Grafton Group plc

Half Year Report for the Six Months Ended 30 June 2022

Good Trading Performance from Diversified Earnings Base

 

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 2022.

 

Continuing Operations1	H1 2022	H1 2021	Change
Revenue	£1,153m	£1,028m	+12.2%
Adjusted3 operating profit2	£151.1m	£158.0m	(4.4%)
Adjusted operating profit before property profit2	£132.6m	£142.6m	(7.0%)
Adjusted operating profit margin before property profit	11.5%	13.9%	(240bps)
Adjusted profit before tax2	£143.4m	£148.8m	(3.6%)
Adjusted earnings per share2	49.5p	50.5p	(1.9%)
Dividend per share	9.25p	8.50p	+8.8%
Adjusted return on capital employed (ROCE) 2	18.8%	20.6%	(180bps)
Net cash (before IFRS 16 leases)	£520.5m	£198.7m	£321.8m
Net cash/(debt) - (including IFRS 16 leases)	£73.5m	(£246.6m)	£320.1m
Statutory Results - Continuing Operations	H1 2022	H1 2021	Change
Operating profit	£140.1m	£152.1m	(7.9%)
Profit before tax	£132.4m	£142.9m	(7.3%)
Basic earnings per share	45.8p	48.5p	(5.5%)

¹ Supplementary financial information in relation to Alternative Performance Measures (APMs) is set out on pages 43 to 47.

² The adjustment of acquisition related items to the adjusted operating results was a change on previous years and thus the June 2021 comparatives have been restated to conform to current year presentation.

³ The term "Adjusted" means before exceptional items, amortisation of intangible assets arising on acquisitions and acquisition related items in both periods.

 

Operational Highlights        

·      Excellent performance in distribution businesses in Ireland and the Netherlands

·      Volumes and profitability lower in Selco relative to last year's exceptional performance

·      Normalisation of revenue and profitability in Woodie's DIY, Home and Garden retail business

·      Good profit contribution from IKH in Finland at 13.2% operating margin

·      Further progress made on sustainability agenda

 

Financial Highlights

·      Full year adjusted profit expected to be in line with current consensus analysts' forecasts

·      Small decline in first half adjusted operating profit (before property profit) as expected

·      Double digit operating profit margin in all segments (before property profit)

·      Strong adjusted return on capital employed of 18.8%

·    Cashflow of £137.9 million from operations supports strong balance sheet

·    Net cash at 30 June 2022 of £520.5 million (before IFRS 16 lease liabilities) providing significant optionality

·    Sustainability linked refinancing of revolving loan facilities for £334.5 million completed in August

·    Dividend growth of 8.8% in line with guidance for dividend cover

 

 

Gavin Slark, Chief Executive Officer Commented:  

 

"Our first half performance saw a significant normalisation of activity levels following exceptional pandemic related spikes in trading in the first half of 2021.  While inflation remains a continuing feature in our markets, we saw improved supply chain consistency as trading patterns normalised and building materials shortages eased. 

 

Though potential macro-economic headwinds remain, Grafton is uniquely placed to outperform given its leading market positions, geographic diversity and the relative resilience of its core repair, maintenance and improvement market. Given the strength of our brands and their market positions together with an exceptionally strong financial position, our focus remains on delivering a strong financial outcome for the year despite the uncertainties in our markets."

 

 

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.   

         

The presentation will be played at 9:00am today via webcast followed immediately by a live audio conference call for analysts and investors at 9:30am hosted by Gavin Slark and David Arnold.   If investors would like to listen to the conference call, they can do so by clicking "Register for the Presentation and Q&A" on the home page of the Company's website or by clicking on the following link: https://brrmedia.news/GFTU_HY22

 

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 ir@graftonplc.com.  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 8147

Tim Rowntree

 

Cautionary Statement

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

 

 

Half Year Report for the Six Months to 30 June 2022

 

Group Results - Trading Summary, Cashflow, Dividend and Outlook

 

The Group delivered a good overall performance in the half year relative to the significant advance in profit and record results in the same period last year which had seen a notable rise in spending on the home prompted by a focus on increasing indoor and outdoor living space, home working and less spending in other sectors during the pandemic. 

 

Trading patterns normalised in all of our markets in the first half of 2022 as building materials shortages and supply chain pressures eased considerably.  Building materials prices continued to rise sharply, including the carryover effects of price increases implemented in the second half of last year, softening volumes in more competitive markets. 

 

The Group continued to deliver strong underlying profitability and is well positioned in its markets.

 

These results demonstrate the benefit of the balanced spread of the Group's operations across geographic markets and sectors which has created a more diversified earnings base.

 

Distribution

 

UK

 

Trading in the UK residential repair, maintenance and improvement ("RMI") market was relatively subdued against a strong performance in the comparative period last year.  Acquisitions and new branches contributed to overall revenue growth for the period.  Revenue in the like-for-like business was marginally lower as a decline in volumes was offset by high double digit price inflation.  While operating profit was lower, a strong operating margin of 11.0 per cent was achieved.  Selco, which accounted for almost three quarters of UK distribution revenue, continued to innovate, improve its customer proposition and invest in its branch network. 

 

Ireland

 

Chadwicks, the market leader in the distribution of building materials in Ireland, produced an exceptionally strong performance in a market that returned to more normalised trading conditions in the half year.  Revenue and operating profit grew strongly and the operating profit margin advanced by 80 basis points to 12.4 per cent.

 

Strong demand was driven by increased spending on housing RMI, an acceleration in the construction of housing scheme developments and one-off houses and an increase in non-residential private and public sector construction.

 

The Sitetech business acquired at the end of February 2022 made an excellent contribution to profit, adding expertise to Chadwicks in the specialist construction accessories market where it has a leadership position.

 

The Netherlands

 

The Isero ironmongery, tools and fixings business reported excellent growth in revenue and profitability and increased its operating profit margin by 170 basis points to 12.5 per cent.  Isero expanded market coverage into the Northeast of the Netherlands with the acquisition in January of the five branch Regts business in Friesland which made a very good contribution to profit.  The branch estate increased to 123 in the half year.

 

Finland

 

IKH, the workwear, personal protective equipment, tools and spare parts wholesaler acquired in July 2021, made a good contribution to operating profit in the half year and reported an operating profit margin of 13.2 per cent. Revenue in the early months of the year was down, on the pre-acquisition comparative period, due to lower demand for a number of weather sensitive product categories and weaker consumer confidence that was affected by the war in Ukraine.  The business has integrated well in its first year under Grafton ownership and is a good strategic fit.

