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Earnings Transcript for TPK.L - Q4 Fiscal Year 2017

Executives: Stuart Chambers - Chairman John Carter - Chief Executive Officer Alan Williams - Chief Financial Officer Anthony Buffin - Chief Operating Officer
Analysts: Gregor Kuglitsch - UBS Priyal Mulji - Deutsche Bank Aynsley Lammin - Canaccord Robert Eason - Goodbody Lush Mahendrarajah - Berenberg Paul Checketts - Barclays Andy Murphy - Bank of America Michael Mitchell - Davy John Messenger - Redburn Paul Roger - Exane BNP Paribas Ami Galla - Citigroup
Stuart Chambers: Alright, good morning, everyone. It’s 08
Alan Williams: Thank you, Stuart and good morning everyone. 2017 proved to be a challenging year with continuing uncertainty in our end markets. While secondary housing market transactions held up at similar level to 2016, the mix of transaction shifted more towards first-time bias thus reducing the read through to RMI volumes. We experienced significant input cost inflation driven by both depreciation in the value of sterling and by commodity driven increases. While currency impact is now abated, selected commodity driven increases will remain a feature in 2018. We also saw UK consumer confidence decline particularly during the second half of the year. A primary focus of the group in 2017 is therefore to recover the impact of the input cost inflation. We also continue to invest selectively in the business for the long-term even though this has had short-term profit impact. Cash generation has however remained strong. As I will cover a little later, we do not expect market conditions to ease in the near time. While we remain committed to investing in the business, you will see us be very disciplined in both capital and operating cost investment whilst the current trading conditions persist. Turning to our financial performance in 2017, you can see an equally mixed picture revenue growth of 3.5% was driven by pricing activity. Given the investments in the business, EBITDA reduced year-on-year by 7.1% or 10.5% if you exclude the contribution from property. This decline in operating profit set through to a reduction in adjusted EPS of 8.3% to £110.4. Despite this, given the strength of cash generation and the Board’s confidence in the longer term prospects, we are recommending a small increase in the dividend of a £0.01 to £0.46 per share, a distribution in total of approximately £113 million. Like-for-like sales in the year grew by 3.3% with total sales growth as I mentioned of 3.5%. As you can see from the graph on the left of Slide 6, sorry, this was driven by price and mix as the business focused on the recovery of input cost inflation. We adjusted prices early in the year before many competitors impacting our volume share. As competitors followed suit, we saw our like-for-like improve. As you can see from this table, this trend is also reflected in the 2-year like-for-likes. Adjusted EBITDA declined by £29 million in the year. Despite growth in gross profit of £54 million in the year and a high contribution from property profits, this was more than offset by increases in both operating cost of the branch and divisional level and by higher unallocated central costs, principally in connection with IT capabilities and developments of new formats, while some of the incremental cost was driven by inflation in payroll and rents and rates. The key driver was the level of investment to expand the network and to improve the proposition for the long-term. As you will hear in a moment from John, these investments are being positively received by customers. However, we need to regain our ability to drive operating leverage of the overhead base. Group adjusted operating margins declined by 80 basis points in the year to 5.5%, primarily due to the increase in operating costs from the investments I mentioned in the group’s proposition, together with 20 basis points decline in gross margin. Whilst gross margins were unchanged in H1, they declined by 40 basis points in the second half. The key drivers for the weak kitchen and bathroom showroom performance than Wickes in Q4, which is now being addressed at selected price investments in General Merchanting. These investments in the main have seen an encouraging response in volumes. The gross margin decline in plumbing and heating predominantly reflects business mix, given the strong growth that we achieved in the lower margin wholesale business. As I mentioned, the increase in operating costs has been driven by investments for the long-term both new branches and store refurbishment, the extension of the range center coverage to the whole of England and Wales in General Merchanting and digital investments, together with general inflation and costs such as payroll and rents and rates. In the absence of volume growth, the group was unable to leverage these investments. Whilst the investments are right for the long-term growth prospects of the business and have been well received by our customers, actions have been taken when necessary to remove cost and also ensure an appropriate balance between cost base management and investment in 2018. Turning to division by division, starting with General Merchanting. We saw an improvement in like-for-like growth trend through the year. Having focused on the recovery of input cost inflation in the first half, selected pricing and promotional investments were made across selective categories in H2 using our new pricing framework. Investments made in the business are seeing a good response from customers and are delivering a positive return on investment. However, this subdued RMI outlook means it is difficult to absorb these additional costs in the short-term. Actions have therefore been taken to reduce cost and support areas and to increase flexibility in the cost base as we head into 2018. Following the announcement of the plumbing and heating transformation plan at the half year, results have been really encouraging. The business returned to growth in 2017 and this strengthened throughout the year reaching 6.1% like-for-like growth in the fourth quarter. The division also grew its operating profit in the second half aided by the substantial cost reduction both through branch closures and also in administrative costs. While there remains much to do, initial results from the transformation program are positive and we are confident to further progress in 2018. The contract merchanting division delivered an excellent performance in 2017 with all three businesses delivering both strong revenue and operating profit performances. The division encountered significant input cost inflation, but this was successfully recovered protecting gross margins. The business also leveraged the investments made in recent years in additional capacity and grew both operating margin and its lease adjusted returns. The division has good visibility of its pipeline of activity and trading momentum remains strong. Turning to the consumer division, we delivered sales growth of 4.7% in 2017, with like-for-like growth of 3%. While Toolstation delivered double-digit like-for-like growth and grew its total sales to over £300 million, Wickes performance slowed throughout the year as the core DIY market became increasingly challenging. Profit performance was impacted in particular by disappointing Q4 kitchen and bathroom showroom period, where the promotional techniques that we used were unsuccessful and hence expected sales were not achieved. Given the higher cost base in place in Wickes in 2017 to support the anticipated sales growth, adjusted operating profits in the division fell back to £82 million. Significant cost reduction activity is being put in place in Wickes to better align the cost base to the sales volumes we expect with £8 million of cost eliminated at the end of 2017 and more activity planned in this area in 2018. The kitchen and bathroom promotional activity has been reset and we have seen an encouraging performance in early 2018. Cash generation remains strong in 2017, with cash conversion of 107% driven by the property activity. This included the sale of the site in Coventry, which had originally been chosen for a fourth range center, which also