Earnings Call: H1 2018

Aug 22, 2018

Good morning, everyone, and welcome to the results for the Grafton Group for the 6 months through to June 2018. For those of you who don't know me, I'm Gavin Clark. I'm the CEO, joined today by David Arnold, who's our group's CFO, and also we have in the room today Mike Roni, who is our non executive chairman. Many of you will be familiar with the format that we operate during the these presentations. So 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. So in terms of the financial highlights, I know many of you would have seen these already, but revenue up 9% to 1,450,000,000 in the period, adjusted operating profit before property profits up 14 percent to 88,000,000. That's up from 77,000,000 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 5.25 percent 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%. So 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 and 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. And I do believe what we are seeing now is the benefits of our diversified business model really starting to come through. So if you look geographically in the UK, 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. So 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 and obviously make acquisitions such as Layland SDM that we made earlier on in this year, Layland has really had a pretty seamless entry into the grafton group performing really well within its core market in Central London. And certainly now we're looking at opportunities for the Layland 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 reading through the middle, you'll see that over the past 6 or 7 years, that operating margin moving from just 2.7 percent up to the 6.1% that we see today and that return on capital employed moving from just over 4.5% to 14% as we see today. So continuing towards those medium term financial targets and good consistent progress on those. And 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, and good morning, ladies and gentlemen. Turning first to the income statement, group revenue was up by 9% to 1000000000 or up 8% in constant currency terms. Adjusted operating profit before property profits were 14% ahead of last year to 1000000. Property profits of 1,000,000 were higher than we had anticipated as a result of the disposal of a loss making bill based branch in Coventry for high density student accommodation. Adjusted operating profit was 17% ahead at 1,000,000 and note that the only difference between statutory operating profit and adjusted operating profit is amortization on acquisitions and this was higher on the back of the Layland SDM acquisition. The net finance cost of 1,000,000 was 1,000,000 lower than the same period last year and 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 1,000,000 from 1,000,000 last year and 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 1000000. I thought it was important to draw out the composition of the of 30 basis points to 6.1 percent pre property profits. And this improvement is a function of 2 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 and 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 6 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 margin 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 was principally a function of organic growth, which contributed 1,000,000. Acquisitions added million with the majority derived from the acquisition of Layland 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 like for like business totaled 1,000,000 with good growth generally across the piece, so for a small reduction in Belgium. Growth initiatives added 1,000,000 of which the bulk was from new Solco stores. The small reduction of 1,000,000 in revenue from branch closures was almost exclusively related to Plumb based branches. Turning now to the components of the 1,000,000 increase in first half operating profit from the 1,000,000 that you see on the left hand side, of the chart to the 1000000 on the right hand side, you can see that 1000000 was derived from profit improvement in the like for like business And 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 1,000,000 compared to the first half of last year. And it's important to note that this net improvement included a reduction of 1,000,000 in Selco's store opening costs compared to the first half of last year. Acquisitions principally comprising Leland STM added 1,000,000 to the profit net of acquisition costs. Analyzing the 1,000,000 incremental operating profit in the like for like business 1,000,000 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 segments saw excellent profit growth 1,000,000 and 1,000,000, respectively. And because of their relatively high gross 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 you can see that adjusted operating profit pre property increased by 7.1 percent to 1000000 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 UK continued to improve as a result of mix with the faster growth of Selco and the acquisition of Layland STM more than offsetting the impact of the competitive market. These competitive conditions were exacerbated during the harsh weather of March 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 UK Merchanting, CELCO store opening costs are expected to be 1,000,000 lower than in 2017 as a result of the lower number of openings this year. In build base, 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 1,000,000 and the operating margin increased by 10 basis points to 8.1%. Average daily like for like revenue growth was cent and the 3 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 of lower margin 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 1,000,000 representing an operating margin of 10.5 percent. 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, And as a result, we saw a small decline in the operating profit to 1,000,000. 