Travis Perkins plc : half year results for the six months ended 30 June 2024

6 August 2024

Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014 (MAR)

Travis Perkins plc - half year results for the six months ended 30 June 2024

Good progress on business improvement actions amidst persistently challenging market conditions

Maintaining market position in a challenging trading environment

• Continuation of trends from H2 2023 with weak demand across the Group’s end markets and commodity price deflation leading to revenue (4.4)% lower than prior year
• Lower volumes and the impact of price deflation on Merchanting gross margin resulted in adjusted operating profit of £75m (2023: £112m)
• Maintained market share and pricing discipline in Merchanting as focus remains on meeting customers’ needs in tough trading conditions
• Continued market share gains in Toolstation UK with operating margin up 130bps
• Adjusting items of £32m recognised in the first half (of which £10m is cash) resulted in statutory operating profit of £38m (2023: £107m)
• Full year adjusted operating profit expected to be around £150m inclusive of £(16)m of losses related to Toolstation France
• Interim dividend of 5.5 pence per share (2023: 12.5 pence per share)

Good progress on business improvement actions

• A simpler, more efficient business: restructuring actions and tighter controls have reduced overheads by £19m versus prior year with cost inflation absorbed. The Group is leveraging scale to deliver future savings in distribution and procurement.
• Addressing loss-making activities: on track to exit Toolstation France by the end of the year; strategic review of Toolstation Benelux complete with actions in place to deliver break-even performance in 2025
• Technology enablement: Oracle Finance ERP system went live 1 July 2024

• Enhanced cash generation: greater financial and operational discipline, including lower capital expenditure, resulted in a cash inflow in H1 of £82m and a reduction of £81m in net debt before leases. Working capital inflow of £54m driven largely by stock reduction; targeting further reduction in H2

New leadership to continue to drive the transformation of the Group’s operating model

• New CEO Pete Redfern and new Chair designate Geoff Drabble to join the Group in September and October respectively. Both will bring extensive construction sector experience and listed company expertise.

(1) Alternative performance measures are used to describe the Group’s performance. Details of calculations can be found in the notes listed.

Nick Roberts, Chief Executive Officer, commented:

“Trading conditions have remained challenging through the first half of the year and we have continued to prioritise delivering for our customers whilst also recognising that a persistently lower volume environment means that we have to deliver a simpler, more efficient business. Whilst market conditions have impacted on our trading margin, we have made good progress on managing our overhead base and generating cash.

With a new government quickly setting out its plans to reform planning to deliver more housing and infrastructure, and the expectation of an easing in macroeconomic conditions, the Group is focused on ensuring that it is well placed to maximise the benefits from both a future recovery in demand and the long term requirement for the UK to expand and decarbonise its housing stock.”

Analyst Presentation

Management are hosting a results presentation at 8.30am. For details of the event please contact the Travis Perkins Investor Relations team as below. The presentation will also be available via a listen-only webcast - please register at the following link:

https://travis-perkins-2024-half-year-results.open-exchange.net/

Enquiries:

Cautionary Statement:

This announcement contains “forward-looking statements” with respect to Travis Perkins’ financial condition, results of operations and business and details of plans and objectives in respect to these items. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as “anticipates”, “aims”, “due”, “could”, “may”, “will”, “should”, “expects”, “believes”, “seeks”, “intends”, “plans”, “potential”, “reasonably possible”, “targets”, “goal” or “estimates”, and words of similar meaning. By their very nature forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, the Principal Risks and Uncertainties disclosed in the Group’s Annual Report and as updated in this statement, changes in the economies and markets in which the Group operates; changes in the legislative, regulatory and competition frameworks in which the Group operates; changes in the capital markets from which the Group raises finance; the impact of legal or other proceedings against or which affect the Group; and changes in interest and exchange rates. All forward-looking statements, made in this announcement or made subsequently, which are attributable to Travis Perkins or any other member of the Group or persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. No assurances can be given that the forward-looking statements in this document will be realised. Subject to compliance with applicable law and regulations, Travis Perkins does not intend to update these forward-looking statements and does not undertake any obligation to do so. Nothing in this document should be regarded as a profits forecast.

