Travis Perkins plc (TPK) Earnings Call Transcript & Summary

This is Zafar Aziz speaking and welcome to the Deutsche Bank Depository Receipts Virtual Investor Conference, dbVIC. I'm pleased to announce that our next presentation will be from Travis Perkins from the U.K. Before I introduce our speaker, a few points to note. [Operator Instructions] On a final note, all of today's presentations are recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Graeme Barnes, Director of Capital Markets from Travis Perkins, which trades on the LSE under the symbol TPK and in the U.S. on the OTC markets as TPRKY. Welcome, Graeme, and over to you.

Thank you, Zaf, and good morning, everybody. I'm going to talk you through today -- we're going to do a bit of an intro into Travis Perkins as a business. We'll take a look at our end markets and where we sit within them. Talk a little bit about how they've changed through the course of 2020 and then finish on a bit of a look forward from a strategic point of view of where we're thinking of taking the business. So beginning with an overall introduction. Travis Perkins is the largest distributor of building materials in the U.K. and we've got a scale in that U.K. market that none of our other competitors can match. The group's demonstrated steady growth in recent years to a turnover of over GBP 7 billion, and generated GBP 442 million of adjusted operating profit in 2019. That's an overall group operating margin of about 6.5%. And that represents a balance between a number of different businesses within the group that we'll cover over shortly. We've got a network of over 2,000 branches covering the full span of the U.K., and that's important for our business because we actually operate on a very local basis. And again, that's something else that I'll come back to. As you can see from the time line on the slide, the business was developed through a significant number of acquisitions between its formation in 1988 and 2012, both growing the merchant network by adding additional branches, typically by buying small independent businesses and also by adding different categories and channels as well as customer groups. Since 2012, growth has been primarily driven by organic investment or grow through market share gains from our existing business base. We fulfill a really important role in the U.K. construction supply chain. We sit between a very large pool of suppliers and a very large pool of customers. And even our very large customers, so the large national house builders, for example, deal with a huge number of suppliers. And therefore, Travis Perkins acts as a really important break bulk service, consolidating a whole basket of products from various suppliers for our customers, putting those together and often managing the logistics of making sure those materials are in the right place at the right time. Like I mentioned at the start, we're the only business really that covers the full spectrum of U.K. construction customers and covers the full spectrum of building product categories. Most of our businesses are market leaders. They're at least #2 in their market, but most of our businesses are #1 in their respective markets. And it's important to understand the structure of some of those end markets, we'll look at them a bit closer later. But in most cases, our markets are highly fragmented, with over half of each of them made up of small independent competitors. And that represents a really strong opportunity for us to continue to grow our market share as we go forward over time. So if we take a look at the 4 different operating segments that we run within the group, we've got the merchanting segment, and I'll come back shortly to what the difference between merchanting is and classic retail. But within that merchanting segment, we've got a number of different businesses, all specializing really in a particular -- either group of products or a specific customer base. So we've got the generalist merchant, the Travis Perkins business, the original business that this overall group was built around. Has a huge product range, sells something in the order of 150,000 different SKUs every year. And also has an enormous customer range, which spreads from the individual building contractor, which is one guy with his pickup truck all the way through to the very largest house builders in the U.K. On top of that general merchant, we've then got a series of market-leading specialists. So we've got Keyline, which is a supplier of heavy civils products and drainage, typically very large concrete pipes that go in the ground. We've got BSS, which is a complex and large-scale industrial plumbing business. If you think how complicated it is moving fluids around a large or complicated building like a hospital, that's BSS' main specialism. And then we've got CCF, which is a bulk distributor of insulation and drywall materials, and that's recently taken over as being the market leader in that segment in the U.K. We then also got a specialist kitchen distributor to the trade, which is Benchmarx, which is #2 in the market to Howdens. Looking across the other segments. We've then got Toolstation, which is another generalist business, selling a very wide range of products. But it specializes in light side materials. So think about the kind of consumable products that any builder that you've had -- do work in your home. It's those light side materials, tools, plumbing, fittings, light electrical work, all of those kind of -- that product set that fits in the Toolstation. It's a highly efficient operating model. It's a business that's really -- it's less than 20 years old. It was developed in the Internet age. It was developed as a full multichannel business, with the aim that the digital platform and the branches work hand-in-hand with each other. It's a really efficient operating model, and that allows it to be the cheapest place in the U.K. for you to buy those light side building materials alongside having that great digital capability, but also over 99% stock availability. And that proposition is demonstrating very fast growth certainly across the U.K., where we're now up to well over 400 stores, but also across Europe. So this is the one part of our business where we feel that, that is a competitive and transferable proposition that will work outside