Travis Perkins plc

John Carter - CEO and Director Alan Williams - CFO and Executive Director

Robert Eason - Goodbody Stockbrokers Gregor Kuglitsch - UBS Investment Bank John Messenger - Redburn Howard Seymour - Numis Securities Aynsley Lammin - Canaccord Genuity Limited Charlie Campbell - Liberum Capital Limited Kevin Cammack - Cenkos Securities Ami Galla - Citigroup Emily Biddulph - JPMorgan Chase & Co

Good morning all. You have Alan and myself with you.

And I'll just give a brief overview of the statement and then Alan I will be available for Q&A. I'd frame our first quarter results as encouraging, in line with our expectations with a 2.7% like-for-like growth and 4.9% total sales growth.

As you can see, the Consumer division continues to perform strongly, albeit the like-for-likes have been impacted by the timing of Easter, with the last year being in March and this year being in April and which we have -- sort of include in this would be around sort of a like-for-like circa 6%. Collectively, the 3 merchant divisions delivered total sales growth of 5.1% or a like-for-like 2.6%.

Clearly, a big feature of the trading is pricing. And following the sharp depreciation of sterling and the reverse of commodity markets, we've seen the highest level of cost price inflation for a number of years.

On a like-for-like basis, collectively, that 2.7% growth was driven by price, with volumes largely unchanged. And clearly, in the Q&A you'll be looking for detail, but we do not want to be drawn in that detail, for commercial sensitivity.

We're comfortable with our overall progress to date on our pass-through exercise. Looking at the different businesses.

General Merchanting was trading in line with our expectation, with modest volume declines offset by pricing inflation. Trading stance -- our trading stance focus was more on cost price inflation and margin management and the continued rollout of our new pricing tool that we developed in 2016.

In -- with regards our Plumbing & Heating, like-for-like revenues declined by 1.1%, with total sales up 1%. Our City Plumbing business and online businesses showed growth in the quarter, but the heating market continues to prove challenging, impacting our PTS and F&P businesses.

As you know, Tony took up his new role last month and is conducting a wide and comprehensive review of these businesses. And as we said, we will provide more information when we report our interim results in August.

And looking at our Contracts division. It was clearly a standout performance in the quarter.

All our 3 businesses of BSS, CCF and Keyline recorded encouraging growth through significant market outperformance supported by the newbuild volumes; and the maturing of our branches is -- in particular in CCF, that we opened in December 2015. Looking at the Consumer business.

We've reported the impact of our Easter, but the underlying like-for-like, as we said, is circa 6%. The new-format Wickes stores continues to perform well ahead of our older estates.

And we'll continue to invest in the rollout of the store refits across the rest of the estate over the next couple of years. Showroom continued to be the -- a strong category for Wickes.

And we're overall pleased with the performance of Toolstation. So if we look at the outlook.

And we -- there is still mixed market indicators that gives us a bit of an inconsistent picture of the strength of building material market for the balance of 2017. The group has therefore ensured that it has sufficient flexibility in its operating models and financial position in order to respond and take advantage of any change in market conditions.

We're still on track to meet our full year expectations. And we really remain confident, as ever, about the long term prospects for the market in which we compete, together with the investments we've made which provide attractive returns and a healthy premium to our cost of capital.

So at this stage, can we open it up for questions, please?

Two broad questions. I know, I appreciate you don't want to go into the details, so kind of directionally a bit of help just on kind of you mentioned that you're very comfortable with the way you're passing-on cost inflation.

Can you just kind of give us a flavor directionally what gross margins are doing in each of your businesses? And secondly, it's just around the outlook.

In the full year results, you gave a very clear statement in terms of an expectation of volume declines to be largely offset by price increases. Has that changed in any way over the last couple of months?

So just any kind of comment on that.

Okay, Alan, did you want to sort of kick things off? Or do you want me to...

Yes. Robert, you're right.

We're not going to be drawn on the specifics, in a quarterly trading update, around gross margin by division. The -- if I just start on the price inflation.

It's obviously varied from category to category. We said in the statement on commodity materials in particular we have seen strong inflation, so we've seen underlying inflation exacerbated by the depreciation of sterling.

That will be, for example, copper, plastics, timber...

Steel.

Steel. We're seeing double-digit inflation, but the second comment I'd make is we're anticipating further inflation coming through within the system versus what we've seen so far.

So our stance through the first quarter has been making sure we're in the right position to offset that inflation within our P&L. So you have seen some volume declines offset by a price increase, as we'd indicated at the full year and I don't think that stance is going to change anytime soon for us.

I don't want to get into gross margin by division, but I think we're comfortable with where we sit division by division at this stage, on the actions that we've taken.

And sort of outlook?

And yes. And in terms of the outlook, we -- during the first quarter, 1 or 2 of the indicators were slightly better than we would have anticipated when we gave the full year result statement.

