Grafton Group plc (GFTU) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome to the Grafton half year results. So let me kick off before I hand over to David for all the financial details. So first of all, I'm pleased with our robust performance in the first half against a tougher-than-expected market backdrop. And I think the fact that we achieved to have roughly flat gross margins compared to first half last year really demonstrate the resilience of our decentralized operating model with good geographic and end-user diversification. Product price deflation continued to negatively impact our sales in the UK & I, albeit volumes in Ireland improved in the first half, but declined due to the overall market conditions in all other operating geographies. We continue to invest in our existing branch network to the benefit of our customers and actively pursuing acquisition opportunities. We preserved our strong balance sheet to execute on growth opportunities and at the same time, supported by our strong free cash flow generation, returned almost GBP 105 million to shareholders, increased the interim dividend by 5% and announced a further GBP 30 million share buyback. For the full year, we anticipate to deliver in line with current expectations. So if we go to the financial highlights. As you can see, revenue down 4.4% compared to first half last year. Adjusted operating profit at GBP 83.1 million, down 20.9%. Adjusted EPS, 33.4p, just down 12.4%, still delivering an overall operating margin pre-property profits of 7.3%. And I think the two numbers I would really like to point are these. As we are in a downturn overall, we still deliver a solid ROCE of 11.1%, greater than our cost of capital, and had a very strong free cash flow conversion again of 120%. I mentioned before, interim dividend up by 5%, supported by that strong free cash flow generation. And as you can see, looking at the net cash basis before leases, we have preserved the firepower to execute on M&A in near term. I'll hand over to David to go through the details.

