Grafton Group plc (GFTU) Earnings Call Transcript & Summary

Okay. Good morning, ladies and gentlemen, and welcome to the results for the Grafton Group for the year ending December 2019. I appreciate it's a pretty grim morning out there this morning and it's a very busy morning in terms of results, so I really appreciate you coming to see us. And I know some of you are off pretty sharp-ish at the end of this one, so we'll try and get through it and make sure we can get you on your way at the appropriate time. For those of you who don't know me, I'm Gavin Slark, I'm the group CEO, and I'm joined today by my colleague, David Arnold, who is the group CFO. Our process for this morning is relatively straightforward, many of you will have seen this before. I will give you a couple of slides just in terms of some highlights from 2019. I'll hand you over to David, who will take you through the detail of the P&L, the balance sheet and also the performance of some of the individual business groups. And then I will come back on at the end, give you a little bit of insight into current trading, what our strategic focus is going forward, and then, hopefully, leave some time for Q&A, which should still give you all time to get a way to where you need to go to. So in terms of 2019, what do we see in 2019? Well, probably worth recognizing the fact that in the U.K., we did see a slightly softer market, particularly in the RMI sector, and particularly in the second half of the year, although new build business did hold up very well during 2019, and we did offset some of the market softness with operational improvements that we'll talk about later. A very good year in terms of Ireland, good growth with our Irish merchanting business, Chadwicks, and also very good growth with the Woodie's DIY business. Both of those businesses producing operating margins in excess of 9%. It was an important year for us in terms of strategic moves. It was also an important year in terms of operational initiatives. And I will go through some detail of those later on, but probably the 2 big things that really happened in the group last year, the transformational deal that we did in the Netherlands with the acquisition of Polvo. Many of you will remember, we first moved into the Netherlands at the end of 2015, acquired a business called Isero that was turning over around GBP 90 million. This deal with Polvo in the second half of last year will get the revenues in Holland this year to something around the EUR 300 million mark. And then also, we divested of the Plumbase operation in the U.K. and also our Belgian merchanting business last year, and I'll take you through some of the detail of that later on and the impact that, that has in terms of revenue and profit going forward. I know many of you will have read the highlights, but just to go through them once more. Revenue up 3% to GBP 2.67 billion. And the adjusted operating profit up 4% to GBP 194.3 million. That is on a pre-IFRS 16 basis. If you rolled it into post-IFRS 16, your operating profit is around about GBP 205 million. The adjusted operating margin, again, up 10 basis points to 7.3%, a slight reduction of 30 basis points and the ROCE down to 14.4%. Adjusted earnings per share, a 4% increase up to 66p. And continuing with our progressive dividend policy, dividend increase of 6% up to 19p per share. I think one of the highlights of last year, and many of you who know Grafton well will know the business has a history of strong cash generation, but we did end the year last year with net cash of GBP 7.8 million, which actually, looking at our own records, we believe, is the first time that Grafton has finished a year in net cash for something in excess of 20 years. So with that, I hand you over to David for the detail of the numbers. Thank you.