boosted property profits booked in the year. We anticipate further strong cash generation in 2018. The strong cash performance is also reflected in the strengthening balance sheet, net debt reduced by £36 million pounds to £342 million and with lease debt barely changed, lease adjusted gearing fell by 270 basis points to 42.6%. Clearly, this was not reflected in the fixed charge cover and lease adjusted leverage metrics given the modest decline in earnings in the year. I would expect these metrics to improve during 2018 as we continue to drive the focus on cash generation and returns. Turning to capital expenditure, you see that base capital expenditure was broadly similar in 2017 to 2016. On a net basis taking into account recycling of property investments, you can see that the net level of expenditure fell by over £70 million to £114 million. Looking forwards, I would expect maintenance and IT CapEx to be broadly similar in 2018 to 2017. I would however expect that growth capital spend will be lower given we have showed some of the investments in light of in certain market conditions. So if I now return to property activity, I have set out on Slide 16 the activity we have had over the last 4 years, you can see that we have invested on the top left hand side, £268 million in freehold purchases, of which over 70% has been brought into use, but is not yet fully matured. Of the remaining 30%, two-thirds will be brought into use during 2018. In fact we have already opened sites in Wisbech and in Cambridge in the first two months of 2018. Over that same full year period, we have disposed of nearly £240 million in sites and generated £96 million in property profits. The property strategy has been designed and will always support the business and is underpinned by our few that we will see less pressure in rental costs in retail than industrial property. We still expect to see around £20 million of property profits per annum as we continue to execute on the strategy. So in terms of outlook for 2018, we expect the mix market backdrop to continue given subdued RMI activity, a slowing economy and reduced consumer confidence. But as I mentioned at the start, we also expect cost price inflation to continue driven by commodity increases. Given this backdrop, it is imperative that we keep the focus on execution and on cost actions to drive productivity and efficiency throughout our network. Furthermore, we have slowed investment to focus on the faster payback and highest priority initiatives. This will aid continued strong cash performance and the maintenance of a strong balance sheet. Despite these near-term challenges, the group remains well positioned for the future. Given market conditions, the group expects performance in 2018 to be similar to 2017. And with that, I’d now like to you over to John to provide an operational update.
John Carter: Thank you very much, Alan. Good morning, everyone. As you have heard from Alan the detail of 2017, step in all the way back and just remind you of the fundamentals of our sector, the UK needs more new homes as well, we know and our existing stock of sort of 27 million homes are underinvested with a strong desire to improve over the coming years. Over the last 4 years, we’ve been continually investing in our portfolio of businesses, many of which hold number one or number two positions in this sector and building sustainable and competitive advantage over the longer term. However, our markets remain subdued and we are managing our business in less certain environment and that really [indiscernible] taking a deliberate approach to managing our cost base, our focus on our trading stance, which obviously affects our gross margins and we will increase our discipline on capital investment as we move forward until the market becomes more clear. Sort of reminding our biggest obviously businesses are General Merchanting so we’ve got a couple of slides with a little bit of detail on what we’ve been doing, and what we intend doing as we go into 2018. The two sort of principal areas centered around trading margin and pricing strategy and cost investment. In 2017, as you will remember, we installed a new pricing tool, which we call Spinnaker that was instilled and completed the rollout in April, and that aim was really to give management more control, and our branch managers better pricing information at the trade counter on the telephone and ultimately for our customers to give better price consistency. In the first half of 2017, we focused on the cost – pricing inflation recovery. As you remember, higher inflation coming through in the first half and our aim was really to try and pass that through into the market. In the second half H2, with a modest reduction in gross margin, we invested in some pricing activities and some categories, some of them worked well. But we learned a number of things from the volume price returns. As we look into 2018 that the foreign exchange elements of inflation has changed more to commodity and our aim again is to manage both price increases coming through into the market, the best way we can and balance off pricing volume. In terms of the margin management mix, we saw last year good growth in our managed service business within General Merchanting and which has a lower return on margin and a slight decline in [indiscernible] our business management within General Merchanting, we’re working together to improve that mix as we go into 2018. And from customer feedback that sort of Alan alluded to General Merchanting is from the customer insight – is customers reaction is extremely positive. The one area that is a bit of a watch out for us is the negative comments around that pricing. And so, and in particular, the consistency in pricing between our branches, so again that’s going to be an area we focus on and refine sort of pricing architecture against that categories to make sure that the customers are feeling that we get value for money from that service that we provide. In terms of the cost, there was number of features that went on in General Merchanting last year. We announced that we are going to extend the whole of England and Wales on our range centers, which we put in a further 183 branches on to the network. Just as a reminder, we have range centers in Warrington, Cardiff, and Tilbury. The costs – operating cost obviously increased as we actually put those branches on and then we built the sales through, you can expect us to see annualized further cost as we roll that – that additional service out, but we’re also seeing really good returns and sales increase from that activity. In the area, we continue to invest in digital and not just a trading website. We’ve introduced and trial in some electronic service within our yards rather than the manual approach that we adopt today and more and more customers are paying their accounts and dealing with this online out of business hours. We took the decision as we come into ‘18 to actually forensically look at our efficiency and productivity and we have taken a number of actions to reduce the cost based within General Merchanting without affecting the customer proposition and our ability to serve our customers. And part of the increase in the cost was the continued expansion of benchmark and new TP branches through the year. Again as we look to 2018, we need to retain some flexibility, markets are uncertain and therefore the teams are working very hard in particularly around discretionary costs and getting inside the detail on how productive each lorry [ph] and each branch can be with its current workforce. And as you would expect, we will manage the estates as we do each year positively and manage the tail where we need to and I would expect sort of circa 8 to 10 branches during the period to close as part of that exercise. A little bit of a reminder, because the Travis Perkins merchant brand is the largest in the UK and the most successful. But to retain that, we have to continue to work hard on the customer proposition. And across this slide is really the activities and focus that we and the team are focusing on whether it be the customer relationships and that’s for me most important with our medium and larger customers in terms of developing that ongoing relationship and sales development. The proposition and its authority in each catchment that we operation and obviously we have the largest network in the UK. How that then transfers to how we deliver in the each of those catchments and the best level of service at the most appropriate price. And then for me going forward, this whole merging of the physical network and the digital is really important for I believe to continue to invest to ensure that we are relevant to the customers and attractive. Moving on to contracts and Frank Elkins and his team have done an outstanding job over the last 3, 4 years. We have consciously focused on a balanced approach to the commercial new residential industrial and infrastructure market. So, we have a very good spread across our three businesses