Thank you, Eric, and good morning, everybody. Group revenue which, as Eric mentioned, continued to be impacted by price deflation in the first half of the year was 4.4% lower than the same period last year at GBP 1.14 billion. The adjusted operating profit pre-property profit of GBP 83.1 million was 20% lower than the first half of 2023 and was reflective of weaker market conditions outside of the group's home market in Ireland. As regards to the operating profit, as Eric has already mentioned, we were really pleased that the group's gross margin remained broadly unchanged, and that was reflective of that strong performance across our Irish businesses. But I would also call out the active management and tight cost control across the group in these tougher markets. There were no property profits in the first 6 months of the year, and we're not anticipating any significant property profit in the second half. The group reported net finance income of GBP 0.3 million during the first half, and that included a foreign exchange gain of GBP 0.9 million. Taking into account the reductions in sterling and euro interest rates, we will receive lower levels of interest income on our deposits in the second half and, as a result, we expect to see modest finance cost rather than an income in full year. The tax rate of 20% was slightly lower than the rate for the first half of last year as the group benefited from a greater proportion of profits in Ireland, which are taxed at 15%, including the Pillar 2 top-up tax rate. We now expect the full year tax rate to be 20% but anticipate that, over time, the effective tax rate will rise to 21.6% as U.K. profits return to being a higher proportion of the overall group profitability. Adjusted earnings per share were 33.4p, 12.4% lower than the first half of 2023. And the lower number of shares issued following the buyback program resulted in a positive impact on EPS relative to the movement in profit after tax. Let's now look at the movements in revenue for the first half of the year compared to the first half of last year. The organic movement, which I'll cover in more detail on the next slide, saw revenue decline by GBP 46 million, while bolt-on acquisitions made in 2023 in Northern Ireland, Finland, the U.K. and Ireland contributed an incremental GBP 11 million in sales. The weakening of the euro against sterling during the period accounted for an exchange loss of GBP 17 million or 1.4% of the reported revenue decrease. Now this slide analyzes that decrease of GBP 46 million in organic revenue in the first half of last year on a constant currency basis. Our Irish Distribution and Retailing businesses saw increases in organic revenues. However, our Distribution businesses in the U.K., the Netherlands and Finland saw a fall in revenue as they face challenging market environments in the first half of the year. In particular, markets in the U.K. remained weak with RMI volumes under pressure due to lower discretionary spending by households. Our Manufacturing businesses also saw a decrease in organic revenue during the period as the fall in demand in housebuilding activity and the weak RMI market continued. New branches across the group contributed incremental revenue of GBP 4 million. Turning to the movement in reported adjusted operating profit. Now this slide bridges from 2023's first half reported figure of GBP 105.1 million to our reported first half 2024 adjusted operating profit of GBP 83.1 million. I'll look at the reduction in operating profit from the like-for-like businesses in more detail in a moment, but you can see that new branches increased operating profit by GBP 0.4 million, acquisitions added GBP 0.9 million and property profit was GBP 1.1 million lower. Foreign exchange translation losses reduced reported profit by GBP 1.4 million. Looking at the GBP 20.8 million reduction in operating profit in our like-for-like business, you can see the biggest contributor was the U.K. Distribution businesses, driven by the decline in the U.K. market. Selco, in particular, continued to see the impact of significantly lower activity levels in the RMI market. In Northern Ireland, MacBlair was also impacted by the difficult RMI market. However, this was partially offset by some modest improvements seen in the new housebuilding market in the province. Our Irish Distribution business saw a positive organic growth of GBP 0.9 million. The Netherlands recorded a decline of GBP 4.7 million, which was primarily driven by price declines in several key product categories and an unfavorable change in sales mix, which reduced the gross margin as well as continued inflationary pressure on the operating cost base. The Finland Distribution business saw a decrease of GBP 2 million in operating profit as a result of a weaker construction market and an overall economy in mild recession. Our Irish Retailing business has performed well and recorded organic operating profit growth of GBP 1.6 million. Our Manufacturing businesses saw a decrease of GBP 4.6 million in the first half of the year, largely due to declines in new housebuilding volumes and the weak RMI market in the U.K. And finally, central costs continue to be tightly controlled despite inflationary pressure. Now moving on to look at our businesses in a little more detail, starting with Ireland and Distribution, where the outlook for growth remains positive as strong government support for new housing continues. We saw a positive trading performance in sales volumes, which grew by 5.4% and more than offset price deflation of approximately 4.9%. The gross margin improved, supported by a lot of work by the Chadwicks team on a branch-by-branch basis, together with a more stable environment for steel prices. In the first half, we opened a new bulk distribution center in East Wall Road in Dublin, which will service our large customer accounts on bulk volume lines, acting as a distribution center for our branches in the Greater Dublin area and that will improve efficiency as well as reduce our carbon emissions. Here in Great Britain, we were delighted to announce the appointment of Frank Elkins as the new CEO of Selco & GB Distribution. As some of you will know, Frank brings extensive industry experience to Grafton, most recently having been the Chief Operating Officer of Travis Perkins. Revenue in the U.K. Distribution business was down by 5.9% to GBP 394.4 million. Lower underlying demand in RMI, combined with poor weather in the first half of the year, resulted in volumes for the first half being 3.9% lower with price deflation of 3%. Our Selco Builders Warehouse business has seen slightly higher like-for-like price deflation in the first half of 4% as a result of its greater exposure to timber prices. The U.K. Distribution gross margin was down overall by 60 basis points, which reflected the weak volume backdrop in competitive market conditions, to which we responded across our businesses with an investment in pricing to ensure that we continue to maintain a strong value proposition for our customers. Despite significant cost pressures, increases in like-for-like overheads were