Half Year Report

Half Year Report

For the Six Months Ended 30 June 2020

Grafton Group plc 

Half Year Report for the Six Months Ended 30 June 2020

Emerging from Lockdown in Strong Position

1 Supplementary financial information in relation to Alternative Performance Measures (APMs) is set out on pages 37 to 46.

2 H1 2019 has now been restated as the Plumbase business is now classified as a discontinued operation. Details are set out in Note 14 and in the APM's.

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

Highlights

· Revenue down 19% and adjusted operating profit in continuing operations down 61% due to Covid-19 pandemic

· Strong recovery in RMI markets across all geographies

· Exceptional performance by Woodie's following 51 days of suspended trading

· Netherlands business remained open with increased scale and profitability following Polvo acquisition

· Strong cash flow from operations of £121.5 million (2019: £157.2 million)

· Net cash position (pre IFRS 16) increases to £58.6 million (31 December 2019: £7.8 million)

· Liquidity of £693.4 million at 30 June 2020 (30 June 2019: £628.6 million)

· Encouraging start to second half with average daily like-for-like revenue up by 3.8%

Gavin Slark, Chief Executive Officer Commented:  

"We are very pleased with the performance of our business which was made possible by the outstanding efforts and commitment of colleagues in a half year outturn that demonstrates the resilience and the cash generative qualities of our Group and the agility of our management teams in responding to the Covid-19 pandemic.

Grafton's resilience, market positioning and geographic diversity together with its low debt and strong liquidity leaves the Group well positioned for continuing progress. We are very encouraged by the performance of the Group in recent months as it emerged in a strong position from the Covid-19 lockdown and based on current trends the Group should deliver a similar level of adjusted operating profit in the second half to the comparable period last year."

Webcast and Conference Call Details

A pre-recorded results presentation and a copy of the results presentation document are available at 7:00am today via the home page of the Company's website www.graftonplc.com.

A live audio conference call for analysts and investors will be hosted by Gavin Slark and David Arnold at 9:30am today. If investors would like to listen to the conference call, they can do so via the "Live Audio Conference Call" webcast link on the home page of the Company's website www.graftonplc.com.

Analysts will be invited to raise questions on the call. Should investors wish to submit a question in advance, they can do so before 8.45am today by sending an email to [email protected]. A recording of the call will be available on the Company's website later today.

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

Tim Rowntree/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 2020

Group Results

The Covid-19 pandemic and the measures taken to contain it had a significant impact on our businesses and is reflected in these results. The performance for the half year demonstrated both the resilience and the cash generative qualities of the Group and it also highlighted the agility of our management teams in responding at speed to this unparalleled event.

Our number one priority was, and remains, the health and safety of our colleagues and customers and this informed and shaped our response from the outset of the crisis. A wide range of health and safety protocols and social distancing measures were implemented in our branches and stores. We also sought to support essential services and the emergency needs of households with the supply of building materials and we took immediate steps to protect the Group's strong financial position.

Trading across the Group was broadly in line with expectations until the second half of March. The impact of Covid-19 on trading over the remainder of the first half varied by country and market and was influenced by the nature and duration of the lockdown measures adopted.

Distribution

Trading in the UK distribution business was affected by the national lockdown and the majority of our branches were closed from 24 March until the beginning of May when reopening commenced on a phased basis. Practically the entire branch estate was reopened on a full-service basis by the end of June. Selco, in particular, benefitted from the marked post-lockdown recovery in the residential repair, maintenance and improvement ("RMI") market. House building sites began reopening at a more gradual pace from mid-May and as a consequence the recovery in this end-use segment of the distribution market was less advanced at the end of the half year.

The Chadwicks distribution business in Ireland was closed on 28 March except for essential deliveries and it fully reopened on 18 May in the first phase of the Irish Government's roadmap for reopening the country. June revenue was ahead of the prior year driven by strong demand from trade and retail customers undertaking housing RMI projects. House building activity was more subdued and slower to recover.

The Netherlands business was categorised as an essential service and remained open throughout the half year while observing strict social distancing and health and safety measures. The business performed well despite the national lockdown and significantly increased its profit contribution following the acquisition of Polvo in July 2019 which performed in line with expectations.

Retailing

Woodie's market leading DIY, Home and Garden business in Ireland was closed between 28 March and 18 May except for digital transactions. On reopening, it experienced a surge in demand that continued to the end of June and remarkably, it reported a similar level of profit to the prior year despite being closed for 51 trading days.

Manufacturing

Revenue in the CPI EuroMix mortar manufacturing business in Great Britain was affected by the closure of plants during the lockdown and by the slow recovery in house building which accounts for a very high proportion of output.

Property Profit

The Group realised a profit of £0.3 million (2019: £4.7 million) from the disposal of surplus properties in the UK.

