Grafton Group plc (GFTU) Earnings Call Transcript & Summary

All right. Let's kick off. Good morning, everyone, and welcome to the Grafton full year '22 results presentation. First, let me share some first impressions after 3 months in the role, and I will cover some of the highlights before handing over to our CFO, David Arnold, to give the financial review of the year past. I think overall, what I can say is, in the first month, I visited all the businesses across all the geographies, and in the latter 2 months, I spent a lot of time with colleagues all over the patch. And I have been very, very pleased with what I've found. I think Grafton is a very good business with strong brands and excellent market positions in each market. We have experienced and committed management teams, and there are plenty of opportunities for further organic growth and bolt-ons in all of our existing markets but, equally importantly, plenty of opportunities to deploy our strong balance sheet and capture buy/build opportunities in new geographies as they arrive. But I think the important bit is I can reassure you that we will continue to be disciplined in the way how we deploy the capital. So we had a very strong performance from the diversified earnings space against let's say a little bit of a softer macroeconomic environment. 60% of our operating profit generated outside of the U.K., an excellent performance of our Irish distribution business with Chadwicks and also in the Netherlands with Isero Polvo. I think Selco, we had a good performance. However, profitability and volumes were lower relative to the previous year, which was an exceptionally strong period. And we shouldn't forget that Selco really had a normalization of trade relative to the exceptional COVID time but also, of course, is the one which is mostly focused on the RMI element, which will be the one which is impacted first, and you have high operating leverage in the Selco store. So if RMI spend goes down, we will feel it disproportionate in Selco. And when RMI spend goes back up, we will equally feel it disproportionately. But in overall, a very strong performance as well or a strong performance. A good contribution from Finland, our IKH business in Finland, first full year in the group, very good performance, Profitability at Woodie's normalized. It had an exceptionally strong performance during COVID being open throughout. And at the same time, we are pleased with where Woodies has landed in '22, still well ahead of the pre-COVID time of 2019. U.K. manufacturing performed well. And overall, we returned over GBP 200 million to our shareholders either by share buyback or, of course, by dividend. Last but not least, close to all our hearts, we made good progress on the ESG front, and I will cover some highlights of that later on in the presentation. In terms of financials, revenue GBP 2.3 billion, up 9.1%. Operating profit, adjusted operating profit just slightly below the record results of 2021. I think really an exceptionally good results. Earnings per share up by 3.9%. Dividend up by 8.2%. And as I mentioned earlier, of course, still a very strong net cash position of just a little bit shy of GBP 0.5 billion on the balance sheet. Adjusted operating profit preproperty profit at 11.3%. I think, again, a very good result given the challenges overall in the macroeconomic environment, and a solid and very good return on capital employed. Let me now hand over to David, who will give you more detail.

