Good morning, everybody. Thank you for coming. I know some of you have made a mad dash across town to get here, welcome to the results presentation for the Grafton Group for the year ending December 2018. I think most of you know us pretty well, if anyone's not sure, I'm Gavin Slark, I'm the Group CEO, I'm joined today by David Arnold, who's our CFO. Our agenda for this morning is relatively simple. I will give you some highlights to start the presentation off. I will hand you over to David, who will take you through some more detail in terms of the P&L, the balance sheet, performance of the individual businesses, and the potential impact of IFRS 16.
Once he's dazzled you with that, I shall come back up and give you a view on current trading and the outlook as we see it, That should leave us plenty of time for some Q&A towards the end. In terms of the results for 2018, revenue up by 9% to GBP 2.95 billion. A significant improvement on last year, resulting in a 19% increase in operating profit to GBP 194.5 million. The adjusted EPS showing a 20% increase up to GBP 0.66, which has also resulted in a 16% increase in the dividend up to GBP 0.18 per share from GBP 0.155 last year. Absolutely in line with our progressive dividend policy, that is the sixth consecutive year of double-digit dividend increase. Adjusted operating margin up by 60 basis points to 6.6%, and the return on capital employed an improvement of 140 basis points to 15%.
Overall, from the headline point of view, very, very strong performance from the Group last year. Very positive set of results. The pleasing aspect from these results from last year is, again, we have seen all of the segments within the Group showing improvement year-on-year. That's merchanting, manufacturing, and retailing all showing improvements against 2017. What's also really pleasing about this set of results as well as we say there, the integration of Leyland SDM and the acquisition that we made last year, which has contributed very positively to the P&L this year, also very broadly based organic growth.
When you look at some of our core businesses, you look at Ireland, you look at Woodie's, you look at Chadwicks, you look at the Dutch business, maybe some businesses in the U.K. that we don't talk about an awful lot, businesses like Civils & Lintels, TG Lynes, Plumbase, as an example, all showing positive organic growth. Excellent progress towards our medium-term financial target. I think we've been very public and said our medium-term target was a 7% operating margin, married to a 15% return on capital employed. That target we actually hit during 2018, with a 6.6% operating margin, very close to that 7% target, too.
A fantastic job by David, Charles, and the finance team in delivering really strong cash flow, getting net debt down to very low levels, meaning that we're in financially really good shape, enabling us to take advantage of investment opportunities that come along in the future. Many of you will recognize this chart, as we've now shown it for a few years, but really just showing the journey of the operating margin and the return on capital employed over the past few years. You'll see there the operating margin over that period moved from just over 2.5% up to that 6.6% that we talked about earlier, and the return on capital employed, stellar growth going from 4.6% up to the 15% where we are today. I think what we're demonstrating there is that consistent growth coming right the way through the group.
With that, you're probably desperate for some more detail, so I shall hand you over to David, who will take you through the financials.
Thank you, Gavin, and good morning, ladies and gentlemen. Group revenue was up by 9% to GBP 2.95 billion, or up by 8% in constant currency terms. Adjusted operating profits before property profits were 18% ahead of last year at GBP 189.6 million. Property profits were slightly ahead at GBP 4.9 million, leaving the group's adjusted operating profit up 19% overall at GBP 194.5 million. There was a GBP 7 million combined charge for amortization on acquisitions and the small loss on disposal of non-core businesses. The net finance cost was GBP 6.1 million, and that was down slightly on the year because of higher interest receivable and lower foreign currency losses. Adjusted profit before tax was 20% up to GBP 188.4 million. We show here the overview bridge of the improvement in operating margin to 6.6%.
We saw significant progress towards our 7% operating margin target last year, and it was really pleasing to see the balance of improvement between that gross margin improvement and the benefits of tight control of operating expenses. The investment and the focus that we've had in recent years on higher margin businesses continued to have a favorable impact last year. As a consequence, despite most of our businesses seeing some pressure on gross margins in competitive markets, the faster underlying growth in higher gross margin businesses, that's the likes of Selco, Ireland, and the Netherlands, together with the Leyland SDM acquisition, all contributed to lifting the group's gross margin by 20 basis points. In addition, self-help initiatives and a continual focus on cost management improved our overhead efficiency by 30 basis points. Overall, we delivered an increase in the group's operating margin of 60 basis points to 6.6%.
The increase in revenue during the year of GBP 237 million was split roughly three quarters from organic growth and a quarter from acquisitions. As you can see, foreign exchange movements didn't have a significant bearing on the 2018 results. The principal acquisition that we made in 2018 was Leyland SDM, which represented GBP 44 million of the incremental revenue of GBP 58 million, with the balance being the acquisitions which we made in Holland. If we look at the organic growth in revenue of GBP 172 million, all businesses delivered like-for-like growth, with the bulk of the absolute growth delivered from the U.K. merchanting and Irish merchanting businesses, which you can see over towards the left-hand side of the chart. GBP 58 million of the increase in organic revenue last year was derived from organic growth initiatives, of which the majority were the new Selco branches.
