Grafton Group plc (GFTU) Earnings Call Transcript & Summary

Good day and welcome to the Grafton Group Trading Update Call. At this time, I would like to turn the conference over to Gavin Slark, CEO. Please go ahead, sir.

Thank you. Good morning, everybody, and thank you for taking the time to listen to our update this morning. I'm sure most of you will have seen the trading update that was posted at 7:00, but we just felt it was an appropriate time just to give a brief update on where we are and what we've been doing in recent weeks and months. If we can just go to the first slide, please, the introduction. You'll see that, obviously, last week really was one of the most significant weeks in the history of Grafton. First of all, the completion of the acquisition of IKH, which I'll talk more about in a moment, but giving us our first move into the Nordics; and then obviously, the agreement of the sale of the traditional GB merchanting business, which really continues our journey and our focus on moving and migrating away from high-margin, low-volume business into those higher-margin and higher-returning businesses, absolutely consistent with the strategy that we've been articulating in recent years. I think also those particular transactions underlines our disciplined approach in terms of deploying capital. And again, I think now over many years, we've demonstrated a very disciplined approach to how we use the cash within the business. With that agreement to sell the traditional GB business, which also, over the past couple of years, we've seen the sale of Plumbase, we've seen the sale of Belgium and the sale of the small Polish business, that actually completes our planned divestments. So in terms of the business going forward, our focus is absolutely on growth and development, and that really should be the end of the divestments across the group. And having completed those transactions, that actually leaves us now on course to deliver a double-digit operating margin from our continuing operations as we go through the rest of the year and reporting for 2021. So quite a significant shift operationally and quite a significant shift financially in terms of the Grafton Group. If we can have the next slide, please. I'll just pass over to David to talk through the sale of the traditional GB business.

Good morning, everyone, and thanks, Gavin. I hope you will all have seen that on Thursday, the 1st of July, we announced the sale of the group's Traditional Merchanting businesses in Great Britain for an enterprise value of GBP 520 million, plus we retained freehold properties with a market value of GBP 25 million. These businesses had combined revenue in 2020 of GBP 828.8 million and generated adjusted operating profit of GBP 18.8 million. I know that some of you will be wondering about the IFRS 16 impact and the associated lease liability which travels with these businesses. And as at the 31st of December 2020, that was GBP 77 million because, largely, this was a freeholder state. The disposal will complete before the end of the first quarter 2022, and it's not conditional on the outcome of the CMA process. And finally, in both the half year and full year financial statements, these businesses will be classified as discontinued operations. And hence, our commentary in this trading update is very much focused upon our ongoing activities. Next slide, please, and I'll hand back to Gavin to just talk about the IKH acquisition. Gavin, you're on mute.

The acquisition of IKH that we announced that we completed last week obviously takes us into the Nordics for the first time. We've spoken quite a lot about wanting good businesses in good markets with good management teams and good growth prospects, and this business absolutely fits all of those criteria. And it's one of Finland's largest PPE tools, spare parts and accessories wholesalers. The business was founded in the mid-1950s. It started actually selling tractor spare parts and repairing tractors in the west of Finland and then has evolved into this multichannel distributor of workwear, PPE, hand tools and power tools. We actually acquired the business from the founding family, so the business has been in private hands right the way through until we acquired the business. It has a very significant element of private label within the business, so just over 40% of the sales are driven from private label products. And around 47% of the business is done through the company's own stores and 53% of the business through its wholesale operations. It has about 130 partner stores across Finland, many of which are actually externally and internally branded as IKH. It has a dozen partner stores in Sweden, and it also has 5 partner stores in Estonia. The Estonian stores are all actually branded as IKH as well. It has got a really good management team, so again, one of our criteria. But the CEO, the Business Development Director, the Commercial Director, Procurement Director, HR Director, all people that have committed to work with us going forward and very, very good caliber people. The family owner had actually been remote from the business for some time, and the management team had been running the business themselves, so very experienced management team. You'll see that the price that we paid was EUR 199 million, and that's on a cash and debt-free basis. And we funded that entirely from our cash resources and obviously underlines the strength there of the Grafton Group being a very cash-generative business. For the year ended February '21, revenue was just over EUR 158 million and the adjusted operating profit being EUR 21 million. And actually, if you look at the business over the last 20 years, it's actually got a very significant and impressive growth record over that period of time, consistently growing and consistently developing. And what it does for Grafton not only gives us that first move into Finland but also opens up potential for future growth opportunities across the Nordics. And we also believe that there is more development to come in terms of the Estonian business. The business itself has a head office and a distribution center in a town called Kauhajoki, which is north of Helsinki. Very, very well-invested business, really impressive distribution center. The distribution center is about 0.25 million square feet, and they move everything through that distribution center. And the scope for growth there is really excellent. So we should be able to significantly increase the turnover without having to put investment into the distribution center. And as I said, being very well invested, you've got about 50% of the lines in the DC are actually picked using our automated Kardex system. So really well set up for the future and a lot of scope for growth and a lot of scope for development. We can have the next slide, please. I'll pass you back to David.