Thank you, Gavin, and good morning, ladies and gentlemen. In keeping with the approach which we adopted at the interims, in this presentation, I intend to primarily focus on comparing the 2019 figures on a pre-IFRS 16 basis with the results on a pre-IFRS 16 basis from last year. Obviously, this does bring with it the risk of greater understanding, but fear not because, next year, we'll be back to full befuddlement mode when we move to a properly fully adopted IFRS 16 basis. I will also focus in this presentation today on continuing operations. In other words, the results and the comparative figures do not contain Plumbase or Belgium, both of which we disposed of last year. So turning now to the numbers in the income statement, and you'll see the group revenue was up 3% to GBP 2.67 billion and a similar figure in constant currency terms. Adjusted operating profit before property profits was 3% ahead of last year at GBP 187.4 million. The operating margin before property profit was 7%, in line with the prior year. And we had a good year on property sales, with property profits slightly ahead of 2018 at GBP 6.9 million, leaving the group's adjusted operating profit up 4% overall at GBP 194.3 million. The net finance cost was GBP 5.6 million. That was slightly lower than last year. Underlying netback interest within that was GBP 6 million, GBP 1.1 million higher than 2018 as a result of a full year's coupon on the U.S. private placement notes which we issued in September of 2018. And that increase was offset by a modest foreign exchange gain. Adjusted profit before tax was up 4% to GBP 188.8 million. Now as you can see from this slide, the increase in revenue during the year to GBP 2.67 billion was ostensibly driven by the acquisition in the Netherlands of Polvo, which we completed in July. Foreign exchange movements didn't have a significant bearing on the 2019 figures though. It is worth noting that the average euro exchange rate last year was almost 88p, and that compares to the current rate of 84p, and so that could prove to be a headwind to the sterling reported results in 2020. Now I've said on the previous slide that the growth in revenue for the year was ostensibly driven by acquisitions, but I'd just like to pick out that of the net organic growth revenue that we saw of GBP 14 million, the like-for-like businesses delivered GBP 47 million of growth. And as you can see here on this graph, the bulk of the absolute growth last year was derived from Irish merchanting, which is over towards the left-hand side, and which grew in like-for-like revenue terms by GBP 27 million. GBP 15 million of the revenue increase was from organic growth initiatives for new branches. And of that, about half was from new Selco branches. At the beginning of 2019, we took the decision to exit from tool hire in Selco as the returns relative to the investment in both assets and people weren't strong enough. And that represented about GBP 8 million of revenue in the prior year. And we had also sold 2 small businesses in 2018, Boole's and Plumbworld. Those together accounted for GBP 40 million of revenue, but neither of which were material enough to separately draw out as discontinued operations. If we now look at the components of the increase in operating profit from GBP 187.6 million to GBP 194.3 million over on the right-hand side of this slide, you can see that in the like-for-like business, profitability reduced by GBP 2.2 million, and I'll return to that in a moment. New stores reduced profit by GBP 0.5 million. But a lower level of store opening costs in 2019, mainly in Selco but also a small amount in the Netherlands, boosted 2019 profitability by GBP 3.9 million. The disposal of Boole's and Plumbworld, together with the closure of Selco hire, reduced profit by GBP 0.9 million. The acquisition of Polvo last year, together with the full year effect of the acquisition of Leyland SDM, added GBP 5.2 million, and the increased level of profit contribution from property was GBP 2 million. I've already mentioned that the like-for-like profit reduced by GBP 2.2 million in 2019. And the driver of this was in U.K. merchanting, where we saw a GBP 9.5 million reduction in the like-for-like profitability. The pain in the U.K. was experienced in the second half. You may recall that in the first half, once we took account of the 1 less trading day, profit would have been ahead, and I'll come on to talk about the U.K. more in a moment. The Irish businesses performed very strongly, particularly Woodie's, which delivered a GBP 3.4 million increase in the like-for-like operating profit. In the Netherlands, like-for-like operating profit was GBP 0.4 million lower, and this was a function of an uneven market, partly influenced by issues which emerged in the second half around nitrogen emissions, which impacted Dutch construction more generally. Central costs were GBP 3 million lower in 2019, and this was largely because of lower variable remuneration costs. In U.K. merchanting, adjusted operating profit pre property profit was GBP 6 million lower at GBP 98 million. I've mentioned that the like-for-like profitability