Grafton Group: Good Trading Performance from Diversified Earnings Base

Grafton Group plc, the international building materials distributor and DIY retailer is pleased to announce its half year results for the period ended 30 June 2022. 

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 

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.

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

*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.

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."

Source : Grafton Group

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