Travis Perkins plc (TPK) Earnings Call Transcript & Summary

Okay. I can call us to order. What a great view to have such a full room on the 1st of August. A warm welcome to you all. Thank you very much for joining us for our first half presentation for 2023. As we all know, it's been a challenging first half while we had anticipated a weak Q1. We had expected an improvement as we move through the period, which did not materialize, driven by weak demand in 2 of our end markets, new housebuilding and private residential RMI, which remains subdued due to ongoing macroeconomic uncertainty. However, other end markets have remained more resilient. We are being agile and focused in our trading stance to ensure that we navigate the short-term successfully while continuing to invest for medium-term competitive advantage for our business and all the while remaining as close to our customers as ever. We recognize that H2 is likely to continue to be subdued and represented by subdued demand, which was reflected in our expected operating profit of GBP 240 million for the full year, which we reconfirm today. So with that, let's hand over to Alan for the financial review.

Thank you, Nick, and good morning, everyone. So as Nick mentioned, it has been a challenging first half, given the market conditions. Revenue was 2.5% lower than prior year with elevated selling price inflation and a high single-digit volume decline, and I'll cover this more -- in more detail, sorry, on the next slide. Operating profit was 31% lower at GBP 112 million given the lower volumes and the phasing of property profits in the prior year, which were heavily H1 weighted. The decline in adjusted earnings per share reflects both the lower profit figure and also the significant increase in the U.K. corporation tax rate. Working capital was well managed in the period with a small inflow despite the seasonal build and as compared to a significant outflow in the comparative period. This, in turn, drove the strong cash generation and cash conversion at 105%. In terms of lease-adjusted leverage, net debt-to-EBITDA came in at 2.1x, marginally above our target range despite the reduction in financial indebtedness. This was driven by the combination of lower EBITDA and an increase in the value of leases. Despite the decline in earnings, the Board has declared an unchanged interim dividend at 12.5p per share. This reflects both the robust financial position and our confidence in the medium-term outlook. Looking at the components of the 2.5% decline in revenue on Slide 7, you can see the significant ongoing impact of selling price inflation, with the business again passing through manufacturer increases effectively. The overall price/mix component was around 6% or GBP 149 million. The impact has moderated during the half particularly Merchanting. This is in part due to higher first half increases in 2022 dropping out of the comparator and also due to commodity deflation in certain products in the second quarter, notably timber, down over 20%, steel and copper. We would expect to continue to see a moderation in selling price inflation through the second half. Volumes overall were 8% lower than the prior year, with Merchanting 10% lower driven by lower housebuilding and RMI activity, as Nick mentioned, but with Toolstation delivering 3% volume growth. You can also see that at the group level, the impact of network changes was negligible, with the contribution from the Toolstation expansion over the last 12 months offsetting the impact of the Merchanting branch closures we announced in Q4 '22. On Slide 8, I've broken out the drivers of the group operating profit performance. Gross profit declined by GBP 29 million as a result of the low volumes described earlier. Merchanting gross margins were maintained given a disciplined approach to margin management across the business. We're all well aware of elevated levels of inflation currently, and we have seen this across all indirect spend categories, in particular, wage inflation, which averaged around 6%. The group has, however, mitigated this impact in the half through the early cost reduction actions taken in late '22, which are generating a GBP 25 million annualized saving, combined with steps taken to flex volume-related costs, such as distribution expenses, vehicles, et cetera. Strategic operating cost investment was lower year-on-year at GBP 11 million, given the slower pace of openings in Toolstation as we concentrate on starting up the new distribution facility in Pineham, Northamptonshire. Finally, as referred to earlier, profits were GBP 12 million lower in the half as H1 '22 contained a significant disposal in Cambridge. So I'll now turn to performance at the segmental level, starting with Merchanting. The business faced tough market conditions in the first half, with revenue down 4.5% and operating profit some 23% lower. Looking at our end markets, the private domestic RMI market, which represents around 35% of segmental revenue, remained challenging throughout the half with fewer secondary housing market transactions and homeowners' budget squeezed by inflation and rising mortgage costs. As you know, the private domestic new build market, which represents around 19% of segmental revenue, has seen substantial volume declines as a result of the rapid rise in mortgage rates. By contrast, the commercial and industrial and public sector markets, which together represent around 46% of segment revenue, have proved much more resilient. These trends are reflected through the different businesses depending on their end market weightings. So for example, while CCF and Keyline have been impacted by the significant downturn in new housebuilding, BSS has held up well given its exposure to the commercial, industrial and public sectors. Within the general merchant business, performance with the professional trade and general builder segment was impacted by the weakness in the RMI market. By contrast, we experienced continuing strong performance in