Retailing

 

Trading in the Woodie's market leading DIY, Home and Garden business in Ireland normalised and revenue and operating profit were lower as anticipated, compared to the exceptional Covid related gains made in the first half of last year when the business continued to trade as an essential retailer while Ireland was in lockdown.  Revenue and profitability were materially ahead of the pre-pandemic level and the operating profit margin was 11.7%.

 

Manufacturing

 

CPI EuroMix, the market leading mortars manufacturing business in Great Britain, reported good growth in revenue that was mainly driven by higher selling prices as a consequence of increased input costs.

 

StairBox, our on-line market leading staircase manufacturer, performed strongly and achieved a good increase in volumes and revenue.

 

The operating profit margin in the overall manufacturing segment was 20.4 per cent.

 

Property

 

The Group recognised property profits of £18.5 million (2021: £15.4 million) in the half year.  As part of the sale of the traditional merchanting business in Great Britain, Grafton retained the freeholds of a small number of properties.   The disposal of two of these properties in the first half generated cash proceeds of £24.0 million and realised a profit of £18.2 million.  In addition, a fair value gain of £0.3 million was recognised on two investment properties in Ireland.

 

Cash Flow

 

The Group's cashflow from operations was £137.9 million, down from £255.3 million in the first half of 2021 which included discontinued operations.   The strong underlying cash generation from operations included an investment of £39.7 million in working capital which compares to a release of working capital of £37.7 million in the same period last year.

 

The Group had net cash (before IFRS 16 lease liabilities) of £520.5 million at 30 June 2022, a decline of £67.5 million from £588.0 million at 31 December 2021.  Net cash including IFRS 16 lease liabilities was £73.5 million (31 December 2022: £139.0 million).

 

Financial Highlights Compared to 2019

 

In view of the previous two financial years being heavily affected by the pandemic and the repositioning of the Group following the disposal of the traditional merchanting business in Great Britain, it is worthwhile considering how the business performed in the first half of 2022 compared with the first half of 2019. Grafton is today a structurally better business that has delivered improved returns since the first half of 2019.  This is reflected in adjusted operating profit, before property profit, growing by 33.7 per cent to £132.6 million from £99.2 million reported for the first half of 2019 and the operating profit margin before property profit increasing by 460 basis points to 11.5 per cent from 6.9 per cent.

 

Over the same period, adjusted earnings per share increased by 57.6 per cent and the interim dividend by 42.3 per cent.  Return on capital employed advanced by 590 basis points to 18.8 per cent from 12.9 per cent and the further strengthening of the balance sheet is demonstrated with the Group moving from a net debt position of £540.5 million, including IFRS 16 leases, at 30 June 2019 to a net cash position of £73.5 million at 30 June 2022, an improvement of £614.0 million.

 

Financing

 

In August 2022, the Group completed a refinancing of its loan facilities that were due to expire in March 2023.  Bilateral revolving loan facilities for £334.5 million were agreed with four established relationship banks for a term of five years to August 2027.  The arrangements include two one-year extension options exercisable at the discretion of Grafton and the banks.  These new facilities provide certainty of finance over a longer period on improved terms and replace existing facilities of £374.5 million. 

 

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.

 

Allocation of Capital

 

The Group's purpose is Building Progress Together and, as outlined at our November Capital Markets event, we remain determined to grow and add value for our shareholders through enhancing our capabilities in construction and related activities.  Our principal focus remains on distribution since we believe this model gives us flexibility to respond to the evolving needs of our customers and to work with the best suppliers and manufacturers for the job.  This flexibility is particularly important as our markets become more influenced by the demands for carbon reduction and higher standards in ESG.

 

The Group invested £45.8 million in three bolt-on acquisitions in the half year and the strength of internal cashflows and exceptionally strong balance sheet provide the capacity to take advantage of opportunities that are a good strategic fit and meet the Group's hurdle rates of return on investment.

 

Acquisitions have been an important part of the Grafton growth strategy over the past quarter of a century and have supported entry into new markets as well as increasing our presence in existing markets.  Our Group has a history of identifying, acquiring and integrating businesses and a skilled and experienced acquisition team to complete transactions.  We continue to evaluate a pipeline of acquisition opportunities in our preferred geographies and market segments and the Board and management will continue to complete transactions that make good strategic and financial sense.

 

In line with the Group's disciplined approach to capital allocation and supported by its strong financial position, a share buyback programme commenced in May 2022 of up to £100 million to be completed by the end of the year. This buyback amount represents the estimated free cash flow generation from the business in the current financial year before development spend.  As at 30 June 2022, the Group had completed £43.9 million of the buyback programme, including transaction costs, and the amount completed increased to £88.5 million on 23 August 2022.

 

Dividend

 

The Board has decided to pay an interim dividend for 2022 of 9.25p per share, an increase of 8.8 per cent on last year's interim dividend. The interim dividend is in line with the Board's guidance for full year dividend cover of between two and three times adjusted earnings and reflects the Group's strong balance sheet and profitability and cashflow from operations for the half year.

 

The interim dividend will be paid on 7 October 2022 by Grafton Group plc to shareholders on the Register of Members at the close of business on 9 September 2022, the record date.  The Ex-dividend date is 8 September 2022.

 

In the half year, the Group had a cash outflow of £52.7 million on payment of the final dividend for 2021.

 

CEO Succession

 

The search for a new Group Chief Executive Officer is progressing with the support of an executive search firm.  As previously announced, Mr. Gavin Slark will continue in his roles as CEO and Board Director until 31 December 2022.

 

Implementing Our Sustainability Strategy

 

Our sustainability agenda is based on reflecting the interests of all stakeholders in our business decisions and focusing on those areas in our business that are likely to yield the most success and deliver tangible results and outcomes that will make a real difference to our stakeholders.

 

We have set specific targets and KPIs across the five focus areas of our sustainability strategy to guide our performance and help us work in a way that's responsible and sustainable. Our sustainability programme informs longer term strategic and investment decisions and day to day operational decisions.

 

Further progress was made during the half year and this is demonstrated in a very real way in the commentaries on the individual businesses that follow which show how sustainability is becoming embedded in our operations.

