Grafton Group Annual Report 2016

FY2016 Annual Report · Grafton Group

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Annual
Report

2016

Grafton at a Glance

Grafton Group plc (“Grafton” or “the Group”) is an international
distributor of building materials to trade customers who are
primarily engaged in residential repair, maintenance and
improvement projects and house building.

The Group has leading regional or national market positions in the merchanting markets in the UK, Ireland,
the Netherlands and Belgium. Grafton is also the market leader in the DIY retailing market in Ireland and is
the largest manufacturer of dry mortar in Britain.

Grafton trades from 631 branches and has in the region of 12,000 employees.

The Group’s origins are in Ireland where it is headquartered, managed and controlled. It has been a publicly
quoted company since 1965 and its Units (shares) are quoted on the London Stock Exchange where it is a
constituent of the FTSE 250 Index and the FTSE All-Share Index.

The Group reported revenue of £2.5 billion and adjusted profit before tax of £136.2m million for 2016.

Further investor and
shareholder information is
available at
www.graftonplc.com

Merchanting
The Merchanting segment
distributes building materials
from 585 branches in the UK,
Ireland, the Netherlands and
Belgium.

Merchanting revenue

up 13% to £2.3bn
(up 10.3% in constant currency)

Retailing
The Group is the largest DIY
retailer in Ireland trading
nationally from 35 stores.

Retailing revenue up

19.5% to £157.1m
(up 5.6% in constant currency)

Manufacturing
The Manufacturing segment
operates the market leading
dry mortar business in Britain
from 10 plants and a plastics
manufacturing facility in Dublin.

Manufacturing revenue

up 12.8% to £59.6m
(up 11.9% in constant currency)

2016 Highlights

Revenue

£2.5bn

Adjusted Group Operating Profit

£142.0m

up 13%

up 12%

EBITA Margin before Property Profit

Cash Generation from Operations

5.5%

Dividend

13.75p

£168.6m

constant

up £29.3m

Net Debt

£96.3m

up 10%

decreased
by £17.3m

Return on Capital Employed

Adjusted Earnings Per Share

12.5%

47.7p

up 30bps

up 16%

Financial Summary1

£m

Revenue
Adjusted2
Operating profit
Operating profit before property profit
Profit before tax
Earnings per share – basic
Statutory results
Operating profit
Profit before tax
Earnings per share – basic
Dividend
Net debt
EBITA margin before property profit
Return on capital employed

2016

2,507

142.0
137.1
136.2
47.7p

120.1
114.2
39.6p
13.75p
96.3
5.5%
12.5%

2015

2,212

127.3
120.6
119.4
41.2p

128.2
120.3
41.6p
12.50p
113.6
5.5%
12.2%

Change

13%

12%
14%
14%
16%

(6%)
(5%)
(5%)
10%
(£17.3m)
-
30bps

1. Additional information in relation to Alternative Performance Measures (APMs) is set out on pages 166 to 169.
2. The term “adjusted” means before amortisation of intangible assets arising on acquisitions and exceptional items of

£19.7 million in 2016 and a net non-recurring credit of £1.4m in 2015.

ྲ Strong organic growth in the
Irish Merchanting, Woodie’s
DIY and Manufacturing
businesses

ྲ Isero acquisition in the

Netherlands contributed £9.1
million to operating profit, an
EBITA margin of 10.4% and is a
strong platform for expansion

ྲ Continued successful

investment in Selco with the
opening of seven branches in
2016 and the planned opening
of at least ten branches in 2017

ྲ Strong cash generation from
operations of £168.6 million
(2015: £139.3 million) resulting
in net debt reduction by £17.3
million and year-end gearing
of just 9%

ྲ Investment of £72.3 million
on acquisitions and capital
expenditure to support future
growth

ྲ 10% increase in dividend in

line with progressive dividend
policy

Sectoral Review – UK Merchanting
(page 21)

Contents

Strategic Report

Chairman’s Statement

Chief Executive Officer’s Review

Business Model

Strategy

Key Performance Indicators

Risk Management

Sectoral and Strategic Review

UK Merchanting

Irish Merchanting

Netherlands Merchanting

Belgium Merchanting

Retailing

Manufacturing

Financial Review

Corporate Social Responsibility

Corporate Governance

Board of Directors and Secretary

Directors’ Report on Corporate Governance

Audit and Risk Committee Report

Nomination Committee Report

Report of the Remuneration Committee on Directors’ Remuneration

Financial Statements

Supplementary Information

Chairman’s Annual Statement

Remuneration Policy Report

Annual Report on Remuneration

Report of the Directors

Statement of Directors’ Responsibilities

Independent Auditor’s Report

Group Income Statement

Group Statement of Comprehensive Income

Group Balance Sheet

Group Cash Flow Statement

Group Statement of Changes in Equity

Notes to the Group Financial Statements

Company Balance Sheet

Company Cash Flow Statement

Company Statement of Changes in Equity

Notes to the Company Financial Statements

Supplementary Financial Information

Grafton Group plc Financial History - 1995 to 2016

Corporate Information

Financial Calendar

Location of Annual General Meeting

153

154

155

156

166

170

172

173

Grafton Group plcStrategic
Report

Strategic ReportSupplementary InformationFinancial StatementsCorporate GovernanceAnnual Report & Accounts 2016Chairman’s Statement

Dear Shareholder,

I am pleased to present my first Chairman’s Statement to
shareholders and to report that 2016 was another year of
growth and development. The executive management team,
led by Group CEO Gavin Slark, made good progress during
the year responding to a challenging market backdrop in
the traditional UK merchanting market while continuing
to implement strategic growth initiatives that strengthened
the position of the Selco merchanting model. The Group
continued to build on its strong leadership positions in the
merchanting and DIY markets in Ireland and completed
a successful first full year of trading in the Netherlands
merchanting market.

Results

The Group reported a strong financial
performance for 2016. Revenue grew by 13
per cent to £2.5 billion (2015: £2.2 billion) and
by 10 per cent in constant currency. Adjusted
operating profit increased by 12 per cent
to £142.0 million (2015: £127.3 million) and
adjusted profit before tax was ahead by 14 per
cent to £136.2 million (2015: £119.4 million).
Adjusted earnings per share increased by 16
per cent to 47.7p (2015: 41.2p).

Dividend

A second interim dividend of 9.0p (2015: 8.0p)
was approved to give a total dividend for the
year of 13.75p. This represents an increase of
10 per cent on total dividends of 12.5p paid
for 2015. The increase is in line with the
Board’s policy of increasing dividends as
earnings increase and reflects both the strong
cashflow from operations and relatively low
level of year-end net debt. The dividend cover
increased to 3.5 times from 3.3 times.

Strategy

Significant progress was made during the year
by the Group CEO and senior management
in developing and implementing the Group’s
medium term strategy as agreed by the Board.
The acquisition of Isero at the end of 2015
represented a significant opportunity for the
Group to enter the merchanting market in

the Netherlands at an attractive stage in the
economic cycle. This move was complemented
by the recently completed acquisition of
Gunters en Meuser which provides Isero with a
market leadership position in the Amsterdam
market and the overall business with a strong
presence in the country’s top five cities.

The growth of Selco organically continued to
be the primary focus of development capital
in the UK merchanting market and this was
complemented by two bolt-on acquisitions in
the traditional merchanting market. Strong
growth in Ireland continued to be driven
by leveraging our market leading brands
from branch networks that provide national
coverage.

The Board’s broad strategy for the development
of Grafton is based on strengthening existing
market positions in the merchanting markets
in the UK and Ireland, continuing to build on
the recent successful entry into the Netherlands
merchanting market and returning the Belgian
business to profitability. The creation of a more
balanced portfolio of businesses internationally
by seeking growth opportunities in new
geographic markets is also a strategic priority for
the Board. The Group has a strong balance sheet
and excellent cash generation from operations to
support its strategic growth ambitions.

ྲ The acquisition of
Isero at the end of
2015 represented a
significant opportunity
for the Group to enter
the merchanting
market in the
Netherlands at an
attractive stage in the
economic cycle.

read more: Strategy (page 10)

Grafton Group plcNomination Committee. Mr. Fisher will be
succeeded as Chairman of the Remuneration
Committee by Mrs. Susan Murray. These
changes will take effect on 9 May 2017.

the Board and its Committees. The report
noted that the Board continued to function
effectively and operate to a high standard of
governance.

Following the retirement of Mr. Ryan and Mr.
Fisher, the Board will be comprised of two
Executive Directors, Gavin Slark and David
Arnold, four Independent Non-Executive
Directors and myself as Non-Executive
Chairman. Mr. Frank van Zanten and Mr.
Paul Hampden Smith joined the Board as
Non-Executive Directors in 2013 and 2015
respectively. The Board was very pleased to
announce the appointment of Mrs. Susan
Murray and Mr. Vincent Crowley as Non-
Executive Directors in October 2016. Both
Susan and Vincent have distinguished track
records managing international businesses
and we look forward to working with them in
the years ahead. Their biographical details are
set out on page 41.

Board Evaluation

An evaluation of the Board, its Committees
and individual Directors was conducted by
the Senior Independent Director having
been externally facilitated by the Institute of
Directors in Ireland during 2015. Each Director
completed a questionnaire that covered a
range of factors that fall within the remit of
the Board including corporate strategy and
business principles, internal controls and
risk management and the effectiveness of

Annual General Meeting

In line with the policy adopted in recent years,
all Directors, with the exception of Mr. Ryan
and Mr. Fisher as noted above, will retire and
seek re-election/election at the 2017 AGM.
Each Director performs effectively and has
demonstrated a strong commitment to the
role. I strongly recommend that it is in the
interests of shareholders and the Board for
each of the Directors going forward to be re-
elected at the Annual General Meeting.

Colleagues

On behalf of the Board, I would like to extend
our appreciation to Gavin Slark and all of
our colleagues for their contribution and
commitment to the progress made by the
Group during 2016.

Outlook

The Board is positive about the Group’s overall
prospects and looks to 2017 as a year of further
progress.

Michael Roney
Chairman

Board Composition and Renewal

Mr. Michael Chadwick retired as Non-Executive
Director and Chairman on 31 December 2016.
Mr. Chadwick joined Grafton in 1975, was
appointed to the Board in 1979 and served as
Executive Chairman from 1985 to 2011 when he
was appointed Non-Executive Chairman. Mr.
Chadwick continued a long tradition of family
association with the management and share
ownership of Grafton that dates back to the
origins of the Group in 1902, when a cement and
plaster distribution business was established
in Dublin. His entrepreneurial leadership of
Grafton through a remarkable phase of growth
and development enabled the Group to evolve
into a major international building materials
business. On behalf of the Board, I would like to
wish Michael continued success in the future
and thank him sincerely for his remarkable
contribution and legacy to Grafton over a 41 year
career and also for his excellent stewardship of
the Board as Non-Executive Chairman over the
past five and a half years.

Mr. Roderick Ryan, Senior Independent
Director and Chairman of the Nomination
Committee, has indicated that he will not be
offering himself for re-election at the 2017
AGM and will retire from the Board at the
conclusion of the AGM. This will conclude
over 11 years of very distinguished service as a
Non-Executive Director of Grafton. The Group
has benefitted greatly from his international
experience in business and finance. On behalf
of the Board, I would like to thank Roddy for
his invaluable contribution to the Board as
Senior Independent Director and as Chairman
of the Nomination and Audit and Risk
Committees.

Mr. Charles Fisher, who joined the Board in
2009, has also indicated that he will not be
offering himself for re-election at the 2017
AGM. His deep knowledge of the merchanting
industry in the UK prior to joining the Board
and his experience as a Director of publicly
quoted and private companies enabled him to
make an invaluable and unique contribution
to the Board’s deliberations. On behalf of the
Board, I would also like to thank Charles for his
service as Non-Executive Director and Chair of
the Remuneration Committee.

Mr. Ryan will be succeeded as Senior
Independent Director by Mr. Paul Hampden
Smith and by myself as Chairman of the

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Chief Executive Officer’s Review

2016 represented an overall strong financial performance
despite challenging trading conditions in the traditional
UK merchanting market. These results demonstrate the
resilience of the Group’s spread of businesses, with strong
market positions and exposure to multiple geographies.
While uncertainties remain about the UK economy, the
recovery in the Irish and Netherlands markets is forecast
to continue. The Group’s very cash generative operations
and strong balance sheet leave it well positioned to invest in
areas where we see good opportunities for growth.

Group Results

Grafton delivered good growth for the seventh
successive year and benefitted from its strong
market positions and exposure to multiple
geographic markets.

The UK merchanting business ended the year
on a stronger note with good revenue growth
in the last quarter following two quarters of
weaker demand due to subdued activity in the
housing market. Selco achieved good revenue
gains and also expanded its branch network.
While the traditional merchanting business
experienced margin pressure in competitive
markets, the restructuring plan announced at
the half year was successfully implemented
and the business ended the year with a lower
cost base.

The management team in the merchanting
business in Ireland capitalised on a recovering
construction market and reported a significant
increase in profitability for the third
successive year that was driven principally by
growth in housing repair, maintenance and
improvement (“RMI”) projects. House building
and non-residential construction activity
increased particularly in the Greater Dublin
Area. The operating profit margin increased by
almost 100 basis points to 7.8 per cent.

The Isero business, acquired at the end of
2015 as a growth platform in the Netherlands
merchanting market, had an excellent first
year under Grafton ownership reporting a
strong set of results supported by a recovering
economy and housing market.

Woodie’s, the Irish retailing business, delivered
a substantial improvement in profit driven
by increased consumer spending and an
enhanced in-store experience. The operating
profit margin in the period increased by over
200 basis points to 4.7 per cent.

CPI EuroMix, the UK Mortar business, reported
strong growth in profitability on the back of
management initiatives and increased demand
from its house builder customer base.

The Group opened seven Selco branches and
completed two bolt-on acquisitions in the
UK. In the Netherlands, it agreed to acquire
Gunters en Meuser, the market leader in the
ironmongery, tools and fixings market in the
Greater Amsterdam Area, a transaction that
completed in January 2017.

The organisational restructuring announced
at the half year led to an exceptional charge of
£19.7 million. This related mainly to 47 branch
closures in the UK Plumbing and Heating and
Contracts businesses. The financial benefits

ྲ The Group opened

seven Selco branches
and completed two
bolt-on acquisitions in
the UK.

Key Performance Indicators
(page 12)

Grafton Group plcJanuary and February average daily like-
for-like revenue increased by 4.7 per cent
in the overall Group, 4.0 per cent in the UK
merchanting business, 13.9 per cent in the
Irish merchanting business and 2.9 per cent
in the Netherlands merchanting business.
A decline in like-for-like revenue by 12.3 per
cent in the Belgium merchanting business
reflected very poor trading in January and a
recovery in February. Like-for-like revenue was
ahead by 5.7 per cent in the retailing business
in Ireland and was down by 3.5 per cent in the
manufacturing segment.

The Group will continue to invest in areas
where it sees good opportunities for growth.
It will also continue to focus on internal
initiatives that provide a sustainable
improvement in performance.

Overall prospects for the current year remain
favourable with continued growth in Ireland
and the Netherlands expected to support an
increase in profit in the year ahead. In the
Group’s UK markets, macro indicators suggest
modest volume growth although markets are
expected to remain competitive against an
inflationary backdrop which is likely to have a
bearing on margins.

Gavin Slark
Chief Executive Officer

from this reorganisation are expected to accrue
from 2017 onwards.

The Group continued to be strongly cash
generative and ended the year with low net
debt and shareholders’ funds of £1.1 billion.

Outlook

The UK economy was resilient during 2016
and growth is forecast to moderate a little
this year as disposable incomes tighten, due
to the inflationary impact of a fall in sterling,
with a potential knock on effect on consumer
confidence and spending. A modest increase in
activity in the new housing market is forecast.
Although spending in the housing RMI market
may remain subdued due to wider economic
uncertainty, the recent rise in mortgage
approvals and increase in house prices is
encouraging for volumes. An important
focus of our development capital will be the
continued expansion of the Selco branch
network with the planned opening of at least
ten new branches in 2017.

In Ireland, overall economic growth is forecast
to remain strong albeit to moderate towards
its long term sustainable level. Demand in
the merchanting and DIY markets should
continue to be underpinned by gains in
employment and increased disposable income.
The outlook for investment in the construction
sector is favourable with forward looking
indicators pointing to an increase in house
building and non-residential construction.

The outlook for the Netherlands economy
and housing market continues to be positive
although some moderation in the pace of
growth is anticipated. The Belgium economy
and housing market is expected to remain weak.

ྲ Overall prospects

for the current year
remain favourable
with continued growth
in Ireland and the
Netherlands expected
to support an increase
in profit in the year
ahead.

Sectoral & Strategic Review
(page 20)

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Business Model

Creating value for our stakeholders

Inputs

Business Activities

The continued success of
the Group is based on

We add value by building on our
strengths and leading market
positions

Strong partnerships with
our customers.

The contribution and
commitment of our
colleagues.

An efficient network of
trusted suppliers.

Key Strengths

Operating Segments

Trading Locations

Leading market positions and brands in each
of the countries in which the Group operates.

Merchanting
Merchanting in the UK, Ireland,
the Netherlands and Belgium

A portfolio of highly cash generative and
profitable businesses.

92% of Group revenue (2015: 92%)

Sound financial metrics based on excellent
cash generation, a strong balance sheet and
the financial resources to fund ongoing
development activity.

A strong financial base to
fund ongoing development
and acquisition activity.

A geographically diversified network of 631
branches with opportunities for further
growth through acquisition and organic
development.

Retailing
DIY Retailing in Ireland

6% of Group revenue (2015: 6%)

Manufacturing
Dry Mortar Manufacturing
in the UK and Plastics
Manufacturing in Ireland

2% of Group revenue (2015: 2%)

585

631

Recognising our
responsibility as
a member of the
communities where our
branches are located.

A customer service orientated culture and
the scale and breadth of operations to create
a competitive advantage in local markets.

Strong, capable, highly motivated and
experienced management teams.

Skills and experience in acquiring and
integrating businesses.

Market Positions

Grafton is the third largest builders merchant
and fourth largest plumbers merchant in the
UK. In Ireland, it is the number one builders
and plumbers merchant and is also the market
leader in DIY Retailing. In the Netherlands,
it holds a market leading position in the
ironmongery, tools and fixings segment of the
merchanting market. The Group also has a
leading position in the merchanting market in
Belgium.

Outputs

Outcomes

Growing our business

And sharing the

internationally

resulting value with our

stakeholders

Revenue

£2.5bn

Shareholders

Increasing profitability and

earnings

73% of Group revenue

484

494

Ireland

20% of Group revenue

Netherlands

4% of Group revenue

Belgium

3% of Group revenue

3rd

1st

Builders

Builders and

Ironmongery,

Merchanting

merchanting

plumbers

tools and

market

merchanting

fixings

4th

Plumbers

1st

segment of

merchanting

DIY retailing

market

Customers

Being brilliant for our customers

Colleagues

Retaining a loyal, engaged and

well trained workforce

Suppliers

Building relationships to grow

each of our businesses

Communities

Engaging with local communities

Adjusted Group

Operating Profit

£142.0m

Almost

12,000

colleagues in 631

branches

reduction

in CO2e Emissions

Over

£500,000

raised for charities

Grafton Group plc

Grafton is an international trade focused, multi-channel distributor
of construction products.

The success of the business is based on the quality of the products it distributes and the quality of
the service it provides to its customers. The Group aims to build on its leading market positions
in the UK, Ireland, the Netherlands and Belgium and to grow internationally in merchanting and
related markets.

Inputs

Business Activities

The continued success of

the Group is based on

We add value by building on our

strengths and leading market

positions

Strong partnerships with

our customers.

The contribution and

commitment of our

colleagues.

An efficient network of

trusted suppliers.

Leading market positions and brands in each

Merchanting

of the countries in which the Group operates.

Merchanting in the UK, Ireland,

the Netherlands and Belgium

A portfolio of highly cash generative and

92% of Group revenue (2015: 92%)

profitable businesses.

Sound financial metrics based on excellent

cash generation, a strong balance sheet and

the financial resources to fund ongoing

6% of Group revenue (2015: 6%)

development activity.

Retailing

DIY Retailing in Ireland

Manufacturing

Dry Mortar Manufacturing

in the UK and Plastics

Manufacturing in Ireland

A strong financial base to

fund ongoing development

and acquisition activity.

A geographically diversified network of 631

branches with opportunities for further

growth through acquisition and organic

Recognising our

responsibility as

a member of the

communities where our

branches are located.

A customer service orientated culture and

Market Positions

the scale and breadth of operations to create

a competitive advantage in local markets.

Key Strengths

Operating Segments

Trading Locations

Outputs

Outcomes

Growing our business
internationally

And sharing the
resulting value with our
stakeholders

g
n
i
t
n
a
h
c
r
e
M

g
n
i
l
i
a
t
e
R

g
n
i
r
u
t
c
a
f
u
n
a
M

l
a
t
o
T

Revenue

£2.5bn

Shareholders
Increasing profitability and
earnings

73% of Group revenue

484

494

Ireland

20% of Group revenue

Netherlands

4% of Group revenue

Belgium

3% of Group revenue

development.

2% of Group revenue (2015: 2%)

585

631

Strong, capable, highly motivated and

experienced management teams.

Skills and experience in acquiring and

integrating businesses.

Grafton is the third largest builders merchant

and fourth largest plumbers merchant in the

UK. In Ireland, it is the number one builders

and plumbers merchant and is also the market

leader in DIY Retailing. In the Netherlands,

it holds a market leading position in the

ironmongery, tools and fixings segment of the

merchanting market. The Group also has a

leading position in the merchanting market in

Belgium.

3rd
Builders
merchanting

4th
Plumbers
merchanting

1st
Builders and
plumbers
merchanting

1st
DIY retailing

1st
Ironmongery,
tools and
fixings
segment of
merchanting
market

1st
Merchanting
market

1st
Mortar
manufacturing

Customers
Being brilliant for our customers

Colleagues
Retaining a loyal, engaged and
well trained workforce

Suppliers
Building relationships to grow
each of our businesses

Communities
Engaging with local communities

Adjusted Group
Operating Profit

£142.0m

Almost
12,000

colleagues in 631
branches

2%
reduction

in CO2e Emissions

Over
£500,000

raised for charities

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016

Strategy

Our overall objective is to be an international
distributor of building materials and related activities.

This objective is supported by our five strategic priorities.

Strategic Priorities

Progress in 2016

Progress in 2016 (continued)

Priorities for 2017

Link to Risk

A Strong
Financial Base

• Maximising long term returns for shareholders

supported by three financial pillars:

Continued focus on operational and commercial
performance across the Group’s businesses during the
year resulted in Group revenue growth of 13 per cent.

Excellence in
Service

Organic
Growth and
Acquisitions

A Supportive
Organisational
Structure and
Management

• Revenue growth in new and existing markets;

• Operating profit margin growth; and

• Optimising capital turn and return on capital

employed.

• Being the first choice supplier to our customers.

• Developing an innovative and efficient multi-specialist

and multi-channel business.

• Refining and developing the range of products and

services offered.

• Increasing e-commerce capabilities.

• Being a focused supplier of building materials.

2016 saw the introduction of a number of new trading
initiatives and innovations in the Group’s merchanting
businesses.

Developments in the Irish retail sector included the

The Group will continue to pursue opportunities

continuation of the Woodie’s store upgrade programme

for innovative customer propositions and routes to

to provide an improved customer experience and ensure

market. The maintenance of a customer service-focused

that it retains its strong market leadership position.

approach to branch operations will remain a priority.

• Deploying mature acquisition and integration skills to

complete transactions and realise synergies.

The expansion of the Selco Branch network continued
during the year with the opening of seven new branches.

The acquisition of Gunters en Meuser, completed in

early 2017, continued the Group’s strategic progress in

Grafton will continue to pursue organic growth.

• Competition

• Increasing market coverage where the Group is

currently under-represented.

• Moving into new territories where opportunities exist
to achieve good returns on capital invested, achieve
leading market positions in national and regional
markets and add value to familiar business models
operating in unconsolidated markets.

The acquisitions of T. Brewer and Allsands represented
a further strengthening of market coverage in the
traditional UK builders merchanting market.

the Netherlands ironmongery, tools and fixings market

The Group will continue to allocate capital for

following on from the acquisition of Isero in late 2015.

new stores in strategic locations and acquisition

opportunities that complement existing branch

locations.

• Operating a decentralised organisational structure that
confers significant autonomy on local management
teams within a tight Group accounting, risk
management and control environment.

During 2016 the Group appointed Ms. Paula Harvey
as Group Head of HR with a particular focus on
improving talent management, succession planning and
development.

• Maximising returns on capital employed from the

existing branch network.

• Utilising the Board and the Group Headquarters in
Ireland to implement the strategy of the Group.

• Employing high calibre management teams with

an appropriate mix of operational and management
experience.

In recognition of the critical part that talent management
and succession planning play in the growth of the Group,
a talent review was conducted during the year. The
results of the review will feed into the Group’s succession
planning strategy and assist with the recognition and
development of top talent.

The Group also maintained its focus on leadership

The Group will continue to focus on the development of

• Colleagues

development with training programmes operating across

the Group’s management teams.

a number of Business Units.

Adjusted EBITA margin before property profit remained

The Group’s key priority for 2017 is to grow like-for-like

• Macro-Economic

constant at 5.5 per cent.

revenue in its markets and focus on gross margin in the

Conditions

Capital turn increased from 2.1 to 2.2 times and return on

capital employed increased by 30 basis points to 12.5 per

The Group will invest in areas of its business which

UK merchanting business.

cent.

provide good long term growth prospects and the

opportunity to improve operating margin and return on

capital employed.

• Competition

• Acquisition and

Integration of

New Businesses

• Credit Risk

Relating to

Customers

• Competition

• Colleagues

• IT Systems &

Infrastructure

• Health & Safety

• Acquisition and

Integration of

New Businesses

• Macro-Economic

Conditions

Ethics and
Integrity

• Conducting business to a high standard of integrity for
the benefit of all stakeholders and in a responsible way
that involves a commitment to achieving the highest
practical standards of health and safety for colleagues,
customers and visitors to Group locations.

A number of additional Group policies were implemented
during the year to build on the existing Group Code of
Business Conduct and Ethics and previously published
Group Ethics policies. New policies issued in 2016
included an Anti-Fraud and Theft Policy, an Employee
Purchasing Policy and an Anti-Money Laundering Policy.

The Group published a statement on its obligations

The maintenance of high ethical standards for the

• Health & Safety

under the UK Modern Slavery Act 2015 which is available

benefit of all stakeholders remains an integral part of

on its website www.graftonplc.com. The Group also

implemented a process to ensure that its businesses do

the Group’s strategy.

not deal with suppliers that are subject to international

The Group will continue to roll out its ethics training

• Colleagues

• IT Systems and

Infrastructure

sanctions.

programme to all Group employees during 2017. Online

modules will be refreshed and updated.

Grafton Group plc read more:

Key Performance Indicators
(page 12)

Risk Management
(page 14)

Strategic Priorities

Progress in 2016

Progress in 2016 (continued)

Priorities for 2017

Link to Risk

A Strong

Financial Base

• Maximising long term returns for shareholders

supported by three financial pillars:

Continued focus on operational and commercial

performance across the Group’s businesses during the

year resulted in Group revenue growth of 13 per cent.

Adjusted EBITA margin before property profit remained
constant at 5.5 per cent.

Capital turn increased from 2.1 to 2.2 times and return on
capital employed increased by 30 basis points to 12.5 per
cent.

The Group’s key priority for 2017 is to grow like-for-like
revenue in its markets and focus on gross margin in the
UK merchanting business.

The Group will invest in areas of its business which
provide good long term growth prospects and the
opportunity to improve operating margin and return on
capital employed.

Excellence in

Service

• Being the first choice supplier to our customers.

• Developing an innovative and efficient multi-specialist

and multi-channel business.

businesses.

2016 saw the introduction of a number of new trading

initiatives and innovations in the Group’s merchanting

Developments in the Irish retail sector included the
continuation of the Woodie’s store upgrade programme
to provide an improved customer experience and ensure
that it retains its strong market leadership position.

The Group will continue to pursue opportunities
for innovative customer propositions and routes to
market. The maintenance of a customer service-focused
approach to branch operations will remain a priority.

• Macro-Economic

Conditions

• Competition

• Acquisition and
Integration of
New Businesses

• Credit Risk
Relating to
Customers

• Competition

• Colleagues

• IT Systems &
Infrastructure

• Health & Safety

Organic

Growth and

Acquisitions

• Deploying mature acquisition and integration skills to

The expansion of the Selco Branch network continued

complete transactions and realise synergies.

during the year with the opening of seven new branches.

The acquisition of Gunters en Meuser, completed in
early 2017, continued the Group’s strategic progress in
the Netherlands ironmongery, tools and fixings market
following on from the acquisition of Isero in late 2015.

The acquisitions of T. Brewer and Allsands represented

a further strengthening of market coverage in the

traditional UK builders merchanting market.

Grafton will continue to pursue organic growth.

• Competition

The Group will continue to allocate capital for
new stores in strategic locations and acquisition
opportunities that complement existing branch
locations.

• Acquisition and
Integration of
New Businesses

• Macro-Economic

Conditions

• Revenue growth in new and existing markets;

• Operating profit margin growth; and

• Optimising capital turn and return on capital

employed.

• Refining and developing the range of products and

services offered.

• Increasing e-commerce capabilities.

• Being a focused supplier of building materials.

• Increasing market coverage where the Group is

currently under-represented.

• Moving into new territories where opportunities exist

to achieve good returns on capital invested, achieve

leading market positions in national and regional

markets and add value to familiar business models

operating in unconsolidated markets.

The Group also maintained its focus on leadership
development with training programmes operating across
a number of Business Units.

The Group will continue to focus on the development of
the Group’s management teams.

• Colleagues

The Group published a statement on its obligations
under the UK Modern Slavery Act 2015 which is available
on its website www.graftonplc.com. The Group also
implemented a process to ensure that its businesses do
not deal with suppliers that are subject to international
sanctions.

The maintenance of high ethical standards for the
benefit of all stakeholders remains an integral part of
the Group’s strategy.

The Group will continue to roll out its ethics training
programme to all Group employees during 2017. Online
modules will be refreshed and updated.

• Health & Safety

• Colleagues

• IT Systems and
Infrastructure

A Supportive

Organisational

Structure and

Management

• Operating a decentralised organisational structure that

During 2016 the Group appointed Ms. Paula Harvey

confers significant autonomy on local management

as Group Head of HR with a particular focus on

teams within a tight Group accounting, risk

management and control environment.

improving talent management, succession planning and

development.

• Maximising returns on capital employed from the

existing branch network.

• Utilising the Board and the Group Headquarters in

Ireland to implement the strategy of the Group.

• Employing high calibre management teams with

an appropriate mix of operational and management

experience.

In recognition of the critical part that talent management

and succession planning play in the growth of the Group,

a talent review was conducted during the year. The

results of the review will feed into the Group’s succession

planning strategy and assist with the recognition and

development of top talent.

Ethics and

Integrity

• Conducting business to a high standard of integrity for

A number of additional Group policies were implemented

the benefit of all stakeholders and in a responsible way

during the year to build on the existing Group Code of

that involves a commitment to achieving the highest

Business Conduct and Ethics and previously published

practical standards of health and safety for colleagues,

Group Ethics policies. New policies issued in 2016

customers and visitors to Group locations.

included an Anti-Fraud and Theft Policy, an Employee

Purchasing Policy and an Anti-Money Laundering Policy.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Key Performance Indicators

The Key Performance Indicators (“KPIs”) below are
used to track performance and increase value for
shareholders.

Performance Trend

Definition and Relevance

2012 2013 2014 2015 2016

2016 Performance

Link to Risks

Link to Strategy

Key Performance
Indicator

Revenue

Group revenue for the year
is a measure of the overall
growth of the Group’s
business.

Adjusted EBITA
Margin before
Property Profit

Adjusted EBITA before
profit on disposal of
Group properties as a
percentage of revenue
provides a good measure
of the performance of the
Group’s businesses.

Adjusted EBITA
Margin after
Property Profit

Group Revenue for 2016
was a record £2.5 billion,
an increase of 13 per cent
on 2015 and represented
the fourth successive year
of growth.

• Macro-Economic

Conditions
• Competition

Strong Financial Base
Organic Growth and
Acquisitions

Excellence in Service
Organisational
Structure &
Management

EBITA margin before
property profit remained
constant in 2016 at
5.5 per cent (The term
“adjusted” means
before amortisation of
intangible assets arising
on acquisitions and
exceptional items of £19.7
million in 2016 and a net
non-recurring credit of
£1.4m in 2015).

Down 10 basis points due
to a decline in property
profit.

• Macro-Economic

Conditions

• IT Systems and
Infrastructure
• Competition

Strong Financial Base
Organic Growth and
Acquisitions

Excellence in Service

• Macro-Economic

Conditions

• IT Systems and
Infrastructure

• Competition

Strong Financial Base
Organic Growth and
Acquisitions

Excellence in Service

n
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Capital Turn

Revenue divided by
average capital employed
where capital employed
is the sum of total equity
and net debt at each
period end.

Capital turn increased to
2.2 times from 2.1 times.

• Macro-Economic

Conditions
• Competition

Strong Financial Base
Organisational
Structure &
Management

Adjusted EBITA

Profit before intangible
asset amortisation on
acquisitions, exceptional
items, net finance
expense and income tax
expense.

8
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1

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The Group delivered
growth in adjusted
operating profit for the
seventh successive year.

• Macro-Economic

Conditions
• Competition

Strong Financial Base
Organic Growth and
Acquisitions

Excellence in Service

Grafton Group plc

Certain KPIs are used as financial measures
to incentivise executives. For 2016 these were
Adjusted Earnings per Share, Return on Capital
Employed and Free Cash Flow which are
identified below with the symbol

Strategy
(page 10)

Risk Management
(page 14)

Performance Trend

Definition and Relevance

2012 2013 2014 2015 2016

2016 Performance

Link to Risks

Link to Strategy

Key Performance
Indicator

Free Cash
Flow

Cash generated from
operations less interest,
tax and replacement
capital expenditure net
of disposal proceeds.
Free cash flow provides a
good measure of the cash
generating capacity of the
Group’s businesses.

Adjusted
Earnings Per
Share

A measure of underlying
profitability of the Group.
Adjusted profit after
tax is divided by the
weighted average number
of Grafton Units in issue,
excluding treasury shares.

ROCE

Lost Time
Accident
Frequency
Rate

A measure of the Group’s
profitability and the
efficiency of its capital
employed. Adjusted
operating profit is
divided by average capital
employed (where capital
employed is the sum of
total equity and net debt
at each period end) times
100.

A measure of the number
of lost time incidents per
100,000 hours worked.

Free Cash Flow was up
£29.1m or 28 per cent in
2016.

• Macro-Economic

Conditions
• Competition

Strong Financial Base
Organisational
Structure &
Management

• Macro-Economic

Conditions
• Competition

Adjusted EPS increased by
16 per cent to 47.7 pence in
2016. Adjusted EPS for 2015
(previously disclosed as
41.01p) has been updated
to exclude amortisation of
intangible assets arising
on acquisitions.

Strong Financial Base
Excellence in Service
Organisational
Structure &
Management

Return on Capital
Employed (ROCE)
increased by 30 basis
points to 12.5 per cent.

• Macro-Economic

Conditions
• Competition

Strong Financial Base
Excellence in Service
Organisational
Structure &
Management

Lost Time Accident
Frequency Rate increased
slightly during the year.

• Health & Safety

Ethics & Integrity
Organisational
Structure &
Management

7
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Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016

Risk Management

The Directors acknowledge that they have overall
responsibility for the Group’s system of internal control and
for reviewing its effectiveness. The Directors recognise that
such a system is designed to manage rather than eliminate
the risk of failure to achieve business objectives and can
only provide reasonable but not absolute assurance against
material misstatement or loss.

The Group has established a risk management
process to ensure effective and timely
identification, reporting and management
of risk events that could materially impact
upon the achievement of Grafton’s strategic
objectives or financial targets. The risk
management process is closely aligned with
the overall strategic development of the Group
which is influenced by economic growth,
organic growth through implants, new formats
and greenfield expansion and acquisition
related growth. Strategic projects are risk-
assessed in conjunction with extensive
commercial, financial and legal due diligence.

The Group’s risk management framework, as
described in further detail below, is designed
to facilitate the development, maintenance,
operation and review of risk management
controls that fulfil the Board’s corporate
governance obligations and supports the
Group’s strategic objectives. The Board is
responsible for establishing and maintaining
risk management controls and for evaluating
their effectiveness. The Audit and Risk
Committee oversees the effectiveness of the
risk management procedures in place and the
steps being taken to mitigate the Group’s risks.

A process for identifying, evaluating and
managing significant risks faced by the Group,
in accordance with the Guidance for Directors
in the 2014 Code and the FRC Guidance on Risk
Management, Internal Control and Related
Financial and Business Reporting, has been in
place throughout the accounting period and
up to the date the financial statements were
approved. These risks are reviewed by the Audit
and Risk Committee and the Board. Executive
management is responsible for implementing

strategy and for the continued development
of the Group’s businesses within parameters
set down by the Board. Similarly, day to day
management of the Group’s businesses is
devolved to operational management within
clearly defined authority limits and subject to
very tight reporting of financial performance.
Group and operating company management
are responsible for internal control including
the identification and evaluation of significant
risks and for implementation of appropriate
internal controls to manage such risks. Group
management reports to the Board on key risks
and internal control issues including the way
in which these issues are managed.

Internal Control System

The key features of the Group’s system of
internal control and risk management include:

• Review, discussion and approval of the

Group’s strategy by the Board;

• Defined structures and authority limits for

the operational and financial management of
the Group and its businesses;

• A comprehensive system of reporting
on trading, on operational issues and
on financial performance incorporating
monthly results, cash flows, working capital
management, return on capital employed
and other relevant measures of performance;

• Written reports from the Chief Executive

Officer and the Chief Financial Officer that
form part of the papers considered by the
Board at every board meeting;

• Review and approval by the Board of

annual budgets incorporating operating
performance and cash flows;

• Board approval of major capital expenditure

proposals and all acquisition proposals.
Capital expenditure proposals below Board
level are delegated to the Management
Committee comprising the CEO, CFO and
Group Financial Controller/Company
Secretary; and

• Review by senior management and the Audit
and Risk Committee of the Internal Audit
Report findings, recommendations and
follow up actions.

The preparation and issue of financial reports,
including the Group’s annual and interim
results is managed by the Group Finance
team based in Grafton’s Head Office in Dublin.
The Group’s financial reporting process is
controlled using accounting policies and
reporting formats issued by Group Finance to
all reporting entities (including subsidiaries)
in advance of each reporting period end.
Group Finance supports all reporting entities
with guidance in the preparation of financial
information. The process is conducted by
finance professionals throughout the Group,
who have responsibility and accountability
to provide information in compliance with
written policies and procedures. The financial
information for each entity is reviewed
on an ongoing basis by the Group’s senior
management.

Grafton Group plcGroup Risk Committee

The Group has established a Group Risk
Committee (“GRC”) whose membership
reflects a range of executive functions, skills,
expertise, experience and levels within
the Group. The GRC is responsible for the
identification, reporting and oversight of risk
management. The GRC prepares an annual
report of its activities and identifies areas for
improvement and changes in the risk profile of
the Group and presents it to the Audit and Risk
Committee.

The GRC is chaired by the Group CFO and
reports to the Audit and Risk Committee. The
Committee meets four times per year and is
responsible for maintaining and monitoring
the Corporate Risk Register, which records
the Group’s material risks and the actions
and controls, both in place and required, to
manage each to an acceptable level of risk
consistent with the Group’s risk appetite. Each
of the Group’s Business Units are required to
maintain a register of key business risks and
report them quarterly to the GRC. The GRC
initiates Group-wide actions to manage risks.

Recent GRC initiatives included the
implementation of a number of new Group
policies including an Anti-Fraud and Theft
Policy, an Employee Purchasing Policy and
an Anti-Money Laundering Policy, and the
ongoing development and roll-out of the
online Ethical Training Programme and
Business Continuity Planning arrangements.

Internal Audit

The Group internal audit function focuses on
areas of greatest risk to the Group. It monitors
compliance and considers the effectiveness of
internal control throughout the Group. The
Audit and Risk Committee reviews Internal
Audit Reports and meets with the Group
Internal Audit and Business Risk Director in
order to satisfy itself on the adequacy of the
Group’s risk management and internal control
systems. In addition, the Audit and Risk
Committee reviews Management Letter points
raised by the external auditor and meets with
the external auditor to discuss the nature of
the points raised. The Chairman of the Audit
and Risk Committee reports to the Board
on all significant matters considered by the
Committee.

The Risk Management Framework diagram
below illustrates the key responsibilities
within the Group’s risk management structure.

Audit & Risk Committee Report
(page 47)

In the Board’s view, the ongoing information
it receives is sufficient to enable it to review
the effectiveness of the Company’s system
of internal control. The Directors confirm
that they have reviewed the effectiveness of
internal control. In particular, during the
year they have considered the significant
risks affecting the business and the way in
which these risks are managed, controlled and
monitored.

Board of Directors

Audit & Risk Committee

Corporate
Risk Register

Internal
Audit

Group Risk Committee

Senior Management

Business Unit
Management & Staff

Business
Risk Register

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Risk Management

Key Risks

(continued)

The Audit and Risk Committee and the Board have carried out a robust assessment of the
principal risks facing the Group. It is not practical to document every risk that could affect
the Group in this report. The risks identified below are those that could have a material
adverse effect on the Group’s business model, future performance, solvency or liquidity.
The actions taken to mitigate the risks cannot provide assurance that other risks will not
materialise and adversely affect the operating results and financial position of the Group.

Macro-Economic
Conditions in the UK,
Ireland, the Netherlands
and Belgium

Risk Description
Trading in the Group’s businesses is influenced by macro-economic conditions in the UK, Ireland, the Netherlands
and Belgium. The Group’s markets are cyclical in nature and a proportion of revenue is dependent on the
willingness of households to incur discretionary expenditure on home improvement projects. Investments of
this nature closely correlate with general economic conditions. A deterioration in economic conditions in the UK,
Ireland, the Netherlands or Belgium could result in lower demand in the Group’s businesses.

The Group’s customers are mainly professional trades people engaged in residential, commercial and industrial
maintenance and new-build projects. These markets are affected by trends in improvements, remodelling and
maintenance and construction. Demand in these markets is also influenced by economic factors including interest
rates, the availability of credit, inflation, changes in property values, demographic trends, tax policy, employment
levels and gross domestic product. Any negative movement in one or more of these factors could adversely affect
demand in the Group’s business.

The result of the UK referendum to leave the European Union (“EU”) has created significant uncertainty about
the near term outlook and prospects for the UK economy. It is still too early to assess the likely impact on the UK
economy of the UK leaving the EU or the extent to which any possible fall in investment and a potentially softer
housing market could impact employment and household spending. It is expected to take two years to conclude
negotiations on the UK’s exit from the EU. The uncertainty during this period and beyond could negatively impact
the UK economy, reduce demand in the Group’s markets and adversely affect the financial performance of the
Group.

Mitigation
The Group has taken significant action in previous years in response to the downturn in its markets to increase
the operating efficiency of its business which leaves it well positioned to benefit from the continuing recovery.
Exposure to the more resilient and less cyclical Repair, Maintenance and Improvement (“RMI”) market has
increased through ongoing expansion of the network of Selco stores particularly in the Greater London Area.

The merchanting branches in Ireland were refocused on the residential RMI market during the downturn but are
equally well positioned to respond to an increase in the new house build markets. Branch showrooms have been
upgraded and the product portfolio expanded to meet the needs of customers engaged in residential RMI projects
which currently account for a higher proportion of revenue.

A highly cost efficient branch implant route to market model has been used to increase revenues through the existing
branch network supported by an enhanced service to customers. Buildbase provides a plant, tool and equipment hire
service to its customers. Electricbase implants supply a range of electrical products. Plumb Centre implants provide a full
range of plumbing and heating products in the Chadwicks and Heiton Buckley branches in Ireland.

The mitigation strategy also incorporates proactive cost control in response to changes in market conditions. An
assessment of macro-economic, construction and residential market conditions informs the allocation of capital
resources to new projects.

The Group will continue to consider the impact of the UK vote to leave the EU on its businesses, monitor
developments on an ongoing basis and will take appropriate action to help mitigate the consequences of any future
decline in demand in its markets.

Grafton Group plc

Risk Movement

Link to Strategy

New
Unchanged
Increased
Decreased

Strong Financial Base
Excellence in Service
Organic Growth and Acquisitions
Organisational Structure & Management
Ethics and Integrity

Competition in
Merchanting, DIY and
Mortar Markets

Risk Description
Grafton faces volume and price competition in its markets. The Group competes with builders merchants and
retailers of varying sizes, and faces competition from existing general and specialist merchants including the
national builders merchanting chains in the UK together with retailers, regional merchants and independents.
The Group also faces the risk of new entrants to its markets, for example, by way of competition from on-line
operators. Actions taken by the Group’s competitors, as well as actions taken by the Group to maintain its
own competitiveness and reputation for value for money, may exert pressure on product pricing, margins and
profitability. Some of the Group’s competitors may have access to greater financial resources, greater purchasing
economies and a lower cost base, any of which may confer a competitive advantage that could adversely impact the
Group’s revenues, profits and margins.

Mitigation
The Group’s businesses monitor gross margins and, where possible, develop appropriate tactical and trading
responses to changes in the competitive and pricing environment. Mitigation of this risk is achieved through
ensuring a value proposition for customers through the review of customer pricing metrics, monitoring pricing
developments in the market place and the active management of pricing. Promotional and marketing activity is
also a feature of revenue and margin management. Procurement strategies are focused on reducing costs through
supplier consolidation and sourcing, when appropriate, through overseas markets. The Group maintains an open
dialogue with suppliers in order to mitigate the impact on customers and Group profitability from commodity
related cost pressures. The Group’s businesses conduct surveys and review feedback from customers in order to
improve the quality of the overall product and service proposition and to ensure that customer expectations are
met.

Colleague Recruitment,
Engagement, Retention
and Skills

Risk Description
The Group has almost 12,000 colleagues engaged in the operations and management of its portfolio of businesses.
Employees are fundamental to the long term success and development of the business. Attracting and retaining
employees with the relevant skills and experience and investing in training and development is essential to
sustaining the existing operations and providing a platform for the longer term development of the Group.

The Group is dependent on the successful recruitment, development and retention of talented executives to run the
overall Group and its businesses.

In addition, the Group’s ability to continue to identify and develop opportunities is influenced by management’s
knowledge of and expertise in its markets.

Mitigation
The Group and its individual businesses are committed to high standards of employment practice and are
recognised as good employers in the UK, Ireland, the Netherlands and Belgium. Remuneration and benefits are
regularly reviewed and are designed to be competitive with other companies in the sectors that the Group operates
in and with market practice generally.

Significant resources and time are devoted to training and development. This includes programmes that are
organised internally by Group businesses and also in conjunction with external bodies. Employee turnover is
closely monitored and processes are in place to provide career development opportunities and actively manage
succession planning throughout the business. The Group made a number of appointments in recent years in
planning for the succession of key executives and to support its longer term development.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016
Risk Management

Key Risks (continued)

(continued)

IT Systems and
Infrastructure

Risk Description
The Group’s businesses are dependent on IT systems and supporting infrastructure to trade. Either the failure of
key systems or the inability to compete through up to date trading platforms could have a serious impact on the
business and could potentially result in the loss of revenue and reduced profitability.

The rate and scale of IT change is increasing as the Group undertakes a programme to replace a number of heritage
systems. These changes have the potential to disrupt operations.

Mitigation
Back-up facilities and Business Continuity Plans are in place and tested regularly to ensure that interruptions to
the business are prevented or minimised and that data is protected from unauthorised access.

The replacement and updating of systems and technologies is supported by a full strategy and business case analysis
and planning and risk analysis for each project. Implementation is supported by subject matter experts and colleagues
from a cross section of functions to ensure that projects are managed to deliver technical, functional and business
solutions within an appropriate cost and timeframe. Regular progress reports are made to the Board and planning and
implementation is subject to review by Group Internal Audit.

Cyber Security

Risk Description
Increased levels of cybercrime represent a threat to the Group’s businesses and may lead to business disruption
or loss of data. The Group is exposed to the risk of external parties gaining access to Group systems to deliberately
disrupt business, steal information or commit fraud. Theft of data relating to employees, business partners or
customers may result in a regulatory breach and impact the reputation of the Group.

Mitigation
The Group has a number of IT security controls in place including gateway firewalls, intrusion prevention systems
and virus scanning. The Group has also introduced a suite of information security policies. Regular IT audits are
carried out in the Group’s businesses. The Group Risk Committee has also established an Information Security
Steering committee to develop and deliver the Information Security Programme. An Information Security
Governance Committee has also been established to set priorities and strategic direction for the Information
Security Programme.

