Strategy and Market Overview

The Group is the leading distributor of building supplies in the UK, with unique breadth and scale. We have 20 businesses that cover the spectrum of the building materials distribution market from retail customers in the Consumer division to major construction companies purchasing large scale building products from the Contracts division.

Fragmented Markets

Our growth is not constrained by the market. The majority of markets in which we compete are highly fragmented, offering significant opportunities to gain further market share and extend our leadership.

Structural Advantage

The scale of the Group, and the investments we have made in our distribution network, afford us a significant structural advantage over our competitors at a divisional and business unit level.

Sustainable Market Share Gains

We are confident that through the combination of operating in fragmented markets, our structural advantage and our superior proposition; we will continue to make sustainable market share gains. This confidence is manifested in significant capital deployment through our self-help programme.

Superior Proposition

  • Range - the scale of the Group and the investment we have made in our sourcing, supply chain and distribution centres, greatly increases the range of products available to our customers.
  • Availability - our market leading and unique centralised distribution network increases the availability of products, with a broader range of products available more quickly.
  • Convenience - with over 2000 locations across the UK, we are well placed to serve our customers. Yet, there are significant growth opportunities, with opportunities to open branches in unrepresented catchments.
  • Price - the scale of the Group affords us significant benefits in terms of sourcing, range, stocking and distribution efficiencies, which passes through to price.

Value Creation Through Capital Deployment

The Group supports the growth strategies of our individual businesses through the efficient and effective allocation of capital. All of our growth capital expenditure must meet the threshold of 25% ROCE. Capital is deployed in the following areas:

Extending leadership- this includes new branches, stores and implants into existing businesses.

Investing to grow- this includes new branch and store formats and investment in the Group’s centralised distribution network.

Re-engineering & infrastructure build- this is investment in our IT systems and improving our multi-channel offer, as well as the relocation of existing businesses.

Levers of Value Creation

In order to deliver its ambitions, the Group developed a strategy in 2013 which was subsequently refined in 2014 and 2015. The chart below sets out the levers the Group is using to create value for its shareholders.

Enabled through people & evolution of unique culture

Customer innovation

Customer innovation

  • Improved value
  • Extended range
  • Product development
  • Format renewal
  • Technology enabled
  • Multi-channel

Optimising network

Optimising network

  • TP expansion and modernisation
  • Wickes national footprint
  • Plumbing and Heating format clarity
  • Implants intesify returns
  • Trade parks

Scale advantage

Scale advantage

  • Supply chain investment
  • Leverage property capability
  • Group sourcing benefits
  • Shared technology investment

Portfolio management

Portfolio management

  • Streamlined central functions
  • Devolved management responsibility
  • Disciplined planning and capital allocation
  • Regular market updates

Enabled through people & evolution of unique culture

The Group’s ambition

Based on the Group’s ability to grow sales ahead of the market, its financial ambitions of the Group can be summarised as:

  • Outperform the market sales growth in each of its markets
  • Grow operating margins in Plumbing & Heating, Contracts and Consumer and sustain sector leading margins in
  • General Merchanting
  • Deliver low double digit growth in EBITA per annum
  • Increase LAROCE by 200-300 basis points over the medium term
  • Deliver strong and consistent growth in shareholder returns

Evolving our Portfolio Model

Our divisions

The Group’s businesses supply greater volumes of product to the more resilient RMI market, albeit with a small, but important component of turnover coming from the supply of material to the new build market.

There was a significant improvement in the key lead indicators the Group monitors as the UK recovery took hold in 2013, which moderated throughout 2014 and 2015. Whilst it is still relatively early in the recovery of the UK construction industry, these key indicators are now at levels consistent with those needed to support sustained medium-term growth in RMI spend, new housing construction and new commercial and industrial development.

The following chart shows some of the key lead indicators the Group tracks:

The Group tracks several market indicators from the housing, retail and construction sectors in order to determine levels of investment and inform the Group’s trading stance. Secondary housing transactions and consumer confidence remain the key indicators that most closely correlate to future performance.

The chart opposite demonstrates the correlation between these indicators. There is an approximate three month lag between the approval of a mortgage and subsequent housing transaction. Following the completion of a housing transaction there is a further lag of approximately six months to when expenditure on home improvement occurs.

Following the last three years of economic recovery and a relatively stable economic outlook which have been characterised by lower inflation, rising employment, low and steady interest rates and rising real wages, consumer confidence became positive on the GFK index for the first time in almost 20 years.

Market Lead Indicators

The Group’s businesses supply greater volumes of product to the more resilient RMI market, albeit with a small, but important component of turnover coming from the supply of material to the new build market.

There was a significant improvement in the key lead indicators the Group monitors as the UK recovery took hold in 2013, which moderated throughout 2014 and 2015. Whilst it is still relatively early in the recovery of the UK construction industry, these key indicators are now at levels consistent with those needed to support sustained medium-term growth in RMI spend, new housing construction and new commercial and industrial development.

The following chart shows some of the key lead indicators the Group tracks:

Recent market trends

The Group tracks several market indicators from the housing, retail and construction sectors in order to determine levels of investment and inform the Group’s trading stance. Secondary housing transactions and consumer confidence remain the key indicators that most closely correlate to future performance.

The chart opposite demonstrates the correlation between these indicators. There is an approximate three month lag between the approval of a mortgage and subsequent housing transaction. Following the completion of a housing transaction there is a further lag of approximately six months to when expenditure on home improvement occurs.

Customer behaviour trends

Following the last three years of economic recovery and a relatively stable economic outlook which have been characterised by lower inflation, rising employment, low and steady interest rates and rising real wages, consumer confidence became positive on the GFK index for the first time in almost 20 years.

The customer proposition

Scale, competitive pricing and convenience

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Excellent availability and fast and efficient delivery

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Product solutions

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Excellent customer service

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Key performance indicators

The Group tracks its performance using 2 operating key performance indicators (“KPI”s), 3 financial KPIs and 4 funding targets that the Board believes are key indicators of its progress against its strategic and financial targets.

Like-for-like sales growth (%)

Adjusted operating profit (£m)

Lease adjusted return on capital employed* (%)

Adjusted earnings per share* (%)

Free cash flow (£m)

Net debt (£m)

Dividend cover (times)

Fixed charge cover (times)

Leverage ratio (times)

Like-for-like sales growth (%)

Adjusted operating profit (£m)

Lease adjusted return on capital employed* (%)

Adjusted earnings per share* (%)

Free cash flow (£m)

Net debt (£m)

Dividend cover (times)

Fixed charge cover (times)

Leverage ratio (times)

Guidance

The Group has a number of guidance measures at a group, divisional and business level:

2014 2015 Change
Revenue £5581m £5942m 6% to 7% growth p.a.
EBITA £384m £413m Low double digit growth p.a.
LAROCE 10.40% 10.50% 200 to 300 bps growth over 5 years
Fixed Charge Cover 3.2x 3.3x 3.5x
LA debt : EBITDAR 2.8x 2.8x 2.5x