 

At Grafton we believe there is a positive connection between sustainability and financial performance.  Our businesses are focusing on the issues most relevant to them and we are aligning resources to these key areas to deliver maximum impact.

 

In another step towards delivering on our sustainability goals, Grafton is pleased to announce the appointment of Mrs. Rosie Howells to the newly created role as Group Head of Sustainability.  Rosie has almost thirteen years' experience in sustainability roles and her experience will be invaluable to Grafton as we continue to develop and implement our long-term sustainability strategy.

 

Colleagues

 

The Board would like to express its appreciation to colleagues across our Group for continuing to provide exceptional support to our customers and business partners and for their hard work and commitment in achieving these half year results.

 

After nine years in the role as CEO of Woodie's, Mr. Declan Ronayne will retire at the end of the year. Following an externally led search process that involved internal and external candidates, Mr. Damien Dwyer who has been Commercial Director of Woodie's since 2013 was appointed as Declan's successor.  The Board is very grateful to Declan for his significant contribution to the business and congratulates Damien on his appointment.  Declan will be available to Damien until the end of the year to facilitate an orderly transition and transfer of responsibilities. 

 

Outlook

 

Whilst the outlook for all our markets is weaker now than it was at the start of the year, we are on track to deliver full year profit in line with current consensus analysts' forecasts (Adjusted EBITA of approximately £267.0 million) though this remains dependent on the usual seasonal upturn in the important trading months of September through to the end of November.  We have scheduled our annual autumn trading update for Thursday 10 November which will provide an opportunity to comment on trading in September and October.

 

Households have experienced cost of living increases in recent months and the shorter term outlook across our markets is more uncertain given potential impacts on disposable income.  Significant building materials price inflation has also impacted construction costs and affordability.

 

In the UK, housing RMI is expected to remain soft as households reduce discretionary spending on improvements and housing transactions slow.  Housing demand continues to remain strong and a near term fall-off in house building is not anticipated.

 

In Ireland, key indicators are positive, and the economy is forecast to continue on a growth path that is among the strongest in the EU.  A more moderate rate of activity is expected in the housing RMI and DIY markets and house building is expected to finish the year strongly.

 

In the Netherlands, record employment and significant household savings may cushion the extent of any decline in spending.  While volume growth in the ironmongery, tools and fixings market is likely to remain relatively subdued, we expect the Isero business to make further progress in the second half of the year.

 

In Finland, IKH should continue to benefit from the volume of ongoing activity that was carried into this year.

 

July was a weaker trading month than anticipated, principally as a result of the twin effects of the very hot weather in the UK and a more pronounced reduction in construction activity with more of our customers taking holidays after two years of enduring the pandemic.  Retail and smaller value RMI transactions have softened but the trade market remains resilient, supported in particular by larger projects and new build work. 

 

Group average daily like-for-like revenue was flat in the period from 1 July 2022 to 14 August  2022. Average daily like-for-like revenue in the UK Distribution business declined by 5.2 per cent.  There was growth of 1.5 per cent in the distribution business in Ireland and 1.8 per cent in the Netherlands and a decline of 10.5 per cent in Finland.  Retailing grew average daily like-for-like revenue by 6.9 per cent and Manufacturing by 30.4 per cent.

 

Notwithstanding the short-term outlook, the strength of our brands, their market positions and our balance sheet strength leave us extremely well placed to respond to the opportunities that will undoubtedly emerge in due course.  We fundamentally believe we will outperform through the cycle and therefore continue to commit organic development capital in line with our normal disciplined approach to ensure our brands continue to strengthen their customer offering for the medium and long term.

 

Operating Review - Continuing Operations   

 

The Distribution businesses in the UK, Ireland, the Netherlands and Finland contributed 84.5 per cent of Group revenue (2021: 79.8 per cent), Retailing 10.3 per cent (2021: 15.4 cent) and Manufacturing 5.2 per cent (2021: 4.8 per cent). 

 

Our geographical footprint continues to diversify.  UK businesses contributed 42.0 per cent (2021: 44.8 per cent) of Group revenue, Ireland 37.5 per cent (2021: 40.9 per cent), the Netherlands 14.6 per cent (2021: 14.3 per cent) and Finland 5.9 per cent (2021: N/A).

 

Distribution Segment

(84.5% of Group Revenue, 2021: 79.8%)

 

	2022	2021*
	£'m	£'m	Change**
Revenue	974.5	820.3	18.8%
Adjusted operating profit before property profit	115.7	101.3	14.3%
Adjusted operating profit margin before property profit	11.9%	12.3%	(40bps)
Adjusted operating profit	134.2	111.9	20.0%
Adjusted operating profit margin	13.8%	13.6%	+20bps

* June 2021 comparatives have been restated to conform to current year presentation of acquisition related items

**Change represents the movement between 2022 v 2021 and is based on unrounded numbers

 

UK Distribution generated 37.2 per cent (2021: 40.3 per cent) of Group revenue, Irish Distribution 26.8 per cent (2021: 25.2 per cent), Netherlands Distribution 14.6 per cent (2021: 14.3 per cent) and Finnish Distribution 5.9 per cent (2021: N/A).

 

UK Distribution

(37.2% of Group Revenue, 2021: 40.3%)

 

	2022	2021*
	£'m	£'m	Change**
Revenue	429.0	414.1	3.6%
Adjusted operating profit before property profit	47.2	55.2	(14.5%)
Adjusted operating profit margin before property profit	11.0%	13.3%	(230bps)
Adjusted operating profit	65.3	65.0	0.6%
Adjusted operating profit margin	15.2%	15.7%	(50bps)

* June 2021 comparatives have been restated to conform to current year presentation of acquisition related items

**Change represents the movement between 2022 v 2021 and is based on unrounded numbers

 

The comparative results for the UK distribution business do not include the Traditional Merchanting Business in Great Britain that was divested on 31 December 2021 and which is classified as discontinued operations.

 

Average daily like-for-like revenue was down by 0.2 per cent on the first half of last year and up by 16.2 per cent on the first half of 2019. 

 

New Selco and Leyland SDM branches contributed revenue of £8.8 million and the P. McDermott & Sons and Woodfloor Warehouse acquisitions in Northern Ireland contributed revenue in the half year of £9.0 million.

