Grafton Group plc (GFTU) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome to the Grafton Half Year Presentation. You all know David Arnold, our CFO; and myself, Eric Born. So I'll -- here we go. First, a few -- a short introduction and highlights to the half year result. A resilient performance of Grafton, again, in a challenging market with adjusted operating profit as anticipated. Our excellent cash flow supported to return over GBP 130 million to our shareholders whilst the net cash balance remained almost unchanged to the year-end position. The interim dividend grows by 8.1% on a lower number of shares in issue, and we just announced this morning a further GBP 50 million share buyback to return cash to our shareholders -- value to our shareholders. Before I hand over to our CFO, David Arnold, I will do some financial highlights, and then David will do the detailed financial review. The adjusted operating profit at GBP 105.1 million was in line with where we expected it to be for the half year. A very solid EPS at 38.1p and an increased interim dividend of 10p per share. Adjusted operating margins were very solid at 8.7%. And I would like to point out that the ROCE remains above 14% in what is a very challenging market at the moment. The balance sheet, again, strong position with net cash before leases of well over GBP 400 million, so, strong position for the market we are in. So David, I'll hand over to you.

Thank you, Eric, and welcome, everybody. Group revenue was 3.2% higher at GBP 1.19 billion. Adjusted operating profit, pre-property profit, was GBP 103.9 million, 22% lower than prior year and in line with our expectations for the first half. The first half saw relatively modest revenue growth, a reduced level of gross profit in the like-for-like business, particularly on the back of steel and timber deflation, particularly in the U.K. and in Ireland, and also cost pressures driven by high rates of inflation. The Group's property profit was GBP 1.1 million compared with GBP 18.5 million in the first half of last year when we disposed off 2 properties previously part of the GB traditional merchanting business. Adjusted operating profit was GBP 105.1 million. The net finance cost of GBP 0.8 million was significantly lower than the prior year as we benefited from higher interest rates on the Group's cash deposits. Adjusted profit before tax was GBP 104.3 million. Now I'd just like to make a few further comments on the income statement. We aren't expecting any further significant property profit in the second half of the year. And the second half finance charge is expected to be slightly higher than in the first half. Whilst the tax rate of 20.1% was higher than in the first half of last year and will continue to increase towards 22.5% in future years, the Group benefits from its Irish tax residency and the current Irish corporation tax rate of 12.5%. Now the Irish tax rate will increase in the next calendar year to 15%, but it remains significantly below the rate applicable elsewhere in the EU, and it's the lowest possible rate allowed under the OECD BEPS 2.0 Framework. This lower rate of tax benefits shareholders through the impact on Grafton's reported adjusted earnings per share which in the first half was 38.1p per share, 23% lower than in the prior year. Now the lower number of shares in issue through the buyback program which we commenced in May of last year and which we've now subsequently extended, has given a positive impact on EPS relative to the movement in profit after tax. Let's look now at the movements in revenue in the first half of the year compared to the first half of last year. Organic growth in revenue accounted for GBP 4 million and acquisition GBP 6 million with the largest component of revenue movement attributable to the stronger euro, which accounted for an exchange gain of GBP 26 million or 2% on the reported revenue increase. Now this slide analyzes the increase of GBP 4 million in organic revenue, which we delivered in the first half of the year. As we expected and we had previously flagged, the U.K. and Ireland saw lower revenues, particularly on the back of falls in steel and timber prices. In fact, the reduction in sales of timber and steel in the U.K. and Ireland more than outweighed the total revenue reductions of GBP 14 million and GBP 9 million, respectively, which you can see on this chart, and as prices stabilize in these 2 key product groups, so that will have a bearing on like-for-like revenue growth going forward. We saw good organic growth in the Netherlands, Woodie's and our manufacturing businesses, and net new branches contributed a further GBP 6 million to Group revenue. Turning to the movement in the reported adjusted operating profit. And this slide bridges from 2022's first half reported figure of GBP 151 million to our reported first half 2023 adjusted operating profit of GBP 105.1 million on the right-hand side. Now I'll look at the reduction in operating profit from the like-for-like business in more detail in a moment, but you can see that new branches reduced operating profit by GBP 1.9 million. That's in terms of the first year operating losses. Acquisitions added GBP 1.2 million and property profit was GBP 17.4 million lower, as I previously mentioned. Foreign exchange translation gains increased reported profit by GBP 2.4 million. Now looking at that GBP 30.3 million reduction in operating profit in our like-for-like business, you can see that, as we anticipated, the biggest elements arose in the U.K. and Irish distribution businesses with reductions of GBP 21.9 million and GBP 11.8 million, respectively. In the U.K., Selco, in particular, was impacted by significantly lower activities in the RMI market, and in Northern Ireland, MacBlair's important housebuilding market was materially down on the same period last year. Of the GBP 21.9 million reduction in U.K. distribution operating profit, roughly GBP 15 million was attributable to lower gross profit. And of this GBP 15 million, a little over half was a result of timber price deflation. In Ireland, steel and timber price deflation saw a more material adverse impact on gross profit than the overall fall of GBP 11.8 million reported by the business, which I think is testament to the underlying strength outside these product groups. The Netherlands and Finland each saw a reduction in like-for-like operating profit of GBP 1.7 million, and both Woodie's and our manufacturing businesses saw good increases in the first half of GBP 1.8 million and GBP 3.1 million, respectively. So now just turning to the individual businesses and starting with Irish distribution. Well, here, we saw first half reported revenue 2.9% higher than the same period last year. We saw strong demand fundamentals underpinned by a resilient housing market with completions in the first half, 6.1% higher than the same period last year, and starts 10% ahead. As previously mentioned, first half profitability was adversely affected by price deflation in steel and timber, which impacted the gross margin. Overall sales price inflation in the first half was approximately 1%, taking into account the deflation that we've seen in steel and timber. And as a result, adjusted operating profit was 25% lower at GBP 28.9 million and the adjusted operating margin was 9.1%, 330 basis points lower than the first half of last year. We opened a new branch in Dublin, which is already operating very well. And we also launched our Chadwicks website aimed at those customers