Good morning, everyone, and welcome to the results for the Grafton Group for the six months through to June 2018. For those of you who don't know me, I'm Gavin Slark, I'm the CEO. Joined today by David Arnold, who's our Group CFO, and also we have in the room today Mike Roney, who is our Non-Executive Chairman. Many of you will be familiar with the format that we operate during these presentations. What you'll get is a short introduction from myself. I will then hand you over to David, who will take you through the details of the financials, and I will then come back at the end and give you a short update on where we see current trading and the outlook going forward.
In terms of the financial highlights, I know many of you will have seen these already, but revenue up 9% to GBP 1.45 billion in the period. Adjusted operating profit before property profits up 14% to GBP 88 million. That's up from GBP 77 million last year. Adjusted EPS up to 30.8p, which is a 19% increase over the same period last year. The dividend up by 14% to 6p a share, up from five and a quarter last year and absolutely in line with our progressive dividend policy. The adjusted operating margin profit up 50 basis points to 6.4%, and the other critical financial measure for us, return on capital employed, an increase of 80 basis points up to 14%. In terms of progress across the group, we see this as a strong set of financial results with all of the major segments of the group providing growth.
David will take you through each of the individual business units and geographies during his presentation. Further progress towards our publicly stated financial targets of a 7% operating margin, married with a 15% return on capital employed. I do believe what we are seeing now is the benefits of our diversified business model really starting to come through. If you look geographically in the U.K., in Ireland and in the Netherlands, good progress in all of those territories, as well as then overlaying that with progress in merchanting, in manufacturing and in retail. The diversified business model really starting to bring benefits through. Continuation of our good cash flow generation. If you look in the period, 96% of the operating profit was turned into free cash flow, enables us to reinvest in the business, enabling us to keep increasing the dividend.
Obviously make acquisitions such as Leyland SDM that we made earlier on in this year. Leyland has really had a pretty seamless entry into the Grafton Group, performing really well within its core market in Central London. Certainly now we're looking at opportunities for the Leyland SDM business going forward. Again, many of you will be familiar with this particular slide, but it's really just to show that continuation of progress towards those medium-term financial targets. If you look at the line running through the middle, you'll see that over the past six or seven years, that operating margin moving from just 2.7% up to the 6.1% that we see today. That return on capital employed moving from just over 4.5% to 14% as we see today. Continuing towards those medium-term financial targets and good consistent progress on those.
Whilst we're on the numbers, I will take the opportunity at this point to hand you over to David, who will take you through the detail.
Thank you, Gavin. Good morning, ladies and gentlemen. Turning first to the income statement, group revenue was up by 9% to GBP 1.45 billion or up 8% in constant currency terms. Adjusted operating profit before property profits were 14% ahead of last year to GBP 88 million. Property profits of GBP 4.5 million were higher than we had anticipated as a result of the disposal of a loss-making Buildbase branch in Coventry for high density student accommodation. Adjusted operating profit was 17% ahead at GBP 92.5 million. Note that the only difference between statutory operating profit and adjusted operating profit is amortization on acquisitions, this was higher on the back of the Leyland SDM acquisition. The net finance cost of GBP 2.5 million was GBP 1.1 million lower than the same period last year, that was principally as a result of a small foreign exchange gain compared to a loss last year.
Within this finance cost, the net bank interest payable declined to GBP 2.1 million from GBP 2.4 million last year, that was as a result of a reduction in gross debt and a higher interest rate receivable on sterling cash balances. The adjusted profit before tax was up 19% to GBP 90 million. I thought it was important to draw out the composition of the operating margin progression that we saw in the first half of the year of 30 basis points to 6.1% pre-property profits. This improvement is a function of two key elements. Firstly, the incremental investment that we have made in recent years, be that organic investment and development or by way of acquisition into higher gross margin businesses.
Despite the competitive markets of 2018, this investment has improved the quality of the group's profitability by virtue of mix benefits, this has added 20 basis points to the overall group gross margin. Secondly, we've maintained a close focus on the cost base, which has delivered an improvement in operating expense efficiency over the last six months. Together, these elements have added 30 basis points and taken our operating margin pre-property profits to 6.1%. Add on the 30 basis point contribution from property profits and our overall operating margins stood at 6.4% in the first half, 50 basis points higher than in the same period last year, and representing further progression towards our medium-term target of a 7% operating margin. Looking at the revenue growth in the first half, the overall increase of GBP 115 million to GBP 1.448 billion was principally a function of organic growth, which contributed GBP 80 million.
Acquisitions added GBP 26 million, with the majority derived from the acquisition of Leyland SDM in February. The impact of the continued weakness of sterling was relatively modest in the period. Now, if we look at the organic growth in revenue of GBP 80 million, the overall growth in like-for-like business totaled GBP 51 million, with good growth generally across the piece, save for a small reduction in Belgium. Growth initiatives added GBP 34 million of which the bulk was from new Selco stores. The small reduction of GBP 5 million in revenue from branch closures was almost exclusively related to Plumbase branches. Turning now to the components of the GBP 13.4 million increase in first half operating profit from the GBP 79.1 million that you see on the left-hand side of the chart to the GBP 92.5 million on the right-hand side, you can see that GBP 8.5 million was derived from profit improvement in the like-for-like business.
As usual, I'll come back to that shortly to look at that in a little bit more detail. Growth initiatives generated an improvement of GBP 0.4 million compared to the first half of last year. It's important to note that this net improvement included a reduction of GBP 1.3 million in Selco store opening costs compared to the first half of last year. Acquisitions, principally comprising Leyland SDM, added GBP 1.9 million to the profit net of acquisition costs. Analyzing the GBP 8.5 million incremental operating profit in the like-for-like business, GBP 3.8 million of the improvement was derived from the merchanting business, and we saw good incremental contributions in all geographies, save for a minor reduction in Belgium. Both the retail and manufacturing segment saw excellent profit growth of GBP 2.5 million and GBP 2.4 million respectively.