 

The gross margin was down by 100 basis points reversing a similar increase last year and was in line with the more comparable level reported for the first half of 2019. The decline on last year was attributed to a normalisation of customer and product mix, non-recurring stock gains realised last year relating to materials price inflation and a more competitive trading environment this year with greater product availability compared with the same period last year.

 

Adjusted operating profit before property profit declined to £47.2 million (2021: £55.2 million) and the adjusted operating profit margin, before property profit, was 230 basis points lower than last year reflecting the small decline in like-for-like revenue, a normalisation of the gross margin and an increase in operating costs.

 

Selco Builders Warehouse

 

Selco Builders Warehouse experienced a small increase in total revenue that was generated by branch openings and a small decline in revenue in the like-for-like branches.

 

Revenue trends this year developed against the backdrop of a surge in activity in the second quarter of 2021 leading to record trading in the first half of 2021.

 

Average daily like-for-like revenue in the first half of this year declined by 1.4 per cent following the exceptional increase in revenue in the first half of last year.  Changes in average daily like-for-like revenue in the first half of 2021 and 2020 were distorted by the closure of branches for a period in the first half of 2020 due to the pandemic.  Average daily-like-for-like revenue growth was 18.4 per cent over the two years to the end of June 2021 and is a more reliable gauge of performance over this period and grew by 16.7 per cent for the three years to the end of June 2022.

 

Supply chain pressures eased although price increases continued to come through from suppliers due to higher energy, commodity and raw materials prices and the war in Ukraine.  Building materials costs price inflation in Selco averaged circa 19 per cent year-on-year in the first half comprising 27 per cent for timber and 16 per cent for other materials and products.

 

There was a substantial normalisation in volumes from the historically high level in the first half of last year.  Selco's customer base is generally focused on smaller housing RMI projects and the sharp increase in the cost of building materials, decline in sentiment and real disposable incomes led to reduced discretionary spending on the home.  Demand from jobbing builders was resilient but there was a decline in transactions with higher margin retail customers from the elevated level experienced during the pandemic. Demand was also affected by a post-pandemic shift away from spending on improving indoor and outdoor living space, that drove the rise in RMI activity last year, to spending on recreational, travel and leisure activities.

 

Branches in the Greater London Area performed more strongly than the regions, reversing the trading pattern in the first half of last year when the regions outperformed.

 

The decline in volumes and increase in the price of building materials, that was mainly passed on to customers, contributed to more competitive market conditions.  The gross margin was down on the prior year, which benefitted from a more favourable customer and product mix as well as one-off inventory gains following the surge in inflation, but compared favourably with historic norms for the business.

 

Costs were well controlled but reflected payroll pressures due to inflation and a very tight labour market that saw some vacancies go unfilled for a period.

 

Operating profit was down on the record level achieved in the first half of last year due to the decline in volumes, which were mainly offset by inflation, a small contraction in the gross margin and an increase in operating costs.

 

Having opened branches in Liverpool, Orpington, Canning Town and Rochester last year, Selco increased the branch estate to 73 with the opening of a branch in Exeter in April and later this year will extend market coverage further with the opening of branches in Cheltenham and Peterborough.  Our target to increase the estate to 100 branches by the end of 2026 will increase selling space to over one million square feet.  We continue to progress a good pipeline of new branch opportunities that are at various stages of development.  Selco currently has very strong branch coverage across London, Manchester and Birmingham and, as well as further bolstering these cities and other parts of the country where we have branches, we will also be taking the unique Selco model to new cities and towns that fulfil our investment criteria for new stores.  We want to provide a flexible multi-channel offering to trades-people who can enjoy the benefits of the widest range of products in stock, unrivalled availability, excellent customer service and competitive trade pricing.

 

Overall revenue developed ahead of plan in the Liverpool, Orpington, Canning Town and Rochester branches that were opened last year.

 

Selco made a significant investment in recent years upgrading its online platform and website and continued its digital journey with the recent launch of a new App that provides further flexibility, improved functionality and new features that enable customers to more easily purchase building materials.  Digital sales accounted for 5.1 per cent of revenue and approximately 80 per cent of on-line orders were fulfilled through deliveries from branches and delivery hubs.    

Last year "Selco Forest", an initiative designed to accelerate the process of offsetting Selco's carbon footprint, was launched and this year, in a move to reduce carbon emissions, twelve electrically powered counterbalance forklift trucks have been added to the fleet beginning a process to transition the entire fleet of over 300 forklift trucks.  In addition, seven Compressed Natural Gas (CNG) vehicles are currently in operation with plans to introduce a further three in the new delivery hub in Birmingham.

 

Selco has also extended its use of alternative fuels with the introduction of HVO (Hydrotreated Vegetable Oil) into the fleet.  HVO is manufactured from waste materials and reduces carbon emissions by up to 90 per cent.

Leyland SDM

 

Leyland SDM, London's largest specialist decorators' merchant that trades from 32 stores in the city, showed modest growth in daily like-for-like revenue as Central London lagged the rest of the country in its post pandemic recovery.

 

Trading in Central London is heavily dependent on demand conditions created by overseas and domestic tourists and office workers.  Footfall continued to lag pre-pandemic levels and the recovery has some way to run as international visitor numbers are still improving post pandemic and hybrid working has slowed the return of workers to offices.  

 

The lower footfall from office workers relative to 2019 has reduced sales of paint and accessories to retail customers and demand from trade customers was weaker because of reduced RMI spending on offices, restaurants and the leisure sector. 

 

New stores that opened last year in Clapham Junction, Dulwich and Bayswater performed ahead of plan.

Principally as a result of higher operating costs, operating profit was lower than the first half of last year. 

 

MacBlair

 

The MacBlair distribution business in Northern Ireland performed well, almost matching last year's record operating profit with the benefit of contributions from acquisitions.

 

Average daily like-for-like revenue was flat despite the anticipated fall in transactions with retail customers who completed an exceptional level of home and garden RMI projects in the same period last year.  The decline in RMI revenue was offset by an increase in house building which was subdued in the early months of last year before showing a gradual recovery as the year progressed.  The increase in housebuilding revenue was led by self-build customers, small scheme developers and timber frame manufacturers.  The return to more normalised trading and the change in the mix of end-use markets between housing RMI and house building resulted in a decline in the gross margin.

