All right, let's kick off. Good morning, everyone, and welcome to the Grafton Full Year 2022 results presentation. First, let me share some first impressions after three months in the role, and I will cover some of the highlights before handing over to our CFO David Arnold, to give the financial review of the year past. I think overall what I can say is in the first month I visited all the businesses, across all the geographies, and in the latter two months I spent a lot of time with colleagues, all over the patch. I have been very, very pleased with what I found. I think Grafton is a very good business with strong brands and excellent market positions, in each market.
We have experienced and committed management teams, there are plenty of opportunities for further organic growth and bolt-ons in all of our existing markets. Equally importantly, plenty of opportunities to deploy our strong balance sheet and capture buy-build opportunities in new geographies as they arrive. I think the important bit is I can reassure you that we will continue to be disciplined in the way how we deploy the capital. We had a very strong performance from a diversified earnings base against, you know, let's say a little bit of a softer macroeconomic environment. 60% of our operating profit generated outside of the U.K. an excellent performance of our Irish Distribution business with Chadwicks and also in the Netherlands with Isero. I think Selco we had a good performance.
However, profitability and volumes were lower relative to the previous year, which was an exceptionally strong period. We shouldn't forget that Selco really had a normalization of trade relative to the exceptional COVID time, but also, of course, is the one which is mostly focused on the RMI element, which will be the one which is impacted first. You have high operating leverage in the Selco store. So if RMI spend goes down, we will feel it disproportionate in Selco. When RMI spend goes back up, we will equally feel it disproportionately. You know, overall, a very strong performance as well or a strong performance. A good contribution from Finland, our IKH business in Finland. First full year in the group, a very good performance. Profitability at Woodie's normalized.
It had an exceptionally strong performance during COVID being open throughout. You know, we are pleased with where Woodie's has landed in 2022, still well ahead of the pre-COVID time of 2019. UK manufacturing performed well and overall we returned over GBP 200 million sterling to our shareholders, either via share buyback or of course via dividend. Last but not least, close to all our hearts, we made good progress on the ESG front. I will cover some highlights of that later on in the presentation. In terms of financials, revenue GBP 2.3 billion, up 9.1%. Operating profit, adjusted operating profit, just slightly below the record results of 2021. I think really an exceptionally good result.
Earnings per share are up by 3.9%, dividend up by 8.2% and as I mentioned earlier of course, still a very strong net cash position of, you know, just a little bit shy of half a billion GBP on the balance sheet. Adjusted operating profit, pre-property profit at 11.3%. I think again, a very good result, given the challenges overall, in the macroeconomic environment and a solid and very good return on capital employed. Let me now hand over to David, who will give you more details.
Thank you, Eric. Good morning, everybody. It's lovely to be back presenting here in person. You all look so much bigger than you did over the last two years. Turning first to the income statement, revenue of GBP 2.3 billion was 9% higher than the prior year. Adjusted operating profit pre property of GBP 260.5 million was 4% lower than 2021 and represented an operating margin, as Eric has said, of 11.3%. Property profit was GBP 25.4 million, and a significant proportion of this profit arose from the sale of a small number of U.K. freehold properties that were retained following the sale in 2021 of the traditional merchanting business in Great Britain.
Disposal of three of these properties generated cash proceeds of GBP 26.2 million and realized profit of GBP 19.9 million. We also recognized a fair value gain of GBP 5 million on the remeasurement of a small number of investment properties. Adjusted operating profit, including property profit, was GBP 285.9 million, 0.7% lower than the record profits we reported in 2021. The net finance cost of GBP 12.6 million was GBP 6.8 million lower than prior year, that principally reflected the impact of higher interest income on our sterling cash deposits in the U.K., as interest rates here increased from 0.25% at the start of the year to 3.5% at year-end. Taking into account the reduced finance costs, adjusted profit before tax increased by 1.7% year-over-year to GBP 273.3 million.
Looking at the revenue movement in 2022, organic growth contributed an incremental GBP 65 million. The largest element of growth was derived from acquisitions, which added GBP 134 million, and of which the purchase of IKH was the largest component. Foreign exchange movements during the year were very modest. This slide analyzes that increase of GBP 65 million in organic revenue, which we delivered last year. You can see that in the U.K. distribution and Irish retail, we saw year-on-year reductions in revenue as both these markets experienced normalization in activity from the heady days of trading during the pandemic, and a softer RMI market, particularly for smaller scale discretionary purchases. By contrast, we saw a significant increase in revenue in the Irish Distribution business with like-for-like revenue up by GBP 53 million.
Here, there was a strong growth in sales to the house building sector during the year. There was good revenue year-on-year growth of GBP 25 million in the Netherlands, with sales to key account customers involved on major construction projects increasing in particular. In Finland, growth was modestly up year on year, and in manufacturing, we delivered good revenue growth in both CPI and StairBox. Net new branch openings contributed GBP 17 million of sales, and most of this was from Selco, where the new branches at Rochester and Canning Town performed particularly strongly. Turning to the movement in reported adjusted operating profit, this slide bridges from 2021's reported adjusted operating profit of GBP 288 million to the GBP 285.9 million reported in 2022.