Health and Safety

Risk Description
The prevention of injury or loss of life to colleagues, customers and third parties is an absolute priority for the Board and
executive management. Health and safety risks in branch locations concern the manual handling of products, slips, trips
and falls and incidents involving fork lift trucks and delivery vehicles. Outside of the branch locations the main health
and safety risks relate to vehicles engaged in transferring building materials from branch locations to customers’ sites.

Mitigation
Health and safety forms part of the agenda at all board meetings and statistics covering accident frequency rates,
lost time, management of risks and the cost of accidents and incidents are reviewed by the Board on a regular
basis. The individual businesses invest significant resources in health and safety management and actively work to
minimise health and safety risks. Accidents are monitored and corrective action taken when appropriate to reduce
or eliminate the risk of recurrence. The Group has recruited additional health and safety expertise to facilitate an
improvement in the management of health and safety risks.

Grafton Group plc

Risk Movement

Link to Strategy

New
Unchanged
Increased
Decreased

Strong Financial Base
Excellence in Service
Organic Growth and Acquisitions
Organisational Structure & Management
Ethics and Integrity

Acquisition and
Integration of New
Businesses

Risk Description
Growth through acquisition has historically been a key element in the Group’s development strategy. The Group
may not be able to continue to grow if it is unable to identify attractive targets, execute full and proper due
diligence, raise funds on acceptable terms, complete acquisition transactions, integrate the operations of the
acquired businesses and realise the anticipated levels of profitability, cash flows and return on invested capital.

Mitigation
Acquisitions are made in the context of the Group’s overall strategy. The Group has a long established, experienced
and skilled acquisition capability that has significant relevant experience in all aspects of acquisition transactions
and in managing post acquisition integration. This process is underpinned by strategic and financial acquisition
criteria and the close monitoring of performance post acquisition including one and three year post acquisition
reviews by Group Internal Audit.

Defined Benefit Pension
Schemes

Risk Description
Retirement benefits are principally provided under defined contribution style pension arrangements. The Group
also operates a number of defined benefit pension schemes in the UK and Ireland. The assets and liabilities of these
schemes may exhibit significant volatility attributable primarily to changes in asset valuations, changes in bond
yields and longevity of scheme members. In addition to future service contributions, significant cash contributions
may be required to eliminate past service deficits.

Mitigation
An investment strategy is in place under the stewardship of the pension scheme trustees, in consultation with the
Group to protect scheme assets and optimise returns.

The Group’s defined benefit pension schemes were restructured during 2013 following consultations between the
Group, the Trustees and active members. The arrangements agreed were based on sharing the cost of funding
scheme deficits and providing for more sustainable future benefits at an affordable cost while also materially
reducing the financial risks of the schemes to the Group’s businesses.

Credit Risk Relating to
Customers

Risk Description
The Group is exposed to the risk of default by customers who purchase products on credit. One of the key features
of customer service in merchanting is the provision of short-term credit to customers, with the Group carrying the
associated credit risk.

Mitigation
The Group’s exposure to customer credit risk is diversified over a large customer base and the incidence of default
by customers is tightly managed by Business Unit credit control teams. Credit insurance is in place to cover major
exposures in the UK merchanting business. Past-due receivables are monitored and actively managed on an on-
going basis and bad debt provisions are made as required.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016
Sectoral & Strategic Review

Merchanting Segment

Revenue

Operating profit*

Operating profit margin*

2016
£’m

2015
£’m

Actual
Change

2,290.6

2,027.7

+13.0%

135.2

5.9%

124.8

+8.3%

6.2%

(30bps)

* Before amortisation of intangible assets on acquisitions and exceptional items

The Group’s merchanting businesses are located in the UK, Ireland, the Netherlands and Belgium.
Overall average daily like-for-like revenue increased by 3.9 per cent.

Grafton Group plcUK Merchanting

The UK Merchanting segment trades from 484 branches,
principally under the Selco, Buildbase and Plumbase brands
in the South East, Midlands and North of England, and under
the MacBlair brand in Northern Ireland.

Market Positions

Builders Merchanting

Plumbers Merchanting

No. 3

No. 4

Proportion of Group Revenue

Revenue

Operating profit*

Operating profit margin*

Operating profit before property profit*

Operating profit margin before property profit*

* Before amortisation of intangible assets on acquisitions and exceptional items

2016
£’m

2015
£’m

Actual
Change

1,771.7

1,662.0

+6.6%

99.7

5.6%

94.8

5.4%

105.9

(5.9%)

6.4%

99.2

6.0%

(80bps)

(4.5%)

(60bps)

Average daily like-for-like revenue increased
by 2.9 per cent for the year. The business had
a strong start to the year however experienced
an easing of growth in the second quarter due
to uncertainty over the near term outlook for
the UK economy. Like-for-like revenue was
relatively flat in the third quarter and growth
picked up in the fourth quarter. Declines
in activity and confidence over the summer
months reversed in the final quarter.

The UK economy continued to grow at a
steady pace during 2016. Increased household
spending was driven by strong growth in
real incomes and employment growth with
the unemployment rate down to 4.8 per cent.
Activity in the housing market was relatively
subdued. Housing transactions increased
marginally over the year with monthly trends
influenced by some transactions being brought
forward and completing ahead of a rise in
stamp duty land tax in April 2016. House
price inflation eased over much of the year
but picked up in the final quarter as consumer
confidence recovered.

Building materials price deflation is estimated
at 1.3 per cent and volumes grew by circa 4.2
per cent. The opening of new Selco branches,

acquisitions and branch rationalisation
accounted for net revenue growth of 3.7 per
cent. The gross margin declined by 70 basis
points due to intense pricing pressure and a
very competitive trading environment in the
traditional merchanting business during a
period of price deflation in the sector.

Selco Builders Warehouse, the retail style
product and service model for trade customers,
outperformed the market with good like-for-
like revenue growth and significant revenue
gains in new branches. Selco strengthened
its position as the UK’s fourth largest builders
merchant after Buildbase with strong demand
led by activity in the residential RMI market.
The rate of growth in like-for-like revenue
softened during the summer months due to
the uncertainty surrounding the outlook for
the UK economy before picking up in the last
quarter.

There was good like-for-like growth in the
London area branches which contributed three
quarters of revenue. The strongest revenue
gains were experienced in regional cities and
towns which supports the Group’s strategic
ambition to increase Selco’s geographic
footprint in the UK. Average transaction

71%

Key Brands

values were lower due to price deflation with
increased transactions driving volume growth
in a competitive market. Revenue growth was
also driven by new product initiatives to gain
share and further differentiate the business in
the market place.

Operating profit and operating margin in
the like-for-like business was ahead of the
prior year despite incurring significant
investment to support the next phase of
branch development. Overall operating profit
was in line with the prior year after incurring
increased branch opening costs.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016(continued)

T.G. Lynes, one of the leading distributors to
the mechanical services market in London
and the South East, performed strongly and
ahead of pre-acquisition expectations in
its first full year in the Group. The business
provides a good platform for developing a
stronger presence in this segment of the
merchanting market in conjunction with
Plumbase Industrial which is now focused
on organic growth through a small network of
branches located primarily in London and the
South East.

MacBlair, the Northern Ireland merchanting
business experienced a mixed market
backdrop during the year. The business
registered modest sales growth and
reported a lower level of operating profit
measured against a very strong prior year
result. A strong performance in the general
merchanting branches was more than offset
by lower volumes in the specialist doors and
ironmongery division. A major refurbishment
of the flagship branch in Belfast was
completed during the year and since the year
end the Lisburn branch was relocated to a new
purpose built facility in the city.

Sectoral & Strategic Review

UK Merchanting (continued)

Buildbase like-for-like revenue growth
was strong in the first and fourth quarters
and moderate for the overall year. The gross
margin was lower against the backdrop of
competitive pressure on selling prices. The
business continued to focus on purchasing,
logistics and pricing initiatives. Operating
costs increased reflecting investment to
upgrade the trading and back office IT systems,
investment in Electricbase and Hirebase
implants and new Partnering contracts.
Whilst Buildbase experienced a tough year
and reported a decline in operating profit, the
business entered 2017 better placed to respond
to competitive markets with improved pricing
processes.

offer a better platform for improving long term
profitability and increasing returns on capital
employed.

There was tough competition in the
residential heating market due to excess
capacity leading to pressure on gross margins.
Branches were operated efficiently and
controls on costs remained very tight. With
weak volume growth and pricing pressure, the
operating profit outcome was lower than the
prior year. The bathroom distribution business
registered solid revenue gains and continued
to deliver strong results and Plumbworld, the
on-line retailer of bathroom products, achieved
revenue gains in core products.

Buildbase Civils, a distributor of heavyside
building materials to the residential new build
and infrastructure markets, faced difficult
trading conditions during the year. Volumes
were higher but pricing was intensely
competitive and a lower gross margin
contributed to a fall in operating profit. The
Scottish business proved more resilient and
delivered an improvement in operating profit.
The focus in this difficult trading environment
was on tighter cost control and a number of
branches were consolidated onto Buildbase
branch properties.

Plumbase showed modest growth in like-
for-like revenue and a marginal decline
in total revenue due to the closure of 28
branches following a rigorous strategic and
financial analysis of the branch network. The
business will in future focus on supporting its
professional domestic installer customer base
through a smaller network of branches that

Grafton Group plcUK Merchanting Strategy in Action

The key elements of the
Group’s UK merchanting
strategy are:

ྲ Focusing on the Repairs,

Maintenance and Improvement
(RMI) segment which has
attractive market dynamics
including greater through-the-
cycle resilience;

ྲ Focusing on three financial
pillars of revenue growth,
improving the operating profit
margin and increasing capital
turn by utilising spare capacity
and creating greater efficiency
in the existing branch network;

ྲ Continuing to extract

efficiencies and synergies
from current market leading
positions;

ྲ Developing Buildbase and

Selco brands in areas of the
market where they currently
do not have a presence or are
under-represented;

ྲ Selectively participating
in consolidation of UK
merchanting market as a
preferred buyer;

ྲ Developing sustainable
position in the electrical
distribution market through
the use of a low cost implant
route to market model
that leverages off existing
merchanting assets and
infrastructure;

ྲ Growing hire centre revenue
in builders merchanting
branches; and

ྲ Expanding selectively in
complementary product
markets.

During 2016 this strategy was implemented
through organic development of the Selco
branch network, with seven new branches
opened during the year, of which five are
located in Greater London (Chessington, South
Croydon, Mitcham, Wembley and Watford),
one on the South Coast (Portsmouth) and one
in the West Midlands (Wolverhampton). The
business traded from 47 branches at the year
end and plans are in place to open at least ten
new branches in 2017 reflecting the success
of the Selco model that services the more
resilient residential RMI segment of the UK
merchanting market. Selco opened its first
new branch of 2017 in Beckton, East London in
February.

The roll out of a small plant hire facility in
all Selco branches was also completed and
the division showed good growth in revenue
and pricing. The ‘Click and Collect’ and Selco
Direct on-line services launched last year
continued to grow revenue.

The acquisition of T. Brewer, a specialist timber
business trading from three branches in

London, strengthened the traditional UK
merchanting business. This acquisition
was in line with the UK merchanting
strategy of selectively acquiring businesses
that offer the prospect of good returns on
invested capital. It follows the acquisition
of Beaumont Forest Products in June 2014
which provided a platform for the growth
of timber revenues. Allsands, a general
builders merchant located in Larkfield,
Kent, was also acquired. Both businesses
made good profit contributions in line with
pre-acquisition expectations.

The 80 Electricbase implants in Buildbase
branches that supply a range of electrical
products recorded a strong improvement
in revenue and profitability. The Hirebase
division had a good year with increased
revenue and operating profit following the
development in recent years of tool, plant
and equipment hire implants in Buildbase
branches.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Sectoral & Strategic Review

Irish Merchanting

The Irish merchanting segment trades mainly under the
Chadwicks and Heiton Buckley brands in the Republic of
Ireland.

(continued)

Market Position

Builders Merchanting

Plumbers Merchanting

Steel Stock Holding

No. 1
No. 1
No. 1

Proportion of Group Revenue

14%

Key Brands

Revenue

Operating profit

Operating margin

The Group’s market leading merchanting
business in Ireland continued to outperform
in a market that is still in the relatively early
stages of recovery reporting double digit
revenue growth for the third successive year.
Average daily like-for-like revenue increased
by 11.6 per cent in constant currency. The
business delivered a very good performance
with a strong advance in profit and a 100 basis
point improvement in the operating profit
margin.

The merchant market benefitted from the
relatively strong performance of the Irish
economy. Increased consumer spending
was driven by gains in employment, with
the number of people at work at its highest
level for eight years, and growth in disposable
incomes. Revenue growth was primarily
stimulated by strong demand in the
residential RMI market despite a decline in
housing transactions to two per cent of the
housing stock. This is estimated to be half
the level expected in a properly functioning
market. House prices increased by eight per
cent in a tight market.

Demand from the house building sector
improved as the supply of houses increased to
an estimated 15,000 units from 12,700 units
in 2015. Supply however remained a long way
short of the estimated 25,000 – 30,000 units

2016
£’m

347.7

27.1

7.8%

2015
£’m

Actual
Change

Constant
Currency
Change

274.5

+26.7%

+11.9%

18.7

+44.6%

+27.0%

6.8%

+100bps

required to meet pent-up demand due to a
shortage of owner occupied, social housing
and rental properties. The Government’s
new Help-to-Buy scheme, which provides a
tax rebate to first time buyers of five per cent
of the purchase price of a new home, and
relaxation of mortgage lending rules by the
Central Bank are expected to stimulate growth
in house building.

prior year. Operating profit showed significant
growth from a low base. In view of the
increasingly trade operated customer base
and change in reporting lines, the In-House
business was transferred from the retail
segment to the merchanting segment with
effect from 1 January 2016 and the prior year
comparative results have been updated to
reflect the change of reporting segment.

Non-residential new build and RMI activity
improved from a low base following a long
period of under investment. There was a pick-
up in demand across most end-use segments
of the market including technology, energy,
infrastructure, hotels, agriculture and offices.

Revenue growth was broadly based across
the branch network as the recovery gained
momentum outside of Dublin and provincial
cities. There was a slight decline in the gross
margin due to a change in product mix in
an otherwise competitive market. During
2016 significant investment was made in
people with the creation of 66 additional roles
to accommodate the next phase of growth
following the sharp increase in revenue over
the past three years.

The five branch In-House kitchen business
benefitted from increased consumer spending
and the reorganisation implemented in the

Grafton Group plcIrish Merchanting Strategy in Action

The Group’s Irish merchanting
strategy is focused on:
ྲ Strengthening its market leadership position;

ྲ Utilising spare capacity in the branch network, as market

conditions improve, to increase revenue, operating margin
and return on capital employed;

ྲ Developing a complementary presence in adjacent product

categories; and

ྲ In-filling geographic coverage through greenfield

development.

Expansion of the branch network
recommenced with the opening of a
Chadwicks Express branch in Central Dublin.
A further three branches are scheduled to open
in Dublin in the first quarter and will increase
the branch network in the Republic of Ireland
to 47 including 20 in the Dublin Area. This
investment is focused on urban areas set to
benefit most from an expected increase in
construction activity and will create easier
access and delivery for contractors operating
to demanding timelines in congested locations.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Sectoral & Strategic Review

(continued)

Netherlands Merchanting

Grafton trades under the Isero and Gunters en Meuser
brands in the Netherlands.

Market Position

Builders Merchanting
(ironmongery, tools and
fixings)

No. 1

Proportion of Group Revenue

Revenue

Operating profit*

Operating margin*

*Before amortisation of intangible assets on acquisitions

2016
£’m

87.7

9.1

2015
£’m

8.5

0.5

10.4%

5.4%

Key Brands

Grafton entered the Netherlands Merchanting
market in November 2015 with the acquisition of
Isero, a specialist merchanting business trading
from 38 branches under the Gerritse, Breur
Ceintuurbaan and Van der Winkel brands.

Isero distributes a broad range of ironmongery,
tools and fixings to the attractive RMI and
new housing markets. The business performed
strongly and in line with pre-acquisition
expectations. The positive economic backdrop
and recovery in the housing market supported

good revenue growth compared to the pre-
acquisition level.

The Dutch economy performed strongly in
2016 driven by improved consumer sentiment,
employment gains and growth in real disposable
incomes which led to increased spending
by households. The upturn in the economy,
availability of mortgages at low interest rates
and pent up demand contributed to growth in
housing transactions by an estimated 20 per
cent. The stock of housing properties for sale

fell sharply during the year. The supply of new
housing increased from a historically low level
but was well short of potential demand.

Commercial initiatives undertaken by
management included expanding the
provision of value added services and securing
procurement gains which protected the
gross margin in a competitive market. A
strengthening central support function
contributed to more efficient management of
working capital.

Grafton Group plcNetherlands Merchanting Strategy in Action

The Group’s strategy in the
Netherlands Merchanting
market is focused on:
ྲ Utilising the acquisition of

Isero to provide a development
platform in a recovering
economy and market;

ྲ In-filling geographic coverage
of the ironmongery, tools and
fixings market through organic
development and acquisitions;

ྲ Identifying opportunities

to invest in other attractive
segments of the merchanting
market; and

ྲ Using Group scale and expertise
to enhance product ranges in
existing branch network.

The Isero business trades in a fragmented
segment of the merchanting market where
there are opportunities to grow the branch
network organically and by acquisition
under an established management team
that has a good track record. A new
branch was opened in North Amsterdam
in August. The acquisition of Gunters
en Meuser, a distributor of ironmongery,
tools and fixings from 14 branches in the
Greater Amsterdam Area was completed
on 5 January 2017. Gunters en Meuser is
a business that is synonymous with the
ironmongery market in Amsterdam where
it has traded for 190 years. This was an
important step in the Group’s development

strategy in the Netherlands where it now
has strong positions in the country’s five
largest cities. The enlarged business trades
from 53 branches and is the market leader
in the Netherlands ironmongery, tools and
fixings market.

The business will focus in 2017 on
the integration of Gunters en Meuser
and on better supporting customers
through on-line and logistics solutions.
The fragmented nature of the market
is expected to present acquisition
opportunities over the coming years.

Belgium Merchanting Strategy
in Action

The Group’s Belgium
Merchanting strategy
focuses on:
ྲ Returning the businesses to

profitability;

ྲ Extracting scale related
synergies as market
position develops;

ྲ Leveraging off best

practice and know-how in
merchanting businesses in
the UK and Ireland; and

ྲ Expanding branch coverage
through organic growth or
acquisitions if the projected
returns meet the Group’s
hurdle rates.

Belgium Merchanting

Grafton trades under the YouBuild and MPRO brands in
Belgium.

Revenue

Operating loss*

Operating margin*

* Before exceptional and non-recurring items

2016
£’m

83.5

(0.7)

2015
£’m

82.8

Actual
Change

Constant
Currency
Change

+0.9%

(10.6%)

(0.3)

(130.9%)

(149.9%)

(0.8%)

(0.4%)

(40bps)

Market Position

Merchanting Market

No. 1

Proportion of Group Revenue

The decline in constant currency revenue by
10.6 per cent was attributed to a fall of 6.4 per
cent in the like-for-like business and to the
disposal of the non-core readymix operation
in June 2015.

Key Brands

The economic environment continued to be
weak and the business experienced difficult
trading conditions in its residential and non-
residential end-use markets. The smaller RMI
orientated branches were more resilient. A
number of the larger branches experienced
sharp volume declines due to lower demand
and a reorientation of the customer base
towards lower volume, higher margin
collected business through a more diversified
customer base.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Sectoral & Strategic Review

(continued)

Retailing

The Group is the largest DIY retailer in Ireland trading from
35 stores nationally under the Woodie’s brand.

Market Position

DIY Retailing Ireland

No. 1

Proportion of Group Revenue

Revenue

Operating profit

Operating margin

Woodie’s increased average daily like-for-like
and total revenue by 5.6 per cent in constant
currency. The business delivered significant
profit growth for the second successive year in
a recovering retail market in Ireland. Woodie’s
also benefitted from a positive response by
customers to the progress made in recent
years to improve the shopping experience
through the roll-out of a new store format and
improved standards across all aspects of the
business.

Good growth in consumer spending and retail
sales in Ireland during 2016 was driven by
strong growth in employment and moderate
growth in incomes supported by relatively
high consumer sentiment.

Woodie’s capitalised on its strong brand and
heritage in the Irish DIY market growing
revenue ahead of the market. An increase in
the gross margin was driven by procurement
gains and improved stock turn on seasonal
lines. Operating costs were tightly controlled
despite upward pressure from investment in
the business and improving customer service.
A key focus during the year was improving
the operation of stores and customer service
proposition through investing in colleagues
including a management development
programme for store managers and the

2016
£’m

157.1

7.3

4.6%

2015
£’m

Actual
Change

Constant
Currency
Change

Key Brand

131.4

+19.5%

+5.6%

3.3

+119.2%

+90.9%

2.5%

+210bps

introduction of “Great Place to Work”
initiatives which have seen significant growth
in colleague engagement.

Woodie’s continued to develop its kitchen
business and now has a dedicated kitchen
sales area in almost half of its estate. The on-

shelf availability of Woodie’s top 1,000 lines
was improved through better merchandising
and supply chain management. There was
also an ongoing focus on upgrading key ranges
and on product innovation and differentiation.

Grafton Group plcRetailing Strategy in Action

The Group’s retail strategy is based on:
ྲ Maintaining Woodie’s clear market leadership position and strong

brand recognition;

ྲ Focusing on core strengths in the DIY, Home and Garden

categories; and

ྲ Utilising spare capacity in the branch network to increase revenue,

operating margin and return on capital employed.

The woodies.ie website was upgraded
in line with evolving technology and
retail trends and now offers improved
functionality, enhanced product images
and access to over 30,000 products. Social
media is now an integral part of ongoing
marketing programmes. The business
has over 75,000 Facebook likes and almost
6,000 Twitter followers. The use of social
media is enabling Woodie’s to engage with
customers and gain insights into their
shopping habits and preferences.

The store upgrade programme was rolled
out to a further eight stores following
a successful trial of the new layout and

merchandising concept which showed
outperformance compared to the
remainder of the estate. This took the
number of branches completed to 12 by
the year-end representing 45 per cent of
total revenue. The results to date provided
the confidence to continue the roll-out in
a further eight stores in 2017, increasing
coverage on completion to 65 per cent
of total revenue. The newly formatted
stores will deliver an improved shopping
environment, enhance performance and
protect Woodie’s strong market leadership
position.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Sectoral & Strategic Review

(continued)

Manufacturing

CPI EuroMix is the market leader in the dry mortar market
in the UK where it operates from nine plants in England
and one in Scotland. MFP is a manufacturer of drainage and
roofline products operating from a facility based in Dublin.

Market Position

Mortar Manufacturing UK

No. 1

Proportion of Group Revenue

Key Brands

Revenue*

Operating profit

Operating margin

*excluding inter-segment revenue

Good first quarter growth in CPI EuroMix,
supported by favourable conditions in the new
housing market, was followed by a period of
uncertainty, leading to overall modest like-for-
like revenue growth in the first half. Demand
from the house builder and bricklaying
contractor customer base recovered strongly
in the second half resulting in mid-single
digit like-for-like revenue growth for the year.
Strong consumer demand for new housing
was sustained by a positive labour market, low
interest rates, the availability of competitive
mortgages and the Government’s Help to Buy
scheme.

The management team delivered strong gains
in operating profit and margin for the year
driven by volume growth and investment in
commercial initiatives that included converting
the sand drying system in all plants from
oil to LPG. This development reduced costs,
increased production efficiency and improved
emissions. Distribution costs were reduced due
to economies of scale achieved from investment
in bulk delivery vehicles that have increased
capacity.

2016
£’m

59.6

12.2

2015
£’m

52.8

9.8

Actual
Change

Constant
Currency
Change

+12.8%

+11.9%

+24.6%

+22.0%

20.4%

18.5%

+190bps

MFP, the Dublin based manufacturer of PVC
drainage and roofline products, increased
revenue by 19 per cent benefitting from the
recovering residential RMI market, new
infrastructure projects and the groundworks
phase of residential and commercial new build
construction which gathered pace during the
year.

Manufacturing Strategy in Action

The manufacturing segment strategy is based on:
ྲ Maintaining our clear market leadership position in the UK mortar

market; and

ྲ Leveraging scale and expertise in the UK mortar market to expand

into related products and markets.

Carlton, the packaged mortar products
business acquired in 2015, was successfully
integrated and targeted synergies and
efficiencies were realised.

Grafton Group plc
Strategic Report

Supplementary InformationFinancial StatementsCorporate GovernanceAnnual Report & Accounts 2016Financial Review

The Group delivered good growth in revenue,
adjusted operating profit and cashflow from
operations in 2016 and ended the year in a position
of financial strength with low net debt and
shareholders’ equity of over £1.1 billion.

discounted at 1.8 per cent, a decline of 55
basis points. There was a decline in scheme
liabilities of £2.7 million due to lower inflation
and salary growth assumptions.

Experience losses of £2.2 million were mainly
due to a higher rate of members transferring
from defined benefit to defined contribution
schemes. The return on plan assets was £22.5
million, a return of 11.0 per cent. There was a
reduction in the deficit by £1.2 million due to
contributions paid to the schemes exceeding
the current service cost for the year.

Net Finance Income and Expense

The net finance charge for the year was £5.9
million (2015: £7.9 million). Net bank and loan
note interest declined to £4.7 million from £5.9
million due to the benefits of the refinancing
of bank debt completed in March 2016, lower
average net debt and a decline in money
market interest rates. The net finance cost on
defined benefit pension scheme obligations fell
to £0.5 million from £0.9 million. There was a
net foreign exchange charge of £0.2 million for
the year which compares to a charge of £0.8
million in the prior year.

Property

The Group’s balance sheet includes the asset
backing of a portfolio of freehold property, the
majority of which is used for trading purposes.
Cashflow continued to be realised from the sale
of properties not in use for trading purposes.
A profit of £4.9 million was realised from the
sale of ten UK properties and the proceeds of
£8.3 million were redeployed elsewhere in the
business. The current expectation is that profit
from property disposals in 2017 will be lower
than the level achieved in 2016.

Pensions

Defined contribution style funding
arrangements apply to over 90 per cent of the
Group’s employees. Defined benefit pensions
schemes have 700 current employees and 1,800
deferred members and pensioners.

Despite high returns on plan assets, the IAS 19
pre-tax deficit on the defined benefit pension
schemes increased by £14.7 million to £31.3
million (31 December 2015: £16.6 million).
Changes in financial assumptions increased
scheme liabilities by £29.4 million. A fall in
the rates used to discount liabilities, which
declined in line with changes in corporate
bond yields, increased scheme liabilities by
£32.0 million. UK scheme liabilities were
discounted at 2.9 per cent, a decline of 105
basis points and Irish scheme liabilities were

ྲ The Group is

committed to achieving
increased returns for
shareholders and has
set a medium term
target of 15 per cent
for return on capital
employed.

Financial Statements
(page 75)

Grafton Group plc
An investment of £10.3 million (2015: £10.0
million) was made in intangible software
assets to upgrade the trading and back-office
systems in the traditional UK merchanting
business, principally Buildbase.

million) and strong cash flow from operations,
provide significant funding headroom and
financing flexibility. The Group’s loan facilities
of £518 million are with six relationship banks.
The earliest maturity is in March 2021.

Taxation

The tax charge for the year of £21.1 million on
profit of £114.3 million was equivalent to an
effective rate of 18.5 per cent. The tax charge
for the year before exceptional items was £23.4
million on profit of £134.0 million, an effective
rate of 17.4 per cent. This was lower than the
underlying rate of 19 per cent due to the use of
a previously unrecognised deferred tax asset to
partially offset a taxable profit of £4.9 million
arising on the disposal of properties in the UK
and agreement of a claim with the UK Revenue
that related to historic capital allowances.

The underlying tax rate of 19 per cent reflected
the blended rates of corporation tax on profits
in the UK, Ireland and the Netherlands and
the disallowance of a tax deduction for certain
overheads charged in arriving at profit before
tax including depreciation on property.
There will be a reduction in the UK rate of
corporation tax from 20 per cent at present to
19 per cent with effect from 1 April 2017 and a
further reduction in the rate to 17 per cent with
effect from 1 April 2020. The Group’s forecast
tax charge for 2017 is 18.5 per cent.

Shareholders’ Equity and Net Debt

Shareholders’ equity increased by £76.4
million to £1.1 billion at 31 December 2016 (31
December 2015: £985.7 million).

Strong cash conversion translated into a lower
level of net debt at 31 December 2016 of £96.3
million, a decline of £17.3 million from £113.6
million at 31 December 2015. The Group’s debt is
principally denominated in euros to provide a
hedge for its euro denominated assets. Weakness
in the sterling exchange rate increased euro
denominated net debt by £38.2 million on
translation into sterling at the end of the year.
The Group remains in a very strong financial
position with the gearing ratio declining to nine
per cent (31 December 2015: 12 per cent). EBITDA
interest cover was 37.9 times (31 December 2015:
27.3 times) and net debt was 0.54 times EBITDA
(31 December 2015: 0.70 times).

Capital Expenditure and Intangible Assets

Financing

The level of undrawn facilities at 31 December
2016 was £217.6 million (31 December 2015:
£115.7 million), which together with the
Group’s surplus cash balances and deposits
of £205.9 million (31 December 2015: £211.6

Capital expenditure of £50.1 million (2015:
£41.6 million) was incurred on property, plant
and equipment. This expenditure compares
to a depreciation charge of £34.9 million
(2015: £32.2 million) and reflects continued
investment in the future growth of the Group.
Development expenditure was £27.2 million
(2015: £21.5 million) and asset replacement
expenditure amounted to £22.9 million (2015:
£20.1 million).

Development expenditure was focused on
projects that provide a platform for the future
profitable growth of the Group including a
spend of £17.4 million on new Selco branches.
Other development projects concerned branch
upgrades and investment in Electricbase and
Hirebase branch implants. Asset replacement
expenditure primarily related to distribution
vehicles required to support delivered revenue
and replacement of tool, plant and equipment
assets that are hired to customers.

Profit after tax increased equity by £93.1
million and dividend payments reduced equity
by £30.1 million. The increase in the defined
benefit pension scheme deficit net of tax
reduced shareholders equity by £11.7 million.
There was a positive currency translation
effect (gain) of £21.6 million on conversion of
euro denominated assets, net of related euro
debt, into sterling at the year-end Sterling/Euro
exchange rate of Stg85.62p (31 December 2015:
Stg73.40p).

Return on Capital Employed and Asset Turn

Return on Capital Employed (ROCE) increased
by 30 basis points to 12.5 per cent (2015: 12.2 per
cent) and capital turn increased to 2.2 times
(2015: 2.1 times). The Group is committed to
achieving increased returns for shareholders
and has set a medium term target of 15 per
cent for return on capital employed. This
target is based on a combination of an
improvement in operating performance and
the more efficient deployment of capital to
generate higher returns.

David Arnold
Chief Financial Officer

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Corporate Social Responsibility

Grafton is committed to conducting its business in a socially
responsible manner. This is demonstrated in the way it
engages with its colleagues, customers, suppliers and with
the communities in which it trades. The Group is also
committed to taking a balanced view on economic, social
and environmental issues when making business decisions.

The Group increasingly recognises the importance of a strategic,
coordinated approach to the many aspects of its corporate
social responsibility (“CSR”). 2016 saw further development in
a number of areas of the Group’s broader CSR strategy. Various
key policies were issued or updated and practical approaches to
implementation continue to develop.

The Group’s core values listed below help to ensure that its CSR strategy is focused
and relevant.

Be brilliant for our
customers

Value our people

Ambitious

Trustworthy

Entrepreneurial and
empowering

The Group’s approach to CSR
is built on the following key
themes, around which policy,
strategy and activity are
focused.

Corporate Governance and
Ethical Business

During 2015 the Group issued a Group Code
of Business Conduct and Ethics setting out
the basic standards of behaviour which all
employees (including contractors, agents
and business partners) of the Group are
expected to follow. During 2016 the Group
issued a number of additional related
policies for adoption by its businesses
concerning ethics and regulatory
compliance including an Anti-Fraud and
Theft Policy, an Anti-Money Laundering
Policy and an Employee Purchasing
Policy. Online ethical training modules
have been developed and rolled out for
completion by all Group employees in
order to ensure that the Group’s principles
of ethical behaviour are embedded across
all Business Units.

Grafton Group plc

Community and Charity Support

The Group recognises its responsibility
as a member of the communities where
it conducts business and is committed to
developing links to those communities
through a range of community and
charitable initiatives supported by local staff
and management. In addition, the Group,
through its branch networks, also supports
a range of charitable causes mainly at a local
level. In 2016, Grafton businesses raised over
£500,000 in support of charities.

Woodie’s raised a total of £220,000 through
the very successful “Woodie’s Heroes”
campaign, which ran for four weeks across
all stores and was advertised nationally.
Funds raised were donated to children’s
charities Make A Wish Ireland, Temple Street
Children’s Hospital, Irish Autism Action and
Jack and Jill Foundation.

The Irish merchanting business supported
a number of charitable initiatives during
the year including a 140km charity cycle

to raise funds for the Friends of the Rotunda
Hospital, and the Barnardos Food & Toy appeal.
The business also celebrated its thirteenth
year of partnership with Moyle Park College,
Clondalkin where colleagues facilitated CV and
interview skills workshops for local students
under the “Business in the Community”
initiative.

Grafton Merchanting GB continued its support
of Cancer Research UK (“CRUK”) with a
number of fundraising events held throughout
the year raising £145,000. “Donation Stations”
were set up at various branch locations
enabling items to be donated to CRUK shops.

In June 2016, Grafton Group plc sponsored its
fifth consecutive cycle challenge. The four
day challenge covered over 300 miles from
the Atlantic to the Mediterranean. A team of
senior executives completed the challenge
and raised over £17,000 for the Foundation of
Light, the registered charity of Sunderland
AFC. The Foundation uses the power of football

to inspire, involve and educate children,
families and adults across the North East of
England and engages with more than 40,000
people every year.

Selco continued its ongoing fundraising
support for MacMillan Cancer Support,
raising £175,000 in 2016 and £365,000 to date
through a variety of sporting events and
community initiatives.

The Isero business continues to sponsor
the ‘Beursvloer Woerden’, a trade fair which
provides for the sharing of information and
skills between local businesses and social
organisations. Other sponsorships included
sports events to raise funds for the Dutch
Cancer Society.

The Belgian merchanting business ran
initiatives throughout the year raising funds
for a number of children’s charities.

Products and Supply Chain

Grafton recognises the increasingly
significant role that effective environmental
management has to play in its business and
acknowledges its corporate responsibilities
in this field.

The UK merchanting and manufacturing
operations continued to maintain
accreditation to the ISO 14001 environmental
management standard. This accreditation
is seen as vital in helping to focus on
environmental risk management initiatives.

CPI Mortars has maintained the
Construction Products Certification (CPC)
BES 6001 accreditation for product and
supply chain sustainability and ethics.

The Group recognises the increasing
importance of supplying renewable and
sustainable products. Product ranges

designed to provide sustainable building
solutions have been introduced in a number
of businesses. These ranges include Solar
Thermal and Solar PV, air source heat pumps,
ground source heat pumps, biomass heating,
rainwater harvesting and heat recovery
ventilation systems. The Woodie’s DIY
business offers a range of environmentally
friendly products including energy-saving
lamps, solar garden lights and composters for
recycling garden and household waste. The
merchanting branches sell condensing boilers
which reduce demand for fossil fuels, energy-
saving insulation materials and controlled
ventilation systems.

Transparent Timber Sourcing

Buildbase holds an internationally recognised
environmental certificate for the PEFC
(Programme for the Endorsement of Forest
Certification) scheme. It is Buildbase policy

that its natural timber products are FSC/
PEFC accredited. The entire operation is
independently audited. Buildbase has adopted
the Timber Trades Federation ‘Responsible
Purchasing Policy’. This demonstrates that the
business is committed to sourcing timber and
timber products from legal and well-managed
forests. The Irish merchanting business
sources timber from suppliers that are FSC/
PEFC certified.

Modern Slavery Act

The Group issued a Modern Slavery Policy
Statement in respect of the year ended 31
December 2016, which is available on its
website www.graftonplc.com. This describes
Grafton’s policy on forced or involuntary
labour and describes the safeguards that the
Group has in place to mitigate against the
risk of modern slavery in its businesses or
supply chains.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016

Corporate Social Responsibility

(continued)

Key CSR Themes (continued)

Carbon Footprint and Energy Reduction

Our Values

Be brilliant for our customers

Value our people

Ambitious

Trustworthy

Entrepreneurial and empowering

ྲ CPI Mortars, the Group’s
mortar manufacturing
business, achieved a 20
per cent reduction in CO2
emissions from manufacturing
operations by switching from
gas oil to LPG fuel for its sand
drying processes.

Greenhouse Gas Emissions

CO2e Emissions by Sector

(Tonnes of CO2e)

Merchanting
and Retail

Manufacturing

Group Total

69,195

18,153

87,348

Total emissions are calculated from the
following:

• Buildings – electricity, gas and fuel oil

• Transport – petrol, diesel and red diesel

• Processing – fuel oil

Overall group CO2e output decreased by 2.1
per cent in 2016. CPI Mortars, the Group’s
mortar manufacturing business, achieved a
20 per cent reduction in CO2 emissions from
manufacturing operations by switching
from gas oil to LPG fuel for its sand drying
processes. The opening of a number of new
Selco stores and the inclusion of previously
unmeasured fuel use in part of the Irish
operations led to an increase in reported
emissions in the merchanting and retail
segments.

Pollution and Waste

As a supplier of building materials and
related products, Grafton strives to reduce
the quantity of waste sent to landfill by
implementing recycling measures across its
businesses. The Group’s Irish businesses are
members of Repak and the UK businesses are
members of Biffpack.

The Group has also focused on operational
efficiencies and reductions in energy usage
through on-going energy audit programmes
and the replacement of old appliances. The
Group’s Irish merchanting business works
closely with the Environmental Protection

Energy Efficiency

Buildbase is a Green Deal provider. Sponsored
by the Department of Energy and Climate
Change (DECC), the Green Deal is an
initiative to encourage home and business
owners to improve the energy efficiency of
their properties. It provides a platform to
enable customers to engage in an initiative
that provides finance to property owners for
the installation of energy efficient products.

Considerable work has been carried out in
the Republic of Ireland operations to reduce
energy consumption through changes
to lighting; the most significant area of
energy demand in branch locations. The
merchanting businesses in Belgium and
Northern Ireland also substantially reduced
energy consumption by installing LED lights
in a number of branches.

Agency to implement best practice solutions
for the treatment and preservation of timber.

In the UK, Grafton has worked hard with
its suppliers to improve the accuracy of
data collection on recycling rates. As a
consequence of improvements in waste
management data collection, reported
recycling rates reduced from 80 per cent to
77.1 per cent.

Grafton Group plc

Colleagues

The success of the Group is dependent
on the contribution and commitment of
its employees. The Group’s decentralised
structure, which is appropriately supported
at Group level, gives colleagues the autonomy
to maximise their experience, expertise and
skills both for their own career development
and for the success of the Group. The Group
recognises that talent management and
succession planning are critical for future
growth and as a result an annual talent review
is conducted and people risks are strategically
managed.

Grafton is committed to high standards of
employment practice across its businesses
and aims to reward colleagues fairly by
reference to skills, performance, peers and
market conditions. Where appropriate,
the Group provide incentives to employees
through remuneration policies that promote
commitment and reward achievement.

The Group has put in place an Equality and
Diversity Policy which states that Grafton will
not tolerate harassment and discriminatory
practices based on age, ancestry, colour,
marital status, medical condition, disability
(both mental and physical), national origin,
race, religion, political affiliation, sex, sexual
orientation or gender identity, or any other
factor as established by law or best practice.
The Group believes that monitoring the pay
between men and women is an important step
to ensuring all colleagues are fairly rewarded
for their work and their contribution to the
business. During 2017 gender pay information
will be published on the websites of UK
businesses that are within the scope of the UK
gender pay gap reporting regulations.

Grafton is committed to offering equal
opportunities to all individuals in their
recruitment, training and career development
having regard to their particular aptitudes
and abilities. Training and development
programmes are important to the business.
Significant attention and resources are
devoted to this area. Training programmes
are organised internally by Group businesses
and also in conjunction with external
bodies, including the Builders Merchant

Federation in the UK. These programmes cover
sales development, customer service, product
training, health and safety and leadership skills.
They help to ensure that the Group can develop,
retain and attract the best talent at all levels
in the business. The Group aims to support
career progression by filling vacancies through
internal promotions and to complement
internal appointments with recruitment from
outside of the organisation.

The Irish merchanting business redesigned its
Management Development Programme during
the year with a view to developing and retaining
strong leadership talent. The programme
comprises a 24-module “Development Road
Map” based on key leadership competencies
including emotional intelligence,
decision making, conflict management,
entrepreneurship and interpersonal skills.
Successful participants are conferred with a City
& Guilds Diploma.

Woodie’s operate a range of learning and
development programmes including the
externally accredited Seeds to Success
Programme, Leadership Development Training
and a Retail Degree Programme. The Isero
business in the Netherlands operates an in-
house business academy to train apprentice
customer service representatives. Buildbase and
Plumbase offer a wide range of training courses
through the ‘My Learning’ e-learning, an
application which complements the Business
Fundamentals, Core and Advanced Management
Development Programmes used to develop
talent in the business.

A number of Group businesses took part in
employee engagement surveys during the
year. The results of all surveys across the Group
demonstrated ongoing improvements in both
participation rates and employee engagement
scores.

Employing companies in the UK will be in
scope for the Apprenticeship Levy from April
2017 whereby a proportion of payroll costs will
be withheld and used to pay for apprenticeship
training and development of future talent. The
Group is committed to the development of
early careers and has over 40 apprentices on

the existing apprenticeship scheme but this
number is expected to increase in future.

The Group has invested in a cloud based HR
solution which allows colleagues in Business
Units in the UK and Ireland to access and
update their employee records from a range
of devices. In the UK, colleagues have access
to “Reward Gateway”, an online benefits
and communications web platform which
provides access to company communications
and information on discounts available
from a range of high street retailers. Since
launching the platform in 2013, employees
have spent over £2.5m through the website.
Selco operates a funded health plan for all
employees which enables them to claim
money back for basic health costs including
dentistry and eye glasses.

The Group operates a Revenue-approved
Save As You Earn Scheme (SAYE) that enables
eligible UK colleagues to share in the success
of the overall Group. A scheme launched
in 2014 will mature in 2017. Participating
employees have the option on maturity to
purchase Grafton Units at a discount to the
market price of the shares at the time the
options were granted. Colleagues can benefit
from any increase in the share price over the
three year savings period.

“Speak-Up”, the group-wide confidential
reporting service established during 2014,
continued to provide an effective channel for
employees to raise concerns to an independent
third party regarding practices or conduct in
their businesses including possible instances of
fraud, theft, serious health and safety issues and
other risks. All reports are logged by the third
party and passed to the Group Internal Audit
team for investigation. The individual making
the report is kept appropriately informed
of the progress of the investigation and its
outcome through the reporting service. All
concerns raised through this channel and the
outcomes of investigations are reported to the
Audit and Risk Committee. While Group policy
encourages colleagues to raise any concerns
with their manager in the first instance, this
service provides an alternative reporting route
if required.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016

Corporate Social Responsibility

(continued)

Our Values

Be brilliant for our customers

Value our people

Ambitious

Trustworthy

Entrepreneurial and empowering

ྲ Each of the Group’s businesses

have put in place agreed
annual Health and Safety
improvement plans which will
allow for the measurement
of future performance
against agreed improvement
objectives.

Key CSR Themes (continued)

Health and Safety

The Group is committed to achieving the
best practicable standard of health and
safety for its colleagues, customers and
visitors to trading locations. It considers
health and safety to be an important
element in the overall management of the
businesses and is an agenda item for all
meetings of the Grafton Group plc Board
and at review meetings of Business Units.
Effective health and safety management
is driven by Directors and senior
management. Management across the
businesses continued to demonstrate their
commitment, involvement and leadership
through active monitoring of performance,
challenging unacceptable standards and
promoting effective safety management as
a priority. The contribution of all colleagues
across the Group is critical to preventing
accidents and protecting staff, customers and
visitors to Group locations.

There was a continued focus during 2016 on
ensuring that the Group’s health and safety
specialists work closely with management
teams to promote responsibility for health
and safety and implement improved
practices. Each of the Group’s businesses
have put in place agreed annual Health
and Safety improvement plans which
will allow for the measurement of future
performance against agreed improvement
objectives. A Group Health and Safety Policy
has also been put in place which sets out
the key responsibilities for health and safety
management and enforcement across the
group. Every employee is expected to fulfil
their responsibilities as effectively as possible
and to raise any concerns about safety within
our business.

There was continuing activity across the
Group’s businesses to improve the quality,
clarity and standard of safety management
systems and procedures and to drive effective
implementation of change. The ongoing
objective is to ensure that all colleagues

are aware of the Group’s health and safety
standards and understand their roles in
observing these standards.

The Group’s training programmes develop
knowledge, understanding, capability
and commitment among colleagues.
Programmes of practical and specialist
training continued with the objective of
ensuring that colleagues have the requisite
skills and competence to operate in areas
that give rise to particular health and safety
considerations. The introduction of a new
manual handling training programme in
late 2015 yielded a 25 per cent reduction in
manual-handling related lost time incidents
in the UK merchanting business.

There was a move to a more coordinated
strategy for health and safety management
across the whole of the Group with the
aim of facilitating the transfer of best
practice and the development of common
standards. A feature of this strategy
was the development of more effective
communication and enabling key safety
information and messages to be delivered
in a clear, coordinated and structured way.
The Group has also invested in a tailored
electronic health and safety management
system which will provide a platform for
performance monitoring, audit management
and dissemination of relevant information to
drive further improvements.

Lost Time Accident Frequency Rate (LTAFR)
increased slightly to 1.55 lost time incidents
per 100,000 hours worked (2015: 1.50).

Grafton Group plc

Strategic Report

Corporate Governance

Corporate
Governance

Supplementary InformationFinancial StatementsAnnual Report & Accounts 2016Board of Directors and Secretary

Michael J. Roney (USA), MBA
Non-Executive Chairman

Gavin Slark (UK)
Chief Executive Officer

David Arnold (UK), BSc, FCMA, FCT
Chief Financial Officer

Michael Roney was appointed to the Board as
Non-Executive Director, Deputy Chairman
and Chairman Designate on 1 May 2016 and
assumed the role of Chairman on 1 January
2017. He was Chief Executive of Bunzl plc from
2005 until his retirement in April 2016. Prior to
joining Bunzl he was Chief Executive Officer of
Goodyear Dunlop Tires Europe having previously
been President of Goodyear’s Eastern European,
African and Middle Eastern businesses. He
was appointed Non-Executive Director, Deputy
Chairman and Chairman Designate of Next plc,
the FTSE 100 listed UK retailer, on 14 February
2017 and will take up the role of Non-Executive
Chairman of Next plc on 1 August 2017. He
is Non-Executive Director of Brown-Forman
Corporation, the US based spirits business and of
Azelis SA, a private company, and was formerly
Non-Executive Director of Johnson Matthey Plc.

Board Length of Service: 0.8 years

Legend

Audit and Risk Committee

Finance Committee

Nominations Committee

Remuneration Committee

Committee Chairman

Gavin Slark joined the Group and the Board as
Chief Executive Designate on 1 April 2011 and
was appointed Chief Executive Officer on 1 July
2011. He is currently a Non-Executive Director
of Galliford Try plc, a UK housebuilding and
construction group. He was previously Group
Chief Executive of BSS Group plc, a leading UK
distributor to specialist trades including the
plumbing, heating and construction sectors.

David Arnold joined the Group as Group Chief
Financial Officer on 9 September 2013. He was
Group Finance Director of Enterprise plc, the
UK Maintenance and Support Services business,
from 2010 to 2013 and Finance Director of Redrow
plc, the house builder, from 2003 to 2010. He
previously held senior financial positions with
Six Continents plc, the hotels group and Tarmac
plc, the building materials company.

Board Length of Service: 6.0 years

Board Length of Service: 3.5 years

Paul Hampden Smith (UK), FCA
Non-Executive Director

Charles M. Fisher (UK), MA
Non-Executive Director

Charles Fisher was appointed to the Board
on 1 May 2009. He was Chairman and Chief
Executive of Sharpe & Fisher plc, the UK builders
merchanting company, from 1989 to 1999. He was
formerly Chairman of Garden Centre Property
Development Trading plc and Mowlem plc and
previously served as a director of a number
of other public companies including Travis
Perkins plc, Baggeridge Brick plc, South Western
Electricity plc and Delta plc. Mr. Fisher has
indicated that he will be stepping down from the
Board following the 2017 AGM.