There was a reduction of GBP 13 million from branch consolidations and disposals. If we now look at the components of the increase in operating profit from GBP 163.7 million over on the left, up to the GBP 194.5 million, which we reported last year, you can see that GBP 20.7 million was derived from profit improvement in the like-for-like business. Growth initiatives contributed a net improvement of GBP 1.2 million. Of this, approximately GBP 3 million relates to lower Selco store opening costs in 2018 when compared to 2017. Acquisitions added GBP 7.1 million to operating profit, of which the bulk comprised the contribution from Leyland SDM. If we look at the analysis of that GBP 20.7 million improvement in the like-for-like business, it was really pleasing to see that profit advanced across all our main businesses.
When we look at the drop-through rates, you can see that the overall group drop-through rate was at 16% on incremental like-for-like revenue. That was slightly higher than last year. Turning now to the individual businesses. In U.K. merchanting, adjusted operating profit, pre-property profit increased by 9.1% to GBP 110.1 million. The operating margin was unchanged at 5.5%, that was up slightly in the second half of the year. Average daily like-for-like revenue grew by 2.7%, with volumes broadly in line with last year, though the RMI market did see a modest volume reduction. The gross margin improved by 30 basis points, that reflected the mixed benefits of the Selco expansion and the acquisition of Leyland, which offset general pricing pressure, which we experienced in competitive markets. Selco profit was ahead of last year due to lower store opening costs.
We made further investment into the new Buildbase trading system, which is now up and running and supporting a significant portion of our day-to-day back office operations. We expect to commence branch rollout in the second quarter. This branch rollout will lead to an increase in operating expenses of approximately GBP 3 million in 2019. That's principally derived through training costs and an amortization of the investment that we've made into the system. It will ultimately lead to even better customer service for our Buildbase customers. The Irish merchanting business continued to perform strongly. Reported revenue grew by 9.3% in GBP terms, and average daily like-for-like revenue was up by 7.7%. That was consistent with our expectations at the start of the year.
We saw the underlying construction market continue to perform well with house completions increasing to 18,000, though still some way short of the annual homes requirement, which is estimated at some 40,000 units per year. The gross margin reduced modestly as we expected, and that reflected the continued expansion of delivered products to new build customers. Operating profit increased by 20% to GBP 41.3 million, and the operating margin increased by 90 basis points to 9.4%, with the second half margin increasing to 10.6%. Our Chadwicks brand trialed a new trading format, and this has now been rolled out to five more branches with further investment across the estate planned. Our investment is focused on ensuring we continue to offer our customers the best experience possible through the largest builders merchanting network in Ireland. In the Netherlands, reported revenue increased by 19% and average daily like-for-like revenue increased by 6.6%.
We saw good performances across both the branch network and also through growth with key national account customers. Operating profit increased by 2.7% to GBP 16 million, and the operating margin was just over 10%. Two branches were acquired in the year, and we opened two new branches. We're continuing to invest into the branch network, particularly focusing on improving the self-select areas for customers. Construction of the new distribution center is progressing well with occupation expected in the second half of the year. In Belgium, after a slow start, we saw improved financial performance in the second half, with an ongoing focus to drive efficiencies and operational improvements to improve returns in this business. Woodie's delivered an excellent performance, with reported revenue up by 10% and operating profit up by 50% to GBP 16.8 million. The operating margin increased by 230 basis points to 8.5%.
The growth in revenue was derived from a roughly equal split between transactions and average transaction value. Seasonal products performed particularly strongly in 2018. The good weather that we had in May and June gave rise to stronger sales in the likes of barbecues and garden furniture, and the Christmas category performed very strongly, too. The store upgrade program now covers 85% of the revenue, and we're continuing to invest in the store estate and digital offering. Online remains a relatively small element of overall revenue but is growing quickly. Manufacturing had another record year, with operating profit up by 27% to GBP 19.2 million. The operating margin increased by 150 basis points to 24.4% due to volume growth and tight management of the cost base. We saw continued growth in packaged products, which are now being extended for sale into Selco.
Turning now to the balance sheet, just a few comments here. Working capital increased slightly faster than revenue last year but remains very well controlled. Working capital intensity was 6.5% at the end of December. We've taken precautionary steps to mitigate Brexit risk and have invested into stock in the first quarter at slightly higher levels than we ordinarily would have done. With net debt at GBP 53 million, representing net debt to EBITDA of just 0.2 times, the balance sheet remains in very good shape. You may remember that we raised money in the US private placement market last year and received the proceeds in September. This was at an average coupon of 2.5%, with the EUR 160 million raised split over 10 and 12 years. Finally, we were delighted to achieve a return on capital employed of 15% last year.