Thank you, Eric. Good morning, everybody. It's lovely to be back presenting here in person. You all look so much bigger than you did over the last 2 years. Turning first to the income statement and revenue of GBP 2.3 billion was 9% higher than the prior year. Adjusted operating profit preproperty of GBP 260.5 million was 4% lower than 2021 and represented an operating margin, as Eric has said, of 11.3%. Property profit was GBP 25.4 million, and a significant proportion of this profit arose from the sale of a small number of U.K. freehold properties that were retained following the sale in 2021 of the traditional merchanting business in Great Britain. Disposal of 3 of these properties generated cash proceeds of GBP 26.2 million and realized profit of GBP 19.9 million. And we also recognized a fair value gain of GBP 5 million on the remeasurement of a small number of investment properties. Adjusted operating profit, including property profit, was GBP 285.9 million, 0.7% lower than the record profits we reported in 2021. The net finance cost of GBP 12.6 million was GBP 6.8 million lower than prior year, and that principally reflected the impact of higher interest income on our sterling cash deposits in the U.K. as interest rates here increased from 0.25% at the start of the year to 3.5% at year-end. Taking into account the reduced finance costs, adjusted profit before tax increased by 1.7% year-on-year to GBP 273.3 million. Looking at the revenue movement in 2022. Organic growth contributed an incremental GBP 65 million, but the largest element of growth was derived from acquisitions, which added GBP 134 million and of which the purchase of IKH was the largest component. Foreign exchange movements during the year were very modest. Now this slide analyzes that increase of GBP 65 million in organic revenue, which we delivered last year. And you can see that, in the U.K. distribution and Irish retail, we saw year-on-year reductions in revenue as both these markets experience normalization in activity from the heady days of trading during the pandemic and a softer RMI market, particularly for smaller-scale discretionary purchases. By contrast, we saw a significant increase in revenue in the Irish distribution business with like-for-like revenue up by GBP 53 million. Here, there was a strong growth in sales to the housebuilding sector during the year. There was good revenue year-on-year growth of GBP 25 million in The Netherlands with sales to key account customers involved on major construction projects increasing in particular. In Finland, growth was modestly up year-on-year. And in manufacturing, we delivered good revenue growth in both CPI and StairBox. Net new branch openings contributed GBP 17 million of sales, and most of this was from Selco, where the new branches at Rochester and Canning Town performed particularly strongly. Turning to the movement in reported adjusted operating profit. This slide bridges from 2021's reported adjusted operating profit of GBP 288 million to the GBP 285.9 million reported in 2022. Profitability in the like-for-like business reduced by GBP 32.3 million, and we'll examine this in more detail in a moment. Acquisitions made a strong profit contribution of GBP 18.5 million with the IKH acquisition accounting for GBP 10.4 million of this. Property profit contributed GBP 8.6 million more in operating profit in 2022. And finally, we also recognized a one-off pension gain of GBP 3.7 million following the closure of our largest Irish-defined benefit pension scheme. Now looking at the GBP 32.3 million reduction in operating profit in our like-for-like business, you can see that the 2 principal areas where profitability declined were in the U.K. and retail in Ireland. Selco and Woodie's both strongly benefited from DIY and RMI spending during the pandemic. And in 2022, we saw normalization in both markets and an impact from reduced discretionary spend on repair and maintenance and improvement as disposable incomes became squeezed. Profitability in Woodie's was markedly reduced in the first half of '22 compared to the pandemic-boosted trading in the first half of the prior year when Woodie's was deemed an essential retailer. Like-for-like operating profit was down by GBP 19.5 million in the period to June '22. And when we entered the second half of the year, we were comparing ourselves against the much more normalized activity experienced in the second half of 2021. We also saw this reduction in RMI activity affect our like-for-like business in Irish distribution, but the decline here was largely offset by higher levels of activity from new-build construction. In The Netherlands and in Finland, like-for-like profitability increased as underlying markets remained relatively resilient during 2022. A second half -- a strong second half performance particularly from CPI EuroMix, saw operating profit in the Manufacturing segment increase by GBP 3.4 million for the year overall. In U.K. Distribution, revenue was up by GBP 16.7 million to GBP 838.6 million, but adjusted operating profit reduced by 20% to GBP 81.8 million, representing an adjusted operating margin of 9.8%. Volumes in U.K. RMI were lower during the year, although in Selco, the pace of decline started to moderate during the second half of 2022. Once again, we saw high levels of inflation, but these too started to reduce as we progressed through the year. In the first half, Selco saw cost price increases by 17%. And in the second half, this had eased back to 7%. There was a reduction in the gross margin by 200 basis points during the year due to lower levels of DIY activity, a smaller proportion of cash collect purchases and an absence of the stock gains that we saw in the prior year. With better product availability in 2022 across the U.K. market compared to the shortages experienced in the previous year, we saw more competitive pricing generally as markets returned to normal. New Selco branches and acquisitions by MacBlair in Northern Ireland, contributed sales of GBP 33.3 million. In Ireland, Chadwicks delivered a very strong performance. Reported revenue increased by 13.6% to GBP 618.3 million, and the adjusted operating profit increased by 5.5% to GBP 70.5 million. This represented an adjusted operating margin of 11.4%. Trading patterns in Irish distribution also returned to more normalized levels of activity. We saw the repair, maintenance and improvement market soften after a particularly strong period in the first half of 2021 when mainstream construction activity was significantly curtailed due to pandemic restrictions. This softening in RMI was mitigated by the strength of new-build, although volumes did decline in the second half as construction activity slowed. While supply chain pressures eased, the rate of inflation was fairly constant through the year and averaged 15%. We continue to improve our market position in Ireland, broadening the products and services available to our construction customers through the acquisition of Proline and Sitetech, and both these acquisitions performed well ahead of plan. And we also continue to invest in the heart of our business with major upgrades completed at a number of branches. In The Netherlands, we saw a year of strong profit growth. The reported revenue increased by 15.9% to GBP 336.7 million, and the adjusted operating profit increased by 23.2% to GBP 37.6 million, representing an adjusted operating margin of 11.2%. These excellent results were a combination of a good performance from acquisitions, together with the benefits of operational and performance improvement measures by our Dutch colleagues. Volumes were flat in the first half and up modestly in the second with inflation averaging 8% in 2022. The gross margin was higher, which reflected the twin benefits of procurement gains and inflation-derived stock gains. The 5-branch Regts acquisition performed well and, in total, Isero now trades from 123 branches in The Netherlands. 2022 represents the first full year of results from IKH, and we were very pleased with the overall performance, which was in line with our preacquisition expectations. The reported revenue was GBP 143 million, and the adjusted operating profit was GBP 20.3 million, representing an operating margin of 14.2%, consistent with the second half of 2021. Market conditions were more challenging than the prior year with mild weather in the first half and the impact on consumer sentiment of the outbreak of war in the Ukraine leading to weaker demand overall. However, revenue increased by 5.4% in the second half as demand recovered. We invested into 2 new owned stores in 2022, which now brings the total owned store network to 12. You may recall that IKH's business model is built on its partner store network, which principally operates in Finland but also has some partner stores in Estonia and Sweden. Where there are attractive complementary white spaces in Finland, which can deliver the appropriate returns from investing in owned stores, then we do so instead of leveraging our partner model. After 2021's incredible performance, activity levels in Woodie's normalized as we expected during 2022. Reported revenue of GBP 244 million was 13.7% lower than prior year, and adjusted operating profit of GBP 32.6 million was 35.9% lower. Nevertheless, we think this is very reflective of the progress, which the Woodies team has made over the last 3 years as the operating profit was 43.9% higher than 2019, which itself was a year that we felt marked a strong performance. In particular, the operating margin in 2022 of 13.3% was an excellent achievement. We're particularly proud of all the work which the Woodie's team has undertaken on driving engagement with all colleagues, and Woodie's was recognized as a Great Place to Work for the seventh consecutive year, was rated in the top 50 of Europe's best workplaces, and has now become the first retailer and the eighth organization to ever achieve a Gold Investors in Diversity accreditation from the Irish Center for Diversity. Turning to our Manufacturing businesses. Overall revenue increased by 21.1% to GBP 120.6 million. And adjusted operating profit was up by 13.9% to GBP 27.4 million, representing an operating margin of 22.7%. CPI EuroMix saw strong revenue growth of 22.3%. Overall, CPI grew its volume in silo mortar mix modestly during the year, although bank product volumes were lower as the RMI market weakened and builders' merchants destocked. In the final quarter, volumes of silo mix reduced as activity in the new housebuilding sector slowed. StairBox delivered revenue growth of 18.9% and saw record levels of demand from its trade customers. We invested in a new property close to the existing production facilities to increase capacity and successfully transferred assembly operations over to the new unit without compromising manufacturing or deliveries. StairBox delivered an operating margin of 31.3% in 2022. Turning now to the balance sheet and just a few points here. As you can see, the principal movements were the increase in goodwill and intangibles on the back of acquisitions during the year, the increase in working capital and the reduction in net cash, largely as a result of the capital return to shareholders. Overall, the pension deficit was broadly unchanged. The group's adjusted return on capital employed was 17.2%. Now looking briefly at the movement in working capital. Overall, we saw an increase of GBP 88.1 million, of which GBP 71.3 million was the like-for-like increase before acquisitions and currency translation movements. The increase in stock was a reflection of both inflation and our trading strategy to increase product availability for customers during the year. Similarly, the increase in trade debtors reflects inflation as well as an increasing proportion of trade customers buying on credit rather than cash customers paying at the point of sale and expected impact of the normalization of trading patents. The quality of the debtor book remains very strong and with a broad spread of customers rather than a particularly concentrated debtor risk and with much of the debtor book supported by credit insurance. Overall, I see opportunities during 2023 to reduce our working capital intensity. But equally, we need to ensure we maintain a competitive advantage through strong stock availability for customers. Just turning to cash flow and cash of GBP 278.8 million was generated from operations, only 8% lower than prior year. You can see the overall increase during the year in working capital of GBP 71.3 million compared to GBP 64.1 million in 2021. Looking at the cash flow in a bit more detail. The group delivered another strong cash performance with free cash flow of GBP 221 million, representing 77% of adjusted operating profit. Dividends paid in cash during the year represented GBP 73.9 million, and we repurchased shares to a net cash value of GBP 140.4 million. In total, we returned GBP 208.9 million back to shareholders by way of dividends and share buybacks in 2022, just under the quantum of free cash flow generated during the year. We invested GBP 24.7 million into the organic development of the group and GBP 46 million into acquisitions. And we ended the year with net cash of GBP 8.9 million, including lease liabilities or GBP 458 million before leases. And finally, a few elements of technical guidance for the year. At this stage, we aren't expecting a significant contribution from property profits in the current year, so please don't bake in anything into the forecast just yet. Depreciation and amortization is forecast to be approximately GBP 100 million to GBP 105 million or around GBP 40 million in an old money pre-IFRS 16 basis. We're currently expecting our gross replacement CapEx spend to be approximately GBP 30 million, and gross development spend to be slightly higher at around GBP 35 million, and that development spend is principally focused on new branches, branch upgrades and investment into new systems. The net finance charge is expected to be approximately GBP 4 million, and that includes IFRS 16 lease costs, although this will, of course, be influenced by, amongst other things, timing of acquisitions and also further increases in interest rates potentially. And finally, we estimate that the tax rate will be 20.1% this year, though over the next few years, this is -- will trend upwards towards 22.4% based on the current composition of our group profitability and also the increase in corporation tax, which will be implemented in the U.K. from April and also the likely increase in corporation tax rate in due course in Ireland. And on that note, back to Eric.