 

The acquisition by MacBlair of P. McDermott & Sons, a single branch distribution business located in Omagh, in December of last year extended market coverage into the Mid-Western region of the province.  In February of this year MacBlair acquired Woodfloor Warehouse, a leading in-store and online timber flooring distributor with branches in Bangor, Belfast and Warrington.  Woodfloor Warehouse brings expertise to MacBlair in the timber flooring market and the acquisition is in line with our strategy of acquiring specialist high quality businesses in complementary markets.  Both businesses performed ahead of pre-acquisition expectations.

 

TG Lynes

 

TG Lynes, a leading distributor of commercial pipes and fittings in London and the Southeast, experienced a relatively slow start to trading last year and then gradually improved and ended the year strongly.   This growth momentum carried into this year and the half year performance was very strong with excellent growth in revenue, operating profit and the operating profit margin.

 

TG Lynes improved its market position increasing volumes with subcontractors to the national housebuilders.  The post pandemic recovery in public sector refurbishment projects on schools and hospitals also contributed higher volumes.

 

One of several sustainability initiatives implemented last year to reduce carbon emissions was the installation of solar panels on the roof of the TG Lynes freehold property in Enfield.  These solar panels reduced the carbon footprint of the business in the half year by generating the equivalent of two thirds of the electricity required to operate the business and reduced demand for energy from the national grid. 

 

Irish Distribution

(26.8% of Group Revenue, 2021: 25.2%)

 

	2022	2021		Constant Currency
	£'m	£'m	Change*	Change*
Revenue	309.1	258.7	19.5%	22.9%
Adjusted operating profit before property profit	38.5	30.1	27.8%	29.8%
Adjusted operating profit margin before property profit	12.4%	11.6%	+80bps
Adjusted operating profit	38.8	30.9	25.7%	30.8%
Adjusted operating profit margin	12.6%	11.9%	+70bps

*Change represents the movement between 2022 v 2021 and is based on unrounded numbers

 

Chadwicks' market leading distribution business in Ireland performed exceptionally well in the half year in a market that experienced a return to more normal trading conditions following the pandemic.  Overall revenue growth was driven by volume growth, significant building materials price inflation, particularly for steel and timber products, and a contribution from acquisitions. 

 

Strong demand was generated from increased spending on materials used in a wide range of housing RMI projects, an acceleration in the construction of scheme and one-off houses and an increase in non-residential private and public sector construction. 

 

Average daily like-for-like revenue growth of 41.9 per cent in the first quarter was measured against weaker trading in the comparative period last year due to the sharp contraction in construction activity caused by pandemic related restrictions. In contrast, the rate of growth in average daily like-for-like revenue in the second quarter eased to 4.3 per cent against a very strong comparator that benefitted from the rapid recovery in house building following the reopening of sites, pent-up demand that developed during the lockdown and increased spending generally on the home.  Overall growth in the average daily like-for-like revenue was 19.5 per cent in the half year.

 

The Steel division, a segment of the business that provides early-stage exposure to new build construction activity, increased revenue and profitability strongly with the benefit of a significant investment made last year in Cut & Bend capacity.

 

The gross margin compared favourably with historic norms for the business but was down on the prior year due to changes in the mix of revenue from end-use markets including a lower proportion of revenue from RMI transactions with retail customers. There were also changes in the product mix from hardware and timber products to plumbing, heating, building materials and steel together with a lower level of inflation related inventory gains.  While supply chain imbalances eased considerably, building materials price inflation remained at a very elevated level with average year-on-year cost prices up by 15 per cent which reduced project affordability for customers and weighed on margins.

 

House completions in Ireland increased by just under 50 per cent in the first half to 13,300 units taking the number of units completed in the year to June 2022 to 25,000, the highest level since 2009.  The construction of scheme houses and single dwellings, the primary end-use markets supplied by Chadwicks, increased by one-third in the period and accounted for almost 70 per cent of units completed in the half year.  Early indicators of future housing supply show that in the year to June 2022, under 30,000 units were commenced. 

 

Estimates indicate that the number of housing transactions in the year to June 2022 were well above the pre-pandemic level in 2019. Both the construction of new homes and the return by vendors of existing properties to the market, as Covid-19 restrictions were lifted and prices rose, have increased activity in the housing market. 

 

The Proline Architectural Hardware ("Proline") business acquired in February 2021 produced excellent results for the half year that were well ahead of plan and synergies from this acquisition included increased profitability in 11 Chadwicks branches that now distribute a range of Proline products. 

 

The Sitetech construction accessories business acquired at the end of February 2022, also traded well ahead of expectations and made an excellent profit contribution in the four months to the end of June in addition to providing Chadwicks with a presence for the first time in a complementary segment of a market where Sitetech has a leading position.

 

In June, Chadwicks completed a sustainability focused upgrade to its Bray branch that forms part of its nationwide upgrade programme.  Chadwicks is a member of the Irish Green Building Council and the Bray branch includes a new ECO Centre, the third opened to date, that provides sustainable building solutions and supports customers in meeting their sustainability goals. The ECO Centre distributes the most up-to-date materials for sustainable building needs including insulation, airtightness, ventilation systems, heat pumps and controls, solar energy and water-saving products.  This initiative helps support a more affordable grant aided, deep retrofit programme recently launched by the Irish Government that targets energy upgrades to a quarter of the national housing stock. 

 

Taking steps toward a more sustainable future and to achieve a high energy rating, Chadwicks made significant updates to the Bray branch's building fabric, installed Solar PV panels, and introduced a new high-performance energy-efficient heating system with heat recovery ventilation.

 

Chadwicks digital platform generated a considerable level of traffic following completion of the rollout of a new transactional website for trade customers with improved functionality.  Rollout of a delivery transport system was completed in May and is improving transport planning, route optimisation, customer service and communications, while reducing transport costs.

 

Netherlands Distribution

(14.6% of Group Revenue, 2021: 14.3%)

 

	2022	2021		Constant Currency Change*
	£'m	£'m	Change*
Revenue	168.7	147.5	14.4%	17.8%
Adjusted operating profit	21.2	16.0	32.2%	39.7%
Adjusted operating profit margin	12.5%	10.8%	+170bps

*Change represents the movement between 2022 v 2021 and is based on unrounded numbers

 

The Isero specialist ironmongery, tools and fixings distribution business in the Netherlands performed strongly and produced excellent results against the backdrop of broadly positive market conditions, a good contribution from acquisitions and commercial initiatives to improve performance.  