Because of their relatively high growth margins and good cost control, we saw good rates of drop-through, which contributed strongly to a really pleasing 17% operating profit drop-through on an incremental like-for-like revenue. Turning now to look at the individual businesses, and starting first with U.K. merchanting, you can see that adjusted operating profit pre-property increased by 7.1% to GBP 53.7 million, with the operating margin unchanged at 5.5%. We estimate that price inflation of approximately 3% more than offset the anticipated modest volume decline to leave overall revenue ahead by 1.8% on a like-for-like basis. The overall gross margin in the U.K. continued to improve as a result of mix with the faster growth of Selco and the acquisition of Leyland SDM more than offsetting the impact of the competitive market.
These competitive conditions were exacerbated by the weaker volume environment experienced during the harsh weather of March and April. Selco's operating profit was very marginally down on last year as a result of the impact of the 19 new stores that we've opened over the last 19 months. Looking at the full year in U.K. merchanting, Selco store opening costs are expected to be GBP 3.5 million lower than in 2017 as a result of the lower number of openings this year. In Buildbase, the new trading system is in end-to-end testing, and we currently anticipate that the first rollout will commence in December. The Irish merchanting business continued to outperform. Reported revenue grew by 10% in sterling terms, and we were up by 7.6% in constant currency. The adjusted operating profit pre-property increased by 10.7% to GBP 17.1 million and the operating margin increased by 10 basis points to 8.1%.
Average daily like-for-like revenue growth was 6.3%. The three new branches we opened last year have made excellent progress, already making a good contribution to profitability. As we've previously signaled, the gross margin reduced as expected. This is very much a function of the changing mix of products sold with a greater proportion of lower margin delivered product being sold to new build customers. As the new build and infrastructure markets continue to increase at a faster rate than the RMI market, we would expect to see some continued modest dilution in the business's gross margin. In the Netherlands, reported revenue increased by 21.4%, with revenue increasing on a constant currency basis by 18.8%. This increase was largely as a result of last year's acquisitions, but we also saw strong like-for-like growth of 7.9% with an expansion of activity with national key account customers contributing to that performance.
With the expanded footprint of the business, we saw the benefits of volume uplift and procurement gains, which improved operating profit by 23% to GBP 8.1 million, representing an operating margin of 10.5%. The Netherlands remains a continued focus for both acquisitive and organic growth. In Belgium, after a promising start to the year, the business experienced weak demand in the house building sector. As a result, we saw a small decline in the operating profit to GBP 0.1 million. The focus of the management team remains on continuing to improve returns by enhancing gross margins and delivering operational improvements. We were pleased to open the new Brussels branch in March, which is an excellent facility to serve customers in central Brussels.
We'd always said that after getting Belgium back to a profit this year, or last year, our priority was to deliver a profitable outcome for 2018. This remains very firmly in the management team's sights. Woodie's had an excellent first half. Reported revenue grew by 15.8% and 13.4% in constant currency terms. Operating profit jumped by 55% to GBP 7.3 million. The operating margin hit 7.5%, 190 basis points higher than the same period last year. Transaction numbers and the average transaction value grew at roughly the same pace as we saw excellent demand for seasonal products, as Ireland took to the barbecues and embraced al fresco dining. The store upgrade program continues to progress really well, and by the end of the year, roughly 80% of Woodie's revenue will be generated through reformatted stores. In manufacturing, we saw another outstanding performance from CPI Mortars.
Volume growth and operational improvements increased the operating margin by 220 basis points to 23.5%, and operating profit increased by over a third to GBP 9.4 million. The new build housing market is expected to continue to support demand. Turning now to the balance sheet and just a few comments here. Working capital increased modestly from December and remains very well controlled, representing 6.1% of revenue. Net debt of GBP 101.7 million equates to 0.5 times net debt to EBITDA, or just 8% on our preferred traditional gearing measure of net debt to equity. Return on capital employed has continued to show positive improvements towards our medium-term 15% target, having increased by 80 basis points over the last 12 months to stand at 14% at June 2018.
Ensuring that the group has a robust funding platform is an important objective for the finance team at Grafton. We recently announced that we'd contracted to issue a US private placement, which will raise the group EUR 160 million at an average coupon of 2.5% split equally over 10 and 12 years. We were really pleased to secure long-term funding at this rate. When the proceeds are received in September, we will use them to reduce drawn bank facilities. Just to remind you that we borrow euros in order to hedge our euro-denominated assets. Turning to the cash flow, it was once again another strong performance, with free cash flow representing 96% of operating profit. The strong positive cash flow enabled us to invest GBP 26 million into development CapEx and GBP 79.7 million into acquisitions, with only a modest increase in net debt to GBP 101.7 million.
Just to provide a little bit of guidance now on some specific areas. Full-year property profits are not expected to be materially different from the first half contribution of GBP 4.5 million. Full-year depreciation is anticipated to be around GBP 43 million. Our total CapEx is expected to be roughly double the depreciation level, split equally between development and replacement CapEx. As we'd mentioned with our full-year results back in February, this year and next, we will see relatively high levels of replacement CapEx as we reinvest in our vehicle fleet. The second half interest charge will be modestly higher, which reflects the slightly higher coupon payable on the US private placement compared to bank borrowing. Finally, the full-year tax rate is expected to be consistent with the first half of 18.5%.
