Travis Perkins plc (TPK) Earnings Call Transcript & Summary

Welcome to the Travis Perkins Q3 Trading Update Call for analysts and investors. With me, I have Travis Perkins' CEO, Nick Roberts; and CFO, Alan Williams, who will take your questions. I will now hand over to Nick for his opening remarks before we move on to questions from the phone line.

Good morning, everyone, and thank you for joining today's call. I'm joined today by Alan Williams, our CFO. And after a short introduction, we'll move to take your questions. Clearly, a lot has happened since we last spoke to you in August. And with the challenges we've seen, I'm pleased to be reporting a resilient set of numbers during the third quarter. For the group as a whole, total sales on a trading day adjusted basis were up 10.7% and like-for-like sales grew by 7.4%. In our Merchanting segment, sales were up by 11.5%. And I think, encouragingly, this performance was very consistent throughout the quarter. Toolstation returned to growth in the third quarter with sales up 6.1% and like-for-like sales marginally ahead. Here, we saw an improving sales trend across the quarter supported by the launch of the September catalog, which has been well received by our customers. Our European business continues to build well with sales up 23.3% in Q3. Reflecting briefly on our end markets, we did see some softening of demand in the smaller trade customer segments who predominantly trade with the general Merchant and Toolstation. Elsewhere, though, particularly in the specialists, end market demand remains robust. This includes larger repair and maintenance contractors, new housing and commercial, industrial maintenance and infrastructure projects, demonstrating the benefit of our end market diversity across the construction sector. Given the current environment, we're keeping a very close eye on costs and driving operational efficiencies. We continue to flex our cost base as required depending on market conditions. So taking all of that into account, where does that leave us? The current range of analyst expectations for FY '22 is in an operating profit of between GBP 304 million and GBP 340 million. Adjusted for the unexpected bank holiday in September, we now expect to be around the middle of that range. Finally, whilst we're seeing a lot of macro uncertainty at the moment, I'm confident that the investments we have made in our business over the last few years will be really important in helping us differentiate ourselves and enable us to outperform and to continue to outperform our end markets. Now I'll hand back to the operator, and Alan and I will take your questions.

[Operator Instructions] Your first question comes from the line of Priyal Woolf from Jefferies.

Yes. It's Priyal here from Jefferies. I've got 3 questions, if possible. So the first one is just on Merchanting volumes. You've obviously said that the specialist merchants are doing much better. I just wondered if you could give us any more quantification on the volume trends within those specialists? Are they still up year-on-year and versus the generalist merchant, which I assume is down more significantly? Second question is just -- wondering if you could give us a sense of how your inventory levels have moved over the course of the year and into Q3? Obviously, starting to hear a little bit more about destocking across the sector more broadly. And then the last question. It's probably quite unfair to ask about the outlook for 2023 at this stage, but maybe what are the range of scenarios that you deem reasonable in terms of volumes, pricing and margin?

Yes. Priyal, on your first question on the Merchanting volume, specialists, are they much better than the general merchanting trend? I think in the statement we've pointed to it being in the smaller customer and from a merchanting perspective, that would be mainly the cash and smaller trade accounts within the general merchant where we've seen the softening of demand. Elsewhere, whether it's in the general merchants or the specialists, the volume trends are fairly consistent and have been consistent through the quarter. On the second point, inventory levels, obviously this is a Q3 trading update on sales, and I wouldn't normally say much about the -- where we are on balance sheet items. But as we've got the question on inventory levels, they've come down a little during the third quarter. And then I agree with you, it's just a little unfair to ask about 2023 range of outcomes at this stage. Obviously, we're all cognizant of the external environment. I think the key thing for us is that the business is outperforming across its different end markets at this stage. We can't control the end markets, but we can make sure that we perform as strongly as we can within the market environment we've got. So we deliberately moved the portfolio of businesses over the last few years to have a more resilient set of end markets. There will be softness in different areas, but at the moment, we're managing through that by continuing to outperform.

