Earnings Call: H2 2019

Feb 27, 2020

Okay. Good morning, ladies and gentlemen. And, welcome to the results for the Grafstein Group for the year ending December 2019. I appreciate it's a pretty grim morning out there this morning and it's a very busy morning in terms of results. So really appreciate you coming to see us. And I know some of you are off pretty sharpish at the end of this one. So we'll try and get through it and make sure we can get you on your way at the appropriate time. For those of you who don't know me, I'm Gavin Slark. I'm the group's CEO. And I'm joined today by my colleague, David Arnold, who's the group's CFO. Our process for this morning is relatively straightforward. Many of you would have seen this before, I will give you a couple of slides just in terms of some highlights from 2019. I'll hand you over to David who will take you through the detail of the P and L, the balance sheet and also the performance of some of the individual business groups. And then I will come back on at the end, give you a little bit of insight into current trading what our strategic focus is going forward and then hopefully leave some time for Q And A, which should still give you all time to get away to where you need to go to. So in terms of 2019, what do we see in 2019? We're probably worth recognizing the fact that in the UK we did see a slightly softer market, particularly in the RMI sector and particularly in the second half of the year, although new build business did hold up very well during 2019 and we did offset some of the market softness with operational improvements that we'll talk about later. A very good year in terms of Ireland, good growth with our Irish merchanting business, Chadwick's and also very good growth with the Woody's DIY business, both of those businesses producing operating margins in excess of 9%. It was an important year for us in terms of strategic moves. It was also an important year in terms of operational initiatives. And I will go through some detail of those later on, but probably the 2 big things that really happened in the group last year, the transformational deal that we did in the Netherlands with the acquisition of Palvo Many of you will remember, we first moved into the Netherlands at the end of 2015, acquired a business called IZERO that was turning over around 90,000,000 This deal with Palvo in the second half of last year will get the revenues in Holland this year to something around the 1,000,000 mark. And then also we divested of the Plumbix operation in the UK and also our Belgian merchanting business last year I'll take you through some of the detail of that later on and the impact that that has in terms of revenue and profit going forward. I know many of you will have read the highlights, but just to go through them once more, revenue up 3% to 2,670,000,000 and the adjusted operating profit up 4% to 194,300,000. That is on a pre IFRS 16 basis. If you rolled it into post IFRS 16 your operating profit is around about 1,000,000. The adjusted operating margin again up 10 basis points to 7.3% a slight reduction of 30 basis points in the Rocky down to 14.4%. Adjusted earnings per share a 4% increase up to 66p and continuing with our progressive dividend policy, dividend increase of 6% up to 19p per share. Think one of the highlights of last year and many of you who know Grafton well will know the business has a history of strong cash generation, but we did end of the year last year with net cash of 1,000,000, which actually looking at our own records, we believe is the first time that Grafton has finished a year in net cash for something in excess of 20 years. So with that, to hand you over to David for the detail of the numbers. Thank you. Thank you Gavin and good morning, ladies and gentlemen. In keeping with the approach which we adopted at the interims, in this presentation, I intend to primarily focus on comparing the 2019 figures on a pre IFRS 16 basis with the results on a pre IFRS 16 basis from last year. Obviously this does bring with it the risk of greater understanding but fear not because next year we'll be back to full befuddlement mode when we move to a properly fully adopted IFRS 16 basis. I will also focus in this presentation today on continuing operations. In other words, the results and the comparator figures do not contain Plumbace or Belgium, both of which we disposed of last year. Turning now to the numbers and the income statement and you'll see the group revenue was up 3% to 1,000,000,000 and a similar figure in constant currency terms. Adjusted operating profit before property profits was 3% ahead of last year at 1000000. The operating margin before property profit was 7% in line with the prior year and we had a good year on property sales with property profits slightly ahead of 2018 at 1,000,000 leaving the group's adjusted operating profit up 4% overall at 194,300,000 The net finance cost was 1,000,000 that was slightly lower than last year. Underlying netback interest within that was 1,000,000 1,100,000 higher than 2018 as a result of a full year's coupon on the US private placement notes which we issued in September Adjusted profit before tax was up 4 percent to 1000000. Now as you can see from this slide, the increase in revenue during the year to 1000000000 was ostensibly driven by the acquisition in the Netherlands Polvo, which we completed in July. Foreign exchange movements didn't have a significant bearing on the 2019 figures though. It is worth noting that the average euro exchange rate last year was almost 88p and that compares to the current rate of 84p and so that could prove to be a headwind to the sterling reported results in 2020. Now I've said on the previous slide that the growth in revenue for the year was ostensibly driven by acquisitions, but I'd just like to pick out that of the net organic growth revenue that we saw of 1,000,000 the like for like businesses delivered 1,000,000 of growth. As you can see here on this graph, the bulk of the absolute growth last year was derived from Irish merchanting, which is over towards the left hand side and which grew in light light revenue terms by 1,000,000. 