value-added services, such as Tool Hire and the Managed Services business, and Nick will speak a little more about this later. Finally, I'd like to highlight continued progress in TF Solutions, the specialist ventilation and air conditioning arm of BSS, where our revenue was up 28%, and, secondly, Staircraft. While volume in Staircraft was impacted by the decline in new housebuilding, the business flexed its cost base really well and continues to deliver for its customers. This has given us confidence to invest in further manufacturing capacity to come on stream in H1 '24. So turning to Toolstation. We delivered a good performance in the half with 9% revenue growth overall. The U.K. experienced above-market revenue growth at 8% despite the depressed RMI market. This was driven by network maturity benefits and further enhancements to the trade customer proposition, coupled with compelling value and outstanding service. The U.K. P&L incurred both dual running and start-up costs associated with the new 500,000 square feet partly automated distribution facility in Northamptonshire, which is on track to commence direct shipments during this quarter. We expect to eliminate this on cost over the next few years through efficiencies, and we'll share more on this at the Toolstation UK investor seminar in late September. The new DC has been the key focus for management in the half, hence the decision to slow branch openings but with the rollout due to resume in 2024. In Europe, the business was not immune to challenging market conditions, but we still grew revenue by 19%. Market conditions were particularly challenging in the Benelux, but the business grew by 9%, benefiting from the maturity cycle in branches opened over the last 2 years. France grew by 42%, with 3 further branches added in the half. While losses in Europe grew half and half, we expect them to narrow in the second half as the Netherlands moves towards breakeven. Now as noted earlier, operating cash flow conversion in the period was strong at 105%, with a free cash flow inflow of GBP 58 million. I was particularly pleased with the working capital inflow of GBP 8 million in the first half despite the ongoing impact of elevated levels of inflation. I would remind you as well that the summer is a seasonal peak compared to December. And this performance compares to an outflow of over GBP 100 million in H1 '22. So what did we do? Well, stock quantities were tightly managed in Merchanting and reduced overall to reflect the current trading environment. In Toolstation, inventory levels are only modestly higher despite the growth in branches and the impact of the stock build in preparation for the opening of the Pineham distribution center. Trade debtors remain well controlled throughout the business, and we have seen a reduction in days sales outstanding in the period. Cash interest paid was lower year-on-year, principally as a result of the acceleration of interest through the bond tender exercise we completed last year. Turning to capital expenditure on Slide 12. You can see that base CapEx was modestly lower year-on-year, reflecting careful management given the market conditions. In Toolstation, expenditure was focused on the Pineham DC given the slower rate of branch openings. In Merchanting, we continued to focus on upgrading general merchant branches and addressing white spaces in our network where we see good returns. And Nick will cover this in more detail later. Maintenance CapEx continues to be concentrated in upgrading our fleet with more efficient and lower-carbon vehicles. As noted, while we continue to invest in information technology solutions to offer better services to customers, the vast majority of this spend is expensed directly through the income statement. In terms of freehold investments, it was a quieter period largely due to phasing, with a step-up anticipated in the second half. In terms of other property activity, in addition to the disposal of a number of former merchant trading branches, we undertook a sale and leaseback transaction on 7 merchant branches, raising GBP 23 million on a sub-6% yield. This will fund the planned freehold investments in the second half. And from a base CapEx perspective, we continue to guide to approximately GBP 100 million for the year or GBP 25 million lower than the medium-term guidance we laid out in September '21 despite inflation in materials and all of that to take into account the current economic climate. The balance sheet remains robust. As described earlier, we have seen a reduction in net debt before leases in the half of GBP 32 million given the good working capital management. On a lease-adjusted basis, net debt grew by GBP 55 million overall as the balance sheet now reflects the lease commitment in Pineham and the new Staircraft production facility I referred to earlier. Coupled with the decline in EBITDA over the last 12 months, this drove the increase in lease-adjusted leverage to 2.1x just above the guidance range. Also of note in the period was the completion of the refinancing of the September '23 bonds through the issuance of GBP 100 million of private placement notes across 6- to 8-year maturities. These fixed rate notes will be funded this month in time for the bond maturity. So in terms of guidance for the full year, we expect market conditions to remain challenging in the second half. As mentioned earlier, we've seen product inflation start to moderate overall, and I would expect this to continue in the balance of the year as H2 '22 price increases drop out of the comparator and given the commodity product deflation we are now seeing. I would expect this lower inflation trend to be offset in the revenue line by steadily improving volume trend, given a less challenging comparator in H2 '22. We're, therefore, reiterating the adjusted operating profit guidance of GBP 240 million issued in early June. And with that, I'll now hand back to Nick for the business review and then look forward to taking questions later.

