REG-Travis Perkins PLC : Results for the full year ended 31st December 2015 <Origin Href="QuoteRef">TPK.L</Origin>
03/03/2016 07:10
Travis Perkins plc
Unaudited results for the full year ended 31st December 2015
Good profit growth in a year of significant change and investment
£m 2015 2014 Change
Revenue 5,942 5,581 6.5%
Like-for-like revenue (1) 3.8% 7.3%
Adjusted operating profit (2) 413 384 7.6%
Adjusted operating profit excluding property profits (2) 389 358 8.7%
Adjusted profit before taxation (2) 382 362 5.5%
Adjusted profit after taxation (2) 307 291 5.5%
Adjusted earnings per share (2)(3) (pence) 124.1 119.0 4.3%
Dividend per share 44.0p 38.0p 15.8%
Lease adjusted ROCE 10.5% 10.4% 0.1ppt
Free cash flow 317 255 24.3%
Operating profit (4) 254 343 (25.9)%
Property profits 24 26 (7.7)%
Operating profit excluding property profits 230 317 (27.4)%
Profit before taxation 224 321 (30.2)%
Profit after taxation 168 259 (35.1)%
Basic earnings per share (3) (pence) 67.8p 105.9p (36.0)%
Cash generated from operations 350 310 12.9%
(1) Details of non-GAAP measures can be found in notes 6, 11, 12, 13, 15, 16
and 17.
(2) The term "adjusted" is used to signify that the effects of exceptional
items, impairment of goodwill and other intangible assets, amortisation of
intangible assets and the associated tax impacts have been excluded from the
disclosure being made.
(3) Share count in 2015 was 247,302,865 (2014: 244,146,721)
(4) Including the non-cash impairment charge of £141m recognised against
goodwill and other intangible assets in PTS and F&P
Full year highlights
* Revenue increased by 6.5%, like-for-like revenue up 3.8% (11.4% two-year
like-for-like)
* Adjusted operating profit, excluding property profits, increased by 8.7% to
£389m
* Adjusted EPS increased by 4.3% to 124.1p, lower than the 7.6% growth in
adjusted operating profit due to lower property profits and non-cash charges
relating to foreign exchange contracts
* Full-year dividend increased 15.8% to 44.0p per share, reflecting
confidence in future growth
* Network expansion continued, with net 53 new branches and stores opened,
including implants
* Significant progress on major strategic fronts, including supply chain
investments in General Merchanting and completion of the re-segmentation in
Plumbing & Heating
* Free cash flow of £317m (note 13) at a cash conversion rate of 77% (2014:
66%) used to fund £134m of growth capex
* Lease adjusted return on capital employed (note 15b) increased to 10.5%
reflecting higher earnings offset by the increase in capital employed
including the £104m invested in freehold property
* Non-cash impairment charge of £141m recognised against goodwill and other
intangible assets of PTS and F&P given the challenging market conditions
John Carter - Chief Executive Officer said:
"The Group has delivered a good performance in 2015 despite the weaker than
expected RMI market in the second half of the year. We made very good progress
on our key strategic priorities; modernising General Merchanting, transforming
Wickes and re-segmenting the Plumbing & Heating division, and we continued to
improve our customer propositions, delivering access to greater ranges with
better availability. The increased capital and operational investments are
enabling us to leverage the scale of the business and exploit structural
advantages in sourcing and supply chain, driving our continued outperformance.
We believe that the growth drivers in our markets remain strong and welcome
the return to growth of mortgage approvals and secondary housing transactions
in the second half of 2015. This has supported good growth in RMI sales for
the Group in January and February 2016. This gives us further confidence that
through our strategy we will successfully deliver against our medium-term
targets of sales outperformance, low double-digit profit growth and improving
returns."
Divisional Performance
Revenue growth Adjusted operating margin LAROCE
Inc. property profits Exc. property profits
Total LFL 2015 2014 2015 2014 2015 2014
General Merchanting 5.3% 3.9% 10.1% 9.8% 9.2% 9.0% 16% 16%
Plumbing & Heating 1.3% (1.4)% 3.3% 4.8% 3.3% 3.5% 6% 9%
Contracts 13.2% 8.5% 6.9% 6.7% 6.4% 6.6% 14% 13%
Consumer 8.0% 5.3% 6.8% 6.0% 6.7% 6.0% 7% 7%
Group 6.5% 3.8% 6.9% 6.9% 6.5% 6.4% 10.5% 10.4%
* General Merchanting revenue increased by 5.3%, 3.9% on a like-for-like
basis, outperforming the market with strong growth in heavyside categories and
tool hire.
* Adjusted operating margins, excluding property profits, improved by 20 bps.
Despite a weaker and more competitive RMI market in the second half gross
margins over the year improved by 10 bps. Higher operating costs from
additional heavyside range centres were offset through significant
efficiencies delivered in the second half of the year.
* Twelve new or relocated Travis Perkins branches were opened in 2015 in
addition to 38 new Benchmarx branches.
Plumbing & Heating
* Plumbing & Heating revenue grew by 1.3%, a decline of 1.4% on a
like-for-like basis.
* Adjusted operating margins, excluding property profits and a number of
one-off short term contracts and associated sourcing benefits, reduced by 20
bps, primarily due to the sales disruption from the re-segmentation programme.
* The re-segmentation programme was accelerated through 2015, with the
majority of branch conversions and closures completed six months ahead of
plan.
