The Grafton Group has published its interim results for the six months to 30 June 2021.
Despite the disruption caused by the pandemic, the group has delivered adjusted operating profit of £142.4 million (before property profit) in continuing operations. This excludes the Traditional Merchanting Business in Great Britain that is now classified as discontinued operations, following its being sold to Huws Gray in June. This level of profitability establishes a new half year record for Grafton and the adjusted operating profit margin of 13.9% is also a record performance.
Cashflow generated from total operations, including discontinued operations, for the half year more than doubled to £255.3 million and the Group ended the half year with net cash of £302.5 million before IFRS 16 lease liabilities, up from £181.9 million at the start of the year.
Each of the group's market leading businesses in the UK, Ireland and the Netherlands contributed to these record results with a notable record profit contribution from the Woodie’s DIY, Home and Garden retail business in Ireland. This despite significant pressure on the Group’s supply chains caused by elevated international demand for building materials, disruption to supply, and container shipping logistics issues.
The Group’s continuing distribution business in the UK now comprises Selco, MacBlair in Northern Ireland and the TG Lynes and Leyland SDM specialist distributors which trade in and around London, following the agreement to dispose of the Traditional Merchanting Business in Great Britain. The continuing businesses fully recovered from the impact of the lockdown in the first half of last year and average daily like-for-like revenue in the first half 2021 was 16.7% (to £414 million) ahead of the first half of 2019. There was a strong advance in operating profit in the continuing business, up 448% on the previous year to £55 million, and the operating profit margin of 13.3% was up from 10.2% in 2019.
Selco, which accounted for almost three quarters of UK distribution revenue in the half year, saw average daily like-for-like revenue increase by 74.4% on the same period in 2020. This follows a decline in total revenue of 30.7% in the first half of 2020, compared to the first half of 2019, as all branches were closed on 24 March 2020, because of the pandemic, and reopened on a phased basis between 6 May 2020 and 22 June 2020.
Half year average daily-like-for-like revenue growth of 18.4% over the two years to the end of June 2021 is reflective of the progress made by the business. Revenue growth trends improved in the second half of last year and continued into the early weeks of this year. Trading began to show a further improvement in the second half of February and gained significant momentum in March that carried through to the end of the half year.
Selco is primarily exposed to the residential RMI market, which recovered quickly following the lifting of lockdown measures. The pandemic appears to have changed the relationship between households and their homes and the sharp rise in savings from reduced spending on leisure, travel and non-essential retail has provided the resources to invest in the home at a time of increased demand for more and better quality space both inside and outside the home. This has taken the form of multiple projects inside the home including extensions, loft works and garage conversions. Outdoor projects have typically involved paving, decking, fencing and construction of garden sheds.
This emphasised significant pressure on the supply chain because of shortages of core materials at various stages during the half year including aggregates, cement, plasterboard, treated timber, sheet materials, landscaping, steel and plastics. In turn supply chain pressures contributed to significant price inflation of around 7.5% compared to the first half of last year.
Last year Selco completed a major upgrade to its website to incorporate several new features that make it easier for customers to transact online. This significantly improved on-line engagement and continues to be the focus of investment with the goal of further enhancing the customer experience. Digital sales accounted for 5.4% of first half revenue and approximately 80% of online orders were fulfilled through deliveries from branches and delivery hubs.
In Ireland, Chadwicks branches remained open to support those parts of the construction sector that were permitted to continue operating from early January to mid-April when a phased re-opening of the construction sector including house building got under way. The business experienced exceptional demand in the residential RMI and new build markets from mid-April. Half year profitability was materially higher than the pre-pandemic result for the first half of 2019 and the operating profit margin was 11.6%, 310 basis points ahead of the first half of 2019. Daly Brothers, the Dundalk builders merchant acquired last year was fully integrated into the network and Proline, the architectural ironmongery business acquired in February, performed in line with plan.
The overall outlook for the Grafton businesses is seen as positive, following the successful rollout of vaccines to date in the four countries where the Group now operates. Risks nevertheless remain that a further spread of Covid-19 in communities following the lifting of most restrictions or the emergence of new vaccine resistant variants could require restrictions to be reimposed and slow or reverse the international recovery that is now becoming established.
Despite the expectation that supply chains will continue to be disrupted to some extent over the coming months, the report sees the recovery in the UK economy as being on track.
Some elements of the construction sector including housing RMI saw volumes fall sharply during the first lockdown then quickly recover by the end of last year. The UK RMI housing market was not directly impacted by further lockdowns this year and performed strongly in the first half at a time of reduced spending on travel, leisure and hospitality.
The company believes that this trend is likely to continue in the second half given the desire of households to improve the amount and quality of indoor and outdoor living space. The spending of an element of savings built up during the pandemic on housing RMI is also likely to add some impetus to the market. The recovery in housebuilding in the UK is expected to continue and to be sustained beyond the ending of the stamp duty holiday in September supported by good demand at a time when the stock of new houses for sale is low.
Gavin Slark, Chief Executive Officer, commented: "The results for the half year highlight the success of our strategy and the exceptional management teams and colleagues across the Group who have again delivered excellent results and outperformance against the backdrop of favourable market conditions. We continued to innovate and deliver a great experience for our customers while also investing strategically to develop and grow our businesses.
"Our strategic growth focus is to invest in higher returning businesses with good market positions that have a differentiated customer offering. The end use market for these businesses is primarily the more resilient residential repair, maintenance and improvements (“RMI”) sector and we saw the benefits of this strategy in the half year. We continued to invest in our digital channels to increase traffic to our websites and on-line engagement and transactions with our customers."
“2021 marks a key phase of a very considered strategic transformation we have executed at Grafton over recent years, which today comprises a portfolio of high returning, differentiated businesses with the capacity to grow and outperform in our chosen markets.
“The overall outlook for the Grafton businesses is positive given the strength of our current market positions, geographic diversity, strong balance sheet and investment pipeline, alongside supportive sector and macro trends together with the successful rollout of vaccines to date in the four countries where the Group now operates.”