looking to renovate and improve the energy ratings of their home. It's called YourRetrofit.ie, and it allows Irish homeowners to cost up a bespoke package of energy improvements for their home and then puts them in contact with an approved trade installer customer base to allow them to get a quote and to get the work done. In the U.K., distribution revenue was 2.2% lower at GBP 419 million. In Selco, sales price inflation eased considerably from 19% in the first half of last year to 2% in the first half of this year. But pleasingly, we also saw the decline in volume start to moderate. Gross profit was significantly affected by deflation in timber of minus 16% in the first half, and adjusted operating profit was 49% lower at GBP 23.9 million, representing an operating margin in U.K. distribution of 5.7%. Selco is an operationally leveraged pure RMI-focused business, which is at the front end of any construction cycle. First into a downturn, but also first out, and we would expect to rebuild operating margins as volumes return. We took appropriate steps early in the first half of the year to reduce our cost base and to partly mitigate the continuing inflationary pressure in the cost base in wages, property and energy. We opened a new Selco branch in Peterborough, a new Leyland SDM branch in Hammersmith, and we've also recently acquired 2 separate single-branch merchants in Northern Ireland, which increases the MacBlair estate. Our Netherlands business continued to perform well in the first half and delivered a strong performance, notwithstanding slightly more challenging conditions. Our scale benefits enabled us to serve and grow through our key account customers in the RMI and new build sectors. Reported revenue was 9% higher at GBP 185 million and the operating profit of GBP 20.4 million was 3.6% lower at an operating margin of 11.1%. Through good procurement initiatives and despite the mix shift towards larger customers, we maintained our gross margin. Collective labor agreements set at a national industry level saw salary increases, together with a very tight labor market, and those both put pressure on operating costs in the first half. And the management team is very focused on managing the discretionary cost base. We continued our organic growth in the Netherlands with the opening of 2 new branches since the start of the year. The Finnish economy has weakened in 2023, but higher sales to partners in Estonia and Sweden largely offset the decline seen in the home Finland market. Reported revenue was 4% higher at GBP 70 million. The adjusted operating profit was 21% lower at GBP 7.1 million and the operating margin was 320 basis points lower at 10%. Against this weaker backdrop, the second half focus is very much on ensuring we have a price competitive offering to our customers and good cost control. Since the start of the year, we've opened a new branch in Lielahti and recently acquired a previous partner store in Kouvolan, which has increased the owned store network to 15 branches. The Woodie's business in Ireland delivered a good first half performance with reported revenue 10% higher at GBP 131 million and the adjusted operating profit up 15% to GBP 16 million. The adjusted operating margin was 50 basis points higher at 12.2%. After a weak and wet first quarter, we saw a much stronger second quarter as the sun shown, and there was good performance in seasonal categories. We saw both volume and value growth with transactions 2% higher and the average transaction value 4.3% up. Woodie's delivered a stronger gross margin as a result of improved product mix and reduced promotional activity. And the Woodie's team continues to focus on efficiencies to mitigate wage cost pressure increases. We see an improving consumer outlook, and whilst confidence remains below the long-term trend in Ireland, the government's finances are well placed to provide support for the economy going forward. And finally, just turning to our manufacturing business. CPI EuroMix saw a strong performance despite a more challenging housing market. 2022 had seen pressure on the gross and operating margins through the recovery of higher input costs -- sorry, but through the recovery of higher input costs, the team have restored the gross margin to its trend levels. We've seen a reduction in silos on site, which is to be expected given a weakening environment for new house build. And so we are expecting volumes to weaken in the second half of the year. Very pleasingly, the team has executed a smooth implementation to date of their new ERP system, and we are already experiencing the benefits across a number of sites where it's been installed. StairBox saw continued volume growth in the first half, and as with CPI, have done a good job in recovering raw material price increases. As ever, the team is focused on innovation to reduce manufacturing cycle time and to maintain their industry-leading efficiency. Overall, manufacturing revenue increased by 10% to GBP 66 million, and the adjusted operating profit increased by 26% to GBP 15.3 million, at an operating margin of 23.3%. Turning now to the balance sheet and a few points here. We saw a reduction in the Group's capital employed from the end of December, although our net cash position of GBP 3.7 million after lease liabilities was barely changed from the year-end. The biggest component of this reduction was in working capital which was almost GBP 40 million lower. And you can see that we've now returned to a net working capital level in line with the position 12 months previous. You may recall that I said back at the time of the full year results in February that we were focused on reducing our investment into working capital, returning back to something more into historic norms. And pleasingly, I think we've seeing that in the first half of the year. Adjusted return on capital was 14.3% in the first half, 290 basis points lower than the same period last year, but still a good result. And that was a function of the lower level of profitability. Turning briefly to the cash flow and cash generated from operations. You can see here the most notable movement was that reduction in working capital of GBP 36 million compared to an increase of GBP 39.7 million last year. Now this schedule sets out the cash flow for the period. And you can see that free cash flow in the period was very strong at GBP 159.4 million compared to GBP 121.7 million in the same period last year. Replacement CapEx in the first half net of disposals was GBP 12.2 million and development CapEx was GBP 11.4 million. Turning to the full year, we anticipate that our gross replacement CapEx will be approximately GBP 30 million. Gross development CapEx will be approximately GBP 35 million. And principally, that's focused on new branches, continuing with improvements and reformatting of the existing estate, and also investment into IT. I'd just like to highlight 2 further points on the cash flow. Firstly, the total capital returned by way of cash to shareholders through both dividend and share buyback was GBP 132.9 million. Now the figure in the cash flow includes a small amount in relation to fees for the buyback. But secondly, and I think a real highlight of the first half, is a very strong level of conversion of profits to cash, which is a continuing feature of Grafton over many years. Free cash flow as a percentage of adjusted operating profit was 152%, which I think is a really pleasing figure. And I think that's a good point on which to hand back to Eric.