Board Length of Service: 7.9 years

Paul Hampden Smith was appointed to the
Board on 27 August 2015 and will be appointed
Senior Independent Director with effect from
9 May 2017. He was Group Finance Director of
Travis Perkins plc from 1996 until his retirement
in February 2013. He joined the Travis Perkins
Group in 1988 and has 25 years’ senior level
management experience in the UK merchanting
industry. He is currently a Non-Executive
Director, Chairman of the Audit Committee and
a member of the Nomination and Remuneration
Committees of Bellway plc and Clipper Logistics
plc. He is also Senior Independent Director of
Clipper Logistics plc. He was previously a Non-
Executive Director and Chairman of the Audit
Committee of Pendragon plc, Redrow plc and DX
Services plc.

Board Length of Service: 1.6 years

Grafton Group plc
Frank van Zanten (NL), MBA
Non-Executive Director

Frank van Zanten was appointed to the Board on
13 May 2013. He is Chief Executive of Bunzl plc,
the FTSE 100 UK international distribution and
outsourcing Group with operations across the
Americas, Europe and Australasia. He joined the
Board of Bunzl on 1 February 2016 and assumed
the role of Chief Executive on 20 April 2016. Prior
to his appointment as CEO he was Managing
Director of Bunzl’s Continental Europe business
area. He was previously Chief Executive of
PontMeyer N.V., the Dutch Builders Merchants.

Board Length of Service: 3.8 years

Roderick Ryan (IRL), B.Comm, FCA,
AITI
Non-Executive Director

Roderick Ryan joined the Board on 15 March 2006
and was appointed Senior Independent Director in
May 2010. He is a Non-Executive Director of Glen
Dimplex and other companies. Mr. Ryan is a former
Managing Partner of Arthur Andersen in Ireland.
Mr. Ryan has indicated that he will be stepping down
from the Board following the 2017 AGM.

Board Length of Service: 11.0 years

Susan Murray (UK)
Non-Executive Director

Vincent Crowley (IRL), BA, FCA
Non-Executive Director

Susan Murray was appointed to the Board
on 14 October 2016. She is currently a Non-
Executive Director of 2 Sisters Food Group, a food
manufacturing company. She is a former Chief
Executive of Littlewoods Stores Limited and
former Worldwide President and Chief Executive
of The Pierre Smirnoff Company, part of Diageo
plc. She is also a former Chairman of Farrow
& Ball and a former Non-Executive Director of
Compass Group plc, Pernod Ricard S.A., Imperial
Tobacco plc, Enterprise Inns plc, Aberdeen Asset
Management plc, SSL International plc and Wm
Morrison Supermarkets plc.

Board Length of Service: 0.4 years

Vincent Crowley was appointed to the Board
on 14 October 2016. He is currently a Non-
Executive Director of C&C Group plc, an
international manufacturer and distributor of
branded drinks, and Executive Chairman of
Altas Investments plc, an Irish company that
holds investments in infrastructure and related
businesses. In the course of a 24 year career
with Independent News & Media PLC, a leading
Irish newspaper and media business, he held a
number of leadership positions including Chief
Executive Officer and Chief Operating Officer
and was a member of the Board. Prior to joining
Independent News & Media PLC, he held senior
roles in KPMG and Arthur Andersen.

Board Length of Service: 0.4 years

Charles Rinn, MBA, FCCA
Group Financial Controller & Secretary

Audit and Risk Committee

Membership

P. Hampden Smith
(Chairman)
C. M. Fisher
F. van Zanten
V. Crowley

Remuneration Committee

Membership

C. M. Fisher (Chairman)
F. van Zanten
P. Hampden Smith
S. Murray

Nomination Committee

Membership

R. Ryan (Chairman)
M. Roney
C. Fisher
F. van Zanten
P. Hampden Smith
S. Murray
V. Crowley

*appointed on 3 March 2017

Finance Committee

Membership

G. Slark (Chairman)
D. Arnold
C. Rinn

Length of
Service

1.6 years
1.3 years
3.6 years
0.2 years

Length of
Service

6.8 years
1.3 years
1.3 years
0.2 years

Length of
Service

6.8 years
0.8 years
6.8 years
1.7 years
1.6 years
0.0 years*
0.0 years*

Length of
Service

6.0 years
3.5 years
13.0 years

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Directors’ Report on Corporate Governance

Compliance with the 2014 UK Corporate Governance Code

Grafton Group plc is incorporated in Ireland and is subject to Irish company
law. Its Units (shares) are listed on the London Stock Exchange and the UK
Corporate Governance Code (“the Code”) sets out the standards for corporate
governance to be applied by companies with a listing on the London Stock
Exchange. This report describes how the Company has applied the main and
supporting principles of the Code.

The Board believes that the Company has, throughout the accounting period,
complied with all relevant provisions set out in the Code.

LEADERSHIP

Role of the Board and Division of Responsibilities

The Board routinely meets eight times a year and additionally as
required by time critical business needs. The Board met on eight
occasions during 2016. There is also contact with the Board between
meetings as required in order to progress the Group’s business. The
Board takes the major decisions while allowing management sufficient
scope to run the business within a centralised reporting framework.
The Board has a formal schedule of matters specifically reserved for
its decision. The matters reserved by the Board for its decision cover
all strategic decisions, risk management, acquisitions, approval of
interim and final dividends and share purchases, changes to the
capital structure, tax and treasury management, major items of capital
expenditure, approval of half-yearly and annual financial statements,
budgets and material matters currently or prospectively affecting the
Group and its performance. The Board’s responsibilities also include
ensuring that appropriate management, development and succession
plans are in place; reviewing the environmental and health and safety
performance of the Group; approving the appointment of Directors
and the Company Secretary; approving policies relating to Directors’
remuneration and severance and ensuring that satisfactory dialogue
takes place with shareholders. The Group has arranged appropriate
insurance cover in respect of legal action against directors.

strategy agreed with the Board and reporting on the performance of
the Group. He is accountable to the Board as Chief Executive Officer
for all authority delegated to executive management. The Chairman is
responsible for leading the Board and ensuring its effectiveness in all
aspects of its role.

Non-Executive Directors act constructively to challenge management
proposals and review the performance of the business and
management. The Board has delegated some of its responsibilities
to the Audit and Risk, Remuneration, Nomination and Finance
Committees.

Senior Independent Director

Mr. Roderick Ryan is the Senior Independent Director. He is
available to act as a sounding board for the Chairman, and as an
intermediary for the other Directors, if necessary. He is also available
to shareholders who may have concerns that cannot be addressed
through the normal channels of Chairman, Chief Executive Officer or
Chief Financial Officer. Mr. Ryan has indicated that he will step down
from the Board at the conclusion of the Annual General Meeting on 9
May 2017. Mr. Ryan will be succeeded as Senior Independent Director
by Mr. Paul Hampden Smith.

It is Board policy that no individual or small group of individuals can
dominate its decision-making.

The roles of Chairman and Chief Executive Officer are split. There
is a clear division of responsibility between the Chairman and the
Chief Executive Officer. The Chief Executive Officer is responsible for
day-to-day management of the Group including implementing the

Company Secretary

The Directors have access to the advice and services of the Company
Secretary, Charles Rinn, who advises the Board on governance matters.
The Company’s Articles of Association and Schedule of Matters
reserved for the Board provide that the appointment or removal of the
Company Secretary is a matter for the full Board.

Grafton Group plcAttendance at Board and Board Committee Meetings during the Year Ended 31 December 2016

The number of board meetings and committee meetings held during the year and attended by each Director was as follows:

Number of Meetings

Total

Attended

Total

Attended

Total

Attended

Total

Attended

Total

Attended

Board

Audit and Risk
Committee

Finance Committee

Remuneration
Committee

Nomination
Committee

M. Chadwick
G. Slark
D. Arnold
F. van Zanten
R. Ryan
C. M. Fisher
P. Hampden Smith
M. Roney
V. Crowley
S. Murray

8
8
8
8
8
8
8
6
1
1

-
-
-
4
-
4
4
2
-
-

-
11
11
-
-
-
-
-
-
-

-
-
-
8
-
8
8
5
-
-

-
-
-
6
-
8
8
5
-
-

2
-
-
2
2
2
2
2
-
-

The Board is assisted by Committees of Board members that focus on specific aspects of its responsibilities. The terms of reference of the Audit and
Risk Committee, Remuneration Committee and Nomination Committee, which were approved by the Board and comply with the Code, are available
from the Company and can also be found on the Group’s website at www.graftonplc.com. Membership of Board Committees is shown on page 41. Ms.
Susan Lannigan, Deputy Company Secretary is Secretary to the Audit and Risk Committee. Ms. Paula Harvey, Group HR Director is Secretary to the
Remuneration Committee and Mr. Charles Rinn is Secretary to the Nomination Committee.

Finance Committee

The Finance Committee comprises Mr. Gavin Slark, Chairman, Mr. David Arnold, Chief Financial Officer and Mr. Charles Rinn, Secretary and
Group Financial Controller. The committee considers the financing requirements of the Group and makes recommendations to the Board. It also
considers amendments to the terms of existing bank facilities, approval of finance and operating leases, for assets other than property up to a
specified level, and litigation matters.

The length of service of the members of the Finance Committee is set out on page 41.

EFFECTIVENESS

Board Composition

It is the Company’s policy that the Board comprises a majority of
Non-Executive Directors. At 31 December 2016, the Board of Directors
was made up of ten members comprising the outgoing Non-Executive
Chairman, the Non-Executive Chairman Designate, two Executive
Directors and six independent Non-Executive Directors. Following the
Group’s AGM and assuming the election/re-election of those Directors
going forward, the Group’s Board will comprise seven Directors
being the Non-Executive Chairman, two Executive Directors and
four Non-Executive Directors. Directors’ biographical details are set
out on pages 40 to 41. The Board considers that its proposed size and
structure following the AGM is appropriate to the scale, complexity
and geographic spread of its operations.

The number of Non-Executive Directors is considered sufficient to
enable the Board and its Committees to operate effectively without
excessive reliance on any individual Non-Executive Director. The Board
believes that Executive and Non-Executive Directors between them
have the necessary skills, knowledge and experience, gained from a
diverse range of industries and backgrounds, required to manage the
Group. The skills, expertise and experience of the Board is used to
review strategy, allocate capital, monitor financial performance and
consider executive management’s response to market developments
and operational matters.

The terms and conditions of appointment of Non-Executive Directors,
which include the time commitment expected from each Director,
are available for inspection by any person at the Company’s registered
office during normal business hours and at the AGM for 15 minutes
prior to the meeting and during the meeting.

Directors’ Independence and Board Balance

The six Non-Executive Directors, Mr. Roderick Ryan, Mr. Charles
M. Fisher, Mr. Paul Hampden Smith, Mr. Frank van Zanten, Mr.
Vincent Crowley and Mrs. Susan Murray are considered by the Board
to be independent in character and free from any business or other
relationship which could materially interfere with the exercise of
independent judgement. The Board has determined that each of the
Non-Executive Directors fulfilled this requirement and is independent.
In reaching that conclusion, the Board considered the principles
relating to independence contained in the Code.

Mr. Roderick Ryan was appointed to the Board in 2006 and, as the length
of his service exceeds nine years, the Code provides that an explanation be
made to shareholders concerning his continued independence. The Board
believes that the integrity and independence of Mr. Ryan is beyond doubt.
He is financially independent of the company and has other significant
professional commitments. His professional experience and long-term
perspective on the Group’s business was important to the work of the

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(continued)

EFFECTIVENESS (continued)

Board and the Nomination Committee during 2016. The Board believes
that Mr. Ryan has demonstrated independence in his role and that he has
made a very valuable contribution to the Board. Mr. Ryan has indicated
that he will not seek re-election and that he will retire from the Board at
the conclusion of the Annual General Meeting on 9 May 2017.

It is Board Policy that Non-Executive Directors are normally appointed
for an initial period of three years, which is then reviewed. Mr. Charles
Fisher has served two years of his third term of three years and he
has indicated that he will retire from the Board at the conclusion of
the Annual General Meeting on 9 May 2017. Mr. Frank van Zanten has
completed his first year of his second term of three years and Mr. Paul
Hampden Smith has completed half of his first term of three years. Mr.
Vincent Crowley and Mrs. Susan Murray were both appointed during
2016 and will be subject to election to the Board at the 2017 AGM.

The Company’s Articles of Association provide that one third of the
Directors retire by rotation each year and that each Director seek re-
election at the Annual General Meeting every three years. Directors
appointed since the last AGM are subject to election by shareholders
at the next Annual General Meeting following their appointment.
However, in accordance with the provisions of the Code, the Board has
decided that all other Directors, with the exception of Mr. Ryan and
Mr. Fisher who have indicated their intention to retire as set out above,
should retire at the 2017 Annual General Meeting and offer themselves
for re-election.

The Board undertakes a formal annual evaluation of the performance
of its Directors and is satisfied that all Directors who are proposed for
re-election continue to discharge their obligations as Directors and
contribute effectively to the work of the Board and its Committees.
Further details on the board evaluation is set out below.

The overall composition and balance of the Board is kept under review
as detailed in the programme of work undertaken by the Nomination
Committee, set out in its report on pages 52 to 53. The Board will
continue to manage the orderly succession of Non-Executive Directors.

Induction and Training

It is the policy of the Board that formal induction is offered to all
Directors appointed to the Board. This includes on-site visits and
meetings with Senior Management in the Group’s businesses and
briefings from the Chairman, Executive Directors and the Company
Secretary. Mr. Mike Roney, Mr. Vincent Crowley and Mrs. Susan
Murray, who were appointed during 2016, completed a comprehensive
induction programme including extensive site visits. Induction
covers matters such as the operations of the Group, the role of the
Board and matters reserved for its decision, powers delegated to Board
Committees, corporate governance policies and the performance of the
Group. Directors are advised on appointment of their legal and other
duties and of their obligations as Directors of a listed company. The
training and development needs of the Directors were reviewed and
agreed at meetings held during the year.

Information and Support

Directors have full and timely access to all relevant information in
a form appropriate to enable them to discharge their duties. Reports
and papers are circulated to Directors in preparation for Board and
Committee meetings. All Directors receive monthly management
accounts and board reports covering the Group’s performance, its
strategy and other matters to enable them to review and oversee the
performance of the Group on an ongoing basis.

All Directors have access to independent professional advice at the
Group’s expense where they consider that advice is necessary to enable
them to discharge their responsibilities as Directors.

The Board periodically holds meetings at Group locations and
meets senior management in order to help Directors gain a deeper
understanding of the Group’s operations and markets.

Evaluation of Board

A formal review of the performance of the Board, Board Committees
and individual Directors is undertaken each year including an external
evaluation every three years. The process is designed to ensure that the
effectiveness of the Board is maintained and improved where possible.

An internal evaluation was conducted by the Senior Independent Director
in respect of the year ended 31 December 2016, an externally facilitated
evaluation having been conducted during 2015 by the Institute of Directors
in Ireland, with whom the Group has no other connection. The internal
evaluation involved each Director independently completing a self-
assessment questionnaire that covered the running of an effective board,
relationships with management, oversight of strategy and development,
monitoring financial and operating performance and shareholder value
creation. The Senior Independent Director collated the responses to the
questionnaire and reported the results of the evaluation to the Board.
The overall result of the evaluation was very positive with a high level
of satisfaction among Directors concerning the matters covered by the
evaluation. The Non-Executive Directors also met during the year without
the Chairman present to appraise the chairman’s performance.

The Board confirms that each Non-Executive and Executive
Director continues to perform effectively and demonstrate a strong
commitment to the role.

Succession Planning

The Board’s general policy is to keep the overall composition and
balance of the Board under review and to manage the orderly
succession of Non-Executive Directors without compromising the
effectiveness and continuity of the Board and its Committees.

The Board plans for succession with the assistance of the Nomination
Committee. The Board believes that it is necessary to have appropriate
Executive Director and Non-Executive Director representation to
provide Board balance and also to provide the Board with the breadth
of experience required by the scale, geographic spread and complexity
of the Group’s operations.

Grafton Group plcThe Nomination Committee takes account of the skills, knowledge and
experience required by the Board, international business experience
and diversity, including nationality and gender, in considering suitable
candidates to serve as Non-Executive Directors as part of the ongoing
process of Board renewal. The Committee also considers the need for
an appropriately sized Board.

ACCOUNTABILITY

The Board is committed to providing a fair, balanced and
understandable assessment of the Company’s position and prospects.

Responsibility for reviewing the Group’s internal controls, risk
management and risk evaluation procedures has been delegated by the
Board to the Audit & Risk Committee. Details of how these duties were
discharged is set out in the Audit & Risk Committee Report on pages 47
to 51.

Following the updates to the UK Corporate Governance Code, in
particular in relation to the risk management process and long term
viability of the Group, an assessment of the viability of the Group over
a three year period to December 2019 was carried out by the Board and
details of this assessment are laid out below.

Going Concern

The Directors, having made appropriate enquiries, believe that the
Company and the Group as a whole has adequate resources to continue
in operational existence for the foreseeable future, being 12 months
from the date of approval of the financial statements and, for this
reason, they continue to adopt the going concern basis in preparing the
financial statements.

Viability Statement

The Directors have assessed the viability of the Group over a three-year
period to December 2019, taking account of the Group’s current position
and prospects, the Group’s strategy and the Group’s principal risks
and how they are managed as documented on pages 16 to 19. Based on
this assessment, the Directors have a reasonable expectation that the
company will be able to continue in operation and meet its liabilities as
they fall due over the period to December 2019.

REMUNERATION

The Board has adopted remuneration policies that are considered
sufficient to attract, retain and motivate Directors of the quality
required to manage the company successfully whilst ensuring that
the performance related elements are both stretching and rigorously
applied. The Board has established a Remuneration Committee
comprising four independent Non-Executive Directors. Details of the

The Board considers senior management succession planning on a
regular basis with a view to developing, over the coming years, a robust
succession pipeline for key positions up to Executive Director level.

In making this statement the Directors have considered the resilience
of the Group, taking account of its current position, the principal
risks facing the business in severe but reasonable scenarios, and
the effectiveness of any mitigating actions that could be taken to
avoid or reduce the impact or occurrence of the underlying risks and
that realistically would be open to them in the circumstances. This
assessment has considered the potential impacts of these risks on the
business model, future performance, solvency and liquidity over the
period.

The Directors have determined that the three-year period to December
2019 is an appropriate period over which to provide its viability
statement. The Group prepares five year plans as part of its annual
budgeting process however, given the inherent uncertainties, the
outer two years are more difficult to forecast. These two years are
used mainly for scenario planning with the Board placing greater
reliance on the initial three year period. In making their assessment,
the Directors have taken account of the Group’s low net debt to equity
position of nine per cent, its strong financial position and headroom
on loan facilities in place over the period, its key potential mitigating
actions of reducing the Group’s cost base, capital expenditure or
dividend payments and the Group’s ability to generate positive cash
inflows in a scenario of falling revenue as working capital is unwound.
These mitigating actions were tested during the downturn in the
Group’s businesses from 2008 to 2012 which highlighted the resilience
of the Group’s business model to a severe and protracted economic
downturn.

committee’s key responsibilities and a description of its work during
2016 are contained in the Report of the Remuneration Committee on
Directors’ Remuneration on pages 54 to 70.

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(continued)

RELATIONS WITH SHAREHOLDERS

Communication with Shareholders

The Company recognises the importance of communication with
shareholders. Meetings are held with existing and prospective
institutional shareholders principally after the release of half-yearly
and annual results. The Group also issues trading updates in January,
May, July and November.

A quorum for a general meeting of the Company is constituted by
four or more shareholders present in person and entitled to vote. The
passing of resolutions at a meeting of the Company, other than special
resolutions, requires a simple majority. A special resolution requires a
majority of at least 75 per cent of the votes cast to be passed.

Shareholders have the right to attend, speak, ask questions and vote at
general meetings. In accordance with Irish company law, the Company
specifies record dates for general meetings, by which date shareholders
must be registered in the Register of Members of the Company to be
entitled to attend. Record dates are specified in the notice of a general
meeting. Shareholders may exercise their right to vote by appointing
a proxy/proxies, by electronic means or in writing, to vote some or all
of their shares. The requirements for the receipt of valid proxy forms
are set out in the Notice convening the meeting. A shareholder, or a
group of shareholders, holding at least 5 per cent of the issued share
capital of the Company, has the right to requisition a general meeting.
A shareholder, or a group of shareholders, holding at least 3 per cent of
the issued share capital of the Company, has the right to put an item on
the agenda of an AGM or to table a draft resolution for inclusion on the
agenda of a general meeting, subject to any contrary provision in Irish
company law.

Memorandum and Articles of Association

The Company’s Memorandum and Articles of Association set out the
objects and purposes of the Company. The Articles detail the rights
attaching to each share class; the method by which the Company’s
shares can be purchased or re-issued; the provisions which apply to the
holding of and voting at general meetings; and the rules relating to the
Directors, including their appointment, retirement, re-election, duties
and powers.

The Company’s Memorandum and Articles of Association may be
amended by a Special Resolution passed by the shareholders at an AGM
or EGM of the Company.

A copy of the Memorandum and Articles can be obtained from
the Group’s website, www.graftonplc.com.

A presentation for analysts was held in London on 7 March 2017
following the announcement of the Final Results for 2016. The
presentation by the Chief Executive Officer and the Chief Financial
Officer was broadcast on www.graftonplc.com/webcast and can be
viewed or downloaded at www.graftonplc.com.

Any significant or noteworthy acquisitions are announced to the
market. The Company’s website www.graftonplc.com provides the full
text of all announcements including the half-yearly and annual results
and investor presentations.

While the Chairman takes overall responsibility for ensuring that the
views of our shareholders are communicated to the Board as a whole,
contact with major shareholders is principally maintained by the Chief
Executive and the Chief Financial Officer. The Chairman is available
to meet with shareholders if they have concerns which have not been
resolved through the normal channels of Chief Executive Officer or
Chief Financial Officer or where such contacts are not appropriate. The
Board receives reports on feedback from investors and also receives
analysts’ reports on the Group. Non-Executive Directors are offered an
opportunity to attend meetings with major shareholders.

General Meetings

The Company’s Annual General Meeting (AGM), which is held in
Dublin, affords shareholders the opportunity to question the Chairman
and the Board. The Notice of the AGM, which specifies the time, date,
place and the business to be transacted, is sent to shareholders at least
20 working days before the meeting. The AGM is normally attended
by all Directors. Resolutions are voted on by either a show of hands
of those shareholders attending, in person or by proxy, or, if validly
requested, by way of a poll. In a poll, the votes of shareholders present
and voting at the meeting are added to the proxy votes received in
advance and the total number of votes for, against and withheld for
each resolution are announced. This information is made available on
the Company’s website following the meeting.

All other general meetings are called Extraordinary General Meetings
(EGMs). An EGM called for the passing of a special resolution must
be called by at least 21 clear days’ notice. Provided shareholders have
passed a special resolution at the immediately preceding AGM and
the Company allows shareholders to vote by electronic means, an
EGM to consider an ordinary resolution may, if the Directors deem it
appropriate, be called at 14 clear days’ notice.

Grafton Group plc
Audit and Risk Committee Report

Dear Shareholder,

As Chairman of Grafton’s Audit and Risk
Committee (“the Committee”), I am pleased
to present the report of the Committee for
the year ended 31 December 2016.

This report describes how the Committee has fulfilled its
responsibilities during the year under its Terms of Reference and under
the relevant requirements of the UK Corporate Governance Code.

The Committee is satisfied that its role and authority include those
matters envisaged by the UK Corporate Governance Code that should
fall within its remit and that the Board has delegated authority to the
Committee to address those tasks for which it has responsibility.

Membership

The Committee currently comprises four Non-Executive Directors:

• Mr. Paul Hampden Smith, Chairman,

• Mr. Charles M. Fisher,

• Mr. Frank van Zanten and

• Mr. Vincent Crowley.

Mr. Michael Roney was appointed to the Committee on 9 May 2016 and
in line with the provisions of the UK Corporate Governance Code, he
ceased to be a member of the Committee on 31 December 2016 prior to
assuming the role of Chairman on 1 January 2017. Mr. Vincent Crowley
was appointed to the Committee on 19 January 2017.

All members of the Committee are determined by the Board to be
independent Non-Executive Directors in accordance with provision
B1.1 of the UK Corporate Governance Code. In accordance with the
requirements of provision C.3.1 of the UK Corporate Governance
Code, I am designated as the Committee member with recent and
relevant financial experience. The biographical details on pages 40 to
41 demonstrate that members of the Committee have a wide range of
financial, taxation, commercial and business experience relevant to
the sector in which the Group operates.

Key Duties

ྲ Monitoring the integrity of the Group’s financial
statements and announcements relating to the
Group’s performance;

ྲ Advising the Board on whether the Annual
Report and accounts, taken as a whole, is
fair, balanced and understandable, and
whether it provides the information necessary
for shareholders to assess the Group’s
performance, business model and strategy;

ྲ Monitoring the effectiveness of the external
audit process and making recommendations
to the Board in relation to the appointment,
reappointment and remuneration of the
External Auditor;

ྲ Overseeing the relationship between the Group
and the External Auditor including the terms of
engagement and scope of audit;

ྲ Reviewing the effectiveness of the Group’s

internal controls;

ྲ Reviewing the scope, resourcing, findings and
effectiveness of the Internal Audit function;

ྲ Overseeing the effectiveness of the risk

management procedures in place and the steps
taken to mitigate the Group’s risks; and

ྲ Reporting to the Board on how the Committee

has discharged its responsibilities.

The full terms of reference of the Committee can be
found on the Group’s website www.graftonplc.com.

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(continued)

Meetings

The Committee met four times during the year and each meeting was
attended by all Committee members as set out in the table on page 43.

Meetings are attended by the members of the Committee and others
being principally the Chief Executive Officer, the Chief Financial
Officer, the Group Financial Controller and Company Secretary and
the Group Internal Audit and Business Risk Director, who attend by
invitation. Other members of executive management may be invited
to attend to provide insight or expertise in relation to specific matters.

The PwC Group Engagement Leader and other representatives of
the External Auditor are also invited to attend certain Audit and
Risk Committee meetings. The Committee also met privately with
the External Auditor and the Group Internal Audit and Business
Risk Director without executive management present. Ms. Susan
Lannigan, Deputy Company Secretary, is Secretary to the Committee.

The Chairman of the Committee reports to the Board on the work of the
Audit and Risk Committee and on its findings and recommendations.

Key Areas of Activity During 2016

A summary of the key activities of the Committee during the year is set out below:

Financial Reporting

The Committee reviewed the draft financial statements and draft half-yearly results before recommending
their approval to the Board. As part of this review, the Committee considered significant accounting
policies, estimates and significant judgements. The Committee reviewed the Half Year and Final Results
announcements. The Committee also reviewed the significant management letter points on internal
controls in the Group’s individual businesses prepared by PwC as part of the audit process. The significant
issues in relation to the financial statements considered by the Committee and how these were addressed
are set out on pages 50 to 51.

Risk Management and

Internal Control

The Board has delegated responsibility to the Committee for monitoring the effectiveness of the
Group’s system of risk management and internal control, which is set out in further detail in the Risk
Management Report on pages 14 to 19. The Committee reviewed the Group’s risk management process and
the procedures established for identifying, evaluating and managing key risks, which included a review of
performance against the objectives set in the prior year.

Internal Audit

The Committee considered reports and updates from the internal audit function which summarised the
findings, recommendations and management responses to audits conducted during the year. These reports
covered the work undertaken, findings, actions recommended and the response of executive management
of the Group’s businesses to recommendations made. The Committee considered and approved the
programme of work to be undertaken by the Group’s internal audit function in 2016. The Group Internal
Audit and Business Risk Director reports to the Chief Financial Officer and also has direct access to the
Audit and Risk Committee. The Committee met with the Group Internal Audit and Business Risk Director
on four occasions during the year where he presented internal audit report findings and recommendations
and updated the Committee on the actions taken to implement recommendations. The scope, authority
and responsibility of the Internal Audit function are set out in the Internal Audit Charter which has been
approved by the Committee.

IT Systems

As part of its review of principal risks, the Committee considered the adequacy of the governance
structures and IT policies and procedures to support the ongoing programme of investment in systems
and infrastructure that will result in the upgrading and consolidation of systems that support a number of
businesses including the rollout of the AX trading platform in Buildbase.

Grafton Group plcExternal Auditor

Non-Audit Services

Whistleblowing and Fraud

As set out in the Report of the Committee for the year ended 31 December 2015, a formal tender process
was carried out during 2015 for the external audit of the Group’s financial statements for the year ended 31
December 2016 and subsequent years. Following the conclusion of this process, on the recommendation of
the Committee, the Board approved the appointment of PwC as auditors to the Group. Full details of this
process are set out on page 53 of the 2015 Annual Report.

The Committee reviewed the External Auditor’s overall audit plan for the 2016 audit of the Group and
approved the remuneration and terms of engagement of the External Auditor. The Committee also
considered the quality and effectiveness of the external audit process and the independence and objectivity
of the Auditor.

In order to ensure the independence of the External Auditor, the Committee received confirmation from the
Auditors that they are independent of the Group under the requirements of the Auditing Practices Board’s
Ethical Standards for Auditors. The Auditors also confirmed that they were not aware of any relationships
between the firm and the Group or between the firm and persons in financial reporting oversight roles in the
Group that may affect its independence. The Committee considered and was satisfied that the relationships
between the Auditor and the Group including those relating to the provision of non-audit services did not impair
the Auditor’s judgement or independence.

The External Auditor is not prohibited from undertaking non-audit services that do not conflict with
auditor independence provided the provision of the services does not impair the auditors objectivity or
conflict with the their role as auditor and subject to having the required skills and competence to provide
the services. The Auditor is precluded from providing non-audit services that could compromise its
independence or judgement.

In January 2016 the Committee approved a policy on non-audit services. Under this policy the External
Auditor will not be engaged for any non-audit services without the approval of the Audit & Risk
Committee. The External Auditor is precluded from providing certain services under Regulation (EU) No
537/2014, or from providing any non-audit services that have the potential to compromise its independence
or judgement. With the exception of fees incurred in acquired businesses, fees for non-audit services in any
financial year are targeted not to represent more than 20 per cent of the audit fee.

The Committee monitors and reviews the nature of non-audit services provided by the Auditors. An
analysis of non-audit services provided by PwC for 2016 is disclosed in Note 3 on page 104. The Committee
has undertaken a review of non-audit services provided during 2016 and is satisfied that these services,
which were limited in nature, were efficiently provided by the External Auditor with the benefit of their
knowledge of the business and did not prejudice their independence and objectivity.

A Group Anti-Fraud and Theft Policy was approved during 2016 setting out the Group’s approach to all
forms of fraud and theft, the responsibilities of Business Unit management in relation to prevention and
detection procedures and controls, the appropriate reporting channels and the possible actions which may
be taken by the Group in response to suspected fraud or theft. Instances of fraud or theft over a specified
threshold are reported to the Committee.

The Committee considers reports received periodically on matters raised through “Speak Up”, a Group
wide confidential reporting service run independently of the Group which allows colleagues to report
any concerns they may have regarding certain practices or conduct in their businesses including possible
instances of fraud and theft. All concerns raised through this channel and the outcomes of investigations
are reported to the Committee.

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(continued)

Anti-Bribery and Corruption

The Group’s Code of Business Conduct and Ethics sets out the ethical standards to which all Group
employees are expected to adhere. A Group Anti-Bribery and Corruption Policy was approved during 2015
and sets out the core standards and procedures to be observed and practical guidance on dealing with
bribery risk. An annual declaration of independence is signed by senior management and other individuals
who are considered to be at higher risk of conflict of interest, including employees who have responsibility
for contract negotiation with customers and suppliers.

Estimates and Judgements

The Committee reviewed in detail the following areas of significant judgement, complexity and estimation in connection with the Financial
Statements for 2016. The Committee considered a report from the external auditors on the audit work undertaken and conclusions reached as set
out in their audit report on pages 77 to 84. The Committee also had an in-depth discussion on these matters with the external auditors.

Goodwill

Recognition of Supplier
Rebates

The Committee considered a report prepared by an international accounting and advisory firm in
conjunction with Group management regarding the allocation of goodwill for impairment testing
purposes to cash generating units (CGUs). The report concluded that the Group’s expansion into new
European markets, together with revisions to management reporting structures and the existence of
Group purchasing synergies indicated the existence of seven CGU groups comprising Ireland Merchanting,
Ireland Manufacturing, Ireland Retailing, UK Merchanting, UK Manufacturing, Belgium Merchanting
and Netherlands Merchanting. The report recommendations were approved by the Committee and
goodwill was allocated between the revised CGU groups.

The Committee considered the goodwill impairment analysis provided by management and agreed with
the conclusion reached that no impairment charge should be recognised in the year. In arriving at its
decision, the Committee considered the impairment review conducted by management which involved
comparing the recoverable amount and carrying amount of the CGUs. The review by management
involved discounting the forecasted cash flows of each CGU based on the Group’s pre-tax weighted average
cost of capital adjusted to reflect issues associated with each CGU and carrying out sensitivity analysis on
the key assumptions used in the calculations including the revenue growth rate, the gross margin, the
discount rate and the long term growth rate. The Committee also considered reports on the medium term
macro-economic environment, analysts’ forecasts for the Group, the budget for 2017 and internal forecasts
for 2018 to 2021 inclusive.

The Committee noted the significant overall level of headroom in the value in use model prepared by
management and considered the impact on the headroom of sensitivity analysis on the key assumptions
used in the model. Of the CGUs which are not significant, the value-in-use of the Belgian merchanting
CGU is the most sensitive to changes in key assumptions. The Committee also compared the year-end
market capitalisation of the Group to its net asset position and noted that it was materially higher than the
net asset value.

Supplier rebates represent a significant source of income in the merchanting industry and is an area of
risk due to the number, complexity and materiality of rebate arrangements. The Committee reviewed the
basis used by management for calculating rebate income for the year and rebates receivable at the year end
and was satisfied that the accounting treatment adopted was appropriate and that rebates receivable at the
year-end were recoverable. In reaching its conclusion, the Committee reviewed information and reports
prepared by the internal audit function which completed full year reviews across all significant Business
Units with the primary objective of providing independent assurance on the adequacy of the design and
operating effectiveness of the controls in place over supplier rebate management. These reviews included
re-performing calculations on a sample of rebate income for 2016 and rebate receivable at year end by
reference to agreements with individual suppliers and reports of purchases made from suppliers. The
Committee also considered the value of rebates received after the year end relating to 2016.

Grafton Group plcValuation of Inventory

The Group carries significant levels of inventory and key judgements are made by management in
estimating the level of provisioning required for slow moving inventory. In arriving at its conclusion
that the level of inventory provisioning was appropriate, the Committee received half year and full year
updates from management on stock ageing and provisioning at Business Unit level. The Committee
reviewed the basis for calculating the valuation of rebate attributable to inventory and was satisfied that
inventory was appropriately valued and that a prudent approach for inventory provisioning was adopted.

Exceptional Items

IT Systems

The Committee reviewed the composition of the charge for Exceptional Items and was satisfied that while
the classification of exceptional costs required the exercise of judgement, the charge was in line with the
Group’s accounting policy on Exceptional Items which seeks to highlight significant items in the income
statement including significant restructuring and onerous lease provisions.

As part of its review of principal risks, the Committee considered the adequacy of the governance
structures, and IT policies and procedures to support a programme of investment in systems and
infrastructure planned over a number of years that will result in the upgrading and consolidation
of systems that support a number of businesses including the rollout of the AX trading platform in
Buildbase and noted that there was a full strategy business case and risk analysis for each project. The
Committee also assessed the AX Trading Platform and the quality of the processes in place in relation to its
development and implementation.

The Committee considered developments related to the implementation of the new system including
reports by internal and external auditors on the transition to an automated supplier invoice matching
system that is intended ultimately to replace the existing system.

As Chairman of the Committee, I engaged with the Group CFO, the Group Internal Audit and Business Risk Director and the PwC Group
Engagement Leader in preparation for Committee meetings. I also attend the Annual General Meeting and am available to respond to any
questions that shareholders may have concerning the activities of the Committee.

Paul Hampden Smith,
Chairman of the Audit and Risk Committee
15 March 2017

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Nomination Committee Report

Dear Shareholder,

As Chairman of the Nomination
Committee of Grafton Group plc (“the
Committee”), I am pleased to present the
report of the Committee for 2016 which
outlines the work performed by the
Committee during the year.

2016 was a year of significant change for the Board and a very active
year for the Committee. In March 2016 the Group announced the
retirement of Mr. Michael Chadwick as Chairman with effect from
31 December 2016 and the appointment of Mr. Michael Roney as his
successor. Mr. Roney was appointed to the Board on 1 May 2016 as Non-
Executive Director, Deputy Chairman and Chairman Designate and he
assumed the role of Group Chairman on 1 January 2017.

On the recommendation of the Committee, two new Non-Executive
Directors, Mrs. Susan Murray and Mr. Vincent Crowley, were appointed
to the Board in October 2016.

Membership

The Committee currently comprises the Chairman and six Non-
Executive Directors:

• Mr. Roderick Ryan, Chairman,

• Mr. Michael Roney,

• Mr. Paul Hampden Smith,

• Mr. Charles M. Fisher,

• Mr. Frank van Zanten,

• Mrs. Susan Murray and

• Mr. Vincent Crowley.

The biographical details of each Committee member are set out on
pages 40 to 41 and their length of service on the Committee is set out on
page 41. All members of the Committee are determined by the Board to
be independent Non-Executive Directors in accordance with provision
B1.1 of the UK Corporate Governance Code.

Key Duties of Committee

ྲ Evaluating the balance of skills, knowledge,
experience and diversity of the Board and
Committees and making recommendations to
the Board with regard to any changes;

ྲ Considering succession planning for Directors
and other senior executives taking into account
what skills and expertise are needed for the
future;

ྲ Regularly reviewing the structure, size and

composition (including the skills, knowledge
and experience) required of the Board and its
Committees;

ྲ Identifying, and nominating for the approval
of the Board, candidates for appointment as
Directors and ensuring that there is a formal,
rigorous and transparent procedure for the
appointment of new Directors to the Board; and

ྲ Considering the re-appointment of any

Non-Executive Director at the conclusion
of their specified term of office and making
recommendations to the Board.

The full terms of reference of the Committee can be
found on the Group’s website www.graftonplc.com

Grafton Group plcThe Committee is satisfied that its role and authority include those
matters envisaged by the UK Corporate Governance Code that should
fall within its jurisdiction and that the Board has delegated authority
to the Committee to address those tasks for which it has responsibility.

International plc and Wm Morrison Supermarkets plc. She is currently
a Non-Executive Director of 2 Sisters Food Group, a food manufacturing
company.

Activities of the Committee During 2016

The Nomination Committee met formally on two occasions during the
year and had significant interaction between meetings. The principal
activities undertaken by the Committee during the year are set out below:

Appointment of a new Non-Executive Chairman

The Committee engaged Zygos Partnership, an external search firm
with no connection to the Group, to assist with the search for new
Non-Executive Chairman to succeed Mr. Michael Chadwick. A job
specification was prepared, including an assessment of the time
commitment expected for the role. An external search was undertaken
and a short list of candidates was put forward for consideration
by the Board. Board members also provided suggestions to the
Committee of potential candidates to be considered for the role. On
the recommendation of the Committee Mr. Michael Roney was
appointed to the Board on 1 May 2016 as Non-Executive Director,
Deputy Chairman and Chairman Designate, and assumed the role of
Chairman on 1 January 2017. Mr. Roney was considered independent
on appointment.

Mr. Crowley is currently a Non-Executive Director of C&C Group plc
and Executive Chairman of Altas Investments plc. In the course
of a 24 year career with Independent News & Media PLC, a leading
Irish newspaper and media business, he held a number of leadership
positions including Chief Executive Officer and Chief Operating Officer
and was a member of the Board. Prior to joining Independent News &
Media PLC, he held senior roles in KPMG and Arthur Andersen.

Committee changes

During the year, the Committee also reviewed and recommended
changes to the composition of Board Committees. Mr. Michael Roney
was appointed to the Audit and Risk, Remuneration and Nomination
Committees on 9 May 2016. In line with best practice, Mr. Roney’s
membership of both the Audit and Risk and Remuneration Committees
ceased on 31 December 2016 in advance of him assuming the role of
Chairman on 1 January 2017. Mrs. Susan Murray was appointed to the
Remuneration Committee on 19 January 2017 and Mr. Vincent Crowley
was appointed to the Audit and Risk Committee on the same date.
Both Mrs. Murray and Mr. Crowley were appointed to the Nomination
Committee on 3 March 2017.

Mr. Roney was Chief Executive of Bunzl plc until May 2016 and during
his ten and a half year tenure he led its global development across the
Americas, Europe and Australasia. He had an outstanding track record
as Chief Executive of the company consistently increasing profitability
and creating shareholder value. Prior to joining Bunzl, Mr. Roney held
the role of Chief Executive Officer of Goodyear Dunlop Tires Europe.
He is a Non-Executive Director of Brown-Forman Corporation, one of
the worlds’ largest US based spirits businesses, and has recently been
appointed Non-Executive Director and Chairman Designate of Next
plc.

Details of the current membership of Board Committees is shown
within each Committee report.

Diversity

The Group’s policy is to promote equality and diversity across all
areas of its business. While the Board will always seek to appoint the
best candidates available and to appoint candidates on merit against
objective criteria, the Committee and the Board recognise the benefits
of greater diversity on the Board and diversity is actively considered
when considering Board appointments.

Appointment of Non-Executive Directors

Board Composition

The Committee identified the skills and experience to support the
future strategic development of the Group and initiated a search for
two Non-Executive Directors. It was agreed that gender and nationality
were factors that would also be given careful attention in shortlisting
candidates for appointment. Leaders Mores in Dublin and Zygos
Partnership in London, two external search firms with no connection
to the Group, were engaged to assist with the search. Following a
shortlisting and interview process, Mrs. Susan Murray and Mr. Vincent
Crowley were appointed to the Board on 14 October 2016.

Mrs. Murray brings strong business experience to the Board having
held the role of Chief Executive of Littlewoods Stores Limited and
the Pierre Smirnoff Company, and Non-Executive Director roles
with Compass Group plc, Pernod Ricard S.A., Imperial Tobacco
plc, Enterprise Inns plc, Aberdeen Asset Management plc, SSL

Recent appointments to the Board, as set out above, were made in
anticipation of planned retirements. The Committee considers
the current size and composition of the Board, taking the recent
announcement on Board changes that take effect at the end of the AGM
into account, to be appropriate.

Finally, I will be stepping down from the Board at the end of the 2017
AGM and I would like to take the opportunity to say that it has been a
pleasure to have served on the Board of Grafton Group plc for the last
11 years. I will be handing over Chairmanship of the Nomination
Committee to Mr. Michael Roney.

Roderick Ryan,
Chairman of the Nomination Committee
15 March 2017

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016
Report of the Remuneration Committee on Directors’ Remuneration

Chairman’s Annual Statement

Dear Shareholder,

On behalf of the Board, I am pleased to
present the Report of the Remuneration
Committee (“the Committee”) on Directors’
Remuneration.

Although not required under the Irish Companies Act, the Committee
has continued to prepare the Remuneration Report in accordance
with the UK regulations governing the disclosure and approval of
remuneration of the Directors. This remuneration report has been
split into three parts – (i) the Chairman’s Annual Statement, (ii) the
proposed Remuneration Policy Report which sets out the Group’s
policy for remunerating Directors, and (iii) the Annual Report on
Remuneration which sets out how Directors were remunerated in 2016
and how it is proposed to apply the proposed policy in 2017. This report
also contains additional information on directors share interests.

Approach to Remuneration

The Committee’s approach to remuneration is to ensure that Executive
Directors are incentivised to implement successfully the Board’s
strategy and that remuneration is aligned with the interests of
shareholders over the longer term. The Committee seeks to achieve this
by:

• Rewarding Executive Directors fairly and competitively for the

delivery of strong performance;

• Taking into account the need to attract, retain and motivate

executives of high calibre and to ensure that Executive Directors
are provided with an appropriate mix of short term and long term
incentives;

• Taking a range of factors into account including market practice, the
changing nature of the business and markets in which it operates,
the performance of the Group, the experience, responsibility and
performance of the individuals concerned and remuneration
practices elsewhere in the Group; and

• Setting bonus targets that are stretching and Long Term Incentive
Plan (LTIP) metrics that are challenging with full vesting of awards
requiring exceptional performance.

Performance Outcome for 2016

The key features of a good performance by the
Group for 2016 are summarised as follows:

ྲ Revenue up 13% to a record £2.5 billion – 10%

increase in constant currency;

ྲ Adjusted* Group operating profit growth of 12%

to £142.0m (2015: £127.3m);

ྲ Adjusted* Group profit before taxation up 14%

to £136.2 million from £119.4 million;

ྲ Adjusted basic earnings per share up 16% to

47.7p;

ྲ Strong cash generation from operations of

£168.6 million (2015: £139.3 million) resulting in
net debt reduction by £17.3 million and year-
end gearing of just 9% (2015: 12%);

ྲ Investment of £72.3 million on acquisitions and
capital expenditure to support future growth;
and

ྲ 10% increase in dividend in line with

progressive dividend policy.

* Before amortisation of intangible assets arising on acquisitions, exceptional
items of £19.7m in 2016 and a net non-recurring credit of £1.4m in 2015

Remuneration for 2016

The Committee agreed in December 2015 not to award an increase in
basic salary to the Chief Executive Officer and Chief Financial Officer
for 2016.

The annual bonus for 2016 was based on very demanding financial
performance targets and personal objectives. Financial performance
targets accounted for three quarters of the overall bonus opportunity.

Grafton Group plcReflecting the performance set out above, a bonus of 72.24 per cent of
basic salary, out of a maximum possible award of 120 per cent of basic
salary, was made to the Chief Executive Officer. The bonus award made
to the Chief Financial Officer was 60.20 per cent of basic salary out of a
potential bonus opportunity of 100 per cent of basic salary.

The performance conditions for LTIP awards granted in April 2014, and
covering the performance period ending on 31 December 2016, were
based on growth in Adjusted Earnings Per Share and Total Shareholder
Return (TSR). Half of the award to the Chief Executive Officer and Chief
Financial Officer was based on the relative TSR performance versus a
comparator group. As the Group’s TSR was below the median, relative
to a bespoke group of 18 UK and Irish quoted companies that operate
in the construction industry, this half of the award will not vest. The
other half of the award was based on the Group’s adjusted EPS for the
financial year ended 31 December 2016 being in the range of 38.0 pence
to 45.0 pence. As the Adjusted Earnings Per Share of 47.7 pence for 2016
exceeded the upper end of the range (representing a compound annual
growth in adjusted EPS of 28.8 per cent), this performance condition
was met and this half of the award to the Chief Executive Officer and
Chief Financial Officer will fully vest.

The Remuneration Committee is satisfied that the short and long-term
elements of remuneration reflect the performance of the Group both in
2016 and over the three years to the end of 2016.

Proposed Changes to Remuneration Policy

The Company’s first Remuneration Policy was approved by
shareholders in 2014. While a revised policy was approved in 2015, there
were no substantive changes made except to facilitate ongoing LTIP
provision for the Chief Financial Officer. 2017 represents the end of
our first Remuneration Policy period and following a comprehensive
review of remuneration and consultation with major shareholders and
institutional investors bodies, a new Remuneration Policy will be put
to a shareholder vote at the 2017 AGM. The Committee was advised by
New Bridge Street, part of Aon Hewitt, on the proposed Remuneration
Policy.

The Committee is seeking to make the following changes to its
remuneration policy and how it is implemented in 2017.

Base Salary Cap

Directors’ salaries were not increased in 2016 and it is proposed that
the 2017 Remuneration Policy will include a salary cap which limits
increases to current Directors’ salaries over the life of the policy
(covering 2017, 2018 and 2019) to that of the general workforce. The
Committee may decide for any particular year, based on company and
personal performance, to apply a lower rate of increase to the salary
of current Directors than the rate of increase applied to the general
workforce.

The increase approved by the Committee for 2017 was two per cent
which is consistent with the increase applying to the general
workforce.

Annual bonus

No changes are proposed to the policy on annual bonus limits. The
annual bonus opportunity will remain at 120 per cent of salary for the
CEO and 100 per cent of salary for the CFO. For 2017, the Committee has
decided to simplify the annual bonus plan by reducing the number of
measures from four to two including removing the personal objectives
element. The 2017 bonus awards will be based on earnings per share (70
per cent) and return on capital employed (ROCE) (30 per cent).

