Travis Perkins' (TVPKF) CEO John Carter on Q2 2016 Results - Earnings Call Transcript

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Travis Perkins Plc (OTC:TVPKF) Q2 2016 Earnings Conference Call August 2, 2016 6:00 AM ET

Executives

Robert Walker - Chairman

John Carter - Chief Executive

Tony Buffin - Finance Director

Analysts

Robert Eason - Goodbody Stockbrokers

Paul Checketts - Barclays Capital

Andy Murphy - Bank of America Merrill Lynch

Charlie Campbell - Liberum Capital

Emily Biddulph - JP Morgan

Howard Seymour - Numis Securities

Dan Porter - UBS

John Messenger - Redburn

Priyal Mulji - Deutsche Bank

Ami Galla - Citi

Robert Walker

We’ve got a number of people joining on the phone, so I think we’ll start as right away. Welcome everybody to Travis Perkins Interim Results 2016. Just the usual two or three minutes introduction and general context from me if I may.

Now I suspect your focus this morning is more about short term outlook in the last six months. However, these are a good set of numbers and we’re particularly pleased with the performance of TP Merchanting, Wickes, Toolstation and Benchmarx. Now we’re listing the interim dividend by 3.4% to 15.25p.

Looking ahead, despite a positive July, our lead indicators especially housing transactions and consumer confidence provide no clues whatsoever as to the outlook for our end markets at this stage. But what I can say and I say with some confidence is that the Group has a proven track record of managing variable costs in line with the market and we will continue to do exactly that. We will also continue to be very selective on capital allocation. We’re now exactly half way through the five year plan announced in December 2013. So many of our projects undertaken so far have yet to reach maturity, but do thing it worth noting that most of the branch network expansion in contracts division is complete, supply chain investment is pretty much complete and building the best projects in our project rather in Plumbing & Heating division which involved transfer of PTS, the closer of some out with PTS is transferred to City Plumbing have finished at the end of last year.

So going forward, capital expenditure with therefore continue to focus on high return businesses and the major initiative to ensure our core merchanting IT systems are fit for the future.

So finally, our balance sheet is strong, working capital is tightly managed as you can see and we have the best management team and bench strength in the Group’s history. And if you’ve had a look, we’ve also got a pretty strong group of non-Executive Directors as well. So we’re very well positioned to continue to win market share and grow shareholder value over the medium term.

And with that I’ll hand over to John then Tony and then back to John.

John Carter

Thank you, Robert. Moring everyone and those are on the telephone line. I’m just going to pick up on some of the highlights for the first six months and Tony is going to give you a bit more in-depth on the financial performance and in particular some of the divisional performance and I’ll of course come back on the strategy and outlook.

Just in terms of content text and Robert covered that pretty extensively, the first half was a good performance and strong growth and outperformance across most of our key businesses. Plumbing & Heating as you can see from the numbers, the market remains tough and we said back in March that we’d make progress I think with same we’re doing really well in making progress in more it’s a really tough market. And clearly the half overall was sometimes have the shin taken off it slightly with the trading into June will be effects of the referendum and govern-in just coming up over side.

The outlook of 2016, we’ve also been a business has been based on good lead indicators and a good arrangement. Remember Geoff Cooper was very, very keen on that. I’ve never been in a situation where we indicate is goods of any less confident and as causes of bit of caution as we look into the remainder 2016 and 2017. Notwithstanding that I believe the business is in excellent shape to cope with whatever is likely to come and you are not going to be surprised to find out our business is being run in many scenarios in terms of what could happen to both volumes and pricing and how we can react with overhead and control of investment.

So we feel we’re in really good state even though we’re finding it quite difficult to get forward guidance on sales for the remainder of this year. It is really important in my mind for us as a business to continue to invest in IT. We have a very big program where we’re chancing that core systems across most of the trade business and we’re really keen maintain that during the next three years because it will give us a business that split for the future and certainly interact better with our customers.

And then structurally, extending our structural advantage, we’ve been really focused over the last two and half years to build better customer propositions, really focused on how we actually moved products around with our supply chain and sourcing. And I think we’ve made really good progress. And as Robert said, we remained really focused and positive developing sustainable growth in returns over the medium and longer term.

I mean in terms of highlights and again probably touched on and Tony will go into more debt, headline sales for six months were 5.8% with an underlying 3.1% like-for-like. Good underlying profit growth of just under 5% excluding that property. We’ve invested above a £120 million in the first six months; 49 million of this is freehold property. And it’s never great to have a negative on a highlight slide but you know we focused very high on that least adjusted ROCE. We saw a slight compression from 11.1 to 10.9 in the period and we remain confident that we can grow that lease adjusted ROCE as we move forward. And again we called out in March that we’ll move our dividend policy more in line with earnings and just given where we are in the cycle and outlook, we’ve increased our dividends of 15.25%.

As we sort of come through the end of June, it is half way through that five year plan and very much predicated on improving our customer propositions and I think the teams have done extremely well and especially in some of the bigger businesses of TP and Wickes where we are seeing really good progression.

We undertook a lot of work in terms of expanding out branch network by 200 trading outlets and we re-segment or reconfigured around 200 trading units primarily in Plumbing & Heating in that period.

And clearly we say the scale and our market position we need it’s a focus on developing better sourcing and better supply chain and again I think we’re very much on track in that program.

As we move forward to so focus on sort of Robert highlighted, a lot of the heavy lifting work in terms of the network configuration within Plumbing & Heating and contracts complete, so it allows us as we move forward on a selected basis to focus on Travis Perkins, Wickes and Toolstation and Benchmarx which we gained really good returns from.

You’re going to see it probably two or three times of the IT systems, for me they are really critical for the growth and for the medium and long term. And we’re now in that situation where up within Plumbing & Heating we have completed lot of the heavy lifting.

When we actually sort of look back and say, so what have we completed? I think TP being the largest mix merchant in the UK can now move 30,000 SKUs to next day delivery to their customers and within in-branch delivery. That really even if times get bit more difficult and will give us a significant competitive advantage then we should be exploiting that as we go forward.

And I think yeah Tony needs a little bit of price in the last three years of really sort of focusing on our financial position and going forward into what might be difficult times we’re in a really strong position to be able cope with that.

