Earnings Transcript for TPK.L - Q4 Fiscal Year 2018
Stuart Chambers:
So good morning, ladies and gentlemen. It's Stuart Chambers, Chairman of Travis Perkins plc. It's my great pleasure to welcome you here for our 2018 results presentation. There are a couple of things that I'd like to just cover off before I hand over to John and Alan for the presentation. We'll touch on performance and also talk about some senior leadership changes. So first of all, performance, as always and ever starting with the safety, we're very pleased to be able to report, but again, last year, we managed to reduce our expected frequency rate for the fifth year running, very pleasing. I would stress, however, that it's a constant vigil and of course the only objective you can ever have and the safety organization, any organization that certainly wants quite a lot of machinery and activity and branches, it's 0 harm, and until such time, we're causing zero harm to not only our enemies but everybody we come into contact within our daily business. We can never relax. So and with that, we'll continue. On the broader financial performance, I'm not going to spill on thunder or the results we have in front view, but I would like to just say one thing. It was a pretty busy year. We reinvented the strategy into the fundamental strategic review in the first half of last year. Culminating it in our kind of board strategy day, where we came to some conclusions and on the exact, worked hard to actually bring those conclusions into work streams and action plans which we kicked off. And of course, this year is going to be busy too. And the one thing I would -- in that is what a great credit it is and how pleased the board is with the management's ability to not only do that, but in parallel, to keep focused on the day-to-day performance and deliver on what the market is expecting last year. That, of course, is something we must repeat this year as well because it is another busy year. And then, of course, it's somewhat an upward, and John will talk about that. Then, just briefly on senior leadership changes. You all would have seen perhaps that we announced also this morning that Tony Buffin is stepping down from the board today, and will be leaving the business. It's a redundancy in the new simplify group wealth, and with P&H plan for disposal obviously, that role ceases to exist and Tony will be leaving us. But I would have say, a real world of thanks to Tony; 6 years, initially a CFO, and then as COO and lastly, leading the team that's been executing the turnaround in performance of our Plumbing & Heating position, which has been a real highlight in the success so far. So a big thanks to Tony. And I think with that, I'll hand over to John.
John Carter:
Thank you very much, Stuart. Good morning, everyone. I just wanted to sort of little bit of things to set in. There will be a little bit of repetition in some of the messages. Alan's not going to do a repetition, it's going to give you good numbers in terms of the financial review. And I'll come back and talk about some of the businesses, the operational review and the strategic update. So to start things, the sort of overall performance of 2018, and in particular, the work we undertook in H1, that came through in the second half of the year. And then talking about the Capital Markets Day and the progress that we've been making since early December. And overall, I think, 2018 turned out to be a pretty good year for the business but very encouraging second half, but it was very much underpinned by the actions that we took in terms of the cost-reduction activity, really stellar performances coming through from our contracts team of BSS, CCF and Keyline and Toolstation, U.K. continues to move forward. And we'll talk a little bit more about that going forward. And a few solid performance for our general merchanting. We've said 2019, it's very much around a transition, which we should see some progression on the Kieran Griffin's leadership as we move through the 2019. And we have Simon King who runs our Wickes business with us in Tidworth will work with Finance Director. And Simon and the team took some early decisions on cost action in May, and we saw some benefits come through on that line, but we also saw some improvements in the trading line as the second half progressed. And as Stuart's already referred to, a stellar performance from Tony and the Plumbing & Heating team. In December, early December, our Capital Markets Day, there were really 2 main things that we talked around, and talking around at now. Our purpose of this group, and that was going firmly, I would call it as nielloed to the trade market and that trade customers. And equally given the growth of the business, about relative to sort of lack of growth of earnings, simplification of the group. But then we're going to say this a number of times, even though the coffee this morning, I must have been asked 4 times, what does actually Brexit mean to us. If anyone's got the answer, I'd really appreciate it. But it is creating sort of a cliché of uncertainty and we're just pushing on the best way we can, and we'll deal with whatever comes at us during the year. The fundamentals for this sector remain extremely strong and gives us confidence to continue to invest and grow our business. We are going to be even harder with our capital allocation, and really target our advantage great businesses as we go forward. And this whole aim of simplifying the group, but also lowering the cost base and bringing our management teams closer to the customers is a real ambition. That's all around for us, and driving stronger earnings as we go forward, stronger cash flow generation and therefore, leading to shareholder returns. Alan is going to talk you through the financials, and I'll come back and talk to some of the businesses.
