Grafton Group plc (GFTU) Earnings Call Transcript & Summary

Good morning, and welcome to the Grafton Group plc Half Year Results 2020 question-and-answer session. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present Gavin Slark, CEO. Please begin your meeting.

Good morning, everybody, and thank you for joining us in this very different way of myself and David doing the Q&A post the results. Very grateful for you all coming on the call and for your continued interest and support of Grafton. One thing I would say is, I know we have a number of shareholders who are also listening on the call, we did have a couple of questions submitted from shareholders that were quite product specific. And what I will be doing is arranging for the individual business CEOs to go back directly to those shareholders to answer those quite specific questions. When we get into the Q&A session, if I could ask you, as we don't have eye contact as we normally do in the room, if you could ask one question at a time rather than rattling off a list of 5 questions, that would be really useful for me and David to make sure that we don't miss anything. So on that basis, I'll ask Fiona to start the process off.

[Operator Instructions] And straight away, we got question from Christen Hjorth from Numis.

Excellent. I've got 3 questions if that's okay, but I'll give it one at a time. The first one is on digital. There's sort of been a lot of commentary around in the presentation that was on the website about benefit of the investment that you've put in given the current crisis and the increase in online sales. Just wondered if you could touch a little bit more on how you see the structure of the market in terms of digital progressing from here. And also are there further opportunities potentially going forward within the business?

Yes, it's a good question, Christen. I mean, certainly, within the U.K., in Selco and in Buildbase, it was quite a significant investment in terms of changing their web trading platforms. So timing was very good, getting that done very early in the year, giving us the ability to do a greater level of web trading as we went through sort of COVID-19 crisis and continuing today. I think digital ordering and digital interaction with customers is something that we perceive that will be a more permanent change as we carry on going forward. And it does have some quite interesting dynamics to it because one of the things is that if you look at people placing orders online, then there is 0 price negotiation. So actually, the gross margin that we're seeing on orders that are placed online is actually slightly higher than we would see when these orders are placed in-store or placed over the telephone because there's actually 0 price negotiation on them. So in terms of are we seeing as a positive characteristic for Buildbase and for Selco in the U.K., we definitely are. If you look at Woodie's in Ireland, as an example, the online trading continued while the stores were closed, but it did become very evident that we needed a greater degree of capacity for online trading in the Woodie's DIY business. And as we go through the second half, we were looking at that investment, stepping up the web trading platform in Woodie's onto Magento 2, which is the same platform that we've put into Woodie's, and that -- as we put into Selco, and that will give us greater capacity for online trading in Woodie's as well. So it's -- we see it as a positive. We see that the timing has been good. We see it as being something that will be a permanent change. And I think we're positioning ourselves very well for that going forward.

Excellent. The second one was just on the balance sheet and capital allocation. I mean, clearly, the balance sheet remains in a very strong position. There is obviously uncertainty out there. I was just wondering if you could touch on the M&A pipeline in terms of sort of shape and geography and comprising from what you're seeing in terms of valuation as well and then perhaps on other forms of capital allocation, whether that's sort of organic investment or sort of shareholder returns. Obviously, you've made the comments on the dividend already.

Yes. I mean the M&A point is a really -- it's a really good question and it's something that we've been asked a few times this morning already about whether we actually see this as an opportunity for buying distressed businesses. And what I would say is, I think over the past few years, we've been very clear about what our strategy for M&A is. It's about buying high-return, high-quality businesses that have got scope for growth. You'll see that in the last few weeks, we did 2 very small bolt-ons, 1 in Ireland and 1 with a business called GDC in London, which were bolt-on to Leyland SDM. So I think our pipeline, we still see as very reasonable. There were a number of businesses that we were looking at pre-COVID. Some of those conversations, I would anticipate, will start to reopen in the coming weeks and months. And our strategy hasn't really changed. No, primarily it is about the European markets. Primarily, it's about niche businesses that we believe can bring higher returns, good management team, good growth prospects going forward. So this doesn't change our plan in terms of suddenly looking for bargains in the distressed bin. This is absolutely -- really underlines the quality of the strategy because if you look at our recent acquisitions, being Polvo, being Isero, being Leyland SDM, being TG Lynes, all of those businesses have continued to deliver high returns during the COVID crisis period. So I think underlines the quality of the strategy that we have, and that strategy doesn't change.