As a managed saying, there is great depth of experiences and understanding of all trading conditions good and so not so good and we actually remained very alert and very flexible, so be able to adapt to whatever conditions the future actually brings us.

So on that I am going to pass it back to Tony, who’ll pick on the financial review.

Tony Buffin

Hello everyone. I am going to run you through the results for the half, but I am also going to try leaving a little bit more guidance about what we expect in the second half of the year looking forward.

But first of all I think it is important to start up with our performance summary. And I am pleased to report again a good progress against the financial metrics that we’ve been now showing consistently with you over the last two and a half years a strong set of headline sales grew by 5.8% and were up 3.1% on a like-for-like basis.

Adjusted EBITDA increased by 9 million and 4.9% to £194 million. We’re particularly pleased with this performance given the underlying growth of little bit stronger with a couple of favorable one-offs in the first half of last year and some legal cost of about 3 million in the first half of this year.

Owing largely to a non-cash gain on the mark-to-market valuation of foreign exchange contracts, adjusted profits after tax grew by 8.2% to 145 million. We are also very pleased the free cash flow generation of 165 million and a free cash flow conversion rate 85% just up on the 84% last year. This does exclude an exceptional tax payment of 42 million for which we previously provided.

This demonstrates ongoing commitment to drive cash returns and we expect to make further progress in our cash management over the next 18 months. As John said, the Board have increased interim dividends to 15.25p per share, this reflects a strong performance and our confidence in driving earlier and returns in every business, way against some uncertainty in our end markets. Growth in the dividend 3.4% is consistent with the guidance that we gave in the half year as John said the dividends will growth more in line with earnings. Despite enhance payment give our strong balance sheet remained very confident in our ability to invest to the cycle and take advantage of any market condition that we might face.

Our lease adjusted returns on capital did decrease by 20 basis points to 10.9% and have predominantly result of £108 million with freehold investments that we’ve made over the last 12 months which we’ve yet to bring into operation.

So just going into sales in a bit more detail, at this point of comparatives, like-for-like volume growth was strong at 4.7%. Output price inflation and mix fell 1.6 points as value investments in Wickes and Toolstation was sustained, there was further competitive pricing particularly in the Plumbing & Heating and we saw the material effects of commodity price deflation in particular on copper, on steal and in plastics.

New branch openings in Benchmarx, CCF and Toolstation with a principal contributors to new space adding nearly 2% to revenue growth. Given these new stores and branches, we’ll not fully mature for three to five years, we expect to continue to benefit in like-for-like sales from these branches going forward.

We continue to draw your attention to our two year like-to-like sales growth in the table provided.

You’ll see from the table there are two years like-for-like growth improved in the half and was above that experienced in both Q3 and Q4 last year. June performance was weaker than we anticipated in the start of the year and July sales growth on a two year like-for-like basis have remained below that experienced in Q2. However, it remains positive in all divisions and we’ve seen a gradual improvement through the course of the month and our lead indicators also suggest sales growth into Q3.

You’ll be familiar with this slide which is I’ll give you more clarity on the underlying profitability of all our business. Excluding the effect of property profits, we maintained our margin at 6.3% despite the increased investment to build up on our market leading positions. We have slightly lower property profits and the half leading to an overall 10 basis points decrease in the EBITA margin.

Our sector-leading margins in our General Merchanting division increased by 30 basis points, excluding changes in property profits to 9.7% and we continue to plan to maintain margins of between 9% and 10% over the medium term.

As John said, we’ve now completed most of the physical aspects of the wide ranging of reconfiguration work in Plumbing & Heating. So we continue the effects of tough tradition conditions and significant commodity price deflation contributed to a 50 basis points decline in gross margins. The team has worked really hard to offset some reduction with operation efficiency improvements and we expect it to continue as we bed down the physical changes that we’ve already made.

In contracts again a significant growth in CCF which is a lower margin business continued and worth of principal drive behind the 40 basis points reductions in operating margins to 5.9% alongside the transfer of 13 high margin Keyline branches to TP. In the consumer division, that margin increased by 10 basis points excluding property profits as volume help operating leverage.

I’ll now take you to the four divisions. Starting with General Merchanting, Travis Perkins and Benchmarx combined revenues grew by 6.7% and we’re up almost 3% from the like-for-like basis demonstrating continued outperformance of the market by both businesses. Following recently range reviews and the new branch rollout program, the performance of Benchmarx has been again particularly strong. Adjusted EBITDA for the division as a whole grew by 13% to 104 million and by 10% to a 100 million excluding property profits. The efficiency measures that we commenced in the second half of last year help drive operating leverage enables us to maintain our returns despite having made significant capital investments some of which yet to come to market.

What we set our plans, we were clear we needed to invest in Travis Perkins, we’ve made significant progress in opening our new range centers in Cardiff and Tilbury, operating our new primary distribution hub in Omega Park in Warrington and our fourth heavyside range center in Coventry, we expect to bring on stream in the early part of 2017.

Alongside, the 28 new TP branch openings and 25 closers in the last two years, we have transferred 23 smaller sized from Keyline to TP and that included 13 in the first half of this year which we transferred effectively on the first of January.

Our ability to continually reconfigure our network to improve our propositions and drive returns provide this with enormous affectability and this is not often well understood.

We’ve made a good start with our IT investment but there will be more to come again as John mentioned. We fully expect our supply chain property and IT investments to provide us with the assets and capability to right perform our markets over the long term and increase returns.

The Plumbing & Heating market as we said before is clearly out\r toughest market and it’s especially in the contract installer into that market. The local installer market have been stronger and City Plumbing branches have been performing better including those that we converted over the last 18 months to two years from PTS. The converted branches are performing in line with our expectations and are on track to improve the margin mix and lease adjusted returns of the mature over the 12 to 24 months.

We also return to like-for-like growth in the half despite the tough market conditions and this is testament the resilience of our team in under our propositions. We have people to reposition our businesses over the last two years have been significant and we should not underestimate the work we done. We look forward to have our branch teams willing new business as we’ve been done physical changes that we’ve already made.

Gross margin reduction led to a decline in adjusted EBITDA of 3 million to 18 million. Again we thought we’ll set the impact of pricing pressures in the market with the future focus on operation efficiencies which we’re included closing six more PTS branches in the first half and five F&P branches from the network.