of the U.K., and we've got very successful businesses now in both the Netherlands and Belgium and also a growing business in France. We've then got the retail segment. So that is our Wickes business. That is kind of -- for the U.K., it's like a small version of home depot. We would label it very much as a digitally enabled home improvement business. It runs a smaller box than its competitors, and it's considerably smaller than a home depot. With our aim that we keep less stock in-store and a tighter range of products in store, but we supplement that by having a much larger range online that you can then have either delivered straight to your home or use the store as a fulfillment center. A further differentiator to the other competitors in this market in the U.K. is that we have a very strong design and install, do-it-for-me business within Wickes. So 1/3 of Wickes' sales is geared towards selling kitchen and bathroom-designed and installed solutions to consumers. And then the other piece would be, actually, it's quite a heavy end DIY store. So we don't go into the pot plants and cushions end of the DIY market. There's no soft furnishings going on. We're talking about the hard end, the timber and the plasterboard and the ironmongery end. And so that actually -- it doesn't only attract the serious DIY, it also attracts the small trade. And actually, around 1/3 of Wickes' sales go to those small trade customers. I'm going to come back later, but that's actually the part of the business, which is -- it's a very different business model because it's focused towards consumers rather than trades people. And we are planning to demerge that part of the business. I'll come back to that later. P&H then is the final division, has 2 main sides to its business. It has the specialist plumbing version of the merchant business, the local merchant, which serves local plumbers across all sorts of categories, whether that's bathroom products or harder and plumbing and heating. We've then got a series of specific online businesses, such as Underfloor Heating. We've got an online boiler specialist in PlumbNation and various [indiscernible] specialist businesses. And then we've got the other half of that business, which is a high-volume contract business where we supply all of the boilers and radiators and heating systems for large contract installers. So in the U.K., for example, that includes British Gas, who are the largest installer of heating systems in the U.K., we supply all of the -- all the product that goes through British Gas. If we just think about those segments from a positioning point of view, merchanting is still absolutely the traditional heartland of the business. And as you can see from the figures on the slide, it's still the largest part. Toolstation is a much smaller business being that much younger, but it's growing really, really quickly. And you can see various differences in the margins across them. Merchanting is the highest. And actually, that should be expected because merchanting actually delivers much more of a service model than some of the other businesses. So it goes beyond straight transactional and is much more of a relationship between the trades and the merchant, and the -- I'll cover more of what that means in a second. Toolstation -- currently, it's margins are around the 5% to 6% mark. Actually, that's being suppressed by the level of operating costs we're putting into that business to grow really quickly. So I talked about the fact that we're -- we've got about 400 branches in the U.K. We are opening 60 new branches a year in the U.K. So we are still opening that business at a good rate. And then the other segment I'd pick out is the P&H business. We talked about the 2 sides of that business. The local plumbers merchant side is great and delivers a really strong return in line with the other merchanting businesses. But that large contract installer side really just is providing logistics for very high volumes of product. That is much less -- it's a much lower margin. And therefore, the balance of margin for plumbing and heating is something that is dragged down, and it's certainly a focus for the group to try and improve as we go forward. As I touched on earlier, the competitive environment is very competitive across the U.K., but, as I said, most of the markets we play in, and most of those markets that you can see on the screen there. Actually, the largest part, the largest section of players are small independent businesses. So there are other big players in each market. But actually, we're competing most with small mom-and-pop independent businesses. And I think our view is that because we are large, we make the best margins, we've got the ability to invest in our business over time. That gives us the potential to serve customers better as our markets change and as our customer demand evolve over time. And we'll come back to some of our future strategic viewpoints in a short while. We're often asked why we have quite such different businesses within the group. Really, I think the point here is that we need to serve very different customer groups. And when you're dealing with a B2B model, those customer groups demand a different service, depending on what they want from you. In particular, I would highlight the difference between a retail format and a merchanting format where trade customers want something quite different. Merchanting is where, for a tradesperson, we offer much more than that transactional retail-like experience. The key is the relationship, and that relationship comes through an understanding of what range the customer is after? What kind of knowledge base they require and advice they need their own products? It's a variable pricing model. So we very much work on the biggest buys best model. So if you're tradesman who shops at a particular merchant all the time, you would expect to get a better discount than somebody who's in there only very occasionally. Much of the product we sell is very large and very heavy. And therefore, there's a big delivery element, not only the ability to have it delivered, but the timing of that and how that works through. And then also, we sell much of our trade sales are done on trade credit. So we do provide credit to our customers on -- depending how big they are on maybe 30 or 