* Lease adjusted return on capital employed reduced by 3 ppts, driven by the
benefits of property profits and the Government backed ECO scheme in 2014 not
repeating in 2015, and disruption from the re-segmentation programme.
Contracts
* Strong sales growth of 13.2%, 8.5% on a like-for-like basis was driven by
Keyline and CCF, with both businesses continuing to take market share.
* Adjusted operating margins, excluding property profits, reduced by 10 bps.
Gross margin reduction was driven by the shift in sales mix towards the lower
margin CCF and Keyline businesses whilst operating efficiency improved with
the increase in volumes.
* Lease adjusted return on capital increased by 1 ppt owing to the
significant growth in profits more than offsetting additional capital
employed.
Consumer
* Revenue growth of 8.0% and like-for-like growth of 5.3% demonstrates
continued strong market share gains.
* Adjusted operating margin, excluding property profits and the year-on-year
improvement arising from the reversal of impairments on loans to Toolstation
Europe of £6m, improved by 30 bps.
* A further 40 Toolstation stores were opened in 2015 with additional
openings committed in 2016.
Enquiries:
Travis Perkins
Graeme Barnes
graeme.barnes@travisperkins.co.uk
+44 (0) 7469 401 819
Matt Johnson
matt.johnson@travisperkins.co.uk
+44 (0) 7584 491 284
Tulchan Communications
David Allchurch / Siobhan Weaver
+44 (0) 207 353 4200
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
Principle Risks and Uncertainties disclosed in the Group's Annual Report,
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 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 3 March 2016, 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
During 2015 the Group made good progress in executing the plan set out in
December 2013. Improvements continue to be made in each of the four areas of
value creation: customer innovation; optimising the network; building on
structural advantage; and managing the portfolio.
Innovation in customer propositions
* Wickes continued to offer better value to customers through price
investments and focused promotional offers.
* Improvements in pricing, and pricing guidance to branches, were trialled in
Travis Perkins during the year and will be extended further in 2016.
* Significant range reviews were completed in Wickes in 2015 providing
customers with more clearly defined value, good quality and premium ranges.
* Further investment in the distribution network enabled Travis Perkins to
extended ranges of up to 16,000 products for delivery within 72 hours.
* The online propositions of both Wickes and Toolstation were enhanced, with
both now offering a one-hour click and collect service.
* Investment continued in new formats for both Travis Perkins and Wickes,
with further roll out in the bathroom showroom concessions in City Plumbing.
Investments in new store formats are demonstrating returns above the Group's
internal threshold and customer feedback continues to be positive.
Optimising the Group's network
* In line with the Group strategy, 53 net new branches, stores and implants
were added to the network in 2015, with openings and acquisitions adding 2.8%
to revenue growth in the year (2014: 1.1%). Network expansion was focused on
businesses that have good long-term growth characteristics and provide
opportunities to improve returns; including Toolstation (40), Benchmarx (38)
and CCF (8). New format branches were also opened in Travis Perkins, Keyline
and Wickes.
* The programme to co-locate businesses continued with eleven trade parks now
open across the UK, and further Benchmarx implants, Tool Hire and Managed
Services concessions opened within Travis Perkins branches, increasing sales
densities from additional footfall.
* The re-segmentation programme in the Plumbing & Heating division was
substantially completed in 2015, six months ahead of schedule. 114 PTS
branches were converted to City Plumbing, with a further 46 branches closed
which do not meet the Group's requirements. The PTS and City Plumbing networks
are now in a position to operate without further disruption in 2016.
* Five PTS distribution centres were consolidated into the lightside
distribution facilities in Warrington and Northampton.
Leveraging the Group's structural advantage
* Investments in the supply chain network have further improved the Group's
competitive advantage resulting in a broader range of products able to be
supplied to customers more quickly.
* The third heavyside range centre opened in Tilbury in July to serve Travis
Perkins branches in London and the South East, providing customers with an
extended range of 3,000 heavyside products available next-day, with a further
3,000 available within two days.
* The three range centres in Warrington, Cardiff and Tilbury now support
around two thirds of Travis Perkins branches. Heavyside product specialists in
the range centres are able to provide knowledge and advice to customers and
colleagues in all branches within their catchment.
* The Group continued to focus on sourcing improvements, with further
increases in direct purchasing through the Group's Asian sourcing team.
* Investment in technology improvement programmes also continued, including
better network connectivity, supply chain systems improvements and
multichannel applications.
* The Group's extensive property network enabled it to repurpose 114 branches
from the PTS format to the City Plumbing format with further conversions from
PTS to Benchmarx, Toolstation and Tile Giant. This demonstrates the Group's
ability to flex the estate to better meet changing customer needs without
incurring significant exit costs.
Managing the portfolio
* The Group continued to focus on lease adjusted return on capital as a
critical measure of performance, ensuring that capital was employed across the
business in the most effective and efficient manner.
* Deployment of new capital was focused on those businesses with significant
opportunities to grow and improve returns, including Travis Perkins, Wickes,
CCF, Toolstation and Benchmarx.
* In businesses with fewer opportunities for growth, capital continued to be
re-allocated, for example, the re-segmentation in Plumbing & Heating.
* The property portfolio is managed to provide the best operating locations
for each business whilst maximising the returns from each site. The Group
invested £104m in freehold property to benefit from flexibility of site use,
ensure control of strategically important sites and add value to the property
asset through development. A sale and lease back transaction was completed in
November, recycling capital from 19 non-strategic sites, realising disposal
proceeds of £33m and releasing cash for investment elsewhere.
* During 2015 further decision making control was devolved to the businesses.
