Grafton Group Regulatory News (GFTU)

Grafton Group plc

Half Year Report

For The Six Months Ended 30 June 2019

Grafton Group plc

Half Year Report for the Six Months Ended 30 June 2019

1 Supplementary financial information in relation to Alternative Performance Measures (APMs) is set out on pages 43 to 54.

2 A bridge between the pre IFRS 16 and the related IFRS impact is set out within the APM's and detail is also in Note 22.

3 H1 2018 has now been restated as Belgium Merchanting is classified as a discontinued operation. Details are set out in the APM's.

4 Change relates to H1 2018 v H1 2019 pre any IFRS 16 "Leases" impact.

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

Highlights

·; Revenue up 2% to £1.4 billion - 3% increase in constant currency

·; Further positive progress towards medium term pre IFRS 16 financial objectives with adjusted operating margin increasing by 20 bps to 6.8% (2019 reported 7.2%) and ROCE up by 100bps to 15.0%

·; Strong organic growth in Merchanting and Retailing businesses in Ireland

·; Good growth in Netherlands and scale of business increased with Polvo acquisition

·; Operating profit margin ahead in UK merchanting business in a softer market

·; Conditional agreement to exit the Belgium business announced today - business reclassified as held for sale / discontinued operation

·; Strong pre-IFRS 16 cash flow from operations of £118.9 million (2018: £109.7 million) (2019 reported £157.6 million)

·; 8% increase in dividend in line with progressive dividend policy

·; IFRS 16 applies from 1 January 2019 - implementation of accounting standard has a significant impact on the measurement and presentation of the financial statements but no economic impact on the Group.

Gavin Slark, Chief Executive Officer commented:  

"We made good strategic and operational progress in the first half of 2019 which supports the ongoing improvement in the underlying quality of our business. Despite the uncertainty in the U.K., the Group continues to benefit from the strength of Selco's market position and our higher returning, growth businesses in Ireland and The Netherlands. Our focus remains on delivering growth in shareholder value and a great experience for our customers and colleagues."

Webcast Details

A results presentation for analysts and fund managers will be hosted by Gavin Slark and David Arnold today 30 August 2019 at 9.30 am (GMT) at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. The results presentation can be viewed/downloaded at www.graftonplc.com and a live webcast of the results presentation can be accessed on www.graftonplc.com/webcasthy19. A recording of this webcast will be available for replay later today on the Group's website.

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 8549

Andrew Jaques/Rachel Mann

Cautionary Statement

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

Half Year Report

For the Six Months Ended 30 June 2019

Group Results

Grafton is pleased to report on a period of further growth and strategic development activity. The Merchanting and Retailing businesses in Ireland in particular were key contributors to growth with operating profit advancing by 11.7 per cent in constant currency. Good growth was also reported by the Netherlands merchanting business while the outcome in the UK merchanting and manufacturing businesses was satisfactory in a softer market.

The improved performance supported an increase in adjusted operating profit margin by 20 basis points to 6.8 per cent and an increase in return on capital employed by 100 basis points to 15.0 per cent.

Merchanting

The overall UK merchanting business realised modest growth in revenue and adjusted operating profit before property profit. Selco achieved a good advance in operating profit that was partly offset by competitive conditions in the traditional builders merchanting business. Uncertainty about the near term prospects and outlook for the UK economy and some reluctance by households to spend on home improvements contributed to weaker demand in the residential repair maintenance and improvement ("RMI") market.

The market leading merchanting business in Ireland continued to increase revenue organically driven by growth in the residential RMI market and continued growth in house building. Operating profit advanced by 12.5 per cent in constant currency and the operating profit margin before property profit increased by 40 basis points to 8.5 per cent.

The Netherlands business, which trades in the ironmongery, tools and fixings segment of the merchanting market, saw a continuation of positive trading conditions with some easing of the strong trends of recent years as growth in the economy and construction sector moderated as expected. Good growth was reported in operating profit and the operating profit margin increased by 20 basis points to 10.7 per cent.

Completion of the 51 branch Polvo acquisition on 1 July 2019 was a significant milestone in the strategic development of the Netherlands business and consolidates its leadership position in the market where it now trades from 113 branches.

The Belgium merchanting business increased revenue and profitability in the period and accounted for three per cent of Group revenue and 0.4 per cent of Group operating profit in the half year. We conducted a strategic review of our operations in Belgium in the context of the Group's allocation of capital and its future growth prospects. This resulted in a decision to divest and we initiated a process to sell the business. Today we announce that the Group has entered into a conditional agreement for the sale of the business which is expected to complete later this year. As a result, the net assets of the Belgium business have been classified as held for sale with the results shown as discontinued operations. The impact on the income statement was an exceptional charge of £26.0 million included in the result from discontinued operations.

