Travis Perkins plc (TPK) Earnings Call Transcript

A very good morning to you all, and thank you for joining us, and welcome to our first virtual results presentation. Alan and I are here in Northampton for really the second time since March 18. After my introduction and sharing a few thoughts, Alan will talk through the financial performance of the group and then I will return with an operational and strategic update and look forward. So the first half of 2020 was one marked by progress despite the challenges of the COVID pandemic. We've all been impacted by COVID. And Travis Perkins and the Travis Perkins family has been no different, the company as a whole, plus all our valued colleagues and their families. The challenges we've had to overcome have been extraordinary. Arguably, this has been the most tumultuous period in our over 200-year history. But the measure of success for me of how the crisis has been navigated is not only about how and what decisions and moves we have made to operate through the lockdown and beyond, but actually how the culture of the business has stood up to the test and how we've harnessed that culture and the moral compass to adapt the business to be flexible and agile and ensure that we not only survive whatever befall to us. But actually, we came out stronger and better prepared to outperform our markets. Clearly, there's been a significant impact on the performance of the Travis Perkins Group with a 20% drop in sales, which has led to a drop in profitability in the first half. But that's only half the story, though. And like many businesses, we've worked very, very hard on our cash and liquidity management with real success and strong cash inflow. And as Alan will outline, a positive impact on our net debt position. Later on, I'm going to talk you through the phases of how we adapted to the rapidly changing environment that we all found ourselves in, pivoting our businesses to digitally enabled contactless operations very quickly, all the while continuing to serve our customers and provide them with the essential services that they need, being involved in the construction of the new NHS Nightingale hospitals as well as ensuring the critical infrastructure of the country remained operational and our homes remained warm and dry. But as a business, we just simply didn't stop there. It was very clear that our customers and we needed to change the way that we worked in order to access the materials that they needed. And we moved at pace as a group to accelerate the strengthening of the core of our business to develop and improve our proposition for our customers. These changes stand the group in good stead for the future, not just to trade through the crisis, but actually as a platform for future growth. We've made some great strides forwards. And whilst there's still a huge amount to do, as I'll delve into later on, the business is strongly placed to outperform its markets. But firstly, over to Alan.