Brilliant. Thanks, Alan. So I'm going to discuss 3 things today: how we're navigating the short-term market challenges; how we're balancing this with investing for medium-term differentiation and growth; and also, as Alan mentioned, our forthcoming investor update on our Toolstation business. Firstly, though, per this slide, a little bit of context. Despite the macroeconomic backdrop in the U.K., we continue to benefit from broad end market exposure. Whilst we've seen the well-documented weakness in national housebuilding and private domestic RMI and the persistent consumer inflation and rapidly rising mortgage rates, we continue to see solid trading in social and economic infrastructure, commercial and industrial segments, benefiting our BSS, Keyline and CCF businesses as well as the TP general merchant with our customers, the best builders and professional tradespeople in town remaining busy, albeit in a lower-volume environment. Looking further forward, we remain confident that the structural demand drivers of retrofit, a need for new housing, repurposed office and industrial space in a world that needs to continue to decarbonize remain compelling over the medium term. So our strategy remains unchanged. In our general merchant, we are maintaining our focus on the needs and servicing the needs of our larger developer and contractor customers, benefiting from the depth of our relationships on national network and, increasingly, our digital and carbon tools and channels that bring efficiency to both our business and our customers while we remain relentlessly focused on delivering for our smaller local general builder and professional trade customers. The very nature of our business, empowered local branch and sales teams supported by data and tools and intelligence from the center, means that we're staying close to and on top of customer needs and balancing and adjusting our trading position constantly. So between our TP general merchant business and Toolstation UK, we access an enormous base of general trade customers, both large and small. There are 4 things we're doing for our smaller general builder and professional trade customers through our TP general merchant business. As the largest merchant in the U.K., we have access to significant amounts of data, and we're using this data to better understand customer behavior and their preferences and then effectively target and engage specific cohorts of customers, which combined with local insight and relationships through our branch teams, is driving acquisition of a greater share of our customers' business despite the lower-volume environment. And supporting this effort, we've got an even sharper focus on gateway categories such as timber, with targeted marketing campaigns and communication strategies specifically designed to resonate with local general builders and professional tradespeople, highlighting the benefits that are most relevant to their needs and attracting them to adjacent categories as they shop with us. Our digital offering provides us with an edge over our competition and makes it easier for our trade customers to access trade advantage deals through logging into our web and app channels. And furthermore, we've been using our relationship and scale with our suppliers to bring the best deals to our customers. And we're also focused on creating more time for our colleagues to spend time with our customers in branch and on the phone. And so we completed the rollout of our branch digital toolkit, which saves us the equivalent of 3,000 hours every week and makes our processes in the branch for serving customers 50% faster than they were before, digitizing branch processes, making lives easier and more efficient for us and our customers. And we're digitizing faster than our competitors and creating advantage in the medium term, all of which reflects our continued commitment to serve our smaller as well as larger customers with a leading service proposition. In TS UK, Toolstation UK, there are 3 key areas of activity in the short term. We continue to attract our general and small trade customers through the advantage of our everyday low price proposition, coupled with our dynamic pricing through trade accounts on apps and in-store, and the ease and simplicity and speed of our customer journey and service model, whether in the store or online or through the app while focusing on greater attachment of products to enable customers to complete the whole project, not just part of it. And we improve our service, continue to improve our service. For example, through greater stock depth and availability in branch on key trade lines and training our colleagues to help solve problems with customers, and we're confident in our ability to continue to mature branch sales and leverage the investment we put into our network and our digital capability over the last couple of years. And as I say, all of this reflects our continued commitment to our small general builder and professional trade customers really based on our expertise, our convenience and our responsiveness to their needs. As I mentioned in my introduction, we continue to carefully balance delivering short-term results with investing for longer-term differentiation and advantage, and we continue to make good progress, leveraging our scale and our access to core trade customers. In Hire, in particular, we continue to grow, and it's now a feature of the core proposition of all 4 of our merchant businesses. We've grown our Hire business, 6% year-on-year and more than 1/3 since 2019, with Hire available now in over 300 of our branches through all of our merchanting BUs. And customer penetration continues to grow strongly as another