Half Yearly Report

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Financial Highlights

Grafton Group plc announces its interim results for the six months ended 30 June 2011.

Highlights:

·; Merchanting operating profit increased by 22% to €33.4m

·; UK turnover and profits increase

·; UK operating margin improved to 4.5%

·; Cost reductions improve returns in weak Irish market

Financial:

·; Strong cash flow from operations of €48.6m reduces gearing to 26%

·; Renewed investment in asset replacement and development expenditure

·; Further reduction in debt

·; Agreement in principle to extend maturity profile of net debt to five years

Commenting on the outlook, Gavin Slark, Chief Executive Officer said:

"The Group is well placed to deal with the continued difficult trading conditions in our core markets. A number of self help initiatives have been identified that will enable us to improve our performance in margins, costs control and cash generation. This leaves us in a strong position to take advantage of any economic upturn or expansion opportunities."

Interim Results

For the Six Months Ended 30 June 2011

Group turnover was higher and operating profit showed a good improvement in the half year following the return to growth in 2010.

UK operating profit increased in a market that experienced a small contraction in volumes. Despite a prolonged period of market weakness, the performance of the Irish Merchanting and DIY Retailing businesses improved in the half year in response to the measures taken to reduce costs.

Group turnover increased by 3 per cent to €1,008.1 million (2010: €978.7 million). Operating profit before amortisation and restructuring increased by 40 per cent to €26.2 million (2010: €18.7 million). Group profit before taxation, amortisation and restructuring costs increased by 16 per cent to €20.2 million (2010: €17.4 million). The gross margin was in line with 2010 and overheads in the like for like business were marginally lower. Restructuring costs of €4.0 million were incurred in the period (2010: €2.9 million).

The Group continued to generate strong cashflow from operations and ended the half year in a healthy financial position with gearing reduced to 26 per cent of shareholders' equity (30 June 2010: 29 per cent).

The Belgian builders merchanting business in which the Group had a 49 per cent interest traded successfully and completed two acquisitions in the current year increasing its annualised turnover to circa €50 million. Group turnover now includes the Group's share of that business which amounted to €10.8 million in the half year.

Dividend

An interim dividend of 2.75 cent per share has been approved representing an increase of 10 per cent on last year's interim dividend of 2.5 cent per share.

Operational Review

Merchanting

Turnover in the Merchanting business increased by 4.0 per cent to €872.9 million (2010: €839.5 million). The segment operating profit (before restructuring costs) increased by 22.0 per cent to €33.4 million (2010: €27.4 million).

The UK Merchanting business increased turnover by 5.0 per cent to €712.7 million (2010: €678.5 million). The increase in sterling turnover was 4.8 per cent and average daily like for like turnover increased by 4.7 per cent. Operating profit before restructuring costs increased by 14.1 per cent to €31.9 million (2010: €27.9 million). The UK operating margin improved to 4.5 per cent from 4.1 per cent.

Trading in the half year was set against the backdrop of softening economic growth. The fall in real post-tax disposable incomes since the start of the year due to the increase in the UK VAT rate together with higher energy and food prices contributed to weakness in consumer spending as households adjusted their spending patterns. Uncertainty over the prospects for the UK economy contributed to low consumer confidence and weakness in the housing market. House prices were under downward pressure and housing transactions, which influence demand in the merchanting market, weakened in the half year.

Average daily like for like turnover growth of 4.7 per cent in the half year reflected a sharp weather related increase in January and stable growth of 3.3 per cent over the course of the February to June period. Turnover growth was primarily driven by the recovery of energy and commodity related price increases. RMI (Repair, Maintenance and Improvement) volumes were down marginally.

Buildbase experienced strong turnover growth in its civils branches which service the new build market together with a healthy advance in turnover in its general merchanting branches. Two single branch bolt-on acquisitions were completed. Plumbase turnover growth benefitted from a high exposure to the RMI market while the branch network increased to 198 with the acquisition of 16 plumbing and heating branches in England and Wales. Market conditions were stable in the East Midlands market and Jacksons, the market leader in the region, improved its performance through a continuing focus on cost reduction.

Selco Builders Warehouse, the trade only builders merchants, reported strong growth in turnover and operating profit. The business had a successful opening of its twenty-ninth branch at Catford, South London. This is the fourteenth London branch, all of which are located inside the M25 motorway. Two further store openings in London are scheduled for early next year. Later this year a new branch in Slough, Berkshire will open and relocation of the Swansea and Minworth, Birmingham branches will significantly expand the capacity of both stores.

In Northern Ireland, turnover in the Macnaughton Blair business stabilised against the background of a fragile recovery in economic growth. Initiatives to improve the gross margin and continuing cost reduction measures resulted in a significant increase in operating profit.