 

Year-on-year revenue trends in the half year were not impacted by the pandemic as the business was treated as an essential distributor and remained open throughout last year.  Revenue growth trends were broadly even across the half year and average daily like-for-like revenue growth of 7.5 per cent was driven by price inflation as volumes were broadly flat.

 

Improved demand came from key account customers engaged on large construction projects including apartment blocks and warehousing, growth in value added solutions and increased spending by housing corporations on social housing RMI.  Demand was strong in the residential and commercial new build sectors and there was a recovery in the public sector residential and non-residential RMI markets.   Transaction numbers with smaller customers engaged in housing RMI projects were lower.  This was a segment of the market that performed strongly last year as households spent some of the savings built up during the pandemic on home improvement projects.  

 

Organic growth in operating profit was very strong despite pressure on volumes, higher payroll costs in a very tight labour market and increased energy prices.  The increase in profitability reflected the drop-through from the increase in like-for-like revenue and an improved gross margin that were partly offset by increased operating costs. This outcome helped deliver an improvement of 170 basis points in the operating profit margin. 

 

Organic revenue growth was complemented by a significant contribution from acquisitions that increased total revenue for the half year by 17.8 per cent in constant currency.  The Regts B.V. ("Regts") business in Friesland acquired in January 2022 performed strongly.  The Regts back-office functions were integrated into Isero and good progress was made harmonising its product portfolio and aligning procurement arrangements.  The five Regts branches and the four Govers branches acquired in April of last year expanded coverage into the Northeast region of the Netherlands.

 

The two Rotterdam branches that we relocated last year and the new branch in Lelystad performed well. During the half year a new branch was opened in Zaandam, just north of Amsterdam, increasing the branch estate to 123.

 

The rate of house price growth in the Netherlands has slowed this year from 20 per cent in 2021 as mortgage rates have roughly doubled and increased the downward pressure on prices.  There continues to be a national housing shortage and, despite the strong demand, the number of existing houses for sale is forecast to decline for a second successive year.  The number of new houses constructed this year is forecast to increase but will fall well short of meeting demand as supply continues to be constrained.

 

Isero continued to implement solutions to reduce carbon emissions including the installation of LED light fittings in several branches as part of an ongoing program and, with the cooperation of landlords, solar panels and heat pumps were installed in three branches.

 

Finland Distribution

(5.9% of Group Revenue)

 

	2022
	£'m
Revenue	67.7
Operating profit	8.9
Operating profit margin	13.2%

 

Grafton acquired IKH, one of Finland's largest workwear and personal protective equipment ("PPE"), tools and spare parts wholesalers, on 1 July 2021. 

 

IKH operates in an attractive segment of the technical trades' distribution market in Finland and has integrated well during its first year under Grafton ownership.

 

Revenue in the first half was lower than the pre-acquisition level in the comparative period last year as milder than normal weather conditions in the early months of the year impacted demand for a number of seasonally sensitive product categories from SME end-use customers operating in the construction, renovation, industrial, agricultural and repair shops sectors.  In addition, consumer confidence was adversely affected by the war in Ukraine given the long border that Finland has with Russia.

 

Revenue from IKH products, which are distributed through a network of independently operated IKH partner stores, third party distributors and eleven owned stores located in major cities, improved in May and June following the slow start to the year.  Local IKH partner stores in Estonia delivered growth and performed well.

 

Housing starts were at a record high last year and, with construction work continuing on these projects, house building is having a good year supported by demand from consumers and investors who are focused on investment in Helsinki and other major cities.  Although consumer confidence has weakened significantly, home buying intentions have remained relatively strong.  Spending on residential RMI by consumers eased following the pandemic but there was an increase in RMI activity carried out by trades people on multi-unit properties where access was restricted during the pandemic.  The volume of non-residential construction including hotels, warehousing, offices and retail centres has recovered following sharp declines in recent years.

 

Retail Segment

(10.3% of Group Revenue, 2021: 15.4%)

 

	2022	2021		Constant Currency Change*
	£'m	£'m	Change*
Revenue	118.9	158.4	(24.9%)	(22.8%)
Operating profit	13.9	34.2	(59.4%)	(56.6%)
Operating profit margin	11.7%	21.6%	(990bps)

*Change represents the movement between 2022 v 2021 and is based on unrounded numbers

 

The Woodie's DIY, Home and Garden business in Ireland returned to more normalised levels of trading as anticipated in the half year.  This follows constant currency revenue growth of 62.2 per cent in the first half of last year when Woodie's was treated as an essential retailer and remained open during the early months of the year when the country was in lockdown. 

 

The home and garden remained important to Woodie's customers and they continued to be engaged in a diverse range of projects.  Half year revenue was 25.6 per cent ahead of the pre-pandemic level in the first half of 2019.  This is a better indicator of underlying performance and reflects Woodie's successful focus in recent years on providing a differentiated customer experience that has made it one of Ireland's best-known retailers with a very high-level brand recognition and awareness.

 

In the first half of last year Woodie's experienced exceptional revenue growth in an unprecedented trading environment.   Demand was elevated across all DIY, home and garden categories and while strong gains were preserved in the first half of this year compared to 2019, most product categories declined to more normalised levels.

 

The fall in revenue was reflected in a lower number of transactions and a small decline in the average basket value that was partly offset by inflation.  Customers purchased fewer higher value seasonal products including garden furniture and lawn mowers compared to last year.

 

Woodie's continued to leverage activity on its digital platform which has grown revenue by 68.5 per cent since 2019.  Following the significant on-line investment in recent years, the delivery of a seamless and consistent shopping experience is resonating well with customers with approximately two thirds of online orders now being fulfilled through the stores.  Digital accounted for 3.4 per cent of revenue (2021: 3.1 per cent). Woodie's now has the strategy, infrastructure and strong social media presence to increase brand visibility and grow revenue through its digital platform as customer preferences gradually change.

 

While the gross margin was at a healthy level, it declined on the prior year due to a range of factors including a less favourable product mix, increased promotional activity, particularly for seasonal ranges, and higher shipping and freight costs.

 

Overheads were tightly controlled and were down on the prior year reflecting the decline in transaction numbers and a lower level of inventory merchandised through the stores.  Some of the additional capacity created last year to support exceptional customer demand was withdrawn. 

