Grafton Group plc

Half Year Report

For The Six Months Ended 30 June 2017

*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 in both periods and before exceptional items in 2016.

^ Being the full year return on capital employed for 2016

Highlights                 

·      Revenue up 9% to £1.3 billion - 6% increase in constant currency

·      Adjusted operating profit before property profit up 19% to £77.0 million (2016: £64.8 million)

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

·      Increase in scale and profitability of the Netherlands merchanting business

·      Recovery in profitability in traditional UK Merchanting business

·      Continued successful investment in Selco with the opening of nine branches in the year to date and at least two more due to open by the year end

·      Another period of strong cash generation with net debt declining to £80.2 million at 30 June 2017 -  gearing of 7%

·      Continued investment to support future profit growth with £68.6 million deployed on acquisitions and capital expenditure

·      11% increase in dividend in line with progressive dividend policy

Gavin Slark, Chief Executive Officer commented:

"We are pleased to report that all geographies contributed to strong growth in revenue and double digit growth in profits and earnings per share in the first half.  This encouraging outcome leaves us well placed to deliver our full year expectations."

Webcast Details

A results presentation for analysts and fund managers will be hosted by Gavin Slark and David Arnold today 31 August 2017 at 9.30 am (GMT) at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS.  The results presentation can be viewed/downloaded at www.graftonplc.com and a live webcast of the results presentation can be accessed on http://www.graftonplc.com/webcast/HY2017. A recording of this webcast will be available for replay later today on the Group's website.

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.

Half Year Report

For the Six Months Ended 30 June 2017

Group Results

Grafton had a very good first half driven principally by organic growth across the Group's businesses.  There was a significant improvement in all key measures of financial performance in the period, with a notable increase in return on capital employed to 13.2 per cent.

The UK merchanting business increased profit and performed well through the half year.  The Selco builders merchanting model continued to be the focus for development capital in the UK with the opening of nine new branches so far this year.  The traditional UK merchanting business reported good growth in profit and benefitted from the restructuring implemented in the last quarter of 2016. 

The market leading merchanting business in Ireland delivered a strong improvement in profit in a favourable market that saw good growth in demand in the residential RMI market and a recovery in house building and commercial construction that gained momentum in the period.  The branch network was expanded with the opening of three new branches in Dublin.  The operating profit margin before property profit increased by 120 basis points to 8.0 per cent.

Increased investment in the Netherlands merchanting business combined with positive market conditions delivered good growth in profit.   The 14 branch Gunters en Meuser acquisition, completed in January of this year, made a good contribution to the first half performance.

The performance of the Belgium merchanting business improved in a weak market in response to a range of measures to increase profitability.

The Woodie's DIY retailing business in Ireland delivered strong growth in profitability as customers responded positively to the improved shopping experience in its stores.  The operating profit margin advanced by 140 basis points to 5.6 per cent. 

CPI EuroMix, the market leading UK mortar business, increased volumes supplied to the house building market.  Profit was well ahead of the prior year and the operating profit margin for the division increased by 230 basis points to 21.4 per cent.

The Group continued to be in a strong financial position and was very cash generative in the period with cash flow from operations of £107.4 million.  Net debt fell to £80.2 million from £96.3 million at 31 December 2016 and net worth (total equity) exceeded £1.1 billion.

Dividend

The interim dividend has been increased by 11 per cent to 5.25p from 4.75p.  This increase is in line with the Board's progressive dividend policy which is based on increasing dividends as earnings grow.  Strong earnings growth has provided scope for a significant increase in the dividend while also increasing dividend cover.

Outlook

Recent softer trends in the UK economy are likely to be sustained over the remainder of the year.  The strength of housing starts should support house building activity while the residential RMI market is expected to be broadly flat with continuing competitive pricing conditions.  Expansion of the Selco branch network reflects our confidence in the medium term outlook for the UK economy.

