Grafton Group Regulatory News (GFTU)

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 August 29 2012

GRAFTON GROUP PLC

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2012

HIGHLIGHTS

·; Revenue up 4.6% to €1.05 billion

·; Underlying operating profit up 19.3% to €31.3 million

·; Underlying profit before taxation up 18.1% to €23.8 million

·; Adjusted basic earnings per share up 11.6% to 8.1 cent

·; Strong cash flow from operations of €54.8 million

·; UK business accounts for 76% of revenue

Gavin Slark, Chief Executive Officer commented:

"The Group continues to make good progress in markets that remain challenging and the outlook is still uncertain. The focus on self-help will continue to be at the forefront of our activities and the Group remains in a financially robust state."

Conference Call 

Grafton will host an Analysts' conference call today at 8.30am (Irish Time) to discuss this announcement. The dial-in numbers are:

Ireland: + 353 1 436 4265

UK: + 44 208 817 9301

US: +1 718 354 1226

Other Countries: +353 1 436 4265

A replay of the conference call will be available from 11.30am (Irish Time). To access the recording, the dial-in numbers are:

Ireland: +353 1 436 4267

UK: +44 207 769 6425

US: +1 630 652 3111

Other: +353 1 436 4267

The digital replay security code is: 7996472#

A copy of this statement is also available on our website www.graftonplc.com

Interim Results

For the Six Months Ended 30 June 2012

Overview

The Group responded strongly to general economic and market weakness and continued to deliver performance and growth. The half-year performance demonstrated the resilience of the Group's brands and the benefit of a range of internal initiatives taken to improve profitability and returns in a difficult trading environment.

Revenue increased by 4.6 per cent to €1.05 billion. The sterling exchange rate appreciated relative to the euro and contributed to the increase in revenue. Underlying operating profit, which excludes restructuring charges and amortisation, increased by 19.3 per cent to €31.3 million (2011: €26.2 million). Underlying profit before tax increased by 18.1 per cent to €23.8 million (2011: €20.2 million).

The proportion of Group revenue from the UK business increased to 76 per cent from 72 per cent.

The merchanting business in the UK performed strongly despite a decline in volumes in the residential repair, maintenance and improvement market as the UK economy slipped back into a mild recession. The business increased profits from higher turnover, procurement gains and operating synergies. A series of measures taken to reduce costs moderated the decline in operating profit in the Irish merchanting business which experienced a fall in revenue. A contraction in consumer spending and adverse weather conditions in the second quarter contributed to a decline in revenue in the Irish retailing business. Revenue in the Belgian merchanting business increased following the completion of three acquisitions last year and the Group's share of the joint venture increased to 58 per cent from 53 per cent.

The Group's businesses were strongly cash-generative with cash flow generated from operations increasing to €54.8 million (2011: €46.2 million). The Group ended the half-year in a strong financial position with good liquidity and lower net debt that is refinanced out to 2016.

In view of the increase in underlying profits and strong cash flows, the interim dividend has been increased by 9 per cent to 3.0 cent (2011: 2.75 cent).

Segment Review

Merchanting Segment

Revenue in the merchanting segment increased by 6.9 per cent to €932.8 million (2011: €872.9 million). Operating profit before restructuring costs was €38.9 million (2011: €33.4 million), an increase of 16.4 per cent.

Merchanting revenue in the UK increased by 9.5 per cent to €780.5 million (2011: €712.6 million). Sterling turnover increased by 3.8 per cent. UK merchanting operating profit before restructuring costs increased by 18 per cent to €37.5 million (2011: €31.9 million). The increase was 12 per cent in constant currency. The operating margin increased by 34 basis points to 4.81 per cent (2011: 4.47 per cent).

Growth in the UK economy fell in the final quarter of 2011 and continued to decline in the first two quarters of this year. Consumer spending was affected by subdued pay growth which was below the rate of inflation. Consumers were focused on paying off loans and increasing savings at a time of economic uncertainty. The merchanting business in the UK faced a challenging economic environment in the half-year and trading was also adversely affected by unseasonal weather with record levels of rainfall in the second quarter.