1000000 of the revenue increase was from organic growth initiatives for new branches and of that about half was from new Selco branches. At the beginning of 2019, we took the decision to exit from Tallhier in Selco as the returns relative to the investment in both assets and people wasn't weren't strong enough. And that represented about 1,000,000 of revenue in the prior year. And we had also sold 2 small businesses in 2018, bulls and Plumworld, those together accounted for 1,000,000 of revenue but neither of which were material enough to separately draw out as discontinued operations. If we now look 1,000,000 over on the right hand side of this slide, you can see that in the like for like business, profitability reduced by 1,000,000 and I'll return to but a lower level of store opening costs in 2019, mainly in Selco, but also a small amount in the Netherlands boosted 2019 profitability by 1,000,000. The disposal of bulls and plumwell together with the closure Elko Higher reduced profit by 1,000,000. The acquisition of Palvo last year, together with full year effect of the acquisition of Layland SDM added 1,000,000 and the increased level of profit contribution from property was 1,000,000. I've already mentioned that the like for like profit reduced by 1,000,000 in 2019. And the driver of this was in UK Merchanting where we saw a 1,000,000 reduction in the like for like profitability. The pain in the UK was experienced in the second half. You may recall that in the first half once we took account of the 1 less trading day profit would have been ahead. And I'll come on to talk about the UK more in a moment. The Irish businesses performed very strongly, particularly Woodies, which delivered a 1,000,000 increase in the like for like operating profit. In the Netherlands, like for like operating profit was 1,000,000 lower and this was a function of an uneven market partly influenced by issues which emerged in the second half around nitrogen emissions which impacted Dutch construction more generally. Central costs were 1,000,000 lower in 2019 and this was largely because of lower variable remuneration costs. In UK Merchanting, adjusted operating profit pre property profit was 1,000,000 lower at 1,000,000 I've mentioned that the like for like profitability reduced by 1,000,000 and this was very much a function of the weaker RMI market which we experienced in the UK in the second half of the year, particularly as we entered the key trading months of September through to November. In that period, we saw like for like revenue drop by 400 basis points and allowing for year on year price inflation that equated to some 500 to 600 basis points full in volumes. This put gross margins under downward pressure and it was the twin volume and gross margin squeeze which saw operating profit fall. We focused on productivity improvements and efficiencies executing a cost reduction plan in our principal UK merchanting businesses to mitigate the market pressures. The Irish merchanting business delivered like for 0.2% consistent with our expectations of continuing moderation from the high levels of previous years. Whilst house building continues to increase in Ireland with 2019 completions 18% higher than the prior year at just over 21,000, a decade high, it remained well short of demand which is estimated at 35,000 to 40,000 new homes per annum. Whilst new housing remains high on the political agenda for all the political parties in Ireland, it's important to note that in the last quarter in particular, the growth in new homes was in apartment schemes rather than houses and those sorts of developments tend to yield less sales per unit and higher direct sales through merchants than a comparable house. Operating profit increased to 1000000 although the operating margin was very slightly lower at 9.2% as the gross margin reduced as expected reflected the continued expansion of delivered products to newbuild customers. In the Netherlands, reported revenue increased by 36% on the back of the acquisition of Palvo. Like for like revenue was up 0.6% with trading conditions in the year uneven and softer in the second half. Operating profit increased by 23% to 1000000. In a 0, overall operating profit was slightly up with strong growth in gross margins on the back of good procurement gains and operating expenses benefiting from slightly lower branch opening costs. Overall, the operating margin of 9.3% was diluted as we expected by the acquisition profit up 19% to 1,000,000 and the operating margin increased 120 basis points to 9.7%. Like for like revenue growth was 4.7 percent driven principally by average transaction values on the back of continued improvements in product ranges and great customer service. Growth was delivered across a number of product categories. The store upgrade program is nearing its completion now, though we have a major investment of 1,000,000 into a freehold store in Dublin with works commencing in the middle of the year. We were really pleased with the performance of our manufacturing business following last year's record level of profitability. Whilst we saw marginal growth in volumes of products sold to house builders, we believe that the market fundamentals remain strong and the operating profit of 1,000,000 was only marginally lower than 2018. CPI's production facilities are well invested and have capacity to accommodate further volume growth in the market. Turning now to the balance sheet and a couple of points here, working capital remains well controlled and it was particularly pleasing to end the year in a net cash position of 1,000,000 and with a rocky of 14.4 percent, particularly given the investment that we made into Pulvo last year. On a post IFRS 16 basis, net debt was 1,000,000 with net debt to EBITDA at 1.7 times. Now from a banking covenant perspective, it's important to note that we don't have a net debt to EBITDA covenant within Cash flow remains very strong with free cash flow generation representing 89% of operating profit on a pre IFRS 16 basis, and 110% post IFRS 16. Net replacement CapEx was well controlled with the bulk of this investment focused on and branch maintenance. And just to provide some initial guidance on some of the more technical elements, of 2020 expectations. Firstly, fully at property profits, we expect those to be between 1000000 and 1000000. Depreciation is expected to be approximately 1,000,000 on a post IFRS 16 basis or around 1,000,000 pre IFRS 16, that equates sorry that compares against our expectations on gross CapEx of approximately 1,000,000 in the year. That's split roughly 1,000,000 on replacement CapEx, 1,000,000 on development spend. All other things being equal with its our pre IFRS 16 finance costs to be around 1,000,000, absent material acquisitions on a post IFRS 16 basis, that's some 1,000,000 higher at around 1,000,000. And we anticipate that the tax rate will increase to approximately 19.5% as a result of the impact of the 1 off deferred tax impact in 2020 from the UK Corporation tax remaining at 19% rather than the expected reduction to 17% which is currently in statute. And on that note, I will hand back to Gavin. Thanks David. So just looking ahead really now, and looking at our strategic focus and the outlook going forward, do want to touch on some of the things that we did during 20 team within the context of strategic focus as well. What do we mean by our strategic focus? What we actually mean is pursuing what we believe is a very focused growth strategy. And that means investing both organically and acquisitively in