Organisational Changes

In view of the weaker trading conditions in the traditional UK distribution business, some organisational and branch changes are being implemented in the second half. These measures will provide sustainable benefits in 2021 and beyond and result in a current year exceptional charge of £16 million. These steps are expected to result in a cash outflow of £6.0 million, and a payback of less than one year, with the benefit of unwinding working capital in the branches affected and the disposal of freehold property.

Cash Flow

The Group continued to be very cash generative with cashflow from operations of £121.5 million (2019: £157.2 million). The Group had net cash of £58.6 million on the balance sheet at 30 June 2020 before lease liabilities having opened the year with net cash of £7.8 million. Lease liabilities were £537.8 million at 30 June 2020 (31 December 2019: £543.4 million) and net debt including lease liabilities was £479.2 million (31 December 2019: £533.8 million), an improvement of £54.6 million in the half year.

Dividend

On 24 March 2020, the Group announced that it was implementing a range of precautionary measures in light of Covid-19 to preserve liquidity and ensure it came through the crisis well positioned for growth. One of these actions was the suspension of the second interim dividend for 2019 of 12.5p per share, which was due to be paid on 6 April 2020.

In view of the impact on trading of Covid-19, the Board does not propose paying a first interim dividend for 2020 in respect of the financial performance for the six months ended 30 June 2020, as it normally would do at this time. The Group however recognises the importance of dividends to shareholders and will consider the scope for the payment of the suspended second interim dividend for 2019 and a full year dividend for 2020, having regard to any significant interruptions to trading from Covid-19 in the second half, as part of its overall review of the full year results.

Outlook

The outlook for the Group's businesses remains uncertain due to the unprecedented situation caused by the Covid-19 pandemic. It is likely that Governments and health authorities will require some social distancing and other measures to remain in place for some time, including possible local or national lockdowns which may be reintroduced from time to time, impacting sentiment, trading and the broader economic environment over the remainder of the year.

The reopening of the UK economy and relaxation of social distancing measures has seen a recovery in the Group's UK distribution and mortar manufacturing businesses in May and June that was sustained in July and August. The gradual recovery in housebuilding is expected to continue but will remain sensitive to the confidence of households to make long term commitments of this nature, employment prospects after the furlough scheme ends and the availability of mortgage finance.

The recovery in the UK housing RMI market is likely to have benefitted from pent-up demand and an increase in household savings during the lockdown. RMI spending over the remainder of the year will be influenced by consumer sentiment at a time of significant uncertainty and the willingness of households to undertake indoor projects due to concerns about social distancing.

In Ireland, although economic activity remains below pre-Covid-19 levels, the Chadwicks and Woodie's businesses have in recent months outperformed the prior year. The near-term prospects remain favourable but are sensitive to the possible reintroduction of containment measures that may be needed to control the spread of the virus and the associated impact on unemployment, consumer confidence and spending over the coming months.

In the Netherlands, measures to control Covid-19, a decline in exports and a moderation in household spending are likely to temper demand in the Isero and Polvo businesses over the remainder of the year. The Polvo acquisition made over a year ago provides an opportunity to continue to realise integration benefits in the enlarged business.

Average daily like-for-like Group revenue increased by 3.8 per cent in the period from 1 July to 16 August. This comprises a decline of 0.7 per cent in UK Distribution, an increase of 11.6 per cent in Irish Distribution, a decline of 1.3 per cent in the Netherlands Distribution, an increase of 35.6 per cent in Retailing and a decline of 12.3 per cent in Manufacturing.

We are very encouraged by the performance of the Group in recent months as it emerged in a strong position from the Covid-19 lockdown but we remain cautious about revenue trends in our markets over the remainder of the year. Based on current trends the Group should deliver a similar level of adjusted operating profit in the second half to the comparable period last year.

Operating Review - Continuing Operations

Distribution Segment* (88% of Group Revenue)

* Excludes Belgium Distribution and the Plumbase Business

The distribution businesses in the UK, Ireland and the Netherlands contributed 88.2 per cent of Group revenue (2019: 89.3 per cent), retailing 9.4 per cent (2019: 7.6 per cent) and manufacturing 2.4 per cent (2019: 3.1 per cent). UK distribution generated 57.2 per cent (2019: 65.9 per cent) of Group revenue.

UK Distribution*

* Excludes the Plumbase Business

The measures adopted to contain the spread of the Covid-19 virus had a very material impact on revenue and profitability in the UK distribution business. There was a sharp and immediate fall in revenue between 24 March 2020 when the majority of branches were closed and the beginning of May when reopening commenced on a phased basis leading to a gradual recovery in trading.

Revenue in the like-for-like business declined by £258.6 million due to the pandemic. Revenue for the half year was further reduced by £5.4 million following the consolidation of a number of branches while the opening of new Selco and Leyland SDM branches contributed revenue of £3.6 million.

The UK distribution business availed of UK Government support of £19.4 million through the Coronavirus Job Retention Scheme for colleagues who were furloughed when branches were closed or operating at a reduced capacity on re-opening.

