Final Results

For the Year Ended 31 December 2022

 

 

 

 

 

 

 

 

 

 

Grafton Group plc

Final Results for Year Ended 31 December 2022

Strong Trading Performance from Diversified Earnings Base

 

Grafton Group plc ("Grafton"), the international building materials distributor and DIY retailer is pleased to announce its final results for the year ended 31 December 2022.

 

Continuing Operations1	2022	20212	Change
Revenue	£2,301m	£2,110m	+9.1%
Adjusted3 operating profit	£285.9m	£288.0m	(0.7%)
Adjusted operating profit before property profit3	£260.5m	£271.2m	(4.0%)
Adjusted operating profit margin before property profit	11.3%	12.9%	(160bps)
Adjusted profit before tax3	£273.3m	£268.6m	+1.7%
Adjusted earnings per share3	96.6p	93.0p	+3.9%
Dividend	33.0p	30.5p	+8.2%
Adjusted return on capital employed (ROCE) 3	17.2%	19.4%	(220bps)
Net cash (before IFRS 16 leases)	£458.2m	£588.0m	(£129.8m)
Net cash - (including IFRS 16 leases)	£8.9m	£139.0m	(£130.1m)
Statutory Results - Continuing Operations	2022	2021	Change
Operating profit	£264.3m	£269.2m	(1.8%)
Profit before tax	£251.7m	£249.8m	+0.8%
Basic earnings per share	89.3p	86.4p	+3.4%

¹ Supplementary financial information in relation to Alternative Performance Measures (APMs) is set out on pages 42 to 47.

² The 2021 results do not include the traditional merchanting business in Great Britain that was divested in 2021 and classified as discontinued operations.

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

 

Operational Highlights        

·      Excellent performance in distribution businesses in Ireland and the Netherlands

·      Volumes and profitability lower in Selco against a strong comparative period and softer backdrop

·      Good profit contribution from IKH in Finland

·      Revenue and profitability normalised in Woodie's DIY, Home and Garden retail business

·      UK Manufacturing businesses performed well

·      Further progress made against sustainability targets

·      Diversified revenue base with over half generated in Ireland, the Netherlands and Finland

 

Financial Highlights

·      11.3% operating profit margin before property profit

·      Adjusted return on capital employed of 17.2%

·      Slight decline in adjusted operating profit (before property profit) to £260.5 million as expected

·      Double digit/high single digit operating profit margin in all businesses (before property profit)

·      High cash conversion with cashflow of £278.8 million from operations

·      £208.9 million returned to shareholders during year through share buybacks and dividends  

·      Net cash at 31 December 2022 of £458.2 million (before IFRS 16 lease liabilities)  

·      Annual dividend per share growth of 8.2%

 

 

 

Eric Born, Chief Executive Officer Commented:  

 

"In my first set of results as Chief Executive, I am pleased to report a strong performance by the Group which is ahead of market expectations. This is a great achievement by my new colleagues across the business and is testament to their dedication and professionalism. It has also confirmed the qualities of the business which attracted me to join Grafton.

 

"We still face many of the external challenges that we faced in 2022, but I am encouraged by the quality of the Group's portfolio of higher margin businesses that are sensibly positioned with both market leading brands and geographic diversity. We now have more than half of our revenues coming from outside the UK in Ireland, Finland and the Netherlands.

 

"Importantly, with a very strong balance sheet, Grafton is well positioned to invest in future growth opportunities and we look forward with confidence."

 

 

Presentation and Webcast Details

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

         

A presentation for analysts and investors will be hosted by Eric Born and David Arnold at 10:15am today.   A live webcast of the presentation including Q&A will be available via the Company's website at www.graftonplc.com or by clicking on the following link: https://brrmedia.news/Grafton_fy_results.

 

Analysts will be invited to raise questions during the presentation.  Should investors wish to submit a question in advance, they can do so before 9.00am today by sending an email to ir@graftonplc.com.  A recording of the webcast will be available on the Company's website later today.

 

 

Enquiries:

Grafton Group plc + 353 1 216 0600

Eric Born, Chief Executive Officer

David Arnold, Chief Financial Officer

 

Murray + 353 1 498 0300 / +353 (0)87 2269345

Pat Walsh

 

MHP Communications + 44 20 3128 8100 

Tim Rowntree/ Eleni Menikou

 

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.

 

Final Results for the Year Ended 31 December 2022

 

Group Results - Trading Summary, Cashflow, Dividend and Outlook

 

Grafton had a successful year and is reporting a strong financial result ahead of market expectations.  Despite macro-economic challenges in its markets, the Group continued to perform well with operating profit close to last year's record result against a less favourable market backdrop. 

 

Trading returned to more normal levels following the exceptional rise in spending on the home during the pandemic and supply chain pressures eased considerably.  Building materials prices rose sharply for the second successive year as the market absorbed increases in the cost of producing energy intensive products.  Certain product categories including timber and steel experienced price deflation following a period of soaring prices caused by a spike in global demand. 

 

Across all geographies, volumes were generally down in residential repair, maintenance and improvement ("RMI") markets as households reduced discretionary spending on the home under pressure from declines in real disposable incomes and rising interest rates.  Activity in RMI markets was also affected by the increased cost of building materials and rising labour costs which reduced affordability.  

 

We remained focused on delivering a strong performance and these results show the strength of our businesses, brands and market positions.  In particular, they demonstrate the benefits of the Group's spread of operations across multiple geographic markets and sectors that has helped to create a more diversified and resilient earnings base.

 

Distribution

 

Ireland

Chadwicks, the market leader in the distribution of building materials in Ireland and the Group's most profitable business, delivered a very strong performance. Revenue growth reflects both building materials price inflation and the impact of acquisitions.  Operating profit grew strongly supported by an operating profit margin of 11.4 per cent.

 

Demand was underpinned by residential RMI spending, the construction of scheme and one-off houses and non-residential construction projects.

 

The specialist Sitetech business acquired in February 2022, a leader in the adjacent construction accessories new build market, made an excellent contribution to profit.

 

UK

Volumes in the UK RMI market were down compared to the prior year when there was a record level of spending on the home during the pandemic and lower spending in other areas of the economy.  During 2022 households under pressure from increased energy and food prices quickly reduced discretionary spending on smaller value home improvements as the economy weakened and consumer sentiment declined. Revenue in the like-for-like business ended the year only marginally lower as a decline in volumes was largely offset by double digit materials price inflation. 

 

Operating profit was down when benchmarked against a strong prior year result and the operating margin of 9.8 per cent reflected gross margin pressure in a competitive market and the operational gearing impact of lower volumes.  Selco, which accounted for almost three quarters of UK distribution revenue, continued to invest in its business and branch network increasing it to 74. 

 

The Netherlands

Isero, the market leading specialist ironmongery, tools and fixings business, achieved excellent results for the year, in broadly favourable markets.  A strong underlying performance was complemented by a good contribution from acquisitions and benefits realised from implementing performance improvement measures.  The operating profit margin increased by 70 basis points to 11.2 per cent.  Market coverage expanded 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 and increased the overall branch network to 123.

 

Finland

IKH, the workwear, personal protective equipment, tools and spare parts wholesaler acquired in July 2021, had a good first full year under Grafton ownership delivering an operating profit contribution that was in line with pre-acquisition expectations despite more challenging market conditions.  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 sentiment following the invasion of Ukraine but recovered in the second half and ended the year strongly.  The operating profit margin for the year was 14.2 per cent.

 

Retailing

 

Woodie's, the market leading DIY, Home and Garden business in Ireland successfully navigated a unique set of trading conditions in 2022 as exceptional pandemic related spending in the prior year unwound and there was also pressure on volumes from the decline in real disposable incomes and a sharp drop in consumer confidence. Operating profit normalised to a level that was 43.9 per cent higher than the pre-pandemic result for 2019. The operating profit margin for 2022 was 13.3 per cent.

 

Manufacturing

 

CPI EuroMix, the market leader in the manufacture of mortar in Great Britain, reported growth in revenue and a good increase in operating profit. Volumes were softer in the final months of the year as activity in the new housing market moderated and were marginally down for the year.

