Grafton Group plc (GFTU) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Grafton Group plc Half Year Results. A quick agenda. I will start with some operational highlights before our CFO, David Arnold, will go through the financial details. And afterwards, you will have me again talking a little bit about strategy and outlook for the remainder of the year. The performance in the first half was, I would call, very solid. We had revenue growth of 6.7%, adjusted operating profit increase of 8.2% and a growth of our adjusted earnings per share of 10.8%. As you will have noted this morning, we increased the interim dividend by 2.3% and reconfirm our full year operating profit guidance between GBP 190 million and GBP 200 million. In terms of development activities in the first half of the year, we completed 2 acquisitions in Europe's faster-growing markets in Ireland, where we acquired Cygnum and in Iberia in Spain, where we acquired Mercaluz. And both of those acquisitions have started well in our ownership and are trading strongly year-to-date. We also invested into new branches on a group-wide basis, especially in Iberia and also in Ireland and we maintain a strong balance sheet to have sufficient firepower to deploy capital as the opportunities arise. I will now hand over to David to go through the financials.

Thank you, Eric, and good morning, everyone. As Eric has already covered some of the key financial KPIs from our first half performance, I'll now dive straight into the income statement in a bit more detail. Revenue of GBP 1.34 billion was 6.7% higher than last year. Strong execution across the group enabled us to deliver a resilient adjusted operating margin before property profits of 7.4%, up 10 basis points year-on-year despite ongoing competitive pressures in several of our markets. This reflects a continued focus on margin management across the group and proactively addressing our cost base to mitigate the ongoing inflationary environment on operating costs. We've seen no material disruption from developments in the Middle East as we continue to manage supply chain risks proactively, maintaining strong product availability while effective supplier engagement and pricing actions have helped protect margins. It's pleasing to report that we saw strong profit growth in the first half with the group's adjusted operating profit of GBP 98.5 million, up 8.2% compared to prior year. Net finance costs were GBP 5.5 million, GBP 1.4 million higher than last year, largely due to reduced interest income on our cash deposits and lower cash balances following the acquisitions and share buybacks that was partly offset by favorable foreign exchange movements. In the full year, we currently expect a finance charge of GBP 15 million to GBP 16 million. The effective tax rate was 19.8%, 30 basis points higher than last year and is our assumed rate for the full year. This slightly higher rate reflects the increasing contribution from Spain, where the corporate tax rate is 25%. We're pleased to report an increase in adjusted earnings per share of 10.8% to 39.4p, which is consistent with our targets set out in our recent Capital Markets event and reflects the impact of operational improvements, organic growth and capital deployment into acquisitions and share buybacks. Looking at the first half revenue increase to GBP 1.3 billion, we delivered an increase of GBP 8 million in organic revenue, and I'll cover that in more detail on the next slide. Acquisitions were the main driver of sales growth in the first half, contributing GBP 56 million of incremental revenue. This reflected the inclusion of the seasonally important May and June trading period at Mercaluz, a full second quarter of trading from Cygnum and the incremental contribution from HSS Hire Ireland, which was acquired at the end of March 2025. The divestment of the small MFP plastic pipe business in the Republic of Ireland at the end of May 2025 reduced revenue by GBP 3 million. And finally, the strengthening of the euro against sterling accounted for an exchange gain of GBP 23 million in the first half. This slide analyzes the net increase of GBP 8 million in organic revenue. In general, I would note that we saw an uptick in product price inflation in the second quarter as pricing actions implemented in response to the conflict in the Middle East flowed through the P&L. Our diversified portfolio supported a resilient first half as strong performances in the Island of Ireland and Iberia more than offset the decline in Great Britain. The Island of Ireland segment delivered organic revenue growth of GBP 19 million, largely attributable to a strong performance in Chadwicks. Against the backdrop of persistently challenging market conditions throughout the first half, organic revenue in Great Britain declined by GBP 19 million year-on-year. Revenue in Northern Europe increased by GBP 2 million on a like-for-like basis, driven largely by an improved