Half Year Report

For the Six Months Ended 30 June 2024

 

 

 

 

 

Grafton Group plc

Half Year Report for the Six Months Ended 30 June 2024

Robust performance reflects diversified business benefits in mixed market conditions

 

Grafton Group plc ("Grafton" or "the Group"), the international building materials distributor and DIY retailer is pleased to announce its half year results for the period ended 30 June 2024.

 

Financial Highlights

§ First half adjusted operating profit of £83.1million (H1 2023: £105.1million) reflective of weaker market conditions outside the Group's home market in Ireland.

§ Strong cashflow generated from operations of £161.1 million (H1 2023: £191.3 million).

§ £104.8 million (H1 2023: £132.7 million) returned to shareholders in dividend payments and share buybacks in the first half.

§ On the strength of anticipated free cashflow generation in the current financial year and confidence in the Group's prospects a new share buyback programme for up to £30m will commence today, complementing dividend growth of 5.0%.

§ Strong balance sheet preserved for organic and inorganic development opportunities.

§ Adjusted return on capital employed of 11.1%.

§ Continue to anticipate delivering full year adjusted operating profit in line with analysts' expectations[1] recognising important Autumn trading season to come.

 

Operational Highlights

§ Overall Group gross margin broadly unchanged and overheads continued to be tightly controlled.

§ Good performance in our Irish businesses, Chadwicks and Woodie's, where outlook for growth remains positive.

§ Product price deflation had a negative impact overall on sales in the Irish and UK Distribution businesses, however, its adverse effect is moderating.

§ Volumes lower across the UK, Netherlands and Finland but continued focus on being the providers of choice for our customers and driving operational efficiencies to position for market improvement.

§ Resilient performance by our UK Manufacturing businesses despite backdrop of challenging UK housing market volume declines.

 

Total Operations[2]	H1 2024	H1 2023	Change
Revenue	£1,137m	£1,189m	(4.4%)
Adjusted[3] operating profit	£83.1m	£105.1m	(20.9%)
Adjusted operating profit before property profit	£83.1m	£103.9m	(20.0%)
Adjusted operating profit margin before property profit	7.3%	8.7%	(140bps)
Adjusted profit before tax	£84.1m	£104.3m	(19.3%)
Adjusted earnings per share	33.4p	38.1p	(12.4%)
Interim dividend	10.5p	10.0p	+5.0%
Adjusted return on capital employed (ROCE)	11.1%	14.3%	(320bps)
Net (debt)/cash (including IFRS 16 leases)	(£46.8m)	£3.7m	(£50.5m)
Net cash (before IFRS 16 leases)	£361.1m	£438.4m	(£77.3m)

 

Statutory Results	H1 2024	H1 2023	Change
Operating profit	£71.3m	£94.3m	(24.4%)
Profit before tax	£71.7m	£93.6m	(23.4%)
Basic earnings per share	28.4p	34.2p	(16.9%)

 

Eric Born, Chief Executive Officer Commented:  

 

"This has been a robust first half performance despite challenging conditions in several of our markets. We are pleased with the performance and outlook of our Irish businesses in particular, and we continue to drive efficiencies and innovations in our other markets to capitalise on what we see as significant positive operating leverage opportunities as these markets turn.

 

"Whilst uncertainties remain in the short term, our medium-term outlook remains positive, supported by strong demand fundamentals, not least in the demand for new housing as markets normalise and consumer confidence improves.  At this point in the year, with the important Autumn trading season yet to come, we continue to anticipate delivering adjusted operating profit for 2024 in line with analysts' expectations.

 

"The Group has continued to be highly cash generative through a challenging period in the cycle, which has enabled us to return cash to shareholders whilst preserving a strong balance sheet to invest in organic and inorganic development opportunities. We continue to actively pursue opportunities to strengthen our existing market positions as well as platform acquisitions, and we remain optimistic that we can execute on some of these opportunities in the near term."

 

Webcast and Conference Call Details

A highlights video and a copy of the results presentation document will be available at 7:00am on 29 August 2024 via the home page of the Company's website www.graftonplc.com.   

         

A presentation for analysts and investors will be hosted by Eric Born and David Arnold at 9:00am on 29 August 2024.  A live webcast of the presentation including Q&A will be available to view via the Company's website at www.graftonplc.com or by clicking here.

 

Analysts will be invited to raise questions during the presentation.  Should investors wish to submit a question in advance, they can do so before 8.15am on 29 August by sending an email to [email protected].  A recording of the webcast will be made available on the Company's website.

 

Investors		Media
Grafton Group plc	+353 1 216 0600	Murray	[email protected]
Eric Born	Chief Executive Officer	Pat Walsh	+353 1 498 0300/+353 87 226 9345
David Arnold	Chief Financial Officer
		Burson Buchanan Helen Tarbet Toto Berger	[email protected]   +44 (0) 7872 604 453 +44 (0) 7880 680 403

 

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 because of new information, future developments or otherwise.

Half Year Report for the Six Months Ended 30 June 2024

 

Business Review

 

The half year performance demonstrated the diversification of our businesses, the resilience of our brands and the benefit of a range of internal initiatives taken to manage profitability and returns in what has been a difficult trading environment, particularly outside of Ireland.

 

We were pleased with the performance of our Irish Distribution and retailing businesses, both of which achieved average daily like-for-like revenue increases in the period.  In Ireland Distribution, Chadwicks delivered an improvement in its trading profitability for the period compared to the first half of last year alongside a stronger operating margin.  With the support of Irish Government policy, new housing commencements were strongly ahead in the first half reaching a post Global Financial Crisis high.  While revenue was slightly weaker in the second quarter in our Woodie's business, excellent margin and cost control management have resulted in an improved operating profit and margin compared against the same period last year.

