Travis Perkins' (TVPKF) CEO John Carter on Q1 2016 Results - Earnings Call Transcript

| About: Travis Perkins (TVPKF)

Travis Perkins PLC (OTC:TVPKF) Q1 2016 Earnings Conference Call April 20, 2016 3:00 AM ET

Executives

John Carter - Chief Executive

Tony Buffin - CFO

Analysts

Aynsley Lammin - Canaccord Genuity

Howard Seymour - Numis Securities

Robert Eason - Goodbody Stockbrokers

Ami Galla - Citi

Andy Murphy - Bank of America Merrill Lynch

Kevin Cammack - Cenkos Securities

Daniel Porter - UBS

Michael Watts - Berenberg Bank

Michael Mitchell - Davy

Geoff Lowery - Redburn Partners

Operator

Welcome to the Travis Perkins Q1 2016 Trading Update. My name is Chris and I'll be the coordinator for today's call. I will now hand over to you hosts John Carter and Tony Buffin to begin the call. Gentlemen, please go ahead.

John Carter

Good morning, all. Our first quarter update, as you can see from the statement, we grew our sales during that period of January to March by 5%. And on a comparable basis, given that Easter was in the first quarter of this year and in the second quarter of last year, the underlying would comparable would be 6.2%. We did flag in our March update that we were trading well during January and February and that continued through March with like for likes at 4.2%. I'd really point you to the like for like over two years at 9.5% being actually at a good solid level and we're trading pretty much in line with expectations.

We'll no doubt pick up on some of the detail but our three priorities remain unchanged. That's the modernization of the TP brand; the transformation of Wickes which we can see from the numbers is trading really well; and the restructuring of our plumbing and heating business. And, as you know, we concluded a lot of the heavy lifting at the end of last year and it's good to see us return to growth in the first quarter of this year.

So I'm really happy at that point to open up to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Aynsley Lammin from Canaccord. Aynsley, please go ahead.

Aynsley Lammin

Two from me, firstly, just on the RMI pickup you mentioned, wondered if you could give a bit more color around there. Which areas of the market? How sustainable do you think that is into Q2 and for the rest of the year? And then secondly, just I don't think that you mentioned any comment on the margins but obviously you said you're happy with numbers, whether there's any big change in margin performance versus what we were seeing towards the end of last year for the four divisions. Thanks.

John Carter

Margins, Aynsley, are broadly where we expect them. I would flag and this goes a little bit for the RMI as well in a minute, that clearly we're in a period of very low inflation. Broadly, our mix is zero, where we're seeing some inflation come through on our heavy side but we're seeing deflation in our light side in plumbing and heating products. In terms of the RMI, it's pretty much across the board. The bit I'd flag is that, regard the market, that we're seeing a much tougher market and a lower demand in social housing. And the house builders or the developers have been somewhat slower in the first quarter of this year. But my expectations is that they will pick up as the year goes on.

Aynsley Lammin

And just on the private residential side, the momentum, you expect that to continue for the rest of the year. You've seen obviously a good performance in Q1.

John Carter

I think with the data that we have available, Aynsley, that the market's behaving pretty much as we expected. We called out earlier this year that we expected sales to be between 5% and 6%. We've had a good first quarter and we remain positive, but within that sort of range of 5% to 6%. Probably at the moment at the upper end of that range but, at the moment, I wouldn't get too excited until we see the year really unfold.

Tony Buffin

And, Aynsley, the only other thing to add from me is obviously we track mortgage approvals and housing transactions for, in particular, private residential RMI spend. If you look at the last eight months of data that's all turned positive. As we know it lags somewhere between six and nine months, although, as we know, it's not a science. But that does look, through October and November, December into the early part of this year, the transaction volumes have been good and we'd expect that to filter through in six to nine months' time, of course.

However, what I would say against that is there's more global macro uncertainty and obviously Brexit at some stage may mean householders defer some of that spend a bit longer. So the underlying transactions are good, mortgage approvals look pretty strong but I think people will, by definition, be a bit more reticent coming into the referendum.

Operator

Our next question comes from Howard Seymour from Numis. Howard, please go ahead.

Howard Seymour

A couple of questions from me, firstly, maybe I'm being awfully detailed on this, tell me if I am, but you normally look at marked out performance. Is it possible to quantify where you think the market's been in the first quarter? I.e., it's not just you in a flat market and you're outperforming but there is genuine signs of market improvement.

