Earnings Call: Q1 2018

Apr 27, 2018

Earnings release

Ladies and gentlemen, welcome to the Travis Perkins Q1 Trading Update. My name is Sasha, and I'll be coordinating your call today. I will now hand you over to your host, John Carter, CEO and Alan Williams, CFO, to begin. Please go ahead. Good morning all. And, as I said, well, to our Q1 2018 trading update. I'm just going to give a short introduction and lift a couple of the extracts from the trading update today, and then we'll open things up for questions and answers. A solid start 2018, with like for like sales growth up 3% against total sales growth in the period of 2.4 SEM. And clearly, this was a period that's been difficult and due to weather conditions experienced in the late February March, and not helped by the fragile UK consumer environment. Underlying trade in general merchanting and contracts remains resilient despite the weather impacts. You'll see an extremely strong trading performance from Tony and the Plumbing and Heating, division with like for like sales up nineteen 0.7%. Where trading within DIY remains challenging. Wix have continued to outperform its peers. In overall terms, volumes have been broadly flat, as you can see from the numbers. And as we expected, and we've made good progress in recovering the commodity led inflation. Our overall expectations for 2018 remain unchanged and we'll mitigate the for call early market conditions that we experienced earlier in the year. So if we open things up for questions, thanks very much. You. First question we have comes from Eve Speramhead from Exane. Eve, your line is now open. So please go ahead. Thank you. Good morning to you. Three questions if I may. The first one is on the 20% well, 19.7 like for like growth in PNH. Could you maybe quantify how much of that was driven by the winter weather condition and how much is underlying? And could also maybe give us a sense of the split between volumes and prices in this division, please? That would be my first question. We will be very difficult to interpret. I mean, clearly, the weather that negatively impacts the building materials and the delivered sales impacted, that impacted TP Wix and contracts would in some respects benefit PNH, but they still had real challenges in delivering during that period. So it's very difficult for us to break that down. So Evertallen, I'd say there's a modest tailwind, particularly in the heating part of Plumbing and Heating overall, but it's the strong outperformance had, a lot to do with the work that we, Tony and the team have been doing over the last 12 months. In reorganizing the business. And I'm 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 as 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. But we've been really encouraged by the performance across all three elements. Thank you. And I know it's too early in a 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 quarter because 20% does look quite a, quite a strong extent, but if it gets harder? So I think it's also structive to look at, the 2 year like for likes here. So Q1 17 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, but we do anticipate continuing good performance from the Plumbing and Heating businesses? I might be stating the obvious, but obviously, January through to March, is the heating season. So you would see, you know, a positive upturn and the weather obviously influenced. Period. So it's very difficult to predict, but we are making good, Tony and the team are making good progress. Yes. And on your On the part of the question around the volume price split, we don't want to go into details, but the trend is not that different from the overall group trend that we've pointed to within the statement. My last question would be on the business and more specifically on the kitchen 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? So, I mean, we this is this is a call about the Q1. I appreciate people are looking for forward guidance. We've been encouraged given the position we're in during Q4, I have no reason to think that the trends will be dissimilar stage from what we've seen during The next question we have comes from Emily Bedolf of JP Morgan. Emily, your line is now open. Please go ahead. Good morning, guys. I've got two questions, please. The first one is just on Wix. And it looks like in the Consumer division, if presumably Toolstation is relatively similar in terms of growth. And if Kitchen and Bathons has recovered, it looks like Wix is incrementally a bit worse is that just weather or is actually do you think the DIY market is actually worse than it was in Q4? And then secondly, just on Plumbing and Heating, I realized 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 kind of plug in this sort of stronger growth in for the rest of the year? Yes. So on the latter, I would absolutely of, Emily don't get too carried away, we are seeing good growth and, and, yeah, good progress but it is our lowest return in division and we are making good progress. Obviously, as Alan called out with the wholesale business, which is, which is high percentage of boilers. So good progress, but as you say, let's just keep it realistic. Okay. So Emily, on Wix, I think we've said in the statement that we, our view is that the UK 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. So I think you had an already weak DIY environment, a difficult competitive environment, fragile consumer, and then we have the weather impacts on top. When you look across the, some of the indoor categories, they have form relatively better within the core within Wix. I think relative to the competition, we're still confident with where we sit, but quite clearly a difficult DIY sheds market. On the point you asked around Toolstation, Emily. We've continued good performance in Toolstation, but even Toolstation took some impact, during March where we had to, close the Bridgewater distribution center, because and couldn't