 

Our distribution businesses elsewhere faced a continued challenging economic environment in the half year.  In the UK, our markets remained weak, and Repair, Maintenance and Improvement ("RMI") volumes were under pressure due to lower discretionary spending by households. Trading was also adversely affected by wet weather in the important Spring trading months. There are however tentative signs emerging of improving consumer confidence.

 

After over six years in the role as CEO of Selco, Howard Luft will leave the business at the end of this month.  Frank Elkins has been appointed as the new CEO of Selco and GB Distribution and will have a broader responsibility for driving the Group's growth agenda for our distribution activities within Great Britain.  Frank has extensive experience in the UK building materials distribution sector, most recently being the Group Chief Operating Officer for Travis Perkins plc.

 

In the Netherlands, lower revenue from timber factories and from smaller customers were largely offset by revenue growth generated by larger construction projects. The slowdown in the Finnish economy and construction sector continued to impact volumes in IKH, which performed well against the overall Finnish market.

 

Materials price deflation pressures seen in Ireland and the UK in steel and timber have negatively impacted revenue but have continued to moderate and also improved the affordability outlook for building and RMI projects.  We were pleased that the overall Group gross margin was broadly maintained in such a competitive market and that notwithstanding the inflationary pressures on wages and property costs, overheads in the like-for-like business were only marginally up on the same period last year following the implementation of cost management measures across our Group. Our management teams have continued to actively manage the cost base, including headcount reductions primarily in UK Distribution and will continue to do so over the remainder of the second half, while still focusing on supporting our customer base.

 

In our manufacturing segment, CPI Mortars delivered a resilient performance with active cost management to partially offset UK housing market volume declines. StairBox, while negatively impacted by the weak RMI market in the UK, delivered improved profitability due to good margin management and the positive impact of its Wooden Windows acquisition.

 

Our proven operating model of a lean centre supports the strategic development of the businesses and continues to develop our pipeline of investment and acquisition opportunities. The central management team drives the sharing of best practices and leveraging of economies of scale as appropriate across the businesses, whilst keeping firm control of costs.

Our balance sheet remains strong, supported by our robust cash generation from operations for the half year, which benefitted from a reduction in net trading working capital in the first six months of the year. 

 

The medium-term underlying fundamentals of the markets that we operate in remain positive and our businesses are well positioned to benefit from structural growth drivers and operating leverage as these markets recover.   With an ageing housing stock, together with governmental support to stimulate activity, there is a positive outlook for housing RMI activity over the medium and longer term.  House building volumes are underpinned by demographic trends and a prolonged period of under supply.

 

In line with our strategy, we continue to actively pursue opportunities for bolt-on investments to our existing businesses to further strengthen our market positions in existing geographies and for platform acquisitions. We remain optimistic that we can execute on some of these opportunities in the near term.

 

Returns to Shareholders

 

Dividends

 

The Board has declared an interim dividend of 10.50 pence per share, an increase of 5.0 per cent on last year's interim dividend of 10.00 pence.

 

Notwithstanding the reduction in our first half profitability, the Board has decided to maintain a similar level of cash payment for the 2024 interim dividend as it paid out for the 2023 interim dividend, allowing shareholders to benefit from the lower number of shares in issue following the buyback of shares executed during the second half of 2023 and the first half of 2024.  The cash outflow on this year's interim dividend is expected to be circa £21.0 million although the actual amount of the cash outflow on the 2024 interim dividend is dependent on the number of shares in issue on the dividend record date.

 

Whilst the Board's medium-term dividend cover policy is between two-times and three-times adjusted earnings, it is likely that in the current financial year the full year dividend cover ratio will drop modestly below the lower level of the target. Given the Group's strong balance sheet and cash flow and recognising the Board's confidence in the medium and long-term growth prospects for the Group, it was appropriate to target a lower dividend cover ratio in the current year.

 

The interim dividend for 2024 will be paid on 11 October 2024 by Grafton Group plc to shareholders on the Register of Members at the close of business on 13 September 2024 (the 'Record Date'). The ex-dividend date is 12 September 2024.

 

In the half year, we had a cash outflow of £52.2 million on payment of the final dividend for 2023. Only dividends paid in the half year have been charged to equity and no liability for the interim dividend has been recognised at 30 June 2024 as there was no payment obligation at that date.

 

Share Buybacks

 

The fourth share buyback programme, launched on 31 August 2023, was extended to 31 May 2024 and the maximum aggregate consideration increased from £50 million to £100 million.  This programme completed on 30 April 2024 and involved the repurchase of 11.1 million ordinary shares at an average price of £9.02 per share.

 

Cash of £343.3 million has been returned to shareholders through share buybacks completed between 9 May 2022 and 30 April 2024 reflecting the repurchase of 40.27 million ordinary shares at an average price of £8.53 per share. The number of shares bought back amounted to 16.8 per cent of the shares in issue when the first buyback programme commenced on 9 May 2022.

 

The Board remains optimistic that it can deploy capital into bolt-on acquisitions and new platforms to benefit shareholders and has preserved its balance sheet strength to execute such opportunities.  Having considered the quantum of capital requirements for those investments which are more likely to be executed in the near term and taking into account the significant strength of the Group's balance sheet and underlying cash generation in the current year, the Board today announces that it intends to introduce a fifth programme to buy back ordinary shares in the Company for an aggregate consideration of up to £30.0 million. 

