Travis Perkins plc (TPK) Earnings Call Transcript & Summary

Good day, and welcome to the Travis Perkins Q1 Trading Update Call. Please note this call is being recorded. [Operator Instructions] I will now hand you over to Nick Roberts, Group CEO. Please go ahead.

Morning, everyone, and welcome to the Travis Perkins Q1 trading update. I'm joined today by our Group CFO, Alan Williams. Given the limited period under discussion and to make sure we can get to as many of you as we can in the time, it'd be really helpful if you could keep your questions succinct and seek to avoid repetition of the previous questions. I'll start in a normal way with a short overview, and then we'll move to the phone lines to take your calls. At a headline level, market conditions remain challenging, but our businesses delivered a resilient performance in the first quarter, and our full year expectations remain unchanged. As anticipated, the market was particularly challenging in new house building and private RMI. However, public sector projects, including social housing, schools, road and rail was solid alongside commercial and industrial sectors. Once again, our mix of business, which spans the full breadth of the construction industry provides resilience. The net effect of these market dynamics was reflected in an overall volume decline, but this was substantially mitigated in the Merchanting businesses by the continuation of elevated sales price inflation at 9%, leading to overall Merchanting revenue being down by 4.7%. We're not immune to changes in the market, but as we had expected these conditions, it reinforces our decision to take costs out early at the end of 2022 in order to underpin our full year guidance. Looking forward, as you would expect, we're taking a balanced approach to investments in these challenging market conditions. We're continuing to develop the drivers of long-term competitive advantage and differentiate ourselves in the market. An example of our organic growth strategy is our Whole House proposition, which we launched to customers in March, providing a turnkey solution to small, medium-sized enterprises and regional housebuilders to plan and design bespoke digital models of individual housing units with the group supplying all the materials required for the build. Similarly, we continue to grow our Toolstation business, and we're pleased with the first quarter's performance with total sales growth of 8.6% and like-for-like sales growth of 4.6%. This further reinforces our confidence in our omnichannel model, which continues to really appeal to customers, and we've now passed the milestone of 1 million app downloads in the U.K. with recent research suggesting that nearly 1/3 of our customers prefer to purchase from us via the app, and we also see this trend continuing in Europe. So once again, the diversity of our end markets allows us to continue to position the business for the long term. Coupled with our ability through our operational agility to navigate the short term and be confident to invest in the face of ongoing uncertainty. So as I close this part of the call, let me reiterate, as we said at our full year results, our priorities, they are and they remain evolving the Merchanting model, maximizing Toolstation growth potential, both in the U.K. and Europe. We've maintained disciplined capital allocation, disciplined working capital and the potential to return excess capital to shareholders in due course. With that, I'll now hand over to the operator for questions.

[Operator Instructions] We will take the first question from Annelies Vermeulen from Morgan Stanley.

Just a couple from me. So first of all, on the volumes in Toolstation, which I think they were relatively resilient in the first quarter. Are there any comments you can make about what is driving that, if that's more U.K. or Europe-driven and any particular segments or products that have allowed that volume performance to be relatively resilient? And then secondly, on pricing in Merchanting remaining relatively elevated. Are there any product categories where you're still seeing pricing increases, whether that was 1st of January, 1st of April? And I know you expect pricing to moderate as we move through the quarters. But again, any particular product categories where that's still running a little bit better. And then just lastly, if you could comment a little bit on sort of your performance versus the market in the fourth quarter. I appreciate you said the market remains challenging. But given you typically hope to or expect to outperform the market, I'd be curious to see where your performance backed up versus the rest of the industry, particularly on volumes in Merchanting. That's it.