Anthony Buffin: Can you hear me okay, yes? Thanks, John. Hello everyone, good to see some familiar faces, and thank you for making in and – what is wonderful, wonderful probably an ’18 weather, so we’re delighted with the temperatures outside at the moment. But as John and Alan have mentioned, it’s been a mixed year for us in the group as a whole. But I’m really pleased with the performance of both the Toolstation UK. business, the European expansion and also the early turnaround in performance in plumbing and heating. As you know with plumbing and heating, we’ve had some unsatisfactory performance over the last 2 or 3 years. And in the summer, we explained that we had two key projects. Firstly to stabilize the business and secondly, arrest the decline in profits that we’ve experienced over the last 3 or 4 years, and I’m pleased to report we make good progress on both fronts. We’ve built a new management team, blending traditional merchanting skills with the best of retail, digital and supply chain capability from both, within and outside the group. We’ve listened hard to our customers and their current and emerging needs. And this has helped us reframe how we think about the business and the countries we can serve and the customers we can also serve in terms of new trades. Together with our support center, our most importantly through reengaging our branch teams, we’ve reignited sales with like-for-like growth of 2.1% for the year as a whole and nearly 6% in the second half. More encouragingly, our work to grow sales and reduce costs resulted in over 8% profit growth in the second half and this is up for the first time in 3 years. We have made changes across almost every aspect of our P&H business. We’re fostering a more open and collaborative culture with incentives to reward outperformance and we’re rebuilding supplier relationships so that our suppliers can rely on us to help them grow their businesses. We combined our two branch-based businesses, City Plumbing and PTS, into a single operation. This is enabling customers to buy from any branch improving their convenience whilst also reducing our costs and capital employed. We increased branch range conformity, improved our availability and offered better value through a tripling of our promotion intensity and have significantly improved our online offer. We closed or integrated a number of our smaller businesses reducing again both cost and complexity. Our FPC wholesale operations had a particularly good year and delivered double-digit growth throughout the second half following a sharper focus on winning new business. Despite closing 46 branches in the year or just over 10% of our branch network in terms of numbers, we were able to grow sales, gain share and increase profit whilst reducing our capital and operating cost base. Our comprehensive restructuring of the business is of course though only just beginning and although growth has accelerated further into 2018 into double-digits we are still only 9 months into what we expect to be a 2-year or 3-year journey. There remains much to do, but we look forward with a clearer plan, growing confidence and increasing optimism in terms of the opportunities we see before us. Moving on to Toolstation UK, it’s been another good year for Toolstation UK. But before I do talk about 2017 in detail, I would like to touch on two key areas that we have been working on over the last 3 to 4 years
John Carter: So, it just really stepping back on summary, three sort of key message is, we believe is as a group we’re executing our strategic plans and developing the best customer propositions that driving long term sustainable shareholder returns. Our markets remain subdued, but we are as a management team capable of adapting today’s market conditions, we remain very flexible in terms of our trading strategies and we will underpin those trading strategies with strong cost discipline. So, thank you very much. And we’ll open up for Q&A please.
Q - Gregor Kuglitsch: Can I maybe – sorry Gregor Kuglitsch from UBS. Can I ask the question, first question on the Wickes and consumer, can you – can you give us a bit more color what went wrong in the first quarter and to what extent I think you flagged early ’18 was better. So is this a easy fix to reverse the change in promotion. Therefore we can recover a profit lost last year or is this something more structural, obviously there’s a bit of a market weakness in there as well? And then the second question, perhaps for Alan you give a helpful chart on the additional OpEx could you help us sort of as we roll into the New Year? How much I think last year you said its 78 million of additional operating costs what that number would look like as we stand here today for 2018? Thank you.
John Carter: So if I take the first one, I think you almost answer the question in the sense it was – it was the promotional mechanics, it didn’t work and because of that we had the ability to view it and correct the actions for the first quarter this year.
Alan Williams: So Gregor in terms of the operating cost bridge if we just look at the bit of detail on that we will see that the network expansion, customer proposition improvement and I would argue the depreciation blocks some there. Overall a consequence of the investments that we’ve been making in the business, so whilst the level of new investment has slowed, so some of those numbers would be lower. You’re still going to have the operating full year, operating cost impact as well as element plus some step up in depreciation during the year, but I think you can take with confidence that the operating costs should grow other things being equal and more slowly than the revenue growth in the business as we focus on trying to drive some operating leverage back into the business. What that implies is although we still got inflation in rents and rates in payroll, we’ve been taking actions to take out cost elsewhere to offset that. So as John talked about improving the efficiency across the whole network that’s not one large thing, it’s a combination of thousands of actions taken every week by all branches and all colleagues within the organization to ensure that we get the operating leverage back into the group.
Priyal Mulji: Hi, it’s Priyal from Deutsche Bank. I’ve just got two questions. One is a follow-up on consumes. So I get the kitchens and bathrooms and wait on like-for-like growth. What would that number have been like for Wickes excluding the kitchens and bathrooms? I’m just trying to get a feel for what’s going on and other parts of the business. And secondly, General Merchanting, I think you mentioned, you’ve been focusing on volume prices in certain categories. Just wondered which categories those were and if that will be expanded to a broad range of products in 2018?
John Carter: So if I take the General Merchant, it is a broad range and we’ve taken things like power tools, wood screws and hardware, where we’ve actually move them to market pricing and we will continue to sort of look at different categories, primarily around areas where customers are voicing, they feel we are more expensive than some of our competitors. In the broader sense, we invested in carcassing with construction timbers in the second half as well and again we will test different categories in terms of the return that we can get from price investments.
