Are we comfortable? Okay. Really good morning to everyone, especially to those on the lines. Welcome to Travis Perkins interim results 2018. I'm going to give a very brief introduction and hand over to Alan to run through the financial review. I will come back and look at the operational update thereafter. We'll open up for questions 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 conditions, have traded really well during this period. 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 Wickes trading. As you would expect, we haven't sat on our hands. We've instigated a lot of self-help in the form of cost reduction, our aim really is to mitigate the volatility of those trading conditions in this period. Really overriding, trade has traded really well. We've got our challenges in Wickes, but we are taking action accordingly. I'll pass you over to Alan.
Thank you, John, and good morning, everyone. 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 this overall sales growth of 4.4% with like-for-like growth of 4.2% is a creditable performance. Adjusted operating profit of GBP 179 million, was GBP 11 million or 5.8% lower. Excluding a 10 million higher contribution from property profits, EBITA was 11.5% lower. As I'll come on to cover in more detail, this was largely driven by the poor outturn in Wickes 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 GBP 286 million. Alongside the anticipated transformation costs in plumbing and heating and restructuring costs in Wickes to significantly reduce operating costs, we've recognized an impairment to the carrying value of goodwill related to the Wickes business of GBP 246 million in the light of current DIY market conditions. Adjusted earnings per share were 4.1% lower at GBP 0.535 in the period. The group's dividend payout is underpinned by the ongoing strength of cash generation, the board has declared an interim dividend of GBP 0.155, unchanged from H1 2017. As highlighted, like-for-like sales growth in the period was 4.2%, with total sales growth of 4.4%.
As you can see from the graph on the left of slide seven, 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 & Heating businesses, with some offsets elsewhere, principally in Wickes. Net new branches opened in the half totaled 17, being driven by Toolstation UK and Europe, whilst the Plumbing & Heating contracts and General Merchanting divisions all saw a modest net reduction in branches. As usual, we've included the branch totals and reconciliation in the appendix of the presentation. Moving to slide eight. 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 & Heating division. This was further exacerbated by a decline in gross margin in Wickes, 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. Gross margin in General Merchanting was unchanged in the period versus H1 17. 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 proposition that I referred to earlier and by inflationary impacts. Moving to slide nine, I've laid out a bridge of adjusted operating profit from H1 17 to H1 18. You can see that property profits increased by a net GBP 10 million. That's principally a phasing impact, and that the impact of the adverse mix in gross margin was a GBP 6 million decline in gross profit. You can also see the net overheads increased by GBP 15 million, a lower level than we have seen in recent years. We continued to invest in the network through new branches, principally Toolstation, and improving the customer proposition with the extension of the Heavyside Range center network reach in General Merchanting and further Wickes refits.
There was a good delivery of cost reduction benefits in the period, with GBP 20 million of benefits realized, more than offsetting GBP 14 million of inflationary elements. These benefits were concentrated in Wickes, with a net operating cost reduction of GBP 9 million versus H1 17, and also were concentrated in the Plumbing & Heating division as part of the transformation program. In addition to an H2 annualization benefit from the actions taken, further cost initiatives have been planned. 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 and June, following the inclement weather during March and April, resulting in overall like-for-like sales growth of 0.6%.
As mentioned earlier, gross margins were stable on H1 2017, a considerable improvement in run rates from the second half of 2017, 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. As I mentioned at the 2017 results presentation, the subdued RMI outlook means it is difficult to absorb some of these additional costs in the short term. We have 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 2018, underpinning the performance, and John will talk about this in a while in more detail. Plumbing & 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 %. 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 and April.
All three businesses delivered good growth, 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 will break the sales between Toolstation first and then Wickes. 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 have established a third distribution center. This will increase our capacity in distribution to be able to support 500-plus stores in the future. The performance of Wickes was disappointing, with a like-for-like sales decline of 7.7%.
While the trade businesses recovered well from the poor weather, Wickes 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 Wickes, with good delivery, as I referred to earlier in H1, and with additional benefits to come in H2. Again, John will talk to you in a little while about this in more detail. As mentioned earlier, we recognized an impairment to the carrying value of the goodwill of GBP 246 million, given the current DIY market outlook. Moving on to working capital and cash.