John Carter

I think, Howard, again reading across, it's easier for us to read the GfK in the consumer and we've definitely outperformed in the first quarter. Within the trade you do have to then drop down to the different businesses. We're early in the reporting season so it's always helpful if we can see what our competition have done but our sense is that TP will probably have just slightly outperformed, certainly in line. And contract is a little bit tougher, but we're annualizing some pretty stiff comparatives and two-year like for likes in contracts are 17.5% which is fantastic. So I think there is an element of outperformance but it's quite difficult to get down to a precise level.

Howard Seymour

And then just second question from me, just on Wickes, particularly on the consumers, up 7.3%. But is there any specific areas where you've particularly done well or is it across the piece, because it's such a good number?

John Carter

No, it is a good number. We're really pleased with Simon and the team. They're getting some momentum and this isn't a one swallow. We have been building this through for the last two years. We've done particularly well in kitchen and bathrooms in this period but we've been pleased with the core business as well.

Tony Buffin

And probably, Howard, maybe just a follow up on that, just to make it totally clear. The 7.3% does include both Easter this year and last year, so we extended the period for 14 weeks to make sure we captured Easter in both periods. So it's a truly comparable number.

Operator

Our next question comes from [indiscernible] from Goodbody. Please go ahead.

Robert Eason

It's actually Robert Eason here. Just a few questions, one on the consumer. Over the last few weeks there's been a lot of noise coming out from Homebase and its new owners in terms of change in pricing strategy. Just want your own views on it and how Wickes are reacting to that or how you see it panning out over the next few quarters. That's question one.

My next question, in your opening remarks you alluded to the fact that you said in the results that January, February was trading well and that continued into March. My question there is, is that right across your different divisions? Or is there any division that stands out, either on the plus or a negative? And you talk about housing transactions and approvals underpinning growth in the next six to nine months. In terms of all the surveys that you do and the more softer feedback that you get from your customers, is there anything telling you that actually Brexit is causing that uncertainty and that deferral process in terms of expenditure?

John Carter

We'll share some of this and I'll give the hard ones to Tony. Across the divisional performance, I think I could actually have something really positive to say about all four divisions. I'm bound to go to plumbing and heating. It's still really tough in contracts, but we're really pleased with the progress we're making in City Plumbing which was obviously the heart of our strategy and why we went through such a big restructuring. It's still early days and there's still hard yards but certainly for our plumbing and heating business the return to growth is good. You can't fail but to be impressed with our Wickes performance, but I would add, underneath that and obviously smaller, we've been really pleased with both our Toolstation and Tile Giant.

So it's all three of our businesses within that division. TP is making some good progress and it clearly is our biggest division and biggest profit earner. Therefore, that's always pleasing to see. And I know 2.1% in like-for-like growth in contract doesn't seem great, but we have done some restructuring in the business and we took some branches away from Keyline and rebranded them TP. You've got to look at the trading days' difference. I think Frank and the team in CCF, Keyline and BSS are trading well and more to do. We opened eight branches in CCF last year which is a big step up in capacity. And that takes a little bit of digestion but it is picking up as we speak.

The pricing in Wickes and I was just going to say, my starting point and we all have slightly different views, is that we started with a price advantage against B&Q and Homebase and actually our price differential between Homebase and Wickes is larger than B&Q. So we're watching their pricing strategy very carefully and we'll adjust where necessary. But they've got to come to us. And, I've got to say, we've got a good plan, we're executing it well, but we're flexible enough to change as and when we need. So, to my mind, they've got to actually develop that strategy and we're watching it like a hawk every day.

Tony Buffin

Yes and I think the only thing to add from me, Robert, is that it is really about look at the shape of the value investment we make. You know that we started this value investment journey with Simon about three years ago, three and a half years ago. And, at the time, some commentators were saying, why are you investing in value? And actually Simon and the team were very committed to investing in value and getting the right price architecture in the business and we've gone a long way to doing that over the last two or three years. We've continued to invest. We've been taking prices down, experiencing deflation, but significantly growing volumes and growing profits and returns off the back of it.

So we think over the last couple of years we've made all the right moves. Not all the right moves but most of the right moves, at least. But, again, we, of course, have got a value strategy because we're the lowest price DIY retailer in the UK and we want to maintain that positioning. So we're now, of course and we always do, look at our value investments all the time and, clearly, we're responding to make sure we give the best value we possibly can to customers, both in the products they buy most in shops, as well as the online range extension. So, of course, we're looking at all of that but we're committed to the journey we're on and I think the results demonstrate making some good progress.

