Travis Perkins plc (TPK) Earnings Call Transcript & Summary

Well, good morning to you all, and a warm welcome to everybody in the room and on the webcast for our first in-person results briefing in 2 years, which has been rather denuded, unfortunately, by the tube strike. I will also say to you a Dydd Gwyl Dewi Hapus, Happy St. David's Day from me to you all. I'll open with some reflections and then hand over to Alan for a financial and operational update before I return with a strategic update and look ahead. Let me first capture the year, if I may. 2021 was a year of significant progress for the group. We successfully navigated a very challenging market in all our businesses and produced what we think is a superb financial performance. Performance underpinned by operational and strategic progress across the group. We were true to our promise to focus on the trade and simplify the group. We demerged the Wickes business. We sold our Plumbing & Heating business. We strengthened our balance sheet. And we repatriated excess capital to shareholders, all the while growing our business, new branches, new propositions, new digital channels and winning share by focusing on our strategy for the future to be the leading partner to the construction industry. That means doing more for our customers by adding new and exciting capability to our business, and it strengthens our investment story for new and existing shareholders, all of which is enabled through our energized and confident teams across the business, full of confidence, full of self-belief, after a challenging yet exhilarating couple of years in the business. And they feel that they have the support and the capability to win and execute the strategy. So I'm incredibly proud of what we've achieved last year and how now we are well positioned for the future, remaining true to who we are and our purpose. We are here to build better communities and enrich lives, and that's a theme I'll return to later. But before that, over to Alan.