 

In June, 'Woodie's Community', a new online data platform with product and project content, was launched.  Customers can find helpful tips, expert advice and inspiration for their Home & Garden projects on this platform as well as learning more about Local Community initiatives. 

 

Woodie's sustainability journey continued with the introduction of metal cages for safely loading, moving and warehousing products.   The metal cages will replace wooden pallets and eliminate the extensive use of plastic shrink wrapping.  The upgrading and redevelopment of the Sallynoggin branch freehold property last year included solar panels which has substantially reduced demand for energy for this store from the national grid and reduced the company's carbon footprint.

 

Manufacturing Segment

(5.2% of Group Revenue, 2021: 4.8%)

 

	2022	2021		Constant Currency Change*
	£'m	£'m	Change*
Revenue	59.4	49.1	21.1%	21.3%
Operating profit	12.1	12.7	(4.5%)	(4.0%)
Operating profit margin	20.4%	25.9%	(550bps)

*Change represents the movement between 2022 v 2021 and is based on unrounded numbers

 

Revenue growth of 18.4 per cent in the ten CPI EuroMix manufacturing plants, that supply national, regional and local house builders and plastering contractors in Great Britain, was mainly driven by the recovery of price increases in response to a sharp increase in the price of raw materials and other input costs.

 

Mortar volumes showed double digit growth in the first quarter measured against volume weakness in the first quarter of last year when house building was disrupted by the pandemic.  Second quarter volumes were marginally lower against a very strong comparator last year which benefitted from the lifting of restrictions and increased house building activity.   Volumes in a few plants were impacted by supply chain disruption from shortages of cement, sand and limestone and programmed works to replace or upgrade production equipment.

 

Operating profit and the operating margin were behind the prior year due to a challenging trading environment that had to absorb significant raw materials price increases and escalating energy and fuel cost inflation.

 

While demand in the new housing market remained strong supported by an ongoing under supply, the operating environment for CPI Mortars' house building and plastering contractor customers was affected by labour and materials shortages. 

 

CPI EuroMix customer service benefitted from a record number of mortar silos on customers' sites throughout the half year following the investment made last year in additional capacity.

 

StairBox, the market leading manufacturer of bespoke staircases, reported strong growth in revenue driven by high single digit volume growth and raw materials price increases.  The business experienced very good demand from its trade customers operating in the housing RMI market across Great Britain.

 

StairBox continued to develop its state-of-the-art staircase manufacturing technology including a major update to its factory management software that improved the efficiency of the manufacturing and assembly processes.  The StairBuilder on-line stairs designer software was also updated to include further design innovations that were well received by customers.

 

StairBox entered into a new lease on a property located close to its existing facility that provides additional capacity in response to the exceptional growth in volumes in recent years and secured the future development of the business at its current location in Stoke-on-Trent.

 

 

Operating Review - Discontinued Operations

 

Discontinued Operations

 

	June 2021
	£'m
Revenue	522.9
Adjusted operating profit before property profit	30.4
Adjusted operating profit margin before property profit	5.8%

 

The Group completed the divestment of the Traditional Merchanting Business in Great Britain for an enterprise value of £520 million on 31 December 2021.  For accounting purposes, this was treated as a deemed disposal on 30 June 2021.  This business comprised the Buildbase, Civils & Lintels, PDM Buildbase, The Timber Group, Frontline, Bathroom Distribution Group and NDI brands.  The Group also retained freehold properties with development potential that had a market value of circa £25 million at the time of divestment.  Grafton retained responsibility for funding the UK defined benefit pension scheme which was closed to future accrual at the end of 2020 when alternative arrangements were put in place.

 

Financial Review

 

Revenue

 

Group revenue from continuing operations, which excludes the Traditional Merchanting Business in Great Britain divested on 31 December 2021 and classified as discontinued, increased by 12.2 per cent to £1.15 billion from £1.03 billion in 2021.

 

Revenue in the like-for-like business increased by 3.0 per cent (£30.9 million) on the prior year. 

 

The acquisition of IKH in Finland and a number of smaller transactions in Ireland, the UK and the Netherlands, contributed revenue of £101.8 million and there was revenue of £8.9 million from new Selco and Leyland SDM branches in the UK and one new branch in the Netherlands.

 

Currency translation reduced revenue by £15.8 million and the closure of a single branch in Ireland on expiry of a lease reduced revenue by £0.7 million.

 

Adjusted Operating Profit

 

Adjusted operating profit from continuing operations of £151.1 million was down by 4.4 per cent from £158.0 million in the same period last year.

 

Adjusted operating profit before property profit of £132.6 million was down by 7.0 per cent from last year's record half year result of £142.6 million.  The adjusted operating profit margin before property profit declined by 240 basis points to 11.5 per cent. 

 

Net Finance Income and Expense

 

The net finance expense decreased by £1.5 million to £7.7 million (2021: £9.2 million).  This charge includes an interest charge of £7.2 million (2021: £7.2 million) 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 £2.9 million to £0.2 million (2021: £3.1 million).  The decline was mainly due to lower interest cost on gross debt and deposit interest received on the proceeds of the sale of the Traditional Distribution business in the UK.   

 

The net finance expense included a foreign exchange translation loss of £0.3 million which compares to a gain of £1.4 million in the same period last year.

 

Taxation        

 

The income tax expense of £23.0 million (2021: £26.9 million) is equivalent to an effective tax rate of 17.3 per cent of profit before tax (2021 Full Year: 17.2 per cent).  This is a blended rate of corporation tax on profits in the four countries where the Group operates and is based on the 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 was £137.9 million (2021: £255.3 million).  The decline of £117.4 million compared to the prior year was partly due to an investment of £39.7 million in working capital this year which compares to a cash release of working capital of £37.7 million in the first half of last year, a change of £77.4 million. 

 

The cash outflow on the dividend payment (£52.7 million) and buyback of shares (£51.5 million) amounted to £104.2 million (Half Year to 30 June 2021: £64.6 million on two dividend payments).

 

There was a cash outflow of £45.8 million on completion of the Sitetech acquisition in Ireland, the Woodfloor Warehouse acquisition in Northern Ireland and the Regts acquisition in the Netherlands.

 

Capital Expenditure and Investment in Intangible Assets

 

We continued to maintain tight control over capital expenditure which amounted to £21.1 million (2021: £17.1 million).  There was also expenditure of £1.2 million (2021: £0.5 million) on software costs that are classified as intangible assets. 