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 and this remains very firmly in the management team sites. Woodies had an excellent first half. Reported revenue grew by 15.8% 13.4 in constant currency terms. Operating profit jumped by 55 percent to 1,000,000 and 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 Alfresco dining. The store upgrade program continues to progress really well and by the end of the year, roughly 80% of Woody'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 percent and operating profit increased by over a third to 1,000,000. The new build housing market is expected to continue to support demand. Turning now to the balance from December and remains very well controlled, representing 6.1% of revenue. Net debt as 1,000,000 equates to 0.5 times net debt to EBITDA or just 8% on our preferred traditional measure of 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. And we recently announced that we'd contracted to issue a US private placement, which will raise the group 1,000,000 and an average coupon of 2.5% split equally over 10 12 years. September, we will use them to reduce drawn bank facilities. Now just to remind you that we borrow euros in order to hedge our euro denominated assets. Turning to the cash flow. Percent of operating profit. The strong positive cash flow enabled us to invest 1000000 into development CapEx and 1,000,000 into acquisitions with only a modest increase in net debt to 101,700,000 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 1,000,000. Full year depreciation is anticipated to be around 1000000 and 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 slightly higher coupon payable on the US private placement compared to bank borrowing. And finally, the full year tax rate is expected to be consistent with the first half of 18.5%. Now just to end on a real high, just like to talk about the new leasing standard IFRS 16, which becomes effective on the 1st 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 January 2019. We estimate based on our current lease portfolio that we will be bringing on a lease liability funding asset onto the balance sheet equal to between 1000000 and 1000000 or roughly 7.5 times the annual lease charge. Now 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 forward. Now we intend to give you a fuller update on IFRS 16 with our annual results in February next year. And on that Thanks, David. I just thought it was worth spending a moment looking at how we've invested over the past few years and really going back to sort of January 1 2015 and looking at what we spent in terms of CapEx on development investment over that period of time. Over that time frame, we have spent 1,000,000 on development CapEx roughly split 1 third on organic investment and 2 thirds going on to acquisitions. And if you look at the chart you've got in front of you, and start at the very top and kind of work your way clockwise. If you look at the Netherlands, look at Layland SDM, look at Selco, look at TG Lines, What you'll see there is that around 3 quarters of that development investment has gone into businesses that produce double digit operating margins. So this is about targeted investment that bring tangible benefits to the group over the medium and long term. And 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 pattern that we would expect to see continue with our development investment going forward. For Selco, we've opened 7 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 3 years, we've increased the store portfolio in Selco by something approaching 75%. And 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 and 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 that is consistent with the medium term plans that we laid out for the business in terms of store numbers. And I think it's also worth bearing in mind that following the acquisition of Layland SDM in February of this year historically we have talked about having micro cellco stores in the center of London and actually the 21 Layland SDM stores in some way reduces the necessity to do that. So 4 new Selco stores planned going through 2019 that will get us up to 70 as we have 66 as we stand here today. And just while we're on Layland STM, 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 Layland 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. So the investment in Ireland really is about maintaining those strong positions and making sure that the 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. But 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. And I think we have said previously, we do see the ability to get to that Dutch business in its current guise to something between 1000000, 1000000 of turnover per year and that very much remains the target that we have. And actually within the Dutch business, some of the organic investment that we'll be doing this year enrolling 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 but 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. But if you look at UK 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. So 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 1, moving to 8.1% during the month of July. And 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, Woodies 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 June, early sales of seasonal products really peaked very, very strongly. But still very, very positive business in terms of the Irish retail business and manufacturing continuing into July with 18.5% like for like growth. So 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 1 month of July 3.3%. So still seeing positive like for like growth in the very early weeks of the second half of the year. So in terms of the outlook, For the UK, obviously we still see a little bit of macro uncertainty in the UK which we would expect to see during the next 6 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 UK should offset any risk to volume during the second half of the year as it has done during the first half of the year and we should continue in the UK to see the benefits of self help and investment that we have made into businesses like Layland SDM and that we continue to make into Selco. In Ireland, the overall economic outlook like growth in our Irish merchanting business going through the second half. And Woodies 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 and obviously the overall outlook in Holland remains strong. And as David said earlier, our focus on Belgium really is about delivering a profit for this year and 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 twenty eighteen. So 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 and then geographically in the UK, in Ireland, and in the Netherlands. So 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 and 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. And 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 and A is obviously certainly for the benefit of those watching on the webcast, we have microphones in the room. So if you have a question, if you could raise