Retailing

Woodie's, the market leader in the DIY, Home and Garden market in Ireland, benefitted from favourable trading conditions and a good response from its customers to the continued development of the Woodie's offering. The business reported double digit growth in operating profit and the operating profit margin increased by 60 basis points to 8.1 per cent.

Manufacturing

CPI EuroMix, the market leading mortar manufacturing business that operates nationally from ten plants in Great Britain, was a significant contributor to Group profitability. There was a small decline in operating profit compared to the exceptional growth reported for the first half of 2018 in a market that has positive long term prospects.

Property Profit

The Group realised a profit of £4.7 million (2018: £4.5 million) and cash proceeds of £8.2 million from the disposal of surplus properties in Ireland and the UK.

Cash Flow

The Group continued to be very cash generative with pre-IFRS 16 cashflow from operations of £118.9 million (2018: £109.7 million). The Group had pre-IFRS 16 net debt of £0.1 million at 30 June 2019 having started the year with net debt of £53.1 million. The Group's net debt increased on 1 July 2019 with the acquisition of the Polvo business in the Netherlands for £117.5 million (€131.0 million) on a debt and cash free basis and ended the period with a strong balance sheet.

Dividend

The interim dividend has been increased by 8.3 per cent to 6.50p from 6.00p. The increase is in line with the Board's progressive dividend policy which is based on increasing dividends as earnings grow.

Brexit

The central scenario for our forecasts is that there is a sensibly negotiated Brexit agreed between the UK and the EU though we expect to experience continued market uncertainty until a clear resolution is agreed. We will continue to manage stock levels as a principal tool to mitigate the potential risk of disruption. In the event of a 'hard' Brexit we would expect the UK and Irish macro economic environment to weaken in the short term compared to our central scenario.

Outlook

In the UK, there is a softer market backdrop and we therefore expect some continuing volume and pricing pressure in the merchanting market. As a consequence we remain focused on self-help initiatives.

Elsewhere, the outlook for the Irish economy remains positive and while some moderation in the pace of growth in consumer spending is expected following the strong performance of recent years, underlying trends in this geography remain positive. As a result, we anticipate continued growth in our strongly positioned merchanting and DIY businesses.

The overall outlook for the Netherlands economy also remains favourable with growth set to continue to moderate. The recent acquisition of Polvo provides an excellent opportunity to leverage the increased footprint of the combined branch networks.

Average daily like-for-like Group revenue increased by 3.0 per cent in July comprising growth of 1.4 per cent in UK Merchanting, 5.9 per cent in Irish Merchanting, 0.5 per cent in Netherlands merchanting, 16.9 per cent in retailing and a decline of 0.1 per cent in Manufacturing.

We have a strong balance sheet to support our growth plans and notwithstanding some near term market uncertainty we look to the future with confidence.

Operating Review - Continuing Operations

The net assets of the Belgium merchanting business have been classified as held for sale and the results are presented as discontinued operations, details of which are shown on page 10 and in Note 14. The 2018 figures have been restated to conform to the current year presentation.

Merchanting Segment* (90% of Group Revenue)

* Excludes Belgium Merchanting

**Actual change represents the movement pre IFRS 16 adjustments

The merchanting businesses in the UK, Ireland and the Netherlands contributed 90 per cent of Group revenue (2018: 90 per cent). Overall average daily like-for-like revenue was up by 3.9 per cent with trading conditions favourable in the merchanting markets in Ireland and the Netherlands and relatively flat in the UK.

UK Merchanting 

* Actual change represents the movement pre IFRS 16 adjustments

Activity in the UK merchanting market was impacted by economic uncertainty which contributed to general weakness in UK house prices, property transactions and mortgage approvals.

The UK merchanting business benefitted from a strong start to the year with growth in average daily like-for-like revenue of 4.8 per cent in the four months to the end of April and a small contraction in May and June, measured against very strong growth of 5.8 per cent in the same period last year, leading to overall daily like-for-like revenue growth for the half year of 2.8 per cent. Materials price inflation is estimated at 2.0 per cent and volumes advanced by 0.8 per cent.

New branches generated revenue growth of 1.3 per cent (£12.9 million) and the Leyland SDM acquisition contributed incremental revenue growth of 0.6 per cent (£6.1million). The disposal of two small non-core businesses and branch consolidations reduced revenue by 2.6 per cent (£24.9 million) which together with an adjustment for one less trading day resulted in overall revenue growth of 1.4 per cent.

The gross margin was flat in competitive markets and the adjusted operating profit margin before property profit increased by 10 basis points to 5.6 per cent. As a consequence of lower property profits in the UK, the adjusted operating profit margin including property profit was 30 basis points lower at 5.7 per cent.

One less trading day in the half-year compared to the prior year reduced operating profit by circa £2.0 million.

Selco Builders Warehouse, the retail style merchanting model for trade and business customers, reported mid-single digit growth in revenue that reflected broadly flat volumes in the like-for-like business and incremental revenue from the opening of seven branches in 2018, six of which were opened in the first half of the year.