contained to 1.5% through rigorous cost management, including headcount reductions in Selco in the first half. In July 2024, Leyland opened its 34th store in South Kensington, marking its ninth store opening in 3 years. Our Netherlands business performed in line with expectations in a challenging market. Revenues were down 2.7% in constant currency and 5.1% in sterling terms to GBP 175.2 million. Isero saw a modest decline in sales to smaller customers into timber factories, which was partially offset by revenue growth from key account customers engaged on larger construction projects and an increase in ventilation sales. As a result of the weaker RMI market, branch revenue decreased in almost all regions across the country. Pressure on gross margins continued, partially due to price declines in several key product categories and with the change in sales mix towards larger but lower margin construction projects. This reduction in gross margin and the continued pressure on the operating cost base, largely driven by high wage inflation from collective labor agreements which is set at the industry level, resulted in lower operating profit and operating profit margin. We continued our organic growth in the Netherlands with the opening of two new branches, which are performing well in the first half of the year in the northeast of the country to better serve local customers in those areas. In IKH, Mika Salokangas was appointed Executive Chairman in 2023, and Mika has now assumed operational responsibility for IKH more broadly. Mika was previously CEO of Ahlsell’'s Finnish operations and is a highly experienced operator in the technical distribution field. Revenue in the Finland Distribution business has decreased by 5.3% in constant currency terms and in sterling terms by 7.6%. However, the business has still performed well against a very weak Finnish market to date in 2024. The adjusted operating profit was 32.9% lower at GBP 4.7 million, and the adjusted operating margin was 7.3%. Active measures were taken to reduce the operating cost base and better align the organization, which partially offsets the decline in the gross margin. The Finnish economy remains in a mild recession but there are signs that there is optimism that there will be a gradual return to growth during 2025, as consumer and business confidence in the economy improves. A business improvement project focused on inventory reduced the investment in stock by EUR 5.8 million in the first half of the year, and this will continue to be a key theme in the second half. Since the start of the year, we've opened a new branch in a suburb of Helsinki, which has increased the owned store network to 15 branches. The Woodie's business in Ireland delivered a good first half performance despite challenges with poor weather in the second quarter, which impacted the sale of seasonal products such as barbecues and plants. Reported revenue was just 0.4% less than the prior period at GBP 130.7 million but was up 2% in constant currency. The half year revenue growth of 2% in constant currency was supported by an increase in the number of transactions by 2.4%, partially offset by a marginal decline of 0.4% in average transaction values. We saw an improvement in gross margins as a result of the active management of product mix and promotional activity, which focused on continuing to prioritize value for money for our customers. Overheads were tightly controlled in the period resulting in improved profitability over the same period last year. The adjusted operating profit was up by 7.9% to GBP 17.2 million with the adjusted operating margin 100 basis points higher at 13.2%. Following the successful launch of the Home Shop in Shop concept in 2 stores in 2023, 4 more stores were rolled out in the first half to further enhance our offering within the important and growing home style category. Turning to our Manufacturing businesses. The first half of the year was a challenging period for CPI Mortars as the fall in demand in new house building activity continue to impact volumes. Volumes were 25.8% down in the first half of the year compared to the same period last year. Gross margin and the overall cost base have been actively managed in the period to partially offset the impact of volume declines. The newly integrated ERP solution, which was fully rolled out across the business in 2023, has facilitated improved cost management in the period. We anticipate that demand will remain relatively subdued in the second half of the year notwithstanding the positive signs emerging of improved consumer confidence and the U.K. government's commitment to increased house building. StairBox was adversely impacted by the challenging RMI market in the U.K. as volumes declined by 16% compared to the same period last year. However, with the beneficial impact of the acquisition of Wooden Windows in December 2023 and ongoing good margin management, profitability in the business has improved compared to the prior period. Overall, Manufacturing revenue decreased by 16.7% to GBP 54.6 million the adjusted operating profit decreased to GBP 11 million at an operating margin of 20.1%. Turning now to the balance sheet, and a few points here. We saw a reduction in the group's capital employed of GBP 64.6 million from the end of December, although our net debt position of GBP 46.8 million after lease liabilities is still broadly in line with year-end. The biggest component of this reduction was in working capital, which was GBP 24 million lower than at year-end, continuing the progress which we made throughout 2023. As Eric has mentioned, the adjusted return on capital employed was 11.1% in the first half, which is above our weighted average cost of capital and represents a very resilient performance in the context of where we are in the construction cycle. As regards to cash from operations, we generated GBP 22.2 million through a reduction in working capital in the first half of the year. And we'll remain very focused on optimizing our level of working capital relative to activity levels and ensuring that we don't compromise on our strong availability proposition to customers. Now this table just sets out the cash flow for the period. Replacement CapEx in the first half, net of disposals, was GBP 13.9 million and development CapEx was GBP 11.4 million. Turning to the full year, we anticipate that our gross replacement and gross development CapEx will be approximately GBP 30 million each. Free cash flow generation remained very strong and was 120% of adjusted operating profit, consistent with the same period last year. Looking to the full year, we expect to fully fund from our free cash flow, the combined requirements of dividends expected to be paid in 2024, together with the totality of the cash requirements of the share buybacks executed to date and the new GBP 30 million buyback program which we announced today. We have preserved our strong balance sheet for organic and inorganic development opportunities with our closing net debt position at the end of June being GBP 46.8 million. And that's a good point at which to hand back to Eric.