businesses that we believe can bring higher returns higher margins, but also businesses that still have good potential for growth going forward. And even though the balance sheet is in remarkably good shape, I would say that we still very much intend to maintain what we believe is a very disciplined approach to capital deployment. Looking at the growth businesses and the higher returning businesses, obviously, last year, transformational deal for us in the Netherlands was the acquisition of Palvo. And I have to say that 6 months in, we're absolutely delighted with the acquisition and what that business is bringing to the overall Dutch offering. It has absolutely cemented the position that we have in terms of being number 1 in the hardware in Iron Mungry market in Holland. And it is an excellent geographical fit. I know we speak here about we acquired 51 branches, bringing the total up to 113 within that acquisition, there was actually only one town in the whole of the Netherlands where we had a branch crossover. So from a geographical point of view, it was a superb fit. We completed that acquisition for 1,000,000 on July 1st, but our short term focus is very much around aligning purchasing benefits. And the reason behind that really is before we acquired Palvo, they'd acquired a business called Van Anchovort they've been working on the integration of Van Ankevort into Palvo. When we acquired Guenters and Mauser, we've been working on the integration of Guenters into the Azero business So we decided the right thing to do operationally, leave those businesses to focus on what they're doing at the moment. And then at some point in the future, we can look at a full integration in the short term, the focus is very much on just absolutely making the most of the purchasing agreements that we have in place. Also looking at our focus on higher return businesses, the disposal we made last year of both Plumb base and of the Belgian business. If you look at the impact this will have in terms of our group going forward, in 2018, the Plumb based business had revenues of around 1,000,000 and an operating profit of 6,000,000. The reasoning behind the divestment of Plumbix really was the guys in Plumbix who are working with us have done a purb job in moving the profit up to that GBP 6,000,000 mark, but we felt further growth potential was relatively limited in that marketplace and the opportunity came to really bring in 1,000,000 of cash for that business and that felt like a really good use of our time and capital and good value for shareholders. In terms of the Belgian disposal, as many of you will know, Belgian had been a difficult trading environment for us for a number of years. In 2018, revenue of just 1,000,000 and a profit of 800,000. The disposal of Belgium was a little bit more complex than it was with Plumbate in terms of making sure we've got the right value for the business. So at the end of 2018, we disposed of a single branch in Sanveet to one private buyer. We then removed a significant proportion of freehold property out of the Belgian business, which we held separately to be sold separately and then we sold the trading business to the people who eventually bought the business. So overall, the value of the Belgian business that we've got is 1,000,000 for that business that was making 1,000,000 a year, which feels like, again, a very good deal and very good value for the shareholders. Within the P and L, you will see a non cash charge of $24,700,000, which we're treating as exceptional as a result of the divestments of the two businesses on that slide. In terms of the operational milestones, what have we been doing in the businesses that we have? We start in the UK We have been working through a change in the ERP system and build base and all of the back office functions are now completely done That system is embedded and all of the back office functions are working on the new ERP system. We've rolled that out into 4 branches now in terms of the front end system, There's another one going next week. And as we go through 2020, the pace of the branch roll out will pick up. So at some point during next year, we'll have that complete ERP process rolled out in the bill based business replacing a system that was well over thirty years old. In terms of Selco, which obviously has been a situation for us of significant investment over recent years, we did open a delivery hub in Edmonton in North London. The delivery hub really takes the physical deliveries to customers out of 6 branches in North London for us. And those 6 branches were becoming a little bit, capacity constrained with the number of vehicle movements going in and out of there. So actually, we found this unit in Edmonton. We've taken the deliveries in the vehicles from 6 telco stores into that one unit because of the logistics efficiencies, we're actually now driving a higher gross margin after haulage from the deliveries that we're doing from Edmonton than we were from doing them from the individual branches. It's not something that we intend to roll out on a nationwide basis, but if you look at the density of branches we had, in this part of London, it made absolute sense to put a central delivery hub in place and it's working very well. We've also put in place a light side distribution center in Oxford for Selco. As many of you will know for ever, we've really had deliveries going direct into the telco stores from manufacturers. But as the business has picked up, the number of deliveries we had going in on a daily basis was again becoming constraining We put a light side distribution center in place in Oxford. The light side product will be consolidated there and delivered actually delivered in aisle order for the branches to put away to each of the Selco stores going forward. Having that DC in Oxford as well also gives us the ability to look at smaller products and buy them more efficiently and more effectively. We opened a new branch in Kingston. We've opened a new branch in Orthington And in June of this year, we'll open a new branch in Salford. And going forward, I think if we're looking at sort of 2, 3, 4 Salco stores a year, that feels like the right pace of growth for Solco going forward. In Ireland, we've been working very hard in getting the Chadwick's brand well established in the Irish market Many of you will know that over a number of years, we've had a number of different brands in Ireland, but as we really drive particularly to improve our digital offer in the Republic of Ireland, single strong branding became really important. So for some of you who know the history, we've got brands such as Heatens, we've got brands such as Eddy's hardware, market hardware even Barrett's have balanced slow will disappear as they become consolidated under the Chadwick's brand. We've also, in Chadwick, consolidated from 4 separate ERP