Demand in the RMI market was impacted by economic uncertainty which made households cautious about spending on discretionary improvement projects on their existing homes and on moving home, both of which are key drivers of RMI activity. The decline in house price in the Greater London Area, which accounted for 71 per cent of Selco's revenue in the period, also contributed to weakness in the RMI market.

A new Selco branch will be opened later this year in Kingston-Upon-Thames and the business is working on a pipeline of new branch opportunities that are expected to open in 2020 and beyond. Four of the longest established branches in the estate were upgraded in the first half. A new delivery-hub was opened in Edmonton to undertake deliveries for four branches in North East London which has freed-up branch capacity, improved branch health and safety standards and created a more positive customer experience. The large branch in Cricklewood was successfully relocated at the end of its lease in December 2018 and has traded in line with expectations for the half year.

A new "Click 'N' Deliver" service introduced in April for bulky building materials including sand, cement, timber and sheet materials complements the existing Click & Collect service.

Selco reported strong growth in operating profit due to a reduction in store opening costs, an increase in the gross margin and increased profitability from the store opening programme in prior years.

Leyland SDM, London's largest specialist decorators merchant that trades from a unique portfolio of 21 convenience led high street locations in central London, performed well in a relatively flat market. The incremental effect of the business being acquired on 18 February 2018 increased profitability in the half year. Targeted operational efficiencies, procurement gains and a reduction in overheads also contributed increased profitability and a solid increase in the operating profit margin. Development of the branch network in prominent locations in London will continue with the opening later this year of branches in Maida Vale and Streatham.

Buildbase had an encouraging start to the year before the market lost some momentum in May and June resulting in overall marginal growth in revenue for the half-year. The market remained highly competitive with pricing pressure, which was partly offset by procurement gains, negatively impacting the gross margin. Increased costs associated with implementing the new trading and back office ERP system and margin pressure resulted in operating profit finishing behind the prior year.

The back office modules of the new ERP system have been successfully implemented and the first branch has recently gone live with rollout to the remaining branches scheduled to occur on a phased basis over the next 18 to 24 months.

Plumbase made very good progress continuing the trend of recent years with a significant increase in operating profit. Revenue was lower due to a successful focus on the quality of earnings generated by the business leading to an increase in the gross margin. Growth in the operating margin also benefitted from performance improvement initiatives which saw a decline in overheads. Market conditions were challenging for the bathroom products distribution business which experienced lower revenue and profitability in a very competitive market.

Civils & Lintels, a distributor of heavyside building materials, continued to increase its exposure to the new housing market with good growth in volumes and also made gains in the steel and concrete lintels market. The new branch in Leeds which opened in the first half of 2018 successfully extended market coverage in the North of England. In Scotland, where the branches trade under the PDM brand, solid revenue gains were made from focusing on opportunities in the new housing market.

MacBlair, the Northern Ireland merchanting business made further progress increasing revenue and operating profit by focusing on the supply of core products and optimising procurement arrangements. Overall market conditions were positive with good revenue and profit advances made in the provincial branches.

TG Lynes, a leading distributor of commercial pipes and fittings in London, made good gains in its markets increasing revenue and operating profit. Its commercial heating, plumbing and mechanical services contractor customer base benefitted from a good level of activity in the residential, commercial and public sector new build and RMI markets.

Irish Merchanting 

* Actual change represents the movement pre IFRS 16 adjustments

The merchanting business in Ireland continued to generate very good growth in revenue and operating profit. Average daily like-for-like revenue was up by 8.3 per cent in a market that continued to benefit from sound demand fundamentals. The business also gained from its strong national market position which is supported by high quality customer service, product expertise and an instinctive knowledge of local markets.

Growth in the Irish economy was primarily driven by foreign direct investment and growth in exports. Increased employment and incomes contributed to growth in spending in the residential RMI market by households who chose to remain in and renovate their existing homes and also by households who moved home.

House building continued to gradually improve and contributed to growth in revenue. The level of activity was however constrained by affordability and tight loan-to-income ratios for first-time buyers particularly in the Greater Dublin Area. Current trends in house building indicate that it will take several years longer than originally projected before housing supply and demand are more closely aligned due to the level of pent-up demand that has developed over a long period of housing under supply. This pent-up demand has been augmented by favourable demographics that have seen the population increase by 400,000 over the past ten years.

Growth in non-residential construction was focused on the hotels sector where high levels of occupancy attracted significant investment in new hotels and in the refurbishment of existing properties.

The new trade centre upgrade was rolled out to a further three branches in the half year and will be extended over the coming years on a phased basis to the entire estate of 40 branches.

The consolidation of the branch network onto a single trading system from four discrete systems was successfully completed. Customers now have greater visibility on pricing and can trade in all branches using a single account.

