Travis Perkins plc (TPK) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Depositary Receipt and Virtual Investor Conference, dbVIC. My name is Zafar Aziz from the PR team at Deutsche Bank. I'm pleased to announce our next presentation with 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 presentation is recorded and can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Heinrich Richter, Investor Relations Manager of Travis Perkins, which trades on the London Stock Exchange under the symbol TPK and in the U.S. on the OTC market as TPRKY. Over to you, Heinrich.

Yes. Thank you very much for that introduction. Well, thank you, everyone, for joining us, and welcome. Over the next couple of minutes, I'll be presenting Travis Perkins, giving you a general overview of the business and then hopefully leave some questions for some Q&A after that. I think as the boilerplate indicates, it's a good place to start to mention that Travis Perkins is, in fact, the U.K.'s largest distributor of building materials. With us being that big, it doesn't mean that we are not close to our customers. In fact, we are very much, very close to our customers, and our customer relations piece is very important to us, and then in fact, for the industry as a whole. I'll take you through a number of the business units. You'll see that they do range in size. They also do range in terms of what we consider to be core assets. And we are in the process of demerging some of those assets with Wickes being successfully demerged and the sale of Plumbing & Heating as well still being for sale. With that being said, not just our business units are very varied, we also have a very broad customer base. So we supply building materials from everyone from retail DIYs in our current Toolstation business all the way through up to big projects like HS2 and big government infrastructure projects. If you look at the group overall, you can see that the Merchanting segment of the group is very much the revenue and profit driver of the group. That is very much seen as the core of the business, and we use that to effectively look at transferring funds and looking at the growth areas of our business in the form of Toolstation and others. In terms of that revenue and profit segmentation that we have there from 2020, we've obviously demerged the retail business in the form of Wickes as well. If you look at Travis Perkins proudest growth history, you can see that it's predominantly grown through acquisition in the past, where we've now come to the scenario where the group has become very complex and very big, where we're now in the process of shifting that strategic intent to making the business a lot leaner. We're also looking to simplify the group and making it a lot easier to do business with us. As you can see, that process effectively started with the sale of Primaflow F&P and then on to the sale of Tile Giant in September 2020 and then that more recently in the demerger of the Wickes business in April 2021. In terms of the financial overview of 2020, I think it's fair to say that 2020 was very much a mixed bag year, obviously, very much impacted by lockdowns and COVID-19 in the first half. And then in the second half, we saw a marked recovery in the second half that we're very encouraged by. In terms of that recovery, you can see it here, where during the end of March, start of April time, effectively when we went into the first lockdown, predominantly that we had a very big impact in terms of the top line sales and like-for-like revenue by segment. One thing I would call out here is Toolstation. As we can see, Toolstation managed to have a very good year in terms of the backdrop of COVID-19. If we look at the growth rate of Toolstation, we can see that, that business unit performed very well because of the function of that business and its digital capabilities to be able to provide customers with online click-and-collect options as well as collect-in-store, which we were unable to do through some of the business units, particularly through that first lockdown period. As you can see, as we entered into end of May and June, we saw a marked recovery across the rest of the business, and those trends continued throughout the year. There were also some other non-COVID impacts in terms of the business in 2020. So it was the first year that Toolstation Europe -- the losses from Toolstation Europe effectively were consolidated in terms of the Toolstation [indiscernible]? And then we also did a branch closure program during the summer in 2020, where we accelerated some of the thinking around what we want our branch estate to look like, particularly within the merchanting business. And that obviously then flattened the like-for-like growth rates, particularly in what we saw in the Q1 update that we did more recently. Now if we look at the Travis Perkins brand, on the left there, you'll see that the Merchanting side is by far the biggest part of the business. Within that, the Travis Perkins Green & Gold is by far the biggest part of that business as well. So that Merchanting segment really includes businesses across that whole piece from small tradesmen coming to the Travis Perkins merchant, your real one-man van type builders, all the way up to big infrastructure contracts that go through Keyline, I mentioned HS2. We also have other players like CCF and BSS, which are very much senior specialist merchants. That competes in the very different customer segment in the likes of SIG. Then we have another important part of the Travis Perkins group in Toolstation. So you can see there from the growth here that Toolstation is very much the growth driver at the moment, albeit still reasonably small in terms of the group as a whole. We do see the growth there and the prospect there as very important for the group going forward. In terms of its competitor set, effectively Screwfix is the biggest competitor we see there, that being