That's consistent with our medium-term objectives and represented an increase of 140 basis points. This improvement in ROCE was led by an improvement in operating margin as capital return remained constant at 2.3 times. You may recall previously that we said that we felt it was unlikely that we could improve capital return significantly from that 2.3 times, and that the ROCE improvement was likely to be derived from future increases in operating margin. Looking at our cash flow, we once again saw strong free cash flow generation, 81% of operating profit. Net replacement CapEx was well controlled, with the bulk of this investment focused on fleet and branch maintenance. We continue to invest in the further growth of the business with GBP 41 million spent on development CapEx.
A gross GBP 81 million was spent on business acquisitions, with a net GBP 13 million generated from the sale of two small U.K. businesses and a branch in Belgium. These disposals contributed GBP 48 million of revenue and GBP 1.5 million of operating profit in 2018. Firstly on property profits, we currently expect these to be about GBP 3 million. That's slightly lower than the GBP 4.9 million we delivered in 2018. Depreciation on a pre-IFRS 16 basis, I'll come to that in a moment, that's currently forecast at approximately GBP 49 million, and we expect 2019 CapEx to be around one and a half times this figure. We expect replacement CapEx to be approximately GBP 50 million, with organic development spend at approximately GBP 25 million. Please note that this excludes any acquisition spend.
Based on current forecasts, the interest charge should be around GBP 7.5 million. That reflects the higher coupon on the US private placement notes. Again, I'd just note that this will be influenced by any acquisition spend. Finally, we expect the tax rate to be 18.5%, consistent with the underlying rate in 2018. Now that John Messenger's come in, I just wanted to spend a few moments on IFRS 16, which is the new lease standard. You'll see that this will be included for the first time in our interim results, which we publish in August. The new standard comes into effect on the 1st of January 2019, we intend to adopt the modified retrospective approach. IFRS 16 will bring all our leases onto our balance sheet at the implementation date, the modified approach does mean that we will not be providing restated comparatives.
The key thing to remember is that the new standard has no impact on cash flows and no impact on our financial covenants. Our financial covenants and our funding agreements are all fixed at the date of signing on the basis of frozen GAAP. We estimate that the balance sheet liability for the current lease portfolio is somewhere between GBP 565 million and GBP 585 million. That's equivalent to roughly seven and a half times our 2018 annual lease charge. Instead of the actual lease rental now being expensed through the P&L account, we will now see a separate depreciation charge and an imputed interest cost.
The impact on profit before tax is neutral over the life of a lease, but it will result in a higher charge in the earlier years with a lower charge coming through in the later years. I've set out on this slide the impact on the various key elements of the income statement, but it is our intention over the next 3 years to provide restated earnings per share information on a pre-IFRS 16 basis in order to provide historic comparability. On that note, I'll hand back to Gavin.
Thanks, David. We just felt it was worth spending a moment just looking at what we perceive to be the factors that makes Grafton a little bit different. I think, first of all, we talk about the market positions that we have. If you look at the U.K., obviously in that traditional merchanting market with Buildbase and with Plumbase, we have very strong market positions. Again, with Selco Builders Warehouse, which in the U.K. is a clearly differentiated business model. In Holland, we've got a leading position in the ironmongery and construction accessories market. Obviously, in Ireland, we are the market leader in both builders merchanting and DIY retailing. Whilst looking at Ireland and Holland, I think one of the other strengths that we have is obviously those two markets are two of the fastest growing economies within Europe.
We also operate what we refer to as a decentralized federated structure. Probably epitomized by the fact that if you visit our head office in Dublin, you'll just be met with a team of 20 something people. It's a very, very small head office with everything else is pushed back out into the businesses, which means that all the resources of the business, all of the assets, are nearer the customer where we believe the individual businesses can make best use of them. That decentralized structure also drives very strong culture development within the individual businesses. We want the people within our businesses to have an ambition to be brilliant for our customers, to feel that they're empowered to be entrepreneurial. You can only really do that in an environment where you trust the people that you have working within the business.
We have got some incredibly talented business leaders working right the way through the group, making sure that we're delivering that customer service and customer experience that helps to differentiate Grafton. As David said, we have an incredibly strong financial base, very low levels of debt, strong cash generation. The balance sheet is in extremely good shape, enabling us to look forward in terms of investment. Over the past few years, we believe we have shown a track record of delivery, consistently delivering better results year-on-year. You know how we love a chart. If you look at this one in terms of earnings and dividend per share, you'll see there that the EPS since 2011, the compound annual growth rate on EPS is in excess of 25%, getting up to that GBP 0.66 level that we saw this year.
In terms of the dividend, moving the dividend from just GBP 0.065 per share up to that GBP 0.18 per share where we are now, showing sustained dividend growth in line with that progressive dividend policy that we have talked about in recent years. In terms of the journey that we've been on, for those of you who were at the Capital Markets Day at the end of 2013, I know a few of you were, we started by saying our aspiration was to get to a 5% operating margin and a double-digit return on capital employed. In 2015, we moved that forward to the targets that we talk about today being a 7% operating margin married with a 15% return on capital employed. One of those targets that we've achieved now, one that we're very, very close to.
