Divisional performance

General Merchanting
Performance 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 and Heating
Performance 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 one-offs, 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 charge and has been recognised following the completion of the re-segmentation programme and the competitive nature of the contract and wholesale markets. 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 intangibles LAROCE was 7%.

Performance 2015 2014 Change
Total revenue £1,386m £1,283m 8.0%
Like-for-like growth 5.3%
Adjusted operating profit £95m £77m 23.4%
Adjusted operating profit excluding property profits £93m £77m 20.8%
Adjusted operating margin 6.8% 6.0% 80bps
LAROCE 7% 7% -
Branch network 571 527 44

The Consumer division made continued market share gains in 2015, with revenue growth of 8.0% and like-for-like growth of 5.3%, well ahead of the DIY market which was broadly flat. This outperformance demonstrates the continued improvement of the Wickes business as it progresses through the transformation programme, the market-leading customer proposition in Toolstation and the growth of the Tile Giant business.

After a period of market weakness in the third quarter of the year, the Consumer division returned to good growth in the fourth quarter. This was predominantly driven by strong kitchen and bathroom sales in Wickes and continued like-for-like growth and network expansion in Toolstation.

In 2015 previous impairments to loans made to Toolstation Europe were required to be reversed, recognising confidence in the future plans and viability of the business. This reversal resulted in a benefit of £6m to 2015 operating profits.

Adjusted operating profit, excluding property profits and the one-off credit for impairment reversals in Toolstation Europe, increased by 11.7% to £87m, driven by the significant improvements made to the customer propositions across the division during the year.

Property profits of £2m were recognised in 2015 (2014: £nil), relating to the disposal of the former Wickes support centre in Harrow, resulting in adjusted operating profits of £95m in 2015 (2014: £77m), and growth of 23.4%.

The businesses in the Consumer division continue to invest in their value propositions in order to maintain market-leading prices and drive continued growth in market share. Wickes undertook significant range review activity in 2015, incurring costs of around £10m as old ranges were discounted for clearance. The majority of range changes have now been completed, with 36 ranges reviewed, including ‘take-away’ kitchens, adhesives and sealants, paint, tiles, flooring and timber. Further reviews are planned, across 32 smaller or simpler categories in 2016, including bricks and blocks, take-away bathrooms and garden maintenance.

Wickes now has eight stores operating in the new format, including four refurbishments, and four new stores. The new store formats allow both trade and retail customers to shop the stores efficiently, whilst also increasing range breadth and availability. Combined with the range review activity, the new store layouts maximise product adjacencies, give more focus to seasonal and promotional activities and segregate a more inviting Kitchen and Bathroom design centre. Initial customer feedback has been positive, returns are encouraging, and plans to continue the refurbishment of existing stores and the opening of new stores continue.

The Wickes online offer was enhanced, with the launch of a one-hour click and collect service. Online transactions now make up over 8% of Wickes sales, with half of the growth in online transactions in 2015 coming through click and collect.

The growth of the Toolstation business continued with a strong revenue performance throughout 2015, driven by both the growth in like-for-like sales from existing stores, and the addition of 40 new branches. Toolstation also benefitted from the introduction of a new one-hour click and collect service.

Tile Giant performed well in 2015 with good like-for-like sales growth. The performance exceeded the growth of the tile market with Tile Giant gaining market share.

Performance 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 margins improved in CCF and Keyline as higher volumes enabled greater efficiencies and further sourcing improvements.

The Contracts division recognised £5m of property profits in 2015 (2014: £1m) through the sale and leaseback of six sites as capital was recycled for further investment.

Lease adjusted return on capital increased to 14% (2014: 13%), a function of increased sales, operating leverage and only modest increases to the capital base.

The Keyline business continued to increase its focus on the delivery of civil, drainage and heavyside materials to large, commercial customers. In 2015 a new format Keyline branch was opened in Lincoln, which was specifically designed to operate at reduced cost, so improving operational efficiency, whilst enhancing the range of specialist heavyside products available to the customer. The acquisition of Rudridge added a further four civils branches to the Keyline network in the South East.

The CCF network was expanded with the addition of eight new branches, six of which were opened in December 2015. This additional capacity should improve national coverage, with faster delivery to both local customers and those on framework agreements. CCF continues to build strong customer relationships, deliver superior customer service, more extensive ranges with strong availability, all resulting in significant share gains.

BSS is the largest operator in the industrial plumbing market. Throughout 2015 difficult market conditions, with both lower spending in the public sector and increasing competition from new entrants to the market, led to reduced volumes and margins. BSS maintained its advantaged market position through investments in pricing, continued market-leading customer service and product knowledge, and by improving the efficiency of the business. Three BSS branches were closed and two were relocated to reduce costs and improve customer accessibility.

In 2016 it is planned to convert 13 Keyline branches into the Travis Perkins format. These conversions will occur where it is felt the existing branch would better serve the General Merchant market and fill a previously underserved catchment.