get trucks in and out as well as some of the individual stores struggling to serve customers when there is low footfall in any case because of the weather I think we don't want to spend the whole call talking about whether we can't avoid the sector, but it's just one of those things. The next question we have is Robert Eason of Godbury. Robert your line is now open. Please go ahead. Hi, Robert. Hi, two questions, and I know you don't want to go into all the detail on margins in the first quarter. So directionally, can you just give us a feel how gross margins are progressing in general merchanting and contracts? And my second question is like 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 Yes. So on the first question, Robert, on General Merchanting and contract Merchanting gross margins where 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 the like for likes come off. Considerably, I would point to 2 aspects on that. 1, we've got a very strong comparator, where we had over 11% growth in the 1st quarterof 17. The second factor I'd point to is, whereas CCF and BSS would have been hit by, you know, for a couple of days of closure of branch is by the weather. Keyliners had a disproportionate impact given the wet and frozen ground conditions that we saw, in the first quarter. So I think some of the house builders have referred to the impact that we seen. We've also seen the impacting housing starts now as well. So 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 costs, activity. This is thousands and thousands of actions every single day across the branch network in the stores addresses side of the business. In terms of underlying cost inflation that we're seeing, clearly 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 the heavyside range sensor extension to the whole of England and Wales that we did in Q3. So we're working hard on actions across the piece to mitigate those impacts. I can't remember what year it was, but there was 1 year when we had a similarly difficult, kind of start to the year. For people to make up the volumes from a rebate perspective, the market got very price competitive. What are the risks about happening again as people 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 is too early in the year because the good news about the weather hitting us when it did, we've got the best part of the year recover. And I think if there's any going to be any concern, it's going to come into back end of Q3 to Q4. The next question we have comes from Paul Checketts of Barclays. Part 2. The first is on Plumbing and Heating. I know we've sort of covered the ground to a degree, but the number, the like flight growth numbers. It's remarkable. And even if you assume benefit from weather and BCG, it's still very high. Could you just recap on the step that have been taken and where you think that really has gained traction, please be how And then 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 independence would be a little slower to do so. Is that are you seeing them put through price increases too now. And we've talked about the outlook for the DIY market in the UK and general terms for the rest of the year. What are your thoughts for the trade market without sort of asking for your own guidance for the full year? But how do you feel that market is going to pan out in the of the year? Thanks. So, thanks, Paul. On the P and H, I think Alan has tried to give a bit of an indication that as we see the three areas of wholesale fee online and let's call it the branch, business, all the progress is being made on all three. Yes, Tony explained back last August, this is really building on the work we did with the infrastructure and tonnage 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. And there's just been some really good basic sort of accelerations of the proposition program of stronger core range, better availability, stronger promotional participation. So all again, it's never one thing. It's a combination that's coming together really well. And Tony would be modest enough to say that everything has fallen well for 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 sort of the outlook that we gave for 20 18. But you can read the indicators as us. It's very mixed and challenging to read. All I'd say is there's a lot of focus on our business and doing the right things. Back on the pricing, issue of an independence, I actually think that the snow that impacted us impacted us a time when, it's thrown sort of the norm, to one side because the independence would have been impacted like everyone. And the one thing that you don't want to do is start the year on your back foot So I think there's been more order on pricing because of the impact of the weather in late February, early March. So 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 that we aim to sort of deliver back to the indication we gave you back in February. The next question we have comes from John Messenger of Redburn Europe. Good morning, Japs. 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 three constituents. I think could 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? And 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. But would it be right to think of the impact of that as being effectively obviously consumer higher gross margin some 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? And would it be fair to say that there are more kind of addressable costs in the consumer division as you've got advertising, there are a number of different cost levers that you can pull. So I'm just thinking as you are moving forward and how you behave and how you're going to deal sales evolution, are you pretty confident that actually what has happened in Consumer can be addressed over the next 9 months guess, in terms of just staying on track relative to what has happened in the trade side? So let's take the second one first, John. There are more levers in consumer. The