As a result, leased adjusted returns declined on a reported basis to 7% compared to reported 10% for the year ended June 2015. However, it’s important to state that the 2015 year to June 2015 did benefit from a material property profit income in the second half of 2014. So excluding that impact, lease adjusted returns reduced by representative 1% in division as a whole largely done to the slight decline operating profits.

As I said this remains almost challenging market but we completed much of the heavy lifting and we fully expect to improve return over the medium term.

Turning to contracts, the strong revenue growth in Keyline and CCF continued in the half with a solid performance by BSS. Revenue grew by 3% to 623 million but if we’d not transferred the Keyline branches to TP that would have been more like 5.5% and 2.7% from a like-for-like basis with the underlying performance remaining extremely strong with our two year like-for-like sales growth in the half overall of 17%.

As I explained early, the reduction in operating margins was principally as a result of the mix of business weighted toward CCF and the transfer of those 13 Keyline branches. With the plead of the progress we are making in all three businesses and the branch network is now substantially complete in CCF and we are well on our way to improving the efficiency of our BSS business.

The transfer of those 13 Keyline branches to TP did reduce sales in the division by 2.5% and profits by just over £1 million. This alongside with the 20% increase in the CCF branch network in Q4 2015 alone led to 1 percentage point decrease in these adjusted returns. We do expect the returns to improve of those CCF branches mature.

And obviously for the benefit of team in Wickes including consumer was - the consumer division was our standard, perform and it continued the trend that we’ve seen over the last two years. Headline sales grew by 10.5% and were up 6.5% on a like-for-like basis demonstrating significant market outperformance.

In Wickes, further improvements have been made in value, in range, and availability with share gains recorded throughout the half.

Gross margin reduced slightly of a strong volume growth improved operating leverage. For the 14 Wickes stores were refurbished in the half bringing the total number of store now trading in the new format to 32. The improvements in the Wickes proposition are encouraging but there is more work to do and we remain resolute in further improving the value range and convenience we offer to our customers to even channel.

Our investment in Toolstation also continue to pace in the half with 16 new stores opened and a further five new stores added to our growing business in the Netherlands. Our underlying EBITA grew by 13% and we are pleased to report a step up in return to 8% to much more acceptable level. Despite the market uncertainty, we have absolutely no plans to moderate our investment in Wickes.

Turning to those items below EBITA, finance costs reduced by 8 million from 18 million last year to 10 million in the first half this year. This was principally down to mark-to-market gains on forward foreign contracts of a credit issue just over 2 million in the charge last year five. Underlying finance costs were therefore similar to 2015.

The effective tax rate remained broadly flat with the charge in the half of 38 million, up from the 33 million charge in the first half of last year. During the half we did as I mentioned early make an exceptional tax payment of 43 million relating to prior year disputed tax charges, we had previously provided for these, there is no impact on earnings. And as mentioned earlier, the board increased the dividend of 15.25p.

Despite the growth in price sales in TP and in the contracts division, free cash flow conversion of 165 million was strong resulting of suddenly a cash conversion rate of 85%. The result of good management of post stock and credit in fact stock fell in the year by - fell in the half by £22.

As I've outlined in the table, free cash flow funded our growth CapEx, our acquisition during the year, dividends to shareholders, additional cash payment to the pension scheme and the majority of the exceptional tax payment. We’ve also consistently guided that we intend to increase on balance sheet net debt to fund freehold purchases in line with our plans freehold purchases of 49 million were funded by the increase in net debt 64 million.

I am trying to give you a bit more flavor on the investments we made in the half. Taking the top line in extending leadership, we opened 16 new Toolstation shops, ten new Benchmarkx branches and relocated seven PT branches to better sides.

In the second, on investing to grow, clearly investing in our customer propositions remained the key area of focus. Trailing up new formats in TP continued and we’ve refitted the 14 Wickes stores. The heavyside range working well and provide us with the strong platform for further improvements in TP proposition.

In the third line in our infrastructure and reengineering, we made a solely start in improving our IT platforms and investing in our multichannel capability. And this brings our total growth CapEx in the half to 51 million. We invested a future 49 million freehold property in construction in the half bringing our total into 108 million over the last 12 months. The majority of these assets are not yet operational and we will be brought to you so the next 12 to 18 months providing both profits and cash generation. We have now completed well over half of our fund increase in freehold investments and the spend we will moderate as we go forward as with our overall capital spend.

As planned, our net debt increased to fund those freehold property acquisitions and also the one-off tax payment. We increased our inter renal charges on new CCF branches, Toolstation and Benchmarkx sides. We made significant progress in improving our financing position over the last two years, while at the same time investing very substantially in our business. It shows we have the balance sheet flexibility to response strictly to market condition and are able to take advantage of the investment opportunities we’ve already and any further opportunities out there rise. Despite our increase in lease adjusted debt, our fixed charge remained flat at 3.3 times while on the way for target of 3.5 and leverage increased modestly and brought in under our expectations.

In terms of guidance for the full year, it is still a little bit too early to precise in our volume expectations given some of the mix messages we are seeing from our lead indicators. However, we are - we’ve fully continued to expect to outperform the market in which we compete. Given recent exchange rate movements, we do expect more inflation to come through in the start of the year, we expect property profits to continue around 20 million and CapEx to moderate to around 200 million including freehold property.

We place ourselves in a very strong financial position. We expect to maintain the strength and do it to consolidate our market leading positions and opportunity that they immerge.

With that I’ll hand back to John.

John Carter

Thanks so much Tony. As many of you know, leaving some of the lead indicators is very difficult and thus that cost at different points before end up in some of the referendum, the two that we’ve always really used as a key lead indicators is housing transactions and we went well on at the end of March with the changes to the [indiscernible] we saw a spike which I’ll show you surely which is just making the interpretation of housing transactions quite difficult and we’re clearly seeing full in consumer confidence and which makes our outlook so much more uncertain.

So as I said earlier, the average if you take between January and June 15 against the average January to June 16, housing transactions are up from sort of 99,000 month to 110,000 and party is going to take a little bit of time for us to start to see that pattern evolve in the second half. We know consumer confidence after the European referendum was come down. Again I think it’s important for us to be able to track those that data as we go forward to start to give us a better feel for giving more precise forecast.