What does that mean in terms of the next stage of the development of Grafton? We've got a very clear plan. We have a very clear strategy on the future growth of the business, achieving those targets along the way really get us to a point now where we can be clearly focused on investing in both organic growth and acquisitive growth to keep driving the earnings of the business forward for years to come. Current trading. This is an incredibly short period of time that we're looking at here. We're talking about January the 1st through till February the 17th, and I think most of you will remember that most of the world didn't come back to work after Christmas until January the 7th.
This is a very short period of time, I know many of you guys have got a voracious appetite for this information. Here is the information that we can give you. What we've given you on the slide is Q4 from last year, then that period up until the 17th of February, sorry, that six-week period at the start of this year. U.K. merchanting, like-for-like growth of 1.9% at the start of this year, compared to that 3.4% and the strong end that we had to 2018. In Ireland, really positive start to the year in terms of merchanting, up by 10.5%. If you then go to the Netherlands, you'll see just over 4.5% growth in like-for-like sales in that first six weeks in Netherlands. Also, 5.5% growth in Belgium.
You will remember that over the past couple of years, we've talked in Belgium about during the second half of last year, we were relocating the Brussels branch, which really accounts for almost 25% of the Belgian revenue. That branch was relocated during the second half of last year, now we can have a focus on really driving revenue growth through that branch that's probably held the growth in Belgium back a little bit over recent years. In retailing, in Woodie's, just over 5.5% growth, continuing the strong performance of Woodie's in that Irish DIY market. Manufacturing up by 1.3%, which you may look at that compared to Q4 and think that that's a little bit of a weaker performance.
What I would just like to point out on manufacturing, if you take the same six-week period from beginning of last year, that business was actually up 26% on the first six weeks of 2017. Last year was an incredibly strong start to the year. Some growth on that this year, but I would also say in terms of our mortar business, we've actually got more silos out on construction sites in the U.K. than we've ever had before. Total group like-for-like revenue growth in that six-week period, 3.7%. Continuing to see growth in every sector, continuing to see growth in every geography. In terms of the outlook, as we see going forward, our focus remains in the U.K. very much on outperforming the market. We obviously all understand there's a little bit of macro uncertainty in the U.K.
We have no control over what happens in terms of the Brexit process, so our focus is very much on whatever the market brings to us, our focus is on outperforming that market. We do believe that RMI activity may be modestly lower this year in terms of volume, but there is some price inflation coming through, and we think that that should help to offset whatever potential volume risk there is in terms of the U.K. market. The U.K. market continues to be competitive. It's been competitive for a long time. We would anticipate it continuing to be competitive going forward. Competitive market conditions for us are pretty much business as usual. In Ireland, we see continued growth coming through in terms of the economy.
The forward indicators are still positive, and as David said earlier, the Irish new build market is still some considerable way off what is recognized generally as a normalized market of between 35,000 and 40,000 homes a year being built. That number was 18,000 last year. We still see the Irish economy as having some continued growth coming forward in the years to come, and it is the fastest growing economy in Europe. In terms of Netherlands and Belgium, obviously the outlook for the Dutch market continues to be positive. We are increasing our scale in the Dutch market, and we should continue to see business improvements coming through from that increase in scale. As I said earlier, Belgium, our focus really is on self-help and making sure that we get the traction that we need out of that new location in Brussels.
In summary, growth and profitability across all of the sectors that we have. Manufacturing, merchanting, and retailing all showing growth during 2018. Of course, in every geography. In terms of the Netherlands, the U.K., and Ireland, growth going right the way across the group. Excellent progress towards those medium-term targets of 7% operating margin, 15% return on capital employed, with that return on capital employed target having been achieved during 2018. Our ongoing focus is on growth and on self-help. Self-help from my perspective, what that really means, it's about doing the simple things really well. I believe if we get the basics right, that gives us a great foundation on which to build, on which to grow.
On that note, the balance sheet puts us in a great position to be able to continue to support investment in organic initiatives as we go through organic growth and looking at acquisition opportunities. I think as we've said consistently, our belief on acquisitions is we continue to look for acquisitions. However, we really are quite disciplined in the approach that we have. They have to be good businesses. They have to have good positions in robust markets with more opportunities to grow and management teams that we believe we can work with going forward. On that note, I will retake my seat. We'll go into Q&A. What I would say in terms of the Q&A, for the benefit of those watching on the webcast, if you've got a question, if you can raise your hand, we'll bring a microphone to you.
If you could give us your name, the company that you represent, then your question, that'll make the Q&A flow very smoothly for us. Thank you.