Thank you, Nick, and good morning, everyone. Before I take you through the detailed financials, I thought it might be helpful to remind you of some of the presentational aspects of our 2020 interim results, which should be borne in mind. Firstly, in terms of portfolio changes, Toolstation Europe has been fully consolidated since the first of October 2019, whereas we had previously accounted for the business as an associate company. And at the end of January 2020, we completed the disposal of the wholesale Plumbing & Heating activity, PF&P. Wickes is included in 2020 and in all comparatives as the demerger was placed on hold in March. And then in terms of impacts of the pandemic, these are included in the underlying adjusted operating profit as presented. And I will try and highlight the details of some of these impacts as we walk down the income statement. We have, however, presented the cost of the significant restructuring announced in mid-June as an adjusting item given its nature and its quantum. So turning to the financial highlights. After an encouraging start to the year with 2.4% revenue growth in the 11 weeks to the 18th of March, the impact of the pandemic and then lockdown was profound. Revenue for the half declined by 20.2% to GBP 2.78 billion and declined by 19.3% on a like-for-like basis. Given the fixed cost base of the business, the revenue decline had a significant impact on group profitability, resulting in an adjusted operating profit of GBP 42 million versus GBP 220 million in H1 '19. The group recognized adjusting items of GBP 129 million, principally the significant business restructuring program we announced in June. Adjusted earnings per share fell to 1.4p per share while basic EPS fell to a 45.7p loss, with the difference primarily driven by the cost of the restructuring program. On the positive side, cash generation in H1 '20 was extremely strong, reflecting the group's focus on liquidity management throughout the pandemic. The group's covenant net debt position fell by GBP 322 million from the position at the end of December '19 million to GBP 22 million. And by GBP 392 million from the position at the end of June 2019. Given the ongoing level of uncertainty in the U.K. economy and the group's end markets, the Board is not proposing the payment of an interim dividend. The Board recognizes the importance of dividends to shareholders and so we'll keep this position under review, taking into consideration the trading environment in the group's end markets and the ongoing liquidity position, and we'll provide a further update in due course. On Slide 8, I've broken out the monthly revenue trends by reporting segment and have also split out Wickes' core DIY and Kitchen & Bathroom showroom elements. As you can see, Toolstation has delivered a consistently strong performance throughout the half. While the lockdown had a significant impact on Wickes, you can see how quickly core DIY recovered reaching growth of almost 50% in June. Kitchen & Bathroom revenue was close to 0 during April and May as home installations were on hold during the lockdown. Since that time, both delivered sales and orders have recovered well and leads remain encouraging. The Merchanting and Plumbing & Heating segments show similar like-for-like patterns, albeit Plumbing & Heating has remained weaker overall given the slower return of work in the home. Both segments remained open during lockdown for essential works and have gradually recovered month-by-month since April. Within Merchanting and Plumbing & Heating, impacts differed by business unit, depending on their predominant end markets. Of note, both commercial and new build continue to lag while RMI is relatively stronger. Across the group, like-for-like sales trends in July and August have returned close to prior year levels, supported by domestic RMI and current strong trading in consumer DIY markets. If we now look at the drivers of the 20% decline in revenue, as you would expect, this is virtually all driven by volume. Overall changes in pricing were modest in the period and were offset by mix. Changes in the portfolio and branch network resulted in net reduction to revenue with the disposal of PF&P and the branch closures in June more than offsetting the contribution from Toolstation Europe and new branches opened in the previous 12 months. There was one additional trading day in the period as well contributing GBP 21 million to revenue. Year-on-year, the gross margin percentage at the total group level was unchanged, and this, despite the impact of the pandemic. Given the unprecedented circumstances in the period, there are a number of moving parts below the surface, which I think you'll want to understand. Firstly, there are some negative impacts due to the pandemic. These are: one, a reduction in anticipated annual volume rebates from suppliers given the significantly lower stock purchases in the first half; two, a higher proportion of customer orders delivered, particularly in Merchanting; and three, an inefficiency in our supply chain operations due to distancing and other measures to ensure the safety of our customers. The second key factor is a small fall in margin within certain segments due to sales mix. So for example, in Merchanting, heavy side volumes have held up better than light side. In Toolstation and Wickes, we have experienced some drag from the strength of DIY and also seasonal sales as consumers have undertaken jobs in and around the home and particularly in the garden during Q2. Conversely, in Plumbing & Heating, we've seen a positive customer mix with installer sales holding up better than contract volumes. The third factor is the overall segmental mix. Both Toolstation and Wickes are higher gross margin businesses than Merchanting and Plumbing & Heating. And this factor outweighs the 2 earlier factors I described. At this stage, it is quite difficult to predict how the second half will unfold, but I would expect a broadly unchanged gross margin overall year-on-year. With such significant effects from the pandemic, you would also expect there to be a number of complex moving parts below the gross profit line. Some of these will prove to be predominantly H1 items. And we would expect some reversals in the second half. So on Slide 11, I've tried to bridge the H1 '19 operating profit to H1 '20. You can see that of the GBP 178 million fall in EBITA, GBP 202 million is from the gross profit line given the lower volumes, meaning that overheads overall have positively contributed. If we unpick that overhead movement of a net GBP 24 million positive, you can see the following elements. Firstly, government assistance of GBP 65 million, with GBP 45 million from the furlough scheme and GBP 20 million from the business rates holiday. As at end June, virtually all colleagues who have been furloughed had returned to the business, meaning there will be a negligible contribution in H2. On the other hand, the business rates holiday will run until March 2021, and we would expect around GBP 40 million of benefit in the second half. Overhead-related inflation and movements in central costs of GBP 20 million, together with GBP 12 million of investments in growth, principally driven by the Toolstation branch opening program, and then there are GBP 9 million of losses in Toolstation Europe now fully consolidated. We then realized GBP 25 million of overhead savings in the half, which is a combination of prior year overhead reduction initiatives and savings made since lockdown. I'll cover future savings from the restructuring program announced in June on the following slide. And then within provisions and accruals, it's important to note, we've recognized additional charges due to the impacts of the pandemic, in line with our accounting policies. Of these, I would expect a number to unwind in part in the second half, and we've estimated these reversing items at around GBP 20 million. The amounts composed of 3 main items: one, holiday pay accruals as colleagues have taken fewer days leave in the first half than their entitlement; secondly, an increase in debtor provisions under IFRS 9; and thirdly, increased provisions for slow-moving stock given lockdown. The final element of the bridge is a year-on-year reduction in property profits of GBP 5 million given lower completions in the period. So turning to the restructuring program. As you'll recall, we announced a significant restructuring program on the 15th of June. The program takes into account the lower volume outlook given the economic conditions and is designed to help mitigate the anticipated fall in gross profit contribution from the recession. Around 165 branches have been closed, primarily in the trade merchant businesses, including Plumbing & Heating. Together with selling and administrative roles across the businesses and also in corporate functions, the total targeted reduction in roles is around 2,500, roughly 9% of the workforce. In terms of cost savings, the program is expected to deliver an annual reduction in overheads of approximately GBP 120 million. As the vast majority of actions were put in place by the end of August, we would expect to deliver a material saving in the balance of 2020. While an adjusting item of GBP 111 million has been recognized in the