In terms of the two and a half years into five year plan, we’ve invested now maybe 600 million in developing the business. And Tony gave you sort of an outline what we’ve done in the last six months and just following that, in terms of extending our leadership in best in Travis Perkins, Wickes, Toolstation, Benchmarx, we’ve invested nearly £100 million and would expect to achieve an excess of 20% return as those investments mature.

In terms of the investing for growth around it sort of build the best project in Plumbing & Heating and still formats being the main area. We’ve invested again over £100 million. And although there is a slightly lower return, we’ve seen really good performance from those investments.

And the infrastructure which is centered really around some of the supply chain and I’d see we spent 75 million and we are seeing progress especially in and around the range center and the capacity that we’ve developed for our national centers and one in particularly Warrington.

As Tony sort of mentioned, we expect nearly 188 million on freehold property, over 100 million of that is yet to be commissioned and we got primes in terms of building those sites now over the coming three years.

Before sort of levers of the strategy in developing stronger customer propositions through innovation, using the largest distributor building materials in the UK and as scale advantage optimizing and networking and growing that network and not be overlooked portfolio management and how we changed, how we managed the different businesses within the group have all progressed substantially over the two and a half years and would see the benefit of those investments maturing as we complete the five years.

We will continue to sort of focus on the areas that we can get good returns where we know through TP, through Benchmarx, through Toolstation. And I believe we will see continue progress with the Plumbing & Heating work and both in City Plumbing and the work that’s actually happening with PTS. We are in a really good financial position. We are very good focused on working capital and cash management and we can be selective in our capital investment as we go forward.

From an operational point of view, I am really pleased that the teams are alert and flexible to address any market conditions that can actually that we face into.

So in terms of really the next periods, we feel that the real opportunities for us to capitalize, we’ve delivered strong performance in the first half of the five year plan that a good first half and to 2016, we have the ability to focus our investment going forward on areas that we believe we can get the best returns. The management teams and the operational teams are poised and alert and flexible to address any market conditions that may change because strong liquidity and a very strong financial position and our focus and our confidence of delivering sustainable growth and returns over the medium term remains extremely high.

So if we start with the questions from the floor, we will go obviously for the phone shortly. You can use the microphone. So if you could start the front and then move backwards.

Question-and-Answer Session

Q - Robert Eason

Hi, Robert Eason from Goodbody Stockbrokers. At the beginning of your presentation John, you talked about you’ve go through scenarios and in terms of the what the business may face, now we all can have a view or not in terms of what the top line will be. Can you just run through what is that flexibility you have for various top line assumption, so we understand the operation leverage and the flexibility you have in us and operating cost base?

And my second question on is on the consumer side lot of charge the entrance openings into the DIY market, you know what are you seeing at all in terms of the impact in your business and you know how you see yourself reacting to that competitive trash or loss over the next couple of years or whatever?

John Carter

You know if we take the question the part of the Wesfarmers group which is highly admired around the globe. So clearly the investment in Homebase is as we take it seriously we’ve got a very clear plan and we’re really pleased with Simon King and the management team in what they doing and I think you are seeing through the numbers with we’re performing well and improving that performance. I think really is a very much us focusing on average in delivering outgoing.

Clearly as things develop, we react accordingly. But at the moment we give respect for them as a management team and I am sure that they will but it’s very much of it.

In terms of leverage, you know hopefully you don’t expect me to give you the numbers. Our branch is clearly a mixture of fixed cost and variable costs. And I think we demonstrated during the last few downturns that we can prove to be flexible with managing a variable cost based on volumes that we are facing into. The moment I think we are trading well and the teams are really focused on the customer and therefore I am personally looking to change that trading trends. But be assure we have comprehensive plans that we can actually adopt our overhead base accordingly. You never do it fast enough and you never do it as far as you want. But I am confident that whatever the circumstances that we’ll continue to outperform our competitors.

Tony Buffin

Yeah and probably fair to say we put ourselves in the trends where we are going to make some cost which is a prudent time to do it, so we’ll do that but that sounds everything we got more we can pull back the operating cost and capital spend. We are in a very different position to where we were in 2008 in financial strength of the business and we deleveraged well, we’ve got long term committed funding in place and we’ve got you know very significant liquidity. So we’re really in a good position to make any necessary change we need to make. But there is volume forecast to read at moment as we said. So when we have a bit more clarity we’ll then act accordingly.

Paul Checketts

Good morning. It’s Paul Checketts from Barclays Capital. I think I’ve got three, the first is going back to the idea of a scenario of this fall as we got into 2017 and when went through it a downturn back in 2009, it was - I would say there was an ongoing question of how you balanced price and margins and overall you focused on margins somewhat more. Do you think that’s an argument this time that you could be a little more aggressive on the price side and it could yield some benefits as you exit? That’s first one.

And the second is, the IT investment you’ve mentioned a few times, can you just give us a picture of what sort of foundation that’s in and where you like to move it more it’s likely to cost?

And the last one is it’s just on the stock side, it fell 22 million, is that we are seeing the benefits of some of the investment and the infrastructure? I think that’s it, thanks.

John Carter

Well, if we just take that in that order in terms of demand price versus volume, you’d understand that I wouldn’t want to give that competition as strategy like. But actually we have choices and I think some of that businesses which cope a volume and some of that businesses will manage our margin. But in outside you know I allowing this time to give up a market position. So we’ll see our trends out and we’re aiming to grow our earnings, so it’s important we do get back balance.

In terms of our IT, it’s important to say our systems were installed and been developed in house since they work and they are robust and they are relatively cost effective. And the investments we are putting in are actually for us to sort of make us relevant and fit for purpose for the future. So we in blueprint stage at the moment in terms of we’ve assigned a partner what we’re working on this developing the software, we’ve been very careful with that until about what the implementation looks like. There is nothing bigger than an IT change in terms of distracting away from the customer. So we are some distance away from implementation and we are very much in design.

And it’s important that we actually get back to join but be very, very thoughtful about implementation.

