Grafton Group Regulatory News (GFTU)

Grafton Group plc

Half year report for the six months ended 30 June 2016

(1) As amounts are reflected in £'m some non-material rounding differences may arise

(2) The term "adjusted" means before intangible asset amortisation on acquisitions and restructuring costs

(3) Additional information in relation to these Alternative Performance Measures (APMs) is set out on pages 31 to 36

Highlights

· Revenue up 13% to £1.23 billion (12% in constant currency) - growth was broadly split between existing business and acquisitions

· Adjusted Group operating profit before property profit growth of 18% to £64.8m (2015: £55.1m) reflected strong contributions from Ireland, the recent acquisition of Isero in the Netherlands and Selco in the UK

· Adjusted Group operating margin before property profit increased by 20bps to 5.3%

· Ongoing investment in Selco store opening programme - 50% increase in store numbers expected in the three years to June 2017

· Robust cash generation from operations of £108.0 million (2015: £73.2 million)

· 6% increase in dividend in line with progressive dividend policy

· Investment of £40.1 million on acquisitions and capital expenditure in H1 to support future growth

· Challenging backdrop in UK merchanting market but organisational restructuring to provide sustainable benefits in 2017

· Net debt of £95.7m was £17.9m lower than at 31 December 2015 resulting in gearing of 9%

"Despite the more uncertain and competitive market conditions in the UK, Grafton continued to make good progress in its key markets enabling the Group to record revenue, profit and earnings per share growth as well as strong cash generation. Both Ireland and the Netherlands continue to show strong growth with ongoing development opportunities. Grafton will continue to invest in areas of its business which combine good long term growth prospects and the opportunity to improve the Group's operating margin and return on capital employed."

Webcast Presentation of Results

A results presentation hosted by Gavin Slark and David Arnold to analysts and investors will take place today 31 August 2016 at 9.30 am (GMT) at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. A live webcast will be available on www.graftonplc.com/webcast/ 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

Grafton Group plc +353 1 216 0600

Gavin Slark, Chief Executive Officer

David Arnold, Chief Financial Officer

Murray +353 1 498 0300

Pat Walsh

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 2016

Group Results

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Grafton made further progress in the half year delivering a solid improvement in profit against a back-drop of mixed economic and market conditions. Growth in profitability was driven by exposure to the strengthening economies of Ireland and the Netherlands and development activity undertaken over the last two years.

In the UK, performance contrasted between the continuing growth in profitability of Selco and the more challenging markets faced by the traditional UK merchanting businesses. Progressively weaker trading conditions were encountered during the period at a time of increased uncertainty in the lead up to the UK's EU referendum.

The Group continued to invest in new Selco stores to support medium to long term growth and implemented a number of initiatives in the traditional merchanting business in the UK that have helped mitigate some of the competitive pressures in the market. In view of these tougher market conditions, which are expected to continue in the second half, some organisational restructuring was undertaken in the first half year (exceptional restructuring costs of £1.2m) with further measures planned in the second half. These measures will provide sustainable benefits in 2017 and result in an exceptional charge of circa £20.0 million for the year. These steps are expected to result in a relatively modest cash outflow in 2016 and will be cash positive following the associated reduction in working capital and disposal of properties.

In Ireland, the merchanting business benefitted from its leading market position and strong growth in the residential repair maintenance and improvement (RMI) market and the early stages of recovery in the new housing and commercial property markets.

The Netherlands merchanting business acquired in November 2015 performed strongly supported by the ongoing recovery in the economy and housing market.

In Belgium, the merchanting business continued to encounter weak markets.

The DIY Retailing business in Ireland performed well as a result of management actions combined with increased household spending in the sector.

The UK mortar business performed strongly despite an easing of house building activity.

The Group remains in a very strong financial position with significant cashflow from operations, low debt and a strong balance sheet with net worth (total equity) exceeding £1.0 billion for the first time. Net debt fell by £17.9 million to £95.7 million from £113.6 million at 31 December 2015.

Dividend

The interim dividend approved has been increased by 6 per cent to 4.75p from 4.50p. This increase is in line with the Board's progressive dividend policy which is based on increasing dividends as earnings grow.