important thing is, is when you pull levers that you don't damage the business, over the medium term, So Simon and the team are being very sensitive to that fact. But you know, as you can see from these numbers, it is challenging in Consumer. And in particular, Wix is fighting very hard, competing well against its direct peers. But actually it's very tough in that part of the world. In terms of contracts, I mean, we've said for some time, we've got 3 brilliant businesses there. Keep key lines at a much slower start and directly responsible for the sort of southern ground in the weather. The underlying order book is okay. I think we watch to second half with a bit of caution, but it is difficult to read the tea leaves at this point in time. John, I would add we're clearly watching the fallout from demise of Carillan 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 Quarter on the market as well, but overall, all three businesses are in really good health. So 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 relates to the weather conditions? Yes, I mean, you're nervous, John, but you know, of that contracts division at least 85 close to 90 is delivered. So it's going to get sort of hammered in those situations when the road in the sites were in that sort of state of that period. Brilliant. And sorry, just the I know we appreciate this is sales in the quarter, but just because it's mentioned by Alan, the Curillion point and particularly the not Curillium, 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 your 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 It's somewhat difficult to tell at this stage quite how much longer the impact will go on. We've seen some indications of subcontractors to the struggles and there were some public examples on some of those. I think that will continue for another 3 6 months, but it is quite difficult to predict exactly when and how. If there were any thing that we're particularly concerning us from a health of subcontractors, which the small material we'd have set so in the statement. We've got good vision, John. We've got good vision, John, but not 2020 vision. Because it was very widespread. Those are more acutely effective. We're working and got good ability. It's the ripple effect that sometimes can catch people later. The next question we have comes from Gregor Coolidge of UBS. Please go ahead. Hi, good morning. I have a question on consumer. I mean, obviously, one your competitors, I think, is doing particularly poorly and I guess there's the sort of outcome strategic review, I think, sort of the next couple of months. So I want to understand how you're setting up the business. Are you kind of in a wait and see mode until kind of get some clarity on that before you perhaps drive harder on costs given the trading environment? And 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. Greg, correct. Just 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. And then I know this is a call in Q1. You may back this one back, but Obviously, we've now almost through April, whether it's been a bit better. So are you confident that what you're saying on weather is in fact the weather and not a weaker market. So 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. Yes. So 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, and 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 anything from what you see from retail, the consumer's looking more than on more fragile, rather than less at this stage, but there are clearly 1 or 2 more positive things that could come along for example, the fact that consumer price inflation looks unabated an average wage inflation has crossed over again with the CPI metric. Appreciate it. Our next questioner is Howard Seymour of Numis, Howard. Thank you. Good morning gents. Hi, Howard. Good morning. A couple on the consumer side, if I may. Just to follow-up slightly, Alan, what you just mentioned there. Because obviously as we look at sort of the retail space, things a pay to be getting worse, you alluded to sort of continued pressure. Are you seeing it getting worse at the moment or a 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. Yes. 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, the previous question there is clearly a change in the competitive dynamic that's happened within that DIY shed market. So 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. And secondly, I totally appreciate say on pricing, etcetera, not wanted 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, etcetera. 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? So I don't think that's a particular factor in the market at this stage for us, Howard. Thank you. Our next question is Ami Galla of Citigroup, Ami. Please go ahead. Thank you. Just two for me as well. On General Merchanting, I was wondering if you could talk a bit about the trends 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 and H. Have we completed the entire store closure process or incrementally should we see that increase over the following quarters? Thank you. So on the P and H side, we have still got 1 or 2 situations that we think we can take advantage of in consolidating and but it the large wave of closures is now ceased and where we are now more in more precision and Tony and his team have got some target areas where we think we can actually benefit we've consolidating rather than closing. On the 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 first quarter. I don't think we're seeing anything particularly unusual going on in the market. I there is scope to continue to build in the medium term on the investments that we've made in the business, and we remain the Okay. Thank you. Our next questionnaire is Michael Mitchell of Davy. Michael, your line is now open to ask your question. Yes, good morning. Good morning all. And just a follow-up on really from where you were out there on. On general emergency account, I