Just to end on a real high, I'd just like to talk about the new leasing standard, IFRS 16, which becomes effective on the 1st of January 2019. We're adopting the modified retrospective approach, I can see I'm holding your attention here, which will bring all our leases onto the balance sheet with effect from the 1st of January 2019. We estimate, based on our current lease portfolio, that we will be bringing on a lease liability and a corresponding asset onto the balance sheet equal to between GBP 500 million and GBP 600 million, or roughly seven and a half times the annual lease charge. The impact on PBT of the new standard is neutral over the life of a lease, but will result in a higher overall charge in the earlier years, which then reduces as we go forwards.
We intend to give you a fuller update on IFRS 16 with our annual results in February next year. On that high, I will hand you over to Gavin.
Thanks, David. I just thought it was worth spending a moment looking at how we've invested over the past few years, really going back to January 1st, 2015, and looking at what we spent in terms of CapEx on development investment over that period of time. Over that timeframe, we have spent GBP 370 million on development CapEx, roughly split one-third on organic investment and two-thirds going on to acquisitions. If you look at the chart you've got in front of you, and start at the very top and work your way clockwise. If you look at the Netherlands, look at Leyland SDM, look at Selco, look at TG Lynes, what you'll see there is that around three-quarters of that development investment has gone into businesses that produce double-digit operating margins.
This is about targeted investment that bring tangible benefits to the group over the medium and long term. Certainly, as we go forward with our focus on the higher returning businesses, whether it's organic or whether it's acquisitive, that is very much a pattern that we would expect to see continue with our development investment going forward. For Selco, we've opened seven new Selco stores so far this year. As David mentioned earlier, we've opened 19 stores in the last 19 months. In fact, if you look over the last three years, we've increased the store portfolio in Selco by something approaching 75%. Later this year, we will relocate the very large store in Cricklewood in North London to a site that's already now finished and very nearby. Selco is performing very, very well.
It continues to be a high-performing business. That operating profit in the first half down just slightly, predominantly down to store opening costs and also having that higher number of stores in the early part of their life cycle, and therefore, the reduced profitability. We have got four new Selco stores planned for next year. That is consistent with the medium-term plans that we laid out for the business in terms of store numbers. I think it's also worth bearing in mind that following the acquisition of Leyland SDM in February of this year, historically, we have talked about having micro Selco stores in the center of London. Actually, the 21 Leyland SDM stores in some way reduces the necessity to do that. Four new Selco stores planned going through 2019.
That will get us up to 70, as we have 66 as we stand here today. Just while we're on Leyland SDM, very, very pleased with the way that business has entered the group. Performing really well, margins are good, the people are good, and we're now actively looking at opportunities for Leyland SDM. Some of those could be organic, some of those could well be acquisitive. In Ireland, obviously, we have an incredibly strong market position, both in terms of builders merchanting and in terms of retail. The investment in Ireland really is about maintaining those strong positions and making sure that the store formats that we have in merchanting and in retail are relevant to today's customers and relevant to the way the market is moving. Very much about maintaining that market-leading position that we have in both sectors in Ireland.
In the Netherlands, we still see further opportunities for both organic growth and acquisitive growth. I think we have said previously, we do see the ability to get that Dutch business in its current guise to something between EUR 200 million-EUR 250 million of turnover per year, and that very much remains the target that we have. Actually, within the Dutch business, some of the organic investment that we'll be doing this year and rolling into next year is relocating their distribution center and continuing to invest in their e-commerce capability, which we see as having real good legs for growth in the Dutch market. If you look at the overall pipeline of opportunities going forward, it's still very healthy.
I think we maintain our stance of being careful shoppers when it comes to acquisitions and really making sure that we are consistently buying good businesses that give good returns in good markets, and very importantly, with good management teams that we can continue to work with going forward. Current trading. This is a very short period of time. This is current trading just for the month of July. If you look at U.K. merchanting, you can compare there the first half of the year of 1.8% like-for-like trading pattern against 2.6% for the month of July. The important message here is the second half of the year has started off positively. It started off well. In Irish merchanting, 6.3% in half one, moving to 8.1% during the month of July.
In Holland, the Netherlands, 7.9% moving to 5.3%, but still very, very strong growth going through for July. In Belgium, as David said earlier, a little bit of contraction there, 1.7% during the month of July, which actually is slightly better than we saw during the first half, where we saw the overall revenue decline by 3.9%. Retailing, Woodie's in Ireland, had an incredibly strong first half, and we're not surprised to see a slight decline during the month of July, as certainly during May and June, early sales of seasonal products really peaked very, very strongly. Still very, very positive business in terms of the Irish retail business. Manufacturing continuing into July with 18.5% like-for-like growth.
If you take a straight comparison right the way across the group, like-for-like growth in the first half of the year at 3.8%, and for the one month of July, 3.3%. Still seeing positive like-for-like growth in the very early weeks of the second half of the year. In terms of the outlook. For the U.K., obviously, we still see a little bit of macro uncertainty in the U.K., which we would expect to see during the next six months or so until the overall political situation regarding Brexit is a little bit more clear than what we have at the moment. We are certainly looking at different scenarios in that aspect and making sure that we can plan as well as we possibly can, given that we're trying to plan for something that is currently unknown.
Price inflation in the U.K. should offset any risk to volume during the second half of the year, as it has done during the first half of the year. We should continue in the U.K. to see the benefits of self-help and investment that we have made into businesses like Leyland SDM and that we continue to make into Selco. In Ireland, the overall economic outlook and the construction market outlook remain very, very positive. We still believe that we will see very good levels of like-for-like growth in our Irish merchanting business going through the second half. Woodie's as a retail business in the DIY sector, very well positioned to continue to demonstrate really good growth as we get into some critical seasonal products during the second half of the year.