Thank you, David. So I think this revenue chart and profit chart is kind of helpful to see how the geographical diversity of revenue and profit streams has been during 2022. And we will, of course, as David mentioned, continue to strengthen our positions in existing markets organically, and if it makes sense with bolt-on acquisitions as we have done during 2022. And we will enter new markets when the right opportunities arise. I think overall, as I said, we'll continue to have a disciplined approach to our capital allocation. But we are, of course, evaluating in all the markets we are interested in more M&A opportunities to do and at what time. It's always a function of what is available and what price, as we all know. But I think the most important thing is we have the firepower in order to execute fast when the right opportunity arises. And at the same time, we are very disciplined to continue to invest into our existing branches and in our existing brands.In terms of dividend cover 2 to 3x and capital returns to shareholder was funded out of the free cash flow in 2022, as you can see from David's slides. Let me talk a little bit about ESG, and don't worry, I will not go through all the points on the slide. So as you can see, a lot is going on. And of course, we focused on a net reduction in absolute terms of CO2 emissions and also a net reduction on operational waste. But what I would really like to point out is also where the opportunities are in helping our customers and their customers, for example, on becoming more energy efficient, and we implemented so far during 2022, 12 ECO Centres in Chadwicks branches, and we implement more during this year. And what that really does is, we help end users can assess the home and have targeted energy ratings. They can come to the Chadwicks branch. And we will help them and guide them through if they want to achieve a B rating what are your different options based on the assessment how you could get there and which is, of course, a very good way to help them really with the specialists who's educated on that to how you can achieve a certain energy rating. And then we will connect them with the appropriate trades person, who will be our customer, who can get it done for the end consumer. So I think it's a very good way on how we can help overall the housing stock to become more energy efficient over time. Just one of the many initiatives we have around ESG. If I turn to -- one of the things which has really struck me as I traveled across our estate was, there is an exceptional colleague and energy -- colleague and community engagement across all the different geographies, really exceptional. And David has talked about Woodie's, but it's not just Woodie's. Also Chadwicks and IKH are recognized as a great place to work. Woodie's has been -- sorry, Selco has been on the 17th place of large companies in the Best Company Awards list. Those are all exceptional achievements. But I think I would like to draw it more also to the cost of living support for colleagues, which is something which I find is really exceptional because it's quite easy, especially as the macroeconomic times became a little bit more choppy. The easy things would be to say, well, let's just save costs wherever we can. But actually, the business did the opposite, Selco and Chadwicks have quite comprehensive programs of cost-of-living support, where we had the majority of the workforce supported with supplementary payments in order to help them cope with the increased energy costs and so on and inflation. And I think that was -- it's really exceptional. It's really great to see how engaged the businesses and, in return, by having that engagement with our colleagues, we also do believe the colleagues do go the extra mile, and we have a fantastic workforce in all the businesses. In terms of current trading, the numbers speak for themselves. I think 2023 has, for us, commenced in line with what we expected. Volumes are slightly lower than in the same period last year as expected, but we also see price inflation moderating. But it's too close or too soon to really make a judgment. The important months are now coming. So we'll know more once the next few months are behind us. But overall, it looks -- it might look a bit brighter than people would have feared in the second half of last year, but this is at too early to call, really. In terms of summary and outlook. Let me just reiterate the points I already made. It's a good performance of the group in somewhat choppier waters in 2022. We really benefited from a good portfolio of businesses with strong brands and market positions. There are some common themes across all our geographies. The RMI market has contracted. Housing markets are likely to soften. But as I said, the outlook might be brighter than feared by many but too close to call. The strength of the businesses and the diversity we have in geography and the strong balance sheet actually leaves us really well placed to execute growth over the medium term. And even if there might be some short-term volatility, I actually think we have all the ammunition we need in terms of skills and balance sheet to make sure the business continues to develop well going forward. We will continue to be disciplined. I think it's the third time I said it. So I think there shouldn't be any worry that we do silly things, but we will make sure that we allocate the capital the way we believe we can deliver attractive returns over the medium term. We build on the current fundamentals. We'll continue to invest into our existing brands. We continue to support our customers, and we will also do continue the bolt-ons where it makes sense in our existing markets to further enhance the market position. And as I said, the aim is to further enhance the portfolio of businesses in new geographies to buy platforms and execute bolt-on acquisitions over time in addition to organically grow. That's all for me. Let's move to questions.