Good. Thanks, Annelies. I'll start on the first 2, and maybe Alan, you pick up the third, if you like. Volume in Toolstation, yes, has been resilient. We've seen some level of confidence, I think, return to the market in small trades and an element of non-trade as well. So we're seeing some resilience there. But also, we think this is as a result of our investment in just a leading proposition. It's really convenient. It's simple for customers, as we said. We've seen great participation through the app. We see great continued levels of Click & Collect and in-branch transactions as well. So we think this is just an element of slowly confidence starting to resume coupled with the investment we've made in our proposition and the simplicity of that. And we're seeing that in the U.K. and in Europe as well, different across our various regions, but we're seeing that. The pricing is very category-specific. I mean, we are seeing elevated pricing, as you say, continue that were end of year or new year pricing increases from the manufacturers. We expect to see that continue but moderate through the year. We expect to see some pricing in certain categories, perhaps to start to tail off, but it's very category-specific. And -- but overall, the picture remains elevated, and we expect it to remain so for the rest of the year.

Annelies, it's Alan. Just on the -- your question around performance relative to the market overall. I think the -- I'd make a couple of comments. One, it's still relatively early in the year that we are reporting on. I'm not seeing any changes in competitor behavior. So I have no reason to see -- to think that dynamics have changed in any way. So I would comment that the pass-through of pricing is pretty disciplined given the absolute levels of inflation that we're seeing both cost price of goods resale and also the indirect inflation that we're seeing. I think all players in the market remain focused on passing that through, notwithstanding the fact that it's obviously a lower volume market than we've seen last year or certainly in the first quarter of last year.

The next question comes from David O'Brien from Goodbody.

A couple of questions from me, please. Firstly, maybe you could give us a comment on how trading actually ebbed and flowed through the quarter and into April, if you could? And then secondly, whole housings a really interesting proposition. Just wondering how the economics work around this. Do you have to pay for access to it? Or really is it about customer and volume acquisition? And then finally, good to get the reiteration of confidence in terms of the outlook for market expectations. I wonder if you could comment maybe how you see profitability balance now between the first half and second half of this year, please.

Great. Thanks, David. Let me comment very briefly on the first quarter. January was pretty ordinary. February was a little bit better. We had a pretty dry February. March was a pretty wet month and was weaker. So it's hard to draw any conclusions really, ebbs and flow through the quarter, your words. And -- but actually, as we've said in the statement, the breadth of our business, the mix of our business, the way we're exposed to different segments gave us resilience through the quarter so that we could deal with that in the short term, as well as continue to look at the long term. And talking of the long term, of course, Whole House, yes, we're really excited about it. Just for the benefit of people on the call, if you haven't seen it, and there's a really good video, which explains Whole House on our website. This is about really helping our regional housebuilder customers who lap in-house capability around design. They tend to work with external architects and consultants and the ability -- internal capability to really optimize space, to optimize choice around facades, window choices, space inside the house and then material choices, particularly as we look at increasingly low carbon material. We've done that work for them. We created a whole range of bespoke housing types, digital models where customers can pay, yes, David, for access to the environment where they can look at different housing types, different sizes, they can customize those because they all want a different -- a point of differentiation and a competitive edge. It might be in the kitchen. It might be in the windows. It might be in the facade treatment. It might be in the space. And we have optimized these in digital models, so it makes it very quick and easy for them to do so. And then we work with them through those various iterations to enable them to understand material offtake and material choice and that ends up as a package of materials that then we're able to supply in total for their project, which allows them to be really efficient, allows us to be really efficient in the provision and fulfillment of those materials and the construction process on-site. And then we've underpinned that with some financial services, products to enable them to spread the cost of the build and for us to synchronize that when materials offtake. So a really elegant package, really demonstrates our ability to understand our customers' need, work with them very, very closely and to produce value-added services that really optimize their business and give them a competitive edge with their customers. So yes, it is a service that is paid for through a log in into the website. If customers then start to download and use our designs and obviously, we benefit from the full project material offload at the back end. So it's just another example of us being innovative and providing real value-added services to our customers through our understanding of their needs.

Yes, David, I'm not expecting any big difference between the half in terms of profitability. So obviously, you've got a more subdued volume environment that we're anticipating in the first half gradually improving in the second half. But equally, you'll have the full extent of overhead inflation running through in the second half, tempering that a little. So the usual sort of split between the half [ as said ].

