Travis Perkins plc (TPK) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. My name is Zafar Aziz, part of the Deutsche Bank team. I'm pleased to announce that our next presentation will be from Travis Perkins from U.K. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box below the slides. Once the Q&A session is ended, don't log out. You'd also might be transferred to the Travis Perkins booth where you can continue to ask questions via chat and access shareholder materials. On a final note, all today's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Heinrich Richter, Investor Relations Manager, Travis Perkins, which trades on the London stock exchange on the symbol TPK, and in the U.S. on the OTC market as TPRKY. Over to you.

Thank you, Zaf, and thank you very much for that introduction. And thank you all for joining the session on Travis Perkins plc. I've structured the presentation to leave about 10 minutes at the end for Q&A. Alternatively you can reach out to me. My details are on the website, and I'd be happy to take your calls or questions as well. The Travis Perkins, as you may know, is U.K.'s largest distributor of materials for the construction and home improvement markets. We have undergone large amounts of change in the last 2 years with the sale of the Plumbing & Heating business and the demerger of Wickes business. All these changes effectively mean that the Travis Perkins group that is focused on advantage trade businesses and really focus on our trade customers to make sure that we deliver the top-quality business that we're known for. Well our customer base being so large and diverse from small contractors on one-man band type builders all the way to the large contractors and also to large infrastructure projects like HS2. The vast majority of those are B2B sales and our customer base very much forward in the professional trade segment of the market. The only area we touched DIY at the moment is within the Toolstation segment, but that remains relatively small compared to the rest of the business unit that we can see by the breakdown there. All this change effectively means that we have 2 segments of the TP business, the Merchanting segment, which is very much the long-standing true stable business in that Merchanting space, very highly cash generative as well. And compete for that core customer that's very much within the core customer base of the Travis Perkins business. The other part is Toolstation. That is our fast-growing and fast expanding business. Toolstation has now expanded through the U.K. and Europe with stores now open in The Netherlands, Belgium and France. The European business is still in its infancy, but the initial results have been very compelling with extraordinary like-for-like figures, both in the Benelux and also very, very encouraging results in France. Table on the right shows the financial performance for the first half of 2021. And I have to note that we've updated the market to include guidance for the full year and our adjusted EBITDA would be somewhere in the region of north of GBP 340 million. As you can see, the business is performing well, so underlying demand from our key markets remaining robust. In terms of that customer segmentation that I mentioned earlier, you can see that to divide that customer segmentation up a little bit more in terms of the business profiles, you've effectively got Toolstation on the left, it's a fixed price merchant. We've got the merchants in the middle, that's the Travis Perkins general merchant. And the specialist merchants to the right, including BSS, CCF and Keyline. The biggest difference between the segments is in the customer size. So Toolstation effectively goes after that small trades person, if you think of your local pilot, one-man band type person, is picking up band stock or hand tools for a local job that he's doing, all the way up to Travis Perkins to merchant, which have customers in the size of that one-man band type culture as well, picking up heavy cycles, all the way through to medium and large trade customers as well as infrastructure projects and HS2 at the moment, probably the most prominent of these projects undergoing. As you can imagine in terms of pricing, there is a different pricing model that we follow for those businesses. So Toolstation is very much a fixed pricing model. That means that you've got the same price in the catalogs that we distribute as well as the online prices that have advertisers through its apps and websites. The Travis Perkins general merchant has a variable pricing model and effectively depends on what level branch manager and how competitive that is in that local customer segment. BSS, CCF and Keyline are tent to be quoted framework agreements. So very large projects that rely more on customer needs being met by specific delivery schedules and that sort of level of delivery management rather than actually competing on the price even though price has been important. In terms of the product ranges that these business segments offer, the Toolstation model was very much centered around centrally mandated branch ranges. So you have the same branch -- same ranges in the branch, if you go to one in Cornwell compared to one in the north of Scotland, for example. For the other 2 business segments, they change depending on where the branch is located. This effect means that, that local Travis Perkins branch can be competitive not only on price, but also on the range that it starts to be competitive in that local market and effectively win that local customer. As you can imagine, the delivery options for those 2 segments are also very different with the fixed price merchant being Toolstation, effectively not having much delivering more Click & Collect, where the larger more heavy sized materials is delivered by our specialist fleet, and that's really what the customers are looking for in that scenario. So here we can see the Travis Perkins business and along with some stats around the scale of each business. Importantly, we can see these businesses are either #1 or #2 in their respective industries. This coupled with the relatively low market share position, specifically in the TP general merchant. So just how fragmented this market is and the points again to the hyper local competitors, specifically within that general merchant market. In terms of the other specialist merchants, we have CCF that is involved in