Volumes in the merchanting market are estimated to have declined by 4 per cent as consumers reduced spending on discretionary projects, and the allocation of funds for public housing RMI declined. Housing transactions, a forward indicator of demand in the RMI market, increased by 10 per cent.

The increase in UK merchanting turnover by 3.8 per cent comprised growth of 1.4 per cent in average daily like for like turnover, growth of 0.8 per cent due to an additional trading day and the net effect of new branches, acquisitions and branch consolidations which increased turnover by 1.6 per cent. The increase in average daily like for like turnover reflects a recovery of price increases and a measure of outperformance in a market that experienced a decline in volumes in the half-year.

The gross margin was maintained in a competitive market and overheads in the like for like business were down following the implementation of cost reduction and rationalisation measures.

Buildbase successfully focused on increasing revenue and profitability through self-help measures in a challenging market that has experienced cumulative volume declines in excess of 30 per cent in recent years. Plumbase increased revenue and profit, strengthened its market position through increased promotional activity, improved its gross margin and tightly controlled costs. The seventeen branch specialist heating spares business was integrated into Plumbase and rebranded as Sparesbase. The Jacksons business produced a satisfactory result having outperformed a weak market in the East Midlands. A new branch was opened in Worksop and redevelopment of the Grimsby branch was completed.

Selco Builders Warehouses, the trade-only builders' merchant, reported good turnover and operating profit growth while continuing to develop a strong brand identity with trade customers operating in the residential RMI market. The business performed strongly in London where fifteen of its thirty one stores are located. Last year's store openings in Catford, South London and Slough, Berkshire traded in line with expectation. Development of the business continued in July 2012 with the opening of a store in Hanworth, South East London. Later this year, the opening of a store in Tottenham, North London will improve the brand's market penetration and enhance opportunities for realising scale-related benefits.

In Northern Ireland, economic activity was broadly unchanged due to weak consumer spending. Construction output stabilised but remains one third below the pre-recession peak in 2007. Macnaughton Blair increased turnover in its general merchanting business driven primarily by strengthening its market position in the Belfast market and through an increased exposure to public sector projects in the areas of health, education and infrastructure. Market coverage improved with the acquisition of branches in Cookstown and Downpatrick. Operating profit showed significant improvement with the benefit of increased revenues and an unchanged cost base in the established business.

Buildbase Civils & Lintels, the eighteen branch specialist heavyside business, grew turnover strongly with its house building, civil engineering and groundworks customer base and also developed a presence in the infrastructure market by securing long-term contracts to supply a number of roads schemes. The drywall and insulation distribution branches that supply sub-contractors to the national and regional house builders were rebranded as NDI. The business performed strongly increasing volumes and operating profit. Plans have been developed to increase market coverage by utilising spare capacity in the existing merchanting estate to increase the number of NDI branches.

Frontline, a distributor of bathroom products increased revenue and profit through expanding its regional market coverage. www.plumbworld.co.uk, the UK's largest specialist online retailer of bathroom products, increased revenues strongly as the online share of the retail market continued to grow. Grafton was the only merchanting business among 22 organisations selected as Green Deal Providers. Sponsored by the Department of Energy and Climate Change (DECC), the Green Deal and ECO is an initiative to encourage home owners to improve the energy efficiency of their properties.

Turnover in the merchanting business in Ireland declined by 8.7 per cent to €136.4 million (2011: €149.4 million). Operating profit (before restructuring costs) was €0.9 million (2011: €1.1 million). Despite very tough trading conditions, the business continued to improve its market position gaining share from competitors who reduced capacity or exited the market.