John Carter

And just on the customer insight, Robert, I don't think there's anything really reportable, other than what's in the general media that there is a bit of uncertainty. But most of our builders have got work. They've probably got a three to four month horizon and most of them have got that work covered.

Operator

Our next question comes from Ami Galla from Citigroup. Ami, please go ahead.

Ami Galla

I just had one question. If you look at your contract order book, can you give us some color into the end markets that feed into the current pipeline today?

John Carter

The order book is mainly around our contracts business and, in particular, Keyline and BSS. And the order book is pretty positive. Call-offs are a little bit slower. So I think the work's there. We've just got to actually see a match up with the order book and the call-offs.

Operator

Our next question comes from Andy Murphy from Bank of America Merrill Lynch. Andy, please go ahead.

Andy Murphy

I think quite of my questions have already been asked but I've got a couple. Just talking about the range centers and the positive impact that they're having, can you perhaps give us a flavor or some examples of what that's allowing you to do now that you weren't doing, say, a year or so ago and an update on when the fourth center is going to open or expected to open? And then secondly, can you just talk a little bit around what's happening, if anything, with the gross margin or is that flat where it's at?

John Carter

Gross margin, there isn't really much to report about. In terms of the range centers, just for those that -- we've got Warrington, Cardiff and Tilbury fully operational. Cardiff went live at the end of 2014 and Tilbury went live in July last year. We're building out Coventry as we speak. It will probably open in the first quarter of 2017. There are three aspects at this moment in time that we're focused on. It's replenishment to our smaller branches that can't take the full loads and the more exciting is the extended range that we can offer our customers better service faster. And both are progressing in line with our expectations. This was always a medium term investment and, therefore, we're working it hard and we're pleased with the performance so far.

Operator

Our next question comes from Priyal Mulji from Deutsche Bank. Priyal, please go ahead.

Unidentified Analyst

Mel, Deutsche Bank. So I was actually just going to ask on the range centers as well, just in terms of is there any sense of what the capacity utilization is in those three which are open now versus the end of 2015? But also on the ground level, how easy is it to get that message of faster availability of more products to the customers who are coming in to your local branches?

And the second question as well was on the good growth in CPS. Is that coming through from -- is that essentially retention and pulling back in older customers? Or is there incremental growth as well from customers which you didn't previously have in those catchments? Thanks.

John Carter

Well the CPS core businesses which obviously were unaffected with the Build the Best project, are trading really well. We have two tranches of branches, the way we measure them, the 2014 conversions which are trading positively and obviously we were still converting branches in December 2015 so the 2015 branches are starting to mature during this year. We always saw this as really seeing the full effects as we went into 2017. We always said 2016 we'd be able to point to some progress. In terms of the customers, we're working really hard to win back some of those customers that were disrupted during the period, but we're winning new customers in the areas where we're offering them a much wider product offering and a more local focus. So it's a little bit of both.

We're still in the first strides of working the network in its new format but we've got to be pleased with the progress we're making. We'll only really know when our competitors of Grafton and Wolseley announce their results for the period, but we're certainly pleased with the progress we're making on plumbing and heating. In terms of the range centers, it's a good question. We're working really hard to promote this service to both our internal personnel and our customers. It is a different approach; an approach that we think over the medium, longer term will offer us a competitive advantage. All I can say is it is progressing and trading in line with expectations and I point to our overall performance in general merchanting which we feel is positive.

Operator

Our next question comes from Kevin Cammack from Cenkos. Kevin, please go ahead.

Kevin Cammack

Two from me, one very quick one. Just looking at your additional space line, is that 2% for the Group? Is that a run rate that one could assume for the year? Or is there any slight loading to this quarter that's impacted that? And the second one, I don't know how many questions it involves but I'm just trying to get behind the plumbing and heating thing a bit more because, obviously, and you've expressed your pleasure with the performance of PTS and the conversions and everything, but I suppose to the naked eye you look at the run rate of numbers and, whilst it's been better, it's not rushing out to you in the sense of getting any real sense of how strongly those conversions are adding to the overall growth of the business.

And I wonder if you look at, let's say obviously you're going to have some that are now just about coming into their second year, if you like, of being converted and obviously some are 12 months, some are six months, could you just give any sort of flavor as to what the performances and the maturity of those performances have been in the converted branches?

John Carter

Some of this is quite sensitive and we're out early with our numbers. I think, overall, we'll have outperformed the market and our competition, reportable competition, in plumbing and heating. I have to tell you within PTS, the 93 branches that we've got focused on contract, it is still really, really tough and, at best, we're flat there. Social housing definitely the demand has weakened and it's still very intensive on pricing.

