Travis Perkins plc (TPK) Earnings Call Transcript & Summary

Welcome to the Travis Perkins First Quarter Trading Update Call for analysts and investors. With me, I have Travis Perkins' CEO, Nick Roberts; and CFO, Alan Williams, who will take your questions. I will now hand over to Nick and Alan for the opening remarks before we move to questions from the phone lines.

Well, good morning to you all. I trust you're all safe and well. Our call this morning will last around 30 minutes because we have the AGM this morning, and of course, we'll need to go and meet our shareholders. And we put a fair bit of detail in the statement this morning. Therefore, we recognize that we may not be able to get to everyone on the line. Matt will be happy in the usual way to pick up any further questions afterwards. We also recognize there are some key topics on people's minds. So please, given the time we have available, can I ask participants to bear that in mind and not repeat questions on similar subjects that have already been covered. So just to summarize the trading statement and the key points within it. It's been an encouraging start to the year with total sales up 13.6%. In Merchanting, total sales were up 17.9%. And given the current environment, pricing accounts for a significant proportion of our growth, around 2/3. We also saw good volume growth, although we're mindful that Q1 is the softest comparative for the merchant businesses. Material cost inflation continues to be passed through in an orderly manner and stock levels remain close to normal. We do now expect pricing to be a higher proportion of sales growth than we had originally forecast, but the market remains rational with respect to managing this impact. Our customers continue to tell us they've got healthy order books. Our larger customers, in particular, are underpinned by a backlog of work in social and economic infrastructure and an ongoing requirement for new housing. In Toolstation, as we expected, sales were down 6%, with like-for-like sales down 11.9%. And as I'm sure you're all aware, we are comparing to a period in 2021 where the country was in lockdown. And with Toolstation one of the few businesses fully open and trading, this obviously fueled a surge in DIY spend that many of us have discussed a number of times. Toolstation's customer base is now returning back to its core trade customers. And hence, this sort of transient volume is dropping out. And we expect the drivers of the business to normalize in the second half. With regards to cost inflation, we continue to manage this well with respect to the significant increases in energy costs, we have limited exposure and remain well hedged. Looking ahead, we're mindful of both the macroeconomic and geopolitical uncertainty. However, customer demand remains robust, and we therefore maintain our expectations for the full year. With that, I'm happy to move to the phone lines and take your questions.

Our first question comes from Will Jones from Redburn.

Just a couple from me, please, around merchanting, if we could and perhaps exploring the price side of things first. I think back at the full year, you had talked about potentially a mirror image of last year's inflation trends, which would have, I think, implied a high single-digit number for 2022. There is a comment in the release potentially signaling that maybe that stays at 10% or more perhaps across 2022. And I suppose linked to that, when we think about gross margins, I think last year, you had about 40 bps of inventory gains that you thought might be given back this year, perhaps the price picture means that might not be the case to the full extent, I don't know. And just whether you can comment on anything else around the gross margin side of things, perhaps customer mix and industry competition.

That ended up being 3 questions, Will. So on the first one, on the pricing, we had said at the full year, we thought it would be a mirror image of 2021. I think we are signaling that it's likely to be a little higher than that. Obviously, very difficult to call at this stage, but we are seeing manufacturers continue to push up prices. I would note, in particular, some of the pressures on categories like timber, given the situation in Ukraine as well. On the second question, on the point around inventory gains, you're correct that we probably, I suppose, giving back less than we had originally anticipated or for other things being equal on that. I think there is some slight offset in that in terms of customer mix. So when I look at the customer mix in Merchanting, our larger customers are a little stronger at this stage. That's a feature of markets like social infrastructure, our managed services business within the general merchant, which, as you know, is a very large chunk of the business. We've seen those customers during the pandemic -- sorry, post-pandemic last year, they were the slowest to recover, and we're seeing a stronger recovery in those customers now. So I think the -- my expectations for gross margin for the year are basically unchanged. I suppose that started to answer the point on customer mix as well that you were alluding to at the end, Will.

And just to add to that, Will, Alan is absolutely right. Our larger customers remain robust and largely unchanged. And also, the domestic RMI space has remained positive as well as people continue to make long-term decisions around utility of their space and their houses. And so we continue to see strong trading in that segment, too.

George Speak, BNP Paribas Exane.

I'll just take one so you can keep things flowing. But could you just give us an indication of how the rising cost of living in the U.K. is having an impact on demand? I appreciate that you're seeing a lot of growth in the social and economic infrastructure side of the business, which I presume is relatively insulated. But at some point does the pressure on the consumer affect your volumes?