The outlook for the Irish economy is positive with the pace of growth projected to remain strong and to provide a favourable trading environment.  Growth in employment and incomes should continue to be supportive of household spending in the residential RMI and DIY markets.  The new housing and non-residential new build markets are still in the relatively early stages of a recovery that is expected to gather pace in response to strong underlying demand. 

Recent strong growth in the Netherlands economy is forecast to continue with the Dutch merchanting business expected to benefit.  While modest growth is forecast for the Belgian economy, our focus remains on self-help initiatives to restore profitability.

Average daily like-for-like revenue growth in the period from 1 July to 27 August 2017 was 6.5 per cent for the Group.  Average daily like-for-like growth was 5.5 per cent in the UK merchanting business measured against marginally positive growth for the same period last year, 9.3 per cent in the Irish merchanting business and 5.9 per cent in the Netherlands merchanting business.   Average daily like-for-like revenue was down 2.7 per cent in the Belgian merchanting business and was up by 10.8 per cent in the retailing business in Ireland and by 20.3 per cent in the manufacturing business. 

Grafton has a high quality portfolio of businesses with strong market positions that provide an excellent platform for growing shareholder value over the remainder of the year and beyond.

Operating Review    

Merchanting Segment (91% of Group Revenue)

The Group operates merchanting businesses in the UK, Ireland, the Netherlands and Belgium. Overall average daily like-for-like revenue in the Merchanting segment increased by 5.6 per cent and the operating profit margin before property profit was ahead by 40 basis points.

UK Merchanting 

Like-for-like revenue growth of 4.5 per cent was driven by supplier price increases and modest growth in volumes. Price inflation was estimated at 2.5 per cent and like-for-like merchanting volumes increased by an estimated 2.0 per cent.  New branches and implants increased revenue by 2.7 per cent and there was a reduction in revenue by 3.1 per cent due to the closure of 47 branches in Plumbase and the Contracts businesses in the last quarter of the 2016.

The UK merchanting gross margin increased by 30 basis points due primarily to favourable mix changes related to revenue growth in Selco. The operating profit margin increased by 20 basis points to 5.5 per cent and would have recorded an increase of 50 basis points but for the increase in Selco branch opening costs of £2.7 million.

Selco Builders Warehouse reported double-digit revenue growth driven principally by the rollout of new branches and consolidated its position as the UK's fourth largest and fastest growing general builders merchanting model.  Selco's unique self-select retail style model is tailored to service trade and business customers operating in the more resilient residential RMI market.

The pace of like-for-like revenue growth was strong in the regions and moderated in the Greater London Area.   The opening of new branches within and outside the M25 in London gave customers more convenient trading options and created capacity in a number of branches that have been trading at record levels of activity over recent years.

Five new branches were opened in the half year in Beckton, Crayford, Guildford, Camberley and Cardiff where the business already has a successful branch.  Since the period end, four branches were opened in Thurrock, Warrington, Poole and Basildon.  Selco now trades from 56 branches and remains on course to open at least eleven new branches in the current year.

Revenue increased from the Click and Collect and Selco Direct on-line services that provide an ongoing opportunity to grow on-line revenue as customers shopping behaviour continues to evolve and increasingly combines both in-branch and on-line channels. 

Buildbase achieved improved results in a general merchanting market that saw significant price increases by suppliers related to sterling exchange rate weakness and the effects of increased commodity prices. 

A range of margin management initiatives were implemented across the business in response to intense competition and pricing pressure in key product categories.  Overheads were well controlled across a stable branch network aided by cost cutting measures implemented late last year.  Buildbase delivered a good performance in a challenging environment reporting good growth in operating profit and operating margin.

Revenue and profit from the Electricbase implants continued to increase while the outturn in the Hirebase implants was steady following several years of strong growth in a mixed hire market. 

Plumbase revenue was lower due to the closure of branches last year following a strategic review of the business.  Like-for-like revenue increased by 4.9 per cent.  The overall result for the period saw an increase in operating profit from a low base due to improvements in operating efficiency, rationalisation of the branch network, customer initiatives and margin management.  The bathroom distribution business delivered good profitability and operating margin.