Thanks, Nick, and good morning, everyone. So as Nick mentioned, the group delivered a really excellent performance in 2021, in addition to delivering the demerger of Wickes and the disposal of Plumbing & Heating. On that note, I should remind you that the 2020 income statement and cash flow have been restated to exclude the discontinued operations and any comparisons that I'll draw to 2019 will also be on a continuing operations basis. The group recovered strongly from the pandemic with annual revenue growth of 24%, helped by both strong execution and the market recovery. Perhaps more meaningfully, revenue was over 10% higher than in 2019, with broadly similar growth overall in each half on a 2-year basis. Adjusted operating profit was also significantly ahead of 2020 and some 19% ahead of 2019 on a comparable basis, with consequent growth in operating margin. The strong operational performance alongside continued disciplined capital management led to a much improved return on capital employed at 12.1%, excluding property profits. Net debt-to-EBITDA leverage on a IFRS 16 basis reduced to 1.2x. And on a pro forma basis, that is adjusting for the proceeds of the P&H disposal still to be returned to shareholders at the year-end. We are at the lower end of the range that we laid out in September last year, namely around 1.5x. While cash conversion was lower in 2021, this was entirely down to the growth in credit sales year-on-year, and cash conversion looked at over 2020 and '21 combined, was over 100%. Finally, the Board is proposing a final dividend of 26p per share to take the ordinary dividend distribution for the year to 38p per share or around 35% of adjusted EPS. This is, of course, in addition to the special dividend we paid of 35p per share. Looking at the revenue performance in more detail. Slide 7 provides a bridge of the key drivers from 2019 to 2021. I would highlight 3 key features. Firstly, you can see the impact of the volume declines in 2020 from both the pandemic and the branch closure program in June of that year. In 2021, there is an annualization impact from the latter, but a very significant positive contribution from underlying volume growth at GBP 655 million. The second key feature is pricing and mix. This was a negligible feature in 2020, but it contributes GBP 305 million of growth in 2021, an indication of the scale and the successful recovery of input cost inflation. Finally, in both years, you can see the positive impact from the expansion of Toolstation. In aggregate, versus 2019, revenue is 10.6% ahead. Underlying volume has grown by 7%, partly offset by the net space reduction of 3% and pricing and mix have contributed growth of 7 percentage points. Turning to Slide 8. I've broken out the year-on-year drivers of the strong operating performance at GBP 353 million. Versus 2020, of course, the largest driver is the gross profit growth from incremental volume at GBP 249 million. This gross profit delivery was further bolstered to the tune of GBP 49 million by strong margin management, both the successful recovery of input cost inflation and the year-on-year recovery in volume related to supplier incentives. I've then highlighted various cost increase elements, namely the non-recurrence of government assistance, which was received in 2020, inflationary elements, including the return to payment of bonus programs after 0 in the prior year and variable costs to service the incremental volume. Next, you can see the contribution of GBP 50 million from the annualization of the branch closure program. This disciplined approach to overheads led to a strong drop-through of gross profit, resulting in an operating margin before property profits of 6.6%. And finally, in terms of property profits, these totaled GBP 49 million in the year, with cash receipts of GBP 78 million. Our property team did an outstanding job in exiting sites closed in June 2020, along with the disposal of the former Tilbury distribution center. I'll now turn to segmental views. If we start the reporting segments with merchanting, the excellent performance was driven by the operational initiatives put in place over the last 24 months to strengthen the business, underpinned by the recovery in end markets. Compared to 2019, like-for-like sales were some 12% ahead. Now as you're well aware, the speed of recovery caused some availability issues and led to significant supply price increases. Our businesses are highly adept at managing these issues. And while availability issues have now largely eased, we do anticipate further cost price increases throughout 2022. At the Capital Markets update in September, Kieran covered the actions taken over the last couple of years to improve the competitive position of the General Merchant to enhance service, build capability and these actions enabling the business to benefit from the volume recovery. Our specialist merchants also benefited from improved efficiency following the 2020 branch rationalization program with both BSS and Keyline achieving record profits. CCF recovered well despite having the biggest challenges from product availability with key products and allocation for much of 2021. Given the strong operating leverage, operating margin in 2021 was 8.4%, some 70 basis points ahead of 2019. And as we discussed at the Q3 trading update, around 40 basis points of this recovery stem from inflation gains in stock, and these are not expected to repeat in 2022. I do, however, expect that operating margin will remain around the 8% mark with mid- to high teens return on capital employed. Toolstation's outperformance continues with growth of over 20%, taking the 2-year growth figure to over 50%. Growth in the second half was lower as the business cycled the strongest comparators from 2020. We anticipate this will also be the case in the first 4 months or so of 2022 before the comparators ease. Importantly, the business continues to perform well with its core trade customers. During H2 '21, in the U.K. business, we saw those higher spending trade customers continuing to grow at over 20%. In the U.K., revenue grew by 19% and was 54% ahead of 2019 with operating profit growth of GBP 42 million and an operating margin of 6.3%, in line with our expectations at this stage of the business's development and despite the heavy investments in the branch network over the last couple of years. Encouragingly, branches opened during the last 3 years are maturing more quickly than those opened in previous years. We anticipate opening a further 60 branches in 2022 in the U.K. to take the total to close to 600 branches. In late 2022, Toolstation U.K. will open a new 500,000 square feet direct distribution center, initially servicing Toolstation only, but with the potential to service direct lightside sales for the General Merchant as well. We anticipate start-up costs expense through the operating profit line of around GBP 5 million in each of H2 '22 and H1 '23. Turning to Europe. Revenue grew by 35% to GBP 92 million as the network was expanded by 40 branches to 123 in total. In the Benelux, sales grew by 32% with the Dutch business narrowing losses and on track for breakeven by the end of 2023. In France, we opened a new distribution center to support future growth in the southeast and doubled the number of branches. At this early stage of 2022, I would anticipate a similar loss overall in Europe to 2021. Free cash flow generation in 2021 was GBP 65 million as working capital was rebuilt given the trading recovery. The increase in working capital of GBP 152 million was driven entirely by the recovery in credit sales. The credit book continues to be really well managed with record low overdues as a percentage of credit sales. The increase in stock, including the impact of cost price inflation was fully offset by the increase in the corresponding creditor position. And as we discussed at the Capital Markets update in September, we remain very focused on the conversion of profits into cash. And as I said earlier, taken together, we delivered cash conversion of 111% across 2020 and '21. Looking at the breakdown of capital expenditure on Slide 12, around 70% of the base expenditure of GBP 95 million was on our strategic priorities. Specifically, Toolstation branch rollout, putting down new larger General Merchant branches, TF Solutions expansion and tool hire. Maintenance CapEx was lower in 2021 as vehicles were redeployed from closed branches and the group experienced lengthening lead times for vehicles and manual handling equipment. I would expect maintenance CapEx in 2022 to form around 35% of total spend. As mentioned -- sorry, earlier in connection with property profits, excellent progress was made on the disposal of closed sites and a cash inflow of GBP 82 million fully funded the acquisition of a number of strategic freehold sites for the merchanting businesses. Turning to 2022. Our updated guidance is for base CapEx of around GBP 140 million, ahead of the previous expectation of GBP 125 million. This increase is driven by a decision to automate the new Toolstation direct distribution center and thus enable us to better manage the labor requirement while delivering a more efficient and lower cost service. If I move on to capital structure. The balance sheet has been transformed as a result of the portfolio actions. Net debt as measured for covenant purposes was GBP 87 million at the 31st of December, with lease liabilities reduced by over GBP 900 million over the last 2 years. At the Capital Markets update in September, I set out for you a target leverage range of 1.5x to 2x on a lease-adjusted basis. This is compatible with investment-grade debt metrics and hence, an optimized cost of funds for the group. I said we wanted to operate towards the lower end of the range in the next couple of years. And on a pro forma basis, adjusting for P&H proceeds still to be returned via buyback, year-end leverage was 1.5x. You will have seen that we have announced this morning the final tranche of that buyback program, having completed GBP 170 million to date to return the P&H proceeds to shareholders in full. The significantly strengthened balance sheet enables the group to invest in strategic growth opportunities, such as the expansion of Toolstation and the acquisition of Staircraft, while at the same time, creating the scope for additional shareholder returns over and above the ordinary dividend. So in terms of the outlook, the lead indicators for our markets remain encouraging with improved levels of housing transactions leading to ongoing strength in both RMI and new housebuilding. We have seen an improvement in commercial markets, particularly in commercial RMI and the outlook for infrastructure is positive. As we have demonstrated in 2021, we very adept at recovering input cost inflation through pricing activity and at managing availability challenges effectively. The group is in great shape. And given the robust end market demand and the positive start to the new year, we are confident of making further progress in 2022. And with that, I'll hand back to Nick and look forward to taking questions later.