George, thank you. I think it's a little bit too early to tell. What we have seen through the quarter is sustained strong demand for materials to undertake domestic RMI projects. As we've said and as you can see in our Toolstation numbers, obviously, the DIY element has receded from the market as expected. But customers undertaking work on their houses using professional trades people to do so and those professional trades people seeking support and materials from us has sustained. We are watchful and vigilant in the market for signs of the impact of cost of living increases, changing the demand profile. And as people reconsider maybe how much work they undertake. But bear in mind, we tend to deal or we tend to serve end customers who are homeowners, who tend to be affluent and who tend to be taking long-term decisions around the utility of space in the home. And therefore, we remain very watchful of that segment, but positive so far.

Arnaud Lehmann, Bank of America.

So I'll keep it to one question as well, please. Considering the macro outlook that you mentioned and the kind of global uncertainties, have you reviewed your strategy at all in terms of store openings, for example, for Toolstation, in terms of your M&A ambitions, in terms of your financial leverage? Do you have like contingency plans, let's say, if the macro was to get worse?

Arnaud, it's Alan. I think we have -- if I start with something like leverage, I think we took a fairly conservative position when we said we wanted to operate within a range of 1.5x to 2x lease adjusted EBITDA. And I said both at the Capital Markets Day and at the full year results, I was very comfortable towards the lower end of the range where we're operating. I think the Toolstation story is really strong, and we intend to proceed with the branch rollout program we've got there. As for M&A, I think we've flagged well on that M&A is probably going to be a small component of our story in any case. So we'll continue to look at really interesting opportunities like taking full control of the aircraft business in Q4 last year, but it won't be a large component of the strategy in any case.

And more generally, Arnaud, I would add to Alan's remarks there, that our business has achieved a high level of agility as a result of navigating the pandemic. And that's something, I think, that serves -- will serve us very well as we -- in a very considered way, like everybody navigates the ever-changing geopolitical situation. So we remain watchful and very flexible in how we adjust our plans, both operational and strategic. But I would end with the comment that we remain absolutely committed to delivering the strategy that we laid out in September last year.

Charlie Campbell, Liberum.

Just one as well. Just exploring the Merchanting a bit more. Just wondering if you give us sort of an idea of sort of the ranking between the Merchanting businesses. So which bits are doing well, which less? It sounds like General Merchanting and CCF are the stars, but just wondered if you could just run through that maybe a little bit.

Yes, Charlie, I think all of the merchanting businesses have had a good first quarter. I think there are still marginal impacts in CCF on availability, but I don't think it's holding back sales. We'd like to have more inventory there, but the business is going well. Keyline, we've spoken about social and economic infrastructure in the statement deliberately, that impacts both Keyline positively as well as in the general merchant business. So it's a fairly broad-based positive first quarter that we've seen.

Gregor Kuglitsch, UBS.

One easy one and then maybe one slightly trickier one. So could you just maybe share and maybe it's not that material, which I guess is why you didn't call it out, but could you just give us the like-for-like for both the Group and Merchanting. I mean maybe I missed it, but I thought you were only talking total sales. And the second question is on Toolstation. So you say that Q1 was kind of down in line with your expectations. Can you just sort of remind us what you think is the sort of DIY component that perhaps is just going to drop out when we think about the full year of this year, sort of, I guess, just extrapolating what happened in the first quarter? What are we talking? Just so we can get a sense and perhaps talk about the comps a little bit there as well.

Yes, Greg, to be very clear on the like-for-like question. I view like-for-like as being more of a retail measure. We're not a retailer. Within the merchant businesses, there are very few changes now in the branch portfolio. So the like-for-like and total sales numbers are very similar. Now having said, we're not a retailer, I recognize, given the pace of opening within the Toolstation network that it still makes sense to help people with a like-for-like as well as a total sales picture to understand the underlying position in Toolstation to form a view on things like maturity of branches as we go through. So on your second question, with regard to Toolstation, can I just remind everyone that Q1 last year, we saw 42% growth in Toolstation. And if memory serves me well, an even higher position going into the Q2 last year as well on both like-for-like and total sales. So it's always very difficult to call in a business like Toolstation, the exact component -- composition, sorry, between DIY and trade customers. The reason being a lot of the trade customers who we've got are sole traders, they're not incorporated businesses, and they're not credit accounts, so they're cash accounts. So it's only through inquiry that we can really understand what the customers do. And then it's a question of recording that. Now not every customer wants to reveal that sort of information. So the way in which we have looked at this rather than being able to get to a pure trade versus DIY sort of split is to look at customers by their annual spend. So we regard customers over GBP 1,000 annual spend as being trade in nature or experienced DIYers rather than the more occasional customers. And our position with those customers remains healthy as we talked about at the full year results. So overall, I think we're -- it's following the pattern that we expected and hopefully, the pattern that we guided quite clearly to you both in -- at the beginning of March and also at the Q3 trading update.

Christen Hjorth from Numis.