on -- in the Mainland and U.K And then Mainland Europe, it's a bit of a different picture, and maybe we'll get into that in the Q&A session. In terms of the P&H, that's made up of a very group of businesses, including City Plumbing, which is the biggest part of that business, and then other bolt-on businesses that form part of that P&H segment, so on the floor heating and direct heating space, for example. That business is currently still up for sale. At the moment, we're effectively looking for the correct market trends. And hopefully, if we're going to get the right price, we'll let that go. So very much Merchanting and Toolstation as seen as the future of Travis Perkins and where we want to focus our core assets on. As I mentioned, we have a very broad customer segment. So from that small retail side, you've got the fixed price merchants in Toolstation. They're very much operating on a fixed price retail model where the price you see is the price you get. Moving all the way into the Travis Perkins merchant side, including City Plumbing and Benchmarx, where it's more of a variable price model. So every customer in effect has a different price for certain goods. Then if we move to the bigger side in the specialist merchants, we have very large tendered contracts, for example, that form a very different customer segment. So if you think of the Merchanting segment as almost being an overlap between that sort of retail small builder side and overlapping on the specialist merchant side as well. So it covers a very large and diverse group of customers that are all very important to us, and obviously, all with very, very different needs in terms of delivery and product ranges. In terms of the market itself, it's a very big market. We estimate -- the last estimate we had was around GBP 76 billion. Now if you look at that graph on the left there, that bar chart, you can see that retail we estimate of being flat. Now obviously, 2020, retail had a very good year. There were some underlying factors there that drove that growth. But we're quite happy with our strategic decision to demerge that business and carry on with the merchants and specialist merchant business that we have. In terms of the split of the market effect that we effectively look at, the RMI side, so that repair, maintenance and improvement side, as you can see, is by far the biggest proportion of our business. And most of that going through the general merchant, some through Toolstation and P&H as well. We also have exposure in terms of the new build sector, so specifically residential and commercial. So residential new build there, we have exposure to across all the group businesses. So the likes of Keyline will go and do the sort of the drainage parts of new residential buildings, so laying down the concrete and drainage pipes and things like that. And then that's when the rest of the businesses after that start getting involved. So TP throughout the building materials and then Plumbing & Heating, obviously, plumbing and heating products. And then all the way to the top where we have the large infrastructure projects. So we have activity across the sector and across the whole range of the building spectrum. In terms of the market fundamentals and where we see the group, it's very well understood that there's higher demand for current new homes being built. In terms of 2019, there was only about 180,000 homes -- new homes being built. So there's a shortfall of about 90,000 new homes every year being built. When you put that in combination with the average property age of 7 years, we feel that, that RMI segment of the market is still very strong and will be very strong as those older homes will need more repair and maintenance. So in terms of the market fundamentals, we're very happy with those, and we think that those will continue for a long time, specifically when we start looking at what the housing transactions might look like going forward and then coupled with that shortage of new homes. So in terms of the market fundamentals, those will remain robust and should feed into the Travis Perkins group. And we're very well placed to take advantage of those market indicators. In terms of the Travel Perkins Merchant and Travis Perkins Group itself, there are 2 main focus areas that we're looking at in terms of our strategic plans and themes: the first being is focus on trade and the second being simplifying the group. So that first, the focus on the trade, we know where the markets are that we win at. We know that where the high margins and the sustainable business is coming from. And it's very much that focus on the trade, the relationships between us and our customers are really strong, and that's really what we want to focus on going forward. Now in terms of the picture moves that we've seen there, so in terms of that focus on the trade, the demerger of Wickes and the sale of Tile Giant effectively means that we have very little to no exposure to the retail DIY segment. And then that's enabled us to invest in advantaged trade businesses on how we see them. In terms of the simplify the group, so once we have a trade-focused business in terms of the simplification of the group that's left, we do intend to sale -- to sell P&H. The reason for selling P&H boils down to more in terms of the margin and structural issue within that industry that we don't see changing fundamentally or sustainably. In terms of that as well, of the simplicity fact, we've got the -- we want to reduce complexity, effectively making Travis Perkins easy to do business with and really the choice partner for the building industry. We also like to have greater management focus on those businesses that remain and really be able to leverage our size and leverage our scale in terms of going forward in terms of winning the market share. And that's really how we see the broad picture and the 2 major themes rolling out. On that, the key priorities as