So for example, the number of housing transactions has been slightly better, but as we say in the statement, the -- we've got an inconsistent picture as you look across the metrics. So if you want to cherry-pick metrics, you can find reasons to be bullish and reasons to be bearish about the outlook.

And that's why we're still adopting a flexible stance and we're happy with where we're overall.

And sorry. If I -- if you wouldn't mind, just one follow-up.

Just in General Merchanting, is it fair for me to say that you're more prepared to give up market share there versus margin? Or that's -- am I misinterpreting?

I think, as we said at the prelims in March, Robert, that this pricing tool is quite extensive and we've completed the rollout, as we said, by the end of April. I think it's more about impacting our outperformance.

And I would also say about General Merchanting that they're annualizing their strongest quarter of last year. So it is definitely a controlled pricing environment where we're focused on pass-through and embedding our pricing tool Spinnaker.

I may have changed my name, but anyway, I've got a few questions. So firstly, on Consumer, obviously you flagged the 3 percentage point impact from Easter which I have to admit it's obviously not particularly visible when we look at last year where I think the opposite was true.

So I guess the question is, are you comfortable that you can sustain the sort of underlying 6% run rate so we should therefore have a pretty robust second quarter? Maybe a little bit early to tell.

And then maybe the follow-up to that, I think, if I understand correctly, your growth area is quite heavily supported by showroom sales which I think is partly because one of your competitors is pulling out of kitchens. Can you sort of give us a sense of when we should think about that effect comping out?

I guess it started at some point last year and then maybe a broader question on the like-for-like. So you just did sort of 2.7%.

If we adjust for the Easter effect that you mentioned, it's sort of 3%, 3.5%. Is it still your view that, that will slow down sort of sequentially reasonably dramatically?

I mean I guess it's not obvious looking at the comps last year which obviously actually eased, if nothing else, but I just want to get your sense to whether your, I think, initial expectation of sort of flat like-for-like may look a little bit cautious at this point.

Well, I think we do go back to the prelims when we were in March, where we set the tone for being cautious. Reading the tea leaves and the data that's coming through does give you a real mixed picture.

As Alan says, if you cherry-pick, you can be quite positive. If -- equally, if you're cherry-picking, it could be quite negative.

I think it's really difficult to forecast Wickes in terms of its underlying 6% like-for-likes because, as we go into the year, a big concern is potential sort of a downgrade on consumer confidence. We've actually had a 3.5-year good run with our showroom business, so we're not in any sense predicting a decline through -- to performance.

And clearly we've been helped by one of our competitors, but we've been on this track of improving our showroom offer now for a good period. It's difficult to forecast where we're and therefore we can only post what we've achieved and see how the year progresses.

Our expectation is that consumer confidence at some point must be impacted by inflation coming through and the squeeze on disposable income. What we can't do is give any precise forecast on that.

In terms of like-for-like as we go forward, we continue to work hard in focusing on this unusual high level of inflation given the last 2 to 3 years and balancing that offer against volume. So we -- that's why we've adopted quite a cautious position for this year.

We're really pleased with the first quarter and we're working hard into the second quarter. We can give you a bit more detail, obviously, in August when we give our interims.

John and Alan, two, if I could, please. And one, it's kind of back on, I think, Robert's earlier question, John, when you think about that -- the General Merchanting division and where you come in with the minus 0.3.

If we maybe look forward over the next month or 2, when data comes out, would you agree that it's probably more likely than not that, as I say, you have been prepared to lose some volume in the short term? Clearly, Spinnaker and what you're doing there make sense, but would you be more confident that actually in Q2, once the independents and others experience the proper feed-through of list price increases, there will be maybe a more balancing out in that were you expecting kind of a Q1 where you'll probably lose a bit of share just given the independents' behavior and the likely timing of price increases actually coming through on COGS?

And then the second one was just when we think about how the group is behaving on that trading aspect. Have you been sort of significantly loading up on inventory, with a view to this price increase kind of movement coming through?

And does that create any issues that we need to think about in terms of the balance sheet or just investment in working capital for the first half?

We'll take the second one, first, John. We will always take -- especially with the investments we've made in our supply chain, we will always take advantage of buying forwards, where we've seen high inflation.

And we do that pretty much in all periods and we aim to manage the stocks accordingly. We're a tad high on stocks at the moment, but my expectations is that the teams are doing really well in terms of managing the capital.

And I think it's a good feature that we've seen in both 2016 and that's continued into '17...

Yes. John, I certainly wouldn't expect to see any issues in the balance sheet, far from it, when we report the half year.

Got you.

And then on the General Merchanting, John, it -- we have a history, when volumes are slightly lower and in a period of inflation, to change our trading stance. This has been compounded by obviously the work we've been doing on the pricing tool.