Profitability in the like-for-like business reduced by GBP 32.3 million. We'll examine this in more detail in a moment. Acquisitions made a strong profit contribution of GBP 18.5 million, with the IKH acquisition accounting for GBP 10.4 million of this. Property profit contributed GBP 8.6 million more in operating profit in 2022. Finally, we also recognized a one-off pension gain of GBP 3.7 million following the closure of our largest Irish defined benefit pension scheme. Now looking at the GBP 32.3 million reduction in operating profit in our like-for-like business, you can see that the two principal areas where profitability declined were in the U.K. and retail in Ireland. Selco and Woodie's both strongly benefited from DIY and RMI spending during the pandemic.
In 2022, we saw normalization in both markets and an impact from reduced discretionary spend on repair, maintenance, and improvement as disposable incomes became squeezed. Profitability in Woodie's was markedly reduced in the first half of 2022 compared to the pandemic-boosted trading in the first half of the prior year when Woodie's was deemed an essential retailer. Like-for-like operating profit was down by GBP 19.5 million in the period to June 2022. When we entered the second half of the year, we were comparing ourselves against a much more normalized activity experienced in the second half of 2021. We also saw this reduction in RMI activity affect our like-for-like business in Irish Distribution. The decline here was largely offset by higher levels of activity from new build construction. In the Netherlands and in Finland, like-for-like profitability increased as underlying markets remained relatively resilient during 2022.
A strong second-half performance, particularly from CPI EuroMix, saw operating profit in the manufacturing segment increased by GBP 3.4 million for the year overall. In UK Distribution, revenue was up by GBP 16.7 million to GBP 838.6 million, but adjusted operating profit reduced by 20% to GBP 81.8 million, representing an adjusted operating margin of 9.8%. Volumes in UK RMI were lower during the year, although in Selco, the pace of decline started to moderate during the second half of 2022. Once again, we saw high levels of inflation, these two started to reduce as we progressed through the year. In the first half, Selco saw cost price increases by 17%, and in the second half, this had eased back to 7%.
There was a reduction in the gross margin by 200 basis points during the year due to lower levels of DIY activity, a smaller proportion of cash collect purchases, and an absence of the stock gains that we saw in the prior year. With better product availability in 2022 across the UK market compared to the shortages experienced in the previous year, we saw more competitive pricing generally as markets returned to normal. New Selco branches and acquisitions by MacBlair in Northern Ireland contributed sales of GBP 33.3 million. In Ireland, Chadwicks delivered a very strong performance. Reported revenue increased by 13.6% to GBP 618.3 million. The adjusted operating profit increased by 5.5% to GBP 70.5 million. This represented an adjusted operating margin of 11.4%.
Trading patterns in Irish Distribution also returned to more normalized levels of activity. We saw the repair, maintenance, and improvement market soften after a particularly strong period in the first half of 2021, when mainstream construction activity was significantly curtailed due to pandemic restrictions. This softening in RMI was mitigated by the strength of new build, although volumes did decline in the second half as construction activity slowed. Supply chain pressures eased, the rate of inflation was fairly constant through the year and averaged 15%. We continue to improve our market position in Ireland, broadening the products and services available to our construction customers through the acquisition of Proline and Sitetech. Both these acquisitions performed well ahead of plan. We also continued to invest in the heart of our business with major upgrades completed at a number of branches.
In the Netherlands, we saw a year of strong profit growth. The reported revenue increased by 15.9% to GBP 336.7 million, the adjusted operating profit increased by 23.2% to GBP 37.6 million, representing an adjusted operating margin of 11.2%. These excellent results were a combination of good performance from acquisitions together with the benefits of operational and performance improvement measures by our Dutch colleagues. Volumes were flat in the first half and up modestly in the second, with inflation averaging 8% in 2022. The gross margin was higher, which reflected the twin benefits of procurement gains and inflation-derived stock gains. The five-branch Rex acquisition performed well, and in total, Isero now trades from 123 branches in the Netherlands.
2022 represents the first full year of results from IKH. We were very pleased with the overall performance, which was in line with our pre-acquisition expectations. The reported revenue was GBP 143 million, and the adjusted operating profit was GBP 20.3 million, representing an operating margin of 14.2%, consistent with the second half of 2021. Market conditions were more challenging than the prior year, with mild weather in the first half and the impact on consumer sentiment of the outbreak of war in the Ukraine, leading to weaker demand overall. Revenue increased by 5.4% in the second half as demand recovered. We invested into two new own stores in 2022, which now brings the total own store network to 12.
You may recall that IKH's business model is built on its partner store network, which principally operates in Finland, but also has some partner stores in Estonia and Sweden. Where there are attractive complementary white spaces in Finland, which can deliver the appropriate returns from investing in own stores, then we do so instead of leveraging our partner model. After 2021's incredible performance, activity levels in Woodie's normalized as we expected during 2022. Reported revenue of GBP 244 million was 13.7% lower than prior year, and adjusted operating profit of GBP 32.6 million was 35.9% lower.
Nevertheless, we think this is very reflective of the, of the progress which the Woodie's team has made over the last three years, as the operating profit was 43.9% higher than 2019, which itself was a year that we felt marked a strong performance. In particular, the operating margin in 2022 of 13.3% was an excellent achievement. We're particularly proud of all the work which the Woodie's team has undertaken on driving engagement with all colleagues. Woodie's was recognized as a great place to work for the seventh consecutive year, was rated in the top 50 of Europe's best workplaces, and has now become the first retailer and the eighth organization to ever achieve a Investors in Diversity Gold accreditation from the Irish Centre for Diversity.