60 days to help them fund their working capital as they go through. So it's a full kind of relationship that goes on there. And the key difference is that in order to provide that good kind of individualized service, the decision-making for those trade customers needs to happen very locally. This is all about the relationship between the local branch and the individual customer. Whereas if we step back and think about our retail business, so a business like Wickes in our group that is a proposition that is put together centrally from the head office in Watford, aiming for the best proposition that'll fit the most people in the U.K. and then rolled out right across the group. So there's a real difference there. And it's important to understand that because that drives some of our strategic decision making, particularly around the fact that we think that Wickes and the remainder of the trade focus businesses would be better off apart than together. We take a quick look at our end markets. Our market size is considerable. So we've got a GBP 76 billion addressable market. And if we look at the bar chart on the left-hand side, actually, the main areas where our businesses are focused in the fixed price operators, the general merchants and the specialist merchants, happily, those are the areas of the market which are growing the strongest. So within the U.K., over recent years, we've certainly seen a move particularly from homeowners to move from a DIY model into much more of a do it for me. And whether that is someone like Wickes taking that whole responsibility on doing the whole job or whether it's you finding a specific tradesman to do the job for you, actually, our exposure to the end markets that are performing strongest there, it leaves us really well placed. You can see in the table on the top right-hand side, the exposure to the end markets by kind of where we sit by proportion. And you can see that our greatest exposure is actually to domestic RMI. So this is looking at the housing stock that exists in the U.K. today and looking at the repair, maintenance and improvement of that housing stock. We also play in the new housebuilding market. We play in the new commercial build market. Now that is not just large office blocks in the middle of cities, but that extends to everything, including kind of large distribution centers and factories. And then finally, we also have an exposure, which is growing over time towards large scale infrastructure. Now that's a very important market to be exposed to right now because there is certainly growth in the infrastructure investment from the U.K. government at the moment, with the U.K. government intending to use infrastructure investment as a driver for economic recovery coming out of COVID. And so there's well over GBP 600 billion earmarked for infrastructure products over the coming years. Just to point out that, and I'll come on in a second. Clearly, our markets have been disrupted by COVID through the course of 2020. But actually, the market fundamentals of our end markets remain really strong. So when we look at domestic RMI and housebuilding, the U.K. has not built enough houses to cope with the demand that it's had for many years now. And actually, the 28 million existing homes in the U.K. remain underinvested. We've seen a start of a recovery of that in 2020, but I think there's a long way to go compared with -- when we compare the U.K. to other European -- Western European countries. The government has been very clear that they want the construction to lead the way out. It's going to fund some of that through infrastructure planning, but it wants construction in general to lead the way out of it -- out of an economic slump. And that's all good. And then you can see from the chart on the right-hand side, while we're in a bit of a low position today on secondary housing transactions, which is a really big driver of domestic RMI taking place, the forecast, and these are not our numbers, these are collaborated from a number of different sources. The forecasts are actually that this level of housing transactions is likely to grow pretty considerably as we look forward over time. I touched on the impact of COVID. It goes without saying that our business was not unaffected by COVID when we had the national lockdown in the U.K. from the end of March through to the start of May. And at the time, there were a couple of different ways of reacting to that. The Wickes and Toolstation businesses that have very strong digital presence already, flipped very quickly to operating almost 100% digitally and then using their local store network to fulfill some of those transactions. We particularly saw really strong growth in Click & Collect. But across our merchants, it was almost the other way around. Construction as a whole in the U.K., came to a halt for a bit. We got -- we had a point in late March, early April, where we had 2/3 of our merchant branches closed and we were probably only putting 3 -- 15% of our normal volume. Now as an industry, we worked very quickly to -- and we led that process to get ourselves into a position where actually the industry could operate on a socially distant and safe basis. And actually, by the end of April, we've heard from many of the large house builders and then with progressively smaller players taking that lead, to actually have processes and procedures in place to be able to get back to site and back to working. And certainly, by the end of April, we have the majority of our merchant branches back open. And then we've seen a really strong recovery across both the larger end of construction and the domestic RMI market since the end of April through to where we are today. That's been led by domestic RMI. I think if you lock people up in their homes and tell them they can't go anywhere or spend money on anything else, then they look around the house and see what they can improve. So I think that has been a benefit to the group. But I think overall, we've seen construction in general recover. And the good news is that even though we're in a second national lockdown as we speak to you now, actually, we've seen almost no impact on the volumes going through our business this second time around because the industry knows how to work. And the last thing I would say on the COVID piece is