Final Results 2011 Statement & Financials

7 March 2012

GRAFTON GROUP PLC

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2011

HIGHLIGHTS

·; Revenue up 3% to €2.05 billion

·; Underlying operating profit up 13% to €54.7 million and €56.9 million excluding amortisation

·; Underlying profit before taxation up 3% to €42.3 million

·; Underlying adjusted basic earnings per share of 15.4 cent

·; Strong cash flow from operations of €96.9 million

·; Dividend per unit up by 7% to 7.5 cent including second interim dividend of 4.75 cent

·; Like for like turnover growth of 4.3% in the UK merchanting business

·; UK revenue and profits increase

·; Significant action taken on restructuring

Gavin Slark, Chief Executive Officer commented:

"The turnaround in performance that commenced in 2010 continued in 2011 in challenging markets with savings realised from cost reduction programmes. The Group is well positioned to make further progress in what we believe will be subdued markets in 2012. We will continue to focus on margin enhancement, cost management and cash generation and evaluate value adding expansion opportunities."

Conference Call 

Grafton will host an Analysts' conference call today at 8.30am (Irish Time) to discuss this announcement. The dial-in numbers are:

Ireland: + 353 1 436 4265

UK: + 44 208 817 9301

US: +1 718 354 1226

Other Countries: +353 1 436 4265

Results for the Year Ended 31 December 2011

Overview

2011 was a year of further progress for the Group against the background of challenging trading conditions in its principal markets, particularly Ireland. The turnaround in performance that commenced in 2010 continued, leading to increased revenue and adjusted profits (before exceptional items and intangible amortisation).

·; Group revenue stabilised at over €2 billion

·; Group adjusted operating profit doubled over the past two years

·; Dividend increase of 50% over last two years

·; Recurring savings from cost reduction programme being realised

·; Adjusted operating profit of UK merchanting business ahead on lower volumes

·; Adjusted operating profit increased in Irish business despite turnover decline

·; Progress made implementing self-help measures including branch consolidations and closure of concrete products manufacturing division in Ireland

·; Management succession and development provides renewed capacity to improve performance in difficult markets

·; Strong cash generation and debt reduction

Revenue stabilised at over €2 billion over the past three years and adjusted operating profit doubled between 2009 to 2011 due to a reduction in overheads in response to a prolonged period of challenging trading conditions in the Group's markets.

Group revenues increased to €2.05 billion in 2011 from €2.00 billion in 2010. Adjusted operating profit (before exceptional items and intangible amortisation) increased by 12.5 per cent to €56.9 million (2010: €50.6 million). The UK business, which accounted for over 70 per cent of Group revenue, increased revenue and operating profit in a reasonably resilient housing repair, maintenance and improvement (RMI) market. The rate of decline in turnover in the Irish business moderated and operating profit increased due to the benefits of cost reductions implemented in 2011 and prior years.

The net finance charge increased to €12.4 million (2010: €7.5 million) due to the higher bank margin on debt refinanced during 2010, compared to the favourable arrangements put in place prior to the credit crisis Adjusted profit before taxation (before exceptional items and intangible amortisation) increased by 3.2 per cent to €44.5 million (2010: €43.1 million).

The statutory result for 2011 was influenced by measures taken to mitigate the impact of adverse market conditions. As previously announced, the charge for restructuring costs and the onerous lease provision amounted to €32.1 million. The Group continued to implement restructuring and cost saving initiatives principally in response to the decline in turnover and excess capacity in the merchanting branch network and manufacturing business in Ireland. The cost of implementing these measures was €12.7 million and there will be an incremental benefit of circa €6.0 million in 2012 from the lower cost base. A charge of €19.4 million was recognised in respect of a small number of onerous leases and related asset impairment primarily in the Irish retailing businesses.

The Group generated cashflow of €96.9 million (2010: €95.7 million) from operations and ended the year in a strong financial position with modest gearing and net debt refinanced out to 2016.

The Belgian builders merchanting business, in which the Group has a 53 per cent interest, traded successfully and completed three acquisitions during the year increasing its annualised turnover to circa €55 million. The business now trades from nine locations.