 

This new buyback programme and the increase in the interim dividend, reflects the Board's confidence in the Group's prospects.  The free cash flow generation for the current financial year is anticipated to fully fund the combined cash requirements of dividends expected to be paid in 2024 together with the totality of the cash requirements of the share buybacks executed in the year to date and the fifth buyback programme announced today. The fifth share buyback programme will commence today and end no later than 31 January 2025, subject to market conditions.

 

Progress on Sustainability

 

We have committed to reach net-zero greenhouse gas emissions across the value chain by 2050 at the latest and we were pleased to have received validation by the Science-Based Targets Initiative for this and the associated near (by end 2030) and long-term targets (by end 2050), the detail of which can be found here.  In setting these targets, the Group has modelled the transition required to achieve the 2030 targets through renewable energy and alternative fuels to reduce Scope 1 and 2 emissions and extensive engagement through the supply chain to reduce Scope 3 emissions.  Scope 3 emissions account for 98% of the Group's greenhouse gas emissions and positive and proactive engagement with our supply chain is central to achieving these targets.  We continue to strengthen our supply chain due diligence process and are pleased to announce a new partnership with EcoVadis, who will support us in the risk assessment of suppliers, the rating of their sustainability programmes and to drive improvements over time. We are about to commence a six-month transition to this new EcoVadis programme.  

 

The business has also been focusing on upcoming legislation, preparing for the EU Corporate Sustainability Reporting Directive (CSRD), the EU Deforestation Regulation, EU Taxonomy, the Carbon Borders Adjustment Mechanism as well as the EU Due Diligence Legislation.

 

Our teams around the Group have continued to focus on attracting and retaining great colleagues. These efforts have been recognised with both Woodie's and Chadwicks being recognised as Great Places to Work. Woodie's remains the highest-placed European retailer in the Great Place to Work Index. Woodie's was also listed as a Best Workplace for Women, being only one of two organisations to achieve this accolade five years running and reflecting its continued commitment to gender diversity.

 

 

While trading conditions are expected to remain challenging during 2024, particularly outside of Ireland, inflation has moderated and interest rate reductions are materialising that are expected to help ease pressure on mortgage holders and improve affordability.

 

Our management teams, supported by strategies from the centre, will continue to actively manage both our gross margins and cost base in response to market conditions. With our strong market positions and market leading brands, the Group is well positioned to deliver an excellent value proposition for our customers and capitalise on its operating leverage as the macro-economic outlook improves.

 

Economic growth in Ireland is expected to be more moderate compared to recent years however we expect resilient demand in the residential RMI and DIY markets. The outlook for growth in the construction market in Ireland remains positive with housing completions expected to continue to increase on the back of strong underlying demand and Government investment.

 

In the UK, we remain cautious on the near-term outlook however there are positive signs emerging of improving consumer confidence due to reductions in inflation and interest rates as well as an expected increase in real disposable income. In addition, the new UK Government's determination to swiftly implement policies to encourage housebuilding should drive activity and increase construction demand which should improve the outlook for a recovery in volumes across our business.

 

In the Netherlands, declining inflation and strong growth in real incomes is expected to support household spending. There are some early indications that the downturn in the housing market has bottomed out and that transactions for existing and new homes should start to increase as underlying demand remains strong.

 

In Finland, the economy is in a mild recession and the recovery is expected to be slow. Return to economic growth is expected in 2025 with modest growth anticipated in 2026. Residential and non-residential construction is expected to decline further in the near term.

 

Given the continuing impact of statutory employment cost increases and collective labour agreements on our operating costs, the Group will remain focused on efficiency whilst also supporting the growth prospects of our brands.

 

Demand fundamentals across the Group's markets are underpinned by an under supply of new homes to meet demand over a prolonged period and an aging housing stock requiring investment, including on energy conservation measures.

 

Group average daily like-for-like revenue in the period from 1 July 2024 to 18 August 2024 was 2.2 per cent behind the same period last year. The below table illustrates that the rate of decline has thus far eased in Q3 when compared to the first half of the year.  

	Average daily like-for-like revenue growth
	H1 2024	1 July 2024 - 18 August 2024
Distribution
Ireland	+0.5%	+0.2%
UK	(7.7%)	(6.0%)
Netherlands	(2.7%)	(1.3%)
Finland	(7.7%)	+0.4%
Retailing	+1.4%	+10.0%
Manufacturing	(21.8%)	(15.0%)
Total Group	(4.5%)	(2.2%)

 

Whilst uncertainties remain in the short term, we are confident that Grafton is exceptionally well positioned to benefit as conditions improve. We continue to anticipate delivering full year adjusted operating profit in line with analysts' expectations recognising the important Autumn trading season to come.

 

Grafton has a portfolio of cash generative businesses and a strong balance sheet which provides an excellent platform for the future growth and development of our Group. The Group continues to re-invest in its asset base to expand the branch network and our offering to customers to capitalise on future growth as markets improve.  

We will continue to allocate organic development capital and pursue acquisitions to ensure that the Group's brands continue to support our customers and strengthen our market positions. In parallel, we will continue to evaluate and progress opportunities for platform acquisitions.

 

 

The distribution businesses in Ireland, the UK, the Netherlands and Finland contributed 83.7 per cent of Group revenue (H1 2023: 83.5 per cent), Retailing 11.5 per cent (H1 2023: 11.0 per cent) and Manufacturing 4.8 per cent (H1 2023: 5.5 per cent).

