Earnings Call: H1 2018

Jul 31, 2018

Are we comfortable? Okay. Really good morning to everyone, especially to those on the lines. Welcome to Travis Perkins Interim Results of 2018. I'm going to give a very, brief introduction and hand over to Alan. To run through the financial review, I'll come back and look at the operational update thereafter we'll open them up for question and answers first from the floor and then go into the lines. From an introduction point of view, Our trade businesses overall despite a very difficult market condition or tough market condition have traded really well during this period. And we'll talk a little bit about the depth of that trading period within the presentation, but it wasn't without its challenges. Overall, they traded really well. Equally, we know we've got our challenges and difficulties in DIY and with the subdued consumer confidence, significant market disruption from some of our competitors that has ultimately impacted our Wix trading But as you would expect, we haven't sat on our hands and we've instigated a lot of self help in the form of cost reduction and our aim really is to mitigate the volatility of those trading conditions in this period. So really overriding freight has traded really well We've got our challenges in Wix, but we are taking action accordingly. And I'll pass you over to Alan. Thank you, gentlemen. Good morning, everyone. So as John's mentioned, it's proved to be a challenging first half. In the context of soft underlying market conditions, the poor winter weather and the difficult DIY market, I think that overall sales growth of 4.4% with like for like growth of 4.2 percent as a credit performance. Adjusted operating profit of 1,000,000 was 1,000,000 or 5.8 percent lower. Excluding a million higher contribution from property profits, EBITA was 11.5% lower. Now as I'll come on to cover in more detail, this was largely driven by the poor outturn in Wix, in the period and by some of the investments we are making in the business, specifically in General Merchanting And Toolstation, to develop the business for the future. As noted on this slide, we've recognized adjusting items of 1,000,000 alongside the anticipated transformation costs in Plumbing and Heating and restructuring costs in Wix, to significantly reduce operating costs. We've recognized an impairment for the carrying value of goodwill related to the Wix business of 1,000,000 in the light of current DIY market conditions. Adjusted earnings per share were 4.1% lower at 53.5p in the period. The group's dividend payout is underpinned by the ongoing strength of cash generation and so the board has declared an interim dividend of As highlighted, like for like sales growth in the period was 4.2%. With total sales growth of 4.4%. And as you can see from the graph on the left of Slide 7, price and mix was again a significant feature with the business recovering input cost inflation of around 3% overall. At a group level, volume growth in the period was a little under 1%, driven by the strong performance in the Plumbing And Heating businesses, with some offset elsewhere, principally in Wix. Net new branches opened in the half totaled 17 being driven by Toolstation U. K. And Europe, whilst the Plumbing and Heating contracts and general merchanting divisions also are a modest net reduction in branches. And as usual, we've included the branch totals and reconciliation, in the appendix of the presentation. Moving to Slide 8. Group adjusted operating margin declined by 90 basis points in the period to 4.8%. This was driven as you can see by the gross margin line where the group experienced an adverse business mix. With strong growth in the lower margin Plumbing and Heating division. This was further exacerbated by declining gross margin in Wix, with lower kitchen and bathroom showroom sales and competitive pressures. These meant that the business was unable to fully recover the impact of input cost inflation in the period. Now gross margin in general merchanting was unchanged in the period versus H1 'seventeen, this is a pleasing performance, reflecting good mitigation of input cost inflation. You'll also see this at the operating cost level, the group as a whole delivered 60 basis points of operating cost leverage, mitigating in part the gross margin decline. This was despite some anticipated increases in overheads, driven by the investments in the Moving to Slide 9. I've laid out a bridge of adjusted operating profit from H1 2017 to H1 2018. You could see that property profits increased by a net 1,000,000, that's principally a phasing impact. And that the impact of the adverse mix in gross margin was the million decline in gross profits. You can also see the net overheads increased by 1,000,000, a lower level than we have seen in recent years. We continue to invest in the network through new branches, principally Toolstation, and improving the customer proposition with the extension of the heavy side range center network reach in General Merchanting and further Wix refit There was a good delivery of cost reduction benefits in the period with million of benefits realized. More than offsetting million of inflationary elements. These benefits were concentrated in Wix with a net operating and also were concentrated in the Plumbing and Heating division as part of the transformation program. In addition to an to annualization benefit from the actions taken, further cost initiatives have been planned. So I'll move to the review by division. On Slide 10, turning to General Merchanting, first of all, We saw an encouraging recovery in sales performance in May June following the inclement weather during March April. Resulting in overall like for like sales growth of 0.6%. As mentioned earlier, gross margins were stable on H1 'seventeen. A considerable improvement in run rate from the second half of twenty seventeen, reflecting a disciplined drive to recover input cost inflation and good disciplines on pricing. Operating profit, however, declined due to the step up in operating cost investment associated with improving the customer proposition and also inflationary impacts. And as I mentioned at the 2017 results presentation, the subdued RMI outlook means it's difficult to absorb some of these additional costs in the short term. We've therefore been taking actions to reduce costs in support areas and to increase flexibility in the cost base. These benefits will start to be realized in H2 18 underpinning the performance and John will talk about this in a while in more detail. Plumbing And Heating division delivered an outstanding performance in the half, as the transformation program really began to deliver. Total sales growth of 15.7% came from across the business, with the pace of growth maintained throughout the second quarter. Growth was particularly strong in the wholesale business, which does impact the gross margin percentage. However, the combined branch based businesses also delivered strong growth in both sales and profit reflecting improved ranging and availability as well as benefiting from tight cost control. There remains significant opportunity to improve the performance further in the division, albeit the growth comparator becomes more challenging as the business starts to cycle the transformation program, which was kicked off in H2 2017. Turning to the Contract Merchanting division on Slide 12. The division again turned in a robust performance despite a slow start to the year, where subdued end markets were further impacted by poor weather in March April. All three businesses delivered good growth and the division successfully recovered significant input cost inflation of around 6%. Gross margin was 30 basis points lower as we grew our direct to site deliveries. However, the efficiency and process improvements in the division that we have implemented recently resulted in operating cost leverage broadly offsetting the impact of the 30 basis points gross margin decline. The Consumer division saw a like for like sales decline of 4.2% with overall sales 1.8% lower. I'll break the sales between Toolstation First and then Wix. So on Toolstation, we again delivered double digit like