The next question comes from Aynsley Lammin from Investec.

Just 2 from me, please. I wondered if you could just comment on, obviously, new housing, we're seeing volumes come back. But is there anything kind of early signs that maybe some of the housebuilders looking into the second half and becoming a little bit more kind of positive just given that sales rates have increased for them? Anything you've seen in the early parts, whether it's the kind of specialist [ merged in ] or anything to give you any indication there for where housing ends up in the second half? And secondly, just on Toolstation Europe, any changes. I think you'd kind of settled with an expectation of a loss of around GBP 30 million in that business for this year. Is that still the case and on track?

Thanks, Aynsley. Yes, just a thought on new housing. I mean, I think we'd reflect your points there actually. We would expect to see, and we are starting to talk about new starts in the second half in order to give the housebuilders product to sell next year, of course. And as you know, we start with the project going into the ground with Keyline and the drainage and civil infrastructure going into the site, and we end with the stairs going in through Staircraft, so we're through the full build process. But we would expect to see more activity return during the second half, and that's what we here too. The only constraint on that and the reason why we're just cautious about it is the constraint of planning. And actually whether planning will be granted for new housing starts at the rate that some of the house builders would like and indeed the industry would like and the country needs. So that might just cause a little bit of caution in new housing on an ongoing basis. On Toolstation U.K., look, you're absolutely right -- sorry, Europe. Yes, you're absolutely right, we're sort of reiterating our position around the GBP 30 million loss. We're really encouraged by what we see across the 3 countries in Europe. We're seeing continued good progress towards breakeven next year in our Dutch business. Great progress in Belgium continues, and we're seeing really encouraging progress in France, as well as we continue to attract, engage and retain more and more trade customers. Our afterwork events are proving really popular and we've seen some really good sales growth in France. And we continue against our plan that we were clear about at the full year to open new branches, albeit at a slower rate in France as we really understand the market, but we remain on track with our plans in Europe.

The next question comes from Emily Biddulph from Barclays.

I've got 2 questions, please. Firstly, on Keyline. Obviously, you're talking about sort of optimism into H2, but would Keyline volume trends actually better in Q1 than they were in Q4? And then secondly, on the price increase of 9% in Merchanting, how much of that was a rollover from last year versus increases at the start of this year? And as I understand, I think price increases usually come through in January and March. Were there increases in March this year?

Emily, it's Alan. Just on the -- on your first question on Keyline, I think volume with new housebuilders remain subdued in Q1 as they were in Q4. I think that's not unexpected. And certainly, they were more robust as we said in the statement in infrastructure in the industrial commercial sort of space, and that's a generalization across the business actually. So remember that those -- the combination of public sector, industrial and commercial, almost half of the group's volume overall. In terms of the pricing and the split between carryover from the period April to December '22 and what component was new in 2023. I would estimate that's around a 2/3 split of carryover and 1/3 new pricing activity. The pricing increases have certainly slowed at this stage. They are less generalized and more category-specific. So for example, still seeing significant increases in more energy-intensive products. I would expect to see that flow of new price increases continue to slow down. So there were a few increases in March, but less than we saw last year.

The next question comes from Christen Hjorth from Numis.

I've got 2. First of all, you obviously reiterated expectations for the year, but just a confirmation that you still expect the same route to get there when you said about which I think as volumes down in the mid- to high-single digits, price up in a similar range and obviously, the GBP 25 million of restructuring savings. And then just secondly, obviously, Toolstation had a tough start to 2022, and part of the reason was the investment that went in. So just wondering how profitability has trended in Toolstation U.K. as those more recent branches mature.