income statement, the gross cash costs of the program are around GBP 85 million, of which approximately GBP 35 million will be incurred in 2020. The remainder, which will be incurred over future years, relates primarily to leasehold property payments and should be offset by sales of freehold sites closed as part of this program and also, hopefully, reduced by finding sublet arrangements. So I'll now turn to performance by reporting segment, starting with Merchanting. After an encouraging start to the year, the segment was, of course, heavily impacted by lockdown. Around 1/3 of branches remained open during late March and April as the business pivoted to focus on essential projects only, including, as Nick mentioned, support to build the network of Nightingale hospitals and to maintain key infrastructure. Branches progressively reopened from late April onwards to support the steady recovery in construction end markets. The recovery has been strongest in domestic RMI markets, with the Travis Perkins general merchant recovering most quickly and the specialist merchants, with a greater exposure to new house building and commercial construction, lagging somewhat as customers ramp up more slowly. Despite good control of discretionary costs and government assistance received, the fixed cost nature of the branch network, together with gross margin pressure from reduced annual volume rebate expectations and the COVID-related inefficiencies, I referred to, resulted in a 75% decline in operating profit. And as I mentioned previously, the restructuring program is concentrated in the merchant businesses. In the Merchanting segment, 140 branches were closed by the end of June. These closures, together with the restructuring of sales and above-branch support teams, are expected to generate around GBP 90 million of annualized cost savings in the Merchanting segment. Moving to Toolstation. The business has continued to deliver outstanding growth, outperforming their respective markets. Despite the disruption of lockdown, Toolstation U.K. delivered like-for-like revenue growth of 12.9% as it rapidly adapted its business model to run the branch network as Click & Collect fulfillment centers and also ramped up home delivery capability. As you would expect, distancing measures and the adaptation of the business model resulted in higher operating costs in the period in the U.K. operation, hence, the fall in operating profit from GBP 13 million to GBP 10 million in the U.K. While lockdown resulted in a pause in the branch opening program with only 9 new branches in the U.K. in the half, we remain committed to the plan to open 60 new branches in the year. Nearly all of these sites are already identified, and we opened 19 new locations during July and August. In Europe, the impact and timing of lockdown was, of course, different from the U.K. but the Toolstation proposition clearly responds well to customer needs with its multichannel capability, it's high stock availability and outstanding value. Total sales in the Netherlands and Belgium grew by 79% and by 56% on a like-for-like basis. In France, total sales grew by 74% and by 61% on a like-for-like. Although the branch network expansion is behind the plan for the year, 8 new branches were opened in Europe in the first half, with further openings in Netherlands, Belgium and France, all planned for the second half. And as disclosed previously, the additional operating costs of the European businesses will lead to the consolidation of around a GBP 20 million loss for 2020, of which GBP 9 million was recognized in the first half of the year. Like Toolstation, Wickes also demonstrated its integrated digital capability and its ability to adapt rapidly to market conditions. From the end of March to mid-May, Wickes stores operated as fulfillment centers for Click & Collect orders, alongside direct-to-home deliveries from the distribution network. Stores reopened to customers in late May, driving an acceleration in DIY sales as the trend for consumers to carry out DIY projects continued strongly. In June, overall like-for-like growth was 22% despite Kitchen & Bathroom sales not recovering fully, with core DIY sales up nearly 50%. For the half, despite lockdown, core DIY delivered like-for-like growth of 6%, while the Kitchen & Bathroom showroom business declined by 40%. Gross margins were essentially flat year-on-year, with a mix shift towards DIY from K&B or Kitchen & Bathroom showroom sales, offset by reduced promotional activity in the DIY categories through the busy spring bank holiday period. As with other segments in the group, the retail businesses delivered good control of overheads, and this will be further underpinned by the June cost savings program. However, given the fixed cost base of the store network, operating profit declined to GBP 32 million in the period. During lockdown, sales in the Plumbing & Heating segment reduced to around 1/3 of prior year levels, similar to the other trade-focused businesses. The recovery in sales has generally been slower than for the general merchant business, driven by a slower recovery in new house building, a more gradual return to activity in the social housing sector and a careful return to operating in customers' homes by larger contract installers. Gross margins were stable with the impact of lower annual volume rebates, offset by the shift in sales mix towards smaller installer customers and the positive business mix change following the sale of the PF&P wholesale business in January. While absolute overhead costs reduced, the significant drop in volumes drove an operating loss for the business of GBP 8 million in H1. As part of the restructuring program, 16 Plumbing & Heating branches were closed in June, alongside a streamlining of above-branch activities. This is expected to generate around GBP 25 million of annualized cost saving. So turning to cash and debt. As I mentioned earlier, our cash performance in the half was outstanding with the generation of GBP 305 million of free cash flow before property transactions, and this despite the significant fall in operating profit. As you can see, the major contributor was the significant inflow in working capital. Inventory reduced by GBP 154 million as stock purchases were reduced. And inventory was also moved around the network. Receivables reduced by almost GBP 400 million given the contraction in credit sales during Q2. Our credit teams in conjunction with branch and sales colleagues have done an absolutely outstanding job throughout lockdown in collecting receivables. Given reduced stock purchases, trade creditors also reduced during the period. And in other creditors, the balance was assisted by the deferral of VAT payments due from between March to June to March 2021. This total is approximately GBP 100 million. On Slide 18, looking at the group's capital expenditure, base CapEx totaled GBP 47 million. This was only modestly lower than H1 '19, as there was a significant capital accrual at the end of December '19 paid in Q1, and as a number of Wickes' refits had already been completed prior to lockdown. New capital commitments were constrained from March onwards. And so expect to see lower cash CapEx in the second half despite the Toolstation branch expansion program. Given the exceptional free cash flow generation, the business delivered a significant reduction in net debt. This was also aided by the GBP 50 million inflow at the end of January from the disposal of PF&P and by the suspension of final dividend for 2019. Covenant net debt was a modest GBP 22 million with reported net debt, including leases, also some GBP 400 million lower. During May, we prudently agreed a relaxation of covenants at the end of June and December 2020, but we also chose not to put in place additional facilities. As of June 30, the group had liquidity headroom of GBP 855 million composed of the undrawn revolving credit facility of GBP 400 million and cash on deposit of GBP 455 million. This position strengthened further during July and August by approximately GBP 100 million. But given the uncertain outlook, we intend to maintain a very strong headroom position. If I look ahead, the long-term fundamentals of our end markets remain robust with ongoing demand for new housing and underinvestment in residential RMI. Since lockdown was lifted, we've seen a good recovery in the construction sector, with strong RMI and DIY demand continuing. While secondary housing transactions have been strong since lockdown, it's not yet clear whether this is a sustained trend or a release of pent-up demand. We also welcome the government stimulus package for U.K. construction. And given our broad end market exposure, we are well placed to service this demand. The near-term outlook for the economy is, however, very uncertain, and an increase in unemployment will undoubtedly have a detrimental impact on consumer confidence. We, therefore, remain cautious on the volume outlook for building materials in the near term, but believe the group remains very well placed to continue to outperform its markets and generate value for shareholders. With that, I'm now going to hand you back to Nick for the operational review and strategic update, and then I'll look forward to taking questions with Nick later.