 

Businesses in Ireland contributed 39.7 per cent (H1 2023: 38.2 per cent) of Group revenue, UK 39.2 per cent (H1 2023: 40.4 per cent), the Netherlands 15.4 per cent (H1 2023: 15.5 per cent) and Finland 5.7 per cent (H1 2023: 5.9 per cent).

 

Distribution Segment (83.7% of Group Revenue, 2023: 83.5%)

 

	H1 2024	H1 2023
	£'m	£'m	Change*
Revenue	951.8	992.5	(4.1%)
Adjusted operating profit before property profit	62.2	80.3	(22.5%)
Adjusted operating profit margin before property profit	6.5%	8.1%	(160bps)
Adjusted operating profit	62.2	81.4	(23.6%)
Adjusted operating profit margin	6.5%	8.2%	(170bps)

*Change represents the movement between 2024 v 2023 and is based on unrounded numbers

 

Ireland Distribution (27.9% of Group Revenue, 2023: 26.8%)

 

	H1 2024	H1 2023		Constant Currency
	£'m	£'m	Change*	Change*
Revenue	317.2	318.1	(0.3%)	2.2%
Adjusted operating profit before property profit	29.7	28.9	2.5%	4.9%
Adjusted operating profit margin before property profit	9.4%	9.1%	30bps	-
Adjusted operating profit	29.7	29.7	(0.0%)	2.2%
Adjusted operating profit margin	9.4%	9.3%	10bps	-

*Change represents the movement between 2024 v 2023 and is based on unrounded numbers

 

Our Ireland Distribution business, Chadwicks, delivered a positive trading performance in the first half of the year with overall average daily like-for-like revenue up 0.5 per cent and volumes up by circa 5.4 per cent.  Following a decline in average daily like-for-like revenue of 0.2 per cent in the first quarter of 2024, which was largely driven by poor weather conditions, the business saw a resumption of growth to 1.1 per cent in the second quarter.

 

The business encountered overall materials price deflation of circa 4.9 per cent in the first six months of the year, as the deflationary pressures in timber and steel moderated.  With this moderation, together with active price management, the business saw an improved gross margin for the period.  Whilst pressure on labour and property costs persisted, management took active steps to tightly control the operating cost base.  Overall, the business delivered an increase in underlying trading operating profit to £29.7m (H1 2023: £28.9m) and increased its operating margin by 30 basis points to 9.4 per cent.

 

The overall outlook for growth remains positive for construction in Ireland, supported by Government backed investment of over €5.0 billion and build targets for new homes over the next five years increasing to 250,000, on the back of just over 32,000 home completions in 2023.  Chadwicks is well positioned to leverage its distinctive brand and market leadership position to capitalise on growth opportunities as they arise.

 

We continued to make progress on a number of initiatives in the first half of the year:

·      We opened our bulk distribution centre in East Wall Road. This will service our large customer accounts on certain bulk volume lines and act as a distribution centre for our branches in the greater Dublin area, improving efficiency and reducing emissions.

·      In 2024, we continued to streamline our customers' journey in-store, taking significant steps to improve the efficiency of printed documentation and reduce administrative waste.

·      Our hire business, Sam Hire, continues on a strong growth trajectory, and we have begun the rollout of low carbon Hydrotreated Vegetable Oil (HVO) vehicles to our hire fleet, with a trial phase in Galway. 

 

In the second half of 2024, we plan to:

·      Implement a Warehouse Management System for our central distribution warehouse to optimise the operations of fulfilment, shipping and receiving tasks in the distribution centre and improve efficiencies across our branch network by automating some business tasks.

·      Migrate recent acquisitions, Sitetech and Rooney's, onto our core IT ecosystem.

·      Continue our refurbishment programme with the completion of extensive upgrades of our Wexford and Midleton branches extending their product range to over 2,000 lines whilst improving branch efficiency.

 

UK Distribution (34.7% of Group Revenue, 2023: 35.3%)

 

	H1 2024	H1 2023
	£'m	£'m	Change*
Revenue	394.4	419.3	(5.9%)
Adjusted operating profit before property profit	12.6	23.9	(47.1%)
Adjusted operating profit margin before property profit	3.2%	5.7%	(250bps)
Adjusted operating profit	12.6	24.3	(48.0%)
Adjusted operating profit margin	3.2%	5.8%	(260bps)

*Change represents the movement between 2024 v 2023 and is based on unrounded numbers

 

Average daily like-for-like revenue in the UK Distribution business was down by 7.7 per cent in the first half as a result of the weak trends experienced in the RMI market together with the effects of price deflation.  The rate of decline was 7.3 per cent in the first quarter and increased slightly to 8.2 per cent in the second quarter.  Total revenue was 5.9 per cent lower with prior year acquisitions in Northern Ireland and new branches opened in Selco and Leyland SDM in 2023 contributing revenue of £4.0 million in the period.

 

The first half of the year followed the trend of the second half of 2023 with both price deflation and pressure on volumes.  Lower levels of demand across the construction sector, particularly in new housebuilding, led in turn to the RMI sector becoming more price competitive.  Lower underlying demand in RMI combined with poor, wet weather during the opening months of the year resulted in volumes in the first half being 3.9 per cent lower, with price deflation of 3.0 per cent which are both offset by contributions from new branches of 1.0 per cent.   Our Selco business has seen slightly higher like-for-like price deflation in the first half of 4.0 per cent as a result of its greater exposure to timber prices. 