reduced by GBP 9.5 million, and this was very much a function of the weaker RMI market which we experienced in the U.K. in the second half of the year, particularly as we entered the key trading months of September through to November. In that period, we saw like-for-like revenue drop by 400 basis points. And allowing for year-on-year price inflation, that equated to some 500 to 600 basis points fall in volumes. This put gross margins under downward pressure, and it was between volume and gross margin squeeze which saw operating profit fall. We focused on productivity improvements and efficiencies, executing a cost reduction plan in our principal U.K. merchanting businesses to mitigate the market pressures. The Irish merchanting business delivered like-for-like revenue growth of 6.2%, consistent with our expectations of continuing moderation from the high levels of previous years. Whilst housebuilding continues to increase in Ireland, with 2019 completions 18% higher than the prior year at just over 21,000, a decade high, it remained well short of demand, which is estimated at 35,000 to 40,000 new homes per annum. Whilst new housing remains high on the political agenda for all the political parties in Ireland, it's important to note that in the last quarter, in particular, the growth in new homes was in apartment schemes rather than houses, and those sorts of developments tend to yield less sales per unit and higher direct sales through merchants than a comparable house. Operating profit increased to GBP 42.8 million, although the operating margin was very slightly lower at 9.2%, as the gross margin reduced as expected, reflecting the continued expansion of delivered products to new build customers. In the Netherlands, reported revenue increased by 36% on the back of the acquisition of Polvo. Like-for-like revenue was up 0.6%, with trading conditions in the year uneven and softer in the second half. Operating profit increased by 23% to GBP 19.6 million. In Isero, overall operating profit was slightly up, with strong growth in gross margins on the back of good procurement gains and operating expenses benefiting from slightly lower branch opening costs. Overall, the operating margin of 9.3% was diluted as we expected by the acquisition of Polvo. Woodie's delivered another excellent performance, with operating profit up 19% to GBP 19.9 million, and the operating margin increased 120 basis points to 9.7%. Like-for-like revenue growth was 4.7%, driven principally by average transaction values on the back of continued improvements in product ranges and great customer service. Growth was delivered across a number of product categories. The store upgrade program is nearing its completion now, though we have a major investment of EUR 2.5 million into a freehold store in Dublin, with works commencing in the middle of the year. We were really pleased with the performance of our manufacturing business following last year's record level of profitability. Whilst we saw marginal growth in volumes of products sold to housebuilders, we believe that the market fundamentals remain strong, and the operating profit of GBP 18.6 million was only marginally lower than 2018. CPI's production facilities are well invested and have capacity to accommodate further volume growth in the market. Turning now to the balance sheet and a couple of points here. Working capital remains well controlled, and it was particularly pleasing to end the year in a net cash position of GBP 7.8 million and with a ROCE of 14.4%, particularly given the investment that we made into Polvo last year. On a post-IFRS 16 basis, net debt was GBP 534 million, with net debt-to-EBITDA at 1.7x. Now from a banking covenant perspective, it's important to note that we don't have a net debt-to-EBITDA covenant within our debt funding arrangements. Cash flow remains very strong with free cash flow generation representing 89% of operating profit on a pre-IFRS 16 basis and 110% post-IFRS 16. Net replacement CapEx was well controlled, with the bulk of this investment focused on fleet and branch maintenance. And just to provide some initial guidance on some of the more technical elements of 2020 expectations. Firstly, full year property profits, we expect those to be between GBP 2 million and GBP 3 million. Depreciation is expected to be approximately GBP 110 million on a post-IFRS 16 basis or around GBP 50 million pre-IFRS 16. That equates -- sorry, that compares against our expectations on gross CapEx of approximately GBP 70 million in the year. That's split roughly GBP 40 million on replacement Capex, GBP 30 million on development spend. All other things being equal, we'd expect our pre-IFRS 16 finance costs to be around GBP 8 million absent material acquisitions. On a post-IFRS 16 basis, that's some GBP 20 million higher at around GBP 28 million. And we anticipate that the tax rate will increase to approximately 19.5% as a result of the impact of the one-off deferred tax impact in 2020 from the U.K. corporation tax remaining at 19% rather than the expected reduction to 17%, which is currently in statute. And on that note, I will hand back to Gavin.