systems down to 1 ERP system, which makes the business more efficient and makes the business easier to run. In terms of Woodies, our DIY business in Ireland, over 90% of the revenue from Woodies now comes from our reformatted branches. We've been constantly reformatting those branches over the past 4 or 5 years. As David said, we've got one big one left to do, which is the free hold site in Sally Noggin. That'll be done this year. But overall, most of the revenue and profit is now driven out of the reformatted woody stores. Online revenue last year grew again by over 50%. Now this business has been growing by over 50% for the last 3 or 4 years. It's still a relatively small part of what the business is But as we get towards the half year of this year, our anticipation is that the online revenue in Woodies will be the equivalent of 1 Woodies physical store but it's always the fastest growing part of the business that we have now. Many of you will be familiar with the great place to work employee engagement survey. I'm delighted to say that last year, Woodies came out as the top retailer in Ireland in the great place to work survey. So I think in terms of engagement in terms of how that business has transformed over the past few years, actually getting that award being voted for by the people who work in the business was a really important milestone. I've already mentioned in IZERO that we did the acquisition of Palvo last year that in its own right was a huge piece of work and a huge effort by the management team. But we also relocated the main DC and the main head office to 120,000 square foot purpose built facility in Vallenk's vein in the Netherlands. It is a significant increase in capacity. Our old distribution center was relatively small and quite inefficiently laid out This gives us a lot of capacity growth potential going forward, but also, and again, a little bit like the Selco DC in the UK, enables us to purchase more efficiently and more effectively. A little bit like we have done in Ireland as well, when we first acquired a 0, There were a number of regional brands within the 0 business and particularly again driven by the digital development. We've taken some of those regional brands out. So as Heritzer such as brewer, Van Der Vinkle have gone and they're now consolidated under the IZERO brand and that is the principle brand that we will use going forward. In terms of the Dutch business. Current trading, I know there's a voracious appetite for current trading information amongst our analysts friends Obviously, this is an incredibly short period of time. We're talking January 1st through to the 23rd February. But what we've tried to do here on the slide is to show you the like for like performance for Q4 and then the like for like performance for the 1st 7 weeks of this year really as a comparison, so you can see the exit rate coming out of last year and how we've gone into this year. So if you look at UK Merchanting, Q4 last year was down 4% 1st 7 weeks of this year, down by just 1.5%. In Ireland, pretty much unchanged, 2.7% in Q4, 2% going into the 1st 7 weeks of this year. That's the Irish merchanting business. In the Netherlands, it's gone from minus 1.4to+1.3 and the retailing business in Q4 was 5.6 percent up on the previous year Q4 is a huge period for us in Woodies and down just 0.3%, if you look at the 1st 7 weeks of this year. Manufacturing business, which principally is our mortars business, down 1.9% in Q4, strong start to the year 6.7% growth in 2020. So if you look overall as a group, Q4, our like for like sales were down by 1.8% and the 1st 7 weeks of this year, down by 0.4%. But I would just say that is an incredibly short period of time. And obviously, as we get towards AGM time, we'll have a much better view on how the year has started. In terms of the outlook, starting with the UK, I think certainly reduced uncertainty to full strength. But as we go through the year, our anticipation is that the RMI market will improve and will get stronger. Still got an opportunity for structural growth in some of the Selco stores that we've opened over the past 2, 3, 4 years, where those branches still have to reach maturity. There's an opportunity within Selco to see greater development of revenue coming through as those branches move towards maturity I think it's also fair to say we still believe there's operational improvements that we can make within the build base business. Build base is still our largest turnover business unit within the group And I think looking at what the performance was last year, particularly in the second half, we believe there's things that we can do to improve that business and improve the returns as we go through 2020. In Ireland, the underlying fundamentals still remain very, very strong. A little bit of political uncertainty in Ireland as we sit here today, but actually the overall RMI market, the overall new build market, still have very, very positive things going forward. We think that both Woodies and Shadowx will show further growth as we go through 2020. The overall house building market in Ireland at the moment completions last year, just over 21,000. It has increased from what it was in 2011 and 2012 and 4000 but still some way short of the 30,000 to 35,000 homes that we believe a normal Irish market would need. So still some significant growth to come in newbuild in Ireland. In terms of the Netherlands, as David mentioned, we did have this issue crop up during 2019 regarding nitrogen emissions that affected both construction and agriculture in the Netherlands, but the government are working a towards a long term solution to that, but they're also putting in place some short term measures should enable some of the construction projects that were paused to restart activity. And obviously, this year, we should get the full year contribution from the Polvo acquisition. We had half a year of contribution last year, but a full year of Polvo in the numbers in 2020. So in summary, what do we believe makes Graft indifferent? Certainly in the markets in which we operate strong market positions. In Ireland, the number 1 DIY retailer and the number 1 Building Materials distribution business, in the Netherlands, in the market in which we operate with the consolidation of the Polvo deal, a clear number 1. And if you look at even in the UK, strong performance from CPI euro mix cemented its position as the number one supplier of mortars to the UK construction market. We do believe that the exposure to the diverse markets is helpful. That's geographical in terms of the UK, the Netherlands, and Ireland, but also the fact that we have exposure to new build, to RMI, and to DIY. So the diverse market, we believe, is a very strong point in terms of grafton going forward. My finance colleagues did a super job in terms of managing the balance sheet and