 

The UK Distribution gross margin was down by 60 basis points which reflected the weak volume backdrop and competitive market conditions to which we responded across our businesses, ensuring that we continued to maintain a strong value proposition for our customers.

 

Despite significant cost pressures, like-for-like operating expenses increases have been contained to 1.5 per cent through rigorous cost management.

 

Adjusted operating profit before property profit declined to £12.6 million (H1 2023: £23.9 million) and the adjusted operating profit margin before property profit was 250 basis points lower at 3.2 per cent reflecting the decline in like-for-like revenue and investment in pricing.

 

Selco, which trades from 75 branches, including 32 in London, is the UK's leading fixed price trade only builders' merchant. Selco focuses almost exclusively on the RMI segment of the construction market and in the period saw lower levels of demand in landscaping and for home extension projects with customers proportionately taking on smaller jobs in the weaker market.

 

Responding to the competitive conditions, Selco invested in pricing on key products which, together with ongoing promotional activity, contributed to a decline in the gross margin. Costs continue to be very tightly controlled in response to the weaker trading environment.

 

Throughout the period, Selco continued to implement several initiatives, some of which included:

·      A successful major upgrade to the latest version of a new operations ERP system across its network of 75 branches and corporate office.

·      Completed the implementation of a new demand planning solution and are already starting to see benefits in availability and better inventory management.

·      Store implant trials: Continuing trials of HSS Hire satellite tool and equipment hire service implants offering trade customers a hire service to complement Selco's unique format and which was extended to a further six branches in the first half of 2024.  A pilot trial of Magnet kitchen showrooms was also extended to two more branches.

·      The "Selco Forest" initiative has continued into 2024 with the latest forest to be developed covering 21 hectares and featuring more than 54,000 trees.

·      As part of its programme of continuous improvement and maintaining a high-quality experience for its customers, Selco completed mini upgrades to three stores in the first half. 

 

The current Selco estate consists of 75 stores and subject to finding suitable properties in priority locations, an estate of approximately 90 stores is a realistic medium-term target. With the medium to longer-term fundamentals of the RMI market remaining positive, and with its high operating leverage, Selco is strongly positioned with its unique customer proposition and branch network to deliver value for stakeholders when the market starts to recover. 

 

Leyland SDM, one of the most recognisable decorating and DIY brands in Central London, experienced challenging trading conditions in the RMI market in the first half of the year which saw lower levels of footfall in London, particularly in trade decorator customers. As a result of lower sales, operating profit was lower than prior year, in spite of stronger gross margins due to new commercial initiatives.

 

On 8 July 2024, Leyland opened its 34^th store in South Kensington, marking its ninth store opening in three years, further strengthening its position as the leading distributor of paint and painting accessories in Central London.

 

In our MacBlair business in Northern Ireland the difficult RMI segment of the market was partially offset by some modest improvements seen in the housing market in the first half of the year.

 

Whilst caution still prevails amongst consumers in Northern Ireland, there are tentative signs of sentiment improving on the outlook for the local economy and household finances.

 

Good work on improving commercial terms with some key suppliers generated an improvement in gross margin in the first half compared to the same period last year.  These actions, together with tight cost management, delivered an improved operating profit in comparison with the first half of 2023.

 

The acquisition of Clady Timber and B. McNamee in Portglenone and Strabane which were completed in 2023 have strengthened MacBlair's position in Northern Ireland and increased its branch network to 23 branches.

 

Our TG Lynes business in London specialises in the distribution of commercial pipes and fittings and, consistent with our other UK businesses, encountered difficult trading conditions in the first half.  The weaker London residential market has seen demand from sub-contractors to national housebuilders soften and there has been reduced Government spending on public sector funded upgrades to schools, hospitals and universities which are important end customers for TG Lynes.  These conditions led to the business reporting an overall decline in operating profit in the period.

 

Netherlands Distribution (15.4% of Group Revenue, 2023: 15.5%)

 

	H1 2024	H1 2023		Constant Currency Change*
	£'m	£'m	Change*
Revenue	175.2	184.6	(5.1%)	(2.7%)
Adjusted operating profit	15.2	20.4	(25.7%)	(24.0%)
Adjusted operating profit margin	8.7%	11.1%	(240bps)	-

*Change represents the movement between 2024 v 2023 and is based on unrounded numbers

 

Our Isero ironmongery, tools and fixings distribution business in the Netherlands performed in line with expectations in a challenging market. 

 

Construction and housing markets in the first half of the year have been weak with declining volumes in both commercial construction, housing production and the number of homes available to buy.  There have been some more positive signs that the housing market may be recovering as the selling prices of existing homes have seen a steep increase, in particular in the second quarter of 2024, together with an increase in overall transactions.  The longer-term outlook for construction in the Netherlands remains positive due to the structural shortage of housing.

 

Overall, average daily like-for-like revenue was down 2.7 per cent in the half year with a slightly weaker second quarter decline of 2.9 per cent compared to the first quarter which was down 2.5 per cent.  Isero saw a modest decline in sales to smaller customers and to timber factories which was partially offset by revenue growth from key account customers engaged on larger construction projects and an increase in ventilation sales.  As a result of the weaker RMI market, branch revenue decreased in almost all regions across the country.

 

Pressure on gross margins continued, partially due to price declines in several product categories and with the change in sales mix where larger construction project sales contribute lower margins.

 

This reduction in gross margin and the continued pressure on the operating cost base, particularly as a result of high collective labour agreement driven wage inflation, resulted in a lower operating profit and operating margin.  These salary increases are negotiated at an industry level between employers' representatives against a backdrop of a very tight labour market, where unemployment levels are very low and with more vacancies than unemployed people to fill them.