And I think just on the sort of point -- the last point that you were making there, Christen, just in terms of how do we view investment in the business, organic acquisitive growth against perhaps capital distribution. So I still think that fundamentally because of the quality of the pipeline that we've got from an acquisition perspective because of the development opportunities that we still got in the existing portfolio, and that sort of very much remains focused around those existing strong heartlands of the Netherlands, Selco in terms of branch openings and, to some extent, but more limited capacity, further investment in Ireland. Those areas still seem much more attractive to us and that sort of power of compounding that we can bring to shareholders than looking at capital distribution through elements like share buybacks, for example.

Excellent. That's really clear. And then just a final one. Clearly, current trends have been positive as you've set out in H2 to date on the like for like. I'm just wondering if there's anything we should -- anything underlying that numbers that's worth noting, for example, performance over recent weeks or anything like that?

No. I mean we've gone right up until the middle of August with the current trading. So we try to give you the best view that we possibly can. Obviously, we're looking forward with a degree of confidence to the second half. We're certainly not complacent. We're very conscious that we're operating still with the COVID-19 virus out there, and we've got to work within those protocols and make sure we've got contingencies in place should we get some sort of local lockdowns or local restrictions. But I think the numbers that we've given this morning, Christen, are about as up-to-date as we can possibly give people. And I would say that the first part of the second half has been really encouraging. And certainly, the differential between new build and RMI is what we expected to see. We are seeing the new build business coming back more slowly. We are seeing more significant strength in the RMI sector. So if you look in the U.K., the performance of Selco would be better than the performance of, say, Civils & Lintels. You're at the opposite end of the spectrum there between RMI and new build. But no, we're very encouraged. But there's nothing hidden. There's no kind of underlying subliminal messages in those numbers. It's just that those are the numbers.

And our next question is from Robert Eason at Goodbody.

Look, a few questions for me, so I'll give them -- ask the questions one by one. Just in terms of just extending the kind of the questions in terms of the performance kind of year-to-date, is there any kind of product patterns that you would call out and that you're looking at closely to see what could lie ahead? Because no one knows what is potentially going to happen on a 12-month view, like first, indoor versus outdoor, big ticket versus small ticket, the type of product that has been sold. Like is there anything that you can share with us on that, that can give us better color on what is happening on the ground?

Yes. Absolutely. I'm not sure we'll give you a huge amount more color as to how you look forward. But certainly, if you look at the RMI sector, Robert, obviously, a huge amount of landscaping, gardening, outdoor products. And if you think about the period of lockdown, generally, the weather was pretty favorable for us as well. So a lot of outdoor product being sold, a lot of decorating product being sold. And if you look at the DIY business in Ireland, again, that's kind of mirrored with the jobs that I think people were looking around the home and saying, we can do a lot of decorating and a lot of gardening. Obviously, as we move into September, then the season starts to change in terms of outdoor products against indoor products. And there are a few supply chain issues with some of those outdoor products now. And maybe the timing of that is quite fortuitous as we come towards the end of the season. But certainly, during the lockdown period, there wasn't a huge amount of decorating and landscaping product going out. But I'm not sure what visibility that gives us going forward as the seasons change. I mean we certainly look at certain milestones that we think will have an influence on trends within the business. And certainly, in the U.K. and Ireland, I think the next milestone that we look at is the schools going back. So I think the schools going back changes quite significantly the sort of home patterns of our potential customers. And during the actual lockdown period, we carried on talking to customers. And the customers were saying to us, they were being driven to outdoor work because when they were looking at indoor work, you had potential customers. We're giving them 2 messages. Early in lockdown, it was we don't really want tradespeople in the house because there was an awful lot of fear about the transmission of the virus itself. And secondly, there was a lot of people working from home, and a lot of people have their children at home who would ordinarily have been at school. And therefore, they weren't able to have indoor jobs done because they weren't able to bring tradesmen into the house. So I think if we can see what happens when the schools go back, that might give us a little bit of a better view as to what the normal for the second half of the year may look like.