the indoor insulation and gypsum products market. CCF competes directly with SIG on the big contract side as well as some of the government expenditure projects like RMI schools and hospitals and the like. Keyline is a leader in the heavy stimulus market. As an example, this is all the ground work that goes into housing developments before the houses are build. For example, the large concrete drainage pipe that goes in before house on top of that. Keyline is also where the vast majority of the infrastructure spend goes into the group. BSS is a leader in the industrial P&H as well as HHIC markets. BSS is also involved in some of the design specification work of large-scale heating and cooling systems that go into large buildings. And finally we have Toolstation that serves an RMI-focused consumables market. There is some way that goes to Toolstation, but it is primarily focused on that RMI space. On the right there, we can see that the Tesco total market for the TP group is very large. And historically, there has been very stable and continued growth in the market. In terms of that GBP 60 billion addressable market, there's some elements of the construction market that we don't touch, for example, that of pouring concrete. In terms of the group end market exposure, you can see that's very much aimed at that RMI market and the new build market as well. The RMI market shows lower cyclicality and therefore, more predictable sales stream when predicts that newbuilding side. The underlying fundamentals for the RMI market has also remained robust as these are driven predominantly by housing transactions and consumer confidence. In terms of the housing transaction number, we do have a tailwind at the moment, and that market remains robust for us looking into the short, medium and long term as well. To compare with this to the retail DIY resilience versus that of the trade and consumer side, fact that our core customers are tradesmen that needs the goods to performers work makes us less cyclical than the discretionary spend of a DIY customer, as we saw the peak of this DIY period and during the COVID lockdown, and now we can see the evidential slowing on that. In terms of that mainstream infrastructure, that is indeed one of the growth drivers as we see going forward as the government expenditure on infrastructure is set to increase quite dramatically. In terms of our end markets, I think it's quite well placed to say that they remain robust. That being the average housing stock of the U.K. is around 70 years, which is quite old. So in terms of the medium to long term, we believe that, that remains robust, leading to that RMI spend. What is aimed to build 300,000 new homes each year is equating at the moment to a shortfall of around 90,000 homes per year, which in effect gives us a bit more runway on that new build sector, which is really good. That will very much flow into that repairs and maintenance improvement market as well, leading us to think that, that long term as well as medium term will remain robust as well as some changes in how we use our homes and how we use our spaces to work from home, for example. Calling targets as well, will play a more important role going forward as the U.K. moves away from gas-fired boilers into things like heat pumps, et cetera. And we're well placed to be able to take advantage of that. In terms of the strategy and the shape of the group at the moment, we set a very ambitious goal back in 2018 to focus on trade and to simplify the group. In terms of the headlines for us of this time period, for the sale Plumbing & Heating as well as the demerger of Wickes. So I think you can say that we've successfully completed all these major moves in terms of getting the estate and getting the business to a point where we can now drive forward this more strategic agenda going forward, specifically around technology. What has allowed us to do in terms of simplifying the group is that we're able to -- management is able to focus a larger position of its time on the remaining group that we believe is a more trade-focused core competency of the group. In terms of capital allocation, it also means that we're a lot more disciplined and able to go after the growth that we see as organic and can be realized a lot faster and lot better than if we were a large group as many miles to beat. In terms of that -- mention on the cost structure, we also went through a large branch closure program during this last summer. Majority of that was aimed at the Travis Perkins general merchant, where we focused on those small branches that were somewhere below 1 acre in size, very much smaller than the average of the rest of the estate. Now as Travis Perkins grew by acquisition and buying these small mom-and-pop shops, but unfortunately, we were at the moment those shops did not service their needs, although we're poorly located in areas that we thought those small shops were not getting the best return on value for those areas. So we decided to restructure that. We're at the moment now where that's all completed and washed through. So we believe in terms of the branch network, specifically within the general merchant, we're in a good space where we can take it forward. That all being said, we believe that there are market changes happening in the market. So -- and it's up to Travis Perkins to not react to those changes, but to rather be on the front foot. And how we're doing that is by managing the macro factors as well as the construction specific factors that will be -- that will allow us to take market share. Now we're doing this with digital tools as well as integrated technologies. And all of these sets that we're taking is very much focused at the different customer segments we have. So here is the means of the small trade customer is very different to a large contractor, for example. So whereas the small trade customer wants an easy-to-use app in the back of his pocket, i.e., a smart time where you can see local stock. He's able to access Click & Collect options and delivery very easily. Those are the sorts of things that customer segment is looking for, and that's all we're aiming to provide to that. Whereas for the larger contractors, they're looking more for dedicated websites where they can see local stock as well, but they're able to see what the stock picks is and be able to arrange for delivery slots accordingly according to their business