Travis Perkins and the Plumbing & Heating division took additional
responsibility for supply chain and commercial negotiations and property and
finance teams during the year. This is enabling these businesses to develop
more robust plans and execute them at pace.
Market drivers
UK population growth trends, immigration and smaller family units continue to
create demand for housing, with the formation of around 225,000 new households
per year. In 2015, around 160,000 new homes were built. This shortfall in
supply, combined with historic under-investment in the existing 28 million
dwellings in the UK means the Group expects continued growth in both new house
building and, importantly, in the repair, maintenance and improvement (RMI)
market.
Following a strong recovery in the first half of 2014, the number of mortgage
approvals dipped in the third quarter of 2014 following the Mortgage Market
Review (MMR) leading to a reduction in the number of secondary housing
transactions in the first half of 2015. The RMI market traditionally lags
transactions by six to nine months which translated to weaker building
material supply volumes in the second half.
Mortgage approval rates have since recovered to above the pre-MMR level, in
turn driving more housing transactions. Although recovery of the RMI market
has been slightly later than expected these lead indicators give confidence
that there will be further growth in the RMI market during 2016, evidenced by
encouraging sales in January and February.
Outlook
Good progress has been made in 2015 in executing the Group's plans evidenced
through improving financial performance and continued outperformance of the
markets in which the Group operates. However, whilst considerable improvements
have been accomplished, the Board believes there is further opportunity to
grow returns over the medium term.
The long term drivers of growth in the RMI market remain positive and the
lagged growth in mortgage approvals and secondary housing transactions
suggests the RMI market should recover well in the first half of 2016.
In addition, the investments the Group is making to improve customer
propositions, optimise the network, exploit scale advantage and efficiently
manage the portfolio of businesses provide confidence that the Group can
continue to outperform and improve returns.
Guidance
Guidance for 2016:
* There is expected to be no discernable inflation in the Group's markets in
2016.
* Market volume growth is expected to be around 2 to 3%. The Group expects to
outperform the markets by around 1 ppt and add around 2 ppts of new space,
resulting in headline sales growth for 2016 of 5 to 6%.
* The Group's medium term EBITA growth ambition remains consistent at around
10%
* Property profits are expected to be around £20m.
* Capital expenditure, excluding investment in freehold property, is expected
to be £170m - £190m in 2016 (2015: £189m).
* Investment in freehold property will continue in 2016 at a reduced level,
the timing and number of which will be dependent on market opportunities.
* The Group expects an effective tax rate of around 20%.
* Dividend cover will continue in the targeted medium-term cover range of
2.5x to 3.25x.
Financial Performance Income Statement
Group revenue increased by £361m, or 6.5%, to £5,942m. Like-for-like sales
grew by 3.8% with additional growth through the opening of new branches and
the inclusion of Primaflow and Rudridge into the Group's results. There was no
change in the number of trading days in 2015 when compared with the prior
year.
Adjusted operating profits increased by 7.6% to £413m. Excluding property
profits, adjusted operating profit increased by 8.7%. At a divisional level,
adjusted operating profits grew in General Merchanting, Contracts and
Consumer, partially offset by a decline in Plumbing & Heating.
Adjusted earnings per share (EPS) increased by 5.1 pence to 124.1 pence. This
4.3% improvement was driven by a 5.5% increase in adjusted profit after tax,
partly diluted by an increase in the weighted average number of shares in
issue due to the exercise of share options and other share related incentives.
The proposed dividend for the year is 44 pence (2014: 38 pence), a 15.8%
increase, and reflects the Board's confidence in the future growth prospects
and cash generating ability of the Group. Dividend cover reduces to 2.8 times
(2014: 3.1 times), and just below the mid-point of the Group's target cover
range of between 2.5x and 3.25x.
Revenue
Total Group revenue increased by 6.5%, with growth of 3.8% on a like-for-like
basis.
Like-for-like revenue growth General Merchanting Plumbing & Heating Contracts Consumer Group
Q1 2015 8.1% (6.1)% 15.1% 6.0% 5.1%
Q2 2015 5.3% 1.0% 12.9% 6.9% 6.3%
Q3 2015 1.7% 1.7% 5.5% 2.3% 2.6%
Q4 2015 1.0% (1.9)% 1.5% 6.1% 1.4%
First half 6.7% (2.9)% 13.9% 6.5% 5.7%
Second half 1.4% (0.3)% 3.6% 4.2% 2.0%
Full year 2015 3.9% (1.4)% 8.5% 5.3% 3.8%
Group like-for-like sales growth slowed significantly in the second half of
2015, driven by weakness in the RMI market. As previously mentioned, the link
between the RMI market and the level of secondary housing transactions shows a
strong correlation. The impact of the Mortgage Market Review on the
availability of mortgages, and therefore the number of secondary housing
transactions, along with uncertainty at the time of the election, had a
negative impact on the RMI market in the second half of 2015. Whilst the
summer months, especially August, were particularly weak, the significant
recovery in RMI spend in October was not sustained consistently through
November and December.
Consequently, weaker fourth quarter trading was experienced across all of the
trade businesses, with lower like-for-like sales growth in General
Merchanting, Contracts and Plumbing & Heating leading to more competitive
market pricing. The Group's consumer businesses, however, performed well
during the final quarter of the year, further extending their outperformance
of the market.
The start to 2016 has been encouraging. The six to nine month lagged growth
in housing transactions suggested RMI demand would improve in Q4 2015 or early
in Q1 2016. The Group has seen these improvements in demand take a firmer hold
in January and February of 2016.