The Irish economy emerged from recession in 2011 and modest export-led growth is forecast for 2012. Weakness in the domestic economy continued due to weak labour market conditions, declining disposable incomes and increased savings. These factors contributed to a further fall in spending on housing RMI, the primary end-use market for the Irish Merchanting business. Housing market indicators point to a further decline in output this year to 5,000 units as the market reaches an historically low and unsustainable level. These are mainly one-off houses built to demand. The very limited construction activity on scheme houses and apartments was concentrated on finishing-out units constructed prior to the market downturn.

Average daily turnover in the Heiton Buckley and Chadwicks branches declined by 13 per cent in January and February including the effect of branch consolidations. The rate of decline moderated to half that level in the March to June period. A number of the provincial branches increased turnover in the half-year benefiting from product expansion and improved facilities. The consolidation of underperforming branches in Dublin, Cork and Limerick implemented in 2011 and during the half-year significantly improved the operational efficiency and results of the enlarged branches.

Gross margins were maintained despite competitive pressures and overheads were reduced by 10 per cent. Branch consolidations generated significant fixed cost synergies and the reduction in employment in the second half of 2011 also contributed to the lower cost base.

Investment in working capital reduced ahead of the rate of decline in revenue. Customer credit exposures were tightly controlled and the proportion of revenue transacted on credit terms continued to decline.

Retailing Segment

Revenue declined by 12.4 per cent to €98.2 million (2011: €112.1 million) due to the combined effects of a decline in household spending and heavy rainfall in April and June which significantly reduced demand for gardening and seasonal products. The sharp fall in turnover resulted in an increased operating loss of €3.5 million (2011: €0.4 million) before restructuring costs.

Retail spending in Ireland continued to decline due to the weak labour market, downward pressure on incomes, public sector cutbacks and higher taxes. The rise in savings, as households reduced borrowings and increased precautionary saving, also exerted pressure on consumer spending. Consumer confidence rose over the first half in response to signs of stabilisation in the wider economy.

The decline in revenue in the Woodie's DIY business reflected a fall in transactions by 10 per cent and a decline in average transaction values by 2.4 per cent as customers switched purchases between product categories. The unseasonably wet weather in the second quarter reduced customer footfall leading to a 18 per cent decline in revenues.

The decline in revenue from gardening products ahead of the trend rate in other product categories accounted for an estimated €1 million of the increase in the operating loss in the period. The business generated an improvement in gross margin from procurement gains and targeting the source of stock shrinkage that partly offset the impact of lower turnover. It also maintined its competitive price position as the leading retailer of DIY and garden products in the Irish market. New ranges of power and hand tools, timber flooring, floor tiles and lighting introduced last year performed well and product ranges were broadened in a number of categories. In a weak consumer market, the business focused on self-help measures that increased the gross margin, maintained tight cost control and improved working capital efficiency.

The Glasnevin, North Dublin City and Blanchardstown, West Dublin stores were extended and refitted to enable improved merchandising, the expansion of product ranges and the creation of an improved shopping experience for customers.

In June 2012 an Examiner was appointed to Atlantic Home Care Ltd, which operates 13 stores as part of the DIY division, in order to facilitate a restructuring and survival of the business which has traded at a loss since 2007. The Examiner has recently indicated that he expects to seek Court approval for a scheme of arrangement on or prior to 14 September 2012 that will involve an investment by a Grafton group company. The scheme of arrangement will incorporate the closure of two stores. Since the period end, agreement has been reached with all but one (currently in discussions) of the continuing landlords to reduce store rents to current open market levels. It is anticipated that, subject to approval by the High Court, the scheme of arrangement will be implemented and the business will return to trading profitably.

Revenues were marginally lower in the eight store In-House kitchens business that has a strong position in the Dublin market. The operating result improved due to further progress in reducing costs. The business expects to improve its competitive position from cross selling opportunities following the installation of kitchen display areas in the newly extended Glasnevin and Blanchardstown Woodie's DIY stores.

Manufacturing Segment

Turnover increased by 1.8 per cent to €23.5 million (2011: €23.1 million). The segment benefitted from a restructuring and cost reduction programme and made an operating profit (before restructuring costs) of €0.5 million compared to an operating loss of €0.9 million in the first half of 2011.