Alan Williams:
Thanks, John, and good morning, everyone. So as you've heard from John and his introduction, the groups delivered a solid performance in 2018 in what continues to be a challenging market. Revenue growth was good at 4.9% on a like-for-like basis, with total revenue of over £6.7 billion, up 4.8% on 2017. At the adjusted profit, operating profit level, we delivered £375 million, which was £5 million or 1.3% below prior year as we continue to invest in the business. But as our commons covering more detail, a much stronger second half with profit growth of 10.7%. Adjusted EPS was 3.7% higher at 114.5p, benefiting from a low financing charge and also a lower tax charge. And given the cash generative nature of the business and our confidence in the long term, the board is recommending an increase in the final dividend of £0.01, taking the total dividend for the year to 47p per share. That's the distribution of approximately £117 million pounds for the year. So moving on to Slide 8, here you can see a steady improvements in the like-for-like growth rates. The like-for-like sales growth strengthened in the second half to 5.5%. With each of the general and contract merchanting and Consumer segments improving on their first half performance. Of the like-for-like growth across the year of 4.9%, just over half came from pricing activity to recover input cost inflation. Volume growth in 2018 was 2.2% and was driven by the Plumbing & Heating contracts businesses and also Toolstation. Looking at the group adjusted operating profit, excluding property profit, and I do that because it gives a clear view of the underlying performance for the business, this was £348 million or £3 million lower than in 2017. While EBITA was £21 million lower in the first half following the full winter weather, significant competitive pressures in Wickes and constant investments elsewhere, the second half saw a strong profit growth of £18 million year-on-year. This reflected a better overall trading performance together with the benefit of cost-reduction actions and general merchanting in Wickes, strong cost control in other businesses, and very good operating leverage in the contract merchanting division. The impact of the cost-reduction actions can be seen clearly on the bridge on Slide 10 from 2017 to 2018 adjusted EBITA. Cost-reduction actions in Wickes and general merchanting, in particular, has fully mitigated the inflationary impact across the group from inflation and wages, rents and rates and utilities. And as you can see, we have continued to invest in the business to the tune of £32 million with this investment concentrated in our most advantage businesses such as Toolstation where we opened 14 new stores in the U.K. in the year, and also a new distribution center. At Capital Markets update in December, I spoke about our overhead base as a proportion of revenue. With revenue growth having slowed since June 2016, and given the investments we've made in the business, we struggled to show much operational leverage. I'm pleased to report a significant improvement in the overhead to sales ratio in 2018. Once we continue to invest in future notably, as I mentioned, through the expansion of Toolstation, the focus on cost reductions will improve. There is plenty more still to be done. Indeed, we announced in December, a target for further £20 million to £30 million of annualized cost-reduction activity, which we expect to be realized by mid-2020. Several actions were put in place towards the end of the year, £5 million annualized, and John will return for this topic later. So if I now take you through the divisions and taking a look first at General Merchanting where like-for-like growth was driven predominantly by pricing activity to recover the input cost inflation. We saw an improving like-for-like revenue trends in H2 following the long winter, with better volume performance later in the year. Gross margins were broadly stable in 2018 as well as recovering input cost inflation, the business continued to use our pricing framework tool to provide more attractive and consistent prices in selected categories and this saw a good response from our customers. In the second half of the year, the business put in place a cost-reduction program, which, coupled with the stable gross margin lead to a strong improvement in H2 profit of £7 million compared to 2017. The Contract Merchanting division again delivered an outstanding performance in 2018 with all 3 businesses outperforming their markets with strong revenues and operating profit growth. Input cost inflation was pronounced, but also successfully recovered. With tight control of cost and continued actions to improve efficiency, the business achieved good operating cost leverage and grew both operating margin and the lease just returned. Turning to Consumer. The Consumer division saw overall sales growth by 0.9% while like-for-like sales declined by 1.3%. In H1, like-for-like sales declined by 4.2%, but grew by 1% in the second half on a like-for-like basis. Adjusted EBITA for the division was £13 million lower on the year at £69 million, which represents the £16 million decline in H1, followed by a £3 million improvement in the second half. In the Wickes business, the like-for-like trend improved considerably in Q4 with 4% growth as competitive pressures began to read and with a much better performance in the Kitchen & Bathroom showroom. Second-half EBITA grew by £3 million driven by the improvements in trading and also this full year, sorry, the full impact of the cost-reduction program, which was put in place during the first half. From a Toolstation perspective, the Toolstation U.K. business continued to outperform with overall growth of 18% and like-for-like sales of 11.4% with revenue performance continuing to strengthen through the year. As expected, profit growth was modest, given the investments in used space and the opening of the third distribution center to support that continued network expansion. The Plumbing & Heating division has an excellent 2018. All 3 business areas, wholesale, branches and online grew both sales and profits. Overall like-for-like revenue grew by 16.1%, and total sales by 11.9%. Whilst gross margin was modestly lower due to changes in business mix and more intensive promotional activity, the higher sales and good control of cost led to a 26% increase in adjusted operating profit to £39 million. So moving to cash flow. The business continued to generate good cash in 2018, albeit not quite as strong in 2017. A main driver of the cash performance was the change in net working capital. Of the increase of £107 million, approximately 2/3 relates to trade working capital. The trade debt is going in line with credit sales and higher inventory, resulting from some soft build for the contingency in case the U.K. leave the EU in a disorderly way at the end of March. An increase in non-trade related working capital was primarily driven by a higher rebate receivable, impacted by both a high level of purchases and a phasing of payments around the year-end. Maintenance CapEx increased modestly to £57 million, reflecting the timing of vehicle replacements across the group. And from a net cash flow basis, you'll note from the table there, outflows £41 million related to adjusting items and £43 million related to the purchase of own shares to fulfill employee share schemes. So if I return to capital expenditure in more detail on Slide 17. Base capital expenditure was £23 million lower than in 2017 at £143 million. This was driven by a reduction in gross CapEx of £25 million as we resetted fewer Wickes stores than in 2017 and with few and new merchant and Wickes opening during the year. From a property perspective, you can see that the net cash flow from purchases and disposals was broadly similar to 2017. Effectively, we have sold and leased back retail space where we see little inflationary pressure, which has freed up capital to invest in industrial properties for the Trade Merchant businesses. From a balance sheet perspective, the group's balance sheet remains strong with net debt on both the cash and lease-adjusted basis broadly unchanged from 2017. Immediately post the year-end, we've refinanced our primary bank facility for further five years, with two one year extension options on the same term. These removes any Brexit-related refinancing risk as the facility would otherwise have been used for renewal in late 2019. As we stated that the Capital Markets event in December, we expect to further strengthen the balance sheet over the coming years through more focused capital allocation and enhanced cash flow generation. Now I'm sure you're all very excited to understand the impact of the new leasing standard, IFRS 16 on our financial statement. However, I'm not going to talk about it right now, I have included it in the appendix with a number of slides for you to understand this. And there are also several members of the finance team present who can go into much more detail than I can. And finally, if I turn to outlook and guidance for 2019. So I'm sure you will all appreciate that the current uncertainty in the U.K. makes forecasting really challenging. As a group, we are planning for the current levels of uncertainty to persist in the short term, and we are focusing on self-help initiative to underpin performance in the near term and to position the business well for the long term. Given the uncertainty and at this early stage in the year, we will expect adjusted operating profit to be similar for 2018 with cost-reduction activities enabling us to offset overhead cost inflation. Despite the near-term challenges, we believe the group remains well positioned for the future. And with that, I'm now going to hand you back to John to provide an operational review and also the strategic update.