Operating profit (before property profit) rose by 12.5 per cent in constant currency to £19.2 million and the operating profit margin increased by 40 basis points to 8.5 per cent after absorbing a small mix related dilution in the gross margin and an increase in employee numbers to support the continued growth and development of the business.

Netherlands Merchanting 

* Actual change represents the movement pre IFRS 16 adjustments

The trading performance of the Netherlands business was favourable with good growth in revenue and operating profit driven by organic growth and acquisitions against the backdrop of moderating growth in the economy and construction sector.

An increase in like-for-like revenue of 3.1 per cent was supported by growth in private and social housing renovation and maintenance activity, strong growth with national account customers focused on development projects and growth in online revenue in response to the development work undertaken last year.

The two single branch acquisitions completed last year performed well and the two branches that were opened last year in Dordrecht and Almere made good progress establishing a market position in these high potential local markets.

The recent relocation of the Isero distribution centre to a new purpose built facility in Waddinxveen, approximately 20 kilometres North East of Rotterdam, strengthens the logistics and supply chain capability of the business with a doubling of capacity. The central management and support office functions have also relocated to this facility.

Operating profit rose by 8.1% in constant currency and the operating profit margin increased by 20 basis points to 10.7 per cent reflecting an improvement in the gross margin from procurement gains.

As previously announced, the Group completed the acquisition of Polvo, a distributor of ironmongery, tools and fixings from 51 branches, on 1 July 2019. This acquisition was a unique opportunity to acquire a leading business and brand that is a good fit with the Isero branch network. The acquisition of Polvo was a transformative transaction that consolidated Isero's leadership position in this segment of the market where the overall business now trades from 113 branches. Polvo's pre-acquisition trading was strong in the half-year to 30 June 2019.

Retail Segment (7% of Group Revenue)

* Actual change represents the movement pre IFRS 16 adjustments

The Woodie's DIY, Home and Garden business made solid gains in the half year with like-for-like constant currency revenue growth of 2.9 per cent despite the very strong performance in the comparative period that saw growth of 13.4 per cent driven by exceptional demand for seasonal products. Strong current year gains in the DIY, Kitchens, Homeware and Home-style categories were partly offset by lower demand for gardening and other seasonal products.

The number of transactions increased by 1.0 per cent to almost 700,000 per month with range upgrades and changes in mix contributing to an increase of 1.9 per cent in the average spend.

The trading environment was generally positive and the business was well placed to benefit from growth in employment and real incomes. The increase in housing transactions and the housing stock in recent years also contributed to growth.

Increased product availability and improved website navigation and functionality facilitated growth in online revenue by 47 per cent, to 1.6 per cent of total revenue, building on the strong foundations for growth that were put in place last year.

Customers continued to respond positively to the store upgrade programme which has accelerated revenue growth in recent years. Two stores were upgraded in the half year taking the number upgraded to date to 29, out of a total estate of 35 stores. The upgraded stores represent 88 per cent of overall revenue.

Woodie's is currently at an advanced stage in upgrading its ERP system and will commence transitioning towards the end of the year. This development will deliver a number of operational improvements including the latest advances in retail technology at the point of sale and better visibility on stock holdings.

A stable gross margin and tight control of overheads enabled the business to optimise the benefit of revenue growth and increase operating profit by 10 per cent to £8.0 million. The operating profit margin increased by 60 basis points to 8.1 per cent following growth of 190 basis points in the first half of last year.

Manufacturing Segment (3% of Group Revenue)

* Actual change represents the movement pre IFRS 16 adjustments

CPI EuroMix consolidated its position as Britain's largest supplier of dry silo mortar. The business is the market leader in the supply of a quality range of mortars to a national, regional and local customer base from a network of ten strategically located plants. The distinctive white and red EuroMix dry mortar silos are a prominent feature on construction sites across the country and the number of silos on-site increased during the period.

Mid-single digit growth in the volume of mortar supplied to the new housing market, which accounted for three quarters of revenue, reflected regional variations in the level of demand and was partly offset by a one-off contract undertaken in the prior year. The fundamentals of the housing market continued to be positive due to strong underlying demand following a long period of undersupply, the availability of competitively priced mortgage finance and the Government's Help-to-Buy Scheme. There was strong growth in demand for bagged product for use in residential and commercial RMI and new build projects.

Increased raw material and environmental compliance costs contributed to the small decline in operating profit which is measured against exceptional profit growth in the same period last year.

Operating Review - Discontinued Operations

Belgium Merchanting 

* Actual change represents the movement pre IFRS 16 adjustments

The Belgium merchanting business achieved good growth in like-for-like revenue that was largely offset by the impact of the disposal of the St. Vith branch in October 2018. More positive market conditions and the performance improvement initiatives implemented in 2018 contributed to the increase in operating profit.