In the Netherlands and in Belgium, we'll continue to see the Dutch business benefiting from its increasing scale. Obviously, the overall outlook in Holland remains strong. As David said earlier, our focus on Belgium really is about delivering a profit for this year. I think we did say very openly in 2017, having delivered a profit last year, our number one objective was to deliver a profit this year, and that is absolutely where we see the business going during the second half of 2018. In summary, what we've seen in the first half is growth in all segments of the business: in merchanting, in manufacturing, and in retail. Then geographically, in the U.K., in Ireland, and in the Netherlands. That diversified business model really starting to bring benefits through to the group.
Our focus remains very clearly on those medium-term financial targets of a 7% operating margin, coupled with a 15% return on capital employed. They remain our targets. We continue to make good progress towards those. Our focus on investment will be on growth initiatives. Constantly looking at the businesses we have within the portfolio now, but looking at opportunities, whether they be organic or acquisitive, to really drive the high-returning businesses and really improve the returns within the group. I think we can look and say, the balance sheet is in excellent shape to take advantage of any of those investment opportunities that come during the second half of this year, and also rolling into 2019. At that point, we're going to break for questions and answers.
The way that we will operate the Q&A is obviously, certainly for the benefit of those watching on the webcast, we have microphones in the room. If you have a question, if you could raise your hand, we'll bring a microphone to you. If you could give us your name and the company you represent, and then your questions, that'll really help us in terms of the webcast. Thank you very much.
Good morning, everyone. It's Robert Eason from Goodbody. Just two broad questions for now. Just in terms of the U.K. performance, can you just give us a bit more color in terms of whether there was any regional variation in that 1.8% like-for-like? Also, was there any product differences, i.e., high ticket versus low ticket? Products that give you a bit more of a lead indicator on future activity. Just a general discussion around that. Second one, very broad question, just about kind of your e-commerce, digital strategy. Can you just give us a flavor of what's going on behind the scenes? Understand the commercial sensitivity-
Yeah
on some of the stuff, just maybe some flavor on what's going on.
I mean, certainly in terms of digital, I think many people look at digital and almost are obsessive about the Amazon effect. If you look at what people anticipate us to talk about digital, I mean, if you look at a business like Woodie's in Ireland, the fastest growing store we have in Woodie's is the e-store. In that kind of traditional interpretation of digital, then the consumer spending going onto online shopping, we're certainly seeing that increase in retail probably more than we are in trade. We're also seeing product patterns in terms of online shopping. Certainly on the Woodie's e-commerce side, we tend to get people buying online products that they would find more difficult to pick up from the store. Things like patio furniture, barbecues, big, heavy product that consumers are ordering online and getting delivered.
I think digital for us, it's a lot more than just online shopping in terms of retail. Even if you look at a business like our CPI Mortars business, where you'll think, "Well, how does digital impact CPI Mortars?" We have developed, and we've got in play a really good customer app in terms of the CPI Mortars business. Every one of our customers that has a silo on site has access to the app. It's personalized to the customer, it's personalized to the site. They can request a new silo, they can request a refill, they can request a maintenance call, they can manage their account. Actually, just by doing refill orders via the app, it saves them having to call the factory. The apps are number specific. For instance, you would have silo number 12345.
You go on the app, that silo appears on your app. You say you want a refill. At the factory, we know exactly what product is in that silo, and we can make sure that refill happens very quickly and very efficiently. Digital, we do do it by business, Robert, as opposed to having a group-wide digital strategy. It's very much embraced as part of the culture of the group.
I think just in terms of regional product variation, I don't think there's anything discernible really that we've seen over the last six months. I think from a regional perspective, it's probably a continuation of a theme that we saw last year and I think we talked about, which is it feels like perhaps the London area is a little bit softer. It probably feels that way just because it hasn't got the higher differential rate of growth that it's had in the past. We're not sitting here thinking that there's particular softness about any of our regional markets that we face into. As regards lead indicators, big items, big ticket spend, things like kitchens and that sort of thing, which historically, going back a couple of years ago to the Brexit environment, it looked like those lead indicators were weakening a bit.
Actually, it's pretty consistent at the moment. Nothing, I don't think, to say that the market is going to move one way or the other. I think our message about the U.K. market is actually, we've got to make our own way in it. I don't think the market's necessarily going to be particularly helpful to us. I think we've got enough in our kit bag from a self-help perspective to continue to improve the business.
Okay.
Thank you. Howard Zammal from Numis. A couple from me, if I may. Firstly, just on the U.K. Sort of trying to square the circle on what you were alluding to, Gavin, because you're saying you think price will offset volumes. You also, as you have before, alluded to the competitive environment and whether you're actually seeing any changes to that competitive environment at the moment.
I mean, generally, I think we've been quite consistent throughout this year in saying we viewed the market as flat-ish. Now whether that's minus 1% or plus 1%, doesn't really matter a great deal. I think you might have seen a little bit of volume softness, but the price inflation has, so far this year, counterbalanced that. I would expect to see that going forward during the rest of the year. It's always very difficult to say if you see a change in behavior from competitors, because actually, in many of the towns where we operate, our primary competitor is the local independent builders merchants, and they operate as an individual mix of businesses.
I don't think the U.K. market is any more or less competitive than what it has been, maybe over the last year or so, but I don't anticipate it getting any less competitive going forward, if that answers your question.
Yeah, it does. Thank you. Second one was on, you alluded to the investment you put into business, and an aspect of organic, acquisitive, et cetera. I suppose it's two questions on this. One is, do you see the shift moving either one way or another? Because obviously, you're saying perhaps less Selcos going forward. Is it more likely to be acquisitions as opposed to organic? Secondly, do you see that into existing markets or potentially new geographic markets as well?