Well thank you very much, Alan, and welcome back. I'm planning to talk you through 3 sections today. Starting with the group's immediate response to the pandemic and how I and my leadership team approach the challenges that presented themselves very quickly. We're all obviously in completely uncharted territory. As I mentioned earlier, this crisis period has been a lot about -- or a lot more than about survival for the group. It's been about how we accelerate our plan to improve our business and utilize wisely our people and resources to advance and improve. So I plan to give you some examples of how we, as a group, have done that and what we've achieved. And how the culture and the people within our business have pulled together to achieve some remarkable feats in what has been a very short, but a very stressful period for everyone. Finally, and I think more importantly, I'd like to talk briefly about how we're looking to the future. If the pandemic has taught us one thing, it's that our end markets really are changing. And that our customers will respond and indeed actively seek different ways of working with us. And these structural changes are a huge opportunity for us to develop and grow our business. I don't have a future strategy to share with you today, but I do have a framework for how we're thinking through these opportunities and challenges and some different time horizons that we're looking to. So what does COVID meant for TP? Well the answer, of course, is lots of things. So let me break it down for you in the way that we approach this as a leadership team as we broke it down into 3 phases. The first thing to note, and this has always been stressed, is that whatever the decisions we've made at whatever point, the absolute #1 priority has been the safety and well-being of our colleagues. The first phase of the pandemic for TP really started pre -- way pre lockdown back in January as we started to look at the security and the impacts on the supply within our Far East supply chain. And of course, as lockdown hit places like Wuhan and China, more generally, we began to think about and operationalize looking after our colleagues in our Shanghai operation. But we started to think carefully about how we could and would mobilize work -- our colleagues to work remotely and then how we would do that fast and at scale and ensure everybody could work should the pandemic affect the U.K. We call this getting out in front of the issue, and we started work on it very easily. It was no easy task. Come early March, just after we spoke to you last, we mobilized thousands of colleagues to homeworking very, very quickly. And that necessitated some really quite highly complex processes around credit management and taking payment over phone to home working very, very quickly and at real scale. The second phase was lockdown itself and we used our voice with government immediately to position ourselves as an essential service through lockdown so the business would not close. As Alan said, we supported the rollout of the NHS Nightingale hospitals, which was incredibly important to us. We continue to support infrastructure projects. And of course, we made materials available for the continued support of domestic maintenance at a time when we really needed to keep critical infrastructure operational and our homes warm and dry in a period of great national need. We really established our role as an industry leader, being primary in developing safe working practices very, very quickly with the government for the government with construction industry leaders and peers. We immediately pivoted our business to what we called our service-light model. Branches were closed to customers, but they pivoted to being fulfillment centers for delivery where there was no contact with customers to keep our people safe, but indeed, we move to remote telephony based or digital contact solutions, as Alan mentioned. We simply did not shut our branches and stores. We pivoted our model, and we did so instantly. With 1/3 of our merchant branches closed and operating contactless models, Toolstation and Wickes pivoted to nearly 100% of digital operation. We had a short, but a very challenging peak with 15,000 of our colleagues on furlough, but we treated them with great dignity, fairness and respect, and we kept them motivating by using video and homeworking methods. And then those colleagues returned rapidly. We moved as lockdown started to ease from having, within our TP general merchant, 130 branches open to more than 600 branches open in less than a week. And as Alan mentioned, throughout all of this, we kept a really tight focus on cash and liquidity, ensuring the viability of the business, however, the crisis panned out. And of course, the future looked very uncertain at that stage. Very quickly and in parallel, we moved our operations to Phase 2, and we started to consider what we call winning the piece would look like. So what do I mean by that? To thus -- to us, that meant, what would we be -- what should we be doing during this period of lockdown and operational constraints to ensure that we are; one, ready for whatever comes next; but two, we emerge stronger. For us, it meant using our time and resources really wisely to drive improvements in the business. And in many cases, these were improvements that we had planned already, but we massively accelerated them. We generally aimed towards improving our customer service, improving our customer propositions, either to suit the immediate and constrained trading conditions such as improving dramatically the digital transacting capability within our merchant businesses, but actually looking towards building a stronger platform for future growth. The key recognition here is that COVID has not only been a crisis for us, it's been an opportunity to really focus our time and resources and to achieve much more than we had planned to in a shortened time frame. And to do this, we adopted a whole new operating rhythm and drumbeat. Being comfortable with making lots of suboptimal untidy decisions, experimenting, learning fast, measuring and moving forward fast. It was a fundamentally different way of working for us, and we've learned a lot. So what has this meant for our group key priorities? I've described a huge amount of change, none of which was planned at the beginning of this year or actually even when we last spoke to you at the beginning of March. In March, I presented 4 key priorities for the group, many of you will recognize this slide. The first one, as part of simplifying the group, was obviously to successfully demerge Wickes, which was an action that we paused at the beginning of lockdown and pre lockdown. The Board continues to believe that the demerger of Wickes will allow both businesses to fulfill that potential, and we'll only pursue it when the market conditions are appropriate to do so. The other 3 priorities, I think we can broadly group together under the banner of really strengthening the core of the business. The regeneration of Travis Perkins general merchant, as I said in March, was well underway but we've driven this at a much faster pace of change, and we're ahead of where we plan to be. For Toolstation, it's proven its strength, as Alan has mentioned, both in the U.K. and Europe with strong like-for-like growth during this -- the most difficult circumstances. The network expansion, as Alan mentioned, was paused, but we've made so many other really important operational changes and progress that I'll set out, which really gives us a strong platform for the future. And we've made some excellent early progress in our broader operational platform for the business and a huge amount of planning is underway from the lessons we've learned during the pandemic to continue that progress. So first then to our TP general merchant and really accelerating the strategy. Our aim, of course, is to be the first choice general merchant in the U.K. and to sustainably outperform the market. And that intent is as true today as it was 6 months ago. This slide will, of course, look familiar. We were working on how we improve our range, our service, our supply and our estate. The difference, of