Thanks, Gavin. And let me just talk you through the trading update, which we published this morning. I mentioned before that the focus of our reporting is on continuing operations, and that's precisely what we've set out on this table on this slide. We've provided both like-for-like and total revenue growth compared to last year and also to 2019, which I know many of us find a more useful reference point. Group total revenue from continuing operations increased by 46% to GBP 1.03 billion from GBP 703.7 million in the first half of 2020 and was up by almost 30% from GBP 792.2 million in the first half of 2019. Looking at the various segments in turn and starting first with U.K. Distribution. This segment now comprises Selco, MacBlair in Northern Ireland, Leyland SDM and TG Lynes. Overall, this segment saw average daily like-for-like growth 16.7% higher than in 2019, and total revenue was 20% higher. Selco performed strongly in the half year, and average daily like-for-like revenue increased by 18.4% compared to the first half of 2019, reflecting the strong momentum from March through to the end of June. From a geographic perspective, trading in the regions outperformed the Greater London Area. Early indications of trading in our new Liverpool branch, which we opened in April, are very encouraging. And we have 2 further branch openings scheduled before the end of the year. In our Irish distribution business, average daily like-for-like revenue in the Chadwicks branches was down by approximately 2% in the period to mid-April compared to the same period in 2019, and that was due to the lockdown measures in force in Ireland. Following the phased reopening of the sector in mid-April, the business performed at its highest level of activity since 2008 and ended the half year with average daily like-for-like revenue up 11.7% on the first half of 2019. And that was very much driven by a buoyant residential RMI market and also the restarting of house building in Dublin and provincial cities. In the Netherlands, trading improved in March and continued to gather pace with good volume and revenue growth in the second quarter. The increase in activity was supported by generally favorable trading conditions in the housing market, the resumption of RMI work on social housing and the lifting of restrictions on trading with retail customers. Geographic coverage was extended with the acquisition of 5 branches in 2 transactions and the opening of a new branch, which has increased the overall branch footprint in the Netherlands to 117. Total revenue was up by 82% compared to 2019, and this was a reflection of the acquisitive growth over the last couple of years. In Retail, Woodie's was classified as an essential retailer and experienced exceptional growth across all product categories in the half year with like-for-like growth of 59.7% compared to the same period in 2019. As we anticipated and we flagged, the rate of growth moderated following the full reopening in May of nonessential retail and other elements of the economy as the COVID-19 restrictions were lifted. And finally, to the Manufacturing segment. CPI EuroMix saw motor volumes recover in March and continue even on improving trend over the first half, although output in June was restricted by a shortage of bulk cement. StairBox, the staircase manufacturing business which we acquired on the 30th of November last year, had an excellent half year, and we're really delighted with the way it has outperformed our pre-acquisition expectations. So just to summarize those performances, overall group revenue from continuing operations was up by 29.6% compared to the same period in 2019. And now I'll hand you back to Gavin to summarize. So next slide, please.

Thanks, David. So just very briefly, obviously, strong trading in the first half and continued strong trading through May and June, and trading in May and June definitely being ahead of our expectations across the group. We have had some issues with supply chain challenges both around product availability and price inflation. Two different challenges there: one, in terms of availability and making sure that we can get the product on the shelves that our customers need, and I think some of those have been very well pressed in recent weeks around things like timber and cement and steel-based products; but then also price inflation, making sure that as the price rises come through to us, that we can pass those price rises through to our end customer. Does give us some operational challenges but going very well. We're changing the forecast in terms of the group operating profit for the year. And what we're now saying is that our adjusted operating profit for the year in continuing operations will be approximately GBP 240 million. So if you look at previous consensus and previous forecast, just to be clear, that is removing the traditional GB merchant businesses from that forecast and adding in the IKH business in Finland, and our forecast is now saying will be approximately GBP 240 million of operating profit for the year from the continuing operations. And obviously, we're very, very pleased with that significant progress that we've made in implementing our strategy across the period. I'm sure as many of you appreciate, transactions such as the GB traditional merchant business and Finland don't happen overnight. They've been happening for some considerable time. Logistically, not easy doing a transaction in Scandinavia in recent weeks, but we've managed to do that as well. So overall, I have to say, really strong performance in the first half, really good strategic progress, business remains in very good shape financially and look forward to the second half and getting towards that profit target of GBP 240 million. At that point, I'll hand you back to the operator, and Holly will now manage the Q&A session that we have coming up. Thank you.

[Operator Instructions] We'll now take our first question from David O'Brien from Goodbody.

Three actually, if I may. Firstly, just on the guidance of GBP 240 million for the year, what kind of broad market trends does that anticipate for the second half of the year? Secondly, just on your comments, Gavin, around the challenges of product availability and price inflation, so how have gross margins performed relative to the second half of last year? And then finally, just on development and M&A. I guess with regard to IKH and the growth prospects you see there, is that going to require further bolt-ons? Or are we talking about kind of capital or CapEx deployment? And more generally, what does the M&A pipeline look like now as we stand?

Okay. Thanks, David. I mean if we start with your M&A question because it's kind of where you finished. I mean in terms of the Finland deal and IKH, I think we see opportunities and we see similarities very close to what we experienced in the Netherlands when we acquired that business at the end of 2015. So I think that there is scope for growth across the Nordics both acquisitively and organically. We see opportunities there to grow the business with what we've got already and also the potential for bolt-ons and potentially maybe going into some different Nordic countries using that business as well. So I think huge similarities between what we saw in the Netherlands in 2015 and what we've seen in Finland. I mean, overall, the sort of pipeline -- as we've said for quite some time, our pipeline has been pretty robust. It is pretty healthy. We're always very, very careful about how we deploy the capital and where we spend the money. Generally -- and I think, again, we've been very open and said the lack of ability to travel has been an issue. And David and I, we did spend 3 days in Finland a couple of weeks ago. And to be fair, it was a bit of a faff to get in and out of the U.K. and in and out of Finland, but we did it. We made it work, and we'll continue to look for those opportunities going forward. So I would say the pipeline is pretty good. There are still issues in terms of being able to travel and meet certain management teams and meet certain businesses, but absolutely delighted to get IKH over the line because I think it's a super business, really good prospects and opens up that new geography that we've been talking about for some time. David, I don't know whether you want to pick up on the margin challenge.

Yes, can do. Yes, David, in response to your question about how does it look compared to first half, second half splits, then I suppose there's 2 components to that. The first is naturally in the second half, we've got the full 6 months of IKH profitability. So we need to factor that in because that transaction closed on the 1st of July. So there will be some incremental growth there from acquisitions in the second half over the first half. So then turning to the like-for-like. From a like-for-like perspective, I mean we've had an exceptionally strong first half, particularly in Woodie's, as you've seen. And as I noted, the period in which it was deemed an essential retailer, and therefore, that first quarter was particularly strong. And naturally, we'd expect that to moderate. And I think, overall, the last quarter has been very strong, and it would be reasonable to expect some moderation as we go into the second half of the year. So looked at between that first half and second half split, I think we should realistically expect that the level of profitability in the first half will be higher than the second half, notwithstanding the fact that we've got some acquisitive growth in there from IKH. So overall, for the year, I would expect the year to come in with a double-digit operating margin but obviously a higher one in the first half reflecting that product mix. And that product mix, I think, then also has a bearing in terms of your question around gross margins and how they compare in the second half -- to the second half of last year. I think as we talked about in terms of the trends that we saw in the second half of last year, which was sort of prevalent in the first quarter of this year, was the level of cash-based transactions in the distribution businesses, which was a reflection of the strength of the RMI market and, in particular, homeowners coming in to transact and do business, say, with the likes of Chadwicks or MacBlair. So our businesses saw a higher proportion of cash-based businesses than they would ordinarily do. Now with the reopening particularly in Ireland of construction as we came into April and into May and June, what we've seen is a growth back of the trade credit side. So naturally, we've seen a sort of dilution around elements of gross margin. But if we were to look at the components and compare how the gross margins on the cash-based business comparing first half of this year to the second half of last year and how gross margins in the trade credit base businesses compared first half to the second half of last year, and then we're pleased with the gross margin performance and we've at least held the position that we were in, in the second half of last year. So I think good gross margin trends, that's a function of our success in translating product price inflation that we are seeing on our input costs and the success that we've had in pushing those through to our end customers in our output selling prices. So pleased with the gross margin trends.

Will Jones from Redburn.

If I could do 3 as well, please, if that's okay. Firstly, just returning to the balance sheet. It was obviously strong before these transactions and will get stronger after potentially heading deep into net cash through next year when the U.K. proceeds come in. Just wondered if you could remind us how you think about the balance sheet and where you'd like it to be ideally over time. And with whatever surplus you see, do you think that the bolt-on pipeline could satisfy that? Or might you need to add in, I guess, a little bit more around shareholder returns as well potentially just given the positive problem, I guess, that you might have over the next 12 to 18 months? The second was just maybe focus on Ireland, and I appreciate the general comments around the likelihood of moderation in second half versus first. But if I was pushing you on the 12% like-for-like growth you've seen in Ireland merchanting versus 2019 just given the momentum in the last couple of months, do you think that probably actually holds or maybe grows second half versus second half '19 against that 12% market? It just seems like that market is clearly coming back very strongly post lockdown. And then maybe if you could just talk more generally around overhead requirements, overhead inflation in the business. Clearly, again, with this big revenue growth on a 2-year view, I know you didn't cut costs in the remaining businesses last year, so that must help. But just any wider commentary, I guess, around the overhead would be great.

Okay. Let me start then in reverse order, Will. So on overhead inflation, I think, along with the rest of -- if I focus on the U.K., sort of along with what we're seeing in the rest of the U.K. economy, we are seeing an increase in inflation. That does have a bearing on things like -- on wages. I think on average, we're probably running at 2% to 3% at the moment. But there are within that hotspot, which wouldn't, I suppose, naturally be caught, let's say, in the true overhead line but in things like distribution costs. So we have seen the well-flagged issue around HGV drivers, for example, shortage of HGV drivers. There is a particularly acute pressure there in terms of salary and inflation in HGV drivers. But in terms of overall overhead inflation, 2% to 3% is probably a realistic expectation as we sit here today. That may tick up a bit, but I don't think we'll be into the same levels of inflation that we are seeing in our input cost inflation from our suppliers. In terms of like-for-like growth in Ireland and, as you say, 12% like-for-like growth against 2019 in the first half, how might that play in the second half, I mean, we have seen a particularly strong level of activity over the last couple of months. I do think it's reasonable to expect that to moderate. And I -- my instincts at the moment are we won't be running at 12% through the second half of the year, that it will be slightly below that. So that's around Irish distribution in particular. On the balance sheet, you -- I think your question was could our pipeline satisfy the underlying cash generation of the business. We've always said that we're acutely aware of whose cash it is that sits on the balance sheet, and we're particularly sensitive to that. But notwithstanding that, we think we have a good pipeline of opportunities. We think we've shown in the past a very disciplined approach to capital deployment, and we're absolutely wedded to that disciplined approach going forward. And if we don't think that we can achieve the hurdle rates that we set out from that pipeline over a reasonable period of time, then clearly, we will look very closely at how best to return cash to shareholders. But as we sit here today, we do think we got a good pipeline of prospects. We think and ask for some tolerance from investors about having that cash and deploying it sensibly. So I think investors will give us their forbearance in that regard. We've demonstrated, I think, with IKH that we've come across a very strong and good business to bring into the portfolio. So that's very much keeping with that theme, as we say, acutely aware of whose cash it is. And in the longer term, we would expect the business to run with modest levels of net debt. We carry an investment-grade credit rating. That's important to us. That provides, as we talked about in the past, boundaries as to the level of debt that we'd be prepared to run to. But fundamentally, an efficient balance sheet with a level of net debt in it is in the long term where we see the group.

I mean it's also just worthy noting that in Ireland, the restrictions in Ireland were at a different point to what they were in the U.K. So as construction continued unabated during the first half of this year in the U.K., there were some quite significant restrictions on the Irish construction market. So there's sort of -- Ireland is at a different point in the curve to where the U.K. is, and also, our Irish retail business is at a different point in the curve to the Irish merchant business. So it's important to look at the trends of Irish merchant business and Irish retail separately because our Irish retail business certainly went through the peak when it was classed as an essential retailer. But it wasn't until April, May time that the Irish construction market was fully reopened. So different points of the curve, Will, as well, which I think is important when you're looking at how those businesses evolve over the second half of the year.

Yes. And sorry, just one quick follow-up, if I could, on the overhead point. Are you having to go out and add much in the way of headcount at the moment generally? Or is it more the like-for-like movement on inflation?

No, we've taken some additional people on in certain parts of the group. So as an example, in Woodie's, we've probably got something in the region of 100 colleagues more in the business than we had at this point last year, and that was down to volumes coming through the business. But generally speaking, across the U.K. business and the Dutch business, it's more about inflation than it is about additional headcount.

And now we move to our next question from Sam Cullen from Peel Hunt.

I've got 3 also, hopefully, the first one pretty straightforward. Could you give an idea of the stocking gains you may have seen through the first half of this year and what you might expect in H2 if the current levels of price inflation continue? In sort of pound note terms would be helpful. Second one is on IKH, and you talked about the level of own label products that our business sells. What are the possibilities of bringing that expertise into the rest of the business, particularly I'm thinking around businesses like Selco in the U.K? And then the last one, just in terms of the expansion across Europe, do you see the Nordics and the Netherlands as the 2 platforms you're kind of sticking with at this stage in time? Or are you looking to expand into other regions outside of those 2?

Good question, Sam. I mean, again, if we kind of go in reverse order, if you look at where we're looking in terms of acquisition opportunities, again, I think we've been very open. And we talked about the Nordics, we talked about the Netherlands, we talked about that kind of Austria, Germany, Switzerland kind of line going through. And so there were opportunities outside of the Nordics and outside of the Netherlands that we have been looking at and we have been talking to, and we'll continue to do that. But again, just to sort of reaffirm, it's a very disciplined approach. We've done a huge amount of work in identifying the markets that we would go into, equally identifying the markets that we wouldn't want to go into. But I think the opportunities across the Nordics are quite significant, and IKH is a great platform for that. You asked about the private label, and I think certainly, when we went up to Finland and went into the owned stores, just as an example, I think that the workwear and PPE offering within IKH is probably the best that we've now got across the whole of the group. So there's definitely things that we can bring from the IKH business into other parts of the group. They do have a really strong brand, as an example, in workwear, a brand called Patron, which is a really high-quality brand. You have to make sure that all of these things are suitable. So as an example, as you can probably imagine, workwear and PPE in Northern Finland is quite expensive because you're talking about products that enable you to work outside in temperatures of around about minus 20, which is quite different to sort of working in the southeast of England. But there are definitely opportunities in terms of products, not only that are in IKH going into other parts of the group but also other parts of the group going into IKH. And actually, just looking at the whole sourcing side, IKH have a guy who does their own sort of quality checks and so forth around the factories where they source from. And we've already -- this week, we've actually got the buying teams of IKH and Isero. And our group procurement team are already in contact with each other even though we already completed the deal last Friday. So yes, there are some real opportunities there, Sam. But obviously, these things take time to manifest themselves, but it's definitely part of the mindset that we have looking at that business.

And Sam, just your question on stock gains, I mean I wouldn't call out stock gains in particular as a material influence on the first half and don't envisage it will be on the second half. The stock turn of all these businesses is pretty quick. So once it's in, it's translating into revenue and an actual tracked margin in what we sell. So I don't think it's a material element to worry about from a modeling perspective.

We'll now move to our next question from Sam Dindol from Stifel.

A couple of questions from me. Firstly, on the M&A point, I think you have over GBP 0.5 billion net cash once the divestment is made. Does that mean you would be willing to do bigger deals? I think IKH was the biggest that you've ever done, but is sort of the GBP 100 million to GBP 150 million still sweet or would you go above that? And then secondly, you've always spoken about the 15% ROCE and a 7% operating margin, obviously, quite a fundamental change in the business with these transactions. Do you have an early sense on where those targets could go? Or is that something you probably may update in the sort of coming months?

Yes, good question. I think -- I mean everything that we have been looking at, Sam, on the M&A front still very much sort of sits in that sweet spot that we've talked about for quite some time. So I wouldn't necessarily expect to see us go out and do something significantly different to what has been successful for us in recent years. So I think that kind of -- you're absolutely right, IKH at EUR 200 million was the most expensive one that we've done. But it was EUR 200 million and still very much in the sweet spot of affordability and practicality. So I wouldn't expect to see a significant change in the kind of deals that we look to do going forward because that sweet spot isn't just from a financial perspective, but it's also from a management perspective and being able to digest that -- those businesses within the group. So our acquisition plan and -- going forward is still very much what it has been over the last couple of years.

And just on financial targets, the 15% return on capital employed and 7% operating margin, from a hurdle rate perspective and looking at new acquisitions, I think they remain as valid today as they have sort of over the last 6, 7 years, although the group will report this year a double-digit operating margin. When it comes to looking at acquisitions, our view is a good quality business, has an operating margin in excess of 7% and that can deliver us in the long term a return on capital employed of north of 15%. So I would hope that people wouldn't be surprised if we do buy businesses that might have margins that are in the 7% to 10% category if it's less than a double-digit margin. More recent acquisitions have been double-digit margin, but ultimately, it's that return on capital employed which is -- of any of the metrics remains our most important return characteristic, so we'll always focus on that. Getting to that 15% long-term return on capital employed, that's the most important of those 2 metrics. For new acquisitions, don't be surprised if you see businesses that were acquired that might be a 7%, 8%, 9% operating margin as long as in the long term, they're delivering that return on capital employed target.

We'll now move to our next question from Christen Hjorth from Numis.

A couple of questions from me, if that's okay. Firstly, just on the sustainability of margins that are expected for 2021, I assume we should expect Woodie's obviously making supernormal EBIT margins last year, and this year, perhaps a decline there as we move into 2022. But as you look through the other divisions, I mean, how sustainable do you think those margins are going forward? And secondly as well, I know it's very early days, but I'd be interested in your initial sort of high-level thoughts on potential trends as we move into next year as well.

Let me pick up the point around sustainability of margins and then perhaps Gavin picks up about sort of the outlook into next year and the thoughts around that. I mean, I think you're right to call out Woodie's, which has had an exceptional 12 months period. Looking at the individual businesses and the sort of the key drivers, then fundamentally, we believe that Selco in the longer term should be around about a 10% operating margin business. And that's very much in our thinking. It's very much how we think about opening new stores. So Selco, around a 10% operating margin; our Irish distribution business, somewhere around about a 9% to 10% operating margin business in the long term. Again, that may report a slightly higher margin this year. The Dutch business has a long track record of reporting operating margins of 9% to 10%. Again, that feels like in the long term where that business should be. And equally with Woodie's, we've always sort of been careful with Woodie's to say that we need to be cautious about where the long-term margin goes. And it's undoubtedly benefited over the last 12 months from a significant spike in activity levels, which has had a bearing by virtue of gross margin and operating leverage in the drop-through into its operating margin. But a long-term DIY retailer that can deliver a 9% or 10% operating margin is a good business in the long term. And that sort of feels like naturally where it should sit. And the manufacturing businesses, again, both CPI and StairBox have a long pedigree of a good double-digit margin, and we see no reason to dilute that. So I think in the long term, we have a stable of businesses at the moment that have the propensity to continue to deliver good 9%, 10%, 11% operating margins for the group. The last 12 months with that spike in activity that we have seen particularly about retail will mean that for this year at least, we'll see an operating margin that's probably above long-term trend.