Turnover in the Irish Merchanting business declined by 7.2 per cent to €149.4 million (2010: €161.0 million). The business was returned to profitability in the second half of 2010 and despite the decline in turnover achieved an operating profit (before restructuring costs) of €1.0 million in the first half of 2011 compared to a loss of €0.5 million in the first half of 2010. The improved outcome was primarily achieved as a result of the cost reduction programmes implemented over the past three years in response to volume declines in the merchanting market that continued into 2011.

The rate of decline in turnover moderated over the course of 2010 but the deterioration in consumer confidence in the final months of the year in response to negative news flow on the economy contributed to further weakness in the merchanting market in 2011.

A weak labour market, tight credit conditions and declining prices contributed to very low levels of activity in the new housing market. Data on housing registrations and commencement notices, a proxy for housing starts, point to an historically low level of house construction. Demand in the residential RMI market, now the principal end-use market for the Irish Merchanting business, was more resilient but not immune from wider economic weakness and also experienced a decline in volumes. In this difficult trading environment, the Chadwicks and Heiton Buckley branches continued to orientate their product offerings to service customers in the RMI market and also effectively used purchasing scale benefits to support an increased level of promotional activity. Higher international steel prices and increased demand generated by a range of projects in the non-residential new build sector resulted in increased turnover and profit in the Heiton Steel business.

Branch consolidations were successfully implemented in the Bray, Co. Wicklow and Limerick City branches. Overheads were maintained at the same percentage of turnover due to payroll, bad debt and other operational cost savings. The gross margin continued to trend upwards.

Retailing

Turnover declined by 4.6 per cent to €112.1 million from €117.5 million but the segment operating loss (before restructuring costs) reduced to €0.4 million from €1.2 million.

Core retail sales volumes continued to trend lower but at a more moderate pace compared to the sharp falls of recent years. Spending was impacted by downward pressure on earnings and increased taxes which combined to reduce disposable incomes. Consumer confidence remained fragile but recovered somewhat from the low levels experienced at the end of 2010 as consumers became more hopeful about the outlook for the economy and their personal finances.

Woodie's DIY maintained transaction volumes at last year's level despite the challenging retail environment. The decline in half year turnover was concentrated over a small number of seasonal ranges including garden furniture, barbeques and garden plants. The unsettled weather conditions in May and June with higher than normal rainfall levels reduced demand for these products over that period. Turnover in a number of product categories benefitted from range refreshment and development including the Party Zone, plumbing, wallpaper, kitchenware, flooring and lighting ranges.

Changes in product mix and purchasing scale benefits enabled the business to maintain its competitive pricing position and also improve gross margin. Overheads were lower because of the measures taken last year to reduce costs in line with lower volumes.

The store at Airside Retail Park, Swords, Co. Dublin was successfully revamped. A break option in the lease of the Letterkenny, Co. Donegal store was exercised and the store was closed.

In-House, the seven store kitchens business, performed in line with the comparative period, maintaining volumes in a difficult market. The sector experienced some reduction in capacity. A number of new kitchen ranges were introduced for trade and retail customers.

Manufacturing

Turnover was up by 6.5 per cent to €23.1 million (2010: €21.7 million) and the segment operating loss (before restructuring costs) was substantially reduced to €0.9 million from €2.3 million.

EuroMix, the market leader in the supply of dry mortar in Britain, where it trades almost nationally from nine plants, increased turnover strongly in the half year and improved its operating performance having returned to profitability in the second half of 2010. Volumes benefitted from milder weather conditions in the early months of the year. The recovery of higher input prices also contributed to the increase in turnover.

Activity in the new housing market was restricted by a lack of mortgage availability with monthly approvals continuing to trend at less than half the pre-credit crisis level and housing starts were lower in the half year. The business focused on opportunities in other end-use markets and secured contracts for the supply of materials to a number of infrastructure projects.

The rate of decline in turnover in the Irish Manufacturing business continued to moderate as the volume of residential and non-residential new build construction activity contracted to well below normal levels of activity.

Financial Review

The Group achieved a significant improvement in its operating performance, generated strong cashflows and further strengthened its financial position in the half year.

Cashflow

The Group's track record for generating strong internal cashflows continued in the half year with cashflow of €48.6 million from operations and €3.8 million from asset disposals. During the three years to the end of 2010 the Group responded to the downturn in its markets by significantly scaling back asset replacement and development expenditure and reducing its investment in working capital. The substantial cash flow generated by the business over this period was deployed to reduce debt. The return to profit growth in 2010 and emergence of the business from the downturn in a strong financial position enabled a pick-up in the pace of asset replacement and development expenditure in the first half to €16.7 million (2010: €7.1 million). Payment of the second interim dividend for 2010, paid in April 2011, amounted to €10.4 million (2010: €5.8 million).