Thanks. Aynsley Lammin from Canaccord. Just two questions, please. Just on the U.K. outlook, obviously lots of uncertainty, you say in competitive markets, business as usual. Given one of the big competitors is maybe acting a bit more aggressively, taking market share and the market, as you said, expects to be down this year on volumes, do you see the risk of more gross margin pressure being higher this year in the U.K.? Just kind of thoughts around that. I guess my second question is, you've reached your return on capital employed 15%. The margins have got to quite high levels now, maybe with the exception of the U.K. Just wonder if you could comment on the further upside you see potentially in margins, you've obviously flagged up strong balance sheet preference for investment acquisitions. Any obvious gaps geographically, business end markets for acquisitions and pipeline?
Thanks.
Okay. I think in terms of gross margin pressure, it's always dangerous to try and look at our business and just do a direct comparison with one competitor. I think we've been quite consistent in our messaging that certainly in terms of traditional merchanting in the U.K., many of our branches consider the local independents to be the ones that really can be strong competition in sort of the local town. I don't think that one competitor maybe changing their position necessarily has a major impact on how we see gross margins in the U.K. I think we continue to work really hard at making sure that we can offer the customers great value while protecting margins and making sure that we grow the earnings going forward.
I think in terms of the operating margins across the group and in some of the businesses, you genuinely cannot just exponentially keep improving the operating margins across the whole group. For us, it's very much about the quantum of earnings and making sure that we have a good pipeline of opportunities, both organically and acquisitively, to keep growing the actual earnings across the group. That's not to say that the operating margins will stay static, because in some businesses we still believe we have room for improvement. When you look at where the level of some of the operating margins are now in the individual businesses, you really can't expect those to keep growing exponentially going forward. In terms of the acquisition opportunities, we're constantly looking at businesses, Aynsley. I think there are geographies that we would like to move into.
There are gaps that we would like to fill. I think, as I said just a moment ago, we are very disciplined in how we deploy capital and making sure that we are buying good businesses in good markets with strong market positions. Critically, with that further opportunity for growth, whether that's organic growth or whether it's looking at bolt-on acquisitions after you've made one deal, and making sure that they have a management team that we can work with. I suppose an overly simplistic message on acquisitions would be, if the right deal comes along next week, fantastic. If the right deal doesn't come along for 12 months, that's great, because it means the right thing to do was to buy that business in 12 months' time.
I think it's much more important for us to buy well in a disciplined manner than just to buy.
Just one follow-on. Would you still make acquisitions in the U.K. or is it
Well, I think if you'd have asked us that two years ago, I think we probably answered and said we would expect our next acquisition to be outside of the U.K., and then the opportunity came to buy Leyland SDM. I think it is about the quality of business. We have a very clear plan of where we'd like to develop, and if opportunities of the like of Leyland SDM come along, high quality business, high operating margins, then we'll always look at them. Do you want to just go next to you? It's probably easier, Aynsley. Thank you.
Ami Galla from Citi. Just a couple from me. I was wondering if you could talk a bit about the Selco like-for-like growth trends over 2018, how has that evolved over the quarters, and what is your outlook for the like-for-like on the existing estate on Selco? My second question is, there were a couple of media reports on some level of price competition in the DIY market, as well as your intention to invest in pricing. Is this a reflection of the overall market tightening and competitors trying to work harder to get that sort of volume? What is your sense of how the market stands today? My third question really is on the M&A pipeline. You've touched quite a bit in detail in the first question.
With the European outlook looking a bit more subdued now, do you think the level of opportunities that you're seeing are much higher? To an extent you can pick and choose the best deals out there? Can you give us some color on the pipeline in that sense?
Okay. Well, if we work backwards and start with the acquisitions, and that'll give David a minute to come up with a really good answer on the Selco like-for-likes for you. I think in terms of the acquisition pipeline, it's always difficult to try and generalize and say in all of the markets that we're looking, is it getting easier to buy? Is it getting more difficult to buy? I think we're very careful about making sure that we can get really good value for what we buy. Now, really good value doesn't always mean it's cheaper than it would have been. Good value can be every bit as much about the quality of the business and the quality of the potential going forward in that particular market.
I wouldn't say that necessarily we're looking at things now compared to six months ago thinking it's cheaper than it was. We really do have quite a disciplined approach in terms of the quality of the business. The quality of the business and the opportunity to grow the business, in reality, is probably more important than whether you're moving half a turn on a multiple or not. I think that's probably more important. In terms of the pricing, your second question, you talked about the DIY market. Obviously, our only exposure to DIY is in Ireland through the Woodie's business. We are clear market leader in terms of DIY in Ireland.
I think when you've got a market leading position, you've got to be very conscious of the fact you still need to offer your customers good value as well as making sure that you're balancing off with maximizing margins. I think investing in price to me is often a code word for just discounting. We've never really had a track record of investing in price. It's about being competitive, it's about managing the margins, and it's about offering the customer a price that is competitive when you put it alongside the level of service that you can deliver.