Thank you, David. So before I talk about strategy, current trading and outlook, I think it's worthwhile to pause a moment and look at the business today relative to the last pre-COVID impacted period in our industry, which was H1 2019. And I think what you can see here is that, through the portfolio reshape, which has happened since then, we have created a much more resilient business, which today has 60% revenue outside of the U.K. and, despite a much more challenging macroeconomic environment than in 2019, delivers a much stronger result in H1. Notably on a lower revenue, we achieved a higher operating profit, as a consequence, a stronger operating profit margin on less capital employed, which leads to a strong ROCE above 14% even in a very challenging environment. And I think it's just important to kind of look at this and take this as the starting point from when you talk about strategy. So in the first 6 months of my tenure, the management team took the time to have a review around strategy. And I'm very pleased to say it's evolution, not revolution. But there are a few tweaks, which I'm happy to point out. So first of all, in terms of geographic focus, the focus on European markets. So focus is on the European markets, including our already existing markets. And we look for markets which have long-term structural growth due to the shortage of housing and the need to improve the existing housing stock, including measures to reduce carbon emissions. So that's really what we are looking for in a market. And then when you look at the next level, which is unchanged, is we continue to focus on the customer group we have a lot of knowledge about, which is the small, medium-sized contractor and installer serving the RMI and new build markets. That's the customer we understand and where we understand how to add value as a group. We focus on distribution of building material and construction-related products, where we can either drive further organic development, consolidation or enhance the already existing product and service offering. And there is a small tweak to where we were before, in the sense that we were much more narrow and really just -- really looked at technical distributors similar to ICO in the Netherlands. And we opened this up, and to make it specific, I would happily buy in a market which has the right characteristics, and we have the ability to further consolidate a strong business, which is a general builders merchant if we can -- if we believe we can add value and repeat, for example, the success story we have with Chadwick's in Ireland. We also committed to continue to develop our retail business in Ireland, Woodie's, a very strong performer. There might still be a couple of gaps in the market. If the right property comes up, we will be happy to open up a further store. In terms of manufacturing, we would equally further build out our portfolio of manufacturing businesses if they have the right characteristics. For example, if you look at StairBox and CPI EuroMix, they are very strong businesses, which directly deliver to the person who uses the product, which no further distributor within the chain. So those are characteristics which we find very attractive. We will continue to manage the business in a federated structure, share best practices across the different operating entities, but also leverage economies of scale as appropriate. For example, on the procurement side, where we see real benefits in working closer together. In summary, we will continue to strengthen our businesses in existing markets. And we are very much focused on finding attractive new platforms and drive consolidation in new markets. So if I look at the 3 different elements of, let's call it, the M&A process. In terms of bolt-on acquisitions in existing markets, I think David already mentioned it, we just had 2 bolt-ons for MacBlair in Northern Ireland. We have a very solid pipeline of potential bolt-ons. And we will continue to do so as appropriate in our existing markets. In terms of platforms, we are engaged in active discussion with a selective number of members -- or vendors, excuse me, in new European markets. Those are good discussions and timing is very much dependent on the vendor. Most of those potential acquisitions are founder owners. Our focus is on deal quality and their focus is Grafton, the company, I would like to hand my business over to, which I have built over the last 30, 40, 50 years. And I'm very pleased to say that I believe that we are in absolute prime positions. And if they get over the hurdle to say, "I do sell my business," I do believe that Grafton is the company which will have the first call to actually execute such a transaction. But the third element is widening the pipeline. I mentioned it earlier, we had very much a focus on technical wholesale, ICO like, but [indiscernible]. So for us, it really depends on the product category. Grafton as a group is in almost every product category in the building material and construction-related distribution. So we have within the Group expertise of many different product categories, from channel business merchanting to more specialized businesses. So we open that funnel and basically would happily do any of those product categories we're already engaged in, as long as we believe it can add value and drive consolidations by acquiring an attractive platform in a still fragmented market where we can bring our expertise to bear and deploy capital. In terms of capital returns, we already mentioned it before. The interim dividend has increased by 8.1% to 10p a share, in line with our progressive dividend policy supported by very strong cash flow and a great balance sheet, and of course, our confidence in the long term how Grafton will develop in the market. The cash payment for the '22 interim dividend remains unchanged relative to prior year, but of course, as there are less shares in issue, there will be higher dividend per share. We have spent since May '22 GBP 243 million on cash buybacks at an average share buy -- average share price of GBP 8.34, and we just announced today to do another GBP 50 million share buyback. So that's the beauty of our balance sheet. We can do both. We can remain focused on acquisitions, focused on making sure we find the right value acquisition, we have the cash on balance sheet, at the same time, we can also return money to our shareholders. Just a very brief update on ESG. We will give a more comprehensive one at the full year. But we aim to be at net zero no later than 2050. And we submit our net zero targets to the SBTi by the end of this year. I think I just want to remind everyone that Scope 3 data is 98% of our emissions. And of course, Scope 3 is what is not in our direct control, it's not directly in our operation, I should say. So for a distributor in our industry, the compilation of the data is somewhat challenging, and the team makes very good effort and we are well advanced, and we're going through the final due diligence step on that. In terms of corporate sustainability reporting directive and the requirements for double materiality assessment, the gap analysis is all underway and we are actively engaged with the stakeholders. In terms of Scope 1 and Scope 2, good progress in the first year, positive emission reductions. For example, the use of HVO has accounted for over 450 tonnes of CO2 savings. Community engagement, we contributed over GBP 300,000 in value to the communities. And in terms of supplier engagement, is good progress and positive engagement with our supplier base around risk management and carbon reduction. So overall, good progress in the first half. In terms of current trading, positive revenue growth since June 30. So in the first few weeks of the second half, overall positive revenue growth. Product inflation and pace of volume decline continues to ease. But I think it's important to say, I wouldn't read too much into it because July and August are not really the strongest month and the really important months are yet to come, which will be September and October. In terms of outlook in Ireland, we believe that the outlook has somewhat improved with strong growth in employment and incomes, which supports consumer spending in the RMI and DIY markets, and house completions are expected to be similar to last year. So we are confident in the Irish market. In the U.K., there are further challenges expected in the RMI market for the remainder of the year and household spending and discretionary spend continues to be weak. And that's just how the U.K. economy is at the moment. And as David already mentioned earlier, our businesses have a lot of operating leverage. And many of them in the U.K. are focused solely on the RMI trade, so -- on the RMI customer. So there is an impact there. In terms of Netherlands, the house market remains subdued as house prices have declined and transaction for existing and new homes remain weak in response to the higher interest rates. Finland, there is a modest contraction in the economy. There is a fall in residential and nonresidential construction. However, IKH's exposure to -- is to different end user markets, not just housebuilding. So therefore, we are somewhat protected relative to the overall economic challenges. So for the full year, we expect adjusted operating profits to be in line with analyst expectations. So in summary, the Group delivered a resilient performance in challenging markets against strong comparators in H1 last year. We traded as anticipated and we reaffirm full year expectations. The reduction in inflation and greater price stability will create a somewhat more predictable trading backdrop. We are well positioned for recovery. We have lean businesses with a lot of operating leverage. So we are ready for a recovery. In the meantime, we are focused on supporting our customers, responding to the evolving market condition whilst continue to manage cost very tightly. We have announced another share buyback this morning, bringing the total to almost GBP 300 million since May 2022. And as I mentioned before, we have strong optionality, and our balance sheet gives us the ability to deploy the capital quickly when one of the opportunity crystallizes and overall we are confident to outperform over the cycle. Thank you very much, and we are ready for any questions.