Turning to our manufacturing businesses, overall revenue increased by 21.1% to GBP 120.6 million. Adjusted operating profit was up by 13.9% to GBP 27.4 million, representing an operating margin of 22.7%. CPI EuroMix saw strong revenue growth of 22.3%. Overall, CPI grew its volume in silo mortar mix modestly during the year, although bagged product volumes were lower as the RMI market weakened and builders merchants destocked. In the final quarter, volumes of silo mix reduced as activity in the new house building sector slowed. StairBox delivered revenue growth of 18.9% and saw record levels of demand from its trade customers.
We invested in a new property close to the existing production facilities to increase capacity and successfully transferred assembly operations over to the new unit without compromising manufacturing or deliveries. StairBox delivered an operating margin of 31.3% in 2022. Turning now to the balance sheet and just a few points here. As you can see, the principal movements were the increase in goodwill and intangibles on the back of acquisitions during the year, the increase in working capital, and the reduction in net cash, largely as a result of the capital return to shareholders. Overall, the pension deficit was broadly unchanged. The group's adjusted return on capital employed was 17.2%.
Now looking briefly at the movement in working capital, overall, we saw an increase of GBP 88.1 million, of which GBP 71.3 million was the like-for-like increase before acquisitions and currency translation movements. The increase in stock was a reflection of both inflation and our trading strategy to increase product availability for customers during the year. Similarly, the increase in trade debtors reflects inflation as well as an increasing proportion of trade customers buying on credit rather than cash customers paying at the point of sale, an expected impact of the normalization of trading patterns. The quality of the debtor book remains very strong and with a broad spread of customers rather than a particularly concentrated debtor risk, and with much of the debtor book supported by credit insurance.
Overall, I see opportunities during 2023 to reduce our working capital intensity. Equally, we need to ensure we maintain a competitive advantage through strong stock availability for customers. Just turning to cash flow. Cash of GBP 278.8 million was generated from operations, only 8% lower than prior year. You can see the overall increase during the year in working capital of GBP 71.3 million compared to GBP 64.1 million in 2021. Looking at the cash flow in a bit more detail, the group delivered another strong cash performance with free cash flow of GBP 221 million, representing 77% of adjusted operating profit.
Dividends paid in cash during the year represented GBP 73.9 million. We repurchased shares to a net cash value of GBP 140.4 million. In total, we returned GBP 208.9 million back to shareholders by way of dividends and share buybacks in 2022, just under the quantum of free cash flow generated during the year. We invested GBP 24.7 million into the organic development of the group and GBP 46 million into acquisitions. We ended the year with net cash of GBP 8.9 million, including lease liabilities or GBP 458 million before leases. Finally, a few elements of technical guidance for the year.
At this stage, we aren't expecting a significant contribution from property profits in the current year, please don't bake anything into the forecast just yet. Depreciation and amortization is forecast to be approximately GBP 100 million-GBP 105 million or around GBP 40 million in an old money pre-IFRS 16 basis. We're currently expecting our gross replacement CapEx spend to be approximately GBP 30 million and gross development spend to be slightly higher at around GBP 35 million. That development spend is principally focused on new branches, branch upgrades, and investment into new systems. The net finance charge is expected to be approximately GBP 4 million, that includes IFRS 16 lease costs. Although this will of course be influenced by, amongst other things, timing of acquisitions and also further increases in interest rates potentially.
Finally, we estimate that the tax rate will be 20.1% this year. Though over the next few years, this will trend upwards towards 22.4% based on the current composition of our group profitability and also the increase in corporation tax, which will be implemented in the U.K. from April, and also the likely increase in corporation tax rate in due course in Ireland. On that note, back to Eric.
Thank you, David. Sorry. I think this revenue chart and profit chart is kind of helpful to see how the geographical diversity of revenue and profit streams has been during 2022. We will, of course, as David mentioned, continue to strengthen our positions in existing markets organically. If it makes sense with bolt-ons acquisitions, as we have done during 2022. We will enter new markets when the right opportunities arise. I think overall, as I said, we will continue to have a disciplined approach to our capital allocation. We are of course evaluating in all the markets we are interested in for M&A opportunities to do and at what time. It's always a function on what is available and for price, as we all know.
I think the most important thing is we have the firepower in order to execute fast when the right opportunity arises. At the same time, we are very disciplined to continue to invest into our existing branches and in our existing brands. In terms of dividend cover 2x-3x and capital returns to shareholder was funded out of the free cash flow in 2022, as you could see from David's slides. Let me talk a little bit about ESG, don't worry, I will not go through all the points on the slide. As you can see, a lot is going on. Of course we, you know, focused on a net reduction in absolute terms of CO₂ emissions and also a net reduction on operational waste.
What I would really like to point out is also where the opportunities are in helping our customers and their customers, for example, on becoming more energy efficient. We implemented, so far, during 2022, 12 ECO Centres in Chadwicks branches. We implement more during this year. What that really does is, you know, we help end users can assess their home and have targeted energy ratings. They can come to the Chadwicks branch and we will help them and guide them through if they want to achieve a B rating, what are your different options based on the assessment, how you could get there. Which is of course a very good way to help them really with a specialist who is educated on to how you can achieve a certain energy rating.