Alan Williams: John, let me give some color on Wickes for 2017. Although the Q4 was poor in kitchen and bathroom, the business did grow significantly in the first half, on the K&B showroom piece. As to the rest of the core – what we would call core DIY, we are modestly down year-on-year and I think if you look at the overall DIY market, so taking the three large operators in the market, we would estimate we have grown our share a couple of points during the year. I am not going to comment particularly as you would expect on competitor activity, but there was a narrowing of the price differential between Wickes and its competitors during the year. We didn’t recover as much input cost inflation as we would have originally set out to do, because we responded to that competitive pressure on pricing. I think strategically and from a competitive positioning point of view, despite the miss in Q4, which we have talked about a fair amount, we are very comfortable with where the Wickes business lies within, what is still a challenging DIY market. And then my final comment maybe anticipating a later question is from a big ticket point of view, I wouldn’t associate that shortfall in Q4 Wickes kitchen and bathroom whether seeing a particular significant drop-off in the kitchen and bathroom market, we have not seen anything to suggest that the market has materially declined for big ticket within the areas where we play.
John Carter: If we do, Aynsley, we move along then.
Aynsley Lammin: Aynsley Lammin from Canaccord. Just two please. Wondered if you give little bit more color in terms of how you see contracts in for 2018. I think some companies have talked about a slowdown in some of the private non-res side in the UK. Just wondered how you see that, the trends there? And then secondly obviously you say you expect a similar year in ‘18 compared to ‘17. Does that mean that the property profit will be £29 million, I know you said kind of ongoing £20 million…
Stuart Chambers: So it’s property profits will return to sort of a guided sort of £20 million. So, they were higher obviously in ‘17 property profit. If you look back they were lower in – lower in ‘16 and a few of the projects didn’t get over the line in ‘16. Trends in contracting, I think it’s pretty tough, we have obviously seen from the [indiscernible] and other comments of the larger contracts. And I think we managed the business going forward with a bit of caution, but the team have got good momentum, they have got good visibility on the order book and but inevitably if the market starts to slow, then our business will be affected, but Frank is and the team – our take is taking market share through the businesses.
Aynsley Lammin: You are not seeing any kind of early signs that...
John Carter: No early, Aynsley, but to be fair, the fourth quarter got a bit tighter than we expected. I think we saw that really coming as clear as we perhaps should have.
Stuart Chambers: John, if I can, I think it’s important to note as well within the last few years, within the contract merchanting division, we deliberately expanded the base of customers that we serve, so there is a good balance between a growing piece in residential, the commercial non-resi and then also a very strong business in infrastructure, where we have sales teams focused on particular segments of the market and by spreading some of that risk there is a slowdown in one area, constantly, we are hedging a bit the risk of those slowdowns. So at this stage, I think we remain confident on the overall outlook for the contract merchanting division.
John Carter: Go on, Robert.
Robert Eason: Sorry, Robert Eason from Goodbody. Just a few questions. Just on the whole kind of pricing model i.e. Spinnaker that was rolled out last year. Can you just delve a bit deeper into kind of your experiences on it when you start tweaking the various buttons within that system? How quick does the customer react to it and just give some of your key learnings and from that process and how should we expect it to evolve over the next 12 months, because quite clearly the gross margin did tweak between H1 and H2 in General Merchanting. So just around how that pricing model is evolving plumbing and heating, kind of point of clarification and then a specific question. Did I hear a double-digit growth year-to-date that’s what you said, in terms of like-for-like, so just clarification on that?
John Carter: So far.
Robert Eason: So far. Okay, so it’s even more double-digit after today. Just in terms of – given the work that you’ve done in that business. Can you just go through what are the other steps that you trough. You’ve closed 10% of the network you are online now with City Plumbing. Just the other steps that you’re going to go through over the next 12 months and given the success so far, as you’ve said, growth for the first time in 3 years, in the second half in profit. What is the sustainable margins of that business now in terms of what we should expect? And it should be targeting towards [indiscernible] – sorry the third question it’s more for John, compared to 6 months ago, given all the indicators that you track and you always go through it in a lot of detail in terms of all the macro indicators that you track. Are you incrementally more negative or positive in terms of the outlook given what you’ve track?
Stuart Chambers: John, do you want to take your P&H and then we will come back to the key indicators and pricing?
John Carter: Can you hear me okay? Yes. So let me start by saying, the turnaround really has been down to 3 or 4 things. Firstly we changed the team and they’ve reengaged the branch teams most importantly. We’ve laid our new strategy. We are changing the culture and changing really the content of what we deliver for customers, so that’s the basis upon which we’ve looked to the business. In terms of what we have done and perhaps more about what we got to come, there is more – there is pricing work for us to do, but our ranges of pricing in plumbing and heating are much narrower than they are – some of the other businesses, so the top to bottom in terms of variable pricing is narrowed, but there is pricing work for us to do. The promotional intensity driven up from 3% to 10% of our total sales in the year is clearly been good for us and we’re looking to extend that across more categories. There is more work for us do on ranging, we’ve added a brand 1,400 skews to conforming range to all our branches, but we think we can increase that potentially doubling that, but also enabling branches to have flexibility and range for local customer demand. There is more for us do on – in online. We are now at about 4% of our sales transaction online so that’s increased quite significantly and we’ve got some very good category niche specialisms in underfloor, in heating, in spares and in bathrooms, but we’re putting a wrap around some of that with City Plumbing online. So that’s gone very well for us, but there’s a lot more to do. And then as we think about the categories we serve, we did a lot of customer and sort of Intel diagnostics last year and we found that our best branches have both plumbing and heating installer customers, they also have a strong spares business, a good bathroom showroom business and what we found is we think we can extend into further categories. One of the areas where we’re looking at very closely is in electrical. What we’re finding is that our – both our big customers and our small customers, plumbers and electricians are becoming or are having to work together much more closely. Electric underfloor, water based underfloor needs electrical motorized actuation valves and heating systems with smart controls, digital controls, digital showers, lighting and ventilation in bathrooms and so on. So, what we find is our plumbing – our small plumbing installers have about 25% of their basket is electrical product. But when we’ve spoken to all of our large contractors, they all have electrical teams. So, we do think there’s a bigger opportunity into electrical and we’re trialing some electrical implants as we speak.