Okay. And my second question is just around bad debt. And how is that trending in the various markets? And how are you thinking about it in terms of provisioning for the full year?

Yes. I mean, actually, we were pleased overall with the trends that we saw on bad debts in the first half. I think when we entered the crisis and lockdown in particular, we obviously had a number of concerns there in terms of cash flows amongst customers. But actually, we saw debt collection remained pretty consistent with where we've seen in previous years, and so customers continue to pay us. And what we've seen is, obviously, with the return from lockdown, customers themselves have been keen to get back to work, keen to make sure they've got access to their trade credit and therefore, keen to ensure that they're up-to-date on their accounts. So actually, I would say, pleasantly surprised on the trade credit front and no discernible deterioration in the credit book. Now we've naturally taken a sort of prudent position as regards to our view of bad debts in the first half just as a sort of a cautious approach, but we aren't seeing anything actually on the ground at the moment. And the important thing to recognize about our business, in particular, is we don't tend to have a concentration of exposure to particular credit. It's lots of small amounts of trade credit that we extend to the -- typically the jobbing builder. So it's lots of small pots. That means we've got a very distributed portfolio and one that's underpinned by credit insurance as well.

Okay. And just my last question if I can. The sense, I guess, is when we were going through lockdown, every company was more focused on just getting products to customer. Given that we've gone through that, what are your thoughts on the competitive landscape? Will, all of a sudden, people start to think about the trade-off between price and volume? And will the market become more competitive in your view? So just kind of a general kind of question around the competitors in the market. Will this intensify as we -- as firms chase volume in the second half? Or how do you think about it?

I think it's a good question, Robert. But I think over the past few years, hopefully, we've been quite transparent and said, the markets in which we operate are constantly competitive markets. And you've always got moving parts within there. I'm not necessarily convinced that we'll see any change to that pattern during the second half of this year. There may well be a little bit more price competition if people are looking for volume. But of course, most of our customers are low-volume customers. We tend not to chase the high-volume contracts anyway. So I'm not necessarily expecting to see any change in the competitive landscape that we normally experience.

And our next question is from Will Jones, Redburn.

I've 3 as well if I could ask one by one. Firstly, just wondering if you could help us with the technical components of the extent to which the numbers in the first half had support from both furlough payments and, obviously, the business rate holiday and, I guess on that second point, the extent to which that will carry through into the second half as well. And then when you think about the cost savings, the branch closes you've announced in the presentation, does that go a long way to compensating for the nonrepeat of [ sale ] support next year? Is it more the sales growth that we should expect that helps offset that? Just the moving parts around those elements, please.

Yes. So just -- I mean in terms of support that we had, both from the job retention scheme and wage subsidy scheme, both in the U.K. and in Ireland. In very round terms, that was about GBP 25 million in the first half. But it was support. It was support that helped go some way to offset overheads because we weren't getting any sales in. So I think it's important to recognize that we'd much rather have no support because we've got sales. That's much better for us. So in the second half of the year, effectively, all our colleagues were back off furlough at the end of July, at the end of June effectively in Ireland but at the end of July in the U.K., and it was a much lower number of colleagues that we had on furlough through July anyway. So I don't think you'd see sort of material support from furlough monies in the second half. As regard rates, in the U.K., our annual rates bit is about GBP 20 million. Now the sort of rate relief that we've had from the U.K. government and rating authorities is really targeted at those businesses that are open to the public rather than trade customers. So the relief that we'll get will not be on that whole amount of rates by any stretch of the imagination. And also the other thing is you really -- before you bank it, you need that certainty of confirmation from the rating authority that they're going to give you that dispensation anyway. So in terms of the first half, there was probably about GBP 5 million of rates benefit that we had in the U.K., and the quantum of benefit in the second half could well be a similar amount. But the comment that I would make, of course, is that relief is going, some way, to mitigate the extra costs that we've got of things like PPE and responding to the COVID crisis and lower elements of productivity as a result. So it's -- I wouldn't view it as a -- sort of a bumper windfall. I think it's just one of the elements that's going to offset some of the trading pressures that we've got more generally as a result of the crisis.

