Good morning. Welcome, finally, to the Travis Perkins Results Presentation. For any of you who do not know me, I am Geoff Drabble. I became formally the Chairman of Travis Perkins on the 1st of February this year. It has been an interesting first couple of months culminating in today's results. Look, I am going to do a brief introduction and also just make a few observations before I hand over to Duncan, who will take us through the majority of the presentation. Obviously, we will get into Q&A, which I think will be the most interesting once that presentation is complete. Sorry, there we go. It has been a while since I did this. I am a little bit out of practice. Look, whilst I started on the 1st of February, really, I was working closely with Pete from the moment he joined.
Look, we're all very disappointed that Pete has been able to build on the good work that he started in his brief tenure with us. He and I had very, very similar views of this business. Look, you'll be tired of us all telling you this, but the group does have incredibly strong fundamentals. It's got a great network, got good people, it's got long-standing relationships and some good brands. I can promise you, the vast majority of our competitors in this industry would love to have all of the strong fundamentals that we have as a business in Travis Perkins. Having said that, we have this unerring knack of scoring own goals and messing up the strong fundamentals that we have. Over recent years, in my opinion, there have been a number of strategic missteps.
In particular, around about a year ago, where we had something of a management void, there were some quite serious tactical blunders, which has resulted in us having way too much attrition in our staff. When I look through those strategic missteps or those tactical blunders, look, we can get into Q&A what they specifically were. They all, in my opinion, have a very common theme. The common theme was there was a lack of clarity of what our business model was and what we were trying to achieve. Actually, I think the culture which existed within the business worked against our likely achievement of that business model. What does that mean? Look, it's all written down here. It all sounds very MBA. Look, what we need is a focused entrepreneurial local business.
You win business in this industry on a postcode-by-postcode basis based on relationships. We are a relationship business. We will not ever replace those relationships with digital or the format of our locations. We are not a retail business. We need to rebuild that trust back into those core relationships and that core entrepreneurial flair out in the field. Having said that, that is not the only thing we can do. Whilst there have been some strategic missteps, some of the things we have put in place to leverage our scale and differentiate ourselves from a lot of our smaller competitors really do have value. There has been a lot of work done. I look at areas such as the apps and some of our digital data stacks where we clearly have market-leading capabilities. I am not convinced we have applied them terribly well.
I think there's some work we can do to join up the dots to make sure that we get benefit from them in the immediate term. At least they're there. It would take us a lot longer to build those things than it will to work out how best to apply them. With that in mind, what do we need to do going forward? Look, what we need to do going forward is refocus on the practical day-to-day running of this business. I think we've made some good starts in that. We are carrying on work which Pete started. By the time we get to Easter, we will have reorganized the business into strong functional leadership with leaders in each of the key verticals within our business.
We will end up with a head of our contracts business with a number of MDs reporting to them. We'll end up with a head of Toolstation, and we will end up with a head of the Green & Gold merchanting business too. We have refocused the business as of yesterday. We launched a series of product initiatives across the business backed by far more flexible, far more immediate short-term bonus plans and sales commission programs. We have just re-energized the business and got it back to doing what it ought to do. Culturally, we're working very, very hard on the center, working far more closely with the people out in the field. There's responsibility in both regards there.
The field felt disenfranchised as they saw a number of initiatives taking place over recent years and stopped engaging with the business and stopped engaging with the center. The center got really, really frustrated because it was actually coming up with some very good ideas and things which will take this business forward in the long-term, and they were not getting traction. What we are going to do and what we are focusing on in the short-term is just joining up those dots that already exist. How is that happening in the absence of a CEO? It is happening because what I have been really pleasantly surprised with over the last four or five weeks is the strength and depth we have around our key leadership group. There is going to be a call later this morning with what we call the key leadership group, which we have been having regularly.
Those people have really stepped up. Actually, all of the initiatives I have just talked about, they have come up with those initiatives, and they are the people who are implementing those initiatives. Is any good going to come of this? I think that level of the organization had not been listened to, did not feel empowered prior to all of this change. Now, out of necessity, they are doing so, and they are doing so well. When I finally step back and become a chair again, this will have been a somewhat intense induction period. If as a result of that, I know an awful lot more about the business and the next level of the organization has stepped up and taken responsibility, it will create an environment where a newcoming CEO will be inheriting the best possible business going forward.
Look, as I said, I suspect we will cover quite a bit of that again in Q&A, which is the appropriate point at which to do it. With that, I'll hand over now to Duncan to take us through the financial review.
Thanks, Geoff. Good morning, everyone. I am going to cover the usual components of the financial review for 2024. I want to start off, if I can, just by giving us some overall context for the year. It has clearly been a challenging year from a trading standpoint, but it has also been a year of significant change for the group. Change and action which orientates us more positively from a performance perspective as market conditions improve. Also, change that has protected our balance sheet and ensures we retain a strong financial position on which to build the turnaround of this business. In Toolstation U.K., we saw a further step on in profitability as we continued to execute our plans to grow that business in line with our previous guidance.
In Toolstation Europe, we took the difficult but necessary decision to close Toolstation France, and accordingly, are reporting it as a discontinued operation in our year-end numbers, eliminating a significant loss from our go-forward performance and restating our prior year comparatives as is appropriate. Closing a business in France is not a straightforward exercise. I would like to recognize and thank the teams involved internally who have made that happen. In Toolstation Benelux, we have successfully repositioned the business from an ongoing growth strategy to a returns-focused agenda with a clear focus on achieving sustainable profitability as soon as possible. Again, for context, that has been a GBP 20 million loss and GBP 30 million loss in the past two trading years. Across the business and in everything we do, we have applied more rigor and discipline in how we can generate cash and use that cash.