for like growth and grew total sales by 17.6%. Profit was modestly lower as in addition to opening 22 new stores, we've established the 3rd distribution center. This will increase our capacity and distribution to be able to support 500 plus stores in the future. The performance of Wix was disappointing with a like for like sales decline of 7.7%. While the trade businesses recovered well from the poor weather, Wix continued to struggle. Although core DIY sales recovered modestly, Kitchen and bathroom showroom sales were weaker than we expected, significantly impacting the profitability. Intense price competition meant that gross margin in core DIY also declined as we were unable to recover the input cost inflation experienced. Significant cost reduction activity has been put in place in Wix, with good delivery as I referred to earlier in H1 and with additional benefits to come in H2. And again, John will talk to you a little while about this in more detail. And as mentioned earlier, we recognized an impairment to the carrying value of the goodwill, of GBP 246,000,000 given the current DIY market outlook. So moving on to working capital and cash. On Slide 14, first of all, cash conversion in H1 'eighteen was 72%. A little weaker than in recent periods. This was as a result of higher than usual working capital outflow for H1, driven by an increase in trade debtors. This increase in trade debtors arose as a result of the phasing of credit sales, where we have a very strong sales performance in May June. Given average payment terms, these accounts will be collected during July August, and therefore, we expect this impact to reverse in H2 and hence, the cash conversion percentage to one aspect in particular. So you'll note million of share purchases in the period. The group has moved its policy from issuing new shares to fulfill all employee share schemes to on market purchase. The million was a catch up as we purchased shares to fulfill all outstanding schemes. So therefore, future spend will be significantly lower. Total lease adjusted debt increased by 1,000,000 in the period, driven mainly by the change in net debt. Where lease adjusted debt to EBITDAR was also impacted by the lower earnings. Other things being equal I would expect these Capital expenditure, moving to Slide 16, you'll see that the base CapEx in the period was broadly similar to H1 'seventeen at 1000000. I would note that growth CapEx in 2018 has been very much H1 weighted with 3 new Wix stores, which were planned several years ago, 3TP branches opened, and the Wix REIT fit program for the year already completed. We're therefore maintaining the previous guidance 1000000 to 1000000 of base CapEx for the year. In terms of property transactions, the acquisition and construction of new development sites and 1 or 2 buy ins of merchanting leases, at 1,000,000 was fully funded by the disposals of 1,000,000. These disposals achieved better prices than anticipated hence the strong delivery of property profits in the period. So finally from me for the moment, the outlook for the year, market lead indicators continue to be mixed making it difficult to forecast accurately near term market volumes. That said, recent trends indicate trade markets are performing more consistently, and so our expectations for the trade focused businesses remain unchanged in 2018. We do, however, anticipate that the UK retail DIY market will remain very challenging given the pressure on the consumer and weak demand for big ticket purchases. We've put in place and continue to work to identify cost reduction activities across the group to mitigate the impact of these market conditions. Given the first half performance of Wix, The group now anticipates that 2018 EBITA will be in the lower half of the range of analysts' expectations. And to be clear, that range is 1000000 to 1000000. And therefore, we're guiding to an EBITA for the year of between 1000000 and million. So with that, I'll now hand back to John for the operational review and look forward to taking your questions later. Thanks Alan. Okay. In all the years, I've been managing the business or being in the senior management. I've not felt a more tricky 6 months than the 1st 6 months of this year. But I do think our businesses have navigated it particularly well despite the real challenges that they've presented. Large construction started off slower than we expected and not helped with the Curillium failure in January. The significant fall weather that we talk around wasn't just that 3 or 4 days of snow impacted at the end of February, early March. Sites were extremely sudden, during March April. And that, and without heavy bias or bias towards heavy materials, that presented us some different challenges. However, we've got to accept that we were encouraging style recovery as the weather opened up during May June. Overall, as Alan has shown, our trade businesses have performed particularly well. Equally, the challenges that we found in DIY, has been the extremely challenging. And consumer confidence has really been very difficult to read and subdued. And this was impacted in and around the larger ticket items, but not solely on that because our core also has been quite, quite difficult to read. A number of activities from our competitors that you would be aware of as calls also additional troubles and made reading the market quite difficult. And as I said at the beginning of the introduction, the businesses have responded with a series of self help and cost reduction activities to help mitigate cool conditions we're operating in. Those near term self help cost reductions I'm just keen to sort of make sure we understand. We made significant progress with our initiatives in the first half. And as Alan pointed out, saving around 1,000,000 and mainly came from Wix and Plumbing and Heating with the transformation program in PNH and Wix period over periods was $9,000,000 lower with its overall cost base having absorbed inflation within the business. So they've done a very good job. But notwithstanding that, we have other further activities underway with across the businesses. That are going to realize service savings in H2 and position us in 2019 in a better state for trading. General Merchanting, again, as Alan identified, we'll see the benefits of around $10,000,000 savings come through in H2 with further activity underway. And Wix announced in April around 30% reduction of their support center staff, which we will see the benefits of that come through equally in the second half. Further, central function and divisional activities on cost saving and reductions are also underway that we will see the benefits come through in H2. So there is a lot of activity making sure that we are bit for purpose during second half of this year going into 2019. I'm taking the Wix situation, we started the year with K and B pretty well. We saw a dip, as we went into Easter, Easter performed well, And then we've seen via really the leads for kitchens tail off during the latter part of the first half. And many of you be aware, the activities of one of our major competitors have withdrawn from delivered installed kitchens and that presents us over the medium term and some good opportunities. That really wants to be seen until Q4 of this year going into 2019 as they actually deliver the orders that they've actually sold during the first half. It wasn't exclusive to kitchens and bathrooms. We've had some challenges with our core business. And with the market being highly price competitive, as, obviously, activities change of ownership of one of our competitors comes through. As the weather opened up in May June, It clearly would have been a benefit to us, but it actually benefited the outdoor categories, which is probably not is one of our weaker categories And so although we benefited from the better weather, we weren't actually in the sweet spot of garden products and outside furniture. As we look forward, we're clearly working on plans to re reinvigorate our Kitchen and bathroom promotional program and leveraging our capability of delivered and installed kitchens and bathrooms. We're building our promotional activity to drive