Stuart Chambers: And Robert, I think with pricing, it's pretty sensitive to take – relatively high level. The 2 things customers are saying to us is we want better price consistency and we want competitive pricing and the whole work with Spinnaker is really aiming to position ourself, in the customers’ eyes, there is value for money. Ironically and you all know this as you invest, you spend your money immediately and your recovery is at different rates with different products and until you try those things, you are never going to quite see what way your returns are. Some are returning very quickly and they resonate well with the customers, others you have to be a bit more patient and believe it’s the right thing to do. So, I think over the coming period to have the tool and have the visibility and be able to try different things, I think is really important for General Merchanting and actually as you would expect that could lend itself to plumbing and heating and other parts of the business. So, I think overall we would want to see a return from that price investment as you would expect. In terms of the key indicators, as you know the two big ones for us are housing transactions and consumer confidence. I think anyone that sort of in February 28 ‘17 versus 28 2016 would feel a little bit more nervous. Consumer confidence has continued to sort of trail down. However, I remain more confident about our setup as we go into ‘18. We have done an awful lot of work through H2 of ‘17 and I think we are positioned well for whatever the market however it performs, so very flexible and very, very focused on cost base and tightened our investment profile.
Alan Williams: We are 9 months in. The way we look at the business is….
John Carter: Not going to be drawn on.
Alan Williams: No, I am not going to give you an answer, but it’s driving like-for-like sales per branch and obviously if we can maintain margins in the mix, then if we can grow like-for-like sales, clearly, the margin will improve from here.
Lush Mahendrarajah: It’s Lush Mahendrarajah from Berenberg. Two questions if I may. Firstly on CapEx, for 2018 it looks like you have reduced it by about £30 million and it seems it had to do with sort of slowing down the network expansion. Can you perhaps tell us in which divisions you maybe slowing or stopping the network expansion that maybe sort of the new guidances for branch openings for 2018? And then secondly obviously one of your competitors in consumer has written down a big chunk of their business, but they were obviously performing badly last year. Do you think you can carry on taking market share in 2018 or do you think a lot of that’s already happened in 2017? Thank you.
John Carter: Alan, did you want to take the CapEx?
Alan Williams: Yes. So on the CapEx for the year I think there is a few indicators in the statement. To be clear, we are continuing on the Toolstation opening program if not accelerating Toolstation UK. The Toolstation Europe at least technically doesn’t get reported within the CapEx, because it’s an associate company of which we own 49%. But the Toolstation UK would be at one of our highest priorities that will still be Wickes store refits, but we will probably do a few less than we did in 2017 just because of the natural cycle of how we do those and having responded to competitor activity in the marketplace as well. We have a couple of openings in General Merchanting in the year, but I think there will be a fewer benchmarks during 2018 than we had in 2017. The other ongoing priority for CapEx is the IT digital investment. So, we are on our major ERP deployment. We are still on track to go live in one of the contractor businesses during the fourth quarter of 2018 and then we look to roll that out over the next 18 months to 24 months. So, I am hoping we will complete the ERP deployment across the merchanting businesses in 2020. So after that point, I would anticipate a modest drop-off in IT and digital, but I think it will be an ongoing area of focus to transform the business on a multi-year basis.
John Carter: And this is the second part obviously that quite unhelpful from down under in terms of the way they are running the business. I think it’s really important for Simon and the Wickes team to focus on their customer, their proposition and go hard in terms of making sure they’re looking after the customer and we'll see what really happens in June. Sorry, we’ll work around.
Paul Checketts: It’s Paul Checketts from Barclays. I have got three of course. The first on the topic of inflation, can you give us the latest in terms of your euro dollar split of the imported goods, please? And just thinking about some of the commentary from you, John, on inflation, it seems like you are quite downbeat about the ability to pass on some of the commodity led inflation. I would have thought that compared to FX led inflation that was probably a bit easier, because your customers were in the same boat, but maybe if you could just elaborate? Second is on plumbing and heating, I know we had to whizz through it. But if you looked at it by customer type and size, probably touched on it slightly, but could you give us a bit more detail on the trends you’re seeing on that basis? And then lastly on the kitchens and bathrooms side with Wickes, what would be the typical seasonality for kitchens and bathrooms across the quarters? Thank you.
John Carter: I didn’t mean to be damply. I mean to be perfectly fair, inflation at a moderate level has always been relatively helpful to merchanting. If you remember, we’ve come off a couple of years of flat inflation and there we see initially foreign exchange driven and they’re more commodity. I think it's more around the quantum of trying to get into the market with customers also finding things difficult especially those that have committed to longer term fixed price and tight price contracts. So, I think it’s more, Paul, the rate that’s coming through and we’ll do whatever we need to do, but there is always a pricing and volume equation. It’s really trying to get the right balance for each of our businesses. And you saw we’ve contracts, I think we’ve done a really solid job working with the customers, with General Merchanting, is a bit of an open market and we have to work harder.
Anthony Buffin: Plumbing and heating, just across the customer types. I also try and think about in with 5 customer types or 4 plus 1 [indiscernible]. Our biggest customer is British Gas. We’ve been doing a lot of work to reengage with them in terms of how we grow our business and their business and that is working well. So, we’re really pleased with the progress we’re making there. Our large subcontractor customers, again we’ve been speaking to the majority of them. Obviously we speak to them every year to renegotiate terms, but they’re in pretty good order. Obviously residential new build is going okay so they’re in good order and we continue to grow that customer base and our wholesale customers, so the customers who are wholesale business the independent plumbers merchants and I said to you, we did double-digit growth in the second half of last year. And I think, we’ve taken significant share in that channel, and so that’s going well for us. Our smaller installer customers are buying more and buying more frequently from us, and that’s one of the areas where they are really understanding the value we’re offering through our promotional program, so that’s working really well and we are attracting new retail customers, both through online, but also through some of the events we are doing in the bathroom showrooms, so we’ve extended opening hours on Saturdays in selective locations. We’ve been running bathroom sale events and those have been working really well for us. So I think across those 5 cohorts of customers, we’ve seen positive momentum on each one.