Great. And the second one is, I guess, exploring of the components of gross margins outside of competition. I guess one question within that is, you think about, I guess, delivery versus collect this year and then the impact of COVID, is there going to be a big shift in the mix across the business of that and, therefore, it's perhaps additional cost for you on that a bit more delivery? And I guess the other question around gross margins is, I think, around rebates that we should be thinking of in what will still be a lower volume environment for the full year even if that was the less [ of what we might just ] see a few months back?

Yes. I think that, that sort of delivered versus collect side element was probably more pronounced in the first half. I think when we come to the second half, we're not expecting a material influence there. I mean, on the one hand, delivery through the COVID crisis, the proportion of deliveries did increase but also, on the other hand, from a mix perspective, actually, we also saw that the percentage of cash, as opposed to the trade credit customer increase, which is symptomatic, if you like, of more jobbing builder work, more professional DIY elements. And that's better overall for gross margin. So I don't see a profound delivered versus collect movement, but I do see that, that -- the more profound impact, overall, on gross margin is that the RMI market, which is higher gross margin, is proving stronger at the moment than new build, which tends to be lower gross margin. So that mix effect is quite important overall for the group. And I think that mix effect, particularly, say, in the U.K. where we've seen like-for-like volume, revenue movement at the moment in the -- in sort of trading in the second half is off about 1%. Well, that slight reduction that we're seeing in revenue like for likes is mitigated by a better gross margin because the RMI performance is better. So I think that's how I see it play out. Again, on that sort of distribution element, one of the elements of the first half is that there is naturally an element of fixed cost associated with the distribution cost, which can impact your gross margin. That won't be an element that's about at the same facet, if you like, in the second half because we anticipate that revenues will be broadly similar at the moment based on current trends. Sorry, finally, just -- sorry, sorry, Will, on rebate. Yes, you're right. I mean volumes overall for the year will be down on last year. So if you like, rebate percentages are likely to be slightly lower than they ordinarily would be. I don't think it's likely to be a material impact on our gross margin. We'll work as hard as ever to make sure that we maintain those rebate percentages at similar levels. And we factored it in -- factored that into our thinking in the first half numbers and our view of the full year.

Great. And then last one, maybe just perhaps if you'd just dig a bit further into Selco, that possibly -- just can you reflect on how some of the smaller formats that you rolled out in the last year or 2 are performing? And has -- does COVID make you think any differently about the importance of that within the U.K. picture, the potential branch network size medium term? Is it -- or is it just as we were in terms of our confidence on that business?

No. I mean we stayed very confident on Selco. Actually, looking across the portfolio of Selco stores, the performance has been very strong. And actually, some of the stores that weren't quite performing at the highest level going into COVID have performed very strongly coming out. So I think, actually, just within the last 48 hours, David and I have sat down with the Selco management team, looking at the expansion plans, looking at where we should be putting new stores down over the next 3 to 4 years. So we still see growth and expansion for the Selco business to give us greater coverage. Some of those stores will be at around about the 20-something-thousand square feet, and there will still be some that are around the 40,000 square feet. So the smaller format stores have performed very well. And they've also done particularly well where we've been able to support them in London with the delivery hub as well. So that capability of delivering product is still really important for Selco. But no, Selco is performing very well. And as we said, if you look at the U.K. distribution figures that we've put out, that is a combination of businesses into RMI and into new build. And Selco is at the very R and the M of the RMI market and performing very well for us. So yes, a lot of confidence in Selco going forward still.

