Grafton Group plc

Good morning everyone, welcome to the Grafton Group plc half year results. Click agenda, I will start with some operational highlights before our CFO David Arnold will go through the financial details and afterwards you will have me again talking a little bit about strategy and outlook for the remainder of the year. the performance in the first half was i would call very solid we had revenue growth of 6.7 percent adjusted operating profit increase of 8.2% and a growth of our adjusted earnings per share of 10.8% as you will have noted this morning we increased the interim dividend by 2.3% and reconfirm our full year operating profit guidance between 190 and 200 million in terms of development activities in the first half of the year we completed two acquisitions in europe's faster growing markets in ireland where we acquired signum and in iberia in spain where we acquired megalus and both of those acquisitions have started well in our ownership and are trading strongly here today We also invested into new branches on a group wide basis, especially in Iberia and also in Ireland. And we maintain a strong balance sheet to have sufficient firepower to deploy capital as the opportunities arise. I will now hand over to David to go through the financials.

Thank you Eric and good morning everyone. As Eric has already covered some of the key financial KPIs from our first half performance, I'll now dive straight into the income statement in a bit more detail. Revenue of 1.34 billion was 6.7% higher than last year. Strong execution across the group enabled us to deliver a resilient, adjusted operating margin before property profits of 7.4%, up 10 basis points year on year, despite ongoing competitive pressures in several of our markets. This reflects a continued focus on margin management across the group and proactively addressing our cost base to mitigate the ongoing inflationary environment on operating costs. we've seen no material disruption from developments in the Middle East as we continue to manage supply chain risks proactively maintaining strong product availability while effective supplier engagement and pricing actions have helped protect margins it's pleasing to report that we saw strong profit growth in the first half with the group suggested operating profit of 98.5 million pounds up 8.2% compared to prior year net finance costs were 5.5 million pounds 1.4 million pounds higher than last year largely due to reduced interest income on our cash deposits and lower cash balances following the acquisitions and share buybacks that was partly offset by favourable foreign exchange movements in the full year we currently expect a finance charge of 15 to 16 million pounds the effective tax rate was 19.8 percent 30 basis points higher than last year and is our assumed rate for the full year. This slightly higher rate reflects the increasing contribution from Spain where the corporate tax rate is 25%. We're pleased to report an increase in adjusted earnings per share of 10.8% to 39.4 pence which is consistent with our targets set out in our recent capital markets event. and reflects the impact of operational improvements organic growth and capital deployment into acquisitions and share buybacks looking at the first half revenue increase to 1.3 billion we delivered an increase of 8 million pounds in organic revenue and I'll cover that in more detail on the next slide acquisitions were the main driver of sales growth in the first half contributing 56 million pounds of incremental revenue This reflected the inclusion of the seasonally important May and June trading period at Mercolouth, a full second quarter of trading from Signum and the incremental contribution from HSS Higher Ireland which was acquired at the end of March 2025. The divestment of the small MFP plastic pipe business in the Republic of Ireland at the end of May 2025 reduced revenue by £3 million. and finally the strengthening of the euro against sterling accounted for an exchange gain of 23 million pounds in the first half. This slide analyzes the net increase of 8 million pounds in organic revenue. In general I would note that we saw an uptick in product price inflation in the second quarter as pricing actions implemented in response to the conflict in the Middle East flowed through the P&L. our diversified portfolio supported a resilient first half as strong performances in the island of ireland and iberia more than offset the decline in great britain the island of ireland segment delivered organic revenue growth of 19 million pounds largely attributable to a strong performance in chadwick's against a backdrop of persistently challenging market conditions throughout the first half organic revenue in great britain declined by 19 million pounds a year on year revenue in northern Europe increased by two million pounds on a like-for-like basis driven largely by an improved performance in Finland organic growth of six million pounds in Iberia was driven by Salvador Escoda only since Mercolus was acquired in the first half the Salvador Escoda performance reflected its continuing positive growth trajectory since we first entered the Spanish market and finally branch openings and closures had a small negative impact on revenue and that will reverse in the full year. Turning to the movement in adjusted operating profit, I'll look at the performance of the light for light business in a moment. The