example of how we're cross-selling products into our existing customers to increase share of wallet. Our Managed Services business continues to grow with our social housing customers. It's up 7% year-on-year, where upgrades, repair and maintenance projects are ongoing, and we have a win rate of 84% in new contracts based on lots and are increasing the penetration with social housing customers of both Hire and Benchmarx Kitchens. The Travis Perkins Managed Services business along with Keyline are among 18 businesses who have been selected for a 4-year, GBP 750 million building materials framework from a public sector purchasing authority called the Cirrus consortium, and the consortium is hosted by Grand Union Housing Group and includes housing providers, local authorities and NHS. So we continue to grow. Our unique ability to manage key data, such as carbon emission and deliver low data is proving a key differentiator with these customers because it aids their social and environmental value agendas. And this is something that our competitors simply cannot do. We're also working with customers to deliver apprenticeships in retrofits to serve the need to upgrade existing properties for greater energy and thermal efficiency. And we're really pleased with the progress that we've made with our digitally led house design and procurement service called WholeHouse, which we launched in March, with 3 packages purchased and escrow packages for 4 material spend with us with customers worth over GBP 4 million now related to this service. Alan touched on this, but a key plank of our capital allocation strategy has been investment in Merchanting destination branches, where we combine depth in heavy side building materials and light side, coupled with higher benchmarks and managed services facilities. And we're pleased with the progress with these branches, delivering revenue and profit performance ahead of the investment appraisal targets and significantly ahead of the 2018/'19 cohort. Penetration rates of value-added services such as Hire and Benchmarx continue to climb. We've got 17 new branches that have opened since 2020 with 6 more opening in the second half, with the majority being freeholds, which gives us, obviously, assurance of long-term tenure. Such as our confidence in this approach, we continue to plan for more branches in key conurbations and regional growth target areas. And so to Toolstation, we are positive about the performance and the share gain and the progress made in winning more trade customers. Investments in our network over the last few years is providing maturity benefits as we continue to acquire share. And we've secured new Toolstation light side frameworks directly with large customers as well as Toolstation being integrated into the frameworks being serviced by our Managed Services business that I mentioned earlier. In 2022, we secured a new framework contract with a large utility company to supply their engineers with light-side materials. In the first half of '23, we have more than tripled last year's spend on this contract, and we're now working with several other large businesses, including utilities, national pub chains or similar contracts with scope for us to extend this to other sectors. With the U.K. infrastructure now in place, including the new DC opening in Q3, we're now fully focused on driving operating margin forward. In Europe, we've doubled the size of the network over the last 2.5 years, and we're seeing good market share gains. And within that, our trade participation remains strong in Europe, which is particularly encouraging. And we're looking forward to sharing with you more details for the vision of our Toolstation business, and we'll be holding, as Alan mentioned, an investor seminar at the new Pineham DC just outside Northampton on the 28th of September. You'll all be invited, and we look forward to seeing you there. So to conclude, we saw weakness in the market last year, and we didn't delay taking cost action early to reflect the reduced volume environment as well as flexing our capital spend, as Alan mentioned, down from GBP 125 million to GBP 100 million, and we are relentlessly focused on operational levers to drive sales. Combining data with local field insights through relationships, we ensure that we are winning customers business, particularly in that general builder and professional tradesperson segment. And we continue to balance that relentless focus on the short-term trading performance of the business with investment in the medium- to long-term differentiation of the group. Investment in apprenticeships, upskilling colleagues to understand retrofits and the decarbonization of products that we sell into customers' projects remain absolutely key for us for the future. We've refreshed our leadership team to bring depth and experience and knowledge to bear for the next phase of navigating what will continue to be a challenging market and delivering the strategy for the medium to long term. And we're confident that despite the headwinds we're currently facing, our long-term investment thesis remains intact. We have a strong balance sheet. We generate good cash, with working capital managed tightly, and this is reflected in our ability to maintain the dividend that we announced today. We're really disciplined in allocating our capital, focusing on proven concepts which enhance our returns. And we will continue to focus on delivering long-term returns to shareholders as we navigate the short term, focusing on market outperformance to invest for the medium- to long-term competitive advantage. Thank you very much for listening. And now Alan and I, as always, we'll be happy to take your questions.

