RNS Number : 3153G
Grafton Group PLC
01 March 2018
 

 

 

 

 

Grafton Group plc

Final Results

For the Year Ended 31 December 2017

                                                           

           



 

 

Grafton Group plc

 

Final Results for the Year Ended 31 December 2017

 

Strong Set of Results with Growth in Profitability in all Segments and Geographies

 

Grafton Group plc ("the Group"), the international builders merchanting and DIY Group, announces its final results for the year ended 31 December 2017.

 

£m*


2017

2016

Change

Revenue**


2,716

2,496

+9%

Adjusted***


Operating profit before property profit


160.9

137.1

+17%

Operating profit


163.7

142.0

+15%

Profit before tax


157.2

136.2

+15%

Earnings per share - basic


54.9p

47.7p

+15%

Statutory results


Operating profit


160.9

120.1

+34%

Profit before tax


154.5

114.2

+35%

Earnings per share - basic


54.0p

39.6p

+36%

Dividend


15.50p

13.75p

+13%

Net debt


62.9

96.3

(£33.4m)

Gearing


5%

9%

(400bps)

Adjusted operating margin before property profit


5.9%

5.5%

+40bps

Return on capital employed


13.6%

12.5%

+110bps

 

*Additional information in relation to Alternative Performance Measures (APMs) is set out on pages 31 to 34.

**2016 revenue has been updated to reflect a change in the presentation of rebates payable to customers and the segmental presentation has also been updated. There was no impact on operating profit as a result of this change.

***The term "adjusted" means before amortisation of intangible assets arising on acquisitions and exceptional items of £19.7 million in 2016.

 

Highlights                      

·     Record revenue reflects strong organic growth

·     Adjusted Group operating profit before property profit up 17%

·     Growth in profitability in all segments and geographies:

Strong organic growth in Irish Merchanting, Woodie's DIY and Mortar Manufacturing

Acquisitions and organic growth increase scale and profitability of Dutch merchanting business

Continued investment in Selco with a record number of branch openings

Traditional UK Merchanting business benefits from growth and prior year restructuring

·     Record cash from operations of £210.7 million (2016: £168.6 million) finances investment and strengthens balance sheet

·     Investment of £119.1 million (2016: £72.3 million) on capital expenditure and acquisitions

·     Progressive dividend policy - growth of 121% over the past five years



Gavin Slark, Chief Executive Officer commented :

 

"2017 was a very good year for Grafton that saw all segments and geographies contribute to strong revenue growth and a 15% increase in adjusted profit before tax and earnings per share.  Our expectations are positive for the current year and we remain confident about the potential to take advantage of opportunities that create value for shareholders."

                                                                                                                                      

 

Webcast Details

 

An analysts and investors results presentation will be hosted by Gavin Slark and David Arnold at 10.00am (GMT) today 1 March 2018 at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. A live webcast will be available on www.graftonplc.com/webcastfy17/ and we recommend you register in advance. A recording of this webcast will also be available to replay later in the day. The results presentation can be viewed/downloaded at http://www.graftonplc.com

 

 

Enquiries:

Grafton Group plc + 353 1 216 0600

Gavin Slark, Chief Executive Officer

David Arnold, Chief Financial Officer

 

Murray + 353 1 498 0300

Pat Walsh

 

MHP Communications + 44 20 3128 8100

James White

 

 

Cautionary Statement

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

 



 

Final Results

For the Year Ended 31 December 2017

 

Group Results

 

 

 

Grafton achieved a strong set of results for the year driven principally by organic growth, an improvement in the Group's gross margin and good cost control, all of which combined to produce a further improvement in financial performance.  The Group also benefitted from its exposure to multiple geographic markets and a well diversified customer base.  

 

The UK merchanting business made good progress and saw operating profit exceed £100 million as it benefitted from internal initiatives and the restructuring undertaken in 2016 which delivered in line with the Group's expectations. Selco had its most active year ever on the development front with the opening of twelve branches.  The traditional UK merchanting brands had a successful year and reported  good progress in growing profitability.

 

The market leading merchanting business in Ireland continued to be an important and consistent growth engine for Grafton delivering double digit revenue growth and a strong increase in profitability for the fourth successive year.  The operating profit margin before property profit increased by 70 basis points to 8.5 per cent.

 

Good organic growth in a favourable market together with the completion of three acquisitions substantially increased the scale and profitability of the Netherlands business in what was only the Group's second full year of trading in that market.  The business is now established as a significant contributor to Group profitability and a sound platform for future growth.

 

The Belgian merchanting business responded positively to the actions taken in recent years and returned to profitability.

 

The Woodie's DIY, Home and Garden retailing business in Ireland delivered high levels of growth in revenue and profit that reflected the success in repositioning the business and the positive response from customers to the store upgrade programme.  The operating profit margin progression was very strong increasing by 150 basis points to 6.2 per cent.

 

CPI EuroMix, the market leading UK mortar business, reported an excellent set of results for the year and the segment operating margin increased by 220 basis points to 22.9 per cent.

                              

Cash generation from operations was very strong at a record £210.7 million (2016: £168.6 million).  These funds were used to invest in future growth through organic initiatives and selective acquisitions, increase the dividend, reduce net debt to its lowest level in almost two decades and strengthen the Group's investment grade credit rating.

 

Dividend

 

A second interim dividend of 10.25p (2016: 9.0p) was approved to give a total dividend for the year of 15.50p.  This represents an increase of 13 per cent on total dividends of 13.75p paid for 2016.  The increase reflects the Board's policy which is based on increasing dividends in line with increases in earnings.  Dividend cover remained constant at 3.5 times. 

 

Outlook

 

We anticipate that overall conditions in the UK merchanting market are likely to remain relatively flat and that further progress in 2018 will continue to be dependent on realising benefits from self-help and other opportunities.

Activity levels in the UK housing RMI market are expected to remain subdued and sensitive to changes in housing transactions and consumer confidence and spending.  House building is expected to remain strong supported by good underlying demand, the availability of mortgages and the Help to Buy scheme.

 

The outlook for the Group's businesses in Ireland is favourable with balanced growth forecast to continue albeit at a more moderate rate than experienced in recent years.  Demand in the merchanting and DIY markets should continue to benefit from increased consumer spending and investment in residential RMI, house building and non-residential construction. 

 

The prospects for the Dutch economy are positive with broadly based growth forecast to continue boosted by international trade and increased public spending.  Demand in the secondary and new housing markets is expected to continue to exceed supply. 

 

The Belgian merchanting business should continue to benefit from internal initiatives and the modest recovery in the economy.

 

Total revenue growth in the period from 1 January 2018 to 18 February 2018 was 6.8%.  Average daily like-for-like revenue increased by 3.8 per cent in the overall Group, 1.0 per cent in the UK merchanting business, 5.6 per cent in the Irish merchanting business, 11.0 per cent in the Dutch merchanting business and 7.2 per cent in the Belgium merchanting business.  Like-for-like revenue was ahead by 17.0 per cent in the retailing business in Ireland and by 25.7 per cent in the manufacturing business.

 

We remain confident about the prospects for growth in the current year and in our capacity to take advantage of future opportunities to create value for shareholders.

 

 

 

 

 

 

 



 

Operating Review                      

 

 

Merchanting Segment (91% of Group Revenue)

 

 


2017

£'m

2016

£'m

Actual Change

Revenue

2,469.4

2,280.6

+8.3%

Adjusted operating profit before property profit

148.9

130.3

+14.3%

Adjusted operating profit margin before property profit

6.0%

5.7%

+30bps

Adjusted operating profit

151.6

135.2

+12.1%

Adjusted operating profit margin

6.1%

5.9%

+20bps

 

Merchanting is a core business and competence of Grafton accounting for 91 per cent of revenue from businesses in the UK, Ireland, the Netherlands and Belgium.  The businesses in each of these countries, all of which have leading market positions, reported increased revenue and adjusted operating profit before property profit for the year.

 

UK Merchanting  

 


2017

£'m

2016

£'m

Actual Change

Revenue

1,845.1

1,762.3

+4.7%

Adjusted operating profit before property profit

100.9

94.8

+6.5%

Adjusted operating profit margin before property profit

5.5%

5.4%

+10bps

Adjusted operating profit

102.6

99.7

+2.9%

Adjusted operating profit margin

5.6%

5.7%

(10bps)

 

The UK Merchanting business delivered a good performance despite relatively weak growth in the UK economy. The business traded against the backdrop of low volume growth in the residential RMI market and a significant pick-up in the rate of building materials price inflation.   Mixed trading conditions were influenced by general economic and household uncertainty and a competitive pricing environment.  The pace of growth in house prices slowed and the number of housing transactions, a driver of RMI spending, was flat at 1.2 million for the fourth successive year.  Against this challenging backdrop, average daily like-for-like revenue grew by 4.5 per cent comprising volume growth of 2.0 per cent and inflation of 2.5 per cent. 