Buildbase Civils, a distributor of heavyside materials primarily to the residential new build and infrastructure markets, recovered strongly under new management.  Strong revenue growth was supported by increased demand in the new housing market for groundworks materials and lintels.  There was a strong advance in operating profit that also benefitted from last year's restructuring.

TG Lynes, a leading distributor to the mechanical services market in London and the South East, strengthened its market position and increased revenue and operating profit.  There was good demand from building services contractors engaged in refurbishment and new build projects in the commercial, public sector and residential markets.   The small network of Plumbase Industrial branches that also operate in this market achieved improved results.

MacBlair, the Northern Ireland merchanting business, reported improved revenue and profit following investment in recent years.  Good gains were made in the general merchanting branches partly offsetting tighter trading conditions in the architectural ironmongery division.  The refurbished flagship branch in Belfast and the relocated branch in Lisburn performed well. 

Irish Merchanting 

The market leading merchanting business in Ireland outperformed a recovering market with constant currency growth of 12.2 per cent in like-for-like revenue. 

The gross margin was ahead despite an unfavourable change in the mix related to increased revenue from higher volume commercial new build projects.  The cost base reflected an incremental investment in customer facing colleagues to maintain service levels,  position the business for the next phase of growth and to take advantage of product development opportunities in an evolving market place.  The strong improvement in operating profit was driven by increased revenue and the operating profit margin before property profit increased by 120 basis points to 8.0 per cent.

The economic backdrop remained positive with a continuation of the growth trends of recent years as the economy remained on a strong footing. 

The shortage of supply of new housing continued to be a feature of the Irish merchanting market with only 15,000 units completed last year.  This was half the number of units required to meet ongoing demand before taking account of pent-up demand due to the shortfall in supply over recent years.  The increase in house building which was initially concentrated in the fast growing Greater Dublin Area has extended to other parts of the country.

The overall number of housing transactions was unchanged on the prior year and, at an annualised rate of 2.5 per cent of the housing stock, remained well below a normalised level of activity.  Favourable economic conditions supported growth in housing RMI and there was a notable increase in commercial activity.  The civils market was quieter following the completion of a number of major infrastructure projects.

Three new branches were opened in areas of Dublin that are expected to benefit from increased construction activity over the coming years.  These branches provide convenient collection points for customers and increased the number of branches in the network to 49 including 20 in Dublin.

Netherlands Merchanting 

The acquisition in January 2017 of the 14 branch Gunters en Meuser business increased the scale of the Dutch business and provided a strong presence in the Greater Amsterdam Area where it has traded for almost two hundred years.   The overall business now trades from 54 branches and is the market leader in the tools, fixings and ironmongery market with a strong position in the country's five largest cities.  The first stage of the integration of Gunters en Meuser, which focused primarily on supplier and procurement arrangements, was successfully completed.

Daily like-for-like revenue increased by 4.3 per cent, a faster rate of growth than the market.  The operating margin was slightly lower due the mix effect of the Gunters en Meuser acquisition which performed in line with our expectations.

The Dutch economy continued to perform well and the housing market recovery continued with a sharp increase in the number of housing transactions for the second successive year.  Despite strong demand, the increase in house building was modest due to a shortage of suitable sites and the complexity of the urban planning process.

A small single branch business was acquired in Wijchen, Eastern Netherlands which provides a good platform to develop a strong market positon in the town.

Belgium Merchanting 

Revenue was down in the first quarter but recovered in the second quarter to register overall like-for-like growth of 1.5 per cent for the half year against the backdrop of modest growth in the Belgian economy and housing market.  The business continued to reorient its customer base towards a lower volume higher margin collected business model.

An improved gross margin, due to changes in the customer mix and procurement gains, and cost reduction initiatives implemented last year contributed to the return to modest profitability.  The Brussels branch will be relocated in the first quarter of 2018 to a new purpose built facility that is being constructed on a site adjoining the branch. 

