Travis Perkins plc

finally, to the Travis Perkins results presentation. For any of you who don't know me, I'm Geoff Drabble. I became formerly the chairman of Travis Perkins on the 1st of February this year. So it's been an interesting first couple of months culminating in today's results. I'm going to do a brief introduction and also just make a few observations before I hand over to Duncan, who will take us through the majority of the presentation. But then obviously we'll get into Q&A, which I think will be the most interesting once that presentation is complete. Sorry, there we go. So it's been a while since I did this. I'm a little bit out of practice. Look, once I started on the 1st of February, really I was working closely with Pete from the moment he joined. And look... We're all very disappointed that Pete is unable to build on the good work that he started in his brief tenure with us. But he and I had very, very similar views of this business. you'll be tired of us all telling you this. But the group does have incredibly strong fundamentals. It's got a great network, got good people. It's got longstanding relationships and some good brands. And I can promise you the vast majority of our competitors in this industry would love to have all the strong fundamentals that we have as a business in Travis Perkins. Having said that, we have this unerring knack of scoring own goals and messing up the strong fundamentals that we have. And over recent years, in my opinion, there have been a number of strategic changes. And in particular, around about a year ago, where we had something of a management void, there were some quite serious tactical blunders, which has resulted in us having way too much attrition in our staff. When I look through those strategic missteps or those tactical blunders, look, we can get into Q&A what they specifically were. But they all, in my opinion, have a very common theme. And the common theme was there was a lack of clarity of what our business model was and what we were trying to achieve. And actually, I think the culture which existed within the business worked against our likely achievements of that business model. So what does that mean? It's all written down here, it all sounds very MBA. Look, what we need is a focused entrepreneurial local business. You win business in this industry on a postcode by postcode basis based on relationships. We are a relationship business. We will not replace those relationships with digital or the format of our locations. We are not a retail business. And we need to rebuild that trust back into those core relationships and that core entrepreneurial flair out in the field. Having said that, that isn't the only thing we can do. So whilst there has been some strategic missteps, some of the things we've put in place to leverage our scale... and differentiate ourselves from a lot of our smaller competitors really do have value. And there's been a lot of work done. I look at areas such as the apps and some of our digital data stacks where we clearly have value. market-leading capabilities. I'm not convinced we have applied them terribly well, and I think there's some work we can do to join up the dots to make sure that we get benefit from them in the immediate term, but at least they're there, and it would take us a lot longer to build those things than it will to work out how best to apply them. So with that in mind... What do we need to do going forward? Well, look, what we need to do going forward is refocus on the practical day-to-day running of this business. And I think we've made some good starts in that. We are carrying on work which Pete started. So by the time we get to Easter, we will have reorganized the business into strong functional leadership with leaders in each of the key verticals within our business so we will end up with um ahead of our contracts business with a number of mds reporting to them we'll end up with a head of tool station and we will end up with a head of the green and gold mercheting business too we have refocused the business as of yesterday we we launched a series of product initiatives across the business backed by far more flexible, far more immediate, short-term bonus plans and sales commission programmes. And so, again, we have just re-energised the business and got it back to doing what it ought to do. Culturally, we're working very, very hard on the centre, working far more closely with the people out in the field. And there's responsibility in both regards there. The field felt disenfranchised as they saw a number of initiatives taking place over recent years and stopped engaging with the business and stopped engaging with the centre. The centre got really, really frustrated because it was actually coming up with some very good ideas and things which will take this business forward in the long term and they weren't getting traction. And again, what we're going to do and what we're focusing on in the short term is just joining up those dots that already exist. How is that happening in the absence of a CEO? Well, it's happening because what I have been really pleasantly surprised with over the last four or five weeks is the strength and depth we have around our key leadership group. There's going to be a call later this morning with what we call the key leadership group, which we've been having regularly. And those people have really stepped up. And actually, all of the initiatives I've just talked about, they have come up with those initiatives, and they're the people who are implementing those initiatives. And so if there's any goods going to come of this, I think... that level of the organisation hadn't been listened to, didn't feel empowered prior to all of this change, and now out of necessity they're doing so and they're doing so well. So when I finally step back and become a chair again, this will have been a somewhat intense induction period. But if as a result of that I know an awful lot more about the business and the next level of the organisation has stepped up and taken responsibility, it will create an environment where a new-coming CEO will be inheriting the best possible business going forward. So, as I said, I suspect we will cover quite a bit of that again in Q&A, which is the appropriate point at which to do it. But with that, I'll hand over now to Duncan to take us through the financial review. Thanks, John.

