Eric Born, a former judoka who represented his native Switzerland in the 1992 Barcelona Olympics, has had plenty to wrap his arms around in his first eight months as chief executive of Grafton Group.
The DIY retailer and builders merchanting group behind Woodie’s and Chadwicks in the Republic reported this week that its operating profit fell by 22 per cent in the first half of the year to £103.9 million (€121.4 million) as households in its four markets – which also includes the UK, Netherlands and Finland – held back on home improvements and its margins were squeezed amid falling steel and timber prices, following massive spikes last year.
The group’s Selco Builders Warehouse business, spanning 75 branches across the UK and focused on supplying small jobbing builders, saw sales volumes fall a further 6 per cent in the first six months of 2023. This followed a 15.1 per cent slump last year when families cut back on discretionary spend as the fifth-largest economy in the world teetered on the brink of recession. UK operating profits plunged almost 50 per cent on the year.
Chadwicks saw its revenue dip 1 per cent in the Republic, stripping out currency fluctuations, as an increase in house building activity was offset by a decline in spend on home improvements, following heightened business in this area in recent years.
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In Finland, a market Grafton entered two years ago when it bought IKH, a specialist workwear, tools and spare parts wholesaler and distributor, a decline in building permits for new homes and rising mortgage rates since the middle of last year have kept revenues in check. Stronger demand from customers in Estonia and Sweden saved the unit from an outright decline in revenues.
However, shares in Dublin-based Grafton, which traces its roots back to 1902 and defected from the Irish stock market to London a decade ago, still managed to rally about 8 per cent this week as Born blessed analysts’ full-year estimates.
This is something in itself, given profit warnings in recent months from the likes of Travis Perkins, the UK’s largest building materials supplier, and SIG, the UK insulation and specialist construction products distributor to where Born’s predecessor, Gavin Slark, jumped ship earlier this year.
Woodie’s stood out as a bright spot at Grafton, with operating profit rising 11.9 per cent, almost twice the pace of sales, with consumers upping spend on gardening and small DIY projects in the second quarter as concerns about the economy outlook and cost-of-living crisis eased, according to the company.
But the standout for analysts and investors was the amount of cash that Grafton continues to generate, even as earnings decline. Free cash flow – essentially the money a company has left over after running expenses and capital investment – actually soared by 30 per cent on the year to £159.4 million, equating to more than 1.5 times operating profit.
Goodbody Stockbrokers analyst David O’Brien highlighted that the company managed to keep its cash position steady at £438 million between the end of last year and June, even though it spent £130 million on dividends and share buy-backs during the period.
The almost-obligatory strategy review that Born has carried out since taking over the helm hasn’t yielded any big new ideas. “It’s evolution, not revolution,” he told analysts on a call on Thursday.
It’s a different start to the last time he led a publicly-listed company. He had barely taken charge of UK-based haulier Wincanton in 2010 when he undertook to sell half the business and refocus the rest.
“If I think dramatic steps are needed, then I’m absolutely fine about taking dramatic steps,” he told The Irish Times. “But in the case of Grafton, it’s a very good, very solid business. There is no need for a major strategic shift.”
But he has made some notable tweaks. While Slark published a chart at an investor day in late 2021 flagging the possibility of acquisitions in the US and Canada, Born is now restricting the group’s focus to Europe. He is reluctant to be more specific than to say that the likes of Greece, Belarus and Russia are out.
“At this moment in time, there is plenty for us to do in Europe,” he said.
The new CEO has also widened the search for the type of business Grafton is interested in, as he reckons the group could deploy £800 million on deals without harming its credit rating.
“The focus before I joined was solely on technical wholesale, which is a very narrow category,” he said. “I don’t think we’d ever have been able to deploy the funds we have in any reasonable time if we just had a focus on that.”
Acquiring a general merchanting business is back on the table – in spite of Grafton’s unhappy experience in this field, outside of the Republic. Slark was only too happy to sell Grafton weak Belgian merchanting business in 2019 and its problematic traditional UK merchanting unit in a very competitive market in 2021.
Born said he’s confident he’ll land a deal to buy a platform in a European market within the next 12-24 months. However, with the company focusing on courting founder-owners who have built up businesses over decades, predicting a time frame is difficult. Investors will likely remain cautious until they see what the CEO ends up locking his arms around.
“While a general merchants platform will typically not have the same types of margins as the specialist distribution businesses Grafton has in Europe, they can chuck of a lot of cash,” said Sam Cullen, an analyst with Peel Hunt in London. “An increased focus on free cash flow per share is a bit of a change in approach.”
Meanwhile, Grafton can find no better bargain around than itself. The company, which has a market value of £1.83 billion, has spent £243 million buying back and cancelling its own shares since May 2022. This week, it embarked on a further £50 million repurchase programme.