value to our core customers. And in particular, we're seeing some good success with our TradePro loyalty scheme which is targeting small builders within the Wix business. Underpinning that activity on promotional activity, has been the cost reduction programs. We've been very successful in reducing our shrinkage, which is a total waste and loss of product within the supply chain of Wix. It's around 1,000,000 and we've reduced that by 25% in the first half. And there's further work going on in those areas to underpin our performance. Stores have been worked hard on productivity. And as I say, the benefits of the actions we've taken in the first half should flow through to help our performance in the second half going into 2019. General Merchanting, and it's worth just stepping back. This is the largest most successful mix merchant in the sector. We've asked it to manage a trading stance of supporting their gross margin And as you saw from Alan's slide earlier, we've returned back to the 2017 margin levels having dipped in the second half of twenty seventeen. Which is no mean feat given the inflation that's coming through. Equally, I would point out that our volumes in general merchants in in the first quarter were minus 3.9 and they were flat in the second quarter demonstrating really the impact of the weather and the progress that the business is making. In addition, we're looking at different formats to give a wider product offering to our of us with good success and focusing on enhancing the proposition through our rain centers and national primary distribution hub. We've reorganized the sales effort to be very much focused on the local important customers in each catchment. We're seeing really good performance from our managed services of winning new contracts regularly, but also pleasing for us is retaining the existing customer base. And just to remind you, these are often the 3, 4 5 year contracts offering product to local authorities and housing associations And I'm pleased to say that we're seeing really good progress with our tool hire business under new leadership and developing good and innovative relationships with suppliers that improve our asset availability and utilization So overall, our general merchanting business is moving forward. Great efforts from Tony and the Plumbing and Heating team, a real success story. The transformation is delivering both sales and profits ahead of expectation. We've redesigned our supply chain which has improved our product availability and improved our efficiency. Tony and the team believe that we can actually grow our electrical business alongside the Plumbing and Heating. We have 9 trial branches in their early stages with encouraging results. Further trials planned. As Alan sort of indicated, we benefited from our major competitor withdrawing from wholesale plumbing and heating and we've taken full advantage to grow our customer base and extend the range of products services that we're offering our customers. And we've made particularly good progress with our online business within the Plumbing and Heating trade business both for our specialist and online businesses of underfloor heating and boiler spares, our shower spares, and growth in our City Plumbing website by expanding our product range and offering to our customer Another great success for us in this period, as Alan indicated with the numbers has been our contracts, merchanting, And where I think Frank has demonstrated continuous improvement in all three by focusing on the customer being highly disciplined in terms of winning work at the right price and delivering on our promise. The key line business is continually going through a process of dropping its legacy branches, which was essentially a mixed merchant and moving to a much more fit for purpose low cost branch network and we'll see that continue over the coming period. BSS, as Alan indicated, is in a good growth period but it's also focused on preparing for our new ERP system as they are going to be the 1st business to introduce that in early twenty 19. And CCF continues in a very disciplined way to grow its business at acceptable margins despite what our competition will say about our business. Another success story has really been our Toolstation business. As Alan indicated, again, growth sales up 17% consistently double digit like for like sales, good progress on the expansion of the branch network we've opened in 22 in the first half. We're building the infrastructure around the business And with the 3rd branch distribution center that we've opened in Manchester area, we've now got the capability of fulfilling 500 branches of this period. We had 3 17. So a lot of headwinds to grow. And Tony and the team are really focused on growing the sales density of our units by pushing hard On front of counter ranges, we've got a larger catalog, much more trade focus, much more online and extended range and dropship. We've moved our extended delivery now to 6 days and we'll be moving it to 7 days and our click and collect down from 10 minutes we're targeting 5 minutes in the coming period. A lot of good things to say about Toolstation UK Equally, but the small has been the development of our Toolstation Europe business. We're developing Netherlands at a rapid pace like for like growth is strong and accelerating. We have 5 new branches in the period and open in a new distribution center that's capable of supporting 100 branches in the coming period. And we're seeing good growth in our online sales in Holland, France, where we have branches and we're selling with a Belgium catalog and a German catalog only online into those markets. All the early stages, we have 6 branches now operate in the Lyon area of France with a small warehouse port in there and early signs of our the impact of their French business is very encouraging. Many of you would have been with us in December 2013 when we announced our 5 year business plan And actually, it's quite interesting 5 years on the world does feel very, very different. Our plan was very much based on growth. But in June 2016, we came a significant change. And I think we are looking and have been thinking very much about how appropriate our business should be going forward. We expect these market conditions to continue for the foreseeable future. So we think it's appropriate time to step back and take a comprehensive review of our business. As always, we're going to be focusing on improved performance and enhancing shareholder value and we aim to bring you the conclusions of that review at a Capital Markets Day in early December. So finally, it's really key for me that despite the difficult and tough trading conditions, that trade businesses, as both demonstrated in our numbers and activities, are performing extremely well. We know we've got some challenges within DIY and our Wix business, but we are responding the best way we can. We have a plethora of robust and active underway self help and cost reduction instigations, that's going to help the remainder of 2018 and set us up in a good way for 2019. And our sector still got long term good growth drivers that are favorable. The investments that we've been making in our business hold us in good stead as we move forward over the medium term. So on that, we will open it up for Q And A. We do have Tony for the difficult questions that in the front we might start. So, Gregor, Hi. Thank you. Gregor Kupich from UBS. This is working. Is it Firstly, for the second half, can you give us a bit of, I think you said in the first half, you took out the million of costs kind of summarize what the cost out year over year is, at this point for the second half? And then anything on a comparison basis? Because I think you mentioned a few things. There's obviously gross margin comp in general merchanting. Obviously, Wix particularly kitchen bathroom was very challenging in the second half of last year. So if you can kind of give a sense how that is integrated to shape up kind of achieving that growth for the second half. And the second question is on Consumer. I think you mentioned a few things, obviously, B and Q exiting Kitchen And Bathroom Homebase, obviously, is