Travis Perkins: Robust Half-Year Performance

Travis Perkins plc has published half- year results for the six months ended 30 June 2021, advising of excellent operational performance and the completion of portfolio actions. 

Highlights

• Robust revenue performance driven by strong operational delivery and broad-based, RMI led recovery.  Like for like revenue in continuing businesses* grew by 44.1% and was 14.5% ahead of 2019
• Adjusted operating profit of £164m (2020: £17m) up 14% vs 2019 resulting from higher volumes with solid gross margins, improved customer proposition and restructuring benefits
• Strong revenue and operating profit performance in Merchanting following decisive actions to refocus the business; challenging period of inflation and materials shortages being navigated well
• Toolstation market share gains continue; rollout on track in both UK and Europe
• Portfolio actions executed with successful Wickes demerger and Plumbing & Heating business sold to H.I.G. Capital for £325m with completion expected Q3
• Interim dividend reinstated at 12.0 pence per share; special return of capital from Plumbing & Heating proceeds post completion
• Increasing guidance for full year 2021 to at least £310m of adjusted operating profit for the continuing businesses reflecting higher property profits of around £30m
• Continued progress on setting industry leading sustainability targets consistent with the 1.5 degree pathway of the 2016 Paris Agreement
• Investor update to be held on 29 September to update on future plans to deliver long term sustainable value to shareholders

1 Alternative performance measures are used to provide a guide to underlying performance. Details of calculations can be found in the notes listed

* The Retail and Plumbing & Heating segments are treated as discontinued operations with the prior year comparatives re-presented

For the full publication, click here.

Nick Roberts, Chief Executive Officer, commented:

"I am delighted with our performance during the first half of 2021. To have executed our planned strategic portfolio actions whilst delivering an excellent trading performance in ever changing market conditions is testament to the hard work and capability of our colleagues across the Group.

I am particularly pleased with the agility that our teams have shown in responding to rapidly evolving market dynamics whilst always maintaining their focus on customer, colleague and supplier safety.

This has been particularly noticeable in the Travis Perkins General Merchant where decisive actions taken during the previous two years have enabled us to respond rapidly to customer needs at a local level. Toolstation UK, meanwhile, is on course to deliver another excellent year of growth and our European rollout continues to gather pace.

Our businesses have continued to play a critical role in the construction sector's ongoing recovery and, while some uncertainty still remains, the end markets for our trade-focused businesses remain robust.

As a result, I am cautiously optimistic around the outlook for the business and confident in our ability to make further progress in the second half of the year. We look forward to updating shareholders on our future plans in September." 

Summary

The Group has made excellent progress during H1 2021, building on the decisive actions taken over the preceding two years to strengthen the business and focus on the trade. The Group's end markets remain resilient, despite high levels of uncertainty across the economy as a whole, and the Group's businesses have responded well to the challenging market dynamics over the past six months.

The Wickes demerger was completed successfully, swiftly followed by the sale of the Plumbing & Heating business, during a period where relentless focus was required on operational matters, in particular colleague, customer and supplier safety.

Delivering a strong operational performance at the same time as managing significant portfolio change reflects the talent and capability within the Group and the benefits of more focused management teams, enhanced communication and local branches empowered to make decisions to meet changing customer needs.

Having maintained strong financial health through the pandemic, the Group remains well placed both to invest in growth opportunities and to provide attractive returns. The Board is pleased to confirm the reinstatement of dividends with the interim dividend at 12.0 pence per share. In addition, the net proceeds of the Plumbing & Heating segment disposal will be returned in full to shareholders.

Business performance

The Group delivered a strong performance in the first half of the year with revenue of £2,299m in its continuing businesses*, up 37.7% or, more meaningfully given the impact of the Covid-19 pandemic in 2020, some 10.7% ahead of 2019. This performance reflects the robust recovery in volumes driven by both domestic and commercial RMI, with management actions over the previous two years leaving the Group's businesses well placed to benefit from increasing demand. 

Actions taken to restructure the business, coupled with careful management of both increasing inflation and product availability challenges, enabled the business to increase overall operating margin in continuing businesses by 20bps vs 2019 and deliver an adjusted operating profit of £164m, 14% ahead of 2019.

The Group continues to invest in both physical networks and technology to meet changing customer needs and exploit market opportunities. Larger branches, with greater capability, are being added to the General Merchant portfolio while the rollout of Toolstation continues at pace in both the UK and Europe. Alongside enabling growth in core businesses, the Group is also focused on identifying emerging opportunities, such as TF Solutions, the Group's air conditioning and refrigeration distributor, where network capacity has been doubled in the last twelve months.

Alongside investment in the branch network, the Group also continues to focus on enhancements to both customer facing and back office technology. Customer Apps are being rolled out, starting with Toolstation and the General Merchant, and the delivery management system has been fully implemented across CCF and Keyline as well as around half of the General Merchant network. Internally, work continues to replace manual processes with digital solutions to improve efficiency.

The Group's balance sheet remains robust with covenant net debt of £105m (31 December 2020: £40m), the increase in net debt resulting from funding the £130m capitalisation of Wickes upon demerger offset by a £65m cash inflow from operations.

Post the demerger of Wickes, the Group's operating leverage (on an IFRS16 basis) has reduced to 1.5x net debt / EBITDA (on a rolling 12 months basis).

* The Retail and Plumbing & Heating segments are treated as discontinued operations with the prior year comparatives re-presented

Portfolio actions

The demerger of Wickes was successfully completed on 28 April 2021. A share consolidation exercise was subsequently undertaken to maintain consistency in the share price, each holder receiving 0.8925 new ordinary shares for every share held. 