As part of its continuous focus on portfolio management, the Group conducted a strategic review of the Belgium business in the context of the allocation of capital and future growth prospects of the business. This review resulted in a decision to divest the business on satisfactory terms, consistent with our strategy of orientating the Group towards structurally higher margin businesses with good long term growth prospects and the potential to generate more sustainable returns and optimise shareholder value.

The Group has entered into a conditional agreement with an affiliate of Aurelius Equity Opportunities SE & Co. KGaA, a private equity firm listed in Germany, to sell its Belgium merchanting business for an enterprise value of £11.0 million. The Group has retained freehold properties worth circa £12.5 million as part of the transaction that it expects to sell in due course. The overall business was valued at circa £28.0 million including £4.5 million realised from the disposal of the St. Vith branch in October 2018. Operating profit was £0.8 million in 2018 (2017: £0.9 million).

The transaction, which is expected to complete later this year, is conditional on carving-out the freehold property from the trading entities and on receiving approval from the Competition Authority in Belgium.

In view of its planned disposal, the assets and liabilities of the business have been re-classified as held for sale on the balance sheet at 30 June 2019 and a non-cash charge of £26.0 million, including costs of disposal, has been shown as an exceptional charge in the results from discontinued operations disclosed in Note 14 on page 34.

Financial Review

The Group achieved a positive outcome for the half year with both the operating profit margin and return on capital employed ahead of the prior year. The Group's strong financial position and balance sheet was supported by excellent cash generation. Pre-IFRS 16 cash flow from operations was £118.9 million (2018: £109.7million) and the Group ended the half year with pre-IFRS 16 net debt of £0.1 million having started the year with net debt of £53.1 million.

Revenue

Group revenue increased by 2.5 per cent to £1.44 billion (2018: £1.40 billion) and by 2.7 per cent in constant currency. Volume and price growth of 3.0 per cent in the like-for-like business increased revenue by £41.1 million. Acquisitions and new branches contributed revenue of £21.3 million helping to offset a revenue decline of £24.9 million from the disposal of two small non-core UK businesses in 2018 and branch consolidations. A currency translation loss due to sterling weakness against the euro reduced revenue by £2.7 million. There was one less trading day in the UK and Ireland in the half year.

Adjusted Operating Profit

Adjusted operating profit of £97.7 million (2018: £92.4 million) increased by 5.8 per cent due mainly to growth in the like-for-like merchanting businesses in the UK, Ireland and the Netherlands and in the retailing business in Ireland. There was also contribution from acquisitions in the UK and the Netherlands. Operating profit before property profit increased by 5.7 per cent to £93.0 million (2018: £88.0 million).

The adjusted operating profit margin increased by 20 basis points to 6.8 per cent and by 20 basis points to 6.5 per cent excluding property profit. The improvement was due to a positive operating margin outcome in the merchanting businesses in the UK, Ireland and the Netherlands and in the retailing business in Ireland.

Property

Cash proceeds of £8.2 million and a profit of £4.7 million were realised from the disposal of four surplus properties. Property profit for the full year is currently forecast at circa £5.5 million.

Net Finance Income and Expense

The pre-IFRS 16 net finance expense increased by £1.0 million to £3.5 million (2018: £2.5 million). This was primarily related to a £1.1 million increase in interest payable to £3.2 million (2018: £2.1 million). The increase was due to the issue of unsecured senior notes with ten and twelve year maturities in the US Private Placement market in September 2018 at an annual coupon of 2.5 per cent. These proceeds were used to refinance bank debt on which a lower interest rate was payable based on short term money market rates. The issue of these notes diversified the Group's sources of funding, considerably extended the maturity profile of debt and provided certainty over the cost of debt at an attractive rate over the ten and twelve year life of the notes. There was a reduction of £0.1 million in the foreign exchange translation loss and pension related financial expenses.

Taxation

The income tax expense of £15.6 million (2018: £16.2 million) is equivalent to an effective tax rate of 17.7 per cent on profit from continuing operations (2018: 18.5 per cent) and is based on the forecast rate for the year. This is a blended rate of corporation tax on profits in the various jurisdictions where the Group operates and is slightly lower than the rate envisaged at the start of 2019. The tax rate for the Group is most sensitive to changes in the UK rate of corporation tax which is currently 19 per cent with a two percentage point reduction to 17 per cent planned to take effect on 1 April 2020.

Capital Expenditure and Investment in Intangible Assets

Gross capital expenditure was £19.3 million (2018: £36.7 million) and there was also expenditure of £1.1 million (2018: £3.6 million) on intangible assets. Proceeds of £9.0 million (2018: £6.2 million) were received on disposal of fixed assets and the net investment on capital expenditure and intangible assets was £11.4 million (2018: £34.1 million).

Development capital expenditure of £7.5 million (2018: £22.3 million) was incurred on the new Isero distribution centre, upgrading Selco stores and the new delivery-hub in London, upgrading Woodie's and Chadwicks branches in Ireland and other branch upgrades and development projects.