That is reflected in our enhanced year-on-year cash position and reduced net debt. These efforts have underpinned our ability to partially refinance our 2026 maturing corporate bond through access to the U.S. private placement market in Q1 2025 on an investment-grade basis. However, there is no shying away from the fact that our merchant businesses have continued to underperform versus our expectations. I'll talk more about that in more detail later. Finally, as we outlined at the half year back in August, from the 1st of July 2024, the group moved the general merchant, CCF, and Keyline businesses onto Oracle Financials as part of a major technology upgrade. As a reminder, Travis Perkins has not made any significant investment into ERP technology for over a generation. This was never going to be a straightforward transition.
As is always the case, some elements are progressing well, and some others are more challenging. Let me start off with what's going well. The first thing to say is the tech ostensibly works. We've taken the out-of-the-box solution and customized very little. We now have a modern purchase ordering system with escalating sign-offs. We have a sophisticated stock valuation engine that gives us true weighted average cost of stock. We are starting to see the benefits of the enhanced data and insights Oracle will give us over the longer term. What are the challenges? The main ones have been in respect of our financial operations. Oracle places a much greater level of checking discipline over the detail required to pay an invoice.
If the detail we receive on an invoice differs from the detail of the order we raised, the order will go into a queue to be manually resolved. In short, we have accrued a significant backlog of invoices, which has had an impact on our working capital position. I will come back to this in more detail. It has also created frustration for our colleagues on the front line who have to interact with suppliers and customers. I would like to thank all three communities for their support and understanding as we have made this transition. In response, we have recruited additional resources into our central teams to address this backlog and are working with Oracle, and we are starting to see this backlog reduce.
In addition, our commercial teams are also actively working with our suppliers to ensure our data sets are better aligned to reduce the exceptions we create in the future. The second challenge is the operating speed and flexibility Oracle gives us in some parts of the business for certain order types. Again, we're continuing to investigate ways in which we can make this more efficient and user-friendly for our colleagues. In summary, we are making good progress, but these adjustments have been difficult, and they're going to remain a key focus for the business in 2025. Coming on to the financial overview, all of these numbers are represented for 2023 on a continuing business basis only, i.e., with Toolstation France excluded.
Group revenue was GBP 4.6 billion, down 4.7% on prior year, with adjusted operating profit down 23.2% to GBP 152 million in line with the guidance we issued in our Q3 2024 trading update back in October. Adjusted earnings per share was 36.6 pence per share, down 32.7%, reflecting the lower earnings year-on-year and also the higher finance costs and effective tax rate. Net debt before leases was down 39.2% from GBP 340 million to GBP 191 million. That has driven a slight reduction in leverage despite the year-on-year reduction in adjusted operating profit from 2.6x to 2.5x . Finally, the board is recommending a final dividend of 9 pence per share to go with the interim dividend of 5.5 pence per share, making 14.5 pence for the full year. This payout is in line with the group's policy to pay a dividend of 30%-40% of adjusted earnings.
Let me come on to discussing the trading environment, and I'll reiterate some of the things I said at half year. The biggest revenue drivers for us are RMI activity, repairs, maintenance, and improvement activity, and new house building. Following two years of a cost of living crisis, household budgets are stretched, and most major RMI projects will be financed by additional borrowing of some sort. We have remained in a suspended state for some time about the evolution of inflation and interest rates. The path to inflation normalizing and rates coming down keeps being pushed right. At the same time, the geopolitical landscape remains uncertain. Both of these factors play into consumer confidence and risk appetite in making major or significant RMI commitments, and that has remained the case into the start of 2025.
From a house-building perspective, we have oscillated between one of the highest years for new housing starts ever recorded in 2023 to jointly the lowest along with the GFC year in 2024. Within this context, demand has been significantly impacted, and volume share has been heavily contested through price as the competitive intensity has gradually risen, exacerbated by commodity price deflation. Against this backdrop, the self-inflicted operational challenges both Geoff and I outlined at the start have put us in a weaker position to respond across all of our merchanting businesses. Specifically, though, in the general merchant business, this saw us move from a position of holding market share through 2023 and into H1 2024, and then steadily start to seed share in H2.
The next bar reflects the loss of revenue from the net branch closures across the group, excluding Toolstation France, and which are detailed in the appendix. The trading day bar reflects three additional trading days in 2024 versus 2023. On the next slide, we've provided the usual operating profit walk year-on-year, and I'll walk through these again each in turn. The GBP 198 million for 2023 is the GBP 180 million we reported last year, adjusted for Toolstation France as the starting point. The gross profit decline is a reflection of the operational performance dynamics I've already referred to on the previous slide and is by some margin the biggest variance year-on-year. Next is overhead inflation, and this is predominantly driven by wage inflation, rent increases, and general cost inflation during the year.
Finally, the adverse variances conclude with a GBP 4 million lower contribution from property profits compared to prior year. Actions and impacts we have taken to offset these are as follows. Firstly, and as I outlined at the half year, we conducted a detailed review of discretionary expenditure at the start of the year and have maintained a disciplined stance towards this throughout 2024. That equates to around a GBP 35 million saving. The next bar is the annualized effect of the restructuring program we implemented at the end of 2023. As Geoff outlined at the outset, with the benefit of hindsight, these changes have weakened our operational effectiveness during the year, and we have already started to actively reinvest in some of those roles and capabilities. That said, the saving effect for the year is around another GBP 35 million.
Next is the margin effect of the trading day benefit I outlined on the previous slide, worth around GBP 30 million. Then come the two Toolstation bars, the first being the additional contribution from the growth of Toolstation U.K., and the second being the effect of our change in strategy in Toolstation Benelux. As a reminder, we communicated at the start of last year that we were conducting a strategic review into the Benelux business and announced the outputs of that review at the half year. We considered all options for the business and concluded that given the invested capital to date, the right thing for the group and shareholders was to accelerate the path to profitability.