Good morning, everyone. So I'm going to cover the usual components of the financial review for 2024. But I want to start off, if I can, just by giving us some overall context for the year. It's clearly been a challenging year from a trading standpoint, but it's also been a year of significant change for the group. Change in action which orientates us more positively from a performance perspective as market conditions improve. But also change that has protected our balance sheet and ensures we retain a strong financial position on which to build the turnaround of this business. In Toolstation UK, we saw a further step on in profitability as we continued to execute our plans to grow that business in line with our previous guidance. In Toolstation Europe, we took the difficult but necessary decision to close Toolstation France and accordingly are reporting it as a discontinued operation in our year-end numbers, eliminating a significant loss from our go-forward performance and restating our prior year comparatives as is appropriate. Closing a business in France is not a straightforward exercise, and so I would like to recognise and thank the teams involved internally who have made that happen. In Toolstation Benelux, we have successfully repositioned the business from an ongoing growth strategy to a returns-focused agenda, with a clear focus on achieving sustainable profitability as soon as possible. Again, for context, that has been a £20 million loss and £30 million loss in the past two trading years. Across the business and in everything we do, we have applied more rigour and discipline in how we can generate cash and use that cash, and that is reflected in our enhanced year-on-year cash position and reduced net debt. These efforts have underpinned our ability to partially refinance our 2026 maturing corporate bond, through access to the US private placement market in Q1 2025, on an investment-grade basis. However, there is no shying away from the fact that our merchant businesses have continued to underperform versus our expectations, and I'll talk more about that in more detail later. Finally, and as we outlined at the half year back in August, from the 1st of July 2024, the group moved the general merchant, CCF and Keyline businesses onto Oracle Financials as part of a major technology upgrade. And as a reminder, Travis Perkins has not made any significant investment into ERP technology for over a generation. So this was never going to be a straightforward transition. And as is always the case, some elements are progressing well and some others are more challenging. So let me start off with what's going well. The first thing to say is the tech ostensibly works. We've taken the out-of-the-box solution and customized very little. We now have a modern purchase ordering system with escalating sign-offs. We have a sophisticated stock valuation engine that gives us true weighted average cost of stock. And we are starting to see the benefits of the enhanced data and insights Oracle will give us over the longer term. So what are the challenges? Well, the main ones have been in respect of our financial operations. Oracle places a much greater level of checking discipline over the detail required to pay an invoice. If the detail we receive on an invoice differs from the detail of the order we raised, then the order will go into a queue to be manually resolved. And in short, we have accrued a significant backlog of invoices, which has had an impact on our working capital position, and I'll come back to this in more detail. But it's also created frustration for our colleagues on the front line, who have to interact with suppliers and customers. And I'd like to thank all three communities for their support and understanding as we have made this transition. In response, we've recruited additional resources into our central teams to address this backlog and are working with Oracle, and we are starting to see this backlog reduce. In addition, our commercial teams are also actively working with our suppliers to ensure our data sets are better aligned to reduce the exceptions we create in the future. The second challenge is the operating speed and flexibility Oracle gives us in some parts of the business for certain order types. And again, we're continuing to investigate ways in which we can make this more efficient and user-friendly for our colleagues. In summary, we are making good progress, but these adjustments have been difficult and they're going to remain a key focus for the business in 2025. So coming on to the financial overview, and all of these numbers are represented for 2023 on a continuing business basis only, i.e. with Tool Station France excluded. Group revenue was 4.6 billion, down 4.7% on prior year, with adjusted operating profit down 23.2% to 152 million, in line with the guidance we issued in our Q3 2024 trading update back in October. Adjusted earnings per share was 36.6 pence per share, down 32.7%, reflecting the lower earnings year-on-year and also the higher finance costs and effective tax rate. Net debt before leases was down 39.2%, from £340 million to £191 million, and that has driven a slight reduction in leverage, despite the year-on-year reduction in adjusted operating profit from 2.6 times to 2.5 times. Finally, the board is recommending a final dividend of 9 pence per share to go with the interim dividend of 5.5 pence per share, making 14.5 pence for the full year. This payout is in line with the group's policy to pay a dividend of 30% to 40% of adjusted earnings. So let me come on to discussing the trading environment, and I'll reiterate some of the things I said at half-year. biggest revenue drivers for us are rmi activity repairs maintenance and improvement activity and new house building following two years of a cost of living crisis household budgets are stretched and most major rmi projects will be financed by additional borrowing of some sort we have remained in a suspended state for some time about the evolution