course, between then and now is where we are in that plan and what we've achieved. COVID has fundamentally changed the way in which our customers wish to deal with us. They had changed force upon them and we've enabled it very, very quickly. I won't talk through all the examples on this slide. We've speeded up our range and category reviews and enabled them to have much more local flavor very, very quickly. As I've mentioned and as Alan mentioned, we pivoted our operations to Call & Collect and Click & Collect immediately, which has allowed us to give and allowed our customers to be much more organized and disciplined with planned collection and delivery slots organized over web and phone. We've obviously made huge changes to our network and announced some deep cuts within our merchanting businesses and within our TP general merchant. We've closed 82 out of 650 branches, that's 13% within our general merchant. As I touched on, in March, we actually had a strategy over the few years ahead to close some of our smaller suboptimal branches, particularly in and around large conurbations. The reality was that many of these small branches couldn't operate in a COVID-compliant way and indeed, within the new ways of working that we had to bring in instantly post lockdown. And under those new ways of working, which sustained and given the uncertainty that we see in the macro market that Alan touched on, they were unlikely to be viable in the long term. And therefore, we accelerated closure of those branches. We've really made tremendous progress to enhancing the merchant's digital capabilities. Merchanting has long lagged retail businesses in the use of digital platforms for the transactions. But as we all know, for merchant businesses, transacting through a digital means is only a fraction of the capability that our core trade customers look for. But as it happens, COVID accelerated and changed that game materially so much so that we had to provide a contactless route to accessing materials and to transact in order to do so, and that became a significant priority from March onwards. And the business responded. We developed new and upgraded digital platforms for our merchant businesses very, very quickly, delivering Click & Collect propositions, greater visibility of stock and availability by branch, which has been hugely successful and allowed us to organize better delivery. It's been a real step change for our merchant businesses. And while some customers, of course, will return and are returning to branch-based transactions and interactions, we see this as a sustained shift on an ongoing basis. So what we've done has put us a long way ahead of where we plan to be. There's still more work to do, of course, and we are making great progress. The other leg of that work, which actually is more important to our trade customers is account management, online and through an app. And whilst we focused on the transaction piece through lockdown, that is now returning to be our #1 priority based on customer feedback, which makes transacting with us much more easy for our customers. So great progress made in the digital space. Our specialist businesses are extending their advantaged propositions as well. They're very much core to our business, and we've made significant strides forward here, too. They have to work very hard on accelerating their digital platforms. Keyline partnered with TP to provide a much broader, higher offering, and we've rapidly developed new pricing frameworks for customers making quoting far more easy, quick and consistent. BSS have continued to develop their customer propositions as well as their digital capability, restructuring their tendering processes and making great progress in developing BIM capabilities for the future. Benchmarx have entered a much closer strategic partnership with TP to really integrate their back-office systems and bring customer sets together to maximize the opportunity for these businesses. That sounds simplistic, but of course, in our customer base between these 2 businesses, there's huge overlap. And now we will work towards getting a much more coherent one view of customer and drive shared -- maximize share of wallet for these 2 businesses. For P&H, as Alan outlined, we've made great progress in continuing to provide essential services for our installer customer base. We continue to improve the business. They have made, again, great progress in upgrading their web platform and developing their Click & Collect capability and the strength of our pure-play online businesses like PlumbNation has really shown through the pandemic. We're seeing good recovery in our MI post lockdown. And of course, we're entering the heating season now. The disposal of F&P obviously simplifies the business and whilst we continue to retain the intent in the longer term to sell the business, we are focusing on operational improvement and improving returns. For Toolstation in U.K., we've made very, very significant developments in the business. In recent years, the key focus for Toolstation, as Alan outlined, has been on network expansion. And whilst the rollout was paused, of course, we opened 19 branches during July and August. And as Alan said, we're on track for 60 new openings this year, which in of itself is tremendous progress. But that really wasn't the only area for development for the business, and we've achieved some really exciting things over the last few months. Toolstation entered the crisis, of course, with really strong digital capabilities which enabled a seamless transition to branch-based -- from branch-based to wholly digitally based transacting and trading. But that kind of trading volume and the increase in trading volume that we saw in those early days really caused the infrastructure to creak. And I will never forget sitting with James MacKenzie and the senior leadership team of Toolstation, very early on Good Friday morning, seeing live the web transactions increase hugely, and to an extent that the website started to slow as it reached maximum capacity. So what did the team do? Well they simply rebuilt the website, and they did it in one weekend, and they did it over the Easter weekend. I mean, tremendous performance to execute that sort of change and then deliver a capacity that allowed the business to continue to grow and at pace. And obviously, that's a change now that will last in the longer term. The team then followed this up with re-platforming the wider business, which gives -- vastly improved operating capacity and effectively future proofs the IT platform for the years ahead. And this was done in a matter of weeks and it gives the business a much more -- a stronger platform for growth in the future. So the volume of web transactions, obviously, wasn't the only challenge, higher web sales becomes the challenge of higher home deliveries. And the home delivery distribution center really maxed out in capacity quite early on. So another challenge was overcome in very short order. And in days, we repurposed the Redditch distribution center from branch replenishment to also be a direct-to-customer replenishment center and that was done, as I say, in days. With all this change going on, and whilst operating drive through gazebo-covered Click & Collect services for our customers, Toolstation delivered very strong like-for-like growth. So I think you'll agree that is truly a remarkable performance. Toolstation Europe continues to gain traction. Our European business was well placed, as Alan mentioned, with a combination of their multichannel capability, their value offer, excellent product availability, a really winning formula in their markets and DIY customers and trade customers sort them out during lockdown. There's been a significant increase in new customers. And these customers are proving very, very sticky. Once they've tried Toolstation, the rate of repeat custom is very high indeed. And you can see that in the growth figures. Even during the lockdown period, volumes have grown considerably, and that gives us really great confidence around our plans for continued expansion through 2020 and beyond. For Wickes, I think the story is one of demonstration of the