So just in terms of order, it's really on how we do the questions, there are some mics. So if you could just make sure that you say your name, rank and serial number into the mic, that would be good. Now I know that you'll have 3 parts to your single question that you're going to ask. So if you could just ask the first part of your question, and then we'll address that, and then you can answer the second part, and then you can ask the third part, that would be great just so that I can remember all the questions, that will be super. So we'll address any questions in the room first. There may be some people on the webcast who haven't been able to join us. And so after we finish in the room, we'll see if there are any questions, other incoming questions coming in. So that's it. And we've got some mics at the back. I'll go to David first.

David O'Brien from Goodbody. First question from me, please. Just you've given us a bit of color on steel and timber pricing and those dynamics in the first half. How do you expect those to play out into the second half?

Yes. I mean, we're hopeful that in terms of both steel and timber prices, that we'll start to see those stabilize. I mean, steel prices have seen almost unprecedented movements in price. If I went back to sort of first quarter of last year, rebar was trading at that point at about EUR 1,600 a tonne and it's now down at EUR 600 a tonne. So that's seen an enormous pressure in 2 ways. I mean, one is, naturally, even if you keep the gross margin the same, your gross profit is less. But it does mean, particularly in the case of steel stocks, where in Ireland we are the biggest steel stockholder, and typically there's a 4-month lag between placing an order and actually receiving the stock, that you end up with some stock losses. So last year, we saw, if you like, a super normal gross margin. First half of this year, we've seen an abnormally low gross margin. So I would expect that, that would normalize. There may still be some further weakness in steel. But it feels like we're getting closer to the bottom. I think equally in timber -- timber we saw back in 2019, a sheet of OSB was GBP 19.99 a sheet. That went up to GBP 40 a sheet in 2021. It was somewhere in the mid-20s in the first half of last year, and now we're back down effectively to GBP 20. So we've seen real volatility there. I think the gross margin position is probably slightly different in timber, I think. Because in general, unlike steel where we've seen the impact on -- of stock losses, in timber, the gross margin, overall, is down a little bit. The issue on timber is more and their selling prices are significantly lower. And I think, again, it feels like we are getting to the point where we should see more stability in pricing. I think at the moment, there's still talk of a little bit more softness, but it feels like we've had the big price falls.

Okay. And just moving on to the strategy piece. You've articulated that's evolution, not revolution. You're now talking about return to maybe general builders merchants. What are you seeing in terms of opportunity set on the continent that maybe didn't exist in the U.K.? Or how is that going to enter to the whole piece?

