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Edited Transcript of GFTU.L earnings conference call or presentation 30-Aug-19 8:30am GMT

Half Year 2019 Grafton Group PLC Earnings Call

Dublin Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Grafton Group PLC earnings conference call or presentation Friday, August 30, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David L. Arnold

Grafton Group plc - Group CFO & Director

* Gavin Slark

Grafton Group plc - CEO & Director

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Conference Call Participants

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* Ami Galla

Citigroup Inc, Research Division - Senior Associate

* Aynsley Lammin

Canaccord Genuity Corp., Research Division - Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Analyst

* Gavin Jago

Peel Hunt LLP, Research Division - Analyst

* Howard David Seymour

Numis Securities Limited, Research Division - Director of Equity Analysis

* Robert Eason

Goodbody Stockbrokers, Research Division - Head of Research

* Samuel Frost Dindol

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

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Presentation

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Gavin Slark, Grafton Group plc - CEO & Director [1]

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Good morning, ladies and gentlemen. Thank you for coming, and welcome to the results presentation for the Grafton Group for the half year to the end of June. For those of you who don't know me, and there may be a few, I'm Gavin Slark. I'm the Group's CEO; and I'm joined today by David Arnold, who is our Group's CFO.

I know many of you will have seen our presentations before, understand the format and the way that they work, but I shall just give you a few early thoughts. I shall then pass you over to David, who will take you through the detail of the numbers. I shall come back at the end, have a look at some strategic issues, have a look at the outlook, and then that should leave us plenty of time for some reasonable Q&A at the end.

So in terms of the introduction and the highlights. Just thought we'd start with what we believe are important factors in what makes Grafton different. We do have leading market positions, and in all of the geographies that we operate in, in all of the sectors, very strong businesses, whether that be in Ireland, the U.K. or the Netherlands, and whether that's in merchanting, retailing or manufacturing, but very, very strong positions in all of the sectors in which we operate. We do have as well as most of our business being in the U.K., really good exposure to fast-growing strong markets in Europe, in particular, the Netherlands and Ireland, really important factors in terms of differentiating points for Grafton.

Our balance sheet capacity is very, very strong. If you look at the balance sheet now and look at the net debt for the half year, we've got very, very low levels of debt, very high levels of cash generation. And oversimplifying it, every pound of profit that we generated, we have converted into cash. And that strong balance sheet gives us both flexibility and opportunities going forward in terms of investment, whether that's investment in organic growth or acquisitive growth. And it also gives us some resilience, should we see any kind of cyclical downturns in the markets in which we operate.

We have got a decent track record in terms of M&A. Obviously, just after the half year, this year, we have completed the acquisition of Polvo in the Netherlands. And we have got a reasonable pipeline going forward, but we will maintain a disciplined approach to M&A and really be careful on how we spend the money. And obviously, steady improvement again in the operating margin and then the return on capital employed, 2 figures that we've spoken about quite a lot in recent years, but really underlines the quality of the earnings, and I also think within each of the businesses we have, the level of management control that we have within those businesses.

So in terms of highlights for the first half, obviously strong organic growth in Ireland. If you look at the like-for-like growth in the merchant business in Ireland, it was still over 8% in the first half of the year and over 3% in our DIY business, Woodie's in Ireland. And both of those businesses now generating operating margins in excess of 8%. Good like-for-like growth in the Netherlands, over 3% growth in Isero, and obviously, since the half year, we've increased that business with the acquisition of Polvo. That takes the annualized sales in the Netherlands now to something just over EUR 300 million per year and a double-digit operating margin overall within the Dutch business.

The operating margin in U.K. Merchanting, move forward, move to 5.6%, a 10 basis points improvement in a slightly softer market, and we'll talk throughout the morning with a focus on self-help and really having a mindset of what we can do for our business rather than being reliant on what the market will do for us.

You will see, and again, I'll talk some more about this later on, we have made an agreement to sell our Belgium business. I think it's fair to say, Belgium has been quite a difficult market for us, and the opportunity has arisen for us to take capital out of the Belgium market and redeploy that capital into some of the higher margin, higher returning businesses that we have. But I'll talk you through some of the details of that when I come back later on.

We have gone through some really important operational milestones in the first half of the year as well. In a number of our businesses now -- again, I will give you some highlights later on about what we've done in Buildbase, what we've done in Selco, what we've done within the Dutch business to really emphasize some of the things that we're doing behind the scenes to make sure the business is well set for the future. And as I said, another really strong period of cash conversion, 100% cash conversion. Every pound of profit converted into cash.

In terms of the financial highlights, you'll see that group revenue increased by 2% to EUR 1.44 billion, which means the adjusted operating profit has a 6% increase to EUR 97.7 million, resulting in the adjusted EPS improving by 6%. Dividend increased by 8% to 6.5p, absolutely in line with our progressive dividend policy we've spoken about over the recent years. And as we keep improving the profitability within the group, and we keep improving the cash generation within the group, that progressive dividend policy stands us in very good stead going forward. The adjusted operating margin, a 20 basis points improvement up to 6.8%, and the return on capital employed up to 15% for the first half of the year, 100 basis points improvement on the half year last year, which was 14%.

Many of you have seen this chart before. But really, just to reemphasize the journey that we've been on in terms of operating margin and in terms of return on capital employed, you'll see there, clearly, the operating margin now at 6.8% and the return on capital employed at 15%. Many of you will remember the conversations we've had about those targets that we actually put out there about getting Grafton to be a 7% operating margin business, married with a 15% return on capital employed, and significant progress, again, made towards those targets there.

So those really are the highlights and the kind of early thoughts in terms of the results. And at that point, I'll pass you over to David, who will take you through the detail of the numbers.

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David L. Arnold, Grafton Group plc - Group CFO & Director [2]

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Thank you, Gavin, and good morning, ladies and gentlemen. This year, we all have the great pleasure in working with the new accounting standard, which is IFRS 16. I'm afraid that I am something of a traditionalist. I do like to be able to compare apples with apples. And therefore, we've taken quite a simple approach with this presentation. And therefore, all the comparisons that we're going to talk about today will be at an old money basis. So we'll be looking at pre-IFRS 16 first half on the first half of last year.

We have included obviously within the results, the IFRS 16 numbers. But unfortunately, it's not going to be until the full year results of 2020 that you're actually going to have a full suite of directly comparable figures.

The other element of the presentation today, I'm going to be focusing on continuing operations. And as Gavin has mentioned, he'll come back and talk about the disposal of our Belgium business in the final part of his summary.