Management

The senior executive management team in the merchanting business continued to evolve over recent months with a number of appointments. Mark Kelly joined the Group in February 2012 with responsibility for Buildbase, Plumbase, Jackson Building Centres and the specialist merchanting brands. Chris Cunliffe was appointed Managing Director of Selco Builders Warehouse having previously served as Chief Operating Officer. Andrew Gribble joined the Group as Managing Director of Plumbase and Jonathon Jennings was appointed to the newly created role of Group Property Director. These individuals have strong track records and bring extensive business and industry experience to their new roles and are well placed to make a significant contribution to the operational and strategic development of the business. As previously announced Leo Martin, Executive Director and Chief Operating Officer, retired at the end of the year following a long period of distinguished service with the Group.

Dividend

In view of the Group's strong cash flows and increase in underlying profit, the second interim dividend has been increased to 4.75 cent (2010: 4.5 cent) per Grafton Unit. The payment will be made on 13 April 2012. This will result in a total dividend for the year of 7.5 cent (2010: 7.0 cent), an increase of 7.1 per cent on the dividend paid for 2010.

Operations Review

Merchanting

Turnover in the merchanting business increased by 3.2 per cent to €1.79 billion (2010: €1.73 billion). Operating profit for the segment was €64.9 million (2010: €61.5 million), an increase of 6 per cent.

UK merchanting branches increased turnover by 4.0 per cent to €1.46 billion (2010: €1.40 billion). Sterling turnover increased by 5.2 per cent and average daily like for like turnover increased by 4.3 per cent. UK operating profit before restructuring costs increased by 3.5 per cent to €59.9 million (2010: €57.9 million). The operating profit margin was unchanged at 4.1 per cent.

Trading in the UK merchanting market was influenced by weak economic growth as a decline in real incomes (due to above trend inflation and subdued consumer confidence) reduced spending. Lower volumes in the UK merchanting market, for the fourth consecutive year, were also influenced by tight credit conditions and the focus of households on paying down debt. Equity withdrawal, traditionally an important source of funding for investment in housing RMI, was lower as households preferred to increase the equity in their homes. Housing transactions, a forward indicator of demand in the merchanting market, remained relatively flat for the third consecutive year, at almost half the pre-downturn level.

Following average daily like for like growth of 4.7 per cent in the first half, average daily like for like turnover increased by 4.0 per cent in the second half. This increase reflected a recovery of commodity-based price increases and a small gain in market share.

Buildbase traded in a relatively stable market with mainly price-driven turnover growth in its general merchanting branches where demand was primarily influenced by housing RMI activity. The specialist branches performed strongly, increasing volumes supplied to the new housing market. Two single branch acquisitions were completed. Trading conditions in the East Midlands market moved towards stabilisation and the performance of Jacksons' business benefitted from operating efficiencies and a lower cost base. A new branch in Worksop is scheduled to open in May 2012 and redevelopment of the Grimsby branch is due for completion at the end of March 2012. Plumbase increased turnover in its like for like business and improved geographic coverage with the acquisition of 16 plumbing and heating branches in England and Wales and the opening of two heating spares branches.

Selco Builders Warehouse, the trade-only builders' merchant, reported strong growth in turnover and operating profit. Development of the business continued with the successful opening of the fourteenth London store at Catford and a store in Slough, Berkshire. The Swansea and Minworth, Birmingham stores were relocated to larger properties in October 2011. The business now trades from 30 stores and a further three stores are scheduled to open in London in the second half of 2012.

In Northern Ireland, turnover stabilised in the Macnaughton Blair business against the backdrop of a fragile economic recovery. The new housing market continued to weaken but the housing RMI market returned to growth and the business also benefitted from a number of public sector new build and RMI projects. With an increased gross margin and a lower cost base due to the restructuring measures taken in recent years, operating profit advanced strongly from a low base. The Derry branch was successfully relocated to a larger property.

Turnover in the Irish merchanting branches declined by 6.4 per cent to €306.8 million (2010: €327.8 million). Operating profit increased by 12.5 per cent to €4.1 million (2010: €3.7 million).

The Irish economy stabilised in 2011 following three years of decline. The domestic economy remained weak due to a fall in disposable incomes and weak consumer confidence which contributed to lower spending on housing RMI projects. All indicators of housing market activity remained very weak. House completions fell further and are believed to be at or close to a cycle floor. Individual properties, which are mainly built to demand, accounted for a high proportion of residential construction and the supply of apartments and scheme houses fell to historically low levels. A sharp fall in mortgage lending and reduced access to credit contributed to lower house building and RMI activity.