of inflation and interest rates the path to inflation normalising and rates coming down keeps being pushed right. And at the same time, the geopolitical landscape remains uncertain. Both of these factors play into consumer confidence and risk appetite in making major or significant RMI commitments, and that has remained the case into the start of 2025. From a house building perspective, we've oscillated between one of the highest years for new housing starts ever recorded in 2023 to jointly the lowest along with the GFC year in 2024. Within this context, demand has been significantly impacted and volume share has been heavily contested through price as the competitive intensity has gradually risen. exacerbated by commodity price deflation. And against this backdrop, the self-inflicted operational challenges both Jeff and I outlined at the start have put us in a weaker position to respond across all of our merchanting businesses. Specifically, though, in the general merchant business, this saw us move from a position of holding market share through 2023 and into H1 2024, and then steadily start to seed share in H2. The next bar reflects the loss of revenue from the net branch closures across the group, excluding Tool Station France, and which are detailed in the appendix. And the trading day bar reflects three additional trading days in 2024 versus 2023. On the next slide, we've provided the usual operating profit walk year on year, and I'll walk through these again each in turn. The 198 million for 2023 is the 180 million we reported last year, adjusted for Tool Station France as the starting point. The gross profit decline is a reflection of the operational performance dynamics I've already referred to on the previous slide, and is by some margin the biggest variance year on year. Next is overhead inflation, and this is predominantly driven by wage inflation, rent increases, and general cost inflation during the year. And finally, the adverse variances conclude with a £4 million lower contribution from property profits compared to prior year. Actions and impacts we have taken to offset these are as follows. Firstly, and as I outlined at the half year, we conducted a detailed review of discretionary expenditure at the start of the year and have maintained a disciplined stance towards this throughout 2024, and that equates to around a £35 million saving. The next bar is the annualized effect of the restructuring program we implemented at the end of 2023. As Jeff outlined at the outset, with the benefit of hindsight, these changes have weakened our operational effectiveness during the year, and we have already started to actively reinvest in some of those roles and capabilities. That said, the saving effect for the year is around another $35 million. And next is the margin effect of the trading day benefit I outlined on the previous slide worth around $13 million, and then come the two tool station bars, the first being the additional contribution from the growth of Tool Station UK, and the second being the effect of our change in strategy in Tool Station Benelux. As a reminder, we communicated at the start of last year that we were conducting a strategic review into the Benelux business and announced the outputs of that review at the half year. We considered all options for the business and concluded that given the invested capital to date, the right thing for the group and shareholders was to accelerate the path to profitability. It is a far more mature business than France was, with 110 stores offering high saturation and coverage in the Netherlands in particular, and the customer proposition is more aligned to how the Dutch and Belgian trades already operate. Through a combination of underperforming store closures, central headcount savings, joining a buying group to enhance gross margins, and outsourcing our logistics and supply chain operations to a third party, we've managed to reduce the loss by £7 million a year on year, and the teams are firmly focused on driving for break-even and thereafter providing a positive contribution to group profitability. That then brings us to the 152 million for 2024, in line with the guidance we provided at the Q3 trading update when adjusting for France. On the next slide, we detail the adjusting items we have recorded during the year. The first line is a £63 million charge in respect of branch impairments, and £57 million relates to the general merchant and CCF businesses, with the balance spread across the other businesses within the group. This is a non-cash charge and arises from the application of IAS 36, where the group is required to adjust the carrying value of individual branches on the balance sheet to our latest view of the future discounted cash flows generated from these assets. The second line is a £33 million charge in respect of staircraft, again non-cash, and predominantly comprises goodwill. The full breakdown of these calculations and the assumptions used for them can be found in note 29 to the accounts. Next is a £26 million charge arising from the restructuring activity conducted during the year, including £9 million of dilapidations and other property-related items, £30 million of stock impairments and £4 million of other costs. And the final two lines reflect central and regional restructuring activity in the year, amounting to £11 million, and the costs associated with closing 39 standalone benchmarks branches, amounting to £6 million as we continue to refocus our proposition. Over onto the next slide, and I want to talk you through the actions we've taken to enhance cash generation and protect the balance sheet against this challenging trading backdrop. If I walk down the face of the table, you can see the headwinds we've faced year on year. The first and most obvious being the lower level of cash inflow arising from underlying profitability and trading operations. The second line represents the cash outflows for the restructuring activity in the year. and the cost of