Just coming back to the Selco point, I think one of the things, we've highlighted this in the past, is that in terms of our strategy of opening Selcos over the last three years, where effectively we've more than added 50% to the overall store estate. The nature of what we're doing is increasing the density of stores that we have, particularly around London and the Southeast. If you go back to the 19 stores that we have opened in 2017, 2018, there were about 16 of those 19 that in some way, shape, or form overlapped with existing stores. The existing stores, of course, in terms of like-for-likes, will be impacted by the extra revenue that's going to the new stores.
In absolute terms, when you look at the like-for-likes for Selco for 2018, in terms of the existing store estate rather than the new store estate, it was somewhere around about 2% was the like-for-like growth. That was consistent with our expectations, given that we expected revenue to migrate to new stores.
Thank you.
Okay. I was going to say, should we just keep coming forward and bring the microphone down to Robert?
Robert Eason of Goodbody. Just in relation to Selco, you've just touched on you've come on the back of a very aggressive store opening program. I think it was a few weeks ago, the Selco chief executive was out in the media talking about GBP 30 million of investment in the business. Maybe if you can just elaborate what is the next stage of development for Selco, given that there's going to be less stores open this year? I think there's only three or four being opened this year. Just elaborate on where the investment is going. My second kind of area of questioning is just more for a view more than anything else.
There's a lot going on in the plumbing and heating market in terms of some big disposals going on, not only with Travis, there's now speculation in relation to Saint-Gobain, given the big writedown last week. There's always ongoing speculation regarding Ferguson. What is your take of the plumbing market and where it could land? Out of that, what opportunities can come Grafton's way out of that? It's for sure the plumbing and heating market's going to change over the next couple of years in terms of ownership. They're kind of the two areas of questions.
Okay. Only two questions from you, Robert.
Yes.
Unusually pleasing. If I start with plumbing and heating and just, again, work backwards. I think, obviously, we made a small disposal in the plumbing market last year. We sold our business, Plumbworld. The reason we disposed of Plumbworld was it was a very focused B2C business, which really didn't fit with where we are. If you look at Plumbase, which obviously is our major exposure to that plumbing and heating market, we've got a very good management team in Plumbase. We've seen a consistent performance improvement in Plumbase over the last two or three years since Mark's been in running that business. I think we see plumbing and heating as an important part of the overall offer of building materials. It's important that our customers can access plumbing and heating. Obviously, with a business like Selco, we sell a lot of plumbing and heating through Selco as well.
We sell a reasonable quantity of plumbing and heating through Buildbase. I think as a category for us, it remains relatively important. Just unfair of me to try and speculate on what will happen with some of our competitors. Actually, we've seen over the past three years, consistent performance improvement in our plumbing and heating business within Grafton, within the U.K. At the moment, we're quite comfortable with what Plumbase is doing. I think if you then look and say, well, what happens in terms of potential big disposals? Who ends up owning those businesses?
Probably the one thing that I would say on that, I think given the size of our Plumbase business, given the size of the plumbing and heating business that we do through Selco, through Buildbase, it would be unlikely that you would see us looking to acquire a major plumbing and heating business in the U.K.
Do you want me to pick up the Selco bit?
Yeah.
Just on the Selco one, you're right, Robert. When we're looking at new branch openings this year, around about three to four is our current thinking, and likely to be more towards the back end of the year. The investment that we'll be making in Selco will be in new branches. It will be on elements of refurbishing the existing branch estate, because I think one of the things that has historically set Selco apart from the competition is actually the quality of the state, and its sort of refreshing, different style compared to a more traditional merchant. There'll be investment going in to maintain the good fabric of what we've got on offer. Of course, we'll continue to invest on the digital side. That remains a very important area of investment for us.
There's a number of initiatives that we're going to be progressing on Selco over the course of the next 12 to 18 months.
I think we've also said on Selco, just historically, we've got a number of branches, particularly around the southeast, that were probably operating close to their physical capacity. Some of the branches that David mentioned that we've opened was there to alleviate that. We also know that in some of the very high turnover branches, we're going to have to make some infrastructure investment to make sure that we can continue to handle the volume safely, that we're actually putting through those stores as well. You've got some of those stores are doing hundreds and hundreds of transactions a day, and we've got physical investment going in to make sure that we can continue to grow, and we can continue to grow safely. We'll come across the front to Howard.
Thank you. Howard Seymour from Hermes. David, you put up an interesting progression on the margins before on gross profit and OpEx efficiency. Two questions on that, really. One on the gross profit. Clearly, the higher margins have come in through, but there's also been mix effects on a negative front, just simply because of mix. Question there is, have you seen any material parts of the group where you've seen gross margins actually decline in overall that? Secondly, just on the OpEx, 30 basis points is a good performance. Sort of question where that was particularly focused and capability to continue to sort of push forward in terms of the margin progression on costs. Thank you.