So we are really doing two things concurrently. One thing is to manage the business very tightly in the down cycle. But certainly, our focus is already to make sure that the business emerges even stronger once the cycle turns again. Hence, we continue to invest into new branch openings to further strengthen our market positions. We opened 6 last year. We have opened 3 in the first half this year, and we continue to open new branches in the second half of the year. We also continue with our branch refurbishment program. And the reason I raised we have an ongoing branch refurbishment program, it's a normal cycle, and many, many companies suspend that once the market turns and the value proposition suffers. We continue to do that. There is an ongoing branch refurbishment program across our estate, and we just do this as part of being ready with the right proposition once the market turns. Of course, as you have seen, we continue to drive efficiency improvements. We use technology to drive process improvements across our businesses. Some examples would be Selco, CPI. We also put in a new demand planning system into Selco in order to make sure we have -- we can improve the working capital position over time and reduce the stock level wise, increasing availability. All those things are just business as usual, and we drive that in across the business. In terms of bolt-on acquisition pipeline, we acquired 5 small businesses last year and we made good progress to execute bolt-ons later on in 2024. And I remain optimistic to execute a new platform in near term. In terms of ESG, our net zero targets have been validated by the science-based target initiative. We modeled the transition plan through to 2030, and we will use alternative fuels and renewable energy to reduce Scope 1 and 2 emissions. But of course, 98% of our emissions are Scope 3. So there is really all about working with the supply chain, working with our suppliers, making sure we reduce the emissions in that part in Scope 3. And for that, we have partnered with EcoVadis, who will help us in the assessment of the suppliers and their sustainability ratings to achieve our targets over time. In terms of corporate sustainability, reporting directive and regulations, the group continues to focus and prepare to be ready for all the legislations, which are upcoming. So very good progress overall on the ESG agenda. In terms of current trading, in the second half, total revenue declining in the second half to date has moderated relative to H1. The Irish businesses continue to perform well. I urge anyone not to read too much into the plus 10% on retailing in the first 6 weeks. These are weak trading months, and don't read anything into that. But overall, the trading has somewhat improved relative to the first half, as you can see in terms of a decline of 2.2% in daily like-for-like revenues. Coming to the outlook. In Ireland, we continue to expect economic growth but to moderate slightly. So it will moderate on a high level. So we are very pleased with the outlook. In Ireland, housing completions continue to increase on the back of strong government support for new housing. So Ireland, a big tick on that. In terms of U.K., we are more cautious on the near-term outlook. Whilst there are early signs of improved consumer confidence and positive noise from the new government in terms of policies to support housing growth, we don't think there will be any drastic change in the near term. In the Netherlands, real income growth is supporting household spending and there are early indications that the downturn in the housing market is bottoming out in the U.K. (sic) [ Netherlands ]. In Finland, Finland is in a mild recession, and we expect slow recoveries going forward. And in fact, the construction market might decline a little bit further in the months to come. In summary, a robust performance reflecting the strength of the group in what were tougher-than-expected market conditions in the first half. Our focus continues to be, to be the provider of choice for our customers in each operating model whilst tightly managing the cost and drive continuous improvement and use and leverage technology to drive efficiencies. The free cash flow in the current year will fund 5% increase in interim dividend as well as the GBP 30 million share buyback we announced. The trading conditions remain challenging, but in the medium term there is a positive outlook supported by strong demand fundamentals in each one of the markets we operate in. We preserved our strong balance sheet to execute on acquisition opportunities in near term. And as we continue to invest in our business, we believe we are excellently positioned to deliver positive operating leverage when the markets will turn. For 2024, we continue to anticipate to achieve full year expectation, but we recognize the important trading months in autumn are yet to come. So I will hand over to Q&A.

