Ladies and gentlemen, welcome to the Travis Perkins Q1 trading update. My name is Sasha, and I will be coordinating your call today. If you would like to ask a question during the presentation, you can do so by pressing star followed by the number 1 on your telephone keypad. I will now hand you over to your host, John Carter, CEO, and Alan Williams, CFO, to begin. Please go ahead.
Good morning, all. As said, welcome to our Q1 2018 trading update. I am just going to give a short introduction and lift a couple of the extracts from the trading update today, then we will open things up for questions and answers. A solid start to 2018, with like-for-like sales growth up 3% against total sales growth in the period of 2.4%. Clearly, this was a period that has been difficult due to weather conditions experienced in the late February and March, and not helped by the fragile U.K. consumer environment. Underlying trade in general merchanting and contracts remains resilient despite the weather impacts. You will see an extremely strong trading performance from Tony and the plumbing and heating division with like-for-like sales up 19.7%. Where trading within DIY remains challenging, Wickes have continued to outperform its peers.
In overall terms, volumes have been broadly flat, as you can see from the numbers, as we expected. We have made good progress in recovering the commodity-led inflation. Our overall expectations for 2018 remain unchanged, will mitigate the difficult early market conditions that we experienced earlier in the year. If we open things up for questions. Thanks very much.
Ladies and gentlemen, if you would like to ask a question, please press star followed by the number 1 on your telephone keypad. If you change your mind and wish to cancel your question, please press star followed by the number 2. When preparing to ask a question, please ensure that your phone is unmuted locally. The first question we have comes from Yves Bromehead, from Exane. Yves, your line is now open, please go ahead.
Thank you. Good morning to you.
Good morning.
Good morning.
Three questions, if I may. The first one is on the 20%, well, 19.7 like-for-like growth in P&H. Could you maybe quantify how much of that was driven by the winter weather condition, and how much is underlying? Could you also maybe give us a sense of the split between volumes and prices in this division, please? That would be my first question.
It would be very difficult to interpret. Clearly, the weather that negatively impacts the building materials and the delivered sales that impacted TP, Wickes, and contracts would, in some respects, benefit P&H, but they still had real challenges in delivering during that period. It's very difficult for us to break that down.
Yves, it's Alan. I'd say there's a modest tailwind, particularly in the heating part of plumbing and heating overall, but the strong outperformance had a lot to do with the work that Tony and the team have been doing over the last 12 months in reorganizing the business. We're not naive to say it's not been helped by competitor actions, where competitors in the market have also been restructuring. That's given us a further tailwind. We tend to segment the plumbing and heating business into three areas when we think about it. There's the branch-based business, the wholesale business, and then also the smaller online businesses that we have. We've seen strong growth in all three of those areas. The strongest growth overall was in the wholesale part, which is driven by heating and boilers. We've been really encouraged by the performance across all three elements.
Thank you. I know it's too early in the year, but could you give us maybe a sense of what could be the run rate in the plumbing and heating division in the following quarters? Because 20% does look quite strong. Let's say, if it gets harder.
I think it's also instructive to look at the two-year like-for-likes here. Q1 2017 was a softer quarter for the business. I don't think we anticipate that we'll be doing 20% like-for-like for the rest of the year, we do anticipate continuing good performance from the plumbing and heating businesses.
I might be stating the obvious, obviously, January through to March is the heating season. You would see a positive upturn. The weather obviously influenced that period. It's very difficult to predict, but Tony and the team are making good progress.
Yes. Yves, on the part of the question around the volume price split, we don't want to go into details, the trend is not that different from the overall group trend that we pointed to within the statement.
Okay. Thank you. My last question would be on the consumer business, more specifically on the kitchen and bathroom. You mentioned that your orders have recovered versus Q4, where you had a bit of some issues in that specific division. Could you maybe tell us if you expect any improvement in Q2 and Q3, because you mentioned that you were flat in Q1?
This is a call about the Q1. I appreciate people are looking for forward guidance. We've been encouraged by the recovery we've seen within KMB orders, given the position we were in during Q4. I've no reason to think that the trends will be dissimilar at this stage from what we've seen during the first quarter.