 

StairBox, the market leading manufacturer of bespoke staircases primarily for the secondary housing market, experienced record demand from trade customers across Great Britain and increased revenue and profitability.

 

The operating profit margin in the manufacturing segment was 22.7 per cent.

 

Cash Flow

 

The Group's cashflow from operations was £278.8 million of which £208.9 million was returned to shareholders in dividend payments and share buybacks (excluding the buyback on LTIP awards).

 

Investment in capital expenditure and acquisitions amounted to £103.8 million.

 

The Group had net cash (before IFRS 16 lease liabilities) of £458.2 million at the year end, a decline of £129.8 million from £588.0 million at 31 December 2021.  Net cash including IFRS 16 lease liabilities was £8.9 million (31 December 2021: £139.0 million).

 

Property

 

The Group recognised property profits of £25.4 million (2021: £16.7 million) in the year.  A significant proportion of this profit arose from a small number of freehold properties that were retained following the sale in 2021 of the traditional merchanting business in Great Britain. Disposal of three of these properties generated cash proceeds of £26.2 million and realised a profit of £19.9 million.  In addition, a fair value gain of £5.0 million was recognised on the remeasurement of a number of investment properties to fair value under International Financial Reporting Standards as adopted by the European Union ("IFRS").

 

Dividend

 

The Board is recommending a final dividend for 2022 of 23.75p per ordinary share in line with its progressive dividend policy.  An interim dividend of 9.25p per share was paid on 7 October 2022. The total dividend for the year is 33.0p per share, an increase of 8.2 per cent on dividends of 30.5p paid for 2021.

 

The total dividend for 2022 of 33.0p is 2.9 times (2021: 3.0 times) covered by adjusted earnings per share of 96.6p and is in line with guidance for cover of between two and three times.  This reflects the Group's very strong balance sheet, profitability and cashflow from operations for the year.

 

The Group's cash outflow on dividends paid during the year was £73.9 million. A liability has not been recognised at 31 December 2022 for the final dividend as there was no payment obligation at the year end.

 

The final dividend will be paid on 11 May 2023 to shareholders on the Register of Members at the close of business on 14 April 2023, the record date.  The ex-dividend date is 13 April 2023.  The final dividend is subject to approval by shareholders at the Annual General Meeting to be held on 4 May 2023.

Share Buyback

 

In line with the Group's disciplined approach to capital allocation and supported by its strong financial position, 12.28 million ordinary shares in the Company were repurchased on the London Stock Exchange for cancellation between 9 May 2022 and 12 September 2022 at a total cost of £100 million, excluding transaction costs, and an average price of £8.14 per share. This represented 5.1 per cent of the issued share capital of the Company (excluding treasury shares) when the programme commenced.  A second share buyback programme for a maximum consideration of up to £100 million, subject to the limitations of the shareholders authority granted at the AGM of the Company in April 2022, was launched on 10 November 2022. Between 10 November 2022 and 31 December 2022, 4.4 million shares were repurchased for cancellation at a total cost of £35.0 million, excluding transaction costs.  Since the year end and up to and including 28 February 2023, the number of shares repurchased in the second buyback programme increased by 3.0 million shares at a total cost of £27.5 million.

 

Allocation of Capital

 

Acquisitions have been an important part of the Grafton growth story supporting entry into new markets and diversifying its earnings base as well as increasing its presence in existing markets. The Group has a long history of identifying, acquiring and integrating businesses and a skilled and experienced acquisition team to complete transactions.

 

Following receipt of the proceeds from the disposal of our traditional merchanting business in Great Britain in December 2021, we recognise that our balance sheet is very strongly positioned with pre IFRS 16 net cash of £458.2 million at the year end.  In the medium term we are targeting to return to a more appropriate level of financial leverage rather than holding net cash.  We have demonstrated over many years a disciplined approach to capital allocation and our priority remains on deploying surplus capital into generating acquisitive growth providing it makes good strategic and financial sense.  In 2022, the decline in valuations in the public equity markets was not matched by a similar decline in vendor expectations for businesses in private ownership and, as a consequence, our acquisition activity was limited to three bolt-on transactions costing £46.0m.  We continue to actively evaluate acquisition opportunities in our preferred geographies and market segments that meet the Group's target rates of return over the medium term. 

 

With the decline in public equity valuations seen in 2022, the Board felt that relative to other opportunities our own equity represented an attractive investment rather than simply a return of capital and, as noted above, it initiated a share buyback programme.  The size and timing of the programme was appropriate for the delivery of value for shareholders whilst at the same time leaving plenty of scope for acquisition opportunities.  This buyback programme, together with our progressive dividend policy, saw £208.9 million returned to shareholders during the year.  The Board will continue to keep the allocation of capital under review including share buybacks.

 

Implementing Our Sustainability Strategy

 

Sustainability remained a key priority on the Grafton Board Agenda during the year.  Rosie Howells joined the business in September as the new Group Head of Sustainability to support implementation of the sustainability strategy and to work with the Group's businesses to drive continuing progress against key sustainability objectives.  We have today published our second Sustainability Report which sets out in more detail our strategy and achievements in 2022.

 

The strategy, Building a More Sustainable Future, is structured on five priority areas: Planet, Customer & Product, People, Community and Ethics. While there is still much to do, the businesses demonstrated strong progress during 2022.

 

Planet

·      Achieved an 11 per cent reduction in Scope 1 and 2 CO2e per £ million of revenue. This was equivalent to a 3 per cent reduction in absolute emissions.

·      Achieved 17 per cent reduction in operational waste relative to revenue vs 2021 with 97 per cent diversion from landfill.

·      Progressed Scope 3 carbon assessment which will also be a priority in 2023.

 

Customer & Product

·      Rental, refurbishment and recycling offerings are available in a number of businesses.

·      Responsible timber sourcing is an important area of focus for our distributor businesses and over 98 per cent of Selco's building timber was FSC or PEFC certified.

 

People

·      Our Diversity and inclusion working group continued to support our businesses to encourage an inclusive culture that promotes diversity. Over 90 per cent of our colleagues in the UK and Ireland completed the voluntary diversity information questionnaire and 77 per cent answered all questions.

·      Woodie's is the first retailer to be accredited as a gold investor in Diversity by the Irish Centre for Diversity following a three year partnership.  It recently achieved gender balance and is now also reflective of national demographics on ethnicity, age and LGBTQI+ status.

·      Our belief that 'there is nothing we do that is so urgent we cannot do it safely' drove our health and safety programme across our business and resulted in a reduction in the lost time incident frequency rate by 8 per cent and a reduction in the severity rate by 21 per cent.

 

Community

·      Grafton invested over £1.0 million in communities through cash, volunteering and in-kind products and services including a donation of over £250,000 to the Red Cross to support the Ukraine appeal.

 

Ethics

·      A strong focus was placed on ethical business training programmes and there was 92 per cent compliance with the business conduct and ethics programme.

·      The Group's businesses continued to embed a supply chain management system in partnership with an expert risk management company.

 

Grafton's sustainability agenda is based on focusing on those areas that are most material to the business and deliver tangible results and outcomes that will make a real difference to its stakeholders. The Group's sustainability programme informs both longer term strategic investment decisions and day to day operational decisions and recognises the positive connection between sustainability and financial performance.

 

Colleagues

 

The Board would like to express its appreciation to colleagues across the Group for their exceptional support and commitment to customers and to each other.  Their hard work, skill, and dedication were essential to achieving a strong outturn in challenging markets.

 

Outlook

 

The Group's portfolio of higher margin businesses is well positioned to withstand short-term market conditions that may impact demand in the year ahead.  Grafton has an excellent position with both market leading brands and geographic diversity as more than half of revenues are now coming from outside the UK in Ireland, Finland and the Netherlands.

 

Importantly, with a very strong balance sheet and net cash before IFRS 16 leases, the Group is extremely well placed to invest in future growth opportunities.

 

The fall in real disposable incomes will continue to weigh on activity in the RMI market and project affordability will be impacted by higher materials and labour costs.  Interest rate increases are expected to lead to a cooling of demand in new housing markets as affordability reduces.  These common themes are likely to impact demand to varying degrees in individual markets. 