performance in Finland. Organic growth of GBP 6 million in Iberia was driven by Salvador Escoda only since Mercaluz was acquired in the first half. The Salvador Escoda performance reflected its continuing positive growth trajectory since we first entered the Spanish market. And finally, branch openings and closures had a small negative impact on revenue, and that will reverse in the full year. Turning to the movement in adjusted operating profit. I'll look at the performance of the like-for-like business in a moment. The major component of the increase in group operating profit to GBP 98.5 million was the GBP 10.4 million of profit attributable to acquisitions, led by Mercaluz with GBP 6.5 million. Looking at the GBP 4 million reduction in adjusted operating profit in our like-for-like business, you can see that all operating segments except Great Britain reported an increase in adjusted operating profit. Disappointingly, the profit growth we achieved in Great Britain during 2025 was not sustained into the first half of 2026 with U.K. private RMI and new build markets both weakening further and all our business units exposed to the U.K. reporting lower profits year-on-year. Moving on to look at each segment now in a little bit more detail. Once again, we saw a good performance from our Island of Ireland segment in the first half. Revenue of GBP 579.4 million increased by 7.5% on a constant currency basis. Like-for-like revenue grew by 3.4% in the first half, led by strong trading in Chadwicks and modest growth in Woodie's against tough comparatives. After a relatively slow start to the year, trading strengthened during the second quarter as construction activity increased and the weather improved markedly. Our businesses on the Island of Ireland delivered strong profit growth in the first half with adjusted operating profit of GBP 60.6 million, up 7.3% on a constant currency basis. This performance was underpinned by a strong performance in underlying trading in Chadwicks in addition to the incremental contributions from the HSS Hire Ireland and Cygnum acquisitions. Trading in MacBlair in Northern Ireland followed a similar pattern to our GB segment with the overall environment remaining challenging. The integration of Cygnum is well on track, and we've been pleased with the business' performance since its acquisition on the 31st of March. First half sales increased by 18.3% on a pro forma basis compared with the prior year, driven by additional production capacity that was brought on stream shortly before the acquisition completed. Cygnum enhances our exposure to the growing Irish new build housing market, and Eric will speak in a little bit more detail about the strategic rationale for the acquisition a little later. We continue to strengthen our market-leading position on the Island of Ireland. This included the opening of a new Woodie's store in Ennis, County Clare in June and a new Chadwicks specialist hub in Ravenhill, Belfast in July. Bringing together The Panelling Center and Sitetech in a single location, the hub demonstrates the Grafton Way in practice, showcasing how our businesses work together across the Island of Ireland to improve our proposition for customers. Moving next to Great Britain. It's fair to say that we were disappointed with the first half results after positive progress last year. Market conditions remain very challenging with new build housing activity and discretionary home improvement projects constrained by affordability pressures and weak consumer and business confidence levels. Revenue in Great Britain was GBP 367.2 million in the first half, down 5.1% year-on-year, with average daily like-for-like revenue declining by the same amount. All our GB businesses reported declines in like-for-like revenue during the period. Despite lower market volumes and continued competitive pressure, we were pleased to deliver a slight improvement in gross margin in the first half, and this reflects the strong execution of our teams and disciplined pricing across our businesses. Notwithstanding inflationary pressure on costs, especially with respect to labor and property, overheads were tightly controlled with the increase in like-for-like overheads contained to approximately 1%, well below general inflation levels. Nevertheless, despite tight cost control, adjusted operating profit of GBP 17.5 million declined by almost 30% as lower volumes weighed on operating leverage. In Northern Europe, market conditions remained subdued in the Netherlands, where the expected recovery has been slower to materialize, resulting in slightly lower volumes compared to prior year. In contrast, Finland showed more encouraging signs of early recovery, supported by improving consumer spending, exports and business investment. Revenue of GBP 244.2 million increased by 0.7% on a constant currency basis. Average daily like-for-like sales grew by 0.8% in the first half, driven primarily by growth