The Chadwicks and Heiton Buckley branch network responded well to the challenging business conditions and continued to outperform the market. The decline in turnover moderated in the second half of 2010 and there was a continuation of this trend through 2011. Turnover was underpinned by housing RMI activity and benefitted from promotional activity and marketing nationally to trade customers and households. The decline in turnover in the like for like business was lower than the headline rate of decline due to branch consolidations in 2010 and 2011. Gross margins were maintained in a competitive market with the benefit of procurement gains. A significant reduction in overheads more than offset the impact on profit of lower turnover. Operating profit was marginally higher for the year.

The restructuring measures adopted in 2010 and 2011 including consolidation of branches and a reduction in employment levels in response to the decline in volumes, contributed to the fall in overheads. Tight management of customer credit exposures resulted in a material decline in the charge for bad debts.

Savings of €50 million were realised in the Irish Merchanting business in the three years to the end of 2011 through cost reductions and branch consolidations. These savings were critical to maintaining profitability in response to sharp declines in volumes and should result in significant operational leverage when the Irish merchanting market recovers.

Retailing

Turnover declined by 4.7 per cent to €219.7 million (2010: €230.5 million) and operating profit of €2.1 million was down from €2.4 million.

Consumer spending was influenced by declining disposable incomes, a weak labour market and a high savings ratio. Consumers also continued to pay down debt. Core retail sales volumes registered growth for the year following a recovery in the last quarter that was partly weather-related and also influenced by discounting and promotions. Discretionary spending categories including DIY experienced a further decline in volumes as financially stretched households remained cautious about the outlook for their personal finances.

The Woodie's business had a strong start to the year benefitting from easier comparatives and driven by very favourable weather conditions in the first four months that brought forward sales of gardening and seasonal products. These early gains were more than offset by tougher trading conditions in the seasonally important months of May and June. Turnover trends were more even in the second half of the year reflecting the weaker backdrop for consumer spending.

Woodie's retained its position as the leading retailer in a well-developed market for DIY and garden centre products. Store footfall was strong and the business completed almost nine million customer transactions during 2011. This compared favourably with the prior year in a more challenging retail market. Average transaction values declined at a time of lower consumer spending on discretionary higher value products. Outdoor seasonal products including garden furniture, BBQs, lawnmowers and furniture experienced a drop in volumes. Sales of DIY, decorative and building products were resilient and electrical, paint and decorative products benefitted from improved merchandising. New ranges of own brand power and hand tools, timber flooring, floor tiles and lighting were successfully rolled out across the network.

A reduction in sales of higher value lower margin products, reduced discounting on seasonal ranges and product sourcing gains contributed to an increase in gross margin. The improvement offset most of the impact on profit of lower turnover.

The store at Airside Retail, North County Dublin was successfully upgraded and increased turnover for the year. Extensions to two long-established stores in Glasnevin, North Dublin City and Blanchardstown, West Dublin will be completed in April 2012 enabling both stores to carry wider product ranges in a larger store format.

In-House, the eight store kitchens business, performed in line with the prior year on lower turnover. The business has a strong presence in the Dublin market and also operates a number of stores in regional cities where market conditions were more challenging due to competitive pressures from industry overcapacity.

Manufacturing

Turnover increased by 9.8 per cent to €47.5 million (2010: €43.3 million) and the operating loss before rationalisation costs reduced to €0.54 million from €3.5 million in 2010. The segment was cash generative after rationalisation costs due to the significant non-cash charge for depreciation in arriving at the segment result.

The UK Mortar business increased turnover by 16 per cent to €34.4 million (2010: €29.7 million) with the benefit of improved weather conditions in the early and final months of the year. Housing starts, an indicator of activity levels in the business' principal market, were down by 4 per cent in England and supply of new housing was approximately half of the pre-downturn level. CPI Mortars performed strongly despite the decline in house building and increased volumes supplied to the sector. The business also benefitted from the development of innovative products and logistical solutions for the supply of sprayed concrete to certain infrastructure projects. CPI Mortars improved volumes in a fairly stable market and also reduced its cost base to report a strong improvement in profit.