Thanks, David. So just looking ahead really now, and looking at our strategic focus on the outlook going forward. I do want to touch on some of the things that we did during 2019 within the context of strategic focus as well. What do we mean by our strategic focus? What we actually mean is pursuing what we believe is a very focused growth strategy. And that means investing both organically and acquisitively in businesses that we believe can bring higher returns, higher margins but also businesses that still have good potential for growth going forward. And even though the balance sheet is in remarkably good shape, I would say that we still very much intend to maintain what we believe is a very disciplined approach to capital deployment. Looking at the growth businesses and the higher-returning businesses. Obviously, last year, transformational deal for us in the Netherlands was the acquisition of Polvo. And I have to say that 6 months in, we're absolutely delighted with the acquisition and what that business is bringing to the overall Dutch offering. It has absolutely cemented the position that we have in terms of being #1 in the hardware and ironmongery market in Holland. And it is an excellent geographical fit. And now we speak here about, we acquired 51 branches, bringing the total up to 113. Within that acquisition, there was actually only one town in the whole of the Netherlands where we had a branch crossover. So from a geographical point of view, it was a superb fit. We completed that acquisition for EUR 131 million on July 1. But our short-term focus is very much around aligning purchasing benefit. And the reason behind that really is before we acquired Polvo, they'd acquired a business called Van Enckevort. They've been working on the integration of Van Enckevort into Polvo. When we acquired Gunters en Meuser, we've been working on the integration of Gunters into the Isero business, so we decided the right thing to do operationally, leave those businesses to focus on what they're doing at the moment and then at some point in the future, we can look at a full integration. But in the short term, the focus is very much on just absolutely making the most of the purchasing agreements that we have in place. Also, looking at our focus on higher-return businesses, the disposal we made last year of both Plumbase and of the Belgium business. If you look at the impact this will have in terms of our group going forward, in 2018, the Plumbase business had revenues of around GBP 258 million and an operating profit of GBP 6 million. The reasoning behind the divestment of Plumbase really was, the guys in Plumbase who were working with us have done a superb job in moving the profit up to that GBP 6 million mark, but we felt further growth potential was relatively limited in that marketplace and the opportunity came to really bring in GBP 62 million of cash for that business, and that felt like a really good use of our time and capital and good value for shareholders. In terms of the Belgium disposal, as many of you will know, Belgium had been a difficult trading environment for us for a number of years. In 2018, revenue of just GBP 91 million and a profit of GBP 800,000. The disposal of Belgium was a little bit more complex than it was with Plumbase in terms of making sure we got the right value for the business. So at the end of 2018, we disposed of a single branch in St. Vith to one private buyer. We then removed a significant proportion of freehold property out of the Belgium business, which we held separately to be sold separately, and then we sold the trading business to the people who eventually bought the business. So overall, the value of the Belgium business that we've got is GBP 28 million for that business that was making GBP 800,000 a year, which feels like, again, a very good deal and very good value for the shareholders. Within the P&L, you will see a noncash charge of GBP 24.7 million, which we're treating as exceptional as a result of the divestments of the 2 businesses on that slide. In terms of the operational milestones, what have we been doing in the businesses that we have? We start in the U.K. We have been working through a change in the ERP system in Buildbase, and all of the back-office functions are now completely done. That system is embedded, and all of the back-office functions are working on the new ERP system. We've rolled that out into 4 branches now in terms of the front-end system. There's another 1 going next week. And as we go through 2020, the pace of the branch rollout will pick up. So at some point during next year, we'll have that complete ERP process rolled out in the Buildbase business, replacing a system that was well over 30 years old. In terms of Selco, which obviously has been a situation for us of significant investment over recent years, we did open a delivery hub in Edmonton in North London. The delivery hub really takes the physical deliveries to customers out of 6 branches in North London for us. And those 6 branches were becoming a little bit capacity constrained with the number of vehicle movements going in and out of there. So actually, we found this unit in Edmonton. We've taken the deliveries and the vehicles from 6 Selco stores into that 1 unit. Because of the logistics efficiencies, we're actually now driving a higher gross margin after haulage from the deliveries that we're doing from Edmonton than we were from doing them from the individual branches. It's not something that we intend to roll out on a nationwide basis. But if you look at the density of branches we had in this part of London, it made absolute sense to put a central delivery hub in place, and it's working very well. We've also put in place a lightside distribution center in Oxford for Selco. As many of you will know, for ever, we've really had deliveries going direct into the Selco stores from manufacturers. But as the business has picked up, the number of deliveries we had going in on a daily basis was again becoming constraining. We put a lightside distribution center in place in Oxford. The lightside product will be consolidated there and delivered -- actually delivered in aisle order for the branches to put away to each of the Selco stores going forward. Having that DC in Oxford as well also gives us the ability to look at smaller products and buy them more efficiently and more effectively. We opened a new branch in Kingston. We've opened a new branch in Orpington. And in June of this year, we'll open a new branch in Salford. And going forward, I think if we're looking at sort of 2, 3, 4 Selco stores a year, that feels like the right pace of growth for Selco going forward. In Ireland, we've been working very hard in getting the Chadwicks brand well established in the Irish market. Many of you will know that over a number of years, we've had a number of different brands in Ireland, but as we really drive particularly to improve our digital offer in the Republic of Ireland, single strong branding became really important. So for some of you who know the history, we've got brands such as Heiton. We've got brands such as Eddie's Hardware, Market Hardware, even Barretts of Ballinasloe will disappear as they become consolidated under the Chadwicks brand. We've also, in Chadwicks, consolidated from 4 separate ERP systems down to 1 ERP system, which makes the business more efficient and makes the business easier to run. In terms of Woodie's, our DIY business in Ireland, over 90% of the revenue from Woodie's now comes from our reformatted branches. We've been constantly reformatting those branches over the past 4 or 5 years. As David said, we've got one big one left to do, which is the freehold site in Sallynoggin. That will be done this year. But overall, most of the revenue and profit is now driven out of the reformatted Woodie's stores. Online revenue last year grew again by over 50%. Now this business has been growing by over 50% for the last 3 or 4 years. It's still a relatively small part of what the business is, but as we get towards the half year of this year, our anticipation is that the online revenue in Woodie's will be the equivalent of one Woodie's physical store. But it's always the fastest-growing part of the business that we have now. Many of you will be familiar