GRAFTON GROUP PLC

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2016

 

Grafton Group plc ("the Group"), the international builders merchanting and DIY Group, announces its final results for the year ended 31 December 2016.

 

£m*		2016	2015	Change
Revenue		2,507	2,212	13%
Adjusted**
Operating profit		142.0	127.3	12%
Operating profit before property profit		137.1	120.6	14%
Profit before tax		136.2	119.4	14%
Earnings per share - basic		47.7p	41.2p	16%
Statutory results
Operating profit		120.1	128.2	(6%)
Profit before tax		114.2	120.3	(5%)
Earnings per share - basic		39.6p	41.6p	(5%)
Dividend		13.75p	12.50p	10%
Net debt		96.3	113.6	(£17.3m)
EBITA margin before property profit		5.5%	5.5%	-
Return on capital employed		12.5%	12.2%	30bps

 

*Additional information in relation to Alternative Performance Measures (APMs) is set out on pages 31 to 34.

**The term "adjusted" means before amortisation of intangible assets arising on acquisitions and exceptional items of £19.7 million in 2016 and non-recurring items in 2015.

 

Highlights                      

·     Revenue up 13% to a record £2.5 billion - 10% increase in constant currency, broadly split between organic growth and acquisitions

·     Adjusted Group operating profit growth of 12% to £142.0m (2015: £127.3m)

·     Strong organic growth in the Irish Merchanting, Woodie's DIY and Manufacturing businesses

·     Isero acquisition in the Netherlands contributed £9.1 million to operating profit, an EBITA margin of 10.4% and is a strong platform for expansion

·     Continued successful investment in Selco with the opening of seven branches and the planned opening of at least ten branches in 2017

·     Strong cash generation from operations of £168.6 million (2015: £139.3 million) resulting in net debt reduction by £17.3 million and year-end gearing of just 9%

·     Investment of £72.3 million on acquisitions and capital expenditure to support future growth

·     10% increase in dividend in line with progressive dividend policy

 

 

 

 

 

Gavin Slark, Chief Executive Officer commented:

 

"2016 represented an overall strong financial performance despite challenging trading conditions in the traditional UK merchanting market. These results demonstrate the resilience of the Group's spread of businesses, with strong market positions and exposure to multiple geographies. While uncertainties remain about the UK economy, the recovery in the Irish and Netherlands markets is forecast to continue.  The Group's very cash generative operations and strong balance sheet leave it well positioned to invest in areas where we see good opportunities for growth."

                                                                                                                                      

 

Webcast Details

 

An analysts and investors results presentation will be hosted by Gavin Slark and David Arnold at 9.30am (GMT) today 7 March 2017 at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. A live webcast will be available on www.graftonplc.com/webcast/ and we recommend you register in advance. A recording of this webcast will also be available to replay later in the day. The results presentation can be viewed/downloaded at http://www.graftonplc.com

 

 

Enquiries:

Grafton Group plc + 353 1 216 0600

Gavin Slark, Chief Executive Officer

David Arnold, Chief Financial Officer

 

Murray + 353 1 498 0300

Pat Walsh

 

MHP Communications + 44 20 3128 8100

James White

 

 

Cautionary Statement

Certain statements made in this announcement are forward-looking statements.  Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied by these forward looking statements.  They appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of Directors and senior management concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies and the businesses operated by the Group.  The Directors do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

 

 

  

  

 

 

 

Final Results

For the Year Ended 31 December 2016

 

Group Results

 

Grafton delivered good growth for the seventh successive year and benefitted from its strong market positions and exposure to multiple geographic markets.

 

The UK merchanting business ended the year on a stronger note with good revenue growth in the last quarter following two quarters of weaker demand due to subdued activity in the housing market.   Selco achieved good revenue gains and also expanded its branch network.  While the traditional merchanting business experienced margin pressure in competitive markets, the restructuring plan announced at the half year was successfully implemented and the business ended the year with a lower cost base.