John Carter:
Thanks, Alan. Thank you. Okay. A slide that we viewed on the 4th of December, our Capital Markets Day is what we sort of use in to set the theme. And we've already said some near-term uncertainty persists, but the long-term drivers fundamentals are strong. Group is growing in sales and complexity, and we feel that need to address it. The two themes that we took away was its focus on the trade and simplify the group. Three of the outputs as I looked at them as we try to develop, is for all of our businesses to drive that business from to the market and outperform the sectors that they're operating. We are encouraging and driving the businesses to set themselves up with a lean cost structure and be agile. And as Alan has said, we will increase our approach to disciplined capital allocation from the most advantaged businesses. So that's why for us, really sets the theme for the coming period. As I know you'll groan, we are going to grow into period where we're redefining the group's reporting structure, because we think it's important that we structure ourselves in the best way to create value for our shareholders. And on your right, we've highlighted an already declared we're seeking disposal on our Plumbing & Heating businesses during this year. As we move from right to left, we'll be reporting our retail businesses, of Wickes and Tile Giant, clearly Wickes being the dominant element of that sector. And then focusing on the trade-focused businesses, we are keeping Toolstation separate given it's growing scale and importance to the group as we go forward. And recently, we announced the omen of a new merchant, a trade merchant organization, of the 5 principal trade merchant businesses. That announcement of the trade merchant businesses will be head up by Frank Elkins, who's sat handsomely at the back. And the aim here, is very much around having central shared services at the center, and resources within the business but the removing of any divisional cost in between the business units and the central shared service functions. The 5 businesses are all very well positioned, Frank's got an incredible track record over the period with Contracts, Keyline, BSS and CCF. Adding to that now, his responsibilities will be Benchmarx under the new MD of John O'Keefe and as we've said before, Kieran was appointed in early January so it's still in the early stages of Kieran's tenure in TP. This is very much around developing a flatter structure to make faster decisions and get closer to our customers as we move forward. As mentioned at the Capital Markets Day, a big emphasis is being put on the empowerment of our branch managers through acting the interests of their customers, and you'll hear me talk very much around the local market. This is where I think all of our businesses is going to be focused to win the best builders in town and giving our branch colleagues more time to deepen that -- or deepen those relationships with local customers. Angela Rushforth, this is going to be assessed in the last four weeks as well, but we've got, I think, an extremely strong lineup under Frank's stewardship. We've come under a lot of questioning in terms of subordinate general merchants going to be different or what is it going to do going forward? I've tried to capture it here on sort of 8 feedbacks or points of feedback from our customers. We passionately believe, or I passionately believe, if we get these 8 elements right, we will win in our local market. This is all around fast, accurate quotes, it's about easy-to-do business, whether it's in the branch or online, competitive and consistent pricing, with as much emphasis on the consistency as the competitive. It's about fast delivery on time and full. It's around when we do make mistakes, fixing them quickly, it's around actually going faithful with great product knowledge. It's actually having the right range in stock on the ground for the right quality, and it's about us as a business going the extra mile for our customers. They are the simple points of how we are going to measure our successful -- our mixed Merchant business as we go forward. We talked about the balance of scales -- scales of balance of empowerment and how we actually want to run the business. This is still in week 8, so please, it's still early doors. But the new management team in General Merchanting, or mixed merchanting, as we're calling it, that is in place we've done as you would expect a lot of communication across the branch manager community and getting very strong positive feedback from them. The whole message is centered around winning our local market. And as highlighted, we've listed Benchmarx from the General Merchanting to give this its own space and its own growth areas, and we believe it's got really strong growth potential. In terms of still to come, I think this whole area of empowerment to make faster, better decisions in the interest of our local customers. Pricing will be a big feature, but we are not a retail business, we are B2B, and that will be done customer-by-customer, and bespoke and tailored to those individual customers in those individual local markets, and we've got the toes to do that effectively. We'll be encouraging the store managers or the branch managers to widen and deepen their branch stock and align it to that of their local customers and local demand. And although as we move through the year, we will tailor the branch managers incentive sets primarily to drive sales and earnings as we go forward. All of essential functions will be aligned to focus on serving their branches and customers more effectively. We said earlier how successful Frank and the Contracts team have been. This is very much a well-driven and proven format. It is all about the focus on the customers and the relationships. It's about talking to them, exploiting our product categories that the customers are seeking on a local or national basis. Our range, it has got to be driven by the customer and not the center. And we've made a number of small acquisitions that are being adjacent categories quite successfully, we are transportive and e-com business, see if solutions, which is growing really fast and profitable and we'll be seeking other opportunities for this businesses to go forward. The most, to me, important part is managing our network and optimizing our branch network effectively, to get the right deliveries, fast, efficient, on time, convenient into that local market and looking after our national customers. Toolstation remains a really exciting opportunity. As Alan sort of highlighted, with the performance of nearly 12% like-for-like growth, it is a low-cost, light-capital model with value leadership across its pricing. That needs to be maintained and developed. We've got a really strong core range, but with James Mackenzie to -- heads up the business, we are increasing our focus on trade-credible products, and extending the range of products in 15,000 as we go through this year. We released a new website in early December to good effect, and we see an increase in online sales on conversion as a result, as we go forward. Although we have now a number of years we've been opening 40 branches, we aim to increase that to up 60 during this year. And if successful, we'll be closing 400 outlets. As touched on before, we've already put the infrastructure in place to take that to 500 in the U.K. with the addition of the third distribution center. And as we grow, as to me, is as important is to build on better colleague engagement