Half-year Results 2021

 

Grafton Group plc 

Half Year Report for the Six Months Ended 30 June 2021

 

Grafton Group plc ("Grafton"), the international building materials distributor and DIY retailer is pleased to announce its half year results for the period ended 30 June 2021.

 

Continuing Operations1	H1 2021	H1 20203 (restated)	Change
Revenue	£1,028m	£704m	+46.1%
Adjusted2 operating profit	£157.8m	£46.9m	+236.2%
Adjusted operating profit before property profit	£142.4m	£46.9m	+203.9%
Adjusted profit before tax	£148.6m	£33.8m	+340.1%
Adjusted earnings per share	50.4p	11.1p	+355.2%
Dividend	8.5p	-	-
Net cash (before IFRS 16 leases) 4	£302.5m	£57.0m	+£245.5m
Net (debt) - (including IFRS 16 leases) 5	(£209.9m)	(£479.2m)	-£269.3m
Statutory Results - Continuing Operations	H1 2021	H1 2020 (restated)	Change
Operating profit	£152.1m	£42.7m	+256.6%
Profit before tax	£142.9m	£29.5m	+384.8%
Basic earnings per share	48.5p	9.6p	+403.4%

¹ Supplementary financial information in relation to Alternative Performance Measures (APMs) is set out on pages 43 to 48.

² The term "Adjusted" means before exceptional items and amortisation of intangible assets arising on acquisitions in both years.

³ H1 2020 has now been restated as the Traditional Merchanting Business in Great Britain is now classified as a discontinued operation.  Details are set out in Note 14.

⁴ Net cash from total operations (before IFRS 16 lease liabilities), which includes cash of the discontinued operations.

⁵ Net debt from total operations (including IFRS 16 lease liabilities), which includes the discontinued operations.

 

Operational Highlights        

·      Strong performance across the Group and a notable record contribution from the Woodie's DIY, Home and Garden business in Ireland

·      Agreement to divest Traditional Merchanting Business in Great Britain for an enterprise value of £520 million

·      Completed acquisition of IKH in Finland on 1 July 2021

·      Good contribution from StairBox acquisition which performed ahead of plan

·      Continued progress of sustainability agenda

 

Financial Highlights

·      Record half year adjusted operating profit of £142.4 million (before property profit)

·      Record Group adjusted operating profit margin of 13.9% (before property profit) and adjusted return on capital employed of 20.5%

·      Record half year cash generation of £255.3 million from all operations

·      Net cash at 30 June 2021 of £302.5 million (before IFRS 16 lease liabilities)

 

 

 

 

Gavin Slark, Chief Executive Officer Commented:  

 

"I want to thank all of our colleagues for their tremendous contribution and commitment in delivering an exceptional first half outcome in which Grafton achieved record operating profits and margins as well as record cash generation.

 

2021 marks a key phase of a very considered strategic transformation we have executed at Grafton over recent years, which today comprises a portfolio of high returning, differentiated businesses with the capacity to grow and outperform in our chosen markets.

 

The overall outlook for the Grafton businesses is positive given the strength of our current market positions, geographic diversity, strong balance sheet and investment pipeline, alongside supportive sector and macro trends together with the successful rollout of vaccines to date in the four countries where the Group now operates."

 

 

Webcast and Conference Call Details

A pre-recorded results presentation and a copy of the results presentation document are available at 7:00am today via the home page of the Company's website www.graftonplc.com.   

         

A live audio conference call for analysts and investors will be hosted by Gavin Slark and David Arnold at 9:00am today.   If investors would like to listen to the conference call, they can do so either via the "Live Audio Conference Call" webcast link on the home page of the Company's website or by clicking on the following link: https://brrmedia.news/GFTU_H121 

 

 

Analysts will be invited to raise questions on the call.  Should investors wish to submit a question in advance, they can do so before 8.15am today by sending an email to [email protected].  A recording of the call will be available on the Company's website later today.

 

 

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 8549

Tim Rowntree/Rachel Mann

 

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.

 

 

 

 

 

Interim Results for the Six Months to 30 June 2021

 

Statement from Gavin Slark, Chief Executive Officer

 

This was a half year of high performance, operational excellence and significant strategic development.

 

Results for Half Year

 

The results for the half year highlight the success of  our strategy and the exceptional management teams and colleagues across the Group who have again delivered excellent results and outperformance against the backdrop of favourable market conditions.  We continued to innovate and deliver a great experience for our customers while also investing strategically to develop and grow our businesses.

 

Our strategic growth focus is to invest in higher returning businesses with good market positions that have a differentiated customer offering.  The end use market for these businesses is primarily the more resilient residential repair, maintenance and improvements ("RMI") sector and we saw the benefits of this strategy in the half year.  We continued to  invest in our digital channels to increase traffic to our websites and on-line engagement and transactions with our customers.

 

Despite the disruption caused by the pandemic, we have delivered adjusted operating profit of £142.4 million (before property profit)  in continuing operations, which excludes the Traditional Merchanting Business in Great Britain that is now classified as discontinued operations.  This level of profitability established a new half year record for Grafton and the adjusted operating profit margin of 13.9 per cent was also a record performance.

 

Each of our market leading businesses in the UK, Ireland and the Netherlands contributed to these record results with a notable record profit contribution from the Woodie's DIY, Home and Garden retail business in Ireland.

 

Our colleagues responded with enterprise and agility to the significant  pressure on the Group's supply chains during the half year that was caused by elevated international demand for building materials, disruption to supply and container shipping logistics issues.

 

Cashflow generated from total operations, including discontinued operations, for the half year more than doubled to £255.3 million and the Group ended the half year with net cash of £302.5 million before IFRS 16 lease liabilities, up from £181.9 million at the start of the year.  On 1 July 2021 the Group completed the IKH acquisition at a cost of €199.3 million.

 

When we divested our Belgium distribution business in 2019, we retained the freehold properties.  We completed the sale of these properties in the half year for £13.6 million and this transaction accounted for most of the property profit of £5.3 million on disposals realised in the half year.  A further property profit of £10.1 million related to an uplift in fair value recognised on investment properties.

 

Group Strategy

 

We announced on 1 July 2021 that the Group had entered into an agreement to divest its Traditional Merchanting Business in Great Britain for an enterprise value of £520 million and that it will retain freehold properties with development potential that have a market value of circa £25 million.  The decision to divest this business followed a comprehensive strategic review which concluded that exiting this segment of the building materials distribution market in Great Britain would enable the Group to optimise shareholder value.  Divestment provides an opportunity to deploy our capital resources towards more differentiated, higher growth potential businesses offering superior returns and greater resilience through the cycle. This transaction will complete our programme of disposals and we thank  all of our colleagues in this business for their longstanding and valued contribution to Grafton and wish them every success in the future. 

 

Divestment of the Traditional Merchanting Business in Great Britain will enable increased focus on our international development strategy which will be a key priority over the coming years.