Christen, yes, so on expectations and the shape of how we deliver the expectations for the year, nothing has changed from the guidance we gave at the end of February. From a Toolstation U.K. perspective, I would just slightly correct what you said, if I may. Some of the tough start to 2022 was also around volume, not around the cost profile alone. We've obviously continued to invest in the business. So we slowed the opening of new branches this year because the team are focusing on the start-up of the new distribution center. As a reminder, that's around 500,000 square feet. It's in Northamptonshire. It will absorb the volume from the existing direct warehouse that we use, but it's also capable of supporting branch fulfillment volumes as well from the same center. It's partly automated and we should be -- we're in the commissioning phase now. So there is some OpEx related to that commissioning phase, but we should be fully up and running by the third quarter. So nothing has changed on the guidance for Toolstation U.K. versus what we discussed at the end of February.

The next question comes from Clyde Lewis from Peel Hunt.

A couple of questions, if I may, one around sort of public sector activity. Obviously, sort of a lot of government pressure sort of getting housing associations to improve stock. I'd be interested to hear a little bit more detail about how that's come through in the first quarter for you. And I suppose read across then into that managed services business as well, which I think you referred to in the statement. And the second one was, I suppose, looking back around on the sort of change of expectations or no change of expectations for getting to your FY '23 sort of guidance, I suppose. Are you not expecting any changes in the CPA forecast when the spring numbers come out in particularly around, I suppose, new housing and RMI activity, it'd be interesting on your read there?

Good. Thanks, Clyde. Yes, interesting one on public sector. As we would expect, and as we have seen, public sector spend generally remains pretty resilient, although, of course, the governments are also reviewing key economic infrastructure projects and some funding and some programs are moving to the right, but we remain active and well positioned in those. Yes, absolutely, we have seen continued activity in the public -- the social housing space to improve the energy efficiency of the housing stock. So that retrofit program is underway. Interestingly, we are re-winning social housing projects through our managed services business and being successful in doing so over the last quarter, re-winning and winning new because of our ability to demonstrate our commitment to our ESG program, both in terms of our carbon road maps, as well as our investment in the next generation of people with skills to work in our industry. So our commitments in that space are ensuring that we are the partner of choice for many of our social housing provider customers and therefore, are successful in securing those contracts. And we've got an awful lot of work to do in that space. I mean, I think -- we think it is the biggest infrastructure program in this country for the next 10 to 20 years. And therefore, we are really focused on how we work with customers to really resolve the complexity of getting that work done and make sure that we're well positioned to fulfill their requirements seamlessly. That's increasingly in, obviously, the provision of low carbon materials and solutions. So that's an exciting space for us and one where we continue to see success.

Clyde, on your second question on the -- what we're expecting in terms of volume outlook, I think I'll make a few comments. One, it's still relatively early in the year. We note the improvement in consumer confidence as well. I think things feel in some respects, slightly less bad there, I say than were anticipated. Certainly, if we look back to Q4 last year and the overall environment in the U.K. That said, obviously, inflation is persistent, and the Bank of England is still talking about potentially more interest rate increases. So there are a few contraindications. And I don't have a crystal ball, and it feels a bit early in the year to call where those various differing indicators are lying. So we'll wait and see. At this stage, we're seeing nothing to change our minds on the expectations we have a couple of months ago.

The next question comes from Marcus Cole from UBS.

A couple of questions as well. I was just wondering if there has been any notable changes in bad debt. And the second one is just around working capital. Is there any [ help ] you can give us there for the rest of the year?

Yes. Marcus, so on the bad debt position, we've not seen any particular change in trends. We do, from time to time, still see the odd subcontractor here or there, go under. I think that's still where they had fixed price contracts, in particular, that predate the increase in energy costs and have been stuck in terms of our bad debt reserve as a percentage of credit sales. It remains in line with the trend we've seen over the last couple of years. And that sort of takes me into the second part of the question around working capital. We continue to manage the working capital tightly within the business. So good discipline around stock, and from a debtor book perspective, certainly, we're collecting pretty well at this stage, and our DSO is in line with the prior year.

The next question comes from Arnaud Lehmann from Bank of America.