actually the bit that sometimes gets overlooked is actually the strength of the cash performance that we've had through the first half of this year. We had over GBP 300 million inflow into the business during the first half. And that's from a point at the end of March, where, we, as every other corporate, I'm sure, we're looking at it, thinking, well, if the worst happens, what does our liquidity look like? And actually, by the time we come out the other side of that, I think we're in a really strong shape. So we come out of this with a much stronger balance sheet than we went into, which I think has surprised quite a few people. So I'm just going to do a very brief kind of 5 minute strategic overview so that I've given you the shape of the business as it is. But actually to give you a view of where we think we're going. We held a Capital Markets Day in December 2018, which came really after a couple of year period where we were post the Brexit referendum, and we voted to leave EU. Nobody quite knew how that was going to work, volumes were soft in the market. And it was difficult for us to take market share through that time. Throughout -- a period of tough trading from 2016 to 2018. And in some respects, I think we -- that pushed us to take a wider look at the group. And I think what you don't see is actually the group, as it stands today, is very complicated. And the issue with complexity is both -- it's difficult to make decisions around where the best place to allocate capital is, but it also comes with cost to manage it. And the way we looked at this was that our overhead cost base had got to too big proportion of sales, and we needed to think of a way of getting that down. We did a full assessment of the businesses across the group. We decided we needed to be much more disciplined and focused in terms of how we allocated capital to drive growth and also how we'd allocate capital to drive best returns. And we quite quickly came to that point that I made earlier that actually our heartland is in serving trade customers. We really know how to sell to the trade and how to give outstanding service. And actually, the market share position of only around 15% in that trademark gives enormous opportunity to grow. I've touched -- I then touched on before to say, actually, the retail model is very different. And therefore, what we find it very difficult over the last few years to manage success in the Wickes model and success across the rest of the group. And therefore, we decided it was time to demerge the Wickes business, let them have a management team to make their own decisions and leave the trade business really focused on how to serve trade customers. And then the other piece we looked at was to say, look, if you've got priorities for investment, they should be where you get the biggest returns. And I touched on the P&H business before where return on sales are considerably lower. And you have to say, well, that's -- it's unlikely that you could justify putting significant investment into P&H rather than into the other areas of the group. And therefore, we decided that we would, at the right time, look at selling the P&H business. So a quick look at the group's key priorities. You've got the first one being the successful demerger of Wickes, and I'll come back to that in one second. The others are really about how do we get the core of the business, pushing in the right direction? How do we, in the short term, nail the fundamentals and then what do we do with these businesses going forward to progressively and sustainably take market share as we go forward. Just a really quick touch on the Wickes demerger. I talked about the rationale for it. From a -- we were basically good to go at the end of April, and we paused that process at the end of March. It will be picked up again as soon as we feel like the market is well placed for it. And that just means we need the right trading environment, probably the right stock market environment and a pretty steady operating environment. So the management team can think about a demerger rather than thinking day-to-day about running the business. The other point I would make on this slide is just how strong the TP Group -- the balance sheet of the TP group, excluding Wickes is. Because Wickes takes, by far, the biggest lump of lease liabilities with it, actually, the leverage position of the group gets us well below our medium-term target. And I think that sets us up well for the future, both from a safety point of view and a security point of view, we have a really safe conservative balance sheet. But also, this is a cash-generative business, but we don't need to do any more deleveraging. We're in a good shape there. So there's probably a different result we looked at for a remaining group as to what we do with cash and how that gets allocated. And then the last thing I want to leave you with is just how we look at the future. I've talked about strength in the core, getting the fundamentals right, making sure we're in the right shape to get on and take some market share. I think as we're also looking beyond that, we know that the construction industry is changing. So I think we need to think about what our opportunities are to modernize this business? How do we build a modern builders merchant, and that's going to involve building on and improving the digital capabilities that we have across our merchant businesses. And in particular, some of the multichannel capabilities that we've put in place on a kind of temporary basis during COVID. But actually, that's just shown us that our customers want those solutions full time. And we've got the ability to invest and do that really well. And so if we can get on and do that in the right way, that's definitely an advantage we have over those small independent businesses. And then the last thing is just recognizing that construction as a whole, I think, is changing. Building materials are changing. ESG requirements are changing. And in our industry, we are absolutely best placed to adapt our business. In order to deepen the relationships we've got across suppliers, customers and regulators and actually be the building material supply partner as we go forward. So I think at that point, I'll leave it there from a presentation point of view, and we'll go to some of the questions.