Outlook

Grafton will continue to invest in areas of its business which provide good long term growth prospects and the opportunity to improve the Group's operating margin and return on capital employed.

It is still too early to assess the likely impact on the UK economy of the vote to leave the European Union. Following weak trading in June, demand in the UK Merchanting business was relatively flat during July and August with markets remaining very price competitive. We are progressing a number of initiatives with a focus on cost control and the implementation of measures that will provide long term sustainable benefits and performance improvements.

In Ireland, the economy has continued to perform strongly and the outlook remains positive driven by job creation and increased disposable income. This should support increased spending in the housing RMI and DIY markets. The gradual recovery underway in the house building and commercial construction markets should continue and support revenue growth in the Irish merchanting business. Belgium continues to be a challenging environment whilst trading conditions in the Netherlands merchanting market are expected to be positive in line with recent trends as the recovery in the economy and housing market is sustained.

Average daily like-for-like revenue growth in the seasonally quieter period from 1 July to 21 August 2016 was 1.8 per cent for the Group. The UK merchanting business reported marginally positive growth in average daily like-for-like revenue while growth of 11.2 per cent in the Irish merchanting business was in line with the first half. Revenue growth of 3.6 per cent in the Retailing business in Ireland was in line with expectations and the rate of growth in average daily like-for-like revenue in the Manufacturing business recovered to 9.1 per cent.

Operating Review

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Merchanting Segment (92% of Group Revenue)

UK Merchanting 

1 Before intangible asset amortisation on acquisitions of £1.1m (2015:£Nil) and restructuring costs of £1.2m (2015:£Nil)

2 Additional information in relation to these Alternative Performance Measures (APM's) is set out on pages 31 to 36

3 Before intangible asset amortisation on acquisitions of £0.4m (2015:£Nil) and restructuring costs of £1.2m (2015: £Nil)

Growth of 3.3 per cent in average daily like-for-like revenue was driven by increased activity in the residential RMI and new build markets. Price deflation was estimated at 1.3 per cent and like-for-like merchanting volumes increased by circa 4.6 per cent. New branches, implants, acquisitions and branch consolidations contributed revenue growth of 4.9 per cent.

Positive initiatives across a number of areas mitigated the effects of competitive pricing pressure in the traditional merchanting business and reduced the overall gross margin decline to 20 basis points.

Selco Builders Warehouse achieved strong market share gains from developing its branch network organically combined with a rate of growth in like-for-like revenue in the established branches that was well ahead of the market. Selco is now firmly positioned as the UK's fourth largest builders merchanting brand after Buildbase. It's unique, trade only product and service model is primarily focused on customers engaged in small residential RMI projects.

Good progress was achieved in the London area branches which contributed three quarters of revenue. Demand was also strong in the larger conurbations of Birmingham and Manchester where the business also has well-established market positions.

Selco's profit performance was very strong and ahead of the prior year. Investment was made to support a step-up in the opening of new branches to leverage the success of the model, the roll-out of small plant hire in all branches and investment in a 'Click and Collect' service that enables customers who order on-line to collect products purchased from any branch within one trading hour.

The five branches opened last year performed ahead of plan and the business continued to build on its development strategy with the opening of branches in Watford and Chessington in the first half. New branches will open in Wolverhampton and Portsmouth in September. We anticipate opening at least six branches in total in 2016 and five in the first half of 2017. By the end of June 2017, the development programme will have seen a fifty per cent increase in the number of branches in three years.

Buildbase like-for-like revenue growth was modest in the half year as solid gains in the first quarter were partially offset by a weaker second quarter. The construction market became progressively more competitive towards the end of the half year. Downward pressure on prices was partially offset by trading initiatives and procurement gains resulting in an overall small decline in the gross margin. Investment to support an upgrade of the businesses ERP system and hardware together and an element of wage inflation increased operating costs in the like-for-like business. Rollout of the new ERP system will commence during 2017 and is expected to provide a significant opportunity to improve business processes and management information.

The smaller merchanting acquisitions made during 2015 and earlier this year made good profit contributions in line with pre-acquisition expectations. The Hirebase and Electricbase implant initiatives delivered good revenue gains across the branch network and improved profitability. Buildbase operating profit was in line with the prior year with a lower organic result offset by contributions from its growth initiatives.