Look, on the [contrary,] you have to look at each market by product category or by specific -- specialism. And some European markets, some have still a very attractive composition, let's call it, on general builders merchant where you have some strong players, but overall the market is still relatively unconsolidated. And the amount of builders merchant, let's say, the density is fall over than, for example, in the U.K., where you have a very high density of general builders merchants. And those are markets where I would not rule out to make an acquisition if you see the right one with a strong team, and we believe we can add value and further growth. My point here really is just because I -- just because we sold a general business merchant in the U.K. doesn't mean that general business merchant is a bad business, because it's an excellent business which we have in Ireland, Chadwicks. And there are markets which display similar characteristics in that particular segment as Ireland demonstrated some time ago. So I think we would be fools not to include this in our funnel and then have a view whether we believe with the right strategy we can generate an attractive ROCE and the business which has a good trajectory going forward. But as I said earlier, we don't just focus on one particular product category. At the same time, though, if we find a good business in a market which is more focused on other product categories, whether that's technical wholesale, like ICO, whether this is more HVAC, air conditioning and heat pumps and [indiscernible], it's really dependent on, is it a good business? Is it a good platform? Does the market have the characteristics of -- the right characteristics for long-term growth? And does it have the fragmentation element that we can really drive consolidation and do a successful buy-build. That's the criteria. But we opened the funnel because we don't want to miss opportunities. If you just look at the technical wholesale, I don't think the funnel was big enough for us. And we have the expertise across many different product categories as a Group.

A final one from me. You called to sharing your best practice and benefits of economies of scale. I guess, is there anything new you've seen as you've appraised a whole group and where are the potential opportunities as you sit now?

Look, we have put in place a Group Procurement Director. So somebody in the Group works now with the different entities. That doesn't mean, that is not -- just to be clear, it is not something which is contrary to federated structure. It's actually you can still be federated, but you can make sure you understand where are the product overlaps, the supply overlaps, and how do we make sure that we source at the best possible cost the right product, whether that's near sourcing or far east sourcing. And historically, in the last few years, we haven't really done that. And that is something where it's an obvious one where you can drive value. It also makes if you have some supplier rationalization, if you buy the same product more or less from different suppliers, it's a no-brainer. So those are things which we have put in place. In terms of best practices around ESG, around IT, around operating processes, those are things we have already done in the past, and we will continue to do so.

It's Harry Goad from Berenberg. I've got 2, please. So the first one is still this point on inflation. And I appreciate you have lots of moving parts by region and by product line. But could you give us a sort of, if possible, a feel for where you think average inflation across the business will sit sort of towards the end of this year? And is there indeed a possibility we move into deflation in 2024? So that's the first question, please.

Yes. So put it into some context. So we take the Group as a whole in the first half, then inflation from the Group was running at 3.5%. I think our expectations for the second half is that we'll see that further reduce for the Group as a whole. Now, are we likely to get into a potential deflationary period? I think -- our view is that inflation in the second half and going into next year is going to be flattish. I think what we've come from in the U.K. and Ireland are sort of pretty good examples of that is, historically, we've gone through a period where typically inflation across product categories was pretty similar. What we've been through is now a period where we've had, on the one hand, either double-digit inflation across product categories or more recently, in key product categories, we've seeing double-digit deflation. But in heavy building materials, we still see quite high single-digit price rises. I think what we'll start to see is we'll start to see that spread of inflation to deflation narrow and things will start to come back towards more modest levels of price increases. If I think about sort of current discussions on the heavy building materials side, I don't think there's a huge amount of talk about price rises in truth. So there is some risk, I think, that we might see modest levels of deflation in the second half of the year. But I think intuition is for the Group as a whole. If we see elements of deflation, I think it may be in specific businesses. I think for the Group as a whole, flattish feels like where we're going to be.

Great. Thank you. The second one is coming back to M&A. And I imagine in the last couple of years, one of your biggest competitors in that auction process is private equity capital. I'm presuming, given where financing rates have moved to, that's perhaps a different landscape. I mean, I'd be interested to hear your views and when you're in a bidding process now, what is that competitive landscape like today as opposed to maybe a year or 2 ago?

Look, private equity is undoubtedly very active in our sector since a few years. I think what we really focus on is, if somebody wants to sell to the highest bidder, they will do an auction. Private equity will be there. We will be there if we think the business is attractive. But we are disciplined on what's the price we buy for because we want to generate the ROCE which is acceptable to us. Now I think the big differentiator is most of the M&A targets on platforms we focus on are actually people who don't want to sell to private equity because they have built a business over a lifetime, and they want to, as part of their succession, the state planning, give the business into the right hands. And there the question is far less -- do you pay the highest possible price because I can already not spend the money I have today, but actually, will you look after my business, which often has the name of the people on the front. And do you continue to develop it and look after my people. And I think that's where, as I said, in my presentation, a lot of that is -- timing is somewhat vendor-dependent, is the active discussions we have at the moment, many of those are with guys who would not sell to private equity. And it's this process of they know they have to, they know rationally they have to kind of organize their succession/estate at some period in time. And being in the discussion and making them comfortable that culturally we are the right fit and we will look after their business, because they don't want the business which just gets flipped in 3 or 4 years. That's one element. And the second element for them is actually really getting over the line to thinking about selling to actually selling, which is a process which takes time. And I know this might sound a bit fluffy, but it's really a dance where you have to kind of make sure the other party is comfortable. And I think on pricing, we'll have to be competitive, but we try to actually avoid any auction processes because those vendors only want to sell to someone where they believe the culture fits, and their business will continue to prosper, if that answers the question.