It is a far more mature business than France was, with 110 stores offering high saturation and coverage in the Netherlands in particular, and the customer proposition is more aligned to how the Dutch and Belgian trades already operate. Through a combination of underperforming store closures, central headcount savings, joining a buying group to enhance gross margins, and outsourcing our logistics and supply chain operations to a third party, we've managed to reduce the loss by GBP 7 million year-on-year, and the teams are firmly focused on driving for break-even and thereafter providing a positive contribution to group profitability. That then brings us to the GBP 152 million for 2024 in line with the guidance we provided at the Q3 trading update when adjusting for France. On the next slide, we detail the adjusting items we have recorded during the year.
The first line is a GBP 63 million charge in respect of branch impairments, and GBP 57 million relates to the general merchant and CCF businesses, with the balance spread across the other businesses within the group. This is a non-cash charge and arises from the application of IAS 36, where the group is required to adjust the carrying value of individual branches on the balance sheet to our latest view of the future discounted cash flows generated from these assets. The second line is a GBP 33 million charge in respect of Staircraft, again non-cash, and predominantly comprises goodwill. The full breakdown of these calculations and the assumptions used for them can be found in note 29 to the accounts.
Next is a GBP 26 million charge arising from the restructuring activity conducted during the year, including GBP 9 million of dilapidations and other property-related items, GBP 30 million of stock impairments, and GBP 4 million of other costs. The final two lines reflect central and regional restructuring activity in the year, amounting to GBP 11 million, and the costs associated with closing 39 standalone Benchmarx branches amounting to GBP 6 million as we continue to refocus our proposition. Over on to the next slide, I want to talk you through the actions we've taken to enhance cash generation and protect the balance sheet against this challenging trading backdrop. If I walk down the face of the table, you can see the headwinds we've faced year-on-year, the first and most obvious being the lower level of cash inflow arising from underlying profitability and trading operations.
The second line represents the cash outflows for the restructuring activity in the year and the costs of closing Toolstation France. We estimate around another GBP 15 million of cash outflows to fulfill our remaining obligations for France phased across 2025 and 2026. The next line represents the impact of our first year-end on Oracle. I have already talked about some of the implementation challenges at the outset. Since the cutover in July, a supplier invoice backlog has arisen, which we have been successfully working through since. This has seen us prioritize and pay a higher proportion of our suppliers on account because we can and because we value those relationships, with a consequent lag in the time it is taking us to collect outstanding debt from some customers, and hence the GBP 58 million working capital outflow, GBP 36 million adverse to the prior year.
As we continue to embed and optimize Oracle, we expect this working capital position to normalize during 2025. We are already seeing in the first few months of this year that our cash collection rate is running ahead of our sales rate. The remaining lines all represent positive variances to prior year, and I'll start with stock. I talked at the half year about the focus we were placing on tighter inventory management across the group, and this has yielded a GBP 64 million lower stock position year-on-year. I'm really pleased with the way our operational and commercial teams have embraced this challenge, and we continue to review all of our materials categories and have further opportunities to pursue this year.
We've also exercised a greater level of discipline and oversight on capital expenditure, which was GBP 64 million for the year, below our guidance of GBP 80 million and GBP 43 million lower than prior year. To be clear, this is not a sustainable or desirable level of expenditure for us on a steady-state basis. We want to invest in modernizing our fleet, upgrading our estate, and as Geoff's already alluded to, we want to invest in the new tools and technologies that will make us more efficient and deliver a better customer experience. Given the current trading backdrop and our commitment to carefully manage our leverage back down, it's been the right thing to do. Finally, we obviously took the difficult decision in early 2024 in respect of the final 2023 dividend to rebase the dividend to the top end of our payout ratio within our prevailing dividend policy.
This was not a decision we took lightly. We understand the importance of the dividend to some shareholders. However, in light of the way the financial performance has evolved, the GBP 59 million favorable variance on prior year should be seen as a logical component of us protecting the balance sheet. If I bring those parts together to explain the overall impact on net debt, which is down significantly on prior year on both an including and excluding lease basis. During the year, we unwound an SPV that had historically been used to fund the TP-defined benefit pension scheme. On the basis that this scheme is no longer in deficit, we have collapsed the SPV, and that has reduced net debt by GBP 25 million. The increase in lease debt arises from sale and lease-back activity during the year and the electrification of our forklift truck fleet.
The overall impact of the actions we have taken has seen us deliver a moderate reduction in year-on-year leverage, down to 2.5x , notwithstanding the significant reduction in year-on-year earnings. I will reiterate the previous guidance I have issued and firmly subscribe to that this group should be operating inside a 1.5-2 times leverage range on a long-run basis. We will continue to maintain a vigilant focus on cash and capital allocation, as you would expect, and we continue to review the balance sheet for non-core assets and disposals that support this objective. Finally, for information in 2025, we have successfully started to refinance the GBP 250 million corporate bond due to mature in 2026, with GBP 125 million of U.S. private placement debt secured on an investment-grade basis in Q1 this year.
This debt has maturities ranging from 2028- 2035 at an average coupon of 6.4%, the maturity and currency profile of which are detailed in the appendix. Let me summarize. On current trading and in merchanting, we have definitely moved out of the aggressive input deflation we were experiencing at the start of last year, specifically on timber. We are starting to see manufacturers' price increases coming through, and where possible, we are seeking to pass those through. The competitive landscape I referred to earlier on means there is limited sequentially improving pricing power at the moment, and therefore it is best described as pricing having stabilized with volumes remaining in modest decline. By contrast, in Toolstation U.K., we've made a solid start to this year and are in line with our expectations.