Aynsley, hand straight up.

Aynsley Lammin from Investec. Just 3 for me, please. First one on price inflation, seems to have slowed or is slowing quicker than maybe you would have expected or thought couple of months ago. Just any kind of color around that. Is that manufacturers cutting costs? Is it just commodities, the market become more competitive? And just wonder what's driving that. And then secondly, on Toolstation. I think we'd expected a loss of around GBP 30 million in Europe for the full year. Is that still your expectation? I think the loss in the first half was a bit bigger than what I had in anyway. And then on the dividends, you obviously held in the interim. Given your guidance, should we expect that to be held for the full year as well?

Great. Thanks, Aynsley. I'll start on the price inflation. We'll pick up Toolstation and maybe like to comment on the divi, Alan. Yes, price -- look, inflation is a really complex and dynamic environment right now, isn't it? We are seeing some signs of deflation on commodities, particularly timber, which, of course, as you all realize, is an incredibly important category in heavy building materials for all our trade customers but particularly our general builder and smaller trade customers. And so where we're seeing that deflation, obviously, we are aiming to and we are passing the advantage and benefits of that on to our customers. In manufactured products, the picture is slightly more complex. We are seeing inflation slow. So we haven't seen a pricing increase since January this year on the key categories of manufactured products, whereas we saw at least 4 price increases in those key categories through 2022. So whilst we're not seeing -- while we're still seeing an inflationary environment, we're not seeing the level of price increase that we saw. And I think that reflects, Aynsley, to your point, a really complex picture of demand and volume and energy and hedging and confidence or lack of in what might happen in the future. So it's a really, really complex picture. What we're doing is working really hard with customers, with suppliers, anticipating where we can pass that benefit through to our customers and -- but ensure that we remain really rigorous and disciplined where we're still seeing inflation and how we pass that through to the market as well. But as I say, it's a really complex picture alongside the demand environment that we see through the second half. Alan, do you want to comment on Toolstation?

Sure. So on Toolstation Europe, Aynsley, the loss is larger in the first half as I said, then in the second half of '22. I do expect that to narrow in the second half, as I said earlier, particularly given the progress that we're making towards breakeven in the Netherlands. And I think it will be a little higher than GBP 30 million on the full year, but I'm comfortable with that. I think on the dividend, the points we're trying to make were the strength and the cash performance of the business. The fact that from an old-fashioned pre-IFRS 16 debt perspective, debt is relatively modest in the business. So for me, that underpins the dividend along with the confidence we've got in the medium term. It would be a bit premature and say -- to call a final dividend recommendation at this stage.

Thanks, Aynsley. Ami, take it away. Ami's up next.

Ami Galla from Citi. Just a few from me as well. Firstly, in the Merchanting business, can you give us some color in terms of the gross margin moves in the first half? And how should we expect that to pan out in the second half? Competitively, are you seeing more pressure on gross margin ahead? The second one on Toolstation. You've talked about dual running costs in H1. How should we think about the second half? And what is the flexes in terms of the savings once those dual running costs go away? And in Toolstation as well, the stock overbuild ahead of the sort of DC opening. As we kind of think about the year-end, do we expect that to normalize?

Do you want to take merchant, Alan? I'll -- on Toolstation.

Yes. So I think, I mean, I said in my comments earlier that the gross margin in Merchanting was held in the first half, which is -- when you take into account all the different features, is a decent performance. I don't see any reason why the trends would change, particularly in the second half. I know there's some commentary on the impacts of stock deflation, things like that. On the commodity products, they're very fast-turning SKUs. So the fact that we're now encountering commodity deflation, there's a bit of impact on stock, but the stock wells are modest if you compare them to slower turning products, say, on the extended range and light side.

Yes. And on the dual running, we anticipated, obviously, as we bring the new Pineham DC onstream, there will be some dual running. But actually, we have announced the closure of our Bridgwater DC, which we're moving through as we speak. So there will be an element of dual running which will run out over time over the medium term. And stock, look, I think at the end of the day, that will be pretty much in the noise because we're transferring stock as we build Pineham from Bridgwater as those operations transfer. But over the medium term, that will work its way through comfortably. Thanks, Ami. We have the mic down there. We've got lots down the front, so where is the mic?

It's Harry Goad from Berenberg. I've got 3, please. Just continuing that point on pricing and the comments you made about the second half, what chance do you think there is that you see overall price deflation in 2024? And even if it's a small risk, how do you think about operating the business in that environment? The second question is on the -- you talked about increasing or improving the potential capability in the core Travis business. Can you just remind us what the sort of typical trade customer can do online compared to maybe a smaller independent? And then finally, in the Toolstation business in the U.K., can you just remind us who you think you're taking market share from?

Do you want to do the first one? I'll do the second, Alan.

Sure. So I think the chances of overall deflation within the mix of what we're selling are probably less than 50%, to be honest, because a lot of those manufacturer -- but a lot of the increases we've seen are from manufacturers who are converting -- have a conversion process and labor is still a significant component of what they've got. So I think you'll continue to see persistent labor inflation for a couple of years in the U.K. economy, and we'll see that through in what we've got. If there is deflation as there is in the commodity products, we'll be looking to pass that through to our customers in the normal course. It's important to remain competitive on pricing in the business, and that's what we try and do.