Excellent. Thanks, Alan. I hope you agree that what Alan has outlined represents a tremendous operational and financial performance. So now I'm just going to touch on some elements of the strategic progress that we've made since we last met at the end of September. First, let's just remind ourselves of the dynamics of some of our end markets, just to build out some of the comments that Alan made. Being blunt, the planning system and the construction industry is failing to meet the needs of the country in terms of new and affordable housing. And the U.K.'s legacy housing stock remains underinvested, particularly in terms of energy efficiency. Furthermore, we have to continue to repair, maintain and improve our social infrastructure, schools, hospitals, prisons, other public buildings. And that work is well served by our specialist merchants, BSS, CCF and the General Merchant. And infrastructure continues quite rightly to attract high levels of investment and a positive policy backdrop from the government. But these needs support our view that our markets remain robust in the long term, particularly from the RMI perspective. In addition, our customers' requirements and their needs and their behaviors continue to change, and the construction process, the industry we serve continues to change as we face into labor and skills challenges and the need to use different materials and materials more efficiently in the construction process and to continue to take out cost and complexity. So against this backdrop, we continue to feel that we are uniquely placed to be at the forefront of the change and benefit from those positive market dynamics. So against that backdrop, let's have a quick recap of what's at the core of our strategy that we ran through back at the end -- at the back end of September. We remain absolutely relentless in our focus on our relationship with our customers to meet their needs now and in the future. And that is all in service of us achieving our ambition to become the leading partner to the construction industry, but this requires us to do more for our customers. So how are we doing that? So as before, we recognize 2 key customer cohorts for our business. Our professional trades and general builder customers who really need price transparency, stock accuracy, convenience, particularly around and increasingly around Click & Collect, delivered fulfillment accuracy, expertise on materials, particularly with respect to sustainability increasingly. And our larger developer and contractor customers who need fulfillment reliability, accuracy, seamless data integration, sustainability advice, again, increasingly, and removing time and complexity on their sites. So we're actively deepening our relationship with our customers to earn a greater share of their wallet by doing what we do in a simpler and more convenient way for them. But we're also elevating our relationship with our customers by adding new value and more value to their businesses, taking away costs, taking away complexity, reducing time on site, introducing them to more efficient materials and ways of working. And we try to solve our customers' problems fundamentally. As we make progress, we remain focused on delivering this value through our 5 leading business units, but we're also leveraging the power of our group assets to bring additional value to our customers. And I'll cover that. So let me take you through some areas of progress. And I stress that these are not exhaustive. We've got multiple areas in play, but I just want to give you a sense of the progress we're making and how we're putting capital effectively to work. So we continue to make great progress in deepening our relationship with our customers by really optimizing our branch channel experience and really being disciplined, as Alan said, in our investments in our branch channels. And it's all in service of making us more convenient and simple to do business with accurate, simple, convenient, right stuff at the right place at the right time for our customers, all underpinned by our knowledgeable colleagues in our branches. So we continue to open new destination branches where we can further grow market share and actually integrate services around the core product offer. So that's higher and benchmarks into our TP branches. As Alan mentioned, TF Solutions and higher into our BSS branches. And these new and existing branches, we're really investing in capability in our colleagues to really increase the penetration of our customer base with a deeper and broader offer. When you visit these destination branches, I was out there number last week, they really work, and customers love them. They really love the fact that integrated services are just positioned with our core product offer. But we continue to invest in new branches as well, new CCFs in West London and East Birmingham, and we've expanded our TF branch network -- TF Solutions branch network by 5 last year. And we anticipate, as we said at the CMU, a more than 30% return on the investment in new and redeveloped General Merchant branches alike. As Alan touched on, we continue to roll out our Toolstation network. 77 new branches in the U.K. That's now a total of just over 530, 123 now in Europe. And we're successfully deepening the relevance of our Toolstation branches to our trade customers by our new essentials front-of-house range, core trade items that are regular needed -- regularly needed for replenishment right at the front of the branch, and our trade customers absolutely love that sort of development. And it's coupled with new trade credit services in our Toolstation business, uptake of which has accelerated over the last few months. And we've also opened our first Toolstation branch in a new TP branch in Swindon, absolutely true to us furthering the collaboration between our businesses and again, making it simpler and more convenient for our customers to get what they need in one place and deepening our relationship with them. So it's too early to discuss progress on that, but we're moving forward with that collaboration really positively. But it doesn't stop there. So we're using technology to further deepen our relationship with our customers. Progress through our online and app channels has been really positive over the last year. This time last year, we had a basic online presence in our General Merchant and a good robust online presence in Toolstation. We've now got vastly improved online channels for our customers using AI to really optimize the experience that they get. And the feedback for that online channel has been fabulous. And we've got great Trustpilot scores. But we've also, as we mentioned at the CMU, so many of you will be aware, got now new mobile apps, which actually put in our customers' pocket, access to their account, their pricing and the ability to organize transactions and fulfillment with us. And they've been extremely popular, and they are generating at least a 25% increase in AOV. So we've also implemented a simple digital onboarding process for our trade credit, and that's rapidly increasing participation through the back end of last year. We're also building on our fabulous 5-minute Click & Collect proposition in Toolstation by adding a 1-hour Click & Collect within the General Merchant for our heavy building materials. That's really enhancing our customers' time efficiency for picking up whatever they need in getting back to their sites. And it's rounded out now by the complete rollout across our merchant businesses of our delivery management system. So customers can track the vehicle, having book-to-time slot, see the vehicle, know what time it's going to come to them and they can track it directly to the site, which really optimizes the efficiency with which they are managing their sites, and we're building out that platform with further enhancements to come. So for our cohort of larger developer and contractor customers, we're really working with them and now moving from pilot phase into operation, bespoke web channels to them, allowing seamless account management and fulfillment capability, really taking time and complexity out of their business. We're also -- and this is important for our people. We're also using our mobile apps to digitize the colleague in-branch experience with digitizing analog paper-based processes, goods in, permanent inventory accounts and now ticketing services within our branch. So our customers and our colleagues are seeing the benefits of our use of technology and again, taking time and complexity out of our business. So this is all enabling us to really focus on deepening our relationship with our customers and earning a greater share of their wallet. So how are we doing in what we call elevating our relationship with our customers to add more value. So we're using our technology capability and our knowledge of our materials and sustainability to add more value to our larger customers where we're in long-term trusted relationships. So for example, we're using our branch assets to create dedicated, local, efficient replenishment centers and hubs for our customers to work with their teams in those locations. And true to our purpose of developing the next generation of skills for our industry, we're also involving local college students in those locations to introduce new and low-carbon technologies to our customers and actually train their operatives alongside our colleagues to fit technologies like PV and air source heat pumps. And we're optimizing our technology platform for those customers to ensure that their fulfillment requirements are met really efficiently. That's also increasing as value-added, the participation and use of our hire business. And we've also introduced new waste management solutions for those customers through the elevation of our relationship with them. So really positive progress made there. As you know, we acquired -- fully acquired Staircraft in the autumn as a way of really enhancing our business with new capability. They have leading design-led timber engineering capability in complex structural elements of houses. So in addition to the staircase, floors, door kits, precut moldings, all elements that take time and complexity out of a build. So we've applied artificial intelligence to the design of modular floor systems, joists and floors that are now being supplied to 5 of the U.K.'s largest housebuilders. They dramatically improve the structural integrity of the floor system. They reduce installation time. They reduce waste dramatically. They reduce costs and improve safety on site. And we're now applying this capability to many more customers, and it is taking out time and complexity in the construction progress. So as you can see, we're being true within that elevating our customer relationship to playing our part in modernizing the construction process in the U.K. with clever design and new ways of working. So to recap them. We've made good early progress in our strategy. We're making sound investments, which really deepen our relationship with our customers. And we're also finding ways based on our relationships to elevate our relationship with our customers and add more value and really progressively achieve the partnership role that we want. Our customers are really appreciating it. And our colleagues are really energized by it. So all of this supports and is completely aligned with our very clear purpose that we shared in September. We're here to build better communities and enrich lives. Our ambition is clear, to be the leading partner to the construction industry, and we're making really good progress. I've also outlined that we're playing our part in modernizing the construction process, but we're also at the heart of decarbonizing our industry. We've set our Scope 3 target, which we announced. And for our Scope 1, 2 and 3 carbon targets, we received approved science-based target initiative for the 1.5-degree pathway. We've published on our website and are delivering our carbon reduction road maps. And we're also at the heart of generating the next generation of skills. We invested in nearly 1,000 apprenticeships for new and existing colleagues during the year, and we brought 500 Kickstart colleagues into the business, 75% of whom are remaining with the business on a permanent basis. That is us being really true to our purpose and developing our business. So what you've seen over the last 3 years is a fundamental shift in the shape, the focus and the strength of this group. We're serving our customers through 5 leading, trade-focused businesses, and we've strengthened the group and its balance sheet. We've accelerated much needed change, and we're really at the forefront of changing our industry. And we have a unique set of assets and capabilities that we're deploying for our customers by deepening and elevating our relationship with them, not as a home improvement retailer, but as a best-in-class value-added distributor, really helping our customers solve their problems by adding value and finding ways forward, all on the way to becoming the leading partner to the construction industry. So I think we've made a fantastic start to this journey. We're very respectful of our history, but we're not looking back. We're only looking forward. We laid out in September, we got a clear repeatable model focused on delivering TSR, positioning our 5 principal businesses to grow above the market, deepening and elevating our relationship with customers, strong cash conversion, management of working capital, as Alan outlined, and funding growth from within our business through our rigor and disciplined allocation of capital, providing attractive earnings growth and good dividends for our shareholders and the potential to return further excess capital to shareholders in the future. So I'm incredibly proud of what we've achieved in 2021, delivering on our promises, doing exactly what we said we would do, delivering our strategy relentlessly, rigorously with real discipline and at pace and focusing on our customers and building better communities, being at heart of the construction industry and changing the lives of many for years to come. So thank you for that. Alan and I will now take your questions. What I propose to do is to prioritize questions in the room, if I may, and then we will go out to the phone lines.