The following table sets out volume, like-for-like and expansionary sales
growth by division through 2015.
Total revenue General Merchanting Plumbing & Heating Contracts Consumer Group
Volume 2.8% (0.1)% 7.4% 8.5% 4.3%
Price and mix 1.1% (1.3)% 1.1% (3.2)% (0.5)%
Like-for-like revenue growth 3.9% (1.4)% 8.5% 5.3% 3.8%
Network expansion and acquisitions 1.4% 2.7% 4.7% 2.7% 2.7%
Total revenue growth 5.3% 1.3% 13.2% 8.0% 6.5%
General Merchanting volumes grew by 2.8%. There was continued inflation in
heavyside products, although this slowed in the second half of the year.
Lightside products continued to experience price deflation as commodity prices
weakened further through the second half of 2015, and direct sourcing of
products continued to drive lower costs passed through to customers in more
competitive pricing.
Plumbing & Heating sales were broadly flat, owing to the 2014 benefits from
the Government incentive scheme being not repeated in 2015, the disruption
from the branch re-segmentation programme and continued market weakness. These
factors were compounded by deflation in copper and plastic prices.
Price inflation in heavyside products in the Contracts division was partially
offset by more competitive pricing in the industrial plumbing market and
copper and steel price deflation. Keyline and CCF volume growth was strong and
contributed significantly to 8.5% like-for-like revenue growth in the
Contracts division as a whole.
Further investment in value and more focused promotions generated significant
growth in sales in Wickes. Toolstation continued to grow strongly as it
invested in lower prices, opened new stores, and delivered an enhanced 60
minute click and collect proposition.
New branch openings and acquisitions added 2.7% to Group sales in 2015.
Acquisitions included Rudridge, which added four branches to the Keyline heavy
civils network, and The Underfloor Heating Store and Bathrooms.com in the
Plumbing & Heating division. Expansion of the branch and store network
continued through the development of new sites and additional implants into
existing locations.
Adjusted Operating Profit
In 2015 the Group was required to impair the goodwill and other intangible
assets of the PTS and F&P businesses by £141m. This impairment is a non-cash,
exceptional charge, and is explained in the Plumbing & Heating business review
section.
General Merchanting Plumbing & Heating Contracts Consumer Group
2014 adjusted operating margin 9.8% 4.8% 6.7% 6.0% 6.9%
Change in gross margin 0.1% 0.1% (0.8)% 1.0% 0.2%
Margin impact of change in operating costs 0.1% (0.8)% 0.6% (0.3)% (0.1)%
Adjusted operating margin excluding change in property profits 10.0% 4.1% 6.5% 6.7% 7.0%
Margin impact of change in property profits 0.1% (0.8)% 0.4% 0.1% (0.1)%
2015 adjusted operating margin 10.1% 3.3% 6.9% 6.8% 6.9%
Reported adjusted operating margins were stable in 2015 and improved by 10
bps excluding the effects of changes in property profits. Improvement in gross
margin across the Group was broadly offset by higher operating costs and the
recognition of slightly lower property profits, £24m in 2015 (2014: £26m).
Group gross margins improved by 20bps, with good gains in the Consumer
division despite the significant range change programme, offset by
deterioration in the Contracts division of 80 bps largely because of a change
in the mix of business. Strong sales growth in Keyline and CCF combined with
higher volumes of direct to customer sales were the principal drivers of the
lower gross margin. In General Merchanting, the strong gross margin
performance in the first half of 2015 reversed in the second half as price
competition due to lower volumes in the market intensified.
Group operating costs increased by 10 bps in 2015, with lower operating costs
in the Contracts division owing to good cost control, more than offset by
higher costs in the Plumbing & Heating and Consumer divisions. In Plumbing &
Heating operating costs increased following the re-segmentation programme,
with City Plumbing branches having a higher cost to serve than PTS branches.
Operating costs in the Consumer division as a function of sales increased
owing to the relative immaturity of new Toolstation branches, the labour costs
associated with range changes in Wickes and additional marketing and online
costs.
In 2014 Plumbing & Heating benefited from property profits realised from the
sale and leaseback of the Warrington primary distribution centre. The
Contracts division included £5m of property profits (2014: nil), which added
40bps to the adjusted operating margin.
Finance costs
Net finance costs, shown in note 9, were £31m (2014: £22m). Interest costs
on borrowings increased by £5m to £25m (2014; £20m) largely owing to higher
average borrowings during the year.
The impact of marking-to-market currency forward contracts used to hedge
commercial transactions, which remained outstanding at the year-end lowered
profits by £5m when compared with 2014. In 2015 £1m of losses were recorded
(2014: £4m gain). Other financing type costs were broadly similar to last
year at £6m (2014: £6m).
The average interest rate on the Group's borrowings during the year was 3.6%
(2014: 3.7%).
Impairment and amortisation
As a result of undertaking its annual review of the carrying value of
goodwill and other intangible assets the Group has recognised an impairment
charge of £141m in respect of PTS and F&P. Trading conditions in the
wholesale and contract-led Plumbing and Heating market have been challenging
with the current structure of the market not expected to materially change in
the foreseeable future. This has caused the Board to reduce its expectations
of future performance in PTS and F&P. After consideration, the Board concluded
that the expected future cash flows of all other businesses in the Group will
be sufficient to support the balance sheet carrying value of goodwill and
other intangible assets.
The annual amortisation charge was £18m (2014: £18m).