 

The management team in the merchanting business in Ireland capitalised on a recovering construction market and reported a significant increase in profitability for the third successive year that was driven principally by growth in housing repair, maintenance and improvement ("RMI") projects. House building and non-residential construction activity increased, particularly in the Greater Dublin Area.  The operating profit margin was ahead by almost 100 basis points to 7.8 per cent.

 

The Isero business, acquired at the end of 2015 as a growth platform in the Netherlands merchanting market, had an excellent first year under Grafton ownership reporting a strong set of results supported by a recovering  economy and housing market.

 

Woodie's, the Irish retailing business, delivered a substantial improvement in profit driven by increased consumer spending and an enhanced in-store experience. The operating profit margin in the period increased by over 200 basis points to 4.7 per cent.

 

CPI EuroMix, the UK Mortar business reported strong growth in profitability on the back of management initiatives and increased demand from its house builder customer base.

 

The Group opened seven Selco branches and completed two bolt-on acquisitions in the UK.  In the Netherlands, it agreed to acquire Gunters en Meuser, the market leader in the ironmongery and tools market in the Greater Amsterdam Area, a transaction that completed in January 2017.

 

The organisational restructuring announced at the half year led to an exceptional charge of £19.7 million.  This related mainly to 47 branch closures in the UK Plumbing and Heating and Contracts businesses.  The financial benefits from this reorganisation are expected to accrue from 2017 onwards.

 

The Group continued to be strongly cash generative and ended the year with low net debt and shareholders' funds of £1.1 billion.

 

Dividend

 

A second interim dividend of 9.0p (2015: 8.0p) was approved to give a total dividend for the year of 13.75p.  This represents an increase of 10.0 per cent on total dividends of 12.5p paid for 2015.  The increase is in line with the Board's policy of increasing dividends as earnings increase and reflects both the strong cashflow from operations and low level of year-end net debt.  The dividend cover increased to 3.5 times from 3.3 times.

 

Outlook

 

The UK economy was resilient during 2016 and growth is forecast to moderate a little this year as disposable incomes tighten, due to the inflationary impact of a fall in sterling, with a potential knock on effect on consumer confidence and spending.  A modest increase in activity in the new housing market is forecast. Although spending in the housing RMI market may remain subdued due to wider economic uncertainty, the recent rise in mortgage approvals and increase in house prices is encouraging for volumes.  An important focus of our development capital will be the continued expansion of the Selco branch network with the planned opening of at least ten new branches in 2017.

 

In Ireland, overall economic growth is forecast to remain strong albeit to moderate towards its long term sustainable level.  Demand in the merchanting and DIY market should continue to be underpinned by gains in employment and increased disposable income.  The outlook for investment in the construction sector is favourable with forward looking indicators pointing to an increase in house building and non-residential construction.

 

The outlook for the Netherlands economy and housing market continues to be positive although some moderation in the pace of growth is anticipated.  The Belgium economy and housing market is expected to remain weak.

 

January and February average daily like-for-like revenue increased by 4.7 per cent in the overall Group, 4.0 per cent in the UK merchanting business, 13.9 per cent in Irish merchanting business and 2.9 per cent in the Netherlands merchanting business. A decline in like-for-like revenue by 12.3 per cent in the Belgium merchanting business reflected very poor trading in January and a recovery in February.  Like-for-like revenue was ahead by 5.7 per cent in the retailing business in Ireland and was down by 3.5 per cent in the manufacturing segment.

 

The Group will continue to invest in areas where it sees good opportunities for growth.  It will also continue to focus on internal initiatives that provide a sustainable improvement in performance.

 

Overall prospects for the current year remain favourable with continued growth in Ireland and the Netherlands expected to support an increase in profit in the year ahead.  In the Group's UK markets, macro indicators suggest modest volume growth although markets are expected to remain competitive against an inflationary backdrop which is likely to have a bearing on margins.

 

Board

 

As previously announced, Mr. Michael Roney succeeded Mr. Michael Chadwick as Chairman with effect from 1 January 2017.

