Earnings Call: H1 2020

Aug 27, 2020

Good morning, and welcome to the half year results for the Grafton Group Plc for the 6 months ended 30th June 2020. I am Gavin Slark. I am the group's CEO, and I am joined today by David Arnold, who is our chief financial officer. The program for this presentation will be that I will take you through a short introduction and some highlights. I'll pass you over to David who will take you through the detail of the numbers and then I will come back at the end and take you through an operational and strategic update and also a view of our outlook for the second half of the year. So our first half overview, we believe that the grafton group is emerging from the COVID crisis in an excellent position that is both financially and operationally. We have seen a very strong recovery in our RMI focus businesses And you'll see that in Selco, in Woodies and in Chadwick's where the performance after reopening has been particularly strong. In our Dutch business and Leland SDM, we've traded continuously through the COVID-nineteen crisis. And these two businesses have played a really important part in our first half performance. We have transformed the digital capability in both Selco and in BillBase, And that is through investment in new platforms, which has resulted in our digital turnover in the first half of the year, more than troubling over the same period last year. We have maintained our strategic and operational progress, kept the business moving forward and continuing to grow and evolve the business. Our cash generation and liquidity has and on a pre IFRS 16 basis, we had net cash of 1,000,000 at the half year. We're very conscious that dividend remains an important consideration for many shareholders and for grafton as a business. You'll be aware that we suspended payment of the 2nd interim dividend for 2019, and we're not proposing to pay the 1st dividend for 2020. However, we will consider the scope for payment of both dividends as part of the overall review of the full year. And at that point, I will pass you over to David. Thank you, Gavin, and good morning, ladies and gentlemen. Before we look back at the how the COVID-nineteen crisis has impacted the first half financial results, it is worth pausing to consider how our strategic plan to improve the quality of Grafton's financial performance over a number of years has supported us in the last 6 months. If you recall, our medium term financial objective was to get the group to a 7% operating margin and just as importantly, a 15% return on capital in employed target and that's on an old money pre IFRS 16 basis, in particular, by focusing on investing in higher returning businesses, Now this chart shows our progress since 2011 towards these financial objectives. In fact, what is notable in the context of our strategy is that our more recent significant acquisitions, our entry into the Netherlands in 2015 and the purchase of Layland STM in 2018 both continue to trade very successfully through the lockdown. It's also of note, but perhaps more of academic interest that notwithstanding the pandemic in the 1st 6 months of this year, that our adjusted operating margin and our return on capital employed were higher or at the same level as that which we delivered back in 2012. We came into the COVID-nineteen crisis with the balance sheet in good shape. With the strong cash generation of the business, net debt has declined in recent years notwithstanding the investment into organic and acquisition growth. As at the 31st December 2019, we had net cash of 1,000,000 on a pre IFRS 16 basis. And we continue to generate cash over the last 6 months with net cash increasing to 1,000,000 as at the 30th June. So all things considered, we entered the second half of the financial year in excellent shape, and I'd like to think that's the principle headline you take away rather than perhaps focusing too long group revenue was down 19 percent to 1,000,000,000. Adjusted operating profit before property profits was 59 percent down at 1,000,000. And with a negligible contribution for property profits compared to last year, adjusted operating profit was 61% lower at 39,400,000. You may recall that at the start of the pandemic, we prudently drew down our bank facilities to ensure we protected our liquidity And as a result of this, together with the impact of 1,000,000 of foreign exchange movements, the finance charge was almost 1,000,000 higher at 1,000,000 This figure of 1,000,000 includes a charge of 1,000,000 in respect of the IFRS 16 impact of leases. It's worth noting that we have since repaid the excess drawings on our facilities given the liquidity and trading position of the group. Now, this slide sets out the 1st half revenue bridge. You will recall that we sold Plumb base in the second half of last year and our results have been restated for this. In the first half, we saw a reduction of 1,000,000 in revenue as a result of the COVID crisis. The acquisition of Palvo in July last year and a single branch acquisition later in the year added 1,000,000 to revenue. This slide analyzes the reduction of £315,000,000 in revenue, which we saw in the first half, and you can see, however, 80% of the reduction was attributable to our UK distribution businesses. The greater impact that we saw in the UK compared to either our Irish or Dutch distribution businesses was purely a function that the business was closed for a longer period and did not fully return back to normalized operations until towards theendofJune. Turning to the movement in reported adjusted operating profit, this slide bridges from the restated post plumb based profit figure of 99.8 1000000 in the first half of the year to the 1,000,000 reported for the first half of this. 1,000,000 of this reduction was in our light like business. We had a very