On slide 14, first of all, cash conversion in H1 2018 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 and June. Given average payment terms, these accounts will be collected during July and August, and therefore, we expect this impact to reverse in H2 and hence the cash conversion percentage to improve. If you look at the box on use of the free cash flow, I'd like to draw your attention to one aspect in particular. You'll note GBP 44 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 GBP 44 million was a catch-up as we purchased shares to fulfill all outstanding schemes. Therefore, future spends will be significantly lower. Total lease adjusted debt increased by GBP 134 million in the period, driven mainly by the change in net debt. This in turn led to an increase in lease adjusted gearing, where our lease adjusted debt to EBITDA was also impacted by the lower earnings. Other things being equal, I would expect these metrics to improve in H2 as the increase in net debt reverses. Capital expenditure, moving to slide 16. You'll see that the base CapEx in the period was broadly similar to H1 2017 at GBP 83 million.
I would note that growth CapEx in 2018 has been very much H1 weighted, with three new Wickes stores, which were planned several years ago, three TP branches opened, and the Wickes refit program for the year already completed. We're therefore maintaining the previous guidance of GBP 140 million-GBP 160 million of base CapEx for the year. In terms of property transactions, the acquisition and construction of new development sites and one or two buy-ins of merchanting leases of GBP 41 million was fully funded by the disposals of GBP 51 million. These disposals achieved better prices than anticipated, hence the strong delivery of property profits in the period. 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. Our expectations for the trade-focused businesses remain unchanged in 2018. We do, however, anticipate that the U.K. 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 Wickes, the group now anticipates that 2018 EBITA will be in the lower half of the range of analyst expectations. To be clear, that range is GBP 360 million-GBP 390 million, and therefore we're guiding to an EBITA for the year of between GBP 360 million and GBP 375 million. With that, I'll now hand back to John for the operational review and look forward to taking your questions later. Thanks.
Thanks, Alan. Okay. In all the years I've been managing the business or been in the senior management, I've not felt a more tricky six months than the first six months of this year. 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 Carillion failure in January. The significant poor weather that we talk around wasn't just the three or four days of snow impacted at the end of February, early March. Sites were extremely sodden during March and April, and with our heavy bias towards heavy materials, that presented us some different challenges. We've got to accept there were encouraging sales recovery as the weather opened up during May and June. Overall, as Alan has shown, our trade businesses have performed particularly well.
The challenges that we found in DIY has been extremely challenging, and consumer confidence has really been very difficult to read and subdued. This has impacted in and around the larger ticket items, but not solely on that, because our core also has been quite difficult to read. A number of activities from our competitors that you would be aware of has caused also additional troubles and made reading the market quite difficult. As I said in the introduction, the businesses have responded with a series of self-help and cost reduction activities to help mitigate the difficult conditions we're operating in. Those near-term self-help cost reductions, I just keen to sort of make sure we understand.
We made significant progress with our initiatives in the first half. As Alan pointed out, saving around GBP 20 million, that mainly came from Wickes and plumbing and heating with the transformation program in P&H. Wickes, period over period, was GBP 9 million lower with its overall cost base, having absorbed inflation within the business. They've done a very good job. Notwithstanding that, we have other further activities underway with across the businesses that are going to realize further savings in H2 and position us in 2019 in a better state for trading. General Merchanting, again, as Alan identified, will see the benefits of around GBP 10 million savings come through in H2 with further activity underway. Wickes 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. There is a lot of activity making sure that we are fit for purpose during second half of this year, going into 2019. Taking the Wickes situation, we started the year with K&B pretty well. We saw a dip as we went into Easter. Easter performed well. Then we've seen via really the leads for kitchens tail off during the latter part of the first half. Many of you will be aware the activities of one of our major competitors have withdrawn from delivered installed kitchens, and that presents us over the medium term, some good opportunities. That really won't 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. With the market being highly price competitive, as obviously activities of change of ownership of one of our competitors come through. As the weather opened up in May and June, it clearly would have been of benefit to us, but it actually benefited the outdoor categories, which is one of our weaker categories. 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 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. In particular, we're seeing some good success with our Trade Pro loyalty scheme, which is targeting small builders within the Wickes business. Underpinning that activity on promotional activity has been the cost reduction programs. We've been very successful in reducing our shrinkage, which is the total waste and loss of product within the supply chain of Wickes. It's around GBP 15 million. We've reduced that by 25% in the first half. There's further work going on in those areas to underpin our performance. Stores have been worked hard on productivity. 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. It's worth just stepping back.