Turnover in the Irish manufacturing businesses declined by 3.4 per cent to €13.1 million (2010: €13.6 million). Operating losses were materially reduced and further rationalisation measures were implemented including closure, since the year end, of the concrete products division in Dublin.

Financial Review

A continued recovery in underlying operating profit and substantial cash generation was achieved in 2011 despite challenging economic and market conditions. Cash flow was used to increase dividends, reduce net debt and invest in the business to create a stronger platform for future growth. A strong year-end balance sheet incorporated a significant freehold estate, a low level of gearing, loans with a maturity profile of almost five years and substantial deposits and undrawn long-term bank facilities.

Cashflow

Cashflow from operations of €96.9 million (2010: €95.7 million) demonstrated the strength of the Group's proven cash generating business model. Adjusted operating cashflow, which excludes rationalisation costs of €10.7 million (2010: €5.3 million), was €107.6 million (2010: €101.0 million). Cash conversion increased by €18.3 million (2010: €8.8 million) from continued tight management of working capital.

Capital expenditure on property, plant and equipment of €35.3 million (2010: €9.6 million) was concentrated on asset replacement and renewal projects and also included new branch openings that support long-term growth and strengthen strategic market positions. The disposal of a number of surplus properties with limited development potential and the routine disposal of non-property assets generated cashflow of €8.7 million (2010: €4.3 million). The spend on acquisitions in the UK merchanting market and further investment in the Belgian Joint Venture was €12.8 million (2010: €2.4 million).

Net Debt

The Group continued to use its strong liquidity from operations to reduce net debt for the fifth consecutive year. Net debt at the year end, which benefits from a seasonally lower level of investment in working capital, reduced to €225.9 million from €255.1 million at the end of 2010. The gearing ratio fell to 23 per cent from 26 per cent.

Good flexibility in managing the liquidity of the business was maintained through the holding of substantial deposits and cash balances that amounted to €134.6 million at the year end. The Group also had access to a significant source of liquidity in the form of undrawn committed revolving term bank facilities of €120 million. In October 2011, as part of the Group's ongoing capital markets programme, new five year revolving bank facilities for €75 million were put in place and the maturity profile of existing debt of €195 million was extended to 2016. In addition, a bank facility for €85 million was extended by one year to mature in 2014 and a new three year bank facility for €35 million was agreed.

The cash generated from operations, as the main source of liquidity, combined with substantial cash deposits and undrawn term bank facilities provide the Group with the resources to finance appropriate organic and acquisition-led development opportunities.

Net Finance Income and Expense

The interest charge on net bank and loan note debt increased to €15.3 million (2010: €9.5 million). The increased interest charge was due to the higher bank margin on debt refinanced at the end of August 2010 compared to the favourable arrangements put in place prior to the credit crisis. The majority of the Group's debt was set at floating rates to take advantage of low interest rates at this stage in the economic cycle. In view of the improving conditions in international debt markets and the Group's access to significant undrawn committed revolving term facilities, cash deposits were reduced to minimise net interest costs in a low interest rate environment.

Shareholders' Funds

Shareholders' funds of €982.8 million (31 December 2010: €990.3 million) increased by underlying profit after tax of €34.6 million and an exchange gain of €25.5 million on translation of the net assets in the UK business at a more favourable sterling/euro exchange rate. Shareholders' funds were reduced by restructuring costs and an onerous lease provision of €32.1 million, an actuarial loss after tax of €19.1 million on defined benefit pension schemes and dividend payments of €16.8 million.

Taxation

The taxation charge of €7.7 million is primarily a non-cash charge due to the unwinding of deferred tax assets and provisions recognised in prior years. The charge also reflects a reduction in UK deferred tax assets due to a fall in the UK rate of corporation tax and an increase in Irish deferred tax liabilities due to an increase in the rate of capital gains tax. No taxation benefit arose in the year from the charge for restructuring costs and the onerous lease provisions related to the Irish business. Taxation paid of €3.1 million reflected the availability of tax deductions carried forward from prior years.

Pension

The deficit on defined benefit pension schemes was €28.6 million (31 December 2010: €15.5 million) net of the related deferred tax asset. The market value of scheme assets was €191.1 million (31 December 2010: €190.9 million). A fall in the rate used to discount liabilities, in line with changes in corporate bond yields, contributed to the increase in scheme liabilities to €224.6 million (31 December 2010: €208.5 million).