Brilliant. So just in terms of process, normal process applies. There's a mic coming around the room. If you wouldn't mind saying who you are and where you're from, that would be lovely. We'll do questions in the room first. We've got some people who may be joining remotely. We'll turn to Sergey to just see if there are any questions after we finished in the room. My usual plea is, can we just ask one question. I'll give you an answer. We'll leave the mic with you until we've answered your normal 6 or 7 questions that you want to ask. But that way, at least we answer the question that you've asked. So well, we'll stop showing at the front, and then we'll go to Will.

Perfect. Shane Carberry from Goodbody. The first one then, just in terms of pricing, and in particular, looking at the kind of like-for-like trends in the last 6 weeks, and I know there's quirks in terms of being a quieter period, but can you talk about how price has moved sequentially? How should we look at it for the remainder of H2 as well? Are there any other's kind of odd year-on-year comps?

Look, I think as we've said in the statement, the impact of price deflation is moderating. The first half in Chadwicks, we saw price deflation of 4.9%. And in the U.K., it was running at 3%, a little bit more in Selco at 4% because of that greater timber exposure. When we started out the year, I think our view was that, that price deflation would moderate more quickly than it seems to be doing at the moment. There wasn't -- I think we had an expectation that manufacturers, and I think manufacturers had an expectation that they would be looking to try to nudge pricing forward in the middle of the year. I think those that have tried haven't really been that successful at making those pricing increases stick. And I think people -- manufacturers, suppliers are tending to revert more to, if I can describe it, as the historical approach of looking at first of January price increases. So our expectation for the second half of the year is that we're not going to see much in terms of price movements, not further big inflation or deflation one way or the other. So pricing overall in the second half consistent with where it was in the first half. But the sort of the year-on-year movement will improve. It's very early into the second half to say where it sits at the moment. I would say it's moderating less quickly in Ireland. That 4.9% is probably 4% to 4.5% in July. A little bit quicker in the U.K., where I think price deflation in July for Selco was more like 1% to 2%, but again strongly influenced by timber. Timber is now 5% down year-on-year. If you went back sort of end of last year, I mean, it points we were sort of 20% down, and that was very influential in terms of the overall inflation level. So timber seems to have stabilized, that's important. Equally, steel in Ireland, which is an important component, seems to be stabilized as well. So that's the sort of outlook.

Perfect. And just one more for me. Just in terms of capital allocation and the GBP 30 million buyback. Obviously, it's a different amount to what you've done in prior buybacks. Should we read anything into that? Can you kind of give us the building blocks of how you arrived at the kind of GBP 30 million number would be helpful.

Look, the important thing for us was making sure that we did preserve that capacity for development of the group, whether that's organic or inorganic. As Eric has said, we're optimistic about executing acquisitions in the near term. So it was important that we look to that balance sheet strength to preserve that. But equally, and we've always said this, it's not mutually exclusive. It's not share buyback or acquisitions. We're in the fortunate position with the strong cash generation of the business that we can consider both. And so we took the view that -- on the basis of our projected free cash flow generation in 2024, that we could top up the buyback, so do that further GBP 30 million, and also that we could increase the dividend by 5%. And the thinking about the dividend, and we did it last year with the full year dividend, was that on the back of that lowest number of shares in issue, we can keep the dividend cash payment at the same level. And effectively, it rewards those shareholders that remained on the register. So they actually get cash benefit from the share buyback. So that was the thinking behind it, really. Will?

Will Jones from Redburn Atlantic. First, perhaps just around the Irish margin performance, I think, please. I think it was 30 bps or so up in the first half despite flat like-for-like sales. And I think you talked earlier in the year about the potential for a gross margin mix negative on the customer type. So just wondering behind that improvement and whether it changes your view on the medium-term potential if Ireland can be making 9.5% at this point.

Look, I think when we take that medium-term view, we've always said somewhere around about 9% for our Irish Distribution businesses. And I think the results that we saw in the first half sort of underline that that's a very fair medium-term position. I think on the gross margin, if you go back to 2023, we were quite strongly influenced in 2023 by what we saw on that price deflation and so that did squeeze gross margin, particularly around steel. And that stability that we've now seen in the steel price has helped the gross margin. But on a branch-by-branch basis, the Chadwicks team has really worked hard on gross margin at a branch level. So I think the success that we've seen on the gross margin in Chadwicks is testament to all the work that you have to do with all our colleagues who work at the desks on what can we do to improve that gross margin. So I think the macro backdrop in terms of commodity prices is helpful if that's stabilizing and starts to turn positive in the future. So I think that's also going to be a helpful underpin. And when the RMI market does recover more strongly, and that mix effect is an important component in terms of gross margin movements, if we start to see the RMI market come back as well, then that would also be a supporter for gross margin.

Second was just around the appointment of Frank Elkins at Selco. Clearly, quite a high-profile figure in the industry. Is there anything you can say at this stage about his kind of vision for Selco and what he might look to do?

I think it's a bit early as he started 3 weeks ago. So I'll give him some time. But look, we had Howard Luft who has run Selco for many years kind of seeking early on that. At some stage, he would like to do something else again in his last stretch of the career before retirement. And that gave us a great opportunity to think about who would be the right person with the right skill set and experience to really drive GB Distribution going forward, so not just Selco but also has overall accountability for GB Distribution. And we are very pleased we could bring Frank onboard, and he will be a tremendous addition to the team. But we do give him a little bit of time until we revisit the overall GB strategy with his input.

And then the last one just around potential for a platform acquisition in near term, as you say. You might not tell us too much, but is there anything you can add on where you're looking and type of business? And perhaps just a reminder of your financial hurdles.