Just in terms of gross margin decline, did we see any notable areas, I think if I went to excuse me, Irish Merchanting, we have talked about already the fact that we expected that gross margin dilution as a consequence of actually delivering more product to new build customers. That was anticipated. If we look at the U.K., I think we did see, as Gavin has mentioned already, quite competitive conditions. It's what we've grown used to. I wouldn't draw out any sort of notable examples. I think we saw particular pressure really in the first half of the year. I would say when we look at the second half of the year, we saw relative improvement against the second half of 2017. I don't think there's anything in particular that I'd call out there, Howard, on that.
In terms of OpEx and future areas of improvement in OpEx, again, I think a fundamental point around our federated structure is that each of our businesses is really incentivized to deliver on that bottom line and to run their businesses efficiently and effectively. We saw a number of businesses this year which continued to drive down operating costs. How much further can that go? I think really it's about revenue improvement relative to holding down an existing cost base. Undoubtedly, when we look, there are a number of areas of pressure that we see, whether that's on things like national minimum wage, whether we see it's on auto enrollment, or indeed whether we see it on property costs. It's a constant battle to look to alleviate and mitigate those pressures which we see across the business.
Thank you.
There you go. I was going to say, Flor down the back.
Thank you. Flor O'Donoghue from Davy. Two from me, I think. One is just on Leyland. I note in the statement you say it performed in line with what you expected. Just interested to hear your view on how it's evolved since you've taken ownership, your sense of how it's been relative to what you might have expected. Maybe added on to that is there any plans to expand it on an organic basis, or is there adjacent opportunities in that area? The second, if I can go back to Selco, just a very quick one really on the, I guess, it's the store opening costs given, presumably, was a help in 2018 going from 12 to 7 if it goes to three to four this year. David, I guess you might just update us on very roughly what the saving is on fewer branch openings.
Okay. In terms of Leyland SDM, as you know, we acquired it just pretty much a year ago almost exactly. Delighted to say the business has been pretty much exactly what we wanted the business to be. We talked last year about that having the potential to be a 13% to 14% operating margin business. That's exactly what it delivered during 2018. We had some planned management changes within that business, because the chief executive who was running it at the time of acquisition and the finance director were both on a contract basis from the previous owner. We've promoted internally, so the Finance Director, Jit Patel, who's gone in, he was an internal appointment. Jonathan Jennings, who's now the Chief Executive of Leyland SDM was an internal appointment, people that we've developed through our own succession plan. There is some potential to expand that business organically.
There is also potential to expand that business with some small bolt-on acquisitions, I would say both of those we're kind of actively looking at the moment. The business has done exactly what we wanted it to do during the first 12 months of ownership.
Just on store opening costs, Selco store opening costs in 2018 were just about GBP 5 million. If you take 2 to 4 new Selco stores this year, you'll be looking at somewhere around about GBP 2 million-GBP 3 million for store opening costs in 2019.
Okay. We'll come to you in a minute, Sam. We've just got John at the back there.
Sorry, yeah. Just to round that one out actually, just on the opening cost, can we just have the GBP 5 million incurred this year, could we just understand what it was last year, David? Was it up at about 7.5 or 8? Just to understand that's the kind of quantum. Second one was just on the organic growth and the kind of growth initiatives and tying that to Selco, apologies if you gave it at the start, but thinking about Selco, is its sales base, is it now around the GBP 530 million mark? In that I'm just trying to glean from the data you've given here. I'm thinking GBP 9 million is the implied LFL. Most of the growth I assume is Selco related, so you get to about GBP 527 million-GBP 530 million of sales.
You're-
Is that the right shape?
You're a little bit toppy there. It's more like 513 in one three-
Got you
in 2018.
Just coming back to Leyland, obviously a year ago you flagged look potential to do things with Leyland, almost like a mini Selco. Has that with obviously getting under the skin a bit, are there things you're going to do with Leyland SDM in terms of more product into it? Maybe it's happened already. Just to understand if that's something that you can roll out elsewhere.
I mean, the Leyland utilizing Selco supply chain, we spoke about at the half year results last year. We said we'd kick that off during the second half of last year. We have done. If you go into a Leyland SDM store, we now have something called Leyland Extra, which is the providing of building materials to customers of Leyland SDM, utilizing the Selco supply chain to actually deliver those products. We started that trial in four stores during Q3. We moved that to 10 stores during Q4. We'll move it to the whole Leyland estate as we go through sort of Q1 this year, John. That was very much part of what we wanted to do. We've done that. It's actually working very smoothly.
It's quite interesting now, of course, when you see customers buying building materials through Leyland SDM, you can start to see which building materials are more relevant to the Leyland SDM customers, and we can start to build a better profile there. Very pleased with Leyland SDM and that whole integration with Selco. It's never designed to be part of the Selco chain. It was never designed to be branded Selco. Utilizing the Selco supply chain to really help to service the Leyland SDM customers was always part of the plan because of the strength of the Selco supply chain, particularly within the center of London.