 

Mr. Roderick Ryan, Senior Independent Director and Chairman of the Nomination Committee, and Mr. Charles Fisher, Chairman of the Remuneration Committee, have indicated that they will not be offering themselves for re-election as Non-Executive Directors at the Annual General Meeting of the Company to be held on 9 May 2017.  This will conclude 11 years of service with the Board for Mr. Ryan and eight years for Mr. Fisher. The Board would like to thank Mr. Ryan and Mr. Fisher for their exceptional contribution to the work of the Board and wish them the very best for the future. 

 

Mr. Ryan will be succeeded as Senior Independent Director by Mr. Paul Hampden Smith who has been a Non-Executive Director since 2015 and by Mr. Roney as Chairman of the Nomination Committee.  Mr. Fisher will be succeeded as Chairman of the Remuneration Committee by Ms. Susan Murray who joined the Board in October 2016.  These changes will take effect on 9 May 2017.

 

 

  

 

 

 

Operating Review                                   

 

Merchanting Segment (92% of Group Revenue)

 

 

	2016 £'m	2015 £'m	Actual Change
Revenue	2,290.6	2,027.7	+13.0%
Operating profit*	135.2	124.8	+8.3%
Operating profit margin*	5.9%	6.2%	(30bps)

*Before amortisation of intangible assets on acquisitions and exceptional items

 

The Group's merchanting businesses are located in the UK, Ireland, the Netherlands and Belgium. Overall average daily like-for-like revenue increased by 3.9 per cent.

 

UK Merchanting 

 

	2016 £'m	2015 £'m	Actual Change
Revenue	1,771.7	1,662.0	+6.6%
Operating profit*	99.7	105.9	(5.9%)
Operating profit margin*	5.6%	6.4%	(80bps)
Operating profit before property profit*	94.8	99.2	(4.5%)
Operating profit margin before property profit*	5.4%	6.0%	(60bps)

*Before amortisation of intangible assets on acquisitions and exceptional items

 

Average daily like-for-like revenue increased by 2.9 per cent for the year.  The business had a strong start to the year however experienced an easing of growth in the second quarter due to uncertainty over the near term outlook for the UK economy.  Like-for-like revenue was relatively flat in the third quarter and growth picked up in the fourth quarter.  Declines in activity and confidence over the summer months reversed in the final quarter.

 

The UK economy continued to grow at a steady pace during 2016.  Increased household spending was driven by strong growth in real incomes and employment growth with the unemployment rate down to 4.8 per cent.  Activity in the housing market was relatively subdued.  Housing transactions increased marginally over the year with monthly trends influenced by some transactions being brought forward and completing ahead of a rise in stamp duty land tax in April 2016.  House price inflation eased over much of the year but picked up in the final quarter as consumer confidence recovered.

 

Building materials price deflation is estimated at 1.3 per cent and volumes grew by circa 4.2 per cent.  The opening of new Selco branches, acquisitions and branch rationalisation accounted for net revenue growth of 3.7 per cent.  The gross margin declined by 70 basis points due to intense pricing pressure and a very competitive trading environment in the traditional merchanting business during a period of price deflation in the sector.

 

Selco Builders Warehouse, the retail style product and service model for trade customers, outperformed the market with good like-for-like revenue growth and significant revenue gains in new branches.  Selco strengthened its position as the UK's fourth largest builders merchant after Buildbase with strong demand led by activity in the residential RMI market.  The rate of growth in like-for-like revenue softened during the summer months due to the uncertainty surrounding the outlook for the UK economy before picking up in the last quarter.

 

There was good like-for-like growth in the London area branches which contributed three quarters of revenue.  The strongest revenue gains were experienced in regional cities and towns which supports the Group's strategic ambition to increase Selco's geographic footprint in the UK.  Average transaction values were lower due to price deflation with increased transactions driving volume growth in a competitive market.  Revenue growth was also driven by new product initiatives to gain share and further differentiate the business in the market place.

 

The roll out of a small plant hire facility in all branches was completed and the division showed good growth in revenue and pricing.  The 'Click and Collect' and Selco Direct on-line services launched last year continued to grow revenue.

 

Operating profit and operating margin in the like-for-like business was ahead of the prior year despite incurring significant investment to support the next phase of branch development.  Overall operating profit was in line with the prior year after incurring increased branch opening costs.