That's a good question. I think it is possible that you would see it more down the acquisitive line rather than the organic strain, because we have put an awful lot of investment into Selco over the past few years. We continue to invest in Selco, but if you look at the number of stores we've opened over the last 18 months, that really has been the peak of investment into Selco in terms of the organic from. I think looking at geographic markets or even looking at sectors, Howard, we don't feel constrained by geographic borders. It really is a case of, if you're looking to go into a new market, you do need to find a good business with a good position in that market that you believe has got the ability to grow.
Critically for us, as we did with the Dutch business, finding a management team that you can work with. You have to tick quite a lot of boxes to make a new market look attractive. I'm not going to sit here and say we will definitely be in a new market this year or next year. What I would say is, if you do see us go into a new market, it will be a very well thought out, very well-planned process that ticks all of those boxes to make sure that the history that we've built up of good quality investments delivering good returns for the business continues.
Yeah. Lovely. Thank you. Sorry, finally, one is slightly different again. Homebase in Ireland has obviously been a mess for quite a while, but now sort of closing down effectively. Just wondered if any ramifications on that. Have they got a lot of stock, for example, they've got to get rid of? Do you just perceive it's going to make any difference to Woodie's at all?
I don't see it having a huge impact. If you look at Woodie's in Ireland, Woodie's is the market leader, and it's several times bigger than that business. I think the key thing for us is, retail across various parts of Europe has been quite challenged. We've got a retail business that is growing, that is developing, that is improving its operating margins. We've got to make sure that we are doing the right thing in Woodie's rather than necessarily being too concerned about the travails of other businesses. We're conscious of it. We're obviously aware of it. We know where the sites are, but our focus really is on what we're doing in Woodie's rather than what other people are doing.
Yeah. Excellent. Thank you.
Thanks. Aynsley Lammin from Canaccord. Just three, actually. Firstly, wondered if you could just remind us or just expand a bit more on the differences between the margins in Irish Merchant and U.K. in terms of the structural differences, whether it's the pricing environment, mix or SG&A and that gap between those margins going forward, what do you expect it would be? Secondly, just on the leverage, obviously, talking about potentially more acquisitions, just again remind us what you'd be happy to get leverage up at this point, given the kind of backdrop. Thirdly, just a bit of a difficult one but on the potential scenario of a no Brexit deal, seven months' time, Ireland, U.K., obviously two economies exposed to that. Any planning you've done, thoughts around the key risks there might be around that? Thanks.
Okay. Well, in terms of Brexit, we've looked at a number of scenarios. It is quite difficult to plan because we don't know what the end scenario is. Obviously, one of the benefits that we have, we tend to trade in the individual markets, and we actually move very little product across borders. The key thing for us really, I suppose, is looking to make sure that product availability is right. We are looking at different scenarios in terms of what products could be at risk if we have a difficulty in moving products across borders, and we are having those plans in place, Aynsley. I still hold out hope that come Brexit date, there'll be something sensible that businesses can work with between the EU and the U.K. I'll let David talk about leverage in just a moment.
In terms of the difference between U.K. and Irish merchanting margins, I do think one of the things that we do have in Ireland, we have absolute market leadership in Ireland. I think by virtue of the scale that we have within that market, generally speaking, market leaders can command better margins than people who are either number 2 or number 3 in those individual markets. Of course also, in Ireland, new build for a while virtually disappeared. What we had was the high volume, low margin business disappeared from the Irish market, and we spent several years where our prime customer in Ireland was that RMI pickup kind of customer.
What we are seeing now, I think as David mentioned in his presentation, a slight change in mix in Ireland where new build is picking up and we are seeing a little bit more in terms of high volume, lower margin delivered product in the Irish business. As you can see, we're still delivering an incredibly healthy operating margin within that Irish business.
I think the only other thing that I would add on the operating margin perspective in Ireland is that if you were to look at on the merchanting side, the average revenue per branch in Ireland is much higher than it is in the U.K. If you like, you just have a more efficient network as well as a stronger market leadership position.
Just on leverage. We certainly look at lease-adjusted net debt to EBITDA when we are thinking about the quantum of leverage that we would look to take on from an acquisition perspective. To give you some context to that, last 12 months, EBITDA, round terms, GBP 220 million. In round terms, annual lease charge at the moment is running at about GBP 70 million. From all the work that we've done on IFRS 16, the sort of multiple that we would apply to that leverage is, round terms, 7.5 times. If you work all that through and look at a lease adjusted net debt to EBITDA using IFRS 16 metrics, you'd come to somewhere around about 2.2 times.
In order to maintain investment-grade credit rating, we've said in the past on lots of occasions, that's important for us in terms of providing a view on how we want to run the business. Lease-adjusted net debt to EBITDA, you generally wouldn't want to take much above 3 times, at least not for a long period. If you were to just do the maths, of course it does depend upon what your acquisition multiple is, it also will now depend upon what lease portfolio you're acquiring. If you were to assume you had a no lease business that you were buying into, in math terms, you'd get to somewhere between GBP 350 million-GBP 400 million, which is consistent with the figure that we've talked about historically.
Great. Got Charlie down here.
Thank you. Two related questions, please. Sorry. It's Charlie Campbell at Liberum. Two related questions, please, relating to the slide you've very helpfully put up on page 26, the split of development spending. Can I just check first of all that those are gross numbers? I would have thought that some capital has come out of U.K. merchanting, so those are gross numbers and not net. The second question is related. You've made a virtue of the investment spending you've made in the higher margin businesses. Could you address the problem in the same way by taking more capital out of the lower margin businesses? Perhaps we'd see sort of more disposals, more closures in the core U.K. merchanting business, which is kind of the laggard around margins.