Yes. Thanks, Harry. The digital capability in general merchant. We designed this, particularly the app with our trade customers. And what was important to them then as is now is their ability to log in to their accounts and to manage their accounts and see their pricing primarily. So we built that so they can log in, they can see their credit limit, they can see their pricing, they can pay their bills, all through the app. What we're now building is further capability in the transactional space where they can access their trade advantage deals through their pricing, but also, new customers can access trade advantage deals through the app. Importantly, though, this provides an end-to-end capability. So it's not just upfront account management and transactional capability. So customers can reserve stock in branch for click-and-collect, or they can arrange for their products to be delivered. They can pick a time and date of their choosing. And then through our delivery management system, they can track the vehicle and the driver within 20 minutes to their site, and they get alerts as to when the product, the load has left our branch and will be delivered to them. Which, as you can imagine, I mean we're used to that in every aspect of our day-to-day life. But when you're managing a site, be it large or small, that's really important information because it allows you to manage the traffic in usually quite constrained environments, particularly in a city and the site to be able to have that load delivered and obviously kind of sequence with other deliveries as well. So that end-to-end capability right through to the delivered load is what's proving to be really important for our customers. And what it allows us to do now, and it's particularly attractive to, dare I say, the younger demographic, is we're starting to build, as I say, more and more transactional capability, which really encourages our customers to log into their trade accounts where they get access not only to their pricing on whatever they bought and agreed with us but actually trade advantage deals elsewhere. And it can provides us the opportunity to really offer them up as we showed on the slide, talking about our campaign with timber, offer up as situations with particular categories, particularly pricing changes in quite a dynamic environment to offer up that very targeted marketing campaign and communication campaign to them. So built with them, for them, and it gives us the platform to build capability as we see it as important to them in the future. TS UK, who we are taking market share from, I think that's a really interesting question. We know we're gaining share ahead of our perhaps most obvious closest competitor. We also think we're taking share from Big Box DIY and small -- those merchant businesses, fixed price and variable price merchant businesses who are specifically targeted at small local customers. The ease of our counter format, now we've got 563 or 564 branches across the U.K., convenient, 20 minutes from most -- where most of our trade customers are working, coupled with the ease of the digital app and the website and the 5-minute click-and-collect allows them just to get whatever they need really, really quickly and the convenience of that, and we know through feedback that they really appreciate the in-branch experience. So they're coming in, they're dealing with a colleague. They're not faced with an iPad. If they click and collect it, it's available for them. But actually when they deal with our colleagues, they get advice, we're able to add particular attachments to their basket. So the whole experience works well. We're not complacent with that. The team are working really hard all the time to improve it, but we think we're taking share. Particularly, we're gaining customers as we built that business in the professional trade, small professional trade space as well as, as I mentioned, some of the larger customers, but we're taking share, I think, from most of the kind of DIY big box market as well as local independents probably. Hope that helps.

Rajesh Patki from JPMorgan. I've got 2, please. First, we come back -- sorry to come back on pricing. Was there any discernible difference between general merchanting and specialist merchanting during the first half? And how does that impact margins in the second half if there was a big difference? And secondly, on Toolstation, do you expect an overall positive outcome for the second half?

Sorry, Rajesh. The second question, do you expect an overall...

Positive outcome.

Positive outcome.

And profit for the second half.

Alan, do you want to take the first?

Yes. On pricing, I don't think there are any discernible differences in trends between the general merchant and the specialists. I think it is much more product category-specific. Obviously, take an example like plasterboard. We sell that in both CCF and in the general merchant. We will recover the inflation, but we're seeing still a high inflationary category. As the example, we will recover that in both businesses. So there's no real discernible difference in trends and, therefore, nothing I'd draw a note to, Rajesh, on the margin.

And yes, we're really pleased with the progress that Toolstation UK has made in the first half. We're really pleased with what the team are doing to shop and even more the focus on our small trade customers and to really improve the way that we're exploring the projects they're undertaking and following the -- selling the full basket of goods for them to undertake those projects successfully. So we have no reason to expect anything other than a positive outcome for the second half. We have microphone down to the front here, please.

Annelies Vermeulen from Morgan Stanley. I might have 2 as well. So firstly, might be a little bit early to ask this one, but I'm going to ask it anyway? So you've talked about new builds not really recovering through the second half based on numbers that you're seeing. Based on your conversations with your largest customers and, in particular, the house builders, do you have any views yet or any market color on how you think that might develop going into full year '24? And then secondly, perhaps one for Alan, how should we think about your leverage at the full year results? Do you still expect to be above your target range? And what are the moving parts of that?

Thanks, Annelies. No, I think it's really early to say on '24 -- new housebuilding, I think you'll hear more from the this week. We stay really close to them. Clearly, there are projects continuing. I think they're constantly reviewing their build cycles and their build plans. And we see this in 2 ways through our business. We see it in Keyline because the Keyline business is providing primary infrastructure, roads, trading edge, curbing, that initial access up to platform level. But we also see it in Staircraft where we see daily, weekly call off data for stairs to complete units. And actually, there is still ongoing activity in that sector. Predicting what that might look like in '24, I think, is complex, and it's tough for us to have a good read over and above what perhaps you've got at this stage.