Tony Buffin

And, just on that point, Kevin, it's worth having a look at the CPA data on social housing and spending on social housing and growth that was published on Monday. That will give you a sense of what the social housing market's doing. Social housing is tough and clearly that's balanced a lot of where our PTS business comes from.

Kevin Cammack

That's what, double digit lower?

Tony Buffin

No.

Kevin Cammack

Not for you I mean, but for the overall spending?

Tony Buffin

No, it's not. It's single digit lower but it is difficult and that does mean that pricing is competitive as well.

Kevin Cammack

Okay.

John Carter

Exactly. If we took the 14 branches, Kevin, we're showing a 7% like for like and we think that's pretty good. We only completed the exercise at December so this is the first quarter and the branches are maturing all the time. So we always said we expect to point to progress during 2016. Plumbing and heating as a category is, without doubt, the toughest market that we operate in. What we undertook, when we decided to restructure the business, was a medium term view that we wanted to deploy our capital to deliver better result or better performance.

And I do think you've got to be a bit patient with us. I think this is pointing to progress. Our branches have got to mature, but we're really happy with the progress we're making in terms of taking a low return in business and over the medium term for us to improve that performance to an acceptable level. And it isn't going to happen overnight.

Tony Buffin

And the other thing just to mention, Kevin, of course, just the way the math works. Of the around 150 conversions that we made, roughly one-third were in 2014 and have had now just over a year's worth of maturity coming through, some closer to 18 months. But the 2015 branches, where two-thirds of them, that's two-thirds of our conversions, happened last year when we accelerated the program to finish off pretty much by the end of the year. So we did squeeze a lot more into the second half so, therefore, there was more disruption and, clearly, some of that disruption is continuing in some of those 15 branches but we expect to work through that during the course of the year, really.

John Carter

And just on your new space question, Kevin. We always do talk about 1% to 2% growth from new space. Given the activity that we've done over, in particular, 2015 but we started in 2014, we're expanding the network, as we said we would. We did point to the fact that we had some freehold purchased in 2015 that we would commission during 2016 and beyond. And we're continuing to expand the benchmark, the Toolstation network. So we would point to that being sustainable, that sort of level, during this year. Tony?

Tony Buffin

Yes, absolutely.

Operator

Our next question comes from Daniel Porter from UBS. Daniel, please go ahead.

Daniel Porter

Just a couple from me. Just following on from Kevin's question on space originally, just in terms of your thinking in terms of CapEx and your spend on freehold property, has that changed since the start of the year? Given what you were saying in terms of that space expansion, are you thinking now that you'll spend more than you possibly did three months ago?

And then in terms of P&H as well, just on the price again, just in the way we should be thinking about the switch into CPS and more out of PTS should actually drive your average pricing higher across the Group. Can you give us a sense of the decline that you saw on that PTS side and the difference in how that transpires to CPS as well, the net difference, if you like?

John Carter

I'll point to the fact that, on a lease-adjusted ROCE basis, plumbing and heating division delivers 6% and we always said that that was too low. So I'd point you to the fact that we've always focused on growing our lease-adjusted ROCE. How we do that is converted a number of low-performing PTSs into CPSs. The characteristic of a CPS has a much higher gross margin, it has a higher cost to serve but we actually have a higher return of earnings.

And therefore, as we progress this project, our aim is to drive our lease-adjusted ROCE and grow our earnings. It is going to take time but we're progressing very much in line. Tony and I's commitment is to drive that lease-adjusted ROCE and to grow our earnings and it has got to be step by step.

Tony Buffin

Yes and just in PTS as well we should say that Matt Mycock and Paul Tallentire and the whole team are working really hard on the capital base as well. Part of our plan was to reallocate assets to higher returning businesses and extract capital. And they've done a really good job on working capital and are progressingly doing a good job in tangible fixed assets and leases as well. So part of our story is to expand the profitability but part of our story is to make sure we manage our capital base carefully and I think the team has done a really good job in that regard.

John Carter

And, as a side subject to that, we did see Grafton extract 12 branches from their network. And in a recent Wolseley announcement they're talking about a GBP15 million restructuring. My expectation is that some of that money will be to close some of their tail poor performers. This should, in my opinion, start to make the market a little bit more -- the segment more attractive over the fullness of time.