and continue to improve our staff retention. This is a good story for us. We have really good opportunities. And equally in Toolstation, which is much as Europe, is a much smaller operation, but we are now up and operational in our Netherlands DC, which has got the ability to grow or support 150 outlets. Currently in the Netherlands we have 32, our plans during 2019 across the 3 territories that we're looking at is to increase stores to just over 25. And we are getting really positive sort of performance from both the store performance and the online across Holland as mirroring the U.K. performance. France is still in its early stages with 11 branches. We will gradually grow that and review that during 2019. And while Belgium is proving good online, we will support the opening of Belgium branches and deliver through the Netherlands distribution center during the year. In terms of the P&H and the numbers, obviously, that Alan showed is being really positive and quite a challenge sector. It's an outstanding performance in 2018. And with clear outperformance in all 3 of the categories that Alan highlighted of wholesale, branches and online. And you have to accept the rate of growth has got to moderate during 2019 as we start to annualize some stellar sales. The team is on a really good work job in terms of optimizing both the City Plumbing network and the PTS to operators one. We've continued to push the breadth and depth of branch staff in terms of the local market and there are embedded some electrical implants across the network to good effect. We're seeing advantages for having it's own dedicated supply chain so that category as we move forward. And although still relatively small, we're seeing good growth on the underlying categories of Plumbing & Heating supported by the last mile from the Plumbing & Heating local branch network. For me, probably, the best performance in 2018 has been the Wickes business. And I don't think any of us should underestimate the impact the plumbings actually had on our market in the two years that we're here. They cause a lot of disruption to the pound and went back to Australia that left us with some real difficulty. And I think Simon and the team put some great decisions in terms of how to cope with this sort of disruptive market. During that time, we maintained our value leadership on prowess and took this some early decisions on reducing our cost base, which allowed us then to focus on trading to good effect. The heritage of Wickes sits within trade in the small tradesman, and I'm really pleased with the work that we're doing on TradePro, which is our loyalty program for our small trade customers, and that is very much helping us grow our core business. The area that I think are mostly -- that they focused on was in the Kitchen area. And clearly, most of you remembered Q4 and H1 of '18 and '17 are quite difficult for us. I think the team have done extremely well of regrouping and building some confidence and momentum in that area and focusing very much on the end-to-end that's a design through the showroom, the delivery, the in-store and if the customer does desire, the ability to wrap back around the financial instrument and lend it. 54% of the Kitchen since 2018 were delivered and in stored, which is well up on the 44% of the year before. And as many of you will know that our major competitor, Kingfisher, decided to stop in and deliver it in-store kitchen. and as we have said it at the Capital Markets Day, that should prove pretty positive for us, and we've started to see our lead bank grow during Q3 -- through the second half and in particular, Q4 that puts us in pretty good spend for 2019. I've always believed and said that Wickes is the most strategically advantaged business in its sector. The sector is challenging, but Wickes has got a lot more advantages than its competition. So in summary, very much sort of picking up on the theme, 2018 was a challenging year, but I think the teams [indiscernible] did really well. And position the group well for what is an uncertain period. And the fundamentals remain strong. Our aim is always to grow our sales line higher and outperform the markets we operate. As Alan said, I think we are looking at this early stage of the year for a very similar sort of outturn of earnings in 2019 against '18, that has to be underpinned by our activities of self help. And we are aiming really to set ourselves up to win, in a low growth market. The strategy that we talked around December is well underway. It's being executed effectively. It's very much is around simplifying the group and reducing our cost structure, focusing our capital allocation on those advantaged businesses and really aiming to drive over the medium-term stronger earning progression, better cash flow generation and ultimately, stronger shareholder returns. So on that, and I know we've got some people on the wires later on so let's not forget those. Can we go to the floor for questions. So Andy?
Q - Andrew Murphy:
Andy Murphy from Bank of America Merrill Lynch. Just two questions for me. And just on the disposal process of Plumbing & Heating, can you talk a little bit about -- a little of the timing cost, but about the sort of temperature of the market, and whether it's at the level of activity, level of interest in there for that kind of activity? And then secondly, just on cost increases, that is a question for Alan. Just in terms of the labor, IT, distribution, that sort of thing. Can you just talk a little bit about the rate of growth in what's driving all those cost increases?
John Carter:
Do you want to pick both of them up, Alan?
Alan Williams:
Yes. I'm happy to take those two. Andy, on the first one on the Plumbing & Heating disposal process, you'll appreciate, everyone will appreciate at this stage, we are very focused on the separation activity. So the Plumbing & Heating businesses are heavily integrated with the rest of the group in terms of its back-office, so IT systems, shared HR teams, shared purchase and general ledger. So our focus has been on the separation there. On the specific, we have seen indications of interest as you'd imagine. We're not ready to launch a process yet, but hope to complete those separation activities during Q2 so that we can do, obviously there's an event on the 29th of March, which may mean we're not able to launch a process if it looked like this very reduced levels of M&A in the market. So we're watching that closely, and we'll update during the year as we progress. On the topic of cost increases, we are still seeing a number of wage pressure. So we are seeing U.K. wage inflation creeping up. We are seeing -- we're due another increase in the national living wage, and we've also got the impact of also enrollment stepping up further this year. So, I'd say, sort of 2.5% or so overall pressure, from wage growth. I may as well, while I'm on the topic of inflation on a roll, I'll cover cost of goods, because I'm sure we'll get that question otherwise. From a cost of goods point of view, it did -- the pressure -- the debate somewhat in the second half. But we are still seeing some commodity increases coming through. So I would imagine that the cost of goods inflation for the year will be a little ahead of U.K CPI, probably a point or so ahead of CPI from an input cost point of view. In terms of central cost, seems like IT you referred to, I don't see any particular increase this year-on-year in those areas. I'm -- I think that will be fairly stable again in the prior year.