Your next question comes from George Speak from BNP Paribas.

So just picking up on that inventory piece and sort of the pricing dynamics associated with that. If there is a risk of some destocking across the sector, does that mean that you'll see any reversal of that gross margin tailwind that you've had over the last couple of years?

Sure, Speak. The gross margin tailwind is a function of the absolute level of inflation we see year-on-year. So if you assume that the overall inventory levels are relatively consistent year-on-year in actual volumes, what you get is on the stock that we have in hand, you will see inflation gains if prices are going up. As the level of absolute inflation increases we see it starts to tail off. There will be -- there won't be a tailwind anymore on that. And I think in the 9 months ago when we reported -- or maybe not that long ago, 7 months ago when we reported the full year numbers for 2021, I identified that we thought that was a 40 to 60 basis points range for the group as a whole on an inflation level at that stage at 12%. Now obviously, inflation in materials has gone a little higher. So that's -- the amount of inflation gains would have been a little higher overall. But you've got to deduct from that, say, 12% from prior year. So I don't think it's a hugely material thing overall to get concerned about.

Okay. That's really clear. Another one, if I may. So on previous calls, you've made comments about larger customers in the mix having a bit of a dilutive impact on margins. And we've talked about today the smaller customers within Merchanting starting to see volume soften there. At what point do you think the sort of the mix of customers will start to stabilize?

I think that's a really difficult question to call at the moment, George, because the -- that smaller customer piece -- there are 2 factors going on. One is the strength of performance in 2021. So you've got a comparative thing. And then secondly, you've got to take into account the high levels of macro economic uncertainty at the moment. It's difficult to tell with inflation being at a 40-year high and policies changing day by day exactly how the end customer in the RMI market will feel going forward. I think we know that whatever the economic conditions, repairs and maintenance still has to take place, and it's the improvement piece where there's a little more uncertainty. But you'll appreciate that given the high economic uncertainty at the moment, that's quite difficult to call.

Okay. And maybe just one last quick question on Toolstation. Could you just give a bit more of an update on the European rollout just in terms of how our customers responding to the business proposition and maybe a bit of a guidance on when you think it might start to become profitable?

Yes. So on the -- we're really pleased with the overall performance in the third quarter, up over 23%. Within that, the French and Belgian businesses which are earlier in their development performed really strongly. They saw less of an impact from the DIY slowdown compared to the Dutch business. But the Dutch business is still in strong high single-digit growth year-on-year in the quarter. As for breakeven, I refer you to comments we've made previously. So we're expecting the Dutch business to breakeven around the end of 2023, fourth quarter '23 should be around a breakeven position. The position has not changed on France and Belgium, where we continue to invest in those businesses.

And George, might I just add something to your -- to Alan's answer on your second question around customer dynamics. You will see released today the next installment of the Travis Perkins RMI Index, which shows in our smaller customer base -- our smaller trade customer base, albeit we have seen softening in that segment, which we say in our statement today, continued resilience in their forward order books. So as Alan said, it's a very mixed picture and one that's actually quite hard to discern signal from noise. But actually, we saw sustained forward order books, customers still being positive about their workloads over the coming 3 to 6 months. And increasingly, and this is something that we might see and are looking carefully around, an increasing number of their end customers asking about energy efficiency schemes and energy-efficient products in their bills. So again, it's a relatively bleak macro outlook. We still see those signs that our trade customers hustle and win work and remain positive around their order books in the smaller segments, just to counterpoint to some of the broader indicators.

The next question comes from David O'Brien from Goodbody.