I'm really pleased that General Merchanting are pretty much in line with where we expected them to be. And I'd see that continue sort of overall into Q2.

Brilliant. And sorry, just one other one.

When -- and maybe it's just a function of where I live and the Wickeses that are around me, but have you accelerated some of the refits and the refurbs given how successful it's been to date, in that I just sense that there seems to be more Wickeses appearing with the new logo and the slightly snazzed-up front door? And the visitor goes in behind it which is working the right way.

But have you -- how many this year? Is it something that you've just decided to accelerate or is that not the case?

I think we will do just in excess of around 33, 34 this year, John.

Right. And so I think that's what you were before...

Yes.

We've just targeted obviously the affluent areas that you live in.

Absolutely. All right, really good.

A couple from me, if that's okay. Firstly, Alan, you alluded to the fact that obviously you've seen a sort of FX move and -- but certainly on commodities et cetera but pricing potentially still moving.

Would you suggest therefore that -- probably more selectively than generally that you'd continue to look to put prices up against that backdrop over the sort of first half and coming year?

Howard, I think we -- this might be slightly cryptic and you'll get back to the same place, but we will continue to look to offset and recover the impact of cost inflation by managing the overall margin mix in the P&L. So I think it's -- it will be the right thing for the longer term is to make sure that we recover the impact of input cost inflation.

Yes. And mostly, though, that's more likely to be the sort of the commodity area, isn't it which has been the, as I say, as opposed to the sort of the FX move [indiscernible].

So there is commodity because of the way that you're hedging rolls through, where you've hedged FX. There may be -- as you annualize the sharp depreciation in sterling last year, there may still be a little bit of FX going through within that as well.

All right, okay. Second question, more general.

And, sorry, I suppose it slightly comes back to John's question but more in a more general basis on market share. There's only sort of one area of the statement where you allude to sort of growing significantly ahead of the market.

Would you sort of say therefore that in merchanting, Plumbing & Heating and Consumer that you've sort of maintained market share overall over this period? And similarly on Benchmarx, if possible, also...

Yes. So on Plumbing & Heating I think we've maintained market share with the larger operators.

It's difficult to read the independents and the development of Toolstation and Screwfix, but broadly we've held market share. I think we've taken a little share in Wickes in this period and I think we're broadly in line with General Merchanting.

We have invested and been gathering momentum in Contracts now for some time. I'm really pleased all 3 businesses have both seen the benefits of the investment and the good management of Frank Elkins and his team.

So we've definitely taken share. Well, we believe we've taken share within the contractors -- the contract merchants.

And Benchmarx, [indiscernible]?

[Indiscernible] just given that their numbers are out today. We -- again, we performed very well against them.

Just two for me. Firstly, just on the kind of net new space and acquisitions.

I think, for the group, it is running at around 0.6%. Just wondered if that's likely to increase as we kind of go through the year, particularly in the General Merchanting and Consumer side.

And then secondly, just on the Contracts division, I wondered if you could just provide a bit more color there. Is that -- is it mainly just the end markets, newbuilds better?

And are you seeing any kind of reaction or change in behavior from the -- your biggest competitor in that market?

Okay, well, I'm quite keen that only sort of 1/3 of that division lines up against the competitor you're talking about, if I'm reading you right. We've enjoyed good growth in BSS and Keyline and very good growth in CCF.

And so for the first time, we've had both all 3 of those businesses operating at a good optimum. With new space, Aynsley, broadly somewhere between sort of 0.6% and 1%, I think, for the year.

We continue to expand Toolstation. I think we've got 8 new Wickes stores for the full year.

We -- as I've said, we're refitting 33 of the older estate. We're focusing on growing Benchmarx.

I think we've got sort of 16 new branches in 2017; not a lot of investment in Contracts; and obviously, at the moment, not a lot of investment in P&H. And I think we'll probably be somewhere between 12 and 15 new branches in TP for the year.

So percentage-wise, I think it's going to be somewhere between 0.6% and 1%.

Yes. Aynsley, it's Alan.

So on -- within that number that John talks about, 0.6% to 1%, remember there were some closures that we announced in October 2016. So if you look at it on a gross basis, there's probably new -- more new space, particularly in Consumer, a bit in General Merchanting.

And then there are some offsetting closures, particularly on Plumbing & Heating. There was a bit in BSS and also some of the timber activity in General Merchanting as well in terms of processing.

My end, I think 3 questions, but they're all quite quick really. So first question is on the Consumer division and just wondering if the price dynamic is -- or the price inflation number is the same as the group number you gave.

And secondly, just wondered if you had a view of property profits for the full year and the first half. And then lastly, just City Plumbing, You've talked about sort of some decent like-for-likes.

Did it actually achieve some like-for-like volume growth in that part of the business?