Long Term Incentive Plan

Since the 2014 Remuneration Policy was approved, the Group has
become more complex as it has expanded internationally through
a series of well-integrated acquisitions in the UK, Belgium and the
Netherlands. Strong organic growth and exposure to strengthening
economies of Ireland and the Netherlands has resulted in a more
complex and diversified business. As part of the review, the
Remuneration Committee concluded that the remuneration policy
should provide a greater focus on incentivising sustained long-term
performance. As a result, the Committee is proposing that the LTIP
policy limits are increased from 150 per cent to 200 per cent of salary for
the CEO and from 125 per cent to 175 per cent of salary for the CFO. The
Committee believes the new limits are appropriate when considered
in the context of the introduction of good practice features outlined
below, more stretching targets, and a below market annual bonus
opportunity.

Awards to be made in 2017 will be at the increased levels subject to
shareholder approval of the proposed Remuneration Policy. Vesting of the
2017 award will continue to be based on TSR (50 per cent) and on EPS (50 per
cent) growth.

The Committee believes in pay-for-performance and in view of the
proposed increase in the quantum of awards, the Committee will
ensure that targets set are tougher, based on expectations at the time
of grant, than those previously set for the EPS and TSR performance
measures. Full vesting will require exceptional performance as
demonstrated below.

Total Shareholder Return

TSR remains an appropriate measure as it ensures that the interests
of Executive Directors are closely aligned with those of shareholders
over the medium to long term and incentivises Directors to ensure
that the Group outperforms relative to a selected comparator group of
companies. The TSR performance condition supports the achievement
of profit growth and cash generation to maximise shareholder value
and outperformance.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Report of the Remuneration Committee on Directors’ Remuneration (continued)

Chairman’s Annual Statement (continued)

period. The Committee is proposing that the TSR performance
condition should be measured against a comparator group consisting
of the constituents of the London Stock Exchange’s FTSE 250 Index
excluding investment trusts. This index was chosen on the basis that
it is more representative of the Group’s overall trading and financial
environment and is a more appropriate measure of outperformance.

The Committee proposes to toughen the TSR performance measure
for the 2017 award. If the Group’s TSR equals the median TSR of the
peer group, 25 per cent of this part of the award will continue to
vest, with full vesting for upper quintile performance or better. This
is more demanding than the current approach which provides for
full vesting for upper quartile performance. Awards will vest on a
straight line basis for performance between the median and upper
quintile. Notwithstanding the achievement of the TSR performance
conditions, no shares will vest unless the Committee considers that
the overall financial results of the Group have been satisfactory in the
circumstances over the performance period.

Earnings Per Share

For EPS growth targets, the Committee sets the percentage growth range
having considered the Group’s budget and strategic business plan, the
Group’s economic and trading environment and analysts’ forecasts for
EPS. The Committee has historically set very demanding growth targets
for EPS in absolute terms.

The proposed EPS range for the 2017 LTIP award is 59.0p to 66.0p for the
year ended 31 December 2019 (compared to actual 2016 adjusted EPS of
47.7p). The lower end of the target range (threshold) is above consensus
Brokers Forecasts of 58.4p for 2019 which were available when the range
was approved on 14 March 2017 and reflects changes made to forecasts
following the publication of the Final Results for 2016 on 7 March
2017. It should be noted that in previous years, market consensus
was the mid-point of the range and therefore the 2017 target is more
challenging than the previous years’ targets.

Consistent with prior years, the upper end of the range is appropriately
stretching and will only be achieved if performance is exceptional.
25 per cent of the award will vest if the lower target in the range is
achieved. Where EPS is between the lower and higher targets in the
range, then between 25 per cent and 100 per cent of this part of the
award will vest on a straight line basis.

Shareholding Guideline

In order to further strengthen the alignment between the interests
of directors and shareholders, the Committee proposes to double the
minimum share ownership guideline to 200 per cent of basic salary for
Executive Directors.

Holding Period

The Committee also proposes introducing a holding period of two
years on shares received from LTIP awards that vest following approval
of this policy after taking into account any shares sold to pay tax
and other statutory obligations. Shares held during the two year

holding period will be deemed to be part of an executive directors’
shareholding. The vesting period and the holding period will be five
years in total.

Summary

The Committee has considered these proposals very carefully and
believes that the increase in the LTIP opportunity is appropriate.
The Committee also believes that in view of the increased scale
and complexity of the Group, the proposed changes are necessary
to appropriately incentivise and retain a highly regarded senior
management team. The EPS and TSR targets that will be set for 2017
and future years will be much tougher as demonstrated by the overall
approach to setting targets for the forthcoming award in 2017 and will
be kept under review to ensure that full vesting of awards will require
exceptional performance and reflect the proposed increase in the
quantum of awards that will be granted. The Committee has further
supported the alignment of directors and shareholders interests by
significantly strengthening shareholder guidelines to require directors
to hold a higher proportion of their personal assets in Grafton shares
and by the introduction of a holding period of two years for LTIP
awards that have vested. It should also be noted that the Remuneration
Policy will include a salary cap which limits increases to current
Directors’ salaries over the three year life of the policy to that of the
general workforce.

Shareholder Engagement

The Committee is committed to ongoing dialogue with shareholders
and institutional investor bodies on remuneration matters and it
welcomes feedback as it helps to inform its decisions. The Committee
takes an active interest in voting and it was very pleased that the 2015
Report on Remuneration received the support of 99 per cent of votes
cast at the 2016 Annual General Meeting (“AGM”) of the company.
The Committee has actively engaged with major shareholders and
institutional investor bodies concerning the proposed changes to the
remuneration policy and the thought process behind these proposals
and in some areas altered its original proposals to take account of the
helpful feedback received during the consultation process.

I hope that we can rely on your continued support at this year’s AGM.
I am available to respond to any questions that shareholders have
about the proposed changes to the remuneration policy, the annual
report on remuneration or indeed on any other aspect of the work of
the Committee and can be contacted by email at remunerationchair@
graftonplc.com.

Finally, I would like to take the opportunity to say that it has been
a pleasure to have served on the Board of Grafton Group plc for the
last eight years and I will be handing over Chairmanship of the
Remuneration Committee to Mrs. Susan Murray at the end of the 2017
AGM.

Charles M. Fisher,
Chairman of the Remuneration Committee

Grafton Group plcRemuneration Policy Report

This part of the Directors’ Remuneration Report sets out the proposed
remuneration policy for the Company and has been prepared in accordance
with Schedule 8 to the Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 (as amended) and the disclosure
requirements set out in the Listing Rules of the Financial Conduct Authority.
The policy has been developed taking into account the principles of the UK
Corporate Governance Code and describes the policy to be applied from 1
January 2017 onwards subject to shareholder approval. The Policy Report will
be put to a non-binding advisory shareholder vote at the 2017 AGM.

Policy Overview

The objective of the remuneration policy is to provide remuneration
packages for each Executive Director that will:

• Attract, retain and motivate executives of high calibre;

• Ensure that executive management is provided with appropriate

incentives to encourage enhanced long-term performance;

• Ensure that the overall package for each director is linked to the short

and longer term strategic objectives of the Group; and

• Have a significant proportion of the potential remuneration package
paid in equity, which is designed to ensure that executives have a
strong alignment with shareholders.

When setting the levels of short-term and long-term variable
remuneration and the balance of equity and cash within the package,
consideration is given to discouraging unnecessary risk-taking whilst
ensuring that performance hurdles are suitably challenging.

In determining the proposed policy, the Remuneration Committee
takes into account all factors which it considers necessary, including
market practice, the changing nature of the business and markets
in which it operates, the performance of the Group, the experience,
responsibility and performance of the individuals concerned and
remuneration practices elsewhere in the Group.

How the Views of Shareholders are taken into Account

The Remuneration Committee considers the guidelines issued by
bodies representing institutional shareholders and feedback from
shareholders on the Group’s remuneration policies and practices.

Leading shareholders and investor bodies were consulted prior to
agreeing this Remuneration Policy. The Committee also takes on board
any shareholder feedback received prior to and at the AGM each year.
This feedback, together with any feedback received during meetings
and contacts with shareholders from time to time, is then considered
as part of the annual review of the Remuneration Policy and its
effectiveness.

When any significant changes are proposed to the Remuneration
Policy, the Remuneration Committee Chairman will inform major
shareholders of these in advance and will offer a meeting to discuss
these changes. The Remuneration Committee will actively engage
with shareholders and give serious consideration to their views.

Details of votes cast for and against the resolution to approve the
prior year’s remuneration report and any matters discussed with
shareholders during the year are referred to in the Annual Report on
Remuneration on page 63 and in the Chairman’s Annual Statement on
page 54.

How the Views of Employees are taken into Account

When setting the remuneration policy for Executive Directors the
Remuneration Committee takes into account the pay and employment
conditions of other employees in the Group although it does not
directly consult with employees on Directors’ remuneration.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Report of the Remuneration Committee on Directors’ Remuneration (continued)

Remuneration Policy Report (continued)

The Remuneration Policy for Directors

The table below summarises the key aspects of the Group’s future remuneration policy for Executive Directors.

Element, purpose
and link to strategy

Operation

Maximum opportunity/limit

Performance targets/comments

Base Salary

To recruit,
retain and
reward
executives
of a suitable
calibre for
the roles and
duties required

Benefits

To provide
market
competitive
benefits to
ensure the
well-being of
Directors

Pension

To provide
market
competitive
benefits

Not applicable

Salaries of Executive Directors are
reviewed annually in January and
any changes made are effective from 1
January.

When conducting this review and
the level of increase, the Committee
considers a range of factors including:

• The performance of the Group and the

individual;

• Market conditions;

• The prevailing market rates for similar
positions in UK and Irish companies of
broadly comparable size and a number
of industry specific peers;

• The responsibilities and experience of

each Executive Director; and

• The level of salary increases

implemented across the Group.

There will be a cap for
current Directors that
limits salary increases for
2017, 2018 and 2019 to that
of the general workforce.

The Committee may
decide for any particular
year, based on the
performance of the
Group and personal
performance, to apply
a lower rate of increase
in salary to Directors
than the rate of increase
applied to the general
workforce.

Benefits may include company car,
mobile telephone, life assurance, private
medical cover and permanent health
insurance.

The value of other benefits
is based on the cost to the
company and is not pre-
determined.

Relocation or other related expenses may
be offered, as required.

Relocation expenses
must be reasonable and
necessary.

Not applicable

A company contribution to a money
purchase pension scheme or provision of
a cash allowance in lieu of pension.

Not applicable

A company pension
contribution or payment
in lieu of pension made
through the payroll of up
to 25% of basic salary.

Grafton Group plcElement, purpose
and link to strategy

Operation

Maximum opportunity/limit

Performance targets/comments

The maximum award
under the annual bonus
plan is 120% of basic
salary for the CEO and
100% of salary for the
CFO and any Executive
Directors appointed in the
future (other than a CEO).

Annual Bonus

To encourage
and reward
delivery of the
Group’s annual
financial and
strategic
objectives

Bonus payments are determined by the
Committee after the year end, based on
performance against the targets set.
Performance measures and targets are
reviewed annually.

The bonus is payable in cash. An Executive
Director is required to apply 30% of their
annual bonus after statutory deductions for
the purchase of shares in the Group until
their shareholding is equivalent to at least
200 per cent of basic salary.

Claw-back may be applied, at the
discretion of the Committee, in the
event of gross misconduct, material
misconduct, material misstatement of
results, a calculation error and/or the use
of incorrect or inaccurate information
when calculating the bonus award.

Long-Term Incentives (‘LTIP’)

To encourage
and reward
delivery of
the Group’s
strategic
objectives;
to provide
alignment with
shareholders
through the
use of shares
and to assist
with retention

The maximum value
of awards which may
be granted in any
financial year is 200% of
salary. This is subject to
shareholder approval at
the 2017 AGM to amend
the LTIP rules to increase
the current limit of
150% of salary (or 200%
of salary in exceptional
circumstances) to 200%
of salary.

The Company’s policy is
to make awards of up to
200% of basic salary in
the case of the CEO and
175% of basic salary in the
case of the CFO and any
Executive Directors (other
than a CEO) appointed in
the future.

The 2011 LTIP is an incentive plan that is
designed to reward Executive Directors
and senior executives in a manner
that aligns their interests with those
of shareholders. An Executive Director
nominated to participate in the plan
is granted an award over “free shares”
which vest subject to the achievement of
performance conditions measured over
three financial years and the Executive
Director remaining employed in the
Group.

There is a claw-back provision under
which the Remuneration Committee has
the discretion to require the reduction
of the vesting of awards or require the
repayment of vested awards (within
two years of the vesting of awards) in
circumstances where the vesting arose
as a result of information which has
subsequently proved to be inaccurate or
misleading in a material respect.

There will, for the first time, be a holding
period of two years on shares received by
Executive Directors from LTIP awards
that vest following approval of this policy
after taking into account any shares sold
to pay tax and other statutory obligations.

The bonus will be primarily based on the achievement
of appropriate financial measures but may also include
an element for non-financial measures including
personal performance and strategic measures.

Financial measures which will account for the vast
majority of the bonus opportunity in any year may
include measures such as earnings per share, profit,
return on capital employed, free cash flow and such
other measures as determined from time to time
by the Committee. The metrics chosen and their
weightings will be set out in the Annual Report on
Remuneration.

For financial measures, a sliding scale is set by the
Committee. No bonus is payable if performance is below
a minimum threshold, up to 20% is payable for achieving
threshold and the bonus payable increases on a straight
line or similar basis thereafter with full bonus payable
for achieving the upper point on the scale.

LTIP awards vest subject to the achievement of
challenging financial and total shareholder return
performance targets measured over a three year
performance period.

The vesting of LTIP awards made to Executive Directors
is currently subject to EPS (earnings per share) and TSR
(total shareholder return) performance conditions.

The Remuneration Committee has the authority to
set appropriate metrics (not limited to EPS and TSR)
for each award taking account of the medium to long
term strategic objectives of the Group.

The EPS (as defined in the scheme rules) condition
if chosen will be subject to achieving EPS within a
target range. 25% of this part of the award will vest if
the lower target in the range is achieved. Where the
EPS is between the lower and higher targets in the
range, then between 25% and 100% of this part of the
award will normally vest on a straight line basis.

If TSR is chosen as a metric, the Group’s TSR must
equal the median TSR of the peer group with 25% of
this part of the award vesting on achieving threshold
performance and full vesting for upper quintile
performance or better. Awards will vest on a straight
line basis for performance between the median and
upper quintile.

Notwithstanding the achievement of a TSR
performance condition, no shares will vest unless the
Committee considers that overall financial results
have been satisfactory in the circumstances over the
performance period.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Report of the Remuneration Committee on Directors’ Remuneration (continued)

Remuneration Policy Report (continued)

Element, purpose
and link to strategy

Operation

All-Employee Share Plans

Maximum opportunity/limit

Performance targets/comments

To encourage
share
ownership
and align the
interests of
employees
with
shareholders

Executive Directors are entitled to
participate in employee share schemes in
operation during the period of the policy
on the same basis as other colleagues.
The Group currently operates the 2011
Approved SAYE Plan for UK colleagues.

The limits are set by the
UK tax authorities from
time to time. Currently
this limit is £500 per
month for the SAYE
scheme.

Not applicable

Minimum 200% of basic
salary to be held in
Grafton shares, built up
over time.

Not applicable

Details of the outcome
of the most recent fee
review are provided in the
Annual Remuneration
Report.

Share Ownership Guidelines

To increase
the alignment
of interests
between
Executive
Directors and
shareholders

An Executive Director is required to apply
30% of their annual bonus after statutory
deductions for the purchase of shares in
the Group until his/her shareholding is
equivalent to at least 200 per cent of basic
salary.

Half of any LTIP awards that vest, after
taking into account any shares sold to
pay tax and other statutory obligations,
must be held until the share ownership
guideline has been met.

Vested awards subject to the two year
holding period will be deemed to be part
of an executive directors’ shareholding.

Chairman and Non-Executive Director Fees

To attract
and retain a
high-calibre
Chairman and
Non-Executive
Directors
by offering
a market
competitive fee
level

The Chairman’s fee is set based on a
recommendation from the Remuneration
Committee.

On the recommendation of the Chairman,
the Board sets the level of remuneration
of all Non-Executive Directors within an
aggregate limit approved from time to time
by shareholders.

Additional fees may be payable for
chairing the main Board Committees.

The level of fees paid seeks to recognise
the time commitment, responsibility
and skills required to contribute to the
effectiveness of the Board.

Non-Executive Directors may be
reimbursed for travel and accommodation
expenses (and any personal tax that may
be due on those expenses).

Notes

1. The measures for the 2017 Annual Bonus will be EPS (70%) and ROCE (30%).
2. The 2017 grant of LTIP awards will be based on EPS (50%) and TSR performance (50%). As set out above, EPS is a key measure of the Group’s overall
performance and TSR reflects the Group’s performance and return to shareholders in terms of the value of their investment in the Group and
dividends received.

Grafton Group plcAnnual Bonus and LTIP Discretions

The Committee will operate the annual bonus and LTIP according to
their respective rules and in accordance with the Listing Rules and
applicable tax rules. A copy of the LTIP rules is available on request
from the Company Secretary. The Committee, consistent with market
practice, retains discretion over a number of areas relating to the
operation and administration of these plans. These include (but are not
limited to) the following (albeit with the level of award restricted as set
out in the policy table above):

Salary levels for Executive Directors will be set in accordance with the
Group’s remuneration policy, taking into account the experience and
calibre of the individual and his/her existing remuneration package.
Where it is appropriate to offer a lower salary initially, a series of
increases to the desired salary positioning may be made over subsequent
years subject to individual performance and development in the role.
Benefits will generally be provided in line with the approved policy, with
relocation, travel or other expenses provided if necessary. A pension
contribution of up to 25 per cent of salary may be provided.

• Who participates in the plan;

• The timing of grant of awards;

• The size of awards;

• The choice of performance measures and performance target

conditions in respect of each annual award (including the setting of
EPS targets and the selection of a TSR comparator group);

• Discretion relating to the measurement of performance in the event

of a change of control or reconstruction;

• Determination of a good leaver (in addition to any specified

categories) for incentive plan purposes based on the rules of the plan;

• Adjustments required in certain circumstances (e.g. in the event of a

de-merger, special dividend or an alteration to the capital structure of the
Company including a capitalisation of reserves or rights issue); and

• The ability to adjust existing performance conditions for exceptional

events so that they can still fulfil their original purpose.

Legacy Arrangements

The structure of the variable pay element will be in accordance with
and subject to the limits set out in the Group’s approved policy detailed
above. Different performance measures may be set initially for the
annual bonus in the year an Executive Director joins the Group taking
into account the responsibilities of the individual and the point in the
financial year that he or she joins the Board. Subject to the rules of the
scheme, an LTIP award may be awarded after joining the Group.

If it is necessary to buy-out incentive pay or benefit arrangements
(which would be forfeited on leaving the previous employer) in the
case of an external appointment, this would be provided for taking
into account the form (cash or shares), timing and expected value
(i.e. likelihood of meeting any existing performance criteria) of the
remuneration being forfeited. The general policy is that payment
should be no more than the Committee considers is required to provide
reasonable compensation for remuneration being forfeited. Share
awards may be used to the extent permitted under the Group’s existing
share plans and provisions under the Listing Rules where necessary.

For the avoidance of doubt, it is noted that the Group will honour any
commitments entered into with current or former Directors that have
been previously disclosed to shareholders.

In the case of an internal hire, any outstanding variable pay awarded in
relation to the previous role will be allowed to pay out according to its
terms of grant or adjusted as considered desirable to reflect the new role.

Differences in Remuneration Policy for Executive Directors

Compared to Other Employees

The Committee is made aware of pay structures across the wider Group
when setting the remuneration policy for Executive Directors. The
Committee considers the general basic salary increase for the broader
employee population when determining the annual salary review for
the Executive Directors.

Fees for a new Chairman or Non-Executive Director will be set in line
with the approved policy.

Service Contracts & Payments for Loss of Office

The Remuneration Committee determines the contractual terms for
new Executive Directors, subject to appropriate professional advice to
ensure that these reflect best practice.

Overall, the remuneration policy for the Executive Directors is more
heavily weighted towards variable pay than for other employees.
This ensures that there is a clear link between the value created for
shareholders and the remuneration received by the Executive Directors
and recognises that Executive Directors should have the greatest
accountability and responsibility for increasing shareholder value.

Approach to Recruitment and Promotions

The remuneration package for a new Director will be set in accordance
with and subject to the limits set out in the Group’s approved policy as set
out earlier in this report, subject to such modifications as are set out below.

The Group’s policy is that the period of notice for Executive Directors
will not exceed 12 months. The employment contracts of the current
CEO and the CFO may be terminated on six months’ notice by either
side. In the event of a director’s departure, the Group’s policy on
termination is as follows:

• The Group will pay any amounts it is required to make in accordance
with or in settlement of a director’s statutory employment rights;

• The Group will seek to ensure that no more is paid than is warranted

in each individual case;

• There is no entitlement to bonus paid following notice of termination
unless expressly provided for in an Executive Director’s employment

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Report of the Remuneration Committee on Directors’ Remuneration (continued)

Remuneration Policy Report (continued)

contract but the Group reserves the right to pay a bonus for the notice
period subject to performance conditions; and

• Following service of notice to terminate employment, the Company

may place the executive on garden leave. During this time, the
executive will continue to receive salary and benefits (or a sum
equivalent to) until the termination of employment.

Remuneration Scenarios for Executive Directors

The Group’s normal policy results in a significant portion of
remuneration received by Executive Directors being dependent on
performance. The chart below shows how the total pay opportunities
for 2017 for Executive Directors vary under three performance
scenarios – Minimum, In line with Expectation and Maximum.

£2,617

44%

27%

£1,689

34%

21%

£1,611

43%

25%

£1,065

32%

19%

£519

1,000

£761

500

100%

45%

29%

100%

49%

32%

Minimum In line with
expectation

Maximum

Minimum In line with
expectation

Maximum

Chief Executive Officer

Chief Financial Officer

Long-Term Share Awards

Annual Bonus

Fixed

Chart labels show proposition of the total package comprised of each element.

Assumptions:

Minimum = fixed pay only (2017 salary, benefits and pension)

In line with Expectation (which is not target) = 50% vesting of the
annual bonus and LTIP awards

Maximum = 100% vesting of the annual bonus and LTIP awards
(assuming that the Policy limits are increased to 200% of salary for the
CEO and 175% for the CFO).

No account has been taken of any share price increase.

A Director’s service contract may be terminated without notice and
without any further payment or compensation, except for sums
accrued up to the date of termination, on the occurrence of certain
events such as gross misconduct. If the Group terminates employment
in lieu of notice in other circumstances, compensation payable is as
provided for in employment contracts which is as follows:

• Gavin Slark – basic salary due for any unexpired notice period;

3,000

2,500

2,000

• David Arnold – basic salary together with benefits and bonus which
would have been payable during the notice period or any unexpired
balance thereof. Any bonus payable is subject to performance conditions.

0
0
0
’
£

1,500

Payments may be made in monthly instalments.

The Group may pay salary, benefits and pension in lieu of notice for a
new director.

The treatment of unvested awards previously granted under the LTIP
upon termination will be determined in accordance with the plan
rules. As a general rule, LTIP awards will lapse upon a participant
giving or receiving notice of his/her cessation of employment.
However for certain good leaver reasons including death, ill health,
injury, disability, redundancy, agreed retirement, their employing
company or business being sold out of the Group, or any other
reason at the Committee’s discretion after taking into account the
circumstances prevailing at the time, awards will vest on the normal
vesting date subject to the satisfaction of performance conditions and
pro-rating the award to reflect the reduced period of time between
the commencement of the performance period and the Executive
Director’s cessation of employment as a proportion of the total
performance period. Alternatively, the Committee can decide that the
award will vest on the date of cessation, subject to the extent to which
the performance conditions have been satisfied by reference to the
date of cessation and pro-rated by reference to the date of cessation of
employment.

Non-Executive Directors

All Non-Executive Directors have letters of appointment with the
Company for an initial period of three years, unless otherwise terminated
earlier by and at the discretion of either party upon one month’s written
notice or otherwise in accordance with the Group’s Articles of Association
and subject to annual re-appointment at the AGM.

The appointment letters for Non-Executive Directors provide that no
compensation is payable on termination other than accrued fees and
expenses.

Grafton Group plcAnnual Report on Remuneration

Although not required under Irish Companies legislation, this report
also includes the disclosures required by UK legislation contained in
Part 3 of Schedule 8 to The Large and Medium-sized Companies and
Groups (Accounts and Reports) (Amendment) Regulations 2013, and
the disclosures required by 9.8.6R of the Listing Rules.

Membership of the Remuneration Committee

The Committee currently comprises Mr. Charles M. Fisher, Chairman,
Mr. Frank van Zanten, Mr. Paul Hampden Smith and Mrs. Susan
Murray, all of whom are Non-Executive Directors determined by the
Board to be independent. Mr. Michael Roney was appointed to the
Committee on 9 May 2016 and resigned from the Committee on 31
December 2016 prior to taking up the role of Chairman on 1 January
2017. Mrs. Susan Murray was appointed to the Committee on 19
January 2017.

The Committee members have no personal financial interest, other
than as shareholders, in matters to be decided, no potential conflicts
of interests arising from cross directorships and no day-to-day
involvement in running the business. The Non-Executive Directors are
not eligible for pensions and do not participate in the Group’s bonus or
share schemes. The Committee’s terms of reference can be found on the
company website.

Mr. Michael Chadwick, the former Chairman, attended meetings of the
Committee during 2016 by invitation and participated in discussions
at Committee meetings. The Committee also consulted with the
CEO as appropriate and periodically invited him to attend meetings
of the Committee. The Chairman of the Committee was assisted
in his work by the Group’s Company Secretary. The Secretary of the
Committee is Ms. Paula Harvey, Group HR Director. The Executive
Directors and Company Secretary take no part in discussions relating
to their own remuneration and benefits. New Bridge Street is the
Committee’s advisor on remuneration matters and fees paid to them
during the year were £32,286. The Group has no other connection with
New Bridge Street, other than that another subsidiary of Aon Hewitt
provides pension advice. During the year New Bridge Street provided a
market practice update to the Committee on remuneration trends and
governance and advised on Remuneration Policy proposals.

Schedule of Work During 2016
The Committee met on eight occasions during
2016 and its schedule of work covered the
following matters that fall within the scope of its
duties and responsibilities:

ྲ Considered and determined bonus awards

under the 2015 bonus scheme for the Executive
Directors and Company Secretary;

ྲ Reviewed and determined that 100 per cent
of the EPS and 73.3% of the TSR components
of the 2013 LTIP award were met and that in
aggregate 86.7 per cent of the 2013 LTIP awards
should vest;

ྲ Approved the 2016 grant of LTIP awards and
determined the EPS and TSR performance
conditions;

ྲ Agreed the framework for measuring financial

targets for the 2016 bonus scheme;

ྲ Conducted a review of Directors remuneration
and considered a market practice update from
New Bridge Street; and

ྲ Reviewed the existing Remuneration

Policy, considered and approved the new
Remuneration Policy to be proposed to
shareholders at the 2017 AGM following
consultation with major shareholders and
institutional shareholder bodies.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Report of the Remuneration Committee on Directors’ Remuneration (continued)

Annual Report on Remuneration (continued)

Single Total Remuneration Figure of Directors’ Remuneration

The following table sets out the total remuneration for Directors for the year ending 31 December 2016 and the prior year.

Executive Directors

G. Slark
D. Arnold

Non-Executive Directors

M. Chadwick**
C. M. Fisher
R. Ryan
P. Hampden Smith
F. van Zanten
M. Roney***
S. Murray****
V. Crowley*****
A. Flynn******

Total Remuneration

Salary/Fees (a)

Bonus (b)

Pension (c)

Other Benefits (d)

Long term
Incentive Plan (e)

Total

2016
£’000

2015
£’000

2016
£’000

2015
£’000

2016
£’000

2015
£’000

2016
£’000

2015
£’000

2016
£’000

2015*
£’000

2016
£’000

2015*
£’000

569
390
959

123
57
57
57
57
77
12
12
-
452
1,411

569
390
959

109
51
51
18
51
-
-
-
48
328
1,287

411
234
645

-
-
-
-
-
-
-
-
-
-
645

359
225
584

-
-
-
-
-
-
-
-
-
-
584

128
78
206

-
-
-
-
-
-
-
-
-
-
206

128
78
206

-
-
-
-
-
-
-
-
-
-
206

53
42
95

-
-
-
-
-
-
-
-
-
-
95

48
39
87

-
-
-
-
-
-
-
-
-
-
87

356
203
559

-
-
-
-
-
-
-
-
-
-
559

1,151
-
1,151

-
-
-
-
-
-
-
-
-
-
1,151

1,517
947
2,464

123
57
57
57
57
77
12
12
-
452
2,916

2,255
732
2,987

109
51
51
18
51
-
-
-
48
328
3,315

* 2015 has been updated as set out in note (e) below.
** Mr. Chadwick retired from the Board on 31 December 2016
*** Mr. Roney was appointed Deputy Chairman and Chairman Designate on 1 May

2016

**** Mrs. Murray was appointed Non-Executive Director on 14 October 2016
***** Mr. Crowley was appointed Non-Executive Director on 14 October 2016
****** Ms. Flynn resigned from the Board on 11 December 2015

Comparative figures included in the table above have been presented on a consistent
basis with the current year. Further details on the valuation methodologies applied
are set out in notes (a) to (f) below. These valuation methodologies are as required by
the Regulations and are different from those applied within the financial statements
which have been prepared in accordance with International Financial Reporting
Standards (“IFRS”). The total expense relating to the Directors recognised within the
income statement is £811,000 (2015: £748,000) in respect of the long-term incentive
plan (LTIP).

Notes to the Directors’ Remuneration Table:

(e) For the year ended 31 December 2016, this is the value of LTIP
awards that will vest in April 2017. The value of the awards is
based on the average share price of £5.31 for the three months
to 31 December 2016. The vesting of these awards was subject to
performance conditions over the period from 1 January 2014 to 31
December 2016. For the year ended 31 December 2015, this is the
value of LTIP awards that vested in May 2016. The value of this
award has been updated from that disclosed last year to reflect the
share price of £6.75 on the date of vesting.

(f) Non-Executive Directors were paid fees at the same annual rate

as 2015 in constant currency being €70,000 except for Mr. Michael
Roney, Deputy Chairman and Chairman Designate who was paid
£115,000 per annum for the period from his appointment to the
Board on 1 May 2016 to 31 December 2016.

(a) This is the amount of salaries and fees earned in respect of the

financial year.

Salary and Fees

(b) This is the amount of bonus earned in respect of the financial year.

financial year by way of a company contribution to a pension
scheme or a payment in lieu of pension made through the payroll.

(d) Benefits comprise permanent health and medical insurance, the
provision of a company car/car allowance and, in the case of Mr.
Slark, a rent allowance.

Having taken account of both external market developments and
internal Group considerations, the Committee agreed in January
2016 that the basic salary of the Chief Executive Officer and the
Chief Financial Officer would remain at its existing level for the year
ended 31 December 2016. Mr. Slark’s salary was £568,711 for 2016 (2015:
£568,711). Mr. Arnold’s salary was £389,500 for 2016 (2015: £389,500).

Non-Executive Directors fees were paid at the rate of £57,000 per
annum, the same level in constant currency (€70,000) since 2005. No
additional fees were paid for chairing Board Committees. The fee paid
to Mr. Chadwick as Chairman was £123,000, the same level in constant
currency (€150,000) since his appointment as Non-Executive Chairman
on 1 July 2011.

Grafton Group plcAnnual Bonus

The maximum bonus opportunity for Mr. G. Slark and Mr. D. Arnold
was 120 per cent and 100 per cent of salary respectively. The maximum
bonus opportunity was divided equally between three financial
measures and one measure related to personal objectives.

The table below analyses the composition of the bonus awards for the year:

achieved and agreed a payment of 18 per cent of salary for Mr. Slark and
15 per cent of salary for Mr. Arnold out of a maximum bonus opportunity
of 30 per cent and 25 per cent of salary respectively.

Following publication of last year’s Annual Report, the Committee
agreed to retrospectively disclose the measures and targets that applied
for the 2015 bonus awards:

Percentage of Basic Salary

Adjusted
EPS

Free Cash
flow

Return on
Capital

Personal
Objectives

11.65%
9.71%

30.00%
25.00%

12.59%
10.49%

18.00%
15.00%

Bonus
Payable

72.24%
60.20%

G. Slark
D. Arnold

Percentage of Basic Salary

Adjusted
EPS

Free Cash
flow

Return on
Capital

Personal
Objectives

4.97%
4.15%

30.00%
25.00%

7.20%
6.00%

21.00%
22.50%

Bonus
Payable

63.17%
57.65%

The maximum bonus opportunity for each of the four components
was 30 per cent of gross pay for Mr. Slark and 25 per cent of gross pay
for Mr. Arnold.

Financial targets were set at the beginning of the year by reference to
the Group’s budget for 2016. The actual targets are set out in the table
below for 2016.

The actual financial targets for 2015 are disclosed retrospectively in the
table below.

Threshold

Budget

Stretch

51.8p

Actual

41.0p

38.9p

Adjusted EPS
Return on capital
employed*
Free cashflow
* Based on capital employed in monthly management accounts

43.2p

10.9%

11.8%
£80.4m £89.3m £107.2m £107.4m

14.5%

12.1%

Threshold
(20%
payable)

Budget
(40%
payable)

Stretch
(100%
payable)

45.4p

47.8p

52.6p

% of
Maximum
Payable

38.84

Actual

47.7p

The maximum bonus opportunity for each of the four components
was 30 per cent of gross pay for Mr. Slark and 25 per cent of gross pay
for Mr. Arnold.

Adjusted EPS
Return on capital
employed*
Free cashflow

11.5 %
12.2%
£93.4m £98.3m £108.2m £134.6m

13.3%

12.1%

41.96
100.00

* Based on capital employed in monthly management accounts

The award for each financial measure was based on a sliding scale from
95 per cent to 110 percent of the Group’s budget for 2016. No bonus was
payable if performance was below a minimum threshold of 95 per cent of
budget. 20 per cent of the bonus opportunity was payable at 95 per cent of
budget and between 20 and 40 per cent was payable on a straight line basis
between 95 per cent of budget and 100 per cent of budget. The bonus then
increased on a straight line basis up to a limit of 100 per cent of the bonus
opportunity on achieving 110 per cent of budget.

The personal objectives for Mr. Slark related to implementation of the
Group’s strategy, improving the performance of the Belgian business
and transitioning from the legacy trading and back office IT systems
in the traditional UK merchanting business to a new Microsoft AX
Dynamics platform.

The personal objectives for Mr. Arnold related to refinancing of
Group debt, undertaking a strategic review and implementing any
agreed restructuring of shared services functions in the traditional
UK merchanting business, transitioning to the new IT system in
the traditional UK merchanting business, appointment of new fund
managers for the UK defined contribution pension scheme and
transitioning the external audit from KPMG to PwC.

The Committee considered the extent to which these objectives were

Financial targets were set at the beginning of the year by reference to
the Group’s budget for 2015. No bonus was payable if the performance
achieved was below 90 per cent of budget and the bonus payable
increased on a straight line basis thereafter with the full bonus
opportunity payable on achieving 120 per cent of budget.

The personal objectives for Mr. Slark related to establishing a new
management team in Belgium, review of structure and management in
the traditional merchanting business in the UK, business development
opportunities, health and safety management and reporting and
progressing implementation of a new IT platform in the traditional UK
merchanting business. The personal objectives for Mr. Arnold were
the development of the finance teams across the Group, undertaking
a review of the UK defined benefit pension scheme, supporting the
Audit & Risk Committee with the tender process for the external audit,
improving accountability for financial returns in the traditional UK
merchanting business and implementation of the business resilience
programme.

Pension

Pension benefits comprise either a company contribution to an
Executive Director’s personal pension plan, a company contribution to
the Group defined contribution pension scheme or an allowance paid
through the payroll in lieu of pension benefit.

Mr. Slark’s pension benefit comprised a payment made to a defined
contribution scheme and a taxable non-pensionable cash allowance. The
total pension benefit was £128,000. The pension benefit for Mr. Arnold

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Report of the Remuneration Committee on Directors’ Remuneration (continued)

Annual Report on Remuneration (continued)

was based on an annual contribution rate of 20 per cent of his salary
which was paid as a taxable non-pensionable cash allowance.

Long Term Incentive Plan (LTIP)

The Remuneration Committee has the authority to set appropriate
criteria for each award. The Committee believes that the LTIP should
align management and shareholder interests and assist the Group in
the recruitment and retention of senior executives.

Awards Granted with a Performance Period Covering the Three

Years to 31 December 2016

The performance conditions for LTIP awards made in April 2014 were based
on growth in EPS (as defined in the scheme) and TSR. Half of the awards
to Executive Directors were based on relative TSR versus a peer group. The
other half was based on the Group’s EPS for the financial year ended 31
December 2016.

The relative TSR performance over the three year period was ranked
below the median of the comparator group, which comprised a bespoke
group of 18 UK and Irish companies that operate in the construction
sector, and this half of the award will not vest as independently
confirmed to the Committee by New Bridge Street.

The other half of the award was based on the Group’s adjusted EPS for
the financial year ended 31 December 2016 being in the range of 38
pence to 45 pence. The adjusted EPS for 2016 of 47.7 pence exceeded the
upper limit of the range. As this performance condition was met, 100
per cent of this part of the award will vest. In aggregate 50 per cent of
the 2014 LTIP awards will vest.

The number of Grafton Units granted to Mr. Slark on 16 April 2014 was
134,181 of which 67,091 will vest under the EPS performance condition
with no units vesting under the TSR performance condition. The
number of Grafton Units granted to Mr. Arnold on 16 April 2014 was
76,582 of which 38,291 will vest under the EPS performance condition
with no units vesting under the TSR performance condition. The
value of the awards made to Mr. Slark and Mr. Arnold is £356,000 and
£203,000 respectively on the basis of the average price of a Grafton Unit
of £5.31 over the three months to 31 December 2016.

LTIP Awards Granted During the Year Ended 31 December 2016

The following awards were made during the year ended 31 December 2016:

G. Slark
D. Arnold

Number of
Units

Share Price
at Grant
Date

Value of
Award at
Grant Date

118,894
67,857

£7.175
£7.175

£853,064
£486,874

Mr. Slark was granted an award on 14 April 2016 valued at 150 per cent
of his base salary in the form of nil cost Grafton Units. Mr. Arnold was
granted an award on 14 April 2016 valued at 125 per cent of his base
salary in the form of nil cost Grafton Units.

The 2016 awards to Mr. Slark and Mr. Arnold are subject to the
achievement performance conditions. Half of these awards will vest
depending on the Group’s TSR performance over a three-year period
commencing on 1 January 2016, with no opportunity to re-test. TSR
will be compared to a comparator group of 18 UK and Irish companies
operating in the construction sector.

Notwithstanding the achievement of the TSR performance condition, no
shares will vest unless the Committee considers that the overall financial
results have been satisfactory in the circumstances over the performance
period.

Where the Group’s TSR performance equals the median TSR performance
of the peer group, then 25 per cent of the shares which are subject to the
TSR performance condition shall vest. 100 per cent of the shares that are
subject to the TSR performance condition shall vest if the Group’s TSR
performance is equal to or greater than the 75th percentile in the peer
group. For TSR performance between the 50th and the 75th percentiles,
between 25 per cent and 100 per cent of the shares which are subject to the
TSR performance condition shall vest on a straight-line basis based on the
Group’s notional ranking compared against the Comparator Group.

Under the EPS performance condition for the other half of awards granted
on 14 April 2016, the Group’s EPS for the financial year ending 31 December
2018 must be equal to 56 pence per share if any part of the award is to vest.
If this target is achieved, then 25 per cent of the shares which are subject
to the EPS performance condition shall vest. Where the Group’s EPS for
the financial year ending 31 December 2018 is equal to or greater than
64 pence per share, then 100 per cent of the shares which are subject to
the EPS performance condition shall vest. Where the Group’s EPS for the
financial year ending 31 December 2018 is between the thresholds of 56
pence and 64 pence per share, then between 25 per cent and 100 per cent of
the shares which are subject to the EPS performance condition shall vest
on a straight-line basis.

Claw back provisions will apply.

External Appointments

The Company recognises that Executive Directors may be approached
to become Non-Executive Directors of other companies and that
opportunities of this nature can provide valuable experience that benefits
the company.

Mr. Gavin Slark is a Non-Executive Director of Galliford Try plc and is
permitted to retain his fee for the role which amounted to £40,000 in 2016.

Non-Executive Directors Remuneration

Non-Executive Directors receive fees for their roles and are precluded from
participating in performance related share or other incentive schemes.

Loss of Office Payments

No loss of office payments were made during the year.

Grafton Group plc
Application of Remuneration Policy in 2017

Salaries

Remuneration Policy. Vesting of the 2017 award will continue to be
based on relative TSR (50 per cent) and on EPS (50 per cent) growth.

The proposed Remuneration Policy for 2017 includes a salary cap which
limits increases to current Directors’ salaries over the life of the policy
(covering 2017, 2018 and 2019) to that of the general workforce. The
Committee may decide for any particular year, based on company and
personal performance, to apply a lower rate of increase to the salary of
Directors than the rate of increase applied to the general workforce.

The following salaries will apply for 2017:

G. Slark
D. Arnold

2017
Base Salary

2016

Base Salary % Increase

£568,711
£580,085
£397,290 £389,500

2.0%
2.0%

The Committee conducted a review of the peer group used in previous
years, which consisted of a bespoke group of eighteen UK and Irish
listed companies operating in the construction sector and, having
considered alternative peer groups, the Committee concluded that
there were too few quoted companies that carried on business activities
that were similar to Grafton to constitute a meaningful sector peer
group. The Committee is proposing that the TSR performance
condition should be measured against a comparator group consisting
of the constituents of the London Stock Exchange’s FTSE 250 Index
excluding investment trusts. This index was chosen on the basis that
it is more representative of the Group’s overall trading and financial
environment and is a more appropriate measure of outperformance.

Chairman and Non-Executive Directors’ Fees

Non-Executive Directors fees are payable in Euro and will remain
unchanged at €70,000. The sterling equivalent was £57,000 in 2016.
The fee paid to Mr. Roney as Deputy Chairman from his appointment to
the Board on 1 May 2016 to 31 December 2016 was at the rate of £115,000
per annum and this increased to £230,000 per annum following his
appointment as Chairman on 1 January 2017.

Pension and Benefits

Mr. Slark and Mr. Arnold will receive pension contributions/salary
supplements in lieu of pension of £128,040 and 20 per cent of salary
respectively which is consistent with the arrangements in place for 2016.

Annual Bonus

The maximum potential performance related bonus pay award for the
Chief Executive Officer for 2017 is 120 per cent of basic salary and the
maximum bonus opportunity for 2017 for Mr. Arnold is 100 per cent of
salary. These limits also applied in respect of 2016.

For EPS growth targets, the Committee sets the percentage growth
range having considered the Group’s budget and strategic business
plan, the Group’s economic and trading environment and analysts’
forecasts for EPS. The Committee has historically set very demanding
growth ranges for EPS in absolute terms.

For 2017, the Committee has decided to simplify the annual bonus
plan by reducing the number of measures from four to two. The 2017
bonus awards will be based on earnings per share (70 per cent of bonus
opportunity) and return on capital employed (30 per cent of bonus
opportunity). The actual targets are commercially sensitive and will be
disclosed in full in the 2017 Annual Report.

The annual bonus is payable in cash subject to part investment in
shares in accordance with the Group’s share ownership guidelines as
set out in the proposed Remuneration Policy.

Clawback provisions will operate as set out in the Remuneration Policy.

Long-Term Incentives

The Committee recognises that the current maximum bonus
opportunities are below market levels but instead wishes to place
greater focus on incentivising sustained long-term performance. It is
therefore proposed that the LTIP policy limits are increased from 150
per cent to 200 per cent of salary for the CEO and from 125 per cent to
175 per cent of salary for the CFO. Awards to be made in 2017 will be at
the increased levels subject to shareholder approval of the proposed

The proposed EPS range for the 2017 LTIP award is 59.0p to 66.0p for
the year ended 31 December 2019. The lower end of the target range
(threshold) is above consensus Brokers Forecasts for 2019 of 58.4p which
were available when the range was approved on 14 March 2017 and
reflects changes made following the publication of the Final Results for
2016 on 7 March 2017. It should be noted that in previous years, market
consensus was the mid-point of the range and therefore the 2017 target
is more challenging than the previous years’ targets. Consistent with
prior years, the upper end of the range is appropriately stretching.
25 per cent of the award will vest if the lower target in the range is
achieved. Where EPS is between the lower and higher targets in the
range, then between 25 per cent and 100 per cent of this part of the
award will vest on a straight line basis.

A holding period of two years will apply on LTIP awards that vest, after
taking into account any shares sold to pay tax and other statutory
obligations, following approval of the proposed Remuneration Policy.
Shares held during the two year holding period will be deemed to be
part of an executive directors’ shareholding. The vesting period and
the holding period will be five years in total.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016
Report of the Remuneration Committee on Directors’ Remuneration (continued)

Annual Report on Remuneration (continued)

Relative Importance of Spend on Pay

The following table sets out the percentage change in dividends and overall spend on employee pay in the 2016 financial year compared with the
prior year.

Dividends payable
Employee remuneration costs

Percentage Change in CEO Pay

Chief Executive Officer
– Salary
– Benefits
– Bonus
Average employee
– Salary, Benefits and Bonus (£)*
* The average salary increased by 1.1% in constant currency. This is based on Full-Time Equivalents (FTE’s).

2016
£’000

32,490
362,905

2016
£’000

569
53
411

2015
£’000

29,340
318,418

2015
£’000

569
48
359

27,951

26,697

Percentage
change

10.7%
14.0%

Percentage
change

0.0%
10.4%
14.5%

4.7%

The table above also shows the percentage year-on-year change in the value of salary, benefits and annual bonus for the Chief Executive Officer
between the current and previous year compared to that of the average employee.

Performance Graph and Single Figure Table

Total Shareholder Return
450

Grafton Group plc

FTSE 250 Index

)
d
e
s
a
b
e
r
(

)
£
(
e
u
l
a
V

400

350

300

250

200

150

100

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Source: Datastream (Thomson Reuters)

This graph compares the TSR performance of Grafton Group plc, assuming dividends are re-invested, with the TSR performance of the FTSE 250
over the period 31 December 2008 to 31 December 2016.

The table below shows the total remuneration figure for the CEO position over the eight years to 2016. The remuneration for 2015 has been updated
as set out on page 64.

CEO single total figure of remuneration (£’000)
Annual bonus payout relative to maximum
LTIP vesting

2009

589
0%
N/A

2010

570
0%
N/A

2011

1,151
16%
N/A

2012

1,001
49%
N/A

2013

1,524
49%
45%

2014

3,080
98%
100%

2015

2,255
53%
87%

2016

1,517
60%
50%

Grafton Group plc

Statement of Shareholder Voting at the 2016 AGM

The Directors’ Remuneration Report received the following votes from
shareholders:

required to apply 30 per cent of their annual bonus after statutory
deductions for the purchase of shares in the Group until this share
ownership requirement is fulfilled.

For
Against
Total

Total Number
of Votes

148,227,970
1,635,494
149,863,464

% of Votes
Cast

98.91
1.09
100.00

The number of votes withheld was 55,173. A vote withheld is not a vote
under Irish law and is not counted in the calculation of the percentage
votes for and against a resolution.

Directors’ and Secretary’s Interests

The beneficial interests of the Directors in the share capital of the
Company were as follows:

Director

M. Chadwick
G. Slark
D. Arnold
R. Ryan
C. M. Fisher
F. van Zanten
P. Hampden Smith
M. Roney
V. Crowley
S. Murray
Secretary

C. Rinn

31 December 2016
Grafton Units*

31 December 2015
Grafton Units*

Unvested LTIP
Awards**

19,436,079
283,692
24,100
35,000
30,000
3,000
32,990
11,529
8,000
-

19,436,079
195,785
15,600
35,000
30,000
3,000
-
-
-
-

-
357,389
203,973
-
-
-
-
-
-
-

400,124

371,530

54,790

* At 31 December 2016 and at 31 December 2015, a Grafton Unit comprised one ordinary
share of 5 cents each and seventeen ‘A’ ordinary shares of 0.001 cent each in Grafton
Group plc and one ‘C’ ordinary share of Stg0.0001p in Grafton Group (UK) plc.
** Vesting of these awards is subject to performance conditions

On 31 December 2016, Mr. M. Chadwick held a non-beneficial interest
in 2,490,330 (31 December 2015: 2,490,330) Grafton Units in his capacity
as a Trustee of a Trust.