Okay. Just in terms of format and how we'll do it, if you could raise your hand, we've got some moving mics. If you wouldn't mind just saying who you are and where you come from, that would be great. Then pose your questions. Try not to give too many because I've got a very, very short memory. And I can generally only remember the first one. If we sort of clear the questions in the room, there may be some people who are joining on the webcast, and for the analysts that are joining, there's a capacity then to answer questions remotely, but we'll come to those at the end. So first off, then, yes. Sam?

Sam Cullen from Peel Hunt. I've got 3. Should I give them one at time, David, to save your memory?

Yes. And I'll let you have your 3.

Yes, okay. So first one's on Selco and kind of the margin weakness that you kind of alluded to. How should we think about the level of volume that you need to put through the business to generate the high single-digit, double-digit margins you've talked about in the past?

I mean, it's a good question. I mean, I suppose is that dynamic between both volume and price. And what we saw during the course of 2022 was some double-digit volume declines, effectively. So look, I think the operating margin in Selco was just a little under 10%. We've always said that, in the medium term, we should regard Selco as sort of a 10%, 11%, that sort of range of operating margin. So it is finally tuned. And when we do start to see that volume pick up again, and then we'll start to see that margin recover. And it is at the margin. So look, I don't think it's much of a volume improvement that we need to get to back over 10%, but it is around that price volume demand dynamic. I think we do have to look at them both together.

Second's on working capital. I think net working capital, something like 10%, 11% of revenue. Historically, I think it was closer to 7%, 8% even with build base, which I guess is probably a drag. Talking about driving working capital out, are we talking getting back to that 7%, 8%? Or are we talking taking 100, 150 bps off?

