Travis Perkins PLC : Annual Financial Report
ANNUAL REPORT 2015
Publication of the Annual Report
25 April 2016
Travis Perkins plc (the "Company") announces that its Annual Report for the year ended 31 December 2015, and the Notice of Annual General Meeting, are now available on the Company's website - www.travisperkinsplc.com.
Printed copies of these documents will be posted to shareholders on 26 April 2016 and in accordance with rule 9.6.1 of the Listing Rules they will shortly be submitted to the National Storage Mechanism.
In accordance with rule 6.3.5 of the Disclosure and Transparency Rules, we set out below the following extracts from the Annual Report in unedited full text. It should be read in conjunction with the Company's preliminary announcement issued on 3 March 2016. Together these constitute the material required by rule 6.3.5 of the Disclosure and Transparency Rules to be communicated to the media in unedited full text. This material is not a substitute for reading the full Annual Report. Page and note references in the text below refer to page and note numbers in the Annual Report.
Statement of Principal Risks and Uncertainties
Related Party Transactions
Statement of Directors Responsibilities
The Company published its preliminary results on 3 March 2016.
On behalf of the Board:
| John Carter - Chief Executive Officer | |
| Tony Buffin - Chief Financial Officer |
The Annual General Meeting of the Company will take place at 12.00 noon on Wednesday 25 May 2016 at Northampton Rugby Football Club, Franklin's Gardens, Weedon Road, Northampton NN5 5BG.
Enquiries:
John Carter, Chief Executive Officer
Tony Buffin, Group Financial Officer
Graeme Barnes, Head of Investor Relations
Travis Perkins plc | +44 1604 683 222 | +44 7469 401 819| investor.relations@travisperkins.co.uk
STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES
For the year ended 31 December 2015
The Group operates in markets and an industry which by their nature are subject to a number of inherent gross risks. The Group is able to mitigate those risks by adopting different strategies and by maintaining a strong system of internal control. However, regardless of the approach that is taken, the Group has to accept a certain level of risk in order to generate suitable returns for shareholders and for that reason the risk management process is closely aligned to the Group's strategy.
The Board has a risk reporting framework that ensures it has visibility of the Group's key risks, the potential impacts on the Group and how and to what extent those risks are mitigated. As part of its risk management process, the principal risks stated in the Group's risk register are reviewed, challenged and updated by the Board and monitored throughout the year. Each operating business within the Group monitors a separate risk register. This risk register is used to determine strategies adopted by the Group's various businesses to mitigate the identified risks and are embedded in their operating plans.
Details of the Group's risk management processes are given in the Corporate Governance report on page 102. The risk environment in which the Group operates does not remain static. The nature of risk is that its scope and potential impact will change over time. As such the list below should not be regarded as a comprehensive statement of all potential risks and uncertainties that may manifest themselves in the future. Additional risks and uncertainties that are not presently known to the Directors, or which they currently deem immaterial, could also have an adverse effect on the Group's future operating results, financial condition or prospects.
The table below sets out, in no particular order, the current principal risks that are considered by the Board to be material, their potential impacts and the factors that mitigate them. The inherent risk (before the operation of control) is stated for each risk area together with an indication of the current trend for that risk.