also undergoing some change. So I want to understand how you have analyzed the potential benefit of those changes in the market conditions, perhaps later on, perhaps it's a 2019 story rather than this year. Alan, do you want to take the cost haven't written myself up? Yes. So, Gregor, if you refer to the chart that John had on the cost actions. You'll have seen, 1st of all, in which 1,000,000 in the first half, that is a net number. So the gross savings was higher than that net of the inflationary impacts. Pretty much all of that, you get an H2 impact. And on top of that, there's benefit from the head office restructuring that John referred to. So it was around 120 or so roles in the Wix head office that came out. From a general merchanting point of view, there weren't many savings in the first half. There was a little as you'd expect of operational efficiency from the way in which we ran the branches, particularly during the poor weather. And also on the transport side, We have various initiatives, which include, we have closed some smaller underperforming branches during the first half. We have taken some of the cost of what we call the above branch. So that's anything upwards in terms of overhead that operates above the individual branches. So we've made some savings there. We've put a GBP 10,000,000 number on that for in the half, in the second half. And so you'll get an H1 2019 impact of that GBP 10,000,000 coming through as well. From a plumbing and heating point of view, the GBP 6,000,000 we referred to in H1 of branch closures there will still be some benefit of that during the 1st 3 months or so of the second half. But remember that we started to close branches And the majority of the branches that we closed in PNH was sort of late August, early September 2017. So you start to lose some of the annualization of that. But I would point out that the overall cost base, Tony got very good tight management within there. We're then looking at some areas across the central cost. So we provide centrally services to a number of the businesses areas like IT back office support. Again, we've got various initiatives which are in train in those areas as well to help underpin the the number. Okay. It's always quite difficult with the initiatives that of our friends down in Italy and Milton King to predict. And there is a bit of jam tomorrow about it. So we are focused on our performance today. But B and Q, sort of indicated about 360,000,000 of delivered installed kitchens of which they expect to retain around 160,000,000 dollars, $170,000,000 of those. So there's broadly $200,000,000 potentially. Now how that's sort of sort of entered the market and distributed we'll have to see. But clearly, it feels quite positive over the medium term. And with Homebase And Hillco, acquiring the business for a pound, They've got their challenges on their hand. They've got very high inventory levels in the stores. So our expectations and what we think we're experiencing is some short term turbulence, has stopped are sold through. But again, I think prediction is that they will reduce their store network as they move forward. And again, we would say over the medium term, that would also benefit our Wix business So I think, Gregory, it's a case that we know we're facing into some challenges today, but we've I think there are some good reasons to believe over the medium term we've got to make them happen. Yes, Phil Rosenberg from Bernstein. Just a couple of couple of questions, please. I think I've understood that your guidance for the full year assumes current market conditions prevail. I'd just like to get your thoughts on that given the sort of the recent deterioration in Wix in particular, but perhaps by division, about how confident you are and the sort of the visibility you have over that period. The second question, I guess, is a little bit in the same vein. Think it's quite important. Could you perhaps comment a little bit about the volume price split? By division, if possible, just to understand, how you got to some of the growth numbers in each division? Okay, Phil. If I take that question first, yes, if you look at page 7 of the statements, We set out the table showing the total revenue split by divisional for the total group split between volume price of mix giving you a like for like revenue growth. We then show you the impact of any network expansion or acquisition disposals. And then there's also a line in there for trading days, trading days H1 and H1, but the same. So no impact from that. If you look there at the volume split and I referred to this earlier, the volume in the group overall 0.8% 3.4% from price and mix. And then you can see as you read across the table, plumbing and heating volumes up seen.5% in the period. And you can see at the other end, the Consumer division volume down 6.1%. So the best place for that answer is to look at the table on Page 7 in detail. On the comment on the guidance, assuming current market conditions prevail, I think, with the wording you referred to, I think we were clear that for the trade businesses, so by trade, 3 divisions, plumbing and heating contracts, general merchanting plus the salt station business. We're seeing a bit more of a consistent performance across that following the the first half. So the first half, January February in areas other than the contracts business actually performed okay. And the impacts in the contracts division for January February was very much around the slow start to the year in construction and the fallout initial fallout from Caribbean, March, April impacted across the business by the weather. As John referred to and then a strong rebound in May June. What we're saying is now those issues have worked away somewhat through the system. We're seeing more consistent performance from week to week across the trade businesses and see no reason why that would change. On the other hand, in the DIY market, I think we are more bearish and that's reflected in the guidance that we've given today. I think we're working on the basis that we got to the half year in a different way, but we got back to where we thought we would be on the trade businesses. I think consumer is still a challenge. Finally, Thanks. And Aynsley Lammer from Canaccord. Two questions, please. I know it's early days, but just wonder if at this stage you could rule anything kind of or have you ruled anything out in terms of the business review? So thinking specifically, would you start looking overseas market? And secondly, Is any division kind of definitely not for sale in that trade versus consumer focus? Could you go down the kind of trade only route And then secondly, just on the gross margin, obviously, you protected the strategy for the General Manager business in the first half. Is that strategy continuing in the second half or were you maybe for a bit more volume over gross margin? So, I think on the review, thankfully, everything is in and everything will be taken into consideration, you wouldn't expect at this point for us to comment in detail. So it is a comprehensive review. So we would include everything in that. I think with the GM, and I think it's important when volumes are difficult for us to protect our margin and, disappointed with our performance in the second half of last year, but we've recovered that situation really well and I think the team have done a really good job. I think until we see some form of opening up of increase in volumes. I think we will hold that stance. And but clearly, be alert to the impact on volume as well. Go on, Emily. I've got you Howard on that. All right. Good morning guys. Emily Vidal from JPMorgan. I've got two questions to And the first one is just on the operating cost margin in general merchanting. Obviously, the comps quite complicated the second half in the gross margin comps easy. And you're talking about cost savings in there. But can we talk about the sort of continued cost inflation that's coming in as well? So is the cost or is this sort of gross margin comp and the fact that you're making savings, is it enough to think that you can get operating margins flat year on year for the full year or sort of how should we think about the 2 offsetting 1 another sort of the bridge at the moment? And then secondly, just on just as you look into, sorry, into 2019. So consensus at the moment does have growth in for 2019. And I realize you're talking about our Capital Markets Day in December, but as you look at it at the moment and with further cost savings company, Are you comfortable that you can actually generate growth into 2019 at the moment? Thanks. On the operating margins, Emily, I haven't actually done the number in the sense that we would aim to maintain our gross margin We're working hard on our cost base. We obviously took a lot of operating costs on when we extended the 180 2 branches, the last 182 branches to the range centers and that's obviously flows through. We'll start to annualize that now. Our aim obviously is to try and get in that range of at the moment of somewhere around sort of 9%. And if things go well, then I think that's a possibility. 