So if we just turn first to the income statement. Group revenue was up 2% to GBP 1.4 billion or up 3% in constant currency terms. Adjusted operating profit before property profits was 6% ahead of last year at GBP 93 million. Property profits of GBP 4.7 million was slightly higher than we had anticipated at the start of the year. And given that we now plan some further disposals in the second half, we expect full year property profits to be approximately GBP 5.5 million.

Adjusted operating profit was 6% ahead of last year at GBP 97.7 million. The net finance cost of GBP 3.5 million was GBP 1 million higher than the same period last year. And that's a consequence of our U.S. private placement issue, which we drew down in September of last year, where we borrowed a EUR 160 million at -- split equally between 10 and 12 years at an average coupon of 2.5%. The adjusted profit before tax was up 5% to GBP 94.3 million.

Looking at revenue growth in the first half. The increase of GBP 34 million was principally a function of organic growth, which contributed to GBP 29 million net of branch consolidations and disposals. Acquisitions added GBP 8 million with the majority derived from the acquisition of Leyland SDM, which we made in February of last year. The impact of foreign exchange movements was negligible.

If we look at that net organic growth in revenue of GBP 29 million, then overall growth totaled GBP 54 million, and that comprised GBP 41 million in the continuing like-for-like business and GBP 13 million from new branches. This growth was partly offset by GBP 25 million reduction from branch consolidations and disposals, with the disposals of the Boole's and Plumbworld business in the second half of last year accounting for GBP 20 million of that revenue reduction. Organic growth initiatives added GBP 13 million of which the majority was revenue from new Selco stores.

Turning now to the components of the first half increase in operating profit to GBP 97.7 million. You can see that GBP 2.2 million was derived from the profit improvement in the like-for-like business, and I will analyze that further in a moment. Growth initiatives generated a net improvement of GBP 2.1 million compared to the first half of last year. And within that improved net improvement was a reduction of GBP 2.7 million in Selco store opening costs compared to the first half of last year. The disposals and branch consolidations reduced the operating profit by GBP 0.8 million and acquisitions, which, as I mentioned, was principally the impact of Leyland SDM, added GBP 1.7 million to profit.

If we analyze the GBP 2.2 million incremental operating profit in the like-for-like business, this was very much an Irish story with the Irish merchanting business and Woodie's together delivering an improvement of GBP 2.9 million. In the U.K., like-for-like profitability reduced by GBP 0.9 million, and this was affected by one less trading day in the first half of 2019, and this represented approximately GBP 2 million of profit. The reduction in absolute profit was principally attributable to Buildbase, where we saw some gross margin reduction combined with slightly higher operating expenses as a result of the project to roll out the new trading system. This U.K. result influenced the overall drop-through percentage for the group, which stood at 5%.

Turning now to look at the individual businesses. In U.K. Merchanting, adjusted operating profit pre-property profit increased by 3.3% to GBP 55.5 million with the operating margin 10 basis points higher at 5.6%. Whilst like-for-like revenue increased by 2.8%, volume growth was slightly under 1% with price inflation running at approximately 2%. The gross margin remained constant overall, but the market continues to be very competitive. As we faced into -- or face into continued uncertainty in the U.K., our focus here is very much one around keeping a tight focus on our cost base and a prudent approach to investment.

The Irish Merchanting business continued to perform strongly, with revenue up 7% in sterling terms. The operating profit, pre-property, increased by 12% to GBP 19.2 million, and the operating margin increased by 40 basis points to 8.5%. Average daily like-for-like revenue growth was 8.3%, and this was broadly balanced across sectors. We saw continued growth in new home completions, with first half completions up 17% year-on-year to just over 9,000. Now this output remains well short of the annual requirements, which are estimated approximately 40,000 homes per annum, and we expect to see sustainable growth delivered over the coming years.

As we expected, the gross margin was slightly diluted as a result of mix movements with proportionately higher levels of delivered product now going out through the branches. In order to maintain our market-leading positions, we are investing into the branch estate to ensure that the proposition remains an excellent experience for our customers. We have a program of branch refurbishments and progressive rebranding of the Heiton business to Chadwicks.

In the Netherlands, reported revenue increased by 5%. Average daily like-for-like revenue growth of 3.1% was generated from a good mix between branch-based activity and increased trading with national account customers. The gross margin improved strongly on the back of continued procurement gains. And the focus on the business is now very much on the integration of Gunters en Meuser onto the Isero systems; the new distribution center, which we've just opened in Waddinxveen; and of course, harnessing the benefits from the recently completed acquisition of Polvo.

In Woodie's, reported revenue grew by 2% and the operating profit by 10%. The operating margin improved by 60 basis points, which was an excellent achievement coming on the back of an improvement of 190 basis points in the first half of last year. Average daily like-for-like revenue grew by 2.9%, and that was broadly split between an increase in transaction numbers and the average transaction value, which is around EUR 28 per transaction.

You'll recall that this time last year, we were talking about the tremendous growth that we've seen for seasonal products with Ireland taking to barbecuing with a vengeance. But this year, I'm pleased to say that we saw a return to more normal weather patterns, and it rained a lot. Nevertheless, we saw good gains across key product segments, including DIY, Kitchens and Homeware.

The store investment program in Woodie's is now drawing to a conclusion, but we are continuing to invest into our digital platform. Online revenue is growing fast with an increase of 50% on last year, and this represents approximately 2% of Woodie's revenue.

In manufacturing, we saw revenue grow by 2%, and the operating profit reduced very modestly to GBP 9.1 million, a very solid performance on the back of the very strong prior year comparator, where profits increased by 34%. Average daily like-for-like revenue grew by 2.9%, with volumes up modestly adjusting for one-off contract, which we had last year. As a result of higher input costs, the gross margin reduced slightly. Nevertheless, the business returned an operating margin of 22.4% in the period, another very strong performance.

Turning now to the balance sheet. Net working capital increased modestly from this time last year and remains very well controlled, representing 6.3% of revenue. Net debt was just GBP 100,000 and return on capital employed increased by 100 basis points to a 15% medium-term target. As regards cash flow, it was once again another very strong performance with free cash flow representing 100% of operating profit. Just to note that the Polvo acquisition completed on the 1st of July and that this added GBP 117 million to our net debt on that date.

Now I've managed to avoid saying too much about IFRS 16, but it would be remiss not to add a little more color. I'm sure that you will have heard similar across other reporting companies by now. The most salient points that I would just draw out for Grafton are that we adopted the modified retrospective approach with all leases being brought on to our balance sheet on a consistent basis from the 1st of January 2019.