A decline in the gross margin by 150 basis points was driven mainly by competitive market conditions in the traditional distribution market.

Selco Builders Warehouse performed in line with expectations in the period up to the lockdown which took effect on 24 March 2020 with the closure of all branches.

Selco initially reopened 42 branches on 6 May for Click & Collect and Click & Delivered trading. The remaining 26 branches were reopened on the same basis on 18 May. In a gradual return to a more normalised operating environment, trading in the 42 branches that were initially reopened was extended to a full in-branch self-select service by the end of May and the remainder of the branch estate was fully operational on 22 June 2020 except for Sunday trading which resumed on 9 August 2020.

Average daily like-for-like revenue increased by 4.7 per cent in June and by 8.2 per cent in the period from 22 June to the month end when all branches were fully open. Selco performed strongly in June with the benefit of strong revenue growth and an increase in the gross margin. Reduced promotional activity and a favourable change in product mix contributed to the improvement in gross margin. Revenue from landscaping products, tools and ironmongery grew strongly in June offsetting declines in insulation, plasterboard and other materials used in projects where preserving social distancing was more challenging for tradespeople and households.

Selco strengthened its digital capability with a major upgrade to its website in February of this year. Functionality was enhanced to provide an improved user experience for customers. This investment better positioned the business to support a higher proportion of online revenue on reopening. Online click & deliver and click & collect accounted for 18 per cent of revenue in May enhancing Selco's reputation for service and providing customers with more flexibility and convenience. It also extended the reach and awareness of the brand enabling customers located in areas not serviced by a local branch to trade with Selco. Digital contributed 12 per cent of revenue in June as customers availed of the self-select service option to make purchases.

The Kingston-Upon-Thames branch that was opened at the end of November performed well and extended coverage of the London market where Selco trades from 39 branches. In February, Selco opened its 68th branch in Orpington and a new branch in Salford is scheduled to open in October. The Bristol branch will be relocated to a larger purpose-built facility prior to the year end and the Chessington branch will be extended into an adjoining unit in September.

The new distribution centre that opened earlier this year in Oxford is successfully providing a fulfilment service for lightside products to all branches.

The safety of colleagues and customers has guided Selco's response to managing the Covid-19 pandemic and they have been reassured by the phased resumption of trading to allow for modifications to branches and the implementation of comprehensive safety and social distancing measures.

Leyland SDM, London's largest specialist decorators' merchant, was categorised as an essential business and was therefore permitted to remain open during the lockdown. All stores implemented strict social distancing and health and safety measures including appointing marshals to safely manage queuing outside the stores and limiting the number of customers allowed in stores at any time. The decline in construction activity across London in response to the lockdown contributed to lower demand from trade customers which was offset by increased spending on painting and decorating products by households. There were early indications in June that the trade business was starting to recover in the central London stores. Revenue and profitability for the half year were broadly in line with the prior year. The new stores in Maida Vale and Streatham performed well. In July, GDC Paints, a five branch decorators merchant based in London, was acquired. The acquisition of this leading specialist business provides Leyland SDM with complementary trading locations in Acton, Greenford, Cricklewood, Fulham and Tooting and increases the store network to 28.

Buildbase experienced low single digit growth in average daily revenue in the period up to the lockdown on 24 March but competitive market conditions exerted strong pricing pressure and consequently the gross margin was lower than the prior year. Buildbase maintained a limited service from 40 branches during the lockdown providing materials to support public infrastructure and essential supplies for the repair and maintenance of homes. The phased reopening of the business commenced in early May with the opening of 80 branches and the remaining branches, except for a small number, were reopened by the end of May. Customers initially placed orders and completed transactions by calling branches or on-line for either same day collection at designated times from branches or for direct delivery to customers sites. Branches were open on a full service basis by mid-June when health and safety and social distancing measures were in place.

Average daily like-for-like revenue was 86 per cent of the prior year level for the month of June and reflected strong demand for materials used for outdoor residential RMI projects, caution on the part of some households undertaking internal RMI projects due to social distancing concerns and the more gradual resumption of house building and commercial new build projects. Buildbase also upgraded its website offering in the first half which led to growth in online activity.

The new Microsoft AX ERP system went live in a number of branches prior to the lockdown and rollout to the remaining branches recommenced in June. The entire branch network is scheduled to migrate on a phased basis over the next 18 months. Amortisation of the system development cost over a period of ten years commenced on 1 January 2020.

Civils & Lintels, a distributor of heavyside building materials to groundworks and civils sub-contractors operating in the new housing market, was materially impacted by the closure of its branch network between 24 March and 11 May and by the moderate rate of recovery which reached close to 80 per cent of the prior year level by the end of the half year. Demand for groundworks materials was influenced by the phased reopening of new housing sites, new ways of working and house builders prioritising the completion and sale of units that were in progress at the time of the lockdown before commencing new developments.