So if we can have some microphones, Matt. Thank you.

Great. Just 2 for me. Aynsley Lammin from Investec. Wondered, firstly, if you could just comment on the kind of outlook for volumes this year. I know some fear that kind of as the wider economy opens up, RMI has had this big boost and certainly, we're going to see a lurch down. Just wondered what your view on that was. And are you confident volumes are at least kind of flat for the market this year? And then secondly, I think you talked about you expect to make more progress this year. Is -- would that be correct in understanding that progress, kind of group profit include in the property of this year? So obviously, property profits falls GBP 25 million. So is that right interpreting that way?

Do you want me to start, Nick? That felt quite financial. So on the volume outlook, and I'll let Nick comment as well, of course. I think we're confident in the market volume outlook. So I don't see any reason why volume should go down in trade-focused markets. When we talk to our customers, they still have strong order books. I took you through earlier some of the segments and I've used there. So RMI, why do I think domestic RMI is well supported where we saw a significant uptick in housing transactions. Housing transactions may do their thing during the year. They could be lower than last year, but we know history shows us that when people move home, they spend money on the new home in the 18, 24 months after moving. So I think that's a supportive environment. We know from the housebuilders, the volume house builders, they are looking to build more units each year. I mentioned that we'd seen a pickup in commercial markets, including in commercial RMI. We've seen a corresponding pickup in things like social housing as well. Some of those areas that were the slowest to recover from the pandemic, we've seen those accelerate recently. And we're doing more in infrastructure going forwards as well. So I think the volume environment overall is favorable for us. In terms of the second question, Aynsley, more progress. We do mean more progress on operating profit. You're right to point out that the guidance is that property profits will go from GBP 49 million to GBP 25 million, but notwithstanding that, I'd expect a nudge forward on the total operating profit for the group.

Aynsley, I'd only add from a nonfinancial perspective, just to Alan's comments. Look, the reason we think RMI remains robust is that people make long-term decisions. And many of those people who are making long-term decisions haven't necessarily been disadvantaged by the pandemic. And indeed, the pattern of work is such that people will -- many people will remain in a kind of hybrid mode. So investments in their property, if we look at domestic RMI, we think will remain robust through the year. And as Alan said, the social infrastructure RMI remains very pressing indeed. And the progress we intend to make against our strategy is, as I outlined there, really, we're making some early good progress, and we will be relentless in prosecuting that through the year. Thanks, Aynsley. Will?

Will Jones from Redburn. Three, please, I think, around merchanting. The first one is just on the issue of the gross margin. Clearly, the inventory gained 40 bps drops out. Is there anything else to bear in mind around gross margin in '22? I was particularly wondering around customer mix if new build is faring better than RM&I within the mix. Second one was just whether you had any early view around how merchanting performed last year against the market. Perhaps it's affected by the comps in 2020, so maybe a 2-year view, but just any sense of outperformance or not in that business. And then just more coming back to price. I guess if we look last year in merchanting, we went from low single digit to low double digit through the year, I think it's average 9%. Could we get a mirror image to average something similar to think in '22?