The mortar business in Britain increased turnover by 10.3 per cent to €18.6 million and by 4.5 per cent in constant currency. Volumes were lower due to a decline in housing starts, which were approximately half the pre-recession level, and demand was also affected by adverse weather conditions in the second quarter. The decline in volumes supplied to the housing market was partially offset by the use of the EuroMix silo system for the production of sprayed concrete for use in infrastructure projects. The business recovered higher input costs and with a stable cost base, operating profit was similar to last year.

Turnover in the Irish Manufacturing business declined to €4.9 million (2011: €6.2 million). CPI, the loss making concrete products business was closed. The continuing manufacturing business was operated at close to breakeven with the benefit of increased turnover in MFP, the PVC drainage and roofline products business, derived from growth opportunities in the infrastructure market and further cost reduction measures.

Financial Review

The Group achieved good growth in underlying profit, generated strong cash flows, and ended the half-year in a strong financial position.

Cash Flow

Cash flow from operations after absorbing redundancy and other costs of €5.0 million amounted to €54.8 million (2011: €46.2 million). This included cash flow of €13.5 million generated from the tight control of working capital. Capital expenditure of €10.6 million (2011: €13.0 million) was concentrated on asset replacement and renewal projects and also included expenditure of €5.6 million on development projects. Net interest and taxation paid was €8.0 million (2011: €9.3 million). Cash outflows also included €11.0 million to cover the second interim dividend for 2011.

Net Debt

Net debt fell by €25.3 million to €200.6 million (31 December 2011: €225.9 million). The gearing ratio declined to 20 per cent from 23 per cent at the end of 2011. Cash deposits and balances were €138.5 million at 30 June 2012 and undrawn committed revolving term bank facilities were €112 million. The average maturity of Group gross debt at 30 June 2012 was 3.4 years.

Pension

The deficit on defined benefit pension schemes was €49.3 million (31 December 2011: €28.6 million) net of the related deferred tax asset. The market value of scheme assets increased to €204.4 million (31 December 2011: €191.1 million). Scheme liabilities were €262.1 million (31 December 2011: €224.6 million), an increase of €37.5 million that included €30.5 million due to a reduction in the rates used to discount liabilities in line with the fall in AA corporate bonds with a maturity of more than ten years.

Taxation

The taxation charge of €4.8 million related mainly to the unwinding of deferred tax assets recognised in prior years in accordance with International Financial Reporting Standards and a charge to reduce the carrying value of net deferred tax assets in the UK business following a reduction in the UK corporation tax rate from 25 per cent to 24 per cent in April 2012.

Since the period end, the UK Revenue has confirmed the Group's entitlement to tax deductions against which a corporation tax provision of €23 million was prudently retained due to uncertainty concerning the outcome. This provision will be available for release through the 2012 full year Income Statement.

Shareholders' Funds

Shareholders' funds were €990.9 million at 30 June 2012 (31 December 2011: €982.8 million). Shareholders' funds were increased by profit after tax for the half-year of €12.2 million and a net exchange gain of €30.2 million on translation of net assets in the UK business at a more favorable sterling/euro exchange rate. The other significant movements on shareholders' funds were payment of a second interim dividend for 2011 of €11.0 million and an actuarial loss after tax of €24.3 million on the defined benefit pension schemes.

Net Finance Income and Expense

The net finance income and expense charge was €7.4 million (2011: €6.0 million). The net finance expense for 2012 includes a net charge of €0.1 million due to movements on hedges, foreign exchange, lease interest and net pension returns and compares to a net credit of €1.6 million in 2011.

The net charge for bank and loan note interest reduced to €7.4 million (2011: €7.7 million). This reflects lower average debt, a higher bank margin payable on loans refinanced in the second half of 2011 and commitment fees on undrawn revolving term bank facilities put in place in October 2011 as part of the Group's fund raising in the capital markets.