Look, I think we reminded everyone every time when we speak, it is Europe only we look at, and the markets need to have the fundamentals which we are looking for. So there is a need for more housing and existing stock needs to be replaced. And we look at segments where we think we can build a leading position which is defendable in the long term and has the right underlying demand characteristics. So as we said in our statements, we are optimistic to do that in the near term, making good progress, and we will announce whenever we are ready to announce. But as always in those processes, you don't know what's around the corner.

And just to pick up on the financial metrics, our objective when we make investments isn't that long term that we can get to a return on capital employed that exceeds 13%. For the platform acquisition, our target would be that, that acquisition and what we could do with it would be a double-digit return on capital employed. But then through future bolt-on acquisitions, which would generally come at lower multiples, we would then expect in due course that, that platform would exceed the 13% ROCE. Chris?

Christen Hjorth from DB Numis. Just a couple for me on the U.K., please. I'll start with the first one. But just a bit of a sense where you think Selco or U.K. Distribution overall volumes are versus 2019, just to provide a bit of a sense of the potential recovery in time?

Look, I think we're at least knocking on the door of being 20% down, I would say, in terms of volume against 2019. And many in the room will remember, 2019 was a sort of a distinctly average year, I would describe it as. I mean, peak year for RMI, I think, was end of '21, '22, which is sort of record levels of RMI, and we probably spent record levels of RMI ourselves around the home. But yes. I think there's a big scope for us to get back to what we would regard as a much more normal level of volume.

And also related to that and also maybe bringing in Frank's appointment. Is now the time to allocate more capital to the U.K. for things like M&A, if it is the bottom of the cycle and there are opportunities out there?

I'm definitely very open to allocate capital in the U.K. for the right opportunities. We believe the U.K. is an attractive long-term market. And with the appointment of Frank, we definitely believe we have brought someone onboard who will have a strong voice and contribution on how we build out the U.K. over a period of time. So we are committed to the U.K.

Aynsley?

Aynsley Lammin from Investec. Just two for me. Firstly, just a bit more on the U.K. You've mentioned the price investment in the U.K. competitive backdrop. Just wondering if you could give a bit more color there, where the competition -- the kind of price competition come from? Is it the majors, the listed players? How do you expect that to evolve? And just while we're on the U.K., if you could remind us of the mix kind of end market for U.K. Distribution, new house, RMI and other.

So firstly, around the sort of the competitive side, look, competition comes from all of those that you mentioned in reality. The usual question is, are players being rational? Is anyone being maverick? And I think the practical answer on the ground is that people are searching for volume and as a consequence, being very competitive on price. You couldn't single out any player in particular, I think it's universally across the board that people are responding to try to get a share of volume. So I think what we've seen in Ireland, though, underpins that when markets do improve, that you can work on your gross margin and look to recover that. So I think it's frustrating that the gross margin is -- has been under pressure in the U.K. But it is a normal facet of the market, I would say. So in due course, once we start to see volumes recover, get back to 2019 levels, then we'd be optimistic that we can start to see that recovery around gross margin.

New house and RMI, please, if you can?

So if we just look at distribution, I probably -- let's just think about it in terms of GB. If the overwhelming exposure in GB is around RMI, TG Lynes, relatively small business, has some exposure to new build. But we would be over 90% in GB on RMI.

Then just second question, just on operating cost inflation. Any comments there on the trends you're seeing.

Look, I think when we look at their operating costs in the first half of the year, I mean, actually overall people costs across the group were up under 1%. Now that's against the backdrop where national minimum wage in Ireland has gone up by 12%, collective labor agreements in the Netherlands, up 7%. So the teams have worked really hard from a productivity perspective. And so we've seen that in terms of labor cost. The pressure in the first half on costs was property. Property costs were up over 6%. And if you've got a branch network, unfortunately, you're a price taker there. There's very little that you can do and particularly with CPI, RPI-linked rent, comparables, rates, that's where the pressure has been rather than -- I mean, don't get me wrong, people costs, we've had to work really hard on. But we've worked really hard on the things we can control, it's been much more hard on property costs. But hopefully, in that regard, we've seen in terms of lease rental increases with the moderation of inflation, a bit more subdued economic activity. Then again, we should start to see that environment becoming less aggressive in terms of inflation. Ami?

Ami Galla from Citi. Two questions from me. The first was one on U.K. Can you give us -- we hear your outlook on the U.K. markets for the second half. But within the sort of Leyland SDM footprint, have you seen any signs of more optimism from the consumer on the back of the first base rate cut? And as we think about the second half, do you expect some green shoots within that sort of subsegment? And the second question was on the platform acquisition. I think the message is quite similar to what we had heard the last time around. And maybe if I can question a bit more on what's kind of holding from a timing perspective. what's holding things back? Is it more timing the macro? Or is it pricing in terms of getting to the right place? Or is it vendor ambition or vendor willingness to an extent?