 

Revenue growth in the like-for-like business was £70.8 million and new branches and developments generated revenue of £56.5 million.  These gains were partly offset by a revenue decline of £44.7 million due to the closure of 47 Plumbase and Contracts branches in the last fourth quarter of 2016.

 

An increase in the gross margin by 30 basis points was due to a favourable change in mix related to increased revenue in Selco.

 

The adjusted operating profit margin before property profit advanced by 10 basis points after absorbing an increase of £3.0 million in Selco store opening costs.

 

Selco Builders Warehouse , the retail style merchanting model for trade and business customers, expanded its branch network organically at the fastest rate in its history.  Reported revenue growth of 15 per cent  for the year came principally from the opening of new branches.

 

Average daily like-for-like revenue growth moderated in the Greater London Area, which accounted for three quarters of revenue, following a sustained period of outperformance.  Like-for-like revenue growth was also influenced by the transfer of revenue from a number of long established branches, that were trading at record levels of activity and with limited spare capacity, to a number of new branches that were opened over the past eighteen months.  There was a significant increase in market coverage with the opening of five branches in the first half and seven in the second half of the year.  The business traded from 59 branches at the year end.

 

Selco continued to implement a clear and well-focused strategy that is based on an opportunity to grow revenue and the scale of the business.  This involved increased investment and a step-up in the number of branch openings and is supported by a very successful operating model.  Selco increased its high level of operating profit before store opening costs which were ahead of the prior year by £3.0 million.

 

Selco plans to open seven new branches this year and to relocate its sizeable long established branch at Cricklewood to a new store nearby.

 

Development of Selco's multi-channel offering continued with the launch of a new on-line platform with enhanced click and collect functionality and a new App that allows customers to prepare lists of building materials required for individual projects, receive quotes and place orders through their smartphones or other devices.

 

Buildbase performed well despite mixed market conditions that saw weak volume growth in the residential RMI market and stronger house building activity.  Commercial initiatives drove like-for-like volume growth in revenue and the business recovered significant supplier price increases related to the effects of sterling exchange rate weakness and increased commodity prices.

 

The gross margin was maintained in a competitive market aided by procurement gains, a more favourable product mix and targeted price adjustments.  Overall, Buildbase recorded an improvement in operating profit and margin in the year.

 

The process of upgrading the Buildbase legacy trading and back office systems is at an advanced stage following two years of planning and development activity.  The trading system recently entered the parallel pilot phase of testing in a number of branches with rollout to the branch estate expected to commence towards the end of this year.  The expected incremental costs of implementation and user training in the current year is circa £3.0 million and the annual amortisation charge following full deployment across the branch network will be circa £3.2 million per annum.

 

Plumbase   profitability was substantially improved from a low base despite revenue being lower due to branch closures in 2016.  Management were successful in growing like-for-like revenue and in maintaining gross margin discipline in a very competitive market environment.  Actions were taken to improve the customer mix and the initiatives taken over the past eighteen months started to deliver benefits.  The bathroom distribution business continued to deliver a strong level of operating profit and a good operating margin.

 

Buildbase Civils, a distributor of heavyside building materials, made good progress under new management increasing revenue and operating profit.  The business benefitted from the branch consolidation and restructuring undertaken last year and from positive trading conditions in the new housing and infrastructure markets.  The branches in Scotland, that trade under the PDM brand, successfully responded to the completion of a number of major hydro electric projects with new business wins for the supply of materials to groundworks projects and reported a good outcome for the year in a more challenging trading environment.

 

T.G. Lynes , a leading distributor of pipes and fittings to commercial heating, plumbing and mechanical services contractors delivered strong revenue and profit growth. The business leveraged its selling and logistics capability and realised significant economies of scale from its single site facility in Enfield that services customers operating primarily within the M25 Motorway.  The small network of Plumbase Industrial branches, that also trade in this market, achieved a significantly improved result.

 

MacBlair , the Northern Ireland merchanting business, realised good revenue and profit growth in its provincial branch network and made an encouraging start to realising gains from investment in the branch infrastructure in the Greater Belfast Area which represents a future growth opportunity.  

 

 

 

 

Irish Merchanting  

 


2017

£'m

2016

£'m

 

Actual Change

Constant Currency Change

Revenue

403.6

347.3

+16.2%

+8.9%

Operating profit before property profit

34.5

+27.3%

+19.7%

Operating profit margin before property profit

8.5%

+70bps


Operating profit

35.5

+31.2%

+23.3%

Operating profit margin

8.8%

7.8%

+100bps


 

2017 was another year of consistent market outperformance by the Irish Merchanting business and the fourth consecutive year to report double digit like-for-like revenue growth.  The business continued to achieve excellent growth in operating profit.

 

Management used the increased scale and operational leverage of the business to achieve procurement gains and efficiencies across the branch network resulting in an increase in the pre-property operating profit margin by 70 basis points to 8.5 per cent.

 

The Irish Merchanting business used the benefits of national scale to continue developing close relationships with customers supported by competitive pricing and great service.   Initiatives to increase the gross profit margin were successful and more than offset the adverse impact of a change in the mix of business related to increased revenue from residential and commercial new build projects.

 

Some of the gains from increased revenue were reinvested in the businesses to support the higher level of activity in the branch network and to provide for further progress in a market that offers significant growth potential.  This involved creating 60 new roles that will allow the business to continue to leverage its leadership position as the market returns to a more normalised level of activity over the coming years.

 

Overall activity in the construction sector increased during the year although growth was uneven across the industry.  Recently published Government statistics show that just 10,283 new build homes were sold last year, an increase of 42 per cent on 2016 but well short of the estimated 30,000 new homes required to meet long term annual demand.  This points to a more sustained but measured increase in new builds over the coming years.

 

Home owners opted to renovate their existing homes as transactions in the secondary housing market remained low due to a lack of supply.  A pick-up in non-residential construction was concentrated in the office, retail and hotel sectors in the Dublin Area.  Although the civils and infrastructure sector was softer in 2017 following the completion of a number of major projects in 2016, prospects for 2018 are very encouraging due the current pipeline of projects.

 

The opening of three branches in Dublin, that provide convenient collection points for customers, increased the branch network to 49 nationally including 20 in the Greater Dublin Area.  We also continued to invest in customer service related opportunities with the opening of three small plant and tool hire implants and the introduction of a range of commercial plumbing products.

 

Netherlands Merchanting  

 


2017

£'m

2016

£'m

Actual Change

Constant Currency Change

Revenue

131.0

87.7

+49.4%

+39.8%

Adjusted operating profit

12.6

9.1

+38.1%

+29.3%

Adjusted operating profit margin

9.6%

10.4%

(80bps)


 

The Netherlands business delivered revenue growth of 49.4 per cent, increased adjusted operating profit by 38.1 per cent and expanded the branch network by 19 to 58 with the completion of three acquisitions.  The business has significantly evolved, under a strong management team, since the Group entered the Netherlands market at the end of 2015 with the acquisition of Isero .  A leadership position and strong presence has been established in the tools, ironmongery and fixing segment of the merchanting market which has a significant addressable market and opportunities to make bolt-on acquisitions.

 

Like-for-like revenue grew by 5.4 per cent in the Isero business.  Strong growth in the branch network, driven by an increased focus on smaller projects that generate higher returns, was partly offset by lower revenue from larger projects.

 

The like-for-like gross margin improved due to positive mix effects and procurement gains.  Growth in operating profit and in the operating margin in the Isero business was partly offset by operating costs incurred on a new on-line platform and on the planned relocation of the central distribution facility to support recent and anticipated growth in the branch network.

 

The 14 branch Amsterdam based Gunters en Meuser business acquired on 5 January 2017 traded ahead of expectations and made a strong operating profit contribution for the year.  The business is primarily focused on the maintenance of private and public sector housing and public sector non-residential properties.

 

The small single branch business acquired in Wijchen, Eastern Netherlands was fully integrated and improved its market position in the town.

                                                  

Scholte & de Vries - Estoppey , a third generation family business, trading from four branches located primarily in the Greater Amsterdam Area, was acquired in November 2017. 

 

Belgium Merchanting  

 


2017

£'m

2016

£'m

Actual Change

Constant Currency Change

Revenue

89.6

83.4

+7.5%

+0.5%

Operating profit/(loss)

0.9

(0.7)

+234.4%

+220.0%

Operating profit margin

1.0%

(0.8%)

+180bps


 

Like-for-like constant currency revenue increased by 1.4 per cent in a more stable market that saw a return to modest growth in the second quarter that continued through to the year end.  The customer base was reoriented towards a small to medium sized trade customer collected business model that led to a reduction in distribution costs.  New procurement arrangements and cost reduction initiatives also contributed to the improvement in performance.