your hand, we'll bring a microphone to you you could give us your name and the company you represent and then your questions, that will really help us in terms of the webcast. Thank you very much. Good morning, everyone. It's Rob Viesen from Good Buffet Just two broad questions for me. Just in terms of the UK performance, can you just give us a bit more color in terms of whether there was any regional variation that 1.8% like for like? And also was there any product differences, I, 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. And 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 on some of the stuff, but 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 And if you look at what people anticipate us to talk about digital, I mean, if you look at a business like woodies in Ireland, the fastest growing store we have in Woodies is the e store. So in that kind of traditional interpretation of digital, then the consumer spending going on to 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. So certainly on the Woody's e commerce side, we tend to get people buying online products that they would find more difficult to pick up from the store. So things like patio furniture barbecues, big heavy product that consumers are ordering online and getting delivered. But I think digital for us, it's a lot more than just online shopping in terms of retail. So even if you look at a business like our CPI Mortise business, where you think 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. So 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. And actually just by doing refill orders via the app, it saves them having to call the factory. The apps are number specific. So for instance, you would have silo number 12345, you go on the app that silo appears on your app. You say you want to refill at the factory. We know exactly what product is in that silo and we can make sure that refill happens very, very quickly and very efficiently. So digital, we do do it by business, Robert, as opposed to having a group wide digital strategy, but 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 seen over the last 6 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 but it probably feels that way just because it hasn't got the higher differential rate growth that it's had in the past, but we're not sitting here thinking that there's particular softness about any of our regional markets that we face into And as regards lead indicators, big items, big ticket spend things like kitchens and that sort of thing which historically sort of 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. So nothing I don't think to say that the market is going to move one way or the other. I think a message about the UK market is actually we got to make our own way in it I don't think the market is necessarily going to be particularly helpful to us, but I think we've got enough in our kit bag from a self help perspective to continue to improve the business. Okay. Howard Seymour from Numis, a couple from me, if I may. Firstly, just on the UK, sort of trying to square the circle on what you're alluding to, Kevin, because you're saying, you think price will offset volumes But 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, mean, generally I think we've been quite consistent throughout this year in saying we viewed the market as flattish. Now whether that's kind of minus 1 percent or plus 1% doesn't really matter a great deal. And I think you might have seen a little bit of volume softness, but the price inflation has so far this year counterbalance that. And I would expect 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. So 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. Second one was on you alluded to the investments you put into business and our perspective organic accretive, etcetera. I suppose there'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 sell goes going forward. Is it more likely to be acquisitions as opposed to organic? And 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. And we continue to invest in 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 front I think looking at geographic markets or even looking at sectors, Howard, we don't feel constrained by geographic borders, but 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 and critically for us as we do with the Dutch business, finding a management team that you can work with. So it's quite a you have to tick quite a lot of boxes to make a new market look attractive. And 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 going to 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. Just home base in the in Ireland has obviously been a mess for quite a while, but so that now sort of closing down effectively. Wondered if any ramifications on that, as they do, they've got a lot of stock, for example, they're going to get rid of, do you just perceive it's going to make any difference to woody's at all? I mean, I don't see it having a huge impact. I mean, if you look at Woodies in Ireland, Woodies 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, 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 Woodies rather than necessarily being too concerned about the travails of other businesses. So 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 Woodies rather than what other people are doing. Thanks. Aynsley Lamon from Canaccord. Just 3 actually. Firstly, I wondered if you could just remind us or just expand a bit more on the differences between the margins in Irish merchant UK in terms of the structural differences, whether it's kind of the price and environment mix or SG and A and that gap between those margins going forward, what do you expect it would be? And then 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? And then thirdly, just a difficult one, but on the kind of potential scenario of a no Brexit deal 7 months time Ireland UK, obviously, 2 economies exposed to that. Any planning you've done thoughts around the key risks there might be around that? Well, in terms of Brexit, we've looked at a number of scenarios and 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. But the key thing for us really I suppose is looking to make sure that product availability is right and we are looking at different scenarios in terms of what products could be at risk if we have a difficulty moving products across borders and we are having those plans in place, Angelie. I still hold out hope that come Brexit date there'll be