 

Organic development of the Selco branch network continued with the opening of seven branches of which five are located in Greater London (Chessington, South Croydon, Mitcham, Wembley and Watford), one on the South Coast (Portsmouth) and one in the West Midlands (Wolverhampton).  The business traded from 47 branches at the year end and plans are in place to open at least ten new branches in the current year reflecting the success of the Selco model that services the more resilient residential RMI segment of the UK merchanting market. Selco opened its first new branch of the year in Beckton, East London in February.

 

Buildbase like-for-like revenue growth was strong in the first and fourth quarters and moderate for the overall year.  The gross margin was lower against the backdrop of competitive pressure on selling prices.  The business continued to focus on purchasing, logistics and pricing initiatives.  Operating costs increased reflecting investment to upgrade the trading and back office IT systems, investment in Electricbase and Hirebase implants and new Partnering contracts.  Whilst Buildbase experienced a tough year and reported a decline in operating profit, the business entered 2017 better placed to respond to competitive markets with improved pricing processes.

 

Market coverage was extended with the acquisition of T. Brewer, a specialist timber business trading from three branches in London, and Allsands, a general builders merchant located in Larkfield, Kent.  Both businesses made good profit contributions in line with pre-acquisition expectations.  The 80 Electricbase implants in Buildbase branches that supply a range of electrical products recorded a strong improvement in revenue and profitability.  The Hirebase division had a good year with increased revenue and operating profit following the development in recent years of tool, plant and equipment hire implants in Buildbase branches.

 

Buildbase Civils, a distributor of heavyside building materials to the residential new build and infrastructure markets, faced difficult trading conditions during the year.  Volumes were higher but pricing was intensely competitive and a lower gross margin contributed to a fall in operating profit.  The Scottish business proved more resilient and delivered an improvement in operating profit.  The focus in this difficult trading environment was on tighter cost control and a number of branches were consolidated onto Buildbase branch properties.

 

Plumbase showed modest growth in like-for-like revenue and a marginal decline in total revenue due to the closure of 28 branches following a rigorous strategic and financial analysis of the branch network.  The business will in future focus on supporting its professional domestic installer customer base through a smaller network of branches that offer a better platform for improving long term profitability and increasing returns on capital employed.

 

There was tough competition in the residential heating market due to excess capacity leading to pressure on gross margins.  Branches were operated efficiently and controls on costs remained very tight.  With weak volume growth and pricing pressure, the operating profit outcome was lower than the prior year.  The bathroom distribution business registered solid revenue gains and continued to deliver strong results and Plumbworld, the on-line retailer of bathroom products, achieved revenue gains in core products.

 

T.G. Lynes, one of the leading distributors to the mechanical services market in London and the South East, performed strongly and ahead of pre-acquisition expectations in its first full year in the Group.  The business provides a good platform for developing a stronger presence in this segment of the merchanting market in conjunction with Plumbase Industrial which is now focused on organic growth through a small network of branches located primarily in London and the South East.

 

MacBlair, the Northern Ireland merchanting business experienced a mixed market backdrop during the year.  The business registered modest sales growth and reported a lower level of operating profit measured against a very strong prior year result.  A strong performance in the general merchanting branches was more than offset by lower volumes in the specialist doors and ironmongery division.  A major refurbishment of the flagship branch in Belfast was completed during the year and since the year end the Lisburn branch was relocated to a new purpose built facility in the city.

 

Irish Merchanting 

 

	2016 £'m	2015 £'m	Actual Change	Constant Currency Change
Revenue	347.7	274.5	+26.7%	+11.9%
Operating profit	27.1	18.7	+44.6%	+27.0%
Operating margin	7.8%	6.8%	+100bps

 

The Group's market leading merchanting business in Ireland continued to outperform in a market that is still in the relatively early stages of recovery reporting double digit revenue growth for the third successive year.  Average daily like-for-like revenue increased by 11.6 per cent in constant currency.  The business delivered a very good performance with a strong advance in profit and a 100 basis point improvement in the operating profit margin.