And our next question is from Sam Cullen at Peel Hunt.

First question really is an expansion, I guess, on Will's last question. In terms of Selco and Leyland also, are you seeing kind of many more opportunities emerge in kind of more urban locations as kind of the retail fallout -- maybe a bit early, but just be interested to see what you're seeing at this stage and what your views are over the next 2, 3, 5 years.

Yes. I think you've kind of answered your own question really, Sam. We're saying it's a bit early because we're all just -- we're all getting back to life. But I think if you're looking for sort of signals of confidence, obviously, in the first week of July, we completed an acquisition in London of the GDC decorators merchant business, and we're bolting that onto Leyland SDM, which obviously enhances the overall network there. So we are seeing opportunities for growth in Leyland SDM. We are seeing opportunities for growth in Selco. Obviously, Selco is a purely organic grown model. So Selco is all about greenfield opportunities. It's all about sites. It's all about making sure that we've got those in the right place. And as we said in the slide presentation, we opened Orpington in the first half of this year. We're going to open Salford during the third week in October. We'll relocate our Bristol branch to a much better location before the end of the year. And we have got plans for stores in 2021. So I think it's a bit early to say how things changed because of retail fallout. Actually, strategically growing Selco and growing Leyland SDM were always part of our growth plans anyway and very much remain so.

Okay. And then the second one is on the branch closures that you've made in merchant in the 15 or so, were these loss-making branches or low -- I assume they're the lowest performing branches pre-COVID, and is it -- it's just the straw that's kind of broken that camel's back, so to speak. And then what -- how should we think about the distribution of the rest of the estate? I'm sure you've got a -- kind of a wide range of performing branches, but how many are kind of further at risk, I guess?

Yes. So I mean this really was a view of some -- modestly, if I can describe it as that loss-making branches, the estate hadn't got any serious loss makers in it. But we felt that in the case of those branches, we couldn't see a long way -- a long-term route to get them back to delivering acceptable returns. So unfortunately, we did have to take the decision in the case of those 15. I think when we look at the remaining of the estate, we're sort of very happy with that footprint, and there aren't any other plans that we've currently got to consider branch closures going forward.

And our next question is from Aynsley Lammin at Canaccord Genuity.

3 questions from me, please. So first of all, I just wondered if you could comment on the commercial trends. I know it's not a huge part of the group, but just trying to see in the commercial build and the regional differences across the country. And second question, you talked about local…

Aynsley, can we just pick that one up first? Yes. I mean what we are seeing in commercial, Aynsley, is it has certainly not recovered at the same rate as domestic. So domestic RMI has come back very, very strongly. Obviously, our exposure into commercial is relatively limited. We do have the business NDI, which does kind of dry lining and partitioning, and that's been a little bit more slowly back. And actually, even though Leyland SDM has performed really, really well as a business, the mix in Leyland SDM has changed a little bit, and we have seen the contract commercial-type decorating business in the center of London really coming back quite slowly, whereas the residential bit has come back much more strongly. So even though we have got limited exposure to it, we are seeing the commercial work coming back much more slowly than we're seeing the residential work.

Sure. And then secondly, obviously, it's quite far out, it seems, at the moment. But 2021, you've obviously seen a very strong recovery in the second half, profits in line with the prior year. I mean just interested, Gavin, in your thoughts about, with the job losses we expect to see and the impact that might have on confidence, I mean, presumably, you're not expecting us to kind of expect GBP 100 million in both halves the next year. I'm just interested in what you think the base case of volumes, what would be a reasonable kind of view for 2021 at this point.