Yes. Look, I think it's a sort of slow but measured response in terms of working capital, and I think that's sort of for a couple of reasons. I mean, firstly, investing early in working capital when prices are rising is a good thing. It's a sensible commercial decision to make. So that's the first thing. The second thing is we've got a balance sheet that can make sure that actually we've got a really competitive and compelling advantage in terms of what customers see and the level of stock that we've got. So I think we have to think about that. But equally, it is about making sure that we have right stock in the right place and that we've got fast-moving stock and turning stock. So all the teams know that, that's a priority. I think in due course, I would expect us to trend back to what I would have regarded as that historic level of, let's call it 8%. I think on occasions, when we were down at 5% and 6% from a working capital intensity perspective, I always felt that, that was more a sort of temporary perspective so 7% to 8% in the long run. But even 7% to 8% equates to quite a lot of cash over time. So yes, I think that's where we should be getting back to.

Okay. And the last one is on M&A versus capital returns. And how should we kind of think about the flexibility you think about in terms of how hot is the cash in your back pocket going to be? Is it going to be burning a hole in your back pocket? How do you think about deal size, the pipeline going forward? And then I think you mentioned in the statement also kind of vendor expectations somewhat unchanged relative to public market valuations and how that's evolving.

Look, the aim, as I said earlier, we will be disciplined. So the aim is, in an ideal world, we deploy the capital buying attractive assets, which we can further build out and generate long-term returns for our shareholders. At the same time, I think if those opportunities are not there, we will look at different ways on how to return capital. So we have a pipeline. We look at it. We have things in the works, and we'll continue to do so. But right now, there's nothing to announce.

Flor O'Donoghue from Davy. I'll keep it to 2. The first one is just on pricing. David, you might just talk us through the dynamics around where you're seeing selling prices, where they are at the moment, what the annualization effect is just in terms of how we might think about that for the year?

Yes, sure. Well, I think we did see slight or actually quite pronounced differentials in inflation during the course of '21 and indeed in '22 across the geographies. And a lot of that was driven by the composition of products that we sell. So for example, in the U.K., it was quite heavily influenced by the price movements that we saw in timber. So in both the U.K. and in Ireland in 2022, we saw double-digit price inflation, whereas if you were to look, say, at The Netherlands and Finland and retail, it was more like 5% to 8% in terms of that spectrum. Our expectations for the current year are that we're likely to see overall inflation across the geographies tend to be in the sort of range of 6% to 8% for the year as a whole. And I'd take a sort of simplistic view, for me, that's the prices at the end of this year are 6% to 8% higher than they were at the end of 2022. And I think that's how we see it at the moment. Clearly, where we're still seeing the bigger price increases across the products that we sell tends to be in those that are quite energy-reliant. So it tends to be the areas of around cement and bricks. So it's definitely the heavier side of products. Timber is still seeing quite significant fluctuations. We saw some significant deflation during the course of the second half of last year. Prices have come down again in the sort of start of this year, but there's also talk that we might start to see price increases as we go towards the middle of the year. I mean, it's a commodity-volatile product, but current best view more like 6% to 8%.

Second one has probably got 2 parts, a Selco based. The first part of it is, I think in a document, you mentioned that medium-term objectives in terms of network pulling back from 100 to 80 to 90, just your thought around that or thoughts around that. And the second part then is just as also in the print this morning, you talked about the, I think, some kind of price investment in terms of Selco last year because of the competitive landscape. Just wondering where you are now in terms of market share, just a broad comment around your actions around the kind of competitive environment in Selco?

You want me to pick those ones up?

Well, we can, or I can kick off on one and hand over. I think the 80 to 90 rather than to 100 by 2026 I think is a pure fact of mathematics and how developers will or will not develop in the current environment certain sites that we will actually not reach even if we wanted 100 by 2026. I think that is one thing which we can say really firm, I think overall, we do believe that we have a very good network of Selco branches. We do believe that we can further expand the Selco branch network in the U.K. But at the same time, we do believe that the real focus is finding the right spots and open them rather than holding ourself hostage to say we want to have a certain number by a certain date. I think that's how I would answer that question. And whether or not -- the ultimate number is 90 or it might well be 100 over time in a different time frame, that we shall see, but I think the focus is to really driving that and opening the right locations rather than compromising on that.

And I mean just in terms of the point about market share, I mean, I think we've always said and we've always been very clear on that we're not obsessive about market share. It's easy to increase your market share, but you just have to drop your prices. But that doesn't make you any money. So I think the really key thing for Eric and myself is, when we look at Selco, we look at how it's positioned for the current year, I think it's probably better set up now than almost it's ever been, great stock levels, great availability, competitive pricing, colleagues fired up and engaged, operationally really efficiently run. So look, I think we're in a great place. It comes back to has it performed in 2022 as we expected? Well, yes, it's an operationally leveraged model. But when we see volumes return, we'll see that drop through down to the bottom line.