 

The merchant market benefitted from the relatively strong performance of the Irish economy.  Increased consumer spending was driven by gains in employment, with the number of people at work at its highest level for eight years, and growth in disposable incomes.  Revenue growth was primarily stimulated by strong demand in the residential RMI market despite a decline in housing transactions to two per cent of the housing stock.  This is estimated to be half the level expected in a properly functioning market. House prices increased by 8 per cent in a tight market.

 

Demand from the house building sector improved as the supply of houses increased to an estimated 15,000 units from 12,700 units in 2015.  Supply however remained a long way short of the estimated 25,000 - 30,000 units required to meet pent-up demand due to a shortage of owner occupied, social housing and rental properties.  The Government's new Help-to-Buy scheme, which provides a tax rebate to first time buyers of five per cent of the purchase price of a new home, and relaxation of mortgage lending rules by the Central Bank are expected to stimulate growth in house building.

 

Non-residential new build and RMI activity improved from a low base following a long period of under investment.  There was a pick-up in demand across most end-use segments of the market including technology, energy, infrastructure, hotels, agriculture and offices.

 

Revenue growth was broadly based across the branch network as the recovery gained momentum outside of Dublin and provincial cities.  There was a slight decline in the gross margin due to a change in product mix in an otherwise competitive market.  During 2016 significant investment was made in people with the creation of 66 additional roles to accommodate the next phase of growth following the sharp increase in revenue over the past three years.

 

Expansion of the branch network recommenced with the opening of a Chadwicks Express branch in Central Dublin.  A further three branches that are scheduled to open in Dublin in the first quarter will increase the branch network in the Republic of Ireland to 47 including 20 in the Dublin Area.  This investment is focused on urban areas set to benefit most from an expected increase in construction activity and will create easier access and delivery for contractors operating to demanding timelines in congested locations.

 

The five branch In-House kitchen business benefitted from increased consumer spending and the reorganisation implemented in the prior year. Operating profit showed significant growth from a low base.  In view of the increasingly trade operated customer base and change in reporting lines, the In-House business was transferred from the retail segment to the merchanting segment with effect from 1 January 2016 and the prior year comparative results have been updated to reflect the change of reporting segment.

  

Netherlands Merchanting 

 

	2016	2015
	£'m	£'m
Revenue	87.7	8.5
Operating profit*	9.1	0.5
Operating margin*	10.4%	5.4%

*Before amortisation of intangible assets on acquisitions

 

Grafton entered the Netherlands Merchanting market in November 2015 with the acquisition of Isero, a specialist merchanting business trading from 38 branches under the Gerritse, Breur Ceintuurbaan and Van der Winkel brands.

 

Isero distributes a broad range of tools, ironmongery and fixings to the attractive RMI and new housing markets.  The business performed strongly and in line with pre-acquisition expectations.  The positive economic backdrop and recovery in the housing market supported good revenue growth compared to the pre-acquisition level.

 

The Dutch economy performed strongly in 2016 driven by improved consumer sentiment, employment gains and growth in real disposable incomes which led to increased spending by households.  The upturn in the economy, availability of mortgages at low interest rates and pent up demand contributed to growth in housing transactions by an estimated 20 per cent.  The stock of housing properties for sale fell sharply during the year.  The supply of new housing increased from a historically low level but was well short of potential demand.

 

Commercial initiatives undertaken by management included expanding the provision of value added services and securing procurement gains which protected the gross margin in a competitive market.  A strengthening central support function contributed to more efficient management of working capital.

 

A new branch was opened in North Amsterdam in August.  The acquisition of Gunters en Meuser, a distributor of tools, fixings and ironmongery from 14 branches in the Greater Amsterdam Area, was completed on 5 January 2017. Gunter en Meuser is a business that is synonymous with the ironmongery market in Amsterdam where it has traded for 190 years. This was an important step in the Group's development strategy in the Netherlands where it now has strong positions in the country's five largest cities.  The enlarged business trades from 53 branches and is the market leader in the Netherlands tools, fixings and ironmongery market.