Just in terms of the gross, yes, those are the gross numbers. If you were to look at it over that period in simple business disposals, there wouldn't have been a huge amount of capital realized from that. Obviously, in terms of the overall asset portfolio of the business, when we think of asset movements, it's generally around property disposals. Actually, over that period, efficiency of working capital, that's been helpful to the cash flow. Just looked at in terms of CapEx, those are gross figures. As regards portfolio management, a key element of our task in looking at the business is absolutely managing the portfolio of businesses that we have. That is about allocating capital to the higher returning businesses, taking decisions about lower returning businesses in terms of capital, or where they sit in the portfolio. That's absolutely we accept our prime responsibility.
Sorry, just to push on that. Would you expect to see that change at all? We've had some portfolio changes in the U.K. maybe a few years ago. Does that accelerate again with a more difficult environment?
I understand your question, honestly, the answer is, we're constantly looking at the portfolio and where can we get the best value for shareholders from the portfolio. Over the past few years, we have divested of a few small businesses that really have been non-core. I think if you look there, even on that chart, you'll see U.K. traditional merchanting, 11% of that investment has gone in. We've been continuing to invest in those core businesses as well. It's a constantly moving feast. I think if you look at the portfolio of businesses that we have now and look at where we have been putting the investment, that was where we would continue to see primarily the investment going. What we then do in terms of portfolio management will just evolve over a period of time, Charlie.
Yeah. Thank you.
Great. Thank you. Michael Mitchell from Davy. Just two, if I could. Firstly, on Leyland. I think the message is quite clear that the integration has gone well in the first five or six months of ownership. Could you give us a bit more detail in terms of where you are? What I'm specifically talking about is, I think back to the dot map that you put up in this room six months ago in terms of the complementarity with Selco.
Yeah.
It has been possible to kind of progress those potential revenue synergies across those two businesses to this point, or what's the view there? Secondly, just back to balance sheet again, if you don't mind. Clearly, there's significant balance sheet capacity, and clearly there's a lot on your plate in terms of organic opportunities and inorganic opportunities. Is the time approaching perhaps where actually you could think about other uses of capital in terms of perhaps increasing shareholder returns, be it through the ordinary dividend, which obviously is within your progressive strategy to this point, or even a shareholder capital return at some point? Thank you.
Okay. In terms of Leyland SDM, I think when we announced the acquisition and we did the full year results in March, we did put the maps up and show the overlay of Selco around greater London and Leyland SDM in the center of London. We spoke at that time about looking at the possibility of being able to deliver building products through Leyland SDM utilizing the supply chain of Selco. That absolutely is part of the plan. That project is well in train, and I would anticipate we will have that live before the end of the year. Absolutely, that plan is in place and certainly in train.
Sorry.
Balance sheet.
The balance sheet in terms of uses. Look, I think we have a good pipeline of opportunities, whether that's organic or whether that's acquisitive, in terms of playing out going forward. We see the opportunity for value creation sitting very much in terms of deployment of capital to value creative elements rather than
a wild distribution policy or share buybacks at this point. As ever, we need to recognize and do recognize that we are custodians of our shareholders' money. It's all about delivering best returns for those.
Thank you. Okay.
Morning. It's Gavin Jago, Peel Hunt. Just a couple. Okay. The first one's on Woodie's. I'm just wondering the seasonality, kind of expecting to change through the second half. I'm just wondering if you can give a sense for what sort of impact of anything that would have on the margins compared to the sort of products you've been selling in H1. I guess what I'm getting at there is, do you think that combined with the new store formats covering most of the revenue, you can maintain that 7.5% margin through the second half?
The second one was just a kind of a reminder, really, just on the Selco portfolio and where, I guess, the maturity profile is and the regional split on how long does it take a store to mature in Greater London versus the regional stores, and what your kind of average revenue, I guess, is in a mature regional store and a Greater London store at the moment.
Okay. I mean, certainly, in terms of Woodie's, the first half of the year was split pretty much between the poor weather and the good weather. Actually, within DIY retail, the product mix is quite different. If you look at the first half of the half, there was an awful lot of low-margin fuel and so forth going out of Woodie's. They still sell an awful lot of sort of solid fuel going into domestic use over there. The second half was very much about outdoor. It was barbecues, it was garden furniture. It's good margin. It's quite interesting because everybody always says, well, a long, hot summer's great if you look at a business like Woodie's. Actually, during the second half of June and flowing through into July, as everyone's lawn basically stopped growing, our sales of lawn mowers, which are high margin, basically disappeared.
Garden chemicals disappeared, you're selling other products. As we go through the second half, the Q3 is probably the least seasonal quarter that we have in Woodie's. It's the quarter that is least affected by weather. Q4, I think as many of you know, Christmas is a very big category for Woodie's. I don't see anything during the second half of the year that should be detrimental to the margin that we've made during the first half of the year. I would anticipate we should be able to follow through during the second half, in quite reasonable shape there. In terms of Selco, I think generally speaking, in Greater London, a Selco store would reach maturity probably at the end of year three. In the regions, they tend to be at the end of year five. There is a difference there in terms of the maturity profile.
The average turnover of store does change quite significantly. I mean, if you do the very basic math up until the end of 2017, you would say that the average Selco store would be turning over something around GBP 10 million. Now, most of those were within that Greater London area. We've got stores in Greater London that would turn over significantly more than GBP 10 million a year. When you get out into the regions and you start looking at places like Coventry or Warrington or York, that'll be a significantly lower number. The mix does change in terms of you look at places like Walthamstow and Wimbledon and Barking. I mean, those are really incredibly high turnover stores driven by footfall that you just won't get in the region.
The overall margin model for Selco does take into account that longer maturity profile when you're out outside of London, and also the fact the end game is a lower turnover store. What you have to make sure is that your cost model in those regional stores is relevant to that lower level of turnover.