David O'Brien from Goodbody. Three from me, please, if I could. Firstly, on your disciplined capital allocation strategy, you've outlined the organic growth opportunities in existing markets, buy and build in new markets. How should investors think about that in terms of evolving the customer and product verticals?

So as you know, in existing markets, we have branched out into different product verticals over time. So in terms of future, I think it's too early to be specific. As I think you would expect, I'm in for 3 month. And we are currently, as a team, working through what we believe the right picks and the right options are going forward. But we will -- and you have the obvious questions around there are scale benefits and how you build scale benefits and your scale benefits be across multiple countries, or just within countries. And we're working through that, and we will come to the right answers, and we will update whenever we have those right answers. For at the moment, you could expect an evolutionary process -- another evolutionary process in terms of both in the way how we look at the business but also in terms of capital allocation discipline.

And secondly, you've touched on a little bit of it already in the presentation, but I guess, compared to your perception of Grafton before you joined the group and in the short time that you've gone around all of the operations, what are the key kind of surprises you've come across?

No surprises, really. So the business is what it says. And I knew it's a federated structure, and each business is run with separate management teams, and there are currently not massive synergies between the different businesses. So -- but what I did find, if anything, it will be a positive surprise, which is how engaged actually the colleagues are on all levels and how much passion there is on a group level for Grafton and at the same time for each individual brand the people work in. So whether that's going to Woodie's, whether that's going to Chadwicks, whether that's going to IKH, people are really proud working into environment. And I think that's a testimonial to the management teams how they engage with the colleagues. I think that for me has been the pleasant surprise to see the level of engagement and professionalism and focus of the different management teams.

Eric's scripted answer for that was actually, he was pleasantly surprised by just how good the CFO was.

Including the CFO.

A final one from me, please. As the questions I alluded to, Selco takes an awful lot of limelight in the U.K., which Leyland and StairBox have been pretty phenomenal acquisitions. I wonder if you could talk about the scalability of both of them given the success they've had so far?

Yes. Look, they're both really, really impressive businesses. I think with Leyland, we still got the opportunity to grow the network that sits within the M25. So I think there's good organic growth opportunity there. I think Leyland, we've proven over many years, it's very successful in London. I think there's a question as to whether it can only work in London because of the density of customer base that you've got here. Maybe it's one of those constant questions that we ask about whether it might work in a Birmingham or a Manchester. But I think for now, there's quite a lot to go out in London for Leyland. So the scalability from an organic perspective, definitely. And look, I think StairBox just been an absolutely fantastic acquisition, great team, great product, customer experience is fantastic. Are there opportunities that we might take that to other geographic markets? I think we explore it in due course. As ever, I think we've always been a bit cautious about looking at a format that works really well in one country and assuming that it's going to work really well elsewhere. But look, I think that, that could be a possibility that we explore in the future. But again, in the meantime, StairBox has expanded its capacity. I still think there's a lot more that we can go at in its existing U.K. market.

Chris Hjorth from Numis. I've also got 3 questions. I'll continue the trend. First 1 for Eric and just on M&A. I assume you're very happy to hit the ground running in terms of bolt-ons with the underlying businesses running out. But in terms of new jurisdictions, do you still feel that you need to get a bit more time under your belt at Grafton, or if the right deal came along in the coming sort of weeks and months would be happy to execute on that?

Look, as always with new jurisdictions, I think first of all, the team has done a lot of work. And I think during the Capital Markets Day end of 2021 communicated kind of where the overall focus is. So we work through revalidating some of those territories. I would probably not look across the pond to kind of think do we really need to go to North America. I think there's a lot we can do in Mainland Europe in the near future, and I don't think it's necessary for us to go across the pond at the moment. But I think within the territories we have discussed, there will be a question of which ones should be prioritized and why, and it's also a function of which opportunity is actually there. You can execute at a decent price. So I think that in a roundabout way hopefully answers your question.

That's great. And then 2 questions on a couple of divisions. So first of all, in Woodie's sort of normalization there, but obviously significantly higher EBIT versus 2019, significantly higher EBIT margins. Is that business structurally just a bigger business now? Or is there still a bit more normalization to go?

Look, I think there could be more normalization to go. But I think in due course, that's probably around the normalization of the operating margin. I still think from an operating margin perspective, it's probably overindexing at 13%. And over time, just from a pure competitive proposition perspective, it's probably more like a 9%, 10% operating margin in due course. But I think in terms of transactions and basket size, if you like, I think it is a rebased business from where it was back in 2019. And as I was sort of a pains to point out in the presentation, we did regard 2019 as a really good result. So look, I think they're doing a great job. But I think probably in due course, operating margins will [ adjust down ].

Makes sense. And then just a final one on the Netherlands. Obviously, a great performance last year. How much more is there to go in The Netherlands?

Yes. Look, I mean, almost EUR 400 million of revenue I think we have ambitions to take that business to be at EUR 0.5 billion revenue business in due course. And that will be a combination of continuing with bolt-on acquisitions. And indeed in terms of organic development from putting new branches on the map because there's still quite an element of whitespace for Isero, particularly sort of when you're getting into north, northeast of The Netherlands. We're quite strong around Amsterdam and sort of further south, but I still think there's some opportunities, actual gaps on the maps.