 

In 2017, the business will focus on the integration of Gunters en Meuser and on better supporting customers through ecommerce and logistics solutions.  The fragmented nature of the markets offers the potential to take advantage of consolidation opportunities complemented by opening new branches.

 

Belgium Merchanting 

 

	2016 £'m	2015 £'m	Actual Change	Constant Currency Change
Revenue	83.5	82.8	+0.9%	(10.6%)
Operating loss*	(0.7)	(0.3)	(130.9%)	(149.9%)
Operating margin*	(0.8%)	(0.4%)	(40bps)

* Before exceptional and non-recurring items

 

The decline in constant currency revenue by 10.6 per cent was attributed to a fall of 6.4 per cent in the like-for-like business and to the disposal of the non-core readymix operation in June 2015.

 

The economic environment continued to be weak and the business experienced difficult trading conditions in its residential and non-residential end-use markets.  The smaller RMI orientated branches were more resilient.  A number of the larger branches experienced sharp volume declines due to lower demand and a reorientation of the customer base towards lower volume, higher margin collected business through a more diversified customer base.

 

 Retail Segment (6% of Group Revenue)

 

	2016 £'m	2015 £'m	Actual Change	Constant Currency Change
Revenue	157.1	131.4	+19.5%	+5.6%
Operating profit	7.3	3.3	+119.2%	+90.9%
Operating margin	4.6%	2.5%	+210bps

 

Woodie's increased average daily like-for-like and total revenue by 5.6 per cent in constant currency.  The business delivered significant profit growth for the second successive year in a recovering retail market in Ireland. Woodie's also benefitted from a positive response by customers to the progress made in recent years to improve the shopping experience through the roll-out of a new store format and improved standards across all aspects of the business.

 

Good growth in consumer spending and retail sales in Ireland during 2016 was driven by strong growth in employment and moderate growth in incomes supported by relatively high consumer sentiment. 

 

Woodie's capitalised on its strong brand and heritage in the Irish DIY market growing revenue ahead of the market.  An increase in the gross margin was driven by procurement gains and improved stock turn on seasonal lines.  Operating costs were tightly controlled despite upward pressure from investment in the business and improving customer service.  A key focus during the year was improving the operation of stores and customer service proposition through investing in colleagues including a management development programme for store managers and the introduction of "Great Place to Work" initiatives which have seen significant growth in colleague engagement.

 

Woodie's continued to develop its kitchens business and now has a dedicated kitchen sales area in almost half of its estate.  The on-shelf availability of Woodie's top 1,000 lines was improved through better merchandising and supply chain management.  There was also an ongoing focus on upgrading key ranges and on product innovation and differentiation.

 

The Woodies.ie website was upgraded in line with evolving technology and retail trends and now offers improved functionality, enhanced product images and access to over 30,000 products.    Social media is now an integral part of ongoing marketing programmes.  The business has over 75,000 Facebook likes and almost 6,000 Twitter followers.  The use of social media is enabling Woodie's to engage with customers and gain insights into their shopping habits and preferences.

 

The store upgrade programme was rolled out to a further eight stores following a successful trial of the new layout and merchandising concept which showed outperformance compared to the remainder of the estate.  This took the number of branches completed to twelve by the year-end representing 45 per cent of total revenue.  The results to date provided the confidence to continue the roll-out in a further eight stores in 2017 increasing coverage on completion to 65 per cent of total revenue.  The newly formatted stores will deliver an improved shopping environment, enhance performance and protect Woodie's strong market leadership position.

 

Manufacturing Segment (2% of Group Revenue)

 

	2016 £'m	2015 £'m	Actual Change	Constant Currency Change
Revenue*	59.6	52.8	+12.8%	+11.9%
Operating profit	12.2	9.8	+24.6%	+22.0%
Operating margin	20.4%	18.5%	+190bps

*excluding inter-segment revenue

 

CPI EuroMix is the market leader in the dry mortar market in the UK where it operates from nine plants in England and one in Scotland.  Good first quarter growth, supported by favourable conditions in the new housing market, was followed by a period of uncertainty, leading to overall modest like-for-like revenue growth in the first half.  Demand from the house builder and bricklaying contractor customer base recovered strongly in the second half resulting in mid-single digit like-for-like revenue growth for the year.  Strong consumer demand for new housing was sustained by a positive labour market, low interest rates, the availability of competitive mortgages and the Government's Help to Buy scheme. 