Asset replacement capital expenditure of £11.8 million (2018: £14.4 million) compares to the pre-IFRS 16 depreciation charge for the period of £22.0 million and related principally to replacement of the distribution fleet that supports delivered revenue, replacement of equipment, forklifts, plant and tools for hire by customers and other assets required to operate the Group's branch network.

An investment of £1.1 million (2018: £3.6 million) was made on the new IT platform in Buildbase and on other software development projects.

Pensions

The IAS 19 deficit on defined benefit pension schemes was £20.5 million at 30 June 2019, an increase of £0.3 million from £20.2 million at 31 December 2018. The return on opening scheme assets of £230.7 million was £24.7 million (10.7%) for the six months. These gains were offset by changes in financial assumptions with the rates used to discount the liabilities of the UK scheme falling by 50 basis points to 2.4 per cent and of the Irish scheme by 60 basis points to 1.2 per cent. The overall impact of experience gains and changes to demographic assumptions was neutral.

Net Debt

The Group started the year with net debt of £53.1 million and ended the half-year with pre-IFRS 16 net debt of £0.1 million at 30 June 2019.

The Group remains in a very strong financial position with pre-IFRS 16 EBITDA interest cover of 37.6 times (Year ended 31 December 2018: 48.0 times).

The Group's policy is to maintain its current investment grade credit rating whilst investing in organic developments and acquisition opportunities that are expected to generate attractive returns together with maintaining a progressive dividend policy.

Net debt increased on 1 July 2019 with the acquisition of Polvo in the Netherlands for £117.5 million (€131.0 million) and the Group retains a strong balance sheet following the acquisition.

Financing 

The Group had bilateral loan facilities of £490.0 million with six relationship banks at the end of June 2019. The amount drawn on these facilities was £216.3 million. The Group also had debt obligations of £143.5 million from the issue of unsecured senior notes in the US Private Placement market, that had ten and twelve year maturities when issued in September 2018, at an average annual coupon of 2.5 per cent.

The average maturity of the committed bank facilities and unsecured senior notes at 30 June 2019 was 5.2 years.

The Group's key financing objective continues to be to ensure that it has the necessary liquidity and resources to support the short, medium and long term funding requirements of the business. At 30 June 2019 the Group had undrawn bank facilities of £273.7 million (31 December 2018: £356.8 million) and cash balances and deposits of £358.9 million (31 December 2018: £223.0 million). These resources 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.

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 and the Netherlands.

IFRS 16 Leases

On 1 January 2019, the Group implemented IFRS 16 Leases, which replaces IAS 17 Leases. The new standard brings most leases on-balance sheet for lessees and eliminates the distinction between operating and finance leases. Under IFRS 16, a lessee recognises a right-of-use asset and a lease liability. The right-of-use asset is treated in a similar way to a non-financial asset and is depreciated. The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the incremental borrowing rate.

IFRS 16 has changed the measurement of many aspects of the Group's accounts including operating profit, earnings per share, net debt and return on capital employed.

All leases except for leases with a duration of less than one year and low value assets are recognised on the balance sheet as lease liabilities. The corresponding right of use asset is an amount equal to the lease liability on transition, adjusted for any prepaid or accrued lease payments and any onerous lease provision.

The Group has implemented IFRS 16 from 1 January 2019 by applying the modified retrospective approach meaning that the comparative figures in the financial statements for the year ended 31 December 2019 will not be restated to show the impact of IFRS 16.

The operating leases that are recorded on the balance sheet for the first time principally relate to merchanting and DIY branch properties, office buildings, cars and distribution vehicles and comprise 2,400 individual lease agreements. The Group has decided to reduce the complexity of implementation by availing of a number of practical expedients on transition on 1 January 2019.

On initial applicaton of IFRS 16, the Group recognised assets and liabilities for its leases previously classified as operating leases under IAS 17. This resulted in the recognition of right-of-use assets of £561.7 million and lease liabilities of £574.9 million. Further details of the impact of the initial application of IFRS 16 on 1 January 2019 are disclosed in note 22.

It should be noted that the overall impact on the Income Statement of adopting IFRS 16 will be neutral over the life of a lease but will result in a higher charge in the earlier years following implementation and a lower charge in the later years. The overall effect on profit before tax is expected to be neutral after approximately four to five years, then becoming positive moving towards the end of the leases. It will not change overall cashflows or the economic effect of the leases to which the Group is a party. There is no effect on Grafton's existing banking covenants as a result of the implementation of IFRS 16.

Shareholders' Equity

The Group's balance sheet strengthened with shareholders' equity up by £17.0 million. Profit after tax increased shareholders' equity by £46.9 million. The payment of dividends in the amount of £28.5 million and the buy-back of 664,961 shares to offset the dilutive effect of share awards at a cost of £6.1 million reduced shareholders' equity by £34.6 million. Other movements increased shareholders' equity by £4.7 million.