There are some early signs of recovery in some elements of the U.K. construction sector. For example, house building activity is definitely starting to increase, as illustrated by the House Builders' own outlook guidance. However, overall, there remains significant uncertainty in the timing and strength of the U.K. construction recovery, especially in RMI. Our focus, therefore, will remain on what we can control. It will be to continue to implement the actions that will rebuild this business, empower our frontline colleagues, and deliver a better customer service. From a financial perspective, we'll continue to keep a tight grip on discretionary expenditure and look for further ways to enhance our cash generation. I will conclude with our full year 2025 guidance. We expect base capital expenditure to be around GBP 80 million, property profits to be around GBP 3 million, and an effective tax rate of around 30% on U.K.-generated profits.
Finally, we expect full year 2025 operating profit, excluding property profits, to be broadly in line with full year 2024, also on an excluding property profit basis. With that, I will start Q&A. Here we go. Might as well start at the front here. Doesn't matter. We'll get to everybody.
Okay. I'll start. Thanks. It's Ainsley Lammon from Investec. I think I've got three questions, actually. First question on recent trading, kind of you call it mixed trading. I think suggests that volumes may be down low single-digit type level in merchanting. How does that compare to the wider market? If you're losing share still in this year, kind of how quickly can you start to move more in line with the market given the kind of issues you mentioned earlier? Second question, just appreciate some more color on pricing between Toolstation and merchanting.
You said some input cost inflation. Is it just more difficult, very competitive in the merchant side? Interest here, a bit more color there to pass those on. Thirdly, on the implied your guidance, what's the implied kind of loss or is it break-even in Benelux Toolstation for the 140 this year? Thanks.
Yeah. Ainsley, I'll be a little opaque and potentially frustrating on current trading because we're not far away from Q1 in terms of giving you a bit more color on that. I think on the market share data look, it's not that robust. I think looking at it on a kind of month-by-month basis, we've talked about this previously, is not desperately useful. I think when you look at it across, and as I made the comment in the script about the second half, we had ceded share.
I think on that basis, we're more confident that it's a robust measure. I maybe ask Geoff to comment around how quickly we think we can address that and turn that around and start moving it back. I think on pricing, look, generally in the it's a different split, isn't it, between the two parts of the business. In merchanting, where also in Toolstation, where it's a retail model, that pricing power has a far greater degree of both control and ability to be passed through because of who the relative competitive set is. In merchanting, it's far more intensely competitive at the moment, and any kind of pricing power we're getting is being sort of hardly contested and fought. I think your comment around low single digits is sort of right indicatively, but I'll give you the more detail on the Q1.
On Benelux, look, I think the market, particularly in Holland, is very similar to the U.K. at the moment. That will not surprise you for me to say that to you. I think it will be unlikely that we will get Benelux to an absolute break-even position for the full year 2025. I would still anticipate we will still have a small and moderate loss, but 20 down to 13, significantly closer than that. I think we will be in a place where we are probably on an exit, very close to an exit rate break-even position in that business. It is to say in a very different space and sort of status to where France was.
In terms of market share, [Duncan is right]. I am not sure the data is great.
If you look at our data, it probably suggests over the course of the last 12 months, we've lost around about 200 basis points of market share. I would caveat that with some feedback from suppliers who say, "No, you're doing yourself a disservice." That's not as bad as it sounds. We have lost market share. There's no question about it. We've lost market share because we've had a huge amount of attrition over recent years in terms of our sales force. If I look at the actions Pete started and we've reinforced over recent weeks, that attrition has largely come to an end. Indeed, positively, we're starting to see growth in our sales force. We're making a lot of tasks fall easier out in the field, as Duncan said, around reinvestment.
He's on big financial sums, but look, how hard is it to get a replacement driver if your drivers are off sick? The answer is, it was really hard. Guess what? Therefore, we couldn't deliver, and now it's really easy again. There are a series of things that we have done in the short-term, including incentive plans, which I think we will start to see the benefit of through the next quarter. Precisely how that works out net in this first quarter, I don't know, because we have lost some salespeople, and we will lose some sales revenue as a consequence. I can kind of get my head around what we are doing and how that will give us positively. There is stuff in the hopper, which we've probably still got to lose, and I'm not quite sure how that all balances out.
This is not rocket science, okay? These are not the Lionel Messi's of sales forces that we have lost here. Most of them have a bag of business, and it traipses around all the competition on a fairly regular basis. What we need is stability and focus and a cultural awareness that people in the field, be they location managers or sales force, are important. I think we'll turn it around pretty quickly if we can get the confluence of short-term incentive plans paying out with a modest recovery in the market. That change in momentum will change this business very, very quickly. I would reiterate, look, I have been reaching out to people who have left this business, and life is not great anywhere else. Let's be absolutely clear. We have a lot of things which are very, very important and we're very, very strong at.
Therefore, I would expect us in relative terms to be seeing an improvement within a quarter or two. Now, what that means in financial terms will depend on what the broader macroeconomic environment is. In relative terms, this is basic operational management, which unfortunately has been lost in recent times.
Thank you, [Arnold Imman] from Bank of America. I have three findings. Firstly, just confirm that the delay in the reporting is just an auditing issue, and there was nothing flagged specifically by the auditors that generated this delay. Second one for Geoff. I mean, I guess you're the Chairman. You didn't expect to get involved, I guess, so quick, so much in the day-to-day operation. What's your actual role? Are you acting CEO? I guess the broader question is, what can you do in terms of improving the business for the short and the long-term?
What would you leave to whoever will be CEO going forward? The last one, focusing on what seems to be good news around Toolstation U.K.. You've done well in 2024. You seem to expect to continue to do well in 2025. U.K. macro is not great. Can you tell us a little bit more about why you think this business can continue to improve this year?
Do you want to start with the auditor?
Yeah, I can. That's an easy one. There's nothing that's in anything related to the fact we're just taking a bit longer to complete the audit process. It's frustrating and not lost on me. The optics, particularly with Pete's news, created some questions, but they are entirely mutually exclusive events.
Look, what's my role? My role is to be whatever it needs to be. We haven't changed job titles.