 

Our entry into the Netherlands market at the end of 2015 and the acquisition of Leyland SDM in 2018, Polvo in 2019 and StairBox in 2020 demonstrate our disciplined use of capital and our track record of creating shareholder value through growth and development.

 

Our very successful Selco Builders Warehouse business now accounts for almost three quarters of our UK distribution activities.  The remainder of our UK distribution business now comprises the very successful MacBlair operations in Northern Ireland and the TG Lynes and Leyland SDM specialist distributors which trade in and around London.  The operating  profit margin in the continuing  UK distribution business was 13.3 per cent in the half year which marks a significant uplift on the margin of 6.4 per cent returned for the first half of 2019 including the businesses that we have agreed to divest. 

 

We were pleased to announce that Grafton completed the acquisition of Isojoen Konehalli Oy and Jokapaikka Oy ("IKH") in Finland on 1 July 2021.  IKH is one of the largest workwear, personal protective equipment ("PPE"), tools, spare parts and accessories wholesalers and distributors in Finland.  It has a track record of over twenty years of  uninterrupted revenue growth and  has a number two market position in its core tools and PPE segment.  IKH  is a very good strategic and cultural fit for Grafton and we are delighted to welcome our new colleagues in Finland to Grafton and look forward to working with them over the coming years.

 

The acquisition of IKH strengthens our operations in mainland Europe in line with our development strategy and provides Grafton with a new growth platform in the Nordic region.  IKH also expands our product ranges and customer reach into attractive core and adjacent markets.

 

Through a combination of organic growth and the acquisition of high potential businesses trading in segments of our markets that exhibit good structural growth drivers, we will continue to allocate capital to those opportunities that allow us to deliver strong and sustainable value and superior returns.

 

Implementing Our Sustainability Strategy

 

Grafton is committed to building a sustainable business for all of its stakeholders.  The Board and the management teams recognise that sustainability is a core element of our strategy and is critical to the long-term success of our portfolio of businesses.  Our sustainability agenda is based on reflecting the interests of stakeholders in our business decisions and focusing on those areas in our distribution, retailing and manufacturing businesses that are likely to have the most success and that can deliver tangible results and outcomes that make a real difference to stakeholders.

 

Our strategy is aligned with the UN Sustainable Development Goals and identifies five key areas of focus and activity which are Customers and Products; People; Resources, Communities and Ethics.

 

We have made further progress during the half year and the commentaries that follow on the individual businesses highlight a range of initiatives implemented that are linked to these goals.

 

Capital Markets Day

 

We intend to hold a Capital Markets Day for investors towards the end of the year to update investors on the progress of the Group and its businesses, capital allocation model and sustainability strategy. 

 

 

 

 

Gavin Slark

Chief Executive Officer

 

 

 

 

 

 

 

 

 

Group Results - Trading Summary, Cashflow, Dividend and Outlook

 

The strength of the customer offering in the Group's market leading distribution, retailing and manufacturing business together with strong demand in the RMI and new housing markets contributed to a very positive performance and record operating profit for the half year. 

 

Trading in January and February was subdued due to national restrictions at a time when rollout of vaccines was still in the early stages.  Strong revenue growth trends developed in the Group's continuing operations in March and April and were maintained through May and June. 

 

Distribution

 

UK (Continuing Business)

The Group's continuing distribution business in the UK now comprises Selco, Leyland SDM, MacBlair and TG Lynes following the agreement to dispose of the Traditional Merchanting Business in Great Britain.  The continuing business fully recovered from the impact of the lockdown in the first half of last year and average daily like-for-like revenue in the first half 2021 was 16.7 per cent ahead of the first half of 2019.   There was a strong advance in operating profit in the continuing business and the operating profit margin of 13.3 per cent was up from 10.2 per cent in 2019.  The strategic investment made to develop the Selco branch network, which accounted for almost three quarters of UK distribution revenue in the half year, was well rewarded as its self-select operating model and well stocked branches were ideally placed to support an increased level of spending on home and garden improvement projects.

 

Ireland

Chadwicks branches remained open to support those parts of the construction sector that were permitted to continue operating from early January to mid-April when a phased re-opening of the construction sector including house building got under way.  Chadwicks, the market leader in Ireland, experienced exceptional demand in the residential RMI and new build markets from mid-April.  Half year profitability was materially higher than the pre-pandemic result for the first half of 2019 and the operating profit margin was 11.6 per cent, 310 basis points ahead of the first half of 2019.  Daly Brothers, the Dundalk builders merchant acquired last year was fully integrated into the network and Proline, the architectural ironmongery business acquired in February, performed in line with plan.

 

The Netherlands

The Isero ironmongery, tools and fixings business, that was permitted to continue operating as an essential distributor during 2020, reported good growth in revenue and profitability for the half year.  Trading conditions were generally favourable as the  economy recovered faster than expected.  Volume gains in the substantial Polvo business acquired in July 2019 contributed to the positive outcome.  The operating profit margin was 10.8 per cent, 60 basis points ahead of the prior year.

 

Retailing

 

Woodie's market leading DIY, Home and Garden business in Ireland managed an unprecedented level of demand and volume of products flowing through its stores in the half year.   Whilst Covid restrictions affected much of Irish retail, Woodie's  was deemed an essential retailer and permitted to trade throughout the first half.  As a result, new records were decisively established for revenue and profitability leading to a more than doubling of the operating profit margin to 21.6 per cent. 

 

Manufacturing

 

The manufacturing segment now incorporates our long established market leading CPI EuroMix dry mortar business in Great Britain, StairBox, the staircase manufacturing business in Stoke-on-Trent that we were pleased to acquire at the end of November 2020 and MFP, a manufacturer of PVC drainage and roofline products based in Dublin . 

 

Volumes  in the CPI EuroMix mortar manufacturing business started to recover in March and continued on an improving trend although they remained below pre-pandemic levels in line with the gradual upturn in house building.  This business has a flexible operating model and produced an operating margin of 21.6 per cent in the half year. 

 

StairBox had an excellent start under Grafton ownership performing ahead of expectations. It produced an operating profit margin of 36.7 per cent, the highest level ever reported by a Grafton business.  The half year performance endorsed our pre-acquisition assessment of this high quality business and management team. Stairbox, a leader in technology in its field, gives Grafton access to a new cohort of customers in an attractive segment of the residential RMI market in Great Britain.

 

Cash Flow

 

The Group's cashflow generated from total operations in the half year more than doubled to £255.3 million from £121.5 million.  This excellent cash generation was driven by better trading in the Group's businesses and included cashflow of £37.7 million released from working capital. 

 

The Group had net cash of £302.5 million at 30 June 2021 before IFRS 16 lease liabilities having started the year with net cash of £181.9 million.  Net debt on an IFRS 16 basis which includes lease liabilities was £209.9 million (31 December 2020: £355.0 million), an improvement of £145.1 million in the half year.