 

Initiatives in the period in our Netherlands Distribution businesses included:

·      In February 2024, we opened two new branches, in Zwaag in the Northwest and Drachten in the North East, aligned with Isero's growth-oriented strategy and focus on providing even better services to local customers.  Both branches have been performing well since opening and Isero plans to open further branches in the second half of this year.

·      Isero continues to undertake a branch refurbishment programme which aims to ensure that the overall branch network continues to be presented to a high standard for customers.  During the half year it completed refurbishments to four branches with further branch improvements planned for the second half.  

·      Following on from the successful installation of roof mounted solar panels in Amsterdam Noord, Isero's sustainability journey has continued with a further eight electric vehicles added to the fleet in the first half of the year and further plans in the pipeline to reduce emissions.

 

 

 

Finland Distribution (5.7% of Group Revenue, 2023: 5.9%)

 

	H1 2024	H1 2023		Constant Currency Change*
	£'m	£'m	Change*
Revenue	65.1	70.4	(7.6%)	(5.3%)
Adjusted operating profit	4.7	7.1	(32.9%)	(31.3%)
Adjusted operating profit margin	7.3%	10.0%	(270bps)	-

*Change represents the movement between 2024 v 2023 and is based on unrounded numbers.

 

IKH is one of the largest technical wholesalers and distributors of workwear and PPE, tools, spare parts and accessories in Finland and has a number two market position in its core tools and PPE segment.  IKH products are distributed through a network of independently operated IKH partner stores, third party distributors and 15 owned-stores, supporting customers operating in the construction, renovation, industrial, agricultural and spares end markets.

 

Average daily like-for-like revenue was 7.7 per cent lower as a result of the continued weakness in the domestic economy, export markets and the construction sector in particular, but it performed well against the overall Finnish market. 

 

Gross margins declined against the competitive market landscape but active measures taken by the business to reduce costs partially offset the impact of lower sales and reduced margins on operating profit.

 

The Finnish economy remains in a mild recession but there are signs that there will be a gradual return to growth during 2025 as consumer and business confidence in the economy improves and IKH is well placed to capitalise on an improving market.

 

Initiatives in the period in our Finland Distribution business included:

·      Mika Salokangas, who was appointed Executive Chairman of IKH in 2023, has now also assumed operational responsibility for IKH.  Mika was previously CEO of Ahlsell's Finnish operations and is a highly experienced operator in the technical distribution field.

·      In January 2024, IKH opened its 15th store in Roihupelto, a suburb of Helsinki.  As a result, IKH now has four stores in the Finnish capital region as it continues to grow its market share in the city. 

·      A business improvement project focused on inventory reduced the investment in stock by €5.8m in the first half of the year.

 

Retail Segment (11.5% of Group Revenue, 2023: 11.0%)

 

	H1 2024	H1 2023		Constant Currency Change*
	£'m	£'m	Change*
Revenue	130.7	131.2	(0.4%)	2.0%
Operating profit	17.2	16.0	7.9%	10.1%
Operating profit margin	13.2%	12.2%	100bps	-

*Change represents the movement between 2024 v 2023 and is based on unrounded numbers

 

The Woodie's DIY, Home and Garden business in Ireland, which operates from 35 stores, had a positive start to the year on the back of the improvement in sentiment in Ireland as cost-of-living pressures eased and with the future economic outlook remaining positive. 

 

Average daily like-for-like sales were up 6.6 per cent in the first quarter.  Sales were marginally weaker in the second quarter with a decline of 1.8 per cent against a strong comparative last year.  Poor weather in the period affected sales of seasonal products such as garden furniture and related products.  Overall there was a first half like-for-like improvement in sales of 1.4 per cent.

 

Half year revenue growth of 2.0 per cent, in constant currency, was supported by an increase in the number of transactions by 2.4 per cent but was offset by a marginal decline of 0.4 per cent in average transaction values.  The strongest performing categories were decorative products, homewares and building products but despite a good start to the year in the important gardening category, the exceptionally wet weather in Ireland has continued to impact demand.

 

Woodie's delivered an improvement in gross margin as a result of good management of product mix and promotional activity which focused on continuing to prioritise value for money for our customers.  Despite the knock-on impact of the increase in the national minimum wage in Ireland, overheads were tightly controlled throughout the period, which has resulted in improved profitability in the business over the same period last year.

 

Woodie's made further progress on several initiatives in the first half of the year, some of which included:

·      Woodie's now has a dedicated sustainability team and following the successful trial of roof mounted solar panels at several branches, the team will continue to rollout solar panels to further stores across the network. 

·      The rollout of the Building Management System across the store network continued, with 17 stores now completed. This has contributed to a reduction in energy costs and more sustainable energy management.  The computer-based system is used to control and monitor energy consumption and to collect data that can provide insights into optimising the energy performance of stores and will be rolled out to the full estate and support office.

·      Following the successful launch of the 'Home Shop in Shop' concept in 2 stores in 2023, a further 4 stores were rolled out in the first half to enhance customers' experience within the home category.

·      The 10-year anniversary of the "Woodie's Heroes" campaign was launched in July 2024. This campaign continues to raise vital funds for four Irish charities with over €3.0 million raised so far with the overall goal to break the €4.0 million mark in contributions raised on a cumulative basis since inception.