benefits of digital integration. Of course, David stood before many of you January at the Wickes Capital Markets Day, setting out why he and the team believe so strongly that their strategy of a fully digitally integrated home improvement business model was so strong. And 7 months on, I think what they've done is demonstrated that the benefits of that model very, very clearly indeed. At the point of lockdown, the business instantly transitioned to 100% digital transacting with the store network focused on it becoming fulfillment centers for customers for drive-through Click & Collect. And it made a seamless transition for customers. Again, similar to Toolstation, some of the stats for that period are truly mind blowing. Over 60,000 orders for Click & Collect or home delivery process daily, 6 months of normal Click & Collect volume every 6 days, and more than 1 million new online customers registered with the business. That is more than the previous 11 years combined. So a phenomenal performance. And of course, as Alan mentioned, that was on the core DIY side of the business, the do-it-for-me, K&B showroom and installation service obviously had to be paused during lockdown as we couldn't enter people's homes. But as lockdown lifted, it was clear that there was pent-up demand for those services and those products. And so as we reopen the branches, the team developed ways of working both within people's homes but also placing a new digital visualization and surveying tool into the market, which has allowed our DFIM (sic) [DIFM] business in a safe and controlled manner to reopen and meet the demand and now it's back up to speed with very, very encouraging lead generation over the last few weeks. So we've learned some very, very important lessons from this period. It's hopefully clear to you all that we've achieved a huge amount, both to enable our operations to navigate the crisis but actually to drive some significant improvements in our business. We really just have not wasted this crisis and hunker down to try and survive it. An important question that we regularly ask ourselves is what those important lessons that we've learned are and what would we do differently next time? And importantly, what have we done in this period that will embed in our ways of working going forward? My first thought, which I mentioned earlier, is around the culture and the values of this business, as I mentioned that at the very start, but the strength of the culture and values in this business is what attracted me here over a year ago and really has served to guide us through these challenging times. We prioritized safety and well-being at all times. And we've taken time to consider the moves that we've made and the pivots that we've made within the business, remaining committed to our customers and committed to fulfilling the essential services that we provide them. We've been values led through all of this, from everything to safety, to operations, to how we conducted ourselves with furlough, and this has retained great commitment for both our colleagues and our customers. Another thing that strikes me is obviously time scales. I regularly have to remind myself of what we've achieved in such a short period of time. Whilst I've referenced the last 6 months, many of the changes that we put in, practically all of them have been done in days and weeks. That demonstrates to me that when we focus and when we move at pace, we can achieve a huge amount and acting was the key, acting in the knowledge that actually our first attempt to the new operating model wouldn't be perfect. We made lots of suboptimal decisions but we learned from them, we shared them, and we moved very fast to make improvements, and that has been tremendous. Nothing -- or many of the changes previously seen too big or too complex and we broke them down, we started small, we piloted hard, we've learned, and we've moved fast with lots of decision-making at pace. I think we've learned a lot about ourselves during this period. I think we're a lot more technologically capable than we thought we were. And whilst we've made very early progress in that regard, we're really starting to understand how we utilize our capability, work with our customers and use the data that's available to us to provide a better service and a better business going forward. I also think we realized as a business how much we can learn from each other. The crisis has created similar challenges for all of our businesses. And by sharing that knowledge, by sharing ideas, by sharing the results of pilots quickly and seamlessly across the business, we've become much more agile and much more successful as a business. And this collaboration between businesses is something that I'm really passionate about, and we'll be doing more of in the future. We've already seen the benefits of this. And more importantly, to me, our colleagues have seen the benefits of this and we move forward with that high on our agenda. So what about the future then? We've begun to think about the future before COVID arrived on our shores, but it became very quickly apparent that our planning for the future couldn't stop as a result of the crisis, and we needed to push forward with our thinking. Indeed, some of our hypothesis that we were testing and talking about back in the autumn around customer behaviors and how they might change and how business models might change in the future have been accelerated overnight. And therefore, we need to keep thinking about them, planning for them and delivering solutions to them. So I think about the future across 3 horizons with clear strategic aims for each of those horizons. The first one, I think, we discussed at length today. We call it strengthening the core of our business, getting the fundamentals right to deliver a successful best-in-market service to our customers today and to drive sustainable market outperformance. This includes 3 of our key priorities. And as you've seen today, we've made some really fantastic progress. We're actually, I think, ahead of where we intended to be, but there's still a huge amount of work still to do. The medium-term horizon, we call this a staging post to create a modern merchant. What does that mean? It really means a leading business materials distributor, one that is truly customer intimate but digitally enabled and completely integrated with its branch network. It means greater collaboration across our business, being more intimate with our customers, having a single view of that customer and how we can maximize our share of their wallet and really maximizing the opportunity at group level. And it means leveraging our scale to develop leading customer propositions for the longer term. And finally, of course, we need to look longer term. The construction industry landscape is changing. COVID has shown us that. And as a supplier to the industry, we need to be prepared to change with this, of course. We ask ourself some broader questions. How do we partner with the breadth of our customer base to enable our customers to do more easily? And how indeed, do we help them grow their business and in doing so, grow ours? So lots more thoughts to come over the months ahead. So to sum up then, I think to try and describe the first half of 2020 is actually quite difficult. But in short, I'd say that we have successfully navigated the COVID crisis so far, it's still with us and changes every day. And we've achieved a huge amount in improving our business, meaning that I think we're coming out stronger. We've done this by really focusing on a timely and clear purpose for our business, being true to our values, leading the industry and using our voice with government very, very clearly, looking after our people, our colleagues and our customers. And we're coming out stronger because we didn't just hunker down and waste the crisis, we innovated fast, we challenge ourselves, we knocked aside old barriers. We got out in front. We took tough decisions early, and we focused on winning the piece. We've still got an awful lot to do, but I feel very much as though as a business, we're on the front foot. With that, Alan and I would be very happy to take your questions.