Return on Capital Employed

Return on Capital Employed increased by 100 basis points to 15.0 per cent (Year to 30 June 2018: 14.0 per cent). The increased returns were achieved from the growth in profitability and allocating development capital to acquisitions and development projects that are expected to meet demanding hurdle rates of return on capital employed.

Principal Risks and Uncertainties

The primary risks and uncertainties affecting the Group are set out on pages 48 to 51 of the 2018 Annual Report and will be updated in the 2019 Annual Report. These risks are expected to remain the same for the remainder of the year, subject to the comments in the outlook on Brexit.

Period End Financial Information 

The consolidated period-end financial statements presented on pages 15 to 42 comprise:

·; the Group condensed balance sheet as at 30 June 2019;

·; the Group condensed income statement and Group condensed statement of comprehensive income for the six months to 30 June 2019;

·; the Group condensed statement of cash flows for the six months to 30 June 2019;

·; the Group condensed statement of changes in equity; and

·; the explanatory notes to the condensed consolidated half year financial statements on pages 21 to 42.

Grafton Group plc

Group Condensed Income Statement

For the six months ended 30 June 2019

Grafton Group plc

Group Condensed Statement of Comprehensive Income

For the six months ended 30 June 2019

Grafton Group plc - Group Condensed Balance Sheet as at 30 June 2019

Grafton Group plc - Group Condensed Cash Flow Statement

Grafton Group plc

Group Condensed Statement of Changes in Equity

Grafton Group plc

Group Condensed Statement of Changes in Equity (continued)

Grafton Group plc

Notes to Condensed Consolidated Half Year Financial Statements for the six months ended 30 June 2019

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 condensed consolidated half year financial statements for the six months ended 30 June 2019 are unaudited but have been reviewed by the auditor whose report is set out on pages 56 and 57.

The financial information presented in this report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. These condensed consolidated half year financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements in respect of the year ended 31 December 2018 that are available on the Company's website www.graftonplc.com.

The condensed consolidated half year financial statements presented do not constitute full statutory accounts. The financial information included in this report in relation to the year ended 31 December 2018 does not comprise statutory annual financial statements within the meaning of section 295 of the Companies Act 2014. The 2018 annual financial statements have been filed with the Registrar of Companies and the audit report thereon was unqualified and did not contain any matters to which attention was drawn by way of emphasis.

Basis of Preparation, Accounting Policies and Estimates

(a) Basis of Preparation and Accounting Policies

The condensed consolidated half year financial statements have been prepared in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Central Bank of Ireland and with IAS 34 Interim Financial Reporting as adopted by the European Union. They do not include all the information and disclosures necessary for a complete set of IFRS compliant financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes to the Group's financial position and performance since the last annual consolidated financial statements as at and for the year ended 31 December 2018.

The accounting policies applied by the Group in the condensed consolidated half year financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 December 2018, except for those noted below.

Having made enquiries, the Directors have a reasonable expectation that Grafton Group plc, and the Group as a whole, have adequate resources to continue in operational existence for the foreseeable future. Having reassessed the principal risks, the directors considered it appropriate to adopt the going concern basis of accounting in preparing its condensed interim financial statements.

The financial statements are prepared in GBP (Sterling) which is the functional currency of the majority of the Group's business.

1. General Information (continued)

Basis of Preparation, Accounting Policies and Estimates (continued)

(a) Basis of Preparation and Accounting Policies (continued)

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.

(b) Estimates

The preparation of half-yearly financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated half year 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 2018, save for the significant judgements relating to the lease term and discount rate referred to below in relation to the adoption of IFRS 16.

Impacts of standards and interpretations in issue but not yet effective

Certain new accounting standards and interpretations have been published that are not mandatory for the current reporting period and have not been early adopted by the Group. These standards are not expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions.

Impacts of standards effective from 1 January 2019

IFRS 16 - Leases (effective date: financial year beginning 1 January 2019)

IFRS 16 introduces significant changes to the lessee accounting by removing the distinction between operating and finance leases, requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases, with a practical expedient for short-term leases and leases of low value assets.

The Group has applied IFRS 16 using the modified retrospective approach, without restatement of the comparative information from 1 January 2019. In respect of those leases the Group previously treated as operating leases, the Group has elected to measure its right of use assets arising from leases using the approach set out in IFRS 16.C8(b)(ii).

The Group has a large number of property, vehicle and equipment leases as well as a small number of leases where the Group acts as a lessor. The standard has a material impact on the Group with the recognition of lease liabilities and right of use assets, however the overall impact on the Income Statement of adopting IFRS 16 will be neutral over the life of a lease but will result in a higher charge in the earlier years following implementation and a lower charge in the later years.

Further details on the impact of adopting IFRS 16 are set out in note 22 to these financial statements and bridges are contained within the APM's.