 

Prior to the year end, the Group acquired the 35 per cent shareholding in YouBuild that it did not already own.  YouBuild trades from 11 branches that are located mainly in the Flanders region and accounts for over half of the Belgian revenue.  The Central Brussels branch was recently relocated to a new purpose built facility on an adjoining site significantly expanding the range of products on offer and improving branch merchandising and logistics.

 

Retail Segment (7% of Group Revenue)

 


2017

£'m

2016

£'m

Actual Change

Constant Currency Change

Revenue

180.4

157.1

+14.8%

+7.4%

Operating profit

11.2

7.3

+53.1%

+44.3%

Operating profit margin

6.2%

4.7%

+150bps


 

Woodie's Ireland's number one retailer for DIY, Home & Garden products, expanded its market position with like-for-like revenue growth of 9.1 per cent.  The strong performance for the year reflected the positive response from customers to the transformation programme implemented in recent years.  This programme sought to build a business for the future to meet the evolving needs of customers while recognising the unique heritage of Woodie's in the Irish retail market.  Woodie's traded strongly though the year in a favourable economy and achieved above market growth from improved and extended product ranges and initiatives in the Seasonal, Kitchens and DIY categories.

 

Eight stores were upgraded taking the number completed to twenty by the year-end representing two-thirds of revenue.  Woodie's online presence, which allows customers the convenience to shop at any time using the direct delivery service or to click-and-collect from stores, was enhanced with a new website and on-line revenue doubled. 

 

Woodie's retained its Great Place to Work status and almost one third of colleagues completed accredited educational programmes which are important to continuing to deliver a market leading service and a good shopping experience for customers. 

 

The benefit of increased revenue was optimised by tight control of costs and operating profit increased by 53.1 per cent.  The operating profit margin advanced by 150 basis points to 6.2 per cent and has grown by 360 basis points over the past two years. 

 

Manufacturing Segment (2% of Group Revenue)

 


2017

£'m

2016

£'m

Actual Change

Constant Currency Change

Revenue

66.1

58.7

+12.5%

+12.0%

Operating profit

15.1

12.1

+24.5%

+23.9%

Operating profit margin

22.9%

20.7%

+220bps


 

CPI EuroMix consolidated its market leadership position in the dry mortar market in Britain where it operates from ten plants.  The business had another successful year under an excellent management team that is focused on industry leading standards and continuous performance improvement.

 

Revenue growth was driven by increased volumes in a strong house building market, product innovation, customer service initiatives that differentiate the business in the market place and recovery of raw material price increases.  There was significant growth in revenue from EuroMix pre-mixed bagged products and concrete in a competitive pricing environment.

 

The gross margin was stable and overheads were down despite the increase in volumes.  Operating profit increased by 24.5 per cent and the operating profit margin was up by 220 basis points and has increased by 410 basis points over the past two years.

 

Financial Review

 

Our three strategic pillars are based on increasing revenue, operating margin and capital turn.  The Group reported revenue of £1.8 billion, an operating margin of 3.4 per cent and capital turn of 1.8 times for 2012 and since then has achieved strong increases in each of these metrics such that, in the financial period just ended, revenue had  grown by 54 per cent to £2.7 billion, the adjusted operating margin was 260 basis points higher at 6.0 per cent and capital turn improved to 2.3 times.  As a consequence, adjusted earnings per share has increased by 263 per cent from 15.1 pence to 54.9 pence and return on capital employed has grown from 6.1 per cent to 13.6 per cent.

 

Significant improvement in the Group's financial returns have been made over the last five years and the Group retains its medium term objective of achieving a Group operating margin of seven per cent and a return on capital employed of fifteen per cent.

 

 

 

Revenue

 

Group revenue increased by 8.8 per cent to £2.7 billion (2016: £2.5 billion) and by 6.8 per cent in constant currency.  Volume and price growth of 5.3 per cent in the like-for-like business increased revenue by £131.4 million.  Acquisitions and new branches contributed revenue of £92.9 million which was partially offset by a revenue decline of £52.3 million from branch closures and divestments.  A favourable currency translation gain, due to the strengthening of the euro, increased sterling revenue by £47.4 million.

 

Adjusted Operating Profit

 

Adjusted operating profit of £163.7 million (2016: £142.0 million) increased by 15.2 per cent driven principally by strong growth in the like-for-like business.  The profit contribution from development activity reflected a good contribution from the Gunters en Meuser acquisition that was partially offset by increased store opening costs in Selco.  Operating profit before property profit increased by 17.4 per cent to £160.9 million (2016: £137.1 million).  Property profit declined to £2.7 million from £4.9 million.

 

Growth in the adjusted operating margin by 30 basis points to 6.0 per cent and by 40 basis points to 5.9 per cent excluding property profit was due to volume growth and efficiencies across the businesses including a focus on tight control of overheads in the like-for-like business and benefits from successfully restructuring the UK Plumbing, Heating and Contracts businesses in the last quarter of 2016.

 

Net Finance Income and Expense

 

The net finance expense increased to £6.4 million (2016: £5.9 million).  The net bank interest payable declined to £4.2 million (2016: £4.7 million).  The benefit of lower average net debt and an easing of market rates for the euro was partially offset by the adverse impact on translation of interest payable on the Group's euro denominated debt.  The net cost of defined benefit pension scheme obligations increased to £0.7 million (2016: £0.5 million). There was a net foreign exchange loss of £1.0 million (2016: £0.2 million) that arose primarily on the translation of Euro and US dollar denominated cash and overdrafts.

 

Taxation

 

The income tax expense of £26.6 million (2016: £21.1 million) was equivalent to an effective tax rate of 17.2 per cent (2016: 18.5 per cent).  The underlying rate for the year was 18.5 per cent (2016: 19.0 per cent).  Non-recurring tax deductions accounted for the difference between the effective rate and underlying rate of 18.5 per cent.  The underlying tax rate is impacted by the disallowance of a tax deduction for certain overheads including depreciation on property.  The underlying tax rate for the Group is most sensitive to changes in the UK rate of corporation tax which declined by one per cent to 19 per cent with effect from 1 April 2017.  A further two percentage point reduction to 17 per cent will take effect on 1 April 2020.  Our current expectation is for the 2018 underlying tax rate to remain at 18.5 per cent.

 

Capital Expenditure and Investment in Intangible Assets

 

Gross capital expenditure was £73.7 million (2016: £50.1 million) and there was expenditure of £7.7 million (2016: £10.3 million) on intangible assets.  Proceeds of £8.8 million (2016: £10.0 million) were received on disposal of fixed assets.  The net investment on capital expenditure and intangible assets was £72.6 million (2016: £50.4 million). 

 

Development expenditure of £41.6 million (2016: £27.2 million) was concentrated on new Selco branches, the purchase of freehold interests in two merchanting branches in Ireland, increasing the merchanting network in Dublin, branch upgrades across the Group's estate and other projects to grow future profitability.  Asset replacement expenditure of £32.1 million (2016: £22.9 million), which compares to the depreciation charge of £39.5 million, related to the distribution fleet that supports delivered revenue, replacing equipment, plant and tools that are hired to customers and other assets required to operate the Group's network of 649 branches.

 

An investment of £7.7 million (2016: £10.3 million) was made on the new IT platform in Buildbase and in other software development projects across the Group.

 

In 2018, development and replacement expenditure is anticipated to be approximately twice the level of depreciation excluding acquisitions. 

 

Pensions

 

The Group's main pension arrangements are operated through defined contribution schemes which apply to over 90 per cent of colleagues.  The net deficit on the defined benefit pensions schemes declined by £7.8 million to £23.5 million (31 December 2016: £31.3 million). The schemes, which are closed to new members, have 900 current and 1,800 deferred members and pensioners.

 

The reduction in the deficit was mainly attributed to good returns on scheme assets which were valued at £239.4 million at the year end. Updated mortality assumptions and a fall in expectations for future inflation reduced scheme liabilities and the deficit in the UK schemes.  These gains were partially offset by a decline of 30 basis points to 2.6 per cent in bond yields used to discount UK scheme liabilities.

 

Net Debt

 

Year-end net debt declined by £33.4 million to £62.9 million (31 December 2016: £96.3 million).  The translation of euro denominated debt at the year-end sterling-euro exchange rate increased the Group's net debt by £9.5 million.  The Group's gross debt is drawn in euros and provides a hedge against exchange rate risk on euro assets invested in the Group's businesses in Ireland, the Netherlands and Belgium.