 

Manufacturing Segment (4.8% of Group Revenue, 2023: 5.5%)

 

	H1 2024	H1 2023		Constant Currency Change*
	£'m	£'m	Change*
Revenue	54.6	65.6	(16.7%)	(16.5%)
Adjusted operating profit	11.0	15.3	(28.2%)	(28.1%)
Adjusted operating profit margin	20.1%	23.3%	(320bps)	-

*Change represents the movement between 2024 v 2023 and is based on unrounded numbers

 

The first half of the year has been a challenging period for our CPI Mortars business as the fall in demand in house building activity continues to impact volumes across its ten manufacturing plants, that supply dry mortar to national, regional and local house builders and their sub-contractors in Great Britain. 

 

The rate of decline experienced in the fourth quarter of last year, which saw volumes down by 25.0 per cent, has continued into 2024 with volumes still down 25.8 per cent against the same period in 2023. The number of silos on customers' sites have also continued to decline in line with volumes.

 

Packaged ready-to-use mortar products, which are largely supplied to the residential RMI market to be utilised for outdoor applications, performed particularly well in the period with volumes up over 9.0 per cent. This segment of the market, in volume terms, accounts for over 10.0 per cent of revenue.

 

Gross margin and the overall cost base have been actively managed in the period to partially offset the impact of volume decline.  The newly integrated ERP solution, which was fully rolled out across the business in 2023, has facilitated improved cost management in the period.  Labour and fleet capacity have been proactively managed with a specific focus on fleet utilisation whilst also applying stringent cost control around essential business spend only.

 
Despite the positive signs emerging of improved consumer confidence and with the UK Government's commitment to increasing housebuilding, we anticipate that demand will remain subdued in the second half of the year with any meaningful change in the market likely to occur in 2025.

 

In StairBox, our on-line market leading manufacturer of bespoke staircases, the challenging RMI market in the UK has adversely impacted volumes which were down 16.0 per cent compared to the same period last year as demand for bespoke staircases declined.  However, with the beneficial impact of the acquisition of TA Windows in December 2023, which trades as Wooden Windows, and ongoing good margin management, profitability in the businesses has improved compared to the prior year.

 

The integration of the Wooden Windows business in the first half of the year has been very successful and work is ongoing with integrating systems.  Towards the end of the year, it is anticipated that the manufacturing facilities of the windows business will be relocated to the StairBox site which will enable further efficiencies across the business.

 

Financial Review

 

Revenue

 

Group revenue was down 4.4 per cent to £1.14 billion from £1.19 billion in the first half of 2023.

 

Group revenue in the like-for-like business declined by 4.2 per cent (£49.7 million) on the prior year.  The decline in average daily like-for-like revenue was 4.5 per cent.

 

Incremental revenue from the Clady Timber and B. McNamee acquisitions in Northern Ireland, Rooney's in Ireland, Kouvolon acquisition in Finland and TA Windows acquisition in the UK, which were completed throughout 2023, increased revenue by £11.5 million.  New branches opened in H2 2023 and H1 2024 in The Netherlands (three), Finland Distribution (two), Ireland Distribution (two) and UK Distribution (two) contributed revenue of £3.5 million in H1 2024.

 

Currency translation of revenue in the euro denominated businesses to sterling decreased revenue by £17.4 million.  The average Sterling/Euro rate of exchange for the six months ended 30 June 2024 was Stg85.47p compared to Stg87.64p for the six months ended 30 June 2023.

 

Adjusted Operating Profit

 

Adjusted operating profit of £83.1 million was down from £105.1 million last year.  This result for the half year included property profit of £Nil (H1 2023: £1.1 million).

 

Adjusted operating profit before property profit of £83.1 million was down from £103.9 million last year, a decline of 20.0 per cent.  The adjusted operating profit margin before property profit declined by 140 basis points to 7.3 per cent. 

 

 

 

 

 

 

Net Finance Income and Expense

 

Net finance income was £0.3 million which compares to a net finance expense of £0.8 million at 30 June 2023.  This incorporates an interest charge of £7.6 million (H1 2023: £8.0 million) on lease liabilities recognised under IFRS 16. Interest income on cash deposits amounted to £12.0 million (H1 2023: £10.9 million).

 

Returns on deposits and account balances increased in the half year and reflected higher Bank of England and European Central Bank base rates in the six months period to 30 June 2024 compared to the prior year period in 2023.

 

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.  Interest payable on bank borrowings denominated in euros and US Private Placement Senior Unsecured Notes decreased to £4.1 million (H1 2023: £4.2 million).  The decrease in the period was due to slightly lower drawn bank debt and a lower interest rate payable following one rate decrease by the European Central Bank on 6 June 2024 bringing its refinancing rate to 4.25 per cent.

 

The net finance income included a foreign exchange translation gain of £0.9 million which compares to a gain of £0.8 million in the prior period.

 

Taxation        

 

The income tax expense of £14.3 million (2023: £18.8 million) is equivalent to an effective tax rate of 20.0 per cent of profit before tax (2023: 20.1 per cent).  This is slightly lower than anticipated at the start of the financial year and reflects the blend of the Group's corporation tax on profits in the four countries where the Group operates and is based on the current forecast rate for the full year.  

 

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.

 

Cashflow

 

Cash generated from operations for the half year of £161.1 million (H1 2023: £191.3 million) was strong and benefitted from a reduction in working capital by £22.2 million.

 

Interest paid amounted to £11.7 million (H1 2023: £11.0 million) which included interest of £7.6 million on IFRS 16 lease liabilities (H1 2023: £8.0 million).  Taxation paid was £12.4 million (H1 2023: £19.6 million).  Cashflow from operations after the payment of interest and taxation was £136.9 million (H1 2023: £160.7 million).

