line disproportionately and outperformed the margin because of mix and chase and sort of somewhat compressed, his actual net operating margin in good periods, he's fractionalized his cost and slightly increased it.
I think the one thing he has done is drive his absolute earnings-
Yeah
and his return on capital. I think this is a paradigm now that if we can outperform the market, we can be sensible with our gross margin, fragment the cost base, it's growing our absolute profit and our absolute return on capital.
Okay. Thank you very much.
You're not asking any questions, John?
I think so, yeah.
I think so. I've got one. We'll come back to you in a minute, John, because you were too slow.
Hi. It's Paul Checketts from Barclays Capital. I've got two. Can I just I think I'm returning to Charlie's question, really, maybe phrasing it slightly differently. If you look at the general merchanting sector, 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? 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 would be for kitchens and bathrooms across the quarters?
Sure. You really put me on the Clearly, and I'm watching Simon eye with smile on now. The strongest period we've created, really on the back of B&Q starting it, is the winter sale.
Got that for about eight weeks, going through back end of December through January and February. Easter's a really important, the second. We've created, obviously, the May Bank Holidays are good, September time, we focus around the big seven or eight. Yeah?
Yeah. Four to three is-
Yeah
[audio distortion]
Yeah. In fairness, people tend to buy kitchens for and at Easter and straight after Christmas, for Easter, and then they try and get them installed for Christmas.
John, if I can.
Paul, there's an eight to 10-week lag from a revenue recognition point of view between the point at which the kitchen is ordered and delivered, on average. When we report our What we just reported from a P&L perspective is mainly sales up to the end of October, broadly, from the 1st of November to 31st of October, roughly. On that point on operating margins, Sorry, Alan. Yep, you're right on the eight weeks, but actually to do what Paul said, it will go up to eight to 10 to 12. Yeah. It's the lag that's important. On general merchanting operating margin outlook, you're right that general merchanting is sector leading in terms of its margins. I think that's the first point to stress.
We were 8.4% net operating margin in 2018, picking up on Charlie's point at the same time, contracts 6.4% net operating margin. It does blend to 7.5%-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. Because it's a very low cost to serve and because of the operating cost leverage that we 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.
Where do I think the pressures are coming? I think 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. You would expect that as we get the engine moving again on the mixed merchant, you will see some drop-through from the gross margin such that we can at least hold that operating margin. That's the ambition. Let's watch the results over the next two to three years.
Thanks.
John.
Two if I could. One, just on kitchens and bathrooms, just to understand the quantum of it within the revenues of Wickes. Is it 20% of sales?
About 30%.
It's 30% of that. Would it be more profitable on the way you strike your numbers today than the overall Wickes number or less profitable in terms of its EBIT? Slightly more accretive.
I think that's quite sensitive, actually.
Slightly accretive. Alan gave it away.
Well, we had finance for you. It's a good business.
Got you. Just clearly the trading stance from the behavior is going to change with the strategy that we heard about in November, December. When we think of gross margin, just to understand where we go, if we strip out Plumbing & 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 & Heating. If I think of Plumbing & Heating as being like a 21% gross margin business because we wholesale
Yep.
Two-thirds of the like-for-like group sales came from there. Is the core around about 30.5%, 31% gross margin, just when we all understand the kind of leverage of what the group will look like.
[audio distortion] .
That kind of quantum.
[audio distortion] .
I'd love to see.
It hasn't moved 50 basis points in the last four or five years.
Okay. Stripping out P&H. Brilliant. Thank you.
I've got Graeme at the back. You're not going to do friendly fire, are you?
No.
No. Is this over the wires?
Yeah. I've got a couple of questions from Paul at Exane. First is, are you continuing to explore any new formats like fixed price, heavy side merchanting, or does your simplification strategy suggest things like BUILT/ are off the agenda?
We opened our second branch BUILT/, probably April. I'm looking at Frank, and I think we'll update the market in August, Graham. We're certainly not investing in a new format. Obviously, we're still working with the BUILT/ format.
Okay. 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. Here goes the first teaching, IAS 19. The assumptions that go into the balance sheet are somewhat divorced from the cash that's required in a pension scheme, given the way it works. In dealing with those balance sheet numbers, first of all, we had a reasonable performance on the assets on the year. The changes were more experience-based on the liabilities. 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 two main pension schemes, which was dated end of September 2017. On an actuarial basis, on a technical provisions actuarial basis on both schemes, we saw a reduction in the liabilities.
The go-forward position, and this is set out in notes to the accounts for the legacy TP scheme, the funding requirement is about half a million GBP a year for the next four years. On the legacy BSS scheme, which on a technical provisions basis is something like 92% funded, there is GBP 10 million in 2019, GBP 8 million the year after then down to GBP 5 million for 18 months, and then that covers the deficit on that scheme. In 2019, the cash requirement's gone down GBP 2 million or GBP 3 million, and then it will go down further in 2019, 2020, and by mid 2021, in theory, depending on future movements in actuarial assumptions, the schemes are back in balance.
Okay.
Graham, is there any other on the wires or is that the best, son? Any last one? Good. Great to see you all. Thank you very much for your patience, and thank you very much again from Alan and myself.