I better start on those, Nick. And I feel quite financial. So on gross margin, Will, you're right. The 40 basis points from stock inflation will drop out to a certain extent. I'm not sure it will fully 100% drop out. And the reason for that goes a bit to your point around the -- your third question, Will, on pricing outlook. So the higher the level of cost price inflation you see, the more likely you are to retain in effect some of that 40 basis points because you've got inflation gains on the stock that you had at the 31st of December 2021. In terms of other features, I think it's neutral overall. So you're right that as volumes in areas -- the large volume areas like new house building, social housing recover, that's a slight drag on the gross margin, but it's offset by some of the added value things that we're doing, including areas like tool hire. So we have over 250 tool hire branches within TP branches. They have all been adding colleagues because of the level of demand that we're seeing at the moment. So we're better able to service that demand. In terms of outperformance or not in merchanting in 2021, to a certain extent, it was a year of 2 halves for the general merchant, where we are annualizing for the first half against the closure of branches. But as we got into the second half of the year, and we're no longer annualizing that, we're confident on the outperformance there. And I think we know from our specialist merchants, they have been outperforming their markets for 6 or 7 years. They're in the best shape they've been and continue to perform really strongly. And then on the question on pricing outlook. You were quite right. 9% inflation -- price inflation overall on 2021, 6% in the first half, growing to 12% in the second half. I think you're right. The best view I've got at the moment is a mirror image of 2021. So double-digit cost price inflation, low double-digit, I should stress in the first half and then tailing off in the second half. We are still seeing manufacturer price increases come through. Not surprisingly, anything that's energy intensive, I would expect to see continued price increases coming through, but we're very confident in the way that we manage those through with our customers.

Thanks, Will.

So Gregor Kuglitsch from UBS. Maybe a couple of questions. Touching maybe on Toolstation, which obviously dipped, I think, slightly negative against the hard comp in Q4. If you just care to comment how that is expected to evolve? I guess the comparators are still pretty challenging. And perhaps if you could give us sort of the component that you think is sort of exposed to a little bit of DIY unwind. The second question, if you just -- the acquisition that you made, if you just care to perhaps elaborate what the profit and sales contribution of that would be? And then finally, on -- back on the merchanting margin. I mean, you're kind of -- just in your answer there, you were suggesting you're going to have basically the same again. So the question is, why should the stock gain unwind at all? Perhaps it's more a '23 event rather than '22?

Do you want to start with Staircraft, Nick?

Yes. So Staircraft is a GBP 55 million revenue business. I think it's some details in the back of the note there that you'll find, Gregor. So GBP 55 million business and a kind of 6% operating margin that obviously now big part of the group with the value added that we're bringing to our customers. And the integration, particularly with the customers in the General Merchant, but increasingly with BSS and CCF, we believe that will move favorably over the next few years. Alan, do you want to come back on Toolstation?

Yes. So on Toolstation, Gregor, I think when I covered on Slide 10, my comments in relation to Toolstation. The sales mix normalized during the second half. So we saw that large uptick in DIY volumes dropping back out from Q3 onwards. So I'd expect that to continue, as I said, through the first 4 months, 5 months of 2022 until we're no longer cycling that. The key factor I want to stress about Toolstation is that our regular customers, so those heavier spending customers, the stat is there on the page, we grew 22% with our customers who spend over GBP 1,000 annually with us in the second half. So all we're seeing is a challenging comp as the DIY piece drops through. We're very confident, and we wouldn't have made the comments we've made about the future outlook if we are not confident with the direction of travel being spot on what we expected with the business. So getting to a 6% -- 6.3% operating margin in the U.K. with further growth to come. We're confident in the GBP 1 billion plus outlook for 2025, and we're increasingly confident with the growth path in Europe as well.

I think it's been an absolutely stunning propositional development within our Toolstation business. And that's what we're seeing, particularly and focused on our trade customers. And that was always the intention. So we need to go into a branch and see what the team have done around the front of house and the way the trade interact with that and the way in which the participation is increasing in our trade credit service through Toolstation. That's what we've been driving. That's what we'll return in this business. And we will exit the comps, and we will move forward with the plan. So we're really excited about it. And I think absolutely, that business is different this time this year than it was this time last year. I mean, it's stunning progress.

And then, Gregor, I think I understood your question on merchanting. Let me answer it this way. We're confident in where we are at the moment. Some of the areas which were the slowest to return from the pandemic are big areas for the TP Group in terms of the merchanting segment, so we've got momentum from those. And we're also confident that the actions that we've taken in the General Merchant put us in a position to outperform and to operate around that 8% to 8.5% operating margin level is perfectly fine for the business going forward.

Clyde Lewis at Peel Hunt. Three, if I may. One, I suppose coming back on price, I suppose, given the sort of movements that we've seen in the marketplace. And obviously, historically, the group has sort of jumped around a little bit about being a price leader in terms of sort of wanting to maximize price as opposed to being a bit more competitive. What have you done, I suppose, within the key businesses in terms of that approach over the last 6 to 12 months? So have you looked to be more competitive on price? Have you actually look to lead a bit more on price? And I suppose linked to that is the changes that you made within the green and gold in terms of the website and the increased pricing visibility that sort of smaller customers have got there. The second one I had was on benchmarks. I think it got one very small mention in the presentation. What do I read from that, I suppose, is the question? Where does that sit in your current thinking? And the last one was on really, I suppose, the number of customer accounts, I suppose, particularly in Travis and BSS, Keyline and CCF. It'd be useful to sort of understand the sort of development of the total account numbers in those major businesses.