Mr. G. Slark held shares at the year-end valued at 2.7 times his salary. Mr. D.
Arnold held shares at the year-end valued at 0.34 times his salary.

Directors’ and Secretary’s Interests under the Grafton Group Share

Schemes

The interests of the Directors and the Secretary to acquire Grafton
Units in accordance with the Grafton Group Share Schemes are shown
below:

Mr. C. Rinn had an interest to acquire 200,000 (31 December 2015: 236,500)
Grafton Units at 31 December 2016 at prices ranging between €1.66 and
€8.48 subject to the rules of the 1999 Grafton Group Share Scheme. An
interest to acquire 36,500 Grafton Units lapsed during the year.

Under the terms of the 1999 Grafton Group Share Scheme, shares were
subject to the performance conditions set out below:

• Basic shares which cannot be converted before the expiration of

five years, unless the Remuneration Committee agrees to a shorter
period which shall not be less than three years, and may be converted
any time after that to the end of their contractual life provided the
Company’s earnings per share has grown at not less than the rate
of growth in the Consumer Price Index plus 5 per cent compounded
during that period. Basic shares granted after 8 May 2008 cannot be
converted before the expiration of three years.

• Second tier shares which cannot be converted before the expiration of
five years and at any time thereafter up to the end of their contractual
life, only if over a period of at least five years, the growth in the
Group’s earnings per share would place it in the top 25 per cent of the
companies listed on the Irish Stock Exchange Index over the same
period and also provided that such shares shall be acquired only if
the Company’s earnings per share growth over the relevant period is
greater, by not less than 10 per cent on an annualised basis, than the
increase in the Consumer Price Index over that period.

The closing price of a Grafton Unit on 31 December 2016 was 550p (31
December 2015: 740p) and the price range during the year was between
440p and 752p (2015: 619.5p and 858.5p).

The share scheme had a ten year life for the award of entitlements.
This period expired in 2009 and was replaced in 2011 by the Long Term
Incentive Plan (LTIP).

There have been no changes in the interests of the Directors and
Secretary between 31 December 2016 and the date of this report except
that Mr. David Arnold’s shareholding increased by 7,546 to 31,646
Grafton Units.

To further align the interests of senior management with those of
shareholders, Executive Directors are subject to share ownership
guidelines. Currently, Executive Directors are required to build a
holding of shares in the Company with a minimum value of 100 per
cent of their salary. It is proposed to double the minimum share
ownership guideline to 200 per cent of basic salary. Directors are

There has not been any contract or arrangement with the Company
or any subsidiary undertaking during the year in which an Officer of
the Company was materially interested and which was significant
in relation to the Company’s business except for remuneration
arrangements.

Mr. D. Arnold has options over 3,015 Grafton Units granted under the
2014 SAYE Scheme.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Report of the Remuneration Committee on Directors’ Remuneration (continued)

Annual Report on Remuneration (continued)

Directors’ and Secretary’s Interests under the 2011 Long Term Incentive Plan (LTIP)

The grant of awards over Grafton Units to the Directors and Secretary under the LTIP are shown below:

Share Price
on date of
Grant

Grant Date

1 January

2016 Granted

Lapsed

Shares
Received

31 Dec
2016

EPS
Condition

TSR
Condition

Performance Period Vesting Date**

Number of Units

G. Slark

16 April 2013
16 April 2014
17 April 2015
14 April 2016

(26,272) (170,520)*

£4.229 196,792
134,181
£6.2025
104,314
£8.1775
-
£7.175

-
-
-
118,894

-
-
-
435,287 118,894 (26,272) (170,520)

-
-
-

-
-
-
134,181
67,091
67,090
104,314
52,157
52,157
59,447
59,447
118,894
357,389 178,695 178,694

1 Jan 2013 – 31 Dec 2015
11 May 2016
1 Jan 2014 – 31 Dec 2016 16 April 2017
1 Jan 2015 – 31 Dec 2017 17 April 2018
1 Jan 2016 – 31 Dec 2018 14 April 2019

D. Arnold 16 April 2014
17 April 2015
14 April 2016

£6.2025
£8.1775
£7.175

76,582
59,534
-
136,116

-
-
67,857
67,857

-
-
-
-

76,582
59,534
67,857

38,291
38,291
29,767
29,767
33,929
33,928
203,973 101,987 101,986

1 Jan 2014 – 31 Dec 2016 16 April 2017
1 Jan 2015 – 31 Dec 2017 17 April 2018
1 Jan 2016 – 31 Dec 2018 14 April 2019

C. Rinn

16 April 2013
16 April 2014
17 April 2015
14 April 2016

£4.229
£6.2025
£8.1775
£7.175

33,000
21,616
14,640
-
69,256

-
-
-
18,534
18,534

(28,594)*

(4,406)
-
-
-

-
-
-
(4,406) (28,594)

-
21,616
14,640
18,534
54,790

-
10,808
7,320
9,267
27,395

1 Jan 2013 – 31 Dec 2015
11 May 2016
1 Jan 2014 – 31 Dec 2016 16 April 2017
1 Jan 2015 – 31 Dec 2017 17 April 2018
1 Jan 2016 – 31 Dec 2018 14 April 2019

* The market price at the date of vesting was £6.75.
** This is the earliest date for vesting except for the vesting in 2016 which is the actual date of vesting. The actual date of vesting is subject to approval by the Remuneration
Committee.

of a listed/quoted company over a period, plus dividends, expressed as
a plus or minus percentage of the opening value. For this reason, both
EPS and TSR are recognised as good measures of shareholder returns on
the value of their investment in the Group when account is taken of the
Group’s share price, dividends paid and performance.

Charles M. Fisher,
Chairman of the Remuneration Committee
15 March 2017

The Group’s long-term incentive share scheme expired in April 2009.
Consequently, no long-term incentive awards were made during 2010.
Shareholder approval was granted at the AGM held on 4 May 2011 for
the introduction of a new Long-Term Incentive Plan (LTIP) and the first
awards under the plan were made on 25 May 2011. Subsequent awards
under the LTIP were made on 18 April 2012, 16 April 2013, 16 April 2014,
17 April 2015 and 14 April 2016.

In the case of awards that were issued in 2011, 2012, 2013, 2014,
2015 and 2016 to the Company’s Executive Directors and Secretary,
the performance conditions are dependent on the growth in the
Company’s EPS (earnings per share) and the Company’s TSR (total
shareholder return) performance (the “EPS Performance Condition”
and the “TSR Performance Condition”, respectively). The vesting of
50 per cent of the share awards granted to the Company’s Executive
Directors and Secretary are subject to the EPS Performance Condition
and the remaining 50 per cent are subject to the TSR Performance
Condition. EPS is the adjusted earnings per share figure shown in the
Company’s Annual Report. TSR represents the change in share price

Grafton Group plcReport of the Directors

The Directors present their report to the
shareholders together with the audited
financial statements for the year ended 31
December 2016.

Group Results

Group revenue of £2.5 billion was 13 per cent higher than Group
revenue of £2.2 billion in 2015. Adjusted operating profit before property
profit increased 14 per cent to £137.1 million compared to £120.6 million
in 2015.

which contain a review of operations and the financial performance
of the Group for 2016, the outlook for 2017 and the key performance
indicators used to assess the performance of the Group. These are
deemed to be incorporated in the Report of the Directors.

The net finance expense was £5.9 million (2015: £7.9 million). Group
statutory profit before taxation amounted to £114.2 million compared
with £120.3 million in the previous year.

The headline rate of corporation tax of 18.5 per cent is lower than the
underlying tax rate of 19 per cent (2015: 21 per cent) due to the use of a
previously unrecognised deferred tax asset to partially offset a taxable
profit arising on the disposal of properties in the UK and agreement of a
claim with the UK Revenue that related to historic capital allowances.
The tax charge was £21.1 million for 2016 (2015: £23.8 million).

Basic earnings per share were 39.6 pence compared with 41.6 pence
in the previous year. Adjusted earnings per share (before intangible
amortisation on acquisitions and before exceptional and non-recurring
items) increased by 16 per cent to 47.7 pence from 41.2 pence in 2015.

Cautionary Statement

Certain statements made in this Annual Report are forward looking
statements. Such statements are based on current expectations and
are subject to a number of risks and uncertainties that could cause
actual events or results to differ materially from those expressed or
implied by these forward-looking statements. They appear in a number
of places throughout this Annual Report and include statements
regarding the intentions, beliefs or current expectations of Directors
and senior management concerning, amongst other things, the results
of operations, financial condition, liquidity, prospects, growth rate
and potential growth opportunities, potential operating performance
improvements, the effects of competition and the strategy of
the overall Group and its individual businesses. The Directors
do not undertake any obligation to update or revise any forward-
looking statements, whether as a result of new information, future
developments or otherwise, except as required by law.

The Group and Company financial statements for the year ended 31
December 2016 are set out in detail on pages 75 to 164.

Dividends

The payment in 2016 of a second interim dividend for 2015 of 8.0 pence
on the ‘C’ Ordinary shares in Grafton Group (UK) plc from UK-sourced
income amounted to £18.8 million. A 2016 interim dividend of 4.75
pence per share was paid on 7 October 2016 on the ‘C’ Ordinary shares
in Grafton Group (UK) plc from UK-sourced income and amounted to
£11.2 million.

A second interim dividend for 2016 of 9.0 pence per share will be paid
on the ‘C’ Ordinary Shares in Grafton Group (UK) plc from UK-sourced
income to all holders of Grafton Units on the Company’s Register of
Members at the close of business on 17 March 2017 (the ‘Record Date’).
The dividend will be paid on 13 April 2017. A liability in respect of this
second interim dividend has not been recognised at 31 December 2016
as there was no present obligation to pay the dividend at the year-end.

The risk factors included at pages 16 to 19 of this Annual Report could
cause the Group’s results to differ materially from those expressed
in forward-looking statements. There may be other risks and
uncertainties that the Group is unable to predict at this time or that
the Group currently does not expect to have a material adverse effect
on its business. These forward-looking statements are made as of the
date of this Annual Report.

The forward-looking statements in this Annual Report do not
constitute reports or statements published in compliance with any of
Regulations 4 to 9 and 26 of the Transparency (Directive 2004/109/EC)
Regulations 2007.

Board of Directors

In line with the provisions contained in the UK Corporate Governance
Code, all Directors retired at the Annual General Meeting of the
Company on 10 May 2016 and being eligible offered themselves for re-
election and all were re-elected to the Board on the same day.

Review of the Business

Shareholders are referred to the Chairman’s Statement, Chief Executive
Officer’s Review, Sectoral and Strategic Review and Financial Review

Under the Company’s Articles of Association, Directors are required to
submit themselves to shareholders for election at the Annual General
Meeting following their appointment and all the Directors are required

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Report of the Directors

(continued)

to submit themselves for re-election at intervals of not more than three
years. However, in accordance with the provisions of the UK Corporate
Governance Code, the Board has decided that all Directors seeking
re-election should retire at the 2017 Annual General Meeting and offer
themselves for re-election.

Share Capital

At 31 December 2016, a Grafton Unit comprised one ordinary share
of 5 cent and seventeen ‘A’ ordinary shares of 0.001 cent each in
Grafton Group plc and one ‘C’ ordinary share of Stg0.0001p in Grafton
Group (UK) plc. The composition of the Company’s share capital
including a summary of the rights and obligations attaching to the
three components of a Grafton Unit is set out in Note 18 to the Group
Financial Statements.

The Group has in place a number of employee share schemes, the
details of which are set out in the Report of the Remuneration
Committee on Directors’ Remuneration and in Note 33 to the Group
Financial Statements.

Annual General Meeting

The Annual General Meeting of the Company will be held at the
IMI Conference Centre, Sandyford Road, Dublin 16 on 9 May 2017 at
10.30am. Your attention is drawn to the circular on the Company’s
website, www.graftonplc.com which sets out details of resolutions to
be considered at the Annual General Meeting, including the following:

Authority to Increase The Limit on the Aggregate Fees for Directors

Shareholders are being asked to increase the limit of the aggregate
fees for Directors to €950,000. The current limit, approved at the 2015
Annual General Meeting, is €750,000.

Authority to Allot Relevant Securities

Shareholders are being asked to renew the Directors’ authority to
allot and issue any unissued ordinary share capital of the Company.
The total number of shares which the Directors may issue under this
authority will be limited to approximately 27 per cent of the issued
share capital of the Company at 15 March 2017. The Directors have
no present intention to make a share issue other than in respect of
employee share schemes.

Disapplication of Pre-emption Rights

At each Annual General Meeting, the Directors seek authority to
disapply statutory pre-emption rights in relation to allotments of
shares for cash up to an aggregate nominal value for all allotments and
all treasury shares of approximately €591,991, representing five per
cent of the nominal value of the issued share capital of the Company.
Under the Articles of Association, shareholders are required to renew
this power at each year’s Annual General Meeting.

A further resolution, which is based on the revised Statement of
Principles on Disapplying Pre-emption Rights published by the Pre-

Emption Group in the UK, would, if approved, authorise the Directors
to issue new shares for cash up to an additional 5% of the nominal
value of the issued share capital of the Company. The authority in
this resolution many only be used to raise funds for the purposes
of financing a transaction which the Directors determine to be an
acquisition or other capital investment of a kind contemplated by the
Statement of Principles on Disapplying Pre-emption Rights published
by the Pre-Emption Group.

Authority to Make Market Purchases of the Company’s Own Shares

At the 2016 Annual General Meeting, shareholders gave the Company
and/or any of its subsidiaries authority to make market purchases of
up to 10 per cent of the Company’s own shares. Shareholders are being
asked to renew this authority.

The Directors monitor the Company’s share price and may from
time to time exercise this power to make market purchases of the
Company’s own shares, at price levels which they consider to be in the
best interests of the shareholders generally, after taking account of the
Company’s overall financial position. The minimum price which may
be paid for any market purchase of the Company’s own shares will be
the nominal value of the shares and the maximum price which may be
paid will be 105 per cent of the then average market price of the shares.

Authority to Re-issue Treasury Shares

Shareholders are being asked to sanction the price range at which
any treasury share (that is a share of the Company redeemed or
purchased and held by the Company rather than being cancelled) may
be re-issued other than on the Stock Exchange. The maximum and
minimum prices at which such a share may be re-issued are 120 per
cent and 95 per cent respectively of the average market price of a share
calculated over the five business days immediately preceding the date
of such re-issue.

The authorities which will be sought at the forthcoming AGM to
allot relevant securities, dis-apply pre-emption rights, purchase the
Company’s Units and re-issue treasury shares will, if granted, expire
on the earlier of the date of the Annual General Meeting in 2018 or 15
months after the passing of these resolutions.

Report of the Remuneration Committee on Directors’
Remuneration

The Board is proposing to submit a new Remuneration Policy which
is set out on pages 57 to 62 to a non-binding advisory vote. It is the
Company’s intention that this policy will apply until the 2020 AGM
unless the Remuneration Committee seeks approval from shareholders
to adopt a new policy at an earlier date. The Board is proposing to
submit the Chairman’s Annual Statement and the Annual Report on
Remuneration of the Remuneration Committee, as set out on pages 54
to 56 and 63 to 70 to a non-binding advisory vote.

Grafton Group plcAmendment of the Company’s Long Term Incentive Plan

Shareholders are being asked to approve an amendment to the Rules
of the Long Term Incentive Plan to increase the limit on an individual
award from 150 per cent of a person’s Base Salary to 200 per cent of a
person’s Base Salary and to remove the reference to the authority of the
Remuneration Committee to make increased awards in exceptional
circumstances. It also allows for the increased limit to apply to awards
granted in 2017 following the AGM.

Notice Period for Extraordinary General Meetings

This resolution will, if adopted, maintain the existing authority in
the Articles of Association which permits the Company to convene
an extraordinary general meeting on 14 days’ notice in writing where
the purpose of the meeting is to consider an ordinary resolution. As
a matter of policy, the 14 days’ notice will only be utilised where the
Directors believe that it is merited by the business of the meeting and
the circumstances surrounding the business.

Substantial Holdings

So far as the Company is aware, the following held shares representing
3 per cent or more of its ordinary share capital (excluding treasury
shares) at 31 December 2016 and 7 March 2017:

Name

31 December 2016

7 March 2017

Holding

The Capital Group
Companies, Inc**
Investec Asset Management
Limited**
Mr. Michael Chadwick*
Franklin Templeton
Institutional, LLC**
EdgePoint Investment
Management Inc.**
Blackrock, Inc.**

30,491,000

12.90

30,491,000

12.90

30,355,630
21,926,409

12.85
9.28

29,979,280
21,926,409

12.69
9.28

20,421,430

8.64

20,081,130

8.50

8,737,098
8,669,320

3.70
3.67

11,107,561
8,839,804

4.70
3.74

* Beneficial holding of 19,436,079 Grafton Units and non-beneficial holding of 2,490,330
Grafton Units.
** The Company has been advised that these units are not beneficially owned.

Apart from these holdings, the Company has not been notified at 15
March 2017 or at 31 December 2016 of any interest of 3 per cent or more
in its ordinary share capital.

Directors’ and Secretary’s interests in the share capital of the Company
are set out in the Report of the Remuneration Committee on Directors’
Remuneration.

Accounting Records

The Directors are responsible for ensuring that adequate accounting
records are maintained by the Company as required by Sections 281-
285 of the Companies Act, 2014. The Directors believe that they have
complied with this requirement by providing adequate resources
to maintain proper books and accounting records throughout the
Group including the appointment of personnel with appropriate

qualifications, experience and expertise. The books and accounting
records of the Company are maintained at Heron House, Corrig Road,
Sandyford Industrial Estate, Dublin 18.

Takeover Regulations 2006

The capital structure of the Company is detailed in Note 18 to the Group
Financial Statements. Details of employee share schemes are set out
in Note 33. In the event of a change of control, the vesting/conversion/
exercise of share entitlements/options may be accelerated. The Group’s
borrowing facilities may require repayment in the event of a change
of control. The Company’s Articles of Association provide that the
business of the Company shall be managed by the Directors, who may
exercise all such powers of the Company subject to the Companies
Act and the Articles of Association. Details of the powers of the
Directors in relation to the issuing or buying back by the Company of
its shares are set out above. The Company’s Memorandum and Articles
of Association, which are available on the Company’s website, www.
graftonplc.com, are deemed to be incorporated in this part of the
Report of the Directors.

Corporate Governance Regulations

As required by company law, the Directors have prepared a Report on
Corporate Governance which is set out on pages 42 to 46 and which, for
the purposes of Section 1373 of the Companies Act 2014, is deemed to be
incorporated in this part of the Report of the Directors. Details of the
capital structure and employee share schemes are included in Notes 18
and 33 respectively.

Directors Compliance Statement

It is the policy of the Company to comply with its relevant obligations
as defined in the Companies Act 2014. The Directors have drawn
up a compliance policy statement as defined in section 225(3)(a) of
the Companies Act 2014. Arrangements and structures have been
put in place that are, in the directors’ opinion, designed to secure a
material compliance with the Company’s relevant obligations. These
arrangements and structures were reviewed by the Company during
the financial year. As required by section 225(2) of the Companies
Act 2014, the Directors acknowledge that they are responsible for the
Company’s compliance with its relevant obligations. In discharging
their responsibilities under section 225, the Directors relied on the
advice of third parties who the Directors believe have the requisite
knowledge and experience to advise the Company on compliance with
its relevant obligations.

Principal Risks and Uncertainties

The Company is required under Irish company law to give a description
of the principal risks and uncertainties. These principal risks and
uncertainties are set out on pages 16 to 19 and are deemed to be
incorporated in this section of the Report of the Directors.

Transparency Regulations 2007

The report on Corporate Social Responsibility set out on pages 34 to 38,
is deemed to be incorporated in this part of the Report of the Directors

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Report of the Directors

(continued)

together with details of earnings per share in Note 11 to the Group
Financial Statements, employment details in Note 6 and details of
financial instruments in Note 21.

Subsidiaries

The Group’s principal operating subsidiary undertakings are set out on
page 163.

Political Contributions

There were no political contributions which require disclosure under
the Electoral Act, 1997.

Post Balance Sheet Events

On 5 January 2017, the Group completed the acquisition of Gunters
en Meuser B.V. (“G&M”), the market leader in the distribution of
ironmongery, tools and fixings in the Greater Amsterdam Area. G&M
trades from 14 branches. The estimated net consideration is €36.2m
(£31.0m).

There have been no other material events subsequent to 31 December
2016 that would require adjustment to or disclosure in this report.

Auditor

The statutory Auditors, PricewaterhouseCoopers, have expressed their
willingness to continue in office in accordance with Section 382 (2)
of the Companies Act 2014 and a resolution authorising the Directors
to fix their remuneration will be submitted to the Annual General
Meeting.

Disclosure of information to statutory Auditors

In accordance with the provisions of section 330 of the Companies Act
2014, each of the persons who are Directors of the Company at the date
of approval of this report confirms that:

So far as the Director is aware, there is no relevant audit information
(as defined in the Companies Act 2014) of which the statutory Auditor is
unaware; and

The Director has taken all the steps that he/she ought to have taken
as a Director to make himself/herself aware of any relevant audit
information (as defined) and to ensure that the statutory Auditor is
aware of such information.

On behalf of the Board

Gavin Slark
Director
15 March 2017

David Arnold
Director

Grafton Group plc

Strategic Report

Corporate Governance

Financial Statements

Financial
Statements

Supplementary InformationAnnual Report & Accounts 2016Statement of Directors’ Responsibilities

The Directors are responsible for preparing
the Annual Report and the Group and
Company financial statements, in
accordance with applicable law and
regulations.

Company law in the Republic of Ireland requires the Directors to
prepare Group and Company financial statements each year. Under
that law, the Directors are required to prepare the Group financial
statements in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union (EU) and have
elected to prepare the Company financial statements in accordance
with IFRS as adopted by the European Union, and as applied in
accordance with the provisions of the Companies Act 2014.

Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the assets, liabilities and financial position of the Group and
Company and of the Group’s and Company’s profit or loss for that year.

In preparing each of the Group and Company financial statements, the
Directors are required to:

• Select suitable accounting policies and then apply them consistently;

• Make judgements and estimates that are reasonable and prudent;

• State that the financial statements comply with IFRS as adopted

by the European Union, and as regards the Company, as applied in
accordance with the Companies Act 2014; and

• Prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the Group and the Company will
continue in business.

The Directors are also required by the Transparency (Directive
2004/109/EC) Regulations 2007 and the Transparency Rules of the
Central Bank of Ireland to include a management report containing a
fair review of the business and a description of the principal risks and
uncertainties facing the Group.

The Directors are responsible for keeping adequate accounting records
which disclose with reasonable accuracy at any time the assets,
liabilities, financial position and profit or loss of the Company, and
which enable them to ensure that the financial statements of the
Company comply with the provisions of the Companies Act 2014,
and as regards to the Group financial statements Article 4 of IAS
Regulation. The Directors are also responsible for taking all reasonable
steps to ensure such records are kept by its subsidiaries which enable
them to ensure that the financial statements of the Group comply with

the provisions of the Companies Act 2014. They are also responsible for
safeguarding the assets of the Company and the Group, and hence for
taking reasonable steps for the prevention and detection of fraud and
other irregularities.

The Directors are responsible for the maintenance and integrity of the
website (www.graftonplc.com). Legislation in the Republic of Ireland
concerning the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.

Responsibility Statement as required by the Transparency

Directive and the UK Corporate Governance Code

Each of the Directors, whose names and functions are listed on pages
40 to 41 of this Annual Report, confirm that, to the best of each person’s
knowledge and belief:

• The Group financial statements, prepared in accordance with IFRS

as adopted by the European Union and the Company financial
statements prepared in accordance with IFRS as adopted by the
European Union, as applied in accordance with the provisions of the
Companies Act 2014, give a true and fair view of the assets, liabilities,
financial position of the Group and Company at 31 December 2016 and
of the profit of the Group for the year then ended;

• The Report of the Directors contained in the Annual Report includes

a fair review of the development and performance of the business and
the position of the Group and Company and that a fair description
of the principal risks and uncertainties faced by the Group and
Company is provided on pages 16 to 19; and

• The Annual Report and financial statements, taken as a whole,

provides the information necessary to assess the Group’s
performance, business model and strategy and is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the company’s position and performance,
business model and strategy.

On behalf of the Board

Gavin Slark
Director
15 March 2017

David Arnold
Director

Grafton Group plcIndependent Auditor’s Report to the Members of Grafton Group plc

Report on the financial statements

Our opinion

In our opinion:

• Grafton Group plc’s Group financial statements and Company financial statements (the “financial statements”) give a true and fair view of the
Group’s and the Company’s assets, liabilities and financial position as at 31 December 2016 and of the Group’s profit and the Group’s and the
Company’s cash flows for the year then ended;

• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as

adopted by the European Union;

• the Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in

accordance with the provisions of the Companies Act 2014; and

• the financial statements have been properly prepared in accordance with the requirements of the Companies Act 2014 and, as regards the Group

financial statements, Article 4 of the IAS Regulation.

What we have audited

The financial statements, included within the Annual Report, comprise:

• the Group and Company Balance Sheets as at 31 December 2016;

• the Group Income Statement and Group Statement of Comprehensive Income for the year then ended;

• the Group and Company Cash Flow Statements for the year then ended;

• the Group and Company Statements of Changes in Equity for the year then ended; and

• the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.

The financial reporting framework that has been applied in the preparation of the financial statements is Irish law and IFRSs as adopted by the
European Union and, as regards the Company financial statements, as applied in accordance with the provisions of the Companies Act 2014.

Our audit approach

Overview

Materiality

• Overall group materiality: £6.3m which represents 4.7% of profit before tax before exceptional items.

Audit Scope

• We conducted an audit of the complete financial information of 15 of the Group’s 16 reporting components, these

account for in excess of 99% of revenue, profit before tax and total assets.

Areas of Focus

• Valuation of goodwill

• Recognition of supplier rebates

• Valuation of inventory

• Implementation of new IT systems

• Presentation and disclosure of exceptional items

The scope of our audit and our areas of focus

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”).

We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular,
we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management
override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material
misstatement due to fraud.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Independent Auditor’s Report to the Members of Grafton Group plc

(continued)

The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as
“areas of focus” in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on
the financial statements as a whole. This is not a complete list of all risks identified by our audit.

How our audit addressed the area of focus

We evaluated the Directors’ reassessment of the identification of
groups of CGUs during 2016 by considering the third party advice
that the Group obtained and our own assessment of the groups of
assets that generate independent cash flows based on our industry
expertise and our assessment of how the group monitors goodwill for
impairment. We tested the allocation of goodwill to the new groups
of CGUs on a “relative value” basis by re-performing management’s
calculations and by confirming that the discounted cash flows used in
management’s calculations were consistent with the cash flows used
in the impairment review calculations referred to below.

We compared the underlying cash flow forecast models for each of the
groups of CGUs to the management approved forecasts. We critically
assessed and challenged management on the key assumptions
included in the model, in particular the revenue and gross margin
assumptions over the period 2017 - 2021. We considered the reliability
of management’s forecasting process by considering how actual results
compared to budget for the years 2014, 2015 and 2016. We considered
the appropriateness of the discount rate applied to each of the groups
of CGUs by comparing the elements of the weighted average cost of
capital calculation to external benchmarks. We also considered the
appropriateness of the long term growth rates included in the terminal
value calculation by reference to external market data.

We performed sensitivity analysis on key assumptions, focusing in
particular on the Belgium Merchanting group of CGUs which has lower
headroom. We assessed the change in assumptions that would result
in an impairment in Belgium Merchanting.

Area of focus

Valuation of Goodwill

Refer to page 50 (Audit and Risk Committee Report) and Note 12,
Goodwill.

At 31 December 2016 goodwill amounted to £566.2m. Goodwill is
allocated to groups of Cash Generating Units (“CGUs”) in order to
conduct impairment testing. The groups of CGUs represent the lowest
level within the entity at which goodwill is monitored for internal
management purposes.

During 2016 the Group considered, having regard to advice received
from a third party expert, that its recent expansion into new European
markets, together with changes to the management reporting
structures, had resulted in the number of groups of CGUs increasing
from 3 to 7.

As set out in Note 12 to the financial statements, this resulted in
goodwill being tested for impairment at this new level. Goodwill was
reallocated to these newly identified groups of CGUs on a “relative
value” basis as set out in the Group’s accounting policies.

The Group tests goodwill for impairment using a value-in-use (“VIU”)
model. The cash flows included in this VIU model are those included
in the management approved forecasts for the period from 2017 to 2021
and long term growth rates are used to estimate cash flows beyond that
period. As set out in Note 12 to the financial statements, this involves a
number of areas of judgement, in particular estimating the growth and
gross margin assumptions in the period 2017 to 2021, long term growth
rates used in calculating a terminal value and pre-tax discount rates
for each CGU.

We focused on this area due to the significance of this asset, the
revision in the allocation of goodwill to the groups of CGUs in the year
and because the Directors’ assessment of the carrying value of goodwill
involves complex and subjective judgements about the future results
of the business. In particular we focused on the Belgium Merchanting
CGU group which, as set out in Note 12, has headroom that is most
sensitive to changes in assumptions.

Grafton Group plcArea of focus

Recognition of supplier rebates

Refer to page 50 (Audit and Risk Committee Report) and Note 1,
Summary of Significant Accounting Policies

The Group has entered into rebate arrangements with a significant
number of its suppliers. Supplier rebates received and receivable in
respect of goods purchased are deducted from cost of sales in the
income statement or the cost of inventory, to the extent that those
goods remain in inventory at year end.

Due to the nature of the agreements in place, a significant portion of
the Group’s rebate income during the year is not received until after
the year end. Certain arrangements have volume targets that span the
year end. In addition, in certain businesses the process for calculating
rebate income requires manual input and use of spreadsheets.

We have focused on this area as the calculation of rebate income in the
year and the rebate receivable at 31 December 2016 involves the use of
estimates and judgements due to the complex rebate arrangements in
place.

Valuation of inventory

How our audit addressed the area of focus

We obtained an understanding of the significant rebate arrangements
that the Group has entered into by meeting procurement personnel and
reading a sample of contracts. We also inspected the work performed
by Internal Audit to ensure there was no findings that would impact
our audit.

We recalculated on a sample basis rebate income and receivables by
reference to supplier agreements and purchases reports. For a sample
of suppliers we obtained third party confirmation of rebate income and
rebates due at 31 December 2016. Where responses were not received
we completed alternative procedures including obtaining rebate
agreements and re-computing rebate income and rebates receivables.
We assessed the reasonableness of any significant estimates or
judgements made by management in the calculation of rebate income
and rebate receivables. We also considered the results of the collection
history in respect of rebate receivables.

Refer to page 51 (Audit and Risk Committee Report) and Note 16,
Inventories

For each in scope component we obtained an analysis of inventory on
hand by location.

Inventory on hand at 31 December 2016 is £292.7m. The Group holds
a significant number of product lines across its branch network in
the UK, Ireland, Belgium and Netherlands. Significant judgement is
exercised by management in assessing the level of inventory provision
in respect of slow moving inventory.

Management assess the required level of provision based on a
model that reflects the age of inventory on hand at year end and
considerations in respect of specific inventory. In locations that
had stocktakes in advance of the year end management estimates
a provision for stock losses (a “shrinkage provision”) in order to
accurately state inventory on hand at year end. Where inventory on
which rebates have been earned is held at the year end, an appropriate
rebate deduction is made from the gross carrying value of that
inventory.

We focused on this area due to the judgement involved in estimating
the inventory provisions and rebate deductions across multiple product
lines and locations.

We tested the accuracy of inventory ageing reports where they
supported the calculation of inventory provisions by selecting a
sample of inventory items on hand and testing the aged classification
by reference to purchase documentation. We recomputed provisions
recorded to assess whether they were in line with Group policy and
we assessed the appropriateness of Group policy by reference to past
experience. We obtained an understanding from management of plans
to liquidate any slower moving inventory and we then considered the
appropriateness of any provisions made.

In locations where stocktaking occurred before the year end we
evaluated the reasonableness of the shrinkage provisions recorded by
reference to the historical shrinkage experience of the Group.

We tested the allocation of rebate deductions to inventory by reference
to the volume and value of inventory sourced from specific suppliers
and the related rebate arrangement with those suppliers.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Independent Auditor’s Report to the Members of Grafton Group plc

(continued)

Area of focus

Implementation of new IT systems

Refer to page 51 (Audit and Risk Committee Report) and Note 15,
Intangible Assets

The Group operates a number of different IT systems across its business
units. The Group has continued its on-going investment in its systems,
in particular the development of in-branch and financial reporting IT
systems in Buildbase (the “AX platform”). During the year the Group
has begun to implement discrete elements of the AX platform. As the
implementation of new IT systems impacts financial reporting this
was considered to be an area of focus during our audit.

Presentation and disclosure of exceptional items

Refer to page 51 (Audit and Risk Committee Report) and Note 4,
Exceptional Items, Non-Recurring Operating Income and Operating
Costs

As set out in the accounting policies on page 93 the Group has adopted
a policy which seeks to highlight significant items within the Group’s
results.

The Group has separately disclosed exceptional items of £19.7 million in
the Income Statement for the year ended 31 December 2016. These costs
relate to branch closures in the traditional UK Merchanting business,
onerous lease provisions and other rationalisation costs.

We have considered this to be an area of focus during our audit as
the classification of items as exceptional involves judgement and the
metric of “operating profit before exceptional items” is a key financial
performance metric for the Group in the current year.

How our audit addressed the area of focus

We obtained a full understanding from management and Internal
Audit of the IT developments during the year. Where there were
implementation issues that impacted on financial reporting we
considered the impact of these on our planned audit approach.

Our audit incorporated tests of the transfer of data between
systems and additional substantive testing of transactions and key
reconciliations to address identified risks to the financial reporting
process as a result of the introduction of new systems during the year.

We assessed the appropriateness of the Group’s accounting policy for
exceptional items by reference to applicable accounting standards. We
evaluated whether the items disclosed as exceptional items met the
criteria set out in the accounting policy and whether all items that met
the criteria were appropriately identified.

We tested a sample of individual items to supporting documentation
including third party evidence, where relevant to ensure appropriate
classification as exceptional in the income statement in line with the
Group’s accounting policy.

We considered the appropriateness of the disclosures made in the
Annual Report.

How we tailored the audit scope

We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates.

The Group financial statements are comprised of the consolidation of 16 components. 15 of these components were subject to an audit of their full
financial information and these accounted for 99% of revenue, 99% of profit before tax and exceptional items and 99% of total assets.

Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those
reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group
financial statements as a whole. During the planning phase of our audit the Group audit partner visited the main locations where work is
performed by component auditors. The Group team attended all significant component team meetings with local management where the results
of each component’s audit were finalised, either in person or by conference call. We obtained and considered the detailed finding reports from all
component teams.

Grafton Group plcMateriality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together
with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the
individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial
statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Overall group materiality

£6.3 million

How we determined it

4.7% of profit before tax before exceptional items

Rationale for benchmark applied

We consider that profit before tax before exceptional items is an appropriate benchmark as
amounts which have been excluded from the Group’s profit before tax are significant non-
recurring items which are not reflective of the Group’s trading activity.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £250,000 as well as
misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Going concern

Under the Listing Rules we are required to review the Directors’ statement, set out on page 45, in relation to going concern. We have nothing to
report having performed our review.

Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the Directors’
statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing
material to add or to draw attention to.

As noted in the Directors’ statement, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing the
financial statements. The going concern basis presumes that the Group and Company has adequate resources to remain in operation, and that the
Directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded
that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these
statements are not a guarantee as to the Group’s and Company’s ability to continue as a going concern.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Independent Auditor’s Report to the Members of Grafton Group plc

(continued)

Other required reporting

Consistency of other information

Companies Act 2014 opinion

In our opinion the information given in the Report of the Directors is consistent with the financial statements.

ISAs (UK & Ireland) reporting

Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:

• information in the Annual Report is:

We have no exceptions to report.

- materially inconsistent with the information in the audited financial statements; or

- apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group
and Company acquired in the course of performing our audit; or

- otherwise misleading.

• the statement given by the Directors on page 76, in accordance with provision C.1.1 of the UK Corporate

We have no exceptions to report.

Governance Code (the “Code”), that they consider the Annual Report taken as a whole to be fair, balanced
and understandable and provides the information necessary for members to assess the Group’s and
Company’s position and performance, business model and strategy is materially inconsistent with our
knowledge of the Group and Company acquired in the course of performing our audit.

• the section of the Annual Report on pages 48 to 51, as required by provision C.3.8 of the Code, describing

We have no exceptions to report.

the work of the Audit Committee does not appropriately address matters communicated by us to the Audit
Committee.

The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the

Group

Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:

• the Directors’ confirmation on page 16 of the Annual Report, in accordance with provision C.2.1 of the
Code, that they have carried out a robust assessment of the principal risks facing the Group, including
those that would threaten its business model, future performance, solvency or liquidity.

We have nothing material to add
or to draw attention to.

• the disclosures in the Annual Report that describe those risks and explain how they are being managed or

mitigated.

• the Directors’ explanation on page 45 of the Annual Report, in accordance with provision C.2.2 of the

Code, as to how they have assessed the prospects of the Group, over what period they have done so and
why they consider that period to be appropriate, and their statement as to whether they have a reasonable
expectation that the Group will be able to continue in operation and meet its liabilities as they fall due
over the period of their assessment, including any related disclosures drawing attention to any necessary
qualifications or assumptions.

We have nothing material to add
or to draw attention to.

Under the Listing Rules we are required to review the Directors’ statement that they have carried out a robust assessment of the principal risks
facing the Group and the Directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than
an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements
are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired
by us in the course of performing our audit. We have nothing to report having performed our review.

Grafton Group plcDirectors’ remuneration and transactions

Under the Companies Act 2014, we are required to report to you if, in our opinion, the disclosure of Directors’ remuneration and transactions
specified by sections 305 to 312 of that Act have not been made. We have no exceptions to report arising from these responsibilities.

Corporate governance statement

• In our opinion, based on the work undertaken in the course of our audit of the financial statements:

- the description of the main features of the internal control and risk management systems in relation to the financial reporting process; and

- the information required by Section 1373(2)(d) of the Companies Act 2014;

included in the Directors’ Report on Corporate Governance, is consistent with the financial statements and has been prepared in accordance
with section 1373(2) of the Companies Act 2014.

• Based on our knowledge and understanding of the Company and its environment obtained in the course of our audit of the financial statements,
we have not identified material misstatements in the description of the main features of the internal control and risk management systems in
relation to the financial reporting process and the information required by section 1373(2)(d) of the Companies Act 2014 included in the Directors’
Report on Corporate Governance.

• In our opinion, based on the work undertaken during the course of our audit of the financial statements, the information required by section

1373(2)(a),(b),(e) and (f) is contained in the Directors’ Report on Corporate Governance.

• Under the Listing Rules we are required to review the part of the Directors’ Report on Corporate Governance relating to the Company’s

compliance with ten provisions of the UK Corporate Governance Code specified for our review. We have nothing to report having performed our
review.

Other matters on which we are required to report by the Companies Act 2014

• We have obtained all the information and explanations which we consider necessary for the purposes of our audit.

• In our opinion the accounting records of the Company were sufficient to permit the Company financial statements to be readily and properly

audited.

• The Company Balance Sheet is in agreement with the accounting records.

Responsibilities for the financial statements and the audit

Our responsibilities and those of the Directors

As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordance with Irish law and ISAs (UK & Ireland). Those
standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with section 391 of the
Companies Act 2014 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any
other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Independent Auditor’s Report to the Members of Grafton Group plc

(continued)

What an audit of financial statements involves

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that
the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

• whether the accounting policies are appropriate to the Group’s and the Company’s circumstances and have been consistently applied and

adequately disclosed;

• the reasonableness of significant accounting estimates made by the Directors; and

• the overall presentation of the financial statements.

We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and
evaluating the disclosures in the financial statements.

We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable
basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination
of both.

In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited
financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies
we consider the implications for our report.

Paul O’Connor
for and on behalf of PricewaterhouseCoopers
Chartered Accountants and Statutory Audit Firm
Dublin
15 March 2017

Grafton Group plcGroup Income Statement
For the year ended 31 December 2016

Revenue

Operating costs – before exceptional items

Property profits

Operating profit – before exceptional items

Exceptional items

Operating profit

Finance expense
Finance income

Profit before tax

Income tax charge

Profit after tax for the financial year

Profit attributable to:

Owners of the Parent
Non-controlling interests
Profit after tax for the financial year

Earnings per ordinary share - basic

Earnings per ordinary share - diluted

On behalf of the Board

Gavin Slark
Director
15 March 2017

David Arnold
Director

Notes

2016

£’000

2015

£’000

7
7

2,507,276

2,211,990

(2,372,349)
4,923

(2,090,471)
6,692

139,850
(19,713)

120,137
(7,166)
1,276

114,247
(21,128)

128,211
-

128,211
(8,932)
1,050

120,329
(23,827)

93,119

96,502

93,347
(228)
93,119

97,179
(677)
96,502

39.56p

41.62p

39.44p

41.30p

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Group Statement of Comprehensive Income
For the year ended 31 December 2016

Profit after tax for the financial year
Other comprehensive income

Items that are or may be reclassified subsequently to the income statement

Currency translation effects:

- on foreign currency net investments
- on foreign currency borrowings designated as net investment hedges

Fair value movement on cash flow hedges:

- Effective portion of changes in fair value of cash flow hedges
- Net change in fair value of cash flow hedges transferred from equity
Deferred tax on cash flow hedges

Items that will not be reclassified to the income statement

Remeasurement (loss)/gain on Group defined benefit pension schemes
Deferred tax on Group defined benefit pension schemes

Total other comprehensive income

Total comprehensive income for the financial year

Total comprehensive income attributable to:

Owners of the Parent
Non-controlling interests
Total comprehensive income for the financial year

On behalf of the Board

Gavin Slark
Director
15 March 2017

David Arnold
Director

Notes

2016

£’000

2015

£’000

93,119

96,502

32
26

20,374
1,221

(461)
258
26
21,418

(13,810)
2,102
(11,708)
9,710

(5,362)
(879)

(442)
82
42
(6,559)

13,142
(1,992)
11,150
4,591

102,829

101,093

103,057
(228)
102,829

101,770
(677)
101,093

Grafton Group plcGroup Balance Sheet
As at 31 December 2016

ASSETS
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Investment properties
Deferred tax assets
Retirement benefit assets
Other financial assets
Total non-current assets

Current assets
Properties held for sale
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets

EQUITY
Equity share capital
Share premium account
Capital redemption reserve
Revaluation reserve
Shares to be issued reserve
Cash flow hedge reserve
Foreign currency translation reserve
Retained earnings
Treasury shares held
Equity attributable to owners of the Parent
Non-controlling interests
Total equity

LIABILITIES
Non-current liabilities
Interest-bearing loans and borrowings
Provisions
Retirement benefit obligations
Derivative financial instruments
Deferred tax liabilities
Total non-current liabilities

Current liabilities
Interest-bearing loans and borrowings
Trade and other payables
Current income tax liabilities
Provisions
Total current liabilities
Total liabilities
Total equity and liabilities

On behalf of the Board

Gavin Slark
Director
15 March 2017

David Arnold
Director

Notes

2016

£’000

2015

£’000

12
15
13
13
26
32
14

13
16
17
20

18
18
19
19
19
19
19

20
23
32
22
26

20
24

566,237
44,584
461,660
21,749
15,718
796
125
1,110,869

8,407
292,681
397,689
205,857
904,634
2,015,503

8,449
210,271
621
13,507
8,446
(531)
73,359
751,842
(3,897)
1,062,067
3,122
1,065,189

300,426
22,385
32,081
675
36,429
391,996

1,051
523,700
21,224
12,343
558,318
950,314
2,015,503

521,521
32,640
430,116
17,797
17,905
744
122
1,020,845

10,805
276,229
355,752
211,565
854,351
1,875,196

8,405
209,810
621
13,674
9,168
(354)
51,764
696,479
(3,897)
985,670
3,350
989,020

323,393
17,875
17,367
404
32,670
391,709

1,326
465,914
19,640
7,587
494,467
886,176
1,875,196

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Group Cash Flow Statement
For the year ended 31 December 2016

Profit before taxation
Finance income
Finance expense
Operating profit

Depreciation
Amortisation of intangible assets
Share-based payments charge
Movement in provisions
Asset impairment and fair value (gains)/losses
Loss/(profit) on sale of property, plant and equipment
Property profit
Loss/(profit) on sale of Group businesses
Contributions to pension schemes in excess of IAS 19 charge
Decrease/(increase) in working capital
Cash generated from operations
Interest paid
Income taxes paid
Cash flows from operating activities

Investing activities
Inflows
Proceeds from sale of property, plant and equipment
Proceeds from sale of properties held for sale
Proceeds from sale of Group businesses (net)
Interest received

Outflows
Acquisition of subsidiary undertakings and businesses (net of cash acquired)
Investment in intangible assets – computer software
Purchase of property, plant and equipment

Cash flows from investing activities

Financing activities
Inflows
Proceeds from the issue of share capital
Proceeds from borrowings

Outflows
Repayment of borrowings
Dividends paid
Payment on finance lease liabilities
Redemption of loan notes payable net of derivatives

Cash flows from financing activities

Net (decrease)/increase in cash and cash equivalents

Cash and cash equivalents at 1 January
Effect of exchange rate fluctuations on cash held

Cash and cash equivalents at 31 December

Cash and cash equivalents are broken down as follows:
Cash at bank and short-term deposits

Notes

7
7

13
15
33
23

28
15
13

2016
£’000

114,247
(1,276)
7,166
120,137

34,929
3,121
3,232
5,802
4,383
19
(4,923)
392
(1,516)
3,010
168,586
(6,936)
(16,269)
145,381

1,740
8,251
881
1,276
12,148

(11,859)
(10,343)
(50,101)
(72,303)
(60,155)

505
77,842
78,347

(145,577)
(30,048)
(409)
-
(176,034)
(97,687)

2015
£’000

120,329
(1,050)
8,932
128,211

32,211
911
4,461
(1,548)
-
(220)
(6,692)
(785)
(3,408)
(13,828)
139,313
(7,463)
(19,305)
112,545

2,779
8,543
2,617
1,025
14,964

(98,641)
(9,988)
(41,592)
(150,221)
(135,257)

3,309
95,097
98,406

(2,917)
(26,797)
(565)
(11,649)
(41,928)
56,478

(12,461)

33,766

211,565
6,753

182,360
(4,561)

205,857

211,565

205,857

211,565

Grafton Group plcGroup Statement of Changes in Equity

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Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016

Group Statement of Changes in Equity

(continued)

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Grafton Group plc

Notes to the Group Financial Statements

1. Summary of Significant Accounting Policies

Statement of Compliance

The consolidated and Company Financial Statements of Grafton Group
plc have been prepared in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union (EU).

The Company Financial Statements have been prepared in accordance
with IFRSs as adopted by the European Union (EU) and as applied in
accordance with the Companies Act, 2014. The Company has taken
advantage of the exemption in Section 304(2) of the Companies Act
2014 from presenting to its members the Company Statement of
Comprehensive Income and related notes as the Company publishes
Company and Group Financial Statements together.

The IFRSs applied in these financial statements were those effective for
accounting periods ending on 31 December 2016.

New Standards, Amendments and Interpretations

The group has applied the following standards and amendments for the
first time in the reporting period commencing 1 January 2016:

• Disclosure initiative – amendments to IAS 1;

• Amendments to IAS 19, ‘Employee benefits’, on defined benefit plans;

• Clarification of acceptable methods of depreciation and amortisation

– Amendments to IAS 16 and IAS 38;

• Annual improvements to IFRSs 2010 – 2012 cycle; and

• Annual improvements to IFRSs 2012 – 2014 cycle.

In applying the amendments to IAS 1 from the disclosure initiative,
the Group now separately presents “property profit” on the Group
Income Statement. The comparative period has been restated for
consistency. This has had the impact of presenting property profit
of £6.7m separately on the Group Income Statement and increasing
operating costs by £6.7m in 2015.

The adoption of the other amendments effective for the first time for
the financial year beginning on or after 1 January 2016 have not had a
material impact on the Group or parent company.