Taxation
After reflecting an exceptional £9m (2014: £nil) credit arising from a
change in the statutory rate of corporation tax and an exceptional £8m credit
arising from the impairment of goodwill and other intangible assets in respect
of PTS and F&P the statutory tax charge for the year was £56m (2014: £63m).
The underlying tax charge, excluding the benefit of the rate change and the
effect of exceptional items, and in 2014 the effect of exceptional items, was
£72m (2014: £68m), which represents an effective rate of 19.7% (2014:
19.7%). This is slightly below the standard rate of corporation tax of
20.25% (2014: 21.5%) applicable to profits in the United Kingdom. The
difference is mainly due to the value of non-taxable property profits
exceeding the value of expenses not deductible for tax purposes.
The Group's balance sheet tax provision includes £71m relating to uncertain
tax positions currently under discussion with H. M. Revenue and Customs
("HMRC"), which arose in prior periods. Based on legal and tax technical
advice the Group claimed tax benefits in its tax returns for several years and
reduced its tax payments accordingly. HMRC have disputed the Group's
interpretation of the tax legislation. The Group has provided HMRC with all
information requested and discussions continue in order to reach a conclusion
on the differing interpretations. It cannot currently be estimated how long it
will take to reach an agreed interpretation and litigation is a likely outcome
if agreement cannot be reached.
The Group is determined to pursue the cases because of the amounts involved,
but given the lack of agreement with HMRC at this stage in the interpretation
of key areas, coupled with the current tax litigation environment and HMRC's
policy for pursuing such a route, the Group has continued to recognise a
provision for the disputed amounts claimed by HMRC. This is considered
appropriate given the uncertainty involved in this process and meets the
requirements of IAS 12.46 for recognition of such a provision.
Following legislative changes that enable HMRC to demand payment of amounts
previously withheld in respect of disputed items, the Group has received
notices to pay £24m in February 2016. The Group expects to receive notices
to pay a further £28m during the second quarter of 2016.
Should the Group's filed tax positions be either agreed by HMRC or the Group
prevail in the litigation process then the tax charge in the group income
statement in a future period will be reduced by the repayment of the £52m
referred to above and the release of £19m of tax provisions for which payment
cannot be demanded under current legislation unless HMRC are successful. If
after concluding all possible avenues available to the Group, it becomes
necessary to amend the Group's filed tax position then there should be no
significant impact on the tax charge in the group income statement.
Earnings per share
Basic EPS decreased by 36.0% in 2015, principally due to the effect of the
non-cash impairment. Adjusted EPS increased by 4.3% with the reconciliation
between Basic and Adjusted EPS noted below.
Profit after taxation decreased by 35.1% to £168m (2014: £259m) resulting
in basic earnings per share decreasing by 36.0% to 67.8 pence (2014: 105.9
pence). There is no significant difference between basic and diluted basic
earnings per share.
Adjusted profit after tax 5.5% higher than 2014 at £307m (2014: £291m)
(note 6c) resulting in adjusted earnings per share (note 11) increasing by
4.3% to 124.1 pence (2014: 119.0 pence). There is no significant difference
between adjusted basic and adjusted diluted earnings per share.
Reconciliation from reported to adjusted earnings 2015 2014
Earnings EPS Earnings EPS
Basic earnings and EPS £168m 67.9p £259m 106.1p
Exceptional Items
Wickes store closures - - £(10)m (4.1)p
Plumbing & Heating network configuration - - £29m 11.9p
Rinus roofing disposal - - £4m 1.6p
Impairment of acquired intangibles £141m 56.9p - -
Amortisation of acquired intangible assets £18m 7.3p £18m 7.3p
Tax on amortisation of acquired intangible assets £(3)m (1.2)p £(3)m (1.2)p
Tax on exceptional items £(8)m (3.2)p £(5)m (2.2)p
Deferred tax rate change (1) £(9)m (3.6)p - -
Other - - £(1)m (0.4)p
Adjusted earnings and EPS £307m 124.1p £291m 119.0p
(1) At a statutory level a deferred tax benefit of £9m was recognised due to
the expected tax rate reductions between 2017 and 2020.
Balance Sheet and Cash Flow
The Group continued to make good progress towards the targeted financial
metrics laid out in 2013.
Medium Term Guidance 2015 2014 Restated*
Net debt £447m £358m
Lease debt £1,443m £1,423m
Lease adjusted net debt £1,891m £1,781m
Lease adjusted gearing 44.6% 43.4%
Fixed charge cover 3.5x 3.3x 3.2x
LA net debt : EBITDAR 2.5x 2.8x 2.8x
*2014 lease related numbers were restated to reflect the refinement to the
calculation to include £5.7m of rental income receivable on leased property
that is sublet
The increase in on-balance sheet debt of £89m relates largely to the
investments made in freehold property. Lease debt increased modestly from the
position as at 31 December 2014. Whilst a number of PTS leases were exited as
branches were closed this was offset by a significant sale and lease back
transaction and additional new leases. The gross lease charge for the year was
broadly flat at £185m.
Overall lease adjusted net debt increased by £110m, largely owing to
additional on-balance sheet debt funding freehold property purchases. The
increase in on-balance sheet debt is consistent with the Group's plans to
increase the proportion of freehold property in the estate.
Lease adjusted gearing (note 14b) increased by 120 bps in 2015 to 44.6%.
Fixed charge cover (note 16c) increased by 0.1x to 3.3x, owing to improvements
in profitability. The lease adjusted net debt to EBITDAR ratio (note 16b) was
flat, representing higher earnings from the Group offset by increasing
on-balance sheet debt, used to fund freehold property purchases.