Okay. Thank you very much.
The next question we have comes from Emily Biddulph of J.P. Morgan. Emily, your line is now open. Please go ahead.
Morning, guys. I've got two questions, please. The first one's just on Wickes. It looks like in the consumer division, if presumably Toolstation's relatively similar in terms of growth, and if kitchen and bathroom has recovered, it looks like Wickes is incrementally a bit worse. Is that just weather or do you think the DIY market's actually worse than it was in Q4? Secondly, just on plumbing and heating, I realize it's a bit early to be talking about sort of margins and profitability, but in terms of the mix of growth that we're seeing, should we sort of not get too carried away on the margin outlook if we're kind of plugging this sort of stronger growth in for the rest of the year?
Yeah. On the latter, I would absolutely concur, Emily. Don't get too carried away. We are seeing good growth and good progress, but it is our lowest returning division. We are making good progress, obviously, as Alan called out with the wholesale business, which is high percentage of boilers. Good progress, but as you say, let's just keep it realistic.
Thanks.
Emily, on Wickes, I think we've said in the statement that our view is that the U.K. DIY market is currently in decline. When we look across the different product categories, quite clearly outdoor projects have been disproportionately hit given the weather. I think you had an already weak DIY environment, a difficult competitive environment, a fragile consumer, and then we have the weather impacts on top. When you look across some of the indoor categories, they have performed relatively better within the core within Wickes. I think relative to the competition, we're still confident with where we sit, quite clearly a difficult DIY sheds market.
On the point you asked around Toolstation, Emily, we continued good performance in Toolstation, but even Toolstation took some impact during March where we had to close the Bridgwater distribution center and couldn't get trucks in and out, as well as some of the individual stores struggling to serve customers when there was low footfall in any case because of the weather.
Thanks.
We don't want to spend the whole call talking about weather we can't avoid the factor, but it's just one of those things.
Yeah. Thanks.
Well done.
The next question we have is Robert Eason of Goodbody. Robert, your line is now open. Please go ahead.
Hi, good morning, everyone.
Hi, Robert.
Hi. Two questions. I know you don't go into all the detail on margins in the first quarter. Directionally, can you just give us a feel how gross margins are progressing in general merchanting and contracts? My second question is, peppered through the statement is just control over costs is very much to the fore. Can you just elaborate on what are you doing there to control costs and what should we have in our heads in terms of underlying cost inflation in terms of operating costs?
Yep. On the first question, Robert, on general merchanting and contract merchanting gross margins, we're relatively comfortable with where we are. I think there's a line in particular in reference to general merchanting where we said good recovery of cost price inflation. I think you can take some comfort and confidence from that. The contracts division has continued to perform well overall. I know the like-for-like has come off considerably. I would point to two aspects on that. One, we've got a very strong comparator, where we had over 11% growth in the first quarter of 2017. The second factor I'd point to is whereas CCF and BSS would have been hit for a couple of days, the closure of branches by the weather, Keyline has had a disproportionate impact given the wet and frozen ground conditions that we saw in the first quarter.
I think some of the house builders have referred to the impact that we've seen. We've also seen the impact in housing starts now as well. With where we are at a relatively early stage in the year, we're comfortable on the gross margins on the merchanting businesses. In terms of the ongoing cost activity, this is
Thousands and thousands of actions every single day across the branch network, in the stores, in retail, and also in all of the office side, the administrative side of the business. In terms of underlying cost inflation that we're seeing, clearly the principal impacts are on wage inflation. There's a bit of impact from depreciation from some of the investments that we've made in prior years, and also the annualization of the Heavyside Range Centre extension to the whole of England and Wales that we did in Q3. We're working hard on actions across the piece to mitigate those impacts.
Okay. If you wouldn't mind if I just have one follow-up question. I can't remember what year it was, but there was one year when we had a similarly difficult start to the year, and for people to make up the volumes from a rebate perspective, the market got very price competitive. What are the risks of that happening again, as people just try to get the volumes back in the door after a very difficult Q1, or are you seeing any signs of that?