Let me start, Alan, with benchmarks and come up to the General Merchant and then we'll come back on customer accounts. An interesting set of questions. Thanks for that. Yes. Look, I don't think we look to send any signal with our comments on benchmarks. Absolutely benchmarks is key to our proposition. And it was really heavily laid out by Kieran at the CMU in September, how important benchmarks is. What we've done with benchmarks, as we outlined then, is integrate it within the General Merchant. So we're actually putting it in where it isn't present into our new branches within the General Merchant and making sure that our trade customers who are coming in for their product for a project, it's a seamless integration with the kitchen that they need if that's part of the project. And we're seeing a fantastic response to that. Our customer penetration, which due to lack of integration of those 2 businesses wasn't where we wanted it to be, continues to improve. And where we have our new destination branches deliberately building in that benchmarks showroom and branch into the core Travis Perkins offer is proving extremely successful. So benchmark is absolutely key. Not only that, we are working now with our managed services customers. And obviously, the addition of the expertise from Staircraft gives us the opportunity to think about kitchen solutions and modular kitchen solutions, and again, taking time, cost and complexity out of replacing kitchen units in social landlord units where access is constrained. So benchmarks gives us a real edge in that core trade customer proposition and the integration of that business with the General Merchant has proved to be extremely successful. So we're really pleased about that. Your point on price. I think we outlined through 2020 and through 2021, actually, the changes we've made in our pricing architecture, much greater simplicity, much greater transparency. You cannot have a credible web offer or anything on an app without actually being competitive in your pricing. So many of our customers, our regular customers, trade customers will have their negotiated pricing architecture with us. That will appear on their app and on their account on the website. But actually, for non-account holders, of which we have many, you have to be competitively priced. And I think that's what we've achieved through our key value item pricing as well as our overall pricing architecture. But that's a story from 2020 through 2021 as well. And we really -- as I said, we're really, really pleased with what we've seen through our digital channels. I mean, that's an investment we made because customers want to deal. They want to have the choice. It's not either or necessarily. They want to use both the branch channel and digital channel. And so actually having provision for both is really important to our business. Do you want to comment on customer accounts?

Yes. So Clyde, I'd actually link in some way, the point about the overall pricing architecture and the number of customer accounts. So in essence, we saw the number of customer accounts we've got grow during 2021. And the reason for the linkage that I make, I think it's fair to say that by being a price leader going back to -- that was the strategy, particularly around 2005 in the general merchant. So going back many years, I think it left a sour taste or a bad impression with some customers who tried us again when they were struggling for availability of product last year so that they could complete the jobs. They were favorably impressed that the pricing is very competitive within the General Merchant. So we managed to gain customers who were cash accounts and convert a number of those to credit accounts during 2021 in the General Merchant, which you know is something we've not done for a while in big numbers. So we're really pleased with the progress that we're making there.

And Clyde, you also talked about our specialist merchants. We got 2 of our MDs in the room here. We made tremendous progress last year again and in 2020 with simplifying the pricing architecture. We made and we talked about at the CMU and other presentations around the progress we've made in simplifying our business by netting out rebates, for example, radically enhancing the kind of simplicity of the pricing architecture for our specialist merchant customers as well. So progress made across the board and customers have really noticed it, so is our competition. Thanks, Clyde.

It's Sam Cullen from Peel Hunt. Also, I've got 3 as well, although I think, 2 are interrelated, really. The first one, hopefully fairly simply is you mentioned the destination branches in TP. Can you give us an idea of what scope you see for those expanding? What a realistic number is over time? And then secondly, when you talk about the average order value and growing share of wallet in Toolstation, how are you disaggregating share of wallet versus just industry wallet increasing over the last year? And a similar question in terms of the maturity profile of Toolstation. You talked about accelerating in the last 3 years. How are you going to split out? What's happening in that majority profile because the market is growing so much in the last 18 months versus the network effect of Toolstation doubling branches, say, in 3 years?

Good. Thank you. So we said at the CMU, that it's likely that our branch numbers within the General Merchant will stay somewhere between 550 and 600. And we haven't changed that view. So we are closing some smaller, more challenged branches because of location, we want larger destination branches. We're opening new, some were repurposing. So we don't necessarily -- we're sticking with that sort of view that overall, the numbers will remain in that range. Our focus though, is on getting these larger, more capable destination branches where we bring hire, where we bring benchmarks. And as I said, in our new Swindon branch, we bought Toolstation as well. In March about the next to last year, we opened a small, I suppose you could call it, small sort of trade location trade parks where we had TP alongside Toolstation, alongside BSS. We know those locations work really well. They become destinations for our customers, and that starts to attract that opportunity to deepen the relationship and attract more share of wallet. In Toolstation, we look carefully to your point about share of wallet at our trade customer accounts. That's where we're really focused. Because actually, if we look at the overall, we get back into the kind of comps with the lower value purchases that we've seen through the pandemic, those DIY customers, you and I. And so we really see that as we've enhanced our trade credit proposition, as we've enhanced our app capability project listings for our trade customers so that they can do repeat orders really quickly, enhancing their search capability, meshing in the trade credit clarity with the app, and we even continue to enhance the trade relevance of our range and the in-branch experience. That's where we see the share of wallet going up. And that's exactly what we want. So those trade customers, as Alan said, those over GBP 1,000 a year trade customers. That's really our key focus, and that's where we've made such good progress. [ Talk about the ] maturity profile.

Yes. On the maturity profile, Sam, the point -- the good thing about the Toolstation business being a very digital business is, we have the history of every sale from the very first sale, and we know the sales profile by branch as well. So we look at the openings. We call them cohorts year by year. And the simple point I'm making is compared to the average maturity profile that we'd seen on previous branches, the ones that we've opened in the last 3 years are very significantly ahead. And therefore, we get to a cash breakeven, a contribution to overheads much more quickly on the 200 we've opened in the last 3 years more quickly than the previous 330. I agree there will be an overall network scale effect, but that's the beauty of the Toolstation model in that -- and why we're so confident on hitting the GBP 1 billion for the business because you start to get momentum. The more units you have, the more you're able to do with trade credible products, expanding the SKU range. The digital side of the business, the app, a strongly performing website. All of those features build on each other and give you that momentum going forward. And it's why we can say with confidence we'll hit the sales number. We'll hit the margin target that we got for the business.

