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Grafton Group cautious on UK recovery

Grafton Group CEO Gavin Slark said the company was not immune to weakness in the UK economy
Grafton Group CEO Gavin Slark said the company was not immune to weakness in the UK economy

Operating profits at building and DIY merchants Grafton Group rose last year, despite softer trading in its UK business. 

Grafton, which owns retail brands like Woodies and Chadwicks, said its pre-tax profits rose by 4% to £172.6m with revenues from continuing operations up 3% to £2.67 billion.

The company said a second interim dividend of 12.5 pence will be paid to give total dividends for the year of 19 pence, an increase of 5.6% on dividends of 18 pence in 2018.  

Grafton said its merchanting and retailing businesses in Ireland delivered a very good performance as it increased operating profit by 9.3% on a constant currency basis. 

Operating profit advanced strongly in the Netherlands merchanting business with constant currency growth of 24.3%. 

But Grafton said it was not immune to weakness in the UK economy in what was the most challenging year for the merchanting market since the global financial crisis and operating profit in continuing operations was marginally down on the prior year.

That had led the firm to issue a profit warning last year - only for the outlook to improve in January - which CEO Gavin Slark blamed largely on uncertainty in the UK market.

"Certainly in the fourth quarter last year there was a lot of uncertainty about where the Brexit situation would land and that really led us to looking perhaps a little bit to pessimistically," he said.

"That actually came through more strongly than we thought it might, but also the group results have been very well supported by another really strong performance in the Netherlands and Chadwicks and Woodies in Ireland having really strong ends to the year," he said.

"That's actually one of the benefits we have - a diverse business in different geographies - you can help to offset a potential weakness in one market with strength in the other," the CEO added.

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Mr Slark predicted that the softness experienced in the UK was purely Brexit-related - and he expected an improving picture in the coming year as political stability increased.

However Brexit does still pose challenges, especially given the British government's acceptance that there will be some degree of border friction from 2021, no matter what state the trade talks are in at that stage.

Mr Slark said that this would not have a huge impact on Grafton Group, as most of the products sold within each country are from that jurisdiction.

He also said that 2019 saw growth in revenue, profitability and earnings per share alongside continuing progress in evolving and re-shaping the businesses.

"Strong organic growth in our Merchanting and Retailing operations in Ireland and in the profitability of our Netherlands operations helped offset a challenging year in the UK due to political and economic uncertainty," Mr Slark said. 

The Grafton CEO said the outlook for 2020 is of continuing but moderating growth in Ireland and the Netherlands and while reduced uncertainty may lead to some uplift in the UK RMI market, it remains cautious about the speed of any recovery.  

"Given the strength of our brands we look forward to another year of progress for Grafton and with a strong balance sheet and rigorous financial discipline we are well placed to capitalise on growth opportunities," he added.

Revenues at Grafton's Irish merchanting division rose by 6.2% to £464.8m while operating profits were up 12.9% to £47.1m in the 12 months to the end of December. 

Grafton said the merchanting business in Ireland continued to grow and expand its competitive advantage. 

It noted that the business performed very strongly in the first half of the year, but international uncertainty resulted in a softening of trading and sentiment in the second half. 

Last year's revenue growth was boosted by an increase in the supply of new housing with completions up 18% to an estimated 21,200 units. 

Chadwicks branch network benefited from strong growth in housing supply in the Midlands, the West and the Dublin commuter belt counties with account for a quarter of national housing output. 

During the year, Grafton said that all of its merchanting brands in Ireland would be aligned as Chadwicks, apart from three large "destination branches". 12 branches were upgraded and rebranded during the year. 

Meanwhile, 2019 marked the fourth year in a row of strong growth and profitability for Grafton's Woodie's DIY business here. 

Revenue growth across the 35 branch estate increased from 2.9% in the first half of the year to 6.4% in the second half and the number of customer transactions increased by 1.5% to 8.4 million.

Online revenue grew by 51% and contributed 1.5% of total revenue, up from 1.1%.

But revenues at Grafton's UK merchanting business fell  by 1.1% to €1.711 billion, while adjusted operating profits dropped 7.1% to €108m as the UK economy continued to slow during the year. 

Grafton noted that growth in UK house prices was subdued with softer demand in London and the South East.

Activity in the UK Renovation Maintenance Improvement (RMI) market, which is linked to GDP growth, consumer confidence and deals in the secondary housing market also weakened, the company said.

Meanwhile, revenues at Grafton's Netherlands Merchanting Division jumped by over 37% to 211.9m.

Adjusted operating profits rose by 24.3% to £19.9m after a "transformative year" for the business, which completed the deal to buy the 51 branch Polvo business in July. 

Shares in the company were lower in London trade today.