We laid this plan out more than two years ago and we're executing it, I think, really in line with where we expected to be. All I'll keep saying is this is tough but we're making progress. With regard to CapEx, we gave guidance between GBP170 million and GBP190 million, subject to freehold properties. We probably, over the first quarter, have slightly moderated our CapEx but very much in line with the guidance we've given you. If the right properties at the right price become available, then we will continue to invest for the medium term.

Tony Buffin

And obviously there'll be a slightly different shape to freehold spend this year. We made some commitments in 2015 which will close out in the first half of 2016. So we still have some properties we've committed to and there'll be some freehold spend coming through in the first half. As John said, we'll continue to commit to good freeholds as they come up. We think we made some really good purchases last year and that will come to market in 2016/2017 and into 2018.

So we do need to digest some of the purchases we made in 2015 because it does take a while for that construction to come through. And, as we said to you before, I think, we had only brought a relatively small proportion of that into operating use in 2015, so we've got some more to do this year and next year. But you should expect our capital spend on freeholds at this stage, I think, to be lower than we had last year, as we said and we've got no reason to change at this stage.

Daniel Porter

Okay. Sorry, Tony, are you able to quantify the first half freehold property--?

Tony Buffin

I would prefer not to at the moment. We're on a trading call but we--

John Carter

It is a little bit lumpy.

Tony Buffin

Yes. There are one or two things that we have purchased and paid for in February and March and, obviously, one or two things may get deferred from May/June into July and possibly into September/October. So, a bit early to give a read on it at the moment.

Operator

Our next question comes from Michael Watts from Berenberg. Michael, please go ahead.

Michael Watts

Just one question from me, just to touch on the CCF business and the eight new branches that you opened there, I just wondered -- because you talked about the slight dilution in like for likes for the existing business there. Is that something you planned for? And, secondly, what does it tell us about the pipeline for new openings as we look through this year? Will that be slowing down? Just to understand what's going on. Thank you.

John Carter

We had six open in December and it just fell that way with some of the building projects. We laid the plan out two years ago to expand CCF. It is a winning proposition in that sector. We've been really pleased with the performance but that's a big jump up, I think. We were operating off about 34 sites. We're now operating off 42. That's a big percentage of increase. But it was necessary because we were, as Howard Luft, our MD of CCF, he invented a word called capacitated. He just struggled to get the service out to the customers.

We now actually have got a much, much better configurated network. You'll see two or three units per annum over the next two to three years as we complete the network as we planned. So it won't be as high as eight units, that was an exceptional situation, but we'll probably have two or three this year and two or three next year.

Operator

Our next question comes from Michael Mitchell from Davy. Michael, please go ahead.

Michael Mitchell

Just one left from my side, please. Could you just talk maybe about the impact the weaker sterling has on the business and maybe specifically in terms of gross margins? I know you said there's not much change in gross margins.

John Carter

It's not material, Michael. We do hedge the dollar but it's a relatively small amount. More than 50% of our products are bought in the UK and primarily the heavy side which is our largest category. We buy a lot of timber out of Sweden. Yes, you'd always prefer to see it the other way but it's not material.

Tony Buffin

Yes and just to give you a flavor for the half-year in the finance charge line, if we carry on with the dollar at $1.43, $1.41 to $1.44 level, we will obviously have a bit of a gain on the currency hedges we've got in place which will be a reversal of what we saw last year. So, if the dollar stays where it is, there'll be a bit of a gain on some of those swap contracts. So, yes for the contracts.

Operator

Our next question comes from Geoff Lowery from Redburn. Geoff, please go ahead.

Geoff Lowery

Two questions, please, about consumer. The first is can you talk about the performance of the showroom category across the first quarter, kitchens and bathrooms? And, second, where B&Q have been closing space, have you seen much of a sales transfer, because there is a fair amount of overlap between their early store closures and some of your neighboring units?

John Carter

At this point of the year, Geoff, I don't really want to disclose details of the showroom, other than we're trading really well against both those categories. And B&Q, inevitably, as they close stores we benefit. It has different degrees of benefit, depending on their location and how they execute the strategy of closures, but we're quite happy for them to keep closing stores.

Tony Buffin

Yes and it's certainly helping us but it's not the key driver to the sales.

Geoff Lowery

No, no, sure.

John Carter

But it's quite helpful.

Tony Buffin

Yes.

Operator

[Operator Instructions]. John and Tony, we have no further questions registered.

John Carter

Well, from our side, from Tony and I, thank you very much and we'll see you soon. Thank you. Bye.

Operator

Ladies and gentlemen, that concludes today's presentation. Thank you for joining. You may now disconnect your lines.

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