Without prejudice to the above:

(a) neither Travis Perkins plc nor any other member of the Group, nor persons acting on their behalf shall otherwise have any liability whatsoever for loss howsoever arising, directly or indirectly, from the use of the information contained within this announcement; and

(b) neither Travis Perkins plc nor any other member of the Group, nor persons acting on their behalf makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained within this announcement.

This announcement is current as of 6th August 2024, the date on which it is given. This announcement has not been and will not be updated to reflect any changes since that date.

Past performance of the shares of Travis Perkins plc cannot be relied upon as a guide to the future performance of the shares of Travis Perkins plc.

Summary

The trading environment has remained challenging for the Group as the key trends from the second half of 2023 - ongoing macroeconomic and political uncertainty, weak end market demand and deflation on certain key commodity products - continued through the first half of 2024. This was reflected in the Group's revenue and earnings performance during the period and management’s primary focus has been on driving efficiencies through the transformation of the Group’s operating model. Alongside disciplined capital allocation, this will support progressive recovery of profitability and reduction of leverage.

H1 2024 Performance

The Group delivered revenue of £2,362m, down (4.4)% versus prior year. The decline in revenue was driven by the Merchanting segment which experienced a combination of activity across the construction sector remaining subdued and significant price deflation, predominantly on commodity products. Toolstation delivered a solid revenue performance, reflecting further market share gains as maturity benefits continue to come through.

Adjusted operating profit of £75m was £(37)m, or (33.0)%, lower than the first half of 2023. The following key factors impacted on operating profit during the first half of the year:

• £(50)m decline in gross margin of which £(30)m was driven by lower sales volumes and £(20)m was attributable to lower Merchanting gross margins, the latter resulting from a combination of commodity price deflation and competitive pressures
• Around £(19)m of overhead inflation, predominantly on payroll and property costs
• Restructuring actions delivered a benefit of £18m in the first half primarily through a reduction in central and regional overhead
• £16m reduction in discretionary spend driven mainly by tighter controls
• Toolstation Europe losses reduced by £4m
• Property profits were £(6)m lower than prior year.

New leadership will continue to drive the transformation of the Group’s operating model

The Group recently announced that Pete Redfern has been appointed as Chief Executive Officer with effect from 16 September 2024 and that Geoff Drabble is appointed as a Non-Executive Director with effect from 1 October 2024. Geoff has also been appointed Chair (designate) from the same date and will take up the position of Chair as soon as his capacity allows.

Pete brings over two decades of leadership, operational and finance experience in the construction sector, including 14 years as Group Chief Executive of Taylor Wimpey plc. During his time at Taylor Wimpey, Pete oversaw the transformation of the company into one of the largest housebuilders in the UK, and its elevation to the FTSE 100, restructuring the Group after its merger, building a strong financial position after the global financial crisis, refocusing the company on its UK operations and delivering a strategy that created significant shareholder value through a focus on organic growth. Alongside his sector experience, Pete also benefits from a deep understanding of Travis Perkins Group, having served on the Board as a Non-Executive Director for nine years to September 2023

Geoff brings unrivalled experience in publicly listed businesses across the building materials distribution, equipment hire and tools markets in which the Travis Perkins Group operates, gained from both executive and non-executive roles.

Geoff is Chair of Ferguson plc, the building materials distribution business listed on the New York and London Stock Exchanges, which primarily operates in North America. He is also currently Chair of DS Smith Plc, the international packaging company. He was a Non-Executive Director of Howden Joinery Group plc, the UK’s leading specialist kitchen supplier, from 2015 to 2023, serving latterly as its Senior Independent Director.

In his executive career, Geoff was Group Chief Executive of Ashtead Group plc, the FTSE 100 listed international equipment hire company, from 2006 to 2019 and previously held senior executive positions in Laird Group plc and Black and Decker Corp. 