Tony Buffin

And I’d say we can burn light up into one bucket but we’ve done a huge amount read and we’ve invested in our and we have a capability in our networks and multichannel and electronic delivery, we are investing in electronic proof of collection with industry that kind of systems in the proof of finance systems, some of the communication system in Wickes. So we’ve done a huge of stuff already, the big we are focusing on already is the core stock in major systems and that’s the bit when you drop the upgrade in the merchant businesses. So but it’s isolated to the merchant businesses. So it’s a big investment but it’s in sort of in a two parts of our business, really well three parts of our business.

John Carter

And then on stock, I think what you are seeing is an improvement of management of working capital. I think we are all seeing some of the benefits of the centralization of distribution and the range centers but we think there is more to go for over the medium term.

Andy Murphy

Good morning. Andy Murphy from Bank of America Merrill Lynch. I got three questions and one follow-up on Paul’s question on IT. And could you give us a flavor what the cost is lie to be for the bit of the year not in terms of stocking. And secondly, I was wondering where you could elaborate a bit further on the July trading sales improving because you has a bit more of a flavor of improving from what to what?

And then finally just in terms of demand from the UK house builders, is that - and then the third question was around demand you’ve seen so far from the UK house builders both pre and post?

John Carter

If I pick the last one, it’s relatively, we’ve always sort of limited our exposure to bigger house builders and that focus is more on the smaller and medium size and we clearly got food positions with the major three and then the next year or so I would say, we’ve not seen any material change in our business with those house builders. I’ve always maintained especially the paid families on board, we don’t much money. And but it is about the volume. So it’s been not change really during this year.

In terms of our IT cost and it’s in excess of a 100 million over the next five years and ‘17 and ‘18 will be slightly higher in terms of the spread and as we start to deploy them.

Tony Buffin

And July performance, so I mean give the context of June first and then July, I think there is some moving parts. You know July was weaker than we anticipated but we haven’t got add in the press release or in the presentation. But it was wet in June, which didn’t help us and you’re seeing I think the wettest June on record. We’ve done some internal analysis and I think it’s quite funny but of the football. The football does have an impact on us because if you get games in afternoon, builders don’t turn up frankly or they go home. They turn up but they are not really there and they go home quickly. There are little bit slow in the morning too. But seriously that has probably about a couple of points impact in terms of sales itself in the month than we’ve done back 2014 and 2012 and 2010 for the tournament.

So we’ve been thought about that, but that did have an impact in June. So the weather was more difficult. There was the football on. We had the strongest month of live performance in the prior years as well, so we were comparing the toughest month in the prior year. And of course the reference, we almost had a perfect storm in June. So June was weaker than anticipated. And what we seen in July is an improving trend and particularly after some of the change in government so on. And we’ve always been marked in consumer confidence but that trend has picked up as we gone through the month.

And to a level we are not happy with. We have like to like positive growth in every division in the month, so clearly that’s encouraging. And as we said earlier, I think we’re looking forward, it’s going to formal Q3 of course as well. And we did have weaker comps in Q3 last year and in Q4. So I think we’re pretty bullish I think about Q3. Q4 is more difficult to read I think at this point.

Charlie Campbell

Hello, it’s Charlie Campbell from Liberum. Just two from me please. I understand obviously see other volume guidance is pretty difficult, not suspect. But I was just wondering if you could help us a bit on pricing and maybe thinking more about market pricing and your own pricing, just what the mix of products starts and exchange rates and so on and whether we should expect a change in the deflation returns which is in the first half possibly turn around to overall inflation in the second?

Second question is on overheads, I think a lot of discipline within the group in the first half, if my numbers are right, but what the one area where overhead since creek up sort of more than anywhere else within the consumer division. I am just wondering if there is anything exceptional in there lots of timing differences that we should think about in terms thinking about the full year for consumer.

John Carter

In terms of the pricing, Charlie, I think when you got the shift that we have in the pound and dollar and pound and euro inevitably there will be a pricing increases coming through both because of currency and input costs we’ve seen so steel, copper and plastics increase in. To what level, we don’t know at the moment, but we said for the last sort of 18 months and our inflation balance against that is fairly zero or flat. That will return to inflation. And we can do is anticipate what levels that will come through when it comes for - to manage the cost. And because everyone will be in these active sign position will be obviously very sensitive to that but it is a direct cost to our business.

Tony Buffin

And in the press release actually we talked about number of things John, and we talked about ultimately our direct source to some extend to finally tuned to be sources because product will drive efficiency hard and we’ll expect manufactures to drive efficiency high. And - but whether our genuine, genuine cost price increases, then some of that where we can avoid it, we’ll let the needs take it pass away to customer. So but we got a lot of belief is not controlled in terms of how that manufactures out from cost price inflation I think.

John Carter

So I think you are right Tony, I think we displayed a significant amount of discipline first half and of course we don’t like say stood sort of 2% that does give you slightly more cost than the 2% we expect on the sales line, that more like 3 or 4. So the underlying cost on like-to-like basis even though when you anticipate. I think in the consumer division, we did - we have put them 40 new Toolstation branches over the last 12 months and of course that goes through into cost but in employee cost and rental cost. They yet to mature, we run about a three to five year type of Toolstation, so we should see improvements in sales and cash generation as a result of those. We deposit this month as well it’s not CapEx just a bit of operating cost in there and a disruption. And of course we’ve been investing in ways pretty heavily across the board.

So but the team I’d say Tony and Simon King have a very clear plan to manage cost in that business. And if they need to they will manage cost tightly. But I think they remain very bullish and I would make any results they are achieving.

Emily Biddulph

Good morning. Emily Biddulph from JP Morgan. I think I’ve got three. The first one on the contract division and what change you’ve seen in competitive, give us some color in sort of what affects you are having.

And in Plumbing & Heating the second one, could we think about in that division actually this sort of if the market stays right is and you continue to see sort of market volume where they are is there a point where we sort of - the effect of disruption should we sort of think about more positive growth in the second half, is that sort of as those new branch that in et cetera is sort of a curve there we combine and see?

And then thirdly, can you give us a comp for that 100 million of sort of unused freehold is dragging sort lease adjusted return done, is there a year-on-year comp for that number, I think it’s not zero?

Tony Buffin

No, we give you that offline. Yeah, I’ve got the number in my head but I won’t give until you contact.

