Travis Perkins: Half year results for the six months ended 30 June 2023

Travis Perkins plc, a leading partner to the construction industry, announces its half year results for the six months ended 30 June 2023

Focused on balancing near-term trading performance with long-term strategic delivery in challenging market conditions

Financial Highlights

• Revenue of £2,472m down (2.5)% and adjusted operating profit of £112m down (31)% reflecting weak market volumes in private domestic RMI and new build housing
• Adjusted earnings per share of 30.5p down (41)% resulting from lower trading profit, phasing of property profits and the increase in the UK corporation tax rate
• Strong cash conversion at 105% driven by tight working capital management
• Lease-adjusted leverage (net debt / EBITDA) of 2.1x due to lower earnings and increased lease commitments. Net debt before leases reduced by £32m during the half.
• Interim dividend maintained at 12.5 pence per share reflecting the Group’s robust balance sheet and confidence in the medium term outlook
• As previously guided, full year adjusted operating profit expected to be around £240m

Operational Highlights

• Merchanting saw resilient demand across commercial, industrial, infrastructure and public sector markets. However, performance was impacted by significant weakness in new build housing and private domestic RMI markets with revenue down (4.5)% overall and operating profit (23.5)% lower due to high operational gearing.
• Toolstation delivered market share gains, with revenue up 9.0%, driven by network maturity benefits and focus on enhancing the trade customer proposition. Operating profit was broadly in line with prior year reflecting investment in network and infrastructure to support future growth.
• Toolstation UK's new partly-automated 500,000 ft2 distribution centre in Pineham, Northamptonshire, which will drive long term operational efficiencies, is on track to open in Q3. The Group will be holding an investor event, focused on Toolstation UK, at Pineham on 28 September 2023.
• Proactive cost actions and continued cost discipline ensured that overhead inflation was mitigated
• Further progress on building a sustainable business with primary focus on decarbonisation

Nick Roberts, Chief Executive Officer, commented:

“Market conditions have been challenging, which is reflected in both our first half performance and our outlook for the balance of the year. The Group remains focused on striking the appropriate balance between seeking to protect shorter term profitability, delivering our strategic objectives and being well placed to benefit when market conditions improve.

Given the market backdrop, we are relentlessly focused on meeting our customers’ needs in core categories and supporting our local branch managers to grow share of wallet, particularly with general builder and professional trade customers, by making it simpler and easier to transact with us through our digital channels and in our branches.

I am pleased with the continued progress we are making on the development of value-added services, as shown in the growth of Managed Services and Hire, and also with the market share gains coming through in Toolstation.

Whilst near-term trading is expected to remain difficult, we continue to work to position the Group to benefit from the long term structural drivers in our end markets. The opportunities presented by the requirement to decarbonise the UK’s built environment and address the shortage of both private and social housing remain significant and our unique portfolio of businesses, coupled with the development of innovative solutions for our customers, will enable the Group to deliver long term growth and create value for shareholders.”

Analyst Presentation

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

https://stream.brrmedia.co.uk/broadcast/64aea0e0cb2b3e5befbad72f

Enquiries:

Cautionary Statement:

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

Without prejudice to the above:

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

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

This announcement is current as of 1st August 2023, the date on which it is given. This announcement has not been and will not be updated to reflect any changes since that date.

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

Summary

It has been a challenging first half for the Group with consumer inflation proving more persistent than anticipated which has resulted in sharply rising interest rates. This has led to a notable reduction in housing transactions, in both the new-build and secondary markets, and homeowners reducing expenditure on renovation projects. In contrast, the Group continues to see a resilient performance across its other end markets – namely commercial, industrial, infrastructure and the public sector. With uncertainty remaining as to how long these challenges will continue, the Group has sought to balance near-term profitability and investment in the long-term drivers of competitive advantage that underpin the Group’s ambition to become the leading partner to the construction industry.

Business performance

The Group saw revenues down (2.5)% in the period, driven primarily by the impact of significantly lower volumes in the new build housing and private domestic RMI markets on the Merchanting business. Toolstation delivered a good revenue performance, reflecting continued momentum in the business and maturity benefits from network expansion across both the UK and Europe.

Pricing remained elevated through the first quarter but has moderated since, driven by the roll off of prior year manufacturer increases and deflation in commodity products. Correspondingly, year-on-year volumes have seen an improving trend into the second quarter after a weak start to the year. Overhead inflation has remained high, principally due to rising staff costs, but has been well controlled due to actions taken in late 2022 and ongoing cost discipline. As a result of these factors, and with property profits being weighted towards the first half in the prior year, adjusted operating profit of £112m was down (31)%.

Whilst the Group is focused on continually refining the near-term trading approach to reflect changes in market conditions and competitive dynamics, investment also continues in strategy execution to both deepen and elevate relationships with customers. Long term investments, including new merchant destination branches and the new Toolstation UK distribution centre, continue as planned. The Group also continues to implement digital enhancements to improve efficiency and to develop innovative future solutions for customers such as its well-received WholeHouse offering, launched in March 2023.

Key to elevating relationships with customers is the development of value-added services and the Group has made good progress in this area with strong growth in both Hire and Managed Services, the integration and development of Staircraft and the adaptation of the Benchmarx offer to serve larger customers alongside smaller specialist kitchen fitters.