Taxation

The tax rate of 18 per cent (2010: 4 per cent) largely reflects a non-cash charge in the Income Statement for deferred tax assets recognised in the UK business in 2010. It is not expected that a material cash tax cost will arise for the year due to the availability of tax deductions carried forward from 2010 and prior years.

Net Debt and Liquidity

Net debt of €245.8 million at the end of the half year was €9.3 million lower than at the end of 2010 and €35.2 million lower than the position at 30 June 2010. The combined effect of lower debt reduced the gearing ratio to 26 per cent (30 June 2010: 29 per cent).

Since the period end the Group has reached agreement in principle for new arrangements which when finalised will leave the Group with five year revolving facilities for €270 million maturing in 2016 comprising new facilities of €75 million and refinancing existing facilities of €195 million. Agreement in principle has also been reached for a new three year revolving facility for €33 million maturing in 2014 and to extend the maturity of an existing facility of €85 million until 2014. These arrangements when implemented will further extend the maturity profile of net debt. The Group's strong internal cashflow together with the new facilities will provide the financial capacity and funding flexibility to support ongoing corporate development.

Net Finance Expense

The interest charge on net bank and loan note debt increased to €7.7 million from €3.4 million due to the higher bank margin attributable to debt refinanced in August 2010 compared to the competitive margin arrangements put in place prior to the credit crisis. EBITDA interest cover, as defined for covenant purposes, was 7.1.

Shareholders' Equity

Shareholders' equity of €955.0 million at 30 June 2011 (31 December 2010: €990.3 million and 30 June 2010: €966.6 million) was equivalent to €4.12 per share.

 Pensions

The deficit on the defined benefit pension schemes reduced to €12.7 million from €15.5 million at the end of 2010 net of deferred tax. An increase in the rate used to discount liabilities in line with changes in corporate bond yields and cash contributions in excess of service costs contributed to the reduction in the deficit. Plan assets of €187.8 million funded 93 per cent of employee benefit obligations at the end of the half year after taking account of the new 0.6% pension levy imposed by the Irish Government on the Irish plan assets.

Risks and Uncertainties

The Transparency (Directive 2004/109/EC) Regulations 2007 requires disclosure of the principal risks and uncertainties which could have a material impact on the Group's performance over the remainder of the financial year and cause actual results to differ materially from expected and historical results.

Trading in the Group's business is affected by economic conditions in the UK and Ireland where the Group's earnings are generated. Demand in the UK and Irish builders merchanting markets and in the Irish DIY and UK mortar markets are sensitive to economic conditions generally including credit conditions, consumer confidence, interest rates, employment trends, inflation, demographic factors and housing market conditions. More difficult market conditions may reduce demand in the Group's markets resulting in lower volumes with a related impact on performance. Adverse weather conditions normally reduces activity in the new build, RMI and DIY markets leading to lower turnover and operating profit in the Group's businesses.

Outlook

It is expected that the current softness in UK growth and pressure on disposable incomes will continue to weigh on consumer spending over the remainder of the year. The uncertain outlook for the economy, low consumer confidence and tight lending conditions are likely to limit near-term growth in housing transactions and a recovery in RMI volumes from the current historically low levels.

The Irish economy continues to face major challenges and while many risks remain, some evidence of stabilisation is beginning to emerge. The development of a broadly based recovery will take some time and is also dependent on continued growth in the international economy.

Average daily like for like sales in July and August increased by 2.5 per cent in the UK and were down by 5.8 per cent in Ireland.

The Group's strong market positions and focus in recent years on reducing costs and generating cash has provided a solid platform on which to improve profitability from internal initiatives, and also to benefit from a cyclical recovery in its markets.

Grafton Group plc

Group Condensed Income Statement

For the six months ended 30 June 2011

Grafton Group plc

Group Condensed Balance Sheet as at 30 June 2011

Grafton Group plc

Group Condensed Cash Flow Statement

For the six months ended 30 June 2011

Group Condensed Statement of Comprehensive Income

For the six months ended 30 June 2011

Grafton Group plc

Group Condensed Statement of Changes in Equity

Grafton Group plc

Notes to Condensed Interim Financial Statements for the half year ended 30 June 2011

1. General Information

The condensed consolidated interim financial statements for the half year ended 30 June 2011 are unaudited but have been reviewed by the auditor whose report is set out on page 24.

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 interim 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 2010 that are available on the Company's website www.graftonplc.com.

The financial information included in this report in relation to the year ended 31 December 2010 does not comprise statutory annual financial statements within the meaning of section 19 of the Companies (Amendment) Act 1986. Those 2010 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 financial information contained in the condensed interim financial statements 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 period ended 30 June 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 interim 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 interim 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 2010.

2. Segmental Analysis

The amount of revenue and operating profit under the Group's operating segments of Merchanting, Retailing 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. Finance Expense and Finance Income