major component of the increase in group operating profit to £98.5 million was the £10.4 million of profit attributable to acquisitions led by Merker Luth with £6.5 million. Looking at the £4 million reduction in adjusted operating profit in our light for light business, you can see that all operating segments except Great Britain reported an increase in adjusted operating profit. Disappointingly, the profit growth we achieved in Great Britain during 2025 was not sustained into the first half of 2026, with UK private RMI and new build markets both weakening further and all our business units exposed to the UK reporting lower profits year on year. Moving on to look at each segment now in a little bit more detail. Once again we saw a good performance from our Island of Ireland segment in the first half. Revenue of £579.4 million increased by 7.5% on a constant currency basis. Like for like revenue grew by 3.4% in the first half, led by strong trading in Chadwick and modest growth in Woody's against tough comparatives. After a relatively slow start to the year, trading strengthened during the second quarter as construction activity increased and the weather improved markedly. Our businesses on the island of Ireland delivered strong profit growth in the first half, with adjusted operating profit of £60.6 million, up 7.3% on a constant currency basis. This performance was underpinned by a strong performance in underlying trading in Chadwick's, in addition to the incremental contributions from the HSS Higher Ireland and Signum acquisitions. Trading in McBlair in Northern Ireland followed a similar pattern to our GV segment with the overall environment remaining challenging. The integration of Signum is well on track and we've been pleased with the business's performance since its acquisition on the 31st of March. First half sales increased by 18.3% on a pro forma basis compared with the prior year. driven by additional production capacity that was brought on stream shortly before the acquisition completed. Signum enhances our exposure to the growing Irish new build housing market and Eric will speak in a little bit more detail about the strategic rationale for the acquisition a little later. We continue to strengthen our market leading position on the island of Ireland. This included the opening of a new Woody store in Ennis County Clare in June and a new Chadwick specialist hub in Ravenhill Belfast in July. Bringing together the panelling centre and site tech in a single location, the hub demonstrates the Grafton way in practice, showcasing how our businesses work together across the island of Ireland to improve our proposition for customers. moving next to great britain it's fair to say that we were disappointed with the first half results after positive progress last year market conditions remain very challenging with new build housing activity and discretionary home improvement projects constrained by affordability pressures and weak consumer and business confidence levels revenue in great britain was 367.2 million pounds in the first half down 5.1 year-on-year with average daily light-for-light revenue declining by the same amount. All our GB businesses reported declines in light-for-light revenue during the period. Despite lower market volumes and continued competitive pressure, we were pleased to deliver a slight improvement in gross margin in the first half and this reflects the strong execution of our teams and disciplined pricing across our businesses. Notwithstanding inflationary pressure on costs, especially with respect to labour and property, overheads were tightly controlled, with the increase in like-for-like overheads contained to approximately 1%, well below general inflation levels. Nevertheless, despite tight cost control, adjusted operating profit of 17.5 million declined by almost 30%, as lower volumes weighed on operating leverage. In Northern Europe, market conditions remain subdued in the Netherlands, where the expected recovery has been slower to materialise. resulting in slightly lower volumes compared to prior year. In contrast, Finland showed more encouraging signs of early recovery, supported by improving consumer spending, exports and business investment. Revenue of £244.2 million increased by 0.7% on a constant currency basis. Average daily life-alike sales grew by 0.8% in the first half, driven primarily by growth in Finland where an improvement in trading conditions and targeted management actions supported trading adjusted operating profit increased to 16.3 million pounds in the first half with the adjusted operating profit margin unchanged at 6.7% higher profitability in Finland more than offset a modest reduction in profits in the Netherlands we continue to make good progress in the Netherlands in the execution of their multi-year improvement program a key milestone was achieved in the period with our end-to-end purchasing and finance processes now successfully operating on their new ERP platform we continue to be very encouraged by the performances of our businesses in Iberia and the broader opportunities in this market revenue of 145.1 million pounds increased by 35.5 percent on a constant currency basis average daily like-for-like sales grew by 6.6 percent in Salvador Escoda supported by strong market demand and record first-half temperatures in Spain with robust commercial execution across its air conditioning refrigeration