In Scotland, lockdown restrictions were relaxed on construction sites in a series of phases that permitted a gradual return of workers in June. The Buildbase PDM branches made good progress in the month operating at over 70 per cent of the prior year level.

MacBlair, the Northern Ireland distribution business, traded positively up to the lockdown on 24 March. Branches across the province reopened on a phased basis between 30 April and 13 May and traded strongly in the period to the end of the half year. Growth in average daily revenue in June was driven by strong demand in the residential RMI market which more than offset weakness in the housebuilding and commercial markets. A focus on outdoor projects saw exceptional demand for landscaping, fencing, decking and paint products from both trade and private customers. Changes to end-use markets supplied and product mix contributed to a favourable gross margin outcome.

TG Lynes, a leading distributor of commercial pipes and fittings in London, maintained a partial service throughout the lockdown to support essential services including hospitals and care homes. The business fully reopened in late April and revenue slowly recovered in May and June ending the half year at 80 per cent of the prior year level. Demand from its building services contractor customer base, who are engaged in refurbishment and new build projects in the commercial, public sector and residential markets, was impacted by construction sites operating at a lower levels of productivity than the pre-Covid-19 level due to new work practices and protocols.

Irish Distribution

Chadwicks average daily like-for-like revenue was marginally ahead of the prior year in January and February. The rate of growth accelerated to 5.1 per cent in the period to 28 March when the lockdown restrictions imposed by the Irish Government to slow the spread of Covid-19 took effect. All branches were closed except for nineteen that remained partially open and over 1,100 colleagues were placed on leave of absence. Health and other critical public sector projects continued to be supplied on a delivered-only basis and emergency supplies of materials were also made to businesses and homes in line with public health guidelines.

Revenue was significantly impacted during the lockdown which ended on 18 May with the reopening of all branches on a full-service basis while implementing strict social distancing measures and health and safety protocols to protect colleagues and customers. Average daily like-for-like revenue was down by 5.0 per cent between 18 May and the month end and increased by 7.3 per cent in June driven primarily by strong demand in the residential repair, maintenance and improvement market. Promotional activity on social media and local marketing campaigns generated increased footfall in branches and a higher proportion of revenue from retail transactions.

The recovery in housebuilding activity was slower as sites reopened on a phased basis with new health and safety measures and work practices extending construction timelines. House completions are estimated to have declined by one-third in the second quarter and are forecast to decline by 20 per cent for the year to 16,500 units. House builders were focused on completing units in existing developments that were under construction prior to the lockdown and they adopted a more cautious approach to commencing work on new sites.

The programme announced last September for rebranding all distribution branches in Ireland under the Chadwicks brand, except for three large destination branches, continued in the half year with the upgrading and rebranding of the Gorey, Limerick and Drogheda branches taking the number completed to fifteen.

Geographic coverage of the Irish market was extended in July with the acquisition of Daly Brothers (North East) Ltd., a single branch builders distribution business located in Dundalk, County Louth that complements the Chadwicks branch network.

A new Chadwicks Fixing Centre launched late last year in the Thomas Street branch in Central Dublin performed well and the concept was replicated at the end of June in Cork Builders Providers, a destination branch in Cork City. The Fixing Centre's supply builders, engineers and specialist tradespeople with a broad range of fixings and tools.

The gross margin benefitted in May and June from changes in mix with a higher proportion of revenue from lower value RMI transactions which attracted a higher margin.

Chadwicks second quarter revenue declined by 35 per cent on the prior year and the business availed of the Temporary Covid-19 Wage Subsidy Scheme for the quarter. All colleagues were retained on the payroll and a subsidy of £4.7 million was received under the terms of the scheme that partially funded payroll costs in the quarter. Branch colleagues received their normal salary in full during the period. Overheads for the half year were down due to the wage subsidy and a decline in variable costs that were partly offset by a small increase in provisioning for potential bad debts.

Netherlands Distribution

The relatively mild lockdown in the Netherlands resulted in a less severe downturn in the economy compared to other European countries. The Covid-19 pandemic has nevertheless reduced construction activity and the economy is forecast to contract by almost six per cent in the current year. The lockdown measures were partially relaxed on 11 May and eased further on 1 June and 1 July with the reopening of most of the economy.

The Isero and Polvo ironmongery, tools and fixings business was not required to close as the Dutch Government and health authorities deemed construction an essential activity that was permitted to continue operating subject to implementing health and safety and social distancing measures. Health and safety protocols were implemented to allow all Isero and Polvo branches and offices to operate safely and to preserve social distancing.

Average daily like-for-like revenue in Isero was down by 0.7 per cent for the half year driven by modest growth in January and February, market weakness in March and April due to the Covid-19 pandemic and a return to growth in May and June. The Polvo business acquired on 1 July 2019 was also very resilient and performed in line with plan for the period.