This is the largest, most successful mixed merchant in the sector. We've asked it to manage a trading stance of supporting their gross margin. As you saw from Alan's slide earlier, we've returned back to the 2017 margin levels, having dipped in the second half of 2017, which is no mean feat given the inflation that's coming through. Equally, I would point out that our volumes in General Merchanting in the first quarter were -3.9%, 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 customers with good success, focusing on enhancing the proposition through our range centers and national primary distribution hub.
We've reorganized the sales effort to be very much focused on the local and important customers in each catchment. We're seeing really good performance from our managed services of winning new contracts regularly. Also pleasing for us is retaining the existing customer base, and just to remind you, these are often the three, four, and five-year contracts offering product to local authorities and housing associations. 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. Overall, our general merchanting, that 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 and 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 and services that we're offering our customers. We've made particularly good progress with our online business within the plumbing and heating trade business, both through our specialist online businesses of Underfloor Heating, our boiler spares, our shower spares, and growth in our City Plumbing website by expanding our product range and offering to our customers.
Another great success for us in this period is, as Alan indicated with the numbers, has been our contracts merchanting, where I think Frank has demonstrated continuous improvement in all 3 businesses by focusing on the customer, being highly disciplined in terms of winning work at the right price and delivering on our promise. The Keyline 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 first business to introduce that in early 2019.
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, with opening 22 in the first half. We're building the infrastructure around the business and with the third branch distribution center that we've opened in Manchester area. We've now got the capability of fulfilling 500 branches. At this period, we had 317, so a lot of headroom to grow. 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 drop ship.
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 U.K. Equally, but 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 opened 5 new branches in the period and opening a new distribution center that's capable of supporting 100 branches in the coming period. We're seeing good growth in our online sales in Holland and France, where we have branches, and we're selling with a Belgium catalog and a German catalog only online into those markets.
Albeit early stages, we have six branches now operating in the Lyon area of France with a small warehouse supporting that, early signs of the impact of our French business is very encouraging. Many of you would have been with us in December 2013 when we announced our five-year business plan. Actually, it's quite interesting, five years on, the world does feel very different. Our plan was very much based on growth. In June 2016, we came a significant change, 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, 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, we aim to bring you the conclusions of that review at a capital markets day in early December. Finally, it's really key for me that despite the difficult and tough trading conditions, our 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 Wickes business, 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. Our sector has 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. On that, we will open it up for Q&A. We do have Tony for the difficult questions, sat in the front with mics up. Gregor?
Hi. Thank you. Gregor Kuglitsch from UBS. Is this 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 sort of GBP 20 million of cost. Can you kind of summarize what the cost out year-over-year is at this point for the second half? Then anything on a comparison basis, because I think you mentioned a few things. There's obviously a gross margin comp in general merchanting. Obviously, Wickes, particularly kitchen bathroom, was very challenging in the second half of last year. If you can you just give a sense how that is integrated to shape up achieving that growth for the second half?
Okay.
The second question is on consumer. I think you mentioned a few things. Obviously, B&Q exiting kitchen and bathroom. Homebase, obviously, is also undergoing some change. I want to understand how you have analyzed the potential benefit of those changes in the market conditions, perhaps later on, perhaps as a 2019 story rather than this year. Thank you.
Okay. Alan, did you want to take the cost?
Yeah.
I won't trip myself up.
Gregor, if you refer to the chart that John had on the cost actions, you'll have seen, first of all, in Wickes, GBP 9 million in the first half. That is a net number, the gross saving was higher than that, net of the inflationary impacts. Pretty much all of that, you get an H2 impact. On top of that, there's benefit from the head office restructuring that John referred to. It was around 120 or so roles in the Wickes 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'd 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 in what we call the above branch. That's anything upwards in terms of overhead that operates above the individual branches. We've made some savings there. We put a GBP 10 million number on that in the half, in the second half. You'll get an H1 2019 impact of that GBP 10 million coming through as well. From a plumbing and heating point of view, the GBP 6 million we referred to in H1 of branch closures, there will still be some benefit of that during the first three months or so of the second half. Remember that we started to close branches, the majority of the branches that we closed in P&H were late August, early September 2017.
You start to lose some of the annualization of that. I would point out that the overall cost base, Tony's got very good site management within there. We're looking at some areas across the central cost. 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 number.