something sensible that businesses can work with between the EU and the UK. I'll let David talk about leverage in just a moment. In terms of the difference between UK and Irish merchanting margins, I do think one of the things that we do have in Ireland we have absolute market leadership in Ireland and 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 sort of either number 2 or number 3 in those individual markets and of course also in Ireland newbuild for a while virtually disappeared. So what we had was the high volume low in business disappeared from the Irish market and we spent several years where our prime to 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 products in the Irish business. But as you can see, we're still delivering an incredibly healthy operating margin within that Irish business? I think the only thing other thing that I would add on the operating margin perspective in Ireland is that if you were to look at them on the merchanting side, the average revenue per branch in Ireland is much higher than it is in the UK So if you like, you just have a more efficient network as well as a stronger market leadership position. Just on leverage. So the 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 to give you some context to that. Last 12 months EBITDA, round terms, 1,000,000 And in round terms, annual lease charge at the moment is running at about 70,000,000, now from all the work that we've done on IFRS 16, the sort of multiple that we would apply to that leverage is around terms 7.5 times. So 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. Now in order to maintain investment grade credit rating and we've said in the past lots of occasions, that's important for us in terms of providing a view on how we want to run the business. In net debt to EBITDA, you generally wouldn't want to take much above three times at least not for a long period. If you were to just do the maths and of course it does depend upon what your acquisition multiple is and it also will now depend upon what lease portfolio you're requiring. But if you were to assume you had a no lease business that you were buying into in mass terms, you'd get to somewhere between 1000000, 1000000, which is consistent with the figure that we've talked about please. Charlie down here. Thank you. 2 related questions, please, sorry, this is Charlie Campbell, Liberum. 2 related questions, please, relating to the slide you've very helpfully put up on page 26. This bit of development spending. Can I just check first of all that there's a gross numbers? So I would have thought there's some capital has come out of UK Merchanting so that those are gross numbers and not net. And 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 and 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. So just in terms of the gross, yes, those are 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 and actually over that period efficiency of working capital. So that's been helpful to the cash flow. But just looked at in terms of CapEx, that's those are gross figures. As regards portfolio management, key element of our task in looking at the business is absolutely managing the portfolio of businesses that we have and that is about allocating capital to the higher returning businesses, taking decisions about lower returning capital lower returning businesses in terms of capital or where they sit in the portfolio, that's absolutely we accept our prime responsibility. I'm sorry, to push on that, would you expect to see that change at all? I mean, we've had some portfolio changes in the UK maybe a few years ago. Does that accelerate again with And I mean 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. But I think if you look there, even on that chart, you'll see UK traditional merchanting, 11% of that investment has gone in. So we've been continuing to invest in those core businesses as well. And it's a constantly moving piece but 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. Thank you. Thank you. Michael Mitchell from Davia. Just two if I could. Firstly on Layland. I think the message is quite clear that the integration has gone well in the 1st 5 or 6 months of ownership, but Could you give us a bit more detail in terms of where you are? And I'm, what I'm specifically talking about is I think back to the dot map that you put up in this room 6 months ago in terms of the complementarity with Cellco, And 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? And then secondly, just to talk 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 organic opportunities and inorganic opportunities. But 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 at this point or even a shareholder capital return at some point? Well in terms of Layland SDM, I think when we announced the acquisition and we did the full year results in March, we did put the maps up and showed the overlay of sellco around Greater London and Layland SDM in the center of London. We spoke at that time about looking at the possibility of being able to deliver building products through Layland SDM, utilizing the supply chain of Selco that absolutely is part of the plan. That project is well in train. I would anticipate we will have that live before the end of the year. So absolutely that plan is in place and certainly in train. And sorry, the balance sheet in terms of users, 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. So 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. But as as ever, we need to recognize and do recognize that we are custodians of our shareholders' money So it's all about delivering best returns for those. Morning. It's Gavin Jay at Peel Hunt. Just a couple of look at the first ones on Woodies. I'm just wondering that the seasonality kind of expecting to change through the 2nd half. I'm just wondering if you can give us 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? And I guess what I'm getting at there is do you think that that combined with the new store formats covering most of the revenue? You can maintain that 7.5% margin through the 2nd half. And the second one was just a kind of a reminder, really, just on the Selco portfolio and where, I guess, the majority 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 in a greater London store at the moment? Okay. I mean, certainly, I mean, in terms of Woodies, the first half of the year was split pretty much between the poor weather and the good weather. And actually within DIY retail, the product mix is quite different. So 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 Woodies. They still sell an awful lot of sort of solid fuel going into domestic uso 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 a long hot summer is great if you look at a business like Woodies actually during the second half of June and flowing through into July everyone's lawn basically stopped growing, our sales of lawn mowers which are high margin basically disappeared garden chemicals disappeared and you're selling other products. As we go through the second half, the Q3 is probably the least seasonal quarter that we have in Woodies. 