No. The honest answer, Robert, is it's too earlier in the year because the good news about the weather hitting us when it did, we've got the best part of a year to recover. I think if there's going to be any concern, it's going to come into the back end of Q3 to Q4.
Okay. That's great. Thanks, guys.
The next question we have comes from Paul Checketts with Barclays. Paul, your line is now open. Please go ahead.
Morning, everyone.
Morning.
I've got two. The first is on plumbing and heating. I know we sort of covered the ground to a degree, but the like-for-like growth number, it's remarkable. Even if you assume benefit from weather and BCG, it's still very high. Could you just recap on the steps that have been taken and where you think that really has gained traction? Please, that would be helpful. The second is on the trade side. I think, John, when we spoke at the full year results, you mentioned that getting through some of the pricing might be more challenging because the independents would be a little slower to do so. Are you seeing them put through price increases too now? We've talked about the outlook for the DIY market in the U.K. in general terms for the rest of the year.
What are your thoughts for the trade market without asking for your own guidance for the full year, but how do you feel that market is going to pan out in the rest of the year? Thanks.
Thanks, Paul. On the P&H, I think Alan's tried to give a bit of an indication that as we see the three areas of wholesale, the online, and let's call it the branch business, progress is being made on all three. As Tony explained back last August, this is really building on the work we did with the infrastructure, Tony's really accelerated the customer proposition work. We're honest enough to say that we do think we're getting some benefit from competitor activity, that they're going through similar changes that we did in 2015. We know we're focused very much on the customer, there's just been some really good basic accelerations of the proposition program of a stronger core range, better availability, stronger promotional participation. Again, it's never one thing. It's a combination that's coming together really well.
Tony will be modest enough to say that everything has fallen well for us in this period. The DIY, I think we watch very closely, Paul, in the sense that making predictions at the moment is challenging. I think overall, we see a way back to the outlook that we gave for 2018. You can read the indicators as us. It's very mixed and challenging to read. All I can say is there's a lot of focus on our business and doing the right things. Back on the pricing issue and independence, I actually think the snow that impacted us, impacted us at a time when it's thrown the norm to one side because the independents would have been impacted like everyone. The one thing that you don't want to do is start the year on your back foot.
I think there's been more order on pricing because of the impact of the weather in late February, early March. Where we sit at the moment, everyone is obviously pointing to the difficult weather conditions. I think our businesses are traveling pretty well considering, and we're focusing on all the areas that we aim to deliver back to the indication we gave you back in February.
Thanks.
Alan
Yep.
The next question we have comes from John Messenger of Redburn Europe. John, your line is now open. Please go ahead.
Good morning, chaps. Sorry, I'll do the same thing and ask 2 if I could. First one was just, you mentioned a bit of the flavor on contracts. I guess it's the one business where there is a bit of a forward order book in there in the various parts of the 3 constituents. Can you just give us a bit of a flavor as to how that's developing? Because obviously it's been a very strong divisional performer for quite a while against the backdrop of kind of non-RES, and uncertainties there. Is actually the business still looking particularly strong? Is there anything you're seeing in the order book, in that division? Then the second question was just when we look at the split between your combined trade operations and the consumer, obviously quite a divergence there.
Would it be right to think of the impact of that as being effectively, obviously consumer higher gross margins, so more leverage. That clearly will probably have put some pressure on the first quarter, but looking forward, does it probably mean there is even more emphasis on costs? Would it be fair to say that there are more kind of addressable costs in the consumer division because you've got advertising, there are a number of different cost levers that you can pull. I'm just thinking as you are moving forward and how you behave and how you're going to deal with sales evolution, are you pretty confident that actually what has happened in consumer can be addressed over the next nine months, I guess, in terms of just staying on track, relative to what has happened in the trade side?
Let's take the second one first, John. There are more levers in consumer. The important thing is when you pull levers that you don't damage the business over the medium term.
Yeah.
Simon and the team are being very sensitive to that factor. As you can see from these numbers, it is challenging in consumer and in particular, Wickes is fighting very hard, competing well against its direct peers. Actually, it's very tough in that part of the world. In terms of contracts, we've said for some time we've got three brilliant businesses there. Keyline had a much slower start and directly responsible for the sort of sodden ground and the weather. The underlying order book is okay. I think we watch the second half with a bit of caution, but it is difficult to read the tea leaves at this point in time. John.