Then we will connect them with the appropriate tradesperson, who will be our customer, who can get it done for the end consumer. I think it's a very good way on how we can help overall, the housing stock to become more energy efficient over time. Just one of the many initiatives we have around ESG. If I turn to, you know, one of the things which has really struck me as I traveled across, our estate was there is an exceptional colleague and community engagement across all the different geographies. Really exceptional. You know, David has talked about Woodie's, but it's not just Woodie's. Also, Chadwicks and IKH are recognized as a great place to work.
Woodie's has been Sorry, Selco has been on the 17th place of large companies in the Best Company awards list. Those are all exceptional achievements. I think I would like to draw it more also to the cost of living support for colleagues. Which is something which I find is really exceptional because it's quite easy, especially as, you know, the macroeconomic times became a little bit more choppy. The easy things would be to say, "Well, let's just save cost wherever we can." Actually the business did the opposite. Selco and Chadwicks have quite comprehensive programs of cost of living support, where we had the majority of the workforce supported with supplementary payments in order to help them cope with the increased energy costs and so on and inflation. I think that was, no, it's really exceptional.
It's really great to see how engaged the business is. In return, by having that engagement with our colleagues, we also do believe the colleagues do go the extra mile. We have a fantastic workforce in all the businesses. In terms of current trading, the numbers speak for themselves. I think 2023 has for us commenced in line with what we expected. Volumes are slightly lower than in the same period last year as expected, but we also see price inflation moderating. You know, it's too close or too soon to really make a judgment. The important months are now coming, so we'll know more once the next few months are behind us. Overall, you know, it looks...
It might look a bit brighter than people would have feared in the second half of last year. As I said, too early to call really. In terms of summary and outlook, let me just reiterate the points I already made. It's a good performance of the group in somewhat choppier waters in 2022. We really benefited from a good portfolio of businesses with strong brands and market positions. There are some common themes across all our geographies. The RMI markets has contracted. Housing markets are likely to soften. As I said, the outlook might be brighter than feared by many, but too close to call. The strength of the businesses and the diversity we have in geography and the strong balance sheet actually leaves us really well placed to execute growth over the medium term.
Even if there might be some short-term volatility, I actually think we have all the ammunition we need in terms of skills and balance sheet to make sure the business continues to develop well going forward. We will continue to be disciplined. I think it's the third time I said it, I think there shouldn't be any worry that we do silly things. We will make sure that we allocate the capital where we believe we can deliver attractive returns over the medium term. We build on the current fundamentals. We will continue to invest into our existing brands. We continue to support our customers, we will also do continued bolt-ons where it makes sense in our existing markets to further enhance the market position.
As I said, the aim is to further enhance the portfolio of businesses in new geographies, to buy platforms and execute bolt-on acquisitions over time in addition to organically grow. That's all for me. Let's move to questions.
Okay. Just in terms of format and how we'll do it, if you could raise your hand, we've got some roving mics. If you wouldn't mind just saying who you are and where you come from, that would be great. Pose your questions. Try not to give too many, because I've got a very, very short memory, and I can generally only remember the first one. If we sort of clear the questions in the room, there may be some people who are joining on the webcast. For the analysts that are joining, there's a capacity then to answer questions remotely. We'll come to those at the end. First off then. Yeah, yeah. Sam?
Thank you. Morning, everyone. Sam Cullen from Peel Hunt. I've got three. Should I do them one at a time?
Yeah
David, to save your memory?
Yeah. I'll let you have your three.
Yeah. Okay. First one's on Selco and the kind of, the margin weakness that you kind of alluded to. How should we think about the level of volume that you need to put through the business to generate the high single digit, double digit margins you've talked about in the past?
Yeah. I mean, it's a good question. I mean, I suppose it is that dynamic between both volume and price. What we saw during the course of 2022 was, you know, some double-digit volume declines effectively. Look, I think, the operating margin in Selco was just a little under 10%. We've always said that, you know, in the medium term, we should regard Selco as sort of a 10%-11%, that sort of range of operating margin. It, it is finely tuned, and when we do start to see that volume pick up again, then we'll start to see that margin recover. It is at the margin.
Look, I don't think it's much of a volume improvement that we need to get to back over 10%. It is around that price volume demand dynamic. I think we do have to look at them both together.
Second one's on working capital. I think net working capital is something like 10%, 11% of revenue. Historically, I think it was closer to 7%, 8% even with Buildbase.
Yeah
guess is probably a drag.
Yeah.
talking about driving working capital, are we talking getting back to that 7%, 8%? Are we talking taking 100, 150 basis points off?
Look, I think it's a sort of slow but measured response in terms of working capital and I think, you know, that sort of for a couple of reasons. I mean, firstly, you know, investing early in working capital when prices are rising is a good thing. It's a sensible commercial decision to make. You know, that's the first thing. The second thing is that, you know, we've got a balance sheet that can make sure that actually we've got a really competitive and compelling advantage in terms of what customers see and the level of stock that we've got. I think we have to think about that.