the cash generation as we go through last year and certainly finishing the year with net cash was a real strong point for us, but Grafton does have a history of very, very strong cash generation and turning most of our operating profit into cash. The finance guys will tell you that the operations guys then see a strong balance sheet as a license to go and spend. What I can reassure you is we will maintain that focused and disciplined approach to capital deployment. I think if you look at our organic investments over the past 5 or 6 years, alongside our acquisitive investments over the past 5 or 6 years, you'll see that we've spent the money very sensibly. We've spent the money very carefully, but we have spent the money we will continue to invest the money going forward. On M and A, we have got a good track record, I believe, of what we've bought and we also have a good pipeline of prospects But what I would say is we will up, we normally get asked the question later on. So I'll preempt that question now. What is the pipeline looking like now? The pipeline is good. The pipeline is and it's more important for us to buy good quality businesses with good prospects rather than just buy more turnover and more profit. And obviously, we've spoken for a number of years about the progressive dividend policy, dividend increase this year and that progressive dividend policy has enabled us to increase dividend payout to shareholders by over 75% in the last 5 years. So we're very conscious as we generate a lot of cash of who the money belongs to and this combination of having a good investment pipeline going forward and continuing to give shareholders a good return on their investment. And at that point, I'll rejoin my colleague and we'll take Q and A What I would say in terms of the questions and answers, certainly for the benefit of the webcast, if you have a question, if you could raise your hand, we'll bring a microphone to you you could give us your name and the organization you represent and then your question, that'll be particularly helpful for the people following on the webcast. Thank you. Robert Eason, from Goodbody. I did have 3, but it was cut down to 2 pretty quickly at the end there. The first question, I'll just get it out of the way. Supply chain, Can you just give us an overview of how much exposure you do have in terms of cost of goods sold in terms of sourcing from China stroke by our Asia. You mentioned during the presentation that, Bill Based, you're working on a number of things to improve, just expand on that comment and maybe just on the timing of that improvement in terms of when we can see it as the following results come. And maybe just change my third question of this. In terms of the M and A, how are you thinking internally about the balance of internally allocating that capital to externally advocate and to shareholders now that you are in a net cash position for the first time in over 20 years. How do you think of that balance? Okay. Good questions. In terms of supply chain and the whole coronavirus thing and how that's impacting us, If you look across the whole of the grafton group, about 8% of our sales will be product that is sourced either directly or indirectly from China and the Far East. So it varies quite significantly by business, Robert, as you can imagine. So the guys in the business, the supply chain teams are on this on a daily basis, In the short term, we don't believe that we have an issue. We've got good stocks in place and certainly we've got a number of businesses that have product on the water coming over from the Far East at the moment. I think it's inevitable, even though we can work really hard on this, if this situation deteriorates or gets worse or goes for a long period of time, there may well be some impact as we go forward, but obviously that wouldn't affect just us. That would be a whole market issue. But in terms of where we are today, feel that we're in a good position in terms of the product that we have available and we have very good visibility of individual factory productions. And it's worth saying that certainly not all of the factories in China that we deal with are actually closed. A number of them are operating, although some are operating on reduced manpower. But I think From where we can be today, I think we're in a relatively good position in understanding where we are and what the potential impact is. But it is, it's about 8% of the total group's turnover is derived from product that is imported from the Far East. In terms of the bill based operational initiatives, I think there's a number of things that we can do. And possibly if you look at businesses that we have like Selco, like Leland SDM in London that also had a really strong year last year, these businesses have probably evolved a little bit more quickly than BillBase has. I think certainly the old ERP system was a handicap in Bill base to evolving the business, into a more modern style and a more modern format. So probably, when would you see tangible results from some of the things that we're looking to do within bill base you're probably looking at 18 months and some of this is driven by the change in the ERP system and the quality of information that we will get and actually the quality of control that we have at a branch level from the new ERP system. And then there are other things that we're looking to do. As David mentioned during his presentation, We did take some cost saving measures, in bill based during the second half of last year as well. And I would say that within the UK merchanting environment. We had a really strong performance for a number of businesses, like I said, Layland SDM, TG lines, very strong performances. We improved our operating margins in places like Scotland and some of the Civil's businesses. So it's fair to say we felt most of the pain during the second half in bill base and that is why that's really the focus area there. I'll let David talk about cash. Yes. I mean, I think from an M and A perspective, the question that frequently comes back is what's the balance sheet capacity looks like, looks like. We were in net cash at the end of the year on a pre IFRS 18 basis 1.7 times net debt to EBITDA post the impact of IFRS 16. So we've always said historic that keeping that investment grade credit rating is very important for us. If you were to translate that into acquisition capacity, it's probably something up to about 1,000,000 How do we think about that acquisition capacity against how we balance what we do investing either organically returning it to shareholders or alternatively acquisitions? I think what's important for us is when we look at the pipeline, we do have, as Gavin has said, a good quality pipeline, I think in terms of acquisitions at the moment, The thing that's always unpredictable is around timing. Many of the