It's Priyal here from Jefferies. I think I've got 3 questions. So the first one, obviously, you've talked about sort of supply constraints starting to ease. But are there any metrics you sort of track that help us to quantify this, things like fill rates? And how are these progressing now? Where are they versus where they usually are? And do you sense you're at an advantage versus some of the smaller independents on this front? Second question, Nick, I know you mentioned that actually most people you sell into haven't been that impacted financially by COVID. But is there any sort of anecdotal evidence from some of your trade customers that may be cost inflation, which is definitely going to continue this year? It's starting to hinder some of that demand even in the short to midterm. And then the last question is just the extra GBP 15 million that you're spending on the fulfillment center. I mean, could we just get a bit more detail on that? I mean, what are you spending that on? What does it achieved? Just sort of how revolutionary is what you're doing there?

Brilliant, thank you. On the anecdotal evidence, we have undertaken 3 times last year, I think our RMI index, which we've made available, which -- and Alan commented on this, where we have seen -- and this is a survey of our trade customers, where we have seen really no change in their forward order book. So typically, they might be out at 8 or so weeks, 8 to 10 weeks, and they've extended well past that through last year, and they are sustained. Anecdotally, you do hear some stories, probably more actually in the commercial or social infrastructure space, where projects might have been delayed for concerns around price inflation. That was a feature more of last summer when there was so much hubris around that. That we think has settled back. Our forward order books remain strong, and we don't see sustained evidence or significant evidence of projects being moved to the right on the basis of inflation or materials challenges.

So Priyal, on the supply constraints, the way we measure this is an availability measure. So when the branch needs a product from a fulfillment center, do we have it in the fulfillment center or not and looking at that across all the SKUs that we sell. And on that availability measure, we're largely back to where we were pre-pandemic. I think there will continue to be some tight areas of supply during the year, but I don't think that's having an impact on our customers more on the safety stock levels that we're carrying. On the incremental GBP 15 million of CapEx, first of all, the fit out of the new DC in terms of the racking, sprinklers, those sorts of things is all in the base CapEx and was in the GBP 125 million that we outlined at the end of September at the Capital Markets update. What's different is the incremental GBP 15 million is on various elements of automation within the warehouse. So this is a warehouse where we will be picking individual items and boxing those. So it's conveyors. It's boxing equipment, automation of that, automated guided vehicles to collect the product from the racks, take that to picking areas. The reason we're doing that is to put ourselves in a position where we can manage the cost better going forwards quite simply. So it will be around a 3-year payback on the equipment. It helps you from a labor efficiency and we all know that labor within the distribution space is quite tight in the U.K. at the moment. So I'd describe that as absolutely future-proofing the facility that we're putting in place. Now my learned colleague, the Finance Director of Toolstation, Richard would tell me that the technology that we're using is Volkswagen Golf type technology. This is not leading-edge technology by any means. So we're not building a very advanced thing. It's all tried and trusted solid German and Swiss engineering that we'll be using.

Arnaud Lehmann from Bank of America. I've got 4, but they are short.

You promise on that.

I promise. Firstly, just can you confirm that the business trends you've seen in January and February are consistent with Q4 and give you this confidence into growing top line and profits in 2022? Secondly, could you -- I mean, you are talking about gaining share of wallet. I believe that was about Toolstation, but I think in TP, you were also talking about gaining market share. Can you comment about the competitive environment, what you're seeing at the likes of Selco, Buildbase, Jewson, et cetera? Are they on track as well on the pricing and value creation rather than chasing volumes? Thirdly, on debt. I think your net debt position, including lease liabilities at the end of December is broadly consistent with what we saw back at the end of June, 600 plus. I was hoping for maybe a bit more free cash flow generation and being able to bring the debt position a bit lower December versus June. Was there any one-off to think about in the cash flow statement? And lastly, property profits. You spent 2021 increasing the guidance and eventually beating your own guidance at the end. Are there any particular projects we should have in mind that could imply upside to your 2022 property profit guidance? That's it.

Good. Let me take the first 2, Alan, and then we'll -- so look, you know why we don't comment on January and February, and we just closed our books last night for February. But as we've said in the statement, positive start to the year, confident for 2022. So I think I'll leave it at that. On our -- lot is going on in the competitive environment in 2021. I'm sure you have dived into our competitive results at one of whom, obviously, Selco came out last week. I'll leave you ask Jewson and Buildbase how they're getting on. Our view is that we are gaining share and performing very positively around those respective competitors, but are side-by-side against some of our key competitors as much as you can dig into their figures sometimes to separate out those businesses indicates that we're making really good progress. So we're very positive around that. We think we're doing all the right things in our strategy, focusing on deepening that relationship. And then really, you talked about used the word value creation. I think when we look at how we're elevating our relationship and adding services and solutions around our core offer, we really are at the forefront of that in our space. So we're very positive around the strategic progress we've made. Debt, Alan?

Yes. So on the net debt, Arnaud, there aren't any particular issues that I'd draw your attention to. We did end the year with more stock in terms of volume, not just a price impact. Some of that was anticipating some of the availability challenges that we saw last year and making sure that we're well stocked on key lines within the General Merchant, in particular. But there's nothing particular that I'd draw your attention to. A lot of that is funded by the trade creditors. So I think it would be more in the -- the key thing is the increase in working capital of GBP 150 million in the year was all about the trade debtors. When I look at the trade credit book in terms of days of sale, overdues as a percentage of the debt, they're all at really good levels. So I said during the comments earlier, record lows on the level of overdues. So there's nothing I'd draw your attention to that stands out in there. On the property profits for last year, first of all, why did we up the guidance to at least GBP 40 million? Well, it's because we'd started marketing the Tilbury distribution center, and we are confident on getting a transaction done in the year. Why did it come in at GBP 49 million where we got more for that property than I thought we're going to get a lot more, hence, the outturn that we had on the year. The GBP 25 million for this year, they are very specific projects. It's always difficult to predict exactly the flow of these things, but I'm confident that, that GBP 25 million of projects will be there. If there's any more that come along, I'll give you good early notice.

