Travis Perkinsplc: Full year results for the year to 31 December 2023

5 March 2024

Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014 (MAR)

Travis Perkins plc, a leading partner to the construction industry, announces its unaudited full year results for the year to 31 December 2023

A challenging year in weak market conditions; driving actions to support profit recovery and enhance cash generation

Protecting market position in challenging conditions

• Progressive downturn in new build housing and private domestic RMI markets leading to Group revenue (2.7)% lower than prior year
• Combination of lower volumes, overhead cost inflation and rapid commodity price deflation in H2 resulted in full year adjusted operating profit of £180m (2022: £295m)
• Invested to protect and build market positions with market share gains in both Toolstation and Travis Perkins General Merchant

Transforming the operating model to build a stronger business

• Step change reduction in non-branch cost base delivered with £35m annualised savings
• Working on a plan for a potential exit of Toolstation France; strategic review of options for Toolstation Benelux
• Optimising Benchmarx branch network with focus on integrated offer within destination General Merchant branches and profitable standalones
• Continued rationalisation of legacy Toolstation UK supply chain, following successful opening of the new Pineham distribution centre
• Delivering profit enhancements through simplification of Group structures, lowering supply chain costs and harnessing benefits from new technology
• Operating profit of £110m (2022: £285m) reflects trading performance and adjusting items of £60m recognised in 2023 (of which around £16m is cash) related to impairments in Toolstation France and Benchmarx, together with restructuring actions

Enhancing cash generation to support future capital allocation

• Reduced capital expenditure requirements in near term; £80m guidance for 2024
• Review of working capital opportunities underway
• Refinancing completed, supporting robust balance sheet; no funding maturities before 2026
• In line with the Board’s policy, 2023 proposed full year dividend of 18.0 pence per share (2022: 39.0 pence per share)

(1) Alternative performance measures are used to describe the Group’s performance. Details of calculations can be found in the notes listed.

Nick Roberts, Chief Executive Officer, commented:

“Ongoing economic challenges have significantly impacted our trading performance, driven by weakness in the new build housing and domestic RMI sectors, and compounded by deflationary pressures on commodity products. Faced with these challenges, we have invested to protect and build our leading market positions. 

With market conditions expected to remain a headwind through 2024, the business is fully focused on improving profitability and enhancing cash generation. We have successfully acted to optimise our cost base and are actively addressing the impact of our loss-making businesses. We are also accelerating changes to our operating model, leveraging our scale to create a simpler, more efficient business. This will be achieved by simplifying our operational structures, consolidating our supply chain, creating shared procurement capability, and embedding new technology.

While the timing of recovery in our end markets is uncertain, the long-term growth drivers of our industry remain robust. The proactive steps we are taking to rebuild profitability and strengthen our balance sheet will create a more resilient business and, together with our strong customer relationships and differentiated offer, will see the Group well positioned to emerge stronger when markets recover.”

Analyst Presentation

Management are hosting a results presentation at 8.15am. 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://travis-perkins-2023-full-year-results.open-exchange.net/

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 5th March 2024, 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

2023 was a challenging year for the Group as a combination of macroeconomic uncertainty, progressively weakening end market demand, sharp deflation on commodity products in the second half and overhead inflation made business planning difficult, weighing heavily on the Group’s earnings performance during the year. Reflecting the expectation of continued challenging market conditions, management’s primary focus is now to drive efficiencies through the transformation of the Group’s operating model and prioritise capital allocation to support the recovery of profitability and reduction of leverage in the medium term.

2023 Performance

The Group delivered revenue of £4,862m, down (2.7)% versus 2022. The decline in revenue was driven by the Merchanting businesses with rising interest rates leading to a significant reduction in new build housing activity. A lack of secondary housing transactions, coupled with weak consumer confidence and pressure on household finances, resulted in the domestic RMI market also remaining subdued. Toolstation saw good revenue growth in both the UK and Europe with maturity benefits being realised and further market share gains.

Adjusted operating profit of £180m was £(115)m, or (39.0)%, lower than in 2022 with the prior year reported adjusted operating profit also including a £15m restructuring charge. Around £(64)m of the profit decline resulted from lower sales volumes whilst approximately £(24)m was attributable to lower gross margins, with deflation on timber products in the second half a significant contributory factor.

Although the Group delivered overhead savings in 2023 of around £35m, the remaining profit reduction was due to these savings being more than offset by overhead increases. The majority of these increases related to inflation, primarily on salaries, and included an £8m cost-of-living payment in January 2023. The increase in overheads also included £(20)m investment in Toolstation, primarily in the new distribution centres at Pineham (UK) and Rotterdam (Netherlands and Belgium) plus the ongoing expansion of the European network.

Transformation of the Group’s operating model

Given the significant impact of the macroeconomic environment on the Group’s profitability, and with uncertainty remaining as to the timing and speed of recovery in the Group’s key end markets, management has commenced further significant actions which will transform the business for the future.

The first phase of this review, completed in the fourth quarter, will deliver further cost savings of around £35m in 2024, primarily from a reduction in central and regional headcount and the closure of the Toolstation Bridgwater distribution centre.

The next phase commenced in February 2024 with 39 standalone Benchmarx branches closed as part of a review of the strategy of the business. The focus is now on optimising the profitability of the remaining standalone branches and growing the network through integrated solutions in new General Merchant branches which provide a lower cost model with a convenient customer journey.

In March 2024 the Group announced the proposed closure of the Toolstation Daventry distribution centre which represents the next stage of supply chain consolidation within Toolstation UK.