John, I would add we're clearly watching the fallout from the demise of Carillion as well, and the slowdown on some of the contracts there within the subcontractors. I think that will have a bit of an impact through the second and third quarters on the market as well. Overall, all three businesses are in really good health.
I don't think I would take the slowdown in the Q1 number to be anything indicative at this stage of a faltering order book or anything like that. It is related to the weather conditions, wouldn't you say?
Yes. You all know this, John, but of that contracts division, at least 85, close to 90% is delivered.
Yeah.
It's going to get sort of hammered in those situations when the roads and the sites were in that sort of state for that period.
Brilliant. Sorry, I appreciate this is sales in the quarter, but just because it was mentioned there by Alan, the Carillion point and particularly the not Carillion, but the health of the subcontractor base. Have you guys got relatively clear line of sight, or is this kind of an evolving picture as to how many subcontractors have already kind of flagged to you or hands up and have had difficulties? Or are we through the worst, or is there kind of a rolling issue here that will permeate through the rest of this year?
John, excuse me. I think it is somewhat difficult to tell at this stage quite how much longer the impact will go on. We've seen some indications of subcontractor sort of struggles, and there are some public examples on some of those. I think that will continue for another three to six months, but it is quite difficult to predict exactly when and how. If there were anything that were particularly concerning us from a health of subcontractors, the small material, we'd have said so in the statement.
We've got good vision, John, but not 20/20 vision.
Right
It was very widespread. Those that are more acutely affected, we're working and got good visibility. It's the ripple effect that sometimes can catch people later.
Got you. Thank you.
The next question we have comes from Gregor Kulik of UBS. Please go ahead.
Hi, good morning. I have a question-
Hi, Gregor.
Hi, good morning, on consumer. Obviously, one of your competitors I think is doing particularly poorly, and I guess there's the sort of outcome strategic review, I think in the next couple of months. I want to understand how you're setting up the business. Are you in a wait and see mode, until you get some clarity on that, before you perhaps drive harder on costs, given the trading environment? As a consequence of that, should we be anticipating a sort of disproportionate profit hit in consumer in the first half? Because obviously, any decision will only start impacting either way, from the second half onwards.
Gregor.
Yeah.
On that, you can imagine we're watching the situation extremely closely. I wouldn't want to go into exactly what our responses are or might be, because I would consider that commercially sensitive. I think we are taking the necessary cost actions within the consumer business, given the slow start we've seen to the year. We will do that irrespective of what our competitors do.
Okay. Then, I know this is a call on Q1, you may bat this one back, obviously we're now almost through April, weather's been a bit better. Are you confident that what you're saying on weather is in fact the weather and not a weaker market? In other words, have you seen at least directionally, things bounce back towards more in line with your expectations in the few weeks we've had this in April?
Yeah. It is a Q1 call, you're quite right. In the last paragraph of the statement, we said that the lead market indicators still remain very mixed. I think it's been difficult this year, you'll probably hear the same thing from peers across the sector, that because we haven't had a consistent so far, it's very difficult to read the tea leaves as to exactly where the markets are going. I don't think that's any different from what we saw, particularly in Q3, Q4 2017. I think if anything, from what you see from retail, the consumer's looking more vulnerable or more fragile rather than less at this stage. There are clearly one or two more positive things that could come along. For example, the fact that consumer price inflation looks to have abated and average wage inflation has crossed over again with the CPI metric.
Okay. Thank you very much. Appreciate it.
Well done.
Our next questioner is Howard Seymour of Numis. Howard, your line is open. Please ask your question.
Thank you. Morning, gents.
Hi, Howard. Morning.
A couple on the consumer side, if I may. It just follows slightly, Alan, what you just mentioned there. Obviously as we look at the retail space, things appear to be getting worse. You allude to continued pressure. Are you seeing it getting worse at the moment, or is the message really there that as it stands at the moment, it's as bad as it was? I appreciate that obviously there is a weather impact and therefore it is difficult to ascertain.