Equally, it is about making sure that we have right stock in the right place and that we've got fast moving stock and turning stock. All the teams know that that's a priority. I think in due course, I would expect us to trend back to what I would have regarded as that historic level of, let's call it 8%. I think, you know, on occasions when we were down at 5% and 6% from a working capital intensity perspective, you know, I always felt that that was more of sort of temporary perspective, so 7%-8% in the long run. Even, you know, 7%-8% equates to quite a lot of cash over time. Yeah, I think, that's where we should be getting back to.
Okay. The last one is on M&A versus capital returns. How should we kinda think about the flexibility you think about in terms of how hot is the cash in your back pocket gonna be? Is it gonna be burning a hole in your back pocket? How do you think about deal size, the pipeline going forward? I think you mentioned in the statement also kind of vendor expectations somewhat unchanged relative to public market valuations and how that's evolving.
Look, the aim, as I said earlier, we will be disciplined. The aim is, in an ideal world, we deploy the capital buying attractive assets which we can further build out and, you know, generate long-term returns for our shareholders. At the same time, I think if those opportunities are not there, we will look at different ways on how to return capital. You know, we have a pipeline, we look at it, we have things in the works, and we'll continue to do so. Right now there is nothing to announce.
Thanks.
Thanks. Flor?
Thank you.
Good.
Thank you. morning, everyone. Flor O'Donoghue from Davy. I'll keep it to two. The first one is just on pricing. David, you might just talk us through the dynamics around where you're seeing selling prices, where they are at the moment, what the annualization effect is, just in terms of how we might think about that for the year.
Yeah, sure. Well, look, I think, we did see slight or actually quite pronounced differentials in inflation during the course of 2021 and indeed in 2022 across the geographies. A lot of that was driven by the composition of products that we sell. So for example, in the U.K., it was quite heavily influenced by the price movements that we saw in timber. In both the U.K. and in Ireland in 2022, you know, we saw double digit price inflation, whereas if you were to look, say, at the Netherlands and Finland and retail, it was more like, you know, 5%-8% in terms of that spectrum.
I, you know, our expectations for the current year are that we're likely to see overall inflation across the geographies tend to be in the sort of range of 6%-8% for the year as a whole. You know, I take a sort of simplistic view. For me, that's the prices at the end of this year are 6%-8% higher than they were at the end of 2022. I think, you know, that's how we see it at the moment. Clearly, where we're still seeing the bigger price increases across the products that we sell tends to be in those that are quite energy reliant. It tends to be the areas of around cement and bricks. It's definitely the heavier side of products.
Timber is still seeing, you know, quite significant fluctuations. We saw some significant deflation during the course of the second half of last year. Prices have come down again in the sort of start of this year. There's also talk that we might start to see price increases as we go towards the middle of the year. I mean, it's a commodity volatile product. Current best view, more like 6%-8%.
Thank you. second one is probably got two parts. It's Selco, based. The first part of it is, I think in the document you mentioned that medium term objective in terms of a network pulling back from 100 to 80 to 90. Just your thought around that or thoughts around that. The second part then is just as also in the, in the, in the print this morning you talk about the, I think, some kind of price investment in terms of Selco last year because of the competitive landscape. Just wondering where you are now in terms of market share. Just a broad comment around your actions around, you know, the, the kind of competitive environment in Selco.
Do you want me to pick those ones up?
Well, we can, or I can kick off on one and hand over. I think the 80-90 rather than to the 100 by 2026, I think it's a pure fact of mathematics, and how developers will or will not develop in the current environment certain size that we will actually not reach even if we wanted a 100 by 2026. I think that is one thing which we can say really firm. I think overall we do believe that we have a very good network of Selco branches. We do believe that we can further expand the Selco branch network in the U.K..
But at the same time, we do believe that the real focus is finding the right spots and open them rather than holding ourselves hostage to say we wanna have a certain number by a certain date. I think that's how I would answer that question. Whether or not the ultimate number is, you know, 90 or it might well be 100 over time, in a different timeframe, that we shall see. I think the focus is to really driving that and opening the right locations rather than compromising on that. David.
I, and I mean, just in terms of the point about market share, I mean, I think we've always said, and we've always been very clear on, that we're not obsessive about market share. It's easy to increase your market share, but you just have to drop your prices. That doesn't make you any money. You know, the, I think the really key thing for Eric and myself is, you know, when we look at Selco, we look at how it's positioned for the current year. I think it's probably better set up now than almost it's ever been. You know, great stock levels, great availability, competitive pricing, colleagues fired up and engaged. Operationally, you know, really efficiently run. Look, I think we're in a great place.
You know, it comes back to has it performed in 2022 as we expected? Well, yeah, it's an operationally leveraged model. You know, when we see volumes return, we'll see that drop through down to the bottom line. Thanks, Flor. David first. Yeah, just there. That's great. Thank you.
David O'Brien from Goodbody. Three from me, please, if I could. Firstly, on your disciplined capital allocation strategy. You've outlined the organic growth opportunities in existing markets, buy and build in new markets. How should investors think about that in terms of evolving the customer and product verticals?