Thank you.
I've got Clyde. Basically, he's got the microphone.
I'll grab the mic. Gavin. I'm Clyde Lewis at Peel Hunt. Just, I think one stroke, sort of maybe one and a half. The U.K. performance in July looks as if volumes were down if you sort of back out the price inflation that you've probably seen. Do you think that's representative of the market? We've seen one or two suppliers, stroke sort of operators actually reporting better numbers in July. I'm thinking Marshalls a little bit, Polypipe. Certainly, the new housing businesses have performed quite well. You obviously lay on top the World Cup. I'm just trying to get a feeling for what you think you did relative to the mark in July. I know you don't like giving too much about August, but have those trends changed at all over the last three weeks or so?
I think the question is how does it feature against our expectations? It's trading pretty much in line with our expectations. We've always said we're never quite so obsessed about what's happening more broadly in the market and focused actually on our own returns. Do we think or have we got any indication that we're particularly anomalous to the market at the moment? I don't think so. It feels, I think as we said, a pretty average market and we've got to do what lies within our capability to perform against that market.
The second one was really on price inflation in terms of your expectations as you go through the balance of this year. Do you think there's any more left to come through.
I think year-on-year, it still feels like we're in a 2%-3% price inflationary environment at the moment. We don't see any particular changes through the balance of the year.
Okay.
It's Lavesh Mandavia from Berenberg. Three questions, if I may. Firstly, on Leyland, I appreciate it's not in like-for-like territory yet to really validate the share, but what is the like-for-like growth from that business in the first six months?
You're right. It's not in like-for-like territory.
Right.
It's an impossible question to answer. I mean, we've only owned it since the middle of February.
Okay.
What I would say to us on Leyland is it's absolutely within a few pounds, it's exactly where we wanted it to be on the financial case that we put together when we actually bought the business.
Secondly, just following up on Selco maturity profile. Obviously, you've got opening costs coming down because you're opening fewer and fewer stores. If you had a big pickup in 2016, 2017 of 19 stores, I believe. Where are we in terms of that margin profile? Because it's been falling for the last couple of years. Is it troughing now? Should we expect a pickup in that business, H2 or next year? Finally, in the manufacturing business and more in the U.K., obviously, a lot of strong growth there driven by new build resi. Are there any capacity constraints we've got to think about there, or have you got enough space there?
No. Well, certainly in terms of manufacturing. We have two prime markets. The biggest market we have for the mortar manufacturing business is new build residential. We've got something in excess of 3,200 silos out on site in the U.K. at the moment. From a factory capacity point of view, we still have the capacity within the factories to move that product through. If there was a restraining factor in terms of growth, it's probably the number of silos that are available. We actually manage the number of silos very carefully. We still have silos spare for capacity now, and we have got more than 3,200 out on the U.K. sites. We also have a secondary market there, which is a dry mix concrete.
When you look at projects like Crossrail, you look at projects like HS2, we have product there that goes specifically into tunneling, in terms of a dry concrete mix. Again, we have the capacity to make that product through. I think probably, just in terms of market growth for the mortar business, it really is how many houses are being built, really is a governing factor in terms of the mortar manufacturing business. If you look at the operating margins and the returns we're getting from that business, they've had a staggering first half of the year.
Just on Selco and the margin, all other things being equal, we should be at a trough point for Selco margins. We'll have had peak opening costs. We've got, if you like, we're into the very early stages for a number of stores of the maturity profile. We've still got a number of those new stores, those 19 we've opened in the last 19 months, will still be making losses. That should start to see some improvement in maturity. Also, we've got the impact, particularly where we've put stores adjoining a mature store, where we've seen an overlap of sales, we should start to see, again, that start to dilute that impact going forward. All other things being equal, we should be at a low point now.
I think we've always said quite openly, we've always anticipated Selco in the medium term being a double-digit operating margin business, that still very much is the plan.
Thank you.
Got John down the front.
Thanks. John Messenger, Redburn. Can I just stick with the last one, just to think around Selco and what have you kind of learned on that 19-store rollout? There's obviously the point about cannibalization, but I'm just thinking, when we look at the sales growth that you've delivered, can I be clear in the first half when you say like-for-like, and then there's the opening dynamic, are you adjusting some of the cannibalization in there? In that GBP 30 million, GBP 31 million of growth initiatives, I think was all pretty much Selco. I'm guessing sales last year were about GBP 220 million in the first half, so that's kind of 14% growth. That sounds to me like respectable double digits. Just to understand, is GBP 30 million kind of what that business did and it was pure like-for-like flat?
Was there some growth from those stores that actually didn't have an overlap? Just as well on Selco, has it told you, "Look, actually convenience is the big thing." As in, where you've got those two stores close by, the trade-off has been that the punter just wants convenience, and if it happens that one branch just is there, that's the reality of just how that business model will work. On Cricklewood, can I understand how old is that store? With the move across, does it make a big difference in how it looks? In that I'm thinking you've had a store leased from 1995 or something, RPI plus a bit. When you've moved, does that create a step change in the costs in terms of leases? Obviously, it's a leased portfolio.
Just for us all to think about in the long-term way that landlords will try to capture some of that upside on that model. Second question was on mortars. Can I just understand 18 and a half-
That's a whole three silos for Selco there.
That was a portfolio on the first one. On mortars in the U.K., 18 and a half in July, like you said, stonkingly good. Are there some new accounts that you've kind of picked up there? Or is that going to slow down because new house building, and it's all about front end of the site, I accept that, but actually the house builders are not opening that much in terms of that growth rate. Is that something that is being driven by other factors as well as the dry mortar point you made, Gavin?
Yeah.