we see them is really in terms of the big moves of portfolio simplification. So we've got the successful demerger of Wickes done. So that's a big step forward for us and a big tick in the box in terms of simplification. Then after that, we think we're looking at regeneration of the Travis Perkins general merchant. Now a lot of significant progress has been made on this in terms of that branch closure program we talked about over the summer and really getting that branch network in the right size that we think is good. So really looking at larger sites that are more capable of holding the stock and the depth that our customers are looking for. And then being able to leverage that size in terms of acceleration in terms of our IT development as well. We also see Toolstation as a very key part of that. So we're really looking to accelerate the Toolstation expansion, both in the U.K. and Europe. So I think Toolstation has proven itself to be a very successful business and a very successful business model that we want to really get our foot on the gas on that and go as quickly as we can. Now on top of that, we're looking to deliver an organizational platform for the future. I think what that really is where does Travis Perkins fit in the future. When we start talking about things like BOM and modular building and all of that sort of stuff happening in the industry, you have to keep abreast of it. And really where does Travis Perkins fit into that supply chain and where do -- where can we really leverage our size and our scale to be able to take advantage of those opportunities going forward. In a bit more detail, I think you can see that -- so this is a bit of a time line on how we think this is going. So currently, that's strengthening the core is very much on top of the agenda. So really what that means is looking at those things in the core businesses that we can do now that's going to put us in good stead going forward. So things like regeneration of the Travis Perkins merchant that I mentioned, the Toolstation expansion as well. And there's a lot to do there, but we're making good progress on that. And if we go a bit further beyond that, we have to start realizing that the merchant space in general is changing. The customers -- the customer is changing as well, introducing things like multichannel and digitally enabled 10 years ago were very bad words in the Merchanting segment. We're very much on the front foot for that now. So we're testing our apps that includes things like customized management of accounts, customers being able to see their own cost structures within those apps, et cetera, et cetera. So it's very much not the idea of just having a transactional website. It's far beyond that. And the strides we've made in that, progress over the last year have been very large. And the early results from those tests have been very positive. Then I think if you go a bit forward beyond that and we start thinking about Travis Perkins as a group, in a world like I mentioned BOM and modular buildings and things like that, how does Travis Perkins make sure that it's in a position to either specify what building materials go into a certain project, but how does it partner with certain building material -- certain building projects and things going forward? So we already have partnerships with Berkeley Homes that's building modular homes, and that's going really well as well. So it's very much a blueprint for the future and a changing world, and it's one that we are excited about. And hopefully, we can be on the front foot and take the opportunities when they come. I think in summary, here's all the quick summary and overview, and we can get to questions. We saved a quite a bit of time, so that's good. I think in general, what we're trying to get across is that we definitely are market leading with the businesses that we have, and specifically Travis Perkins general merchant, Toolstation now being firmly #1, but very clear growth path as it goes forward, and the specialist merchants as well. So we've got very, very good, very high-quality businesses that we're looking to grow in the future. In terms of the U.K. itself, we have comprehensive geographic coverage. So really, all of the businesses are very well placed across the U.K. to take up any opportunity that we possibly could there. We're also very well positioned in terms of that growth from the core piece that we were talking about earlier. And we think that our plans for the future will remain so, and we will be able to have a good track record in terms of that core growth. In terms of the performance during COVID-19, I think the business did really well. Hopefully, that was demonstrated by the end of year results and also in the Q1 results. We -- obviously, it being a very difficult year for everyone, I think we came out, I don't want to say winners, but we did come out very good and very strong. We came out with a branch network that we think is the right one to work from and operates as a very good base to start the next cycle, if you want to call it that, in terms of the TP general merchant, and that's going to really put us in good stead going forward. And I think the strategy as well is clearly laid out, and the strategy very much going forward is focusing on: one, getting the business in the right place. They're really focusing on the core business and making sure that we do what we do really well. And from there, we start looking at what the customer is going to want going forward and how the Travis Perkins, not just be a builders merchant, not just be the place where you go and buy bricks and blocks, but how do we partner with those construction with the construction industry, large and small, retail, all of that infrastructure going forward and where do we see ourselves placed in that whole cycle. Well, thank you very much for that. I think I'll go to questions, and there's a couple that have come in already.