 

Dividend

 

The Group had a cash outflow on dividends of £64.6 million during the half year comprising the second interim dividend for 2019 of 12.5p per share that was paid on 19 February 2021 in the amount of £29.9 million and the  final dividend for the year ended 31 December 2020 of 14.5p per ordinary share that was paid  on 5 May 2021 and amounted to £34.7 million.

 

The Board has decided to pay an interim dividend for 2021 of 8.5p per share in the amount of approximately £20.4 million. This interim dividend is in line with the Board's progressive dividend policy and reflects both the Group's strong profitability and cashflow from operations for the half year and its (pre-IFRS 16) net cash position at 30 June 2021.

 

The interim dividend will be paid on 1 October 2021 by Grafton Group plc, following the simplification of the Grafton Unit that was approved by shareholders at the EGM on 21 January 2021, to shareholders on the Register of Members at the close of business on 3 September 2021, the record date.  The Ex-dividend date is 2 September 2021.

 

Outlook

 

The overall outlook for the Grafton businesses is positive following the successful rollout of vaccines to date in the four countries where the Group now operates.  Risks nevertheless remain that a further spread of Covid-19 in communities following the lifting of most restrictions or the emergence of new vaccine resistant variants could require restrictions to be reimposed and slow or reverse the international recovery that is now becoming established. 

 

It is expected that supply chains will continue to be disrupted to some extent over the coming months and we will continue to work with our partners to minimise the impact on our customers.

 

The recovery in the UK economy is on track and the outlook is positive.  Some elements of the construction sector including housing RMI saw volumes fall sharply during the first lockdown then quickly recover by the end of last year. The UK RMI housing market was not directly impacted by further lockdowns this year and performed strongly in the first half at a time of reduced spending on travel, leisure and hospitality.  We believe that this trend is likely to continue in the second half given the desire of households to improve the amount and quality of indoor and outdoor living space.  The spending of an element of savings built up during the pandemic on housing RMI is also likely to add some impetus to the market.  The recovery in housebuilding in the UK is expected to continue and to be sustained beyond the ending of the stamp duty holiday in September supported by good demand at a time when the stock of new houses for sale is low.

 

In Ireland, there are encouraging signs that economic activity is normalising following the lifting of restrictions and the near-term outlook for the economy is favourable.  Activity in the residential RMI market is predicted to remain strong and, following the reopening of sites in April, house building is expected to gain momentum in response to the scarcity of supply and the high level of pent up and forecast demand. The exceptional revenue growth trends in the Woodie's DIY, Home and Garden business eased as expected following the reopening of non-essential retail and leisure activities and it is anticipated that this trend will continue in the second half.

 

The Netherlands economy saw a pick-up in activity in the second quarter and the outlook is favourable with an expectation of a return to a steady  growth path by the year end.  Consumers have become more confident and underlying demand in the RMI and new build housing markets should sustain a continuation of the positive first half trends in the ironmongery, tools and fixings distribution market.      

 

Average daily like-for-like Group revenue increased by 4.4 per cent in the period from 1 July  to 15 August 2021. This comprised increases of 6.9 per cent in UK Distribution, 9.4 per cent in Irish Distribution, 9.7 per cent in Netherlands Distribution and by 7.4 per cent in Manufacturing.  Average daily like-for-like revenue declined as anticipated by 16.7 per cent in Retailing which compares to growth of 35.6 per cent in the same period last year.

 

We are very encouraged by the strong first half performance across the Group and, while our markets are not without risk concerning how demand will unfold, we are confident in the delivery of full year Group adjusted operating profit in continuing operations of approximately £240 million, as previously guided, subject to increasing property profit by £10 million related to the retention of four investment properties as part of the divestment of the traditional merchanting business in Great Britain. 

 

Operating Review - Continuing Operations   

 

The Distribution businesses in the UK, Ireland and the Netherlands contributed 79.8 per cent of Group revenue (2020: 82.3 per cent), Retailing 15.4 per cent (2020: 14.1 per cent) and Manufacturing 4.8 per cent (2020: 3.6 per cent). 

 

UK businesses contributed 44.8 per cent (2020: 39.0 per cent) of Group revenue, Ireland 40.9 per cent (2020: 41.4 per cent) and the Netherlands 14.3 per cent (2020: 19.6 per cent).

 

Distribution Segment (80% of Group Revenue)

 

	2021	2020	2019
	£'m	£'m	£'m	Change*
Revenue	820.3	579.0	651.6	41.7%
Adjusted operating profit before property profit	101.2	39.3	63.5	157.3%
Adjusted operating profit margin before property profit	12.3%	6.8%	9.7%	+550bps
Adjusted operating profit	111.9	39.4	67.3	183.7%
Adjusted operating profit margin	13.6%	6.8%	10.3%	+680bps

*Change represents the movement between 2021 v 2020 and is based on unrounded numbers

 

UK distribution generated 40.3 per cent (2020: 35.7 per cent) of Group revenue, Irish Distribution 25.2 per cent (2020: 27.0 per cent) and Netherlands Distribution 14.3 per cent (2020: 19.6 per cent).

 

UK Distribution 

 

	2021	2020	2019
	£'m	£'m	£'m	Change*
Revenue	414.1	250.7	344.4	65.2%
Adjusted operating profit before property profit	55.1	10.1	35.2	448.0%
Adjusted operating profit margin before property profit	13.3%	4.0%	10.2%	+930bps
Adjusted operating profit	65.0	10.1	39.0	540.3%
Adjusted operating profit margin	15.7%	4.0%	11.3%	+1,170bps

*Change represents the movement between 2021 v 2020 and is based on unrounded numbers

The results of the UK distribution business for the half year and comparative results for 2020 do not include the Traditional Merchanting Business in Great Britain which is classified as discontinued operations.

 

Revenue growth of 65.2 per cent reflects strong underlying demand continuing the trends that developed in the second half of last year and a weaker performance in the comparative period in 2020  because of the measures adopted in the second quarter to contain the spread of Covid-19.  These measures resulted in the closure of all branches, except for the Leyland SDM branches, on 24 March and the phased reopening in May and June. 

 

Average daily like-for-like revenue was up by 63.5 per cent on the first half of 2020 and by 16.7 per cent on the first half of 2019.  There was one less trading day in the first half of 2021.

 

The GDC Paints business acquired in July 2020 contributed revenue of £3.6 million in the half year and new Selco and Leyland SDM branches contributed revenue of £3.9 million. 

 

The gross margin was up by 100 basis points on the level reported for the first half of 2019, when trading conditions were more comparable than 2020.  This improvement was attributed to changes in product mix, improved procurement arrangements and stock gains realised from materials price inflation.

 

First half operating profit before property profit increased to £55.1 million (H1 2020: £10.1 million) at an operating profit margin of 13.3 per cent that represents a structural shift in the quality of the UK Distribution business following the agreement to divest the Traditional Merchanting Business in Britain.