Buildbase Civils encountered continuing competitive market conditions. Gross margin pricing pressure together with weaker volumes led to a material reduction in operating profit on the prior year. Actions have been taken to reduce the cost base including merging the management team into the Buildbase infrastructure and transferring two Civils branches to established Buildbase branch properties.

Plumbase revenue was flat as like-for-like growth was offset by branch closures and the consolidation of branches into properties shared with other UK merchanting brands. The domestic heating market was very competitive due to relatively low volume growth and the addition of new capacity in established and new trade formats. A small decline in the gross margin was due to the mix effect of a higher proportion of revenue from the contract installer market. There was a strong focus on pricing discipline in a competitive market and on controlling variable costs in response to demanding market conditions. There was an overall decline in performance in the half year.

The Group's UK bathroom distribution business increased operating profit on the prior year. Plumbworld, the on-line bathroom retailing business, delivered strong growth in revenue which combined with tight control of costs resulted in a significant improvement in performance.

T.G. Lynes, a distributor of pipeline and mechanical engineering products acquired in March 2015, performed strongly providing a high quality platform for developing a strong position in the mechanical services market in London and the South East in conjunction with the Plumbase Industrial branches in the region.

Macnaughton Blair, the market leading merchanting business in Northern Ireland, reported unchanged operating profit. A major refurbishment of the businesses' flagship branch in Belfast completed in July better positions the business to service its residential and commercial customer base in the City. Modest growth in the Northern Ireland economy was supported by an improvement in the labour market and a pick-up in earnings. Activity levels were relatively subdued in the residential new build and RMI markets.

Irish Merchanting 

Revenue was up by 12.6 per cent in constant currency. Operating profit increased by 35.1 per cent to €13.8 million (2015: €10.2 million) in constant currency.

Strong market leadership from the highly experienced management team leveraged the Group's strengths to outperform the recovering market in Ireland. Trading from a national network of branches, the business used the breadth of its product range and customer service proposition to consolidate its market leadership position and grew average daily like-for-like revenue by 11.7 per cent.

The Chadwicks and Heiton Buckley brands emerged from the downturn with significant spare capacity in the branch network which has been used to support strong organic revenue growth in recent years. Strong leverage from higher revenue has delivered good growth in operating profit and this trend continued through the half year. There was a small product mix related decline in the gross margin due to increased revenue from the energy sector.

The merchanting business in Ireland experienced a strong improvement in market conditions due to a significant increase in investment in the construction sector. Growth was primarily concentrated on the residential RMI market. The ongoing recovery in the economy also stimulated demand in other segments of the market. Transactions in the secondary housing market were subdued at 2.1 per cent of the housing stock. The rate of increase in house prices moderated in a tight market which saw the stock of houses for sale decline.

The recovery in house building increased from a very low base. There was a considerable shortfall in housing supply with output running at close to half the level of potential demand. Housebuilding activity was concentrated on small scheme developments in the Greater Dublin Area and on the construction of single dwellings in provincial locations.

The recovery in the broader economy has driven demand for commercial and industrial properties leading to an increase in the number of new-build and refurbishment projects underway and planned. Activity in the merchanting market was also supported by public sector capital investment in the roads network, water services, transport and telecommunications.

The six store In-House kitchens business increased operating profit due to favourable market conditions and cost reduction measures implemented in the prior year. In view of the increasingly trade nature of the customer base and change in reporting lines, the In-House kitchens business was transferred from the retailing to Irish merchanting with effect from 1 January 2016. The 2015 comparatives, where applicable, have been updated to reflect this transfer.

Netherlands merchanting reported revenue of £41.5 million and operating profit before amortisation of £4.7 million, an operating margin of 11.3 per cent. Local currency revenue was €53.3 million and operating profit before amortisation was €6.0 million. Amortisation of intangibles amounted to €0.8m.

The Isero business, which was acquired in November 2015, is a leading specialist distributer of tools and fixings trading from 39 branches under the Gerritse, Breur Ceintuurbaan and Van der Winkel brands. The timing of the acquisition at an early stage in the recovery was positive as the Dutch economy and housing market continued to perform strongly.