small increase in Selco store opening costs, and we were delighted with the incremental profit contribution of 5 1,000,000 from the acquisition of Palvo, which was consistent with the acquisition plan, notwithstanding the broader COVID related challenges of the first half. I've already mentioned that the like for like profit reduced by £61,800,000 and the overwhelming majority of that reduction 53,300,000 was felt in UK distribution. Given its high operating margin, the temporary closure of Selco in particular accounted for roughly half of that movement. By the same token, the very strong returns and high operating leverage in manufacturing saw a 1,000,000 reduction in profit or for 1,000,000 reduction in revenue. Of real positive note, Other performances of both the Netherlands and retail like for like businesses, which were reached just 1,000,000 lower in constant currency profit terms despite the impact of COVID 19, and we'll come on to look at this in more detail shortly. In UK distribution, the majority of our branches temporarily closed on the 24th March and were not fully operational until the 22nd June. Layland SDM traded successfully throughout the period having been categorized as an essential store, which did a great job serving local communities with essential repair and maintenance supplies in and around Central London. Following reopening, we saw a good recovery in the private housing RMI market, and Selco in particular saw strong revenue and gross margin growth in June. New house building commercial markets have been slower to recover. UK average daily like for like revenue growth in June recovered to minus 10.8% against the same period last year, despite our businesses not being fully open for the whole month. In Ireland, our Chadwick's branch temporarily closed from the 28th March to 18th May, although a number continued to provide deliveries throughout this period to support essential services. Following full reopening and consistent with our experience in the UK, we saw a strong recovery in housing RMI with new house bills slower to recover. Daily like for like revenue growth increased strongly by 7.3% in June. In the Netherlands, our operations continued to trade as they were categorized as an essential business. Notwithstanding the operational challenges, particularly in the early days of the crisis, the Dutch team did a terrific job and amazingly we saw only a marginal decline in average daily like for like revenue and a 0 for the 1st half. Overall revenue was up 70% on the prior year as a consequence of the Polvo acquisition and adjusted operating profit increased by 56% to 1,000,000 at an operating margin of 10.2 percent. The theme of stronger demand in housing RMI that we're seeing in the UK and Ireland was replicated in the Netherlands and we saw a slight shift in the mix of business as a result. Ordies were temporarily closed for 51 days from the 28th March through to 18th May, except for online sales. Incredibly, the impact of that closure was largely offset by tremendous growth in like for like revenue immediately after opening, which saw exceptional demand for decorating and outdoor products. The Woodies team delivered a fantastic job in the face of the exceptional customer demand, and the operating profit of 1,000,000 was at a slightly higher operating margin of 9.8% in the first half. Finally, our manufacturing business was temporarily closed from 24th March with a phase reopening in late April early May. Our Scottish plant did not come back on stream until late June as a result of the impact of COVID rules on construction north of the border. We have seen a gradual reopening of sites by house builders with their early focus on finishing off partially completed stock. Volumes have been on a recovering trend. We were 1 third of their prior year level in May, and by June, this had recovered to 70%. This business remains supported by the strong underlying demand for housing in the UK in the medium term. Turning now to the balance sheet and a few points here. Intangible assets increased to 1000000 with a key driver being reduced to £174,000,000 over the last 6 months, modestly lower than the position 12 months previous. Trade debtors and creditors fell by roughly similar amounts in the first half, with the value of stock reducing by 1,000,000 in response to lower levels of activity. It's also worth noting that we did not make use of any extended payment opportunities on paye or VAT beyond the end of June and that normal trading terms applied to suppliers. The pension deficit increased to 1000000 from 1000000 and this was mainly a result of a reduction of 60 basis points in the discount rate used to calculate the value of liabilities in our UK defined benefit schemes. Net debt on an IFRS 16 basis, which includes liabilities, reduced to 479,000,000 and represented 1.9x net debt to EBITDA, slightly lower than in June 2019. We have an investment grade credit rating, which was confirmed in June, and our possession of that rating enabled us to move very quickly in securing access to the Bank of England's COVID facility. We were granted access to 1,000,000, and whilst we have no current intention of drawing down on this facility, is always good to have access to it as an absolute backstop if required. Strong cash generation remains an integral strength of Grafton's businesses. The reduction in sales led to cash being generated from a reduction in stock and overall, cash generated from operations was 121,500,000. Free cash flow of 1,000,000 represented 2 32 percent of adjusted operating profit Net replacement and development CapEx were kept at very modest levels relative to depreciation. As Gavin has mentioned, we suspended the payment of the 2nd interim dividend in respect to the 2019 results, which is a consequence benefited the net cash flow by 