 

The gearing ratio declined to five per cent (31 December 2016: nine per cent).  The Group remains in a very strong financial position with EBITDA interest cover of 48.4 times (31 December 2016: 37.9 times) and net debt of 0.31 times EBITDA (31 December 2016: 0.54 times).  The Group's leverage policy is to maintain its current investment grade credit rating.

 

Financing

 

The Group had bilateral loan facilities of £528.3 million with six relationship banks at the year end.  In March 2017, an option was exercised to extend facilities of £430.7 million with five banks for a further year to March 2022.  The average maturity of committed facilities of £528.3 million, including a facility of £97.6 million maturing in March 2021, was 4.0 years at 31 December 2017.  A further one-year extension option was exercised in February 2018 for facilities of £430.7 million with five of the Group's six relationship banks.

 

The Group's key financing objective is to ensure that it has the necessary liquidity and resources to support the long term funding of the business.

 

At 31 December 2017 the Group had undrawn bank facilities of £213.1 million (31 December 2016: £217.6 million) and cash balances and deposits of £253.7 million which together with strong cash flow from operations provide good liquidity and the capacity to fund investment in working capital, replacement assets and development activity including acquisitions.

 

Shareholders' Equity

 

Shareholders' equity increased by £112.5 million in the year to £1.2 billion.  The effect of profit after tax of £127.7 million less dividend payments of £33.7 million increased equity by £94.0 million.  Equity increased by £6.4 million due to a remeasurement gain on pension schemes and by £4.1million due to a currency translation gain on euro denominated net assets.

 

Return on Capital Employed and Asset Turn

 

Return on Capital Employed (ROCE) increased by 110 basis points to 13.6 per cent (year to December 2016: 12.5 per cent) and capital turn increased to 2.3 times from 2.2 times in 2016.  The generation of increased returns on capital employed is a key financial metric in the creation of shareholder value and was achieved through increasing profitability in existing businesses and allocating development capital to acquisitions and organic developments that meet a demanding hurdle rate of return on capital employed.

 

Principal Risks and Uncertainties

 

The primary risks and uncertainties affecting the Group are set out on pages 16 to 19 of the 2016 Annual Report and will be updated in the 2017 Annual Report.

 


Grafton Group plc

 

Group Income Statement

For the year ended 31 December 2017

 

 

 

 

Continuing activities

Notes


2017

£'000


2016

£'000

Revenue

2


2,715,830


2,507,276

Operating costs - before exceptional items



(2,557,654)


(2,372,349)

Property profits

3


2,722


4,923

Operating profit - before exceptional items



160,898


139,850

Exceptional items

3


-


(19,713)

Operating profit

3


160,898


120,137

Finance expense

4


(7,122)


(7,166)

Finance income

4


675


1,276

Profit before tax



154,451


114,247

Income tax expense

17


(26,622)


(21,128)

Profit after tax for the financial year



127,829


93,119

Profit attributable to:






Owners of the Company



127,719


93,347

Non-controlling interests

8


110


(228)

Profit after tax for the financial year



127,829


93,119

Earnings per ordinary share - basic

5


53.95p


39.56p

Earnings per ordinary share - diluted

5


53.80p


39.44p







 

 




 

Grafton Group plc

 

Group Statement of Comprehensive Income

For the year ended 31 December 2017

 


Notes


2017

£'000


2016

£'000

Profit after tax for the financial year



127,829


93,119

Other comprehensive income






Items that are or may be reclassified subsequently to the income statement






Currency translation effects:






- on foreign currency net investments



4,146


20,374

- on foreign currency borrowings designated as net investment hedges



-


1,221

Fair value movement on cash flow hedges:






- effective portion of changes in fair value of cash flow hedges



(202)


(461)

- net change in fair value of cash flow hedges transferred from equity



336


258

Deferred tax on cash flow hedges



(30)


26




4,250


21,418

Items that will not be reclassified to the income statement






Remeasurement gain/(loss) on Group defined benefit pension schemes

13


7,438


(13,810)

Deferred tax on Group defined benefit pension schemes



(1,069)


2,102




6,369


(11,708)

Total other comprehensive income



10,619


9,710

Total comprehensive income for the financial year



138,448


102,829

Total comprehensive income attributable to:






Owners of the Company



138,338


103,057

Non-controlling interests

8


110


(228)

Total comprehensive income for the financial year



138,448


102,829

 

 

 

Grafton Group plc

 

Group Balance Sheet as at 31 December 2017


 

Notes


 

31 Dec 2017

 

 

 

31 Dec 2016

ASSETS



£'000


£'000

Non-current assets






Goodwill

15


591,746


566,237

Intangible assets

16


54,340


44,584

Property, plant and equipment

9


504,412


461,660

Investment properties

9


22,056


21,749

Deferred tax assets



11,867


15,718

Retirement benefit assets

13


1,527


796

Other financial assets



126


125

Total non-current assets



1,186,074


1,110,869







Current assets






Properties held for sale

9


5,055


8,407

Inventories

10


328,525


292,681

Trade and other receivables

10


413,095


397,689

Cash and cash equivalents

11


253,659


205,857

Total current assets



1,000,334


904,634







Total assets



2,186,408


2,015,503







EQUITY






Equity share capital



8,494


8,449

Share premium account



212,167


210,271

Capital redemption reserve



621


621

Revaluation reserve



13,327


13,507

Shares to be issued reserve



8,744


8,446

Cash flow hedge reserve



(427)


(531)

Foreign currency translation reserve



77,505


73,359

Retained earnings



858,053


751,842

Treasury shares held



(3,897)


(3,897)

Equity attributable to owners of the Parent



1,174,587


1,062,067

Non-controlling interests

8


-


3,122

Total equity



1,174,587


1,065,189







LIABILITIES






Non-current liabilities






Interest-bearing loans and borrowings

11


315,165


300,426

Provisions



21,888


22,385

Retirement benefit obligations

13


25,006


32,081

Derivative financial instruments

11


484


675

Deferred tax liabilities

17


37,986


36,429

Total non-current liabilities



400,529


391,996







Current liabilities






Interest-bearing loans and borrowings

11


916


1,051

Trade and other payables

10


572,130


523,700

Current income tax liabilities

17


27,613


21,224

Provisions



10,633


12,343

Total current liabilities



611,292


558,318







Total liabilities



1,011,821


950,314







Total equity and liabilities



2,186,408


2,015,503

Grafton Group plc

Group Cash Flow Statement

For the year ended 31 December 2017                                                                                                                                                                                                                         


Notes

31 Dec 2017

£'000

31 Dec 2016

£'000

Profit before taxation



154,451


114,247

Finance income



(675)


(1,276)

Finance expense



7,122


7,166

Operating profit



160,898


120,137

Depreciation

9


39,455


34,929

Amortisation of intangible assets

16


4,032


3,121

Share-based payments charge



4,908


3,232

Movement in provisions



(3,094)


5,802

Asset impairment and fair value gains/losses

9


329


4,383

(Profit)/loss on sale of property, plant and equipment



(737)


19

Property profit



(2,722)


(4,923)

Loss on disposal of Group businesses



3


392

Contributions to pension schemes in excess of IAS 19 charge



(1,840)


(1,516)

Decrease in working capital

10


9,506


3,010

Cash generated from operations



210,738


168,586

Interest paid



(6,438)


(6,936)

Income taxes paid



(18,157)


(16,269)

Cash flows from operating activities



186,143


145,381

Investing activities






Inflows






Proceeds from sale of property, plant and equipment

9


3,100


1,740

Proceeds from sales of properties held for sale

9


5,708


8,251

Proceeds from sale of group businesses (net)



512


881

Interest received



675


1,276




9,995


12,148

Outflows






Acquisition of subsidiary undertakings and businesses (net of cash)

14


(37,732)


(11,859)

Investment in intangible asset - computer software

16


(7,687)


(10,343)

Purchase of property, plant and equipment

9


(73,729)


(50,101)




(119,148)


(72,303)

Cash flows from investing activities



(109,153)


(60,155)

Financing activities






Inflows






Proceeds from the issue of share capital



1,941


505

Proceeds from borrowings



34,355


77,842




36,296


78,347

Outflows






Repayment of borrowings



(31,439)


(145,577)

Dividends paid

6


(33,708)


(30,048)

Acquisition of non-controlling interest



(2,630)


-

Payment on finance lease liabilities



(439)


(409)




(68,216)


(176,034)

Cash flows from financing activities



(31,920)


(97,687)







Net increase/(decrease) in cash and cash equivalents



45,070


(12,461)

Cash and cash equivalents at 1 January



205,857


211,565

Effect of exchange rate fluctuations on cash held



2,732


6,753

Cash and cash equivalents at the end of the year



253,659


205,857

Cash and cash equivalents are broken down as follows:






Cash at bank and short-term deposits



253,659


205,857


Grafton Group plc

Group Statement of Changes in Equity


Equity share capital

Share premium account

Capital redemption reserve

Revaluation reserve

Shares to be issued reserve

Cash Flow hedge reserve

Foreign currency translation reserve

Retained earnings

Treasury shares

Total

Non-Controlling Interests

Total equity


£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Year to 31 December 2017













At 1 January 2017

8,449

210,271

621

13,507

8,446

(531)

73,359

751,842

(3,897)

1,062,067

3,122

1,065,189

Profit after tax for the financial year

-

-

-

-

-

-

-

127,719

-

127,719

110

127,829

Total other comprehensive income













Remeasurement gain on pensions (net of tax)

-

-

-

-

-

-

-

6,369

-

6,369

-

6,369

Movement in cash flow hedge reserve (net of tax)

-

-

-

-

-

104

-

-

-

104

-

104

Currency translation effect on foreign currency net investments

-

-

-

-

-

-

4,146

-

-

4,146

-

4,146

Total other comprehensive income

-

-

-

-

-

104

4,146

6,369

-

10,619

-

10,619

Total comprehensive income

-

-

-

-

-

104

4,146

134,088

-

138,338

110

138,448

Transactions with owners of the Company recognised directly in equity

Dividends paid

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(33,708)

 

 

-

 

 

(33,708)

 

 

-

 

 

(33,708)

Issue of Grafton Units

45

1,896

-

-

-

-

-

-

-

1,941

-

1,941

Share based payments charge

-

-

-

-

4,908

-

-

-

-

4,908

-

4,908

Tax on share based payments

-

-

-

-

439

-

-

-

-

439

-

439

Transfer from shares to be issued reserve

-

-

-

-

(5,049)

-

-

5,049

-

-

-

-

Acquisition of non-controlling interest

-

-

-

-

-

-

-

602


602

(3,232)

(2,630)

Transfer from revaluation reserve

-

-

-

(180)

-

-

-

180

-

-

-

-


45

1,896

-

(180)

298

-

-

(27,877)

-

(25,818)

(3,232)

(29,050)

At 31 December 2017

8,494

212,167

621

13,327

8,744

(427)

77,505

858,053

(3,897)

1,174,587

-

1,174,587














Year to 31 December 2016













At 1 January 2016

8,405

209,810

621

13,674

9,168

(354)

51,764

696,479

(3,897)

985,670

3,350

989,020

Profit after tax for the financial year

-

-

-

-

-

-

-

93,347

-

93,347

(228)

93,119

Total other comprehensive income













Remeasurement (loss) on pensions (net of tax)

-

-

-

-

-

-

-

(11,708)

-

(11,708)

-

(11,708)

Movement in cash flow hedge reserve (net of tax)

-

-

-

-

-

(177)

-

-

-

(177)

-

(177)

Currency translation effect on foreign currency net investments

-

-

-

-

-

-

20,374

-

-

20,374

-

20,374

Currency translation effect on foreign currency borrowings designated as net investment hedges

-

-

-

-

-

-

1,221

-

-

1,221

-

1,221

Total other comprehensive income

-

-

-

-

-

(177)

21,595

(11,708)

-

9,710

-

9,710

Total comprehensive income

-

-

-

-

-

(177)

21,595

81,639

-

103,057

(228)

102,829

Transactions with owners of the Company recognised directly in equity













Dividends paid

-

-

-

-

-

-

-

(30,048)

-

(30,048)

-

(30,048)

Issue of Grafton Units

44

461

-

-

-

-

-

-

-

505

-

505

Share based payments charge

-

-

-

-

3,232

-

-

-

-

3,232

-

3,232

Tax on share based payments

-

-

-

-

(349)

-

-

-

-

(349)

-

(349)

Transfer from shares to be issued reserve

-

-

-

-

(3,605)

-

-

3,605

-

-

-

-

Transfer from revaluation reserve

-

-

-

(167)

-

-

-

167

-

-

-

-


44

461

-

(167)

(722)

-

-

(26,276)

-

(26,660)

-

(26,660)

At 31 December 2016

8,449

210,271

621

13,507

8,446

(531)

73,359

751,842

(3,897)

1,062,067

3,122

1,065,189















Grafton Group plc

Notes to Final Results for the year ended 31 December 2017

 

1.   General Information

 

Grafton Group plc ("Grafton" or "the Group") is an international distributor of building materials to trade customers who are primarily engaged in residential repair, maintenance and improvement projects and house building.

 

The Group has leading regional or national market positions in the merchanting markets in the UK, Ireland, the Netherlands and Belgium. Grafton is also the market leader in the DIY retailing market in Ireland and is the largest manufacturer of dry mortar in Great Britain.

 

The Group's origins are in Ireland where it is headquartered, managed and controlled.  It has been a publicly quoted company since 1965 and its Units (shares) are quoted on the London Stock Exchange where it is a constituent of the FTSE 250 Index and the FTSE All-Share Index.

 

The financial information presented in this preliminary release does not constitute full statutory financial statements. The preliminary release was approved by the Board of Directors. The annual report and financial statements will be approved by the Board of Directors and reported on by the auditors in due course. Accordingly, the financial information is unaudited. Full statutory financial statements for the year ended 31 December 2016 have been filed with the Irish Registrar of Companies. The audit report on those statutory financial statements was unqualified.

 

Basis of Preparation, Accounting Policies and Estimates

 

(a) Basis of Preparation and Accounting Policies

 

The consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards ('IFRS') issued by the International Accounting Standards Board ('IASB') as adopted by the European Union ('EU'); and those parts of the Companies Act 2014 applicable to companies reporting under IFRS.

 

The financial information in this report has been prepared in accordance with the Group's accounting policies. Full details of the accounting policies adopted by the Group are contained in the consolidated financial statements included in the Group's annual report for the year ended 31 December 2016 which is available on the Group's website; www.graftonplc.com .

 

The accounting policies and methods of computation and presentation adopted in the preparation of the Group financial information are consistent with those described and applied in the annual report for the year ended 31 December 2016. There are no new IFRS standards effective from 1 January 2017 which had a material effect on the financial information included in this report.

 

The financial information includes all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. Certain tables in the financial information may not add precisely due to rounding.

 

(b)   Estimates

In preparing the Financial Statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2016. Actual results may differ from estimates calculated using these judgements and assumptions.

 

 

 

 

2.   Segmental Analysis

The amount of revenue and operating profit under the Group's reportable segments of Merchanting, Retailing and Manufacturing is shown below. Segment profit measure is operating profit before exceptional items and amortisation of intangible assets arising on acquisitions.


2017

£'000

2016

£'000

Revenue





Merchanting


2,469,350


2,290,568

Retailing


180,391


157,090

Manufacturing


78,009


74,358

Less: Inter-segment revenue - manufacturing


(11,920)


(14,740)



2,715,830


2,507,276

Segment operating profit before exceptional items and intangible assets amortisation arising on acquisitions





Merchanting


148,877


130,264

Retailing


11,179


7,304

Manufacturing


15,125


12,149



175,181


149,717

Reconciliation to consolidated operating profit





Central activities


(14,249)


(12,592)



160,932


137,125

Property profits


2,722


4,923

Operating profit before exceptional items and intangible assets amortisation arising on acquisitions

 


163,654


142,048

Exceptional items


-


(19,713)

Amortisation of intangible assets arising on acquisitions


(2,756)


(2,198)

Operating profit


160,898


120,137






Finance expense


(7,122)


(7,166)

Finance income


675


1,276

Profit before tax


154,451


114,247






Income tax expense


(26,622)


(21,128)

Profit after tax for the financial year


127,829


93,119

 

The amount of revenue by geographic area is as follows:


2017

£'000

2016

£'000

Revenue





United Kingdom


1,907,159


1,827,028

Ireland*


588,030


509,074

Belgium


89,613


83,462

Netherlands


131,028


87,712



2,715,830


2,507,276

     *Includes Poland in 2016 which is immaterial

 

 

 

 

 

2.   Segmental Analysis (continued)

 

 

Operating segment assets are analysed below:


31 Dec 2017

£'000

31 Dec 2016

£'000

Segment assets





Merchanting


1,816,532


1,695,668

Retailing


59,348


55,570

Manufacturing


43,349


41,769



1,919,229


1,793,007

Unallocated assets





Deferred tax assets


11,867


15,718

Retirement benefit assets


1,527


796

Other financial assets


126


125

Cash and cash equivalents


253,659


205,857






Total assets


2,186,408


2,015,503

 

Operating segment liabilities are analysed below:


31 Dec 2017

£'000

31 Dec 2016

£'000

Segment liabilities





Merchanting


545,941


502,871

Retailing


43,657


41,451

Manufacturing


15,053


14,106



604,651


558,428

Unallocated liabilities





Interest bearing loans and borrowings (current and non-current)


316,081


301,477

Retirement benefit obligations


25,006


32,081

Deferred tax liabilities


37,986


36,429

Current income tax liabilities


27,613


21,224

Derivative financial instruments (current and non-current)


484


675






Total liabilities


1,011,821


950,314

 

 

3.   Operating Profit

 

The property profit of £2.7 million (2016: £4.9 million) relates to the disposal of 11 UK properties and one Irish property (2016: ten UK properties).