As you know, in existing markets, we have branched out into different product verticals as over time. In terms of future, I think it's too early to be specific, as you, I think you would expect. I'm in for three month, and we are currently as a team working through what we believe the right picks and the right options are going forward. You know, we will, you know. You have the obvious questions around, you know, where are scale benefits and how you build scale benefits, and should scale benefits be across multiple countries or just within countries? We are working through that, and we will come to the right answers, and we will update whenever we have those right answers.
At the moment, you could expect an evolutionary process and not a revolutionary process in terms of both in the way how we look at the business, but also in terms of capital allocation discipline.
secondly, you've touched on a little bit of it already in the presentation, but I guess compared to your perception of Grafton before you joined the group and in the short time that you've gone around all of the operations, what are the key kind of surprises you've come across?
No surprises really. You know, the business is what it says and you know, I knew it's a federated structure, and each business is run with separate management teams, and there are currently not massive synergies between the different businesses. What I did find, if anything, would be a positive surprise, which is how engaged actually the colleagues are on all levels and how much passion there is on a group level for Grafton and at the same time for each individual brand, the people working. Whether that's going to Woodie's, whether that's going to Chadwicks, whether that's going to IKH, people are really proud working into environment. I think that's a testimonial to the management teams, how they engage with the colleagues.
I think that, for me, has been the pleasant surprise to see the level of engagement and professionalism and focus of the different management teams.
Eric's scripted answer for that was actually he was pleasantly surprised by just how good the CFO was.
Sorry.
Including the CFO. Including the [CEO].
A final one for me, please. As the questions all allude to, like, Selco takes an awful lot of limelight in the U.K.. You know, Leyland and StairBox have been pretty phenomenal acquisitions. Wonder if you could talk about the scalability of both of them, given the success they've had so far.
Yeah, look, I, you know, they're both really, really, impressive businesses. I think with Leyland, we've still got the opportunity to grow the network that sits within the M25. I think there's good organic growth opportunity there. I think Leyland, you know, we've proven over many years, it's very successful in London. You know, I think there's a question as to whether it can only work in London because of the density of customer base that you've got here. Maybe, you know, look, you know, it's one of those constant questions that we ask about whether it might work in a Birmingham or Manchester. I think for now, there's quite a lot to go at in London for Leyland. The scalability from an organic perspective, definitely.
Look, I think StairBox has just been an absolutely fantastic acquisition. Great team, great product. You know, customer experience is fantastic. Are there opportunities that we might take that to other geographic markets? I think, you know, we explore it in due course. As ever, I think, you know, we've always been a bit cautious about looking at a format that works really well in one country and assuming that it's gonna work really well elsewhere. Look, I think that could be a possibility that we explore in the future. Again, in the meantime, StairBox has expanded its capacity. I still think there's a lot more that we can go at in its existing UK market.
Thank you.
Chris.
I've got the mic. Chris Millington from Numis. I've also got three questions. I'll continue the trend. First one for Eric and just on M&A. I assume you're very happy to hit the ground running in terms of add-ons with the underlying businesses running that. In terms of new jurisdictions, do you sort of feel that you need to get a bit more time under your belt at Grafton? Or if the right deal came along in the coming sort of weeks and months, would be happy to execute on that?
Look, as always, with new jurisdictions, I think first of all, the team has done a lot of work. I think during the capital markets day, end of 2021, communicated kind of where the overall focus is. You know, we work through revalidating some of those territories. I would probably not look across the pond to kind of think, do we really need to go to, you know, North America? I think there is a lot we can do in mainland Europe in the near future, and I don't think it's necessary for us to go across the pond at the moment. I think within, you know, the territories we have discussed, there will be a question of which ones should be prioritized and why.
It's also a function of which opportunity is actually there you can execute at a decent price. I think that in a roundabout way, hopefully answers your question.
That's great. Thanks. Two questions on a couple of divisions. First of all, in Woodie's, sort of a normalization there, but obviously significantly higher EBIT for 2019, significantly higher EBIT margins. Is that business structurally just a bigger business now, or is there still a bit more normalization to go?
Look, I think there could be more normalization to go. I think in due course, that's probably around a normalization on the operating margin. You know, I still think from an operating margin perspective, it's probably over-indexing at 13%. You know, over time, just from a pure competitive proposition perspective, it's probably more like a 9%, 10% operating margin in, in due course. I think in terms of transactions and basket size, if you like, I think it is a rebased business from where it, where it was back in 2019. You know, as I was sort of at pains to point out in the presentation, we did regard 2019 as a really good result.
look, I think that they're doing a great job, but I think probably in due course, operating margins will drift downwards.
That makes sense. Then just the final one on the Netherlands, obviously a great performance last year. How much more is there to go in the Netherlands?
Yeah, look, I mean, almost EUR 400 million of revenue. You know, I think we have ambitions to take that business to be a half a billion EUR revenue business in due course. That will be a combination of continuing with bolt-on acquisitions and indeed, in terms of organic development from putting new branches on the map. There's still quite a, quite an element of white space for Isero, particularly sort of when you're getting into North, Northeast of the Netherlands. You know, we're quite strong around Amsterdam and sort of further south, but I still think there's some opportunities, actual gaps on the maps.
Brilliant. Thank you.
Thank you. Aynsley?
Thanks. Aynsley Lammin from Investec. I think I've got three as well, actually. Just first question, exploring a bit more the discipline comment around M&A. kind of what level of leverage would you be comfortable with for those strategic type of deals? I guess I'm just trying to get to kind of what the capacity is for acquisitions over the medium term from the balance sheet.