Now we haven't cherry-picked certain leases to recalculate the impact of those back to the original lease inception, instead what we've done is we treated all leases on the same basis, save for those some small exemptions -- or some exemptions around small leases and short leases. But we feel it's better to just bring everything on from effectively the 1st of January to more quickly get to what I would describe as a normalized position, where we aren't bearing that front-loaded impact of the interest cost -- of the imputed interest cost. As a consequence of the modified retrospective approach, we won't be restating comparatives, and that's why we've run through the numbers on a pre-IFRS 16 basis.

Now you'll find in the announcement and also at the back end of the presentation, there's a chunk of pre to post IFRS 16 bridges to help you sort of unpick the impact. I've got to emphasize that the standard has no impact on cash flows or banking or U.S. private placement covenants, and that our investment and acquisition criteria remains largely unchanged. Our investment-grade credit rating is unaffected by IFRS 16. Credit rating agencies have used leased adjusted debt in their credit reviews for a number of years. And perhaps, the only bearing that IFRS 16 will have is a more consistent treatment across rating companies in terms of capitalized value of leases. If you have any technical questions or challenges around IFRS 16, then I can give you a counseling number to call.

As regards full year technical guidance, just to provide a little color on some more specific areas. I've mentioned already that full year property profits are now expected to be around GBP 5.5 million, so that's up a modest amount on our guidance at the beginning of the year. Full year depreciation is anticipated to be GBP 46 million on a pre-IFRS 16 basis, and our gross CapEx spend, excluding acquisitions, is expected to be around GBP 75 million. So there's no real change there. The interest charge is likely to be slightly higher, GBP 8 million to GBP 8.5 million because of the expenditure that we've had on Polvo.

And finally, as regards to full year tax rate, our view is now it will be slightly lower at 17.7%. We've previously indicated 18.5%, so slightly better on tax.

And on that note, I will pass you back to Gavin.

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Gavin Slark, Grafton Group plc - CEO & Director [3]

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Thanks, David. I just want to spend a few moments really talking about sort of strategic update, some of the things that we've been doing and how we see the outlook going forward. Obviously, I think it's fair to say that our focus very much remains on investing in higher-margin growth markets, markets that have strong growth potential and where we can have a strong position such as the Netherlands, but also continued investment into businesses such as Woodie's in Ireland, the merchant business in Ireland where we've got very, very strong market positions and also where we have a clearly differentiated business model, such as Selco and such as Leyland SDM. I'm going to talk in a few minutes a little bit more about some of the operational milestones that we've achieved and also as I said, a little bit of detail around the disposal of the Belgium business.

Acquisition of Polvo, really important milestone in terms of the Dutch business. You will remember, many of you, we acquired the Dutch business just over 3.5 years ago. It had revenues of around about EUR 90 million. And post-Polvo, that now gives us annualized revenues in Holland of around about EUR 300 million. So very, very significant step change and growth in that Dutch market for us. And also as we've spoken about a couple of times here, but the strong balance sheet and cash generation does give us great opportunities in terms of further investment, both organically and in terms of M&A, should the right opportunities come forward.

In terms of operational milestones, just really want to pick on 3. And this is just really to give you some example of some of the things that we're doing to make sure that we are actually focusing on what we can do for our business rather than being reliant on what the market can do for us. In Buildbase, we have spoken for a number of years and spoken quite extensively about the investments and work that's actually gone into the new IT system. The first branch has now gone live on the IT system.

Now this is a really major step, but it's also the beginning of the final step in terms of the IT rollout. The back-office functions, credit control, accounts payable, accounts receivable are all operating on the new system and have been for quite some time. So actually, putting the first branch on the system is the beginning of the end of the IT development and IT investment. And we anticipate completing the branch rollout of that IT system over the next 18 to 24 months, but hugely encouraging early start in terms of the new branch trading, and obviously, supported by the fact that the back-office functions have been operating on the new system for some considerable time.

In Selco, we have opened a new 3-acre delivery hub in Edmonton in London. Now this is about delivering heavy-side building materials direct to customers. This isn't involved in store replenishment.

Why have we done this? Well, primarily because a number of the stores around London were starting to operate very close to capacity. We have branches that were receiving 70, 80, 90 inbound deliveries from suppliers on a daily basis, causing us some operational issues. By taking these deliveries and operating them out of a central hub, it enables us to actually deliver more efficiently, deliver more effectively, significantly reduces inbound deliveries and vehicle movements within those stores, which actually enhances the customer experience. And the guys who actually are going to the stores and collecting product makes it much easier for them to do so and also significantly improves the health and safety management within most Selco stores.

In Isero, David mentioned earlier, we've just recently relocated our distribution center and our head office to a new purpose-built facility in Waddinxveen. For those of you who aren't positive about where Waddinxveen is, it's almost in between Rotterdam and Utrecht. I'll let you go and check out on Google Maps exactly where it is later on.

With that growth in the Dutch business from GBP 90 million to GBP 300 million obviously we've outgrown the facilities that we had in Woerden, which is where the head office and distribution center were. So this has been planned over the last 2.5 years to move to this new facility and have the capacity to continue to grow the Dutch business, but also to make that business more efficient and more effective in the way that we operate the support of the branches that we now have, including the Polvo ones.

In terms of the Belgium business, as I said, I think it's fair to say, Belgium has been a difficult market for us for some considerable time. The group has been in Belgium for something around a decade. But it has been a low-margin business for us and a relatively small contributor in terms of the group. We did say a couple of years ago that our short-term aim was to get the Belgium business to be sustainably profitable. And you'll see there, it made GBP 800,000 in 2018 and GBP 900,000 in 2017. And the opportunity arose for us to divest of the Belgium business to Aurelius and really give us the opportunity to redeploy that capital into higher margin, higher returning businesses such as the Polvo acquisition. And it felt like the right thing to do for both Grafton and for the Belgium business.

With Aurelius, we've got an agreement that they will pay us an enterprise value of around GBP 11 million. Aurelius, by the way, are a European-based private equity house. We are going to retain ownership of the freehold properties. Those freehold properties are valued at around GBP 12.5 million. We will retain ownership of those properties, and at some point in the future, we will sell those as an investment to someone in a separate transaction.

The overall business value that we've put down there at GBP 28 million also includes the fact that we disposed of the St. Vith branch at the end of last year, which was the branch we had in the German-speaking part of Belgium. And we divested of that single branch for GBP 5 million at the end of last year. There is a noncash exceptional charge of GBP 26 million on the disposal of this, but we genuinely feel that, A, this is the right thing for Grafton in terms of redeploying capital into higher return businesses; and also the right thing for the Belgium management team and the Belgium business going forward.