I've not actually done the count, but I would suggest there's a little bit of volume.

So on Consumer, yes, the -- on the pricing dynamic. It's -- we don't want to go into too much detail, but we're broadly similar across the piece.

There are obviously categories where we're selectively increasing in price competition and particularly on what in my old consumer language I've called KVIs, so the key value items, making sure we remain competitive there. On property profits, for the year, we'd still expect around the usual guidance we give, around -- plus or minus around GBP 20 million.

So we're a little lower last year. We'd expect this year to be back in that range.

And on CPS, we had a like-for-like revenue growth, but remember we're recovering the input cost inflation as well. And particularly when you get into something like copper, that was pretty high, as was the -- on the plastics side.

Okay. And any ideas around property profits; how they might fall H1, H2?

Probably still too early, is it or...

It's a bit too early because it will depend on the -- a strict accounting rule where we've exchanged contracts or not on a sale before the half year, whether we can recognize it. So it's a little early, I'm afraid.

Actually, I'm pretty sure all my questions have been addressed, but I would like to actually come back on one which is just this 3% number around Easter that was given for Wickes. And I must confess, I guess, a bit like Gregor, it seemed quite a high number to me.

And I just -- in a sense just want your reassurance that you consider that to be a normal vagary as to the variation around Easter. Or was there something in particular that's made that number higher this year that gives us confidence...

So Kevin, you're well sort of experienced with us. And it's always difficult to interpret the first quarter in our business.

January often starts slower than we would like. February is a short month and you'll get the occasional dump of snow.

And then March opens up and we start to get a bit of trading. In years where Easter flips between March and April, it's bloody difficult to read, so we tend to sort of take March and April as 1 month.

And we had a strong Easter in Wickes in 2016 and we've had a positive Easter in 2017. It -- we're happy with that guidance that we've given.

I think the bit I was just slightly reluctant is that -- the ongoing run rate for the remainder of '17 and that's where we'll be a little bit cautious. We're trading well.

Easter was a good trading period for Wickes in particular.

But in a sense, to be clear, your caution is around the sort of macro. It's not around how Q2 has unwound after Q1.

It's around the -- it's a -- no, no, no. It's very much about macro.

And the -- I'll make the point, Easter for Wickes is the equivalent of Christmas for most retailers, so it's a big trading period and then followed up by obviously the bank holidays. And we're trading well.

And when we try and compare sort of that March, April '16 against '17, we've been pleased with the performance.

I have just two questions, please. The first one, in Consumer.

And I'm sorry if this is a repeat of the earlier questions in Consumer, but if you could give us some more color on the competitive pressures there. How are you seeing the market with Wesfarmers ramping up and improving their pricing of the -- their pricing offer in the market?

And also on Consumer, if you could give us some sense of the online penetration of your business in Wickes, if that's helping your like-for-like trends. The last one was really a technical one on Contracts.

The negative spaced growth in Q1, could you give us some color on that?

Okay. I think the negative space is still the unwinding of the...

There were two BSS branches closed.

Yes, closure.

Yes.

Just tidying up the estate. Consumer online continues to grow nicely.

We had a record trading day over Easter and over 2 million online in one day. So we're progressing that side of the business really well.

What was particularly pleasing is the high element of Click & Collect. Pricing in Wickes in particular is it remains relatively benign.

Obviously, Wesfarmers are becoming more competitive but not sufficient that we've got anarchy in the market. Their numbers were out today, as I'm sure you've seen and we compare nicely against them.

I think we're managing the business to grow the sustainable returns and we'll price in accordance to sort of the cost price inflation versus volume. So it's a skill.

I think the team are doing a really good job and -- but there is no aggressive activity on pricing at the moment. That's not to say there won't be, but we haven't seen it to date.

I've got two questions based on Contracts. And the first one, just on the sort of relative like-for-like performance.

I think, in previous years when BSS industrials underperformed slightly, you've talked about a negative margin mix. Is that -- the fact that's growing, is the gap there too narrow to -- that we need to consider that this year?

Or is it still a dynamic? And then secondly on the Contracts business as well, just the order book or sort of the outlook there.

Sorry if I missed it on the start of the call, but do you have anything sort of to give us a sense of what Q2 might look like?

Yes, no, the order book hasn't really moved dramatically either way. And BSS, if you remember, last summer, we unfortunately had to -- changes at the management.

And Frank Elkins, who had previously run BSS, dropped in to manage both the Contracts division and BSS. That has been addressed and there's a new Managing Director being appointed.

But what Frank's done is really got the team focused and we're getting good growth coming through. Let's see how the year progresses, but I'm really pleased with the direction of travel of BSS.

Just, ladies and gentlemen, thanks very much for your time. And we look forward to seeing you in early August.

Thank you very much.

Thank you.