New Standards, Amendments and Interpretations not yet adopted

A number of new standards and amendments to standards and
interpretations are effective for annual periods beginning after 1
January 2016, and have not been applied in preparing these financial
statements. None of these are expected to have a significant effect on
the financial statements of the Group or parent company, except for the
following:

• IFRS 9, ‘Financial instruments’, (effective date: Grafton Group

financial year beginning 1 January 2018). This standard addresses
the classification, measurement and recognition of financial assets
and financial liabilities, introduces new rules for hedge accounting
and a new impairment model for financial assets. The new hedge

accounting rules will align the accounting for hedging instruments
more closely with the Group’s risk management practices. As a
general rule, more hedge relationships may be eligible for hedge
accounting, as the standard introduces a more principles-based
approach. The new impairment model requires the recognition of
impairment provisions based on expected credit losses (ECL) rather
than only incurred credit losses as is the case under IAS 39 Financial
Instruments: Recognition and Measurement. It applies to financial
assets classified at amortised cost, contract assets under IFRS 15
Revenue from Contracts with Customers, lease receivables, loan
commitments and certain financial guarantee contracts. While
the Group has not yet completed a detailed assessment of how its
impairment provisions would be affected by the new model, it may
result in an earlier recognition of credit losses. The new standard
also introduces expanded disclosure requirements and changes in
presentation. These are expected to change the nature and extent of
the Group’s disclosures about its financial instruments particularly.
The Group is currently assessing the full impact of IFRS 9 with
the new standard likely to affect the Group’s accounting for some
financial instruments.

• IFRS 15, ‘Revenue from contracts with customers’ (effective date:
Grafton Group financial year beginning 1 January 2018). This
standard deals with revenue recognition and establishes principles
for reporting useful information to users of financial statements
about the nature, amount, timing and uncertainty of revenue
and cash flows arising from an entity’s contracts with customers.
Revenue is recognised when a customer obtains control of a good
or service and thus has the ability to direct the use and obtain
the benefits from the good or service. The standard replaces IAS
18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related
interpretations. The impact of IFRS 15 is being assessed by the Group.
Implementation of IFRS 15 requires a thorough review of existing
contractual arrangements. At present, the Directors anticipate
there will not be material measurement differences from the
implementation of IFRS 15, however additional disclosures will be
required. The transition work in respect of other areas is on-going but
has not, as yet, highlighted potentially material adjustments.

• IFRS 16, ‘Leases’ (effective date: Grafton Group financial year

beginning 1 January 2019). This standard addresses the definition
of a lease, recognition and measurement of leases and establishes
principles for reporting useful information to users of financial
statements about the leasing activities of both lessees and lessors. A
key change arising from IFRS 16 is that most operating leases will be
accounted for on balance sheet for lessees. The standard replaces IAS
17 ‘Leases’, and related interpretations. Subject to EU endorsement,
the Group will apply IFRS 16 from its effective date. It is expected
that the adoption of the standard will result in increased debt being
recognised on the Group Balance Sheet. The full impact of IFRS 16
has not yet been fully assessed. The Group has entered into leases
principally relating to property in the UK, Ireland, the Netherlands
and Belgium. Note 3 to the financial statements outlines the Group’s
lease rentals and other hire charges and Note 31 outlines the Group’s
operating lease commitments at 31 December 2016.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

Transactions Eliminated on Consolidation

Intra-group balances and transactions, and any unrealised gains and
income and expenses arising from such transactions, are eliminated
in preparing the consolidated financial statements. Transactions with
joint ventures and associates are similarly eliminated to the extent of
the Group’s interest in the equity. Unrealised losses are eliminated in
the same way as unrealised gains, but only to the extent that there is
no evidence of impairment.

Revenue Recognition

Revenue comprises the fair value of consideration receivable for goods
and services supplied to external customers in the ordinary course of
the Group’s activities and excludes inter-company revenue and value
added tax.

In general, revenue is recognised to the extent that it is subject to
reliable measurement, that it is probable that economic benefits
will flow to the Group and that the significant risks and rewards of
ownership have passed to the buyer. In the case of sales of goods,
this generally arises when products have either been delivered to or
collected by a customer and there is no unfulfilled obligation that could
affect the acceptance of the products. Revenues are recorded based
on the price specified in the sales invoices/contracts net of actual and
estimated returns and any discounts granted.

Segment Reporting

An operating segment is a component of the Group that engages
in business activities from which it may earn revenues and incur
expenses for which discrete financial information is available,
including revenues and expenses that relate to transactions with any
of the Group’s other components. All operating segments’ operating
results are reviewed regularly by the Group’s Chief Operating Decision
Maker, being the Board, who is responsible for allocating resources and
assessing performance.

Foreign Currency Translation

Functional and Presentation Currency

The consolidated financial statements are presented in sterling. Items
included in the financial statements of each of the Group’s entities
are measured using its functional currency, being the currency of the
primary economic environment in which the entity operates which
is primarily euro and sterling. The functional currency of the parent
company is euro.

1. Summary of Significant Accounting Policies
(continued)

The Directors are considering the potential impact of a number of
standards that will be effective in the future.

Basis of Preparation

The consolidated Financial Statements, which are presented in sterling
and rounded to the nearest thousand are prepared on a going concern
basis. The Company Financial Statements continue to be presented in
euro and rounded to the nearest thousand and are prepared on a going
concern basis. The Statements have been prepared under the historical
cost convention, as modified by the previous revaluation of land and
buildings, the measurement at fair value of share-based payments at
initial date of award and the measurement at fair value of all derivative
financial instruments. The carrying values of recognised assets and
liabilities that are fair value hedged are adjusted to record changes in
the fair values attributable to the risks that are being hedged.

The preparation of consolidated financial statements in accordance
with IFRS as adopted by the EU requires management to make certain
estimates and assumptions that affect the application of accounting
policies and the reported amount of assets, liabilities, income and
expense. Management believes that the estimates and assumptions
made are reasonable based on the information available to it at the time
that those estimates and assumptions are made. The areas involving a
high degree of judgement or complexity, or areas where assumptions
and estimates are significant in relation to the consolidated financial
statements are set out in Note 34 and relate primarily to provisions for
liabilities including onerous lease provisions, valuation of inventory,
accounting for defined benefit pension schemes, asset impairment
provisions, goodwill impairment, fair value of investment properties,
rebate income and current taxation.

Basis of Consolidation

The consolidated financial statements include the financial statements
of the Company and all subsidiaries drawn up to 31 December each year
together with the Group’s interest in joint ventures.

The financial year-end of the Group’s subsidiaries and joint venture are
coterminous.

Subsidiaries

The financial statements of subsidiaries are included in the
consolidated financial statements from the date on which control is
obtained and they cease to be consolidated from the date on which
the Group loses control. The definition of control is when the Group is
exposed to, or has rights to, variable returns from its involvement with
the entity and has the ability to affect these returns through its power
over the entity.

Grafton Group plc1. Summary of Significant Accounting Policies
(continued)

Transactions and Balances

Transactions in foreign currencies are recorded at the rate of exchange
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated to the relevant
functional currency at the rate of exchange ruling at the balance
sheet date. All currency translation differences on monetary assets
and liabilities are taken to the income statement except for the
effective portion designated as a hedge of a net investment in a foreign
operation which is recognised in other comprehensive income.

Foreign Operations

The assets and liabilities of foreign operations, including goodwill
arising on consolidation, are translated to sterling at the foreign
exchange rates ruling at the balance sheet date. Results and cash flows
of subsidiaries which do not have sterling as their functional currency
are translated into sterling at average exchange rates for the year and
the related balance sheets are translated at the rates of exchange ruling
at the balance sheet date. Foreign exchange movements arising on
translation of the net investment in a foreign operation, including
those arising on long term intra-Group loans deemed to be quasi
equity in nature, are recognised directly in other comprehensive
income, in the currency translation reserve. The portion of exchange
gains or losses on foreign currency borrowings or derivatives used to
provide a hedge against a net investment in a foreign operation that
is designated as a hedge of those investments is recognised directly in
other comprehensive income to the extent that they are determined to
be effective. The ineffective portion is recognised immediately in the
income statement.

Movements since 1 January 2004, the date of transition to IFRS, are
recognised in the currency translation reserve and are reclassified to
the income statement on disposal of the related business.

Property profit is disclosed as a separate line item on the face of the
Income Statement. Property profit arises when the proceeds, less costs
to sell, exceed the carrying value of the disposed property.

Rebate Arrangements

Rebate arrangements are a common component of supplier agreements
in the merchanting industry. As part of its on-going business
activities, Grafton Group plc has entered into such arrangements with
a significant number of its suppliers.

Supplier rebates received and receivable in respect of goods which have
been sold to the Group’s customers are deducted from cost of sales in
the income statement. Where goods on which rebate has been earned
remain in inventory at the year-end, an appropriate rebate deduction
is made from the gross balance sheet carrying value of that inventory.
The rebate deduction is only released to the income statement when
the goods are ultimately sold.

At the year-end the balance sheet includes a balance representing
unpaid amounts receivable from suppliers.

Finance Expense

Finance expense comprises interest payable on borrowings calculated
using the effective interest rate method, net foreign exchange losses
on monetary items and gains and losses on hedging instruments
that are recognised in the income statement. The net finance cost of
pension scheme obligations is recognised as a finance expense in the
income statement. The interest expense component of finance lease
payments is recognised in the income statement using the effective
interest rate method. Where appropriate the fair value adjustment to
hedged items that are the subject of a fair value hedge is included as
a finance expense or finance income. Borrowing costs that are not
directly attributable to the acquisition, construction or production of
a qualifying asset are recognised in the income statement as incurred
using the effective interest rate method.

Share Capital and Share Premium

Finance Income

The company’s share capital and share premium has been translated
from euro into sterling at historic rates of exchange at the dates of
transactions.

Exceptional Items and Non-Recurring Items

The Group has adopted a policy in relation to its income statement
which seeks to highlight significant items within the Group’s results.
Such items may include significant restructuring and onerous lease
provisions, profit or loss on disposal or termination of operations,
litigation costs and settlements and impairment of assets. Judgement
is used by the Group in assessing the particular items which, by virtue
of their scale and nature, should be disclosed in the income statement
or related notes. Where exceptional items are not significant for
separate presentation, they are disclosed as non-recurring items.

Finance income comprises interest income on funds invested
(including available-for-sale financial assets), dividend income,
gains on the disposal of available-for-sale financial assets, and gains
on hedging instruments that are recognised in profit or loss. The
net expected return on defined benefit pension scheme plan assets
is recognised as finance income in the income statement. Interest
income is recognised in the income statement as it accrues using the
effective interest rate method.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

1. Summary of Significant Accounting Policies
(continued)

Business Combinations

Business combinations are accounted for using the acquisition
method as at the acquisition date, which is the date on which control
is transferred to the Group. Control is defined as when the Group is
exposed to, or has rights to, variable returns from its involvement with
the entity and has the ability to affect these returns through its power
over the entity.

The Group measures goodwill at the acquisition date as:

• the fair value of the consideration transferred; plus

• the recognised amount of any non-controlling interests in the

acquiree; plus

• if the business combination is achieved in stages, the fair value of the

existing equity interest in the acquiree; less

• the net recognised amount (generally fair value) of the identifiable

Goodwill is subject to impairment testing on an annual basis and at
any time during the year if an indicator of impairment exists.

Where the recoverable amount of a cash generating unit is less than
the carrying amount, an impairment loss is recognised. Impairment
losses arising in respect of goodwill are not reversed once recognised.

Where a subsidiary is sold, any goodwill arising on acquisition, net of
any impairments, is included in determining the profit or loss arising
on disposal.

Intangible Assets (Computer Software)

Acquired computer software, including computer software which
is not an integrated part of an item of computer hardware, is stated
at cost less any accumulated amortisation and any accumulated
impairment losses. Cost comprises purchase price and any other
directly attributable costs.

assets acquired and liabilities assumed.

Computer software is recognised if it meets the following criteria:

When the excess is negative, a bargain purchase gain is recognised
immediately in the income statement.

• An asset can be separately identified;

• It is probable that the asset created will generate future economic

benefits;

The consideration transferred does not include amounts related to
the settlement of the pre-existing relationships. Such amounts are
generally recognised in the income statement.

• The development cost of the asset can be measured reliably;

• It is probable that the expected future economic benefits that are

attributable to the asset will flow to the entity; and

Costs related to the acquisition, other than those associated with the
issue of debt or equity securities, that the Group incurs in connection
with a business combination are expensed as incurred.

Any contingent consideration payable is recognised at fair value at the
acquisition date. If the contingent consideration is classified as equity,
it is not re-measured and settlement is accounted for within equity.
Otherwise, subsequent changes to the fair value of the contingent
consideration are recognised in the income statement.

Goodwill

Goodwill is the excess of the consideration paid over the fair value
of the identifiable assets, liabilities and contingent liabilities in a
business combination and relates to assets which are not capable of
being individually identified and separately recognised.

Goodwill acquired is allocated, at acquisition date, to the groups of Cash
Generating Units (CGU’s) expected to benefit from synergies related to
the acquisition. Where management reassesses its groups of CGU’s,
goodwill is reallocated on a relative value basis.

Goodwill is measured at cost less accumulated impairment losses. The
CGU’s represent the lowest level within the Group at which goodwill
is monitored for internal management purposes. These units are no
larger than the operating segments determined in accordance with
IFRS 8: Operating Segments.

• The cost of the asset can be measured reliably.

Costs relating to the development of computer software for internal use
are capitalised once the recognition criteria outlined above are met.
Computer software is amortised over its expected useful life, which
ranges from 4 to 10 years, by charging equal instalments to the income
statement from the date the assets are ready for use.

Intangible Assets (Other than Goodwill and Computer Software)

An intangible asset, other than goodwill and computer software, is
recognised to the extent that it is probable that the expected future
economic benefits attributable to the asset will flow to the Group
and that its fair value can be measured. The asset is deemed to be
identifiable when it is separable (i.e. capable of being divided from
the entity and sold, transferred, licensed, rented or exchanged, either
individually or together with a related contract, asset or liability) or
when it arises from contractual or other legal rights, regardless of
whether those rights are transferable or separable from the Group or
from other rights and obligations.

Intangible assets acquired as part of a business combination are
capitalised separately from goodwill at fair value on the date of
acquisition if the intangible asset meets the definition of an asset and
the fair value can be reliably measured.

Grafton Group plc1. Summary of Significant Accounting Policies
(continued)

Intangible assets are carried at cost less any accumulated amortisation
and any accumulated impairment losses. The carrying value of
intangible assets is reviewed for impairment at each reporting date
and is also subject to impairment testing when events or changes
in circumstances indicate that the carrying values may not be
recoverable.

Intangible assets are amortised on a straight-line basis. In general,
finite life intangible assets are amortised over periods ranging from
one to twenty years, depending on the nature of the intangible asset.

Property, Plant and Equipment

Property, plant and equipment are stated at cost or deemed cost less
accumulated depreciation and impairment losses. The Group’s freehold
properties in Ireland were revalued to fair value in 1998 and are
measured on the basis of deemed cost being the revalued amount at the
date of that revaluation less accumulated depreciation. The valuations
were deemed to be cost for the purposes of transition to IFRS as adopted
by the EU.

Property, plant and equipment are depreciated over their useful
economic life on a straight line basis at the following rates:

Freehold buildings

Freehold land

Leasehold buildings

Plant and machinery

Motor vehicles

Plant hire equipment

50-100 years
Not depreciated
Lease term or up to 100 years
5-20 years
5 years
4-10 years

The residual value and useful lives of property, plant and equipment are
reviewed and adjusted if appropriate at each balance sheet date.

On disposal of property, plant and equipment, the cost and related
accumulated depreciation and impairments are removed from the
balance sheet and the net amount, less any proceeds, is taken to the
income statement.

The carrying amounts of the Group’s property, plant and equipment are
reviewed at each balance sheet date to determine whether there is any
indication of impairment. An impairment loss is recognised whenever
the carrying amount of an asset or its cash generation unit exceeds its
recoverable amount. Impairment losses are recognised in the income
statement unless the asset is recorded at a revalued amount in which
case it is firstly dealt with through the revaluation reserve relating to
that asset with any residual amount being transferred to the income
statement.

Cost includes expenditure that is directly attributable to the
acquisition of the asset. Subsequent costs are included in an asset’s
carrying amount or recognised as a separate asset, as appropriate, only
when it is probable that future economic benefits associated with the
item will flow to the Group and the cost of replacing the item can be
reliably measured. All other repair and maintenance costs are charged
to the income statement during the financial period in which they are
incurred.

Investment Properties

Investment property is initially measured at cost and subsequently at
fair value with any change therein recognised in profit or loss.

Any gain or loss on disposal of investment property (calculated
as the difference between the net proceeds from disposal and the
carrying amount of the item) is recognised in profit or loss. When
investment property that was previously classified as property, plant
and equipment is sold, any related amount included in the revaluation
reserve is transferred to retained earnings.

When the use of a property changes from owner occupied or held
for sale to investment property, the property is remeasured to fair
value and reclassified accordingly. Any gain on this remeasurement
is recognised in profit or loss to the extent that it reverses a previous
impairment loss on the specific property, with any remaining gain
recognised in Other Comprehensive Income and presented in the
revaluation reserve. Any loss is recognised in profit or loss.

Assets Held for Sale

Non-current assets that are expected to be recovered principally
through sale rather than continuing use and meet the IFRS 5 criteria
are classified as held for sale. These assets are shown in the balance
sheet at the lower of their carrying amount and fair value less any costs
to sell. Impairment losses on initial classification as non-current assets
held for sale and subsequent gains or losses on re-measurement are
recognised in the income statement.

Investments

Investments, other than investments in joint ventures and associates,
are stated in the balance sheet at fair value. All other investments are
classified as available for sale with changes in fair value recognised
directly in other comprehensive income until the investment is
disposed of or is determined to be impaired, at which time the
cumulative gain or loss previously recognised in other comprehensive
income is brought into the income statement for the period. All items
recognised in the income statement relating to investments, other
than investments in joint ventures and associates, are reported as non-
operating items.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

1. Summary of Significant Accounting Policies
(continued)

Where investments are actively traded in organised financial markets,
fair value is determined by reference to Stock Exchange quoted market
bid prices at the close of business on the balance sheet date. Where it
is impracticable to determine fair value in accordance with IFRS 13,
unquoted equity investments are recorded at historical cost and are
included within financial assets on this basis in the Group balance
sheet. They are assessed for impairment annually.

Leases

Assets held under finance leases, which are leases where substantially
all the risks and rewards of ownership of the asset have transferred to
the Group and hire purchase contracts are capitalised in the balance
sheet and are depreciated over the shorter of useful life and lease term
with any impairment being recognised in accumulated depreciation.
Leased assets are recorded at an amount equal to the lower of its fair
value and the present value of the minimum lease payments at the
inception of finance leases. The capital elements of future obligations
under leases and hire purchase contracts are included in liabilities
in the balance sheet and analysed between current and non-current
amounts. The interest elements of the obligations are charged to the
income statement over the periods of the leases and hire purchase
contracts so as to produce a constant periodic rate of interest on the
remaining balance of the liability.

Leases where the lessor retains substantially all the risks and rewards
of ownership are classified as operating leases. Operating lease rentals
are charged to the income statement on a straight-line basis over the
lease term. Lease incentives are recognised over the lease term on a
straight line basis as a reduction of the lease expense.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost
is based on the first-in, first-out principle and includes all expenditure
incurred in acquiring the inventories and bringing them to their
present location and condition. Raw materials are valued on the basis
of purchase cost on a first-in, first-out basis. In the case of finished
goods and work-in-progress, cost includes direct materials, direct
labour and attributable overheads based on normal operating capacity
and excludes borrowing costs. Net realisable value is the estimated
proceeds of sale less all further costs to completion and less all costs to
be incurred in marketing, selling and distribution.

Trade and Other Receivables and Payables

Trade and other receivables and payables are stated at amortised cost
(less any impairment losses), which approximates to fair value given
the short-term nature of these assets and liabilities.

Trade receivables are carried at original invoice amount less an
allowance for potentially uncollectable debts. Provision is made when
there is objective evidence that the Group will not be in a position to
collect all of its receivables when they fall due. Bad debts are written-
off in the income statement on identification.

Cash and Cash Equivalents

Cash and cash equivalents comprise cash balances held for the
purposes of meeting short-term cash commitments and money market
instruments which are readily convertible to a known amount of cash.
Where money market instruments are categorised as cash equivalents,
the related balances have an original maturity of three months or less.
In addition, for the purposes of the Group cash flow statement, bank
overdrafts are netted against cash and cash equivalents where the
overdrafts are repayable on demand and form an integral part of cash
management. Bank overdrafts are included within current interest-
bearing loans and borrowings in the Group balance sheet.

Derivative Financial Instruments and Hedging Activities

Derivative financial instruments, principally interest rate and
currency swaps, are used in certain circumstances to hedge the
Group’s exposure to foreign exchange and interest rate risks arising
from its financing activities.

Derivative financial instruments are recognised initially at fair value
and thereafter are subsequently re-measured at their fair value. Fair
value is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable willing parties in an arm’s
length transaction. The fair value of interest rate and currency swaps is
the estimated amount that the Group would receive or pay to terminate
the swap at the balance sheet date, taking into account current interest
and currency exchange rates and the current creditworthiness of the
swap counterparties.

The method of recognising the resulting gain or loss on re-
measurement to fair value depends on whether the derivative
is designated as a hedging instrument. Where derivatives are
not designated or do not fulfil the criteria for hedge accounting,
changes in fair values are reported in the income statement. Where
derivatives qualify for hedge accounting, recognition of the resulting
gains or losses depends on the nature of the item being hedged. The
Group designates certain derivatives for various purposes in hedge
relationships in one or more of the following types of relationships:

(i) Fair value hedge: Hedges of the fair value of recognised liabilities;
(ii) Cash flow hedge: Hedges of a particular risk associated with a

highly probable forecast transaction; or

(iii) Net investment hedge: Hedges of a net investment in a foreign

operation.

Grafton Group plc1. Summary of Significant Accounting Policies
(continued)

comprehensive income is transferred to the income statement in the
period.

The Group documents at the inception of the transaction the
relationship between hedging instruments and hedged items, as well
as its risk management objectives and strategy for undertaking various
hedging transactions. The Group also documents its assessment, both
at hedge inception and on an ongoing basis, of whether the derivatives
that are used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items.

(i) Fair Value Hedge

Any gain or loss stemming from the re-measurement of the hedging
instrument to fair value is reported in the income statement. In
addition, any gain or loss on the hedged item which is attributable
to the fair value movement in the hedged risk is adjusted against
the carrying amount of the hedged item and reflected in the income
statement.

Where a derivative financial instrument is used to economically hedge
the foreign exchange exposure of a recognised monetary asset or
liability, hedge accounting is not applied and any gain or loss accruing
on the hedging instrument is recognised as finance income or expense
in the income statement.

If the hedge no longer meets the criteria for hedge accounting, hedge
accounting ceases and the adjustment to the carrying amount of
a hedged item for which the effective interest method is used is
amortised to profit or loss over the period to maturity.

(ii) Cash Flow Hedges

The effective part of any gain or loss on the derivative financial
instrument is recognised in other comprehensive income and
presented in the cash flow hedge reserve in equity with the ineffective
portion being reported as finance expense or income in the income
statement. If a hedge of a forecasted transaction subsequently
results in the recognition of a financial asset or a financial liability,
the associated gains and losses that were recognised in other
comprehensive income are reclassified into profit or loss in the same
period or periods during which the asset acquired or liability assumed
affects profit or loss. For cash flow hedges, other than those covered
by the preceding statements, the associated cumulative gain or loss
is removed from other comprehensive income and recognised in the
income statement in the same period or periods during which the
hedged forecast transaction affects profit or loss. The ineffective part of
any gain or loss is recognised immediately in the income statement.

Hedge accounting is discontinued when a hedging instrument
expires or is sold, terminated or exercised, or no longer qualifies for
hedge accounting. The cumulative gain or loss at that point remains
in equity and is recognised in accordance with the above policy
when the transaction occurs. If a hedged transaction is no longer
expected to occur, the net cumulative gain or loss recognised in other

(iii) Hedge of Net Investment in Foreign Operation

Any gain or loss on the hedging instrument relating to the effective
portion of the hedge is recognised in other comprehensive income
and presented in the foreign currency translation reserve in equity.
The gain or loss relating to the ineffective portion is recognised
immediately in the income statement within finance income or
finance expense. Cumulative gains and losses remain in equity
until disposal or partial disposal of the net investment in the foreign
operation at which point the related differences are reclassified to the
income statement as part of the overall gain or loss on sale.

Interest-Bearing Loans and Borrowings

All loans and borrowings are initially recorded at fair value, net
of related transaction costs. After initial recognition, current and
non-current interest-bearing loans and borrowings are measured
at amortised cost. Any difference between the proceeds (net of
transaction costs) and the redemption value is recognised in the
income statement over the period of the borrowings using the effective
interest rate method. Amortised cost includes any issue costs and
any discount or premium on settlement. Borrowings are classified as
current liabilities unless the Group has an unconditional right to defer
settlement of the liability for at least twelve months after the balance
sheet date.

Fees paid on the establishment of loan facilities are recognised as
transaction costs of the loan to the extent that it is probable that some
or all of the facility will be drawn down. In this case, the fee is deferred
until the draw-down occurs. To the extent there is no evidence that it
is probable that some or all of the facility will be drawn down, the fee is
capitalised as a pre-payment for liquidity services and amortised over
the period of the facility to which it relates.

Provisions

A provision is recognised on a discounted basis when the Group
has a present (either legal or constructive) obligation as a result of
a past event and it is probable that a transfer of economic benefits
will be required to settle the obligations and a reliable estimate can
be made of the amount required to settle the obligation. A provision
for restructuring is recognised when the Group has approved a
restructuring plan and the restructuring has commenced. A provision
for onerous contracts is recognised when the expected benefits to be
derived by the Group from a contract are lower than the unavoidable
costs of meeting its obligations under the contract. The provision
is measured at the lower of the present value of the expected cost of
terminating the contract and the present value of the expected net cost
of continuing with the contract.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

1. Summary of Significant Accounting Policies
(continued)

Retirement Benefit Obligations

Obligations to the defined contribution pension plans are recognised
as an expense in the income statement as service is received from the
relevant employees. The Group has no legal or constructive obligation
to pay further contributions in the event that these plans do not hold
sufficient assets to provide retirement benefits.

The Group operates a number of defined benefit pension schemes
which require contributions to be made to separately administered
funds. The Group’s net obligation in respect of defined benefit pension
schemes is calculated separately for each plan by estimating the
amount of future benefits that employees have earned in return
for their service in the current and prior periods. That benefit is
discounted to determine its present value, and the fair value of any
plan asset is deducted. The discount rate employed in determining the
present value of the schemes’ liabilities is determined by reference to
market yields at the balance sheet date on high quality corporate bonds
for a term consistent with the currency and term of the associated
post-employment benefit obligations.

The net surplus or deficit arising in the Group’s defined benefit pension
schemes are shown within either non-current assets or liabilities on
the face of the Group Balance Sheet. The deferred tax impact of pension
scheme surpluses and deficits is disclosed separately within deferred
tax assets or liabilities as appropriate. The Group recognises actuarial
gains and losses immediately in other comprehensive income.

Any increase in the present value of the plans’ liabilities expected to
arise from employee service during the period is charged to operating
profit. The Group determines net interest expense/(income) on the net
defined benefit liability/(asset) for the period by applying the discount
rate used to measure the defined benefit obligation at the beginning
of the period. Differences between the income recognised based on
the discount rate and the actual return on plan assets, together with
the effect of changes in the current or prior assumptions underlying
the liabilities are recognised in other comprehensive income. When
the benefits of a defined benefit plan are improved, the portion of the
increased benefit relating to past service by employees is recognised
as a past service cost in the income statement at the earlier of the date
when the plan amendment occurs and when the related restructuring
costs are recognised. To the extent that the benefits vest immediately,
the expense is recognised immediately in the income statement.

Share-Based Payment Transactions

The 2011 Long-Term Incentive Plan (LTIP), the 1999 Grafton Group
Share Scheme for Senior Executives and the SAYE Scheme for UK
employees should enable employees to acquire shares in the Company
subject to the conditions of these schemes. New units are issued to
satisfy obligations under the 1999 Grafton Group Share Scheme and
the SAYE scheme. Entitlements under the LTIP may be satisfied by the

issue of units or by a market purchase of units. The fair value of share
entitlements at the grant date is recognised as an employee expense
in the income statement over the vesting period with a corresponding
increase in equity. The fair value is determined by an external valuer
using a binomial model. Share entitlements granted by the Company
are subject to certain non-market based vesting conditions. Non-
market vesting conditions are not taken into account when estimating
the fair value of entitlements as at the grant date. The expense for share
entitlements shown in the income statement is adjusted to reflect the
number of awards for which the related non-market based vesting
conditions are expected to be met, such that the amount ultimately
recognised as an expense is based on the number of awards that meet
the related non-market based vesting conditions at the vesting date.

The proceeds received by the Company on the vesting of share
entitlements are credited to share capital and share premium when the
share entitlements are converted or issued.

Income Tax

Income tax in the income statement represents the sum of current tax
and deferred tax.

Income tax is recognised in the income statement except to the extent
that it relates to items recognised directly in other comprehensive
income.

Current tax is based on taxable profit and represents the expected tax
payable for the year. Taxable profit differs from net profit as reported
in the income statement because it excludes items of income or
expense that are taxable or deductible in other years and it further
excludes certain items that are not tax deductible including property
depreciation. The Group’s liability for current tax is calculated
using rates that have been enacted or substantially enacted at the
balance sheet date. The Group’s income tax charge reflects various
allowances and reliefs and planning opportunities available in the
tax jurisdictions in which the Group operates. The determination of
the Group’s charge for income tax in the income statement requires
estimates to be made, on the basis of professional advice, in relation to
certain matters where the ultimate outcome may not be certain and
where an extended period may be required before such matters are
determined. The estimates for income tax included in the financial
statements are considered appropriate but no assurance can be given
that the final determination of these matters will not be materially
different to the estimates included in the financial statements.

Deferred tax is provided, using the liability method, on all temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation
purposes. Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply in the year when the asset is realised
or the liability is settled based on rates that have been enacted or
substantially enacted at the balance sheet date.

Grafton Group plc1. Summary of Significant Accounting Policies
(continued)

2. Segment Information

Deferred tax assets and liabilities are not recognised for the following
temporary differences:

• Goodwill that is not deductible for tax purposes;

• Temporary differences arising from the initial recognition of an asset
or liability in a transaction that is not a business combination and,
at the time of the transaction, affects neither the accounting profit or
taxable profit or loss; and

• Temporary differences associated with investments in subsidiaries
in which case deferred tax is only recognised to the extent that
it is probable that the temporary differences will reverse in the
foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit would be available to allow all or part of the
deferred tax asset to be utilised.

Share Capital

Ordinary Shares

Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of ordinary shares are recognised as a
deduction from equity, net of any tax effects.

IFRS 8 Operating Segments requires operating segments to be
identified on the basis of internal reports that are regularly reviewed
by the Chief Operating Decision Maker, being the Board, in order to
allocate resources to the segments and to assess their performance.
Three reportable segments have been identified, Merchanting,
Retailing and Manufacturing.

The Merchanting segment is engaged in the distribution of building
and plumbing materials primarily to professional trades people
engaged in residential repair, maintenance and improvement projects
and also in residential and other new build construction from a
network of 585 branches in Britain, Ireland, the Netherlands and
Belgium. In view of the increasingly trade nature of the customer base
and change in reporting lines, the In-House kitchen business was
transferred from retailing to merchanting with effect from 1 January
2016. The 2015 comparatives, where applicable, have been updated to
reflect this transfer.

The aggregation of operating segments into the Merchanting segment
reflects, in the opinion of management, the similar economic
characteristics within each of these segments as well as the similar
products and services offered and supplied and the classes of
customers. This is assessed by reference to gross margins and long-
term growth rates of the segments.

Repurchase of Share Capital

When share capital recognised as equity is purchased, the amount
of the consideration paid, including directly attributable costs, is
recognised as a change in equity.

The Retailing segment operates Ireland’s largest DIY and home
improvement business from a network of 35 stores that supply mainly
retail customers with a wide range of products for DIY and for the
home and garden.

Dividends

Dividends on ordinary shares are recognised as a liability in the
Group’s financial statements in the period in which they are declared
by the Company. In the case of interim dividends, these are considered
to be declared when they are paid. In the case of final dividends these
are declared when authorised by the shareholders in General Meeting.

Earnings per Share

The Group presents basic and diluted earnings per share (EPS) data for
its ordinary shares. Basic EPS is calculated by dividing the profit or loss
attributable to ordinary shareholders of the Company by the weighted
average number of ordinary shares outstanding during the period,
adjusted for treasury shares held. Diluted EPS is calculated by dividing
the profit or loss attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding adjusted for treasury
shares held and for the effects of all dilutive potential ordinary shares
related to employee share schemes.

The Manufacturing segment comprises the largest manufacturer
of dry mortar in Britain operating from 10 plants and a plastics
manufacturing business in Ireland.

Information regarding the results of each operating segment is
included in this note. Performance is measured based on segment
operating profit/(loss) as included in the internal management reports
that are reviewed by the Group’s Chief Operating Decision Maker.
Segment operating profit is used to measure performance, as such
information is the most relevant in evaluating the results of the
Group’s segments.

Segment results, assets and liabilities include all items directly
attributable to a segment.

Segment capital expenditure is the total amount incurred during the
period to acquire segment assets that are expected to be used for more
than one accounting period.

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

2. Segment Information (continued)

Group Income Statement

Continuing operations – Year Ended 31 December

Merchanting

Retailing

Manufacturing

Group

2016

£’000

2015

£’000

2016

£’000

2015

£’000

2016

£’000

2015

£’000

2016

£’000

2015

£’000

Segment revenue

Less: Inter-segment revenue

Segment operating profit

Property profits
Amortisation of intangible assets arising on
acquisitions
Exceptional items (Note 4)
Non-recurring pension credit (Note 4)
Non-recurring asset impairment (Note 4)
Segment operating profit after

exceptional and non-recurring items

2,290,568
-
2,290,568
130,264
4,923

2,027,740
-
2,027,740
118,118
6,692

(2,198)
(16,933)
-
-

(465)
-
2,945
(1,520)

157,090
-
157,090
7,304
-

-
(2,020)
-
-

131,416
-
131,416
3,332
-

74,358
(14,740)
59,618
12,149
-

63,059
(10,225)
52,834
9,749
-

2,522,016
(14,740)
2,507,276
149,717
4,923

2,222,215
(10,225)
2,211,990
131,199
6,692

-
-
-
-

(2,198)
(18,953)
-
-

(465)
-
2,945
(1,520)

116,056

125,770

5,284

3,332

12,149

9,749

133,489

138,851

Reconciliation to consolidated operating profit

Segment operating profit after non-recurring items
Central activities
Central activities – exceptional items (Note 4)
Operating profit

Finance expense
Finance income
Profit before tax

Income tax
Profit after tax for the financial year

Group

2016

£’000

133,489
(12,592)
(760)
120,137
(7,166)
1,276
114,247
(21,128)
93,119

2015

£’000

138,851
(10,640)
-
128,211
(8,932)
1,050
120,329
(23,827)
96,502

100

Grafton Group plc2. Segment Information (continued)

Group Balance Sheet

Continuing operations – as at 31 December

Merchanting

Retailing

Manufacturing

Group

2016

£’000

2015

£’000

2016

£’000

2015

£’000

2016

£’000

2015

£’000

2016

£’000

2015

£’000

Segment assets

1,695,668

1,562,237

55,570

45,963

41,769

36,660

1,793,007

1,644,860

Reconciliation of total assets

Deferred tax assets
Retirement benefit assets
Other financial assets
Cash and cash equivalents
Total assets in the Group balance sheet

15,718
796
125
205,857
2,015,503

17,905
744
122
211,565
1,875,196

Continuing operations – as at 31 December

Merchanting

Retailing

Manufacturing

Group

2016

£’000

2015

£’000

2016

£’000

2015

£’000

2016

£’000

2015

£’000

2016

£’000

2015

£’000

Segment liabilities

502,871

449,105

41,451

31,027

14,106

11,244

558,428

491,376

Reconciliation of total liabilities

Interest bearing loans and borrowings
(current and non-current)
Retirement benefit obligations
Deferred tax liabilities
Current tax liabilities
Derivative financial instruments
Total liabilities in the Group balance sheet

301,477
32,081
36,429
21,224
675
950,314

324,719
17,367
32,670
19,640
404
886,176

101

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

2. Segment Information (continued)

Other Segment Information

Capital expenditure
Investment in intangible assets
Intangible assets acquired
Depreciation
Amortisation of intangible assets

Geographic Analysis

Merchanting

Retailing

Manufacturing

Group

Continuing operations – Year Ended 31 December

2016

£’000

44,937
10,343
2,815
29,931
3,121

2015

£’000

37,545
9,988
17,276
27,305
911

2016

£’000

2,790
-
-
2,661
-

2015

£’000

1,328
-
-
2,677
-

2016

£’000

2,374
-
-
2,337
-

2015

£’000

2,719
-
-
2,229
-

2016

£’000

50,101
10,343
2,815
34,929
3,121

2015

£’000

41,592
9,988
17,276
32,211
911

The following is a geographic analysis of the information presented above. The analysis of geographic revenue below is the same whether it is
based on location of assets or customers.

Belgium

Ireland*

Netherlands

Group

2016

£’000

2015

£’000

2016

£’000

2015

£’000

2016

£’000

2015

£’000

2016

£’000

2015

£’000

2016

£’000

2015

£’000

Segment revenue (continuing
operations)

Capital expenditure
Investment in intangible
assets
Intangible assets acquired

Segment non-current assets
Goodwill
Properties held for sale
Inventories
Trade and other receivables
Total segment assets

83,462

82,762

509,074

409,040

87,712

8,538 1,827,028

1,711,650 2,507,276

2,211,990

1,108

1,158

6,868

4,199

700

151

41,425

36,084

50,101

41,592

-
-

-
11,326

10,343
2,815

9,988
5,950

10,343
2,815

9,988
17,276

13,584

12,168

126,398

105,367

14,871

16,981

373,140

346,037

527,993
566,237
8,407
292,681
397,689
1,793,007

480,553
521,521
10,805
276,229
355,752
1,644,860

Segment liabilities

13,384

12,460

167,905

134,980

7,809

5,906

369,330

338,030

558,428

491,376

*Includes Poland which is immaterial

102

Grafton Group plc3. Operating Costs and Income

The following have been charged/(credited) in arriving at operating profit:

Non-recurring items (Note 4)

Defined benefit pension scheme past service credit
Asset impairment charge in Belgian business
Total non-recurring items (Note 4)

(Increase) in inventories
Purchases and consumables
Staff costs before non-recurring items (Note 6)
Auditor’s remuneration - Group and subsidiaries
Depreciation
Lease rentals and other hire charges
Amortisation of intangible assets
Loss/(profit) on disposal of property, plant and equipment
Loss/(profit) on disposal of Group businesses
Selling, distribution and administrative expenses

2016

£’000

2015

£’000

-
-
-
(2,160)
1,712,918
362,905
808
34,929
59,619
3,121
19
392
199,798
2,372,349

(2,945)
1,520
(1,425)
(13,220)
1,521,720
318,418
659
32,211
54,302
911
(220)
(785)
177,900
2,090,471

In applying the amendments to IAS 1 from the disclosure initiative, the Group now separately presents “property profit” on the Group Income
Statement. The comparative period has been restated for consistency. Property profits of £6.7 million in 2015 are now separately presented.

103

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

3. Operating Costs and Income (continued)

The following services were provided by the Group’s Auditor:

Audit services (i)
- Group Auditor – PwC Ireland (2015: KPMG Ireland)
- Other network firm – PwC (2015: KPMG)

Other assurance services (ii)
- Group Auditor – PwC Ireland (2015: KPMG Ireland)
- Other network firm – PwC (2015: KPMG)

Auditor’s remuneration - Group and subsidiaries (i) & (ii)

Other non-audit services
- Group Auditor – PwC Ireland (2015: KPMG Ireland)
- Other network firm – PwC (2015: KPMG)

Tax advisory services
- Group Auditor – PwC Ireland (2015: KPMG Ireland)
- Other network firm – PwC (2015: KPMG)

Total*

- Group Auditor – PwC Ireland (2015: KPMG Ireland)
- Other network firm – PwC (2015: KPMG)

*Amounts for 2016 include expenses. These were not included in 2015.

2016

£’000

2015

£’000

344
443
787

13
8
21
808

-
32
32

-
-
-

357
483
840

399
95
494

141
24
165
659

-
68
68

192
241
433

732
428
1,160

As set out in the 2015 Annual Report, a formal tender process was carried out for the external audit of the Group’s financial statements for the year
ended 31 December 2016 and subsequent years. Following the conclusion of this process, on the recommendation of the Audit and Risk Committee,
the Board approved the appointment of PwC as auditors.

104

Grafton Group plc4. Exceptional Items, Non-Recurring Operating Income and Operating Costs

Non-recurring items

Defined benefit pension scheme past service credit
Asset impairment charge in Belgian business
Total non–recurring items charged in operating costs in the income statement

Exceptional items

2016

£’000

2015

£’000

-
-
-

(2,945)
1,520
(1,425)

Exceptional items presented separately in the income statement

(19,713)

Exceptional items

Exceptional items of £19.7m (2015:£Nil) relate to branch closures in the traditional UK Merchanting business (£16.1 million), an increase in the
onerous lease provision of £3.2 million and other rationalisation costs of £0.4 million. The branch closure costs in the UK primarily relates to fixed
asset and goodwill impairments, redundancy costs, dilapidations provisions and the write down of inventory balances.

Pension scheme credit

The 2015 past service credit of £2.9 million arose from the change in the basis for increasing pensions to CPI from RPI (Note 32).

Asset impairment

In 2015 a review of the inventory provisioning in Belgium resulted in a non-recurring inventory asset impairment charge of £1.5 million to the
income statement.

5. Directors’ Remuneration, Pension Entitlements and Interests

Emoluments
Benefits under long-term incentive plan (LTIP)*
Total emoluments

Emoluments above include the following pension payments/contributions
- Defined contribution **

2016

£’000

2,357
559
2,916

206
206

2015

£’000

2,164
1,151
3,315

206
206

For the year ended 31 December 2016, this is the value of LTIP awards that will vest in May 2017. The value of the awards is based on the average share price of £5.31 for the
three months to 31 December 2016. The vesting of these awards was subject to performance conditions over the period from 1 January 2014 to 31 December 2016. For the year
ended 31 December 2015, this is the value of LTIP awards that vested in May 2016. The value of this award has been updated from that disclosed last year to reflect the share
price of £6.75 on the date of vesting.
This is the amount of contribution payable in respect of the financial year by way of a company contribution to a pension scheme or a payment in lieu of pension made
through the payroll. This amount is accruing to two directors at 31 December 2016 (2015: two).

Further information on Directors’ remuneration, pension entitlements and interests in shares and share entitlements is presented in the Report
of the Remuneration Committee on Directors’ Remuneration on pages 54 to 70.

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(continued)

6. Employment

The average number of persons employed during the year by segment was as follows:

2016

2015

Merchanting
Retailing
Manufacturing
Holding company

The aggregate remuneration costs of employees were:

Wages and salaries
Social welfare costs
Share based payments charge
Defined benefit pension (Note 32)
Defined contribution pension and related costs
Staff costs before non-recurring items

Past service credit - non-recurring (Note 32)
Charged to operating profit

Net finance cost on pension scheme obligations (Note 32)
Charged to income statement

Remeasurement loss/(gain) on pension schemes (Note 32)
Total employee benefit cost

10,492
1,080
208
29
11,809

£’000

318,804
33,316
3,232
2,263
5,290
362,905
-
362,905
510
363,415
13,810
377,225

9,142
1,088
179
25
10,434

£’000

278,556
28,224
4,461
2,360
4,817
318,418
(2,945)
315,473
897
316,370
(13,142)
303,228

The share-based payments charge was derived on the basis of the Group’s expectation of the number of shares likely to vest having regard to the
service and non-market performance vesting conditions, the historic performance of the Group over the period since the share entitlements were
granted and the forecast performance over the remaining life of share awards.

Total capitalised costs in the year amounted to £2.5 million (2015: £2.5 million).

Key Management

The cost of key management including Directors is set out in the table below:

2016

2015

2016

£’000

2,581
895
263
3,739

2015

£’000

2,317
839
257
3,413

Number of Individuals

Short-term employee benefits
Share-based payment charge
Retirement benefits expense
Charged to operating profit

106

Grafton Group plc7. Finance Expense and Finance Income

Finance expense:

Interest on bank loans and overdrafts
Interest on loan notes
Net change in fair value of cash flow hedges transferred from equity
Interest on finance leases
Net finance cost on pension scheme obligations
Foreign exchange loss

Finance income:

Fair value movement on derivatives (cross-currency interest rate swaps not in hedging relationship)
Interest income on bank deposits

Net finance expense recognised in income statement

*Net bank/loan note interest of £4.7 million (2015: £5.9 million)

Amounts relating to items not at fair value through income statement

- Total finance expense on financial liabilities
- Total finance income on financial assets

Recognised directly in other comprehensive income

Currency translation effects on foreign currency net investments
Currency translation effects on foreign currency borrowings designated
as net investment hedges
Effective portion of changes in fair value of cash flow hedges
Net change in fair value of cash flow hedges transferred to income statement

2016

£’000

5,975 *
- *

258
208
510
215
7,166

(1,276)*
(1,276)
5,890

6,908
(1,276)

20,374

1,221
(461)
258
21,392

2015

£’000

6,839 *
95 *
82
207
897
812
8,932

(25)
(1,025)*
(1,050)
7,882

8,850
(1,025)

(5,362)

(879)
(442)
82
(6,601)

8. Foreign Currencies

The results and cash flows of the subsidiaries with euro functional currencies have been translated into sterling using the average exchange rate
for the year. The balance sheets of subsidiaries with euro functional currencies have been translated into sterling at the rate of exchange ruling at
the balance sheet date.

The average sterling/euro rate of exchange for the year ended 31 December 2016 was Stg81.95 pence (Year ended 31 December 2015: Stg72.59). The
sterling/euro exchange rate at 31 December 2016 was Stg85.62 pence (31 December 2015: Stg73.40 pence).

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Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

9. Income Tax

(a) Income tax recognised in income statement

Current tax expense

Irish corporation tax
UK and other corporation tax

Deferred tax expense

Irish deferred tax expense relating to the origination and reversal of temporary differences
Deferred tax credit resulting from change in tax rates
UK and other deferred tax expense relating to the origination and reversal of temporary differences

Total income tax expense in income statement

Taxation

2016

£’000

89
16,212
16,301

1,902
(820)
3,745
4,827
21,128

2015

£’000

1,060
20,017
21,077

1,240
(881)
2,391
2,750
23,827

The headline rate of corporation tax is 18.5 per cent. Excluding exceptional items the tax rate reduces to 17.4 per cent. This 17.4 per cent is lower
than the underlying tax rate of 19 per cent as (i) a previously unrecognised deferred tax asset has been utilised against a UK taxable profit arising
on the disposal of properties during the year ended 31 December 2016 and (ii) a credit has arisen from an historic capital allowance claim which
has now been agreed with UK Revenue. This underlying tax rate reflects the cash tax payable and a non-cash charge due to the unwinding of
deferred tax assets. The underlying tax rate of 19 per cent (2015: 21 per cent) reflects the mix of profits between the UK, Ireland, the Netherlands
and Belgium and the disallowance of a tax deduction for certain overheads charged in arriving at profit including depreciation on buildings. The
UK corporation tax rate reduced from 21 per cent to 20 per cent from April 2015 and is due to drop further to 19 per cent in April 2017 and to 17 per
cent in April 2020.

Taxation paid in 2016 of £16.3 million (2015: £19.3 million) reflected the availability of tax allowances and various reliefs carried forward from prior
years.

The amount shown for current taxation includes a liability for tax uncertainties and is based on the Directors’ best probability weighted estimate
of the probable outflow of economic resources that will be required. As with all estimates, the actual outcome may be different to the current
estimate.

108

Grafton Group plc9. Income Tax (continued)

(b) Reconciliation of effective tax rate

Profit before tax
Profit before tax multiplied by the standard rate of tax of 12.5% (2015: 12.5%)
Effects of:
Expenses not deductible for tax purposes
Differences in effective tax rates on overseas earnings
Effect of change in tax rates
Benefit of prior year items not recognised for deferred tax
Other differences
Total income tax expense in income statement

Actuarial movement on pension schemes
Employee share schemes
Financing – cash flow hedge

2016

£’000

114,247
14,281

5,670
5,353
(820)
(2,917)
(439)
21,128

2016

£’000

(2,102)
349
(26)
(1,779)

2015

£’000

120,329
15,041

2,140
7,787
(881)
(2,582)
2,322
23,827

2015

£’000

1,992
(674)
(42)
1,276

At 31 December 2016 the Group recognised deferred tax assets on tax losses of £6.2 million (2015: £8.2 million). The tax losses arose in the Irish and
Belgian tax jurisdictions and their utilisation is dependent on future profits. The Directors have concluded that a forecast period of up to four years
is the appropriate timescale over which to consider whether it is more likely than not that the Irish and Belgian sub-groups will earn sufficient
future profits to utilise losses carried forward.