Yeah. I think it is extremely difficult to pick out a trend at this stage. In addition to the weather impact and the general consumer impact, as to one of the earlier questions, well, previous question, there is clearly a change in the competitive dynamic that's happened within that DIY sheds market. I think it's very difficult to pick out a discernible trend at this stage. I would say that DIY is a weak market at this stage.
Okay. Fair enough. Secondly, I totally appreciate what you're saying on pricing, et cetera, and not wanting to go into detail, but just specifically on kitchens and bathrooms, because traditionally in that market, people can flag price increases, and that can help orders ahead of that, et cetera. Without going into detail, have there been any sort of price movements that you've seen in your business that potentially would have impacted the order intake?
I don't think that's a particular factor in the market at this stage for us, Howard.
Okay. Thank you.
Our next question is Ami Galla of Citigroup. Ami, please go ahead.
Thank you. Just two from me as well. On general merchanting, I was wondering if you could talk a bit about the trends that you've seen in April. I appreciate you don't want to give us an exact number, but is there any scope to recover some of the share losses that you've taken in that division last year? My second question really is on store closures and P&H. Have we completed the entire store closure process or incrementally should we see that increase over the following quarters? Thank you.
On the P&H side, we have still got one or two situations that we think we can take advantage of in consolidating. The large wave of closures has now ceased.
Now more in precision. Tony and the team have got some target areas where we think we can actually benefit through consolidating rather than closing.
On your question on general merchanting, Amy, and the trends and the relative share position. I think it's quite tricky to tell at this stage relative performance of the business, given the weather impacts that we talked about during the first quarter. I don't think we're seeing anything particularly unusual going on in the market. I think there is scope to continue to build in the medium term on the investments that we've made in the business. We remain confident in those investments, that they're the right thing to have done to drive the longer-term sustainable performance of the business.
Okay. Thank you.
Our next questioner is Michael Mitchell of Davy. Michael, your line is now open to ask your question.
Yes, good morning. Morning, all. Just to follow on really from where you were at there, Alan, on general merchant. Again, I appreciate it's obviously difficult to get a kind of underlying trend, and you've described your own performance in general merchanting as resilient. Is there anything to suggest that that market has deteriorated over the last couple of months, or were your comments earlier about a similar kind of outlook as what we had in Q3, Q4 suggest that actually the market is probably where we were at the turn of the year? Thank you.
I think if you try and unpick the weather impact, I don't think we've seen a change in underlying trends within the market.
Okay. That's great. Thank you.
The next question is Charlie Campbell of Liberum. Please go ahead.
Good morning. Yes, this is Charlie Campbell here. A lot of questions have already been answered, I think, so just one from me. Just on the consumer division, as we think about sort of Q1 and Q2, could you just give us an idea of how important Easter is, and whether that moving from Q2 into Q1 has a meaningful impact when we think about like-for-likes in Q1 and Q2 for this year?
It's made tricky, Charlie, by the fact that-
Yeah
Good Friday and Easter Saturday were in March and Q1.
Yeah.
The Easter Sunday and Easter Monday, Easter Monday tending to be the bigger overall day of the four-day weekend, fell in Q2.
Yeah.
I think, in the context of the market, we were pleased with our overall Easter trading. Easter is that period, and the timing of the bank holidays in May relative to where Easter falls are clearly really important parts of the overall DIY patterns of the year.
Yeah.
Charlie, if it helps, I always tell people Easter at Wickes is equivalent to Christmas at Debenhams.
Our next question is from Andy Murphy of Merrill Lynch. Andy, your line is open. Please go ahead.
Morning, John. Morning, Alan.
Morning.
Quite a few questions obviously have been answered already. I was just wondering on the consumer side, that the figure of -4.6, given what you're saying about pricing is probably plus two and a half, let's say. Is it fair to say that across that division as a whole, you're talking about probably -7 in terms of volumes? Secondly, on sort of potential efficiencies, can you give us a flavor for what you've sort of got up your sleeve in terms of what actions you could take if conditions got markedly worse, in your opinion?