Free cash flow
The Group continued to generate strong free cash flows.
(£m) 2015 2014
EBITA 413 384
Depreciation of PPE and other non-cash movements 98 89
Proceeds in excess of property profits 25 4
Change in working capital (96) (107)
Maintenance capital expenditure (55) (50)
Interest (20) (15)
Tax paid (48) (50)
Free cash flow 317 255
Cash conversion rate 77% 66%
The Group generated £317m of free cash flow in 2015, with a conversion rate
of 77% to EBITA (2014: 66%). Net working capital increased by £96m in 2015
(2014: £107m), net working capital days were broadly flat. Purchases to
acquire stock increased by £14m as the stock level in the lightside
distribution centre in Warrington increased, and the heavyside range centres
in Cardiff and Tilbury became operational. This was partially offset by better
management of stock in the branch network.
Receivables increased by £43m, owing to the growth in credit sales by the
Group. Payables decreased by £39m as the instances that suppliers were paid
on time improved, due to a focus on resolving disputes more promptly and
efficiently. Maintenance capital expenditure rose to £55m as the Group
continued to maintain the expanding branch network to a standard that is safe
and secure for colleagues, suppliers and customers. Interest payments
increased by £5m due to a full year of interest payments on the public bond
issued in September 2014, and the increase in on-balance sheet debt.
Net debt, funding and liquidity
Net debt rose in 2015 and finished the year at £447m (2014: £358m), an
increase of £89m (2014: £14m increase).
At 31 December 2015 the Group's committed funding comprised:
* £250m guaranteed notes due 2021, listed on the London Stock Exchange.
* A revolving credit facility of £550m, refinanced in December 2015, which
runs until December 2020, advanced by a syndicate of 8 banks.
In addition:
* Five bilateral revolving credit facilities totalling £221m with tenures of
18 to 24 months, signed in January and February 2016.
* $200m of unsecured guaranteed $US senior notes were fully repaid at their
maturity on 26 January 2016 and not replaced.
At 31 December 2015, the Group had undrawn committed facilities of £440m
(2014: £550m) and available cash and short term borrowings of £84m (2014:
£108m). The Group's rating was maintained at BB+ stable during 2015. The
next review is due in the spring of 2016.
Capital investments
In 2015 the Group completed four small, bolt-on acquisitions, totalling
£26m. Rudridge, a four branch network of civil merchants in the South East,
was added to the Contracts division in February. In July the Group invested in
Bathrooms.com to expand channel capability in the bathrooms market. The
Underfloor Heating Store was acquired in August 2015. Garratt Timber Supplies
was acquired in July 2015.
Investments to provide best-in-class customer propositions and drive
continued outperformance continued throughout 2015, with £134m invested in
growth capex, and a further £104m invested in freehold property sites to
sustain the future pipeline of network expansion.
The expansion of the Group's branch network continued with new branches
opened in Travis Perkins, Benchmarx, CCF, Wickes and Toolstation.
As noted earlier, significant capital investments were also made through the
completion of the Group's second primary lightside distribution centre, Omega,
and in new heavyside range centres in Cardiff and Tilbury. Under the Group's
'Investing to grow' plans, further work was completed in opening new formats
in Wickes and Travis Perkins.
Improving the IT infrastructure of the Group remained a key area of
investment in 2015. Online investment in the Consumer division continued, with
the development of Click & Collect services in Wickes and Toolstation now
offering a one hour service. Travis Perkins developed a fully transactional
website, with customers able to purchase products from the current 'trade
offers' range online. Travis Perkins also adopted a new electronic proof of
delivery (EPOD) system, reducing the administrative burden on colleagues and
improving delivery traceability for customers.
(£m) 2015 2014
Extending leadership New TP / Wickes / Toolstation / CCF / Benchmarx branches Benchmarx implants / showrooms / tool hire implants 49 34
Investing to grow New Wickes / TP formats Distribution centres Plumbing & Heating branch conversions 57 17
Re-engineering and infrastructure build Multi-channel development IT infrastructure upgrades 28 29
Growth capital investment 134 80
Freehold property 104 35
Maintenance 55 50
Total capital investment 293 165
The Group acquired 25 (2014: 19) freehold properties for £77m (2014: £35m)
and invested a further £27m construction work to develop new branches and
distribution assets. The investment was partially financed through free cash
flow, with the majority through the £89m increase in on-balance sheet debt.
Increasing the level of freehold property assets is enabling the Group to
secure attractive operating sites that might otherwise not be available,
provides operational flexibility, and allows the Group to benefit from capital
appreciation and development gains. Many of these assets are not yet in
operation, but provide the Group with the opportunity to grow earnings and
improve returns as they are brought into use.
The value of leasehold properties based on applying a valuation of 8 times
the annual lease charge was £1,443m (2014: £1,423m).
The Group continues to realise value from its property assets once
developments have been completed, there is limited strategic value in holding
the site and where returns on capital can be improved by investing
elsewhere. During the year property disposal proceeds were £45m (2014:
£27m) realising gains on disposal of £24m (2014: £26m). The primary
contributor was the sale and leaseback of 19 properties which the Group did
not consider to be strategic sites or to have further development potential,
which realised proceeds of £33m and profits of £19m.