Isero operates in an unconsolidated segment of the Netherlands merchanting market where there are opportunities to strengthen the branch footprint through organic development and acquisitions and to increase exposure to the growing RMI market. The first greenfield branch opening under Grafton ownership was recently completed in North Amsterdam and the business is well positioned to take advantage of other growth opportunities. The Group is very pleased with the progress of Isero and with the commitment of its management team to the future growth and development of the business.

Increased consumer spending in the Netherlands was driven by positive sentiment among households, increased private sector employment, higher real disposable incomes and rising house prices. The recovery in the housing market accelerated this year in response to pent-up demand and a sustained decline in mortgage interest rates which has improved affordability. The pace of growth in housing transactions at 25 per cent was much stronger than market expectations and there was also a sharp increase in housebuilding following a long period of under supply.

Belgium Merchanting

Revenue declined by 13.3 per cent in constant currency. Average daily like-for-like revenue fell 7.4 per cent and disposal of the non-core readymix operation in June 2015 also contributed to the decline in revenue.

Trading in the merchanting market was adversely affected by weakness in the Belgium economy which slowed in the first quarter due to a decline in consumer confidence and spending and the terrorist attacks in Brussels in March. Overall revenue and profitability was maintained in line with the prior year in branches focused on supplying residential RMI and small scale construction projects. The larger branches in Brussels and Flanders experienced difficult market conditions due to a sharp decline in residential, commercial and civils projects. Cost reduction initiatives are being implemented to reduce the cost base of the business in response to the change in market conditions.

Retailing Segment (6% of Group Revenue)

Retailing revenue increased by 6.4 per cent in constant currency to €93.7 million (2015: €88.0 million). Woodie's average daily like-for-like revenue increased by 6.4 per cent. Constant currency operating profit increased to €3.9 million (2015: €1.0 million).

The Woodie's management team have significantly re-focused the business over the last three years to a more customer centred, service driven proposition. There was an encouraging level of revenue growth in the four stores which were refurbished last year and a further three stores in Dublin were refurbished during the half year. The refurbishment programme, which will be extended to a further five stores in the second half, is designed to improve the medium term performance of the business and maintain Woodie's strong market leadership position in the Irish DIY market.

Consolidation of the supplier network generated economies in procurement and increased the gross margin. The appointment of a new logistics partner led to an improvement in supply chain management and product availability. The strong operating profit progress was due to high operating leverage on increased revenue, an increase in the gross margin and tight control of a relatively fixed cost base.

The recovery in retail sales that extended into the DIY sector in the second half of 2015 continued in the half year. The improvement in market conditions was driven by a strongly performing Irish economy with a range of indicators pointing to good growth in domestic demand. An improvement in the labour market, moderate growth in incomes and consumer confidence at relatively high levels were key factors behind the growth in the market.

Manufacturing Segment (2% of Group Revenue)

CPI EuroMix, the market leader in the supply of dry mortar in Great Britain, increased revenue by 14.2 per cent to £28.4 million (2015: £24.8 million). Average daily like-for-like revenue from the nine established mortar plants was ahead by 0.6 per cent in the half year. Strong growth in the first quarter revenue was driven by robust underlying demand for new homes supported by the availability of mortgages at low interest rates and the Help to Buy equity loan scheme. This growth was partially offset by weaker volumes in the second quarter as the rate of house building activity moderated.

Good growth in volumes and strong management action on pricing and operational efficiencies, including improved fleet utilisation contributed to a significant improvement in operating profit and positively impacted the operating margin. In July 2015, the Group acquired Carlton, a packaged mortar products business, to increase CPI's capabilities in this segment of the market and is very pleased with its performance to date.

MFP, a manufacturer of PVC drainage and roofline products based in Dublin, performed strongly assisted by increased activity in the residential RMI and new build markets and new contracts in the wind farm sector with like-for-like revenue growth of 25.0 per cent in the half year.

Property

The asset backing of freehold property is a key balance sheet strength. While the majority of the portfolio is used for trading purposes, the Group has historically earned profits and realised cash flow from the disposal of surplus property. This trend continued in the half year when a profit of £3.5 million (2015: £6.1 million) was realised from the disposal of a number of UK properties for £5.4 million.