'nineteen. Yes, so on 'nineteen, did a little earlier tell as we were saying that the volume piece in particular is quite difficult to read. I think I'm confident, let's say there's some confidence in the cost plan that we're building that there will be self help initiatives coming through to help the number in 2019, whatever the market conditions are. But I Firstly, I'm finding that's quite challenging to call at the moment what 2019 will look like from a market perspective. We're going to take our hours. That's right. Thank you. No problem. Thank you very much. Howard Seymour from Numis, and I've got 2, if I may, please. Firstly, on General Merchanting, And just to be clear, John, so obviously that the costs have gone up on the premise of the range centers, etcetera, those aspects. Are you losing the fact that the savings that's happening in the second half are a direct benefit from that or are they direct costs that you're taking out of the business and therefore the range ultimately should add further benefits. I'm just trying to get a feel for I wouldn't be linked to Ram we are looking at driving efficiencies, Howard, across different aspects, the whole supply chain, branch network, and streamlining the costs that set as Alan pointed out above branch. We're also seeing the benefit of streamlining some of our central functions and obviously that charge goes down to the businesses. Okay. Thank you, John. And then secondly, reinvigorated K and B promotional program. I wonder if you could put some some more bones on that because clearly it is a competitive market you're alluding to gross margin. I'm not in the competition what we're going to do now. No, we need to find ways to drive volumes. We can see across some of our competition that some better than we would have expected and we need to find ways to drive the volume as well at an acceptable return. Yes, thank you. Just one last one as well, because obviously with the C and D coming in into the year, things like the store expansion, buying approval properties, etcetera. And it stands at the moment as all that stopped on the premise that you are going to no, no. I think what we're what we're actually doing been cautious. We said we want to be disciplined on that capital. Alan has given a guidance of $140,000,000 to $160,000,000. It is business as usual, but we are taking a review more for the future, not for today. Okay, fine. Thank you very much. Howard, just on the on the property side, if I can. I think sometimes because because it doesn't come through in the accounting. You don't get a rich enough appreciation for the growth that Martin mentioned, the property team are bringing in value to the business. So we look at a, an existing use and alternative use value on the property that we own within the freehold estate and we look at the net book value. We can see year after year that the the embedded value within that property portfolio is growing versus the net book value. So I think the team has done a great job with what they've done. And you're seeing some of that flow through the property profits line. So, I'm not saying property profits are going to be there in perpetuity, but what the team do is buy, plots of land. They buy industrial sites. We redeveloped those into trade parks, for example, new branches, And then we some of those will elect to keep. Some of them will sell on from the portfolio to fund the next development. It's very much a self sustaining approach that we take into property. As John said, we're not ruling anything in or out from the capital markets Day and a review we're doing, but why wouldn't you continue to grow that value if you can see ways to do that through the property portfolio? The synthetic within the business. Yes. Good morning, Michael Mitchell from Davy. Firstly, two questions on the code. Firstly, on the outlook for the trade businesses, you talked about greater consistency in terms of trend. I wonder could we dig a little bit deeper on a division by division based across 3 major divisions there? And if you could capture whether it's assumed fair to assume that the what we've seen Q3 to date is consistent with the kind of a strong end to the first half of the year. And then secondly, everyone from Alan. Alan wondered, could you give us some more color at this point in terms of what IFRS 16 might mean for the balance sheet and capacity to invest, etcetera? Thank you. Yes. I'm actually, John, may I answer the on the outlook. I'm not going to comment on Q3 to date, if you would imagine, you can take from the fact that what we've said is we see nothing, adverse particularly if we if I thought I'd sort of fair amount about the consistency that we've been seeing. On individual, divisional outlook, again, won't go specific on the revenue or volume outlook, but let me help you a bit on the on our thoughts around that. So Plumbing and Heating, first of all, I think we demonstrated an outstanding performance in Q4 2017 flying through into H1 2018. I think the that growth level will attenuate, we are starting to cycle from Q4, some of the savings from last year. But there are other savings that are in there. Secondly, the contract vision, I think you've seen increasingly consistent performance despite, difficult end markets for the business. So some of the exposure to commercial, for example, and the we spoke about the Caribbean impacts as well. Notwithstanding that for really consistent performance, I see no reason why that would change. And from a general merchanting point of view, we've talked about that self help that will come through in the overheads. And we've also talked about the stance taking on the gross margin. And then from a Toolstation point of view, while we're talking about trade businesses, we are looking to accelerate the opening of the network. We're seeing a real opportunity there. And growing the sales entity in individual branches. On IFRS 16, going to keep this really short. We're not expecting to see a massive change from a balance sheet point of view. I think we're assisted by the fact that we look at the lease adjusted debt metrics. So from a lease, total lease debt in the balance sheet, I think it's at this stage, we think it will be within 1,000,000 of the figure that we show from an asset value from a P and L impact, you'll see changes in the depreciation and interest line So an increase in the interest line. You'll see a reduction in the operating cost ex depreciation as a consequence it's not going to be material to the overall results. And then the other thing I'd say is, first of all, if you look in the notes to the results statement, there's a bit more of a description about the methodology that we'll be adopting the modified methodology under IFRS 16. So that's described in the statement. Final thought is if anyone wants to talk about that in more detail, very happy to do so. I'm afraid we'll both for England if we do. Possession is 910. So it's me. I think I've got 3 questions all focused on apologies, Kitchener bathrooms and wigs. I'm just slightly intrigued to know your thoughts on the background to why I think you implied it had got worse post Easter, but when it really turned down, and I understand Obviously, you reverted to type after the trialing a different system back end of last year, Q3. And you would have thought well, sorry, I would have thought that coming into sort of second, third quarter this year, actually in a position at Homebase And B And Q would not have been as disruptive as it might have been earlier in the year. Havens put their prices up in April. So presumably that hasn't done you any harm. I'm just sort of slightly intrigued as to what you think would have driven that decline further as you've sort of exited the half year. And around that, has that been the same experience for say benchmarks to give us some flavor of how specific it is to kitchens And just lastly, on the goodwill impairment, is that in a way an acknowledgement that where we are today in the sort of financial metrics. So that is the sort of new norm the new norm that we might have to accept going forward? Or do you still genuinely believe that there are things you can do to get you back to say the types of returns that were being seen 2 years ago? Or do you simply think that Mark that just a completely different ballgame now. So as usual, Kevin, very thoughtful and challenging questions. I think I would sort of point out 4 year run on kitchens in Wix when we started, it was half size it is today. So if we still would line up 4 years, we've done well. It's just currently we're finding things more challenging. I talked to a number of different people like I'm sure you do and we saw obviously the market leaders numbers last week. They were very aggressive. I'm not going to go into detail, but that affected their benchmark business. As well. And I think we're reestablishing ourselves in the kitchen market having really done very well for three and a half years. Equally, I think you have to sort of look at why Kingfisher or B and Q have decided to come out of installed kitchens And we have seen a progressive sort of contraction with MFI disappearing. There's been a real shift of players in the kitchen market. I think we offer a great product at a really good price. And I remain confident that we can find our way back to growth. It is still very profitable for us, but clearly what you're seeing is that it is sensitive to volume. So we are around finding, reinvigorating that promotional activity, try and get back on to our front foot. I think at medium term, it looks more positive than shorter term. The goodwill, it is a technical, I'll let Alan describe it, but it is a technical accounting obligation and very difficult where to avoid it. Yes. So on the goodwill, 1st of all, I'd repeat the note 12 that the results statement where we discuss the approach on impairments and how that's worked. And there's also a sensitivity table there. Kevin, the way that, this works, we have 1,000,000,000 of carrying value of assets for the Wix cash generating unit as it referred to. So that was Broadly 1000000, 1000000 of intangibles, 700 of goodwill, 150 or so of acquisition related intangibles. And then the balance, the remaining 150 or so with, tangible operating assets. So fixed assets, working capital in the business. We have to perform a a review of the cash flows based on what we know today. The accounting standard doesn't let you build in self help or improving initiatives that you haven't, yet committed to. So it's quite an onerous test So we have performed that review. And having done so, we have chosen, based on the outlook to write off approximately 25 percent of the carrying value of the assets within the division. So the carrying value now is 1,000,000 in the balance sheet. That will be supported, at this stage by the analysis that we've done at the business for the long term. Think you referred to as support. Could you just explain that a little bit more? I mean, it's obviously If you're still I don't imagine you're expecting the business to run at 2 thirds, the level it has been the last couple of years. Just what exactly has, have you outsourced some of that or have you genuinely cut a third of the people? So, yes, interesting businesses when they're in a period of growth tend to sort of employ people to fuel that growth. And sometimes you get to a situation where if you step all the way back and say, can we do this differently more efficiently So I would sort of frame the Wix move of actually sort of right sizing, but so. Thank you. Okay. I was just going to ask that question as well actually. But just in a similar vein, heating. Obviously, you've closed quite a lot of branches. I just wonder what's the sort of retention rates of the sales from those? I knew we'd get down in one way or another. We've seen them pretty good attention. Sort of the 60% of the brands that we've closed because we're a relationship with their business and actually making sure that we engage with customers and providing the service the need is really important. So we've retained a fair chunk of business. So we've been really pleased with that. John Messenger Redburn. 3, if I could. First one was just coming back on Greg's earlier question around cost saves and what's coming. Obviously, from the Slide 9 in the pack, you had 35 gross costs, 20 savings. You've highlighted Plumbing, you get the annualization. So there's only about 3,000,000 kind of left to come in the 3rd quarter. So you're down to I just want to understand these 2017, obviously then kind of second half savings. Other actions you put in place, we should be assuming cost saves are kind of north of 20 in the second half. Is that the right thinking to be applying here in terms of what's coming through? And is there anything around the cost inflation factors that are going to be greater than creating a 1,000,000 hit in the second is it a broadly 1,000,000 of costs gross and then we can all go and make assumptions around what you might repound on the cost side? 2nd question, is just on the share purchases. I understand, is there a logic around either tax savings or whatever that makes it logical to do it via trust in Jersey? Rather than simply buying them in to re release later because obviously you would at least have unlocked a bit of an EPS benefit if you did the treasury option. And then final question was just on the ERP. Can you just give us an idea of the overall timeframe? You mentioned BSS Q1 next year. Are you trialing it in Rodriguez yet? Is that still going to happen? And what is the timeframe for ERP to be completely rolled out across the business units and is it going into everything except Wix or is Wix included in there? Alan, do you want to pick up on cost saving number and the share? Yes. So on the cost savings, John, I think to a shorthand way would be to say on the inflation on rent rates, wages, depreciation multiplied by 2. For the year. On the saving side, so the gross saving in Wix in the first half was obviously more than that $9,000,000 make an assumption about your inflation and you can get to a number on that. You will see at least that again in the second half. On Plumbing and Heating, you will still get something similar to the first half when what I was saying was some of the branch closures come out of that number, but there are other savings that we put in place. In the first half, you didn't really have much saving within the operating cost base on general merchanting of 1,000,000 there. Yes. And then we also pointed to some savings in the, in the general central costs that we manage. So I would anticipate that we'll be showing that chart for the full year. It will be at least, at that level of saving time too. Great. That's a result. On the share purchase logic, it's not driven by any tax considerations or Jersey based trust things. It's quite simple. The over the years, if you issue new shares, you dilute existing shareholders. And taking into account who our existing long term shareholders are. They don't particularly like from my conversations with them to see ongoing dilution. So by moving to on market purchase to fulfill share schemes. The number of shares and issues stay stable. You're right. You get some over time some EPS benefit from doing that, but it's not driven by accounting or tax. It's driven by what's the right thing for the shareholder base in the long term. And then on the ERP, John, as I said, all plans at the moment are moved to move BSS onto the platform in March next year. There's a lot of work to be done between now and then as you would expect, and we want to do a right launch, given it's our first launch. We discounted the Radaridge launch on the basis that we would have to rewrite all the integrations for every part and there was a lot more cost and complication created with that. So we were effectively moving straight to CSS as released 1. Released to is being worked on in parallel, which we're aiming at the moment for October 2019. Which will be a proportion of general merchanting. And the plan at the moment because obviously, we can keep relatively fluid is that we will put other trade businesses on the system CCF key line and benchmark during 2020. And at the moment, probably by the end of Q1, 2021, we will have the trade businesses on. We clearly have the options for plumbing and heating on, but it's not part of the program as it sits at the moment. And we have Wix and Toolstation with stand alone systems, So the Toolstation, very effective stand alone IT platform. And Wix essentially with all its points of sale and customer facing is independent. It's just reliant on the group for general ledgers and AP and that will also need to be addressed as we come off the legacy system. Related to the IT and the operating costs related to it, are we kind of in a steady run rate or is there a further step up because of what's going on in terms of how that's before it washes out. I wish someone would have said it's always going to take longer and cost you more. Before I put my hand up for it. So at the moment, we are in a period where we're now starting to see double costs where we're maintaining our existing legacy systems, but ramping up our costs to make way for the new M3 platform, we are now this year and next year, I think, in our peak. Is that fair, Anna? Yes. So within the breakout of the CapEx we gave John, particularly in the statement where there's a bit more detail. The IT costs look broadly similar year on year for the half, but that would reflect more spend on the ERP and less on other IT in the as we get the team to really focus on driving the RP program over the line. Our aim is to decommission the legacy system as soon as we can. Because then that's the way to get the cost out. Thanks. Robert, I'll come back and then Hi, it's Paul Checketts from Barclays. I've got a couple around the strategy review and then just a couple of questions regarding the second half. On the strategy review, can you just talk a bit about how you're actually set about this? Who will be involved in it internally in terms of making these decisions and whether you use external consultants as well. And then I'm sure you don't want to front run too much, but conceptually the range centers were conceived at a time when it was thought that volumes would be expanding and now we're in a much flatter environment. So they conceptually work in a flatter environment And then the bits on the second half, what do you think the below the line items are likely to be in the second half restructuring cost cost related to the review. And lastly, on the working capital side, Alan, can you just give us a feel for your confidence in that that working capital will come back in the second half and what the risk factors might be? Thanks. Okay. In the review, the board has asked myself and the exec to do the work. I want to say there'll be zero consultancy input, but there'll be little at the moment. And we'll go, but it'll be quite a specialist. We're not going to be signing a big check to McKinsey. Of Boston Consulting Group for a whole piece of work, but we'd be quite frugal. The range sensors will be part of that review as well in terms of the future. So I think as I said earlier, it's it's everything is in to that review and nothing's been ruled out. Okay. Just if I can answer those other questions. Just on the before I do on the range center, It's important to know that they do make a return on the capital that we've invested in them, even with the subdued volumes at the moment. So that the basis of that calculation being the, the operating costs that you've got within, including the transport to get products around versus the incremental sales that we've seen that we think we would otherwise wouldn't have captured and a contribution from suppliers to the operating costs given that they're doing fewer deliveries side to side, they're going to the range centers instead. So they are, exceeding our cost of capital in terms of the return we say. I won't deny that that would be a much more attractive IRR where we're seeing stronger volume growth through the business. On the on your third point, Paul, on the below the line costs in the second half. I think there will be some at this stage. I don't have a firm number on that so we know what the actions are. I'm not anticipating that you will see a big number, as John was saying, for anything like consulting related to the strategic review elements we're doing that mainly in house. And then on the working capital with the increase, if you analyze the different elements, stock was barely changed from the prior year. Creditors broadly went up in line with the increase of cost of goods sold. So I see no reason why those would change. And then on the debtors, I'd make 2 points. 1, we always have a first half increase in working capital, which tends to be a trade debt allowed element because of seasonality in the business. What I was trying to say during the presentation was that that seasonality has been exacerbated. This year by the fact that you had lower sales or sales going backwards during March April? And then you had a very strong recovery in May June. And when you work out the debtor days from the balance sheet, you'll see it's 50 odd days. And therefore, if those sales are weighted in May June, quite simply, you haven't booked the proceeds from those sales. So those proceeds come in during July August and with confidence on that. Robert, go on. Good morning, everyone. Robert Eason from Goodbody. I'm not too sure how many questions. I'll keep going. Just in terms of the contracts and the Plumbing and Heating business you alluded to in the presentation in terms of in contracts, you did a lot more direct delivery in something in heating. Obviously, the wholesale business grew very strongly. Can you just give us, indications of what the mix effects that was from a gross margin perspective? And your expectation for those mix effects going into the second half, just to better understand what is kind of been business driven versus kind of underlying pressure? In gross margins? 2nd question is just more focused on the trade environment. Just given that gross margins are so, to the fore, for the publicly quoted companies, because you have to report Can you just give us a sense of what independents are doing? Because again, what you see happening is the independents are just consolidating and in the background between bolt ons all the time, but what's their behavior like in the softer market? Has it changed? Are you seeing any change in terms of their strategy from kind of bog standard commodity to more specialized products? Just kind of discussion around that. Just a point of clarification, Alan, just on the guidance, just to clarify that 360 3.90 that you quoted. That implies that included the property profits in this by you have to strip out the 'twenty or the 'twenty five that is now is the point of clarification. On that, on my 4th question, just given that I had to look at the battery's head for the last hour, I have to have a plumbing and heating question direct And so repeating my question kind of last year as well in terms of plumbing and heating, great results to kind of put a lid on our expectations, getting carried away. What are your expectations on the margin profile of that? Given that you really have got stuck into it and can it be mid single digit margin without putting a timeframe on it or predicting what you're going to say at the beginning of December. Do the plumbing and everything. Yes. So