Dividend
Dividend costs increased in line with the Group's plan to maintain a
progressive dividend policy, with £100m paid to shareholders in 2015. The
proposed dividend for the year of 44 pence (2014: 38 pence) results in a 16%
increase compared to 2014 (2014: 23% increase). An interim dividend of 14.75
pence was paid to shareholders in November 2015 at a cost of £37m. If
approved, the proposed final dividend of 29.25 pence will be paid on 27 May
2016, the cash cost of which will be approximately £73m.
A 44.0 pence full year dividend would reduce dividend cover to 2.8 times
(2014: 3.1 times) adjusted earnings per share, just below the midpoint of the
Board's target cover range of between 2.5x and 3.25x.
Return on Capital
Net assets at the end of 2015 were £2,796m (2014: £2,678m), which
contributed to capital employed of £3,286m (2014: £3,114m).
Including the impairment of goodwill and other intangible assets in the PTS
and F&P businesses, the ROCE was 12.9% (2014: 12.7%) and LAROCE (note 15b) was
10.8% (2014: 10.6%), after adjusting for property leases at rate of 8 times
the annual charge.
Pensions
The Group made £40m (2014: £35m) of cash contributions to its defined
benefit schemes and £14m (2014: £12m) to its defined contribution pension
scheme during the year. At 31 December 2015 the combined gross accounting
deficit for the Group's two final salary pension schemes was £52m (2014:
£98m), which equated to a net deficit after tax of £42m (2014: £78m). The
gross deficit for the BSS scheme, based upon the net present value of the
agreed minimum funding contributions was £52m (2014: £57m). The TP scheme
had a £34m surplus, which on the application of IFRIC 14 was reduced to nil.
During the year the Trustees of both schemes finalised the 30 September 2014
actuarial valuations. These resulted in the Group being obliged to pay
recovery plan contributions of £10m p.a. (2014: £25m) until September 2021,
and voluntarily agreeing to pay additional contributions of £2m (2014:
£nil).
Business performance
General Merchanting
2015 2014 Change
Total revenue £1,972m £1,873m 5.3%
Like-for-like growth 3.9%
Adjusted operating profit £199m £183m 8.7%
Adjusted operating profit excluding property and one-offs £182m £169m 7.7%
Adjusted operating margin 10.1% 9.8% 30bps
LAROCE 16% 16% -
Branch network 813 772 41
General Merchanting revenue increased by 5.2%, 3.9% on a like-for-like basis,
demonstrating continued outperformance compared to the market. Growth was
particularly strong in heavyside materials, supported by the heavyside range
centre network, and Tool Hire. Growth in heavyside categories has led to an
increase in the proportion delivered sales (53.4% versus 51.8% in 2014). Sales
growth slowed considerably in the second half of the year as the RMI market
slowed owing to fewer secondary housing transactions in late 2014 and early
2015.
Despite the strong start to the fourth quarter in October, the expected
pick-up in volumes occurred in January and February 2016, rather than as
anticipated in November and December 2015. The growth in nine month lagged
housing transactions provides increased confidence that the market growth is
likely to be sustained through the first half of 2016.
Adjusted operating profits, excluding property profits, grew by 7.7% to
£182m. Gross margins improved by 10 bps in 2015. An improvement in gross
margins in the first half, driven by improved sourcing, and better management
of cost price inflation pass through was offset in the second half of the year
by increased competitive pricing in the weaker market. The operating cost base
of the business was controlled carefully across the year, with additional cost
invested in the range centre network, new store formats and customer service
offset by improvements in efficiency.
Property profits were £3m higher in 2015 at £17m (2014: £14m), with the
majority of these profits recognised towards the end of the year, from the
disposal of 12 Travis Perkins sites, as part of the wide sale and leaseback
transaction.
Lease adjusted return on capital employed was flat at 16% compared with 2014,
with growth in operating profits broadly offset by the increase in capital
employed following the investments made in new branch openings, the
distribution network, store formats, and the growth in net working capital as
credit sales grew. These investments are expected to drive improvements to
shareholder returns in 2016 and beyond.
Twelve new Travis Perkins branches were opened or re-sited in 2015, either
entering under-served catchments, or moving existing businesses to alternative
sites to locate them more conveniently for customers and optimise operations.
The benefits of supplying an extended heavyside product range more quickly to
customers through the heavyside range centre network were evidenced by the
growth in heavyside categories. In July 2015 the Tilbury range centre was
opened to cover branches in London and the South East, and combined with the
range centres in Warrington and Cardiff, service two thirds of Travis Perkins
branches with next day and day-plus-one deliveries.
The heavyside range centres are also able to support the growing Tool Hire
proposition. Assets can be held centrally, and supplied to branches next-day
or as required by customers. This extends the number of branches able to offer
tool hire, where previously only branches large enough to stock a credible
range of hire assets could provide this additional service. Any branch now
served by a range centre can offer a broad tool hire solution to customers
driving superior profit density for existing branches and efficient returns on
highly utilised hire assets. The range centres improve tool hire operational
efficiency, as less equipment is required to cover the network, asset
utilisation is increased, and maintenance activity is centralised requiring
fewer resources in-branch.
The programme to modernise Travis Perkins branch formats continued, with
twenty branches now operating with the new shop and yard layouts. Initial
signs from these branches are encouraging with strong sales growth and
positive customer feedback.
Benchmarx continues to grow through a combination of organic growth, and
network expansion. New branches were opened in 38 sites across the UK,
including 26 standalone showrooms and 12 implants within Travis Perkins
branches.