Stuart Chambers: And Paul, the strongest – is how the markets evolved and how customers think. So the winter sale which starts now sort of around the 15th of December goes through to February. It’s the strongest single promotion period. And Easter would be probably the second strongest period. And if you follow Howdens, they’ve always done a very strong promotion in period 11, we respond to that with a big bang promotion and benchmarks and that would be the third period in the autumn. Not many kitchens are sold during the summer.
Alan Williams: Paul, just kind of back on the – the points around FX split. So unfortunately it’s a complicated situation. So if we split it between direct exposure so where we pay in foreign currency, somewhere between $200 million and $300 million let’s say and probably less than 100, but growing in euro denominated purchases. However, there are certain categories that whilst we might pay in sterling, clearly they have a large foreign currency component, so there are – you have got indirect impacts going on within the network as well. So, I am afraid, it’s quite complex, but the direct piece, I would say both dollar and euro are growing – euro is probably growing a little faster than the dollars at the moment.
Unidentified Analyst: [indiscernible] from Bernstein. Just a couple of questions on General Merchanting if you don’t mind. Just like to sort of understand when the benefits are going to come through of some of these initiatives. I guess the range center have really extended this year. Is there – can you talk about a sort of a revenue benefit that you have got from that extension? And also on the sort of the digital IT, I understand the rollout will happen over the next few years. At what point, does that payback from that investment come? And the second question is just on the profitability for – in General Merchanting in the second half, which seems to have accelerated significantly from the first half. So, we are almost in the sort of double-digits falling in operating profit. I haven’t really understood exactly what is behind that acceleration and whether that will impact going into 2018?
John Carter: Okay. So I think we have progressed each quarter in General Merchanting on the sales line as we went through ‘17 and I would like to feel that as we will see that progression and as the range center and the work we do in the proposition comes through. And clearly, if we were in a more buoyant market, I think we would be seeing a more buoyant sales profile in General Merchanting. In terms of the IT, sometimes you have to look at investment in IT without payback, in the sense that if you don’t invest, you actually can’t serve your customers as well by having to think as we roll some of the IT investment or the work that we are doing on IT, we will see a benefit in efficiency and productivity. But I think you know the mantra that we work on is, are we actually helping our colleagues to serve our customers easier and are we making easier for our customers to buy from us. And if we can answer both of those, it’s yes. Then we are investing, because we believe that’s a sustainable long-term benefit to the businesses. We won’t be releasing until later this year the first release of the work we are doing. And our aim if all things go well is to start rolling the General Merchant into the new platform in 2019. So, it’s still some way up.
Unidentified Analyst: [Question Inaudible]
Alan Williams: In the second half – partly to do with the investment as we called out the range center extension, the investments in some of digital and some of the investments in the pricing tool. I think to be fair we have taken corrective action on both of those areas. We have been diligent in the cost base and we have been very focused on the margin. Glad, it will come back, let’s see.
Andy Murphy: Good morning. It’s Andy Murphy from Bank of America. Just a couple of questions around pricing and gross margins if I may. 2017, can you give us a flavor for what you think the overall group cost inflation was in terms of products and what your perhaps estimate is with of what it might be for 2018? And within that 2018, can you give us a flavor around what products are seeing the most inflation and perhaps a follow-up to that really is where you find it easiest as to where you find it hardest to pass those price rises on to the customer or the consumer?
John Carter: Okay. While we are – Alan think I have got a number in my head, but you will be well detailed.
Alan Williams: Right. So pricing if we decompose the like-for-like revenue growth in the year and this is an Appendix to the – presentation appendix 5, you’ve got volume for the group minus 0.2% for the year and the price and mix contribution 3.5% giving the 3.3% like-for-like revenue growth. So we if you put to one side some of the price investments that we chose to make, with more or less offset the input cost inflation. So if you would back up the model taking a typical gross margin and say around the 30% mark, you can work back to what we think the input cost pricing must have been in the year including the FX component. So I would say that was more like 5% on the year. Quite clearly, we are expecting it to be lower than that in 2018, because the FX components drops out and it’s much more driven by the commodity price increases. So we are still seeing increases in some of the same categories actually as last year. So copper for example, would be seeing increases in plastics which are partly driven by the oil price and conversion costs and then we are also seeing increases in materials related to insulation, with our [indiscernible] insulation material, chemicals used in the manufacturing process.
John Carter: And I think whether it is a plumber or a carpenter, no one is asking for price increases. So I think it’s generally tough to sales people at the movement, your prices are going up 5%, whereas in whatever commodity both – it’s category.
Andy Murphy: The general flavor for what the overall price...
John Carter: I happen to think is going sort of be similar. But we have sort of a slightly different mix because of the way commodities where foreign exchanges really drive in across the board. I think, as Alan sort of called out the copper, the oil and steel. There is so much drive in those products. Last year, we saw quite high jump in timber prices [indiscernible], right. Clyde, if we do Clyde and then...
Unidentified Analyst: I’ve got four, I think. Please jump. New residential markets obviously being one of the strongest sectors, can you give us an idea as to what percentage you think that is now for the group in terms of that end market? And also how you are managing it? Obviously, it touches your business in various different ways. Have you got any sort of central team where you’re increasingly trying to talk to lot’s of [indiscernible] or TW or for Zimmen probably increasingly less 4%?
John Carter: You know that one off, now.
Unidentified Analyst: Yes, going – if you want to do that one.
John Carter: Well only in the sense that pricing in that sector is very, very fierce and just getting fiercer. So broadly if you take subcontract and direct, because we do very little direct in the bigger house builders, verticals of top 2 divisions, it’s stable around sort of somewhere between 20% and 25%, because we tried with some customers that go into new build and into commercial and it’s quite difficult to separate that out. But although that’s attractive in, it’s growing, there’s no attractive in the margins and the pricing we can get.
Unidentified Analyst: The second was on sort of volumes and I suppose with the sort of flat volumes you effectively reported, what’s again your best guess of that total volume market that you’ve been addressing again given those comments on resi and also maybe attached to that is what’s been happening to the number of trade accounts that you’ve got, and across the group. Are they going up or down, I mean what are you seeing in that sort of?