1,000,000. Overall, net cash flow of 1,000,000 was identical to the 1st half of 2019. And finally, just a few elements of technical guidance. We currently expect full year property profits to be approximately 1,000,000. We're currently forecasting that depreciation will be approximately 1,000,000 on a pre IFRS 16 basis approximately 1000000 to 1000000 on a post IFRS 16 basis with some of the variable being around lease renewals and extensions. Our current view on gross CapEx spend is approximately 1,000,000 in total split between replacement spend of approximately 1,000,000 and development spend of circa 1,000,000. We expect the net finance charge to be roughly double the first half charge at approximately 1,000,000. And finally, the tax rate will be slightly higher this year than our previous guidance at approximately 22%. This is because of the impact on deferred tax of the UK not reducing the rate of corporation tax as previously planned, together with tax disallows, being a high proportion of our projected pretax profit for the year as a result of the first half results. And on that note, I'll hand you back to Gabby. Thank you, David. In terms of our strategic focus, our focus remains very much on investing in the higher margin growth businesses that have strong market positions and further development potential. And if you look at recent acquisitions such as a 0, Palvo, Leland SDM and TG lines, they really underline that strategy. The acquisition pipeline remains encouraging and we continue to progress small bolt on acquisitions. And in recent weeks, we have completed the acquisition of a single site builders merchant in Ireland, and also the GDC decorating merchant plumed approach to the allocation of capital, and each business that we look at has to jump both financial and non financial hurdles to be considered as an acquisition target. And the strong balance sheet and excellent liquidity that have been a virtue of grafton throughout lockdown provide a really strong platform for those growth initiatives. And that financial strength really underpins our confidence in the future of the business It was appropriate at this point to have a look at the cost base of the business and make sure that we had rightsized the cost base throughout the group And it's important to say that we don't believe that any major restructuring is necessary. We have reviewed the cost base of the UK business in the light of the potential downside risk, particularly in the new bill businesses, and that does mean we'll be closing a small number of unprofitable branches 15 in total in the UK traditional merchanting business predominantly in the build based brand and with a couple of closures in the timber group and Plumb based Industrial. Overall, in the second half, we see that restructuring cost to be around about 1,000,000. And after cash payback period on that restructuring charge of less than 1 year. And this really is about us maintaining a clear view on having an efficient business going forward. In terms of the operational milestones that we've achieved in the current year, if we start with Selco, we've upgraded the website platform significantly to increase our digital capability and really drive digital revenue. We moved to the Magento 2 platform, and what we've now got is the click and collect and click and deliver business is running very close to 1,000,000 a week in Elko. During the first half, we opened our 68th branch in Orthington. And during the second half, we'll be opening number 69 is in Salford, which will be during 3rd week in October and also relocating one of our Bristol branches to a new location before the end of the year. In January, we opened our new distribution center in Oxford, and that gives us a huge simplification of the inventory management processes in Selco reducing the number of deliveries in store significantly and really improving the efficiency of the movement of inventory throughout the business In build base, we've continued to focus on business improvement, modernizing the offer and making sure that build base stays relevant to the modern customer. We've continued with the rollout of the Microsoft ax system, and we've now got 9 branches live on that new IT platform. And we'll continue to roll that out now at a rate of around about 2 branches per week. It's also worth remembering that all of the back office functions were done prior to this year, so putting the branches live on the ax system really is the last piece of the jigsaw. As with Selco, we upgraded the website significantly increased the digital capability and the our ability to take online orders in bill base. In fact, during the first half of this year, our online orders in bill base were around about 1,000,000, and that compares to around about 1,000,000 in the same period last year. As I mentioned a moment ago, in Layland SDM, we completed the acquisition in July of GDC Paints. A 5 branch decorators merchant business with some great locations in London in places like Greenford, Acton, Tooting, Cricklewood, and Fulham. The combined business now has a total of 28 branches across London, and we'll continue to look for both greenfield possibilities and bolt on acquisitions for that business. And we still see further opportunities in that business for growth. And one of the things that we'll be doing during the autumn of this year is switching on the next generation of e commerce platforms within Layland SDM to make sure that we are at the forefront of digital trading in that business too. Moving into Ireland and looking at our Chadwick's merchanting business, we also made an acquisition in this business in July 2. With a well established single site business in Dundorck that really just fills a geographic gap that we had in Ireland, and it's at the first Builders Merchant acquisition that