Demand from corporations that carry out routine maintenance on social housing and public sector properties was directly impacted by the lockdown. Revenue from technical services was also weaker, major projects were delayed and investment by key customers in power tools, scaffolding, PPE and other products was deferred. Revenue shortfalls in these segments of the market were offset by stronger demand from the core customer base of tradespeople engaged in private residential RMI projects whose customers used the lockdown as an opportunity to undertake home renovations.

Activity in the housing market was positive with growth in prices and transactions supported by a housing shortage and low mortgage interest rates. Demand held up well in both the secondary and new build markets.

Polvo transitioned to the Isero buying group at the end of last year which enabled a move towards supplier consolidation, a closer alignment of private label brands and greater harmonisation of procurement terms in the current year.

The Amsterdam based Gunters en Meuser branches were successfully migrated to the Isero Microsoft AX ERP system which has improved visibility of the business and provided opportunities for realising further integration benefits. This development enabled the Gunters en Meuser branches to be supplied on a twice daily basis with a wider range of products from the increased capacity provided by the new purpose-built distribution centre that was opened last year in Waddinxveen, North East Rotterdam. Kooning, a single branch business located at Schiphol airport acquired in November 2019, performed to plan in the period and was migrated to the Polvo Microsoft AX ERP platform.

The Group's strategy for the integration of its market leading Netherlands business remained firmly on track in the half year despite the challenges presented by the Covid-19 pandemic.

Retail Segment (9% of Group Revenue)

Marginal revenue declines in January and February were more than offset by a one-third increase in revenue in March as customers engaged in forward buying ahead of the lockdown imposed by the Irish Government that took effect on 28 March when all stores were closed. These restrictions required the closure of all non-essential businesses including hardware and DIY stores and remained in place until 18 May.

Extensive social distancing measures and health and safety protocols were developed during the lockdown to allow for the safe reopening of our stores and colleagues were provided with training to implement these changes in line with the public health guidelines.

Woodie's stores reopened on 18 May to a surge in demand that saw revenue for the 14 trading days to the month end increase by 153 per cent on the same period in the prior year. Growth continued at a moderating pace through the month of June when revenue was ahead of the prior year by 62 per cent establishing a new record for monthly revenue. Revenue growth was driven by exceptional levels of demand for interior and exterior paint and woodcare products. There was also strong demand for shrubs and plants, garden furniture, barbeques, outdoor sheds, fencing and tools. A material increase in average transaction values reflected increased purchases by customers due to pent-up demand.

The gross margin for the half year was slightly impacted by a change in the mix from increased sales of seasonal products.

Operating costs were lower due to savings on variable store costs during the lockdown and a lower spend on discretionary costs including marketing and advertising. Improved terms were agreed on a number of lease renewals to align rents with current market levels. These savings were partly offset by significant Covid-19 costs related to social distancing, incremental cleaning and sanitation and other health and safety initiatives in stores to protect customers and colleagues.

Woodie's claimed support under the Temporary Wage Subsidy Scheme for April and May but following the strong recovery in trading on reopening the business, this support has been fully repaid since the end of the half year.

Woodie's digital revenue increased by 25.1 per cent from a low base as shopping patterns rapidly evolved and restrictions caused by the pandemic increased omnichannel activity. Customers availed of the digital option particularly during the seven week period when stores were closed. While Woodie's stores will remain at the heart of the customer experience, the business has responded to the shift in consumer behaviour by accelerating planned investment in digital channels.

In February and March, Woodie's successfully transitioned to an upgrade of its established Microsoft ERP system that has delivered the latest retail technology at the point of sale with a modern and more streamlined navigation experience and an updated supply chain and financial management platform. The upgrade also provides improved technology to support the planned growth in digital revenue.

Woodie's response to Covid-19 underscored its reputation as Ireland's leading DIY, Home and Garden retailer and as a great place to work. The business performed well in the half year and despite the closure of all stores for a seven week period reported only a marginal decline in revenue and a small increase in operating profit.

Manufacturing Segment (3% of Group Revenue)

CPI EuroMix, the market leading dry mortar manufacturing business that operates nationally from ten plants in Great Britain, was making good progress and broadly on track to meet our current year expectations in the period to 24 March 2020 when a decision was taken to temporarily close all plants in line with the advice from the UK Government. Procedures and protocols were developed during the lockdown ahead of the safe reopening of the nine plants in England on a phased basis during late April and early May. The plant in Scotland reopened at the end of June following the lifting of Government restrictions.

Volumes were negligible for April and recovered to one-third of the prior year level in May and seventy per cent in June as house building sites gradually reopened and construction recommenced with an initial focus on completing houses that were at an advanced stage of construction. There was significant disruption to the housing market during the second quarter as the shutdown of sites delayed building programmes and reduced volumes. Completion timelines were extended on reopening sites due to the operation of social distancing measures.

The shortage of homes has underpinned demand in the new housing market which saw increased activity as the economy gradually reopened and emerged from the lockdown. Strong underlying demand was supported by a shortage of supply, an historically low interest rate environment and support for first time buyers through the Help to Buy Scheme.