So on the full year leverage, Annelies, I suppose you can break the drivers down into 3 components. The first one, we've effectively given you with guidance of GBP 240 million, add something back for depreciation to that, which won't be modestly higher than prior year, but there's your EBITDA number. And then within the indebtedness element, there are obviously 2 elements: the lease debt, which is the more significant component in scale. We've already included within there now the Toolstation lease, the new Staircraft manufacturing facility. As leases renew, given the change in the interest rate environment, that will have some modest impact on leverage going forwards. The third component is the actual financial indebtedness where I'm expecting that to be really well controlled based on the controls in place on working capital and also the seasonality cycle. So on the total indebtedness, I wouldn't expect much change, to be honest.

Ben, Charlie? Can we -- Ben, then Charlie?

Ben Wild from Deutsche Bank. 2.5 questions from me. Firstly, just coming back on the working capital. You mentioned in the statement that the general builder and professional trade customers are relatively weak compared to larger contractors and developers. But in the half, we've delivered a strong working capital management performance. Any color on the shape of the debtor book currently and the actions you're taking to manage cash collections? Secondly, and again, coming back to price. On the commodity price deflation, we've seen the timber price axed promotion, which I think there was an image in the presentation today. How quickly are you passing on the benefit of lower prices relative to your peers? And can you make a comment more broadly on discounting activity in the first half and in the second half as well?

So if I start with the debtor book shape and if you're getting towards, Ben, the overall health in terms of risk around bad debt, the bad debt reserve as a percentage of credit sales is essentially in line with prior year. We are seeing a few business failures from time to time. It's something that we're monitoring very closely, as you can imagine. How we're doing it, I think we have fantastic credit teams in the business. And personally, I can't thank them enough for the work that they do. I think that comes from knowing the customer really well. So there are certain elements with much smaller customers where you might be able to automate the larger customers, particularly in our specialist businesses or the larger customers in the general merchant. You need credit teams who know the customers really well. They're an adjunct of our sales operation for me. On that commodity price deflation element, we're passing it through as quickly as we can. I think certainly, the timber campaign is a marketing campaign. It's communicating to customers that the price is coming down, and we're passing that through quickly. I'm aware it's created a bit of noise with some competitors, so much the better. Discounting as such, I wouldn't -- I don't think it depends how you define what you mean by discounting. If you're thinking about people trying to shift volume through by just cutting the prices, I don't think we see much of that in this sort of business. People are trying to remain very competitive on price, but I'm not seeing anyone do anything that I've described as silly.

Charlie?

It's Charlie Campbell from Liberum. I've got 3, but I think they're all quick. That's for a bit detail, though. So first one, Toolstation UK, you talked about trade and winning share with trade. Can you just remind us what the consumer side of that business is doing and what percentage of sales consumer still is within Toolstation? Secondly, you called out to Hire and Managed Services as highlights within Merchanting. Just any idea if there's any clues you can give us. Some quantum would be very well received. And last one just on inventory. How much do you think there is to come out of inventory? Still, I guess we're taking precautionary holdings during supply chain problems. Is that fully unwound? Or is there still a bit more to come across the group from the June position?

Yes, on Toolstation UK, consumer as a percentage of sales is somewhere still around 60%, and what we're seeing is the trade participation increased rapidly as we really benefit from what we've built over the last few years, as I say, which is the convenience of our network, the in-branch experience and, particularly, the app and the increased functionality of the app. It gives them project lists. It gives them -- increasingly, we're using data and technology to provide a better search experience through our app and through our web. So we're seeing increased participation of trade customers. And as I said, increased depth of stock, branch-relevant stock in the branches as well, which is what is important to our trade customers. So that shift will take time, but we see it, and it's making great progress. Hire and Managed Services quantum in terms of revenue, I'm assuming, Charlie, we're seeing growth of our Hire business in excess now of GBP 150 million and our Managed Services business, GBP 250 million. But as I say, 6% year-on-year growth for Hire and 7% year-on-year growth for Managed Services. Alan, do you want to comment on inventory?

Yes. Charlie, I think the supply chain issues have largely washed throughout the industry. And certainly, I think it was a feature within our own actions during the first half of last year, but just in case, some branches were holding on to a bit too much stock. I think we've removed all of that now within our own supply chain.

Will?