John Carter: So most of the businesses if not all the businesses, they are seeing their customer numbers increase. So that’s a positive. Toolstation in particular – the timing was sort of waxing miracles gathering momentum in their customer file [Indiscernible] General Merchanting is growing its network. Because that’s been a focus really, Clyde, if markets are flat although little tight then you got to get out and get share and the best way to do that is chase share of wallet of your existing customers or expand your customer base. So positively we are growing in the customer base.
Unidentified Analyst: So I’m following up from that. And do you think the market was actually down in terms the areas you are serving?
John Carter: It’s really difficult to go. I think if you – our work on the basis is broad to flat, because your interest really small numbers in different sections and different geographies. Alan or Tony?
Anthony Buffin: I think, consumer I think and in terms of the shed market and Toolstation together in those markets and I think combined we grew share. In P&H, on a local catchment basis, we were definitely growing share with the like-for-like in the second half. But if you look at the overall market, because we took 46 branches out, I would say overall with flat sales, we probably dropped a point overall, but on local basis clearly grew share because of that network production. And I think contractors clear that we grew share. At General Merchanting, we have been a bit more difficult to read I think.
Unidentified Analyst: Third one was Wickes and I mean that sounded a little bit, but who took the decision I suppose to change the promotional style, because obviously....
John Carter: As Chief Exec, I will take the responsibility, but we do this together and all I would say is if you don’t try different things, you pressed an eye. And you want to make every decision right and the team didn’t do it. Let’s say they have genuinely thought that it was a good decision that will improve progressively, it didn’t and therefore, we don’t want to do that again.
Unidentified Analyst: And the last one I had was again I suppose coming back to the European question. I think Tony obviously with Toolstation obviously the movement of [indiscernible] again you are sort of spending a bit more time and effort maybe looking at alternative options there, does that need to be applied to other parts of the group, rather than just Toolstation given the UK market has been difficult at best?
John Carter: We think we have a truly competitive advantage model in Toolstation that resonates in different markets. We find it difficult to see a Travis Perkins in other parts of globe actually as a mix merchant. So, we think lowest cost to deliver, lowest products, great value. It’s got everything going in and that’s why we tested in other markets. And I will genuinely say, it’s not – going to be distracting what we are trying to do in the UK, that’s why we have the team working [indiscernible].
Michael Mitchell: Thanks very much. Michael Mitchell from Davy. And just a few around the 2018 profit bridge if I can. Alan, going back to your commentary you are on about the expectation or anticipation that operating costs should grow at a slower pace than revenues. Is that something we should expect for each division or is that common around the group? Number one. And secondly, if we could expect, I think when you say 30 or 40 basis points of improvement from an operating cost perspective, should we be thinking that, that’s given back the gross profit level and therefore margins at group level for the year are broadly flat year-on-year? And then thirdly just in terms of point of clarification around the 2018 performance expected to being similar to 2017 at this point. Just to be clear is that at this point expecting £380 million in profits, therefore excluding the £20 million in property or £360 million on an underlying basis or is it – shall I – or the other way as the £350 million underlying plus the £20 million gets to £370 million? Thank you.
Alan Williams: Okay. So, let’s be very clear. We are 2 months into the year. So, it’s always tricky to give guidance so early on. When we say similar for me that puts a bit of a range around the number compared to the prior year, I am looking at the total EBITA of £380 million, including property profits, property with £29 million in 2017 and we’ve been very clear in saying we expect that to be approximately £20 million in 2018. In other words, you could build back up £10 million of operating profit growth in the businesses. The cost base that we are talking about, so if you look at our operating costs, including branch costs, stool costs above branch above stool, so central costs in each of the businesses or divisions, group central costs. And also all of our distribution and logistics, we are talking about £1.7 billion of cost base or so in total. There are headwinds in there from the investments that we have made as I was describing earlier. And the – and also input cost inflation – sorry general inflation in payroll and rents and rates. So have – the consumer division has greater exposure to the national living wage than the three merchanting businesses. So, that’s one of those headwinds. But the tailwinds that we’ve put in are around the cost actions that has been taken. So as we sat today assuming a similar trend of markets to 2017, I would expect that we will grow our overhead base in total less than we grow the revenue line, so some modest operating leverage. And I think, we would look to be holding the gross margin percentage year-on-year. But again early days and I don’t want to be canned for saying, we hold it if we’re 15 basis points off at the end of the year, so that’s as good as I am going to say.
John Messenger: Thanks. John Messenger of Redburn. I think I have got three, two for the group and one for Tony, if I could. Just on that point around cost inflation. What was the 17 million of the group percentage, just to have an understanding of what is not being allocated out to the various parts, so clearly it was a material move on the central cost line? And the second question, the group level was really around – when we think about Wickes, the promotion – was this really a Q3 thing, where the revenues are booked in Q4, just trying to understand was this something that the group kind of was fully aware of in November, I guess, because I see the lead time between somebody being promoted to booking and installation and the kitchen or bathroom being fitted. Installations in 4Q would have generally been booked or sold in the third quarter. Just to understand, how this flow through and therefore why chances are you doing far better now, because you addressed it actually pretty early in the fourth quarter to get yourselves righted for this key season.
John Carter: The clue on that one John is that that we’ve called out an 8 million saving towards the end of the year. So we could see it coming in, but you can’t get to your cost quick enough in a year. Therefore, it was around making sure we went into ‘18 in better shape.
John Messenger: Got it. So just back on the cost one. So that – because I am looking 6.5%, 95 million cost increase, from what you just answered before and I walk away thinking 3% cost inflation 50 odd rather 95 is probably where we should all be thinking, just have a rough idea.
John Carter: Sure. I was waiting to write down the third question, but…
Alan Williams: We get back to the…
John Messenger: Yes, what the third one is sorry.
Alan Williams: So the – on the 17 million, again without doing all kind of accounting discussion the consequences of cloud-based accounting are that the mix between what you would capitalize and what you write off immediately to the P&L changes you have a bit more going straight to the P&L, so the largest element of that increase in unallocated costs is related to the IT BLP investments that we’re making in the business. We’ve also built up a specialist digital team during 2017 and retain those costs at the center and then we also retain at the center any development costs that we’re doing on new formats.