I'm not called interim CEO or anything like that. This is my third chair role. What I've experienced is you go through an awful long period of time where you don't deserve your money and you do bugger all. Then there are periods of intense activity where you've got to step up and do what's required. This falls into the category of stepping up and doing what is required. Mrs. Drabble has a significant influence in me turning this business around very, very quickly. Look, this is a sector I know fairly well. There are decisions that need to be taken where I think I can create an environment where people can make those decisions.
I think some very good things have been done in the last five weeks, many of them carrying on from work that Pete started, but largely because I have been impressed by the quality of people who perhaps have not been listened to for quite some time, and now I'm relying on very, very heavily. Yes, I can take away some roadblocks. I can create an environment in which they can make decisions, and we can feel like a proper trading business again. We actually had this one or two of the people who were in the meeting yesterday, what's called the SLT, which is really the management team for the merchanting business. They learned some really good things yesterday, which I'm quite encouraged about. I felt there was an energy in the business.
If I had a pound for every time in this industry I had seen in a budget preparation in different businesses a SWOT analysis where the threat was, what if Travis Perkins ever gets its act back together again? We are going to be that T for the foreseeable future. That is the threat for the other people within this industry.
Toolstation U.K.
Yeah, I mean, it is lots of what I just talked about, we both talked about in terms of some of the operational challenges obviously do not affect Toolstation, which is helpful. It is a really great quality business. It has got a very experienced and stable management team. We are sort of firmly on with the plans we outlined back at the last capital markets update on that, and do not feel we have got anything else to add. It remains on track.
I can answer that.
I knew relatively little about Toolstation. It's not a model I knew particularly well, but I'm really quite excited by it. I think it has real structural tailwinds behind it. I think I'd quite like us to get out of the zero-sum game of it's either us or Screwfix who wins, because I think actually the whole sector can win, and actually we can both profit from being a very good alternative to traditional ways of acquiring light-side equipment. I think we need to raise our aspirations in terms of what the profitability can be by individual location, and the profitability can be as a whole. It's been fortunate that it's been relatively immune to some of the disruption which has affected the rest of the business, and you can see the benefits of that in its own performance.
I think as a benchmark of what we can be, I think it's a very good benchmark.
Thanks. Will Jones from Redburn Atlantic. I'll try three as well, please. The first, just on those hiring needs, perhaps you could help us just size what needs to be done. I think you've got 720 merchant branches. Any context as to how many of those need kind of new leadership, or were lost through the attrition? Second is just when you think about that tension between the center and the field. I think you mentioned some sense of initiatives that had come from the center that weren't really taken up. What were those? Previously, I think you'd talked about potentially looking at taking some cost out of the center and redeploying it to the fields. Is that still the case?
Is it still a net not a lot happening on a kind of cost-savings basis as a result of those kind of flows? The last one was just around pricing and gross margin. You mentioned the limited pricing power currently. Are you able to push that back to the manufacturers, or are you taking a bit of a hit on the gross margin? Just whether there are any other mixed factors in the gross to think about this year?
Yeah, look, let me start with the levels of investment on a location-by-location basis. We have location managers in pretty much all locations. I'm not saying we haven't got some vacancies. I'm not following it by vacancy-by-vacancy basis. We have been through the worst of the churn, and therefore we are now settling down a new management team.
I checked this statistic in a meeting yesterday because there is a gentleman who runs our northern region who has done this amazing job. I was checking the statistic that he gave me once or twice before in case I happened to refer to it today to make sure it was accurate. He basically, over a one-year period, lost every single depot manager he had in that northern region. Over the course of the last 12 months- 18 months, he has replaced them. He will tell you he is delighted that he lost some of them and less delighted that he lost others, but he is very confident about his team. If you look at the performance of his region, given that level of disruption, it is performing incredibly well, which just goes to show the innate robustness of our business.
What he does need is a few more salespeople and an easy ability to have some slightly younger trucks, and he needs to be able to get replacement drivers so he can get deliveries out on time. These are not massive investments. We are a cash-generative business. From an operating cash, Duncan and team have done a very good job on cash. We will redeploy the cash we are generating on those operating needs. There are going to be no fancy new grandiose projects that we'll be announcing anytime soon. We will be reinvesting in the core delivery within our business. I think from that perspective, we're in pretty good shape. In terms of the center and the field, let me try and give you a couple of examples.
Before I took this job, I signed up for all of the Travis Perkins apps because I wanted to see if they were any good. I have a disagreement with some of the people in the business who do not fully agree with me. I am a great believer in apps. If you look at how apps transform, like things like Click and Collect transformed the prospects of businesses like Ashtead and Ferguson, that utilization and making transacting with us earlier easier for the small to mid-sized business, our apps are really quite good. Our data stacks in terms of how we can slice and dice different information, who we trade with, etc., is remarkably good. I would have said we are years ahead of other businesses I know in this industry. Because of all the disruption, are our depot managers accessing that information and getting any advantage from it right now?
No. What we're doing is we're winning awards from functional IT departments saying we've got the best data stack in the industry. That's true, but that's of no use to me whatsoever unless we're using it out in the field. What we are, we started this mantra, which is if you're in a central organization, I want you every day to wake up and say, "What have I done to improve the life of the field and generate sales?" I'm sort of banning us going to win awards. I want us to use the information we've got to improve the business. It is going to be a way quicker to improve that communication flow than it is to build that. It will take our competitors up to five years to build the quality of information.
Again, I happen to be out at a location where people were bemoaning this. The key to running a sales force in this industry in the U.K. is something called a Glenigan report, which basically tells you where every construction site is, what's there. You've got to follow that information, get your sales force out on site very, very quickly. The local depot managers were bemoaning the fact they didn't quite know how to get Glenigan reports anymore. You can debate whether they should have done, but they were telling me they didn't. I then happened to bump into this gentleman who runs our data by pure chance in the location in Paddington. I asked him what he was doing, and he showed me the most impressive set of analysis of Glenigan reports I've ever, ever had. It's there. We just weren't using it.