and ventilation product categories a key highlight during the period was the completion of our second acquisition in Iberia Mercolud at the end of April like Salvador Escoda it's primarily serving the professional HVAC installer market and represents another important step in strengthening our position in the region. We've been pleased with the integration process to date and very encouraged by its early trading performance, with average daily life-alike sales up 6.7% on a pro forma basis across May and June, and Eric will discuss Merker Luthe in more detail shortly. Our Iberia segment delivered an adjusted operating profit of £14.1 million, representing an adjusted operating profit margin of 9.7%. The strong year-on-year increase on both profits and margin was largely attributable to Mercolouth which joined the group just before the start of two of its most important seasonal trading months. Grafton continues to support local management teams in driving organic growth. Salvador Escoda opened five branches in the first half and Mercolouth opened a further branch following completion of its acquisition. Having successfully supported Salvador Escoda's accelerated expansion plans following integration, we expect to provide similar support to Mercolud. We continue to assess further growth opportunities in the attractive Iberian market with a strong pipeline of both organic and inorganic development. Now this slide analyzes our cash flow in the first half. and as you can see the group generated 70.7 million pounds in free cash flow and that represents a 72% conversion of adjusted operating profit into cash building upon the group's strong cash flow generation credentials working capital management remains a key focus for the group and we invested 22 million pounds in net working capital during the first half reflecting product price inflation and inventory actions taken in response to developments in the Middle East we've always said that we believe it is essential to continue to reinvest into our businesses to maintain their competitive edge even during times of market weakness and we invested a net 23 million pounds into replacement and development capex in the first half where do we use that free cash flow and that strength of our balance sheet well the major element went into acquisitions but we also returned a net 75.5 million pounds to shareholders through dividends and buybacks you will have seen from today's results announcement that we propose to increase the interim dividend by 2% to 11 pence per share and consistent with the targets which we set out at our capital markets event it remains our intention to restore dividend cover more firmly within the two to three times dividend cover range as we move forwards share buybacks of 25.6 million pounds were executed in the first half out of a total figure announced in the current year of 50 million pounds Grafton's cash generative nature together with its strong balance sheet continues to support both shareholder returns and provide significant firepower for the group to capitalise on organic and inorganic development opportunities. At the end of June our net debt was £315 million representing least suggested net debt to EBITDA of just under one times. And turning to the balance sheet a key point to note is that the acquisitions accounted for £34 million of the £53 million increase in net working capital since the end of 2025. Adjusted return on capital employed was 10.7% in the first half that was down 20 basis points on last year and that's very much a function of our recent capital deployment into acquisitions. This level of return on capital employed is still around two percentage points higher than our estimated weighted average cost of capital capital turn was constant at 1.4 times finally just note before I hand back to Eric I have included some technical guidance for the full year which you might find may find helpful in the appendices Eric so a few words about strategy and outlook

I will share a few slides which I went through in detail at our very recent capital markets event so I will not dwell on them but the strategy remains unchanged we provide our trade customers in Europe with construction related products and solutions that what we do we drive growth and through long-term organic growth in markets where there are underlying structural growth drivers and supplement that via acquisitions and execute all of that in our federated operating model where we combine the best of two worlds which means good controls, processes, best practice and technology through the group whilst having local accountability in execution and customer proximity and all of that is what we call the Grafton way the talk about the long-term growth drivers key is how we select markets again aside from the cattle markets event we select regions and countries which have underlying structural gross drivers we are well aware this is a cyclical industry but in the long run these are like markets where the gross drivers are there then in each market we look at which verticals do we believe we can deliver their returns, the profitability, strive for consolidation and growth and enhance the businesses through our shared knowledge across the group, exactly what we do in Spain, and the outcome of that is that in every single market where we operate in, we have strong management teams running differentiated models with trusted local