Good progress on business improvement actions

Recognising the significant impact of the macroeconomic environment on the Group’s profitability, management commenced a series of actions which will transform the business for the future.

The first phase of this review, completed in the fourth quarter of 2023, delivered annualised cost savings of around £35m for 2024, primarily from a reduction in central and regional headcount.

In February 2024, 39 standalone Benchmarx branches closed as part of a review of the strategy of the business. The focus is now on growing the Benchmarx network through integrated solutions in new General Merchant branches, which provide a lower cost model with a more convenient customer journey, whilst optimising the profitability of the remaining standalone branches.

Work to deliver further structural efficiencies will continue over the medium term, focused on the following areas:

• Supply chain consolidation - reviewing and optimising the Group's supply chain to deliver greater economies of scale and efficiencies
• Technology enablement - driving benefits from new technology, starting with the implementation of the new Oracle Finance system
• Shared procurement capability - consolidating separate procurement functions across businesses to leverage the buying capability of the Group’s combined scale
• Simplifying Group structures - streamlining the interactions between businesses to enhance the customer experience

In the first half of the year, good progress was made in a number of areas as set out below:

Supply chain consolidation

• In order to drive long-term efficiencies from the investment in the new Toolstation Pineham distribution centre, the Toolstation Bridgwater distribution centre was closed and the Toolstation Daventry distribution centre is in the process of closing down, which is expected to be completed by September 2024
• Reflecting the actions taken to streamline the Benchmarx network, Benchmarx kitchen cabinets are now being solely assembled at the Group’s Primary Distribution Hub in Northampton and the Benchmarx assembly facility in South Molton, Devon has been closed
• The Group’s timber supply chain has been consolidated with the closure of the Kings Lynn and Tilbury timber supply centres
• A review is underway to explore the opportunity of lightside range harmonisation across the Group’s businesses

Technology enablement

On 1 July 2024, the Group successfully implemented a new cloud-based Oracle Financial ERP system. The project was delivered by a dedicated cross-functional team and represents a significant step for the Group in terms of modernising its technology. Oracle will strengthen financial controls, enable new standardised processes and enhance stock visibility and reporting, which will deliver longer term benefits for the Group. As a result of the system being cloud-based, the Group will also benefit from being part of Oracle’s upgrade roadmap in the future.

Shared procurement capability

During the first half, the Group’s commercial function has been restructured with teams now aligned by product category, rather than working specifically for a business unit. This has eliminated duplication, lowered costs and created the opportunity for the Group to generate synergies through building category expertise alongside harmonising ranges and trading terms. The changes also create a central digital and marketing capability which will deliver scale benefits and enable the development of a Group-wide customer proposition.

Simplifying Group structures

The Group continues to review its operating model and organisational structures to deliver a sustainably more efficient business with the first stage being the consolidation of the management teams of CCF and Keyline. This review is now benefiting from the recent arrival of a new Chief HR Officer and will be a key focus for the new management team over the next twelve months, following the arrival of the new Chief Executive.

Capital structure and shareholder returns

Despite a continuation of challenging market conditions, the Group has made good progress on actions to strengthen the balance sheet in the first half, with overall net debt reducing by £54m and net debt before leases reducing by £81m. However, the decline in operating profit has seen net debt / adjusted EBITDA rising slightly from year end to 2.7x. Management remain focused on the following medium-term capital allocation priorities:

• Returning leverage to the target range that the Group set out in its Capital Markets Update in 2021 of 1.5 - 2.0x as soon as possible in order to restore an investment grade credit rating
• A disciplined approach to capital allocation, focused on maintaining asset quality and sources of competitive advantage
• Improving working capital management and an ongoing review of loss-making activities
• An attractive and sustainable dividend

Accordingly, the Board is pleased to declare an interim dividend of 5.5 pence per share which reflects the Group’s policy to pay a dividend of 30-40% of adjusted earnings, the revised guidance on adjusted operating profits and the expected benefit of closing Toolstation France.