 

There was no recognition of rates relief of £3.8 million received in the continuing UK distribution business in the period which is in the process of being repaid. 

 

Selco Builders Warehouse

 

Selco Builders Warehouse experienced a remarkable level of demand and a step up in revenue in the half year. This strong performance endorsed the benefits of a multi-year strategic investment programme in the branch network and digital infrastructure that made it possible to support more customers and deliver record breaking sales. 

 

Selco management and colleagues accomplished a great deal in the half year in their response to a very dynamic trading and operational environment while at all times prioritising the health and safety of customers and each other.   

 

Average daily like-for-like revenue increased by 74.4 per cent on the same period in 2020.  This follows a decline in total revenue of 30.7 per cent in the first half of 2020 compared to the first half of 2019 as all branches were closed on 24 March 2020, because of the pandemic, and reopened on a phased basis between 6 May 2020 and 22 June 2020.  Half year average daily-like-for-like revenue growth of 18.4 per cent over the two years to the end of June 2021 is more reflective of the excellent progress made by the business.

 

Revenue growth trends improved in the second half of last year and continued into the early weeks of this year.  Trading began to show a further improvement  in the second half of February and gained significant momentum in March that carried through to the  end of the half year. 

 

The improved performance was broadly based across the branch network with branches outside of the Greater London Area, that accounted for almost one-third of revenue, making the strongest advances. 

 

Selco is primarily exposed to the residential RMI market which recovered quickly following the lifting of lockdown measures.  The pandemic appears to have changed the relationship between households and their homes and the sharp rise in savings from reduced spending on leisure, travel and non-essential retail has provided the resources to invest in the home at a time of increased demand for more and better quality space both inside and outside the home.  This has taken the form of multiple projects inside the home including extensions, loft works and garage conversions.  Outdoor projects have typically involved paving, decking, fencing and construction of garden sheds.

 

There was significant pressure on the supply chain because of shortages of core materials at various stages during the half year including aggregates, cement, plasterboard, treated timber, sheet materials, landscaping, steel and plastics.  The procurement team worked closely and successfully with supply chain partners to diminish the impact on customers and optimise our in-stock positions.   Supply chain pressures also contributed to significant price inflation, particularly in core products including timber, and we estimate that overall cost price inflation was circa 7.5 per cent compared to the first half of last year.

 

The new branches that were opened last year in Orpington and Salford, the Bristol branch that was relocated to an enlarged modern facility and the Chessington branch that was extended into an adjoining unit materially outperformed plan.

 

The operational leverage from the strong growth in revenue and an increase in the gross margin contributed to an improvement in the operating profit margin to 13.7 per cent. 

 

Last year Selco completed a major upgrade to its website to incorporate several new features that make it easier for customers to transact online.  This significantly improved on-line engagement and continues to be the focus of investment with the goal of further enhancing the customer experience.  Digital sales accounted for 5.4 per cent of first half revenue and approximately 80 per cent of on-line orders were fulfilled through deliveries from branches and delivery hubs.    

 

The branch estate increased to 70 with the opening of a new branch in Liverpool, where early trading indications are very encouraging, and new branches will open later this year in Canning Town and Rochester while a pipeline of branch openings over the coming years is being actively developed.  Major upgrades were completed to the  Catford and Ruislip branches as part of a rolling programme of investment in the branch estate and mini upgrades were also completed on a  number of branches.

 

Following the success of the delivery hub in Edmonton, that centralised customer deliveries for six branches in North London, a second hub was recently opened that will centralise deliveries on a phased basis for the seven branches in the Birmingham Area.  These hubs also provide a fulfilment service for heavyside products ordered on-line through the Click & Deliver facility.

 

The Selco Sustainability Pledge, a blueprint including targets and commitments for what can be achieved over the next decade, was recently launched.  The business has already taken decisive action this year, as part of its responsibility to the environment, with the launch of 'Selco Forest', an initiative designed to accelerate the process of offsetting its carbon footprint. The trees planted this year will offset 8,000 tonnes of carbon during their life cycle which is equivalent to the amount of carbon used on customer deliveries over two years.  Selco is also testing and trialling greener delivery vehicles utilising compressed natural gas technology.

 

Leyland SDM

 

Leyland SDM, London's largest specialist decorators' merchant, was categorised as an essential business and continued to trade throughout 2020. Like-for-like revenue and operating profit were in line with the first half of last year.  While the re-opening of non-essential retail on 12 April 2021 helped to increase footfall and the level of transactions conducted with retail customers, demand from trade customers was weak because the limited number of workers and international tourists in central London has significantly reduced investment particularly in offices, restaurants and the leisure sector.  This backdrop was reflected in revenue in the like-for-like stores being down by 7.4 per cent on the first half of 2019.  The stores located in the commuter belt continued to make gains from increased spending by households and trade customers on painting and decorating products. 

 

The five store GDC Paints acquired in July 2020 completed a successful first year under Grafton ownership and performed ahead of expectation.  The five branches were integrated into the Leyland SDM store network and ERP system and now benefit from the distinctive branding and corporate identity of Leyland SDM.  The new store that opened in Kingston-Upon-Thames in November 2020 is developing a revenue stream and in June  Leyland SDM opened its 30^th store in Clapham Junction.  The Shoreditch, Chelsea and Victoria stores were upgraded.

 

MacBlair

 

The Northern Ireland distribution business traded very strongly in the second half of last year and this trend gathered pace leading to record revenue and operating profit for the first half while the operating profit margin of 12.0 per cent also established a new record for the business and compares to the full year outturn of 8.6 per cent for 2020.  First half revenue was ahead of last year by 58.3 per cent and up by 26.7 per cent on 2019.

 

MacBlair experienced exceptional demand in the attractive residential RMI market which was the strongest driver of revenue growth.  There was notable growth in the volume of landscaping, fencing, decking and timber products supplied.  The new housing sector returned to growth in March and traded strongly in the run up to the end of the half year with most of the increase in activity concentrated on self build customers and smaller house builders.  Demand from the major house builders in the province involved in housing scheme developments was more subdued.  Trading with customers operating in the commercial and industrial sectors was also very positive.  The higher proportion of revenue from the residential RMI end-use market, product price inflation stock gains and changes in product mix contributed to a favourable gross margin outcome.

 

TG Lynes

 

Revenue in TG Lynes, a leading distributor of commercial pipes and fittings in London, recovered to within four per cent of the level reported for the first half of 2019.  In line with the trend that developed in the second half of last year, demand was strongest from subcontractors engaged in upgrades to existing properties, residential new build, public sector and RMI projects.  Investment in the hotel, leisure, retail and office sub-sectors continued to be impacted by the pandemic although there were indications of improving order books at the end of the half year.  Good pricing discipline was maintained in a competitive market and a strong operating profit performance was delivered with a high double digit operating profit margin for the half year coming in only marginally behind the level reported prior to the pandemic. 