Charlie?

Yes, Charlie Campbell at Liberum. Just 2 really for me, please. Just first of all, just on Toolstation and thinking about the profile of margins as the business matures. It does sound to me from the presentation today as if actually trade might end up being a bigger percentage of Toolstation U.K. than you've previously thought, which is probably helpful for margins. So I just wonder if you -- this is the right time to be thinking about margin and maturity being a bit bigger than previously expected. Or perhaps that story has got a bit longer to run. And then secondly, on Toolstation, again, on the U.K. business. Glad to hear that there's some Volkswagen Golf technology in there. Is the installation of that all outsourced just again to get an idea of the risks of that project? Automated system sounds quite risky to me, but just on thoughts on mitigation of the risk of that program.

Yes. So Charlie, just starting with that one. The installation is outsourced. We're working with a partner to manage all of the different contractors. We also have a failsafe mechanism in that. It is a warehouse that can be operated manually, if needed, as well as having the automation there. On the Toolstation margin maturity, I think you're right that trade will be a significant proportion of the business. In my mind, we'd always anticipated that, and that's reflected in the range of products that we stock and getting into more trade credible ranges. I think it's a little early to start calling margin could be bigger than expected. And the other point I'd point out is that we do maintain a fairly healthy price advantage versus the competition within Toolstation, and we're very keen on keeping that because that's one of the things that our customers love about the business.

And this one just as a supplementary. Has the take-up of trade credit not surprised you about, I mean that was sort of a message that seems to have come out. I mean, perhaps I'm over-reading that.

The trade credit is going really well. It's always difficult when you've not done it before in a business like that to know quite how it will take off. But we've automated the process. It's actually another area of collaboration between the TP General Merchant and Toolstation that's in place. In that, it's the TP General Merchant credit team who've helped put that automation in process -- in place for the Toolstation business to accelerate qualifying customers for credit. So it's going -- at this stage, it's going really well, still small overall, but really promising.

John. No. No, John. Question on this. As we got a couple of minutes left, are there any more questions in the room?

[Operator Instructions] And we will take our first question from Rajesh Patki from JPMorgan.

Yes. I hope you can hear me well. Yes. I have got 2 questions. First one is on the specialist merchanting business. You mentioned record profit delivery for BSS and Keyline. Just wondering if that is largely due to better margins this year? Or is the top line for each one of those businesses ahead of the 2019 level as well? And the second one is, I think you touched upon briefly on the second half performance. But if you can add some color on how you're thinking about the working capital moves for this year. That will be great.

Rajesh, it's Alan here. So on the second half performance and the outlook on working capital. I think working capital as a percentage of sales or on a DSO basis, I'd expect to see broadly consistent with 2021. I'd actually suspect there'll be a little reduction on that basis of percentage of sales in the merchanting business, which will help us fund the continued expansion on Toolstation. In terms of the specialist businesses and BSS and Keyline in particular, certainly, on a 2-year basis, if you look, they were growing their like-for-like sales healthily. The gross margins were really solid in both businesses. But one of the points I highlighted was the efficiency within those businesses, namely having closed some branches during 2020, which were lower than the average revenue and difficult sites to operate. We've managed to effectively recover volumes without adding back as much operating costs into the business. So we saw an improvement in the overheads to sales ratios in the businesses as well. That was across the 3 specialists. And I have no doubt if we haven't been held back by availability challenges within CCF, we'd have seen a similar pattern given the improvement that we made in the network during 2021 -- sorry, 2020.

Thank you, Rajesh. We have time maybe for one more on that.

And we will take the next question from Ami Galla from Citi.

Just few questions from me. First one is a follow-up on Toolstation. Could you give us some sense of the possible timing of the direct fulfillment center opening up? And in terms of Toolstation, where does the online mix in the business currently fit? And do we expect that to increase over the next couple of years as you kind of use the fulfillment center in that regard? My next question was on Staircraft. You've been -- you've given us a reasonably helpful guide in terms of the sort of housebuilders that you're working with. Is there a number that you can give us in terms of the average number of sites that Staircraft is currently being used on? And the last one is just a follow-up on the working cap inflows for 2022. Do -- is the sort of level of trade debtors in the business at the right level? Or should we see further investment in that regard going forward?

Thank you, Ami. Let me start, and Alan will pick up. If I heard you rightly, the timing for the DC is back end of this year and into early next. And the online mix, we haven't set necessarily a target for that. It's just a huge opportunity for us. And through really driving the quality and capability on our online channel as well as the app channel, there's just a great opportunity for growth, and we've been really pleased by the positive uptake and performance so far. Staircraft. I'll have to come back to you on the number of sites specifically. I mean, as I said, we are working with all the top housebuilders and growing that business extremely positively. So we will just have to respond to you on the number of sites. I'm not sure. No. No. Okay.

And then on the question, Ami, around working capital and trade debtors, is it at the right level. I think if you look at the trade credit as a percentage of merchanting sales, the trade debtor book, that gives you a very good indication of where we are on the business. And as I always, it pains to point out now for the third time of asking record low overdues as a percentage of sales within the business as well.

Just on Staircraft, Ami. Our opportunity here extends way beyond the large housebuilders who are very important customers to us for Staircraft and the rest of the business. But actually, the opportunity to grow that business into our regional bespoke housebuilder cohort is really exciting for us. And so we move beyond the traditional names that you and I will know and love and into a group of customers that actually, in aggregate, exceed the demand of the large housebuilders. So it is a really exciting opportunity for us to grow our Staircraft business. Thanks, Ami. I think we are absolutely on time. So thank you so much to everybody on the webcast and for those who have asked us some questions and everybody in the room. It's been a fabulous year for us and one that we are extremely proud of. The business is incredibly confident, and we look forward to 2022, and we look forward to seeing you again soon. Thank you very much.