discussions that we have are with privately owned companies and you can't force the timing. The important thing is that we're in the right place with the availability of the capital to deploy it when we see a good quality business. So I think we just remain very disciplined, very focused. I think we don't sit here bereft of ideas at the moment and I think we're in a very healthy position to enter this year given perhaps some of the uncertainties that we currently see in the market. Okay. If I'm bringing microphone down at the front here to the soon to be retired Howard Seymour, I didn't know that. But it goes dead straight away, mate. Howard Seymour seemed to be retired from you, miss. A couple of questions for me, if I may please. Firstly, just on the UK, Kevin, you alluded to sort of the a bigger element perhaps of confidence than there was before. Just wondering if you've seen any changes in terms of product pricing on that mean, we're in now quite a strange period obviously with the corona thing going on as well. But is it looking to you like a traditional pricing situation in the UK, as you've seen before. And then secondly, you mentioned that the second half was weaker in Holland. Would you attribute an awful lot of that down to the nitrogen because you sort of mentioned that the underlying market's good. And is there that potential for that bounce back, as you're saying, that the, obviously, the permits now looking like they might have raised up a bit Thank you. Yeah. Certainly I think in terms of the UK, I mean, we almost always get asked a question about pricing and how do we see competitors pricing against our own pricing? And when you've got obviously hundreds of outlets across the country. It's very difficult to sort of say, well, a certain business is pricing in one way and we're pricing in another way. Think it's symptomatic of the fact that we operate in a competitive market. It always has been a competitive market. I believe it always will be a competitive market. But certainly from our perspective, We try very hard to find the balance between pricing competitively to be competitive out in the marketplace and maintaining healthy gross margins on what we're selling. So I don't think the pricing environment has changed significantly Howard today compared to what it was 6 months ago or what it was 12 months ago. In terms of the nitrogen issue in the Netherlands, I mean, it's a very it's an interesting development that happened last year in terms of the nitrogen issue I know obviously it's very difficult to strip out completely what the effect of nitrogen was compared to maybe the market softening slightly but all of the information we have say that the future of the Dutch construction market is still very positive. Underlying fundamentals, as I said in the presentation, still look very strong. And certainly the conversations that we have on a weekly basis with the guys who run the Dutch business for us, they their belief is that once we get this restriction lifted you will start to see construction projects come back to life. Some of the construction projects that are on pause are actually big projects, so they will take a little bit of time to come back to life. But hopefully during the first half of this year, we'll get that permanent resolution to the nitrogen issue. It has impacted construction quite significantly. Impacted agriculture in a huge way in the Netherlands. I think just to put that into context, I think when the nitrogen issue first arose, effectively there was a hold put on the granting of any construction permits wherever they were. So we have got quite a backlog of approvals I think now that is sort of worked through the system, when you look at the number of permits that have actually been directly affected because they're quite close and adjacent to some of the nature reserves which gave rise to the original issue, I think it's only about 15% that are directly affected and where mitigating measures will need to be put in place with those planning consents. So it's definitely formed, you know, there's a bit of a hiatus whilst that work that works through. And I think that that does have a bearing. If you would, if you look at some of the forecasts that are coming out of the Netherlands for construction permits, I think it's pretty flat this year and next but there's definitely a political will, within the Netherlands to continue to grow and increase house building because as there is indeed in Ireland and the UK, there's a structural housing shortage. Okay. Do you want to just come down the middle here, Clyde? Thanks. Angelie Lammin from Canaccord. Just 3 actually. Just wondering if you have a bit more detail on the average kind of 1.5% for Life Flex in the UK. I think Huddl's today was talking about a very slow start to the year as you strip out the 1st 2 weeks, the kind of trend got better. Is that what you've seen or has it been a fairly consistent kind of pattern across the 8 weeks? And secondly, I wonder if give any bit more view on kind of new housing infrastructure commercial RMI, the end market split in the UK, how you see the trends there for this year? And then lastly, just on pricing in the UK is 2%, 3% price inflation kind of about where your expectation is? Shall I just let me sort of start with the end 1. I think that the outlook on price inflation in the UK is really difficult to call as we sit here right now. I think sort of absent the coronavirus, we probably would have been sitting here and saying that actually we thought inflation was probably like to be a bit little bit weaker this year than it was last year, it ran about 2%. But I think you might see certain product categories that are influenced by coronavirus this year hardwood faced plywood for example, 80% of UK supply comes through China. So that's quite an important product component last year we saw a softness on timber pricing. So I think I suspect we'll see that bounce back. So I think it's more unpredictable in terms of picture. Right now I'd probably be pitching it for probably closer to 1% than 2%, but it might be a different picture by the time we're talking at the AGM. I think in terms of like for like in the UK and what have we seen in the market, the reality is it's too early to say I think we came back I think it was a slightly weaker start because I think in terms of the timing of Christmas, people have taken a little bit longer It seemed to be getting a bit more momentum, and I think there was a bit more of a feel good factor around. But the reality is, particularly on the heavy side, it's been strongly influenced the wet weather that we've had over the last couple of weeks. So does it make it any different to a normal winter? Probably not, but I don't think we can read too much into it in terms of the underlying strength of the market. Certainly, if you're talking