The value of properties held for resale and actively marketed and properties held with a view to enhancing their development potential was £29.0 million.

Pensions

Defined contribution style funding arrangements apply to over 90 per cent of the Group's employees. Defined benefit pensions schemes have 700 current employees and 1,800 deferred members and pensioners.

The IAS 19 pre-tax deficit on the defined benefit pension schemes increased by £29.6 million to £46.2 million (31 December 2015: £16.6 million). The increase in the deficit related to changes in financial assumptions that included an increase in the present value of scheme liabilities by £32.2 million due to the rates used to discount liabilities declining in line with movements in corporate bond yields. UK scheme liabilities were discounted at 3.2 per cent, a decline of 75 basis points and Irish scheme liabilities were discounted at 1.5 per cent, a decline of 85 basis points. There was a gain of £5.3 million from lower inflation and salary growth assumptions.

Experience losses of £3.0 million were mainly due to members leaving service. Asset gains were £1.6 million and there was a reduction in the deficit by £1.3 million due to contributions paid exceeding the pension expense in the period.

Net Finance Income and Expense

The net finance charge for the year was £3.3 million (2015: £3.3 million). Net bank and loan rate interest declined to £2.4 million from £2.9 million due to the refinancing of bank debt completed in March 2016, lower average net debt for the year and a decline in money market interest rates. The net finance cost of defined benefit pension scheme obligations fell to £0.2 million from £0.4 million. There was a net foreign exchange charge of £0.5 million included in the net finance expense charge for the period which compares to a gain of £0.2 million in the prior year.

Taxation

The tax charge for the year of £12.2 million is equivalent to an effective rate of 19.4 per cent. This was lower than the underlying rate of 20 per cent due to the use of a previously unrecognised deferred tax asset to offset the majority of taxable profit arising on the disposal of properties in the UK. The underlying effective rate of 20 per cent forecast for 2016 reflects the blended rate of corporation tax on profits in the UK, Ireland and the Netherlands, the disallowance of a tax deduction for certain overheads including depreciation on property charged in arriving at profit before tax. There was a reduction in the UK rate of corporation tax to 20 per cent with effect from 1 April 2015 and a further reduction in this rate takes effect in two stages to 19 per cent from 1 April 2017 and 17 per cent from 1 April 2020.

Capital Expenditure and Intangible Assets

Capital and development expenditure on property plant and equipment amounted to £22.4 million (2015: £15.7 million). The focus of development expenditure in the amount of £12.1 million (2015: £10.8 million) was on organic growth opportunities, principally on four new Selco stores and major branch development projects. Asset replacement expenditure of £10.3 million (2015: £4.9 million) included the purchase of motor vehicles, routine branch refurbishment and replacement of plant and equipment hired to customers.

An investment of £5.8 million (2015: £3.5m) was made in intangible assets related to updating IT systems and infrastructure to support a number of UK businesses, principally Buildbase.

Net Debt

Net debt at 30 June 2016 was £95.7 million, a decline of £17.9 million from £113.6 million at 31 December 2015. The Group's debt is principally denominated in euros to provide a hedge against euro denominated assets. Sterling exchange rate weakness increased euro denominated net debt by £28.7 million on translation into sterling at the end of the period. The gearing ratio declined to 9 per cent (31 December 2015: 12 per cent). EBITDA5 interest cover4 was 35.4 times (31 December 2015: 27.3 times) and net debt was 0.56 times5 EBITDA (31 December 2015: 0.70 times).

4 Additional information in relation to these Alternative Performance Measures (APM's) is set out on pages 31 to 36

Financing

The level of undrawn facilities at 30 June 2016 was £208.0 million (31 December 2015: £115.7 million) which together with the Group's surplus cash balances and deposits (£206.8 million at 30 June 2016) and strong cash flow from operations provide appropriate funding headroom and financing flexibility. In March 2016 the Group completed an amendment and extension of its loan facilities to improve terms and refresh the maturity date. Bilateral loan facilities for £434 million were extended to March 2021 with five existing relationship banks and two one-year extension options were also agreed. These arrangements were timed to take advantage of more favourable market conditions for pricing on drawn and undrawn facilities. The Group also entered into a revolving loan facility for £58 million on similar terms with a new relationship bank. These arrangements provide certainty of finance over a longer period on more competitive terms.