Hi, Andy. Well, you're right. If we look at overall price trends within the business, let's say I haven't seen a particularly different trend between the general merchanting, plumbing and heating and consumer businesses. Contract merchanting, we've seen a bit stronger pricing given some of the commodity-related elements and well-trailed supply chain issues and some of the materials that we use within those markets. I'm going to answer it by saying the trend in consumer is not that different from general merchanting or P&H.
Okay.
In terms of further cost levers that we can pull, where obviously if things get markedly worse, I think we took actions 10 years ago within the business in a, at the time, the global financial crisis to take cost out. If you want to look at a very negative scenario, I think you'd be looking at similar actions to what we'd taken at that stage. At this stage, we talked a bit about this at the end of February with the full year results. There were actions that we were taking on the supply chain and distribution side on kitchen and bathroom, which are done. There are some further actions that we are contemplating on the supply chain side. We can look at, for example, delivery patterns.
We're looking across the range of disciplines within stores around manning, as well as elsewhere within the business around where we recruit, how we fill vacancies, et cetera.
Cool. All right. Thank you very much.
The next question is Clyde Lewis of Peel Hunt. Clyde, your line is open. Please go ahead.
Morning, John. Morning, Alan.
Hi, Clyde.
I think I've still got three, if I may.
Oh, wow.
First one, when you refer to broadly flat volumes and pricing really driving the overall growth, are you talking on a like-for-like basis or on a total sales basis? Just to clarify on that point.
Yeah. It would be more on the like-for-like.
Okay. Thank you. Regionally, have there been any material differences in terms of activity levels across the country?
Not noticeably, Clyde.
Okay. Thank you. The last one was on your outlook comment and your indicators. You talk about a mixed bag of indicators. I'm just wondering which ones you would read as positively at the moment. That was all.
I think it's a variation on different degrees, Clyde. Yeah. Look, the housing transactions are not tanking, and consumer confidence is holding up relatively well against the long-term average. You can read them as much as I can. We have to have a bit of caution. Equally, we remain, overall, with what we can see in front of us, pretty positive in terms of delivery across 2018.
Clyde, I think in these tricky sorts of markets, you have to look a lot to self-help. That's certainly what we're doing at the moment.
That's fair enough. Okay. Thanks, gents.
Thank you.
Our next question comes from Lokesh Maheswari of Berenberg. Please go ahead and ask your question.
Hi there. Good morning, guys. Two questions-
Morning
If I may. Morning. The first is on plumbing and heating. I remember you saying at full year results that like-for-likes have been pretty good this year, but you might see some softness on the margin front. Given like-for-likes have been better than I guess most people have anticipated, is that beneficial or detrimental to your margins versus what you were expecting at the start of the year? Secondly, on consumer, obviously one of your competitors is seeing issues. If and/or when their potential sites come up for sale, is that something you'd be interested in, or are you happy with that portfolio as it is? Thank you.
I think we're sitting, watching, and wouldn't want to comment at this stage regarding that competitor. I don't actually remember the comment regarding margins.
On plumbing and heating, I think there is nothing from a gross margin point of view within the division that would be remarkable or different in terms of the trend.
All you are pointing to is the mix.
Yeah. I think from a mix point of view within the group overall, remember that plumbing and heating is lower margin than the general merchanting division or consumer. There is a slight adverse mix to the group, but it is not material overall.
Okay. Thank you.
Thank you.
Our next question is Aynsley Lammin of Canaccord. Please go ahead.
Hi. Morning. Just two quick ones I think left for me. Firstly, I wondered, any changing trends in bad debts? Anything you can say there. Then secondly, just on the cash flow side, obviously you're cutting costs, but I wondered if a GBP million year number, if you've decided to cut CapEx for the full year against what you would have expected late last year, or any kind of changes to working capital flows we should be aware of? Thanks.
Hi, Aynsley. We've not changed our CapEx guidance from what we said at the full year results at the end of February. Just in terms of the trend on bad debts, as we were talking about earlier, there's one or two minor specifics within the Carillion subcontractor environment. We have insurance against some of those debts, but overall it will be, at this stage, no different from the normal pattern that we'd see or normal bad debt percentage reserve.
That's great. Thank you very much.
Thank you.
We currently have no further questions.