In late May, the Plumbing & Heating business was sold to an affiliate of H.I.G. Capital, a leading global alternative investment firm, for cash consideration of £325m with the deal expected to complete in Q3. Due to the strength of the Group's balance sheet, the net proceeds will be returned to shareholders via a 35 pence per share special dividend, to be paid as soon as practicable post completion, and a share buyback programme expected to commence shortly thereafter. 

Investor Update

On 29 September, Management will hold an update for investors that will include presentations from senior leaders from across the Group's businesses.

The investor update will outline plans for the evolution of the Group's customer proposition, including plans to take advantage of collaboration opportunities. It will also set out key sustainability initiatives alongside technological and digital solutions that will enhance the customer experience as well as drive simplification of internal processes across the Group. In addition, the update will set out plans for further, long-term growth in Toolstation, in both the UK and Europe, and how the Group's priorities for capital allocation will drive future shareholder returns. 

Outlook

The long term fundamentals of the Group's end markets remain robust with ongoing demand for new housing and historic underinvestment in the repair, maintenance and improvement of the existing UK housing stock needing to be addressed. This is further underpinned by the UK Government's commitment to decarbonise the UK economy, providing stimulus packages across a number of sectors, and to invest in infrastructure.

Whilst some uncertainty remains due to the ongoing pandemic, coupled with inflationary pressures and product availability issues, the Group expects the RMI market to remain strong for some time to come and for new housing to continue on its recovery path.

Given the additional property profits resulting from the highly successful post-restructuring disposal programme, adjusted operating profit for the continuing business for 2021 is now expected to be at least £310m.

Technical guidance

The Group's technical guidance for 2021 is as follows:

• Effective tax rate of 20%
• Base capital expenditure of around £100m
• Property profits of around £30m 

Segmental performance

For Toolstation, please click here

Merchanting 

*2020 branch network figures for comparison are taken at 31 December 2020

The Merchanting businesses delivered a strong first half performance, particularly the Travis Perkins General Merchant, underpinned by the strong recovery in domestic RMI demand. Overall Merchanting revenue was up 37.5% versus H1 2020, where enforced closures due to the pandemic significantly affected trading, and 1.9% ahead of H1 2019. Factoring in the 2020 branch closure programme, like-for-like revenue growth was 47.3% and 11.0% up when compared to 2019.

This strong top line performance, combined with robust gross margins and cost benefits from the restructuring programme, delivered an adjusted operating profit of £156m, up 11% versus 2019  and an operating margin of 8.2%, some 70bps ahead of 2019.

Price inflation accelerated through the first half of the year, with prices increasing by around 4%, Q1 being around 2% compared to Q2 at around 7%. Inflationary pressure is expected to persist in the near term with shortages on some key product lines, most notably in raw materials such as timber and plasterboard related products, which has posed a particular challenge for CCF. Overall, despite these challenges, the Merchanting businesses have managed the issues well, working closely with customers and suppliers to ensure a fair outcome for all.

Performance in the General Merchant benefitted from improvement initiatives undertaken during 2019 and 2020, which included the simplification of processes and commercial deals alongside reduced central influence on pricing and range. The focus on enabling our branches to compete effectively in their local markets and more competitive shelf-edge pricing, particularly on lightside products, has given our branch teams the confidence to adopt a more entrepreneurial approach to running their businesses. These actions, coupled with the rationalisation of the branch network and investment in larger, more capable sites, provide a solid base for the Travis Perkins General Merchant to profitably grow its market share in the medium term.

The specialist businesses are recovering well, with BSS in particular well placed to take advantage of strong demand in the commercial RMI market. Alongside the good performance in the core BSS business, TF Solutions, the Group's specialist air conditioning and refrigeration business which was acquired in 2017, provides an exciting growth opportunity. With strong demand in this market expected to continue in the medium to long term, the Group has invested in 6 further TFS branches during the last twelve months to double the network capacity. 

Keyline is starting to see momentum build as the refreshed management team refocuses the business with the objective of delivering enhanced service to customers through technical specialism and sustainability planning. The infrastructure market is strong and new housing is beginning to recover with Keyline the beneficiary of being "first on site" as new housing starts gradually pick up.

CCF's marketplace remains challenging as the "late cycle" trades, specifically new housing and commercial, continue to lag and product availability remains an issue with several core products on restricted supply. Focus remains on quality of business and enhancing CCF's service offering to build long term partnerships with customers and suppliers.

In all of the specialist businesses, the difficult but decisive actions taken during 2020 to rationalise the cost base are delivering important benefits. All businesses are carefully rebuilding their capacity in line with market recovery and in a disciplined manner to ensure longer term efficiencies are locked in to create a more flexible cost base that enables operating leverage.

Financial Performance

Revenue analysis

Both business segments delivered strong revenue growth, although against comparatives influenced slightly differently by the first national lockdown in H1 2020. The Merchanting businesses experienced a period of severe disruption, including many temporary branch closures, in the prior year whilst Toolstation was able to continue trading largely throughout the period, albeit at reduced levels, by adapting branches to become fulfilment centres.

Input cost inflation picked up in the first half of 2021 and was exacerbated by materials shortages. In Merchanting, prices are updated in line with manufacturer increases which are invariably communicated clearly to the market. In Toolstation, this is less straightforward and has to be managed carefully to maintain value leadership.

The reduction in network capacity in the Merchanting business reflects the 2020 restructuring programme and the 1.9% overall growth against 2019 represents a very encouraging performance given the loss of c. (9)% capacity. Toolstation growth reflects the impact of the ongoing network expansion across both UK and Europe and the resulting market share gains.

Source : Travis Perkins PLC

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