we've made in Ireland since 2008. Following a successful trial in Dublin, we've opened now a second fixing center in Cork, and Cork continues to perform very, very well. And as with bill base, we've continued to modernize our estate with 3 branches significantly upgraded and rebranded during the first half. And as David mentioned earlier, even with the temporary shutdown, this business produced an 8% operating margin in the first half of the year. In our DIY business, Woodies All of the branches have now been upgraded to the new version of the Microsoft And Vision ERP system, which gives us many years of operation on that system going forward. We've also commenced the next phase of digital development with investment in expert resources and moving towards the Magento 2 platform as we have done in Selco. And that is because of the recognition that even though e commerce performed well during the lockdown, we need more capacity in e commerce and woodys to help us for the future and to help us maintain that very good operating margin, which in the first half was very close to 10%. In IZERO, our Netherlands business, yet another major systems project completed. With the Gunther's and Moiza branches now successfully migrated onto the IZero Microsoft ax ERP platform. That means that not only have we now got IZERO and Gunther's operating on one platform, but all of the Gunther's and Moiza branches are now linked in to our new DC that we opened last year in Vaddingsvane. In total, the Dutch business is now 113 branches. And we've continued with the integration of Polvo by transitioning the Polvo business into the I00 buying group which, along with the closer alignment of the Palvo and IZERO private label brands, really helps us to protect the margins that we have in that business but also to drive efficiency in supply chain and in sourcing. So in terms of current trading and the outlook, It's worthy of note that obviously during the first half of the year, we've seen some significant reductions in turnover due to the closures that David outlined earlier on. But what we've put on this slide for you is the total performance for the first half of the year and then the performance for the first section of the second half from July 1st through to 16th August. In UK distribution, you'll see that the first half of the year revenue was down by a little over 30% but during the first period of the second half, which is a combination of businesses that both operate in RMI and in newbuild, revenue down by just 0.7%. In Ireland, in the first half, revenue was down by 16.7% and at the beginning of the second half, a significant increase in revenue of 11 point 6%. In the Dutch business, which traded all the way through the global pandemic, 0.7% reduction in the first half of the year, with a reduction of just 1.3% in the first period of the second half. And obviously, one of the most significant businesses we have being the retail business in Ireland, reduction of just 2% in the first half of the year, taking into account it was closed for 51 days and an increase in the first sector of the second half of over 35%. Our manufacturing business which is heavily reliant on new build residential in the UK was down by 38% in the first half of the year and down by 12.3%, which is absolutely in line with what we're seeing with the new build businesses having a slower recovery than those that are more focused on RMI. So across the whole of the group, revenue in the first half of the year declined by 24.3% with the first period of the second half seeing an increase of 3.8%. Our performance in any of our geographies will be influenced by our capacity to continue to trade and avoid COVID-nineteen related lockdowns whether they be of a local or national basis. It is positive to say that the local lockdowns we have seen in the UK have had a very minimal impact on recent business. And we continue to be pleased with the strength of the repair maintenance and improvement market in all of the geographies in which we operate. And I'm pleased to say that based on current trends, we anticipate that we should be able to deliver a level of adjusted operating profit in the second half of this year similar to the same period last We emerge strongly from that, from that crisis, and that really is a testament to the commitment and quality of the colleagues that we have within the business. We have worked very hard on doing the right thing for our colleagues, for our customers and the communities in which we operate And as we entered the temporary close down in March, we got very strong buy in from our colleagues for doing the right thing. We've also tried very hard with significant investment both in physical and in PPE barriers within the stores. To make the reopening process as positive a process as we possibly can as our colleagues have to adjust to new processes and new protocols in virtually all of our working environments. Our core businesses have continued to build on strong market positions and they emerge in an excellent position to support the RMI market growth that we are seeing. We're continuing to progress the strategic and operational initiatives and that enhanced digital capability as we outlined earlier in the presentation. And in particular, we see digital playing a really important part in the business going forward. Our balance sheet remains in great shape, and that has been a long term feature of the grafting group and we will maintain that pattern we still see opportunities for both organic and acquisitive development in the COVID world. And I think it's fair to say that we are confident of the future but not complacent about the situation that we're currently operating in. And at that point, I would just like to say thank you for your attention and for your interest in Grafton. Thank you very much