Our first question comes from Yves Bromehead of Exane BNB Paribas.

A few questions on my side. Number one, I wanted to come back to the annualized cost-saving measures. I just wanted to know if you could clarify the timing of this between H2 2020, but also what we should expect in 2021? I would also be interested to better understand the mechanics behind this given that you benefited from the furlough, but also business rate relief. And therefore, what is exactly the net impact probably into 2021? Number two, looking more near-term into H2 2020. I was just wondering if you could give us a bit more color in terms of the margin side of the business, especially on your comments with the better activity levels, the cost-saving measures that you've implemented and the business rate relief, which should continue into H2 2020? So any color on that would be helpful. And maybe just a last question on the digitalization of your merchant business. Given that you have seen a pickup in activity, can you comment on whether or not you've been seeing a switch back to the more traditional way? And what type of investment you will do in the IT side of the business in the future?

Thank you, Yves. Perhaps for those first two, I'll hand to Alan, and then I'll come back on the digital merchant.

Yes. So Yves, thanks for the questions. On the savings from the restructuring program, so GBP 120 million of gross benefit. I think I referred to the fact that the program was essentially complete by the end of August. So if you take that GBP 120 million and you take [ GBP 412 million ], that takes you to the number we'd anticipate for H2 '20. And therefore, as you go through into 2021, I think you can basically assume on a gross basis, GBP 10 million a month for the first 8 months before we start to cycle the saving from September onwards in 2020. In terms of the furlough scheme, no anticipated benefit in the second half of 2020, I think that's done. From a business rates point of view, around GBP 40 million in the second half and then GBP 20 million to come in the first quarter of 2021. I think we need to think when we're thinking about the shape of the P&L about why we did the restructuring program. We undertook the restructuring because we're acutely conscious of the volume environment in the short to medium term. So the design of the program was to offset some of the shortfall in gross profits that we'll see because of reduced volumes going through the business. As we think about your -- the second question you have, Yves, on H2 '20 margins overall. I think I referred separately to the gross margin element that I expect to see that, again broadly unchanged overall. I think we tend to see a slightly stronger second half in terms of margin. There will be benefit from the fact that volumes have picked up but it's important to remember how uncertain the current environment is. So I think it's -- we deliberately not given detailed financial guidance today because we just think the environment remains pretty uncertain at this stage.

Good. Thanks Alan. And just on the digital merchant question, Yves. Of course, we saw pickup through necessity. We closed our gates, but we served our customers through contact list means, and of course, our customers pivoted to using technology as a means of accessing materials. Of course, as I mentioned, we have seen a transition back to as we've opened the gates of our branches while remaining and retaining our safe working practices in a very controlled way, we've seen customers wanting to retransact through the branch. But we continue to develop our digital capability because we see a shift in our customers' behavior and a willingness to use technology to work with us. It makes it simpler and easier for them in a number of different ways. So we continue to develop that. And all of that development has been, obviously, our people's time and capability in developing these tools and deploying them very, very quickly. So we're still, as I said, working on how we plan the future of our digitalization of the business is part of our broader improvement in our technology underpinned for the business. And as we plan that, obviously, we'll be thinking about the investment in that as we move forward. But broadly, at the moment, that is within our kind of OpEx line as we invest our time and work with our customers to develop that capability. I hope that answers your question, Yves.

Yes.

[Operator Instructions] We now have a question from Robert Eason of Goodbody.

Can you hear me?

Yes, we can.

Sorry, I've got 5 questions. So I don't know if you want them all at once or one by one.

Why don't we take them all at once and then we'll decide how we answer them.

Okay. Just my first question is on rebates. You called it out as being an impact in H1, which is totally understandable. But I just want to understand, what are your assumptions in terms of coming up with the rebates in H1? Like are you making assumptions about H2 in terms of where volumes would end up to come up with that figure? So just a kind of debate about how much of you've already booked in rebates and the assumptions that, that is based on? Second question is just around bad debts. Quite clearly, there's increased provisions being put true in H1, which is totally understandable. But just generally, what are you seeing on the ground as you chase around your customers to pay? Is there any particular areas where it's harder and smaller customers versus bigger customers, different sectors? So just a general discussion around that. You talked about July and August is back to previous year's levels. Obviously, when you broke out the monthly figures for April and May and June, there was big variance between the businesses, mainly retail being a big plus -- positive outlier. And on that, can you just give us a bit more detail of the mix within that July, August back to kind of 2019 levels? And my last question -- sorry, there's 4. My last question is just on the store closures. When you're analyzing this, and I understand, it's only a couple of months so far, how much of the sales are you capturing? And how should we think about that as we model going forward?

Alan, I'll take the last one and you pick up the rebate and debt.

Yes. So, yes, Robert, quite a financial financially focused set of questions more than the strategic focus. So on rebates, assumptions, H1 and H2, the element that I was referring to on rebates that we've looked at differently, of course, is the any annual volume rebates or growth incentives that we receive from our suppliers. We've made a fairly prudent assumption at this stage. Given the lower expected level of purchases for the year, we've reflected that as we accrue for the expected benefit for the first half, we thought about where some of the second half volumes in terms of purchases would lie and then form the view on that. From a bad debt perspective, the increased provisions are largely what you're required to do through the accounting standard, IFRS 9. So you have to look forward to your expected credit loss. How do we do that? What we basically saw on previous recessions, and what we've seen, at this stage, on the ground, I refer to the job the credit teams have done with sales and with branch colleagues. They've done an absolutely outstanding job and have worked tirelessly with our customers to collect. So there are, of course, a few customers who have gone under during the second quarter but we've not seen a large step-up at this stage in business failures amongst our customer base. But that's the point of provisioning for the future in case that were to arise. In terms of July and August details on mix, I'd say it's largely a continuation of the trends that we're seeing in June. So we're seeing continued robustness in DIY, in retail across Wickes and Tile Giant. The Kitchen & Bathroom business in retail is recovering well. Toolstation remains a consistent strong performer. We've seen the merchants -- I think you have to break it down a little by end market to really understand what's going on there. So more softness in new starts and in commercial. But the RMI piece remaining pretty robust at this stage.