 

Exceptional items of £19.7 million in 2016 million relate to branch closures in the traditional UK Merchanting business of £16.1 million, an increase in the onerous lease provision of £3.2 million and other rationalisation costs of £0.4 million. There is no similar charge in 2017.

 

In 2017, the Group incurred acquisition costs of £0.7 million (2016: £0.7 million) and recognised amortisation costs on acquired intangibles of £2.8 million (2016: £2.2 million).

 

 

 

 

 

 

 

 

4.   Finance Expense and Finance Income

                                                                                         


2017

£'000

2016

£'000

 

Finance expense






Interest on bank loans and overdrafts


(4,902)

*

(5,975)

*

Net change in fair value of cash flow hedges transferred from equity


(336)


(258)


Interest on finance leases


(188)


(208)


Net finance cost on pension scheme obligations


(721)


(510)


Foreign exchange loss


(975)


(215)




(7,122)


(7,166)








Finance income






Interest income on bank deposits


675

*

1,276

*



675


1,276








Net finance expense


(6,447)


(5,890)


 

* Net bank/loan note interest of £4.2 million (2016: £4.7 million).

 

 

 

 

 

 

5.   Earnings per Share

 

The computation of basic, diluted and underlying earnings per share is set out below. 

 


Year Ended 31 Dec 2017

£'000

Year Ended 31 Dec 2016

£'000

Numerator for basic, adjusted and diluted earnings per share:










Profit after tax for the financial year


127,829


93,119

Non-controlling interest


(110)


228






Numerator for basic and diluted earnings per share


127,719


93,347






Amortisation of intangible assets arising on acquisitions


2,756


2,198

Tax relating to amortisation of intangible assets arising on acquisitions


 

(618)


 

(564)

Exceptional items


-


19,713

Tax relating to exceptional items


-


(2,231)

Numerator for adjusted earnings per share


129,857


112,463








Number of Grafton Units


Number of Grafton Units

Denominator for basic and adjusted earnings per share:










Weighted average number of Grafton Units in issue


236,746,881


235,942,078






Dilutive effect of options and awards


662,760


726,245






Denominator for diluted earnings per share


237,409,641


236,668,323






Earnings per share (pence)





- Basic


53.95


39.56

- Diluted


53.80


39.44






Adjusted earnings per share  (pence)





- Basic


54.85


47.67

- Diluted


54.70


47.52

 

 

 





6.   Dividends

 

The payment in 2017 of a second interim dividend for 2016 of 9.0 pence on the 'C' Ordinary shares in Grafton Group (UK) plc from UK-sourced income amounted to £21.3 million. A 2017 interim dividend of 5.25 pence per share was paid on 6 October 2017 on the 'C' Ordinary shares in Grafton Group (UK) plc from UK-sourced income and amounted to £12.4 million.

 

A second interim dividend for 2017 of 10.25 pence per share will be paid on the 'C' Ordinary Shares in Grafton Group (UK) plc from UK-sourced income to all holders of Grafton Units on the Company's Register of Members at the close of business on 9 March 2018 (the 'Record Date').  The dividend will be paid on 6 April 2018. A liability in respect of this second interim dividend has not been recognised at 31 December 2017, as there was no present obligation to pay the dividend at the year-end.

 

 

 

7.   Exchange Rates

 

The results and cash flows of subsidiaries with euro functional currencies have been translated into sterling using the average exchange rate for the year.  The balance sheets of subsidiaries with euro functional currencies have been translated into sterling at the rate of exchange ruling at the balance sheet date.

 

The average sterling/euro rate of exchange for the year ended 31 December 2017 was Stg87.67p (year to 31 December 2016: Stg81.95p).  The sterling/euro exchange rate at 31 December 2017 was Stg88.72p (31 December 2016: Stg85.62p).

 

 

8.   Non-Controlling Interests

 

In December 2017, the Group acquired the non-controlling interest of YouBuild NV (formerly BMC Groep NV). This is now accounted for as a 100% subsidiary undertaking.

 

 

9.   Property, Plant and Equipment, Properties Held for Sale and Investment Properties

 


Property, plant and equipment

Properties

held for sale

Investment properties


£'000

£'000

£'000

Net Book Value




As at 1 January 2017

461,660

8,407

21,749

Additions

73,729

-

-

Acquisitions (note 14)

5,585

-

-

Depreciation

(39,455)

-

-

Disposals

(2,363)

(2,986)

-

Disposal of Group businesses

(1)

-

-

Impairments & property revaluations

(300)

-

(29)

Transfer to properties held for sale

(214)

214

-

Transfer to investment properties

-

(157)

157

Transfers to property, plant and equipment

883

(497)

(386)

Currency translation adjustment

4,888

74

565

As at 31 December 2017

504,412

5,055

22,056

 

 

 

10. Movement in Working Capital


 

 

Inventories

Trade

and other receivables

Trade and other

payables

 

 

Total


£'000

£'000

£'000

£'000






At 1 January 2017

292,681

397,689

(523,700)

166,670

Currency translation adjustment

4,008

3,631

(5,752)

1,887

Disposal of Group businesses

(342)

(245)

161

(426)

Acquisitions through business combinations (note 14)

7,697

6,667

(3,499)

10,865

Movement in 2017

24,481

5,353

(39,340)

(9,506)



At 31 December 2017

328,525

413,095

(572,130)

169,490

 

 

11. Interest-Bearing Loans, Borrowings and Net debt



31 Dec 2017

£'000


31 Dec 2016

£'000

Non-current liabilities





Bank loans


312,980


297,870

Finance leases


2,185


2,556

Total non-current interest-bearing loans and borrowings


315,165


300,426






Current liabilities





Bank loans


478


645

Finance leases


438


406

Total current interest-bearing loans and borrowings


916


1,051






Derivatives-non current





Included in non-current liabilities


484


675

Total derivatives


484


675






Cash and cash equivalents


(253,659)


(205,857)






Net debt


62,906


96,295

 

The following table shows the fair value of financial assets and liabilities including their level in the fair value hierarchy. It does not include fair value information for financial assets and liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.


31 Dec 2017


31 Dec 2016


£'000


£'000

 

Liabilities measured at fair value

Designated as hedging instruments

Interest rate swaps (Level 2)

484


675

 

Liabilities not measured at fair value

Liabilities at amortised cost

Bank loans

313,458


298,515

Finance leases

2,623


2,962


316,081


301,477

 

 

Financial assets and liabilities recognised at amortised cost

Except as detailed above, it is considered that the carrying amounts of financial assets and liabilities including trade payables, trade receivables, net debt and deferred consideration, which are recognised at amortised cost in the year end financial statements, approximate to their fair values.

 

Financial assets and liabilities carried at fair value

All of the Group's financial assets and liabilities which are carried at fair value are classified as Level 2 in the fair value hierarchy. There have been no transfers between levels in the current period. Fair value measurements are categorised into different levels in the fair value hierarchy based on the inputs to valuation techniques used. The fair values of interest rate swaps are calculated as the present value of the estimated future cash flows based on the terms and maturity of each contract and using forward currency rates and market interest rates as applicable for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty where appropriate.