2 quantitative ones very quick and one quality one and sort of noting the constant Toolstation. But if I look at that like-for-like sales down 12%, I mean, how satisfy are you about the like-for-like sales in the U.K. itself? And how would that split between volume and price? Those are just the 2 quantitative ones. And then just with DIY under pressure, are you sort of seeing increased price competition from perhaps sort of more DIY-focused stores, et cetera?

Yes. So within Europe, remember as well that we have the same phenomenon in the U.K. Not only were lots of retail alternatives closed to the sort of DIY market in Q1 '21 in Europe. But a number of our -- the larger DIY units were also closed, particularly in Benelux. So we benefited from that. But in terms of the level of price inflation that we're seeing in Toolstation, I'd say at this stage, it's probably around a mid-single-digit level of inflation, certainly lower than merchanting, where the inflation is more weighted towards the heavy side categories.

Christen, your question on pricing coming under pressure for that DIY segment. We remain watchful around there. Generally, people are really competing by developing the proposition and the service proposition where we think we are particularly strong. And we've seen less pricing pressure, although obviously, there are some -- there has been some kind of flash sales and discounting. Obviously, we retain a price premium in Toolstation, which is valued by our customers, particularly our trade customers, and we continue to emphasize the service proposition around that to win, and we're really encouraged by the results that we see.

Mady Jobber, Morgan Stanley.

Just 2 for me. On the kind of the loss we're going to be seeing in this trend in DIY volume. My first question is, has there been anything you've been doing strategically to try and retain some of that bolus of volume that you saw that was sort of as a COVID benefit? And secondly, where are the DIY customers going? Is it that they are -- there's not as much of a demand because people are able to go out and about and not wanting to necessarily spend their time doing DIY in their home? Or is it that they're going to other competitors like the ones you mentioned that were previously closed during COVID.

Super. Look, we don't think DIY customers are going to anybody else because all you got to do is read across to our competitors' numbers and you'll see the same effect. What we are seeing is, as we said in our statement and my introductory remarks, if you bear in mind, this time last year, people had very little else to do, and very little -- very few ways to spend their money. So actually, when the likes of Toolstation are open and there are jobs to do at home, then that really drove a surge in DIY. So we don't see the business going elsewhere. We see people spending their money in different ways and taking advantage of the ability to go on holiday overseas. But there's still, obviously, DIY work going on. And indeed, as people are squeezed in their pocket, they might choose actually to do more themselves. But we're just seeing the impact as we expected of that staying at home because you can't do anything else. So I'll get on with some jobs at home, painting and decorating, patio and garden work, drop out of the market. So we continue to serve those customers really well, and they continue to come into our branches and seek products through our online channels. So we continue to see and continue to retain DIY customers by the strength of our service proposition, the strength of the click and collect, the strength of our app that is being used by more and more customers all the time and the real compelling home delivery options that Toolstation provides as well as well as the value premium that we have in Toolstation. So actually, far from being down hearted about DIY, we expected the change, but we continue to focus on that customer set successfully.

Aynsley Lammin, Investec.

Two from me, please. Just start with maybe some cost kind of comments below the cost of goods line, things like labor, fuel, haulage, et cetera, are you seeing kind of increased pressure there? Are you happily offsetting that? And then secondly, just maybe coming back to merchant on the competitive backdrop. Is it fair to say the kind of wider industry is successfully in passing on that cost inflation in a disciplined way? Are you seeing any changes amongst the regionals or the independent on the Merchanting side in terms of their pricing strategies?

Yes, if I take the second one, I would describe it as a disciplined and orderly sort of pass-through. I think everyone is -- we're all aware of the level of inflation customers, end customers and competitors alike as well as the manufacturers. So it is what it is at the moment, and it's fairly orderly. On the overhead cost pressures, we did put a sentence in the statement saying overall cost inflation for the group is expected to remain manageable. That's not to say, obviously, it's not at elevated levels, but the reflection we're making is, for example, our utilities cost as a proportion of the P&L is relatively modest. And therefore, it's painful, but we're taking the necessary actions to ensure that we can offset those impacts within the P&L.

Rajesh Patki from JPMorgan.

I've got 1 question. If you can confirm that the current softness that we're seeing in Toolstation has no impact on the target of over GBP 1 billion of sales by 2024? Or do you now think it takes longer to get there? Or in other words, did the targets set last year incorporate the unwind in DIY levels that we are witnessing now?

Yes. Rajesh, I think we're very comfortable with the targets that we outlined for where Toolstation is going.

This was the last question today. And with this, I'd like to hand the call back over to our speakers for any additional or closing remarks.

Super. Thank you all for your questions and for joining us this morning. That's really helpful, and we enjoy talking to you as always. And we look forward to speaking to you again soon.