in Finland, where an improvement in trading conditions and targeted management actions supported trading. Adjusted operating profit increased to GBP 16.3 million in the first half with the adjusted operating profit margin unchanged at 6.7%. Higher profitability in Finland more than offset a modest reduction in profits in the Netherlands. We continue to make good progress in the Netherlands in the execution of their multiyear improvement program. A key milestone was achieved in the period with our end-to-end purchasing and finance processes now successfully operating on their new ERP platform. We continue to be very encouraged by the performances of our businesses in Iberia and the broader opportunities in this market. Revenue of GBP 145.1 million increased by 35.5% on a constant currency basis. Average daily like-for-like sales grew by 6.6% in Salvador Escoda, supported by strong market demand and record first half temperatures in Spain with robust commercial execution across its air conditioning, refrigeration and ventilation product categories. A key highlight during the period was the completion of our second acquisition in Iberia, Mercaluz at the end of April. Like Salvador Escoda, it's primarily serving the professional HVAC installer market and represents another important step in strengthening our position in the region. We've been pleased with the integration process to date and very encouraged by its early trading performance with average daily like-for-like sales up 6.7% on a pro forma basis across May and June, and Eric will discuss Mercaluz in more detail shortly. Our Iberia segment delivered an adjusted operating profit of GBP 14.1 million, representing an adjusted operating profit margin of 9.7%. The strong year-on-year increase on both profits and margin was largely attributable to Mercaluz, which joined the group just before the start of two of its most important seasonal trading months. Grafton continues to support local management teams in driving organic growth. Salvador Escoda opened 5 branches in the first half, and Mercaluz opened a further branch following completion of its acquisition. Having successfully supported Salvador Escoda's accelerated expansion plans following integration, we expect to provide similar support to Mercaluz. We continue to assess further growth opportunities in the attractive Iberian market with a strong pipeline of both organic and inorganic development. Now this slide analyzes our cash flow in the first half. And as you can see, the group generated GBP 70.7 million in free cash flow, and that represents a 72% conversion of adjusted operating profit into cash, building upon the group's strong cash flow generation credentials. Working capital management remains a key focus for the group, and we invested GBP 22 million in net working capital during the first half, reflecting product price inflation and inventory actions taken in response to developments in the Middle East. We've always said that we believe it is essential to continue to reinvest into our businesses to maintain their competitive edge even during times of market weakness, and we invested a net GBP 23 million into replacement and development CapEx in the first half. Where do we use that free cash flow and that strength of our balance sheet? Well, the major element went into acquisitions, but we also returned a net GBP 75.5 million to shareholders through dividends and buybacks. You will have seen from today's results announcement that we proposed to increase the interim dividend by 2% to 11p per share. And consistent with the targets which we set out at our Capital Markets event, it remains our intention to restore dividend cover more firmly within the 2x to 3x dividend cover range as we move forward. Share buybacks of GBP 25.6 million were executed in the first half out of a total figure announced in the current year of GBP 50 million. Grafton's cash-generative nature, together with its strong balance sheet, continues to support both shareholder returns and provide significant firepower for the group to capitalize on organic and inorganic development opportunities. At the end of June, our net debt was GBP 315 million, representing lease adjusted net debt to EBITDA of just under 1x. And turning to the balance sheet, a key point to note is that the acquisitions accounted for GBP 34 million of the GBP 53 million increase in net working capital since the end of 2025. Adjusted return on capital employed was 10.7% in the first half. That was down 20 basis points on last year, and that's very much a function of our recent capital deployment into acquisitions. This level of return on capital employed is still around 2 percentage points higher than our estimated weighted average cost of capital. Capital turn was constant at 1.4x. Finally, just to note, before I hand back to Eric, I have included some technical guidance for the full year, which you may find helpful in the appendices. Eric?