Risks and Uncertainties

The Transparency (Directive 2004/109/EC) Regulations 2007 requires disclosure of the principal risks and uncertainties which could have a material impact on the Group's performance over the remainder of the financial year and cause actual results to differ materially from expected and historical results.

Trading in the Group's business is affected by economic conditions in the UK, Ireland and Belgium where the Group's earnings are generated. Demand in the builders merchanting markets in the UK, Ireland and Belgium and in the Irish DIY and UK mortar markets are sensitive to economic conditions generally including credit conditions, consumer confidence, interest rates, employment trends, inflation, demographic factors and housing market conditions. More difficult market conditions would reduce demand in the Group's markets resulting in lower turnover and operating profit. Adverse weather conditions would also reduce turnover and operating profit in the Group's businesses.

Outlook

The outlook for the UK economy is uncertain but it is expected to face headwinds over the remainder of the year due to fiscal consolidation, tight credit conditions and a decline in exports to the euro area. There may be a mild recovery in consumer spending as pressure on net take home pay eases but weakness in the wider economy is expected to weigh on demand in the residential RMI market despite the need for significant investment in an ageing housing stock following five years of under spending.

In Ireland, the economy has stabilised but the outlook continues to be challenging. Demand is expected to remain weak in the merchanting and DIY business due to the weak labour market, pressure on disposable incomes and households continuing to pay down debt.

UK merchanting daily like for like sales were flat in July and August. In Ireland average daily merchanting revenues were down 12.5% which was impacted by branch consolidations. Irish retailing revenues were down 7% in the same period.

The Group's first half performance demonstrates the range of self-help measures successfully implemented in response to the challenging market conditions. There will be a renewed focus over the remainder of the year on strengthening the market position of the Group's businesses and on profit improvement measures that will add long-term value for shareholders.

Grafton Group plc

Group Condensed Income Statement

For the six months ended 30 June 2012

Grafton Group plc

Group Condensed Balance Sheet as at 30 June 2012

Grafton Group plc

Group Condensed Cash Flow Statement

For the six months ended 30 June 2012

Grafton Group plc

Group Condensed Statement of Comprehensive Income

For the six months ended 30 June 2012

Grafton Group plc

Group Condensed Statement of Changes in Equity

Grafton Group plc

Notes to Condensed Interim Financial Statements for the half year ended 30 June 2012

1. General Information

The condensed consolidated interim financial statements for the half-year ended 30 June 2012 are unaudited but have been reviewed by the auditor whose report is set out on page 27.

The financial information presented in this report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. These condensed interim financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements in respect of the year ended 31 December 2011 that are available on the Company's website www.graftonplc.com.

The financial information included in this report in relation to the year ended 31 December 2011 does not comprise statutory annual financial statements within the meaning of section 19 of the Companies (Amendment) Act 1986. Those 2011 annual financial statements have been filed with the Registrar of Companies and the audit report thereon was unqualified and did not contain any matters to which attention was drawn by way of emphasis.

Basis of Preparation, Accounting Policies and Estimates

(a) Basis of Preparation and Accounting Policies

The accounting policies applied by the Group in the condensed interim financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 December 2011.

The adoption of other new standards and interpretations (as set out in the 2011 Annual Report) that became effective for the Group's financial statements for the year ended 31 December 2012 did not have any significant impact on the interim financial statements.

(b) Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2011.

2. Segmental Analysis

The amount of revenue and operating profit/(loss) under the Group's operating segments of Merchanting, Retailing and Manufacturing is as follows:

2. Segmental Analysis (continued)

Operating segment assets are analysed below:

The amount of revenue by geographic area is as follows:

3. Exceptional Items

The 2012 exceptional items of €5.5 million (2011: €4.0 million) largely relate to redundancy costs in the merchanting business and in the closure of the CPI mortar manufacturing business in Ireland along with asset impairment in the DIY business.

4. Finance Expense and Finance Income