 

The management team delivered strong gains in operating profit and margin for the year driven by volume growth and investment in commercial initiatives that included converting the sand drying system in all plants from oil to LPG.  This development reduced costs, increased production efficiency and improved emissions.  Distribution costs were reduced due to economies of scale achieved from investment in bulk delivery vehicles that have increased capacity. 

 

Carlton, the packaged mortar products business acquired in 2015, was successfully integrated and targeted synergies and efficiencies were realised.

 

MFP, the Dublin based manufacturer of PVC drainage and roofline products, increased revenue by 19 per cent benefitting from the recovering residential RMI market, new infrastructure projects and the groundworks phase of residential and commercial new build construction which gathered pace during the year.

 

Financial Review

 

The Group delivered good growth in revenue, adjusted operating profit and cashflow from operations in 2016 and ended the year in a position of financial strength with low net debt and shareholders' equity of over £1.1 billion.

 

Property

 

The Group's balance sheet includes the asset backing of a portfolio of freehold property, the majority of which is used for trading purposes.  Cashflow continued to be realised from the sale of properties not in use for trading purposes.  A profit of £4.9 million was realised from the sale of ten UK properties and the proceeds of £8.3 million were redeployed elsewhere in the business.  The current expectation is that profit from property disposals in 2017 will be lower than the level achieved in 2016.

 

Pensions

 

Defined contribution style funding arrangements apply to over 90 per cent of the Group's employees.  Defined benefit pensions schemes have 700 current employees and 1,800 deferred members and pensioners.

 

Despite high returns on plan assets, the IAS 19 pre-tax deficit on the defined benefit pension schemes increased by £14.7 million to £31.3 million (31 December 2015: £16.6 million).  Changes in financial assumptions increased scheme liabilities by £29.4 million.  A fall in the rates used to discount liabilities, which declined in line with changes in corporate bond yields, increased scheme liabilities by £32.0 million.  UK scheme liabilities were discounted at 2.9 per cent, a decline of 105 basis points and Irish scheme liabilities were discounted at 1.8 per cent, a decline of 55 basis points.  There was a decline in scheme liabilities of £2.7 million due to lower inflation and salary growth assumptions.  

 

Experience losses of £2.2 million were mainly due to a higher rate of members transferring from defined benefit to defined contribution schemes.  The return on plan assets was £22.5 million, a return of 11.0 per cent.  There was a reduction in the deficit by £1.2 million due to contributions paid to the schemes exceeding the current service cost for the year.

 

Net Finance Income and Expense

 

The net finance charge for the year was £5.9 million (2015: £7.9 million).  Net bank and loan note interest declined to £4.7 million from £5.9 million due to the benefits of the refinancing of bank debt completed in March 2016, lower average net debt and a decline in money market interest rates.  The net finance cost on defined benefit pension scheme obligations fell to £0.5 million from £0.9 million.  There was a net foreign exchange charge of £0.2 million for the year which compares to a charge of £0.8 million in the prior year.

 

Taxation

 

The tax charge for the year of £21.1 million on profit of £114.3 million was equivalent to an effective rate of 18.5 per cent.  The tax charge for the year before exceptional items was £23.4 million on profit of £134.0 million, an effective rate of 17.4 per cent.  This was lower than the underlying rate of 19 per cent due to the use of a previously unrecognised deferred tax asset to partially offset a taxable profit of £4.9 million arising on the disposal of properties in the UK and agreement of a claim with the UK Revenue that related to historic capital allowances. 

 

The underlying tax rate of 19 per cent reflected the blended rates of corporation tax on profits in the UK, Ireland and the Netherlands and the disallowance of a tax deduction for certain overheads charged in arriving at profit before tax including depreciation on property.  There will be a reduction in the UK rate of corporation tax from 20 per cent at present to 19 per cent with effect from 1 April 2017 and a further reduction in the rate to 17 per cent with effect from 1 April 2020. The Group's forecast tax charge for 2017 is 18.50 per cent.