Deferred income tax liabilities have not been recognised for any taxes that would be payable on the unremitted earnings of certain subsidiaries as
it is probable that any temporary differences will not reverse in the foreseeable future.

10. Dividends

Group

Interim dividend of 8.0p per Grafton Unit – paid 15 April 2016
Interim dividend of 4.75p per Grafton Unit – paid 7 October 2016
Interim dividend of 7.0p per Grafton Unit – paid 17 April 2015
Interim dividend of 4.5p per Grafton Unit – paid 9 October 2015

2016

£’000

18,825
11,223
-
-
30,048

2015

£’000

-
-
16,282
10,515
26,797

The payment in 2016 of a second interim dividend for 2015 of 8.0 pence on the ‘C’ Ordinary shares in Grafton Group (UK) plc from UK-sourced
income amounted to £18.8 million. An interim dividend for 2016 of 4.75 pence per share was paid on 7 October 2016 on the ‘C’ Ordinary shares in
Grafton Group (UK) plc from UK-sourced income and amounted to £11.2 million.

109

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

10. Dividends (continued)

The Board has agreed to pay a second interim dividend of 9.0 pence on the ‘C’ Ordinary shares in Grafton Group (UK) plc from UK-sourced income
to all holders of Grafton Units on the Company’s Register of Members at the close of business on 17 March 2017 (the ‘Record Date’) and the cash
consideration will be paid on 13 April 2017. A liability in respect of this second interim dividend has not been recognised at 31 December 2016, as
there was no present obligation to pay the dividend at the year-end. The dividend payable on 13 April 2017 of £21.3 million will be recognised in
2017.

11. Earnings per Share - Group

The computation of basic, diluted and adjusted earnings per share is set out below:

Numerator for basic, adjusted and diluted earnings per share:

Profit after tax for the financial year
Non-controlling interest
Numerator for basic and diluted earnings per share

Exceptional items (Note 4)
Tax relating to exceptional items
Amortisation of intangible assets arising on acquisitions
Tax relating to amortisation of intangible assets arising on acquisitions
Non-recurring defined benefit pension credit (Note 4)
Tax relating to non-recurring defined benefit pension credit
Non-recurring costs incurred in Belgium business (Note 4)
Tax relating to non-recurring costs incurred in Belgium business
Numerator for adjusted earnings per share

Denominator for basic and adjusted earnings per share:

Weighted average number of Grafton Units in issue

Dilutive effect of options and awards
Denominator for diluted earnings per share

Earnings per share (pence)

- Basic
- Diluted

Adjusted earnings per share (pence)

- Basic
- Diluted

2016

£’000

93,119
228
93,347

19,713
(2,231)
2,198
(564)
-
-
-
-
112,463

2015

£’000

96,502
677
97,179

-
-
465
(93)
(2,945)
530
1,520
(532)
96,124

Number of
Grafton Units

235,942,078

233,477,908

726,245
236,668,323

1,824,338
235,302,246

39.56
39.44

47.67
47.52

41.62
41.30

41.17
40.85

The weighted average potential employee share entitlements over 593,675 Grafton Units (2015: 1,845,500) which are currently anti-dilutive are not
included in the above calculation for diluted earnings per share and adjusted diluted earnings per share.

Adjusted EPS for 2015 has been restated to conform to current year which excludes amortisation of intangible assets arising on acquisitions.
Adjusted EPS for 2015 was previously disclosed as 41.01p (basic) and 40.69p (diluted). The charge for 2015 was not material and therefore not adjusted
for in arriving at adjusted EPS.

110

Grafton Group plc12. Goodwill

Cost

At 1 January
Arising on acquisitions (Note 28)
Measurement period adjustment
Disposal of Group businesses
Translation adjustment
At 31 December

Goodwill Acquired

2016

£’000

521,521
5,380
(500)
(549)
40,385
566,237

2015

£’000

480,157
53,254
-
(641)
(11,249)
521,521

Goodwill acquired during the year in the amount of £5.4 million (2015: £53.3 million) was allocated to the merchanting segment. Goodwill on these
acquisitions reflects the anticipated purchasing and operational synergies to be realised as part of the enlarged Group. Intangible assets which
formed part of the acquisition consideration are detailed in Note 15.

Measurement Period Adjustment

Goodwill Disposed

The branch closures in the traditional UK merchanting business in 2016 resulted in a write off of goodwill amounting to £0.5 million. In June
2015, the Group disposed of a non-core scaffolding business in Northern Ireland and a non-core readymix business in Belgium. Goodwill on these
disposals amounted to £0.6 million.

Goodwill Impaired

There were no impairments during the year (2015: £Nil). Total accumulated impairment losses at 31 December 2016 amounted to £Nil (2015: £Nil).

Cash Generating Units

Goodwill arising as part of a business combination is allocated to groups of cash generating units (‘CGUs’) for the purpose of impairment testing
based on the Group’s existing business segments or, where appropriate, recognition of a new CGU. During the year, the Merchanting segment
was split into four individual CGUs to reflect the structure of the Group following the Group’s expansion into new European markets and due to
revisions to management reporting and the existence of Group purchasing synergies. The CGUs represent the lowest level at which goodwill is
monitored for internal management purposes and are not larger that the operating segments determined in accordance with IFRS 8, Operating
Segments. The Board has determined, for the purposes of IFRS 8, Operating Segments, that three reportable segments exist, Merchanting,
Retailing and Manufacturing. A total of seven CGUs (2015: three) have been identified and these are analysed between the three reportable
segments as follows:

Merchanting
Retailing
Manufacturing

Cash-generating units

Goodwill

2016

Number

2015

Number

2016

£’000

4
1
2
7

1
1
1
3

564,073
-
2,164
566,237

2015

£’000

519,357
-
2,164
521,521

111

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016
Notes to the Group Financial Statements

(continued)

12. Goodwill (continued)

Impairment Testing

Goodwill is subject to impairment testing on an annual basis at 31 December and additionally during the year if an indicator of impairment is
considered to exist. The recoverable amount of each cash generating unit is determined based on value-in-use calculations. The carrying value of
each cash generating unit was compared to its estimated value-in-use. There were no impairments during the year (2015: £Nil).

Value-in-use Calculations

The value-in-use is calculated on the basis of estimated future cash flows discounted to present value. Estimated future cash flows were
determined by reference to the budget for 2017 and management forecasts for each of the following years from 2018 to 2021 inclusive. The
terminal value was calculated using a long-term growth rate in respect of the years after 2021. The estimates of future cash flows were based on
consideration of past experience together with an assessment of the future prospects for each of the businesses within the CGUs. The assumptions
used are also referenced against external industry data.

The key assumptions used in the value-in-use calculations are the revenue growth rate, gross margin, the discount rate and the long term growth
rate. The pre-tax discount rates used were based on the Group’s estimated weighted average cost of capital, adjusted to reflect risks associated with
each CGU. The discount rates range from 8.6 per cent to 10.9 per cent (2015: 8.9 per cent to 11.2 per cent). In determining the terminal value of the
value-in-use, it was assumed that cash flows after the first five years will increase at a long term growth rate of 2 per cent (2015: 3 per cent). The
rate assumed was based on an assessment of the likely long term growth prospects of the individual CGUs.

Significant Goodwill Amounts

Only the UK merchanting and Irish merchanting CGUs have significant amounts of goodwill. A summary of the allocated goodwill and the
assumptions relating to the recoverable amounts of these CGUs is shown below:

Goodwill (£’000)
Recoverable amount basis
Revenue growth rate average
Gross margin growth average
Long term growth rate
Discount rate (pre-tax)

UK Merchanting

Irish Merchanting

2016

363,967
Value-in-use
2.4%
13 bps
2.0%
8.9%

155,648
Value-in-use
8.1%
14 bps
2.0%
8.6%

The remaining goodwill balance of £46.6 million is allocated across three CGUs and the goodwill amounts of these CGUs are not significant either
individually or in aggregate. As noted above, the merchanting CGU has been split into four separate CGUs in 2016. There are no prior comparative
amounts in respect of the UK merchanting and the Irish merchanting CGUs. The total merchanting CGU was allocated £521.5m of goodwill in
2015.

Sensitivity Analysis

The value-in-use calculations are sensitive to changes in the key assumptions of the revenue growth rate, gross margin, the discount rate and
the long term growth rate. While management believes that the value-in-use assumptions are prudent, sensitivity analysis was performed based
on reasonable changes in each of the four key assumptions in the significant CGUs. No reasonably possible change in any of the key assumptions
would cause the carrying amount to exceed the recoverable amount in significant CGUs.

Of the CGUs which are not significant, the value-in-use of the Belgium merchanting CGU is the most sensitive to changes in key assumptions.
However, the underlying assumptions used in compiling the cash flow forecasts for Belgium are deemed by management to be prudent. In
addition, should the recoverable amount of the Belgium Merchanting CGU reduce in the future to the extent that the recoverable amount would
be lower than its carrying amount, any impairment charge is not likely to be significant.

112

Grafton Group plc
13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties

13. (a) Property, Plant and Equipment

Cost

At 1 January 2015

Additions
Acquisitions
Disposals
Disposal of Group businesses
Reclassifications
Reclassification to properties held for sale
Exchange adjustment
At 1 January 2016

Additions
Acquisitions (Note 28)
Disposals
Reclassifications
Reclassification to properties held for sale
Reclassification to investment properties
Exchange adjustment
At 31 December 2016

Depreciation and impairment

At 1 January 2015

Charge for year
Disposals
Disposal of Group businesses
Reclassifications
Reclassification to properties held for sale
Exchange adjustment
At 1 January 2016

Charge for year
Disposals
Reclassification to properties held for sale
Reclassification to investment properties
Impairment *
Exchange adjustment
At 31 December 2016

Net book amount

At 31 December 2016

At 31 December 2015

Freehold
land and
buildings
£’000

Leasehold
improvements /
buildings
£’000

Plant machinery
and motor
vehicles
£’000

312,774
998
4,649
(1,701)
-
130
(1,772)
(8,273)
306,805
854
4,404
(800)
(1,085)
(2,179)
(1,152)
16,956
323,803

33,208
3,999
(234)
-
417
(716)
(3,191)
33,483
3,453
(771)
(478)
(535)
1,091
3,340
39,583

81,366
6,090
630
(155)
-
(1,002)
-
(1,596)
85,333
10,610
-
(335)
1,085
-
-
5,593
102,286

36,499
3,232
(16)
-
(714)
-
(853)
38,148
3,835
(82)
-
-
264
3,449
45,614

296,491
34,504
3,208
(19,620)
(3,439)
872
-
(6,996)
305,020
38,637
1,396
(14,848)
-
-
-
20,957
351,162

197,513
24,980
(18,385)
(2,721)
297
-
(6,273)
195,411
27,641
(13,105)
-
-
1,967
18,480
230,394

Total
£’000

690,631
41,592
8,487
(21,476)
(3,439)
-
(1,772)
(16,865)
697,158
50,101
5,800
(15,983)
-
(2,179)
(1,152)
43,506
777,251

267,220
32,211
(18,635)
(2,721)
-
(716)
(10,317)
267,042
34,929
(13,958)
(478)
(535)
3,322
25,269
315,591

284,220
273,322

56,672
47,185

120,768
109,609

461,660
430,116

* The impairment charge in 2016 arose as a result of the branch closures in the traditional UK merchanting business.

113

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(continued)

13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties (continued)

13. (a) Property, Plant and Equipment (continued)

The Group’s freehold and long leasehold properties located in the Republic of Ireland were professionally valued as at December 1998 by
professional valuers in accordance with the Appraisal and Valuation Manual of the Society of Chartered Surveyors. Property acquired/purchased
after December 1998 is stated at fair value or cost. The valuations which were made on an open market for existing use basis were deemed to
be cost for the purpose of the transition to IFRS as adopted by the EU. The remaining properties, which are located in the United Kingdom, the
Netherlands and Belgium, are included at cost less depreciation.

Property, plant and equipment included leased assets as follows:

Cost
Accumulated depreciation
Net book amount
Depreciation charge for year

Plant, machinery
and motor vehicles

Leasehold properties

2016
£’000

198
(198)
-
30

2015
£’000

170
(152)
18
33

2016
£’000

6,610
(3,544)
3,066
266

2015
£’000

5,831
(2,898)
2,933
244

The Group repaid finance leases amounting to £0.4 million (2015: £0.6 million) and entered new leases during the year of £Nil (2015: £Nil).

13. (b) Properties Held for Sale

At 1 January 2015

Transfers from property, plant and equipment
Transfers from investment properties
Disposals
Translation adjustment
At 31 December 2015

Transfers from property, plant and equipment
Transfers to investment properties
Impairment during the year
Disposals
Translation adjustment
At 31 December 2016

Carrying Amount
£’000

9,581
1,056
1,858
(1,569)
(121)
10,805
1,701
(930)
(314)
(3,328)
473
8,407

During the year ten UK properties held for sale were sold. Eight properties were transferred from property, plant and equipment. Two properties
were transferred to investment properties. The total number of properties held for sale at 31 December 2016 is 22 (2015: 26), of which 19 (2015: 23)
are located in the UK, two (2015: two) in Ireland and one (2015: one) in Belgium. These properties are shown in the balance sheet at the lower of
their carrying amount and fair value less any disposal costs. Six properties are included at a fair value of £4.5 million (2015: eight properties at £4.9
million). During the year a number of properties were impaired resulting in a total impairment charge of £0.3 million.

Properties held for sale are not used in the course of business and are available for immediate sale in their present condition subject to terms that
are usual and customary for properties of this nature. The individual properties were being actively marketed at the year end and the Group is
committed to its plan to sell these properties.

114

Grafton Group plc13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties (continued)

13. (c) Investment Properties

At 1 January 2015

Transfers from properties held for sale
Translation adjustment
At 31 December 2015

Transfers from properties held for sale
Transfers from property, plant & equipment
Fair value gain
Translation adjustment
At 31 December 2016

Fair Value
£’000

20,473
(1,858)
(818)
17,797
930
617
302
2,103
21,749

Following completion of a review of its estate in 2016, one Irish investment property was revalued which gave rise to a fair value gain of £0.3
million. Two properties in the UK were transferred to investment property from properties held for sale and one Irish property was transferred to
investment property from property, plant & equipment. The total number of investment properties at 31 December 2016 is 22 (2015: 19) of which six
(2015: four) are located in the UK and 16 (2015: 15) are located in Ireland. These properties are being held pending a recovery in the property market
or with a view to enhancing their development potential by securing alternative use planning.

Investment properties of £21.7 million, which are separately classified in non-current assets, are carried at fair value in the financial statements.
An internal review undertaken by the Group Property Director was used to determine fair values. The valuation techniques used were the market
value of comparable transactions that were recently completed or on the market. In cases where there are no recent precedent transactions,
valuations were based on estimated rental yields and consultations with external agents who have knowledge of local property markets.

13. (d) Fair Value Hierarchy – Properties Held for Sale Carried at Fair Value and Investment Properties

As noted in the Group’s accounting policies on page 95, properties held for sale are held at the lower of carrying amount and fair value less costs
to sell. Investment properties are carried at fair value. Fair value is defined as the price that would be received if the asset was sold in an orderly
transaction between market participants based on the asset’s highest and best use. Valuations are reviewed each year by the Directors with
movements in fair value recognised in the income statement.

The Group reviewed its property portfolio during the year. Properties held for sale comprise land and buildings in a number of locations across the
UK, Ireland and Belgium. Investment properties, comprising land and buildings located in the UK and Ireland, are held for capital appreciation
and or rental income and are not occupied for trading purposes by the Group. This also includes parts of properties which are sublet to third
parties. Properties held for sale comprise properties that are held at a cost of £3.9 million (2015: £5.9 million) and properties held at a fair value of
£4.5 million (2015: £4.9 million). Investment properties are held at a fair value of £21.7 million (2015: £17.8 million).

In general, valuations have been undertaken having regard to comparable market transactions between informed market participants. Due
to very limited transactions for properties of a similar nature in the UK and Ireland, the valuations of a number of properties were determined
internally with reference to local knowledge, valuation techniques and the exercise of judgement following consultation with property advisers
with recent experience of the location and nature of the properties being valued.

The property valuations are derived from data which is not publicly available and involves a degree of judgement. For these reasons, the valuations
of the Group’s property portfolio is classified as level 3 as defined by IFRS 13.

115

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(continued)

13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties (continued)

The following is a summary of valuation methods used in relation to the Group’s held for sale and investment properties which are carried at fair
value:

Comparable
market
transactions
£’000

Offers
from third
parties
£’000

Total
2016
£’000

3,707

745

4,452

Comparable
market
transactions
£’000

17,665
2,890
20,555

Other
methods
£’000

-
1,194
1,194

Comparable
market
transactions
£’000

Offers
from third
parties
£’000

Total
2016
£’000

17,665
4,084
21,749

Total
2015
£’000

3,681

1,245

4,926

Comparable
market
transactions
£’000

14,323
2,451
16,774

Other
methods
£’000

-
1,023
1,023

Total
2015
£’000

14,323
3,474
17,797

At 31 December 2016

Properties Held for Sale

Merchanting segment

Investment Properties

Merchanting segment
Manufacturing segment
Total

At 31 December 2015

Properties Held for Sale

Merchanting segment

Investment Properties

Merchanting segment
Manufacturing segment
Total

116

Grafton Group plc13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties (continued)

The following table shows a reconciliation from the opening balance to the closing 2016 balance for level 3 fair values:

Balance at beginning of year
Transfers from property, plant and equipment
Transfers to investment properties
Disposals
Impairment
Fair value gain
Foreign exchange movement
Balance at end of year

Recorded at fair value
Recorded at cost
Total

Properties
held for sale
2016
£’000

Investment
properties
2016
£’000

10,805
1,701
(930)
(3,328)
(314)
-
473
8,407

4,452
3,955
8,407

17,797
617
930
-
-
302
2,103
21,749

21,749
-
21,749

During 2016, one Irish investment property was revalued with a fair value gain of £0.3 million. During 2016 five UK held for sale properties were
impaired giving rise to an impairment charge of £0.3 million.

The following table shows a reconciliation from the opening balance to the closing 2015 balance for level 3 fair values:

Balance at beginning of year
Transfers from property, plant and equipment
Transfers from investment properties
Transfers to properties held for sale
Disposals
Foreign exchange movement
Balance at end of year

Recorded at fair value
Recorded at cost
Total

Properties
held for sale
2015
£’000

Investment
properties
2015
£’000

9,581
1,056
1,858
-
(1,569)
(121)
10,805

4,926
5,879
10,805

20,473
-
-
(1,858)
-
(818)
17,797

17,797
-
17,797

During 2015 five Irish investment properties were revalued with a net fair value gain of £Nil. There was no impairment charge or revaluation gain
recognised during 2015 in relation to held for sale properties.

Valuation Techniques and Significant Unobservable Inputs

The following tables show the valuation techniques used in measuring the fair value of properties held for sale and investment properties and the
significant unobservable inputs used. Where market transactions are present, the comparable market transaction method is used for land and
buildings held for sale or capital appreciation.

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(continued)

13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties (continued)

Properties Held for Sale

Valuation technique

Significant unobservable inputs

Inter-relationship between key unobservable inputs and
fair value measurement

Comparable market transactions -

UK - Regional (excluding major cities)

The estimated fair value would increase/

price per square metre:

The value is based on comparable market
transactions after discussion with
independent agents and/or with reference to
other information sources.

• Comparable warehouse market prices of

(decrease) if:

£130 - £411 per square metre.

• Comparable market prices per square metre

• Comparable industrial development land
prices of £200,000 - £1,000,000 per acre.

were higher/(lower).

Offers from third parties:

Ireland – Urban

The estimated fair value would increase/

This valuation is used for properties that
have formal offer documentation received
by the Group from third parties intending to
purchase with a reasonable possibility of a
sale being concluded.

• Conditional offer price for single

(decrease) if:

redevelopment site £2.514m per acre.

• Final offer price increased/(decreased).

Ireland – Regional

• Conditional offer price for single

redevelopment site £1.243m per acre.

UK - Regional (excluding major cities)

• Two offers for warehouse property of £456

per square metre.

• One offer for office space of £910 per square

metre.

UK - Urban (major cities)

• Two warehouse properties under offer for

£359 and £527 per square metre

118

Grafton Group plc13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties (continued)

Investment Properties

Valuation technique

Significant unobservable inputs

Comparable market transactions -

Ireland - Urban

Inter-relationship between key unobservable inputs and
fair value measurement

The estimated fair value would increase/

price per square metre:

The value is based on comparable market
transactions after discussion with independent
registered property appraisers and/or with
reference to other information sources.

• Comparable minimum office market prices of

(decrease) if:

£461 per square metre.

• Comparable market prices per square metre

were higher/(lower).

• Comparable minimum warehouse market

prices of £223 per square metre.

• Comparable agricultural land market prices

of £12,843 per acre.

• Comparable industrial or development land

prices of £85,620 - £285,400 per acre.

Ireland - Regional

• Comparable warehouse market prices of £31 -

£563 per square metre.

• Comparable market prices of development

land £42,810 - £428,100 per acre.

UK - Regional (excluding major cities)

• Comparable warehouse market price of £228 -

£350 per square metre.

• Comparable market prices for development
sites of between £150,000 and £1,500,000 per
acre.

14. Other Financial Assets

At 1 January 2015

Translation adjustment
At 31 December 2015

Translation adjustment
At 31 December 2016

Other investments represent sundry equity investments at cost less provision for impairment.

Other
Investments
£’000

123
(1)
122
3
125

119

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(continued)

15. Intangible Assets

Cost

At 1 January 2015

Additions
Acquisitions
Translation adjustment
At 1 January 2016

Additions
Acquisitions (Note 28)
Translation adjustment
At 31 December 2016

Amortisation

At 1 January 2015

Charge for the year
Translation adjustment
At 1 January 2016

Charge for the year
Translation adjustment
At 31 December 2016

Net book amount

At 31 December 2016

At 31 December 2015

Computer
Software
£’000

Trade
Names
£’000

Customer
Relationships
£’000

5,881
9,988
-
-
15,869
10,343
-
13
26,225

124
446
-
570
923
(3)
1,490

-
-
2,274
69
2,343
-
225
255
2,823

-
66
-
66
274
12
352

-
-
15,002
466
15,468
-
2,590
1,719
19,777

-
399
5
404
1,924
71
2,399

Total
£’000

5,881
9,988
17,276
535
33,680
10,343
2,815
1,987
48,825

124
911
5
1,040
3,121
80
4,241

24,735
15,299

2,471
2,277

17,378
15,064

44,584
32,640

Computer software of £24.7 million at 31 December 2016 (2015: £15.3 million) reflects the cost of the Group’s investment to upgrade the IT systems
and infrastructure that supports a number of UK businesses as part of a multi-year programme of investment. A number of these systems are not
yet available for use in the business and are therefore not amortised.

Customer relationships and trade names arise from business combinations (Note 28) and are amortised over their estimated useful lives. The
average remaining amortisation period is 9 years (2015: 10 years).

The amortisation expense of £3.1 million (2015: £0.9 million) has been charged in operating costs in the income statement. Amortisation on
acquired intangibles amounted to £2.2 million (2015: £0.5 million).

120

Grafton Group plc16. Inventories

Raw materials
Finished goods
Goods purchased for resale

2016

£’000

1,117
1,307
290,257
292,681

2015

£’000

1,165
1,351
273,713
276,229

The inventory provision at 31 December 2016 was £31.7 million (31 December 2015: £20.7 million). Certain inventory items which were previously
classified as finished goods have been reclassified to goods purchased for resale in the current year. The reclassification related to a refinement of
what is defined as finished goods and goods purchased for resale.

During the year, £2.1 million of inventory was written down as a result of the branch closures in the traditional UK merchanting business.

17. Trade and Other Receivables

Amounts falling due within one year:

Trade receivables
Other receivables

2016

£’000

282,551
115,138
397,689

2015

£’000

244,798
110,954
355,752

The carrying amount of trade and other receivables represents the maximum credit exposure. Other receivables primarily includes prepayments
and rebates receivable.

The maximum exposure to credit risk for trade debtors and other receivables at the reporting date by geographic region was as follows:

United Kingdom
Ireland
Netherlands
Belgium

Carrying Amount

2016

£’000

302,459
66,072
15,529
13,629
397,689

2015

£’000

276,908
52,546
12,641
13,657
355,752

Credit risk is well diversified over a broad customer base with only a small number of accounts with balances in excess of £100,000 that
collectively account for a small proportion of total trade receivables.

121

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(continued)

17. Trade and Other Receivables (continued)

The ageing of trade and other receivables at 31 December was:

Gross Value

Impairment

2016

£’000

2016

£’000

Carrying
Amount

2016

£’000

Gross Value

Impairment

2015

£’000

2015

£’000

Carrying
Amount

2015

£’000

280,715

291,855

89,592
17,991
18,373
125,956
406,671

(734)
(2,117)
(6,131)
(8,982)
(8,982)

88,858
15,874
12,242
116,974
397,689

43,915
24,209
3,716
71,840
363,695

Not Past Due

Past Due

0-30 days
30-60 days
+60 days

Movement in Impairment Provision

At 1 January
Written-off during year*
Additional provision
Translation adjustment
At 31 December

*Includes an amount of £0.1 million in 2016 (2015: £Nil) written off as a result of the branch closures in the traditional UK merchanting business.

18. Share Capital and Share Premium

Group and Company

Authorised:

Equity shares

300 million ordinary shares of 5c each
30 billion ‘A’ ordinary shares of 0.001c each

122

(1,168)
(4,129)
(2,646)
(7,943)
(7,943)

2016

£’000

7,943
(4,189)
4,688
540
8,982

42,747
20,080
1,070
63,897
355,752

2015

£’000

9,355
(1,951)
792
(253)
7,943

2016

€’000

2015

€’000

15,000
300
15,300

Grafton Group plc18. Share Capital and Share Premium (continued)

Year ended 31 December 2016

Issued and fully paid:

Ordinary shares

At 1 January

Issued under UK SAYE scheme*
2011 Long Term Incentive Plan

Date awards granted
April 2013 LTIP
At 31 December

‘A’ ordinary shares

At 1 January

‘A’ ordinary shares issued in year
At 31 December

Total nominal share capital issued

* Refer to Note 33 which outlines the issue price of both the 2014 and 2012 SAYE Schemes.

Year ended 31 December 2015

Issued and fully paid:

Ordinary shares

At 1 January

Issued under UK SAYE scheme
2011 Long Term Incentive Plan

Date awards granted
April 2012 LTIP
At 31 December

‘A’ ordinary shares

At 1 January

‘A’ ordinary shares issued in year
At 31 December

Total nominal share capital issued

Issue Price

Number of Shares

2016
Nominal Value
£’000

235,721,435
193,060

Nil

881,392
236,795,887

4,007,264,395
18,265,684
4,025,530,079

8,383
8

36
8,427

22
-
22

8,449

Issue Price

Number of Shares

2015
Nominal Value
£’000

233,090,638
1,578,367

Nil

1,052,430
235,721,435

3,962,540,846
44,723,549
4,007,264,395

8,287
58

38
8,383

22
-
22

8,405

123

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(continued)

18. Share Capital and Share Premium (continued)

Share Premium

Group

At 1 January
Premium on issue of shares under UK SAYE scheme
At 31 December

Grafton Units Issued During 2016

2016

£’000

209,810
461
210,271

2015

£’000

206,597
3,213
209,810

The number of Grafton Units issued during the year under the Group’s Executive Share Schemes and the UK SAYE scheme was 1,074,452 (2015:
2,630,797) and the total consideration received amounted to £505,000 (2015: £3,309,000). Costs relating to the issues were £Nil (2015: £Nil).

Grafton Units

At 31 December 2016 and 31 December 2015, a Grafton Unit comprised one ordinary share of Euro 5 cent and seventeen ‘A’ ordinary shares of
Stg0.001 cent each in Grafton Group plc and one ‘C’ ordinary share of Stg0.0001p in Grafton Group (UK) plc.

Ordinary Shares

The holders of ordinary shares are entitled to attend, speak and vote at all General Meetings of the Company.

‘A’ Ordinary Shares

At 31 December 2016, there were seventeen ‘A’ Ordinary shares per Grafton Unit.

All ‘A’ ordinary shares purchased between 2004 to 2009 were cancelled.

The ‘A’ ordinary shares rank pari passu with ordinary shares regarding any dividends declared. On a return of capital on a winding up or
otherwise (other than on conversion, redemption or purchase of shares), the holders of ‘A’ ordinary shares are entitled, pari passu with the holders
of the ordinary shares, to the repayment of their nominal value of 0.001 cent per share, with no right to participate any further. The holders of
the ‘A’ ordinary shares are not entitled to receive notice of any general meeting of Grafton or to attend, speak or vote at any such general meeting,
unless the business of the meeting includes a resolution varying or abrogating any of the special rights attaching to such shares.

‘C’ Ordinary Shares (in Grafton Group (UK) plc)

The ‘C’ ordinary shares do not entitle their holders to receive notice of, attend or vote at any general meeting of Grafton Group (UK) plc unless the
business of the meeting includes a resolution varying or abrogating any of the special rights attaching to such shares. If dividends are declared
on ‘C’ ordinary shares, the holder of a Grafton Unit shall be entitled to be paid dividends in respect of the ‘C’ ordinary shares comprised in such
Grafton Unit. On a return of capital on a winding up or otherwise (other than on conversion, redemption or purchase of shares) the holders of
‘C’ ordinary shares are entitled, pari passu with the holders of the ‘A’ ordinary shares and ‘B’ ordinary shares in Grafton Group (UK) plc, to the
repayment of their nominal value of Stg0.0001p per share, with no right to participate any further. Any holder of a ‘C’ ordinary share, with the
prior approval of an extraordinary resolution of the holders of the ‘C’ ordinary shares or with the prior consent in writing of the holders of at least
three quarters in nominal value of the issued ‘C’ ordinary shares, is entitled to call for all the holders of the ‘A’ ordinary shares and/or ‘B’ ordinary
shares to acquire all the ‘C’ ordinary shares at their nominal value.

Treasury Shares

The Group holds 500,000 (2015: 500,000) Grafton Units at a cost of £3,897,000 (2015: £3,897,000) as treasury shares.

124

Grafton Group plc19. Group Statement of Changes in Equity

The capital redemption reserve is a legal reserve which arose from the purchase of ‘A’ ordinary shares, the redemption of redeemable shares in
prior years and the buy-back and cancellation of shares.

The revaluation reserve was created as a result of a revaluation of Irish properties in 1998.

The shares to be issued reserve comprises amounts expensed in the income statement in connection with share-based payments, net of transfers
to retained earnings on the exercise of share entitlements and the lapsing of such entitlements.

The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments
related to hedged transactions that have not yet occurred.

The foreign currency translation reserve arises from the currency effect on translation of the investment in subsidiaries with euro functional
currencies as adjusted for foreign currency borrowings and derivatives designated as net investment hedges.

Non-Controlling Interests

The Group has a controlling interest in YouBuild NV (formerly BMC Groep NV), a Belgian builders merchanting business. This company is
accounted for as a subsidiary undertaking with a non-controlling interest.

20. Interest-Bearing Loans and Borrowings

Non-current liabilities

Euro bank loans
Sterling bank loans
Finance leases

Current liabilities

Euro bank loans
Sterling bank loans
Finance leases

2016

£’000

297,870
-
2,556
300,426

442
203
406
1,051

2015

£’000

269,540
51,274
2,579
323,393

788
189
349
1,326

The decrease in non-current interest bearing loans and borrowings largely reflects net borrowings repaid during the year which was partly offset
by the foreign exchange movement on translation of the Group’s euro bank loans into sterling at the year end.

125

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(continued)

20. Interest-Bearing Loans and Borrowings (continued)

Maturity of Financial Liabilities

The maturity profile of the Group’s interest bearing financial liabilities (bank debt, loan notes and finance leases) can be summarised as follows:

Due within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
After five years

Derivatives
Gross Debt
Cash and short term deposits
Net debt
Shareholders’ equity
Gearing

Bank loans

Finance leases

2015

£’000

977
505
221
320,088
-
-
321,791

2015

£’000

349
349
349
349
349
1,183
2,928

Bank loans

Finance leases

2016

£’000

645
343
136
89
297,302
-
298,515

2016

£’000

406
406
406
406
406
932
2,962

Total

2016

£’000

1,051
749
542
495
297,708
932
301,477
675
302,152
(205,857)
96,295
1,062,067
9%

Total

2015

£’000

1,326
854
570
320,437
349
1,183
324,719
404
325,123
(211,565)
113,558
985,670
12%

The following table indicates the effective interest rates at 31 December 2016 in respect of interest bearing financial assets and financial liabilities
and the periods during which they re-price. The effective interest rate and timing of re-pricing were adjusted for the effect of derivatives.

Euro deposits
Sterling deposits
Cash at bank
Cash and cash equivalents

Floating rate debt:

Euro loans
Sterling loans
Total floating rate debt

Fixed rate debt:

Euro loans
Finance leases
Total fixed rate debt
Derivatives
Total Net Debt

Effective
Interest Rate

0.00%
0.25%
0-0.2%

0.84%
2.00%

1.41%
6.00%

Total

£’000

8,239
9,598
188,020
205,857

6 months
or less

£’000

8,239
9,598
188,020
205,857

(238,378)
(203)
(238,581)

(59,934)
(2,962)
(62,896)
(675)
(96,295)

(59,934)
(203)
(60,137)
(675)
(93,536)

6 to 12
months

£’000

1-2 years

2-5 years

£’000

More than
5 years

£’000

-
-
-
-

-
-
-

-
(203)
(203)
-
(203)

-
-
-
-

-
-
-

-
-
-
-

-
-
-

-
(406)
(406)
-
(406)

-
(1,218)
(1,218)
-
(1,218)

-
-
-
-

-
-
-

-
(932)
(932)
-
(932)

126

Grafton Group plc20. Interest-Bearing Loans and Borrowings (continued)

Borrowing Facilities

The Group had an undrawn committed borrowing facility at 31 December 2016 of £217.6 million (2015: £115.7 million) in respect of which all
conditions precedent were met. In March 2016 the Group completed an amendment and extension of its loan facilities to improve terms and to
extend the maturity date to March 2021 plus two one-year extension options exercisable at the discretion of the bank’s and the Group. In addition,
the Group also entered into a revolving loan facility for €75 million (£58 million) on similar terms with a new relationship bank. A one-year
extension was agreed with five of the Group’s six relationship banks in March 2017.

The following table indicates the effective interest rates at 31 December 2015 in respect of interest bearing financial assets and financial liabilities
and the periods in which they re-price. The effective interest rate and timing of re-pricing were adjusted for the effect of derivatives.

Sterling deposits
Euro deposits
US dollar deposits
Cash at bank
Cash and cash equivalents

Floating rate debt:

Euro loans
Sterling loans
Total floating rate debt

Fixed rate debt:

Euro loans
Finance leases
Total fixed rate debt
Derivatives
Total Net Debt

Effective
Interest Rate

0.40%
0.00%
0.00%
0-0.4%

1.51%
2.07%

1.77%
6.00%

Total

£’000

32,316
10,529
1,251
167,469
211,565

(218,948)
(51,463)
(270,411)

(51,380)
(2,928)
(54,308)
(404)
(113,558)

6 months
or less

£’000

32,316
10,529
1,251
167,469
211,565

(218,948)
(51,463)
(270,411)

(51,380)
(175)
(51,555)
(404)
(110,805)

6 to 12
months

£’000

1-2 years

2-5 years

£’000

More than
5 years

£’000

-
-
-
-
-

-
-
-

-
(174)
(174)
-
(174)

-
-
-
-
-

-
-
-

-
(349)
(349)
-
(349)

-
-
-
-
-

-
-
-

-
-
-
-
-

-
-
-

-
(1,047)
(1,047)
-
(1,047)

-
(1,183)
(1,183)
-
(1,183)

21. Financial Instruments and Financial Risk

The fair values of financial assets and liabilities together with the carrying amounts shown in the balance sheet are as follows:

At 31 December 2016

Other financial assets*
Trade and other receivables*
Cash and cash equivalents*

Interest rate swaps
Euro bank loans
Sterling bank loans
Finance leases
Trade and other payables*

Available
for sale

£’000

Cashflow
hedge

£’000

Fair value
through profit
and loss

£’000

125
-
-
125
-
-
-
-
-
-

-
-
-
-
(675)
-
-
-
-
(675)

-
-
-
-
-
-
-
-
-
-

Loans and
receivables

Liabilities at
amortised cost

£’000

-
397,689
205,857
603,546
-
-
-
-
-
-

£’000

-
-
-
-
-
(298,312)
(203)
(2,962)
(523,700)
(825,177)

Total
carrying
value

£’000

125
397,689
205,857
603,671
(675)
(298,312)
(203)
(2,962)
(523,700)
(825,852)

Fair value

£’000

-
-
-
-
(675)
(298,312)
(203)
(2,962)
-
(302,152)

127

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(continued)

21. Financial Instruments and Financial Risk (continued)

At 31 December 2015

Other financial assets*
Trade and other receivables*
Cash and cash equivalents*

Interest rate swaps
Euro bank loans
Sterling bank loans
Finance leases
Trade and other payables*

Available
for sale

£’000

Cashflow
hedge

£’000

Fair value
through profit
and loss

£’000

122
-
-
122
-
-
-
-
-
-

-
-
-
-
(404)
-
-
-
-
(404)

-
-
-
-
-
-
-
-
-
-

Loans and
receivables

Liabilities at
amortised cost

£’000

-
355,752
211,565
567,317
-
-
-
-
-
-

£’000

-
-
-
-
-
(270,328)
(51,463)
(2,928)
(465,914)
(790,633)

Total
carrying
value

£’000

122
355,752
211,565
567,439
(404)
(270,328)
(51,463)
(2,928)
(465,914)
(791,037)

Fair value

£’000

-
-
-
-
(404)
(270,328)
(51,463)
(2,928)
-
(325,123)

*The Group has not disclosed the fair values of financial instruments such as short term receivables and payables because their carrying value closely approximates fair value.

Fair Value

A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets
and liabilities. Set out below is an analysis of financial instruments carried at fair value, by valuation method. The different levels in the fair value
hierarchy have been defined as follows:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included within level 1 that are observable, either directly or indirectly.
Level 3: inputs that are not based on observable market data.

Fair values have been determined for measurement and/or disclosure purposes based on the following methods.

• Trade and other receivables/trade and other payables

For receivables and payables with a remaining life of less than six months or demand balances, fair value is the amount that is payable
contractually less an impairment provision where appropriate.

• Cash and cash equivalents, including short-term bank deposits

For short term bank deposits and cash and cash equivalents, all of which have a remaining maturity of less than three months, the carrying
amount is a reasonable approximation of fair value.

• Other financial assets

Certain of the Group’s financial assets are comprised of investments that do not have a quoted market price in an active market and whose fair
value cannot be reliably measured. Such investments are measured at cost less provision for impairment where appropriate and applicable.

• Derivative instruments (Cross currency interest rate swaps and interest rate swaps)

The fair values of cross currency interest rate swaps and interest rate swaps are calculated as the present value of the estimated future cash
flows based on the terms and maturity of each contract and using forward currency rates and market interest rates as applicable for a similar
instrument at the measurement date. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit
risk of the Group entity and counterparty where appropriate.

128

Grafton Group plc21. Financial Instruments and Financial Risk (continued)

Fair Value (continued)

• Interest bearing loans and borrowings

For floating rate interest bearing loans and borrowings with a contractual repricing date of less than six months, the nominal amount is deemed
to reflect fair value. For loans with repricing dates of greater than six months, the fair value is calculated based on the present value of the
expected future principal and interest cash flows discounted at interest rates effective at the balance sheet date and adjusted for credit spread.

• Finance lease liabilities

Fair value is based on the present value of future cash flows discounted at market rates and credit spread.

The following table shows the fair values of financial assets and liabilities including their level in the fair value hierarchy. It does not include fair
value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of
fair value.

Liabilities measured at fair value

Designated as hedging instruments

Interest rate swaps

Liabilities not measured at fair value

Liabilities at amortised cost

Euro bank loans
Sterling bank loans
Finance leases

Liabilities measured at fair value

Designated as hedging instruments

Interest rate swaps

Liabilities not measured at fair value

Liabilities at amortised cost

Euro bank loans
Sterling bank loans
Finance leases

2016

Total

£’000

(675)

(298,312)
(203)
(2,962)
(301,477)

2015

Total

£’000

(404)

(270,328)
(51,463)
(2,928)
(324,719)

2016

Level 1

£’000

-
-
-
-

2015

Level 1

£’000

-
-
-
-

2016

Level 2

£’000

(675)

(298,312)
(203)
(2,962)
(301,477)

2015

Level 2

£’000

(404)

(270,328)
(51,463)
(2,928)
(324,719)

2016

Level 3

£’000

-
-
-
-

2015

Level 3

£’000

-
-
-
-

129

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(continued)

21. Financial Instruments and Financial Risk (continued)

Fair Value (continued)

Level 2 Fair Values

Type

Valuation technique

Financial assets and liabilities measured at fair value

Interest rate swaps

The fair value of interest rate swaps
is calculated as the present value
of the estimated future cashflows
based on observable yield curves

Significant
unobservable inputs

Inter-relationship between key
unobservable inputs and fair value
measurement

Not applicable

Financial assets and liabilities not held at fair value

Other financial liabilities*

Discounted cash flows

Not applicable

*Other financial liabilities include Euro bank loans, Sterling bank loans and finance leases.

Risk Exposures and Group Treasury Policy

The Group’s operations expose it to various financial risks that include credit risk, liquidity risk, currency risk and interest rate risk. The Group’s
treasury policies, which are regularly reviewed, are designed to reduce financial risk in a cost efficient way. A limited number of foreign exchange
swaps, spot foreign currency contracts and interest rate swaps are undertaken periodically to hedge underlying interest rate, fair value and
currency exposures and it is Board policy to manage these risks in a non-speculative manner.

The Group has exposure to the following risks from its use of financial instruments:

• Credit risk

• Liquidity risk

• Currency risk

• Interest rate risk

The manner in which the Group is exposed to each of these risks and the risk management policies applied are discussed below.

The Board of Directors has the overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board is
responsible for developing and monitoring the Group’s risk management policies.

The Board and the Audit and Risk Committee have reviewed the process for identifying, evaluating and managing the significant risks affecting
the business.

Credit Risk

Credit risk arises from credit granted to customers. Credit risk also arises on cash and cash equivalents, derivative financial instruments and cash
and deposits with banks and financial institutions.

Exposure to credit risk is monitored on an ongoing basis. The Group’s exposure to customer credit risk is diversified over a large customer base
and the incidence of default by customers is tightly managed by Business Unit credit control teams. Credit insurance is in place to cover major
exposures in the UK merchanting business. Credit evaluations are performed regularly. New customers are subject to initial credit checks that
include trade and bank references and are generally subject to restricted credit limits prior to developing a credit history. Due to the established
nature of the businesses a high proportion of customers have long-standing trading relationships with Group companies. These established
customers are reviewed regularly for financial strength and the appropriateness of their credit limit.

130

Grafton Group plc21. Financial Instruments and Financial Risk (continued)

The Group establishes a provision for impairment that represents its estimate of losses in respect of trade and other receivables. The main
components of this provision are a specific loss component that relates to individually significant exposures and a collective loss component
established for groups of similar assets in respect of losses that have been incurred but not yet identified.

Cash and short term bank deposits are invested with a range of banks, all with original maturities of less than 3 months at 31 December 2016.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments,
in the balance sheet.

The maximum exposure to credit risk at 31 December 2016 and 31 December 2015 was:

Trade and other receivables
Cash and cash equivalents

2016

£’000

397,689
205,857
603,546

2015

£’000

355,752
211,565
567,317

Additional disclosures in relation to the Group’s exposure to credit risk arising from trade and other receivables is set out in Note 17.

The maximum exposure to credit risk for cash and cash equivalents, based on the domicile of the parent bank, at the reporting date was:

United Kingdom banks
Domestic banks
Netherlands banks
Belgian banks

Carrying Amount

2016

£’000

168,428
34,900
1,005
1,524
205,857

2015

£’000

171,089
35,878
3,123
1,475
211,565

The cash on deposit is primarily held with Bank of Ireland, HSBC, Ulster Bank, Barclays, ABN AMRO and Lloyds Bank. All of the Group’s cash is
held with financial institutions which have an investment grade credit rating.

Gross amounts of cash and cash equivalents
Amounts set off in the balance sheet *
Net amounts of cash and cash equivalents in the balance sheet

2016

£’000

245,742
(39,885)
205,857

2015

£’000

263,181
(51,616)
211,565

*The Group has netting arrangements in place with Bank of Ireland, HSBC and Lloyds Bank with cash balances and overdrawn positions being netted as a legal right of set-off
exists with each bank.

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(continued)

21. Financial Instruments and Financial Risk (continued)

Foreign Currency Risk Management

Transactional foreign exchange risk arises from foreign currency transactions, assets and liabilities. Group operations manage foreign
exchange trading risks against the functional currency. The majority of trade conducted by the Group’s Irish, Belgian and Dutch businesses is
in euro. Sterling is the principal currency for the Group’s UK businesses. Currency risks are regularly monitored and managed by utilising spot
and forward foreign currency contracts as appropriate for settling liabilities arising from the purchase of goods for resale in non-functional
currencies. The majority of transactions entered into by Group entities are denominated in functional currencies and no significant level of
hedging is required.

A portion of the Group’s net worth is denominated in euro reflecting profit after tax reserves retained in euro denominated trading and finance
companies which gives rise to translation differences on conversion to sterling.

Borrowings made in a non-functional currency are swapped into a functional currency.

Sensitivity Analysis

A ten per cent strengthening of the sterling exchange rate against the euro exchange rate at the balance sheet date would have decreased
equity and profit after tax by the amount shown below. This assumes that all variables, in particular the results and financial position of each
euro functional currency entity and interest rates, remained constant. A ten per cent weakening of the sterling exchange rate against the euro
exchange rate would have an equal and opposite effect on the amounts shown below on the basis that all variables remain constant.

31 December 2016

10% strengthening of sterling currency against the euro

31 December 2015
10% strengthening of sterling currency against the euro

Hedging

Equity

Profit after tax

£’000

(19,045)

(1,851)

(11,370)

(650)

The Group has exposure to changes in interest rates on certain debt instruments and has hedged an element of this risk by entering into interest
rate swaps. The nominal value of contracts outstanding is £59,934,000 (2015: £51,380,000) and the period hedged is from December 2014 to May 2019
(2015: December 2014 to May 2019).

The Group classified interest rate swaps as cash flow hedges and stated them at their fair value. The fair value of these swaps at 31 December 2016
was a liability of £0.7 million (31 December 2015: a liability of £0.4 million). A net charge of £203,000 (31 December 2015: £360,000) was recorded in
the cash flow hedge reserve in other comprehensive income and a balance of £Nil (31 December 2015: £Nil), being the ineffective portion of the
hedge, was taken to the Group Income Statement (Note 7).

Up until June 2015 the Group had exposure to fair value risk and US dollar fluctuations through its fixed rate US dollar Private Placement loan
notes. The Group’s policy is to hedge this exposure to currency and fair value movements. This was initially achieved by entering into a number of
cross currency interest rate swaps that swapped the debt into floating rate sterling.

The Group originally designated its cross currency interest rate swaps (CCIRS) as both a hedge of its fair value exposure to interest rate fair value
and currency risk associated with its fixed rate firm commitment in its US$ Senior Notes and a hedge of the Group’s exposure to foreign currency
risk arising on its net investment hedge in operations in the UK. Certain CCIRS fell out of hedge accounting at 30 June 2011 as noted below. The
Group’s US loan notes have now been fully repaid with the final repayment made in June 2015. The related CCIRS also expired at the same time.
The fair value of these swaps at 31 December 2016 was £Nil (31 December 2015: £Nil).

132

Grafton Group plc21. Financial Instruments and Financial Risk (continued)

Hedging (continued)

Movements in fair value have been recognised in the income statement as set out in Note 7.

Effectiveness testing performed on the Group’s hedging relationships at 31 December 2011 revealed that two of the Group’s cross currency interest
rate swaps were ineffective. As a result, hedge accounting ceased with effect from 30 June 2011, the last reporting date on which the hedges were
proven to be effective.

The effect of ceasing to hedge account in respect of these two cross currency interest rate swaps is that all fair value movements on the two swaps
from 30 June 2011 were reflected in the income statement while the associated US dollar loans are now accounted for at spot rate on the balance
sheet with the impact of the movement in the spot rate taken to the income statement. The cumulative fair value adjustment recognised on
the loans at 30 June 2011 is amortised to the income statement over the remaining term of the borrowings. The net income statement impact in
the current year, being the difference between the amounts recorded and the amounts that would have been recorded had the hedge remained
effective, was a charge of £Nil (2015: £0.5 million) to finance income and expense.