needs. So as you can see, it's very different in terms of the strategy to go after these different customer sets, even though they serve the same basic construction market. In terms of the summary, hopefully, I've shown a compelling investment proposition here. I think due to the 2018 capital markets update and a focus on getting those things right, we've got a reshaped group that's more stable and predictable with competitively advantaged trade-focused portfolio. And I think you can see that with the range of businesses we have very much focused on that trade customer. I think this has been the core competency of the group, and it's very important that we got back to it. And I think we have, if you look at the portfolio where it is at the moment. We've taken those actions to simplify the processes, speed in decision-making and address the cost base. That was done through the branch rationalization that we went through last summer. As I said, that's all finished now, and then now we can start building up from where we were then. Think on that third point, we're also well positioned to take advantage of this new market. With our national coverage and the size and scale we have in TP, we can take advantage of, for example, the ESG move towards more sustainable products, where we can offer those on a national scale as well as those ESG metrics that those big contractors and big contracts asked for before you can move into those sorts of contracts and win those contracts. I think our scale allows us to be able to do that. On that fourth point, we've got a strong balance sheet at the moment with good cash conversion. Our cash conversion at the moment is more than enough to satisfy our growth plans, that being of growing the Toolstation business and looking at the general merchants as well. That gives us scope on top of that and for enhanced shareholder returns over and above ordinary dividend. Now what you've seen with the Plumbing & Heating sale, we've actually returned a portion of that as a special dividend, and we've started a share buyback scheme as well with those funds. That finishes the presentation, and I will go into Q&A as they've come in. A couple of them already. Please read that out.

So the first question is, can you discuss the growth in your digital channels over the past year? So this is a very interesting one. I think as a sector, it's important to note that we are probably a bit behind -- or not probably, we are quite a long way behind in terms of the use of technology and digital channels when compared to other industries. However, if you look at a company like Toolstation, they've always operated on a multichannel approach. So whether it be Click & Collect or home delivery, that was always around about 50% of the customer journey sales that went through that business. So that's always been a key part of that business. In terms of the larger parts of the group, so the Travis Perkins general merchant. We've now launched a customer app. So within that customer app, that's been downloaded, I think, about 300,000 downloads now on the app store. In terms of that app, what you can do, what that makes it quite unique is that because of the variable pricing model, you can go into the app and see your more unique pricing. [Technical Difficulty] Excuse me. Apologies, I think I've got disconnected there. I was talking about the digital channels. So in terms of the Travis Perkins general merchant, those sales are starting to grow, even though it's from a low base. So I think in terms of the growth, we are very much at the foothills of this journey. That being said, it's a very important journey to go on. We can see that we're starting to attract a younger cohort of builders as well, which is very good. I don't think many other competitors in our space can say that. I think as well, it's important to mention that it's as a differentiator in terms of that local hypercompetitive competitors, they won't be able to expense these items in the same way we can, distributing the cost across a branch network of 550, 600 odd branches, makes it a lot more palatable than if you have 1 or 2 branches. So I think at the moment, I can't say that it's going to blow the lights out. But I think in a couple of years, let's revisit this, and I think we'll be in a good position because we've taken the front-foot approach on this rather than being caught beyond. Hopefully, that answers your question. I've got another question coming in here. Can you discuss expansion opportunity outside of the U.K.? In terms of expansion outside of the U.K., we are only focusing on Toolstation. In terms of the other businesses, we are not considering that just because the competitor set outside of the U.K. is very established, and we don't see much room for Travis Perkins to enter there. However, for Toolstation, we do. So right now in Netherlands and Belgium, we have around 80-odd stores, I think. We are looking to grow that to about 120 to 150 stores over the next couple of years. I think that in that Benelux region, the Toolstation model has proven to be very good and very effective in terms of its growth trajectory. And in a lot of ways, it's very similar of the Toolstation business in the U.K. Outside of that, we are -- we have about 19-odd stores in France at the moment. We have just signed a lease for a distribution center in Lyon that can accommodate up to about 120 Toolstation branches in that Lyon area. And I think that's going really well. So what we have noticed within the French market is that there are definitely differences to the U.K. market. I think in terms of -- there's a lot of stories out there of business who thought they could just take a British business in France and think it would work and then they failed. We're very conscious that we don't want to do that. So that's why we're probably doing the roll-off a bit slower than some people would have liked. But it's very important for us to be able to get the confidence that we need in terms of where to place the branches, how the signage works as well in terms of France, that we found differences with how the customers react to that. And there's a sort of a customer education piece as well that goes along with that. So we found in the French business that a lot of the customers there did not grow up with all gross model type of store the Toolstation looks like. So in terms of those businesses and those