 

Capital Expenditure and Intangible Assets

 

Capital expenditure of £50.1 million (2015: £41.6 million) was incurred on property, plant and equipment.  This expenditure compares to a depreciation charge of £34.9 million (2015: £32.2 million) and reflects continued investment in the future growth of the Group.  Development expenditure was £27.2 million (2015: £21.5 million) and asset replacement expenditure amounted to £22.9 million (2015: £20.1 million).

 

Development expenditure was focused on projects that provide a platform for the future profitable growth of the Group including a spend of £17.4 million on new Selco branches.  Other development projects concerned branch upgrades and investment in Electricbase and Hirebase branch implants.   Asset replacement expenditure primarily related to distribution vehicles required to support delivered revenue and replacement of tool, plant and equipment assets that are hired to customers.

 

An investment of £10.3 million (2015: £10.0 million) was made in intangible software assets to upgrade the trading and back-office systems in the traditional UK merchanting business, principally Buildbase.

 

Shareholders' Equity and Net Debt

 

Shareholders' equity increased by £76.4 million to £1.1 billion at 31 December 2016 (31 December 2015: £985.7 million). 

 

Strong cash conversion translated into a lower level of net debt at 31 December 2016 of £96.3 million, a decline of £17.3 million from £113.6 million at 31 December 2015.  The Group's debt is principally denominated in euros to provide a hedge for its euro denominated assets.  Weakness in the sterling exchange rate increased euro denominated net debt by £38.2 million on translation into sterling at the end of the year.  The Group remains in a very strong financial position with gearing ratio declining to 9 per cent (31 December 2015: 12 per cent).  EBITDA interest cover was 37.9 times (31 December 2015: 27.3 times) and net debt was 0.54 times EBITDA (31 December 2015: 0.70 times).

 

Financing

 

The level of undrawn facilities at 31 December 2016 was £217.6 million (31 December 2015: £115.7 million) which together with the Group's surplus cash balances and deposits of £205.9 million (31 December 2015: £211.6 million) and strong cash flow from operations provide significant funding headroom and financing flexibility.  The Group loan facilities of £518 million are with six relationship banks.  The earliest maturity is in March 2021.

 

Profit after tax increased equity by £93.1 million and dividend payments reduced equity by £30.1 million.  The increase in the defined benefit pension scheme deficit net of tax reduced shareholders equity by £11.7 million.  There was a positive currency translation effect (gain) of £21.6 million on conversion of euro denominated assets, net of related euro debt, into sterling at the year end Sterling/Euro exchange rate of Stg85.62p (31 December 2015: Stg73.40p).

 

 Return on Capital Employed and Asset Turn

 

Return on Capital Employed (ROCE) increased by 30 basis points to 12.5% (2015: 12.2%) and capital turn increased to 2.2 times (2015: 2.1 times).  The Group is committed to achieving increased returns for shareholders and has set a medium term target of 15 per cent for return on capital employed.  This target is based on a combination of an improvement in operating performance and the more efficient deployment of capital to generate higher returns.

 

Principal Risks and Uncertainties

 

The primary risks and uncertainties affecting the Group over the remainder of the year are set out on pages 56 to 58 of the 2015 Annual Report.

 

Since publication of the 2015 Annual Report, the UK vote to leave the European Union (EU) has created significant uncertainty about the near term outlook and prospects for the UK economy. As noted in the outlook above, it is still too early to assess the likely impact on the UK economy of the vote to leave the European Union or the extent to which any possible fall in investment and a potentially softer housing market could impact employment and household spending.

 

The final timeframe for the UK's ultimate exit from the EU remains unclear. It could take up to two years or possibly longer.  The uncertainty during this period could negatively impact the UK economy, reduce demand in the Group's markets and adversely affect the financial performance of the Group. The Board and management will continue to consider the impact on the Group's businesses, monitor developments on an ongoing basis and take appropriate action to help mitigate the consequences of any decline in demand in its markets.