Aynsley Lammin from Investec. Just 2 from me, please. First of all, on the -- back to M&A, I mean, in terms of the kind of people just talking to in the pipeline, what's the kind of size of the deal? Should we just expect bolt-ons or there are some big deals in there in the kind of hundreds of millions? And if you could just remind us where you'd be comfortable taking the balance sheet if you saw the right deal at the right price? And then just secondly, on the kind of operating costs, obviously, you talked about product price and inflation slowing, just interested in the trends at the operating cost line, wages, rent, et cetera?

I'll take the first one. Yes. I mean, the pipeline has anything from businesses which are, call it, GBP 0.5 billion in revenue, down to single site, a few million bolt-on. So you have a pipe which is diverse in that. In terms of where are we comfortable to taking the balance sheet to, I think we always were clear that we want to maintain investment grade. That hasn't changed. So therefore, it's pretty clear how far we would take the balance sheet in terms of leverage. So the pipeline, as I said, good size to small -- has anything in it from...

Just in terms of the operating cost environment. Again, I think what we'll see is inflation is going to start to ease. But we've been through in the first half of the year. When I look at the P&L account, we've seen gross margin pressure, but undoubtedly, the biggest pressure has been on like-for-like operating cost increases, which have really come across wage inflation. It's been property costs and it's been energy costs. Those are the 3 really key drivers of OpEx pressure. One of the challenges that we've got, and I mentioned it, for example, say in the case of the Netherlands and Finland, tends to be around collective labor agreements on nationally set wages. But equally, when we look at national minimum wages, say, in the U.K. and Ireland, and in particular, those would be entry-level benchmarks for the likes of Selco or for the likes of Woodie's, then when we're seeing very high single digit or, in some cases, recommendations to double-digit increases in those prices, then that puts big pressure, not just at the entry level, but clearly has a knock-on effect and repercussions all the way up. So I think it's -- that is an ongoing pressure. I do think, if I look at like-for-like cost increases in the first half for the Group as a whole, they were just a little under 7%. I think we'll start to see that ease. But the pressure is managing what's happening on some of those nationally set wages. And our task then is to offset those increases through efficiencies. So for example, if we were to look at Selco, which has always been a sort of tight cost ship, but if I was to look at headcount, then we've reduced largely through natural wastage head count in the like-for-like business by just under 8%. So we're trying hard, but that sort of 8% efficiency gain in terms of labor, in terms of full-time equivalents is really only offsetting what is a movement in the national minimum wage. So yes, I think it will come down. In reality, for margin improvement, we need to see revenue growth outstripping cost inflation. And we were sort of clear on that coming into the year that that's the pain point for any distributor.

Ami Galla from Citi. Just a few questions from me. First one was on current trading. I appreciate this is somewhat less meaningful. But in terms of the U.K. business, were there any diverging trends between Selco and Leyland SDM that you had seen in current trading to date? Maybe I'll wait for the second.

Yes. So look, I mean, I think we have seen a good performance in Leyland SDM. We've grown the footprint of that estate in recent years. So we're getting stores that are maturing. So that's helping within London. But I also think within London, we have, over the last couple of years, seen an increase in trade activity in the likes of hospitality and leisure and hotels and pubs and restaurants in Central London, which is helpful. When we look at the stores in the Leyland estate that have outperformed, it's the likes of a Shaftesbury Avenue, for example. So I think Central London has benefited, in particular, in terms of that return on activity. Selco is really pure RMI. It's generally -- in general, more residential RMI. And I just think what we've seen in the RMI space is that the improvement level of activity, which is sort of always the kicker that you tend to get, that's come down significantly, and we're sort of, to a core repair and maintenance, nondiscretionary spend at the moment. So I think that's sort of how we're seeing it. Leyland's benefited, I think, from more tourists in town, put it crudely. Selco is sort of more at the front end of residential RMI.

My second question was on your Irish business and the launch of the sort of Chadwicks platform that you talked about. Can you give us some color as to pickup of interest in that? I mean, any scale of what the level of energy retrofit demand looks like in that space?

Yes. Look, the retrofit element has just started. So we had, I forgot the number actually, we had -- how many hits did we have on the...

Well, I think sort of literally in the first couple of weeks, we've had sort of 50 direct links that we're costing up. So we -- because it's literally in its infancy, I think we'll see a build of momentum in terms of number of people making inquiries. And then we need to see what the conversion rate is. But in general, I think the Irish market from a renovation and remediation perspective has much more opportunity per capita than the U.K. because there's much more available in terms of grants from the Irish government to support that work, whereas in the U.K., to a large extent, homeowners are really on their own.

My last question was just on the sort of M&A front. You've talked about your extended strategy. My question really is, in terms of the last 6 months, were there any specific businesses where you've had advanced discussions? Or it's really a question of timing where vendor ambitions on pricing is really dependent on market conditions, which are not perfectly right at this stage?

No. On -- let's focus on platforms rather than -- so on platforms, we have discussions with owners who want to sold their estate and wants to be comfortable that we are the right owners for them. So we are in the dance. We are confident that in the medium term, we will get one of those over the line. But -- or that's at least our expectation, whilst we open the funnel further. But it's really -- we have to have those discussions and once they are comfortable, that's actually when you then really go down into the detailed negotiations. Yes. So that's where we are on M&A. You had 2 parts of the question. What was that?

I mean, on a broader point, you've talked about kind of matching minds to an extent, in terms of vendors may be willing to wait at this stage. The question is, we know the current macro outlook is more difficult. Is it more that the sort of the conversions are more likely to materialize when the macro outlook actually improves?