Shareholders' Equity

Shareholders' equity increased by £26.4 million to £1.01 billion at 30 June 2016 (31 December 2015: £985.7 million). Profit after tax increased equity by £50.6 million and dividend payments reduced equity by £18.8 million. The increase in the defined benefit pension scheme deficit reduced shareholders equity by £24.3 million. There was a currency gain of £16.2 million on conversion of euro denominated assets, net of related euro debt, into sterling at the Euro/Sterling exchange rate of Stg82.65p (31 December 2015: Stg73.40p).

Return on Capital Employed and Asset Turn

Return on Capital Employed (ROCE) declined by 10 basis points to 12.1% (2015: 12.2%) and capital turn5 declined to 2.1 times (2015: 2.2 times). The Group is committed to achieving increased returns for shareholders based on a combination of an improvement in operating performance and the more efficient deployment of capital to generate higher returns.

5 Additional information in relation to these Alternative Performance Measures (APM's) is set out on pages 31 to 36

The primary risks and uncertainties affecting the Group over the remainder of the year are set out on pages 56 to 58 of the 2015 Annual Report.

Since publication of the 2015 Annual Report, the UK vote to leave the European Union has created significant uncertainty about the near term outlook and prospects for the UK economy. As noted in the outlook above, it is still too early to assess the likely impact on the UK economy of the vote to leave the European Union or the extent to which any possible fall in investment and a potentially softer housing market could impact employment and household spending.

It could take up to two years and possibly longer until the UK leaves the EU. The uncertainty during this period could negatively impact the UK economy, reduce demand in the Group's markets and adversely affect the financial performance of the Group. The Board and management will continue to consider the impact on the Group's businesses, monitor developments on an ongoing basis and take appropriate action to help mitigate the consequences of any decline in demand in its markets.

Group Condensed Income Statement

For the six months ended 30 June 2016

Group Condensed Statement of Comprehensive Income

For the six months ended 30 June 2016

Group Condensed Balance Sheet as at 30 June 2016

Group Condensed Cash Flow Statement

For the six months ended 30 June 2016

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 2016

1. General Information

The condensed consolidated half year financial statements for the six months ended 30 June 2016 are unaudited but have been reviewed by the auditor whose report is set out on pages 38 and 39.

The financial information presented in this report has been prepared in accordance with IAS 34 Interim FinancialReporting as adopted by the European Union. These condensed consolidated half year financial statements do notinclude all the information and disclosures required in the annual financial statements and should be read in conjunctionwith the Group's annual financial statements in respect of the year ended 31 December 2015 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 2015 does not comprise statutory annual financial statements within the meaning of section 295 of the Companies Act 2014. Those 2015 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.

(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 explanatorynotes are included to explain events and transactions that are significant to an understanding of the changes to theGroup's financial position and performance since the last annual consolidated financial statements as at and for the yearended 31 December 2015.

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 2015.

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 euro sterling exchange rates for the six months ended 30 June 2016 and 2015 and for the year ended 31 December 2015 are set out below:

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

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

The group has applied the following standards and amendments for the first time in the reporting period commencing 1 January 2016:

· Disclosure initiative - amendments to IAS 1;

· Amendments to IAS 19, 'Employee benefits', on defined benefit plans;

· Clarification of acceptable methods of depreciation and amortisation - Amendments to IAS 16 and IAS 38;

· Annual improvements to IFRSs 2010 - 2012 cycle; and

· Annual improvements to IFRSs 2012 - 2014 cycle.

The adoption of these amendments did not have any impact on the current period or any prior period. Other changes to IFRS which became effective for the Group in 2015 did not have an effect on the condensed consolidated half year financial statements or they are not currently relevant for the Group.

(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 2015.

The amount of revenue and operating profit under the Group's reportable operating segments of Merchanting, Retailing and Manufacturing is as follows:

The amount of revenue by geographic area is as follows: