Grafton Group plc (GFTU) Earnings Call Transcript & Summary

Good day, and welcome to the Grafton Group trading update call, which is being hosted by Gavin Slark, Chief Executive Officer; and David Arnold, Chief Financial Officer. At this time, I'd like to turn the conference over to Gavin Slark. Please go ahead.

Thank you. Good morning, everybody, and thank you for taking the time to come on our call this morning. I know a lot of you know me, I'm Gavin Slark. I'm the group CEO. And, obviously, I've got David Arnold, who's our CFO, alongside me. I appreciate that most of you will have seen the trading update that we put out this morning. So my plan is just to have a couple of minutes counter through the trading update, and then we'll open up for Q&A, which I'm sure you've got some questions lined up ready for us. Overall, we're very pleased with our performance to date in the second half of this year. And you'll see that on the back of the trading update this morning, we've made a slight increase in the operating profit guidance, now putting the continuing operations guidance up to a range of between GBP 265 million and GBP 270 million, which compares to current analysts' consensus forecast of GBP 256 million. That is the analyst consensus forecast that we have collated as the group. So, overall, a very, very positive start to the second half of the year and continuing the strong trend that we've seen during 2021 from Grafton. In terms of the individual businesses, U.K. distribution, obviously, since the divestment of the traditional GB merchanting business, Selco really is the mainstay of our U.K. distribution business. We also have in their Leyland SDM in London, TG Lynes and MacBlair. But Selco, by far, the biggest part of that. And obviously, still seeing daily like-for-like growth of over 7% in the 4 months to October, which is really pleasing to see. And, again, we've continued the growth of Selco, opening our 71st branch in Canning Town just a couple of weeks ago, following Liverpool earlier this year, and we will get a new store in Rochester open and trading before the end of the year. So, overall, in terms of U.K. distribution, still seeing good levels of growth, still seeing good levels of recovery. In terms of the Republic of Ireland, obviously, strong trading performance from Chadwicks. And, again, it's important to remember that during the first quarter of this year, we have significant restrictions on the construction industry in Ireland, so continuing to see Chadwicks come back from April onwards when that -- the whole of that market started to reopen and continuing a very strong performance as we go through into the second half of this year. The Dutch business, many of you will remember, obviously, had the least amount of disruption from COVID-19 of all of our businesses across the group. So still seeing growth in the Dutch business, but don't have the same degree of bounce back in that business because it didn't have the same level of disruption in the first place. But we are seeing a steady path of growth, good spending in all of our customer segments, both residential and commercial and the overall projects business going forward in the Netherlands, looking very promising. Just while we're on distribution, obviously, a quick mention about IKH, which is the recently acquired business in Finland, focusing very much on tools, personal protective equipment and workwear. I'm very pleased with how we've interacted with the management of that business since we acquired it at the very beginning of the second half. Good integration work going on. Myself and David have been fortunate now to spend quite a bit of time face-to-face with the management team and some of you who will be coming to the Capital Markets Day tomorrow will get the opportunity of meeting Matti, who is the CEO of the Finnish business. In terms of retailing, obviously, Woodie's has continued to be very, very positive in Ireland. Again, worth remembering in the first half of this year, Woodie's was one of very few stores that was allowed to be opened in Ireland. If you oversimplify it, it really was sort of pharmacies, supermarkets and DIY stores. So Woodie is trading well compared to where it was in 2019. We are seeing some normalization of that business now as we absolutely anticipated, but the business is still doing very well. And as we go into what is a very strong quarter for us, fourth quarter in terms of Woodie's retailing, we're anticipating a good strong finish to the year. Lot of Christmas product now in stock and ready to go out. And I think the guys have done a super job in Woodie's as well in terms of managing some of those supply chain pressures. An awful lot of product there comes in from the Far East. And as far as our Christmas stock is concerned, we've probably got something in excess of 90% of the stock in-store right now that we anticipated getting for the whole of the Christmas season. So the guys have done a really good job there in managing supply chain. On manufacturing, obviously, StairBox, which we acquired almost exactly a year ago, continues to perform very well, alongside the mortar manufacturing business. The mortar manufacturing business is still a little bit softer compared to where it was last year. But I think what we are -- and 2019, but the conversations we're having with the house builders, if you paraphrase it, would be that the majority of the house builders would anticipate getting back to 2019 volumes during 2022, and we would expect to see that corresponding lift in the mortar manufacturing business, which obviously is a market leader, has an incredibly strong market position. In terms of the discontinued operations, just worthy of a comment there, the traditional GB merchant business. I think as everybody is aware that it's deemed to have been disposed of, although the completion of that transaction will happen probably very early in 2022 and certainly no later than the end of February 2022. But, again, as it was at the half year, not included in the numbers and not included in the analysis. So I think in terms of an overall summary, obviously, 2021 has been an exceptional year for us, not only in terms of volumes coming through certain businesses, but obviously, a lot of inflation coming through. And one of the things that's been really pleasing to see is the ability of the businesses to pass those rising prices through to our customers. And that has obviously had a significant impact on the performance as we go through. We do know that pricing pressure remains in the market. The backdrop for many of our customers and suppliers is still very challenging. Still some issues in terms of supply chain. But, overall, I think we've managed those challenges and jumped those hurdles very well and we sort of head towards the end of 2021 in very, very good shape. Operationally, in good shape. I think as all of you are aware, financially in good shape and strategically, we still have a good plan. So, overall, I would say, very, very pleased with where we are. Delighted to be able to upgrade the profit forecast for the end of the year. And I don't know, David, if you've got anything you'd like to add before we go into Q&A. But I think that's probably the perfect time to throw the process open to Q&A. And at that, I will hand back to the operator who will manage that process for us.

[Operator Instructions] We will take the first question from David O'Brien from Goodbody.

Firstly, and fairly, obviously, just on inflation, I guess, specifically on U.K. and Ireland distribution businesses. Just wondering, could you quantify the level of inflation in the 4-month period and how that's impacting the year-on-year and 2-year on your like-for-like sales numbers, what we should generally expect into next year in terms of inflation? Secondly, has there been any change in product availability dynamics? And then finally, if you could give us a comment maybe on any change in the competitive dynamics across the space, particularly in the U.K.?

David, let me just pick up on that inflation point first. I think -- I mean we've got more accurate data for Q3 than perhaps we have for the October inflation numbers. Although, I would sense from the -- that sort of general conversations with the businesses that October inflation as a month-on-month is running at double digit levels. We're still seeing quite high price escalations. But for Q3, in the U.K. and Ireland, price inflation has been running 10% to 11%. Now, if we look at the Netherlands, the level of inflation there is much lower. It's been running year-on-year at about 2%, which is very much a function of product categories. Big price increases that we've seen in the U.K. and Ireland, for example, in particular, have been around those products which have quite a high energy content. Products like steel, for example, which if you look at Q3 of this year, steel price inflation has been running at about almost 30% year-on-year. So big price increases there. What does that mean in terms of volume? How do we take that and interpret that against last year? Well, obviously, last year, we were emerging from the COVID restrictions. We saw a big spike up in the DIY world. That had a bearing too on the distribution businesses, particularly in Chadwicks, which does cater for retail consumers and DIY as well. They saw an uptick in activity. And we talked about that in the first half results. So year-on-year against '20 volumes in the U.K. and in Ireland, down slightly. If we look at that 2-year comparison, then I think if we look at sort of 2-year inflation activity, then the 2-year volumes are up a bit on where they were in 2019. I think you can also apply that also in the retail world as well. And I think if you look at the 2-year growth that we've seen in Woodie's, I think, you've got 3 factors really at play there. One is naturally the price inflation and at sort of similar levels and that -- that we've seen in the -- in Irish distribution. So on the one hand, we've got price inflation. If we look at transaction numbers, transaction numbers from a 2-year perspective are up on 2019, up slightly. The big driver there is the average basket size. So average basket size has gone up, which is a function of both inflation, but also is very much a factor of actually customers putting more in their baskets, which I think is really pleasing. So that's the overall dynamic in respect of price and volumes. On product availability, I mean not much to add them from where we were back in the first half. Gavin has mentioned, Woodie's, in particular, and the success that they've had in getting containers over from China. I think as a business overall, we've done a really good job in making sure that we've got access to supply. I don't think the picture is that different to the one that we talked about in August, which is, to some extent, there's a bit of trench warfare going in and making sure that day-to-day, we've got products available in store. Where there are shortages, I don't think they've had material impact in terms of our sales line. Maybe it's 1%, 2%, but I think the quid pro quo is that actually, in terms of passing on price increases, we've been very successful in that, and therefore, seeing the benefit in gross margin. So I don't think the picture is so dissimilar to that, that we saw in August.

In terms of the competitive landscape, David, I mean, obviously, the biggest change for us is about us rather than about other people. The fact that, obviously, stepping out of that traditional merchant business changes our competitive profile quite significantly. But if you look at businesses that are competing with Selco, if you look at businesses like maybe Wickes, or you look at businesses like Screwfix, I think separate independent businesses. And we continue to monitor what they do. But I would say in terms of pricing, in terms of availability, in terms of aggression, there hasn't really been a significant change in terms of the U.K. distribution marketplace compared to what we've seen previously.

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

Just couple from me. Just wondering, firstly, on your guidance. If we go back to what you had said in August and the guidance you gave then, and the numbers today, where is it coming from in terms of just looking across the business? And then secondly, just wondering, is any of what's happening in terms of your profitability this year, is any of it being driven by stock gains in terms of inventory performance or anything like that? Is that any part of this?

Yes. Let me pick those up Flor. In terms of the guidance and improvement, I think that's largely about the strength in Ireland, actually, and that is on the island of Ireland. Chadwicks and MacBlair on the distribution side has had a very strong 4 months and Woodie's, similarly, has had a very strong period. And I think all of those businesses have outperformed against what we expected. And I think the strength that we see on the island of Ireland has been really pleasing. So I think when you look at the numbers, I suspect it's the Irish element that will be the nudge up. In terms of -- sorry, what was the second -- what was the second one, Flor?