Okay. It's always quite difficult with the initiatives of our friends down in Eastleigh and Milton Keynes to predict. There is a bit of jam tomorrow about it, so we are focused on our performance today. B&Q have indicated about GBP 360 million of delivered installed kitchens, of which they expect to retain around GBP 160 million, GBP 170 million of those. There's broadly GBP 200 million potentially. How that enters the market and distributed, we'll have to see. Clearly it feels quite positive over the medium term. With Homebase and Hilco acquiring the business for GBP 1, they've got their challenges on their hand. They've got very high inventory levels in the stores. Our expectations and what we think we're experiencing is some short-term turbulence as stocks are sold through. Again, I think prediction is that they will reduce their store network as they move forward.
Again, we would say over the medium term, that would also benefit our Wickes business. I think, Gregor, it's a case of we know we're facing into some challenges today. I think there are some good reasons to believe over the medium term, but we've got to make them happen. Okay.
Phil Rossiter from Bernstein. Just a couple of questions, please. I think if I've understood it, your guidance for the full year assumes current market conditions prevail. I'd just like to get your thoughts on that, given the recent deterioration in Wickes in particular, but perhaps by divisions about how confident you are and the sort of visibility you have over that period. The second question, I guess, is a little bit in the same vein, because I 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've got to some of the growth numbers in each division?
If I take that question first.
Yeah.
If you look at page seven of the statement, we set out a table showing the total revenue split by division and for the total group, split between volume, price, and mix, giving you a like-for-like revenue growth. We show you the impact of any network expansion or acquisition disposals. There's also a line in there for trading days. Trading days H1 and H1 were the same, 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. You can see, as you read across the table, Plumbing and Heating volumes up 16.5% in the period. You can see at the other end, the consumer division volume down 6.1%.
The best place for that answer is to look at the table on page seven in detail. On the comments on the guidance, assuming current market conditions prevail, I think, with the wording you referred to, I think we're clear that for the trade businesses, by trade, three divisions, Plumbing and Heating, Contracts, and General Merchanting, plus the Toolstation business. We're seeing a bit more of a consistent performance across that following the first half. The first half, January and February, in areas other than the Contracts business, actually performed okay. The impact in the Contracts division for January and February was very much around the slow start to the year in construction and the initial fallout from Carillion. March, April impacted across the business by the weather, as John referred to, a strong rebound in May and 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. Aynsley?
Thanks. Aynsley Lammin from Canaccord. Two questions, please. I know it's early days, just wondered if at this stage you could rule anything kind of, or have you ruled anything out in terms of the business review? Thinking specifically, would you start looking at overseas markets? 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? Secondly, just on the growth margin, obviously you protected the strategy for the general merchant business in the first half. Is that strategy continuing in the second half, or are you going maybe for a bit more volume over growth margin? Thanks.
I think on the review, Aynsley, everything is in and everything will be taken into consideration. You wouldn't expect at this point for us to comment in detail. It is a comprehensive review, so we would include everything in that. I think with the GM, I think it's important when volumes are difficult for us to protect our margin. 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. Clearly be alert to the impact on volume as well. Go on, Emily, I've got you on mute. All right.
Morning, guys. Emily Biddulph from Barclays . I've got two questions, please. The first one's just on the operating cost margin in general merchanting. Obviously, they're quite complicated for the second half, the growth margin comp's easy. You're talking about cost savings in there. Can we talk about the sort of continued cost inflation that's coming in as well? Is the sort of growth margin comp and the fact that you're making savings, is it enough to think that you can get operating margins flat year-over-year for the full year? How should we think about the two offsetting one another, sort of the bridge at the moment? Secondly, just as you look into
Sorry, into 2019. Consensus at the moment does have growth in for 2019, and I realize you're talking about a Capital Market Day in December, but as you look at it at the moment, and with further cost savings come through, 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 last 182 branches to the range centers, and that obviously flows through. We'll start to annualize that now. Our aim, obviously, is to try and get in that range, at the moment, of somewhere around 9%. If things go well, then I think that's a possibility. 2019.
Yes. On 2019, I did a little earlier tell, as we were saying that the volume piece in particular is quite difficult to read. Let's say that I'm confident in the cost plans that we're building, that there will be self-help initiatives coming through to help the number in 2019, whatever the market conditions are. Personally, I'm finding that quite challenging to call at the moment, what 2019 will look like from a market perspective.
I'll agree. We're going to take Howard, that's all right. Thank you.
Patient there, Howard.