CPI EuroMix has a resilient and flexible operating model that was responsive to changes in market conditions during the period and continued to deliver good returns and cash flows on substantially lower revenue.

Operating Review - Discontinued Operations

The Group entered into a conditional agreement in the first half of 2019 for the sale of its business in Belgium which completed on 4 October 2019. The business was reported as a discontinued operation in the half year to 30 June 2019 and the assets and liabilities were presented as held for sale. The goodwill allocated to the Belgium business of £9.2 million was written-off in the period and net assets were written down to fair value less costs to sell of £16.8 million, totalling £26.0 million. This charge, including the profit for the period of £0.3m, resulted in an overall net loss of £25.7 million which was recognised as a loss after tax from discontinued operations in the income statement.

On 1 October 2019 the Group completed the disposal of Plumbase, a specialist UK plumbing and heating business. The results for the period ended 30 June 2019 have been restated to report the Plumbase profit of £3.2 million as a discontinued operation.

Financial Review

The Group achieved a satisfactory outcome for the half in unprecedented circumstances. The sharp decline in revenue and profitability experienced by the Group's businesses in the UK and Ireland was due to a public health intervention in both countries which led to a shutdown of branches to prevent the spread of the Covid-19 virus rather than a lack of demand by customers.

Despite the decline in profitability, cash flow from operations remained strong at £121.5 million (2019: £157.2 million). The decline in revenue released working capital of £25.1 million. Trade and other receivables declined by £102.4 million but this cash inflow was offset by a decline in trade and other payables by £101.4 million.

Revenue

Group revenue from continuing operations declined by 19.4 per cent to £1.06 billion (2019: £1.31 billion) and by 19.5 per cent in constant currency. Revenue in the like-for-like business declined by £312.9 million. Acquisitions and new branches contributed revenue of £61.9 million and revenue was reduced by £5.4 million from branch consolidations. A currency translation gain increased revenue by £1.2 million.

The UK accounted for 59.4 per cent (2019: 68.8 per cent) of Group revenue, Ireland for 27.5 per cent (2019: 25.0 per cent) and the Netherlands 13.1 per cent (2019: 6.2 per cent).

Adjusted Operating Profit

Adjusted operating profit from continuing operations of £39.4 million (2019: £99.8 million) declined by 60.5 per cent due to the decline in profitability in the distribution and manufacturing businesses in the UK and the distribution business in Ireland as a consequence of the measures introduced to stop the spread of the Covid-19 virus including the temporary closure of branches.

Adjusted operating profit before property profit of £39.1million (2019: £95.1 million) declined by 58.9 per cent. The adjusted operating profit margin declined by 390 basis points to 3.7 per cent and by 350 basis points to 3.7 per cent excluding property profit.

Property

The disposal of a small number of UK properties that were held for resale generated proceeds of £1.1 million (2019: £8.2 million) and a profit on disposal of £0.3 million (2019: £4.7 million).

Net Finance Income and Expense

The net finance expense increased by £1.9 million to £14.6 million (2019: £12.7 million). The recognition of leases on the balance sheet under IFRS 16 created an interest charge on lease liabilities of £9.3 million (2019: £9.3 million).

Interest payable on bank borrowings and US Private Placement Senior Unsecured Notes, net of bank interest received on deposits, increased by £0.8 million to £4.0 million (2019: £3.2 million). The increase was mainly due to the drawdown of £263.0 million as a precautionary measure to increases liquidity in response to the Covid-19 crisis. The rate of interest receivable on bank deposits declined during the period because of excess liquidity in the banking system which led to lower interest rates on sterling deposits and more negative rates on euro deposits.

The net finance expense included a foreign exchange translation loss of £1.1 million which compares to a gain of £0.1 million in the same period last year.

Taxation

The income tax expense of £4.5 million (2019: £14.9 million) is equivalent to an effective tax rate of 22.1 per cent on profit from continuing operations (2019: 17.7 per cent) and is based on the current forecast rate for the year. This is a blended rate of corporation tax on profits in the jurisdictions where the Group operates and is higher than the rate of 19.5 per cent guided at the time of our 2019 Final Results Announcement which was based on a higher level of forecast profitability for the year.

Legislation that was passed in 2016 to reduce the UK rate of corporation tax by two percent to 17 per cent with effect from 1 April 2020 did not proceed leading to a one-off increase in the charge for deferred tax which increased the forecast tax rate for the current year by 3.1 percentage points as opposed to 1.1 per cent in the guided rate of 19.5 per cent.

Certain items of expenditure charged in arriving at profit before tax, including depreciation on buildings, are not eligible for a tax deduction. The ineligible expenditure accounted for a higher proportion of profit forecast for the year which along with a change in the profit mix from each jurisdiction contributed to a net increase in the forecast tax rate for 2020 by 0.6 per cent.