| Inherent Risk, Level and Trend | Risk Description | Impact | Risk Mitigation |
| Market conditions Inherent Risk: High Trend: Static | The Group's products are sold to businesses, tradesmen and retail customers for a broad range of end uses in the built environment. The Group's markets are cyclical in nature and the performance of those markets is affected by general economic conditions and a number of specific drivers of construction, RMI and DIY activity, including mortgage availability and affordability, housing transactions and the timing and nature of government activity to stimulate activity, net disposable income, house price inflation, consumer confidence, interest rates and unemployment. A significant downturn in economic conditions or alternatively major uncertainty about the future outlook could affect the Group's markets, levels of construction activity and the confidence levels of the Group's customers, which could reduce their propensity to purchase products and services from the Group's businesses. | Adverse effect on financial results | The Board conducts an annual review of strategy, which includes an assessment of likely competitor activity, market forecasts and possible future trends in products, channels of distribution and customer behaviour. The Group maintains a comprehensive tracking system for lead indicators that influence the market for the consumption of building materials in the UK. Significant events including those in the supply chain that may affect the Group are monitored by the Executive Committee and reported to the Board monthly by the Group CEO. Should market conditions deteriorate then the Board has a range of options dependent upon the severity of the change. Historically these have included amending the Group's trading stance, cost reduction, lowering capital investment and cutting the dividend. |
| Competitive pressures place pressure on prices, margins and profitability Inherent Risk: High Trend: Static | Market trends, particularly in respect of customers' preferences for purchasing materials through a range of supply channels and not just through the Group's traditional competitors may affect the Group's performance so making traditional branch based operations less relevant or profitable. Increased price transparency could cause customers to perceive that the Group is less competitive than some other competitors. Public sector buying groups could reduce sales if public bodies chose to buy direct from manufacturers. Disintermediation may become more of a threat if manufacturers decide to deal directly with end users. The Group faces the risk of new entrants to any of its markets, including from businesses currently operating outside its industry or only in overseas markets. | Adverse effect on financial results. | Changes to market practice are tracked on an on-going basis and reported to the Board each month. The Group is building multi-channel capabilities that complement its existing operations and provide its customers with the opportunity to transact with the Group through channels that best suit their needs. Pricing strategies across the Group are regularly reviewed and where necessary refined to ensure they remain competitive. The development of new, innovative and competitive supply solutions is a key strength of the Group. It works closely with customers and suppliers on a programme of continuous improvement designed to improve its customer proposition. The Group's strategy allows it to use sites flexibly. Alternative space utilisation models are possible, including maintaining smaller stores and implanting additional services into existing branches. |
| Information technology capabilities impact the Group's ability to trade profitably Inherent Risk: Medium Trend: Increasing | The Group depends on a wide range of complex IT systems, both in terms of the availability of hardware and the efficient and effective operation of software. The rapid expansion of the Group together with an increasing demand for IT services, particularly as the Group embraces modern platforms such as multi-channel, updates its point of sale systems and develops its supply chain capabilities, could result in development programmes being delayed or new IT systems and change management systems not being successfully implemented. Should a system become unavailable for an extended period either through deliberate act or through accidental failure it could impact the business' ability to trade. Incidents of sophisticated cyber-crime represent a significant and increasing threat to all businesses including the Group. A major breach of system security could result in disruption to systems and / or the theft and misuse of confidential data with consequential impacts on the Group's reputation or ability to trade. | Adverse effect on financial results. Adverse effect on the Company's reputation. | The strategic demands of the business, the resources available to IT, the performance levels of key systems and IT security are kept under review by the Executive Committee. Plans that require continual investment in the IT infrastructure have been approved and are being implemented. Maintenance is undertaken on an on-going basis to ensure the resilience of group systems, with escalation procedures operating to ensure any performance issues are resolved at an early stage. The Group's two data centres mirror each other with data processing capable of being switched from one site to the other. An IT disaster recovery plan exists together with a business continuity plan. Arrangements are in place for alternative data sites for both trade and consumer businesses. Off-site back-up routines are in place. The Group has a data security committee responsible for monitoring and maintaining cyber security. In addition a programme of risk oriented reviews is undertaken to ensure the level of control around IT systems remains robust. The Group has reacted to the increasing cyber threat by increasing the size of its team to deliver a comprehensive security architecture. Investments in best of breed solutions have been made that continually adapt to mitigate the risk associated with the most advanced threats. Furthermore, the Information Security team has the full support of senior management acting as an important gateway to ensure the development of new systems is performed according to industry standard security practices. |