Fabulous. And just on your last question, Robert, around store closures and the retention of customers and custom, clearly, there's a mixed picture here. Within our general merchants, I think, as I said, we focused on the smaller, typically rural or small market town branches that prove to be suboptimal for us going forward. And of course, with the smaller local, typically local customer base there, we've seen some loss of that customer, whilst not all. Within our urban -- within the urban areas, we've seen and would expect, again, typically a larger customer base, retention of more than 80% of those customers. Within our specialist merchants, the picture is slightly different, of course, where we see very high retention. Within CCF, within Keyline, within BSS, they're larger relationships, larger customers, we typically deliver. And so actually, they're less reliance on coming into the local branch and so we see very high retention rates there. So a mixed picture, depending on which part of the business and which part of our customer set we're looking at. I hope that answers your questions, Robert.

Yes. If you -- if I could, just one more, just -- sorry, just on benchmarks and strategically aligning it more with Travis Perkins. Is this too much of a big assumption to assume we could see that in a 5-year period being fully integrated within the general merchanting branch network given the crossover in customer base? Or is that just a step too far?

Well as I said, we're looking at full integration in terms of our -- many of our back-office systems and processes because we -- the businesses share a customer base that is very common. And we aim, as I said, to maximize the opportunity and the proposition, the integrated proposition we give to those customers, and of course, the share of their wallet. So how we -- what we find as we move those businesses together, we'll determine the decisions we make going forward, but it will be a close integration of the businesses, and that process has already started.

Our next question comes from Will Jones of Redburn.

Yes, a few from me as well, please, I think, mainly revolving around gross margin and mix. But would it be possible -- I think, the operating margin decline in general merchanting was about 500 basis points. I know you don't like to split out exact details on gross margin anymore, but could you give us a broad feel as to how much of that came at the gross line potentially? Within the gross margin pressure, you obviously helpfully highlighted various moving parts, but none of them were actually around kind of industry competition per se, although one of your competitors did refer to that as an issue back earlier in the year. Could you just give us a bit of a feel on them -- on that point around the industry competitive backdrop, please? And then just a couple of questions. One -- yes, a couple of questions on mix, I suppose. I was always quite intrigued by your point on collect versus delivered. But if we look in 2019, I think, 34% of merchant sales were collected, and it was 42% in the first half of this year. So it's actually gone up, which surprises me given the pandemic. So can you clarify the point, please, around kind of collect versus delivered within the mix? And then actually -- sorry, the last one was really just kind of jumping topic slightly, but Plumbing & Heating. Obviously, there's been a lot of change in that business in the last few years around branch closures and disposals and now cost savings. And it's probably going to be -- won't make much money, if any, in 2020. But can you give us a broad feel for what you might see as the right margin at a sensible level of volume at some point in the future of that business, because, obviously, a lot has changed?

Thanks, Will. If I start with the point on merchanting operating margins, you're right, I'm not going to provide a breakdown at this stage. Overall, the gross margin drop is a relatively modest part of the movement. I don't think it's helpful to focus on the 500 basis point decline in margin given the severe impact of the lockdown on volumes. Just thinking about the competitive backdrop, I'm not sure we've seen a huge amount of change to be honest during the period. I think all competitors have rightly been focused on health and safety and on supporting their customers through unprecedented conditions within the marketplace. I'd say we've not seen intensity on pricing during that period. It wouldn't surprise me if there is some pickup on the competitive landscape from a pricing point of view, given the volume shortfalls people have seen over the year. When I look at our overall trends, I'd say we're pretty comfortable with where we've been going there in terms of our relative share. And as both Nick and I said, we think we're well placed to continue to outperform in the medium term. From a Plumbing & Heating point of view, yes, a huge amount of change. If we think about the different drivers, we started from a point where the business, on last year's volume, was making around a 3% operating margin. There is some benefit from the disposal of PF&P, given it was a wholesale business, and therefore, lower margin, albeit around GBP 250 million to GBP 275 million of revenue. So think of that as an upward point. And we've carefully said in the statement, there's lots more that we can do to continue to improve the business over time. So for competitive reasons, I'm not going to go into the detail of what those initiatives are. But we are optimistic that we've got some good plans. And when we look through the impact of the pandemic, we're positive that we can continue to improve that business a little further from this stage. I'll have to get back to you on the detail on the collected versus delivered. I think intuitively, you're quite correct. So I would expect that to be more delivered overall within the period. But we'll come back to you on that.

We now have a question from Christen Hjorth of Numis

Just 3 questions from me, if that's okay. First one is on stock availability. We've heard that certain products have been less available over each time. So I know, obviously, you've had quite a significant inventory inflow in terms of working capital over the period. Just any thoughts on being able to restocking key products and stock availability in general? The second one is just on Toolstation. So firstly, there's some extra COVID-19 overhead you referred to. I was just wondering if that's expected to continue in the second half or the productivity in that guide can improve as time goes on? And then also with regards to Toolstation Europe, whether you can give any guidance at this stage to perhaps how the losses in that business trend? You've obviously given it for this year, but perhaps looking into next year as well. And then finally, just coming back to the restructuring point, GBP 120 million of cost savings, which you've run through. Just if we look back to like a normalized basis in, say, 2019, would that be a net neutral impact on EBIT? I'm just trying to sort of understand what the potential impact on revenue and gross margin would be on a normalized basis on that restructuring?

Thank you, Chris. Should I start and...