Outlook

The Group welcomes the decisive actions being taken by the new government to encourage more house building and infrastructure improvements which will promote better trading conditions for businesses operating in the construction sector. These changes, coupled with a reduction in interest rates which is now underway, will lead to an improved financial performance in 2025.

However, these factors will take time to take effect and therefore the Group remains focused on business improvement actions to drive efficiencies and enhance cash generation, ensuring that the benefits from a recovery are fully maximised. Given this backdrop, the Group is expecting a similar level of demand in the second half of the year and accordingly expects FY24 adjusted operating profit will be around £150m, inclusive of £5-10m of property profits and around £(16)m of losses in Toolstation France.

The Board remains confident in the long-term fundamentals of the Group and the end markets in which it operates. Guided by the recent experienced leadership appointments to the Board, the Group is clearly focused on creating value for shareholders over the medium term.

Technical guidance

The Group’s technical guidance for 2024 is as follows:

• Expected ETR of around 29% on UK generated profits
• Base capital expenditure of around £80m
• Property profits of between £5m and £10m

Adjusting items

There were £32m of adjusting items in the period (2023: nil) as set out below:

The supply chain consolidation charge relates to the closure of a number of distribution centres in Toolstation, Benchmarx and the Group timber supply chain. The costs relate primarily to stock write-downs.

The restructuring charges relate to actions taken to reduce central and regional headcount and to centralise the procurement function.

The charge associated with Benchmarx reflects the costs, which were primarily related to redundancy, of closing 39 standalone branches in February.

The Toolstation France charge reflects adjustments to stock provisions and lease liabilities made as a result of the decision to exit the business, as well as legal costs.

Segmental performance

Merchanting

* 2023 branch network figures for comparison are taken at 31 December 2023

Note - all figures above exclude property profits

The Merchanting segment continued to experience challenging market conditions with revenue down by (5.8)% and adjusted operating profit reduced by (30.0)% to £91m, reflecting the pressure on gross margins from commodity price deflation and a highly competitive market environment driven by a sustained reduction in trading volumes. Adjusted operating margin reduced by (160)bps as a result of those lower gross margins. Actions taken on overheads reduced the Merchanting cost base broadly in line with revenue.

In a market where demand is well below the long-run average, the Merchant businesses remain fully focused on maintaining market share by responding to customers’ needs in a challenging trading environment. With respect to value-added services, the Group continued to deliver good sales growth in Hire (+3%) and Managed Services (+9%).

A (3.6)% reduction in pricing was the primary driver of revenue decline, being a combination of commodity price deflation (mainly timber) and more competitive market pricing. Volumes were down (3.1)% with around (0.6)% of the decline attributed to branch closures. One extra trading day in the first half provided a benefit of around 0.9%.

Whilst conditions are set for a pickup in new housebuilding activity, the domestic RMI market continues to remain weak. The certainty provided from an earlier than anticipated general election was welcome but resulted in near-term delays to public sector activity which is reflected in the first half volume performance.

47 Merchanting branches were closed in the first half of the year, 39 of which were Benchmarx standalone branches, with 8 smaller General Merchant branches also closed. The Benchmarx decision was focused on optimising the Benchmarx branch network, with the focus on an integrated offer within destination General Merchant branches. In the case of the General Merchant branches, these sites were deemed to be poorly located or requiring significant investment and where trade could be transferred to an alternative nearby branch.

Whilst recognising the need to adjust the cost base to reflect market volumes, the Merchanting management teams are highly cognisant of the need to ensure that the Merchant businesses remain strongly positioned to benefit from a market recovery. The ability to operate a national network of high quality assets maintains a source of competitive advantage for the Group and, to that end, three new branches were added in the period, two General Merchant branches in Leeds and Derby and a new CCF branch in Norwich.

Over the last three years the Group has focused on exiting smaller, uneconomic branches whilst adding new capacity in target catchments through larger, more capable destination branches with integrated services such as Hire and Benchmarx kitchens. The result of this network strategy is that the Merchant segment has broadly similar operating capacity to 2021, leaving the Merchant businesses well-placed to benefit from a recovery in demand whilst offering a mo