| Colleague recruitment, retention and succession plans do not deliver the required skills and experience Inherent Risk: Low Trend: Static | The ability to recruit, retain and motivate suitably qualified staff is an important driver of the Group's overall performance. The strength of the Group's customer proposition is underpinned by the quality of people working throughout the Group. Many of them have worked for Travis Perkins for some considerable time, during which they have gained valuable knowledge and expertise. The Group faces competition for the best people from other organisations. Ensuring the retention, proper development of employees and the succession for key positions is important if the Group is not to suffer an adverse effect on future prospects. | Inability to develop and execute development and succession plans. Competitive disadvantage. | The Group's employment policies and practices are kept under regular review. Staff engagement and turnover by job type is reported to the Executive Committee regularly and to the Board. Succession plans are established for the most senior positions within the Group and these are reviewed annually. The Group's reward and recognition systems are actively managed to ensure high levels of employee engagement. A wide-range of training programmes are in place to encourage staff development, whilst management development programmes are available to those identified for more senior positions. Salaries and other benefits are benchmarked regularly to ensure that the Group remains competitive and the Group operates incentive structures to ensure that high performing colleagues are adequately rewarded and retained. |
| Supplier dependency could result in shortages of product Inherent Risk: Medium Trend: Static | The Group is the largest customer to many of its suppliers. In some cases, those suppliers are large enough to cause significant supply difficulties to the Group if they are unable to meet their supply obligations due to either economic or operational factors. Alternative sourcing may be available, but the volumes required and the time it may take those suppliers to increase production could result in significant stock-outs for some considerable time. The Group has become more reliant on overseas factories producing products as the Group has rapidly expanded its direct sourcing capabilities. This has increased the Group's exposure to sourcing, quality, trading, warranty and currency issues. There is a potential for European anti-dumping legislation to be extended to encompass further Asian countries which could increase the cost of some imported products. | Adverse effect on financial results. Adverse effect on reputation. | The commercial and financial teams have established strong relationships with the Group's key suppliers and work closely with them to ensure the continuity of quality materials. To spread the risk where possible contracts exist with more than one supplier for key products. The Group has made a significant investment in its Far East infrastructure to support its direct sourcing operation which allows the development of own brand products, thereby reducing the reliance on branded suppliers. Comprehensive checks are undertaken on the factories producing products and the quality and the suitability of that product before it is shipped to the UK. |
| Defined benefit pension scheme funding could increase significantly Inherent Risk: Medium Trend: Static | The Group is required by law to maintain a minimum funding level in relation to its on-going obligations to provide current and future pensions for members of its two defined benefit pension schemes. The level of contributions required from the Group to meet the benefits promised in the final salary schemes will vary depending upon the funding position of those schemes. The funding of pension obligations could increase due to a number of factors including poor performance of the pension fund investments, falling corporate bond and gilt yields and increasing longevity of pension scheme members. | Adverse effect on financial condition. | All of the Group's final salary pension schemes are closed to new members. For the Travis Perkins scheme, pensionable salary inflation has been capped at 3% per annum. The schemes' investment policies are kept under regular review by the Trustees in conjunction with the Group to ensure asset portfolios produce the desired level of return within an acceptable risk profile. The Group has agreed deficit reduction payment plans for each of its defined benefit pension schemes with the Trustees of the schemes. The repayment plans will remain in place until the next actuarial valuation when, in conjunction with the Scheme Trustees, they will be reassessed to take into account the circumstances at the time. In 2015 the Group agreed with the Trustees to align future member contributions more closely to the cost of the accrual and in so doing capping the current service contribution of the Group. Notwithstanding this the Group remains exposed to movements in member longevity, the value of pension scheme investments and falling corporate bond and gilt rates. |
| Future expansion plans are not implemented or do not achieve the desired sales and profit improvements and funding liquidity is unavailable Inherent Risk: Low Trend: Static | The Group's strategic plans are predicated on the continued expansion of its UK branch network and the development of its supply chain capabilities. Large scale acquisitions in existing UK markets are unlikely due to the Group's size and the resulting concerns of the competition authorities to ensure competitive markets. Therefore the Group will rely on developing smaller scale opportunities, in new catchment areas or in new formats within existing sites or on expanding into adjacent markets in which it does not have a presence. The Group also needs to ensure that funding is available to support its plans. The Group has been reliant on the banking market for funding, a market that has contracted in recent years and which may continue to contract in the future. It established a bond issuance capability in 