 

TG Lynes installed solar panels on the roof of its 55,000 sq. ft. freehold property in Enfield.  Generating solar energy for use on this site will lower demand for energy from the national grid and reduce the company's carbon footprint.  The business also demonstrated its commitment to sustainability by replacing traditional light fittings with LED lighting and supported colleagues switching to electric cars by installing electric vehicle charging points at its workplace.  The ERP system was updated to a solution designed for distributors that provides greater visibility on the trading, operations and performance of the business.

 

Irish Distribution 

 

	2021	2020	2019		Constant Currency
	£'m	£'m	£'m	Change*	Change*
Revenue	258.7	190.2	226.2	36.1%	37.3%
Adjusted operating profit before property profit	30.1	15.2	19.3	97.6%	102.8%
Adjusted operating profit margin before property profit	11.6%	8.0%	8.5%	+360bps	-
Adjusted operating profit	30.9	15.2	23.1	102.9%	107.5%
Adjusted operating profit margin	11.9%	8.0%	10.2%	+390bps	-

*Change represents the movement between 2021 v 2020 and is based on unrounded numbers

 

Trading in the half year fell into two distinct phases that were linked to the introduction of lockdown measures in Ireland to reduce a surge in Covid-19 cases at the turn of the year and the subsequent phasing out of these measures.  The first  phase covered the period from early January to mid-April when non-essential construction, with certain exceptions, was required to cease and sites were closed.  During this period all Chadwicks branches remained open to support those elements of construction that were permitted to continue operating.  Customer activity in our branches was down and average daily like-for-like revenue declined by 2.0 per cent on the same period in 2019.

 

There was a significant acceleration in trading in the second phase which started with the lifting of restrictions on house building from mid-April and the complete reopening of the construction sector from early May.  Trading across the branch estate was very strong as households invested in a wide variety of home maintenance and improvement projects and house building restarted in Dublin and other provincial cities.  Average daily like-for-like revenue in the period from mid-April to the end of June increased by circa 30 per cent compared to the same period in 2019 in response to exceptional levels of customer demand.  Revenue growth incorporates materials price inflation estimated at circa 6.9 per cent which affected a number of core commodities including steel and timber categories.

 

In May and June Chadwicks performed at its highest level of activity since 2008 which contributed to overall growth in average daily like-for-like revenue of 11.7 per cent for the half year compared to the first half of 2019.

The Steel division, a value-added segment of the business that differentiates Chadwicks from competitors and provides early-stage supply opportunities to support new build projects, performed strongly and made a significant contribution to profitability. 

 

There was a  shortage of certain building materials due to exceptional demand in May and June that was mainly resolved by working closely with supply chain partners to prioritise the stocking of core lines.

 

There was a marked recovery in housing starts following the lifting of restrictions in mid-April.  There were 12,700 units started in the second quarter and 27,000 units in the year to end of June which remains well short of underlying annual demand which is estimated at 40,000 units.  House completions quickly recovered in the second quarter and 9,000 units were completed in the half year partly driven by a doubling of the number of apartments completed, particularly in Dublin.   

 

The sharp improvement in the operating margin reflected operating leverage from growth in revenue and an increase in the gross margin that benefitted from favourable changes to mix and inflation related stock gains realised in core categories. 

 

Chadwicks opened its third Fixings Centre, a concept that provides builders, engineers and trades people with a wide range of fixings and tools, as part of the upgrade to the Galway branch. 

 

The acquisition of Proline Architectural Hardware ("Proline") that completed on 11 February 2021 brought specialist expertise to Chadwicks in the distribution of architectural ironmongery products.  Proline performed in line with plan in the period and generated an operating profit margin of 21.9 per cent.  The Daly Brothers branch in Dundalk, County Louth acquired in July 2020 was integrated into the Chadwicks branch network and ERP system and performed ahead of plan.

 

Our multi-year programme of branch upgrades continued with an upgrade to the Galway branch that incorporates Chadwicks first dedicated ECO Centre to showcase sustainable products for energy efficient new build and retrofit projects.  This development is part of a wider programme by Chadwicks, a member of the Irish Green Council, to take a leading role supporting customers and communities in Ireland through the distribution of building materials that improve the sustainability of buildings. 

 

Netherlands Distribution

 

	2021	2020	2019		Constant Currency Change*
	£'m	£'m	£'m	Change*
Revenue	147.5	138.1	80.9	6.8%	7.6%
Adjusted operating profit	16.0	14.1	9.0	13.9%	15.1%
Adjusted operating profit margin	10.8%	10.2%	11.1%	+60bps	-

*Change represents the movement between 2021 v 2020 and is based on unrounded numbers

 

The specialist  Isero and Polvo ironmongery, tools and fixings business in the Netherlands was categorised as an essential business and continued to trade throughout the pandemic.  These very good results for the half year show a continuation of the strong performance reported for last year.  

 

The business worked closely with supply chain partners during the period to reduce lead times and optimise the stock holding of ironmongery, tools and fixings products at a time of supply shortages.

 

Growth in operating profit and the operating margin progression were primarily driven by the drop-through from growth in average daily like-for-like revenue of 5.6 per cent and an increase in the gross margin from purchasing initiatives that more than offset the adverse mix effect of increased revenue from volume projects.

 

There was a pick-up in the rate of growth in like-for-like revenue in the second quarter as the Netherlands economy reopened and consumer sentiment recovered.  There was also a rise in confidence in the housing market as a shortage of new builds combined with strong demand, a reduction in property transfer tax for first time buyers and a relaxation of certain mortgage lending conditions contributed to double digit year-on-year growth in house prices. 

 

Spending on residential RMI projects benefitted generally from a strong labour market and households channelling a proportion of savings set aside during the pandemic into home improvement projects.   Demand was also strong from national key account customers engaged in house building, commercial construction and renovation projects. 

 

The performance of the Polvo business, acquired in July 2019, was very positive and underpinned by broadly based growth across its markets including increased demand in the new housing and projects markets and outperformance by branches in the Southern region of the Netherlands.

 

Activity in the Amsterdam Area was most affected by the lockdown with the loss of revenue from retail customers for a period in a small number of end-consumer orientated ironmongery branches.  Revenue from Housing Corporations involved in the maintenance and refurbishment of social housing in the City was lower and demand also continued to be weaker in the tourism, leisure and entertainment sectors due to the pandemic.  Revenue in the Schiphol branch, that was acquired in late 2019 and integrated into the Polvo branch network last year, was impacted by reduced activity in the airport due to the pandemic.

 

The acquisition in April of Govers B.V, an ironmongery, tools and workwear business, expanded geographic coverage for the first time into the North West Netherlands region where Govers trades from four branches.  In January, the acquisition of Van den Anker Ijzerhandel Katwijk B.V., a single branch distributor of ironmongery, tools and fasteners, strengthened the market position of Polvo in the Mid-Western region.