And David, so just on that as well, just with IKH, is that -- the margin that it generates, 13%, is that also sort of a sensible long-term target for that business?

Yes. Well, that -- I mean, to be fair, that business, Gavin mentioned, it's got a very strong pedigree of delivering growth over a long period of time. And actually, its operating margins has been around that level over a number of years. So yes, that's probably a reasonable level of which to assume our long-term target should be.

I mean in terms of the trends looking forward and where we see the markets going, I mean, obviously, it depends on the individual geography and the individual markets. But if you look at the U.K., if you look at the newbuild market in the U.K., I think it's fair to say that the house builders in the U.K. are still quite bullish. That's very good for our motor manufacturing business. The overall RMI market, I think, does remain strong in the U.K. We have to get through this second half challenge on supply chain of certain products. And I've got no doubt in my own mind that our sales figures would be higher at the moment if we had a free flow of product coming through. So there is some demand there that's still sort of constricted by supplying product. If you look at the Dutch market, as an example, we had a full review with the Dutch guys yesterday. [ They're, I guess, ] anticipating residential construction growing steadily over the coming years. In Holland, they have a similar problem to the U.K. They've got a real shortage of newbuild houses. They've got a shortage of houses going into the resale market, and they have an issue with investors buying buy-to-let. So the lower end of the newbuild market is quite weak. So I think if you look at the markets in which we're operating between the U.K. and the Netherlands, the underlying market fundamentals there remain good, bearing in mind that our Dutch business didn't really deviate much from its kind of traditional track during the COVID pandemic. If you look at Ireland as a separate market in terms of house building, I mean Ireland had been on a continuous growth curve from sort of 2013 through to 2020. Obviously, last year, not too significantly off course. But as we go through this year, we're starting to see new sites reopen. We're seeing self-build kick back in. So overall, Christen, I would say that the sort of markets in which we operate, we're very comfortable that those are good markets to be in for the coming years. And obviously, football comes home on Sunday night. The market in the U.K. feels good. Everybody gets a boost from that. Probably the reason I'm so croaky this morning is that I spent 90 minutes giving Gareth Southgate the benefit of my wisdom at high volume on the TV last night. But no, I think, overall, the markets in which we operate, we're very, very comfortable of how the trends look over the coming years.

We now move to our next question from Ami Galla from Citigroup.

Just 2 questions from me. The first one was on IKH, if you could give us some sense of what was the pre-COVID normalized turnover for the business and how did that fare during the lockdowns. The second one really was on the U.K. market. The sort of growth that you've seen in Selco, is there any comparison that you can give in terms of what has been the growth in the broader market in May and June? And again, are there any changes in terms of the capacity of the jobbing builder in the U.K. that you anticipate in the second half?

I think capacity of the jobbing builder, I mean, I don't know whether any of you have tried to get a good quality tradesman in recent months. But obviously, every one that we're seeing, everyone that we're talking to, these guys have all got really good order books. They've all got an awful lot of work stacked up. So I think -- and there is a finite number of builders in the U.K. I think that's what gives us a good degree of confidence about the U.K. market and the RMI market in particular going forward is that the customers that we're talking to have got a lot of work stacked up. Now these aren't like large construction companies. They don't have an order book that kind of stretches out with the value attached to it. But anecdotally, the people that we talk to, and we talk to a lot of customers in different businesses, they've got a lot of work stacked up. So I think that gives us a huge amount of confidence looking forward. It's very difficult with Selco to say is there something else that you can compare to in May and June. I mean, a, it's a very recent, very short period of time. I think if you look at things like the DIY retailers, the DIY retailers can give you some indication, but obviously, they have an awful lot of sales earlier in the year if things like barbecues and patio furniture as we experienced in Woodie's, which is quite different to Selco. But I think when David and I look at the Selco figures on a daily basis, on a daily basis, those figures are robust. They are coming through at a level that they're at, and we're not really seeing those daily sales figures deviate significantly as we've gone through May or June into July. So I think the level of growth that we have in Selco feels quite robust. Selco is a very well setup business, has experienced, as I said earlier, some supply chain pressures, and we just need to make sure that we carry on working on those. But no, I think overall, the sort of level of growth that we have in Selco and the market dynamics, we're very, very comfortable with.