John Carter

Contract focused on larger customers are subcontractors for larger contractors. When we are seeing a little bit more caution in the bigger projects in terms of differing or delaying, so that will effect BSS primarily. We did not see CCF business is focused on part new build and part commercial. And clearly the new build is still travelling more. And Q1 again has got good exposure to underground and several products in both new build and commercial work.

So I think frankly working in the same, I’ve got some challenges, but I am really again confident with that plan and that project tracking and we’ve got enlarge sort of order book because of actually drove down from orders as sort of deferred a little bit. But ongoing and it might be a little bit tighter in contracts but even if you take the like-for-like sales over the last two years, it still remains very strong.

On P&H, I think we’re probably the first one out with the post deploy like, maybe interesting to see where competitors have done. We always it’s our toughest business and sector and we always we see progress this year. I think given the uncertainty what we are looking into in terms of end user sort of demand for material, I think it’s difficult to predict but what we can really do is mentioned that again say competition.

Tony Buffin

Yeah, so in the freehold I more, we’ll come back to you.

John Carter

Kevin, I’ll level to last, because you always ask the hard ones. Can you move over to Howard.

Howard Seymour

It’s an easy question. It’s - probably just one question actually it comes back to Tony, you quite resolute in terms of what you saying on Wickes and Toolstation regarding the growth profile there, just sort of widening that and would you seamless say at the same sort of profile on to merchanting Benchmarx where you have been sort of pursuing growth and you’d sort have to say that the messaging that in Benchmarx, you’ve done a lot in P&H and therefore contract, lesser growth, lesser immediate growth in there. I am just thinking how resolute you go down the chain of growth in the various different parts of the business as it stands with that?

Tony Buffin

In Toolstation, we’ve got put line into 2017, I don’t see any reason to change that. The like-for-like growth is sort of double digit really and you know why do we change that given where we are, so it’s pretty disruptive, leverage is coming through. And with Wickes, I think where we start is the refits I am given as very material in sales and very strong returns. So again you know even if we saw volume down quite significant I think Howard I think given the sales growth for say we want to still doing that because the returns are so good. So I think we press some with that.

And Benchmarx you slightly more difficult, I think where we got trade parts that we’ve already acquired and that will come into market would definitely be opening and they were very well in Tripoths [ph] and we probably will just moderate a number of standalones we put then depending on the market as we see and as you say contract the work is substantially done in P&H. So perhaps John, do you want to pick it up.

John Carter

We’re really old just with TP, we’ve got a good pipeline in terms of the freeholds that we’ve acquired and we’ll be bringing those to market in a sense of different thought. But again I’ve been really pleased with the progress and safety business, this might over the last two years.

Dan Porter

Good morning, guys. Dan Porter from UBS. Just I think from me, can we talk a little bit just follow-up on Emily’s question, it’s about the P&H margins, I know you are targeting a sort of 4% or to get back somewhat near 4%. Just given the first half result, what is the more reasonable timeframe do you think and is that still the target to get back to maybe two year trade?

Secondly, just in terms of receivables obviously, you’ve had another large investment there, how do you see that evolving over the next 12 or say months just given one the strategy of offering better credit sense that also very - outlook is slowing as well?

And then finally just on the Wickes on the consumer division, I mean I know 6 million day stocking impacts in 2015, 4 million in the first half of last year, during net benefit are you seeing any unwanted of that in that profit figure for this year, just in terms of day stocking impact from last year within I think Wickes in terms of ranger views, are you seeing any net benefit of that in that proper figure for this year?

Tony Buffin

Yeah, what we said was we did range these trends something that went. So what we did see range of these in the first overall through the way to last year, we carried all the range of that’s slightly lower rate this year, so we are seeing a slight benefit from that but really it’s compensated for offset by the extra business we are making. If you think about 14 refits we’ve done that is about 6% or 7% of the stake and you do get some disruption from that, you get some operating cost when you go in as well. So we have seen benefits from as the range reduction program and the lease but part of that I guess it’s all back into future range reduction this year and also disruption but we not called on the hand because ultimately 13% underlying growth in profits you know it feels pretty good. So we could call all source of things but we be decided but it’s not.

John Carter

Business is usual but for the central distribution down concern some good work. On the P&H and I don’t think 4% should be changed, I think the timing just a little bit more difficult to make, but the work we did be in balanced between or rebalanced between PTS and City Plumbing give us a every chance. I would call out deflation has been probably tough in P&H. That looks like it’s going to change for the next period. So it is really a case of let’s see how that pens out.

And did you want to pick up on the receivables.

Tony Buffin

So I didn’t touch.

Dan Porter

[Technical Difficulty]

Tony Buffin

Yeah, there is two or three things in there, we’ve seen slightly higher receivables and we should see that again in the first half because of that very good growth in the contracts business you know in CCF we’ve seen in Keyline, but - and BSS and also in the larger customer into the TP business. So if you take all that together you know when I pointed 17% to your like-for-like in contracts, you know as you look at that overall you know clearly those businesses are much more credit focused and are cash focused. And the large customers in TP are different, that’s all on credit. So that’s why we’ve seen sort of build in that credit balance over time. And some smaller customers are switching from cash to credit as well. So that’s just I think a market function but also a function of this portion of growth we’ve seen in the large contract business.

And you know going forward, you know I don’t expect more material growth from those contract costumer going forward. I expect to normalize as you’d expect overtime. But if there is reduction for any reason, in any of those business and you clearly get, you get some working capital back. On - we don’t end up with negative scores, but if we do that that be - that set we have. And you saw that in previous recessions in our business the recent cash in the sales and sales were to go back, but at this stage we are not expecting that.

John Carter

We are 80% in trades and trades in excess of 80% credit, just a feature of our business.

John Messenger

Thanks. John from Redburn. Three if I could please. The first is just around the like-for-like in the first half, what you’ve done this year around how you preformed either the group level or for division level against the market place, any quantification there?

The second, as you talked to need to keep your pricing in check in terms of the General Merchanting division and make an adjustment over the course of the kind of medium term kind of competition, can you just update us how far through that process you think you are?

And the last one is on the commentary range is in terms of when you said still finding to press ahead with next year, but what kind of volume environment would you need to make you reconsider whether that’s the right thing to do heading into next year around the market? Thanks.