Stock gain.

Stock gains. Yes, sorry, stock gains.

Yes, stock gains, yes.

Yes. So on stock gains, there is an element. And, again, if you go back to what we were talking about at the half year, undoubtedly, that inflationary element, that real snap up in high rates of inflation has a bearing in terms of our gross margins. And you can look at certain product categories, in particular. So I mentioned steel already. We are the biggest steel stockholder in Ireland. And the impact of that 30% year-on-year increase, which we saw in the third quarter does bring with it advantage in terms of stock gains. And I would estimate that for the year as a whole, we've probably got a little over EUR 5 million of benefit just on steel alone, which won't be replicated next year. So, yes, there is an element of stock gains. If you cast your mind back to what we were talking about overall at the time of the half year, I don't think the picture has changed. We were talking about sort of roughly 200 basis points of improvement that was split between 50 basis points, which was fundamentally good work that we've done across our businesses that we'd look to hold on to. And then the other 150 basis points, which we did expect to dilute and dissipate was a function of both stock gains, but also importantly, was about customer mix, about trade starting to take a bigger proportion of the overall and that trade customer comes at a lower gross margin than typically the sort of DIY customer does. So the dynamics are very much in line with, as we were talking about back in August.

[Operator Instructions] We'll now take the next question from Christen Hjorth from Numis.

3 for me, if that's okay. First of all -- and you just touched, David, on sort of the DIY mix. As we look in the second half and as we sort of looking forward, does it feel like that mix is now at a more normalized level? Or would we expect sort of that dynamic to continue into next year? The second one, just on Ireland and outlook and perhaps 2022 specifically, but I assume there would be for Chadwicks, at least, some easier comps going in the start of next year. But just how you see the outlook there, the medium term? Obviously, construction activity remains well below historic levels. And then just finally, on Selco, just -- obviously, very strong growth that has come through over the last sort of 12 to 18 months. Should we assume that there's been an acceleration of some of the newer Selco maturities on the new depots coming through there and perhaps reaching maturity earlier?

Yes. Let me pick up. Do we think that DIY is now back to a sort of more normalized level? And I think the answer to that is, yes. I think it -- I think what we see is customer base is now much more back to sort of normal working activity. Much less working from home and more competing areas of spend now that hospitalities and travelers reopen. So yes, I think that's down to a more normalized level. One of the things, for example, that we look at is the -- particularly on our Irish distribution is the balance of revenue and how that is -- can be skewed towards trade credit or cash. Now if you went back historically pre-COVID, about 22% of Chadwicks sales would have been in cash with the rest on trade credit. What we actually saw in the first quarter of this year when construction generally was locked down, but there was a lot of DIY activity going on, was that cash sales peaked at about 31% of our sales. And what we're now seeing is that's now reverting back towards that 22% normalized level. So, yes, I think we're back to a more normalized level of activity more generally, not just in U.K. -- sorry, not just in Ireland, but also in the U.K. and indeed in the Netherlands. Now, you mentioned about the Irish outlook and easier comps next year. I think there's a few factors at play there. I think on the one hand, we've got underlying strength in construction. So I think construction activity, overall, in terms of output will be up. So that's a positive. In terms of the margin comps, tougher, though, because that DIY element, which did support gross margins in the first half of this year will be replaced by a higher level of lower gross margin trade spend. So I think on the one hand, revenue up, but on the other hand, we see dilution in gross margin next year, because of that lower proportion of the DIY side.

And I think the point you made, Christen, about the kind of the underlying construction market in Ireland is quite important. I mean, obviously, the latest forecast we have are for 2021 housing completions will be around about 21,000 in Ireland. And the forecast for 2022 is around 27,000, rising to over 30,000 in '23. So the industry as a whole, the whole construction industry in Ireland is looking for some quite significant volume growth in new build over the next couple of years. As about 25% of that is apartments, which doesn't really suit us because the material mix isn't as good. But the underlying kind of new build market in Ireland is looking pretty good for the next couple of years. So I think we should see some volume uplift as we go through Ireland in 2022 and '23. But as David said, you then got that kind of counterbalance on the gross margin with a lower level of DIY. But the actual underlying construction market in Ireland for the next couple of years is looking very good.

And I think finally, your point about, have we seen an acceleration of the maturity curve of the Selcos that we opened. I think -- I mean, the answer to that is, yes, we have. I think, we saw some really good growth for some of the newer stores, particularly the regional stores. And I think they're definitely, within their local geographies, got quicker at establishing their name and their presence in the trade market. So, yes, very reassured by that. And that, I think, even further cements our commitment to the growth of Selco and increasing number of stores.

As there are no further questions, I would now like to hand the call back to Gavin for closing.

Thank you very much. As ever guys, always appreciate your time, always appreciate your interest in Grafton. Again, I know we'll see a number of you tomorrow at the Capital Markets event, I mean that we're looking forward to very much, where you will get the opportunity of meeting some of the broader management team as well. But for now, thank you very much for your time. Thank you for your interest and stay well, stay healthy. Thank you, everybody.

Thanks a lot.