with the Great Place to Work employee engagement survey. I'm delighted to say that last year, Woodie's came out as the top retailer in Ireland in the Great Place to Work survey. So I think in terms of engagement, in terms of how that business has transformed over the past few years, actually getting that award, being voted for by the people who work in the business, was a really important milestone. I've already mentioned in Isero that we did the acquisition of Polvo last year that, in its own right, was a huge piece of work and a huge effort by the management team. But we also relocated the main DC and the main head office to 120,000 square foot purpose-built facility in Waddinxveen in the Netherlands. It is a significant increase in capacity as our old distribution center was relatively small and quite inefficiently laid out. This gives us a lot of capacity growth potential going forward but also, again, a little bit like the Selco DC in the U.K., enables us to purchase more efficiently and more effectively. A little bit like we have done in Ireland as well, when we first acquired Isero, there were a number of regional brands within the Isero business, and particularly, again, driven by the digital development, we've taken some of those regional brands out. So brands such as Gerritse, such as Breur, Van der Winkel have gone and are now consolidated under the Isero brand, and that is the principal brand that we will use going forward in terms of the Dutch business. Current trading, I know there's a voracious appetite for current trading information amongst our analyst friends. Obviously, this is an incredibly short period of time. We're talking January 1 through to the 23rd of February. But what we've tried to do here on the slide is to show you the like-for-like performance for Q4 and then the like-for-like performance for the first 7 weeks of this year really as a comparison. So you can see the exit rate coming out of last year and how we've gone into this year. So if you look at U.K. merchanting, Q4 last year was down 4%; first 7 weeks of this year, down by just 1.5%. In Ireland, pretty much unchanged, 2.7% in Q4, 2% going into the first 7 weeks of this year. That's the Irish merchanting business. In the Netherlands, it's gone from minus 1.4% to plus 1.3%. And the retailing business in Q4 was 5.6% up on the previous year. Q4 is a huge period for us in Woodie's and down just 0.3% if you look at the first 7 weeks of this year. Manufacturing business, which principally is our mortars business, down 1.9% in Q4. Strong start to the year, 6.7% growth in 2020. So if you look overall as a group, Q4, our like-for-like sales were down by 1.8% and the first 7 weeks of this year, down by 0.4%. But I would just say that is an incredibly short period of time. And obviously, as we get towards AGM time, we'll have a much better view on how the year has started. In terms of the outlook, starting with the U.K., I think, certainly, reduced uncertainty in the U.K. is a good thing. Obviously, we believe that the RMI market will take some time to come back to full strength. But as we go through the year, our anticipation is that the RMI market will improve and will get stronger. We've still got an opportunity for structural growth in some of the Selco stores that we've opened over the past 2, 3, 4 years, where those branches still have to reach maturity. So there's an opportunity within Selco to see greater development of revenue coming through as those branches move towards maturity. I think it's also fair to say we still believe there's operational improvements that we can make within the Buildbase business. Buildbase is still our largest turnover business unit within the group. And I think looking at what the performance was last year, particularly in the second half, we believe there's things that we can do to improve that business and improve the returns as we go through 2020. In Ireland, the underlying fundamentals still remain very, very strong. A little bit of political uncertainty in Ireland as we sit here today, but actually, the overall RMI market, the overall new build market still have very, very positive things going forward. We think that both Woodie's and Chadwicks will show further growth as we go through 2020. The overall housebuilding market in Ireland at the moment, completions last year, just over 21,000. It has increased from what it was in 2011 and '12 from 4,000, but still some way short of the 30,000 to 35,000 homes that we believe a normal Irish market would need. So still some significant growth to come in new build in Ireland. In terms of the Netherlands, as David mentioned, we did have this issue crop up during 2019 regarding nitrogen emissions. That affected both construction and agriculture in the Netherlands, but the government are working, a, towards a long-term solution to that; but they're also putting in place some short-term measures that should enable some of the construction projects that were paused to restart activity. And obviously, this year, we should get the full year contribution from the Polvo acquisition. We had half a year of contribution last year but a full year of Polvo in the numbers in 2020. So in summary, what do we believe makes Grafton different? Certainly, in the markets in which we operate, strong market positions. In Ireland, the #1 DIY retailer and the #1 building materials distribution business. In the Netherlands, in the market in which we operate, with the consolidation of the Polvo deal, a clear number #1. And if you look at even in the U.K., strong performance from CPI EuroMix cemented its position as the #1 supplier of mortars to the U.K. construction market. We do believe that the exposure to the diverse markets is helpful, that's geographical in terms of the U.K., the Netherlands and Ireland, but also the fact that we have exposure to new build, to RMI and to DIY. So the diverse market, we believe, is a very strong point in terms of Grafton going forward. My finance colleagues did a super job in terms of managing the balance sheet and the cash generation as we go through last year, and certainly, finishing the year with net cash was a real strong point for us. But Grafton does have a history of very, very strong cash generation and turning most of our operating profit into cash. The finance guys will tell you that the operations guys then see a strong balance sheet as a license to go and spend. What I can reassure you is we will maintain that focused and disciplined approach to capital deployment. I think if you look at our organic investments over the past 5 or 6 years, alongside our acquisitive investments over the past 5 or 6 years, you'll see that we've spent the money very sensibly, we spent the money very carefully but we have spent the money, and we will continue to invest the money going forward. On M&A, we have got a good track record, I believe, of what we've bought and we also have a good pipeline of prospects. But what I would say is we will -- we normally get asked the question later on, so I'll preempt that question now, what is the pipeline looking like now? The pipeline is good. The pipeline is strong. We believe we've got good investment opportunities. However, we will still spend the money very carefully. And it's more important for us to buy good quality businesses with good prospects rather than just buy more turnover and more profit. And obviously, we've spoken for a number of years about the progressive dividend policy. Dividend increased this year, and that progressive dividend policy has enabled us to increase dividend payout to shareholders by over 75% in the last 5 years. So we're very conscious, as we generate a lot of cash, of who the money belongs to and this combination of having a good investment pipeline going forward and continuing to give shareholders a good return on their investment. And at that point, I'll rejoin my colleague, and we'll take Q&A. What I would say in terms of the questions and answers, certainly for the benefit of the webcast, if you have a question, if you could raise your hand, we'll bring a microphone to you. If you could give us your name and the organization you represent and then your question, that will be particularly helpful for the people following on the webcast. Thank you.