John Carter: And none of those are dramatically escalating.
Alan Williams: So in 2018, I wouldn’t expect a significant difference in that unallocated cost element.
John Messenger: And then, the other one was just on plumbing and heating and Toolstation. Obviously there has been quite a lot of change with what focus they have proposed to do in the U.K. particularly around broaden growth and closing out of wholesale. Historically, you’ve talked about whether wholesale belongs inside the group because it is effectively competing with yourself. How is that view changed with their decision to kind of close that down, excluding there is couple of 100 million sales out of there that is available in the market. So what is the strategy change around P&H, does it stay as it is or are there pieces that you’d carve off and then the other one was just on Toolstation, 51% that you don’t own. Can you just let us all know is that something that’s Mark’s decision, your decision, timeframe and rough idea what the sales are in Europe, just for the – for us to get some quantification of the potential capital commitment in the future?
John Carter: Yes, John. I don’t think it’s appropriate for us to discuss whether we are going to own businesses or otherwise.
John Messenger: The last one, Toolstation had obviously your criteria set, so no criteria.
John Carter: My comment responds to plumbing and heating and ownership of the business and comments about competing with ourselves. I don’t think that’s something that we are going to comment on.
Alan Williams: So, no, you talked about – let me just talk about the wholesale market ignore ownership for a second, but talk about the wholesale market. We think BCG was probably £70 million or £80 million of sales, of which half is boilers or actually probably two-thirds was boilers and a third sort of plumbing and heating consumables. As you would expect, even if you closed down the business if there is profitable business in there and you have distribution capability, you might expect to retain some of that and I think that’s probably the case. Our competitors probably would try to attain some of that good business, John. And what I would point to is our double-digit growth in the second half of last year. That was irrespective of any changes in the competitive landscape. So, we went into this year in very good order. There might be a couple of points of benefit to us in plumbing and heating as we go through the year, but it’s probably between 1 and 2 points top line. So it’s not – it’s certainly not the driver to our improvements in the second half or into 2018 although and some of that business is low margin as well, John, I would say. In terms of – so, we are – I think we are in good place in wholesale. In terms of Toolstation, Europe – look we have a very good relationship with Mark. He has now been with us for 10 years. When I joined the business, we had an arrangement with Mark. We reset that arrangement to make sure it works for both parties, which we did and that’s worked well for us. Mark enjoys working with us. He wouldn’t – if he wouldn’t have been around for 10 years, so he didn’t. And we are making really good progress in Europe. And the team we are building in Holland, in Belgium is in good order. And the final thing and the business, turnover wise about £30 million this year and the capital commitment obviously a capital commitment through leases for the shed, but you know John, the cost of the shops is small about €150,000, €170,000 each, so they are relatively small investments.
Operator: Our first question today comes from the line of Paul Roger of Exane BNP Paribas. Paul, please go ahead.
Paul Roger: Yes, good morning everybody. Couple of questions from me. First a general question on the merchanting business, I mean, obviously you have made quite lot of investment here on the store formats and everything else in recent years. Are you surprised that not give you more significant competitive advantage, it sounds like you obviously having to do if you got something on pricing in order to maintain share maybe on the call you would do a little bit better than I think the investments you have made. On the second one is just a follow-up on Toolstation in Europe, looking at the accounts, it looks like that business was some small loss-making in 2017. When you are expecting that to return to profitability and how significant could that profit contribution be looking longer term?
John Carter: Probably if we can keep it relativity short.
Alan Williams: Of course, John. I think we would be expecting to get Toolstation in the Netherlands alone, broadly breakeven next year.
John Carter: Well done.
Alan Williams: Sorry, John. For the avoidance of doubt that associate line will still be an associate loss, because whilst we are getting to breakeven in Netherlands, there is some central costs for running Toolstation in Europe and that’s also the investment going into France as well. So, we think Paul you said when will it return to profitability stepping up a business, you always incur a loss when you are setting it up. It’s very rare that you find something where you can make profits from day 1.
John Carter: And I think on the General Merchanting side, it’s a fair comment. We have invested considerably over the last 3 to 4 years and I think rightly, so we have got a good plan going forward in terms of being appropriately priced, the right availability, the right range and it’s important that we actually showed progression as we move forward.
Paul Roger: I just have a quick follow-up. Just on the emerging business obviously, you’ve highlighted the fixed price on through the big cost build. I know it’s quite small, how is that performing and that could be an area you potentially expand in 2018?
John Carter: I think it is really early Paul and we will give update when we’ve got some better data. There is unquestionably some good things that will come out of it.
Paul Roger: Okay, thank you.
Operator: Our next question comes from the line of Ami Galla of Citigroup. Ami, please go ahead.
Ami Galla: Good morning.
John Carter: Good morning, Ami.
Ami Galla: Just two questions from me please. My first one is on the fixed cost base, I mean, if you could give us some color as to how much cost, did you take out in 2017 and how much of that is reflected in the numbers?
John Carter: So we spoke Ami early about 8 million in Wickes, it was between 5 and in General Merchanting, both of those are cost base resets that we did at the end of the year, so there is not really an impact in the 2017 numbers.
Ami Galla: And on plumbing and heating, is then not an incremental number we should think about?
John Carter: So we – Tony spoke earlier about we took around 10% of the branches out, so our costs for running the branches were down. We also had a reduction centrally in plumbing and heating, and you would expect to see some benefit from that rolling through into 2018, as well.
Ami Galla: Okay. And the second one, if I can follow-up is just one on the pricing side, on the General Merchanting business. I mean could you give us some sense to what independence that you ready in point pricing and actually in terms is your NAV?
Alan Williams: So difficult to, because they are – because of the independents, they will operate slightly different, but if you were to generalize their views as you move into any sort of period of pricing input on products. They tend to sell though on existing costs where we have a preferred route to do on replacement costs. So there is often a lag as they are selling through their stock and clearly establishing the market price doesn’t happen until that, stocks often sold through.
Stuart Chambers: One last question. Okay, thank you very, very much for your patience, really appreciate it.