In terms of Polvo, as David said, we completed that transaction on the 1st of July, superb geographic fit with our existing branch network in the Netherlands. It adds 51 branches to that network and takes the total business now to 113 branches, consolidates our market-leading position, makes us a very, very significant major player in that Dutch market. Our short-term focus, having bought the business really is about purchasing arrangements, and we're not going to go through a large-scale integration in the short term. Firstly, we're still going through the integration of Gunters. We need to get that finished. And actually, within Polvo, they acquired a business last year called Van Enckevort, and they've been going through the integration of that business.

So our short-term focus is on really maximizing those purchasing arrangements, leaving the businesses to focus on what they do day-to-day without significant disruption to their systems. And then at some point in the future when we believe the time is right, we'll then look at putting the 2 businesses onto one system, but really getting that business established within the Grafton Group and not causing the management distraction and disruption by major integration work.

In terms of current trading, obviously I appreciate we are very early into the second half of the year, but completely accept there is a voracious appetite amongst some of you for sales data. So what we've done here is obviously, the last 4 months we had was July, was only the first month of the second half of the year, but giving you some comparisons there, so the first half in total, and then July in isolation. So U.K. Merchanting, like-for-like growth in July of 1.4%; merchanting in Ireland, just under 6% growth during the month of July; and in the Netherlands, 0.5% growth on a like-for-like basis in the month of July. In terms of retailing, good month in terms of July, 16.9% like-for-like growth on the back of some very positive performances that we had last year as well. And as David mentioned earlier, from a volume perspective, manufacturing down by 0.1% in terms of revenue for like-for-like during the month of July, giving us a total group like-for-like growth in the month of July of 3%, which compares to the 3.6% for the whole of the first half.

In terms of outlook, I think it's fair to say and you can't hide from the fact that at the moment, we have a slightly softer market backdrop in the U.K.. We are expecting to see some continuing pressure, both on volume and in terms of pricing. Macro political issues aside, our focus in the U.K. really is very much on self-help. What I mean by self-help is about taking positive steps to make sure that we are doing things that really positively influence the business rather than relying on market forces driving what we can do. And when you look at those investments that we're making on those initiatives in businesses like the rebranding of Chadwicks, the investments into Woodie's, Selco's distribution hub, the Isero distribution center, that's what we mean by self-help, really focusing on what we can do to drive the business forward.

In Ireland, we still see positive years to come in terms of growth. Certainly, as David mentioned earlier, the new house build rate is improving on a year-to-year basis, but still some considerable distance short of where we believe it needs to be at around about 40,000 homes per year. You will remember, some of you, we went through several years of double-digit like-for-like growth in Irish Merchanting. In the first half of this year, that was 8%. So still very, very positive, but we always anticipated that double-digit growth would soften slightly but giving us mid- to high single-digit growth for the foreseeable future. And we do see that growth continuing, both in the Builders Merchant Business in Ireland and in the Woodie's DIY business, which is the market leader in DIY in Ireland.

In the Netherlands, obviously, the market outlook continues to be favorable. But really, for us, it's about making sure we maximize the benefits of that new and large business, making sure that we get the new distribution center and head office in Waddinxveen settled in very well, but still, opportunities to improve in terms of revenue and in terms of footprint in that Dutch market.

So as a broad summary, first half, continued progress in terms of margin and in terms of capital employed -- the return on capital employed, which I think really underlines the quality of the earnings as well as the actual quantum of the earnings. In U.K. Merchanting, in Dutch Merchanting, in Irish Merchanting and Irish retail, the operating margins move forward in each of those businesses. In terms of the ongoing focus on self-help and growth, everything I've spoken about over the past few moments, but really investing in the business in a sensible way to make sure that we can continue to grow and not just grow the quantum, but grow the quality of the business.

The robust balance sheet and I think the pedigree now of strong cash generation, as David said, every single pound of profit that we've made has been converted into cash. And that gives us real confidence in terms of the long-term prospects for the group. And it gives us the ability to invest both in organic initiatives and also in acquisitions. But I must stress, as we have had for a number of years, we will maintain what we believe we have now, which is a well-disciplined approach in terms of M&A, making sure that we're only spending the shareholders' money on assets that we believe can bring good sustainable medium to long-term value.

And with that, that gets us to the point of Q&A. Now particularly for the benefit of those who are following online, if you have a question, I'd ask you to raise your hand. We'll bring a microphone to you. If you could give us your name and the company that you represent and then ask your questions, then we'll be happy to take the questions then, and people online can follow who's asking. Thank you very much.

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Questions and Answers

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [1]

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I'm Robert Eason from Goodbody. Without stating the obvious, the elephant in every corporate HQ, Brexit, is there -- if I can avoid that question. But maybe come from the angle of -- what do you believe is different in how you're structured, whether it's from a management perspective, decision-making process perspective, that is different how you can deal with whatever is thrown at corporate over the next few months? So maybe just go through structures, how you're going about the day-to-day interacting with management teams, et cetera.

The second kind of area of questioning is just kind of almost looking for the canary in the coal mine. Maybe if you can just discuss because you have in previous years, like have you seen any shift in trends in big-ticket items across your network? Any shift in bad debts in terms of regionally, at a group level, at a divisional level? Any shift in credit insurance in terms of how they're behaving with the corporates? So that's kind of trying to look for the canary in the coal mine, as I said.

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Gavin Slark, Grafton Group plc - CEO & Director [2]

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Okay. Well, if we start off on the elephant in the room but trying to attack it from a different angle. I think it was the way you put it, Robert. We do operate a very decentralized, very federated structure. Each of the CEOs in each of the businesses are responsible for their own strategic plans. They're responsible for running their business on a day-to-day basis. By doing that, as opposed to trying to drive that too much centrally, it means you've got people that are very, very close to what's happening in their own markets, and they can really react quite quickly and be quite nimble in the way that we look to manage whatever challenges come towards us. So I think the decentralized structure and having divisional CEOs with real responsibility and real accountability is a huge benefit for us. And we have got some very, very talented, some very high-quality business CEOs out there across the different businesses within the Grafton group.

I think also if you look at sort of Brexit in particular because I know you are dying for me to talk about that Brexit, Robert. But if you look at Brexit, in particular, I think obviously it's there. We need to manage our way through it. In reality, I can't influence what's happening in terms of Brexit. I can't influence what's happening in terms of the U.K. Parliament. So there's only so much sleep that we won't want to lose over Brexit. Our focus really is about running the businesses in the U.K. the best way that we can and being as best prepared as we possibly can be for an event that we don't know what it's actually going to look like when we get to the other side.