Retail Segment (6% of Group Revenue)

Woodie's performed strongly increasing like-for-like revenue by 6.6 per cent, a similar rate of growth to the first half of the prior year.  Seasonal product categories including plants and shrubs, lawn mowers and pressure washers performed strongly and Woodie's continued to develop its kitchens business from dedicated showrooms in half of its estate. 

The retail sales environment was positive in line with generally improving trends for the Irish economy.  Higher retail sales were driven by increased employment and growth in real incomes as inflation remained subdued.  

Woodie's outperformed the market in the half-year and continued to benefit from the focus in recent years on enhancing the customer shopping experience by improving store lay-outs and merchandising, better product ranges, investment in store colleagues and promotional activity.

The benefit of increased revenue was protected by maintaining the gross margin and controlling costs.  Savings from simplifying processes and operations were invested in customer facing roles in the stores.  Over 1,000 colleagues participated in learning and training programmes to enable them to deliver the very best service to customers and to develop new skills that are important to the future success of the business and that support their career aspirations. 

Constant currency operating profit increased by 41.0 per cent and the operating margin was ahead by 140 basis points to 5.6 per cent.

A further four stores were upgraded in the half year taking the number completed to sixteen with a further four scheduled for completion in the second half of the year.  Woodie's garden centres, which are an integral part of each store, are also being upgraded with eight completed in the half year.

Manufacturing Segment (3% of Group Revenue)

CPI EuroMix, the market leader in the supply of dry mortar in Great Britain, saw very good growth in volumes and used capacity at its ten plants to meet strong market demand nationally and win new business ahead of the market.  Mortar demand from the house builder and bricklaying sub-contractor customer base was underpinned by good demand for housing.  High levels of employment, access to competitively priced mortgages and the Help to Buy scheme supported good demand in the new housing market.  The CPI EuroMix service model and business structure was well placed to respond to increased mortar demand in its core market. 

Strong growth in profitability was delivered through industry leading standards in product innovation, quality control and customer service.  The operating leverage from increased volumes was optimised by an improved gross margin and tight control of costs.  Structural changes made in recent years have left the business better equipped to supply increased volumes while also providing the flexibility to invest in additional resources in response to changes in output.

Financial Review

The financial position of the Group continued to strengthen in the half year with increased profitability converting into a strong operating cash flow and higher returns on capital employed.  The Group ended the period with a strong balance sheet that incorporates the asset backing of a portfolio of freehold property, a low level of net debt, good liquidity and shareholders' equity of over £1.1 billion.

Property

The disposal of a number of properties not used for trading purposes realised a profit of £2.0 million, down from £3.5 million in the first half of 2016.  The proceeds generated from these disposals were £4.0 million (30 June 2016: £5.4 million).  Property profit for the full year is expected to be circa £3.0 million (2016: £4.9 million).

Pensions

The IAS 19 defined benefit pension scheme pension deficit was £20.2 million at 30 June 2017, a reduction of £11.1 million from the position at 31 December 2016. The primary drivers of the fall in the deficit were a decline in liabilities in the Irish scheme due to a 25 basis points increase in the discount rate used to measure liabilities in line with an increase in euro denominated corporate bond rates, a decline in liabilities in the UK scheme due to lower inflation and salary growth assumptions and good returns achieved on scheme assets which stood at £230.3 million at the period end.    

Net Finance Income and Expense

The net finance charge for the half year increased to £3.6 million (2016: £3.3 million) due to an increase in the net finance cost on pension scheme obligations and an increased charge for foreign exchange.  Net bank interest was unchanged at £2.4 million and reflected the benefit of lower average net debt for the period and  lower money market interest rates that were offset by the adverse effect of currency translation as debt is principally denominated in euros.