Thank you, David. So a few words about strategy and outlook. I will share a few slides, which I went through in detail at our very recent Capital Markets event, so I will not dwell on them. But the strategy remains unchanged. We provide our trade customers in Europe with construction-related products and solutions. That's what we do. We drive growth through long-term organic growth in markets where there are underlying structural growth drivers and supplement that via acquisitions and execute all of that in our federated operating model where we combine the best of 2 worlds, which means good controls, processes, best practice and technology through the group whilst having local accountability in execution and customer proximity. And all of that is what we call the Grafton way. I talk about the long-term growth drivers. Key is how we select markets, again, aside from the Capital Markets event, we select regions and countries which have underlying structural growth drivers. We are well aware. This is a cyclical industry. But in the long run, we select markets where the growth drivers are there. Then in each market, we look at which verticals do we believe we can deliver the returns, the profitabilities, drive consolidation and growth and enhance the businesses through our shared knowledge across the group, exactly what we do in Spain. And the outcome of that is that in every single market where we operate in, we have strong management teams running differentiated models with trusted local brands. We have local scale and the necessary customer centricity, which allows us to deliver industry average -- above industry average returns, ROCE and cash generation throughout the cycle. Our federated operating model, again, just a little illustration. The outcome is really the most important thing is on the bottom of the slide. Agile, customer-focused businesses, empowered and engaged colleagues delivering the returns we expect. And from a structural point of view, as a group, we have the structures in place to make sure that best practices are leveraged, IT solutions are leveraged, procurement benefits are taken where it makes sense and the capital allocation is stringently controlled by the group. So that's a model which has worked very well for us over time, and we continue to execute. David mentioned briefly Mercaluz. Mercaluz is a Spanish company, leader in HVAC, predominantly air conditioning, very complementary to Salvador Escoda. It's a different model. Salvador Escoda offers 40,000-plus SKUs, AC, ventilation, refrigeration, a one-stop shop for the installer with branches and the network of branches. Mercaluz has their branches are like small distribution centers. They deliver to the installers. They have a narrow range, about 8,000 SKUs, very much focused on the own brand, which is Johnson, Johnson Air Conditioning and other products. So 75% of the sales are own branded product, hence, a very, very strong margin, which can be achieved. There is a rapid expansion underway. We have now 20 locations in Spain. 9 locations were opened in the last 18 months. Whilst we were in contact with them and talked about acquiring the business, integration progressing really, really well. The local management team remains in place. So the 2 former owners continue to run the business with all the appropriate incentive structures you would expect so that our incentives are aligned to successfully continue to grow the business and have the next phase of accelerated growth in a strong market. Our other acquisition was Cygnum in the Republic of Ireland, a leading supplier of made-to-order off-site timber frame solutions. That's a product expansion for Chadwicks. It's a business where it is our first MMC business, so modern methods of construction. This is a growing element, especially in scheme housing, low-rise scheme housing, where in the first half, 66% of new scheme housing commencements had timber frames. We have synergies with Chadwicks in 2 ways. One, we are the largest buyer with the Chadwicks Group of materials like insulation and so on -- and timber, which is needed to do those timber frames. So there is a product and procurement synergy, but also in addition to the customers which Cygnum already has, there is now access to the customers which Chadwicks has to provide the timber frame solutions. Again, integration progressed very well and trading is in line with where we expected it to be. At the Capital Markets event, we were clear about our ambition of GBP 850 million plus free cash flow cumulatively until the end of 2030, an EPS CAGR greater than 10% and in normalized market, a ROCE, which is 13% or more by 2030. So we are tracking well to achieve that. We had a free cash flow in the first half, as David mentioned, of just shy of GBP 71 million and adjusted EPS growth just shy of 11% and a ROCE of 10.7%, and that with 2 markets which are not at all pumping on all cylinders, namely Northern Europe and in particular, GB. Which nicely brings me to the current trading and the average daily like-for-like sales, as you can see in the first half, but also in the most recent weeks up until the 23rd of August, the Island of Ireland performing well and strong and the same can be said for Iberia, our 2 strong growing markets. Northern Europe with a little bit of growth, but not fantastic and still a challenge in GB, which is, in my eyes, significant upside potential once we can have the positive effect of the operating leverage, which we have in our GB businesses. In terms of H2 outlook, we have a positive Republic of Ireland construction outlook for the second half. So we expect to continue to perform strongly in the Republic of Ireland. In terms of Northern Ireland with our MacBlair business, we expect no significant uplift in the second half as from a macro point of view, this is more aligned to our GB businesses. In Great Britain, we expect the second half market conditions to remain unchanged compared to the first half. So we expect it to continue to be challenging. And of course, the Autumn Budget will be key in shaping consumer confidence going forward. So we will see what the outcome will be. In terms of Northern Europe, the Dutch market conditions are expected to be similar to the first half. And in Finland, we expect that the gradual recovery, which has started will continue in the second half of the year. In Spain, we expect continued strong growth as Spain remains one of the fastest-growing large economies in Europe. In summary, a resilient performance in the first half. The acquisitions are performing well, are in line with our expectation. Integration is going well. So that's always important that the teams gel with the teams we already have. So that is all going well. We continue to execute our strategy, drive long-term organic growth, supplemented with value-enhancing acquisitions, and we reaffirm full year guidance for the operating profit for the full year and remain on track to deliver our 2030 targets. Any questions?