Yeah. Stop there because I can-
Okay.
I'll whilst I remember it. So just in terms of financial leverage, I mean we've always said investment grade credit rating. You know, that is important, and I think that's important from a discipline, it's important from a lender's perspective, it's important from an investor perspective. That, you know, that remains key to us. Therefore, you know, that sort of sets those parameters around financial leverage of, you know, in general 1x-2x lease-adjusted net debt to EBITDA. I think that's fair. Equally, you know, you've got to take cognizance of what's the current environment. You know, if you're in a recessionary environment, you wanna be running it closer to 1x than you would to 2x. Equally, you know, for the right acquisition, we are a very cash generative business.
You know, we've just demonstrated that over the years, that we turn in cash. We can afford to push it to higher levels of leverage and then look to de-lever.
Makes sense. Second question, just on the price inflation, presumably you'll be looking to offset the cost inflation, you know, costs. Just comment briefly on the kind of operating costs, you know, labor, wage inflation, utilities. Would you see a squeeze there, or would you hope to offset some of that with price inflation?
Yeah, look, I mean, I think, and this isn't, this isn't just a Grafton specific thing, this is an overarching comment. I think that the challenge on profitability in 2022 is around cost inflation. You know, I think if we look at the top line, if you take our view of inflation, I think overall we'll see volumes down in the current year overall. You know, the sort of +1% that we're seeing in the first couple of months of the year, you know, overall like- for- like of sort of 1%-2% is probably not unreasonable. You're looking at volumes down, sort of low single digits. You're gonna get, I think, overall the benefits of revenue, which are gonna drop through to the P&L account.
I think there's probably still some pressure on gross margins. At my expectation on gross margins in the current year overall for the group, because of the more competitive markets and a bit of pressure on volumes across markets, you know, I might see gross margins off 50- 60 basis points, that sort of element. Sort of what you get from the revenue I think was probably offset pretty largely by what we see in gross margin. The issue then becomes around OpEx. Our OpEx is GBP 550 million or thereabouts, it was last year. You know, very round terms. I think we'll be dealing with high single-digit levels of inflation that's coming through there.
If I look, for example, at our energy bill, you know, our energy bill in 2022 was GBP 10 million. Forecast for this year is double that because of hedging coming off and new pricing. There may be some benefits that we see because energy costs prove to be lower than we'd anticipated. As we sit here today, there's GBP +10 million. You know, we can't avoid that. If I look, for example, at what's happening in terms of rental increases on property, you know, there's an additional GBP 5 million coming in there. That's why I sort of take the view that we're probably looking at rates of inflation on OpEx of 8%-9% overall when we take into account the impact of labor cost increases as well.
you know, the thing that I would say is we are efficiently run. We've got our branches in the right place. you know, this is about fine-tuning a cost base in response to volume movements. There's no radical cost buckets that we want to go and chase to take cost out of, because fundamentally, we want a really robust proposition in front of customers. So when you sort of look at the math of the P&L account, for us, as it is for, you know, every retailer, every distributor, I think the issue in the current year is around that OpEx cost inflation.
Thanks very much. Just lastly, on manufacturing, like-for-like growth year to date nearly 13%. Is that just inflation coming through, or would you expect the new housing kind of downturn start to feed through to that like-for-like growth?
Yeah. Look, I think what we've seen in the first couple of months of the year, I think we have to be very cautious about the first couple of months of the year. We've always said it, you know, it's thin trading. Actually, I think this year, I think it was influenced by late return of customers coming back to work. You know, when you looked at how Christmas fell, we all thought everybody would be back up and running ninth of January. In the tradesman builder community work, it didn't actually start really getting going until the 16th. I think it was a sort of a relatively thin start to the year. When I look at manufacturing, that's really price.
You know, volume's off a bit. I genuinely, I really wouldn't read too much into it because I don't think sites were really getting going. Naturally, you know, the biggest influence for CPI EuroMix is what's the sales rate that Taylor Wimpey and Persimmon and everybody else is gonna be getting in the year ahead. Ami?
Ami Galla from Citi. A few questions from me as well. I'll go one by one.
Thank you.
The first one, just on the competitive challenges that you see in Ireland from new entrants, I mean, given Howdens is expanding its footprint here, how do you see your market position and your ability to defend your share there? Are you able to comment how much of your product portfolio currently comes from kitchens in that space?
Julien?
Obviously, you know, we have mainly The Panelling Centre as a brand, which deals with kitchens. Having been in Ireland earlier this week and spoken to our colleagues, they specifically on the buildup of Howdens, they don't see an impact at all so far. I say so far, so we shall see. The view is that we are positioned in a slightly different price segment relative to where Howdens trades, and overall it's a relatively small proportion of the revenue stream we have in Ireland. If that answers the specific question there.
The second one. Following up from the comments of Aynsley on the cost side. Are there any plans for restructuring on the overheads further into the year once we have more clarity or visibility on volumes across the business? Is this scope for that at all, given most of the footprint that you now have are businesses which are performing relatively well?