 

Organic developments in the period included the opening of a branch in Lelystad, a growth city in the centre of the Netherlands, and relocation of one of the Rotterdam branches in February to a higher profile location that has since then made good progress growing in-branch customer collection transactions.

 

The half year performance of the Netherlands business reflects the success of the strategic investments made over the last two years while there was also a focus in the half year on laying the foundations for the future growth and development of the business.

 

Retail Segment (15% of Group Revenue)

 

	2021	2020	2019		Constant Currency Change*
	£'m	£'m	£'m	Change*
Revenue	158.4	99.3	99.9	59.4%	62.2%
Operating profit	34.2	9.7	9.5	252.4%	268.3%
Operating profit margin	21.6%	9.8%	9.5%	+1,180bps	-

*Change represents the movement between 2021 v 2020 and is based on unrounded numbers

 

Woodie's outstanding performance in the second half of 2020 continued through the first half 2021 as the business delivered record half year revenue and operating profit while more than doubling the operating profit margin to 21.6 per cent.

 

Growth in demand was broadly based across all DIY, home and garden categories and reflected the benefits of a colleague and customer centred strategy so successfully pursued in recent years.  The retail backdrop that saw Woodie's categorised as an essential retailer, and allowed to continue trading during the lockdown, was also supportive.

 

The rate of growth in revenue moderated, as anticipated, following the full re-opening in May of non-essential retail in Ireland that had been closed since the beginning of the year.  

 

Woodie's flexible operating model and managements agile response to exceptional demand conditions in the half year provided customers with a great shopping experience in a safe environment.  These results demonstrate the hard work and commitment of Woodie's colleagues to deliver an exceptional service to customers. Service levels were maintained with the appointment of 150 additional colleagues during the period.

 

Management ensured that Woodie's branches were well stocked for an early start to seasonal trading at the beginning of March and exceptional demand was experienced through to the end of the second quarter for outdoor products including garden furniture, barbeques, garden sheds, plants, shrubs and composts.  Households also undertook a range of projects inside the home and we saw significant growth in the sale of decorative and DIY products.

 

Woodie's procurement colleagues worked closely with domestic and international supply chain partners to mitigate the impact of disruption to the supply of certain products at a time of unprecedented global demand.  Record levels of stock were moved through branches during the half year with a particular focus on the supply of fast moving lines and seasonal categories.

 

The increase in revenue was broadly split between an increase in the number of shopping transactions and an increase in the average  basket value related to the purchase of higher value seasonal products and an increase in the range of products purchased during a single store visit.

 

The gross margin expanded due to several factors including a more favourable sales mix and reduced promotional activity. 

 

Woodie's branches have a "new look and feel" following the multi-year investment programme, including two branches upgraded in the half-year, that has created a unique DIY, Home and Garden retail proposition in the Irish market.

 

Upgrading the branch network was complemented with further investment in Woodie's digital platform to improve the on-line customer experience and strengthen Woodie's longer term competitive advantage.  Working with partners, the on-line platform was upgraded to increase the speed and improve the user experience.  The marketing content was made more relevant and customer on-line communications were streamlined onto a single platform.

 

The efficiency of the on-line order fulfilment and delivery service was also improved with the creation of a new 15,000 sq. ft. home delivery service that utilises spare capacity in the Drogheda branch.  We also deployed  the latest electronic labelling, track and trace and proof of delivery technology.  These strategic investments are essential elements of Woodie's ongoing response to evolving customer preferences as the proportion of on-line transactions increase.  On-line transactions represented 3.1 per cent of revenue in the first half.

 

Woodie's was recently recognised with a national award in Ireland for the connection it created between its learning and development programmes and colleague engagement and business performance.  All people managers completed "conscious inclusion" training over the past 18 months as part of Woodie's diversity programme which also benefitted from the use of artificial intelligence tools to substantially remove unconscious bias in recruitment.

 

Manufacturing Segment (5% of Group Revenue)

 

	2021	2020	2019		Constant Currency Change*
	£'m	£'m	£'m	Change*
Revenue	49.1	25.4	40.7	93.5%	93.6%
Operating profit	12.7	3.6	9.2	256.4%	254.0%
Operating profit margin	25.9%	14.1%	22.5%	+1,180bps	-

*Change represents the movement between 2021 v 2020 and is based on unrounded numbers

 

CPI EuroMix, which pioneered the use of dry mortar technology in Great Britain, supplies national, regional and local house builders and plastering contractors with high quality mortars from ten plants that provide almost national coverage of the market.

 

Mortar demand was soft in January and February due to the disruption to house building caused by the pandemic before starting to gradually recover in March.  This recovery continued in the second quarter although volumes remained below the same period in 2019.  Trading towards the end of the second quarter was impacted by a shortage of cement and tight delivery capacity.  The operating profit margin recovered to 21.7 per cent in the half year from 14.0% in the first half of 2020.

 

Government support for first time buyers, improving levels of mortgage availability and long term under supply continued to provide favourable demand conditions for new housing, the primary end-market for CPI EuroMix products.

 

CPI EuroMix ended the half year with a healthy order book and a record number of mortar silos on customers sites providing a competitive advantage and further enhancing its market leading reputation for quality and service.

 

The manufacturing segment now incorporates the results of StairBox, the staircase manufacturer, that was acquired on 30 November 2020 for a total consideration of £44.0 million.  Stairbox uses technology to design and manufacture an extensive range of high-quality customised staircases from its facility in Stoke-on-Trent. 

 

Revenue, operating profit and cashflow outperformed plan and StairBox had a very successful half year under Grafton ownership.  Revenue in the period was £12.8 million and operating profit was £4.7 million, an operating margin of 36.7 per cent.

 

The StairBuilder on-line stairs designer software, the first of its kind in the UK, was updated in June to provide a new version of this interactive software with additional features and improved functionality making it easier for customers to design, price and buy a staircase on-line.  The new features include a live 3D model that updates with each click as customers create their own unique staircase designs virtually.

 

Operating Review - Discontinued Operations

 

Discontinued Operations

 

	2021	2020	2019
	£'m	£'m	£'m	Change*
Revenue	522.9	354.7	521.4	47.4%
Adjusted operating profit/(loss) before property profit	30.4	(7.8)	20.2	-
Adjusted operating profit/(loss) margin before property profit	5.8%	(2.2%)	3.9%	+800bps

*Change represents the movement between 2021 v 2020 and is based on unrounded numbers

 

The Group entered an agreement on 30 June 2021 to divest the Traditional Merchanting Business in Great Britain which comprises the Buildbase, Civils & Lintels, PDM Buildbase, The Timber Group, Frontline, Bathroom Distribution Group and NDI brands for an enterprise value of £520 million.  The Group will also retain freehold properties with development potential that have a market value of circa £25 million and will retain responsibility for the UK defined benefit pension scheme which was closed to future accrual at the end of 2020 when alternative arrangements were put in place.