No problem. Thank you very much. Howard Seymour from Numis. I've got two, please. Firstly, on general merchanting. Just to be clear, John. Obviously, the costs have gone up on the premise of the range centers, et cetera, other aspects. Are you alluding to the fact that the savings that's happening in the second half are a direct benefit from that, or are they direct costs you're taking out of the business, and therefore, the range centers ultimately should add further benefits? I'm just trying to get a feel for-
No.
What we-
I wouldn't link the two.
Right.
We are looking at driving efficiencies, Howard, across different aspects of the whole supply chain, branch network, and streamlining the costs that sit, 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. Secondly, reinvigorated K&B promotional program. I wonder if you could put some more bones on that, because clearly it is a competitive market. You're alluding to gross margin.
I'm not liking-
Keep the costs down
the tone of 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 have done better than we would have expected. We need to find ways to drive the volume as well at an acceptable return.
Okay. Thank you. Can I get just one last one as well, because obviously with the CMD coming in into the year.
Yeah.
Things like the store expansion, buying the freehold properties, et cetera.
Yeah.
As it stands at the moment, has all that stopped on the premise that you are going to-
No. I think what we're actually doing is being cautious. We've said we want to be disciplined on our capital. Alan's given a guidance of GBP 140-GBP 160. 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 property side, if I can. I think sometimes 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. We look at an existing use, an alternative use value on the properties that we own within the freehold estate, and we look at the net book value. We can see year after year that the embedded value within that property portfolio is growing versus the net book value. 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. 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 redevelop those into trade parks, for example, new branches. Some of those we'll elect to keep. Some of them we'll 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 the review we're doing, why wouldn't you continue to grow that value if you can see ways to do that through the property portfolio that's embedded within the business?
Yes. Good morning. Michael Mitchell from Davy. Firstly, two questions, if I could. 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 basis across the three major divisions there? If you could capture whether it's fair to assume that what we've seen Q3 to date is consistent with the kind of a strong end to the first half of the year. Secondly, I have one for Alan. Alan, I wonder, could you give some more color at this point in terms of what IFRS 16 might mean for the balance sheet and capacity to invest, et cetera?
John, may I?
Oh, yeah.
on the outlook? I'm not going to comment on Q3 to date, as you would imagine. You can take from the fact that what we've said is we see nothing adverse, particularly if I thought I'd talked a 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 our thoughts around that. Plumbing & Heating, first of all, I think we demonstrated an outstanding performance in Q4 2017 flowing through into H1 2018. I think that growth level will attenuate. We are starting to cycle come Q4 some of the savings from last year, but there are other savings that are in there. Secondly, the Contract division. I think you've seen increasingly consistent performance despite difficult end markets for the business.
Some of the exposure to commercial, for example, and we spoke about the Carillion impact as well. Notwithstanding that, a really consistent performance. I see no reason why that would change. 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 that we're taking on the gross margin. 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 density in individual branches. On IFRS 16, I'm 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 lease-adjusted debt metrics.
From a total lease debt in the balance sheet, I think at this stage, we think it will be within GBP 100 million of the figure that we show from an asset value. From a P&L impact, you'll see changes in the depreciation and interest lines, 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. 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. 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 bore for England if we do.
I think possession is nine-tenths, it's me.
Oh, hello, Kevin.
I think I've got three questions all focused on, apologies, kitchen and bathrooms and Wickes. I'm just slightly intrigued to know your thoughts on the background to why I think you implied it had got worse post-Easter, that when it had really turned down, and I understand, obviously, you reverted to type after trying a different system back end of last year, Q3. You would have thought, well, sorry, I would have thought that coming into the second, third quarter this year, actually in a position at Homebase and B&Q would not have been as disruptive as it might have been earlier in the year. Howdens put their prices up in April, so presumably that hasn't done you any harm. I'm just slightly intrigued as to what you think would have driven that decline further as you've exited the half year.
Around that, has that been the same experience for, say, Benchmarx to give us some flavor of how specific it is to kitchens? Lastly, on the goodwill impairment, is that, in a way, an acknowledgment that where we are today in the financial metrics of that business is 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 two years ago? Or do you just simply think that, Kevin, that it's just a completely different ballgame now?
As usual, Kevin, very thoughtful and challenging questions. I think I would point out four-year run on kitchens in Wickes, when we started, it was half the size it is today. If we still would line up four 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 our Benchmarx business as well. 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 look at why Kingfisher or B&Q have decided to come out of installed kitchens. 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. We are around finding, reinvigorating that promotional activity to try and get back onto our front foot. I think 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 to avoid it.