That is why, look, people are going to hear me talk about re-empowering the field and entrepreneurial nature out in the field. That is true. I fundamentally believe in that. That is what will win us back market share in the short-term. In the medium to long-term, what will make us winners is the adoption of a lot of the technology and a lot of the investments that we have already made. That is where I believe, together with a new CEO, we can bring some pace to the improvement in this business.
Your last one was on pricing. Look, no, I mean, we are traditionally a pass-through business.
What I would say is that, I mean, given the relative stress that's in the sector and has been in the last 18 months, and I think we're getting benefits from kind of the changes we've made in terms of having a group commercial-wide view across all our businesses, we're having good quality conversations with a number of material suppliers who perhaps are also not finding life particularly easy at the moment and continue to highlight the fact that as the largest player in this market, they want to support our recovery as much as we want to support theirs as well. That is definitely something I'm seeing a lot of examples of at the moment.
Look, good purchasing is based around good selling.
We have to convince our supply base again, which I think fundamentally they believe, looking at the structure of our business, that we are their best route to improve their business and to improve their market share, that they will go quicker aligned with us than they will with anybody else. Again, perhaps I'm being overly optimistic. I don't think that's a tough sell. It's probably not a conversation we've had sufficiently in recent time. We have to demonstrate that we're going to be really good partners, and then they will utilize our scale to help. These have to be mutually beneficial arrangements.
Morning. It's Charlie Campbell at Stifel. I've got two questions, both on merchanting and broadly related, I think.
I just wonder, kind of when you look at the business model at the moment and you look at the kind of potential gross margins, what your views would be on a kind of couple of aspects. One would be sort of relative pricing against the industry. That has clearly been something that we have debated before in the past and whether that is the right level. Then secondly, you have talked a lot about incentivizing people. I was not quite clear if that is salespeople or branch managers and whether you are going to have to give basically branch managers a bigger share of the economics to get a better result on the ground locally.
Yeah, sure. Look, I believe that we ought to have value-added services which ought to allow us to have some pricing power over our smaller competitors. We are not there now. We are just not.
If we're kidding ourselves that we can price significantly better than anybody else with our recent experience as customer service, that's not true. What we can be is selective in where we fight, but it's where we have regional strength, where we have product strength, and where we have support from suppliers. Do I believe we offer a range of value-added services which ultimately people will be prepared to pay for? Yes. That will particularly become true where you get a chance to gain market share and where you really get a chance to add margin is at the inflection point, where a market starts to turn. Instead of everybody just worrying about cost, they're worrying about getting it. There's a gentleman here who runs our managed service business at the moment. We're having this very conversation only yesterday.
We need to get ourselves ready for that inflection point. I'm not 100% sure when it's going to come. I've lived through enough construction cycles to know it will come. What I will know is, and you can see it already, we are not alone in cutting costs and doing dumb things in this industry in order to survive. Therefore, the capacity in the marketplace to satisfy the market when that inflection point comes will be insufficient. That's what we need to prepare ourselves for. I don't believe we have any significant pricing point. Now, in terms of how we have structured incentivizing our local teams, yes, we have done it as a combination of both the sales force and the local managers. That's really important. We need them working together to understand their patch and winning back local mid-sized trade customers.
They are best served to do that. We can have national teams who can hit big national house builders and big national infrastructures, but to win back that higher margin, mid-sized builder requires, as I said, doing it on a depot-by-depot, postcode-by-postcode basis, a combination of building on those relationships that both salesmen and depot managers have. I believe that will be more than self-funding. It may not be in the first month or the second month, and that's okay because it will be in the short-term and in the medium to long-term. Look, are our medium-term margin aspirations any different to what they were? No. Would I trade volume for margin over the next two quarters? Yes.
Just as a supplementary, just to clarify that, do you see a sort of step change in basically the costs of branch managers, salespeople across the country to move the model maybe more into line with some of the other models that are out there?
Look, it is based. You do not get sales commission unless you sell more. Therefore, to a large extent, proportionately, we should not see a significant change. Yes, to your point, do I believe our core staff should share more in the business economics of this business? Yep, 100%.
Yeah. Thank you. Good morning. It is Ben [Wylde] from Deutsche Numis. Three questions, please. Firstly, on the branch impairments, what exactly have you impaired there? Are the impairments impacting specific businesses or branch types within the group? More color would be helpful there. On Oracle and the disruption that you have described, there is an emphasis on employee churn.
To what extent do you believe that the implementation of Oracle has driven volume underperformance in the last two quarters and into this year? How do you think about that fading? Hopefully. Thirdly, on CapEx, Duncan, you made the point very clearly that GBP 64 million is not a sustainable level of CapEx for this business. What is a sustainable level of CapEx for this business? Thank you.
Would you do one or three?
I'll do two and share.
Fine. I'm not going to go into war and peace on the branch impairments. It's all in note 29 to the accounts, but you can see it in there. On CapEx for the business, look, I mean, we have, on a medium-term run rate, historically been sort of north of 100, more probably more like GBP 120 million of capital expenditure.
I'm not going to be drawn on a specific number on that for obvious reasons because I think there is a I've got a view around how much I think we need to invest in our fleet and invest in our estate, but also need and we're starting to formulate that thinking with Pete clearly, but that'll also be a conversation for whoever replaces Pete as well to start thinking about. We have requirements to invest in upgrading our fleet and our estate. There's no two ways about that. We've been pretty open about it. I think it will definitely come up north of GBP 80 million and be heading somewhere towards that original level of expenditure that we outlined.
I think, again, a growing proportion of digital and IT expenditure as well as we start to invest in some of the things Geoff's talked about that will not necessarily be capital expenditure, but it will still be cash out the door.
