Travis Perkins PLC : Annual Financial Report

ANNUAL REPORT 2014

Publication of the Annual Report

24 April 2015

Travis Perkins plc (the "Company") announces that its Annual Report for the year ended 31 December 2014, and the Notice of Annual General Meeting, are now available on the Company's website - www.travisperkinsplc.co.uk.

Printed copies of these documents will be posted to shareholders on 24 April 2014 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 2015. 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 2015.

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 Thursday 28 May 2015 at Northampton Rugby Football Club, Franklin's Gardens, Weedon Road, Northampton NN5 5BG.

Enquiries:

John Carter, Chief Executive Officer
Tony Buffin, Group Financial Officer
Matt Johnson, Investor Relations Director

Travis Perkins plc | [phone] | [phone] | [e-mail]

STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES
For the year ended 31 December 2014

The Group operates in a market and an industry which by their nature are subject to a number of inherent 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.

The Board has a 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. Details of the Group's risk management processes are given in the Corporate Governance report on page 88. 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.

This section describes the current risk factors 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 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 housing transactions, the timing and nature of government activity to stimulate activity, net disposable income, house price inflation, consumer confidence, interest rates and unemployment.   Negative or uncertain economic conditions could affect 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 online traders.   Public sector buying groups could reduce sales if public bodies chose to buy direct from manufacturers.   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. Disintermediation may become more of a threat if manufacturers decide to deal directly with the end users.	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.   The Group is leading the industry in terms of the development of new and innovative supply solutions, and works closely with customers and suppliers on a programme of continuous improvements.   The Group continues to refine pricing strategies to ensure it remains competitive.   The Group's branding 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:  Static	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.   Increasing levels of sophisticated cyber-crime represent a significant threat to all businesses with the potential to cause disruption to systems or the theft and consequential misuse of confidential data.	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 three data centres mirror each other with data processing switched from one to the other on a regular basis. An IT disaster recovery plan exists and is tested regularly together with the 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.   A programme of risk oriented reviews is undertaken to ensure the level of control around the IT systems remains robust.
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 Human Resources Director monitors staff engagement and turnover by job type and reports to the Executive Committee regularly and to the Board annually. 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 used to assist those identified for more senior positions.   Salaries and other benefits are benchmarked annually to ensure that the Group remains competitive.
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, the quality and the suitability of that product before it is shipped to the UK.   The Group has reacted to the increasing cyber threat by doubling 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.
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 to ensure asset profiles are kept in line with the profile of liabilities.   The Group has agreed deficit payment plans which currently require it to pay up to £26m per annum to its defined benefit pension schemes. The repayment plans will remain in place until the next actuarial valuations, when in conjunction with the Scheme Trustees they will be reassessed to take into account the circumstances at the time.
Future expansion plans are not implemented or do not achieve the desired sales and profit improvements   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 has 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 it.   As part of its capital management strategy the Group has developed plans and instituted a series of metrics that are designed to maintain opportunities to extend sources of 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.

 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, and the details of interests in the share capital of the Company, of the Directors, are provided in the audited part of the remuneration report on pages 111 to 114.

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. The prior year figure has been restated to include the remuneration of all the directors.

	2014   £	2013   £
Short-term employee benefits	16.1	11.3
Post employee benefits	0.4	0.9
Share-based payments	2.9	6.0
---------------------------------------------------------------------------------	--------------	-------------------
	19.4	18.2

 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 (2013: £22.4m);
• levying an annual management charge to cover services provided to members of the Group of £8.3m (2013: £8.0m);
• receiving annual dividends totalling £197.1m (2013: £121.0m).

Details of balances outstanding with subsidiary companies are shown in note 19 and on the Balance Sheet on page 134.
Other than the payment of remuneration there have been no related party transactions with directors.
The Group advanced a total of £4.9m (2013: £2.9m) to all the Group's associate companies in 2013. 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.

Declaration

The Directors consider that the Annual Report and Accounts, when taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's performance, business model and strategy.

By order of the Board

John Carter	Tony Buffin
Chief Executive Officer	Chief Financial Officer

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This announcement is distributed by NASDAQ OMX Corporate Solutions on behalf of NASDAQ OMX Corporate Solutions clients.
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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