Two questions, please. Firstly, on business or volume trends in Merchanting, you highlighted the weakness in new build and RMI and more resilience in other sectors, commercial, industrial and public. Does that have any impact on the mix of products, categories that you sell or on pricing or [ the risk ] on margins? Is it accretive or dilutive to margins, this change in mix of customers? And my second question is on potential incremental cost-cutting initiatives you mentioned earlier in the year, the GBP 25 million and I think, 20 branches that were closed. What would it take for you to consider incremental cost-cutting efforts? Are you still a bit more optimistic for volumes into '22, let's say, if volumes were still down a little bit in the second half? Would that be a trigger for more cost-cutting initiatives?

Let me take the first one, Arnaud. So on the volume trends within Merchanting and the mix of business, I suppose the headline is, it's pretty neutral overall to the margin position, what we're seeing. So the areas where we're seeing more volume pressure, RMI tends to be a little more profitable and new house building tends to be a little less profitable in gross margin terms. So the 2 are effectively offsetting each other.

Arnaud, thanks for the second question. Look, as we said in the statement and as I said earlier, we really anticipated the market conditions that we've seen through the first quarter. And we took action at the end of last year to address that. So we will remain flexible. One of the things that we are very good at is adjusting our business depending on the conditions that we see in the market. We remain able to adjust. We remain flexible on an ongoing basis. So we watch the volume environment. We'll adjust our business to suit. We're very agile in being able to do so. And we're -- but we're confident in our ability to navigate the short term in the rest of the year.

We will take the next question from Rajesh Patki from JPMorgan.

I've got 2 as well. I think the first one is on pricing. The split that you provided for rollover hikes and the new hikes for Merchanting is very helpful. Just wondering if it is similar for Toolstation as well. And the second one, sorry if I missed out in your initial remarks, if you provided an idea about the investment in the Whole House initiative? And is this incremental to the planned OpEx or CapEx for the year?

Yes. So Rajesh, on the pricing from a Toolstation perspective, I think it will be broadly similar. So the increases that we saw in Toolstation were particularly elevated in the second half of '22 and I'd expect that to start to moderate as we get into the second half of '23.

Rajesh, on Whole House, this is a really exciting development for us. We've invested in capability in our business. This is about investment in our people and investments in their skills to be able to work closely with our customers develop the digital models, develop the overall proposition, and we've done that on an incremental OpEx basis. So no CapEx involved. Obviously, this is a really skilled stuff, and we're working very closely with designers and technologists to be able to do this really, really well. So as I say, it's incremental OpEx to our plan, and we're excited about the interest and customers that we've seen over the last 18 months as we've been developing it, but certainly since its launch in March.

Any idea of the size or magnitude of this OpEx?

It's a material...

Early days in terms of the size and the OpEx, as I say, it's just investment in our people. So really not material to our numbers.

We will take the next question from Ami Galla from Citigroup.

Just a couple of questions from me as well. The first one was in private RMI, what are the regional valuation that you experienced in the quarter in that market? Across your end markets, are there any signs of any project delays or, to some extent, postponing any pipeline of work? And the last one is, you talked about weather being wet for March. Could you quantify maybe what was the weather impact for the sort of Q1 volumes [indiscernible]?

Yes, Ami, it's Alan. I don't think there's any particularly strong regional variations that we're seeing. I think the London volumes and the Southeast have been a bit better than some of the trends that we saw last year, but not material enough to make a big difference. When we talk to our customers, particularly at the larger end, they certainly are still pretty positive. They still can see the pipeline of projects coming through. Sometimes the offtake is a bit delayed versus what they're anticipating, but I don't think there's anything particularly strong within that overall. I'm afraid I don't have an idea of what the weather impact overall was in March. There are too many other factors going on. I'd just note that it was particularly wet, so that has an impact on groundworks laying of concrete in particular.

No, there is no further questions. I was going to hand back over to you Mr. Roberts for closing remarks.

Perfect. Well, thank you, Marianne. And thank you all for dialing in and for your questions, and we look forward to seeing you at the half year in a few months.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.