Yes. I mean I completely understand you asking the question Aynsley because if I was in your seat, I'd probably be asking me the same question. It's incredibly difficult to look and see what 2021 looks like. I mean we have seen a really positive start to the second half of 2020. We are looking, as we go through 2020, probably at quarter 3 being slightly higher than we saw in 2019. In our own model, we're probably seeing quarter 4 being slightly lower than we saw in 2019, and therefore, giving us that kind of overall pattern of being similar to last year. I think as we go through the second half and particularly in the U.K., the furlough scheme starts to unwind, see the impact that does have on unemployment, see the impact that does have on consumer confidence. If you look at the Construction Products Association, they're still forecasting 2021 to be down on 2020 and kind of heading back towards 2019 levels. And then you look at other indicators that we've always talked about with regard to RMI, like house transactions. House transactions in the U.K. were incredibly strong in July, which would ordinarily be a lead indicator for RMI business coming down the line. And I think you can probably read into my answer, which is why we haven't really given any specific sort of guidance going into 2021. We feel quite confident in what we're saying about the second half of 2020. But I still think we've got quite a lot of ground to cover between now and the year-end before we really start getting a feel for what normal looks like and, in particular, what the exit rate for 2020 is going into 2021. We still feel confident about the future in the businesses that we've got, but we are very conscious of the fact that the economic turmoil that will go on, on the back of the COVID-19 and also the fact that there is still, if you like, the risk or the opportunity of localized lockdowns and restrictions. I mean the localized restrictions we've seen in the U.K., thus far, have had a minimal impact on trading, which is very, very good. But if we got a broader lockdown across a bigger conurbation, say, something like Birmingham, that may well have an impact. But I think it's very difficult to really look out to 2021 apart from we've got great businesses with great market positions. The management teams have done a brilliant job in getting them back to life since we started to reopen during May and June. And we are confident -- it's very difficult to put a specific feel out for 2021 at the moment. I'm sure by the time we get to the end of this year, David will feel more comfortable coming on the phone to you and perhaps giving you a little bit more guidance for 2021.

That's great. And then just last quick one. Of the like-for-like 3.8% you see in H2, how much of that is price and volume? Is there any kind of big increase in price inflation or anything?

To be honest, I would say it's almost too difficult at the moment to try to strip that back to a price and volume dynamic. There's lots of moving parts out there at the moment. And to be honest, we're just focusing on really, on getting the sales to customers, and we'll worry at some future stage about what was volume and what was price.

And our next question is from Sam Dindol from Stifel.

A couple of questions from me. Firstly, on the acquisitions. Given your balance sheet strength, would you be comfortable making a sort of Polvo, Leyland size deal? Or would you want a bit more comfort on the outlook before sort of committing to that sort of expansion on acquisition?

Good question. And I think if you look at the strength of the balance sheet and you look at our history of making those size of acquisitions, I think the key thing is, if it was the right deal, if it was the right business, if it was the right price in the right market with the right management team, I think we -- and we were confident in the outlook of that business, then we would feel confident of doing deals at that kind of Leyland, Polvo, Isero kind of size. I mean that really is very much our sweet spot in terms of the acquisitions. And I think -- I mean David and I have worked together now for 7 years. And during that period, hopefully, we've demonstrated to people a very careful allocation of capital to acquisitions, and we've spent the money carefully. And that whole pattern of a careful allocation of capital won't change. But I think for that kind of scale of deal because of the history that we have with them, if it was the right deal and it jumped the financial and the nonfinancial hurdles, yes, I think we feel quite comfortable there, Sam.

Brilliant. And then secondly, on the Netherlands, is the nitrogen emissions issue ongoing? And would we say that sort of unwinds in '21? Or any color you can give there in terms of how that's impacting construction volumes?

Yes. I think that the sort of the initial fears which we had more generally, I think, in the Netherlands across a variety of sectors have been assuaged through various measures that the government has taken to mitigate that. But I think the reality ongoing, whether it's in the Netherlands or in the U.K., is we've got to be sensitive on environmental legislation, and we'll just have to respond as a business accordingly. But I don't see as we sit here at the moment that from a nitrogen specifics perspective that there should be a material adverse effect in terms of construction activity in 2021 in the Netherlands.