anecdotally to customers, I genuinely think they feel more confident this year than they do 12 months ago. I think they genuinely think that we will start to see a pickup in activity, all other things being equal And in terms of the sort of split of sort of underlying growth rates between the various components, I think our view would be actually newbuild on residential housing. We should continue see growth. I think RMI will benefit if we do continue to see some strength in the housing market that sees a pickup in transactions we certainly saw weakness in the RMI market last year. So I think sort of broad picture in terms of sort of major infrastructure that wouldn't really be airbag anyway. I'm going to come over this side. Thanks. This is Sam Dennoff from Stifel. A few from me. Firstly, in Ireland, always say margins can't get any better and they continue to do so. So it's 9% to 10% where we used to offer sensible base case going forward. And secondly, on your long term targets, obviously, you're already at above 7% operating margin. As you acquire higher margin businesses, do you see scopes sort of reset those? Targets? And then finally, on the portfolio, is there any more sort of areas you may dispose off on sort of the next couple of years? Okay. Good question, Sam. I can answer these in fairly short order actually because in terms of Ireland margins, does 9% look sensible going does 9% to 10% look for going forward? Yes. I think that is a sensible place to be. Certainly, I think in terms of DIY retail, any DIY retail is producing an operating margin in of 9% at the moment is doing really, really well. So I think we're very conscious in terms of pricing, in terms of how we position the business to make sure that we don't try and stretch the operating margins too far. And in a distribution business, 9% to 10% feels like pretty good performance So that seems like a sensible place to go going forward. In terms of the medium term targets, you're right. I think it was 2013. We first talked about getting the group to a 7% operating margin. Obviously, we have exceeded that. I think it's very difficult certainly in terms of looking out and saying, well, should it be 8% or should it be 8%, 8.5%. I think we certainly have a view in some of our existing businesses that the opportunity for operating margin growth may be becoming more limited. And I think certainly 6 months ago when we met, we talked about the profit growth actually being more about the quantum of profit rather than the percentage of operating margin. I think that's very much where we are now. I think in terms of the businesses that we have, there are some businesses where we believe we can improve the operating margin, but we have got a number of businesses where we believe they're pretty much operating at a peak. In terms of portfolio management, I think to be honest, it's something that we constantly look at. And I think if you look at what we've done over the past few years, you'll see that we have made some big decisions in terms of managing the portfolio, both in terms of businesses coming in and businesses going out. It's something that we look at constantly in terms of do we believe we would returns for the businesses that we have? As we sit here today, we're not about to buy anything. We're not about to sell anything as we sit here today, but we constantly look at it to make sure that the group actually stays fit for purpose looking into the future and that the businesses that we have within the portfolio are the right businesses for the next 5 to 10 years as opposed to the right businesses for the past 5 to 10 years, but some of the businesses we've had for a long time are still performing really, really well. We do look at it constantly. I think the thing that I would just add is I'm looking forward to the next change in accounting standards that adds another 40 basis points to our operating margin. Coming right down the front. We'll start with Charlie. Sorry, Florida. I don't see your hand up, but the bat will come back to you. Good morning. Charlie Campbell from Liberum. Just two really. So just on Solco, you've talked about sort of 2 to 4 openings this year and next few years. And I think that was the target for last year as well, but there was only one, just wondering kind of why that was particularly. And then secondly, just wanted to talk about the M and A pipeline. I think you've been pretty clear that you'll only buy good businesses that are growing. So recovery situations presumably we can rule out and also just thinking about the pipeline, should we think that it's roughly in proportion to the existing split of the business? So quite a lot of UK opportunities in there. Or would you encourage us to think that actually you'd be surprised if you did more in the UK that the opportunities are more elsewhere? That's a really good because a couple of years ago I said the chances of us doing a deal in the UK were really slim and then we went and bought Leland SDM about 6 weeks later. So I think on the M and A pipeline, opportunities in Ireland are quite limited because of the scale of businesses that we have. I think if you look in the UK as well, if we could find some more high margin specialized businesses like TG lines like Leland SDM, then that would be attractive. There's still an opportunity for some bolt ons in the Dutch business as well. I think we've been quite open over the past sort of 18 months or so and said at some point, finding another new geography as a growth vehicle would also be attractive to us. But the key thing for us is it does have to be a good business. It does have to operate in a sensible market. It does have to have scope for growth and it does have to have a management team that we can work with and drive that business forward. As we have done in Holland. So even before we actually get to looking at financial metrics, we have some quite high hurdles to jump in terms of making sure the business is attractive to us. So We are looking at an awful lot of businesses in different markets but at some point we'll find the right one and when we do Charlie that'll be the one that we go for but I think, yes, there's bolt ons in our existing markets and we would also be interested in that next geography as well. What's your first question? Oh, Selco? Yes. Yes. So just on Selco, I mean, I think we said last year, we were taking a pause in terms of growth because the business really had to adapt to what was 31 openings that we'd had over the sort of previous 3 years. I think 3 to 4 is a sensible view. It's always a bit influenced by making sure we get absolutely the right location and then we'll end up things like planning consents and speed of construction and that sort of thing. So 3 to 4 I think is a reasonable average some years it might be 2 to 3 and other years it will be more like 4 to 5. So. Okay. If