Yeah. Look, I... absolutely no plans for that. I think, firstly it comes back to that point, you know, the branch estate across all our brands are where we want it. That's the first thing. The second thing is in the current environment of full employment, as you will probably hear from, any number of companies, actually the challenge is getting people in. I think we're very efficiently run. You know, if there is any further reduction in volumes, I just think that that natural wastage almost will deal with that. I, you know, I think we're very efficiently managed.
no plans for major restructuring, major restructuring costs, not at all, and we just, we'll just continue to manage it as we've always done, which is, you know, a really firm eye on the cost base anyway.
Yeah. Probably from a newcomer, I think that what you would call the group overhead is, I would say, very slim. There is no big group structure. What I would say, it's a very slim run business. When I visited the different operating units, I would say they're very close to the cost line. They're very mindful that we are, you know, we are not a business which has massive margin and cost is a secondary element. It's managed pretty tightly, and I can just echo what David said. I think it's very tightly run. If anything it's just continued fine-tuning rather than any massive cost reductions because the scope isn't there.
My next question was on StairBox. If you could just give us some scope in terms of how do you see that business growing? What's the sort of medium-term ambition of how much can StairBox scale up to? Maybe the investments that are needed for that to step up more materially from here.
Yeah. I mean,
We can do it jointly. You just add it. I think the first bit is, it's a phenomenal business, which I don't know who of you have seen it, but it's a really great business which can deliver stairs very efficiently with almost no waste, far faster than if you order it in a conventional way. Coming back to your question around, what David mentioned, we invested in incremental capacity. I think that business could have another 40% output relative to what it does today without having incremental infrastructure investment, into the U.K.. I think that's one element.
I think also the business, we do use the business, for example, now to use some downtime of their production to actually produce stairs which are preproduced, not to measured, and you can sell them throughout our branch network. We believe there is a lot of scope for the business to organically grow with the investments we have already done. I think once we are post 40% incremental growth, you would have, you probably would have to think about incremental investment in kind of getting the production capacity. In terms of additional markets, geography, I think the honest answer is we haven't done the work in sufficient detail to have a real view on it.
I think we evaluated the closest country and came to the conclusion that probably it doesn't warrant to set up a production. If you don't have a production, it kind of doesn't work. That'll be obviously Ireland.
Yeah.
There was-
We came to the conclusion that proportionately there were too many bungalows.
Yeah. You know, if you then ask yourself would it, could it work in Finland, we haven't done the work.
Maybe a last one, just a technical one. For the Dutch merchanting business, can you comment on the scale of gross margin normalization that we need to think about given there were stock gains last year?
Yeah. Look, I think, in terms of that gross margin normalization, just purely on stock gains, you're probably in the 50 to 100 basis points territory.
Thank you.
Thank you. Oh, Sam.
Thank you. Sam Dindol from Stifel. A couple from me, please. Firstly, on IKH, have you thought about expanding the partner stores to other Nordic countries? Is there a significant opportunity in Finland from the owned stores? I think you added two. Is there more to go there?
Let me take the first one on the partner stores. As you know, we have partner in Estonia. We have partner stores in, or we have partners in Sweden. The answer there is, you know, part of the reason why I'm not saying here strategically, we are working through with the team in each one of the geographies, as you would imagine, where do we go exactly? How do we get there over the next five years? We will evaluate. Part of it is, part of the USP, I would say, of IKH is vast assortment, great stock availability, and delivered literally very fast to wherever it needs to be within Finland.
In other words, if we seriously want to build in a new geography, we will have to invest into distribution and stock in country. At the moment, we serve those partners by sending the staff from Finland over there, which is, of course, a different lead time. We are working through the economics, what makes sense in what sequence. If that kind of answers that part of the question. The second part was?
In terms of the own brand in Finland, is there still a lot to go for? Is that 10 going to 30 or 40, or is it any sense of that?
Yeah. Look, I think the really important thing is we've got a really strong partner network. What you don't want to do is to compete with your own customers. Where we do put those own stores in is where there is a sort of clearly defined geography. Look, I don't think it's 12 that goes to 36, but equally, it's 12 that probably could go to 20. It's a sort of a careful measured approach, I think.
Secondly on Selco. I mean, there's a lot of talk today about StairBox expanding geographically. As Selco gets more mature in the U.K., is that something you considered in terms of Europe metropolitan centers, or it just wouldn't work from a infrastructure investment perspective?
Yeah. I just sort of comes back to the point that I made. You just have to be really careful with a format that works really well in one geography about whether it carries to other geographies. I mean, Selco, for example, you know, you look at France, you know, Saint-Gobain has a very strong Selco-like format there, Plateforme du Bâtiment. You look at the Netherlands, for example, you know, there is in Bouwmaat a very strong similar equivalent there. That, I think, is why we've always been cautious. You know, let's focus on the bits that we're really good at and maximize those. Okay. Any more questions in the room? If there are no more questions in the room, if anybody's got any on the phones?
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Okay. It doesn't look like we have any callers on the line.
We-
Oh.
We have no questions coming through, so I hand over to you.
Thank you very much. Thank you. Eric, do you wanna finish or?
No, you go on.
Well, look, all I can say is thanks everyone for making the time and the effort to come and join us in person. That was really great to have everybody in a room together rather than a sea of small screens. Thank you very much, and see you all soon. Thank you.
Thank you.