Before we go to our last question, which is to be put forward by Ami Galla, [Operator Instructions] Ami from Citigroup.

Just one question for me. If I can talk -- I'll ask a bit more on stock availability. You did touch upon the fact that there are supply chain issues on stocks which are in high demand. I'm wondering what is your sense of stock availability across the overall sector. And what sort of conversations are you having with manufacturers? Do you have a little bit more leeway in having a stronger stock availability versus some of the independents in the market?

Yes. I mean, obviously, with the volumes that we sell, we have very good relationships with most of our supplier partners. So at the moment, we're managing that process as well as we can. Because of the very high demand that we saw when the business reopened for, in particular, landscaping products, so if you look at timber, if you look at decking, if you look at fence panels, concrete posts, even bagged post mix, there was quite significant shortages around on some of those landscaping products. Now we are coming towards the end of the landscaping season. So we may well see that start to ease. On interior product, as the world came back to life, we had a significant issue in the U.K. with bagged plaster. And there's one major supplier who supplies the vast majority of U.K. merchants. We've been working very closely with them to try and get as much plaster into the business as possible. But bagged plaster was a particular issue across nearly all of our group in terms of the U.K. business. And we did have some issues with paint. And paint is still a little bit short supply. The bagged plaster is now back in manufacture. It's starting to come through, but there are still some shortages on those 2 interior products specifically. But I think it's fair to say, if you spoke to most of our management teams, whether it's in Civils, whether it's in Buildbase, Leyland SDM, Selco across the U.K., there are constant conversations going on with suppliers to try and make sure that we've got the right products coming through. And even in our own business, as you are aware, we have a bagging plant within our manufacturing business that manufactures post mix. And we've got significant lead times even in our own manufacturing business, and that was purely down to the volume of demand that was there when we came back. It's also worth bearing in mind, when you look at things like fence panels, concrete posts and post mix, we had some quite severe storms just before the COVID crisis. So actually, we've seen an uplift in landscaping products before we went into the COVID lockdown. And then post-COVID lockdown, the weather was very good, a lot of people spending time at home. So really, Ami, I would say, landscaping is where there was the biggest issue. On interior product, it was really around paint and it was really around plaster. And there are still some shortages there, but we are working our way through it and working very closely with the manufacturers.

And can I have one more follow-up on that? Like is there -- could you quantify what sort of margin benefit would you have had in that sort of environment of stock tightness in those sort of products? I'm wondering if the sort of -- in addition to the sort of mixed factor between RMI and new build, is there a further margin benefit that you're experiencing from a much tighter stock backdrop at this stage?

Well, I think the margin backdrop is more favorable than, say, it was in the first quarter. You have seen in our announcement that when we talked in the first quarter, particularly around traditional merchanting and Buildbase in particular, it was a very price competitive environment at that point in time. I think coming back into the increasing levels of demand and stock availability immediately means that the conversation with the customer isn't price focused. It's much more focused on getting the product to the customer. So that has to be beneficial in terms of overall margin. But I couldn't and wouldn't quantify what that benefit might be.

And our next question is from Charlie Campbell at Liberum.

Just a couple of questions from me really, both around the U.K. The first question, I suppose, on the gross margin. The 150 basis point fall seems quite large because it would seem to me that the businesses that did best in the half are probably those with the highest gross margin. Is that right? And does that mean then that the pressure in the kind of traditional business is more than 150? Is that the right way of looking at it?