we do floor at the back, and then we'll come down to Christian at the front, and I think we're probably getting quite close to time then. So. Thank you, sorry, Donu, JV. Just two for me. One, just on costs, anything to note there, general overhead staff, any trends. Second one, just go back to Selco, I think in the statement you mentioned, refreshing some of the stores. Is that a something that has to be done in in-depth? Or is it kind of just as there are a few stores that needed to be refreshed? Or is it something that would be more widespread, widespread across the state in the coming years as a as a cost or as an investment? Yes, I mean, just picking up the point on costs in terms of any trends, I think we've we think that there is pressure generally on employment cost whether that's because of full employment or alternatively some of the moves that we see from a statutory perspective in terms of national minimum wage and the impact that don't like ours. So I think we're constantly working on productivity initiatives, efficiencies to mitigate the pressure that we're getting that we're feeling on employment costs. I think in terms of Selco and refreshing stores, the reality is we've got significant levels of revenue, particularly through some of the major London based stores where we'll have revenues of 15,000,000, £20,000,000 a year going through a single store, a huge volume of transactions and traffic through those stores. And And the reality is we need to make sure that we continue to refresh that estate. So it looks really good and compelling for the customers. So So I think it's just it's a natural, which is a reflection of the success of the business that means that we need to continue to reinvest and make ourselves really look really good and competitive for the customer base. We're going to have to say places like Waltham Stowe barking, Wimbledon. I mean, although they've been open for sort of 10 years, I mean, they've had a hard life. So we do need to make sure that they're in the right state. And also it also provides us an opportunity for investing to reduce costs in things like LED lighting and things like energy, more energy efficient heating systems and that sort of thing. So when we're doing the upgrades, it also ultimately should be mitigating in terms of longer term operating costs. Okay. Right down the front here please, Rachel. Kristen York from you. There's 2 really quick ones, I'm sure. First of all, on Ireland, you've pointed political uncertainty. I was just wondering whether you've sort of seen anything on the ground. I mean, obviously, you've set up the like for likes, but more sentiment related and things like that. And you also pulled out the performance in Layland. Obviously, that's London focused, which I imagine was a bit tougher last year than perhaps the rest of the UK. So any color in terms of performance there and also whether you start to see some of those revenue synergies with Selco coming through at Yes, I think in terms of Ireland, I'm not going to profess to be an expert on Irish politics, but I think whichever way the government goes going forward pretty much all of the political parties in Ireland seem to be convinced that building more houses is a good thing to do. So I think whichever way that political situation works its way through, we don't see a significant detrimental impact on our business. In fact, in some ways, the opposite because of the commitment to housing. In terms of Layland, yeah, operational efficiencies with Selco, some of the revenue derived issues have been perhaps a little bit lighter than we thought they might be. But certainly in terms of procurement on things like paint and sundries, some significant benefits there. We opened 2 Greenfield stores with Layland as well. We opened made a veil in the second half of last year. We opened Stratham in the second half of last year. They're performing very well. I mean, Layland SDM for us just to be a business returning circa, a 15% operating margin for us. So for any of you who are London based and shop in Layland SDM stores, thank you very much. Got one at the back with John. Thanks, John Messenger from Redburn. 2, if I could. One is because I think the Chairman's in the room. Just to ask about the dividend policy, because I'm just thinking your yield is about 2% covers 3.3,3.4 times. Was there no temptation to possibly be a bit more generous on the dividend just in terms of that mix of are you looking at the business going forward and whether that cover should we think of it staying up at kind of north of 3 or whether it should edge lower? And then the second one was just on the CapEx guidance for this year, the 1,000,000, can I just to your point about Befuddlement, David, I guess, is that a kind of old world 1,000,000? And then for us all, just to understand it, new lease inceptions, leases running off or that malarkey does that kind of broadly wash its face or just to understand in terms of CapEx and the shift? Yes. And what's in the cell? These are all for you, these. Yes. So so CapEx guidance, yes, when we talk 1,000,000, I would describe it as we're talking real cash there. So it's not an IFRS sixteen number, that's about the pound notes that we'll write to buy to spend on real hard assets. In terms of the sort of the whole of IFRS 16 and does it sort of wash its face? I mean to be honest, I would just take a simple view when you're looking at it and assume that 2020 has a similar sort of level of delta between old money and new money in 2020 that it does in 2019. In reality, when you look a purely theoretical basis over time that it should start to wash through. But of course, as you constantly renew leases, you sort of reinventing yourself. So I think it will start to weigh in, but the simplest thing is to take a similar approach to 2020 as 2019. Terms of dividend policy, I mean, yes, we did debate, we did debate it as you would imagine. We do have strong cover, but historically, we've always had quite strong cover. I'm afraid part of the big settlement of IFRS 16 that does drop cover a little bit. And it's a sort of marginal call, but I think it appropriate in the context of where the market currently sits. And as earnings grows, it continues to grow, then we'll continue to nudge an dividend. I think we, again, was been quite open in saying we wanted to have a dividend policy that delivered sort of smooth predictable growth rather than Hollywood peaks 1 year and dragging it back the year after and that's very much plan that we have going forward, John. And we've never been a dividend yield stock. We've got anything else before we wind it up. Brilliant. Ladies and gentlemen, thank you very much for your time and your interest this morning. I know some of you are racing off, but thank you very much and hopefully we'll see you all in 6 months' time. Thank you.