John Carter

Yeah, what volume in terms, what volume in decline. As I think you have to be catastrophic the range centers are working and they give us so many other options, we put in new a warehouse management system into some of our central distribution and we just want the time concentrate so it goes on to the new system after being tested. So all plans at the moment for H1 and I am pushing for as early as possible if it can fits in. In terms of like-for-like is a little bit too early for us to do some read across until we have got everyone else in. We have got the better data on consumer through GFK and clearly Wickes has taken market share consistently over the year of this first half. Can you help me out on the pricing question?

John Messenger

Maybe on the market share, the best we can get in terms looking at CPA data, the MF data, the HHIC data which is the Hot Water Heating Association in Community and also GFK, I think you know demonstrably consumer both in Wickes and actually Tile Giant Toolstation who’ll significantly take a share. I think in general merchanting Benchmarx again, the data we look out, we don’t disclose the Benchmarx data but we have taken share there. The same in TP. given the best that we can get from BMF and the CPA we know have some challenges and contraction is certainly in CPF and Key 1[ph] taking some share. It is the plumbing and heating business or business related to that which is more difficult to read I think. But again I think here we lost share.

Tony Buffin

Sorry, what about the pricing which I just think couple of years ago there was just big picture recognition in same product traffic was relatively expense against peers and didn’t want that gap to open up if anything you want to close in but it was going to be a gradual process in certain lines over a medium term.

John Carter

We made really good progress on pricing decision, we have been using trade offers both online and in the ground which is, of pricing I think it is like painting the whole bridge, you never finish because different elements evolve in. I think we are comfortable, we have got better tools, better visibility, the ongoing customer insight in terms of how it represents in terms of value. So I would never say it is finished but also say that we made really good progress. Go ahead Kevin.

Priyal Mulji

Hi. This is Priyal Mulji from Deutsche Bank, I just had three questions, I think so first one was the follow up on contracts. I know you said you have a good order book, but I remember back in Q1 you were saying that some of the big contractors are still being tended for being delayed until post referendum outcome. I just wondered what the latest on contracts was. Have they been put out right or are they just being delayed further? And the second question I know you said last July for getting better across all divisions, is it too early to see any differentiation between businesses which cater more to the discretionary side of our mind like Benchmarx versus more the R&M elements of it. Thank you.

John Carter

Okay on the contracts, I think leading into the referendum and savings [ph] we have probably seen the direction it travels a little bit more deferment and I am not aware of cancellations. So I think we just got to be patient to see to have those larger projects such the - come to market. Of whole, I would say all three businesses are trading pretty well. It is not that if we are in decline. You want to pick up key line?

Tony Buffin

So in July, yeah I think it is bit too early as it is only the second of August and we haven’t really got all the number put together for July but then as we are seeing some, the shape, I am just looking at number and my own estimates but it doesn’t appear to be differentiation across the business as you know. I should expect because we have a business continues to trade, well you might not expect the consumer business does continue to trade very well. We obviously look and trying to gather so non-profit market information on things like, sort of billed cancellations and cancellations in our kitchen business early the consumer confidence and so on. But what we have seen is we saw in to the first week or two post referendum is a bit more volatility but sounds good because of that. We’ve seen no discernible change in people looking for kitchen online in terms of request for brochure, request for meetings and the cancellation data. So that sort of give us an indication that either we are different to the market or the market is normalized and stabilized in those discretionary spend item or that we haven’t seen some of the effects of consumer confidence that might be key forward 2017. But at the moment the cancellation data looks no different, the search for kitchens looks no different, search for Wickes kitchen is no different and the actually the business is traded well. So I think I would meet anything into that other than, it looks like it is okay.

Priyal Mulji

I want you to just help us slightly in terms of where we should be looking in your businesses to, if you do have to make the response which ones is likely to be first and I guess the question to my mind is, without obviously pressing you on the exact numbers what is the sort of variance between the businesses in relation to fix the variable cost, I assume there is a spread if you like between four areas, just being interested to know, not the exact picture but which of the ones, perhaps you would be making action quicker is necessary?

John Carter

I think the response, each management team across the four businesses or individual business units have got plans. And you are not going to be surprise is slightly different. You want to maintain the business of going well now for as long as we can, so in that consumer area they have got clear plans for that probably going to be latter in reactant to those and you are not going to be surprised, we are pushing full time until an employment in 18 hours. So it will be varied Kevin based on performance and where we think we can continue to get the growth.

Tony Buffin

This is not one business, as a sizably different ratio of variable.

John Carter

So moving on to your second part of that, I am trying to get only some time to think of good answer. We have, the property ratio in consumer tends to be double the out trade. If you will look in that side, it carries more property cost and it actually caries less distribution cost than the typical builders notion of tight business. A very large power of the cost base still remains people.

Tony Buffin

Don’t be ruffed on the extend Kevin but, we look at every business, we have trends in every business and we have got a plan for varying levels of sales growth and going forward and actually I am still thinking 17 depending on obviously there is going to be some sales growth now, it is hard to read that but while I go back to this is the thing that we said before in terms of the sales I would like to give some indication and performance of the market that should carry on, not like sales growth will continue to come through given what we have done and the majority of the these type possibly we’re still immature in some areas and price will come through, volume is a key variable of course and so none of us can predict well. But in terms of the cost base, if you look as John said, if you look at Wickes, they have put a higher prospect of sale ratio for rental cost but at the same time higher gross margins and they have got more discretionary spend like marketing, when you say marketing it is discretionary not so different question but I think we got leaders in every business is the point.

Priyal Mulji

Can I just pick on of course these, the Wickes situation in particular I mean it is probably just media reaction, but obviously the massive shift in GFK consumer confidence chassis [ph]. So the last time it is being down at this level effectively was recession on the horizon if not ready in it. I have no idea whether that is the case or not, but I suppose what would be interest to know is, if you use that index alone, had any real correlation to the performance of -

John Carter

I think my take on it we are alert to consumer confidence and the movement pretty soon out of Brexit. That’s what we are tracking as Tony said, you know really sort of request for capital deployment, because we won’t to get an early indication of slowing. At the moment what we are actually saying is we are trading well in particular in the consumer business, so it is really a case of just for us to be alert as we go forward and keep the different forms of tracking activity so at the moment it does scale a little bit of fund renewal. So we don’t know what consumer confidence will look like next month.