Aynsley Lammin:
Aynsley Lammin from Canaccord, too. Firstly, on your expectations for adjusted operating profit to be similar. Just kind of flesh out the assumptions you've made about like-for-like volumes and prices there. Flat volumes up, price up two pounds and also just remind us with the incremental benefit from the cost savings may have been, as well as the kind of cost-cutting you expect to feature into '19? And then secondly, just on Contracts. Obviously it's been performing very well, like-for-like growth up about 8% for the last 3 quarters. Do you expect that to be the kind of pipeline looking good, do you expect that to hold up to that good level? And maybe just a bit more explanation on how you -- of the performance there were in Contracts?
John Carter:
So progress there is all down to here. But no. Contracts has been on a roll now for a number of years. And it is really taking share. All the three businesses are taking share. Inevitably that has to moderate. But I've been bent at with -- to Frank for a few years he's been outperforming. So I think we just need to be careful that we don't believe that those go on forever. On the expectation for 2019, Aynsley, I'd likely give us a bit of slack. Because we're 8 weeks into a year that we have no real idea. So we've modeled, as you'd expect, from flat margin. We've got our pricing and our cost coming through and we've obviously got an element of investment. It's our best guess at the moment, but we are really early in the year and I'd much rather us update as the year progresses. Our next formal update is the 8th of May, and we'll, I think, have a much better view of how we've moved through the 29th of March, or kick the can down the road. But it's our best guess based on looking into a very uncertain or sort of buggy market.
Alan Williams:
So Aynsley, on the '18 and '19 cost savings. First of all, I showed a chart with £38 million of cost savings coming through from General Merchanting and Wickes. They were roughly a half-and-half sort of thing. So in 2019, I would expect around a further £10 million, which is the annualization of those activities given the phasing of them being in the first half in Wickes, so there will be 3 or 4 months' worth of benefit to come through plus the H2 actions that we took in General Merchanting. I also referred to the 25 to 30 -- sorry, £20 million to £30 million further initiatives that we're looking to put in place, which we talked about on the 4th of December at the Capital Markets event. Of those, £5 million of actions were annualized, were taken late in Q4. So I would expect a full year benefit from that. And clearly, we're on with some of the other actions as well so there will be more benefits coming through in the year. And we'll update at the half year on the phasing on those. Just adding to John's comments on the outlook for 2019, if you look at some of the lead indicators, they are very depressed at the moment. So consumer confidence is very low. Secondary housing market transactions remain at low levels and so do mortgage approvals. So added to which, we've got a clear uncertainty around Brexit. So it is a hard one to read. My assumption is most of the divisions will be similar in terms of underlying performance from a revenue perspective. So we will look for self-help from those cost actions to ensure that we deliver on our objectives for the year.
John Carter:
So, to the lady just in front of Aynsley.
Sofia Sotto-Mayor:
It's Sofia Sotto-Mayor from Exane. My first question is on the Consumer division and how much the Q4's acceleration reflects an easy base from last year? And if it's possible to give an estimate on the underlying volume run rate? And the second question is regarding the redundancy of the COO. If you could give a bit more details on the thinking behind it, and any management succession generally, any thoughts.
John Carter:
So from our point of view, the -- we were expecting Q4 Consumer, and mainly driven by Kitchens, to be a bit stronger. As -- we've invested in some of the Kingfisher design consultants across the Wickes network. We always thought that would come through later in the year. We have -- volumes were not much different than we were expecting. But obviously, we've come in a -- we were annualized at a very soft number in 2017, which really shone a light on the positivity. In fact, we fell away very sharply in Q4 '17. So it was a good number but made -- looked much better because of the annualization.
Alan Williams:
If I can add a couple of comments on that from a retail DIY outlook for that market. I think we saw some easing in the pricing pressure that we've seen. So I think the pricing pressure from Bunnings Homebase was probably at its extreme in the -- around Easter time. That's not to say the issues have gone away, so I'd say some easing at this stage on the pricing environment. Weddings, I think it's going to work. I think they'll close more stores, and they still have a number of clearance stores as well. And then I'd say secondly, we did a better job in terms of our kitchen promotional program than we had done in the winter, autumn/winter 2017, early '18 sale. So there were some elements that we had brought ourselves as well as changes in the marketplace. I think as John said earlier, the team dug in really hard on a really challenging environment. On the questions around with the COO point, I don't know whether, Stuart, you would like to make any comments on succession process over whether you want me to comment. So on behalf of Stuart and the board, from a succession process, first of all, and then I'll come back to the redundancy element. It was clear in the Nomination Committee report, in the Annual Report in 2018 that the board were thinking about a succession process. That thinking continued, and I understand the process will conclude during 2019. So I think you should bear with us. John is CEO and in his 41st year and doing a pretty good job, I think, at leading the business forward. So that's where we are for now. On the redundancy element, you'll appreciate with the simplification of the group, we -- at this stage, we don't need a third Executive Director position with responsibility spanning across different businesses in the way that we have previously. So we simplified the structure and therefore, the role is not needed at this stage.
John Carter:
Ami at the back. I'll come over to the other side of the room.
Ami Galla:
Ami Galla from Citi. Just a couple from me. The first one, if you could comment on the gross margin move sequentially between H1 and H2? And is there any material move that you've seen across your division? The second one is really a point of clarification. The exception costs that you've incurred in 2018, have all of them been -- come through the cash? Or is there any phasing of cash costs that we need to consider into '19? And the third one on Toolstation, it's quite an ambitious expansion plan. Could you give us some reason or color as to where these really -- are you looking at expanding your Toolstation footprint? And the last one, really on the order intake for Kitchen & Bathroom, you've talked about the lead indicators looking more interesting. If you could give us some numbers around that, that would be quite helpful.