Finally, there is one more. What are you doing in Belgium? Kind of if there's a business to sell, surely it's that one. What is wrong with Belgium? If you were to look at it tomorrow and say, "Okay, would we buy in Belgium?" What is the structural point in that business that means it's just never bloody worked?
Okay. Crikey. Okay. Let's just start on the mortars business. I think it's the easiest one to answer. In terms of mortars, have we picked up some new accounts? Yes, we have. Primarily, though, those accounts have been small to medium-sized house builders. What we haven't seen is large switching between the national house builders. Yes, we have picked up some more accounts, but generally small and medium-size and regional house builders. Overall what we are just seeing is huge demand for volume of mortars from the house builders going out of CPI. It's an operationally, highly operationally geared business. The more volume that goes through, the returns are disproportionately good. In terms of Belgium. Very good question. The group has been in Belgium since 2009, it's been in Belgium for getting on towards 10 years.
I think what we have seen, and probably if you look at that pie chart that we showed of where our investment has been going over the past few years, one of the characteristics of Belgium is it is a very heavy side building materials business. They were trucking the product a long way. Generally, it's that kind of high volume, low margin, heavy side building materials business. Whereas if you look at that in contrast to the Dutch business as an example, the Dutch business really is fundamentally, its starting point is it's a higher gross margin business on the kind of products that you don't generally have those large bulk discounts on, or the heavy transport costs. I think, we have got comparable businesses in the U.K. to Belgium.
If you look at Civils & Lintels that sits within the Buildbase Group, it is a comparable business, and I think it always is going to be a lower margin business. As we said to Charlie earlier on, we're constantly looking at what the right thing to do in terms of value for our shareholders are. We look at all of the businesses across the group, John, to make sure that we are doing the right thing by the shareholders, and we will continue to look at those businesses. What's your first five questions?
Selco.
Store model.
Yeah.
Yeah.
There were lots of sub-questions that took us from the macro, I think, down to an individual store level there. I think, the point you said was convenience, how important is that to customers? The heart of the Selco proposition has always been convenience. We try to make it easy to do business with ourselves. Customers actually don't like dealing with businesses that are difficult to do business with. For convenience, accessibility is important to our customer base. Understandably, they don't want to travel a great deal of distance to go and get a product because largely for that customer base, time is money. That's where they make their individual returns. It's not on the materials, it's on the labor cost. If they're distracted from working, they're not making money. Convenience is absolutely at the heart of it.
Really, that was one of the key elements for us in terms of the acquisition of Leyland SDM. I think that's the first part. In terms of store rollout and that uplift, the numbers that you see there is purely the growth from those new stores. Within the like for like numbers that you saw, you see the element of overlap of a mature store that's been open for more than 12 months. There are a number of stores in there where we do have overlaps that have a lower revenue in the first half of this year compared to last year. Overall in that area where we have overlap, I would use Croydon as a good example. We have a mature store in Croydon that was operating at capacity. We opened up a second store in Croydon, along the Purley Way.
That's taken revenue off that Croydon store, gives that old mature store the opportunity to continue to grow again. Overall, from the Croydon market, we've taken more share. That was always a deliberate part of our strategy. If you were to look at the portfolio of stores that sits in the like for like, that doesn't have an element of overlap, we've continued to see growth. I think the final point on Cricklewood, for any of you that have been there, is one of our older stores, and actually is a store that's had a much longer life than we ever expected. It was always part of a redevelopment in that part of London. For probably 10 years, that discussion has been going, and it's got to the point now where the landlord is redeveloping that site. It's been a terrific engine for Selco.
We've got a great store that's just down the road that will replace that. Actually, if you go to this Cricklewood store, the current store, it looks quite tired. A big element for us is actually, as we go forwards, is making sure that that Selco format continues to get organic investment into those existing stores so that they continue to look good for customers. Actually, the time is right for that Cricklewood store to relocate because it will be moving into a fresh store. Are landlords trapping, if you like, an uplift? Inevitably. That's what landlords do. Are there pressure on rent? Yes, I think we see that across the piece. Fundamentally, as we've always said, Selco isn't operating in a retail environment with a retail rent. It's operating with an industrial rent.
For those of you who know North London, we're moving off the A5 to a site that you'll have direct access to from Staples Corner, literally right at the bottom of the M1, right on the North Circular. It's another good site, John.
Thank you.
We've probably got time for one more, if we've got one more, but I'm afraid then we'll have to move on. You're going for seconds, Clive.
I'm going for seconds, if I may. Just again, it's linked to Selco, but also the Buildbase in the U.K. Just in terms of sort of price comparisons, if I had a Buildbase account and I've got a new Selco down the store, am I really able to see better prices in Selco than the Buildbase? It's obviously going to probably depend on the size of the customer I am. I'm just trying to get a feeling for how close those price comparisons for an average size Selco customer would be if I've also got a Buildbase account.
We do see quite a lot of variation in terms of the size of customer that we get in Buildbase and Selco. The customer base is quite clearly differentiated, and the pricing in Selco is aimed specifically at the kind of one and two-man band. It's the small traders who are going into Selco. We tend to have the pricing in Selco is driven by the shelf edge price for convenience for the small jobbing contractor. Whereas in Buildbase, you tend to be driven more by trade accounts, bigger projects, larger sales of materials. It's very difficult to do a price comparison between the two, Clive. I would say generally speaking, the pricing in Selco would be more competitive if you are a smaller jobbing contractor, whereas the pricing in Buildbase is aimed more at the larger customer.
I think, ladies and gentlemen, that really gives us the endpoint in terms of time. Thank you very much for your interest. Thank you for coming in. Thank you for those of you who've watched on the webcast, and we'll see you all in six months' time. Thank you.