In terms of the churn, look, the big period in terms of churn was the first half of last year. We found ourselves in a bit of a leadership void. We had sort of said the CEO was going, but he was not gone. The chair had gone. There was a new chair being looked for. Therefore, there was a very uncertain period. In that uncertain period, there were a number of things, all of which happened together, which was, I think we made some poor decisions around bonuses.
There were one or two other decisions from the center which, in the eyes of the field, rightly or wrongly, restricted their ability to do business in the manner in which they wanted to do business. On top of all of that, here's a new system. The early implementation of that system just made their lives a little bit more difficult. Therefore, if you were in that period of uncertainty, a combination of all of those things, and you got approached, I kind of understand why you'd probably be prepared to leave. We were open season to be attacked by our competition. Pete came in, and as I said, Pete landed really well out in the field. He talked very sensibly about where he wanted to take the business. I found Pete as well as being academically very intelligent to be emotionally intelligent too.
You saw the improvement in those statistics. Again, given some of the decisions that were taken over the five-year period, why had we not lost more people? People know as bad as it is, we are probably the best show in town. We really tested that over a six-month period. It would be wrong to attribute it to Oracle. There was a combination of factors. I believe you can all do some due diligence and check this out with us that we have stopped the physical flow of people leaving us. Indeed, I think we are starting to rebuild the organization. Whether we have stopped the negative sales impact of that or whether there is a tail to that beyond them leaving, that is my uncertainty and precision around what is going to happen in the next quarter or so around revenue.
It would be wrong to blame it on Oracle. It was just one of a range of combining factors.
In your view, Oracle, the system itself is not driving significant customer disruption.
Oh, no, it's causing some disruption. Look, there are two separate issues as I see it. Again, Duncan, you should look. There is the financial bit of matching invoices and paying suppliers because of the quality of our database and matching orders with invoices. Look, we are having to throw in an inordinate amount of resource at fixing it. That's one of the reasons why the audit was to look. When I started as an auditor, I don't know, 40-odd years ago, what you spent your life doing was ticking supplier invoices to statements. No auditor has done that for about 30 or 40 years.
That is what they were back down to doing again to some degree. It has had a disruption to the business. In terms of trading, yes, it has had a disruption because we have been struggling with those invoices. Statements have not been particularly accurate. There is one particular area which is dropship. If we place an order and it gets shipped directly from a supplier directly to a customer, Oracle is very inflexible and takes too long to process an order. Now, you are talking to the person who was the Chairman of Ferguson, and Ferguson wrote off $100 million rather than implement Oracle because it was a slow, cumbersome process. We are not in the same position as that whatsoever. There will have to be a workaround around dropship because it is getting better. Certainly, all of the administrative stuff is certainly getting better.
Luke over there was telling me yesterday we had cut another five minutes off the processing time of dropship, which is great progress. It is still never going to be quick enough, is the truth of the matter, in my humble opinion, because we get better margins when our customers change their mind. We react to their uncertainty of what they want, and we charge them for it. We cannot have a system that says, "No, you cannot change your mind." We need a system that allows them to change their mind. Whilst that seems odd, perhaps to finance people or IT people, that is how our business works, and that is how we make money. Therefore, we will need to do something. It is a minor tweak around a proportion of our business. Again, remember, you can see it. It has not touched Toolstation.
There are huge swathes. It doesn't affect the odd sales. There are significant swathes of our business where it's had no effect. That doesn't mean we shouldn't change it, but it'll be a minor tweak. This is not a ripping out. Again, for all Ferguson wrote off $100 million, their finance system remains on Oracle, and it's a very good system. There are tweaks. Let's be clear. I'm conscious of the internal audience as much as the external audience. We know it needs to be a lot better, and we know how important dropship is.
Thanks for taking my questions, [Zym Becow] from JP Morgan. First question is just on the U.K. housing market. Can you just remind us what your new build exposure is there? Are you more geared to the smaller house builders?
Obviously, the government's got a clear plan to build, so that should be impactful to your business. Secondly, I appreciate a lot has happened since, but the Toolstation U.K. targets, how can we think of that to effectively move that off the table? Thank you.
Yeah, you mean U.K housing markets, I mean, Keyline is probably the most obvious what you describe as our canary in the coal mine reaction in terms of the kind of sort of civils and groundworks attached to that. What I was referring to in my comments around, we're starting to see some early signs of some inflection in that, which you would expect. I think in answering to your question around, we have relationships across all array of the house builders, small, regional, family-owned through to the big nationals as well across all parts of our business.
Those are all important relationships. I think on Toolstation U.K., I would not say take it off the table. I think that is a bit harsh. I mean, I think I have made the comment. I think we are sort of firmly on track in terms of the targets that we have published previously. I have got a very stable and experienced management team. I think Geoff said it at the outset as well. It is an opportunity for a fresh perspective with whoever comes in to be new CEO as well, opportunities and ways in which we can take that business further forward. I would say, no, do not take it off the table. I would say equally with some opportunities and rights to think about where we take the next sort of strategic phase of that business forward and how we take it forward.
I genuinely, as I said, it's a business of all the businesses in here. I knew the least about when I joined. I am genuinely excited. I think I've talked a lot about bad decisions over the last 12 months. A good decision that was taken over the last 12 months was to focus less on opening new locations and just getting growth through new stores and more looking at the profitability and potential of individual stores. I think we can raise our aspirations about the mix of business, the margin of business. Again, it comes down to, is it a retail experience and do we need process, relatively low-paid order pickers in branch, or is there a cross-selling opportunity? If we look at our stocking levels, do we have the appropriate range? Do we have the appropriate quantity of range to be able to satisfy projects?