 

Despite these headwinds, we expect some important factors to help mitigate some of the adverse effects on household spending and the current economic outlook appears brighter than many feared in the second half of last year.  Strong labour markets with low levels of unemployment and declining energy prices and inflation should have a positive impact on consumer spending.

 

In the UK, housing RMI activity is expected to remain weak as discretionary spending remains under pressure.  House building is also likely to slow as house builders respond to the cooling market by reducing starts in response to lower demand.

 

In Ireland, the economy has proven resilient and is forecast to grow at a more moderate pace which should support a good level of consumer spending in the RMI and DIY markets.  House completions are expected to be held back by the decline in commencements and concerns about the viability of new developments.

 

In the Netherlands, growth and volumes are expected to be subdued with the housing market likely to remain softer due to higher mortgage rates.

 

In Finland, IKH's exposure to a range of end use markets is expected to help shield it from some of the effects of a mild economic downturn and anticipated fall in house building, following a period of strong growth.

 

2023 has commenced in line with our expectations. In general, volumes are slightly lower than the same period last year and price inflation is moderating.

 

Average daily like-for-like Group revenue increased by 0.7 per cent in the period from 1 January 2023 to 19 February 2023. Average daily like-for-like revenue declined by 1.6 per cent in the UK Distribution business and by 0.1 per cent in the Ireland distribution business. There was growth of 0.4 per cent in the Netherlands and 6.3 per cent in Finland.  Retailing grew average daily like-for-like revenue by 2.4 per cent and Manufacturing by 12.6 per cent.

 

Notwithstanding the current economic conditions, the strength of Grafton's businesses, its geographic diversity and balance sheet leaves it well placed to continue to execute its strategy and to respond to opportunities that emerge. The Group's objective is to outperform in its chosen markets through the cycle. We will allocate organic development capital appropriately to ensure that the Group's brands can continue to support their customers and strengthen their existing market positions.  In addition, we aim to further enhance our business portfolio in selective geographies to support earnings progress and deliver sustainable returns for our shareholders.

 

 

 

 

Operating Review - Continuing Operations   

 

The Distribution businesses in the UK, Ireland, the Netherlands and Finland contributed 84.2 per cent of Group revenue (2021: 81.9 per cent), Retailing 10.6 per cent (2021: 13.4 cent) and Manufacturing 5.2 per cent (2021: 4.7 per cent). 

 

The UK businesses contributed 41.4 per cent (2021: 43.4 per cent) of Group revenue, Ireland 37.8 per cent (2021: 39.5 per cent), the Netherlands 14.6 per cent (2021: 13.8 per cent) and Finland 6.2 per cent (2021: 3.3%).

 

Distribution Segment

(84.2% of Group Revenue, 2021: 81.9%)

 

	2022	2021**
	£'m	£'m	Change*
Revenue	1,936.8	1,727.6	12.1%
Adjusted operating profit before property profit	210.3	209.8	0.2%
Adjusted operating profit margin before property profit	10.9%	12.1%	(120bps)
Adjusted operating profit	235.6	221.8	6.3%
Adjusted operating profit margin	12.2%	12.8%	(60bps)

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

** The 2021 results for the distribution segment do not include the traditional merchanting business in Great Britain that was divested in 2021 and classified as discontinued operations.

 

UK Distribution generated 36.5 per cent (2021: 39.0 per cent) of Group revenue, Irish Distribution 26.9 per cent (2021: 25.8 per cent), Netherlands Distribution 14.6 per cent (2021: 13.8 per cent) and Finnish Distribution 6.2 per cent (2021: 3.3 per cent).

 

UK Distribution

(36.5% of Group Revenue, 2021: 39.0%)

 

	2022	2021**
	£'m	£'m	Change*
Revenue	838.6	821.9	2.0%
Adjusted operating profit before property profit	81.8	102.5	(20.2%)
Adjusted operating profit margin before property profit	9.8%	12.5%	(270bps)
Adjusted operating profit	106.2	113.0	(6.0%)
Adjusted operating profit margin	12.7%	13.7%	(100bps)

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

** The 2021 results for the UK distribution business do not include the traditional merchanting business in Great Britain that was divested in 2021 and classified as discontinued operations.

 

Revenue growth of 2.0 per cent comprises a decline of 2.0 per cent in the like-for-like business and growth of 4.0 per cent from acquisitions and new branch openings.  Average daily like-for-like revenue declined by 1.2 per cent.

 

New Selco and Leyland SDM branches contributed revenue of £15.9 million and the acquisitions in Northern Ireland of the P. McDermott & Sons branch in Omagh, acquired in 2021, and Woodfloor Warehouse, acquired in 2022, contributed incremental revenue in the year of £17.4 million.

 

Gross margin was down by 200 basis points reflecting a normalisation of trading as the businesses reverted to a more traditional trade and retail mix as well as the impact of non-recurring inflation related stock gains realised in the prior year, a more competitive trading environment with greater product availability (compared to supply chain pressures in 2021 that resulted in a shortage of core building materials) and investment by Selco in pricing in a competitive market.

 

Adjusted operating profit before property profit declined to £81.8 million (2021: £102.5 million) and the adjusted operating profit margin, before property profit of 9.8 per cent, was 270 basis points lower than in 2021 due to the small decline in like-for-like revenue, normalisation of the gross margin and increased operating costs.

 

 

Selco Builders Warehouse ("Selco")

 

Revenue declined by a net 1.7 per cent comprising growth of 2.2 per cent from new branches (which are treated as part of like-for-like operations on the first anniversary of opening) and a decline of 3.9 per cent in the like-for-like branch network.  

 

Revenue trends in 2022 developed against the backdrop of a pandemic related surge in activity and record trading levels in the first half of the prior year. Trading normalised in the second half of 2021 as the high level of demand for building materials and supply chain pressures gradually eased.   

 

Significant price increases continued to come through from suppliers as they passed on higher energy, commodity and raw materials prices. 

 

Average daily like-for-like revenue declined by 1.4 per cent in the first half following the exceptional growth in the first half of the prior year.  Building materials' cost price inflation averaged circa 17.0 per cent year-on-year in the first half.  The decline in first half volumes was circa 18.4 per cent.  Average daily like-for-like revenue declined by 4.9 per cent in the second half.  Building materials price inflation eased to 7.0 per cent and the decline in volumes moderated to 11.9 per cent in the second half.  Average daily like-for-like revenue for the year was down by 3.1 per cent and volumes fell by 15.1 per cent. 

 

Housing RMI volumes fell sharply as the economy weakened, inflation climbed to the highest rate for 40 years, consumer confidence remained weak and interest rates rose. Households were also forced to change their spending patterns as they struggled to adapt to soaring energy costs in the face of reduced real disposable incomes and they cut back on discretionary spending.  Selco's trade customers are primarily engaged on small residential RMI projects and volumes were also affected by the very sharp increase in the cost of building materials for the second successive year that reduced affordability and discretionary spending on the home. 

 

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 in 2021, to spending on recreational, travel and leisure activities.  Households were less inclined to spend on their homes with house price growth significantly moderating and interest rates rising.  Non-essential RMI spending on the home was the part of the Selco market that was most exposed to cutbacks on spending as homeowners opted to defer expenditure until visibility on the prospects for the economy and for their personal finances improved.  Branches in London and the South East performed more strongly than those in the regions.

 

Gross margin was down by 200 basis points on the prior year, which had benefitted from a more favourable customer and product mix and inventory gains during a period of rising prices and supply chain pressures.  Selco invested in price on core products in a more competitive market that struggled to immediately absorb the combined effect of high building materials price inflation being passed on to customers and falling volumes. 

 

Overall costs were very tightly controlled notwithstanding inflationary pressure on payroll costs in a very tight labour market and increased rents on a number of branch properties that were subject to five yearly reviews.

 

Operating profit was down on the record result achieved in the prior year due to the sharp decline in volumes, that were partly offset by inflation, and contraction in the gross margin in a very competitive market.

 

The branches that were opened in 2021 in Canning Town and Rochester substantially outperformed plan.  Selco's long-established presence in the South West, where it trades from two branches in Bristol, was extended with the opening of a branch in Exeter in April and one in Cheltenham in December that increased the estate to 74 branches.  A new branch in Peterborough will open in April 2023.  Given the weaker growth outlook for the UK economy and the difficulties experienced by developers in funding new projects we have reassessed Selco's plans for the rollout of its new stores which had targeted an increase in the estate to 100 by 2026.  Our current plans envisage a store estate of approximately 80-90 stores over the medium term.

 

Selco provides a flexible omni-channel offering to trade customers who can enjoy the benefits of a wide range of products in stock, excellent customer service and competitive trade pricing.  Stores are at the heart of the omni-channel experience and serve as a competitive advantage for how the majority of our customers want to shop today.  Selco is engaged in an ongoing store upgrade programme that delivers a better experience for customers and colleagues and ensures that the overall estate is maintained to a good standard.  During the year it completed major upgrades to the Kingsbury, Cardiff and Baguley stores and mini upgrades to nine other stores.  

 

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.

Preparatory work was completed on upgrading the Microsoft Dynamics 365 finance and operations ERP system to a version that incorporates the latest technology.  The upgrade was successfully tested and trialled in three branches before the year end and deployment in the Corporate Office and remainder of the branch network has commenced.

 

Selco implemented a range of initiatives in recent years to enhance the colleague experience and work environment for its 3,000 colleagues and was recognised as one of the best places to work in the UK and ranked in 17^th position in the large company category by colleagues who participated in the Best Companies engagement survey.

 

An initiative to offset Selco's carbon footprint was launched with the planting of more than 100,000 trees near Jedburgh in the Scottish Borders in 2021 and as part of Selco's ongoing commitment to create a sustainable business it joined with the landowner and a key timber supplier in the planting of 160,000 trees on 60 hectares of land located near Llandrindod Wells in Wales.  In another move to reduce carbon emissions, the process to transition the entire fleet of over 300 forklift trucks (as they come up for replacement over the coming years) commenced with the purchase of 28 electrically powered forklift trucks. 

 

A new gas management system to optimise energy usage and reduce carbon emissions was implemented across the branch estate. Selco is also exploring energy generation opportunities across the estate and completed a successful trial of solar panels on the roof of the Barking branch.  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.  All delivery vehicles in the two delivery hubs are now fuelled by lower carbon emission HVO rather than diesel.

 

Leyland SDM

 

Footfall in Leyland SDM, London's largest specialist decorators' and DIY business, started to gradually recover in the early months of the year as visitors and workers began to return to the city.  These groups are key drivers of RMI activity in the leisure and office sectors.  Average daily like-for-like revenue grew by 2.0 per cent in the first half and picked up as the year developed exceeding 10.0 per cent in the fourth quarter driven by inflation and a return to volume growth. 

 

Revenue in the Clapham Junction, Dulwich and Bayswater stores that were opened last year was in line with plan.

 

A decline in the gross margin and increased costs contributed to a decline in operating profit.

 

MacBlair

 

The MacBlair distribution business in Northern Ireland operated at a more normalised level of activity following a record result in the prior year that benefitted from exceptional pandemic related spending on housing RMI.

 

Building materials' price inflation offset a decline in volumes and average daily like-for-like revenue was flat for the year. Transactions with retail customers declined from the exceptional level in the prior year which saw record spending by households on home and garden improvement and maintenance projects.  The decline in RMI revenue was offset by an increase in house building, a market that was subdued in the early months of the prior year before gradually recovering.  Self-build customers, developers of small housing schemes and timber frame house manufacturers generated good growth in revenue. 

 

There was a decline in the gross margin in the like-for-like business because of the fall in higher margin collected transactions with retail customers and an increase in the volume of core building materials delivered to house builders' sites. 

 

The branch in Omagh acquired in December 2021 was integrated into the MacBlair branch network and procurement arrangements were aligned.  In February 2022, MacBlair acquired Woodfloor Warehouse, a leading on-line distributor of timber flooring in Great Britain, Northern Ireland and the Republic of Ireland.  It also operates branches in Bangor, Belfast and Warrington.  Revenue was down on the pre-acquisition level because of a decline in on-line revenue transactions with retail customers in Great Britain, in a weaker RMI market, that accounts for a significant proportion of activity. 

 

Operating profit was down on the prior year including contributions from the two acquisitions and a high single digit operating profit margin was reported for the enlarged business.

TG Lynes

 

TG Lynes, a leading distributor of commercial pipes and fittings principally in London, performed very strongly in what was a record year for the business with excellent growth in revenue and operating profit.  Operating profit saw a continuation of a trend of strong growth since the business was acquired by Grafton in 2015.

 

TG Lynes continued to improve its market position, increasing volumes with subcontractors to the national housebuilders.  Volumes were also higher from the post pandemic recovery in the upgrading of schools and hospitals.  Investment also increased in the hotel, leisure, retail and office sub-sectors of the market.  New build projects with long lead times account for two-thirds of revenue and were not immediately impacted by the downturn in the economy.

 

Voice picking technology was successfully trialled in the warehouse in Enfield and will go live in the first quarter of this year.  It will provide an optimal path for picking orders, reducing errors and increasing warehouse efficiency.    

 

The installation of solar panels in the prior year reduced the carbon footprint by generating the equivalent of two thirds of the electricity required to operate the business and lowered demand for energy from the national grid. 

 

Irish Distribution

(26.9% of Group Revenue, 2021: 25.8%)

 

	2022	2021		Constant Currency
	£'m	£'m	Change*	Change*
Revenue	618.3	544.3	13.6%	14.4%
Adjusted operating profit before property profit	70.5	66.8	5.5%	5.7%
Adjusted operating profit margin before property profit	11.4%	12.3%	(90bps)	-
Adjusted operating profit	71.5	68.2	4.7%	0.6%
Adjusted operating profit margin	11.6%	12.5%	(90bps)	-

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

 

Chadwicks' distribution business in Ireland produced a very strong performance for the year as trading returned to more normal levels following the pandemic. Revenue growth was driven by building materials' price inflation and a significant contribution from acquisitions. Volumes declined in the second half as increased costs of materials and labour alongside subdued demand led construction businesses to scale back activity.

 

Supply chain pressures eased in line with activity levels, but the rate of inflation remained elevated for core building materials including insulation, plasterboard, cement and plastic products driven by higher raw materials and energy prices. A fall in steel and timber prices, partly reversed prior year increases due to the post pandemic spike in demand internationally.   Building materials cost price inflation averaged 14.7 per cent for the year.

 

Average daily like-for-like revenue growth of 41.9 per cent in the first quarter was very strong even adjusting for weaker trading in the first quarter of the prior year when branches remained open albeit at a time when much of the construction sector was not operating due to pandemic related restrictions. The rate of average daily like-for-like growth eased in the second quarter to 4.3 per cent against a very strong prior year performance that benefitted from the rapid recovery in activity and pent-up demand following the lifting of restrictions. Overall growth in average daily like-for-like revenue was 19.5 per cent in the first half. Very strong activity in the first half gave way to a slowdown in second half trading with average daily like-for-like growth easing to 2.1 per cent and averaging 10.3 per cent for the year.

 

Volumes of core building materials recovered from reduced levels caused by the closure of house building sites in the first quarter of the prior year. Demand for hardware products, landscaping materials and paint were lower following exceptional demand from retail customers undertaking housing RMI projects during the pandemic.

 

The gross margin was down on the prior year due to changes in the mix of revenue including a lower proportion of revenue from RMI transactions with retail customers and an increase in the proportion of revenue delivered to trade customers. There was also a time lag in the recovery of materials price increases due to competitive pressure in the market.  The sharp fall in steel and timber prices reduced margins on inventory, partly reversing the gains made in the prior year when prices were rising sharply.

 

Housing transaction volumes are estimated to have increased by circa six per cent in 2022 to 63,000 representing almost three per cent of the housing stock in a market that was very illiquid by international standards. New house completions contributed to growth in transactions increasing to an estimated 29,900 units, up from 20,400 in 2021 when output was reduced by Covid 19 restrictions. There was a major increase in apartment completions which rose by 79 per cent to account for half of total completions. Growth in housing scheme units was 42 per cent and the number of one-off house completions increased by 17 per cent, both of which are significant markets for Chadwicks.

 

The number of housing units on which construction commenced slowed during the year with the decline in apartment construction impacted by the increase in construction costs, planning constraints  and securing project finance. The availability of land and construction capacity contributed to a fall in the commencement of housing schemes and increased costs also weighed on the construction of one-off houses that are typically constructed in non-urban areas.

 

The Proline Architectural Hardware ("Proline") business acquired in February 2021 outperformed plan and produced an excellent result for its first full year under Chadwicks ownership that was complemented by introducing a range of Proline products in 28 Chadwicks branches.

 

The Sitetech construction accessories business acquired at the end of February 2022, traded well ahead of expectations, and made an excellent profit contribution in the ten months post acquisition, in addition to providing Chadwicks with a strong presence in a complementary segment of a market where Sitetech is the market leader. Sitetech collaborated with Chadwicks and provided access to complementary products and the expertise and colleague training required to generate incremental revenue.

 

Chadwicks completed major upgrades to its Bray, Coolock and Kilkenny branches that facilitated the introduction of a number of new product ranges. ECO Centres were opened in 10 branches that supply a range of energy efficient products including insulation, airtightness, ventilation systems, heat pumps and controls, solar energy and water-saving products.  This initiative takes a sustainability first approach to creating better buildings and helps support the grant-aided retrofit programme in Ireland that targets energy upgrades to a quarter of the national housing stock.

 

Chadwicks new transactional website offers over 10,000 products to trade and retail customers with delivery and collection options from 37 locations nationwide.  The new website has increased customer engagement and provided the flexibility and convenience to trade on-line combined with the knowledge and expertise they receive dealing with their local Chadwicks branch. 

 

Chadwicks digital strategy has created greater mobility for colleagues so they can operate digitally throughout branches while delivering greater flexibility in how they engage with customers. The rollout of a delivery transport system has created efficiencies from improving transport planning, route optimisation, customer service and communications.

 

Netherlands Distribution

(14.6% of Group Revenue, 2021: 13.8%)

 

	2022	2021		Constant Currency Change*
	£'m	£'m	Change*
Revenue	336.7	290.5	15.9%	16.8%
Adjusted operating profit	37.6	30.5	23.2%	24.3%
Adjusted operating profit margin	11.2%	10.5%	+70bps	-

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

 

Isero produced excellent results for the year, in broadly favourable markets, that included a good contribution from acquisitions and benefits realised from implementing performance improvement measures.

 

The business has steadily grown in recent years to become the clear market leader in the ironmongery, tools and fixings distribution market in the Netherlands.  It has acquired 82 branches and opened seven in the period since Grafton acquired Isero in late 2015 and now trades from 123 branches.

 

Year-on-year revenue trends were not impacted by the pandemic as the business was treated as an essential distributor and remained open throughout 2021. First half volumes were flat and with inflation contributing growth of 7.5 per cent in average daily like-for-like revenue.  Second half average daily like-for-like revenue growth of 10.4 per cent included a small increase in volumes. 

 

Revenue increased from key account customers engaged on large commercial construction projects, including apartment building and the maintenance of public sector housing.  Isero also improved its market position in the supply of hinges and locks to timber factories where its end-to-end service proposition is a differentiator. Transaction numbers with smaller customers engaged in housing RMI projects were lower.  This segment of the market performed strongly last year as households increased spending on home improvement projects during the pandemic.  Revenue also increased from value added solutions that use technology to efficiently replenish inventory levels in containers located on the sites of customers engaged on large construction projects and in the vans used by Housing Corporations for maintenance services.

 

There was a strong advance in operating profit from growth in like-for-like revenue and a higher gross margin that reflected inflation related inventory gains and improved procurement arrangements. These growth components helped deliver an improvement in the operating profit margin of 70 basis points.  Payroll costs also increased in a tight labour market.

 

The number of transactions in existing homes dropped for the second successive year as affordability, that was already stretched by average house prices increasing by almost a third since early 2020, deteriorated further.  The new housing market was also under pressure as forward sales declined and the number of building permits issued continued to fall. 

 

Organic revenue growth was complemented by a significant contribution from acquisitions that increased overall constant currency revenue by 16.8 per cent.  The five branch Regts B.V. ("Regts") business in Friesland acquired in January 2022 extended Isero's coverage into the Northeast region of the Netherlands and outperformed plan.  Good progress was made harmonising its portfolio of products and aligning procurement arrangements.

 

The two branches in Rotterdam that we relocated last year to higher profile locations and the new branch in Lelystad, a growth city in the centre of the Netherlands, performed well. The new branch that was opened in Zaandam, just north of Amsterdam, also got off to a strong start.  The branch in Gouda was relocated and five branches were upgraded including three of the four Govers branches acquired in April 2021. Further automation measures were implemented in the Waddinxveen distribution centre to improve handling efficiency.

 

Isero continued to implement solutions to reduce carbon emissions focusing on the installation of LED light fittings in several branches as part of an ongoing upgrade programme and, with the cooperation of landlords, solar panels and heat pumps were installed in six branches.  A new circular model was trialled to extend the lifetime of colleague and customer PPE and certain other products through repair and reuse.

 

Finland Distribution

(6.2% of Group Revenue, 2021: 3.3%)

 

	2022	2021		Constant Currency Change*
	£'m	£'m	Change*
Revenue	143.2	70.8	102.2%	101.7%
Operating profit	20.3	10.0	104.2%	103.7%
Operating profit margin	14.2%	14.1%	+10bps	-

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

 

IKH, one of Finland's largest workwear and personal protective equipment ("PPE"), tools and spare parts wholesalers, operates in an attractive segment of the technical trades' distribution market in Finland.  It was acquired by Grafton on 1 July 2021 and performed in line with expectations in its first full year as part of the Group.

 

First half revenue was down on the pre-acquisition level in the prior year as milder than normal weather conditions in the early months of the year reduced demand for a number of seasonally sensitive product categories and trading was also affected by the sharp drop in consumer confidence following the invasion of Ukraine by Russia which shares a long land border with Finland.  Trading improved in May and June following the slow start to the year.

 

Average daily like-for-like revenue increased by 5.4 per cent in the second half as a recovery in demand that developed in the third quarter gained further impetus in the final months of the year supported by generally resilient activity.

 

IKH products are distributed through a network of independently operated IKH partner stores, the strategic cornerstone of the model, third party distributors and owned stores operated from complementary locations. These three routes to market provide a balanced channel exposure and are good touchpoints to support customers operating in the construction, renovation, industrial, agricultural and spares end markets. These channels were strengthened with the appointment of new partners in Joensuu, Finland's 12^th largest city, and in the towns of Raahe and Jamsa.  The three new partners will enable IKH to increase geographic coverage of the market in the central region of Finland.  Exports to Estonia increased and IKH's partner in the country will open a new store in Tallinn in March 2023.

 

The new IKH store in Hämeenlinna, a city located 100 kilometres north of Helsinki, that opened at the end of 2021 started to build market share.  In November, IKH opened its 12^th own store in Rovaniemi, the capital city of Lapland in Northern Finland.

 

The new housing market has been strong in recent years in response to good demand from consumers and investors.  There was a record number of housing starts in 2021 and construction work continued on these projects and house building had a good year with a significant increase in investment.  The number of building permits issued for new homes dropped considerably as mortgage rates and construction costs increased and the housing market started to return to more normal levels of activity.  Residential RMI activity was underpinned by good demand for building services renovations and increased energy related projects in apartment buildings and single housing units.  The weakening economy, higher costs, lower yields and uncertainty slowed new non-residential construction projects.

 

IKH participated in the Great Place to Work colleague engagement survey for the first time and exceeded the threshold for recognition as a Great Place to Work in Finland.

 

Retail Segment

(10.6% of Group Revenue, 2021: 13.4%)

 

	2022	2021		Constant Currency Change*
	£'m	£'m	Change*
Revenue	244.0	282.8	(13.7%)	(13.0%)
Operating profit	32.6	50.9	(35.9%)	(35.5%)
Operating profit margin	13.3%	18.0%	(470bps)	-

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

 

Revenue in Woodie's DIY, Home and Garden business in Ireland normalised, as expected, following exceptional pandemic related constant currency growth of 19.4 per cent in 2021 when Woodie's was treated as an essential retailer and continued to trade during the early months of the year while the country was in lockdown. The normalisation of trading was concentrated over the first half which saw revenue decline by 22.8 per cent. 

 

Revenue trends were broadly stable in the second half despite weak consumer sentiment as cost-of-living pressures caused households to increase spending on essentials including energy and to cut back on discretionary spending.  Consumers also continued to spend more on leisure activities and experiences and less on other areas, including DIY, home and garden, that boomed during the pandemic.   

 

Woodie's had to navigate a unique set of trading conditions in 2022 as exceptional spending in the prior year unwound and real disposable incomes declined as inflation reached its highest level in almost four decades. The business was resilient and as market leader Woodie's was well placed to leverage its competitive advantage to support customers engaged in a broad range of DIY, home and garden projects.

 

A significant proportion of the revenue gains made in the prior year were maintained and there has been a step change in the performance of Woodie's since 2019. Revenue increased by 18.7 per cent from £205.5 million in 2019 and operating profit by 43.9 per cent from £22.6 million. This is a better gauge of Woodie's performance and of the progress made from a clear and consistent focus on colleagues, customers and products.

 

Woodie's provides on-line and in-store channels for its customers while differentiating the service and experience of shopping in its stores. On-line was 3.4 per cent of revenue (2021:  2.9 per cent).  The Woodie's website is also used as a powerful opportunity to engage with customers and enable them to locate and research products that they purchase in-store.   Woodie's has a strong presence on several social media platforms that are becoming the primary channels to communicate with customers and increase brand visibility.  

 

Woodie's was recognised as A Great Place to Work for the seventh consecutive year. It was ranked 11th in Ireland's and 41st in Europe's Best Workplaces benchmarked against the largest international and domestic employers. Putting people first has been central to Woodie's success in recent years and it continued to measure and improve colleague engagement against a range of metrics.  Woodie's became the first retailer and the eighth organisation to ever achieve a Gold Investors in Diversity accreditation from the Irish Centre for Diversity

 

The number of transactions declined by 12.2 per cent and the combined net effect of investment in pricing in certain categories, changes in the average basket value from customers purchasing fewer higher value seasonal products and inflation reduced revenue by 0.8 per cent. Revenue declined across all categories except gardening which performed very strongly.

 

Gross margin trends that developed in the first half of the year continued through the second half with changes in product mix, increased promotional activity, particularly for seasonal ranges, and higher shipping and freight costs contributing to a decline.

 

There was upward pressure on energy and property costs, but the overall cost base was tightly controlled and was down on the prior year as some of the additional capacity put in place to support exceptional customer demand in 2021 was withdrawn. 

 

Energy usage declined by 14 per cent following the upgrade of store lighting, the implementation of new digital controls and a colleague education programme on energy efficiency.

 

Woodie's continued its engagement with communities in Ireland raising over €400,000 for four charities through its annual Heroes campaign that has raised almost €3.0 million over the past eight years.

 

Manufacturing Segment

(5.2% of Group Revenue, 2021: 4.7%)

 

	2022	2021		Constant Currency Change*
	£'m	£'m	Change*
Revenue	120.6	99.6	21.1%	21.2%
Operating profit	27.4	24.0	13.9%	13.9%
Operating profit margin	22.7%	24.1%	(140bps)	-

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

 

The CPI EuroMix business that mainly supplies mortars to national, regional and local house builders and plastering contractors from ten plants in Great Britain performed strongly with revenue growth of 22.3 per cent driven by a surge in the price of raw materials and other input costs.  Volumes for the year were very marginally down as low single digit growth in silo mortar, that accounted for 90 per cent of output, was offset by a decline in the sale of bagged mortar products supplied to the residential RMI market. 

 

Silo mortar volumes recovered strongly in the first quarter with double digit growth on the prior year when house building was disrupted by the pandemic.  Second quarter silo mortar volumes were marginally lower against a very strong comparator that benefitted from an increase in house building as restrictions were lifted.   First half volumes in a few plants were also impacted by supply chain disruption from shortages of cement, sand and limestone and scheduled works to replace or upgrade production equipment. 

 

Overall, second half silo mortar volumes were flat as third quarter growth was offset by a decline in the fourth quarter.  House building slowed in the final months of the year as house builders began to scale back activity in response to a drop in weekly sales rates, a rise in cancellations and lower forward sales.  Demand for new houses was affected by interest rate rises.

 

Demand was well down for ready-to-use bagged mortars and concrete supplied to the housing RMI market compared to the exceptional pandemic related demand in the prior year. Destocking by customers and increased pressure on discretionary spending on the home by end customers as the year progressed also weighed on volumes. 

 

There was a good advance in operating profit on the prior year following the recovery of materials price inflation in the second half and the operating margin was maintained at 20.0 per cent.

    

CPI EuroMix is at an advanced stage in planning for the implementation later this year of a new ERP system that will support all areas of the business, increase visibility of its daily operations and provide real-time information and increased functionality that should allow it to better support the needs of all of its stakeholders.

 

The number of locations using lower carbon cement was increased to seven plants from three in 2021 and we continued to engage with a partner on even lower carbon cement alternatives that are in the very early stages of research and development.  Solar panels were installed at four locations to reduce energy demand from the national grid.  A trial was conducted at one plant on fuelling vehicles with HVO (Hydrotreated Vegetable Oils) instead of fossil fuels.  The business is also engaged on an ongoing research project with its vehicle manufacturer concerning electric powered tractor units used to refill silos on customers sites with dry mortar materials.  Carbon emissions from mortar delivery vehicles were offset through the planting and maintenance of 30 hectares of woodland with 80,000 trees in Dumfries, Scotland which is accredited and registered under the Carbon Code.

 

StairBox, the market leading manufacturer of bespoke staircases primarily for the secondary housing market, reported revenue growth of 18.9 per cent to £31.3 million (2021: £26.3 million).  The increase in revenue was sustained by volume growth of 7.4 per cent and raw materials price increases.  Despite the decline in activity in the residential RMI market, StairBox experienced record demand from trade customers across Great Britain.  Operating profit increased by 9.2 per cent to £9.8 million (2021: £9.0 million), an operating margin of 31.3 per cent (2021: 34.2 per cent).

 

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 updated to include further design features that were well received by customers.  These developments helped StairBox to continue to win a very high level of customer trust and confidence in the quality of its bespoke staircases and service.

 

StairBox successfully relocated its assembly operations to a nearby leased property that provides additional capacity for the overall operation following exceptional growth in volumes in recent years and secures the future of its manufacturing capability in Stoke-on-Trent.

 

Financial Review

 

Revenue

 

Group revenue from continuing operations increased by 9.1 per cent to £2.30 billion from £2.11 billion in 2021.

 

Revenue in the like-for-like business increased by 2.4 per cent (£48.3 million) on the prior year. 

 

The acquisition of IKH in Finland in July 2021 and a number of bolt-on transactions in Ireland, the UK and the Netherlands, contributed revenue of £134.4 million.  New Selco and Leyland SDM branches in the UK, one new branch in the Netherlands and two new branches in Finland contributed an additional £17.8 million of revenue in the year.

 

Currency translation reduced revenue by £7.9 million and the closure of a single branch in Ireland on expiry of a lease reduced revenue by £1.1 million.

 

Adjusted Operating Profit

 

Adjusted operating profit from continuing operations of £285.9 million was down marginally from £288.0 million last year.  This included a non-recurring pension scheme curtailment gain of £3.7 million.

 

Adjusted operating profit before property profit and before the pension scheme curtailment gains was £256.8 million, down by 5.3 per cent from last year's record result of £271.2 million.  The adjusted operating profit margin before property profit and the pension scheme gain declined by 170 basis points to 11.2 per cent. 

 

Net Finance Income and Expense

 

The net finance expense declined to £12.6 million (2021: £19.4 million).  This charge includes an interest charge of £14.9 million (2021: £14.6 million) on lease liabilities recognised under IFRS 16.

 

Interest income on cash deposits amounted to £8.7 million (2021: £0.2 million).  The Group had cash deposits of £467.0 million at the year-end that were denominated in sterling.  Returns on these deposits increased as the year developed to reflect the eight occasions that the Bank of England raised rates from 0.25 per cent at the start of the year to 3.5 per cent at the year end.  

 

Interest payable on bank borrowings denominated in euros and US Private Placement Senior Unsecured Notes fell to £5.6 million (2021: £6.2 million).  The decline was due to lower average debt and a lower interest rate payable on part of the bank debt borrowed under the ECB's Targeted Longer-Term Refinancing Operations. This was partly offset by a higher interest rate payable on the remainder of the bank debt following four increases by the European Central Bank in its key interest rate from zero per cent to 2.5 per cent in the second half of the year. 

The net finance expense included a foreign exchange translation loss of £0.7 million which compares to a gain of £1.7 million in the prior year.

 

Taxation        

 

The income tax expense of £43.1 million (2021: £43.0 million) is equivalent to an effective tax rate of 17.1 per cent of profit before tax (2021: 17.2 per cent).  This is a blended rate of corporation tax on profits in the four countries where the Group operates.  

 

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.

 

The tax rate is expected to increase to 20.1 per cent in 2023 and in the medium term, based on expectations of the balance of profitability across the Group and tax rates, is anticipated to increase to a little over 22 per cent.

 

Cashflow

 

Cash generated from operations for the year was £278.8 million (2021: £303.2 million).  There was an investment of £71.3 million into working capital.  The increase in stock was a reflection of both inflation and our trading strategy to increase product availability for customers during the year at a time of rising prices.  Similarly, the increase in trade debtors reflects inflation as well as an increasing proportion of trade customers relative to cash customers as activity normalised during 2022. 

 

Interest paid amounted to £21.9 million (2021: £20.5 million) which included IFRS 16 lease interest of £14.9 million (2021: £14.6 million).  Taxation paid was £39.5 million (2021: £43.7 million).  Cashflow from operations after interest and taxation payments was £217.3 million (2021: £239.0 million).

 

There was a cash outflow of £46.0 million on completion of the Sitetech acquisition in Ireland, the Woodfloor Warehouse acquisition in Northern Ireland and the Regts acquisition in the Netherlands.  The outlay on capital expenditure and computer software was £57.8 million (2021: £44.4 million).

 

The cash outflow on the dividend payment (£73.9 million) and buyback of shares (£135.0 million) amounted to £208.9 million (2021: £84.9 million).

 

Capital Expenditure and Investment in Intangible Assets

 

Grafton continued to maintain tight control over capital expenditure which amounted to £55.3 million (2021: £43.6 million).  Expenditure of £2.5 million (2021: £0.8 million) was incurred on computer software that is classified as intangible assets. 

 

Asset replacement capital expenditure of £33.2 million (2021: £24.6 million) compares to the depreciation charge on property, plant and equipment of £34.2 million (2021: £38.3 million).  This 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.

 

Development capital expenditure of £22.1 million (2021: £19.0 million) was incurred on a range of initiatives that provide a platform for future growth 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 property, plant and equipment increased to £28.5 million (2021: £22.2 million).  The disposal of three freehold properties retained following the sale of the traditional merchanting business in Great Britain generated cash proceeds of £26.2 million and realised a profit of £19.9 million. 

 

Pensions

 

The IAS 19 defined benefit pension schemes had a net deficit of £10.5 million at the year end, down by £1.0 million on the net deficit of £11.5 million on 31 December 2021. 

 

Changes to financial assumptions reduced scheme liabilities by £98.1 million reflecting the net impact of a gain from the increase in discount rates and a loss from the increase in inflation expectations.  Changes in demographic assumptions increased scheme liabilities by £2.9 million and experience variations increased liabilities by £2.4 million.  The net impact was a reduction in the liabilities of the schemes by £92.8 million.

 

The increase in discount rates used to discount scheme liabilities moved in line with increases in corporate bond rates. The rate used to discount UK liabilities increased by 290 basis points to 4.8 per cent and the rate used to discount Irish liabilities increased by 255 basis points to 3.7 per cent.  These movements reduced scheme liabilities by £108.0 million.

 

Inflation rates increased, particularly in relation to the Irish schemes, over the past year and this impacted the value of liabilities as future benefit payments from the pension plans are directly or indirectly linked to future inflation.  This was particularly 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 at the date members retire with inflation increasing liabilities only up to that date.

 

There was a loss on plan assets of £97.8 million due to the fall in the values of liability driven investments, bonds and equities that was almost matched by the reduction in liabilities.  

 

Asset experience losses in the UK scheme were greater than the reduction in liabilities and this was the main contributor to the scheme deficit increasing from £0.7 million to £14.2 million.  In Ireland, asset experience losses were materially less than gains from the reduction in liabilities resulting in a significant improvement in the financial position of the schemes.  There was also a once-off gain of £3.7 million (before costs) from closing one of the schemes to future accrual.  These factors mainly contributed to the schemes in Ireland moving from a deficit of £9.9 million to a surplus of £4.6 million.  

 

There was a scheme deficit of £0.8 million (31 December 2021: £0.8 million) related to the Netherlands business. 

 

Following 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 IFRS 16 lease obligations) at 31 December 2022 was £8.9 million which compares to £139.0 million at 31 December 2021.  The proceeds on the sale of the Traditional Merchanting Business in Great Britain for an enterprise value of £520.0 million were received on 31 December 2021.

 

The Group's net cash position, before recognising IFRS 16 lease liabilities, was £458.2 million, down from £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. The Group has a progressive dividend policy with an objective of maintaining dividend cover at between two and three times earnings.

 

Liquidity

 

Grafton ended 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 £934.6 million at 31 December 2022 (31 December 2021: £1,235.4 million).  As shown in the analysis of liquidity on page 46, accessible cash amounted to £707.7 million (31 December 2021: £840.7 million) and there were undrawn revolving bank facilities of £226.9 million (31 December 2021: £394.7 million).

 

The Group had bilateral loan facilities of £340.7 million at the year end (31 December 2021: £433.7 million) with four relationship banks and debt obligations of £141.9 million (31 December 2021: £134.4 million) from the issue of unsecured senior notes in the US Private Placement market.

 

In August 2022, the Group completed a refinancing of its bilateral loan facilities that were due to expire in March 2023.  These revolving loan facilities for £340.7 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 four banks.  These new facilities provide certainty of finance over a longer period on improved terms and replaced facilities of £380.7 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.

 

A one-year facility for £86.0 million put in place in December 2021 and facilitated by one of the Group's relationship banks under the ECB's Targeted Longer-Term Refinancing Operations was repaid in December 2022. This facility was used to temporarily replace drawings on existing facilities on more attractive terms.

The average maturity of the committed bank facilities and unsecured senior notes at 31 December 2022 was 5.2 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.

 

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 £13.2 million (2021: £13.0 million) and the finance (interest) expense by £14.9 million (2021: £14.6 million) in the period.  Profit before tax was reduced by £1.7 million (2021: reduced by £1.6 million) and profit after tax reduced by £1.3 million (2021: reduced by £1.4 million) because of IFRS 16.

 

The right-of-use asset in the balance sheet at 31 December 2022 was £420.1 million (31 December 2021: £421.3 million) and lease liabilities were £449.3 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 year with shareholders' equity up by £26.0 million to £1.75 billion.  Profit after tax increased shareholders' equity by £208.6 million and there was a gain of £30.7 million on translation of euro denominated net assets to sterling.  Shareholders' equity was reduced for a remeasurement loss (net of tax) of £2.5 million on pension schemes, for dividends paid of £73.9 million and by £143.0 million for the buyback of shares. Other changes increased equity by £6.0 million.  

 

Return on Capital Employed

 

Return on Capital Employed in continuing operations declined by 220 basis points to 17.2 per cent (2021: 19.4 per cent) including leased assets.

 

Principal Risks and Uncertainties                     

 

The primary risks and uncertainties affecting the Group are set out on pages 70 to 75 of the 2022 Annual Report and Accounts.  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; Competition in Distribution, Retailing and Manufacturing Markets; Information Technology Systems and Infrastructure; Health and Safety; Sustainability and Climate Change; Internal Controls and Fraud and Pandemic Risk.

 

 

 

 

 

 

Grafton Group plc

 

Group Income Statement

For the year ended 31 December 2022

 

	Notes		2022 £'000		2021 £'000
Revenue	2		2,301,482		2,109,909
Operating costs			(2,062,597)		(1,857,487)
Property profits	3		25,381		16,740
Operating profit			264,266		269,162
Finance expense	4		(21,273)		(21,269)
Finance income	4		8,690		1,904
Profit before tax			251,683		249,797
Income tax expense	17		(43,065)		(42,952)
Profit after tax for the financial year from continuing operations			208,618		206,845
Profit after tax from discontinued operations	14		-		134,422
Profit after tax for the financial year			208,618		341,267
Profit attributable to:
Owners of the Company			208,618		341,267
Profit attributable to:
Continuing operations			208,618		206,845
Discontinued operations			-		134,422
Earnings per ordinary share (continuing operations) - basic	5		89.3p		86.4p
Earnings per ordinary share (continuing operations) - diluted	5		89.2p		86.3p
Earnings per ordinary share (discontinued operations) - basic	5		-		56.2p
Earnings per ordinary share (discontinued operations) - diluted	5		-		56.1p
Earnings per ordinary share (total) - basic	5		89.3p		142.6p
Earnings per ordinary share (total) - diluted	5		89.2p		142.3p

Grafton Group plc

 

Group Statement of Comprehensive Income

For the year ended 31 December 2022

 

	Notes		2022 £'000		2021 £'000
Profit after tax for the financial year			208,618		341,267
Other comprehensive income
Items that are or may be reclassified subsequently to the income statement
Currency translation effects:
- on foreign currency net investments			30,741		(25,168)
Fair value movement on cash flow hedges:
- effective portion of changes in fair value of cash flow hedges			(29)		57
			30,712		(25,111)
Items that will not be reclassified to the income statement
Remeasurement (loss)/gain on Group defined benefit pension schemes	13		(5,040)		14,886
Deferred tax on Group defined benefit pension schemes			2,558		(3,212)
			(2,482)		11,674
Total other comprehensive income/(expense)			28,230		(13,437)
Total comprehensive income for the financial year			236,848		327,830
Total comprehensive income attributable to:
Owners of the Company			236,848		327,830
Total comprehensive income for the financial year			236,848		327,830

 

Grafton Group plc - Group Balance Sheet as at 31 December 2022

 

	Notes		31 Dec 2022		31 Dec 2021
ASSETS			£'000		£'000
Non-current assets
Goodwill	15		635,751		599,810
Intangible assets	16		153,712		144,327
Property, plant and equipment	9		354,402		319,295
Right-of-use asset	8		420,115		421,254
Investment properties	9		26,084		26,527
Deferred tax assets	17		8,063		8,793
Lease receivable			453		881
Retirement benefit assets	13		4,584		3,596
Other financial assets			129		126
Total non-current assets			1,603,293		1,524,609
Current assets
Properties held for sale	9		4,364		6,125
Inventories	10		399,565		344,172
Trade and other receivables	10		267,694		233,486
Lease receivable			196		212
Cash and cash equivalents	11		711,721		844,663
Total current assets			1,383,540		1,428,658
Total assets			2,986,833		2,953,267
EQUITY
Equity share capital			7,870		8,570
Share premium account			221,975		219,447
Capital redemption reserve			1,389		643
Revaluation reserve			12,375		12,519
Shares to be issued reserve			8,647		11,837
Cash flow hedge reserve			(37)		(8)
Foreign currency translation reserve			87,492		56,751
Retained earnings			1,411,053		1,413,737
Treasury shares held			(5,185)		(3,897)
Equity attributable to owners of the Parent			1,745,579		1,719,599
Total equity			1,745,579		1,719,599
LIABILITIES
Non-current liabilities
Interest-bearing loans and borrowings	11		253,502		172,601
Lease liabilities	11		389,198		396,070
Provisions			15,189		14,862
Retirement benefit obligations	13		15,068		15,067
Deferred tax liabilities	17		61,011		56,402
Total non-current liabilities			733,968		655,002
Current liabilities
Interest-bearing loans and borrowings	11		-		84,030
Lease liabilities	11		60,105		52,924
Trade and other payables	10		420,653		419,111
Current income tax liabilities			20,595		15,956
Derivative financial instruments	11		29		8
Provisions			5,904		6,637
Total current liabilities			507,286		578,666
Total liabilities			1,241,254		1,233,668
Total equity and liabilities			2,986,833		2,953,267

 

Grafton Group plc - Group Cash Flow Statement

For the year ended 31 December 2022	Notes	31 Dec 2022 £'000		31 Dec 2021 £'000
Profit before taxation from continuing operations			251,683		249,797
Profit before taxation from discontinued operations	14		-		143,846
Profit before taxation			251,683		393,643
Finance income			(8,690)		(1,904)
Finance expense	4,14		21,273		22,512
Operating profit			264,266		414,251
Depreciation	8,9		94,313		97,894
Amortisation of intangible assets	16		20,295		17,184
Share-based payments charge			4,719		5,601
Movement in provisions			(1,316)		(1,950)
(Profit)/loss on sale of property, plant and equipment	9		(248)		522
Property profits - continuing operations	9		(20,383)		(6,890)
Property profits - discontinued operations	9		-		(396)
Fair value gains recognised as property profits	9		(4,998)		(9,850)
Asset impairment and fair value losses	9		-		248
Profit on disposal of Group businesses	14		-		(125,116)
Gain on derecognition of leases			(475)		(500)
Contributions to pension schemes in excess of IAS 19 charge			(6,150)		(23,650)
Increase in working capital	10		(71,273)		(64,129)
Cash generated from operations			278,750		303,219
Interest paid			(21,879)		(20,464)
Income taxes paid			(39,529)		(43,722)
Cash flows from operating activities			217,342		239,033
Investing activities
Inflows
Proceeds from sale of property, plant and equipment	9		845		2,611
Proceeds from sale of properties held for sale	9		4,238		18,881
Proceeds from sale of investment properties	9		23,463		756
Proceeds from sale of Group businesses (net of cash disposed)	14		-		498,530
Interest received			8,690		193
			37,236		520,971
Outflows
Acquisition of subsidiary undertakings (net of cash acquired)	14		(45,978)		(123,309)
Deferred acquisition consideration paid	10		(4,000)		-
Investment in intangible asset - computer software	16		(2,522)		(827)
Purchase of property, plant and equipment	9		(55,318)		(43,616)
			(107,818)		(167,752)
Cash flows from investing activities			(70,582)		353,219
Financing activities
Inflows
Proceeds from the issue of share capital			2,574		2,974
Proceeds from borrowings			141,722		96,897
			144,296		99,871
Outflows
Repayment of borrowings			(158,909)		(152,004)
Dividends paid	6		(73,868)		(84,921)
Treasury shares purchased	20		(142,981)		-
Payment of lease liabilities			(58,078)		(56,043)
			(433,836)		(292,968)
Cash flows from financing activities			(289,540)		(193,097)
Net (decrease)/increase in cash and cash equivalents			(142,780)		399,155
Cash and cash equivalents at 1 January			844,663		456,028
Effect of exchange rate fluctuations on cash held			9,838		(10,520)
Cash and cash equivalents at the end of the year			711,721		844,663
Cash and cash equivalents are broken down as follows:
Cash at bank and short-term deposits			711,721		844,663