Identification of leases

The identification of leases involves judgement as IFRS 16 defines a lease as a contract (or part of a contract) that, for a period of time in exchange for consideration, conveys the right to:

• control an identified asset;

• obtain substantially all economic benefits from use of the asset; and

• direct the use of the asset

The Group has availed of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and the guidance in IFRIC 4 will continue to be applied to those leases entered into or modified before 1 January 2019.

1. General Information (continued)

Impacts of standards effective from 1 January 2019 (continued)

IFRS 16 - Leases (effective date: financial year beginning 1 January 2019)

Lease term

The lease term is the non-cancellable period for which the Group has the right to use an underlying asset together with:

• periods covered by an option to extend the lease if the Group is reasonably certain to exercise that option; and

• periods covered by an option to terminate the lease if the Group is reasonably certain not to exercise that option.

This assessment involves the exercise of judgement by the Group.

Initial measurement of lease liability

The lease liability is initially measured at the present value of the lease payments that are payable for the lease term, discounted using the incremental borrowing rate. The Group's weighted average (by lease liability) incremental borrowing rate applied to lease liabilities as at 1 January 2019 was 3.5%.

Lease payments included in the measurement of the lease liability comprise:

• fixed lease payments (including in-substance fixed payments)

• variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

• the amount expected to be payable by the lessee under residual value guarantees (e.g. if the fair value of the asset at the end of the lease term is below an agreed amount, the lessee would pay to the lessor an amount equal to the difference between the fair value and agreed amount);

• the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

• payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

The lease liability does not include variable elements which are dependent on external factors, e.g. payments that are based on turnover. Instead, such variable elements are recognised directly in the income statement.

Judgements applied include determining the lease term for those leases with termination or extension options and the discount rate used which is based on incremental borrowing rate. Such judgements could impact the lease term and significantly the resultant lease liability and right of use asset recognised.

Where a lease agreement contains a clause to restore the asset to a specified condition i.e. dilapidation costs, the Group recognises a provision for dilapidations under IAS 37 in its statement of financial position.

Initial measurement of right of use asset

The right-of-use asset comprises the amount of the initial measurement of the lease liability, adjusted for:

• any lease payments made at or before the commencement date, less any lease incentives

• any initial direct costs incurred by the Group

In addition, where the Group subleases a headlease (or part thereof) to a third party and such sublease is deemed by the Group to be a finance sublease, the right of use asset relating to sublease is derecognised and a finance lease receivable is recognised.

1. General Information (continued)

Impacts of standards effective from 1 January 2019 (continued)

IFRS 16 - Leases (effective date: financial year beginning 1 January 2019)

Subsequent measurement of lease liability

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

• the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

• the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).

• a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

The Group did not make any material adjustments outlined above during the periods presented.

Subsequent measurement of right of use asset

After initial measurement, the right of use assets are measured at cost less accumulated depreciation, adjusted for:

• any impairment losses in accordance with IAS 36 Impairment of Assets

• any remeasurement of the lease liability.

Right-of-use assets are depreciated over the shorter period of the lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset.

Lease modifications

A lease modification is a change to the original terms and conditions of the lease. The effective date of the modification is deemed to be the date when both parties agree to a lease modification.

A lease modification is accounted for as a separate lease if:

• the modification increases the scope of the lease by adding the right to use one or more underlying assets; and

• the consideration for the lease increases by an amount commensurate with the standalone price for the increase in scope of the lease.

If both criteria are met, the Group adopts the accounting policy on the initial recognition and measurement of lease liabilities and right-of-use assets.

If a change in the lease terms does not meet the test outlined above, the Group must modify the initially recognised components of the lease contract.

1. General Information (continued)

Impacts of standards effective from 1 January 2019 (continued)

IFRS 16 - Leases (effective date: financial year beginning 1 January 2019)

Sublease accounting

Where the Group acts as a lessor, the sublease is classified as a finance lease or an operating lease.

A lease is deemed to be a finance lease where the lease transfers substantially all the risks and rewards incidental to the ownership of the underlying asset. Otherwise, the lease is deemed to be an operating lease.

Where the Group subleases an asset, it accounts for its interests in the head lease and the sublease separately. If the head lease is not a short-term lease or low-value lease and the sublease is deemed to be a finance lease, the Group recognises a lease liability relating to the head lease but does not recognise a corresponding right of use asset. Instead, the Group recognises a finance lease debtor relating to the sublease.

IFRIC 23 - Uncertainty over Income Tax Treatments (effective date: beginning 1 January 2019)

This IFRIC did not have a material impact on the Group in the current period.

Amendments to IAS 19 - Plan Amendment, Curtailment or Settlement (effective date: beginning 1 January 2019)

This amendment did not have a material impact on the Group in the current period.

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. The impact of IFRS 16 "Leases" on the individual CGU's is set out in Note 22 and within the APM's.