appreciate it's obviously difficult to get a cover on the line trend as he's described real performance in general purchasing as resilient. But is there anything to suggest that the market has deteriorated over the last couple of months or we are comments earlier about a similar kind of outlook as what we had in Q3, Q4 to suggest that actually the market is probably where we were at the turn of the year. I think if you try and unpick the weather impact, I don't think we've seen a change in underlying trends within the The next question is Charlie Campbell of Liberum. Please go ahead. Hi, good morning. Yes, this is Charlie Campbell here. A lot of questions have already been answered. I think so. So just one for 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 when whether that moving from into Q1 has a meaningful impact when we think about like for likes in Q1 and Q2 for this year? So it's made tricky charlied by the fact that Good Friday Easter Saturday were in March and Q1. And then the Easter Sunday and Easter Monday Eastern Monday tending to be the bigger overall day of the full day weekend fell in Q2. So I think in the context of the market, we were pleased with our overall Easter trading. So Easter is a that period and the timing of the bank holidays in May relative to where Easter falls are clearly really important parts of the, the overall DIY patterns of the year. Charlie, if it helps, I always tell people, Easter at Wix is equivalent to Christmas at Devon Okay. Our next question is from Andy Murphy of Merrill Lynch. Good morning, John. Good morning, Alan. A few questions obviously been answered already, but it's, I was just wondering on the consumer side, that the figure of minus 4.6. Given what you're saying about pricing is probably plus 2.5, let's say, it fair to say that across that division as a whole, you're talking about probably minus 7 in terms of volumes? And then 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? So well, you're right, we the if we look at overall price trends within the business, And let's say I haven't seen a particularly different trend between the general merchanting, plumbing and heating 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 market. So the I'm going to answer it by saying the trend in consumer is not that different from general merchanting P and H. So in terms of further cost levers that we can pull, we're obviously, if things get markedly worse. I think we took actions 10 years ago within the this in a at the time of 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've taken at that stage. At this stage, we are 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, then 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, etcetera, trip. The next question is Clyde Lewis of Peel Hunt. Clyde. Your line is open. Please go ahead. Good morning, John. Good morning, Alan. I think I've still got 3, if I may. Well. First one, on the, when you refer to sort of broadly flat, sort of volumes and sort of pricing, would you be driving the overall growth. Are you talking on a like for like basis or on a total sales basis, just to sort of clarify on that point? Yes. It would be more on the like for like. Regionally, there been any material differences in terms of sort of activity levels across the country? Not noticeably Clyde. Okay. Thank you. And the last one was on, your sort of out of the content and your indicators. You talk about sort of a mixed bag of indicators. I'm just wondering which ones you would read as positively at the moment. I think it's a variation on a different degrees, Clyde. How in transactions are not planking. And consumer 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, but equally, we remain overall with what we can see in front of pretty positive in terms of delivery across 2018. Claude, I think in these tricky Southern markets, you have to look a lot to self help. And that's certainly what we're doing at the moment. Our next question comes from Lars Mahindraja of Berenberg. Hi there. Good morning guys. Two questions, if I may. First is on Plumbing Heating. You're saying at full year results, like for likes would be pretty good this year, but you might see some softness on the margin front, given like for likes have been sort of bad I guess most people have anticipated. Is that beneficial or detrimental to your margins versus what you're expecting at the start of the year? Secondly, on Consumer, it was obviously one of your competitors seeing issues, if and or when they're potential sites come up for sale? Was that something you'd be interested in? Or are you still happy with that portfolio? I think we're sitting watching, and, you know, we didn't want to comment at this stage, regarding that competitor. In terms of the, I don't actually remember the comment regarding margin. So on plumbing and heating, I think, there's nothing from a gross margin point of view within the division that would be remarkable or difference in terms of the trend? Yes, 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, So there is a slight adverse mix to the group, but it's not material overall. Our next question is Aynsley Lammin of Canaccord. Please go ahead. Hi, good morning. And just two quick ones, I think, left for me. Firstly, one there's any change in kind of trends in bad debt anything you can say there? And then secondly, just on the cash flow side, obviously, you're cutting costs, but wondered if you're, if a 1,000,000 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? Hi, Ann. So 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 1 or 2 minor specifics, within the Korean subcontractor environment, we have insurance against some of those debt. But overall, it will be at this stage no different to the from the normal pattern that we or normal bad debt percentage reserve. We currently have no further questions. So then thank you very much for your time and we'll see you in late July. Thank you.