No, I think on the owners who want to resolve their estate, they will take a view on what the business is worth. Once they are comfortable when -- that they actually really want to sell it now, that's what I would call the dance. I don't think the macro necessarily have a massive impact on that because they have to get over the mental hurdle to say goodbye to their business and hand it over, which is not an easy process if you have built the business over a lifetime. But at the same time, I should also say that we have looked at many platforms, we have had management presentations of potential platforms. But I don't want to use the expression remain disciplined all the time, but if you look at the platform, which at a good year last year made low double-digit percentages, and it goes very much down to 2% or less this year, and we don't really think this is a business which we can build up, then...

Low single-digit percentages. Yes, yes.

Yes. Low single digit. What did I say? Oh, sorry, low single digit percentage. Pardon me. Low single digit. Then it's just not for us. So I think deal quality is important. So is it the right deal for us. But on timing, I think most or many of the deals we look at are really to buy bilaterally from founders.

Will Jones from Redburn Atlantic. Three, if I can, please. First, just around competition, I suppose you referred in statements added competition in the U.K. and Ireland particularly. Just perhaps you can elaborate on how you're seeing that currently? Is it intensifying? Is it stabilizing? And perhaps you could link that, I think the gross margin in the U.K. fell 250 bps. In the past, it's been going up, you've talked about temporary and nontemporary factors. I don't know if you could help us understand that 250 bps?

Yes. Look, I think in the U.K., in particular, we've seen a very, very competitive market. And I think that that's a function of all the players scrabbling full volume. And I think particularly with the reduction that we're seeing in new house build, it's meant that the RMI space has become a particular focus if as a merchant you're not getting the level of activity from new build. So I think it is very competitive and it's very price competitive. And equally, there's high level of stock availability as well. So there's a lot of people, I think, competing for, in general, what is a lower volume requirement at the moment in the industry. And that, I think, has undoubtedly had a bearing in terms of the gross margin in the first half. I think Selco's position is to be a really trusted partner for its RMI customer base. And as a trusted partner, that means we've got to have credible value-based pricing. It means that we've got to ensure we've got that stock in depth and the best quality service. It's a 3-pronged attack, if you like, on securing customers. But value is a really important part of that proposition. And so we have responded to ensure that we've got that value proposition. And I think of the 250 basis point reduction in the overall U.K. gross margin, I think that a lot of that is around ensuring that we've got that competitive price in terms of gross margin. Now I do think that over time we'll see a recovery in gross margins, but it could take a couple of years, and it does depend upon volume growth to get there.

Second one, just coming back to the strategy and potential M&A. I just wondered, given the characteristics you say you look for at the country level, would you be willing to specify which -- or help us understand which countries might tick those boxes better? I'm sorry, just linked to that, just the return on capital that you may look to target, there's no numbers today, but I think back at the same day in '21, you outlined the kind of returns you might look for on bigger stuff. Does that still apply?

So let's start with return on capital. As a Group, we want to have return on capital which exceeds our WACC. And so we really target to generate a ROCE which is pretax ROCE of 13% to exceed that. So that's the overall thing we are trying to achieve. Now if you look at the platform, that means if you buy a platform and we then develop the business, we expect over time to achieve that, not on day 1, I mean, that is probably taking the ROCE element. In terms of markets, we look -- we were debating whether we should put on the map or not and show different countries. And then you just get the discussion about why is this country in, why is this country out. But generically, you can say that the developed European countries, and we probably don't go further south than Spain and Portugal, is really what we are focusing on in terms of territory. So we don't -- we have -- for example, Greece is out.

I think you ruled out [indiscernible] as well.

Yes. And then just the last one was -- it's for David. I suppose you've given us views over the last year or 2 about potential sustainable margins longer term by division. I just wondered, and I appreciate things are moving around a lot at the moment, but whether there's any change to any individual components of that as you -- based on what you've learned over the last 6 months?

No, I don't think so. I mean, as you will have seen from the results, I mean, clearly in terms of the biggest gap to where we see sustainable margins, currently sits in the U.K. And I do feel that over time, we will rebuild those margins to the levels that we've historically said in terms of it being low double digit operating margins. I think the characteristics of the group of businesses that we've got should get us back there. But the key thing around that is volume growth and its revenue growth exceeding cost inflation. That's really important. I still think the RMI market has got some way to recover in terms of volumes, and it will require a rebuild in terms of margins and gross margins. Christen?

Christen Hjorth from Numis. The first one, just whilst we're on Selco, and you touched on improvement maybe sort of almost all gone. Does it feel like activity is bottoming there? And I suppose if you look at gross margins as well?

I think if we just look at it objectively on what we're seeing in terms of pace of volume declines, it is undoubtedly slowed. Now I think -- so that's good news. We've got to be cautious, as Eric said, though. July and August, thin months of trading, and in truth have been quite weather-influenced. So I think if the weather had been better, then the numbers probably would have been a little stronger. But the real acid test for this year will be September, October, November. So I think we sort of -- we've got to reserve judgment on it. I mean, I hate to say it because it's sort of on the front page of every newspaper, but we need to see, for example, how that has a bearing in terms of the RMI construction market and van person because a van person tends to drive a van that isn't low emissions. And that -- I know lots of industry bodies are talking about that. And I just think we need to see how that pans out.

And the second one is just on Finland, as the most recent platform business. Just sort of an update around how you sort of view that business, how it's performed, obviously, cyclically impacted? But also the opportunity to grow that platform as well?