I think the only thing that I would just add to that, Gavin, is that, I mean, we can look and see how the discontinued operations performed in the first half. And the like-for-like revenue growth against the first half of 2019 in the GB traditional business was 5%. And of course, that does contrast with what we've got in the continuing operations where we saw like-for-like growth of just under 17%. So I think we've seen a very strong performance, as Gavin has said, on -- from Selco. In terms of your question around IKH, and I'm conscious we did say there's a hard stop, I think, at 9 because I think Persimmon have got an update. On IKH, because it's progressively grown over 20 years and each year incrementally grown its revenue, it's a bit difficult to dissect the sort of the pre-COVID, COVID impact from it. We think that the reflection of activity that we've seen over the last financial year for IKH is pretty reflective of the base from which to build.

We'll now take our next question from Flor O'Donoghue from Davy.

Just very quickly for me. Just wondering, could you maybe give us a little bit of help in terms of maybe bridging the new guidance equivalent [ so far ] you would have felt prior consensus would have been? I appreciate, obviously, there's a lot of moving parts there. And then secondly, just, I guess, more technical one as well. Just looking ahead in terms of what your thoughts are around with all the recent developments, the depreciation impact and also on the tax rate. I'll leave it at those 2.

Brilliant. Well, Gavin, do you want to pick up the tax rate? Yes, just to -- sort of addressing those -- the technical questions, and thanks for that, Flor. In terms of tax, obviously, we've seen that the -- in 2023, in the U.K., the corporation tax rate is set to increase to 25%. Because that's now in statute, that will have a bearing this year on deferred tax. So whereas originally, we had anticipated that the group would have an underlying tax rate of about 19% for the purposes of the current year, bearing in mind that change in the U.K., I think you're better off using a figure for the tax rate of about 21%. In terms of depreciation, and I'll treat that on a pre-IFRS 16 basis, so it's good old school depreciation, in very round terms, we had anticipated at the start of the year depreciation would be about GBP 50 million. The businesses, the GB Traditional Merchanting businesses that we're disposing of, they have depreciation in that business of about 20%. So the ongoing level of depreciation will be about GBP 30 million. From a bridge perspective, and let's just take some very round numbers. So if we were to assume that analyst consensus before was GBP 243 million and some had updated for IKH and some haven't, but let's assume it wasn't in there, it was GBP 243 million. From the conversations that I've had with yourself, Flor, and a number of other peers, I suspect you could probably take somewhere around GBP 40 million to GBP 45 million out for the GB Traditional Merchanting businesses that was contained in the analyst forecast. So make the math easy, let's call it, GBP 43 million. So GBP 243 million, take off GBP 43 million for the GB Traditional Merchanting businesses, will take you back to GBP 200 million, add in the half year of IKH, let's call that GBP 9 million, so you'd be at GBP 209 million on a previous analyst consensus. That GBP 209 million now compares to what we're indicating is somewhere around about GBP 240 million. So on that math, there's probably something around a 15% upgrade.

There are currently no more questions, so I'd like to hand the call back to our speakers for any additional or closing remarks.

Thank you, Holly. I just appreciate everybody's time this morning in listening to us. A lot of you know us and know the business very well, but it has been quite a significant couple of weeks in the history of Grafton and continue to push the business forward in a very disciplined way. So thank you very much for your interest. Thank you for your support. And we look forward to speaking to you all soon. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.