Let's start. Do you want to take the first one or...

You deal with the acquisition piece and I'll bowl in on painting and decorating.

Okay. Look, 6 months ago, I said I think my words were, I'm disappointed if we wouldn't execute during 2024. And now I say I'm optimistic to execute in near term, and I think that's the same answer. So I don't think anything has shifted. So we are making the progress we expect. Now just to remind everyone that our main focus is buying a good business at a fair valuation where we think we can really add value with our operating model, decentralized, adding value from the center, letting the local team run and then build an even stronger position that the business has to deliver the ROCE targets we want to achieve. So naturally, we engage with businesses which don't necessarily have a for sale sign on their house. And therefore, that process is a bit of a dance and will normally take a little bit longer. That's why timing is kind of difficult. It's not -- we try to make -- we would happy to go into an auction of a business. But David is an extremely disciplined CFO. So he'll always come back to, do we actually think we can create real value and do we think we get it for a fair price and then really drive something, which is a strong long-term position. So the timing is dependent on the type of businesses and ownership structures we engage to get to it. But as I said, I remain confident for execution in near term. In terms of the other question around Leyland, look, Leyland is a great business, but RMI has been hit across the U.K., even in Central London. We had less footfall, less transaction, H1 relative to H1 last year in Leyland, if you go into the micro detail. Are we confident that we'll return? Absolutely, we are. Hence, we opened another store in South Kensington, and we will open more stores with the Leyland model. But I don't expect -- if you look at the market forecast, RMI down 6% in '24, expected to go up 2% next year. That's kind of like the overall, so you kind of look at this and say, well, I don't expect a hockey stick in the U.K., but I expect the U.K. to take a turn for the better as we enter into the new year, if that answers it.

Clyde?

Clyde Lewis at Peel Hunt. The first one I had was on CPI. Now obviously, it's a mortars business, so they're serving very much the new housebuilding industry. Are you starting to see improving trends in terms of demand for new silos on sites yet?

I would put it in the camp that there's more positive talk about it but not a huge amount of actual silos going out on site. So I think our end customers are feeling more optimistic that volumes are going to pick up, but we're yet to see it, which is why we've said that we are cautious notwithstanding the fact that housebuilding trends are improving, a bit cautious about the second half of the year and seeing a dramatic improvement in volumes.

Second one was on working capital. How close do you think you are to, I suppose, getting to the trough of what you think is the minimum level of stock and trade debtors and creditors that you think the business can work with? And is there a structural change, though, so that when things bounce back, it's not going to jump to the same sort of extent? Or do you think this is very much sort of playing the drop off in volumes and then it will obviously sort of use up some of your capital on the way back out?

Look, I think in my time in the group, I've always had the view that somewhere between 8% to 9% of your 12 months revenue is where working net -- working capital tends to sit, and I still hold that view. I think we still got a little bit further to go, but we just have to tread very carefully because suddenly there's a conflict and boats have to go the long way around. And so we just have to make sure -- we probably need to hold slightly more buffer stocks than historically we had pre-COVID. But I think in the context of the budget at the moment, there's still businesses that we're working with, where we see opportunities. But it's probably in the GBP 5 million to GBP 10 million camp rather than significantly more than that.

And then last one was on costs. I mean, obviously, the comments around rent, you can't do an awful lot about that. But I suppose I'm just trying to get a flavor for how much how you're -- how you're changing your thoughts about the messages you're giving to the management teams about, look, you need to do more in terms of productivity improvements. Clearly, there's always an ongoing drive to improve that. But are you leaning more or slightly less on the teams to drive that productivity improvement at the moment?

We always encourage teams to look at productivity improvements. And we also encourage the team, if you take our Distribution businesses in Ireland, if you take the island of Ireland between Chadwicks and, let's say, MacBlair, we encourage them to think about between the two back ends, how do you make it more efficient. The same is true in GB Distribution. So if you think about Leyland and Selco, as an example, so how do you make sure you really leverage what you have in combination? How do you make it more efficient. So these are ongoing processes. I wouldn't say we push the teams. I would -- it's a dialogue when you have our quarterly reviews and say, look, you guys need to -- we have a decentralized structure, you have a federated structure. You guys need to be close to the customer, you need to be close to the market. You need to make the right decisions on what products, what price and so on and so on. Notwithstanding all of that, what can you do to be stronger together than alone, and that's an ongoing process. So we don't lean more into them, but we continue to encourage the colleagues.