A few for me, please. Firstly, look, very difficult to see where we're going. But maybe you can help us rebase where we actually are because trying to pinpoint where merchant volumes now versus 2019 levels accounting for branch closures, et cetera, and a lot has happened. But if you could give us that at kind of divisional level for Merchanting? And if you had any color on how that varies between the general merchant business and specialist. And I guess again, back to previous question, maybe very difficult to determine where the top line is going next year. But I guess the cost base is a little bit more in your own hands. Where do you see inflation in the cost base for the second half of '22 kind of trending? Where do you expect that to go into next year? And you've talked about tightening your belt with regards to cost of managing closely. What are the levers you can pull given there was a pretty meaningful restructuring not so long ago as well? Third question. Just have you seen anything in regards to bad debts ticking up generally in the U.K. merchants business? And finally, just to get a sense of -- look, you're clearly calling out this weaker RMI and then the larger guys remaining pretty resilient. In your experience as one or other leader lagged into a downturn, so ultimately, is RMI telling us that this is coming on the larger contractor side as well?

David, thank you. I think we got all of those down. Let me start and then Alan will pick up. I'm just going to start with the weaker RMI. Alan said it earlier, we just are cautioning around bucketing everything as RMI. We see improvement projects showing some sign of weakness, which given the factors in the broader environment is not surprising. But actually, as I said about our RMI index and the feedback we get from customers, there's still demand around R&M. So we just need to take that into account. And we would expect to see some level of softening around the more discretionary spend. We trailed that at half year. And so it's a finer picture that we need to think about rather than just bucketing it in the broader RMI. However, we know from the breadth of our customer base, that there's still plenty of R&M in the commercial and I in the commercial and particularly social housing space, the kind of social infrastructure space that needs to be undertaken. And there's still an element of catch up post the pandemic. So it is a very complex picture. But within that, we see areas of sustained demand as well as early signs of a bit of weakness in the domestic space. Let me just talk to the cost base. I think it's fair to say that we would expect to see inflation continue in all areas of the cost base. But we mustn't forget that we have gained far greater flexibility in our cost base over the last few years. As you say, we took out much more inflexible elements in our cost base in 2020 around smaller branches, and we'll come back to that point in a minute. So we've got much more flex and much more agility in our business to be able to flex our cost base. So we have been adjusting our cost base, particularly in Toolstation and the general merchants this year, unsurprisingly. And we'll continue to do so. We're able to manage that at all levels of the organization and [indiscernible] accordingly. But clearly, there are very different dynamics in the different parts of our business. So we're further forward in tuning in Toolstation and general merchants. So there's no one-size-fits-all answer to that. So -- but we do maintain focus on all the things that we've gained, all the levers that we've gained in -- that are giving us the position of outperforming our markets. And we maintain a very clear focus on delivering our strategy. So all -- lots of flexibility in the way that we tune and adjust our business as we go forward. Alan?

Yes. David, first, I'll pick up on your other couple of questions. So where are volumes in Merchanting in 2022 year-to-date versus 2019. And you've talked about the branch closure program that we've had. I suppose the first point to remember is that in 2021, the recovery came -- from the pandemic came more quickly than any of us were anticipating, and we exceeded the levels of volume that we've seen in 2019, that's adjusted closures in 2021. I haven't done the exact calculation, but I guess that our volumes overall are roughly in line with 2019 at this stage, if not slightly ahead. I don't think there's a discernible difference in trend between the general merchant and the specialist. The specialist continue to perform really well, which has been a theme -- gosh, [ we're getting our ] first 10 years now, they've been outperforming. And the general merchant, as we flagged at the half year and we've hinted that in the statement this morning, continues to recover its market position. So on the third question you asked around bad debt experience. We're not seeing anything unusual in terms of the patterns at this stage. Our debtor book when I look at overdues as a percentage of credit sales, the DSO as well as the bad debt experience, they're all pretty much in line with prior year at this stage. So nothing I'd want to flag there. The one other point I'd make up with regard to Nick's answer to your fourth question, which in account of first around the RMI and the larger customers, the larger customers are still telling us that they have very busy order books. And it's a question of when that work comes through for them, when they put things down on the ground. But we still hear anecdotically shortage of workers for a number of the major contractors. They're still looking for labor, which gives us some encouragement that things have slowed because of the high levels of uncertainty but the levels of work is still out there.