Robert Eason from Goodbody. I did have 3, but it was cut down to 2 pretty quickly at the end there. The first question, I'll just get it out of the way, supply chain. Can you just give us an overview of how much exposure you do have in terms of cost of goods sold and in terms of sourcing from China/wider Asia? You mentioned during the presentation that at Buildbase, you're working on a number of things to improve. Just expand on that comment and maybe just on the timing of that improvement in terms of when we can see as the funding results come. And maybe just change my third question a bit in terms of the M&A. How are you thinking internally about the balance of internally allocating that capital to externally allocating it to shareholders now that you are in a net cash position for the first time in over 20 years? How would you think of that balance?

Okay. Good questions. In terms of supply chain and the whole coronavirus thing and how that's impacting us, if you look across the whole of the Grafton group, about 8% of our sales will be product that is sourced either directly or indirectly from China and the Far East. So it varies quite significantly by business, Robert, as you can imagine. So we -- the guys in the business, the supply chain teams are on this on a daily basis. In the short term, we don't believe that we have an issue. We've got good stocks in place. And certainly, we've got a number of businesses that have product on the water coming over from the Far East at the moment. I think it's inevitable, even though we can work really hard on this, if the situation deteriorate or gets worse or goes for a long period of time, there may well be some impact as we go forward. But obviously, that wouldn't affect just us. That would be a whole market issue. But in terms of where we are today, I feel that we're in a good position in terms of the product that we have available, and we have very good visibility of individual factory productions. And it's worth saying that, certainly, not all of the factories in China that we deal with are actually closed. A number of them are operating, although some are operating on reduced manpower. But I think from where we can be today, I think we're in a relatively good position in understanding where we are and what the potential impact is. But it is -- it's about 8% of the total group's turnover is derived from product that is imported from the Far East. In terms of the Buildbase operational initiatives, I think there's a number of things that we can do. And possibly, if you look at businesses that we have, like Selco, like Leyland SDM in London that also had a really strong year last year, these businesses have probably evolved a little bit more quickly than Buildbase has. I think, certainly, the old ERP system was a handicap in Buildbase to evolving the business into a more modern style and a more modern format. So probably, when would you see tangible results from some of the things that we're looking to do within Buildbase? You're probably looking at 18 months. And some of this is driven by the change in the ERP system and the quality of information that we will get and, actually, the quality of control that we have at a branch level from the new ERP system. And then there are other things that we're looking to do. As David mentioned during his presentation, we did take some cost-saving measures in Buildbase during the second half of last year as well. And I would say, look, within the U.K. merchanting environment, we had a really strong performance from a number of businesses. Like I said, Leyland SDM, T.G. Lynes, very strong performances. We improved our operating margins in places like Scotland in some of the Civils businesses. So it's fair to say we felt most of the pain during the second half in Buildbase, and that is why that's really the focus area there. I'll let David talk about cash.