So the first one is regarding Toolstation Europe. So the question is, how is the Toolstation business performing in Europe? The Toolstation business in Europe is doing extremely well. So in Europe, effectively, we have 2 different segments. We've got the Benelux region, which includes Netherlands and Belgium. And then we've got France as well. The Benelux region at the moment is running at about 65 stores. We expect that region to be profitable by the end of the year, which is very encouraging. In terms of the growth curve of those stores, they are very much matched up to what we saw on the mainland. So everything we've seen from Europe is very encouraging. As we go forward, France is going to play a bigger and bigger part of that European story. So we are now have a handful of stores in France at the moment. We've signed a lease to open up a warehouse that can support up to about 120 stores in the Lyon area in France. So we're really quite excited about France, and we're very keen to get on and get that expansion going. Some early results in France as well, the growth curves of those stores that matched up to those in the U.K. and the Netherlands, albeit a bit slower at the start, because I think the French market is slightly different in that way where we found that was a bit slower to start up. But we find the customers there to be stickier. So once they are -- they come to the stores for the second time, they don't go anywhere else, which is encouraging, because that's good for long-term growth as well. So I think in terms of Europe, we're quite happy with how that's going. It's traded really well through 2020. And I think we'll keep going on and expanding that as quick as we can. Cool. So let me go to the next question. So the question is regarding the Wickes spinoff. Can you provide some color on how the Wickes spinoff will help optimize the group's operations? So in terms of the operations itself, there's not an awful lot to optimize. Now I say that, but in an inverted bracket because that business was separate all along. So there was very little in terms of systems and supply chains and warehousing, that was mixed from the TP group and the Wickes business. So in terms of the actual operations of that business, there's not much optimization that's going to come out of that. That being said, the reason why the strategic rationale for the demerger of that business was very much around focus, focus of management and focus of capital as well. So as you can imagine, Wickes is very much a retail business. It's got the needs of a retail business. So it needs GBP 20 million, GBP 30 million a year to refit stores and do all of that sort of retail type stuff that it needs to do. Now we've got different needs across the business where we think we can deploy that capital a bit better. So instead of having a scenario where we've got many mouths to feed, we're now in a situation where we've got clear plans for our advantaged businesses, so the Merchanting business specifically and Toolstation as well. We'd rather not have that capital going that way. We'd rather have that more focused on the business that we think is advantaged. So hopefully, that answers your question. And the next question is regarding e-commerce and Toolstation. So the question is, can we speak to your e-commerce strategy for the Toolstation Group? So Toolstation is very much what the term is a multichannel operation. So it has just been -- quite recently, a couple of months ago, been refitted all to TP networks to support increases in demand. So we had a bit of an accreting infrastructure there because of demand, but that's all being looked at. In terms of its e-commerce strategy, it's very much driven by store location. And what I mean by that is, if you go on to Google and you type that you're looking for a drill, for example, it puts results of actual physical stores to the top of the list. Now that, in its own way, is a bit of an optimization exercise that Toolstation gets. That, coupled along with its price leadership, means that you get to the top of the list with the best price. Then if you sell on top of that, you've got 5 minute click-and-collection options, which are very, very popular with trade customers, specifically at the moment. It makes it a strategy that's really working for us, and it's really good. So in terms of the approach of e-commerce in terms of Toolstation, I think it's all of those pieces that come together. So it's not one straight strategy where, I don't know, we use this platform, it's a whole lot of things that come together to make sure that you're firstly #1 on the list when it comes to it. You have the stock and you have the stock availability that's backed up by data and apps in real time. And then put on top of that the value leadership