I also think it underlines from a Grafton perspective the importance of having really high-quality, high-returning businesses outside of the U.K. I think it really underlines the importance of the contribution of Ireland and the contribution of the Netherlands as opposed to just being solely U.K. focused. I mean these days, we speak a lot about U.K. Builders Merchanting, but actually in terms of Grafton, there is so much more to Grafton now than just U.K. Builders Merchanting.

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David L. Arnold, Grafton Group plc - Group CFO & Director [3]

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If I just pick up the point about big-ticket items and perhaps what we've seen across the business in terms of bad debt. From a big-ticket item perspective, there has been some slowdown in July and August. I would be hesitant though to draw too much into that because July and August are historically relatively slower months in terms of activity. So the summer break is always a difficult period, I think, to get a handle on it.

Though anecdotally, in terms of talking to customers, you would say there is a little bit of hesitancy and people, I think, are just waiting to see what happens over the next couple of months, which I think is understandable. Practical things, customers, developers, who've got property that, for example, they might be looking to convert into flats, I think at the moment, they're probably holding back a bit and just waiting to see what happens. So I think, yes, there is a little bit of hesitancy and softness over -- in the U.K.

From a bad debt perspective, one of the really strong attributes of Grafton is that typically, our traditional customer, it's a small and medium-sized jobbing builder. It's not a contractor. So our exposure in terms of bad debt tends to be relatively limited anyway. And we do carry credit insurance. We're not really seeing anything discernible in terms of the deterioration in bad debt, certainly nothing that would be particularly noteworthy. And as I say, I think the business has a resilience anyway when it comes to bad debt.

In terms of regional variances and differences that we might be seeing in activity in the U.K., I think it's a -- it's probably slightly slower in London and the Southeast than perhaps it is compared to the regions. Once you get out to Manchester and you sort of head north then actually, the level of activities is still pretty good.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [4]

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Aynsley Lammin from Canaccord. Just 2, please. Wondered if you could comment a bit more on the U.K. competitive backdrop. Are you seeing any kind of change in behavior with the bigger players or some of the independents? And when you look at the kind of cost inflation coming through on your cost of goods sold, are you confident of holding the kind of gross margins in the next 6 to 12 months?

And secondly, just on acquisition pipeline, what are you seeing there? Is it fair to say that you'd probably hold off in the second half, at least, given all the kind of Brexit and political risks?

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Gavin Slark, Grafton Group plc - CEO & Director [5]

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On the acquisition pipeline, I suppose, saying that we hold off in the second half, that puts quite a short window on it. And actually, a lot of the transactions that we've done over the recent years have got quite a long gestation period in terms of from when you first start talking to someone to learn about the business, understand the business, get to know the management team. So these are quite long processes. I think we've been very disciplined in what we've done on M&A in recent years. And I think we've being cognizant of what's going on in the background. I think if the right opportunity came along in the second half, and we made sure that it met all the parameters that we set.

Remember, we've been quite open in saying we're really interested in good businesses that have good positions in very sort of sensible markets, scope to grow, management teams that we can work with. And that's before we even get to the numbers and how much you'd pay for it. So I wouldn't necessarily say we wouldn't do something in the second half. I'd just say we maintain the discipline that we actually have in the way that we operate. And certainly, with the strength of the balance sheet that we have, we have the capability to do it. But I think we've always been very careful about how we spend the money and is about quality as opposed to just necessarily having to do deals.

In terms of U.K. competitors, obviously there's been a little bit of consolidation amongst some of the regional independents. There is still some capacity going in from some of the independents. I think there has been some pricing pressure from certain parts of the market. But I think really the U.K. Builders Merchant market has been competitive for quite a long time. I don't necessarily see now being any more or any less competitive. You've got that macro piece in the background going on, and maybe some of the competitors are more interested in volume than necessarily in price. But I don't think it's changed significantly from where it has been for a number of years.

And I think also I'm very conscious about when we talk about competitors, we instantly get dragged into a conversation about U.K. Builders Merchanting competitors. And as I said earlier, there's so much more that we look at across the group as opposed to purely focusing on U.K. Merchanting. It's a really important part of what we do. We're very conscious of what the competitors are doing. But I think particularly when you look at businesses like Leyland SDM, like Selco, you've got some clearly differentiated models there that really stands us in very good stead.

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Ami Galla, Citigroup Inc, Research Division - Senior Associate [6]

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Ami Galla from Citi. Just 2 questions from me. The first one is on the U.K. again. If you could split out the trend that you've seen in the last 3 months across the end markets in the U.K., that will be quite helpful.

And the second one, following the exit of Belgium. When you look at your U.K. portfolio, do you see further scope of exits or the underperforming elements of the business that you could look to exit over the next 12 to 24 months?

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Gavin Slark, Grafton Group plc - CEO & Director [7]

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Right. It's a very good question. I mean certainly, we're constantly looking at the whole portfolio within the group. I think probably, I'm right in saying that the Belgium disposal will be sort of the highest profile disposal that we've made for some time. Over the past couple of years, we've constantly looked at lower margin or noncore businesses, and we have exited a number of businesses. David mentioned earlier Boole's. He mentioned Plumbworld. Obviously, we had a business, a very small business in Poland that we exited. We had a scaffolding business that we exited. We had a small solar business that we've exited. All over the past kind of 3 or 4 years.

So we are constantly looking at the whole portfolio and making sure that we believe we're getting best value out of what we've got. And if we can't get greater value, is there a better way of redeploying that capital? So it's not something that we do lightly. It's not something that is a one-off event with Belgium. We're just constantly looking at it all of the time. And I think in any market where you've got evolution of competitors, evolution of geographic presence, that's just a sensible way of running your business anyway. In terms of the U.K. end markets...

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David L. Arnold, Grafton Group plc - Group CFO & Director [8]

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Yes. I mean if we just sort of -- just stick with a simple split between new build and RMI. I mean historically, RMI has tended to see less cyclical movement than new build. I wouldn't say there's a hugely discernible difference. New build is slightly stronger than RMI at the moment. I think overall, our outlook on RMI volumes for the second half of the year from the market as a whole would be sort of a modest reduction in volumes and new build probably closer to the flattish, if you see -- if you get my drift. But I don't think there's anything marked or pronounced between our end markets at the moment.

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Gavin Slark, Grafton Group plc - CEO & Director [9]

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Can you bring the microphone down to Howard at the front and then we'll...

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [10]

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Howard Seymour from Numis. If we can do a couple, please. Firstly, on U.K., you allude to the IT system rollout. Just as it rolls out, does the cost profile change in terms of the investment or has a lot of that investment already sunk? Sorry, I'll just keep on going.