Excellent. So just on the questions front, we have some microphones that will come around. If for the benefit of the tape, you could state your name and your rank and serial number, that would be great. I certainly have a selective memory. So if you ask me too many questions at once, I'll select not to answer them. So if you could do them one at a time, and I'll give you the answer, that will be even better. So we'll start with Will. You have the mic.

Will Jones, Rothschild & Co Redburn. A couple, please. The first around pricing. Perhaps you could just walk us through how that's evolved in the top line as we've gone from, say, Q1 through to the early part of Q3? And maybe within that, just how commodities are faring relative to normal finished products?

Yes. So actually, the year started from an inflationary perspective in a very benign way. If I was to look across the group, Q1 inflation was very modest indeed, pretty flat actually. And then we started to see it pick up as we got towards the end of the second quarter. I would say across the businesses, the more material impacts have been around the heavy building products in GB and in Ireland. If you look at the Spanish businesses, indeed, if you were to look at Woodie's, a lot of the products which they are buying in, they would have bought in some way in advance. So they haven't really been as impacted by product price inflation at this point. That's more likely to be a feature as we move into 2027 for those businesses in particular. But if you look at the likes of Chadwicks and the GB distribution businesses, I think what we saw was inflation in the second quarter, we were more in the 3% to 4% camp. And as we exited, I would say we were more around that 4%. And now the huge amount of volatility, as we know, in markets more generally. What is the outlook for the second half? I think probably on the heavy building materials side, probably is probably closer to the 4%, I would say, than the 3%. I think that's where the bigger pressure that we see comes through for those other businesses, I think it's about next year. And next year, we're probably likely to see a higher rate of inflation for those businesses than we saw this year where it's been running at sort of that 1% to 2% level.

Was there anything to note in timber and steel where it's relevant?

I wouldn't say there's anything particular to call out there. I mean they've been -- steel has been relatively volatile. And of course, we have to concern ourselves with things like CBAM as well these days and the impact of that.

And second one was just maybe unpicking some of the moving parts around gross margin. Firstly, whether there's been any kind of one-off assistance from that sequential price inflation through recent months? And then maybe just exploring where you're seeing the competitive tension and any of those self-help levers that I think Finland, you called out is one, for example, but anything to explore on gross margin?

Well, if I sort of pick up the gross margin and perhaps Eric picks up sort of competitive elements around the market and self-help. I mean on gross margin, I would say, no, there hasn't been no sort of specific one-off elements of that. It's just a function of an awful lot of work that we've been doing at the branch level in terms of pricing, in terms of being quick to pass through any of the extra price increases that we've got. I mean, a lot of work around selective promotional activity. And I think continuing that theme that we had and talked about last year really, which in GB -- in the GB context, which is we saw no benefit in being very aggressive on price because we just didn't see that the market would give the volume uplift to compensate for that. So yes, I think we continue to be quite tactical. We'll be very responsive. GB had a good performance on gross margin as we talked about in the first half. Overall for the group, we were pleased with where the gross margin landed.

I think in terms of competitive environment in each market is, as you would expect, given the circumstances of the market, the toughest market, I would say, at the moment is GB where volumes are really low. And with low volumes, you will have the same amount of players fighting for lower volumes, which normally gives extra competitive pressure. But as David said, we are not really driving the businesses per se on gaining market share and achieving less gross profit than maintaining market share and achieving more gross profit, right? So we work closely with the businesses in each market, but we certainly have no irrational competitive behavior in any of the markets.

Shane Carberry, Goodbody. The first one, just a follow-up maybe on Cygnum and given how constructive the new build background is in Ireland, probably right out to 2030, just trying to get an idea of where you think that business could go over the medium term? And when we think about it scaling from here, is it additional manufacturing facilities? I know it's just been ramped up from a manufacturing perspective. Or is it plugging into the Chadwicks model? Just how we should think about the growth from here over the medium term?

Well, in the medium term, I would say we have sufficient capacity in the existing setup after the capacity expansion to significantly grow the business, right? But of course, if the business will grow successfully and at some stage, we need to expand capacity, well, that's what we will do, right? So like in any of the businesses. But in the medium term, we certainly have no capacity constraint to significantly grow the business over time.