brands, we have local scale and the necessary customer centricity which allows us to deliver you know industry average above industry average returns rocky and cash generation throughout the cycle our federated operating model again just a little illustration the outcome is really the most important thing is on the bottom of the slide agile customer focused businesses empowered and engaged colleagues delivering the returns we expect and from a structural point of view as a group we have the structures in place to make sure that best practices are leveraged IT solutions are leveraged procurement benefits are taken very make sense and the capital allocation is stringent controlled by the group so that's a model which has worked very well for us over time as we continue to execute David mentioned briefly Mercalus Mercalus is a Spanish company leader in HVAC predominantly air conditioning very very complimentary to Salvador Escoda it's a different model Salvador Escoda offers 40 000 plus SKUs AC ventilation refrigeration a one-stop shop for the installer with branches and the network of branches Mercalus has their branches are like small distribution centers they deliver to the installers they have a narrow range about 8,000 SKUs very much focused on the own brand which is Johnson Johnson air conditioning and other products so 75% of the sales are own branded products hence the very very strong marching which can be achieved There is a rapid expansion on the way, we have now 20 locations in Spain, 9 locations were opened in the last 18 months, you know, whilst we were in contact with them and talks about acquiring the business integration progressing really really well the local management team remains in place so the two former owners continue to run the business with all the appropriate incentive structures you would expect so that our incentives are aligned to successfully continue to grow the business and have the next phase of accelerated growth in a strong market our other acquisition was signum in in the republic of ireland a leading supplier of mates to order off-site timber frame solutions that's a product expansion for jagvics it's a business where is our first you know mmc business or multiple methods of construction this is a growing element especially in scheme housing low-rise scheme housing where in the first half 66% of new scheme housing commencement had timber frames we have synergies with Chadwick's in two ways one we are the largest buyer with Chadwick's group of materials like insulation and so on and timber which is needed to do those timber frames so there is a product procurement synergy but also you know in addition to the customers which signum already has there is now access to the customers which cedric has to provide the timber frame solutions again integration progressed very well and trading is in line with where we expected it to be at the capital markets event we were clear about our ambition of 850 million plus free cash flow cumulatively until the end of 2030 an EPS CAGR greater than 10% and in normalized markets a rocky which is 13% or more by 2030 so we are tracking well to achieve that we had a free cash flow in the first half as David mentioned of just shy of 71 million and adjusted EPS growth just shy of 11% and a rocky of 10.7 and that with two markets which are not at all pumping on all cylinders namely Northern Europe and in particular GD which nicely brings me to the current trading and the average daily like-for-like sales as you can see in the first half but also in the most recent weeks up until the 23rd of August the island of Ireland performing well and strong and the same can be said for Iberia our two strong growing markets Northern Europe with a little bit of growth but you know not fantastic and still a challenge in GB which is in my eyes significant upside potential once we can have the positive effect of the operating leverage which we have in our GB businesses in terms of H2 outlook we have a positive republic of ireland construction outlook for the second half so we expect to continue to perform strongly in the republic of ireland in terms of northern ireland with our mcflair business we expect no significant uplift in the second half as from a macro point of view this is more aligned to our gb businesses in Great Britain we expect the second half market conditions to remain unchanged compared to the first half so we expect it to continue to be challenging and of course the autumn budget will be key in shaping consumer confidence going forward so we will see what the outcome will be in terms of northern europe the dutch market conditions are expected to be similar to the first half and in finland we expect that the gradual recovery which has started will continue in the second half of the year in spain we expect continuous strong growth as Spain remains one of the fastest growing large economies in Europe In summary, a resilient performance in the first half the acquisitions are performing well are in line with our expectation integration is going well so you know that's always important that the teams gel with the teams we already have so that is all going well we continue to execute our strategy drive long-term organic growth supplemented with value enhancing acquisitions and we reaffirm full year guidance for the operating profit for the full year and remain on track to deliver our 2030 targets. Any questions?