 

Asset replacement capital expenditure of £10.4 million (2021: £12.0 million) compares to the depreciation charge (before IFRS 16) on property, plant and equipment of £16.5 million and related principally to the 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.

 

The Group incurred development capital expenditure of £10.7 million (2021: £5.1 million) on a range of development initiatives including new branches in Selco, Isero and IKH; upgrades to Chadwicks and Isero branches; as well as investment in IT hardware.

 

The proceeds from the disposal of fixed assets increased to £24.1 million from £17.0 million.  The proceeds on disposal of fixed assets exceeded capital expenditure by £1.7 million (2021: Capital expenditure exceeded the proceeds on disposal of fixed assets by £0.6 million).

 

Pensions

 

The IAS 19 defined benefit pension schemes showed a surplus of assets over liabilities of £7.7 million, an improvement of £19.1 million on the deficit of £11.5 million at 31 December 2021. 

 

Changes to financial assumptions reduced scheme liabilities by £83.9 million.   This reduction in liabilities by £83.9 million reflected the net impact of a gain from the increase in discount rates and a loss from the increase in inflation expectations.  Experience gains and changes in demographic assumptions increased scheme liabilities by £2.5 million and by £0.2 million respectively.

 

The increase in discount rates used to discount scheme liabilities was in line with increases in corporate bond rates. The rate used to discount UK liabilities increased by 200 basis points to 3.9 per cent and the rate used to discount Irish liabilities increased by 225 basis points to 3.4 per cent. 

 

Market forecasts for future inflation increased significantly over the past six months. This impacted the value of liabilities as future benefit payments from the pension plans are directly or indirectly linked to future inflation. This is more relevant to the UK scheme where inflation both in the period up to and after retirement increases the projected growth in benefits. In Ireland, pensions are fixed once they come into payment with inflation only increasing liabilities in the period up to the date that members retire.

 

There was a loss on plan assets of £63.3 million due to the fall in bonds and equities which was in line with expectations as it offset a high proportion of the liability gains.  The asset losses in the UK scheme were of a similar magnitude to the movement in the liabilities such that the overall UK deficit did not materially change over the half year.  In the Irish schemes, the asset losses were equivalent to just over half the gains on the liabilities resulting in a significant improvement in the Irish schemes' financial position.  

 

Following the divestment of the traditional distribution business in Great Britain, Grafton retained 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

 

Net cash (including lease obligations) at 30 June 2022 was £73.5 million which compares to £139.0 million at 31 December 2021, a position that was boosted by the proceeds received on completion of the sale of the Traditional Merchanting Business in Great Britain for an enterprise value of £520.0 million.

 

The Group's net cash position, before recognising lease liabilities, was £520.5 million which compares to £588.0 million at 31 December 2021.

 

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 £1,113.4 million at 30 June 2022 (31 December 2021: £1,235.4 million).  As shown in the analysis of liquidity on page 47, accessible cash amounted to £778.7 million (31 December 2021: £840.7 million) and there was undrawn revolving bank facilities of £334.7 million (31 December 2021: £394.7 million).

 

At 30 June 2022, the Group had bilateral loan facilities of £374.5 million (31 December 2021: £433.7 million) with four relationship banks and debt obligations of £137.3 million (31 December 2021: £134.4 million) from the issue of unsecured senior notes in the US Private Placement market.

 

In addition, a new one-year facility for £85.8 million was put in place in December 2021 that was facilitated by one of the Group's relationship banks under the ECB's Targeted Longer-Term Refinancing Operations. This facility was used to temporarily replace drawings on existing facilities on more attractive terms and will be repaid in December 2022.

 

The average maturity of the committed bank facilities and unsecured senior notes at 30 June 2022 was 2.2 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.

 

As already noted, in August 2022, the Group completed a refinancing of its loan facilities that were due to expire in March 2023.   Bilateral revolving loan facilities for £334.5 million were agreed with four banks for a term of five years to August 2027, with two one-year extension options, to replace existing facilities of £374.5 million. 

 

 

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 £6.8 million (2021: £6.3 million) and the finance (interest) expense by £7.2 million (2021: £7.2 million) in the period.  Profit before tax was reduced by £0.4 million (2021: reduced by £0.9 million) and profit after tax reduced by £0.4 million (2021: reduced by £0.8 million) because of IFRS 16.

 

The right-of-use asset in the balance sheet at 30 June 2022 was £418.1 million (31 December 2021: £421.3 million) and lease liabilities were £447.0 million (31 December 2021: £449.0 million).

 

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.

 

Shareholders' Equity

 

The Group's balance sheet strengthened further in the period with shareholders' equity up by £36.1 million to £1.76 billion.  Profit after tax increased shareholders' equity by £109.4 million and there was a gain of £11.3 million on translation of euro denominated net assets to sterling.  Shareholders' equity was increased by £15.6 million for a remeasurement gain on pension schemes and was reduced for dividends paid of £52.7 million and £51.5 million for the buyback of shares. Other changes increased equity by £4.0 million.  

 

Return on Capital Employed

 

Return on Capital Employed in continuing operations declined by 180 basis points to 18.8 per cent (2021: 20.6 per cent) including leased assets.

 

Principal Risks and Uncertainties                     

 

The primary risks and uncertainties affecting the Group are set out on pages 64 to 69 of the 2021 Annual Report and will be updated in the 2022 Annual Report.  These risks refer to Macro Economic Conditions in the UK, Ireland, the Netherlands and Finland; Cyber Security and Data Protection; Acquisition and Integration of New Businesses; Supply Chain; Colleagues; Sustainability and Climate Change; Competition in Distribution, Retailing and Manufacturing Markets; Health and Safety; Information Technology Systems and Infrastructure; Pandemic Risk - Covid-19; and Internal Controls and Fraud. 

 

We have considered the additional indirect risk as a consequence of the war in Ukraine and the Group continues to monitor the geopolitical and macroeconomic impacts. At this time, it is not possible to make a full assessment of the likely adverse impact of the increase in energy prices or the wider economic implications for the Group's businesses and markets.

 

Period End Financial Information

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

 

·      the Group condensed income statement and Group condensed statement of comprehensive income for the six months to 30 June 2022;

·      the Group condensed balance sheet as at 30 June 2022;

·      the Group condensed cash flow statement for the six months to 30 June 2022;

·      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.