It's Harry Goad from Berenberg. Just sorry, I'm afraid, coming back to the platform acquisition topic once again. Can you remind us where you're willing to take balance sheet leverage to what do you see as an appropriate sort of peak leverage? And just in that context, should we be thinking about that on the including leases, excluding leases basis? And one part to that is, do we -- should we expect that this acquisition, if it were to come, to be funded from existing resources?

Working backwards, look, we've got a lot of liquidity and firepower. So yes, it would come from our existing resources. On where would we take leverage to, I always think you've got to look at where you are in the cycle and how confident you are that you're getting growth going forward. So if it's -- you're definitely in the up cycle, then taking leverage to 2, 2.5x net debt to lease adjusted EBITDA with a view to then deleveraging with that strong free cash flow generation that we've got to bring it back below 2 is perfectly plausible. At this sort of stage in the cycle, I'd probably be at the sort of 1 to 1.5x net debt to EBITDA just because life is a bit more uncertain at the moment. But if you take the current forecast for EBITDA for the current year, probably GBP 280 million to GBP 290 million, I would imagine somewhere in the room, round terms, GBP 50 million of net debt at the end of June, there's quite a lot of capacity given that we would also be acquiring our EBITDA, too. So hopefully, that gives you some view. Thank you. Ben?

That was actually my question. Ben Varrow from RBC. I'll take another one. Just maybe on the M&A pipeline but outside of the platforms, perhaps bolt-ons, could you give us a bit of color if you've seen any changes in that pipeline in terms of maybe more targets coming online and the type of multiples that you're seeing over there?

Look, the pipeline keeps on evolving. So it becomes bigger, to answer that question, in each one of the markets. And the multiples for bolt-ons would normally be somewhere 5 to 6x.

Yes. Can we whisk over to the other side of the room, Charlie and Flor, please.

Charlie Campbell at Stifel. A couple of questions. I'll do the quick one first. U.K. Distribution, I just wonder what percentage of revenues is London?

Good question. I suppose, how does one define London? We're taking within the M25. So that is probably 60%, yes.

And second question, a bigger picture. In terms of -- you're very kind, I suppose talked about volumes, I suppose it's a U.K. comment, but minus 20% compared to 2019. What does the head count look like? And how quickly does that have to recover in a recovery scenario?

Well, the head count certainly isn't down 20%. The head count will be down modestly because if you think about our operating formats, in reality, there is a minimum level of colleagues that you can operate a Selco at both safely, but also to deliver the customer proposition. So in reality, the headcount flex is relatively marginal, probably sits more at, if I can describe it as the sort of head office level. But even there, I mean, we are super slim. So operating leverage, when we do start to get that come back in, should be quite pronounced.

So there isn't really a need, let's say, over the next 12 months to put a lot of people back in as volumes come back?

No.

And I think to David's point, we are very conscious that we don't cut the muscle. So you really need to have the ability to flex once the volumes come back.

Flor?

Flor O'Donoghue from Davy. Just one for me on Netherlands. Just looking at there, it looks like the drop-through -- the negative drop-through is a bit higher than elsewhere in the business in the first half. Just wondering is there anything there in terms of cost or anything behind that?

Well, just two things really. The first is very strong gross margin in 2023 because they had the benefits of inflation that came through. And then in the current year, no inflation with lower volume levels, less buying, so less rebates. So the gross margin was down, but equally -- and the Netherlands was one area that was affected by in particular that pressure, as I mentioned, about collective labor agreement. So there was an element of extra costs that came in there on both colleague and indeed on property costs. So yes, that was the reason for the squeeze in the Netherlands.

Just a follow-up on that. You might just remind us again of the mix in the Netherlands in terms of new RMI, res, non-res?

It's much more evenly balanced, I would say, in the Netherlands between newbuild and RMI. RMI is very important. And as with all our other businesses, it's a better gross margin business, RMI. But actually, as we noted, the Netherlands did well in terms of what we saw on some of the major customers that we've got and, hence, a bit of a mix effect in the gross margin as well. Thank you very much. We have no questions from Sergey. So thanks, Sergey, for listening in. We hope you enjoyed the presentation. But that said, I think, thanks, everyone, for coming.

Thank you very much.

Brilliant. Thank you.