Adjusting items in 2019 primarily related to the impairment charge taken against the IT improvement programme, and the costs to separate the P&H business from the Group. Finance charge

Net finance charges, shown in note 10, were GBP85m (2019: GBP87m). In the year, GBP10m of accelerated interest was incurred on the early repayment of the 2014 bond but this was more than offset by a GBP12m favourable year-on-year movement on the remeasurement of foreign exchange and derivatives.

Interest costs overall were in line with the previous year, as was interest recognised on lease liabilities at GBP59m. Taxation

The tax charge for continuing activities for the period to 31 December 2020, including the effect of adjusting items, is GBP14m (2019: GBP58m). This represents an effective tax rate (ETR) of negative 184.4% (2019: 32.1%).

The tax charge for the year before adjusting items is GBP37m (2019: GBP69m) giving an adjusted ETR of 25.7% (standard rate 19%, 2019 actual 19.7%). The adjusted ETR rate is higher than the standard rate due to the effect of expenses not deductible for tax purposes (such as depreciation of property), unutilised overseas losses and a decrease in the deferred tax asset related to employee share schemes following a decrease in the share price in 2020. Earnings per share

The Group reported a statutory loss after tax of GBP22m (2019: profit of GBP123m) resulting in a basic loss per share of 8.8 pence (2019: earnings of 48.9 pence). There is no difference between basic and diluted basic earnings per share.

Adjusted profit after tax was GBP105m resulting in adjusted earnings per share (note 12(b)) of 42.4p (2019: 112.7 pence). There is no difference between adjusted basic and adjusted diluted earnings per share. Cash flow and balance sheet

Throughout the pandemic, the Group has maintained a close focus on cash flow and its liquidity position. The actions taken by the Group have protected liquidity throughout, generating significant cash from working capital during the year and maintaining a strong balance sheet.

As a result of the Government's decision, driven by the Covid-19 crisis, to allow deferral of VAT payments due on or before 30 June 2020, the Group received a deferred cash benefit on tax payments of GBP107m in H1 2020. This amount was required to be paid to HMRC on or before 31 March 2021 but, given the strength of the Group's liquidity position, this amount was paid in full during December 2020. Free cash flow 


(GBPm)                                                       FY 2020 FY 2019 
Group adjusted operating profit excluding property profits 215     421 
Depreciation of PPE and other non-cash movements           122     141 
Change in working capital                                  195     (129) 
Net interest paid (excluding lease interest)               (28)    (26) 
Interest on lease liabilities                              (59)    (57) 
Tax paid                                                   (45)    (53) 
Adjusted operating cash flow                               400     297 
Capital investments 
Capex excluding freehold transactions                      (108)   (121) 
Proceeds from disposals excluding freehold transactions    12      19 
Free cash flow before freehold transactions                304     195

The key driver of the improvement in free cash flow was a significant reduction in working capital during the year, partially offset by the decline in adjusted operating profits previously outlined.

The significant cash inflow from working capital was driven primarily by a reduction in inventory of GBP97m, principally the result of the utilisation of around GBP60m of additional stock held at the end of 2019 to mitigate a possible no-deal exit from the EU. The remainder of the working capital movement largely related to the efficient use of stock from branches closed as part of the restructuring and tight controls in place to manage stock holding over the second half of the year, offsetting increases from the expansion of the Toolstation network; and lower receivables balances, driven by an ongoing focus on cash collections throughout the second half of the year and building on the excellent work of the credit teams during the first phase of the pandemic.

Capital investment

Net capital expenditure was GBP9m higher than previous year, primarily a result of lower disposal proceeds as property transactions were paused during the initial lockdown. 


(GBPm)                       FY 2020 FY 2019 
Maintenance                (42)    (56) 
IT                         (15)    (12) 
Growth Capex               (51)    (53) 
Base capital expenditure   (108)   (121) 
 
Freehold property          (26)    (22) 
Gross capital expenditure  (134)   (143) 
Disposals                  64      82 
Net capital expenditure    (70)    (61)

Base capital expenditure was GBP13m lower during the year driven by lower spend during the early phases of the pandemic.