Will Jones from Redburn. And 3 if I can as well, please. Sorry to come back to commodities, but could you just give us a feel for what you think the share of your revenues are, a bit of where you classify commodity products? And do you think 2Q was probably the worst point on the deflation or it might have been the third quarter? Second one, just around savings. I think the GBP 25 million had within it around a couple of percent coming out of headcount at the start of the year. When we look at where volumes are likely to be this year versus 2 years ago in Merchanting, they're probably going to be down in the order of 10%. So just wonder how close you are to pressing the button on more headcount adjustments? And then the last one is just whether you can give us an update on what you've learned in Toolstation France over the last 6 months?

Thanks, Will. Do you want to cover the first one and I'll pick up France?

Sure. So on commodities, Will, if I were able to predict commodities, I'd have probably retired before now. So I have no idea where commodities are going. In terms of the mix, timber is probably about 20% of the merchant business overall. The areas on steel and copper where we see a direct correlation, copper and steel tube within BSS and then builders metals in businesses like CCF and the general merchant together, they're a relatively small proportion, but where the copper price goes on tube, you can imagine it's going to come through in -- at some point in fixings as well. On the second question around more headcount adjustments, we -- listen, we're managing the headcount really tightly within the businesses, whether that's same branch or sign-off processes for replacing leavers in the businesses. An example, we will continue to manage things really tightly in line with the volume that we're seeing, but don't expect us to come out with any more whole scale branch closure programs, assuming, of course, within the bounds of what we're seeing at the moment, I think all of our branches, bar a few, which have opened in the last couple of years are positive contribution. So I think it would be counterproductive to take capacity out of the business in that way. We'd rather just manage the heads and the vehicle movements within the branches really tightly. So as an example, another area where we can make savings in volume-related overheads is slowing down the replacement cycle on vehicles. So if we see volumes for further within the market, if you run a particularly bearish scenario on the economy, we would just slow the replacement of older vehicles within the branches further.

And Will, on France, I think we've learned a lot to expand on some of the points that we made, I guess, in March. Trade participation, we're really pleased with the overall performance of our French business. Trade participation is higher there coming to Charlie's question that it is in the U.K., we're about 70% trade participation in France. And where we said over, I suppose, the last 3 or 4 presentations, we've said we've really been trying to crack the code of how you attract, acquire, retain French trades customers because it's different. And I think we are much more positive about the kind of codification of our process there. It's actually a bit like the relationship-based merchanting model in the U.K. Actually, we've really invest in building -- invested in building relationships with local trade customers through various strategies in branch involving all of our team, and they proved to be really successful. And so our trade customers are now bringing more trade customers. And they're seeing the benefit of the convenience of the model because we're having to teach the model in France. The counter model is unique, the way in which -- they don't anticipate that whatever they ask for is going to be in stock, and they're really surprised when it is in stock and then in stock in depth. And so the more they try it and the more they talk about it, the better it gets. And so we're really pleased with the kind of trade participation increase in France. And I think we're pretty close to kind of cracking the code of how we do that and replicate it as we carefully roll out our network. So yes, we learned a lot and continue to learn. Christen?

Christen Hjorth from Numis. Two for me, please. First of all, just on Toolstation UK and just the bridge of the margin maybe from H1 to target levels for the high single digits and potential timing or update on timing on when that could be achieved. And second, just on the guidance for the full year, what does that imply in terms of market trends in H2 in terms of volumes, et cetera? I know you set out your volumes but just general market points there.

Okay, Christen, on the first one, we're really looking forward to telling you all about that on 28th September. It's a really simple answer.

I'll wait to that.

What we're seeing in the second half, as we stand here today is a continuation of what we've seen through the second quarter. We see volumes in the domestic private RMI space holding up, sustained demand, albeit as we've said, at lower levels. And as Alan and I have said, we're really confident in what we're doing. We'll continue to enable us to win the share that we want of that market and continue to focus on growing our share. We see sustained levels of activity in commercial, industrial, social, economic infrastructure. And we are managing against, in response to Annelies' question, the uncertainty in new housebuilding volume to hold our own, but we've also diversified our business. I mean CCF, Catherine, Manager/Director sitting here in the audience has -- whilst very reliant on new housebuilding, has also accessed and grown new markets, as has been with our Keyline business. And so that's giving us real strength as we face uncertainty in new housebuilding. And that's why we remain confident in restating our outlook at GBP 240 million. The way that plays out, obviously, has got some uncertainty attached to it, but actually, we're really confident in our ability to do that. Good. We've obviously answered all of your questions or shocked you into submission. One of the 2. So with that, we'll close the session. Thank you very much for attending. Really good to see you during the early part of the summer holidays. Thank you for joining us. And we'll see you again soon, hopefully in September 28.