Yes, that is a good question. And I think we can continue to modestly grow the owned store network, which we have in Finland. So we now improved or increased it to 15 stores. We can -- we believe over the next years, we can probably increase that to up to 20%. In terms of IKH Partner stores, so the wholesale element, either branded as IKH Partners or non-branded resellers of products we deliver as a wholesaler, I think we are in Finland at pretty much maturity on that. And the question is how fast can we and will we grow in adjacent geographies. So we have a strong development in Estonia and we have a steady development in Sweden on new partners. And we need to see how do we drive that growth. But it's not -- there are not that many obvious M&A bolt-ons in the Finnish market. So you have to think about Scandinavia and how you build, how you embody that platform into a bigger Scandinavian M&A play, if that answers.

Sam Cullen from Peel Hunt. I've got 3. Two kind of easy ones to kick off, I think. So on the retail business, I might have got the numbers wrong, you said pricing was up quite strongly in the first half or kind of ahead of the rest of the group? Can you expand on why that was?

Yes. If we look at price inflation in retail, it was more like 5% to 6%, and really influenced by that -- those specific categories. So retail wasn't exposed to the same level of timber price deflation. If you look at the Woodie's offering, it's very significantly reliant proportionately on decorating and on gardening products. So it's very much led by the categories in particular. .

And then on manufacturing, could you see any significant pull forward of demand, do you think, in the residential space and CPI in the first half?

Yes. I mean, I guess the basis for your question is effectively changes in building rigs and effectively new house build trying to get a hold of it by -- ahead of it by effectively putting foundations in the ground. There may have been an element in that. I mean, to some extent, actually, the performance that we saw volume-wise in the first half was better than we thought it would be given the overall market backdrop. You got to remember though, of course, CPI is really focused on brick work. So there's not a huge amount that goes in, there's a little bit maybe in some foundation blocks. But in general, there's not a huge amount that would go into the slabs. I think probably from a volume perspective, that was more about house builders back end of last year and the beginning of this year, building out the plots they needed to meet their effectively forward order book, and equally to make sure that they've got stock on the ground to sell when customers come in. I think what we will now see is, we'll see a lower level of demand as house builders effectively adjust the carrying stocks that they've got to meet the underlying demand. So yes, I think there was a sort of a bulge build-out to what they've sold, make sure they've got stock on the ground, and now will effectively be keeping pace against the sales raise.

The last one, apologies, is back on the M&A piece and the kind of strategy. I guess, historically, this industry hasn't been sort of synonymous, I guess with rapid sort of structural growth, particularly the general side of the industry rather than the more specialist side, and you've clearly benefited over the last decade or so of growing the structural -- structurally growing or growing unit growth, if you like, in terms of rolling out Selco and rolling out Isero and looking out to roll out IKH, and the general merchants are typically only won where they've been relative market share winners rather than sort of absolute market share winners, obviously massively bigger than anyone else in Ireland. How many other markets do you think there are either nationally or regionally, in some of the larger European economies where you can go, and I don't know, for the sake of argument, be the largest player in Bavaria or an area of Spain or Portugal that might work or where the number is going to stack up? Is that how we should think about your sort of general merchanting strategy?

Yes. I thought it's a difficult question. Okay. No. Yes. I think in general merchanting, your density is really key, and you're far better off in having -- being the majority player and having the density in a particular geographic area of an overall country than being a guy who is spread around the country and doesn't have the density. So that's how we look at it. But then you need to see, okay, how -- if you buy a player, for example, who have -- has this characteristic of being [indiscernible] how do you think you can still grow them? How does the rest of the market look like? And would we believe it could [indiscernible]? That's how we look at the general builders merchanting. But I think just to put it all into perspective, I have not said we are now just looking at general builders merchant. What I have said is that we have not excluded general builders merchants in our funnel, which is a subtle difference to where we were prior. But that's probably what I would say. But we look at this -- as I said, I'm well aware that it's a more difficult trade format in a way because you have variable pricing depending on customer groups and there are decisions made in a branch, which in other formats are not made to the same extent. So you really have to be comfortable with the assets, the management and the ability of that team that you can further drive it. And it comes back to, I think, what David probably has preached to all of you for years. It's about making -- it's the right asset with a strong team in the local market, which can continue to develop whatever we purchase. So -- but the short answer to your question is yes.

Flor O'Donoghue from Davy. Just a couple of quick ones from me. Firstly, on StairBox. Just trying to understand, it's -- usually you see they might be kind of struggling in this type of environment, but it seems to be going from strength to strength. Just to understand kind of the business there, how it's doing so well, if that's okay?

Sure. Well, look, the fundamental point about StairBox is that you can use a website and design your staircase and get it delivered straight into your house where the installer can install it on your behalf at the far faster time scale than -- and at a better price than if you would have it traditionally manufactured. And I think StairBox is a disruptor in the staircase industry, and that's what drives the growth.

Yes. I mean, fundamentally, if you replace the staircase in your home, it transforms your home floor. I'd really recommend it. It's a very, very good value proposition. And StairBox is a price leader, and we have seen competitors during our ownership, some quite significant competitors just go out of business. So the team in Stoke are just relentlessly focused on cost and efficiency and do a great job.

And second one, just very quick really, I guess, just on property profits. I know you've said there's not much in H2 or -- just beyond that, is there much else to extract from the portfolio?

Look, we've got, I would say, probably a couple of properties in London that have potential, but I would put that into the long-term potential bucket. They're not actually properties which the group is occupying and trades off. But in order to realize value, I think there's quite some way ahead to maximize the position there. So that could come. But if we think it's going to come, we'll flag it well in advance. Okay. If there's no more questions in the room, we'll just see if there are any questions outside the room.

[Operator Instructions] There are currently no questions from the phone. I'll hand back to the room for closing remarks.

Okay. In that case, thank you all very much for attending, and have a good rest of the day. Thank you.

Thanks a lot. Cheers. Thanks.