Yeah. On the goodwill, first of all, I'd refer you to Note 12 of 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 had GBP 1 billion of carrying value of assets for the Wickes cash-generating unit, as it's referred to. That was broadly GBP 840 million, GBP 850 million of intangibles, GBP 700 of goodwill, GBP 150 or so of acquisition-related intangibles. The balance, the remaining GBP 150 or so, was tangible operating assets. Fixed assets, working capital in the business. We have to perform a review of the cash flows based on what we know today. The accounting standard doesn't let you build in self-help or improvement initiatives that you haven't yet committed to. It's quite an onerous test.
We have performed that review, and having done so, we have chosen, based on the outlook, to write off approximately 25% of the carrying value of the assets within the division. The carrying value now is GBP 750 million in the balance sheet. That would be supported, at this stage, by the analysis that we've done of the business for the long term.
Are those on the phone, it's Phil to ask a question.
I think you referred to as support. Could you just explain that a little bit more? I mean, I don't imagine you're expecting the business to run at two-thirds the level it has been the last couple of years. Just what exactly, have you outsourced some of that, or have you genuinely cut a third of the people?
Yeah. It's interesting, businesses, when they're in a period of growth, tend to employ people to fuel that growth. Sometimes you get to a situation where if you step all the way back and say, "Can we do this differently, more efficiently?" I would sort of-
Okay
frame the Wickes move of actually right-sizing-
Yeah
if I could say.
Thank you.
Okay. I was just going to ask that question as well, actually. Just in a similar vein, Plumbing and Heating, obviously, you've closed quite a lot of branches. I just wondered what's the sort of retention rate of the sales from those?
I knew we'd get down here at one point or other.
We've seen pretty good retention, sort of 50% or 60% of the branches we've closed because we're a relationship-led business and actually making sure that we engage with customers and provide them the service and products they need is really important. We've retained a fair chunk of business, so we've been really pleased with that.
John. John Messenger, Redburn. Three, if I could. First one was just coming back on Gregor's earlier question around cost saves and what is coming. Obviously, from the Slide nine in the pack, you had GBP 35 gross costs, GBP 20 savings. You have highlighted plumbing and heating, you get the annualization, so there is only about GBP 3 million left to come in the third quarter. You are down to, I just want to understand these GBP 17, obviously then second half savings, other actions you are putting in place. We should be assuming cost saves are north of GBP 20 in the second half. Is that the right thinking to be applying here in terms of what is coming through? Is there anything around the cost inflation factors that are going to be greater than creating a GBP 35 million hit in the second half?
Is it broadly GBP 70 million of costs gross? Then we can all go away and make assumptions around what you might rip out on the cost side. Second question was just on the share purchases. Can I understand, is there a logic around either tax savings or whatever that makes it logical to do it via a trust in Jersey rather than simply buying them in to re-release later? Obviously you would at least have unlocked a bit of an EPS benefit if you did the treasury option. 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 Rudridge yet? Is that still going to happen? What is the timeframe for ERP to be completely rolled out across the business unit?
Is it going into everything except Wickes, or is Wickes included in there?
Alan, do you want to pick up on the cost-saving number?
Yeah
the share?
On the cost savings, John, I think a shorthand way would be to say on the inflation on rent, rates, wages, depreciation, multiplied by two.
Yeah
for the year. On the savings side, the gross saving in Wickes in the first half was obviously more than that GBP 9 million. Make an assumption about your inflation, you can get to a number on that.
Yeah.
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, 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. We pointed to GBP 10 million there.
Yeah.
We also pointed to some savings in the general central costs that we manage. I would anticipate that we'll be showing that chart for the full year. It will be at least at that level of savings times two, as a result. On the share purchase logic, it's not driven by any tax considerations or Jersey-based trust things. It's quite simple. Over the years, if you issue new shares, you dilute existing shareholders. Taking into account who our existing long-term shareholders are, they don't particularly like, from my conversations with them, to see ongoing dilution. By moving to on-market purchase to fulfill share schemes, the number of shares and issues stay stable. You're right, you get some overtime, some EPS benefit from doing that.
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.
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 Rudridge launch on the basis that we would have to rewrite all the integrations for every path. There was a lot more cost and complication created with that. We were effectively moving straight to BSS as release 1. Release 2 is being worked on in parallel, which we're aiming at the moment for October 2019, which will be a proportion of general merchanting.