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 Woodies. So 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'm generally speaking in greater London, a Selco store would reach maturity probably at the end of year 3, in the regions they tend to be at the end of year 5. So there is a difference there in terms of the maturity profile the average turnover of store does change quite significantly. So I mean, if you do the very basic math sort of up until the end of 2017, you would say that the average Selco store would be turning over something around 10,000,000 and most of those were within that Greater London area. We've got stores in Greater London that would turnover significantly more than 10,000,000 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. So the mix does change in terms of you look at places like Walthamstern, Wimbledon and Barkin, I mean, those are really incredibly high turnover stores driven by footfall that you just won't get in the region. So the overall margin model for Selco does take into account that longer maturity profile when you're outside of London and also the fact the end game is a lower turnover store. And what you have to make sure is that you cost model in those regional stores is relevant to that lower level of turnover. Clyde Dacey's got the mic. I'll grab the mic. Gavin, I'm Gavin Clyde. Just I think one stroke sort of maybe 1.5 The UK performance in July, it 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 because we've seen 1 or 2 supplier strokes sort of operators actually reporting better numbers in July. I'm thinking Marshall's a little bit of polypipes in the new housing businesses have performed quite well, but then you obviously lay on top of the World Cup. So just trying to get a feeling for what you think you did relative to the market in July. And I know you don't like giving too much about August, but have those trends changed at all over the last 3 weeks or so? I think the question is how does it feature against our expectations and it's trading pretty 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 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 sort of year on year, it still feels like we're in a 2% to 3% price inflationary environment at the moment. We don't see any particular changes through the balance of the year. It's Lars Mandaraju from Berenberg. 3 questions, if I may. Firstly, on Layland, I appreciate it's not in like for like territory yet. Do you really bore today this year? But what is the like for like growth in that business in the 1st 6 months? Right. It's not in like for like territory. It's an impossible question to answer. I mean, we've only owned it since since the middle of February. Okay. So what I would say to us on Layland 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 just following up on sort of the cellco maturity profile, obviously, so you've got, you've got opening costs coming down because you're opening fewer and fewer stores. So you've just had a big pickup in 2016, 2017, of 2019 stores, I believe. Where are we in terms of that margin profile? Because it's been sort of falling for the last couple of years. Is it troughing now? Should we expect to pick up in that business sort of H2 or next year. And then finally, in the manufacturing business and more in the UK, obviously a lot of strong growth there driven by new board resi. Are there any like capacity constraints you've got to think about there or have you got enough space there? No, well certainly in terms of manufacturing, we have 2 prime markets. The biggest market we have for the water manufacturing business is newbuild residential. We've got something in excess of 3200 silos out on-site in the UK at the moment. And 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. And we actually manage the number of silos very carefully, but we have got We still have silos spare for capacity now and we have got more than 3200 out on the UK sites We also have a secondary market there which is a dry mix concrete. So when you look at projects like crossrail, you look at projects like HS2, We have product there that go specifically into tunneling in terms of a dry concrete mix. And again, we have the capacity to make that product through. So 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 sort of governing factor in terms of the water manufacturing business. But if you look at the operating margins and the returns we're getting from that business. I mean, they've had a stagger in first half of the year. And just on SELCO and the margin, all other things being equal, we should be at a trough point for Selco margins. We 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. So we still got a number of those new stores, those 19 we've opened in the last 19 months, we'll still be making losses. So that should start to see some improvement in maturity. And also we've got the impact particularly where we've put stores are joining 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. So 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 CELCO in the medium term being a double digit operating margin business and that's still very much is the plan. Thanks. John Messenger Redburn. Can I just stick with the last one just to think around Salco? And what have you kind of learned on that 'nineteen 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, that the opening dynamic, are you adjusting some of the cannibalization in there and that 1000000 or 1,000,000 of growth initiatives, I think, was all pretty much Selco? I'm guessing sales last year about 1,000,000 in the first half, so that's kind of 14% growth. That sounds to me like respectable double digit. So just to understand, is that is 1,000,000 kind of what that business did and it was pure like for like flat or was there some growth from those stores that actually didn't have an overlap? And then just as well on Selco, is it has it told you, look, actually, convenience is the big thing as in where you've got those 2 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. And on Crickerwood, can I understand how old is that store? And with the move across, does it make a big difference in how it looks? And I'm thinking you put out 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? Because obviously it's a lease 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? 