closing Toolstation France. We estimate around another 15 million pounds of cash outflows to fulfill our remaining obligations for France phased across 2025 and 2026. The next line represents the impact of our first year end on Oracle. I've already talked about some of the implementation challenges at the outset, and since the cutover in July, a supply invoice backlog has arisen, which we have been successfully working through since. This has seen us prioritise and pay a higher proportion of our suppliers on account, because we can and because we value those relationships, with a consequent lag in the time it is taking us to collect outstanding debt from some customers, and hence the £58 million working capital outflow, £36 million adverse to the prior year. As we continue to embed and optimize Oracle, we expect this working capital position to normalize during 2025. And we are already seeing in the first few months of this year that our cash collection rate is running ahead of our sales rate. The remaining lines all represent positive variances to prior year. And I'll start with stock. I talked at the half year about the focus we were placing on tighter inventory management across the group, and this has yielded a £64 million lower stock position year on year. I'm really pleased with the way our operational and commercial teams have embraced this challenge, and we continue to review all of our materials categories and have further opportunities to pursue this year. We've also exercised a greater level of discipline and oversight on capital expenditure, which was £64 million for the year, below our guidance of £80 million and £43 million lower than prior year. To be clear, this is not a sustainable or desirable level of expenditure for us on a steady-state basis. We want to invest in modernising our fleet, upgrading our estate, and as Geoff's already alluded to, we want to invest in the new tools and technologies that will make us more efficient and deliver a better customer experience. But given the current trading backdrop and our commitment to carefully manage our leverage back down, it's been the right thing to do. Finally, we obviously took the difficult decision in early 2024 in respect of the final 2023 dividend to rebase the dividend to the top end of our payout ratio within our prevailing dividend policy. This was not a decision we took lightly. We understand the importance of the dividend to some shareholders. However, in light of the way the financial performance has evolved, the 59 million pounds favorable variance on prior year should be seen as a logical component of us protecting the balance sheet. So if I bring those parts together to explain the overall impact on net debt, which is down significantly on prior year on both an including and excluding lease basis. During the year we unwound an SPV that had historically been used to fund the TP defined benefit pension scheme. On the basis that this scheme is no longer in deficit, we have collapsed the SPV and that has reduced net debt by £25 million. The increase in lease debt arises from, say, a leaseback activity during the year and the electrification of our forklift truck fleet. So the overall impact of the actions we've taken have seen us deliver a moderate reduction in year-on-year leverage, down to 2.5 times, notwithstanding the significant reduction in year-on-year earnings. And I'll reiterate the previous guidance I've issued and firmly subscribe to, that this group should be operating inside a 1.5 to 2 times leverage range on a long-run basis. So we will continue to maintain a vigilant focus on cash and capital allocation, as you would expect, and we continue to review the balance sheet for non-core assets and disposals that support this objective. Finally, for information in 2025, we have successfully started to refinance the £250 million corporate bond due to mature in 2026 with £125 million of US private placement debt secured on an investment grade basis in Q1 this year. This debt has maturities ranging from 2028 to 2035 at an average coupon of 6.4%. the maturity and currency profile of which are detailed in the appendix. So let me summarise. On current trading and in merchanting, we have definitely moved out of the aggressive input deflation we were experiencing at the start of last year, specifically on timber. we are starting to see manufacturers' price increases coming through, and where possible, we are seeking to pass those through. But the competitive landscape I referred to earlier on means there is limited sequentially improving pricing power at the moment, and therefore it is best described as pricing having stabilised with volumes remaining in modest decline. By contrast, in Toolstation UK, we've made a solid start to this year and are in line with our expectations. There are some early signs of recovery in some elements of the UK construction sector. For example, house building activity is definitely starting to increase, as illustrated by the house builder's own outlet guidance. But overall, there remains significant uncertainty in the timing and strength of the UK construction recovery, especially in RMI. Our focus, therefore, will remain on what we can control. It will be to continue to implement the actions that will rebuild this business, empower our frontline colleagues, and deliver a better customer service. From a financial perspective, we'll continue to keep a tight grip on discretionary expenditure and look for further ways to enhance our cash generation. And so I'll conclude with our full year 25 guidance. We expect base capital expenditure to be around £80 million, property profits to be around 3 million, and an effective tax rate of around 30% on UK-generated profits. And finally, we expect full year 25 operating profit, excluding property profits, to be broadly in line with full year 24, also on an excluding property profit basis. And with that, I will start Q&A.

We'll start at the front here. It doesn't matter. We'll get to everybody.