The plan at the moment, because obviously we can keep relatively fluid, is that we will put other trade businesses on the system, CCF, Keyline, and Benchmarx during 2020. At the moment, probably by the end of Q1 2021, we will have the trade businesses on. We clearly have the option to put plumbing and heating on, but it's not part of the program as it sits at the moment. We have Wickes and Toolstation with standalone systems. Toolstation, very effective standalone IT platform, and Wickes, essentially with all its point 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.
Can I just on CapEx. 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?
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. At the moment, we are in a period where we've now started 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, Alan?
Within the breakout of the CapEx we gave, John, and 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 initiatives as we get the team to really focus on driving the ERP 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 look to Paul, then you're next.
Hi, it's Paul Checketts from Barclays. I've got a couple around the strategy review, then just a couple of questions regarding the second half. On the strategy review, can you just talk a bit about how you 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? I'm sure you don't want to front run too much, 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. Do they conceptually work in a flatter environment? The bits on the second half, what do you think the below-the-line items are likely to be in the second half, restructuring costs related to the review?
Lastly, on the working capital side, Alan, could you just give us a feel for your confidence in 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 won't say there'll be zero consultancy input, but there'll be little at the moment, but it'll be quite specialist. We're not going to be signing a big check to McKinsey or Boston Consulting Group for a whole piece of work. We'll be quite frugal. The range centers will be part of that review as well in terms of the future. I think, as I said earlier, everything is in to that review and nothing's been ruled out.
Just to, if I can answer Paul's other question. Before I do on the range centers, it is important to note that they do make a return on the capital that we have invested in them, even with the subdued volumes at the moment. The basis of that calculation being the operating cost that you have got with them, including the transport to get the product around, versus the incremental sales that we are seeing that we think we otherwise would not have captured, and a contribution from suppliers to the operating cost, given that they are doing fewer deliveries site to site, they are going to the range centers instead. They are exceeding our cost of capital in terms of the return we seek. I will not deny that that would be a much more attractive IRR were we seeing stronger volume growth through the business.
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 do not have a firm number on that till we know what the actions are. I am not anticipating that you will see a big number, as John was saying, for anything like consultancy related to the strategic review elements. We are doing that mainly in-house. 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. I see no reason why those would change. On the debtors, I would make two points. One, we always have a first half increase in working capital, which tends to be a trade debtor-led element because of seasonality in the business.
What I was trying to say during the presentation was that seasonality has been exacerbated this year by the fact that you had lower sales or sales going backwards during March and April, and then you had a very strong recovery in May and June. When you work out the debtor days from the balance sheet, you will see it is 50-odd days. Therefore, if those sales are weighted in May and June, quite simply, you have not booked the proceeds from those sales. Those proceeds come in during July and August, and we are confident on that.
Right. Robert, go on, and then-
Good morning, everyone. Robert Eason from Goodbody. Not too sure I have any questions left, so 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 plumbing and heating. Obviously, the wholesale business grew very strongly. Can you just give us indications 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 has been business driven versus kind of underlying pressure in gross margins? Second 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?
Again, what you see happening is the independents are just consolidating in the background. They're doing bolt-ons all the time. What's their behavior like in this softer market? Has it changed? Are you seeing any change in terms of their strategy from bog standard commodity to more specialized product? Just kind of a discussion around that. Just a point of clarification, Alan, just on the guidance, just to clarify that GBP 360-GBP 390 that you quoted, that included the property profits in it, i.e., you have to strip out the GBP 20 or the GBP 25 that it now is. Just a point of clarification on that. My fourth question, just given that I had to look at a bachelor's heads for the last hour, I have to have a plumbing and heating question direct.
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? Can it be mid-single digits margin without putting a timeframe on it or predicting what you're going to say beginning of December.
You want me to answer that one, Robert?
No, I want him.
Go on, Tony. You're just sat there. We'll do the Plumbing and Heating and then we'll
The mix effect is about just under half that gross margin impact from wholesale within the Plumbing and Heating results. I think it's on page 36, you'll see the Sorry, it's not page 36. It's about half that impact on gross margin dilution. Overall, pretty good shape. I think there's a little bit more in there from promotional intensity in the first half, in the branch business, but not huge. We're really pleased with the sell price inflation, cost price inflation pass-through we're getting. That's all going pretty well. In terms of longer tonight, look, I do want to manage your expectations, Robert. I think if you now look on the business, we were confident about six and a half like-for-likes in half two last year. It's better to give a two-year like-for-like read on the business in the second half.