that it maintains throughout [indiscernible] Screwfix and as well as the big box DIY stores. Okay. Next question. So in terms of next questions on Brexit. So how have your plans for Brexit being executed? So Brexit is quite an interesting question. When -- before -- so about 2017 in preparation for the first Brexit deadline, we increased our stock carrying by around GBP 80 million to GBP 90 million just in terms of trying to mitigate some of that risk that could come through in terms of the Brexit situation? Obviously, that doesn't happen then. So we carried that stock all way through to the real Brexit date. Obviously, during that time as well, we engaged with government to make sure that we got our clearance focus in our warehouse, so we actually don't need to import things and not goods cleared at the docks. We can clear them within our warehouses. So we kind of mitigate that risk as well in terms of the supply chain, which has worked really well. But then on more sort of overall point, our exposure to materials from Europe is very limited. If timber in Scandinavia comes to mind, but the timber manufacturers do keep large stores and stocks of Timber at the ports in the U.K. And being their biggest customer, we have pretty much first dibs on that. So that's -- the timber side is not something that we're too worried about. The one thing that did get impacted by Brexit somewhat was tiling. So we get quite a bit of -- you see it quite a bit of tiling from Italy, specifically for the Tile Giant and Wickes business. But that's obviously a cost that's taken across the board. So effectively, it just got passed on to the customer in the end. So in terms of Brexit, I think the biggest issues we'll probably wait and see is what the effect will be long term. I think there's still some question marks around long-term impact of what Brexit is going to mean. But as we sit here today, there's not really been much impact from that. Okay. The next question is on lumber prices. Following the explosion in lumber prices, how do you see this affecting the group's top and bottom lines? So quite right, we have seen quite a bit of inflation in lumber. So I think I'll put copper and steel in there as well. Historically, not just Travis Perkins, but general merchants as a whole have been really good at passing through inflation to its customers. So effectively, we get usually about 6 months warning before our suppliers put up their prices. And then we get about 3 months to pass that on to our customers, our larger customers as well. So in terms of that effect in the business, in terms of an inflationary point, I think you could assume that we will pass that through to the end customer. We've always been good at that as an industry and will probably continue being good in that industry. But in terms of the inflation point, I think, in general, the inflationary environment we're seeing at the moment is slightly elevated. I wouldn't say it's benign. The last estimate I saw was around 2% of all the SKU range in the business. So even though we have some products that are looking a bit deeper than that, as a broad basket, about 2% is not that. We don't expect that to change materially through the year. I think in terms of inflation and passing it yourself, anything below 1% you struggle to pass on, because it's so small that no one really cares. And then above 5% and 6%, you get into an environment where that starts affecting volume. So we're still very much within that sweet spot of around 2%, and we expect that going forward. Just last question if I have time. So have you been impacted by supply chain shortages over the past year? And how is it changing? So in terms of supply chain shortages, the major products there effectively being driven by the volume environment. So I would put dry wall and some of those products in there as well. Luckily, the volume environment is not that high for that at the moment. So even though those products are on allocation at the moment, the volume environment is still relatively subdued. So we're able to manage that quite successfully. We did see some shortages on hand and power tools, specifically coming out of the Far East, just because that DIY boom last year really caught manufacturers off guard. So we're really in a position where some of those levels, we're coming down to levels we probably wouldn't be comfortable at, but that is all now sort of [indiscernible]. And sitting here, we don't see any real supply shortages on the light side categories really, yes. Yes. I think we've got 1 minute over. So I'd just like to thank everyone for joining. And if you have any additional questions, myself and that details are on the website, please feel free to reach out to us. And we'll be more than happy to help out. All right. Thank you. Bye.