Taxation

The tax charge for the period of £13.7 million is based on the forecast rate of 18.5 per cent for 2017 and compares to the underlying rate of 20 per cent in the first half of 2016.  This rate reflects the blended rate of corporation tax on profits in the UK, Ireland and the Netherlands and the disallowance of a tax deduction for certain overheads including depreciation on property.   There was a one per cent  reduction in the UK rate of corporation tax to 19 per cent with effect from 1 April 2017 and a  further two percentage point reduction to 17 per cent will take effect on 1 April 2020.

Capital Expenditure and Intangible Assets

Capital expenditure on property, plant and equipment was £34.8 million (2016: £22.4 million) gross and £30.1 million net of proceeds of £4.7 million from asset disposals. 

Development expenditure of £22.0 million included an outlay of £17.3 million on new branches, principally to expand the Selco network, asset hire implants in the Irish Merchanting business, the purchase of a freehold property in the UK merchanting estate and the ongoing Woodie's branch upgrade programme.

Asset replacement expenditure of £12.8 million related to the distribution fleet and tool, plant and equipment assets for hire to customers and compares favourably to the deprecation charge for the period of £18.8 million . 

An investment of £3.1 million (2016: £5.8 million) was made in intangible assets as part of a multi-year investment programme to upgrade the trading and back-office ERP systems in Buildbase. The rollout of the new system is expected to commence in 2018.

Net Debt

Net debt at 30 June 2017 was £80.2 million, a decline of £16.1 million from £96.3 million at 31 December 2016.    Gross debt is principally denominated in euros to provide a natural hedge against exchange rate risk on assets located in Ireland, the Netherlands and Belgium.  Sterling exchange rate weakness increased euro denominated net debt by £7.2 million on retranslation into sterling at the period end exchange rate. 

The gearing ratio at 30 June 2017 declined to 7 per cent from 9 per cent at 31 December 2016.  EBITDA interest cover was 41.4 times (Year ended 31 December 2016: 37.9 times) and net debt to EBITDA was 0.42 times (31 December 2016: 0.54 times).

Financing

The Group had undrawn bank facilities of £203.2 million at 30 June 2017 (31 December 2016: £217.6 million) which combined with strong cash flow from operations and cash balances and deposits of £243.4 million (31 December 2016: £205.9 million) provides significant capacity and liquidity to fund investment in working capital, replacement assets and development activity. 

In March 2017, the Group exercised an option to extend bilateral bank loan facilities of £429 million, originally put in place in March 2016, for a further year to March 2022.  The average maturity of committed gross debt facilities of £526 million, including a facility for £97 million that matures in March 2021, was 4.5 years at 30 June 2017.

Shareholders' Equity

Shareholders' equity increased by £56.1 million in the half year to £1.1 billion at 30 June 2017.   The net effect of profit after tax of £60.4 million and dividend payments of £21.3 million increased equity by £39.1 million.  Equity increased by £9.0 million due to a remeasurement gain on pension schemes and by £5.4 million due to a currency translation gain on euro denominated net assets.

Return on Capital Employed and Asset Turn

Return on Capital Employed (ROCE) increased by 70 basis points to 13.2% (Year to December 2016: 12.5%) and capital turn increased to 2.3 times from 2.2 times in 2016.  The generation of higher return on capital employed is a key financial metric in the creation of shareholder value and was achieved through increasing profitability in existing businesses and allocating development capital to projects that meet the Group's hurdle rate of return.

Principal Risks and Uncertainties

The primary risks and uncertainties affecting the Group over the remainder of the year are set out on pages 16 to 19 of the 2016 Annual Report.

Interim Financial Information
 

The condensed consolidated half year financial statements presented on pages 12 to 30 comprise:

·        the Group condensed balance sheet as at 30 June 2017;

·        the Group condensed income statement and Group condensed statement of comprehensive income for the half year;

·        the Group condensed statement of cash flows for the half year;

·        the Group condensed statement of changes in equity; and

·        the explanatory notes to the condensed consolidated half year financial statements on pages 18 to 30.

Start of condensed consolidated half year financial statements

Grafton Group plc

Group Condensed Income Statement

For the six months ended 30 June 2017