The Group has balanced supporting colleagues at a difficult time with adjusting the cost base to reflect market conditions. The Group made a "cost of living" payment in January 2023 (at a cost of £8m) to over 17,000 colleagues (c. 95% of the workforce) and in April 2023 awarded a pay rise of around 6% on average with those on lower incomes receiving a larger award, balanced by a lower award for senior executives. With an objective of mitigating cost increases in the current year, the Group took proactive steps to reduce the cost base at the end of 2022, resulting in annualised savings of £25m, and will make additional savings by flexing volume related costs.

A key part of the Group's long term strategy is to invest in technology to create solutions that simplify processes for branch teams and save customers time. Given the current environment, the focus of this strategy is on operational efficiency and the Group has implemented several new initiatives including the introduction of handheld terminals in the General Merchant, which removes the need for paper invoicing and notably speeds up the customer journey.

Capital structure and shareholder returns

The Group’s balance sheet remains in good health with net debt before leases reducing to £274m (31 December 2022: £306m). On an IFRS16 basis, operating leverage (rolling 12 month net debt / EBITDA) of 2.1x is slightly above the guided range of 1.5x – 2.0x. This metric has increased by 0.3x compared to 31 December 2022 as a result of the reduction in EBITDA and an increase in lease liabilities driven primarily by the inclusion of the Toolstation distribution centre in Pineham.

The Board has declared an unchanged interim dividend of 12.5 pence per share, reflecting the Group’s robust financial position and confidence in the medium term outlook. The dividend will be paid on 10 November 2023 to shareholders on the register at the close of business on 6 October 2023. The Company's shares will go ex-dividend on 5 October 2023. The Company operates a Dividend Reinvestment Plan, elections for which must be received by the Company's registrar by 5.30pm on 20 October 2023.

Outlook

With the outlook for the UK macroeconomic environment remaining challenging, notably with respect to the impact of higher interest rates on the new-build and secondary housing markets, the Group expects demand to remain subdued into the second half in the new build housing and private RMI markets.

Demand in the Group’s other end markets remains resilient with well-funded long-term projects across the commercial and infrastructure sectors, robust demand for industrial RMI and a significant backlog of work being addressed across the public sector, particularly in social housing, education and healthcare.

At a Group level, revenues are expected to remain in low single digit decline through the second half with pricing in low single digit growth and volumes in mid single digit decline. As previously guided, the Group expects to deliver a full year adjusted operating profit of around £240m.

Segmental performance

Merchanting

* Excluding property profits

** 2022 branch network figures for comparison are taken at 31 December 2022

The Merchanting segment was impacted by reduced demand in the new build housing and private domestic RMI markets with revenue down by (4.5)% and operating profit down (23.5)% to £130m.  Price inflation in the half was still elevated compared to the long-run average but has moderated through the period as prior year increases have rolled off and the Merchant businesses have seen deflation on commodity products, primarily on timber.

Merchanting gross margin was solid and cost actions mitigated inflationary overhead increases during the first half. However, operating margin reduced by (160)bps due to the impact of lower volumes on a predominantly fixed cost base.

The Private domestic RMI market (~35% of Merchanting revenue) remained challenging throughout the half with notably fewer secondary housing transactions and homeowners’ budgets squeezed by inflation and rising mortgage costs. Whilst the General Merchant experienced resilient demand across larger contractors and developers, the professional trade and general builder segment was weaker.

The General Merchant team are relentlessly focused on demonstrating the value and convenience of the customer proposition for this key segment. This targeted approach, combining data on customer behaviour with local insight, will involve sharper focus on gateway categories, such as timber, and working closely with our suppliers to bring the best deals to our customers through our omni-channel offer.

The private domestic new-build market (~19% of Merchanting revenue) saw substantial volume decline as the impact of rapidly rising mortgage rates quickly reduced new housing starts. This was more pronounced amongst the national housebuilders, with regional housebuilders remaining more active, but the impact was nonetheless significant on CCF, Keyline and Staircraft.

Despite these challenges, CCF was able to deliver a resilient performance with revenue growth driven by disciplined pass through of manufacturer price increases, whilst Staircraft saw good profit growth resulting from improvements in margin management. Staircraft is investing in a new c. 170,000 ft2 facility in Coventry to enable the business to significantly increase capacity with the first output from the new factory expected in the first half of 2024.

The commercial and industrial market (~22% of Merchanting revenue) saw continued solid demand in the first half which enabled BSS to deliver a robust performance. TF Solutions continues to gain market share with two new branches added and revenue up 28%.

The public sector market (~24% of Merchanting revenue) remains strong with a pipeline of well-funded projects across the infrastructure segment and a large backlog of work on social housing and public assets. This strength is reflected in the performance of the Group’s Managed Services business, with revenue increasing by 7% in the first half, and has helped Keyline to partially offset the impact of notably lower new housing starts.

The Group's strategy of developing value-added services, enabled by destination branches in the General Merchant, continues to progress well. Alongside Managed Services, Hire is also performing strongly with revenue growth of 6% in the first half and now 34% ahead of 2019. Since 2020, the Group has invested in seventeen new, expanded or relocated destination branches with these branches delivering a revenue and profit performance ahead of investment appraisal targets and significantly ahead of the 2018-19 cohort. The Group continues to invest in the future pipeline with six more sites due to open in the second half including Tamworth, Cambridge and Epsom.

Toolstation

* Excluding property profits

** 2022 branch network figures for comparison are taken at 31 December 2022