 

The cash outflow on the dividend payment was £52.2 million (H1 2023: £51.6 million) and £52.6 million (H1 2023: £81.2 million) was spent on the buyback of shares.  The total cash outflow on the dividend payment and buyback of shares was £104.8 million (H1 2023: £132.7 million), excluding transaction costs.

 

Capital Expenditure and Investment in Intangible Assets

 

We continued to maintain appropriate control over capital expenditure which amounted to £23.3 million (H1 2023: £23.9 million).  There was also expenditure of £2.8 million (H1 2023: £1.9 million) on software that is classified as intangible assets.

 

Asset replacement capital expenditure of £14.6 million (H1 2023: £14.4 million) compares to the depreciation charge (before IFRS 16) on property, plant and equipment ("PPE") of £20.9 million (H1 2023: £19.2 million) and related principally to the replacement of distribution vehicles, plant and tools for hire by customers, forklifts, fixtures and office equipment and other assets required to operate the Group's branch network.

 

The Group incurred development capital expenditure of £8.7 million (H1 2023: £9.5 million) on a range of organic development initiatives including new branches, investment in IT software, and upgrades and extensions in Woodie's, Isero and Chadwicks.

 

The proceeds received from the disposal of PPE was £0.7 million (H1 2023: £2.1 million).  The amount spent on capital expenditure and software development, net of the proceeds received on asset disposals, was £25.3 million (H1 2023: £23.7 million).

 

Pensions

 

The Group operates four legacy defined benefit schemes (one in the UK and three in Ireland), all of which are now closed to future accrual.  The defined benefit pension schemes had an accounting deficit of £3.8 million at the period end, down by £2.0 million from a deficit of £5.8 million on 31 December 2023. 

 

The deficit on the UK scheme reduced by £0.5 million to £14.1 million and the surplus on the schemes in Ireland increased by £1.5 million to £11.1 million.

 

There was a scheme deficit of £0.8 million (31 December 2023: £0.8 million) related to the Netherlands business. 

 

Net Debt/Cash

 

Net debt (including lease obligations) at 30 June 2024 was £46.8 million (31 Dec 2023:  £49.3 million and 30 June 2023: Net cash of £3.7 million).

 

Our net cash position, before recognising lease liabilities, was £361.1 million (31 Dec 2023: £379.7 million and 30 June 2023: £438.4 million). 

 

The Group's policy is to maintain its investment grade credit rating while investing in organic developments and acquisition opportunities. The Group has a progressive dividend policy with a long-term objective of maintaining dividend cover at between two and three-times earnings although it is anticipated that dividend cover for the full year will drop modestly beneath this.

 

Liquidity

 

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

  

The Group had liquidity of £822.7 million at 30 June 2024 (31 December 2023: £849.6 million).  As shown in the analysis of liquidity on page 45, accessible cash amounted to £549.4 million (31 December 2023: £579.9 million) and there were undrawn revolving bank facilities of £273.3 million (31 December 2023: £269.7 million).

 

At 30 June 2024, the Group had bilateral loan facilities of £332.0 million (31 December 2023: £336.9 million) with four relationship banks which all mature in August 2028 and debt obligations of £135.4 million (31 December 2023: £139.1 million) from the issue of unsecured senior notes in the US Private Placement market.

 

The revolving loan facilities of £332.0 million were put in place in August 2022 for a term of five years to August 2027.  The arrangements included two one-year extension options exercisable at the discretion of the Group and the four banks. The first one-year extension was agreed and exercised during 2023 and as at the end of June 2024, these facilities were repayable in August 2028.  Subsequent to the end of June, a further one-year extension has been agreed and these facilities are now repayable in August 2029.  This is sustainability linked debt funding and includes an incentive connected to the achievement of carbon emissions, workforce diversity and community support targets that are fully aligned to the Group's sustainability strategy.

 

The average maturity of the committed bank facilities and unsecured senior notes was 4.4 years at 30 June 2024 (30 June 2023: 4.7 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.

 

Shareholders' Equity

 

Shareholders' equity declined by £62.1 million to £1.59 billion at 30 June 2024 from £1.66 billion at 31 December 2023.  Profit after tax increased shareholders' equity by £57.3 million.  There was a loss of £18.7 million on retranslation of euro denominated net assets to sterling at the period end rate of exchange.  Shareholders' equity was increased for a remeasurement gain (net of tax) of £1.5 million on the pension schemes and was reduced for dividends paid of £52.2 million and by £52.6 million for the buyback of shares. Other changes increased equity by £2.6 million.  

 

Return on Capital Employed

 

Adjusted Return on Capital Employed declined by 320 basis points to 11.1 per cent (H1 2023: 14.3 per cent).

 

Principal Risks and Uncertainties

 

The principal risks affecting the Group are set out on pages 68 to 75 of the 2023 Annual Report and Accounts.

 

Period End Financial Information

 

The consolidated period-end financial statements presented on pages 18 to 39 comprise:

 

·      The Group condensed income statement and Group condensed statement of comprehensive income for the six months ended 30 June 2024.

·      The Group condensed balance sheet as at 30 June 2024.

·      The Group condensed cash flow statement for the six months ended 30 June 2024.

·      The Group condensed statement of changes in equity for the six months ended 30 June 2024.

·      The explanatory notes to the condensed consolidated half year financial statements on pages 24 to 39.