Capital Expenditure and Investment in Intangible Assets

As a precautionary measure to preserve liquidity, the Group has cautiously managed its capital expenditure commitments since the outbreak of Covid-19 in March 2020. Gross capital expenditure was £13.2 million (2019: £19.3 million) and there was also expenditure of £0.3 million (2019: £1.1 million) on intangible assets. Proceeds of £1.4 million (2019: £9.0 million) were received on disposal of fixed assets and the net investment on capital expenditure and intangible assets was £12.2 million (2019: £11.4 million).

The Group incurred capital expenditure of £6.5 million (2019: £7.5 million) on various development initiatives including new Selco branches, upgrades to Woodie's and Chadwicks branches in Ireland, energy-efficient lighting systems and other projects of a development nature.

Asset replacement capital expenditure of £6.7 million (2019: £11.8 million) compares to the pre-IFRS 16 depreciation charge for the period of £22.5 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 £0.3 million (2019: £1.1 million) was made on software development projects.

Pensions

The IAS 19 deficit on defined benefit pension schemes was £44.7 million at 30 June 2020, an increase of £23.5 million from £21.2 million at 31 December 2019. Changes to financial assumptions increased scheme liabilities by £14.2 million. There was a further fall in discount rates used to discount scheme liabilities in line with declines in corporate bond rates. The rate used to discount UK liabilities fell by 60 basis points to 1.5 per cent and the rate used to discount Irish liabilities fell by 10 basis points to 0.95 per cent. Changes in financial assumptions that were based on experience increased liabilities by £3.3 million and there was an actuarial loss of £5.0 million on plan assets due to the investment performance in the period being less than the actuarial assumptions.

Net Cash/Debt

The Group's net cash position, before recognising lease liabilities, increased to £58.6 million at 30 June 2020 from £7.8 million at 31 December 2019. The Group remains in a very strong financial position with pre-IFRS 16 EBITDA interest cover of 14.4 times (Year ended 31 December 2019: 39.9 times).

Net debt including lease obligations referred to below improved by £54.6 million to £479.2 million at 30 June 2020 from £533.8 million at 31 December 2019.

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

Liquidity

Grafton started the year in a very strong financial position and well placed to respond to the adverse impact on trading of Covid-19 with excellent liquidity, net cash before IFRS 16 lease liabilities and a robust balance sheet.

The Group had liquidity of £693.4 million at 30 June 2020 (30 June 2019: £628.6 million) of which £419.0 million (30 June 2019: £354.9 million) was held in accessible cash and £274.4 million (30 June 2019: £273.7 million) in undrawn revolving bank facilities.

The Group had bilateral loan facilities of £494.6 million with six relationship banks at 30 June 2020 and debt obligations of £146.0 million (31 December 2019: £136.1 million) from the issue of unsecured senior notes in the US Private Placement market.

The average maturity of the committed bank facilities and unsecured senior notes at 30 June 2020 was 4.2 years.

In addition, the Group moved quickly to secure access to the Bank of England's Covid Corporate Financing Facility and was approved to borrow up to £300 million. This facility remains undrawn and there is no current intention to utilise it, serving as it does as an additional backstop to Grafton's existing committed facilities.

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. These resources together with strong cash flow from operations provide good liquidity and the capacity to fund investment in working capital, routine capital expenditure 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 in the businesses in Ireland and the Netherlands.

IFRS 16 Leases

Leases that are recorded on the balance sheet principally relate to distribution and DIY branch properties, office buildings, cars and distribution vehicles.

IFRS 16 increased operating profit by £6.3 million and the finance (interest) expense by £9.2 million in the half year. Profit before tax was reduced by £3.0 million and profit after tax by £2.4 million as a result of IFRS 16.

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 three to four years, then becoming positive moving towards the end of the leases.

The right-of-use asset in the balance sheet at 30 June 2020 was £504.0 million (31 December 2019: £522.2 million).

IFRS 16 did not alter the overall cashflows or the economic effect of the leases to which the Group is a party. Similarly, there was no effect on Grafton's banking covenants as a result of the implementation of IFRS 16 in 2019.

Shareholders' Equity

The Group's balance sheet strengthened further with shareholders' equity up by £14.1 million to £1.38 billion. Profit after tax increased shareholders' equity by £16.0 million and there was a gain of £16.0 million on translation of euro denominated net assets to sterling. Shareholders' equity was reduced by £18.9 million for a remeasurement loss on pension schemes.

Return on Capital Employed

Return on Capital Employed before recognising IFRS 16 leased assets declined by 420 basis points to 10.1 per cent (2019: 14.3 per cent) and by 260 basis points to 7.8 per cent (2019: 10.4 per cent) including leased assets. The decline reflects the fall in profitability in the half year caused by the Covid-19 pandemic.