 

The Share Purchase Agreement was signed on 30 June 2021 and from that date Grafton ceased to have rights to variable returns from its shareholdings in the entities being divested and will instead receive an agreed daily amount up to the date of completion.  International Financial Reporting Standards requires the business being divested to be treated as discontinued operations for the half year and as a deemed disposal at 30 June 2021.

 

A net gain on the deemed disposal of £95.3 million, net of the costs of disposal, has been recognised and more details are set out in Note 14.

 

The Group balance sheet reflects a debtor of £465.7 million relating to proceeds receivable on completion. In addition, the Group will receive £116.0 million on settlement of inter-Group amounts that are outstanding.  The net debt position of £209.9m at 30 June 2021 includes net debt of £36.7 million (cash and the lease liability) which form part of the deemed disposal.

 

Revenue increased by 47.4 per cent to £522.9 million from £354.7 million in the first half of 2020 and by 0.3 per cent from £521.4 million in the first half of 2019.  Average daily like-for-like revenue was up 53.3 per cent on the first half of 2020 and by 5.3 per cent on the first half 2019.  There was one less trading day in the first half of 2021 and the consolidation and closure of branches reduced revenue by £11.8 million.  The Timber Group opened a new branch in Poole that contributed revenue of £1.3 million.

 

Like-for-like revenue was down by £161.8 million during the first half of 2020 as a result of the closure of branches on 24 March, except for a limited service to provide emergency supplies, and their phased reopening between early May and mid-June.  

 

Good revenue and operating profit growth was achieved by all brands in the period supported by a strong recovery in the residential RMI and new build markets.  

 

Financial Review

 

Revenue

 

Group revenue from continuing operations, which excludes the Traditional Merchanting Business in Britain that is classified as discontinued,  increased by 46.1 per cent to £1.03 billion from £703.7 million in the first half of 2020 and was up by 29.7 per cent from £792.2 million in the first half of 2019.  First half revenue in the continuing  like-for-like business increased by 42.3 per cent (£297.9 million) on the prior year and by 17.8 per cent on the first half of 2019.  Acquisitions contributed revenue of £27.0 million and new branches £3.9 million. A currency translation loss reduced revenue by £4.7 million.

 

Adjusted Operating Profit

Adjusted operating profit from continuing operations of £157.8 million (2020: £46.9 million) was up by 236.2 per cent due to the decline in profitability last year in the distribution and manufacturing businesses in the UK and the distribution business in Ireland as a result of the temporary closure of branches and plants.

 

Adjusted operating profit before property profit of £142.4 million (2020: £46.9 million) grew by 203.9 per cent and the adjusted operating profit margin increased by 7.2 per cent to 13.9 per cent before property profit. 

 

Property

The Group recognised property profits of £15.4 million in the half year in continuing operations.

The disposal of properties in Belgium that were retained following divestment of the distribution business in 2019, together with small number of properties in Ireland and the UK that were held for sale, generated proceeds of £17.0 million (2020: £1.1 million) and a profit on disposal of £5.3 million (2020: £0.3 million).

 

In addition, a fair value gain £10.1 million was recognised on five properties which were transferred to investment properties during the period.  Four of these were properties which were retained by the Group following the agreement to divest the Traditional Merchanting business in Great Britain.  These four properties have a fair value of £15.75 million and a market value of circa £25 million.

Net Finance Income and Expense

The net finance expense decreased by £3.9 million to £9.2 million (2020: £13.2 million).  This  charge includes £7.2 million (2020: £7.8 million) of an interest charge on lease liabilities recognised under IFRS 16.

 

Interest payable on bank borrowings and US Private Placement Senior Unsecured Notes, net of bank interest received on deposits, decreased by £0.9 million to £3.1 million (2020: £4.0 million).  The decline was mainly due to the repayment of cash drawndown during the first half of 2020 as a precautionary measure to increase liquidity in response to the Covid-19 crisis.  The rate of interest receivable on bank deposits declined in the first half of 2021 because of excess liquidity in the banking system which led to lower interest rates on sterling deposits and an increase in negative interest rates on euro deposits. 

 

The net finance expense included a foreign exchange translation gain of £1.4 million which compares to a loss of £1.1 million in the same period last year.

 

 

 

 

Taxation        

 

The income tax expense of £26.9 million (2020: £6.5 million) is equivalent to an effective tax rate of 18.8 per cent on profit from continuing operations (2020: 22.1 per cent) and is based on the current forecast rate for the year.  This is a blended rate of corporation tax on profits in the three jurisdictions where the Group operates.   The forecast charge includes a once-off increase in deferred tax arising from the UK tax rate increasing to 25 per cent from 19 per cent which is effective from 1 April 2023.  This change was enacted in UK legislation in May 2021 and adds 0.7 per cent to the tax rate on profits in the Group's continuing operations.

 

Certain items of expenditure charged in arriving at profit before tax, including depreciation on buildings, are not eligible for a tax deduction. This factor increased the rate of tax payable on profits above the headline rates that apply in the UK, Ireland and the Netherlands.

 

Cashflow

 

Cash generated from total operations increased to £255.3 million (2020: £121.5 million) including the release of £37.7 million from working capital (2020: £25.1 million).

 

The reduction in working capital in the first half was a reflection of the strong trading in the Group's cash based businesses, notably Selco and Woodie's, and we would expect this position to reverse in the second half of the year.

 

Expenditure on acquisitions and capital expenditure amounted to £30.0 million (2020: £13.6 million).

 

Capital Expenditure and Investment in Intangible Assets

 

We maintained disciplined control over the allocation of capital and capital expenditure for the period was £17.1 million (2020: £13.2 million).  There was also expenditure of £0.5 million (2020: £0.3 million) on software costs that is classified as intangible assets.  

 

Proceeds of £17.0 million (2020: £1.4 million) were received on disposal of fixed assets generating a net outflow of £0.6 million from assets sold and purchased (2020: £12.2 million net outflow).

 

The Group incurred capital expenditure of £5.1 million (2020: £6.5 million) on a range of development initiatives including new branches in Selco, Leyland SDM and the Netherlands, upgrades to Woodie's,  Chadwicks,  Selco and Leyland SDM branches and the creation of additional manufacturing capacity in StairBox.

 

Asset replacement capital expenditure of £12.0 million (2020: £6.7 million) compares to the depreciation charge on property, plant and equipment of £22.5 million and related principally to replacement of the distribution fleet that supports customer deliveries, replacement of fixtures and fittings, plant and machinery, forklifts, plant and tools for hire by customers and other assets required to operate the Group's branch network.  

 

Pensions

 

The IAS 19 deficit on defined benefit pension schemes was £33.3 million at 30 June 2021, a decrease of £17.3 million from £50.6 million at 31 December 2020.  Changes to financial assumptions decreased scheme liabilities by £11.1 million.  Experience gains reduced the deficit by £3.0 million and changes in demographics by £1.6 million.  