Benchmarx continues to outperform the market, increasing its market share in
trade kitchens and building relationships directly with end-users on behalf of
the business's trade customers. In 2015 the Benchmarx product range was
refreshed, reducing the number of SKUs and complexity. This allowed greater
operational efficiency and improved the on-time in-full delivery to customers,
and provides the business with a strong platform for further growth.
Plumbing & Heating
2015 2014 Change
Total revenue £1,371m £1,353m 1.3%
Like-for-like growth (1.4)%
Adjusted operating profit £46m £65m (29.2)%
Adjusted operating profit excluding property and one-offs £46m £48m (4.2)%
Adjusted operating margin 3.3% 4.8% (150)bps
LAROCE 6% 9% 3ppts
Branch network 463 505 (42)
Plumbing & Heating revenue grew by 1.3% in 2015, although this represented a
decline of 1.4% on a like-for-like basis. The heating market continued to be
highly competitive, leading to intense pricing pressure, particularly in the
supply of products to larger contractors and through the wholesale channel.
Combined with the continued weakness in commodity prices such as copper and
plastic, this impacted the sales of both PTS and F&P. There were signs of
recovery in the local bathroom installer market which is more closely
correlated with consumer confidence and improvements in the RMI market.
The like-for-like revenue decrease in Plumbing & Heating of 1.4% was due to
two main factors. The positive impact on boiler sales from the government
backed ECO scheme in 2014 was not repeated in 2015. The re-segmentation
programme to convert PTS to City Plumbing branches was accelerated in the
second half of the year, with the programme substantially complete by the end
of 2015, six months ahead of the original schedule. This increase in activity
caused higher levels of disruption than previously anticipated, impacting
sales negatively; however, it leaves the Plumbing & Heating division in a
strong position to focus on the growth of the newly structured businesses from
the beginning of 2016.
Adjusted operating profit for the division reduced by £19m to £46m (2014:
£65m). In 2014 the Plumbing & Heating division recognised £11m of property
profits from its share of the sale and leaseback of the Warrington primary
distribution centre. In 2014 Plumbing & Heating also benefited from the
Government backed ECO scheme, which created both a boost in sales and sourcing
benefits. Neither of these factors repeated in 2015.
Adjusted operating profit, excluding property profits and a number of one-off
short term contracts and associated sourcing benefits, reduced by £2m to
£46m from £48m in 2014. This was primarily driven by the like-for-like sales
deterioration including the disruptive impact of the re-segmentation
programme. Operating costs in City Plumbing branches converted from PTS, were
also higher, given the higher cost-to-serve of the City Plumbing business, but
as yet have not benefitted fully from the additional sales expected following
conversion.
The re-segmentation programme accelerated in the second half of the year,
with 114 branches converted from PTS to City Plumbing in 2015. In addition, 30
unsuitable PTS sites were closed with a further three relocated, and seven
City Plumbing sites were relocated with a further six closed.
Following the annual impairment review a charge of £141m has been recognised
against the goodwill and other intangible assets of PTS and F&P. The
impairment is a non-cash, exceptional charge, and is necessary due to changes
in the plumbing & heating market relating to contract and wholesale customers
which has been highlighted following the completion of the re-segmentation
programme. The PTS network now comprises 95 branches with a considerably lower
capital base, with work continuing to improve the operating efficiency and
working capital management of the branches to enhance returns.
There is increasing confidence in the expanded City Plumbing network, now
totalling 344 branches, following strong customer response to the improved
bathroom proposition, renewables and spares offers. City Plumbing branches
unaffected by the resegmentation programme and those converted early in 2014
have seen encouraging like-for-like growth, and it is expected that those
branches converted in 2015 will mature through 2016 and 2017.
In the wholesale distribution channel served by F&P there has been increased
competition in 2015. The F&P business will continue to fully integrate
Primaflow, which will improve operational and capital efficiency across the
combined F&P, Primaflow and Connections business.
As part of the Group's plan to leverage its scale in the UK, and to simplify
and consolidate distribution networks, the PTS supply chain has been fully
integrated into the Group's lightside facilities in Warrington and
Northampton. The remaining PTS distribution centres were closed in 2015.
Lease adjusted returns reduced, as lower adjusted operating profits more than
offset the reduction in capital employed through the closure of branches and
strong debtor management. After the impairment of goodwill and other
intangible assets LAROCE was 7%.
Contracts
2015 2014 Change
Total revenue £1,214m £1,072m 13.2%
Like-for-like growth 8.5%
Adjusted operating profit £83m £72m 15.3%
Adjusted operating profit excluding property profits £78m £71m 9.9%
Adjusted operating margin 6.9% 6.7% 20bps
LAROCE 14% 13% 1ppt
Branch network 181 171 10
Sales in the Contracts division grew strongly in 2015, with total sales up
13.4%, 8.5% on a like-for-like basis. Throughout the year growth was
concentrated in the Keyline and CCF businesses which are focused on the
commercial construction and new house building markets, although growth in
these markets slowed in the second half of the year. BSS' sales are more
weighted to public sector RMI and construction. This market has been more
difficult in 2015, resulting in BSS sales marginally lower on a like-for-like
basis. BSS maintained its market-leading position in this more difficult
market by focusing on providing the best customer solutions, and investing to
operate more cost-effectively.
Adjusted operating margins, excluding property profits, reduced by 20 bps,
with gross margins reducing by 80 bps, offset by a 60 bps improvement from
operating costs. The reduction in gross margin was driven by the shift in
sales mix towards the lower margin CCF and Keyline businesses. Whilst the
products sold in these businesses attract a lower gross margin the businesses
themselves generate strong returns. At a business level, adjusted operating
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