Principal Risks and Uncertainties

The primary risks and uncertainties affecting the Group are set out on pages 48 to 53 of the 2019 Annual Report and will be updated in the 2020 Annual Report. These risks refer to Macro Economic Conditions in the UK, Ireland and the Netherlands including the Impact of Brexit; Colleagues; Pandemic Risk - Covid-19 Virus; Competition in Distribution, DIY and Mortar Markets; Information Technology Systems and Infrastructure; Cyber Security and Data Protection; Health and Safety; Acquisition and Integration of New Businesses; Supplier Management and Rebates; Internal Controls and Fraud; and Sustainability.

The Covid-19 pandemic has increased the potential impact of certain of these risks and the longer term impacts will depend on a range of factors including the duration and scope of the pandemic, the impact of the pandemic on economic activity in the UK, Ireland and the Netherlands and the nature and severity of measures adopted by governments in these countries, including restrictions on or temporarily requiring the closure of the Group's businesses including, distribution branches, DIY, Home and Garden stores and mortar manufacturing plants, travel, regulations that require avoiding large gatherings and orders to self-quarantine or self-isolate. The Covid-19 pandemic may have significant negative impacts in the medium and long term on the Group's businesses. Changes in consumer behaviour as a result of government imposed lock downs and the need for people to self-quarantine or self-isolate or observe social distancing for an indeterminate period of time may lead to the closure of distribution branches, DIY, Home and Garden stores and mortar manufacturing plants. The severity of government-imposed lock downs and the period for which they continue in the UK, Ireland and the Netherlands will have an impact on customer demand in those countries. A deterioration in the financial position of customers and consumers as a result of Covid-19 pandemic may also impact demand for the Group's distribution, DIY and mortar products. In addition, disruptions as a result of Covid-19 in manufacturing, supply and distribution arrangements may also adversely impact the performance of the overall Group.

Period End Financial Information 

The consolidated period-end financial statements presented on pages 17 to 36 comprise:

· the Group condensed balance sheet as at 30 June 2020;

· the Group condensed income statement and Group condensed statement of comprehensive income for the six months to 30 June 2020;

· the Group condensed statement of cash flows for the six months to 30 June 2020;

· the Group condensed statement of changes in equity; and

· the explanatory notes to the condensed consolidated half year financial statements on pages 23 to 36.

Grafton Group plc

Group Condensed Income Statement

For the six months ended 30 June 2020

Grafton Group plc

Group Condensed Statement of Comprehensive Income

For the six months ended 30 June 2020

Grafton Group plc - Group Condensed Balance Sheet as at 30 June 2020

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 2020

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 distribution markets in the UK, Ireland and the Netherlands. 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 2020 are unaudited but have been reviewed by the auditor whose report is set out on pages 48 and 49.

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 2019 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 2019 does not comprise statutory annual financial statements within the meaning of section 295 of the Companies Act 2014. The 2019 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 2019.

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 2019, except for those noted below.

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

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.

1. General Information (continued)

Basis of Preparation, Accounting Policies and Estimates (continued)

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

Going Concern

The Group's net cash position, before recognising lease liabilities, increased to £58.6 million at 30 June 2020 from £7.8 million at 31 December 2019. The Group had liquidity of £693.4 million at 30 June 2020 of which £419.0 million was held in accessible cash and £274.4 million in undrawn revolving bank facilities. In addition, the Group has access to the Bank of England's Covid Corporate Financing Facility ("BOE CCFF") and was approved to borrow up to £300 million. In view of the Group's strong cash and liquidity position, debt of £263 million that had been prudently drawn in April under the committed revolving bank facilities and held in cash was repaid. No refinancing of debt is due until March 2023, the Group does not have a leverage (net debt/EBITDA) covenant in its financing arrangements and its assets are unsecured.

Having made appropriate enquiries and regard to the above information, 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, being 12 months from the date of approval of the Half Year Report. Having reassessed the principal risks, as detailed on page 16, in particular the impact of the Covid-19 pandemic and based on expected cashflows, the strong liquidity position of the Group and additional BOE CCFF borrowing facility, the directors considered it appropriate to adopt the going concern basis of accounting in preparing its condensed interim financial statements.

(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 2019.

Goodwill

Goodwill is subject to impairment testing on an annual basis and at any time during the year if an indicator of impairment is considered to exist. In view of the impact on the Group's businesses in the UK and Ireland from the introduction of national lockdowns which resulted in the temporary closure of the majority of the branches, the impairment review conducted at the end of 2019 was updated at 30 June 2020. The impairment testing process resulted in no impairment of goodwill.

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 2020

Certain new accounting standards and interpretations have been published that are effective from 1 January 2020. These standards did not have a material impact on the Group in the current reporting period and are not expected to have a material impact on future reporting periods and on foreseeable future transactions.

2. Segmental Analysis

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

2. Segmental Analysis (continued)

The amount of revenue by geographic area is as follows:

*Service revenue, which is recognised over time, amounted to £12.6 million for the period (2019: £16.2 million)