No. When you think about the first half gross margin pressure, Charlie, there's 2 things at stake because the market was distinctly different between the first and the second quarter. In the first quarter, the market was generally very competitive, very price competitive, and that undoubtedly had a bearing on gross margin. When we went into the second quarter, actually, which [ still had ] the sales to be truthful and the reality was that the gross margin was affected by an element of fixed cost that goes through your cost of sales. So things, for example, like fleet depreciation, so you've got a cost going through there without any sales to actually bear and reduce the level of that cost impact. So that's a sort of double whammy, if you like, on first half gross margin. Coming into the second half from the various responses that you hopefully picked up today, the gross margin environment is very different, both in terms of mix because it's much more RMI focused. That's higher gross margin business compared to lower gross margin new build activity. So that's a positive on the one hand. And then the other positive, on the other hand, is we're just not in that same price -- customer price-focused environment because it's much more about availability of the product.

I think it's also worth saying, of course, Selco is one of our highest margin businesses. And Selco was closed, lock, stock and barrel for basically 2 months. So that gross margin impact of a high-margin business being closed completely because the business that we were transacting in the first half during lockdown was predominantly through Buildbase, which was just servicing that kind of emergency repair and maintenance contractor business, which is inherently low margin. So the fact that we have the high-margin business close down completely also had an impact.

That's very clear. Yes. And the second question on the U.K. distribution business as well. Just tracking through some of the math on the sales and the gross margin. Hopefully, I've done it correctly. But big fall in the overhead line. And obviously, we've had some benefit from furlough, and also you talked about rates. There seems to be another movement in there. I just wondered kind of why the overheads have come down so well H1 versus H1.

I don't know. I need to look at your analysis, actually, Charlie, and just check that you were looking at continuing operations, but I mean aside from, I mean, furlough and some rates relief, you've -- those would be the major components within that.

Yes. Okay. So it may just be -- sorry, I might have made a mistake in putting Plumbase in the wrong place. So I'll have another look at that. Maybe talk to you later.

The other element is -- I mean, remuneration for that period was reduced, so that would have had a bearing. You've got performance-related pay elements like that, which, unfortunately, due to the circumstances, won't be happening this year.

And our final question today is from Florence O'Donoghue from Davy.

Just one for me, really. Just wondering the deals that you reported there in July, particularly GDC, just wondering what the contribution will be from them over full year. Is it material? Obviously, the Irish business is quite small, but CDC -- GDC, sorry, being a 5-branch business, is there any -- what's the impact of that very roughly next year or over full year?

Yes. It's quite a simple one actually for it. If I can put the 2 together because it's just -- they're very round numbers. So in very round terms, we paid GBP 10 million for the 2 businesses. In the case of the Irish business, that also included a very significant piece of freehold real estate as well. So the overall cost was GBP 10 million in total, including the real estate. And in the first full year, we would anticipate an operating profit contribution of those businesses of around about GBP 1.8 million.

I just have -- we obviously had some questions that were submitted online from investors. I think we've addressed almost all of those. I've just got one here from Lello of One Investments. There were 3 parts. I think we've answered the last 2 or given pretty strong hints. The one that was raised, in particular, was what is the minimum level of top line growth that we need to hit our guidance for second half operating profit? And I think the reality is our view of second half revenue is at similar levels to that of last year. What we've got is that the balance as regards the gross margin with, as we've talked about, the strength of the RMI market, which is generally favorable for gross margin against the weaker new build activity. So even though we might have a slightly weaker revenue growth, say, in the U.K. because of that weakness in the U.K. new build market, that should be mitigated by the strength that we see in our higher-margin RMI market. So overall, our view is a similar level without being too specific in terms of second half operating profit on sales. And I think that probably wraps up all the questions now.

Yes. So if we've got no more questions, I would just like to say thank you, ladies and gentlemen, for your interest. Thank you for persevering with this different way of doing the Q&A. Hopefully, you all got the opportunity to look at either the presentation with the voice-over this morning before you came on the call and the short video that David and I recorded and put on the website as well. So thank you very much for your attention. Thank you for your interest and your continued support of Grafton.

Thanks, everyone.

This now concludes today's call. Thank you all for joining. You may now disconnect your line.