Secondly, on Ireland, on the merchant side of things. You allude to the gross margin dilution. Which -- will that continue? Sort of as the new build shifts, do you expect that to continue? And a similar question in terms of the branch investment and refurb. Is there a cost dynamic to that, that we need to be aware of?

And then finally, Holland, you allude it moderate. And if you actually look at July, that was quite flat relative to where you've been in the first half year. Is that quite a dramatic trend or am I sort of reading too much into that one-month trading?

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Gavin Slark, Grafton Group plc - CEO & Director [11]

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Okay. I love the way you read so much into one-month trading. Yes, I know. So I think in terms of the U.K. IT system, again, I think we've been quite open over recent years in terms of the work that's gone on to get it to this point. I think in terms of operational cost going forward, there's a little bit of operational cost because obviously when you're rolling out an IT system into a branch network, you're kind of covering staff and you're training staff and so on and so forth. That's -- but the vast majority of the CapEx into that system has already been spent. I wouldn't use the same phrase as you did in terms of sunk because actually, we've ended up with a really, really good system. But the primary sort of levels of CapEx has actually been spent.

In terms of the Irish gross margin, and again, I think we've flagged quite openly, as we saw more business going into new build, which is delivered business as opposed to collected RMI business, that we would see the gross margin mix shift. It hasn't shifted by a significant amount, but it has shifted by what we expected. I think it's fair to say there might be a little bit more shift in that gross margin as the new build market continues to grow in Ireland and kind of get back towards the levels that we feel a normalized market is. But I think in terms of gross margin mix in Ireland, there might be a little bit more shift in the gross margin as that new build continues to move. But obviously, we're very conscious of maintaining margins wherever we can and getting the best returns that we can.

Branch investments in Ireland really is about CapEx as opposed to about OpEx. So it is about branding. It is about relaying some of the stores. It's about making them a little bit more 21st century-friendly is probably the best way of putting it, Howard, and making sure that we're reacting to the way that the customers are changing. It does also -- the rebranding in Ireland really is quite significantly driven by the digital agenda as well because when you're looking at trading on a national basis, having a single brand that you can hook on to in terms of Ireland is really quite an important part of it.

I would say on the branding in Ireland, we have got some brands in Ireland that are so strong that they will stay. So just as an example, Cork Builders Providers will stay as Cork Builders Providers. It's an incredibly strong branding, Cork, and changing that brand wouldn't be the right thing to do. So this is about some of the smaller brands around Ireland and Heiton Buckley coming more under the Chadwicks' umbrella. What was the last one?

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [12]

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Holland.

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Gavin Slark, Grafton Group plc - CEO & Director [13]

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Holland.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [14]

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Am I reading too much into July?

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David L. Arnold, Grafton Group plc - Group CFO & Director [15]

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Yes. I mean it -- we had to expected a slowdown in the moderation in growth in Holland. I think we can't read too much into July and August. And the comments I made as regards to the U.K. and like-for-like is -- equally applies in Ireland and in Holland in terms of not reading too much into July and August. They tend to be thinner trading period. But nevertheless, if you look at the Dutch economy, it is a trading economy. It's a strong trading economy. And therefore, it sits adjacent to Germany. So we have to be cognizant of the macro picture in Holland.

The commercial permits position in Holland, we're still seeing good growth. I think they were up about 7%. Residential new build, I think they're expecting to be up between 2% and 3% this year, although we have seen a reduction in permits on the resi new build. There's particular pressures, as I think it probably is in the U.K. in terms of cost of new build homes because we're moving more towards carbon neutrality. So I think there's an element there around that. So there's a few micro things. But our underlying view is we'd still expect Holland to be growing. And -- but we'd expect to see some softness in that -- compared to where it has been coming from quite a high base.

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Gavin Slark, Grafton Group plc - CEO & Director [16]

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I think there's also the point of just underlining the quality of the Dutch business. Again, first half of last year, the operating margin was 10.5%. First half of this year, the operating margin is 10.7%. And just getting at that 20 basis point movement in the operating margin, I think, underlines the fact that we are very careful about the business that we take on. It's not just about going after more volume. The quality is really important to us.

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [17]

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It's Gavin Jago from Peel Hunt. Just a few if I could, please. The first one, just on margin sustainability. Just given where we are, I guess, in the cycle and the competitive backdrop and the self-help measures, maybe just run through your key areas and kind of how confident you are of sustaining the margins. I guess the U.K., for example, you've got Selco, you've got a maturity profile still helping, but a guidance elsewhere would be useful.

Second one is another canary in the mine. Just looking at CPI and how that's been performing. Have you got any details on how that's been regionally for the new build plays just in terms of volumes? And then finally, hopefully, it's easy one. All other things being equal, but a net debt guidance pre-IFRS 16 for the full year, please, David?

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Gavin Slark, Grafton Group plc - CEO & Director [18]

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So that one's for you, at least, David.

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David L. Arnold, Grafton Group plc - Group CFO & Director [19]

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Yes. I mean I would expect us to see a good level of cash conversion in the second half. We'll put a little bit more into working capital in terms of protecting the position of the group. So when we look at working capital, I'd expect to see a working capital increase overall of probably GBP 10 million to GBP 20 million. I think I've given the guidance on CapEx. So the other principal component then comes down to the judgments you make around operating profit.

In terms of margin sustainability, I mean I think it very much boils down to all the work that we're doing in the business on efficiencies and productivity improvements. That, I think, is the key thing for us. We're very much, and you can see it across all our businesses, I think, in terms of the performance that we had in the first half, very much focused on gross margin. It is about quality of return. So we've been at pains to point out on many occasions we don't go chasing market share. So gross margin is an important focus for us.

But beneath all that, we're doing an awful lot of work around making sure that we're as efficient and productive as possible. And I think that's the key element of self-help. At the end of the day, we sit within a macro environment, and we can't avoid that macro environment. But we can certainly make sure that we're at the top of our game. And that's where we're at.

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Gavin Slark, Grafton Group plc - CEO & Director [20]

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I think in terms of CPI, obviously we've got 9 full mortars plants across the U.K., 7 of the 9 are showing really strong growth and doing very, very well. If you look at the 2 out of the 9 that are showing the lowest levels of growth actually is the southeast. So what we are seeing, if you look for any kind of regional buyers, we're seeing stronger growth outside of the Southeast, the smallest levels of growth we're seeing within the Southeast. Thanks, Gavin.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [21]

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Clyde Lewis at Peel Hunt. A couple, if I may. One on -- again, coming back to mortars, I suppose, talking about the competition and CPI. You indicated, I think, that you didn't recover the sort of full cost of input materials. Obviously, some of that may be Southeast. But I'm wondering also if there's some sort of competition factors sort of elsewhere within that marketplace.