John Carter:
So if we worked backward, the order intake for Kitchens is good against a really challenging Consumer market. So I think we're outperforming, but I wouldn't want to give the impression that it's easy. So I think we've definitely taken advantage of Kingfisher withdrawing from the installed delivered. But I think big ticket items are still a challenge. Toolstation has still got a lot of opportunity to grow its catchments. So classically like most operators, it's a gravity-fed catchment analysis that we're working to, and we have our top 100 sort of catchments that we're targetting. And primarily, there is a bit of a blast towards Southeastern London, as you would expect. But actually, some of our more sort of market town and rural locations are doing really, really well. We continue to do very well in Bristol, for instance, which is the original town of Toolstation. So we feel we still got a lot of opportunity, and a lot of really good catchment. It is a good step up from 40 to 60 as a target number, and that's why we wanted to execute it really well. So it's very much a focus. The physical side of finding the science and identifying them and fishing them out, I always think it's the sort of the fairly easy bit. Making sure we've got brilliant teams in each of the 60 that we're targeting I think is really the key here. So we're all very much supporting James and the team. It's quite ambitious but actually, we're feeling pretty confident that we can execute that well. Do you want to...?
Alan Williams:
Yes, sure. On adjusting items, Ami, there are a number of those, which were provisioned at the year-end, so there will be cash to come through, so on the element labeled as restructuring costs, we had £16 million related to the Merchanting supply chain. So that is the consolidation of the TP and Benchmarx distribution centers. The restructuring in the Range Centre in Tilbury. And also, we've merged the Cardiff Range Centre with a timber supply center in South Wales as well. So £16 million, most of that is cash still to come. We recognized £16 million from the closure of 27 branches. Of that, we have incurred the cash redundancy costs. However, there are -- some of those properties were leases. So we have to provide for the leases. The redundancies and reorganization costs at Wickes of £13 million, I'd say around 3/4 of that was cash incurred in the year and then the balance was largely cash incurred as well on that. So there will be additional disclosure around the remaining provision and the phasing of that when you get the notes to the Annual Report, which will be on the website later today. On the gross margin element between H1 and H2, it was a little stronger in H2 on an underlying basis. I'd say year-on-year General Merchanting largely unchanged. In the Contracts business, we're a little lower on gross margin percentage. The reason being a shift towards larger customers and an increased number of direct shipments. From a Consumer business point of view, Toolstation stable, Wickes was down given the pricing pressures that we talked about earlier. And then in Plumbing & Heating, the main driver of slightly lower gross margins was around the mix between businesses. So the wholesale business having grown faster than the rest of the business overall, clearly a lower gross margin activity than the branch basis.
Gregor Kuglitsch:
Gregor Kuglitsch from UBS. So a few questions. The first one is on working cap. I think you flagged some sort of Brexit-related stocking. Could you give us a figure of what you think kind of is essentially temporary, that £107 million outflow? And is the growth essentially a reflection of the fact that the trade businesses are growing while the Consumer business, which obviously has more favorable working cap dynamics isn't? Question number one. Question number two, is there more restructuring to come? I'm guessing P&H, separation costs, things like this? I think overall, it was quite a hefty number last year. If you could give us sort of a steer of where we're heading there. Toolstation profit, third question, was flat with the DC opening. Do you think you can actually make progress in '19 in terms of profit? And then finally, I don't want to kind of bore people with IFRS 16, but you've obviously, given the detail in the account. I guess, the question I've got is, could you give us a broad plate of, I think, the £1.35 billion of lease liabilities by the main divisions and specifically, how much related to the P&H and Wickes considering the situation there?
John Carter:
So if I could comment on the easy ones and leave the hard ones to Alan. Toolstation profit, I think we explained in '18, this is primarily putting the distribution center down and growing the network. This year, we will look to progress the business but obviously, it's setting up the investment from 40 branches -- new branches to 60 will have obviously a depressing effect on net profits as well. So I think, Gregor, we are about growing the business and the network. And obviously, the investment levels are short term, suppressing our gross margins. Alan did you want to take the working capital? Because I've got a number in my mind that's always higher than yours.
Alan Williams:
Yes. So on the working capital, first of all our inventory was about £35 million-or-so year-on-year, some of that is natural growth of the business. So we have started a Brexit stop build, so I would anticipate that by the time we get to late March, we will have taken on between £80 million and £100 million incremental inventory on a base of £750 million-or-so of inventory. So we're concentrating that in a like-sized imported product that's coming a long way. Clearly heavy side is more U.K.-sourced. There are then a few areas like timber on the heavier end, which are also imported and where we'll need to do some work. As to how much of the working capital we'll reverse during the year, I think I mentioned some phasing elements around the year-end related to rebates. So I'd see some of that reversing or getting better in the year. You're right, however, Gregor, that a lot of that working capital build is due to the trade business overall growing faster than the Consumer business. On the point around restructuring, there will be more elements to come. So when we announced the £20 million to £30 million of cost savings on December 4, we did point out that the roughly equivalent amount of investment in one-off costs to realize those savings. And then from a Plumbing & Heating separation point of view, there will be some more costs related to that and ultimately, disposal costs, which we will separately identify if and when we get to that point. On the IFRS 16 point, the lease is in the business, and we'll have seen that from the previous lease-adjusted debt figures that we've given as well. The leases are concentrated particularly in Wickes and we also have a number in Plumbing & Heating, but it's nowhere near as material as the Wickes number. So the Wickes number would probably be at a half of the total lease debt within the business. There will be some more disclosure on that when the Annual Report is published later on. Did we cover all the questions? Well done. Next one.