Your next question comes from the line of Aynsley Lammin from Investec.

Just 2 questions from me, please. First of all, on the price and if you give us a bit more color what's kind of pushing the price inflation and the trends you're seeing there and our gross margins still holding up, I know you're still able to pass those price increases on successfully. And then the second question, just looking at the kind of full year guidance, just wondered what you'd assume for Q4? I mean, is it the kind of continuation of the trends you've seen in Q3, top line growth around kind of 10%? And are you still on track for a GBP 25 million property target -- profit within that guidance?

Aynsley, on the pricing, first of all, what's driving the elevated levels of inflation. It's another round of increases that we've been seeing on heavy-side materials that we -- I think we flagged these at the half year that we'd already seen them being presented to us for effect from July. A fair amount of that is energy-related. So anything which has a high conversion cost is seeing higher levels of inflation. We are still operating and the -- I'd characterize the merchant market as orderly in terms of passing on that inflation to the customer base at this stage. I'm not expecting a discernible difference in trends in Q4 versus Q3, and the guidance on property profits for the full year still remains.

The next question comes from the line of Rajesh Patki from JPMorgan.

I've got 2 questions as well. First one is if you could provide the moving parts by division for the revised guidance. Is the revision you made almost entirely for the Merchanting division? Is the expectations for Toolstation unchanged? And secondly, if you could provide any indications on the recent 3 weeks, if there has been any noticeable difference to what you reported for the third quarter.

Rajesh, on moving parts by division, I don't think there's anything additional that we need to flag or suggest versus expectations. Listen, I'm not going to comment on a 3-week trend. I think that's an unfair and potentially [ disgusting ] question, to be frank, I've already given the response about the trends from Aynsley's question, Q4 versus Q3.

Your next question comes from the line of Christen Hjorth from Numis.

A couple of questions for me, please. First of all, on Toolstation, I mean, obviously, you sort of called out at the half year stage, there's been a lot of investments in new branches over the last 24 months. Can you just touch on the performance of those new branches? I know it's maybe a slightly different macro backdrop, but if that will go to as expected. And the second one, just on TP. I noted the moving parts around the smaller jobbing builders. But overall, obviously, the strategy has been to win back some of those smaller jobbing builders. And so where do you think you sort of fit in terms of market share? And how should we sort of ex that out from some of the comments you made around demand?

Thanks, Christen. On Toolstation, we remain really positive about the performance of the branches that we've opened. And we continue to see consistent performance against our maturity model, as you know, and as we've talked about, I suppose, several times now. We continue the kind of trade-ification of our Toolstation business, really focusing our customer proposition, the way in which we develop our branch channel and our digital channel, all towards the need of our trade customers. And we're really pleased with what we've seen both in branch performance and digital channel performance and, on an ongoing basis, a successful conversion of trade customers from the other businesses within the group over to Toolstation. So despite the volatile macro, we remain really pleased with the investment in the Toolstation business and what we're seeing in return. To your second question about winning back those smaller customers. Again, we've seen some really positive progress in that regard. Not only are we benefiting from the investments in our branch channels, particularly around the destination branches that we talk about, where we've got the depth and the range of heavy-side products that our customers want and demand. We've got the attachment of Tool Hire and Equipment Hire, we've got the attachment of Benchmarx. And then we benefit from the -- augmenting that with the digital channel, which gives our customers the opportunity to check stock, organize delivery, organize Click & Collect. All of that is ensuring that we are more simple and convenient to do business with for our small and large customers, actually. But we've seen smaller customers come back to us because they appreciated the ease of the service proposition and the fact that our pricing architecture is now competitive with the rest of the market. So we are -- we continue to outperform the market, as we've said, and we continue to win back former and lapsed customers and, indeed, win new customers, particularly in the kind of younger cohort of the professional trade and smaller builder who are much more willing and seamless in the use of the digital channel. So positive signs on both fronts.

Next question comes from Arnaud Lehmann from Bank of America.