We have too many products and too few of each product to be a full project supplier. Basic upselling we can do. Should we be offering same-day delivery to site and what are the logistics and cross-stocking requirements? We have built this great big distribution center, which currently is a massive drag on our costs and makes no sense whatsoever. It is never going to be used for the reason it was built. However, I think it will prove to be an excellent investment in terms of our ability if in major conurbations like here in London, we can offer same-day delivery to site and as part of a cross-stocking solution. I think a new CEO coming in can reimagine and be very, very bullish about the potential in Toolstation.
Shane Carberry from Goodbody. Just one follow-on to Charlie's question, if I could.
Just, Geoff, when you talk about kind of empowering the branch managers and becoming more of a localized business, is it fair to call that a little bit of a change in strategy versus the last kind of 6 months- 12 months where we've heard a lot about kind of centralization?
Yeah, absolutely. 100%. Look, we just got it a bit wrong in terms of, again, I will stress this is a relationship business and those relationships are important. Is the world slowly changing and do we need to be at the forefront of that? Yes, we do. Again, look at the proportion of our business that are using apps. Now, again, look, businesses I've been involved in, Ashtead, Ferguson, Howdens have all got apps. Now, how people use the apps is relatively unimportant early on. More often than not, they'll sit at home and clear invoices on it.
They'll start placing orders for collection, either click and collect or for delivery the following day. You need that technology. A growing proportion of our business ought to be click and collect. Ultimately, a person needs to be on site, place an order as they can do at Ferguson, as they can do in Ashtead, track where that order is in the system, and see it being delivered to their site. [Hell], I can do that if I order a curry at home. Why can't I do it if I want to place an order? Ultimately, as I said, a lot of the strategy does make sense. Ultimately, people shouldn't care where we deliver it from, whether it comes from a CCF location, a Toolstation location, or a Greenagle.
They should be able to go on an app, on site, place an order, and we ought to be able to satisfy it. Look, we need to set parameters next day or same day. All of the things we were heading towards have a logic. I am not saying that a lot of them have not been applied as well as they should. None of them, there was a disregard to how that was not mutually exclusive to the culture we have out in the field with the depot manager. What we are doing needed to be complementary to what we already had, and it became substitutional. It became substitutional, most importantly, in the minds of our associates. That is what we have got to change.
In changing it, I don't want to piss off everybody in the center who says, "I don't want you to keep developing this stuff. I just want you to be more aware of what you need to do to make it useful in the hands of our associates." They're really frustrating, but you can see bits everywhere. You thought, "If you could just join up the dots and if you could actually apply some of the capabilities that we have right now, this would be very swiftly a much better business."
Thanks. Ami Galla from Citi. A few questions from me. The first one was on working capital. Could you help us on the stock side? Do you think this is the optimal level, or is there scope to optimize the stock levels in the business further?
The second one was just on the cost reductions that have been implemented last year. Are there any tailwinds from annualization that we should consider in 2025? We hear your point on the investment side, of course, but is there an offset there in the short-term? The last one was just on the scenarios that you have probably budgeted in for this year. If the underlying market conditions are worse than what you are currently expecting as a base level, what is the scope to protect your balance sheet? You've touched upon that you'll be constantly looking at non-core. When you look at the portfolio today, is there anything that sits in that non-core bucket at all?
Yeah, look, on working capital, I think, let's be sunny-side up for a bit for a second and assume the market does start to improve, of course, across the course of this year. I think we'll end up with some relative, probably, neutrality on stock in the sense of some parts of the business will probably start stocking up a bit more in anticipation of that. I alluded to it a bit earlier on. There are parts of our range still where we think we've got opportunities to take further stock out. There are still some stock reduction targets within the business for this year. I don't think anything we've done in there has been kind of finance-imposed to the point where it's ended up hobbling our ability in a recovery.
I think actually it's been getting our house in order and discipline, led by our commercial teams, which they've been great at doing. On the cost reduction, I guess the easy answer is it's implicit in the guidance in respect of kind of what we need to do to reinvest in the roles that we think we need to take on. You can rest assured in the current market, we're going to keep a strong focus on discretionary spend where we don't need to be spending things. At the same time, they want to give oxygen to things that Geoff's alluded to in terms of incentives and structures in order to get us on the front foot and winning. There's a careful balancing out there. Of course, there is.
Ultimately, we're not going to save our way to solving some of the problems that we've talked about at the outset. We've got to be sensible, and it's implicit in the guidance. Look, on the scenarios on the balance sheet, there is a lot of optionality we've got. I don't say this in a complacent sense, but the balance sheet isn't the thing that keeps me awake most at night, certainly not in the last three or four weeks. It's not been the thing that's kept me awake most at night. We've got a really strong balance sheet. We've got a really good quality property portfolio. We've got means and ways of creating more cash if we need to.
Candidly speaking, even in the kind of really doomsday scenario and the market got much, much harder this year, we are still far lower levered and have a far lower cost of financing than virtually all of our peer group that are either in private equity ownership or in any other form of ownership. Actually, being a PLC in this market and having refinanced in Q1 on investment-grade debt is, I think, a point of relative strategic advantage, which we have worked hard to create the space to do. We will continue to run the business in a careful and thoughtful way. You come back to that leverage position and the improvement we have made in terms of the overall net debt, you do not need a lot of improvement in underlying profitability just on the way that leverage count works, and you start to see quite a sharp downward movement on leverage.
We're doing all the right things on that. We have got further options, and we continue to look at them.
Can I add just one follow-up on the leverage point? What are the sort of lease liabilities that you're currently carrying for Toolstation France?
They're negligible, but they're wrapped up in the overall cash closure costs for running into next year and have come out of the discontinued operation as part of the year-end count. They're out as part of the discontinued component. Thank you.
All right. That seems to be all of the questions. As I say, look, it has been an uncertain time. Appreciate you spending the time with us today. Hopefully, I won't be doing this in three months' time, but let's wait and see. Thank you very much.