customers, once you get them to the point of education, we find that they're stickier than the U.K. customers. It's just getting to that stage where they accept and understand the model. So in terms of growth outside of the U.K., very much focused on Europe. And right now, that focus is on Toolstation. So Benelux, as I mentioned, and France at the moment and within that Lyon area of France. I've got another question here. Impressive annual growth of 38%. What are the drivers of growth? And how have -- and how have/will you been impacted by supply chain issue? Well, thank you. I think we did a lot of work during the pandemic to get to those sorts of growth numbers. That didn't magically happen. A lot of the work that we set out for ourselves in 2018 allowed us to get to a position to really flex during the last couple of months to really go after the market and get to those sorts of levels. So that sort of growth that just happened, it was a lot of hard work went into that. In terms of the supply chain issues, there's been a lot talked about at the moment in the media around supply chain storages. I can tell you that we are not seeing that at the moment in terms of our business. About 2 or 3 months ago, there were a couple of things that were on allocation. So mainly timber and some other heavy side products. But where I am at the moment in terms of supply chain, and we aren't seeing any impact of that at the moment. And in terms of what are the drivers of growth and how that serve around growth drivers. So in terms of growth drivers for us, for Toolstation, it's quite simple, get the stores down and expand the range because Toolstation effectively is a price leader in that market. That sort of growth driver strategy that we've had that business has proven to be very good, and we'll continue to do that. So we've got a very good idea of how many Toolstations we can put down a year. It's around about 60 or so in the U.K. And that's what we -- that's the sort of level that we're going up. Europe is a bit different. It's a little bit lower, especially in France where we're still trying to hold the model a little bit. But as soon as we get that done, then hopefully, we can get to the same sort of level. In terms of the rest of the businesses in terms of growth drivers. So general merchant, very much around using our branches with our scale at the same time. So the branch network at the moment and some of the devolution of power in terms of stocking to the branch managers to power and price and being a lot more competitive in the local markets, that's a very key section for us at the moment, where historically, we've been very good at servicing the large customers because we've got a very big broad range of stores located very well across the U.K. But that effectively meant that the smaller customers had the impression that we were maybe showing them [ better ] little bit. We had shortage pricing issues, et cetera, et cetera, which goes a bit deeper, but really, we've looked at that and corrected that over the last couple of months. So really being hyper locally competitive is very important for us in terms of the general merchant. And then you put on top of that some of the extra bits we're doing and convenience we provided to the customers with things like the app that we've rolled out and our access vehicle fleet, which is -- which includes -- which increases that service level that we're able to give to our customers. Hopefully, that answers the question. I got a question. Do you offer consulting and installation services or any plans to do so? So we do not offer any consulting or installation services. We are a distributor. That being said, we are -- we try to involve ourselves in projects and try to specify where we can. So I use the example of BSS here. So BSS effectively sounds big boilers, big pipes, big valves, that sort of stuff. Now where we try and fit ourselves into that supply chain is when -- doing the cad drawing of that building, we own the cad inserts and the cad dimensions of those products. So we can go to the architect and -- or the design consultant service and add that heating with the pipes. And we -- because we own that, they are BSS products. So when that then gets passed through to the contractor who builds the building, BSS goods are already in that drawing. So they will probably end up buying those goods from BSS. So that's the sort of thing with the value-added services of what we're trying to do goes to. So in terms of direct consulting and installation, we do not offer those services. I think we're running to time a little bit, but I've got 1 more question that came in. Dividend and share buyback plan for 2022. So I think we've proven that our balance sheet is strong enough to maintain that progressive dividend policy that we've had historically, and we'll definitely continue that. We go into a bit of detail in terms of the dividend policy in our CMD desk. So if you want the absolute numbers to go and have a check in that towards the end in the finance section. In terms of the buyback, this has been quite interesting learning to us, because the funds we've set aside for the buyback is the first time that we've tried the buyback program. So realistically, we're using this as a test case to see how it goes. I think it's been going quite well. The buyback was always quite interesting because we feel that with a lot of our investor base, they prefer buyback to the dividend just because of tax implications. I can't exactly speak to what the Board's try to do because they haven't met on this yet for next year. But I do think that everything is on the table. We do also have a very large investor base that tell us that they do want the dividend. So I think it's appropriate to assume that it would be some mixture of the 2 going forward, if I look at the picture, how it is now. That's not guidance, obviously, but that's just my feeling. So I think that gets us to the end of our questions and the end of our time as well. I would just like to thank you again for joining the session. If you have any other questions or you would like to reach out for a meeting or a one-on-one session with myself or someone else from the IR team, we are very much -- we are very happy to do that. We just head over to Travis Perkins plc. My details are posted all over the website. So feel free to do that. And I hope you have a good evening. Thank you very much.