 

 

 

 

 

12. Reconciliation of Net Cash Flow to Movement in Net Debt

 



31 Dec 2017

£'000


31 Dec 2016

£'000






Net increase/(decrease) in cash and cash equivalents


45,070


(12,461)

Net movement in derivative financial instruments


264


(203)

Cash-flow from movement in debt and lease financing


(2,477)


68,144

Change in net debt resulting from cash flows


42,857


55,480






Currency translation adjustment


(9,468)


(38,217)

Movement in net debt in the year


33,389


17,263






Net debt at 1 January


(96,295)


(113,558)






Net debt at end of the year


(62,906)


(96,295)






Gearing


5%


9%

 

 

 

13. Retirement Benefits

 

The principal financial assumptions employed in the valuation of the Group's defined benefit scheme liabilities for the current and prior year were as follows:

 

 


Irish Schemes

UK Schemes


At 31 Dec 2017


At 31 Dec 2016


At 31 Dec 2017


At 31 Dec 2016



%


%


%


%


Rate of increase in salaries

2.65%

*

2.50%

*

0.00%

**

0.00%

**

Rate of increase of pensions in payment

-


-


3.10%


3.10%


Discount rate

1.85%


1.80%


2.60%


2.90%


Inflation

1.45%


1.30%


2.10%

***

2.20%

***










 

*2.65% applies from 2 January 2019 (31 December 2016: 2.5% from 2 January 2019)

** Pensionable salaries are not adjusted for inflation

*** The inflation assumption shown for the UK is based on the Consumer Price Index (CPI)

 

 

 

 

 

 

 

13. Retirement Benefits (continued)

 

The following table provides a reconciliation of the scheme assets (at bid value) and the actuarial value of scheme liabilities:


         Assets

         Liabilities

Net asset/(deficit)


Year to

31 Dec 2017

Year to 31 Dec 2016

Year to

31 Dec 2017

Year to 31 Dec 2016

Year to

31 Dec 2017

Year to

31 Dec 2016


£'000

£'000

£'000

£'000

£'000

£'000

At 1 January

221,966

186,807

(253,251)

(203,430)

(31,285)

(16,623)

Acquired in year

-

-

(198)

-

(198)

-

Interest income on plan assets

5,296

6,235

-

-

5,296

6,235

Contributions by employer

4,193

3,610

-

-

4,193

3,610

Contributions by members

688

731

(688)

(731)

-

-

Benefit payments

(8,179)

(6,942)

8,179

6,942

-

-

Transfer in of assets/(liabilities)

-

1,162

-

(1,162)

-

-

Current service cost

-

-

(2,677)

(2,411)

(2,677)

(2,411)

Other long term benefit (expense)/ gain

-

-

(56)

148

(56)

148

Past service credit

-

-

282

-

282

-

Settlement gain

-

-

98

-

98

-

Curtailment gain

-

-

-

169

-

169

Interest cost on scheme liabilities

-

-

(6,017)

(6,745)

(6,017)

(6,745)

Remeasurements







Actuarial gains/(loss) from:







-experience variations

-

-

183

(2,196)

183

(2,196)

-financial assumptions

-

-

(6,216)

(29,364)

(6,216)

(29,364)

-demographic assumptions

-

-

1,900

1,450

1,900

1,450

Return on plan assets excluding interest income

11,571

16,300

-

-

11,571

16,300

Translation adjustment

3,828

14,063

(4,381)

(15,921)

(553)

(1,858)

At 31 December

239,363

221,966

(262,842)

(253,251)

(23,479)

(31,285)

Related deferred tax asset (net)





3,581

4,699

Net pension liability





(19,898)

(26,586)

 

The net pension scheme deficit of £23.5 million is shown in the Group balance sheet as retirement benefit obligations (non-current liabilities) of £25.0 million and retirement benefit assets (non-current assets) of £1.5 million. £13.0 million of the retirement benefit obligations relates to schemes in Ireland, Belgium and the Netherlands and £12.0 million relates to one UK scheme. £1.0 million of the retirement benefit asset relates to a second UK scheme and £0.5 million to one scheme in Ireland.

 

 

 

13.    Retirement Benefits (continued)

 

The 2016 net pension scheme deficit of £31.3 million is shown in the Group balance sheet as retirement benefit obligations (non-current liabilities) of £32.1 million and retirement benefit assets (non-current assets) of £0.8 million.  £17.3 million relates to the schemes in Ireland, Belgium and the Netherlands and £14.8 million relates to one UK scheme. £0.5 million of the retirement benefit asset relates to a second UK scheme and £0.3 million to a scheme in Ireland.

 

14.    Acquisitions

 

On 5 January 2017, the Group completed the acquisition of 100 per cent of the issued share capital of Gunters en Meuser B.V. ("G&M"), the market leader in the distribution of ironmongery, tools and fixings in the Greater Amsterdam Area. G&M trades from 14 branches. In April 2017, a small single branch business was acquired in Wijchen, Eastern Netherlands which provides a good platform to develop a strong market position in the town.  On 21 November 2017, 100% of the issued share capital of Scholte & de Vries - Estoppey B.V. ("SV-E") was also acquired. SV-E is a third generation family business that distributes ironmongery, tools and fixings from four branches located primarily in the Greater Amsterdam Area. These acquisitions will strengthen and complement the market position of the Group's existing businesses in the Netherlands ironmongery, tools and fixings markets. All businesses are incorporated in the merchanting segment and were strategic acquisitions to grow the business in the Netherlands. Details of the acquisitions made in 2016 are disclosed in the Group's 2016 Annual Report.

 

The provisional fair value of assets and liabilities acquired in 2017 are set out below:


Total

£'000

Property, plant and equipment

5,585

Intangible assets - customer relationships

4,883

Intangible assets - trade names

534

Intangible assets - computer software

91

Inventories

7,697

Trade and other receivables

6,667

Trade and other payables

(3,499)

Retirement benefit liabilities

(198)

Deferred tax (liability)

(1,970)

Deferred tax asset

271

Cash acquired

51

Net assets acquired

20,112

Goodwill

17,671

Consideration

37,783



Satisfied by:


Cash paid

37,783

 

Net cash outflow - arising on acquisitions


 

Cash consideration

 

37,783

Less: cash and cash equivalents acquired

(51)


37,732

 

The fair value of the net assets acquired have been determined on a provisional basis. Goodwill on these acquisitions reflects the anticipated purchasing and operational synergies to be realised as part of the enlarged Group.

 

Acquisitions completed in 2017 contributed revenues of £32.3 million and operating profit of £3.0 million for the period from the date of acquisition until the year end. Acquisitions would have contributed revenue of £45.5 million and operating profit of £3.1 million in the year ended 31 December 2017 on the assumption that they had been acquired on 1 January. The Group incurred acquisition costs of £0.7 million (2016: £0.7 million) which are included in operating costs in the Group Income Statement.

15.    Goodwill

 

Goodwill is subject to impairment testing on an annual basis and more frequently if an indicator of impairment is considered to exist. The Board is satisfied that the carrying value of goodwill has not been impaired.

 


Goodwill

£'000

Net Book Value


As at 1 January 2017

566,237

Arising on acquisitions (note 14)

17,671

Disposal of Group businesses

(89)

Currency translation adjustment

7,927

As at 31 December 2017

591,746

 

 

16.    Intangible Assets

 


Computer Software

£'000

Trade Names

£'000

Customer Relationships

£'000

Total

£'000

Net Book Value





As at 1 January 2017

24,735

2,471

17,378

44,584

Additions

7,687

-

-

7,687

Arising on acquisitions (note 14)

91

534

4,883

5,508

Amortisation

(1,276)

(336)

(2,420)

(4,032)

Currency translation adjustment

(4)

74

523

593

As at 31 December 2017

31,233

2,743

20,364

54,340

 

The computer software asset of £31.2 million at 31 December 2017 (2016: £24.7 million) reflects the cost of the Group's investment on upgrading the IT systems and infrastructure that supports a number of UK businesses as part of a multi-year programme of investment.   A number of these systems are not yet available for use in the business and are therefore not amortised.

 

The amortisation expense of £4.0 million (2016: £3.1 million) has been charged in 'operating costs' in the income statement. Amortisation on acquired intangibles amounted to £2.8 million (2016: £2.2 million).

 

 

17.    Taxation

 

The income tax expense of £26.6 million (2016: £21.1 million) was equivalent to an effective tax rate of 17.2 per cent (2016: 18.5 per cent).  The underlying rate for the year was 18.5 per cent (2016: 19.0 per cent).  Non-recurring tax deductions accounted for the difference between the effective and underlying rate of 18.5 per cent.  The underlying rate is based on the prevailing rates of corporation tax and the mix of profits between the UK, Ireland, the Netherlands and Belgium.  The underlying tax rate is impacted by the disallowance of a tax deduction for certain overheads including depreciation on property.  The underlying tax rate for the Group is most sensitive to changes in the UK rate of corporation tax which declined by one per cent to 19 per cent with effect from 1 April 2017.  A further two percentage point reduction to 17 per cent will take effect on 1 April 2020. 

 

 

 

 

 

 

17.    Taxation (continued)

 

The liability shown for current taxation includes a liability for tax uncertainties and is based on the Directors best probability weighted estimate of the probable outflow of economic resources that will be required. As with all estimates, the actual outcome may be different to the current estimate.

 

Accounting estimates and judgements

 

Management is required to make judgements and estimates in relation to taxation provisions and exposures. In the ordinary course of business, the Group is party to transactions for which the ultimate tax determination may be uncertain. As the Group is subject to taxation in a number of jurisdictions, an open dialogue is maintained with Revenue Authorities with a view to the timely agreement of tax returns. The amounts provided/recognised for tax are based on management's estimate having taken appropriate professional advice. If the final determination of these matters is different from the amounts that were initially recorded such differences could materially impact the income tax and deferred tax provisions and assets in the period in which the determination was made.