The reduction was mainly on maintenance capital expenditure where the Group has taken the opportunity to rephase planned vehicle replacements, including the reallocation of vehicles previously aligned to branches which have now been closed.

IT programme spend was slightly ahead of last year, reflecting the investment in projects to modernise the Group's infrastructure, both as a response to the Covid crisis and also to accelerate planned changes to enhance the Group's customer proposition.

Growth capital investment was in line with previous year after a drive during the second half of the year to get the Toolstation UK branch rollout back on track following delays during the first lockdown. Two larger footprint Travis Perkins General Merchant branches were also opened during the year.

Uses of free cash flow 


                                              FY 2020 FY 2019 
Free cash flow (GBPm)                           304     195 
Investments in freehold property              (26)    (22) 
Disposal proceeds from freehold transactions  52      64 
Acquisitions / disposals                      54      (43) 
Dividends                                     -       (116) 
Pension payments                              (12)    (10) 
Sale / (purchase) of own shares               6       (8) 
Cash payments on adjusting items              (65)    (90) 
Other                                         (15)    (18) 
Change in cash and cash equivalents           298     (48)

During the year, the focus on protecting the liquidity position of the Group was highly successful and led to an increase in cash and cash equivalents of GBP298m. The key drivers of the improvement were: ? Strong free cash flow from tight working capital management ? Suspension of dividend payments during the year ? GBP50m from the sale of Primaflow F&P Net debt and funding

The strong focus on cash and liquidity, and the resulting cash position of the Group, has driven a significant improvement in the net debt position. 


                                     FY 2020 FY 2019 Change 
Covenant net debt                    GBP40m    GBP344m   GBP(304)m 
Covenant net debt / adjusted EBITDA  0.1x    0.7x    (0.6)x 
Net debt under IFRS16                GBP1,397m GBP1,788m GBP(391)m 
Net debt / adjusted EBITDA           2.8x    2.5x    0.3x

Note - the covenant test under financing agreements is based on 'frozen GAAP' before the introduction of IFRS16. Leverage covenant for June 2020 was relaxed from 3.0x to 3.5x. It was waived for December 2020 and will be reinstated at 3.0x at June 2021.

Covenant net debt reduced by GBP304m from 31 December 2019 to GBP40m. As described above, this movement was a result of increased cash balances primarily due to excellent working capital management through the year. This was also the principal driver of the corresponding reduction in net debt under IFRS16.

Despite the significant step down in profitability of the Group, the reduction in IFRS16 net debt caused the rolling 12-month Net debt / adjusted EBITDA ratio to increase only modestly year-on-year to 2.8x. The medium term leverage target for the Group remains 2.5x.

In May 2020 the Group took the prudent step to agree with its lenders a relaxation of its financial covenants for the test dates at the end of June and December 2020: ? The interest cover covenant was waived for both June and December 2020 ? The net leverage covenant was relaxed to 3.5x for June 2020 ? The net leverage covenant was waived for December 2020 ? A minimum liquidity headroom covenant was established for September and December 2020

Funding

As at 31 December 2020, the Group's committed funding of GBP950m comprised: ? GBP300m guaranteed notes due September 2023, listed on the London Stock Exchange ? GBP250m guaranteed notes due February 2026, listed on the London Stock Exchange. These notes were issued in November

2020 at a coupon of 3.75%. Proceeds were used to buy in notes due to mature in September 2021 ? A revolving credit facility of GBP400m, refinanced in January 2019, of which GBP54m matures in 2024 and the remaining

GBP346m matures in 2025.

As at 31 December 2020, the Group had undrawn committed facilities of GBP400m (2019: GBP400m) and deposited cash of GBP455m (2019: GBP140m), giving overall liquidity headroom of GBP855m.

The Group's credit rating, issued by Standard and Poor's, was maintained at BB+ negative watch following its review in April 2020. In November 2020, Fitch Ratings assigned the Group an investment grade rating of BBB- with stable outlook. Building a sustainable business framework

During the year, despite the challenges of the pandemic, the Group made good progress on its broader Environmental, Social and Governance agenda, ensuring that Travis Perkins continues to enhance its reputation as a responsible employer with both strategy and policies driven by well established core values.

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