Priyal Mulji

It may easily bounce back.

John Carter

It could.

Tony Buffin

And I think it is fair and important, if we look at those, online searches or Wickes searches, probably the lead is - the most forward looking leading care we have and we have seen no discernable change in that. We have seen seasonal pattern to it but we see no discernable change from the prior year and I think these are the things that you know of course the consumer confidence data fallen. I think it starts from post even at the first time I’m just looking at the chart and first time positive is 2005, so it was positive for a very brief period of time, but it fall negative again, not to be too [indiscernible] about it but we are back it sort of mid-2013, 2014 levels yeah, in April and May, but it is nowhere near the sort of negative 13, negative 14 that we saw during the recession, we know probably negative 15. The other thing surround the GSK data which gives me slightly more encouragement is that, the climate for large purchases has fallen but actually post in the July survey versus the post Brexit survey - immediate post Brexit survey actually got bit better and the savings right the consumers anticipated in the immediate post Brexit survey will significant higher, that step up the savings right and not again in this July survey, [indiscernible] trying to get. So consumers are not going to have many places to put their money to get points straight from savings, that probably encourages me a little bit, they are going to spend some money. They may run not going holiday in Europe, because of the exchange rate and they will be staying home. So I think it is so mixed Kevin, I think we are trying to get the read on it but the key think I point to out I think is the cancellation data from where you have seen no move like that.

John Carter

Is there one last in the floor because we got to go on to the lunch [ph].

Ami Galla

Hi, Ami Galla from Citi. I have just one question, the contract division. You mentioned a new pricing guidance scheme in the contracts division, is that something new that we should be aware of.

John Carter

We have an approach across the group and this is part of the scale advantage, we develop something in one business and then our aim is then to sort of expand and exploit. So that pricing to was developed in TP to the earlier question that Ann gave us and we deployed in CCF and we are looking around coming in around plumbing and heating as well in the early stages of deploying, plumbing and heating. So it is a real case of we got, we can see the evidence and we are then moving through different parts of the trade businesses.

Ami Galla

Thank you.

John Carter

So we go to the funds, and everyone is being patient.

Operator

We have one question from Mark [indiscernible] from HSBC. Mark please go ahead.

Unidentified Analyst

Hi good morning gentleman, thank you for the revenue - the appendix which is very kind of remind us of encashed repayments that are every type is essential but I’m pretty unappreciative consumer confidence. Can you gives us some insight of, it is a rough what your exposure is to commercial, some commercial markets on - commercial has taken the most already whereas the consumer may or may not. The commercial vision you have, can you gives us your view as to exposure to commercial.

John Carter

We don’t include that because it is really difficult to get. So we aren’t getting commentary [ph] so we have some customers that are working both and they can’t even tell us what that split is and I would say 15%.

Tony Buffin

Yeah it got to be small. And the combination not just commercial new build up, commercial RMI as well, delivering income prospect clearly commercial and have to continue. I think our exposure to new build should be low to mid-single digit.

Unidentified Analyst

Thanks very much gentleman.

Operator

Our next question is from Michael Mitchell from Davy. Michael please go ahead.

Michael Mitchell

Yes, hi good afternoon, thanks for taking my call. I have a question, just like I think I saw it on a couple of items please first being CapEx, I think I am right in saying that the pretty free held investment CapEx in the first half of the year was $71 million and if that CapEx is low, clearly it is somewhere below previous expectations or thought around 170 to 190 for the full year, that’s question one. Question two again, kind of beyond volume in the second half of the year which appreciates as it unclear that the contribution that we can expect from new space, the second half of the year, I mean the 1.9% we get in the first that should be spent something similar or below that in the second half and then thirdly maybe difficult to answer but just again in terms of pricing I think previously we expected to pricing for the full year it is broadly flat, obviously we are down 1.6% for the first half of the year. Should that, should we now expect or that likely now to be slightly negative, thank you.

John Carter

You want to pick the CapEx.

Tony Buffin

Sure I will do CapEx and then contribution from new spaces. CapEx, just to give you run down on the number 51 million on growth CapEx on the first half 20 on maintenance support free holds got us to our 120. We got it to 200 for the year that is slightly different to what we have said previously, I mean slightly lower because we previously excluded the free house from that number and that was in all in number. There will be some free whole puts in the second half of the year with commitment we made and we wanted to see through. The maintenance number would broadly be similar in the second half give or take but you also see a modest in the growth CapEx as well. Now in part owing to slightly more caution given our end market demand but it really is a function of plan that we wrote back in 2013 we said we have to invest early and heavily in the business in the sense of getting free hold sites, getting these sites to trade from and improving the propositions. Because if we didn’t do that early we don’t get any maturity of the fact over the course of five year plan from those investments we made. So we have to invest harder and early and we did that as you know John mentioned earlier, we have invested 600 million or so in the last two and half years. We always anticipated the capital spent would moderate in the second half of the plan, it is beginning to moderate already in the first half versus the run rate from the second half last year and that will continue to moderate in to the second half of this year so, you know part of that is just making sure we are judicious with our capital deployment.

We always expected it to moderate, it may moderate a bit more and that is not cash strength. We got a very good cash and strategic investing it is just about making sure we read the market in terms of the volume expectation, so I think that’s is overall perspective on CapEx. In terms of contribution from new space, we have been running between sort of 2 and 2.5 for the last 18 months which is combination of new space and small acquisition. You should expect it to be around 1.5% or 2% I think for the balance of the year. That would be most from acquisition or small acquisition August September time, that we should be about 1.5% to 2% for the balance of the year. And again to Kevin’s earlier point we got a very good handling .

John Carter

In terms of inflation it is very difficult to tell because we have arrangements with our supplier that has to give us sort of notice and I think we seen full expense of foreign exchange element or commodities. I am going to hedge my best and say I’m proud to give you further update on the 19th of October when we get fair visibility and I think it is taken the obvious, we will see inflation return to our mix.

Michael Mitchell

Super, very good thank you.

Operator

We have no further questions registered.

John Carter

And these final ones I have missed in the room. Okay, on behalf of Tony and myself and Robert, thank you very much and we'll see you soon. Thank you. Bye.

Operator

If you have missed any part of this call or would like to hear again a recording will be ready shortly. Thank you for joining today’s call.

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