Yes. I mean I think from an M&A perspective, the question that frequently comes back is what does the balance sheet capacity look like? We were in net cash at the end of the year on a pre-IFRS 16 basis, 1.7x net debt-to-EBITDA post the impact of IFRS 16. So we've always said historically that keeping that investment-grade credit rating is very important for us. If you were to translate that into acquisition capacity, it's probably something up to about GBP 300 million. How do we think about that acquisition capacity against how we balance what we do, investing either organically, returning it to shareholders or, alternatively, acquisitions? I think what's important for us is when we look at the pipeline, we do have, as Gavin has said, a good quality pipeline, I think, in terms of acquisitions at the moment. The thing that's always unpredictable is around timing. Many of the discussions that we have are with privately owned companies. And you can't force the timing. The important thing is that we're in the right place with the availability of the capital to deploy it when we see a good quality business. So I think we just remain very disciplined, very focused. I think we don't sit here bereft of ideas at the moment. And I think we're in a very healthy position to enter this year given perhaps some of the uncertainties that we currently see in the market.

Okay. Bring a microphone down the front here to the soon-to-be-retired Howard Seymour.

Howard Seymour, soon to be retired from Numis. A couple of questions from me, if I may, please. Firstly, just on the U.K., Gavin, you alluded to sort of there's a bigger element perhaps of confidence than there was before. Just wondering if you've seen any changes in terms of product pricing on that. I mean we're in now quite a strange period, obviously, with the corona thing going on as well. But is it looking to you like a traditional pricing situation in the U.K., as you've seen before? And then secondly, you mentioned that the second half was weaker in Holland. Would you attribute an awful lot of that down to the nitrogen? Because you sort of mentioned that the underlying market is good. And is there potential for that bounce-back, as you say, and that the -- obviously, the permits now are looking like they might [ be able to publish ]?

Yes. Certainly, I think in terms of the U.K., we almost always get asked the question about pricing and how do we see competitive pricing against our own pricing. And when you've got, obviously, hundreds of outlets across the country, it's very difficult to sort of say, well, a certain business is pricing in one way and we're pricing in another way. I think it's symptomatic of the fact that we operate in a competitive market. It always has been a competitive market. I believe it always will be a competitive market. But certainly, from our perspective, we try very hard to find the balance between pricing competitively to be competitive out in the marketplace and maintaining healthy gross margins on what we're selling. So I don't think the pricing environment has changed significantly, Howard, today compared to what it was 6 months ago or what it was 12 months ago. In terms of the nitrogen issue in the Netherlands, I mean, it's a very -- it's an interesting development that happened last year in terms of the nitrogen issue. And obviously, it's very difficult to strip out completely what the effect of nitrogen was compared to maybe the market softening slightly. But all of the information we have would say that the future of the Dutch construction market is still very positive. Underlying fundamentals, as I said in the presentation, still look very strong. And certainly, the conversations that we have on a weekly basis with the guys who run the Dutch business for us, their belief is that once we get this restriction lifted, you will start to see construction projects come back to life. Some of the construction projects that are on pause are actually big projects, so they will take a little bit of time to come back to life. But hopefully, during the first half of this year, we'll get that permanent resolution to the nitrogen issue. It has impacted construction quite significantly, impacted agriculture in a huge way in the Netherlands.

I think just to put that into context. I think when the nitrogen issue first arose, effectively, there was a hold put on the granting of any construction permits wherever they were. So we have got quite a backlog of approvals. I think now that they sort of worked through the system, when you look at the number of permits that have actually been directly affected because they're quite close and adjacent to some of the nature reserves, which gave rise to the original issue, I think it's only about 15% that are directly affected and where mitigating measures will need to be put in place for those planning consents. So it's definitely formed. But it's a bit of a hiatus whilst that works through. And I think that does have a bearing. If you look at some of the forecasts that have come out in the Netherlands for construction permits, I think it's pretty flat this year and next. But there's definitely a political will within the Netherlands to continue to grow and increase housebuilding because -- as there is indeed in Ireland and the U.K., there's a structural housing shortage.

Okay. Just come down the middle here.

Aynsley Lammin from Canaccord. Just 3, actually. Just wonder if you can give a bit more detail on that average kind of 1.5% for like for likes in the U.K. I think Howden today was talking about a very slow start to the year. If you strip out the first 2 weeks, the kind of trend got better. Is that what you've seen? Or has it been a fairly consistent kind of pattern across the 8 weeks? And secondly, I wonder if you could give us any bit more view on kind of new housing, infrastructure, commercial RMI, the end market split in the U.K., how you see the trends there for this year? And then lastly, just on pricing in the U.K. Is 2%, 3% price inflation kind of about where your expectation is?