Outlook

In the UK, growth is forecast to remain subdued in the near term before starting to improve as households' real incomes gradually recover following an easing of the high rate of inflation experienced over recent years. The fiscal consolidation programme, tight credit conditions and households saving a high proportion of income are likely to weigh on housing transactions and a recovery in volumes in the RMI market. Medium-term demand fundamentals for the housing RMI market remain exceptionally strong in view of the decline in volumes by over 30 per cent since 2007 and the need for investment in an aging housing stock.

In Ireland, the economy has stabilised but the immediate outlook is challenging due to pressure on disposable incomes, concerns about employment prospects and very tight credit conditions. Demand is expected to remain weak in the Irish merchanting and DIY businesses.

Group turnover in the UK Merchanting business in January and February continued on a similar trend to 2011 with average daily like for like growth of 4.0 per cent. Market conditions remained difficult in Ireland with average daily turnover in the Merchanting branches down by 11 per cent in the like for like business after adjusting for branch consolidations. A decline in turnover by eight per cent in the Irish Retailing business was largely offset by an improved gross margin.

The Group is targeting further operating profit growth for 2012 based on cost savings and modest turnover growth, subject to market conditions. Grafton's strategically important market positions, high operating cashflow and reduced cost base provide a good platform to benefit from a recovery in its markets from current cyclical lows.

Grafton Group plc

Group Condensed Income Statement

For the year ended 31 December 2011

Grafton Group plc

Group Condensed Balance Sheet as at 31 December 2011

Grafton Group plc

Group Condensed Cash Flow Statement

For the year ended 31 December 2011

Group Condensed Statement of Comprehensive Income

For the year ended 31 December 2011

Grafton Group plc

Group Condensed Statement of Changes in Equity

Grafton Group plc

Notes to Preliminary Statement for the year ended 31 December 2011

1. General Information

The financial information presented in this report has been prepared using accounting policies consistent with International Financial Reporting Standards (IFRS) as adopted by the European Union and as set out in the Group's annual financial statements in respect of the year ended 31 December 2010 except as noted below. The financial information does not include all the information and disclosures required in the annual financial statements. The Annual Report will be distributed to shareholders and made available on the Company's website www.graftonplc.com in due course. It will also be filed with the Company's Annual Return in the Companies Registration Office. The auditors have reported on the financial statements for the year ended 31 December 2011 and their report was unqualified and did not contain any matters to which attention was drawn by way of emphasis. The financial information for the year ended 31 December 2010 represents an abbreviated version of the Group's statutory financial statements on which an unqualified audit report was issued and which have been filed with the Companies Registration Office.

Basis of Preparation, Accounting Policies and Estimates

(a) Basis of Preparation and Accounting Policies

The financial information contained in this Preliminary Statement has been prepared in accordance with the accounting policies set out in the last annual financial statements.

The following are the other new standards that are effective for the Group's financial year ending on 31 December 2011 and that had no significant impact on the results or financial position of the Group for the year ended 31 December 2011:

·; Improvements to IFRSs (2010)

·; IAS 24 Revised: Related Party Disclosures

·; Amendment to IAS 32 - Financial Instruments: Presentation - Classification of Rights Issues

·; Amendment to IFRIC 14 - Prepayments of a Minimum Funding Requirement

·; IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments

(b) Estimates

The preparation of this Preliminary Statement 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 this Preliminary Statement, 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 2010 other than the addition of taxation referred to in note 15.

2. Segmental Analysis

The amount of revenue and operating profit/(loss) under the Group's operating segments of merchanting, retail and manufacturing is as follows:

2. Segmental Analysis (continued)

Operating segment assets are analysed below:

The amount of revenue by geographic area is as follows:

3. Exceptional Items in Operating Profit

The 2011 exceptional items relate to restructuring costs and asset impairment which amounted to €12.7 million. A charge of €19.4 million was recognised in respect of a small number of onerous leases and related asset impairment primarily in the Irish retailing businesses which accounts for the increase in provisions on the balance sheet at 31 December 2011.

4. Finance Expense and Finance Income

* Net bank/loan note interest of €15.3 million (2010: €9.5 million).

# Net expected pension return of €1.9 million (2010: return of €1.1 million).

5. Earnings per Share

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