 

Deferred tax

 

At 31 December 2017, there were unrecognised deferred tax assets in relation to capital losses of £0.6 million (31 December 2016: £1.2 million), trading losses of £3.4 million (31 December 2016: £3.2 million) and deductible temporary differences of £nil (31 December 2016: £2.6 million). Deferred tax assets were not recognised in respect of certain capital losses as they can only be recovered against certain classes of taxable profits and the Directors cannot foresee such profits arising in the foreseeable future with reasonable certainty. The trading losses and deductible temporary differences arose in entities that have incurred losses in recent years and the Directors have no certainty as to when there will be sufficient taxable profits in the relevant entities against which they can be utilised.

 

 

18.    Related Party Transactions

 

There have been no new related party transactions. There were no other changes in related parties from those described in the 2016 Annual Report that materially affected the financial position or the performance of the Group during the year to 31 December 2017, except for the resignation of two directors during the year.

 

 

19.    Events after the Balance Sheet Date

 

On 16 February 2018, the Group completed the acquisition of LSDM Limited ("Leyland SDM").  Leyland SDM is regarded as one of the most recognisable and trusted decorating and DIY brands in Central London selling paint, tools, ironmongery and accessories.  The Leyland SDM "small box" convenience trading format is a proven business model in Central London that complements the Group's larger Selco branches located in Greater London.  Leyland SDM trades from 21 branches.  The total consideration payable was £82.4 million on a debt-free, cash-free basis and was funded from the Group's cash and debt facilities.

 

There have been no other material events subsequent to 31 December 2017 that would require adjustment to or disclosure in this report.

 

 

20.    Board Approval

 

This announcement was approved by the Board of Grafton Group plc on 1 March 2018.



 

Supplementary Financial Information

Alternative Performance Measures

 

Certain financial information set out in this consolidated half year financial statements is not defined under International Financial Reporting Standards ("IFRS"). These key Alternative Performance Measures ("APMs") represent additional measures in assessing performance and for reporting both internally and to shareholders and other external users. The Group believes that the presentation of these APMs provides useful supplemental information which, when viewed in conjunction with IFRS financial information, provides readers with a more meaningful understanding of the underlying financial and operating performance of the Group.


None of these APMs should be considered as an alternative to financial measures drawn up in accordance with IFRS. The key Alternative Performance Measures ("APMs") of the Group are set out below.  As amounts are reflected in £'m some non-material rounding differences may arise. Numbers that refer to 2016 are available in the 2016 Annual Report.

 

APM

Description

 

Adjusted operating profit/EBITA

Profit before amortisation of intangible assets arising on acquisitions, exceptional items, net finance expense and income tax expense.

 

Adjusted operating profit/EBITA before property profit

Profit before profit on the disposal of Group properties, amortisation of intangible assets arising on acquisitions, exceptional items, net finance expense and income tax expense.

 

Adjusted operating profit/EBITA margin before property profit

 

Adjusted operating profit/EBITA before property profit as a percentage of revenue.

 

Adjusted profit before tax

Profit before amortisation of intangible assets arising on acquisitions, exceptional items and income tax expense.

 

Adjusted profit after tax

Profit before amortisation of intangible assets arising on acquisitions and exceptional items but after deducting the income tax expense.

 

Capital Turn

Revenue for the previous 12 months divided by average capital employed (where capital employed is the sum of total equity and net debt at each period end).

 

Constant Currency

Constant currency reporting is used by the Group to eliminate the translational effect of foreign exchange on the Group's results. To arrive at the constant currency change, the results for the prior period are retranslated using the average exchange rates for the current period and compared to the current period reported numbers.

 

Dividend Cover

Group earnings per share divided by the total dividend per share for the Group.

 

EBITA

Earnings before exceptional items, net finance expense, income tax expense and amortisation of intangible assets arising on acquisitions.





EBITDA

Earnings before exceptional items, net finance expense, income tax expense, depreciation and amortisation of intangible assets arising on acquisitions. EBITDA (rolling 12 months) is EBITDA for the previous 12 months.

 

EBITDA Interest Cover

EBITDA divided by net bank/loan note interest.

 

Gearing

The Group net debt divided by the total equity attributable to owners of the Parent times 100.

 

Like-for-like revenue

Like-for-like revenue is a measure of underlying revenue performance for a selected period. Branches contribute to like-for-like revenue once they have been trading for more than twelve months.  Acquisitions contribute to like-for-like revenue once they have been part of the Group for more than 12 months. When branches close, or where a business is disposed of, revenue from the date of closure, for a period of 12 months, is excluded from the prior year result.

 

Operating profit/EBITA margin

Profit before net finance expense and income tax expense as a percentage of revenue.

 

Return on Capital Employed

Operating profit divided by average capital employed (where capital employed is the sum of total equity and net debt at each period end) times 100.

 

Adjusted Operating Profit/EBITA before Property Profit

 


2017


 2016


£'m


£'m 

Revenue

2,715.8


2,507.3





Operating profit

160.9


120.1

Property profit

(2.7)


(4.9)

Exceptional items charged in operating profit

-


19.7

Amortisation of intangible assets arising on acquisitions

2.8


2.2

Adjusted operating profit/EBITA before property profit

160.9


137.1





Adjusted operating profit/EBITA margin before property profit

5.9%


5.5%





 

Operating Profit/EBITA Margin


2017


 2016


£'m


£'m

Revenue

2,715.8


2,507.3

Operating profit

160.9


120.1

Operating profit margin

5.9%


4.8%





 

Adjusted Operating Profit/EBITA & Margin


2017


 2016


£'m


£'m

Operating profit

160.9


120.1

Exceptional items charged in operating profit

-


19.7

Amortisation of intangible assets arising on acquisitions

2.8


2.2

Adjusted operating profit

163.7


142.0





Adjusted operating profit/EBITA margin

6.0%


5.7%





Adjusted Profit before Tax

 


2017


 2016


£'m


£'m

Profit before tax

154.5


114.2

Exceptional items charged in operating profit

-


19.7

Amortisation of intangible assets arising on acquisitions

2.8


2.2

Adjusted profit before tax

157.2


136.2





 

Adjusted Profit after Tax

 


2017


 2016


£'m


£'m

Profit after tax for the financial year

127.8


93.1

Exceptional items charged in operating profit

-


19.7

Tax on exceptional items

-


(2.2)

Amortisation of intangible assets arising on acquisitions

2.8


2.2

Tax on amortisation of intangible assets arising on acquisitions

(0.6)


(0.6)

Adjusted profit after tax

130.0


112.2





 

Reconciliation of Profit to EBITDA


2017


 2016


£'m


£'m

Profit after tax for the financial year

127.8


93.1

Exceptional items charged in operating profit

-


19.7

Net finance expense

6.4


5.9

Income tax expense

26.6


21.1

Depreciation

39.5


34.9

Intangible asset amortisation

4.0


3.1

EBITDA

204.4


177.9





 

Net debt to EBITDA


2017


 2016


£'m


£'m

EBITDA

204.4


177.9

Net debt

62.9


96.3

Net debt to EBITDA - times

0.31


0.54





 

EBITDA Interest Cover


2017


 2016


£'m


£'m

EBITDA

204.4


177.9

Net bank/loan note interest

4.2


4.7

EBITDA interest cover - times

48.4


37.9

 

 

 

 




Gearing


2017


 2016


£'m


£'m

Total equity attributable to owners of the Parent

1,174.6


1,062.1

Group net debt

62.9


96.3

Gearing

5%


9%

 

 




Return on Capital Employed

 


2017


 2016


£'m


£'m

Operating profit

160.9


120.1

Exceptional items charged in operating profit

-


19.7

Amortisation of intangible assets arising on acquisitions

2.8


2.2

Adjusted operating profit

163.7


142.0





Total equity - current period end

1,174.6


1,065.2

Net debt - current period end

62.9


96.3

Capital employed - current period end

1,237.5


1,161.5

Total equity - prior period end

1,065.2


989.0

Net debt - prior period end

96.3


113.6

Capital employed - prior period end

1,161.5


1,102.6

Average capital employed

1,199.5


1,132.0





Return on capital employed

13.6%


12.5%





 

Capital Turn

 


2017

£'m


2016

£'m

Revenue

2,715.8


2,507.3

Average capital employed

1,199.5


1,132.0

Capital turn - times

2.3


2.2





 

Dividend Cover

 


2017


 2016

Group adjusted EPS - basic (pence)

54.85


47.67

Group dividend (pence)

15.50


13.75

Group dividend cover - times

3.5


3.5

 


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