That's a better indication of where we're heading. The two-year like-for-likes have been pretty consistent through the first half. We'd be hopeful of continuing something like that in the second half. As Alan said, we did go over a tougher comp for the second half. In terms of the operating margin step up 70 basis points in the first half. Of course, we've got ambition to get it higher.
On the question, Robert, on contracts gross margins, 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. You can operate with a few fewer sites overall or tighter yards than you otherwise have. Whilst it has 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&L. Quite clearly, if it's slightly lower gross margin sales, they are high return on capital sales because you need less capital to support that. That's the key feature of the element. I also spoke about the 6% input cost inflation being the peak across the divisions within the contracts division.
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 fifth division. You're quite correct, though, within that GBP 360-GBP 390 range that the market currently or was seeing, embedded within that approximately GBP 20 million, GBP 21 million of property profits, depending on the analyst, because that was the guidance we gave earlier in the year. As we very clearly laid out, we're now giving guidance for that segment of GBP 25 million rather than the GBP 20-GBP 21 that may have been in the market previously.
On the independents, Robert, I've always said when talking to the general merchants, our best competition aren't the nationals that we all talk about. They are our independents in every catchment up and down the country. I think they are the benchmark that we work towards. They do split into primarily two groups for me. Those that have been really successful and those that just get by. Clearly, and talking with individual analysts, you're doing more and more research on pooling the different businesses across the U.K. Obviously, they're higher profile given the amount of activity of M&A. Half has obviously been bought, Huws Gray's been bought, the activity at MKM. These are all very good companies, and we watch very closely. Huws Gray, in particular, have been very good at bolt-on acquisitions.
We've chose to go more brownfield and use our property arm to put branches into locations that we believe are more precise based on catchment analysis and infill to our overall network. I always remember taking Tony around the branches when we first joined, and we stood on a map of London in our branch in Hampstead and saw 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. Not always can you acquire a business where you want to. For the brownfield, we're seeing our business move forward on that basis. I've always been the highest respect for the independents. They are very good in each catchment. Yes, sorry.
Hi. Adrian Kearsey, Panmure Gordon. Actually, taking up at that point during the presentation, you've spoken about Travis Perkins more in absolute terms 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 quarter, second quarter, so perhaps we can understand how that business is evolving in the new environment?
Yeah. Obviously, flagged the real successes of managed service and tool hire in the period. Our heavy side, given the support we have for our range center, has performed well. Albeit in the six months, we were badly affected with the weather. The underlying, its heavy side is growing faster than many of the categories. We're struggling on the shop and the light side area, and I think that's a bit of more of a reflection on how successful Toolstation and Screwfix are. The one that's really quite static and we need to find ways forward would be in and around the timber and the sheet materials.
Yeah, we are a generalist merchant, and what we're trying to do is create a range that a jobbing 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.
For those on the phone, it's star one to ask a question.
Ami from Citi. Just one question from me. Could you talk a bit about your e-commerce penetration across all your divisions, what are you seeing in the market, and where do you think you really need to build up your business here?
Our most successful business, as we've said before, is Toolstation. Broadly, 20% of the business is online. Wickes has been, I think, pretty successful given as you compare it in its sector. It's just over 10% of its business. We've tracked pretty much the whole sales call and we can actually get to a point where 50% of all Wickes sales either started online or was researched or was completed online, or the first kitchen appointment was actually generated online. It's a big influence on the consumer-faced business of Wickes. It's very convenient for the small tradesman in Toolstation. 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 PlumbNation, Underfloor Heating.
Tony and the team are building good capability around that and see that as a good source of income as we move forward. We continue to work on the digital program for general merchanting, 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. I think it's going to become more and more important to the trade. I think the larger the customer, you're coming up with different solutions. They're not going to just be placed in online. They want more bespoke and linked to our systems. It's that 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 how they want to interact and be served by us.
Can 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?
We don't have too many things worry us in life, 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 packs of plasterboard or packs of bricks and big loads of timber. The more the bulky the product, I think the fact is having a network of 2,000 branches around the U.K., we can complete that last mile more effectively than them. Sure enough, online, they have to be respected.
Thank you.
Any other questions from the floor? Wow, that was a mammoth, wasn't it? Shall we go to the lines?
Of course, gentlemen