John Carter:
So I'm going to replace the mark again. We'll take your row and then we'll move on to the left. I got you guys on the front.
Priyal Mulji:
Priyal from Jefferies. Just two questions. The first one, just clarifying on the operating profit guidance being flat year-on-year. Is that, including or excluding property profits given that those were slightly higher than usual £20 million this year? And the second one is just the trash the NTP to widen and deepen the stock range through your branch managers. Is there a risk that, that gives too much power back to the branch managers and you go back to the situation where you end up with quite a lot of back end stock in, could you replicate what you did in Wickes, where certain products were available online only in that General Merchanting business?
John Carter:
So I think you asked a good question about balance. And I guess I put a lot of faith in Kieran, his management team's brains to get that right. And I think if we'll see good sales growth, good profit growth, then you'd assume that things are going well locally. So I think there are a number of measures that we would put on that, Priyal, but we would be very careful that it wouldn't be a free-for-all and there'll be elements of core range that we would expect the managers to support. But give them more freedom to talk to individual customers about servicing them. It will come out in the performance. But I'm pretty confident that it's the right thing to do locally with the right framework. On the operating profit, Priyal, the guidance is the total adjusted operating profit number, so including property profits and therefore, my implication if you take similar to mean exactly the same, 3.75, you get a £7 million year-on-year improvement in the underlying if property profits were £20 million.
Howard Seymour:
Howard Seymour, a couple for me from here. Firstly, you alluded to the fact that General Merchanting saw volume gains in the second half, John. Just sort of looking at that in the context of was that market move or was that market share as your initiatives have taken place? And secondly, Alan mentioned the COGS dynamic. As the year is starting, are you seeing any specific pricing patterns emerging heavyside, lightside, obviously international products as opposed to U.K. products?
John Carter:
So I think we'll have to see. We're quite early in the reporting so we'll have to see where the others report. My sense is, Howard, that it's mainly a little bit of share. Probably we're flat to negative in some areas. And therefore, pricing comes through, but the volumes, we would have taken a bit of share. I think there is no pattern other than you've got to watch that manufacturers are being opportunists during this whole period. So you end up with a bit of an arm wrestle on price. We are obviously building stock, and one of the other points is just an answer to Alan, it's not just in our -- on our balance sheet. Obviously we're working closely with a number of our suppliers. But they're building their stock to be able to see this through. Our timber supplier from Southern Sweden has doubled their stock on the docks in anticipation of finding things difficult. But like always, there's no pattern other than I think if the manufacturer is being opportunist.
Robert Eason:
Robert Eason from Goodbody. You don't mind if I pick on two bullets that you have in your presentation. One of them was you were talking about winning local market share. How should we view that in context of how you're going to manage gross margins and -- across the business? And in terms of winning that local market share? And secondly, you talked about a tailored branch manager incentive to drive sales and earnings. Can you just gave us a bit of an insight how you've changed them? Have -- and just broad structures. I know it can vary from business to business but just give us a sense of how the people on the ground are being incentivized.
John Carter:
I think they're quite linked. We're incentivizing our branch managers to grow their business, grow their earnings. And what we looked at is where we're not lifting the bar on what they can earn in terms of profit share approach to earnings. So I think the incentives are evolving. We need to make them attractive for managers to drive to the line and deliver the best earnings that they can. And often that means taking local share. The local share is more around -- it's not going to come through for national intervention. It is the branch manager and their catchment, of identifying the best buildings in town from winning their share of wallet locally. And we've got tools coming out of our ears, Robert, to watch margin, yes, by product, by categories, by branch. So if the incentives are right to grow earnings, then the managers tend to understand that, and it's not -- they're not going to get rewarded just for sales.
Charlie Campbell:
Charlie Campbell from Liberum. I've got two on quite a similar theme I think. So looking at Appendix 8, the new reporting structure. I just wanted to sort of understand the margins a bit. So within merchant, I think the margin comes out sort of high 7s. And looking forward, I would guess that we should think of that as being pretty hard to advance because whatever progress is made in what used to be Contracts is probably offset by some softening in General Merchanting going forward. So the question is whether you think it's plausible that Merchanting margin can advance from here. And then the second, just to follow up to Robert's question on General Merchanting incentivization. My understanding is that there used to be a lot of focus on returning capital. Has that now gone? And it's really all about sales and earnings?
John Carter:
So it's definitely decreased in its element, Charlie, but not gone. And I think that's what Frank and Kieran will be looking at in terms of refining the incentives as we move forward. I have to stress, I don't think they're broken when we talk to the branch managers. But that doesn't mean that we shouldn't have a continuous improvement to try and tailor them to better performance. So there'll be more emphasis on earnings than just return on capital. I forgot your first question, sorry.
Charlie Campbell:
Sorry, it was my fault. It was rather long actually. So the margin in the new merchant sector.
John Carter:
I think as a proxy, and Alan may just have a slide view that the -- moving the operating margin is not easy if you want a sustainable business and I think if we take what Frank's done with Contracts over the 5 years, he's grown the top line disproportionately and outperformed, the margin, because of mix and -- are sort of somewhat compressed, but it's actually net operating margin. In good periods, it's fractionalized its cost and slightly increased it. So I think the one thing he has done is drive his absolute earnings and his return on capital. So I think this is a paradigm now that if we can outperform the market, we can be sensible with our gross margin, augment the cost base. It's growing our absolute profit and our absolute return of capital. Ask any questions. Yes.
Paul Checketts:
It's Paul Checketts from Barclays Capital. I've got two. I think I'm returning to Charlie's question really, maybe phrasing it slightly differently. If you look at the General Merchanting sector, you've got sector-leading margins but they have been trending down. Might I marry up what the message is around the evolution of the strategy? What do you think it's going to mean for gross margins and operating margin in that business this year and next year? And then the second one is just on the Kitchen & Bathroom side. Could you give us a sense of what the seasonality of your sales have been for Kitchen & Bathroom across the quarter?