2014, but the availability of funds from that market at a sensible cost may depend upon the Group's rating which can be affected by its trading performance. | Adverse effect on financial results. | Responsibility for identifying and implementing opportunities to expand the Group's operations rests with each of the divisional boards, with capital being deployed to those projects giving the best return on capital. The Group has identified a significant number of opportunities for expansion throughout the United Kingdom and continues to develop alternative trading formats that will open up additional opportunities in future. The Group continues to invest in its leading supply chain infrastructure. Its capabilities in this area allow it to source directly from manufacturers, offer superior availability to customers and operate cost efficient mechanisms to deliver products to customers when they most need them. It is the responsibility of the treasury function to manage the Group's liquidity, funding availability and treasury risk by reference to the policies and plans set out in the board approved funding strategy. Regular reporting of a series of key metrics is designed to monitor treasury activities and maintain opportunities to diversify sources and access suitable funding. |
| Business transformation projects fail to deliver the expected benefits, cost more or take longer to implement than expected Inherent Risk: Medium Trend: Static | The Group is undertaking a large number of strategic projects throughout its business. These projects are intended to transform the Group's infrastructure and its information technology systems and to develop its supply chain operations and its branch and store networks. By their nature, strategic projects are often complicated, interlinked and require considerable resource to deliver them. As a result the expected benefits and the costs of implementation of each project may deviate from those anticipated at their outset. | Adverse effect on financial results. | All potentially significant projects are subject to detailed investigation, assessment and approval prior to commencement. Dedicated teams are allocated to each project, with additional expertise being brought into the Group to supplement existing resource when necessary. All strategic projects are closely monitored by the Executive Committee with regular reporting to the Board |
| Plumbing and Heating business performance adversely affects Group returns Inherent Risk: High Trend: Increasing | The market supplying boilers to large contract customers, served by the PTS business, is highly competitive, offers low margins and certain manufacturers exercise a degree of control through disintermediation. Competition in the plumbing and heating ("P&H") markets remains intense, with margins being adversely affected and is likely to continue to be so for the foreseeable future. The provision of plumbing and heating product to the secondary P&H market, which is undertaken by F&P, is becoming increasingly competitive. Low margins, pressure on sales and a high fixed cost base mean the Plumbing & Heating business profit could be more muted than some of the Group's other businesses. | Adverse effect on financial results | The re-segmentation of the P&H business has been completed and has established CPS as a business serving the needs of the jobbing plumber, with PTS business focussing on the contract customer. Projects are underway to tailor branch processes in the PTS business to better meet the needs of contracting customers and improve the customer offer which should drive an increase in sales. The branch network of the F&P/Primaflow business is going through a major rationalisation programme to better meet the needs of customers, whilst reducing costs. Greater focus is being placed on cost control and the introduction of improved systems. In addition further capital investment is being made in showrooms to boost sales in the more profitable CPS business. |
RELATED PARTY TRANSACTIONS
The Group has a related party relationship with its subsidiaries, its Directors and with its pension schemes (note 28). Transactions between Group companies, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Company and its subsidiaries are disclosed below. In addition the remuneration of the Directors, and the details of their interests in the share capital of the Company are provided in the audited part of the remuneration report on pages 117 to 122.
The remuneration of the key management personnel of the Group is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.
| 2015 £m | 2014 £m | ||
| Short-term employee benefits | 10.7 | 16.1 | |
| Post employee benefits | 0.4 | 0.4 | |
| Share-based payments | 4.2 | 2.9 | |
| 15.3 | 19.4 |
The Company undertakes the following transactions with its active subsidiaries:
- providing day-to-day funding from its UK banking facilities
- paying interest to members of the Group totalling £22.5m (2014: £22.5m)
- levying an annual management charge to cover services provided to members of the Group of £8.4m (2014: £8.3m)
- receiving annual dividends totalling £256.5m (2014: £197.1m)
Details of balances outstanding with subsidiary companies are shown in note 19 and in the Balance Sheet on pages 142 and 143.
Other than the payment of remuneration there have been no related party transactions with directors.
The Group advanced a total of £3.5m (2014: £4.9m) to all the Group's associate companies in 2015. Operating transactions with the associates during the year were not significant.
DIRECTORS' RESPONSIBILITY STATEMENT
We confirm that to the best of our knowledge:
- The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
- The Strategic Report, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
- The annual report and financial statements taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy
We consider that the Annual Report and Accounts, when taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position, performance, business model and strategy.
By order of the Board
| John Carter | Tony Buffin |
| Chief Executive Officer | Chief Financial Officer |
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Travis Perkins PLC via Globenewswire
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