Aynsley Lammin from Investec. I think I've got 3 as well, actually. Just first question, exploring a bit more the discipline comment around M&A. Kind of what level of leverage would you be comfortable with for those strategic type of deals? I guess, I'm just trying to get to kind of what the capacity is for acquisitions over the medium term from the balance sheet?

Stop there because I want to remember it. So just in terms of financial leverage, I mean, we've always said investment-grade credit rating. That is important. And I think that's important from a discipline. It's important from a lender's perspective. It's important from an investor perspective. So that remains key to us. And therefore, that sort of sets those parameters around financial leverage of, in general, 1 to 2x lease-adjusted net debt to EBITDA. So I think that that's fair. But equally, you've got to take cognizance of what's the current environment. And if you're in a recessionary environment, you want to be running it closer to 1 than you would to 2. But equally, for the right acquisition, we are a very cash-generative business. We've just demonstrated that over the years that we turn in cash. So we can afford to push it to higher levels of leverage and then look to delever.

Makes sense. And then second question, just on the price inflation, presumably you'll be looking to offset the cost inflation, COGS. And just comment briefly on the kind of operating costs, labor, wage inflation, utilities, et cetera? And would you see a squeeze there? Or would you hope to offset some of that with price inflation?

Yes. Look, I mean, I think, and this isn't just a Grafton-specific thing. This is an overarching comment. I think that the challenge on profitability in 2022 is around cost inflation. I think if we look at the top line, if you take our view of inflation, I think overall, we'll see volumes down in the current year overall. So the sort of plus 1% that we've seen in the first couple of months of the year, overall like-for-like of sort of 1%, 2% is probably not unreasonable. So you're looking at volumes down sort of low single digits. So you're going to get, I think, overall, the benefits of revenue, which are going to drop through to the P&L account. I think there's probably still some pressure on gross margin. So my expectation on gross margins in the current year overall for the group because of the more competitive markets and a bit of pressure on volumes across markets, we might see gross margins of 50, 60 basis points. That's sort of that sort of element. So sort of what you get from the revenue, I think, was probably offset sort of pretty largely by what we see in gross margin. So the issue then becomes around OpEx. And our OpEx is GBP 550 million or thereabouts. It was last year, very round terms. And I think we'll be dealing with high single-digit levels of inflation that's coming through there. If I look, for example, at our energy bill. Our energy bill in 2022 was GBP 10 million. Forecast for this year is double that because of hedging coming off and new passing. Now there may be some benefits that we see because energy costs proved to be lower than we'd anticipated. But as we sit here today, there's plus GBP 10 million, we can't avoid that. If I look, for example, at what's happening in terms of rental increases on property, there's an additional GBP 5 million coming there. So that's why I sort of take the view that we're probably looking at rates of inflation on OpEx of 8%, 9% overall when we take into account the impact of labor cost increases as well. Now the other thing that I would say is we are efficiently run. We've got our branches in the right place. This is about fine-tuning a cost base in response to volume movements. There's no radical cost buckets to -- that we want to go and chase to take cost out of because, fundamentally, we want a really robust proposition in front of customers. So when you sort of look at the maths of the P&L account, for us, as it is for every retailer, every distributor, I think the issue in the current year is around that OpEx cost inflation.

And then just lastly, on manufacturing like-for-like growth year-to-date, nearly 13%. Is that just inflation coming through, or would you expect the new housing kind of downturn start to feed through to that like-for-like growth?

Yes. Look, I think what we've seen in the first couple of months of the year, I think we have to be very cautious about the first couple of months of the year. We've always said it. It's thin trading. And actually, I think this year, I think it was influenced by late return of customers coming back to work. When you looked at how Christmas fell, we all thought everybody would be back up and running 9th of January. But in the tradesman builder community work, it didn't actually start really getting going until the 16th. So I think it was a sort of a relatively thin start to the year. But when I look at manufacturing, that's really price. Volume's off a bit. But genuinely, I really wouldn't read too much into it because I don't think sites were really getting going. But naturally, the biggest influence for CPI EuroMix is what's the sales rate that Taylor Wimpey and Persimmon and everybody else is going to be getting in the year ahead.

Ami Galla from Citi. A few questions from me as well. I'll go one by one. The first one, just on the competitive challenges that you see in Ireland from new entrants. I mean, given Howdens is expanding its footprint here, how do you see your market position and your ability to defend your share there? Are you able to comment how much of your product portfolio currently comes from kitchens in that space?

We have mainly The Panelling Centre as a brand, which deals with kitchens. Having been in Ireland earlier this week and spoken to our colleagues, they specifically on the buildup of Howden, and they don't see an impact at all so far, I say so far. So we shall see. The view is that we are positioned in a slightly different price segment relative to where Howden trades. And overall, it's a relatively small proportion of the revenue stream we have in Ireland to answer the specific question there.

The second one was -- I mean following up from the comments of Aynsley on the cost side. Are there any plans for restructuring on the overheads further into the year once we have more clarity or visibility on volumes across the business? Is this good for that at all given most of the footprint that you now have are businesses which are relatively well?