 

There was an increase in discount rates used to discount scheme liabilities in line with increases in corporate bond rates. The rate used to discount UK liabilities increased by 50 basis points to 1.9 per cent and the rate used to discount Irish liabilities increased by 45 basis points to 1.15 per cent.   

 

There was an actuarial gain of £0.9 million on plan assets due to the investment performance in the period exceeding the assumed interest income on assets. 

 

A payment of £20.0 million was made in July 2021 as part of a funding arrangement with Trustees to reduce the deficit on the UK defined benefit scheme.

 

Grafton will retain responsibility for the UK defined benefit pension scheme which was closed to future accrual  at the end of 2020 when alternative arrangements were put in place.

 

Net Cash/Debt

 

The Group's net cash position, before recognising lease liabilities, increased to £302.5 million at 30 June 2021, up from £181.9 million at 31 December 2020.  This includes cash of £103.8 million that are in discontinued operations.

 

On 1 July 2021 the Group completed the IKH acquisition at a cost of €199.3 million.

 

The Group remains in a very strong financial position with pre-IFRS 16 EBITDA interest cover of 53.1 times (Year ended 31 December 2020: 30.7 times).

 

Net debt including lease obligations declined by £145.1 million to £209.9 million at 30 June 2021 from £355.0 million at 31 December 2020.  This includes £67.1 million of lease obligations that are in the discontinued operations.

 

The Group's policy is to maintain its investment grade credit rating while investing in organic developments and acquisition opportunities that are expected to generate attractive returns and maintain a progressive dividend policy.

 

Liquidity

 

Grafton started the year in a very strong financial position with excellent liquidity, net cash before IFRS 16 lease liabilities and a robust balance sheet.  

 

The Group had liquidity of £913.5 million at 30 June 2021  (30 June 2020: £693.4 million) of which £560.2 million (30 June 2020: £419.0 million) was held in accessible cash and £353.3 million (30 June 2020: £274.4 million) in undrawn revolving bank facilities.

 

At 30 June 2021, the Group had bilateral loan facilities of £478.8 million with six relationship banks and debt obligations of £137.3 million (31 December 2020: £143.8 million) from the issue of unsecured senior notes in the US Private Placement market.

 

The average maturity of the committed bank facilities and unsecured senior notes at 30 June 2021 was 3.1 years.

 

The Group's key financing objective continues to be to ensure that it has the necessary liquidity and resources to support the short, medium and long-term funding requirements of the business.  These resources together with strong cash flow from operations provide good liquidity and the capacity to fund investment in working capital, routine capital expenditure and development activity including acquisitions.

 

The Group's gross debt is drawn in euros and provides a hedge against exchange rate risk on euro assets in the businesses in Ireland, the Netherlands and Finland following the acquisition of IKH on 1 July 2021.

 

IFRS 16 Leases 

 

Leases that are recorded on the balance sheet principally relate to properties, cars and distribution vehicles. 

 

IFRS 16 increased operating profit by £6.3 million and the finance (interest) expense by £7.2 million in the half year.  Profit before tax was reduced by £0.9 million and profit after tax by £0.8 million as a result of IFRS 16. 

 

The right-of-use asset in the balance sheet at 30 June 2021 in total operations was £480.5 million (31 December 2020: £505.9 million).  The right of use asset includes £60.8 million in respect of the Traditional Merchanting Business in Great Britain which was deemed to have been disposed.

 

IFRS 16 does not alter the overall cashflows or the economic effect of the leases to which the Group is a party.  Similarly, there is no effect on Grafton's banking covenants as a result of the adoption of IFRS 16 in 2019.

 

 

Shareholders' Equity

 

The Group's balance sheet strengthened further with shareholders' equity up by £170.1 million to £1.64 billion.  Profit after tax increased shareholders' equity by £231.4 million and there was a loss of £14.4 million on translation of euro denominated net assets to sterling.  Shareholders' equity was increased by £13.5 million for a remeasurement loss on pension schemes and reduced for dividends paid of £64.6 million. Other changes increased equity by £4.2 million.  

 

Return on Capital Employed

 

Return on Capital Employed in continuing operations before recognising IFRS 16 leased assets improved by 1,580 basis points to 29.3 per cent (30 June 2020: 13.5 per cent) and by 1,080 basis points to 20.5 per cent (30 June 2020: 9.7 per cent) including leased assets.

 

Principal Risks and Uncertainties                     

 

The primary risks and uncertainties affecting the Group are set out on pages 59 to 65 of the 2020 Annual Report and will be updated in the 2021 Annual Report.  These risks refer to Macro Economic Conditions in the UK, Ireland, the Netherlands and Finland including the Impact of Brexit; Colleagues; Pandemic Risk - Covid-19 Virus; Competition in Distribution, Retailing and Manufacturing Markets; Sustainability and Climate Change; Information Technology Systems and Infrastructure; Cyber Security and Data Protection; Health and Safety; Acquisition and Integration of New Businesses; Supplier Management and Rebates; and Internal Controls and Fraud. 

 

As noted above, the Group experienced  supply chain disruption and significant building materials price inflation in the first half which is expected to continue in the second half with the risk that the Group is unable to fulfill customer demand because of volume shortages or because customer demand reduces due to increased prices.

 

The Covid-19 pandemic has increased the potential impact of certain of these risks and the longer term impacts will depend on a range of factors including the duration and scope of the pandemic, the impact of the pandemic on economic activity in the UK, Ireland, the Netherlands and Finland and the nature and severity of measures adopted by governments in these countries, including restrictions on or temporarily requiring the closure of the Group's businesses including, distribution branches, DIY, Home and Garden stores and manufacturing plants, travel, regulations that require avoiding large gatherings and orders to self-quarantine or self-isolate. The Covid-19 pandemic may have significant negative impacts in the medium and long term on the Group's businesses. Changes in consumer behaviour as a result of government imposed lock downs and the need for people to self-quarantine or self-isolate or observe social distancing for an indeterminate period of time may lead to the closure of distribution branches, DIY, Home and Garden stores and manufacturing plants. The severity of government-imposed lock downs and the period for which they continue in the UK, Ireland, the Netherlands and Finland will have an impact on customer demand in those countries. A deterioration in the financial position of customers and consumers as a result of Covid-19 pandemic may also impact demand for the Group's distribution, DIY and mortar products. In addition, disruptions as a result of Covid-19 in manufacturing, supply and distribution arrangements may also adversely impact the performance of the overall Group.

 

Period End Financial Information
 

The consolidated period-end financial statements presented on pages 20 to 42 comprise:

 

·      the Group condensed balance sheet as at 30 June 2021;

·      the Group condensed income statement and Group condensed statement of comprehensive income for the six months to 30 June 2021;

·      the Group condensed statement of cash flows for the six months to 30 June 2021;

·      the Group condensed statement of changes in equity; and

·      the explanatory notes to the condensed consolidated half year financial statements on pages 26 to 42.