And the other one is on Selco. The Edmonton delivery center, is that the start of a process now where you look maybe in the Midlands areas where there's enough concentration to establish, again, more sort of delivery centers in sort of due course?

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Gavin Slark, Grafton Group plc - CEO & Director [22]

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That's a good -- it's a good question. I'll start with Selco. Edmonton was specifically around that part of London. It was where we had the longest established stores, where we have some of the highest turnover stores and stores that physically were really struggling in terms of capacity. And it just felt that the right thing to do rather than putting more physical stores on the ground, take some of the deliveries out, operate the deliveries to customers from a central hub.

Actually, probably more likely to look at a second delivery hub within London rather than outside of London. And I think the difference being, Clyde, when you go to even places like Birmingham, Manchester and so forth, the branches are nowhere near the capacity of some of the London branches we're operating out. So this really was a very London-specific opportunity for us. As I said, it's a 3-acre concrete yard in Edmonton that we've been able to take. It's absolutely ideal for what we need for delivering heavy side building materials. But it was very, very much London-centric as opposed to is it something that's going to develop across the whole of the U.K.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [23]

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Would you look at changing the SKUs that those particular branches might offer so that you can probably get more delivery product move from Edmonton?

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Gavin Slark, Grafton Group plc - CEO & Director [24]

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So what it is, it really is about heavy side building materials because it's a heavy side building materials that take the physical space in the stores. And obviously, in terms of the environment for the customers, from a health and safety point of view, your heavy side building materials is everything that's been moving either on or off of a truck with a forklift. It's quite sort of intensive way of working.

We will still have the heavy side building materials in the branches for the customers who want to collect the heavy side building materials. When we did the analysis of how much was going into the stores and in a very short period of time was being reloaded onto a truck and moved out of the stores, that really is where the opportunity came. So it's not about changing the SKUs in the stores. It's about heavy side building materials being available in-store to collect, but we will keep a lower concentration of stock of those products and keep the higher concentration out in a delivery hub. Therefore, we're not moving the trucks in and out of where the customers, just makes it a better environment.

In terms of mortars, I mean David mentioned the input cost. Most significant change in terms of competitive nature in terms of the mortar business, I think most people accept CPI mortars in terms of dry silo mortars. It is the market leader. It's got a very strong market position. We have a very strong reputation amongst our customer group in CPI. And I have to say also we have an excellent management team in CPI. Larry and Tony have got a brilliant team around them and do a superb job for us. And I think we sit here, yes, we got a sort of a slight negative in terms of what it was doing, but we're still sitting here with the business making an operating margin in excess of 22%. So it's a quality problem to have, but no significant change in terms of competition on mortars.

Sam, down the front. Then John, we'll come to you next.

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Samuel Frost Dindol, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [25]

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Sam Dindol from Stifel. Just a couple for me. Firstly, I think in your one planned Selco opening this year, do you see sort of slowdown in Selco openings over the medium term will come to where the footprint is at the moment? And then secondly also on Selco, can you give any color on how initiatives to sort of sell a popular subset of Selco product, Leyland, has gone so far? Or any sort of progress on that?

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Gavin Slark, Grafton Group plc - CEO & Director [26]

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Okay. In terms of the branch openings, I would anticipate, going forward -- I mean it's never an exact science because it really all hangs around real estate deals, making sure we've got the right property in the right place, fitted at the right time. I think it's reasonable to look forward and say 3 to 4 Selcos a year is probably where we anticipate going.

We had a couple of years of incredible growth. We're putting new branches on the ground this year. It's a small number, but that really is driven by property deals. But I think going forward from next year onwards, Sam, yes, if you look to 3 to 4 Selcos a year, that feels reasonable in terms of the investment going in. It also feels reasonable from an operational point of view, making sure that the guys can actually open the branches and operate them in the right way.

I think it's also worth saying that very early this year, we started out a Click ‘N’ Deliver in Selco. And this was really quite an important evolution of Selco. This was about offering heavy side building materials available online to be delivered, something that Selco can do because of its pricing architecture. We started it in March. Year-to-date, we have delivered in excess of GBP 5 million worth of product on Selco Click ‘N’ Deliver. We've got a lot of new customers who have now come to us as online customers who haven't previously shopped with us in store. So that's been a really, really successful part of what we've done. So actually, by the end of this year, the revenue that we generate through Click ‘N’ Deliver will actually be the equivalent of a reasonable Selco store.

So I think as well as looking at the Selco estate going forward, we've also been looking at how do we interact with the customers, and that digital agenda does drive some behavior changes in terms of how you develop the store network. Do you need 40,000 square feet? Or actually in and around London, a point of that Clyde raised, can you operate on a smaller footprint because actually people are going online and ordering heavy side building materials and we can then deliver them direct to the customers, right? That's all influencing how we look at the Selco estate but probably 3 to 4 stores going forward.

The trial of doing building materials through Leyland SDM is still ongoing. It's still moving reasonably well. What we are discovering is there are some very specific product groups that seem to go very well through Leyland SDM and some product groups that don't go quite as well through Leyland SDM and actually putting more emphasis on those that are doing really well and making sure we get the right margin on those. Probably, Sam, the right thing to do is to ask us that when we sit here in March, and we would have had a whole year of kind of trying to make -- of trialing of that. But early doors, certainly there are some products that are selling very, very well being delivered through Selco, being ordered through Leyland SDM.

And Leyland SDM, just while we're on that point, I know we haven't mentioned it specifically in terms of the presentation, very, very pleased with how it's going. Jonathan, who's the CEO down there, Jig who is the Finance Director of that team, that business is doing exactly what we anticipated it doing. In fact, in fairly short order now, we'll be opening 2 greenfield sites of Leyland SDM: one in Streatham, one in Maida Vale, and they'll be open in the next few weeks. So still very much investing in Leyland SDM, developing that business. Again, it's another double-digit operating margin business for us.

We've got John at the back there. He's hand up about 6 times already.

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Unidentified Analyst, [27]

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No worries. Just kind of -- I've got 4 areas. But can we just stick with Selco for a second? You mentioned the pricing architecture allows you to do the Click ‘N’ Deliver. It's a while since I've looked on the site, but is it a fixed fee? Just in terms of people who take that option, is it GBP 50 delivery charge or there's some kind of nominal number? Or how are you doing it? And therefore, when you look at those sales that are being generated, how do they look as a sort of margin contributor, Gavin?