Work to deliver further structural efficiencies will continue over the medium term and be focused on the following areas:

• Supply chain consolidation - reviewing and optimising the Group's supply chain to deliver greater economies of scale and efficiencies
• Technology enablement - driving benefits from new technology starting with the implementation of a new Oracle finance system to improve processes, data, and control
• Simplifying our structures - streamlining the interactions between businesses to enhance the customer experience
• Shared procurement capability - consolidating separate procurement functions across businesses to harness the buying power of the Group’s combined scale

Adjusting items

There were £60m of adjusting items in the year (2022: nil) as set out below:

The restructuring charge relates primarily to severance payments made as a result of headcount reductions in Q4 2023, the majority of these roles being in central functions or regional sales and support teams. Also included in the charge are the costs related to the closure of the Toolstation UK Bridgwater distribution centre and other supply chain restructuring activity.

The charge associated with the Benchmarx branch closures related to fixed asset impairments and property closure costs.

The Toolstation France impairment charge relates to the write-down of goodwill, property and right-of-use assets under IAS36.

Capital structure and shareholder returns

The Group has previously set a medium-term leverage target of 1.5x – 2.0x net debt / adjusted EBITDA (on an IFRS 16 basis), this target range being consistent with the maintenance of investment grade credit metrics. The Group’s balance sheet remains robust with the refinancing of the 2023 bond completed during the year and the renewal of the revolving credit facility of £375m (see “Funding” section for more details) providing adequate liquidity for its future plans.

However, with net debt / adjusted EBITDA rising to 2.6x at the year-end, management has set out the following medium-term capital allocation priorities:

• Maintaining an investment grade credit rating by returning leverage to the target range as soon as possible
• A disciplined approach to capital allocation, focused on maintaining asset quality and sources of competitive advantage
• Improving working capital management and an ongoing review of loss-making activities
• An attractive and sustainable dividend

Taking into account all of these factors, for 2023 the Board is recommending a final dividend of 5.5 pence per share (2022: 26.5 pence per share) to give a full year dividend of 18.0 pence per share (2022: 39.0 pence per share), in line with the Group’s previously communicated policy.

The commitment to lowering leverage will result in a planned reduction in capital expenditure to £80m in 2024 (compared to medium-term guidance of £125m). Property activity will continue in order to enhance the quality of the Group’s branch network but with the objective of generating a cash surplus from property transactions in the year.

Outlook

A recovery in the UK construction sector is unlikely to gather any momentum before the UK general election is concluded with the Group’s customers, large and small, inevitably waiting to see if there is a post-election government stimulus package for the sector and also seeking clarity on the future direction of interest rates.

Mindful of these challenges, management is planning for another year of weak demand, with overhead and cash management actions supporting financial performance. Lead indicators and customer feedback will be closely monitored to inform further actions during the year. Pricing benefit is expected to be minimal in 2024 with lower timber pricing rolling over into H1 and limited manufacturer increases.

Whilst it is still early in the trading year, the Group has seen a continuation of the weak trading environment experienced in the second half of 2023. Accordingly, management's best estimate at this stage is that FY24 adjusted operating profit will be in the range of £160m to £180m, inclusive of around £10m of property profits and around £(20)m of losses in Toolstation France.

Technical guidance

The Group’s technical guidance for 2024 is as follows:

• Expected ETR of around 29% on UK generated profits
• Base Capital expenditure of around £80m
• Property profits of around £10m

Segmental performance

Merchanting

Note - all figures above exclude property profits

The Merchanting segment had a challenging year with revenue down by (4.4)% and adjusted operating profit reduced by (32.5)% to £212m, reflecting the high operational gearing of the Merchant businesses. Revenue decline was consistent although the drivers moved significantly through the year with pricing starting off at elevated levels due to the rollover of 2022 increases before falling away rapidly. Deflation on commodity products, notably timber, became a major factor in the H2 with overall pricing turning negative, having been +9% in Q1. By contrast, volumes started the year weakly, driven by a reduction in new build housing activity, before levelling off in H2 as comparatives eased and actions on pricing delivered market share gains in the General Merchant.

Throughout a difficult year, the Merchant businesses remained focused on meeting customers’ needs, notably in the second half when pricing was adjusted to reflect the weak demand environment and ensure that existing customers were retained alongside winning new work. There was continued progress on the development of digital capability and increased penetration of higher margin, value-added services, particularly Hire which delivered revenue growth of 6%

The private domestic RMI market, the Merchant segment's largest end market which is primarily serviced by the Group’s General Merchant business, remained depressed throughout the year. Pressures on household finances, the significant rise in the costs of building materials and labour and the rise in the cost of borrowing have all contributed to lower levels of activity in the renovation and improvement market.

The private domestic new-build market, primarily serviced by Keyline, CCF and Staircraft working with national and regional housebuilders, was significantly impacted by the economic turmoil in autumn 2022 with activity down by around one-fifth in the year. This reduction in activity has weighed heavily on the performance of all three businesses with each deriving at least half of their revenue from this customer base in normal market conditions.

The Merchant segment’s other end markets - commercial, industrial and public sector - which represent around half of the segment’s revenue, remained relatively stable, supported by long-term projects. This stability was reflected in a more resilient performance in BSS, which derives the majority of its revenue from these sectors, and in the Group’s Managed Services business where revenue increased by 5% as the business continues to benefit from its tailored proposition to partner with social housing providers.

Adjusted operating margin reduced by (210)bps as a result of lower gross margins and high levels of operational gearing in the Merchant businesses. Overhead inflation, mainly driven by payroll costs, remained elevated with underlying inflation of around 5%. Cost actions and volume related savings of around £35m in 2023 mitigated the overall cost increase to around 1% for the year.

Toolstation