the mix effect is about, just under half that gross margin impact. From wholesale within the plumber heater results. I think it's on page 35. You see the, sorry, it's not page 6 at but then it's about half of the advertising dilution. Sort of broadly a good shape. I think there's a little bit more in that promotion intensity in the first half. In the branch business press, but not you. We're really pleased with the down bank inflation cost by convention password we're getting. That's all going pretty well. In terms of longer term outlook, they do want to manage your expectations, Robert. But I think if you now look on the business, we were confident about 6 6 hours like in half of last year. And it's better to give a 2 year like for like reading the business in the second half. That's a better indication of where we're heading. The 2 year life will actually be pretty consistent through the first half. And we'd be hopeful of continuing something like that in the second half, but then the balance that we did go over of a couple of comments in the second half. In terms of the operating margin step up 70 bps, in the first half, and of course, we'll transition together So on the question, Robert, on Contracts's gross margins, The I think the key thing about the direct to site sales is it enables you to operate low cost branches because you have less inventory going through those yards. So you can operate with a few fewer sites overall or tighter yards than you otherwise have. So whilst it has a some impact in that gross margin, it's not all the 30 basis points, and I'll come back to that. It does deliver you, operating cost leverage and efficiency elsewhere in the P and L. And quite clearly, if it's slightly lower margin gross margin sales, they are high return on capital sales. Because you need less capital to support that. And so that's the key feature of the element. I also spoke about the 6 percent input cost inflation, being the peak across the divisions within the contract division So mathematically you've got some impact from the high level of input cost inflation that you're trying to recover. On the guidance point, you could almost say that property is the 5th division. You're quite correct though within that 360 to 390 range that the market currently all we're seeing, embedded within that approximately 20 $21,000,000 of property profits depending on the analyst because that was the guidance we gave earlier in the year. And as we very clearly laid out, we're now giving guidance for that segment of 1,000,000 rather than the million to million that may have been in the market previously. And then on the independents, Robert, I've always said when talking to the general merchants, our best competition part of the nationals that we all talk about. They are our independence in every catchment up and down the country. And I think they are the benchmark that we work towards. And, they do split into sort of primarily 2 groups for me. Those that have been really successful and those that just get by. And, and clearly, And talking with individual analysts, you're doing more and more research on pooling the different businesses across the and obviously the higher profile given the amount of activity of M And A, half is obviously being bull, huge phrase being bull, the activity at MKM. And these are all very good companies. And we watch very, very closely Hughes Gray in particular have been very good at bolt on acquisitions. We chose to go more brownfield and put use that property to put branches into locations that we believe are more precise based on sort of catchment analysis and an infill to our overall network. However, remember, so we're taking Toni around the branches when we first joined, and we're still on a map of London in our branch in Hampstead and sort of the dots of our branches and you realize as big as we are in London, there's a huge amount of opportunity for us to infill. But not always, can you acquire a business where you want to? So for the brownfield and we're seeing we're seeing our business move forward on that basis. But I've always been the highest sort of respect for the independence. They are very good in each catchment. Actually taken up at that sort of point. During the presentation, you've spoken about Travis Perkins more in absolute across the period rather than on relative terms. Would you perhaps be able to give more of an indication how different categories have performed in the first in the first quarter, second quarter. So perhaps we could sort of understand how that business is evolving in the new in the new environment. Yes. So obviously it flagged the real successes of managed services until higher in the period. Our heavy side, given the support we have for our rain center has performed well, albeit in the 6 months we were badly affected with the weather. But the underlying is heavy soil added is growing faster. That many of the categories, we're struggling on the shop on the light side area. And I think that's a bit of more of a reflection on how successful Toolstation and Screwfix are. So, and the one that's really quite static and we need to find ways forward with being around the timber and the sheet materials. But we are a generalist merchant and what we're trying to do is create a range that a job in builder can feel confident coming in and finding what they want to complete that extension or that refurb of a property in a local area. Just one question from me. Could you talk a bit about your e commerce penetration across all your divisions and what are you seeing in the market and where do you think you really need to build up your business here? So our most successful business, as we've said before, is Toolstation. Broadly, 20% of the business is online. Wix has been, I think, pretty successful given as you compare it in its sector It's just over 10% of this business, but we've tracked, pretty much the whole sort of sales and we can actually get to a point where 50% of all Wix sales either started online or was researched and all was completed online or the first Kitchen appointment was actually generated online. So it's a big influence on the consumer face business out of Wix. It's very convenient for the small tradesmen in Toolstation. We, we then really the leading trade business would be our Plumbing and Heating business that's got a combination of specialists, and dedicated online business, whether it's Promination, Underfloor Heating, and Tony and the team are building good capability around that and see that was a sort of a good source of income as we move forward. We continue to work on the digital program for general merchants in And but that will be enhanced dramatically when we get the ERP system in that allows us to actually be able to serve our customers much better than our current legacy systems. So I think it's going to become more and more important trade. I think the larger the customer you're coming up with with different solutions, they're not going to just be placing sort of online. They want more bespoke and linked to our system. So it's an area that I think as businesses, it will be to our advantage with our scale to be able to invest and deliver to the customer on what they have, how they want to interact and be served by us. I have a follow-up here. Are there any parts of your business where you could be concerned with online retailers such as Amazon picking up business? So, we don't have too many things worry us in line, but Amazon clearly is a beast. And if it turns its attention on anyone, it's pretty difficult to resist. I still think they're going to struggle with with packs of glass to board or packs of bricks and big loads of timber. So the more of the bulky the product, I think the fact is having a network of 2000 branches around the UK, we can complete that last mile more effectively than them. Sure enough online, they have to be respected. Any other questions from the floor? Well, that was a matter. Should we go to the line? Of course, gentlemen. And at this moment in time, we have no questions from the telephone. Okay. Any final question? Thank you very, very much for your patience. Good to see you all.