Yes. Look, absolutely, no plans for that. And I think, firstly, it comes back to that point. The branches state across all our brands are where we want it. So that's the first thing. The second thing is, in the current environment of full employment, as you will probably hear from any number of companies, actually, the challenge is getting people in. And so I think we very efficiently run. If there is any further reduction in volumes, I just think that, that natural wastage almost will deal with that. But I think we're very efficiently managed. So no plans for major restructuring, major restructuring costs, not at all. And we'll just continue to manage it as we've always done, which is a really firm eye on the cost base anyway.

Yes. And probably from a newcomer, I think that what you call the group overhead is, I would say, very slim. So there is no big group structure, but I say it's a very slim-run business. When I visited the different operating units, they're very close to the cost line. They're very mindful that we are -- we know the business which has massive, massive margin, and cost is a secondary element. So it's managed pretty tightly, and I can just echo what David said. I think it's very tightly run, and if anything, it's just continued fine-tuning rather than any massive cost reductions because the scope isn't there.

My next question was on StairBox. If you could just give us some scope in terms of how do you see that business growing? What's the sort of medium-term ambition of how much can StairBox scale up to and maybe the investments that are needed for that to step up more materially from here?

Yes. I mean, we can do it jointly. I think the first bit is it's a phenomenal business, which I don't know who of you have seen it, but it's a really great business, which can deliver Stairs very efficiently with almost no waste far faster than if you order it in a conventional way. So coming back to your question around what David mentioned, we invested in incremental capacity. I think that business could have another 40% output relative to what it does today without having incremental infrastructure investment into the U.K. I think that's one element. I think also the business, we do use the business, for example, now to use some downtime of their production to actually produce stairs which are preproduced, not to measured, and they can sell them throughout our branch network. So we believe there is a lot of scope for the business to organically grow with the investments we have already done. I think once we are post-40% incremental growth, you would have -- we probably would have to think about incremental investment in kind of getting the production capacity. In terms of additional markets, geography, I think the honest answer is we haven't done the work in sufficient detail to have a real view on it. I think we evaluated the closest country and came to the conclusion that probably it doesn't warrant to set up a production. And if you don't have a production, it kind of doesn't work. So there will be obviously Ireland.

I think we came to the conclusion that, proportionately, there were too many bungalows.

So -- but -- so if you then ask a, could it work in Finland, we haven't done the work.

Maybe a last one, just a technical one. For the Dutch merchanting business, can you comment on the scale of gross margin normalization that we need to think about, given there were stock gains last year?

Yes. Look, I think in terms of that gross margin normalization, just purely on stock gains, you're probably in the 50 to 100 basis points territory. Sam?

Sam Dindol from Stifel. A couple from me, please. Firstly, on IKH. Have you thought about expanding the partner stores to other Nordic countries? And is there a significant opportunity in Finland from the owned stores? I think you added too. So is there more to go there?

So let me take the first one on the partner stores. As you know, we have partners in Estonia, we have partners -- partner stores in -- we have partners in Sweden. The answer there is part of the reason why I'm not saying here strategically, we're working through with the team in each one of the geographies, as you would imagine, where do we go exactly, how do we get there over the next 5 years, and we will evaluate that part of it is, part of the USP, I would say, of IKH is a lots of assortment, great stock availability and delivered literally very fast to wherever it needs to be within Finland. So in other words, if we seriously want to build in a new geography, we will have to invest into distribution and stock in country. At the moment, we serve those partners by sending the stuff from Finland over there, which is, of course, a different lead time. So we're working through the economics, what make sense in what sequence, if that kind of answers that part of the question. The second part was?

In terms of the owned brand in Finland, is there a lot to go for? Is that 10 going to 30 or 40? Or is it...

I think the really important thing is we've got a really strong partner network. And what you don't want to do is to compete with your own customers. So where we do put those owned stores in is where there is a sort of clearly defined geography. So look, I don't think it's 12 that goes to 36. But equally, it's 12 that probably could go to 20, but it's a sort of a careful measured approach, I think.

And then secondly, on Selco, I'd love to talk to you about StairBox expanding geographically. As Selco gets more mature in the U.K., is that something you considered in terms of Europe metropolitan centers, or it just wouldn't work from an infrastructure investment perspective?

Yes. It sort of comes back to the point that I made. You just have to be really careful with a format that works really well in one geography about whether it carries to other geographies. I mean, Selco, for example, you look at France, Saint-Gobain is a very strong Selco-like format there, platform [Foreign Language]. You look at The Netherlands, for example, there's [ Bouwland ], a very strong, similar equivalent there. So that, I think, is why we've always been cautious. Let's focus on the bits that we're really good at and maximize those. Okay. Any more questions in the room? If there are no more questions in the room, if anybody has got any on the phones?

[Operator Instructions]

Okay. It doesn't look like we have any callers on the line.

We have no questions coming through. So I hand over to you.

Thank you very much. Thank you. Eric, do you want to finish? Well, look, all I can say is thanks, everyone, for making the time and the effort to come and join us in person. That was really great to have everybody in the room together rather than a sea of small screens. So thank you very much, and see you all soon. Thank you.

Thank you.