Shall I?

Yes.

If you would just let me -- let's sort of start with the end one. I think the outlook on price inflation in the U.K. is really difficult to call as we sit here right now. I think, sort of absent the coronavirus, we probably would have been sitting here and saying that actually we thought inflation was probably likely to be a little bit weaker this year than it was last year. Last year, around about 2%. But I think you might see certain product categories that are influenced by coronavirus this year. Hardwood-faced plywood, for example, 80% of the U.K. supply comes through China. So that's quite an important product component. Last year, we saw a softness on timber pricing. So I think I suspect we'll see that bounce back. So I think it's more unpredictable in terms of picture. Right now, we'd probably still be picturing it for probably closer to 1% than 2%, but it might be a different picture by the time we're talking at the AGM. I think in terms of like-for-like in the U.K. and what have we seen in the market, the reality is it's too early to say. I think we came back -- I think it was a slightly weaker start because I think in terms of the timing of Christmas, people have taken a little bit longer off. It seemed to be getting a bit more momentum. And I think there was a bit more of a feel-good factor around. But the reality is, particularly on the heavy side, it's been strongly influenced by the wet weather that we've had over the last couple of weeks. So does it make it any different to a normal winter? Probably not. But I don't think we can read too much into it in terms of the underlying strength of the market. Certainly, if we're talking anecdotally to customers, I genuinely think they feel more confident this year than they do 12 months ago. I think they genuinely think that we will start to see a pickup in activity, all other things being equal. And in terms of the sort of split of sort of underlying growth rates between the various components, I think our view would be actually new build on residential housing, we should continue to see growth. I think RMI will benefit if we do continue to see some strength in the housing market that sees a pickup in transactions. We certainly saw weakness in the RMI market last year. So I think that's the sort of broad picture in terms of sort of major infrastructure that wouldn't really be our bag anyway.

Come over this side.

This is Sam Dindol from Stifel. A few from me. Firstly, in Ireland, we always say margins can't get any better and they continue to do so. So is 9% to 10% where you still have a sensible base case going forward? Secondly, on your long-term targets. Obviously, you're already at above 7% operating margin. As you acquire higher-margin businesses, do you see scope to sort of reset those targets? And then finally, on the portfolio, is there any more sort of areas you may dispose off on sort of the next couple of years?

Okay. Good questions, Sam. I can answer these in fairly short order, actually, because in terms of Ireland margins, does 9% look sensible going -- does 9% to 10% look sensible going forward? Yes. I think that is a sensible place to be. Certainly, I think in terms of DIY retail, any DIY retailer producing an operating margin in excess of 9% at the moment is doing really, really well. So I think we're very conscious in terms of pricing, in terms of how we position the business to make sure that we don't try and stretch the operating margins too far. And in a distribution business, 9% to 10% feels like a pretty good performance. So that seems like a sensible place to go going forward. In terms of the medium-term targets, you're right. I think it was 2013 we first talked about getting the group to a 7% operating margin. Obviously, we have exceeded that. I think it's very difficult, certainly, in terms of looking out and saying, well, should it be 8%? Or should it be 8%, 8.5%? I think we certainly have a view in some of our existing businesses that the opportunity for operating margin growth may be becoming more limited. And I think, certainly, 6 months ago when we met, we talked about the profit growth actually being more about the quantum of profit rather than the percentage of operating margin. I think that's very much where we are now. So I think in terms of the businesses that we have, there are some businesses where we believe we can improve the operating margin, but we have got a number of businesses where we believe they're pretty much operating at a peak. In terms of portfolio management, I think, to be honest, it's something that we constantly look at. And I think if you look at what we've done over the past few years, you'll see that we have made some big decisions in terms of managing the portfolio, both in terms of businesses coming in and business is going out. It's something that we look at constantly in terms of do we believe we'd get returns for the businesses that we have. As we sit here today, we're not about to buy anything. We're not about to sell anything as we sit here today. But we constantly look at it to make sure that the group actually stays fit for purpose looking into the future and that the businesses that we have within the portfolio are the right businesses for the next 5 to 10 years as opposed to the right businesses for the past 5 to 10 years. But some of the businesses we've had for a long time are still performing really, really well. But we do look at it constantly.

I think the thing that I would just add is, I'm looking forward to the next change in accounting standards that adds another 40 basis points to our operating margin.