And just on Selco, too. Am I right in thinking it's now about GBP 270 million in sales? I know we won't get a profit number, but just to clarify there. And -- for the half year, yes, exactly. And obviously, you mentioned the GBP 2.7 million kind of lower opening costs. Just a rough idea of what you think that will be as an incremental movement for the full year, David.

And then the secondary was just on DIY in Ireland, the 1.6% of sales that are being done online. Is that -- again, is that a Click and Collect? Or is that a delivered number? And are you keen to do deliveries? I assume not. But the growth there, is that just because, actually, up to now, your website has always deliberately tried to stop people ordering that way? And how keen are you on that growing? And kind of what do you think it might grow to? Because obviously, it's pretty modest at the moment.

Third one was just on the U.K. trading system. What will a customer see? And what does it do for branch manager? And is this rolling across everything ex Selco in the U.K. ultimately? Just to have a feel as to what this really is going to do. Does it give inventory visibility, that sort of thing?

And then final one, CapEx. Obviously, you've guided for this year, David, GBP 50 million and GBP 25 million in terms of split. When we think of next year with Polvo added, but with less distribution center investment, I assume less IT, is CapEx likely to go up, down or hold at GBP 75 million?

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David L. Arnold, Grafton Group plc - Group CFO & Director [28]

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I always feel like it's a test for Alzheimer's with you, John, because you have -- so I'm going to do the easy ones that you've just asked. And then Gavin can pick up Selco. On CapEx, GBP 75 million this year. Next year, we would expect it to see reduce. So I think an element of that will be around replacement. We've been through quite a big truck replacement program over the last couple of years. We're coming towards the end of that next year. So I would expect to see it moderate. I think it will still overall in totality be higher than depreciation. And so if you delve in round numbers, let's say, depreciation is GBP 50 million in old money, then rather than GBP 75 million next year, at this point, I'd probably be lower at GBP 60 million in that context.

In terms of the U.K. trading system and are we intending on rolling it out everywhere, the reality is actually Selco operates on a system called Nuvation, which is actually the same as Woodie's operates on in terms of platform, although they're slightly different systems. Selco itself is going through a process of upgrading to the latest version of Nuvation, as indeed Woodie's. And so those are projects that are going on. Those are systems specific to their business, tailored for their businesses. The AX system that we've got in Buildbase is really going across, I would describe it as a sort of Buildbase family of companies. So it will be going into Civils & Lintels, NDI, The Timber Group. It won't be going to Plumbase. Plumbase already operates on Kerridge.

So what will the customer see? I think what -- and the branch managers? So the real benefit that we've got, firstly, from the AX system and the rationale for introducing it was that it will switch on in the morning. There is always a risk. Opal, the existing system is about 30 years old. And the rationale for changing the system was very much one about making sure that we had a system that was robust, stable and supportable. The issue with a system that's 30 years old is quite frankly that you just run out of people that understand and know the system. So that was the original intention of it, but it was also to get a system that would enable us to be able to control pricing better.

The current system that we've got, the existing system is relatively difficult and cumbersome in terms of managing the pricing architecture and maintaining the price file, but also more particularly, the speed of getting data out of the system in order to be able to adapt pricing. So I think that's really the advantage that we see coming further down the line. That really only arises once you set it up in the last branch, and you've been starting to get that data and can manage it.

In terms of what does the customer see, the reality is our objective from the beginning is that the customer sees no difference. The #1 priority for us is being -- actually that the customer comes up, transacts with us, goes away, gets their statement and doesn't actually notice that we've changed systems. And I'm pleased to say that, that's actually where we're at today. We've moved the back office, the production statements onto the new system and customers just haven't noticed, which actually is -- to my mind, is a real achievement. So that's our primary objective. Because actually, from a customer experience perspective, green technology is actually quite quick. So once you start moving towards more windows-based systems, in many ways, it can slow you down. So that was a key imperative for us, was that there was no difference from a customer perspective.

In terms of DIY and Woodie's and Click and Collect versus delivered, that online figure is both Click and Collect and delivered. Actually, the interesting thing that we see is where the real growth has been has tended to be in more cumbersome items. So customers have ordered things like garden furniture, where they're able to get it delivered rather than necessarily come into a branch and pick it up. And the reality is we almost don't mind how we take the money. We're happy with how those transactions come in as long as our customers are getting a good experience at the end of it all.

That is where the Alzheimer's kicks in. The Selco costs are before subset, so that could...

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Gavin Slark, Grafton Group plc - CEO & Director [29]

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You were looking at...

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Unidentified Analyst, [30]

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I guess year-on-year, you talked about GBP 2.7 million.

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David L. Arnold, Grafton Group plc - Group CFO & Director [31]

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Yes. The GBP 2.7 million, it will be probably GBP 3 million to GBP 4 million year-on-year rather than GBP 2.7 million. And that we're slightly skewed towards the first half, I think, in 2018.

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Gavin Slark, Grafton Group plc - CEO & Director [32]

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And there is a very simple answer to your first question, which we can both remember in terms of Selco and kind of the online proposition. In a very, very simple way, John, the gross margin that we get from doing a delivered sale online through Click 'N Deliver is very slightly higher than we get from doing a delivered sale on an order that is taken in store.

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Unidentified Analyst, [33]

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Sorry, just one final thing on Selco. When you look at your profile of the growth, the initiatives. Obviously, there was a GBP 600,000 kind of drag because of the maturity issue in terms of Selco coming through, I guess. If you were to look back at last time you had a big splurge of Selco openings, I assume they probably were getting into profit quicker. I'm just thinking is -- within this -- and this is partly because obviously it's about sales being switched from former branches to the new ones. But has that maturity profile and the movement from a new Selco to profit kind of elongated as the model has changed? And is that likely to carry on when you open the 3 or 4 in the pipeline looking down the line?

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David L. Arnold, Grafton Group plc - Group CFO & Director [34]

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Yes. I think we've always said it's really influenced by where we open the Selco stores. And I don't think when we look back at -- as we regularly do, in terms of maturity profiles of the stores that we've opened, I don't think we've seen a change in that maturity profile from a regional perspective. Undoubtedly, the stores that we open within the M25 mature faster than those that sit outside the M25.

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Gavin Slark, Grafton Group plc - CEO & Director [35]

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Any more questions, guys? That is perfect. We've been exactly an hour. Thank you very much for those of you who come and attended in the room. Also appreciate your interest in the business.

Thank you to everyone who's followed the webcast online as well. And hopefully, we'll see you all again in 6 months' time when we talk about the full year results. Thank you.