2nd question was on mortars. Can I just understand '18 18.5? That was a portfolio in the first one. On Mortars in the UK, 18.5 in July, like it's stonkingly good. Are there some new accounts that you've kind of picked up there? Or is that going to slow down? Because your new house building, and it's all about the front end of the site, I accept that, but actually Hassburgers are not opening that much in terms of that growth rate. So is that something that is being driven by other factors as well as the dry water point you made, Gavin? And then finally, there is one more. What are you doing in Belgium kind of if there's a business to sell surely to that one? And what is wrong with Belgium? If you do 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. Craigy. Okay, so let's just start on the Mortise business. So because it's 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. So yes, we have picked up some more accounts, but generally small and medium size and regional house builders. So overall what we are just seeing is huge demand for volume of mortars from the house builders going out of CPI. And it's an operationally highly operationally geared business. So the more volume that goes through, the returns are disproportionately good. In terms of Belgium, very good question. I mean the group has been in Belgium since 2009. So 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 heavyside 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 product that you don't generally have those large bulk discounts on or the heavy transport costs. So I think we have got comparable business is in the U. K. To Belgium. If you look at civils and lintals that sits within the build based group, it is a comparable business. And I think it always is going to be a lower margin business. And as we said to Charlie earlier on, we're constantly looking at what the right thing to do in terms of value our shareholders are and 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? So, Selco, yeah? Yes, so I well, 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? And the heart of the Selco proposition has always been convenient. 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 and for convenience, Accessibility is important to our customer base. Understandably, they don't want to travel a great dealer distance to go and get our 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. So if they're from working, they're not making money. So convenience is absolutely at the heart of it and really that was one of the key elements for us in terms of the acquisition of Layland STN. So I think that's the first part. Then in terms of store rollout and the 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. So So 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. But overall in that area where we have overlap and I would use Freudon is a good example. We have a mature store in Freudon that is at was operating at capacity. We opened up a second store in Croydon, along the Pearly Way. That's taken revenue off that Croydon store gives that old mature store the opportunity to continue to grow again. Overall, from the Croda market, we've taken more share. And that's 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 Crickerwood The Cricklewood for any of you that have been there is one of our older stores and actually is a store 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 at discussion has been going and it's got to the point now where the landlord is redeveloping that site and it's been a terrific engine for Cellco. We've got a great store that's just down the road that will replace that. Actually, if you go to this Crickerwood store, the current store, it looks quite tired. A big element for us is actually as we go forward is making sure that that Selco format continues to get organic investment into those existing stores so that they continue to look good for Crickwood store to relocate because it will be moving into a fresh store. Our landlord's trapping if you like and uplift inevitably. That's what landlords do. Is are there pressure on rent? Yes, I think we see that across the piece. But fundamentally, as we've always said, Selco isn't operating in a retail environment with a retail rent, it's operating within industrial rent. For those of you who know North London, I mean, 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. So it's another good site, John. We've probably got time for 1 more if we've got 1 more, but I'm afraid then we'll have to we'll have to move on. You're going for seconds. I'm going for seconds if I may. Just again, it's linked to Salco, but also the build base in the UK, just in terms of sort of price comparisons If I had a bill based account and I've got a new Selco down the store, am I really able to see better prices in Selco than the bill based actually going to probably depend on the size of the customer I am, but I'm just trying to get a feeling for how close those comprise for an average size telco customer would be if I've also got a build base. We do see quite a lot of variation in terms of the size of customer that we get in bill base and Selco, the customer base is quite clearly differentiated and the pricing in Selco is aimed specifically at the kind of 1 and 2 man band. It's the small traders who are going into Selco. So we tend to have the pricing in Selco is driven by the shelf hedge price for convenience for the small job in contractor whereas in build base you tend to be driven more by trade accounts, bigger projects, larger sales of materials. So it's very difficult to do a price comparison between the two Clive, but I would say generally speaking, the pricing in Selco would be more competitive if you are a smaller job in contractor whereas the pricing in build base is aimed more at the larger customer. And I think ladies and gentlemen, that really gives us the endpoint in terms of time. So 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 6 months' time. Thank you.