Sorry, just one final one. We go back to Selco and that store and the rollout. In terms of the messaging here, is part of this look actually Selco was a little bit overearning effectively in terms of pushing the limits on sales per store and hence the rollout of more stores? Just trying to. Obviously when you look around the country, are there bigger cities where you'd like to go and put a store in sooner rather than later, rather than just having the cannibalization? It just obviously dilutes what we're seeing-
Yeah
coming through from Selco.
It does, and as I said, it was very deliberate cannibalization to make sure that we had the kind of business that could continue to operate and could continue to grow. We mustn't forget with Selco, we talk about Selco in the South East. It's very strong in Birmingham. It's very strong in Manchester. It's very strong in Bristol, Cardiff, Swansea. We've got some very good Selcos outside of the South East that are generating good levels of revenue. I think one of the things that we look at is we still believe there are gaps in the South East that we can fill with Selco stores, and there are other cities around the U.K. I think as we go back, if you go back three or four years ago, we had a challenge with real estate on Selco, making sure we could get the right units.
As David said, we've opened 19 Selcos in the last 24 months. We went through a real period of sustained growth. I think the right thing to do now is just to make sure that we do get the right returns from those stores, to make sure that the formatting is still right. We're still looking at smaller format Selco stores, particularly for parts of the South East where getting 30,000 to 40,000 sq ft could be cost prohibitive. If we can make the model work in 15,000 to 20,000 sq ft, opens up more opportunities. Selco, I mean, being open with you, John, Selco, as an individual business unit, it's the biggest profit earner that we have within the Grafton Group. It's a very significant part of our plans going forward.
I don't want to give a plug for Chris Evans in his new show on Virgin Radio. Even he was singing the Selco jingle yesterday.
Yeah. I think we have Sam down the front here. Sorry, yeah.
Thanks. Sam Dindol from Stifel. A couple from me. In terms of the two Irish businesses, very good margin progression.
Should we see those as double-digit operating margin business going forward on a sustainable basis, or is that probably a bit toppy? Secondly, on lease-adjusted net to EBITDA, currently at 2 times. You previously spoke about sort of being comfortable with 3 times. Should we see around sort of GBP 300 million headroom for acquisitions?
Yeah. If I just pick those two up. We did see really good margin progression. The Irish merchanting operating margin up to 9.4%, and Woodie's increased their operating margin to 8.5%. I think that the key thing for us is that we need to have the right margin in the right markets in which we operate. We need to be careful and considerate of our customer base. We need to make sure that we continue to offer a very competitive and compelling proposition. I think that that naturally means that there'll be a headroom around the operating margin. It sort of plays a little bit to our view of overall long-term group targets for operating margin in that 7% operating margin.
I think we'll continue as a group to see progression and improvement, but it's likely to be about relative growth in the mix rather than about continually driving forward an improvement in Irish merchanting and Irish retail operating margins. I think operating margins around about their current level are probably about right in terms of those two businesses. In terms of net debt to EBITDA, I think you've answered that question very well. I think around about GBP 300 million is about right in terms of acquisition capacity.
I think also, Sam, if you go back and look at your notes from maybe a couple of years ago, I think we said that we always saw the Irish merchanting business as being a nine-something% operating margin business. It's very consistent with where we've always felt we could get the margins to. Got another one down the back there.
It's Lush from Berenberg. Two questions, just another one on Selco. Just to clarify obviously with the sort of step down in opening costs and obviously the maturing of those 19 branches, have margins in Selco now bottomed out and is that what drove the recovery in the U.K. margin in H2? Secondly, obviously a lot of chat earlier about acquisitions. Is there anything you see, particularly in the U.K., I guess, that is non-core? Because obviously you've got quite a few formats there at the moment. Thank you.
I suppose non-core is quite an interesting topic. We are continually sort of refreshing the portfolio of businesses. We probably don't make a big song and dance about it. If you look over the sort of recent history, we sold Plumbworld last year. We sold a business called Bulls last year that was a specialist in steel pipes, valves and flanges. That wasn't core. If you look in recent time, we've sold the Belgian Ready Mix business. We've sold our solar business that was based in Sunderland. We've sold the Irish scaffolding business. We've constantly kind of trimmed some of those smaller peripheral businesses, redeployed the capital into higher returning businesses. I think it's something that we are consistently looking at in terms of our portfolio to make sure that the businesses we have are the right businesses to continue to grow going forwards.
We have consistently done that over the past few years. That's not a new initiative.
Based on life as we see it at the moment, Lush, I would say actually, yes, you're right. We would say that they've bottomed out. When you look particularly at Selco, the combination of store opening costs that we've had over the last couple of years and the new store format, we should start to see those mature now and deliver an incremental contribution.
Any more, ladies and gentlemen? Feel like an auctioneer now. Okay, brilliant. Listen, thank you very much for your time. I know it's a very busy day out there today. Really appreciate your interest and thank you very much, and hopefully we'll see you all in six months' time. Thank you.