John Carter:
Clearly -- and I am watching if Simon will either smile or not. The strongest period we created really on the back of being Q starting it is the winter sale, about 8 weeks, going through sort of back end of December through January and February. And Easter is the really important, the second. And then we've created -- I mean, obviously, the May bank holidays are good, but then September time we focus around the big 7 or 8.
Paul Checketts:
[Indiscernible].
John Carter:
Yes. So in fairness, people tend to buy kitchens fall and at Easter and straight after Christmas. Fall, Easter and then they'll try to get them into shape for Christmas.
Alan Williams:
John, if I can. Paul, there's an 8- to 10-week length from a revenue recognition point of view between the point of which the kitchen is ordered and delivered on average. So when we report our -- what we just reported from a P&L perspective, it's mainly sales up to the end of October, broadly. So from 1st of November to 1st of October, roughly. On that point on operating margin.
Paul Checketts:
[Indiscernible].
John Carter:
Yes. It's the length, you see, Paul. So on General Merchanting operating margin outlook, you're right that General Merchanting is sector-leading in terms of its margin, so I think that's the first point to stress. We were 8.4% net operating margin in 2018 and picking up on Charlie's point, at the same time Contracts, 6.4% net operating margin. So it just blends to 7.5% to 8%. The contract merchanting piece, remember there in particular, we have a large exposure to large customers, large contractors, national, and therefore, that has an impact on the gross margin. But because it's a very low cost to serve and because of the operating cost leverage that we've generated within the business, as long as we drain that business at least in line with the market, I think we can hold, if not slightly increased, the net operating margin there. From a General Merchanting point of view, I think overall having a net operating margin around 8% would be a reasonable number. So where do I think the pressures are coming? I think there are -- there's a greater concentration growing generally in the market of bigger contractors. I think clearly market pricing remains very competitive. But we haven't devised the self-help measures and taking overhead out of the business to ensure that we can hold if not progress the net operating margin. And you would expect that as we get the engine moving again, on the mix merchant, you will see a drop-through from the gross margin such that we can at least hold that operating margin. So that's the ambition. Let's watch the results over the next 2 to 3 years.
Unidentified Analyst:
Two if I could. One, just on Kitchen & Bathroom, just to understand the quantum of it. Within the revenues of Wickes, just is it 20% of sales [indiscernible].
John Carter:
About 30%.
Unidentified Analyst:
30% of that. And would it be more profitable on the way you're striking on them today than the overall Wickes number or less profitable? In terms of its EBIT.
John Carter:
Slightly more than -- I think that's quite sensitive actually.
Unidentified Analyst:
Slightly accretive. Alan gave it away.
John Carter:
It's a good business.
Unidentified Analyst:
Got you. And then just clearly the trading stamp and the behavior is going to change with the strategy that we heard about in November -- December. But when we think of gross margin, just to understand where we go, if we strip up something. '18, obviously the gross margin last year at 29.6 -- 28.6% just reported. Would I be right that there isn't a kind of an ongoing disclosure here, taking out something at each end but if I think of Plumbing in '18 as being like a 21% gross margin business because we wholesale -- the like-for-like group sales came from there, is the core around about 30.5%, 31% gross margin just when we all understand the kind of leverage what will look like. That kind of quantum.
John Carter:
So it hasn't moved 50 basis points in the last 4, 5 years. That question.
Unidentified Analyst:
Stripping out P&H. Okay.
John Carter:
I've got Graeme at the back. You're not going to do friendly fire are you? No. Is this over the wires?
Graeme Barnes:
Yes. I've got a couple of questions from Paul at Exane. First is, are you continuing to install any new formats like fixed-price heavyside merchanting? Or just for a simplification strategy suggest things like build-through of the agenda?
John Carter:
We open our second branch build, probably April. I'm looking at Frank. I think we'll update the market in August, Graeme. But we're certainly not investing in a new format. But obviously we're still working with the build format.
Graeme Barnes:
Okay. And the second one is Alan-focused, I think. What drove the big improvement in the pension now in surplus? And does this mean payments in 2019 will be lower than last year?
Alan Williams:
Right. So it goes with the first pension, IAS 19. So the assumptions that go into the balance sheet are somewhat resourced from the cash that's required in the pension scheme given the way it works, so we have a good -- dealing with those balance sheet numbers first of all. We had a reasonable performance on the assets on the year. But the changes were more experience-based on the liabilities. So it was the way that the liabilities moved, which are heavily linked to AA corporate bonds with a similar duration, so the liabilities within the pension scheme. Completely separate from that in the real world of cash, we had a triannual review on the 2 main pension schemes, which was dated September -- end of September '17. On an actuarial basis, so on the technical provisions actuarial basis on both schemes, we saw a reduction in the liabilities. So the go-forward position in this is set out in notes to the accounts for the legacy CP scheme, the funding requirements about £0.5 million a year for the next four years. And on the legacy PFS scheme, which on a technical provisions basis is something assuming 92% sundered, but £10 million in '19, £8 million the year after, then down to £5 million for 18 months. And then that covers the deficit on that scheme. So in 2019, the cash requirement's gone down £2 million or £3 million. And then it will go down further in '19, '20, and by mid-21, in theory, depending on future movements, an actuarial assumption schemes are back in balance.
John Carter:
Graeme, is there any other on the wires or is that the last one? Any last ones? Good. Great to see all. Thank you very much for your patience. And thank you, very much again, from Alan and myself.
Operator:
Ladies and gentlemen, that does conclude today's call. Thank you very much for joining, and enjoy the rest of your day.