And then the second one, I guess, is just around the 2030 targets and the EPS target. I mean already, you're coming in slightly ahead of kind of circa 11% relative to the 10% CAGR. What does that do for your confidence level when you think about the fact that some of the markets, as you mentioned, are quite subdued within that mix. It might have been easy to think some of that CAGR would have been back-end weighted maybe.

Look, the way how I do it. I joined this industry in 2022. And I didn't expect -- and at that time, there were a lot of our earnings coming out of GB, right? So when I joined, I did not foresee that GB will kind of do what it will do. And I always tease David, who has spent a lifetime in the industry telling me second half next year, the recovery will start. It hasn't yet happened. So my point is you don't really know 5 years out what is happening. We certainly had a good start. And if all the markets in a perfect world, so let's say, Ireland continues until 2030 to be strong, so does Iberia, we achieved the ambition to get GBP 1 billion in Iberia at the 7% to 10% operating margin and Northern Europe plus GB recover, happy day. I feel very confident. But what I don't know is do we have some other market which has a slowdown in 2028, 2029, right? So I think you can only deal with it as you go along. Overall, as we explained in the Capital Markets Day, I think we have the levers necessary in our hands to achieve those targets. So I'm pretty confident we will get there. But I'm not overconfident because I don't have a magic wand to read the future. So we just have to be cautious and react to what happens.

Sorry, Flor, I think this just got in line with you.

A couple from me. Flor O’Donoghue from Davy. First one I might ask is relating to Salvador Escoda, just the network expansion. You just might give us a bit more color on the 5 new branches, where they are? Is it geographic gaps? Just broad economics around how it works in terms of opening costs, the kind of pathway to maturity and those kind of things, if that's okay?

Yes, sure. It's filling openings, right? So where we have still wide gaps where we think we will -- we'll be able to open it. It's across Spain where we opened and also on the Balearic Islands. We have a plan to open 7 this year, 5 were done in the first half, 2 more to come in line with our business plan. Opening a Salvador Escoda branch is not expensive. It's -- they are not massive branches. It's not like a Selco where you put quite a lot of capital down. So it's a relatively modest investment, and we would normally expect the business to certainly contribute after 12 months to the bottom line. So it's sometimes earlier, right? So it's a relatively fast breakeven. And you have relatively short lease commitments as well. You take a 5-year lease, lease costs are relatively low. And so you -- if it wouldn't work, you can exit relatively painless. And if it doesn't -- if it does work, it normally moves into an extension of leases is pretty simple, or it moves into evergreen contracts.

It's slightly different to that Mercaluz model. A new Mercaluz branch tends to be a slightly higher investment because it tends to act as a distribution hub. So you need a sort of slightly bigger warehouse than you would with a Salvador branch.

Second one then just might turn to GB. Really feels like you've done everything you can in operating costs and trying to keep the business as tight and as lean as possible. Is there any thought around maybe as leases come up and the likes of Selco that you may look at kind of consolidating the estate a bit? Or will you just kind of just have to hang tough until the market turns?

It's a constant process where we look at each branch, does the branch contribute? Is it -- does it contribute to overhead if it's not otherwise in the best shape? So we look at this very, very actively. And if it makes economic sense to consolidate, we'll consolidate. If it makes economic sense to continue to trade, we'll continue to trade. I think we closed one in the last 18 months, right? We went from 75 to 74, and we will keep monitoring it. In the long run, we still believe that there is potential for up to 90 Selcos in GB. We believe it's a very good model, but it's a model with a lot of operating leverage. And at that moment in the cycle, operating leverage isn't great, right? When the cycle turns, operating leverage is great. That's how it works, right? But we will -- if it makes economic sense to exit some sites, we will. But you have to look at it on a site-by-site basis, how does it contribute now? Do we think -- how much more revenue do you actually need for the site to be a really good contributor again. So you have to look at it in the -- at the overall picture of each site.

And just to add to that, I mean, I think Frank Elkins covered some of this at the Capital Markets event. We've got a new centralized distribution center that will be coming on stream next year. So that's an important investment. Now inevitably, there will be an element of some double running costs for a period. But once that is operating on its own, that's a big efficiency gain for Selco as well. It gives them more capacity for doing some own brand sourcing and that sort of thing. So that's quite an exciting efficiency improvement that by the time we get sort of '28, '29, that will be in full swing.