So the first question we've got is, do you think there will be significant consolidation in the sector? And if so, do you think it would be trade, retail or construction supplies? I think that's an interesting question. The question then goes on to say, will we be looking to deploy capital in order to do that? It's quite difficult for us to deploy capital in the market in the U.K. because with such a strong presence across the whole U.K. that actually -- the competition and markets authority, would look at this on a localized basis. So if we already have a builders merchant here in town, it's very difficult for us to try and buy the local independent as well because it leaves us with a very, very strong position in that local catchment. So it's hard for us to buy large numbers of branches. We're always in the market. If there's a good local independent, where we don't have a presence, then we're always in the market to look at that. And we're also always in the market to look for opportunities to add different product categories or different channels to the market. So an example of that would be about 2 years ago, we bought a business that was -- we only have 4 branches in the Midlands of the U.K., but it's specialized in air conditioning. And that air conditioning specialism fits really nicely into that BSS Industrial plumbing business that I talked about and then we can start to scale that business up by putting its capability through our existing larger network. So we're always looking at that. In terms of the wider industry, I think there is some consolidation to be done. I've already said we're not the player to do that. I think there's definitely some PE money out there thinking about doing that. But they tend to butt up against a kind of ceiling where you move from being able to operate as a small independent business kind of on a shoe string up to needing a much bigger kind of business -- above branch business. And that tends to -- they tend to tap out at about 70 branches. So when you compare that to our 2,000-branch network, they've got some way to go to consolidate to get to our size on that. I hope that answers your question. We then got another question on changes for CapEx next year. It's a pretty good question because our CapEx this year has been -- we've really tightened the belt on that. As I think lots of corporates will have in a liquidity -- the strength of liquidity view that we've been aiming for. I think on the whole, we've got those key priorities that I showed. We want to keep rolling out the Toolstation business. We've got work to do on the Travis Perkins network and the general merchant, and we want to make some of these digital improvements. Realistically, that's probably going to be GBP 100 million a year of CapEx. That includes maintenance CapEx within that figure on an ongoing basis. And I think that's probably the figure that's going to be right for the next few years. Just to point out, though, that's probably half where we were about 4 years ago from our CapEx spend. I'm going to try and rush through one more question, which is the classic we've had all the time, which is around Brexit early next year. The answer to that is we've done everything we can. We do import goods into the U.K., all on the light side. We have got that in shape. We can do our own customs checks. We've up stocked. So we're carrying more inventory on those products. So operationally, we've done everything we can to make sure we've got product for our customer. The bigger worry for us is what happens to the overall market. Does it cause a recession in the U.K., even worse than COVID might, and how do we react to that? That's something we'll have to react to as we go forward, and we'll see how things play out. And I think at that point, I've probably run out of time. I'm looking at the clock, and we've got about 20 seconds left. So thank you, everyone, for joining today. Anybody who wants to follow-up on these or get in touch for a one-to-one or any more information, absolutely get in touch. Our details are all over the website, and we look forward to hearing from you.