Interest Rate Risk

The majority of the Group’s ongoing operations are financed from a mixture of cash generated from operations and borrowings. Borrowings are
initially secured at floating interest rates and interest rate risk is monitored on an ongoing basis. Interest rate swaps are used to manage interest
rate risk when considered appropriate having regard to the interest rate environment.

Cash Flow Sensitivity Analysis for Variable Rate Instruments

A reduction of 50 basis points in interest rates at the reporting date would have increased profit before tax and equity by £1.5 million (2015: £1.6
million) on the basis of the Group’s gross debt of £302.2 million. An increase of 50 basis points, on the same basis, would have an equal and
opposite effect.

Capital Management

The capital structure of the Group comprises share capital, reserves and net debt.

The overall approach is to optimise shareholder value by leveraging the balance sheet to an appropriate level having regard to economic and
trading conditions in the Group’s markets, the level of internal cash generation, credit conditions generally and interest rates payable.

The Group’s capital structure is kept under ongoing review and the debt component is actively managed with a view to maintaining diversified
sources of funding, significant undrawn facilities and cash deposits.

The Directors monitor the Company’s share price and may from time to time exercise their powers to make market purchases of the Company’s
own shares, at price levels which they consider to be in the best interests of the shareholders generally, after taking account of the Company’s
overall financial position.

The principal bank covenants are a net debt to equity ratio limit of 85 per cent, EBITDA interest cover of 4 times and a minimum shareholders’
equity of £0.7 billion at 31 December 2016.

At 31 December 2016 the net debt to equity ratio was 9 per cent and shareholders’ equity was £1.1 billion. EBITDA for the year was £177.9 million and
underlying EBITDA interest cover for 2016 was 37.9 times.

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(continued)

21. Financial Instruments and Financial Risk (continued)

Funding and Liquidity

The Group has cash resources at its disposal through the holding at the year-end of deposits and cash balances of £205.9 million (31 December 2015:
£211.6 million) which together with undrawn bank facilities of £217.6 million (2015: £115.7 million) and cash-flow from operations should provide
flexibility in financing its operations.

The following are the undiscounted contractual maturities of financial liabilities, including interest payments.

31 December 2016

Non-Derivative Financial

Liabilities

Bank loans
Finance lease liabilities
Trade and other payables
Derivative Financial Instruments

Interest rate swaps used for hedging

*Includes interest based on the rates in place at 31 December 2016.

31 December 2015

Non-Derivative Financial

Liabilities

Bank loans
Finance lease liabilities
Trade and other payables
Derivative Financial Instruments

Interest rate swaps used for hedging

*Includes interest based on the rates in place at 31 December 2015.

Carrying
Amount

£’000

Contractual
Cash Flow*

Within 1
Year

Between 1 and
2 Years

Between 2 and
5 Years

Greater Than 5
Years

£’000

298,515
2,962
523,700

675
825,852

313,986
10,496
523,700

644
848,826

3,504
673
523,700

313
528,190

3,194
673
-

237
4,104

307,288
2,019
-

94
309,401

-
7,131
-

-
7,131

Carrying
Amount

£’000

Contractual
Cash Flow*

£’000

Within 1
Year

£’000

Between 1 and
2 Years

Between 2 and
5 Years

Greater Than 5
Years

£’000

321,791
2,928
465,914

404
791,037

342,170
10,230
465,914

395
818,709

6,272
649
465,914

185
473,020

5,787
649
-

158
6,594

330,111
1,946
-

52
332,109

-
6,986
-

-
6,986

134

Grafton Group plc21. Financial Instruments and Financial Risk (continued)

The following table indicates the periods in which cash flows associated with derivatives that are cash flow hedges are expected to occur.

31 December 2016

Carrying
Amount

Expected Cash
Flow

£’000

6 Months
or Less

£’000

6 to 12
Months

£’000

Interest rate swaps

(675)

(644)

(160)

(153)

31 December 2015

Carrying
Amount

Expected Cash
Flow

£’000

6 Months
or Less

£’000

6 to 12
Months

£’000

Interest rate swaps

(404)

(395)

(90)

(95)

1 to 2
Years

£’000

(237)

1 to 2
Years

£’000

(158)

2 to 3
Years

£’000

(94)

2 to 3
Years

£’000

(68)

3 to 4
Years

£’000

3 to 4
Years

£’000

4 to 5
Years

£’000

4 to 5
Years

£’000

22. Derivatives

Included in non-current liabilities:

Fair value of interest rate swaps

2016

£’000

2015

£’000

(675)

(404)

The increase in derivatives (non-current) at 31 December 2016 is due to movements in the fair values of the interest rate swaps.

Nature of derivative instruments as at 31 December 2016

Hedge
Period

Interest Rate Swap

Dec 2014 to May 2019

Nature of hedging instrument

Floating interest rate to
fixed interest rate

Notional payable
amount of
contracts
outstanding

Notional
receivable
amount of
contracts
outstanding

Fair value
asset
£’000

Fair value
liability
£’000

€70,000,000 €70,000,000

(675)

Nature of derivative instruments as at 31 December 2015

Hedge
Period

Interest Rate Swap

Dec 2014 to May 2019

Nature of hedging instrument

Floating interest rate to
fixed interest rate

Notional payable
amount of
contracts
outstanding

Notional
receivable
amount of
contracts
outstanding

Fair value
asset
£’000

Fair value
liability
£’000

€70,000,000

(404)

135

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(continued)

23. Provisions

Non-current liabilities

Insurance provision
Onerous lease provision
Dilapidations provision

Current liabilities

Insurance provision
Onerous lease provision
Dilapidations provision
Other provisions

Provisions

At 1 January

Charge in year
Utilised / released
Paid during the year
Acquisitions
Foreign exchange
At 31 December

Non-current

Current

Provisions

At 1 January

Charge in year
Utilised / released
Paid during the year
Acquisitions
Foreign exchange
At 31 December

Non-current

Current

2016

£’000

9,110
9,144
4,131
22,385

3,951
3,519
3,415
1,458
12,343

2015

£’000

7,658
5,867
4,350
17,875

4,284
2,113
-
1,190
7,587

Insurance

Onerous Leases

Dilapidations

2016

£’000

11,942
4,496
(2,805)
(2,525)
-
1,953
13,061
9,110
3,951

2015

£’000

11,513
5,682
(1,863)
(2,733)
-
(657)
11,942
7,658
4,284

2016

£’000

7,980
5,007
(1,599)
-
-
1,275
12,663
9,144
3,519

2015

£’000

9,381
598
(2,034)
-
523
(488)
7,980
5,867
2,113

2016

£’000

4,350
3,225
(219)
-
-
190
7,546
4,131
3,415

Restructuring

Other Provisions

Total

2016

£’000

-
4,180
(4,180)
-
-
-
-
-
-

2015

£’000

-
-
-
-
-
-
-
-
-

2016

£’000

1,190
1,244
(1,022)
-
-
46
1,458
-
1,458

2015

£’000

2,039
-
(117)
(1,039)
400
(93)
1,190
-
1,190

2016

£’000

25,462
18,152
(9,825)
(2,525)
-
3,464
34,728
22,385
12,343

2015

£’000

4,454
307
(349)
-
-
(62)
4,350
4,350
-

2015

£’000

27,387
6,587
(4,363)
(3,772)
923
(1,300)
25,462
17,875
7,587

136

Grafton Group plc
23. Provisions (continued)

Insurance Provision

The insurance provision relates to actual obligations under the self-insurance elements of the Group’s overall insurance arrangements which are
subject to limits in respect of individual claims. This provision was based on an independent actuarial valuation. The provision principally covers
the combined public and employer liability claims for the Group’s businesses. The Group has third party insurance cover above specific limits for
individual claims and has an overall maximum aggregate payable for all claims for any one year. Given the nature of employer and public liability
claims, the timing of cash outflows can vary significantly. The outflow arising from the payment of claims in the next year is expected to be at a
similar level to the previous year. Based on historical experience, it is the Directors best estimate that the balance of claims which are provided for
at 31 December 2016 will be paid over a two to six year period.

The incurred but not reported (IBNR) element of the insurance provision is classified as non-current as the normal cycle for settlement of such
claims is likely to be more that 12 months from the year end.

Claims no longer being challenged by the Group are classified as current liabilities at year end. The Group no longer has an unconditional right to
defer payment and it is only the timing of the payment that is uncertain.

On-going claims in legal process are classified as non-current liabilities at year end as the Group still has an unconditional right to defer
settlement since it can not generally determine the extent and duration of the legal process unless the Group expects to settle claims within 12
months.

Onerous Lease Provision

The onerous lease provision covers the expected cost to the Group of onerous property leases based on the present value of the unavoidable costs of
meeting obligations under lease contracts where the unavoidable costs exceed the economic benefits expected to be received under the contract.
The timing of cash outflows is over the remaining life of the relevant lease. Changes in trading patterns from year to year may impact forecast
cashflows and alter the amount and timing of outflows.

Expected reimbursements in the form of sub-lease rental income are taken into account in respect of certain properties which can be sublet.

The increased charge in 2016 primarily relates to the exceptional items recognised during the year (Note 4).

Dilapidations Provision

The dilapidations provision covers the cost of reinstating certain Group properties at the end of the lease term. This is based on the terms of the
individual leases which set out the conditions relating to the return of property. The timing of the outflows will match the ending of the relevant
leases which ranges from 2 to 20 years. The increased charge in 2016 primarily relates to the branch closures in the traditional UK merchanting
business.

Restructuring Provision

The restructuring provision recognised in 2016 primarily relates to the branch closures in the traditional UK merchanting business and includes
severance payments.

Other Provisions

Included in other provisions are pension settlement contributions, legal provisions, deferred consideration and WEEE provisions. None of these
are individually material to require separate disclosure in the financial statements.

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(continued)

24. Trade and Other Payables

Trade payables
Accruals
Social welfare
Employee income tax
Value added tax

25. Obligations under Finance Leases

Leasehold Property

Committed finance lease obligations:
Within one year
Between one and five years
Later than five years

Minimum lease
payments

£’000

673
2,692
7,131
10,496

2016

Interest

£’000

267
1,068
6,199
7,534

Principal

£’000

406
1,624
932
2,962

Minimum lease
payments

£’000

649
2,595
6,986
10,230

Under the terms of the leases, no contingent rents are payable.

26. Deferred Taxation

Recognised deferred tax assets and liabilities

Property, plant and equipment
Employee share schemes
Financing
Other items
Intangibles
Tax value of losses carried forward
Pension
(Assets)/liabilities

Assets

2016

£’000

(3,175)
(528)
(85)
(1,000)
-
(6,231)
(4,699)
(15,718)

Liabilities

2016

£’000

Net (assets)/
liabilities

2016

£’000

31,244
-
-
827
4,358
-
-
36,429

28,069
(528)
(85)
(173)
4,358
(6,231)
(4,699)
20,711

Assets

2015

£’000

(4,903)
(1,192)
(50)
(1,011)
-
(8,150)
(2,599)
(17,905)

2016

£’000

409,020
78,610
3,936
6,079
26,055
523,700

2015

Interest

£’000

300
1,199
5,803
7,302

Liabilities

2015

£’000

27,052
-
-
1,676
3,942
-
-
32,670

2015

£’000

367,772
68,088
3,901
4,656
21,497
465,914

Principal

£’000

349
1,396
1,183
2,928

Net (assets)/
liabilities

2015

£’000

22,149
(1,192)
(50)
665
3,942
(8,150)
(2,599)
14,765

The decrease in the deferred tax asset reflects the utilisation of tax allowances and reliefs for which deferred tax assets were previously
recognised, the movement on deferred tax assets in respect of employee share schemes and an increase in the deferred tax asset on the pension
schemes deficit.

At 31 December 2016, there were unrecognised deferred tax assets in relation to capital losses of £1.2 million (31 December 2015: £1.6 million),
trading losses of £3.2 million (31 December 2015: £0.9 million) and deductible temporary differences of £2.6 million (31 December 2015: £3.8
million). Deferred tax assets were not recognised in respect of certain capital losses as they can only be recovered against certain classes of taxable
profits and the Directors cannot foresee such profits arising in the foreseeable future with reasonable certainty. The trading losses and deductible
temporary differences arose in entities that have incurred losses in recent years and the Directors have no certainty as to when there will be
sufficient taxable profits in the relevant entities against which they can be utilised.

138

Grafton Group plc26. Deferred Taxation (continued)

Analysis of Net Deferred Tax (asset)/liability

£’000

Balance
1 Jan 16

Recognised in
profit or loss

Recognised
in other
comprehensive
income

Foreign
exchange
retranslation

Arising on
acquisitions

Property, plant and equipment
Employee share schemes
Financing
Other items
Intangibles
Tax value of losses carried forward
Pension

27. Movement in Working Capital

At 1 January 2015

Translation adjustment
Interest accruals and other movements
Acquisitions
Disposal of Group businesses
Movement in 2015
At 1 January 2016

Translation adjustment
Disposal of Group businesses
Acquisitions (Note 28)
Movement in 2016
At 31 December 2016

22,149
(1,192)
(50)
665
3,942
(8,150)
(2,599)
14,765

Balance
1 Jan 15

£’000

22,970
(2,317)
(6)
926
-
(8,922)
(5,345)
7,306

2,334
315
-
(628)
(564)
3,139
231
4,827

-
349
(26)
-
-
-
(2,102)
(1,779)

2,823
-
(9)
(210)
473
(1,220)
(229)
1,628

763
-
-
-
507
-
-
1,270

Recognised in
profit or loss

Recognised
in other
comprehensive
income

Foreign
exchange
retranslation

Arising on
acquisitions

£’000

76
1,799
-
97
(94)
255
617
2,750

-
(674)
(42)
-
-
-
1,992
1,276

(1,029)
-
(2)
(8)
134
517
137
(251)

132
-
-
(350)
3,902
-
-
3,684

Inventory

£’000

Trade and other
receivables

Trade and other
payables

£’000

249,906
(3,399)
-
16,742
(240)
13,220
276,229
13,980
(560)
872
2,160
292,681

302,871
(3,165)
387
24,986
(2,287)
32,960
355,752
13,084
(1,433)
1,853
28,433
397,689

(425,696)
7,291
(437)
(16,247)
1,527
(32,352)
(465,914)
(21,923)
1,040
(3,300)
(33,603)
(523,700)

139

Balance
31 Dec 16

£’000

28,069
(528)
(85)
(173)
4,358
(6,231)
(4,699)
20,711

Balance
31 Dec 15

£’000

22,149
(1,192)
(50)
665
3,942
(8,150)
(2,599)
14,765

Total

£’000

127,081
727
(50)
25,481
(1,000)
13,828
166,067
5,141
(953)
(575)
(3,010)
166,670

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

28. Acquisition of Subsidiary Undertakings and Businesses

On 5 January 2016, the Group completed the acquisition of the entire share capital (100%) of T Brewer & Co. Limited (“T Brewer”), a London based
specialist timber business that trades from 3 branches in Clapham, Enfield and Amersham. The Group also acquired 100 per cent of the share
capital of Allsand Supplies Limited (“Allsands”) on 1 February 2016. Allsands is a single branch general builders Merchanting business located in
Larkfield, Kent. Both acquisitions were in the merchanting segment and were strategic in nature to grow the merchanting business in the UK.
Goodwill on these acquisitions reflects the anticipated purchasing and operational synergies that should be realised as part of the enlarged Group.
Neither of these acquisitions are material and thus do not require individual disclosure.

Acquisitions would have contributed revenue of £19.4 million and operating profit of £1.2 million in the year ended 31 December 2016 on the
assumption that they had been acquired on 1 January.

Acquisitions completed in 2016 contributed revenues of £19.0 million and operating profit of £1.5 million for the period from the date of acquisition
until the year end. In 2016, the Group incurred acquisition costs of £0.7m (2015: £1.3m). These have been included in operating costs in the Group
Income Statement.

The provisional fair values of assets and liabilities acquired in 2016 are set out below:

Property, plant and equipment (Note 13)
Intangible assets – customer relationships (Note 15)
Intangible assets – trade names (Note 15)
Inventories (Note 27)
Trade and other receivables (Note 27)
Trade and other payables (Note 27)
Corporation tax
Deferred tax liability (Note 26)
Cash acquired
Net assets acquired
Goodwill (Note 12)
Consideration

Satisfied by:
Cash paid
Net cash outflow – arising on acquisitions

Cash consideration
Less: cash and cash equivalents acquired

Total

£’000

5,800
2,590
225
872
1,853
(3,300)
(291)
(1,270)
2,586
9,065
5,380
14,445

14,445

14,445
(2,586)
11,859

140

Grafton Group plc28. Acquisition of Subsidiary Undertakings and Businesses (continued)

The fair value of identifiable net assets acquired in 2016 was £9.1 million.

Total acquisitions

Fair Value

Consideration

£’000

Goodwill

£’000

9,065

14,445

5,380

Any adjustments to these provisional fair values within the twelve month timeframe from the date of acquisition will be disclosed in the 2017
Annual Report as stipulated by IFRS3 Business Combinations.

A measurement period adjustment on finalisation of the IFRS 3 Business Combination accounting for the Parkes Services Limited acquisition,
completed in 2015, resulted in a reduction in goodwill of £0.5m. In addition, a measurement period adjustment on finalisation of the IFRS 3
Business Combination accounting for the Wollens Limited acquisition, also completed in 2015, was recorded during the year. This resulted in an
additional payment of £0.7m.

29. Reconciliation of Net Cash Flow to Movement in Net Debt

Net (decrease)/increase in cash and cash equivalents
Net movement in derivative financial instruments
Loans disposed with group businesses
Cash flow from movement in debt and lease financing
Change in net debt resulting from cash flows

Translation adjustment
Movement in net debt in the year

Net debt at 1 January
Net debt at 31 December

2016

£’000

2015

£’000

(12,461)
(203)
-
68,144
55,480
(38,217)
17,263
(113,558)
(96,295)

33,766
(245)
130
(79,966)
(46,315)
8,073
(38,242)
(75,316)
(113,558)

141

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

30. Capital Expenditure Commitments

At the year end the following commitments authorised by the Board had not been provided for in the financial statements:

Contracted for
Not contracted for

Capital expenditure commitments are analysed by geography in the table below:

UK
Ireland
Netherlands
Belgium

2016

£’000

5,773
67,505
73,278

2016

£’000

67,678
2,873
421
2,306
73,278

2015

£’000

4,098
55,085
59,183

2015

£’000

56,302
1,125
-
1,756
59,183

Amounts relating to intangibles included above

3,025

7,199

31. Operating Leases

Total commitments payable under non-cancellable operating leases are as follows:

Operating lease payments due:

Within one year
Between two and five years
Over five years

Land and
buildings

2016

£’000

56,042
208,219
368,875
633,136

Other

2016

£’000

5,940
10,136
-
16,076

Total

2016

£’000

61,982
218,355
368,875
649,212

Land and
buildings

2015

£’000

52,109
199,529
521,662
773,300

Other

2015

£’000

4,318
7,375
1,296
12,989

Total

2015

£’000

56,427
206,904
522,958
786,289

The Group leases a number of properties under operating leases. The leases typically run for a period of 15 to 25 years. Rents are generally reviewed
every five years.

During the year ended 31 December 2016 £59.6 million (2015: £54.3 million) was recognised as an expense in the income statement in respect of
operating leases.

142

Grafton Group plc
32. Pension Commitments

A number of defined benefit and defined contribution pension schemes are operated by the Group and the assets of the schemes are held in
separate trustee administered funds.

The actuarial reports are not available for public inspection.

IAS 19 – Employee Benefits

The Group operates four defined benefit schemes in Ireland, two defined benefit schemes in the UK, one scheme in the Netherlands and three
schemes in Belgium for qualifying employees (the “DB Schemes”). All schemes except one are closed to new entrants. The DB Schemes are
administered by trusts that are legally separated from the Group. The trustees of the DB Schemes are required by law to act in the interest of the
members of the DB Schemes. The trustees of the DB Schemes are responsible for the investment policy of the schemes.

Under the DB Schemes, the employees are entitled to receive an annual payment on attainment of normal retirement age which in Ireland, is
in line with the State pension age (i.e. age 66, 67 or 68 depending on year of birth) and in the UK is age 65 for the majority of benefits. The level
of benefit payable depends on length of service. It also depends, in the case of Ireland, on a member’s final pensionable salary near retirement
(excluding salary increases up to and including 1st January 2019) and in the case of the UK, on a member’s 2013 pensionable salary. Salary for
pension purposes is integrated with the State Pension. The DB Schemes provide post retirement pension increases in the UK only and spouse’s
death in retirement pensions in both Ireland and the UK. No other post-retirement benefits are provided to employees.

Defined Benefit Pension Schemes – Principal Risks

Through its defined benefit pension schemes the Group is exposed to a number of risks the most significant of which are detailed below:

Asset volatility: Under IFRS the assets of the Group’s defined benefit pension schemes are reported at fair value. The majority of the schemes’
assets comprise of equities, bonds and property all of which may fluctuate significantly from one reporting period to the next.

Discount rates: the discount rates used in calculating the present value of scheme liabilities are determined by reference to market yields at the
balance sheet date of high quality corporate bonds consistent with the currency and term of the retirement benefit obligations. Changes to the
discount rates can have a very significant impact on the amount of defined benefit scheme liabilities.

Salary and price inflation: Some of the Group’s pension obligations are salary and inflation linked. Higher salary and price inflation will lead to
higher liabilities. In 2013 the Group agreed new arrangements on pensionable salary increases which reduced this risk as noted in the financial
assumptions. The exposure to inflation risk relates to the granting of inflation linked pension increases in the UK and also to revaluation of
deferred benefits in both the UK and Ireland.

Longevity risk: In the majority of cases the Group’s defined benefit pension schemes provide benefits for life. Increases in life expectancy will
therefore give rise to higher liabilities.

The nature of these risks is not materially different across all schemes with the exception of salary and price inflation risks which differ between
the UK and Ireland.

143

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

32. Pension Commitments (continued)

Financial Assumptions

The financial assumptions used to calculate the retirement benefit liabilities under IAS 19 were as follows:

At
31 Dec 2016
Irish schemes

At
31 Dec 2016
UK schemes

At
31 Dec 2015
Irish schemes

At
31 Dec 2015
UK schemes

Valuation method
Rate of increase in salaries
Rate of increase of pensions in payment
Discount rate
Inflation rate increase

*2.50% applies from 2 January 2019 (31 December 2015: 2.60% from 2 January 2019).
** Pensionable salaries are not adjusted for inflation.
***The inflation assumption shown for the UK is based on the Consumer Price Index (CPI).

Projected Unit Projected Unit Projected Unit Projected Unit
0.00%**
3.35%
3.95%
2.50%***

0.00%**
3.10%
2.90%
2.20%***

2.50%*
-
1.80%
1.30%

2.60%*
-
2.35%
1.40%

The future life expectancy at age 65 for males and females (currently aged 55 and 65), inherent in the mortality tables used for the 2016 and 2015
year end IAS 19 disclosures are as follows:

2016 Mortality (years)

Future Pensioner aged 65:

Current Pensioner aged 65:

Ireland

2015 Mortality (years)

Male
Female
Male
Female

22.4
24.7
21.1
23.6

22.5
24.8
21.7
23.8

Future Pensioner aged 65:

Current Pensioner aged 65:

Male
Female
Male
Female

Ireland

22.3
24.6
20.9
23.5

22.6
24.9
21.8
24.0

Scheme Assets

The assets in these schemes are analysed below:

UK equities
Overseas (non- UK) equities
Government bonds
Corporate bonds
Property
Other
Cash

Actuarial value of liabilities

Deficit in the schemes

Represented by:
Retirement benefit assets
Retirement benefit obligations

23
42
10
4
4
14
3
100

2016

£’000

50,271
92,264
23,258
9,595
10,129
30,471
5,978
221,966
(253,251)

(31,285)

796
(32,081)
(31,285)

24
46
10
7
6
3
4
100

2015

£’000

45,093
86,214
17,788
13,730
11,919
4,672
7,391
186,807
(203,430)

(16,623)

744
(17,367)
(16,623)

Some of the investment funds in which the schemes invest, held shares in Grafton Group plc. The total amount held in Grafton Group plc shares
was £Nil at 31 December 2016 (31 December 2015: £34,000).

144

Grafton Group plc32. Pension Commitments (continued)

The net pension scheme deficit of £31,285,000 is shown in the Group balance sheet as (i) retirement benefit obligations (non-current liabilities) of
£32,081,000 of which £17,282,000 relates to the Euro schemes and £14,799,000 relates to one UK scheme and (ii) retirement benefit assets (non-
current assets) of £796,000 relating to a second UK scheme (£449,000) and one Euro scheme (£347,000).

In 2015, the net pension scheme deficit of £16,623,000 is shown in the Group balance sheet as (i) retirement benefit obligations (non-current
liabilities) of £17,367,000 of which £10,125,000 relates to the Euro schemes and £7,242,000 relates to one UK scheme and (ii) retirement benefit assets
(non-current assets) of £744,000 relating to a second UK scheme (£528,000) and one Euro scheme (£216,000). Changes in the rates used to discount
liabilities, in line with changes in corporate bond rates, decreased scheme liabilities by £12.0 million.

The actual return on plan assets is set out below:

Actual return on plan assets

Plan assets are comprised as follows:

Equity – UK
Equity – Other
Bonds - Government
Bonds – Corporate
Property
Cash
Other
Total

2016

£’000

2015

£’000

22,535

5,084

Quoted

£’000

Unquoted

£’000

49,870
91,877
23,100
9,029
10,000
5,925
28,965
218,766

401
387
158
566
129
53
1,506
3,200

Total

£’000

50,271
92,264
23,258
9,595
10,129
5,978
30,471
221,966

Sensitivity of Pension Liability to Judgemental /Assumptions

Assumption

Discount rate
Rate of salary growth
Rate of inflation*
Life expectancy

Change in Assumptions

Increase by 0.25%
Increase by 0.25%
Increase by 0.25%
Increase by 1 year

Impact on Scheme Liabilities

Reduce by 4.5%
Increase by 0.7%
Increase by 2.5%
Increase by 3.6%

*Assumed that an increase of 0.25% in the inflation assumption would also give rise to an increase in the salary increase assumption of 0.25%.

The above sensitivity analysis is derived through changing an individual assumption while holding all other assumptions constant.

145

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

32. Pension Commitments (continued)

The following table provides a reconciliation of the scheme assets (at bid value) and the actuarial value of scheme liabilities:

Assets

Liabilities

Net asset/(deficit)

Year Ended 31 December

At 1 January

Acquired in year
Interest income on plan assets
Contributions by employer
Contributions by members
Benefit payments
Transfer in of assets/(liabilities)
Current service cost
Past service credit – non-recurring
Past service credit
Other long term benefit gain
Curtailment gain
Interest cost on scheme liabilities
Remeasurements

Actuarial gain/(loss) arising from:
- experience variations
- financial assumptions
- demographic assumptions
Return on plan assets excluding interest income
Translation adjustment
At 31 December

Related deferred tax asset (net)
Net pension liability

Expense Recognised in Operating Costs

Past service credit (i) - non-recurring (Note 4)

Current service cost
Other long term benefit gain
Past service credit (ii)
Total operating charge / (credit)

2016

£’000

186,807
-
6,235
3,610
731
(6,942)
1,162
-
-
-
-
-
-

-
-
-
16,300
14,063
221,966

2015

£’000

189,203
-
5,394
2,787
1,074
(6,603)
-
-
-
-
-
-
-

-
-
-
(310)
(4,738)
186,807

2016

£’000

2015

£’000

(203,430)
-
-
-
(731)
6,942
(1,162)
(2,411)
-
-
148
169
(6,745)

(2,196)
(29,364)
1,450
-
(15,921)
(253,251)

(222,163)
(397)
-
-
(1,074)
6,603
-
(2,488)
2,945
128
-
-
(6,291)

2,491
10,041
920
-
5,855
(203,430)

2016

£’000

(16,623)
-
6,235
3,610
-
-
-
(2,411)
-
-
148
169
(6,745)

(2,196)
(29,364)
1,450
16,300
(1,858)
(31,285)
4,699
(26,586)

2016

£’000

-
-
2,411
(148)
-
2,263

2015

£’000

(32,960)
(397)
5,394
2,787
-
-
-
(2,488)
2,945
128
-
-
(6,291)

2,491
10,041
920
(310)
1,117
(16,623)
2,599
(14,024)

2015

£’000

(2,945)
(2,945)
2,488
-
(128)
(585)

(i) In 2015, the past service credit of £2,945,000 arose from the change in the basis for increasing pensions to CPI from RPI.
(ii) The past service credit of £128,000 in 2015 arose from the 0.15% pension levy imposed by the Irish Government on the Group’s Irish plan assets.

146

Grafton Group plc32. Pension Commitments (continued)

Recognised Directly in Other Comprehensive Income

Remeasurement (loss)/gain on pensions
Deferred tax on pensions

The expense/(credit) is recognised in the following lines in the income statement:

Operating costs/(income)
Net finance costs on pension scheme obligations
Total operating charge

Actuarial Valuations – Funding Requirements

2016

£’000

(13,810)
2,102
(11,708)

2016

£’000

2,263
510
2,773

2015

£’000

13,142
(1,992)
11,150

2015

£’000

(585)
897
312

Employees pay contributions equal to a percentage of pensionable salary. The percentage payable varies by scheme. Triennial actuarial valuations
are carried out to determine the Group’s contribution rate required under the schemes.

In Ireland, the DB Schemes are also assessed annually against the Funding Standard (the statutory minimum funding requirement). As most
of the DB Schemes did not satisfy the Funding Standard, funding proposals are in place to address any Funding Standard deficits. The funding
proposals are agreed between the Group and the trustees of the relevant schemes and are designed to restore the Funding Standard positions by
2023.

In the UK, the DB Schemes are subject to the Statutory Funding Objective under the Pensions Act 2004. Valuations of the DB Schemes are carried
out at least once every three years to determine whether or not the Statutory Funding Objectives are met. As part of the process, the Group must
agree with the Trustees of the DB Schemes the contributions to be paid to address any shortfalls against the Statutory Funding Objectives and
contributions to pay for future accrual of benefits.

No explicit external contracts have been entered into to provide liability matching such as longevity swaps or annuity purchase. Following
a recent strategy review the scheme’s investments are being more closely aligned to the liabilities by term and nature in order to minimise
volatility and target full funding on the local statutory funding measures.

The contributions expected to be paid to the Group’s defined benefit schemes in 2017 total approximately £4.3 million.

Average duration and scheme composition

Ireland

2016

2015

2016

2015

Average duration of defined benefit obligation (years)

19.00

18.00

18.90

Allocation of total defined benefit obligation by participant

Active plan participants
Deferred plan participants
Retirees

2016

2015

36%
29%
35%
100%

36%
25%
39%
100%

147

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016
Notes to the Group Financial Statements

(continued)

33. Share Based Payments

The Group’s employee share schemes are equity settled share based payments as defined in IFRS 2 Share Based Payments. The total share based
payments expense for the year charged to the income statement was £3,232,000 (2015: £4,461,000), analysed as follows;

LTIP
UK SAYE Scheme

Details of the schemes operated by the Group are set out below:

Long Term Incentive Plan (LTIP)

2016

£’000

3,046
186
3,232

2015

£’000

3,934
527
4,461

A Long Term Incentive Plan (LTIP) was introduced in 2011. Details of the plan are set out in the Report of the Remuneration Committee on
Directors’ Remuneration on pages 54 to 70. Awards over 837,007 Grafton Units were granted under the plan on 14 April 2016 (2015: 707,588).

A summary of the award granted on 14 April 2016 is set out below:

Grant date

Share price at date of award
Exercise price
Number of employees
Number of share awards
Vesting period
Expected volatility
Award life
Expected life
Risk free rate
Expected dividends expressed as dividend yield

Valuation model - EPS
Valuation model - TSR
Fair value of share award – EPS component
Fair value of share award – TSR component

Grafton Group LTIP

2016

2015

14 April 2016

17 April 2015

£7.25
N/A
215
837,007
3 years
23.7%
3 years
3 years
0.45%
1.75%

£8.10
N/A
207
707,588
3 years
29.0%
3 years
3 years
0.71%
1.47%

Binomial model

Black Scholes / Monte-Carlo Black Scholes / Monte-Carlo

£6.88
£3.94

£7.75
£4.75

The expected volatility, referred to above, is based on historic volatility over the last 3 years. The expected life is equal to the vesting period. The
risk free rate of return is the yield on bonds from the Bank of England of a term consistent with the life of the award at the grant date. The fair
values of share awards granted under the 2011 plan were determined taking account of peer group total share return volatility together with the
above assumptions.

148

Grafton Group plc33. Share Based Payments (continued)

A reconciliation of all share awards granted under the LTIP is as follows:

Outstanding at 1 January

Granted in year
Forfeited#
Expired unvested
Exercised
Outstanding at 31 December

2016

Number

2015

Number

2,563,157
837,007
(144,797)
(30,677)
(881,392)
2,343,298

3,035,869
707,588
-
(127,870)
(1,052,430)
2,563,157

#Share entitlements forfeited by employees who have left the Group and have no further entitlements under the scheme.

At 31 December 2016 and 31 December 2015 none of the LTIPs were exercisable.

Share Schemes

Up to April 2009 key executives could acquire shares in the Group so as to provide an incentive to perform strongly over an extended period and
to align their interests with those of shareholders. Under the terms of the 1999 Grafton Group Share Scheme, two types of share were available
subject to the conditions set out below:

(i) Basic shares which cannot be converted before the expiration of five years, unless the Remuneration Committee agrees to a shorter period
which shall not be less than three years, and may be converted any time after that to the end of their contractual life provided the Company’s
earnings per share has grown at not less than the rate of growth in the Consumer Price Index plus 5 per cent compounded during that period.
Basic shares granted after 8 May 2008 cannot be converted before the expiration of three years.

(ii) Second tier shares which cannot be converted before the expiration of five years and at any time thereafter up to the end of their contractual
life, only if over a period of at least five years the growth in the Group’s earnings per share would place it in the top 25 per cent of the companies
listed on the Irish Stock Exchange Index over the same period and provided that such shares shall be acquired only if the Company’s earnings
per share growth over the relevant period is greater, by not less than 10 per cent on an annualised basis, than the increase in the Consumer Price
Index over that period.

The share scheme had a ten year life for the award of entitlements and this period expired in 2009. The percentage of share capital which may be
issued under the scheme and individual grant limits complied with Institutional Guidelines.

The number of Grafton Units issued during the year under the Company’s Executive Share Schemes was Nil (2015: Nil). Entitlements outstanding
at 31 December 2016 amounted to 2,440,001 (2015: 3,524,501). Grafton Units may be acquired, in accordance with the rules of the scheme, at prices
ranging between €1.66 and €8.48 during the period to 2019.

A reconciliation of share entitlements under the Grafton Group Share Option Scheme and the 1999 Grafton Group Share Scheme is as follows:

Outstanding at 1 January

Forfeited#
Expired*
Outstanding at 31 December

2016

2015

Weighted average
exercise price
€

Number

Weighted average
exercise price
€

Number

3,524,501
(257,000)
(827,500)
2,440,001

5.94
3.86
11.50
4.27

5,082,501
(579,000)
(979,000)
3,524,501

6.50
7.76
8.11
5.94

#Share entitlements forfeited by employees who have left the Group and have no further entitlements under the scheme.
*Performance conditions not met.

149

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

33. Share Based Payments (continued)

Share entitlements are exercisable within six months upon a change of control of the Company. The weighted average remaining life of the share
entitlements is 1.6 years (2015: 2.2 years).

At 31 December 2016 none of the share entitlements were exercisable as the conditions for exercise were not fulfilled before the year-end.

UK SAYE Scheme

Options over 593,675 (2015: 936,083) Grafton Units were outstanding at 31 December 2016, pursuant to the 2014 three year saving contracts under
the Grafton Group (UK) plc Savings Related Share Option Scheme at a price of £5.97. These options are normally exercisable within a period of six
months after the third anniversary of the savings contract, being April 2018 for the 2014 SAYE scheme.

The number of Grafton Units issued during the year under the Company’s 2012 SAYE Scheme was 188,135 (2015: 1,577,781) and the total
consideration received amounted to £439,000 (2015: £3,267,000). Options forfeited in the year were 21,973 (2015: 49,811).

The number of Grafton Units issued during the year under the Company’s 2014 SAYE Scheme to good leavers was 4,925 (2015: 586) and the total
consideration received amounted to £30,000 (2015: £4,000). Options forfeited in the year were 127,375 (2015: 79,369).

A reconciliation of options granted under the 2012 Grafton Group (UK) plc Savings Related Share Option Scheme is as follows:

Outstanding at 1 January

Forfeited
Exercised
Outstanding at 31 December

2016
Option price
€

2.85
2.85
2.85

Number

210,108
(21,973)
(188,135)
-

Number

1,837,700
(49,811)
(1,577,781)
210,108

A reconciliation of options granted under the 2014 Grafton Group (UK) plc Savings Related Share Option Scheme is as follows:

Outstanding at 1 January

Forfeited
Exercised
Outstanding at 31 December

The weighted average share price for the period was £6.03.

2016
Option price
£

5.97
5.97
5.97

Number

725,975
(127,375)
(4,925)
593,675

Number

805,930
(79,369)
(586)
725,975

2015
Option price
€

2.85
2.85
2.85

2015
Option price
£

5.97
5.97
5.97

At 31 December 2016 and 31 December 2015 none of the 2014 UK SAYE shares were exercisable. The 2012 SAYE scheme matured on 1 November 2015.
The weighted average remaining life is 1.3 years.

34. Accounting Estimates and Judgements

The Group’s main accounting policies affecting its results and financial condition are set out on pages 91 to 99. Judgements and assumptions have
been made by management by applying the Group’s accounting policies in certain areas. Actual results may differ from estimates calculated using
these judgements and assumptions. Key sources of estimation uncertainty and critical accounting judgements are as follows:

150

Grafton Group plc34. Accounting Estimates and Judgements (continued)

Goodwill

The Group has capitalised goodwill of £566.2 million at 31 December 2016 (2015: £521.5 million) as detailed in Note 12. Goodwill is required to be
tested for impairment at least annually or more frequently if changes in circumstances or the occurrence of events indicate potential impairment
exists. The Group uses value in use calculations to determine the recoverable amount of cash generating units containing goodwill. Value in use
is calculated as the present value of future cash flows. In calculating value in use, management judgement is required in forecasting cash flows
of the segments and in selecting an appropriate discount rate and the nominal growth rate in perpetuity. A measurement period adjustment of
£0.5 million was recognised by the Group in 2016 (2015: £Nil). In addition, the branch closures in the traditional UK merchanting business in 2016
resulted in a write off of goodwill amounting to £0.5 million (2015: £Nil).

Retirement Benefit Obligations

The Group operates a number of defined benefit retirement plans which are as set out in Note 32. The Group’s total obligation in respect of defined
benefit plans is calculated by independent, qualified actuaries and updated at least annually and totals £253.3 million at 31 December 2016 (2015:
£203.4 million). Plan assets at 31 December 2016 amounted to £222.0 million (2015: £186.8 million) giving a net scheme deficit of £31.3 million (2015:
£16.6 million). The size of the obligation is sensitive to actuarial assumptions. The key assumptions are the discount rate, the rate of inflation, life
expectancy, pension benefits and rate of salary increases.

Insurance Provisions

Insurance provisions of £13.1 million (2015: £11.9 million) shown in Note 23 were based on a review of self-insured claims undertaken by an
independent firm of actuaries and consultants. Claims in excess of specified limits are covered by external insurers.

Onerous Lease Provisions

Onerous lease provisions of £12.7 million (2015: £8.0 million) shown in Note 23 relate to the expected cost to the Group of onerous property leases
and are based on the present value of unavoidable costs of meeting the obligations under lease contracts where the unavoidable costs exceed the
economic benefits expected to be received under these contracts. Changes in trading patterns from year to year may impact forecast cashflows
and alter the amount and timing of outflows.

Taxation

Management is required to make judgements and estimates in relation to taxation provisions and exposures. In the ordinary course of business,
the Group is party to transactions for which the ultimate tax determination may be uncertain. As the Group is subject to taxation in a number
of jurisdictions, an open dialogue is maintained with Revenue Authorities with a view to the timely agreement of tax returns. The amounts
provided/recognised for tax are based on management’s estimate having taken appropriate professional advice. If the final determination of these
matters is different from the amounts that were initially recorded such differences will impact the income tax and deferred tax provisions and
assets in the period in which the determination was made.

Investment Properties and Properties Held for Sale

The Group holds investment properties of £21.7 million (2015: £17.8 million) and properties held for sale of £8.4 million (2015: £10.8 million). Details
on the fair value of the investment properties and a number of the properties held for sale is set out and explained in Note 13.

Rebate Income

Rebates from suppliers represent a significant source of income for the Group each year. The nature of the arrangements in place means that a
large proportion of the rebates due to the Group are not collected until after the year end. The calculation of rebate income in the year and the
rebate receivable at year end is based on the agreements in place with suppliers. Rebate is accrued in the year as it is earned. Due to the supplier
specific nature of each arrangement the calculations can be complex and requires management to make estimates in the absence of any supplier
confirmations.

151

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Group Financial Statements

(continued)

34. Accounting Estimates and Judgements (continued)

Valuation of Inventory

Inventory comprises raw materials, finished goods and goods purchased for resale. Provisions are made against slow moving, obsolete and
damaged inventories for which the net realisable value is estimated to be less than cost. Determining the net realisable value of the wide range
of products held in many locations requires judgement to be applied to determine the likely saleability of products and the potential prices that
can be achieved. In arriving at any provisions for net realisable value, the Directors take into account the age, condition, quality of the products
in stock and recent sales trends. The actual realisable value of inventory may differ from the estimated value on which the provision is based. The
Group held provisions in respect of inventory balances at 31 December 2016 amounting to £31.7 million (2015: £20.7 million).

35. Related Party Transactions

The principal related party transactions that require disclosure under IAS 24: Related Party Disclosures relate to subsidiaries, key management
personnel and post-employment benefit plans.

Subsidiaries

Sales to and purchases from, together with outstanding payables and receivables to and from, subsidiaries are eliminated in the preparation of the
consolidated financial information in accordance with IFRS 10, Consolidated Financial Statements.

Key Management Personnel

The term key management personnel for 2016 is the Board of Grafton Group plc and the Company Secretary/Group Financial Controller. The cost
of key management personnel is analysed in Note 6 to the Group Financial Statements. The Report of the Remuneration Committee on Directors’
Remuneration on pages 54 to 70 provides detailed disclosure for 2016 and 2015 of salaries, fees, performance-related pay, pension allowance, other
benefits and entitlements to acquire Grafton Units in accordance with the rules of the 1999 Grafton Group Share Scheme and awards granted under
the LTIP.

During the year, three Directors were appointed to the Board of Grafton Group plc.

Post-Employment Benefit Plans

Pension commitments to existing and former employees under defined benefit pension scheme arrangements are disclosed in Note 32 to the
Group Financial Statements.

36. Events after the Balance Sheet Date

On 5 January 2017, the Group completed the acquisition of 100 per cent of the issued share capital of Gunters en Meuser B.V. (“G&M”), the market
leader in the distribution of ironmongery, tools and fixings in the Greater Amsterdam Area. The acquisition of G&M will strengthen and
complement the market position of the Group’s existing business in the Netherlands ironmongery, tools and fixings market. G&M trades from
14 branches. The estimated net consideration is €36.2 million (£31.0 million). Acquisition-related costs amounted to £0.3m. Due to the short
time frame between completion date and the date of issuance of this report, it was not possible to reliably estimate the fair values of assets and
liabilities or the goodwill amount associated with this acquisition.

There have been no other material events subsequent to 31 December 2016 that would require adjustment to or disclosure in this report.

37. Approval of Financial Statements

The Board of Directors approved the Group Financial Statements on pages 85 to 152 on 15 March 2017.

152

Grafton Group plcCompany Balance Sheet
As at 31 December 2016

ASSETS

Non-current assets

Intangible assets
Property, plant and equipment
Deferred tax asset
Investments in subsidiary undertakings
Financial assets
Receivables from Group companies
Total non-current assets

Current assets

Receivables from Group companies
Other receivables
Cash and cash equivalents
Total current assets

Total assets

EQUITY

Capital and reserves

Equity share capital
Share premium account
Capital redemption reserve
Shares to be issued reserve
Retained earnings
Treasury shares held
Total equity

LIABILITIES

Current liabilities

Payables to Group companies
Other payables
Deferred tax liabilities
Current income tax liabilities
Total current liabilities

Total liabilities

Total equity and liabilities

On behalf of the Board

Gavin Slark
Director
15 March 2017

David Arnold
Director

Notes

2016

€’000

2015

€’000

3
3
9
4
4
5

5
5

6
6

8
8
9

130
578
362
531,173
13
13,991
546,247

1,081,436
7,547
5,372
1,094,355
1,640,602

11,880
300,345
905
10,617
931,237
(5,746)
1,249,238

384,589
6,749
26
-
391,364
391,364
1,640,602

105
774
511
373,768
13
17,820
392,991

680,140
6,305
8,351
694,796
1,087,787

11,826
299,782
905
10,964
349,954
(5,746)
667,685

408,956
11,075
71
-
420,102
420,102
1,087,787

153

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Company Cash Flow Statement
For the year ended 31 December 2016

Profit before tax

Finance income
Finance expense
Operating profit

Depreciation
Amortisation of intangible assets
Share-based payments charge
Contributions to pension schemes in excess of IAS 19 charge
Asset impairment
Movement of Group payables
Movement of Group receivables
(Decrease) in working capital
Cash (used)/generated from operations

Interest paid
Income taxes paid
Cash (outflows)/inflows from operating activities

Investing activities

Inflows

Interest received

Outflows

Purchase of property, plant and equipment
Purchase of intangible assets

Cash flows from investing activities

Financing activities

Inflows

Proceeds from the issue of share capital
Cash flows from financing activities

Net (decrease)/increase in cash and cash equivalents

Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December

Cash and cash equivalents are broken down as follows:

Cash at bank and short-term deposits

* Prior year comparatives have been restated to conform to current year presentation.

154

Notes

3
3

13
4

3
3

2016

€’000

577,099
(32)
214
577,281
205
28
1,292
-
15,005
(24,367)
(567,217)
(5,568)
(3,341)
(214)
(11)
(3,566)

(9)
(53)
(62)
(30)

617
617

(2,979)

8,351
5,372

2015*

€’000

10,617
(41)
165
10,741
196
-
1,523
(2)
-
68,197
(79,402)
(1,011)
242
(165)
(8)
69

(131)
(105)
(236)
(195)

4,554
4,554

4,428

3,923
8,351

5,372

8,351

Grafton Group plc
Company Statement of Changes in Equity

Equity share
capital

Share
premium
account

Capital
redemption
reserve

Shares to
be issued
reserve

Retained
earnings

Treasury
shares

Total equity

€’000

Year to 31 December 2016

At 1 January 2016
Profit after tax for the financial year
Total other comprehensive income
Remeasurement loss on pensions (net of tax)
Total comprehensive income

Transactions with owners of the Company recognised

directly in equity

Issue of Grafton Units
Share based payments charge
Transfer from shares to be issued reserve

At 31 December 2016

Year to 31 December 2015

At 1 January 2015
Profit after tax for the financial year
Total other comprehensive income

Remeasurement loss on pensions (net of tax)
Total comprehensive income
Transactions with owners of the Company recognised

directly in equity

Issue of Grafton Units
Share based payments charge
Transfer from shares to be issued reserve

At 31 December 2015

11,826
-

299,782
-

-
-

54
-
-
54
11,880

563
-
-
563
300,345

11,694
-

295,360
-

-
-

132
-
-
132
11,826

4,422
-
-
4,422
299,782

905
-

-
-

-
-
-
-
905

905
-

-
-

-
-
-
-
905

10,964
-

349,954
576,985

(5,746)
-

667,685
576,985

-
-

-
576,985

-
-

-
576,985

-
3,951
(4,298)
(347)
10,617

-
-
4,298
4,298
931,237

-
-
-
-
(5,746)

617
3,951
-
4,568
1,249,238

9,846
-

334,514
10,414

(5,746)
-

646,573
10,414

-
-

(2)
10,412

-
-

(2)
10,412

-
6,146
(5,028)
1,118
10,964

-
-
5,028
5,028
349,954

-
-
-
-
(5,746)

4,554
6,146
-
10,700
667,685

155

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016
Notes to the Company Financial Statements

1. Income Statement

In accordance with Section 304(2) of the Companies Act 2014, the income statement and related notes of the parent undertaking have not been
presented separately in these financial statements. There was a profit after tax of €577.0 million (2015: profit of €10.4 million) attributable to the
parent undertaking for the financial year.

2. Statutory and Other Information

The following items have been charged to the company income statement:

Statutory audit (refer to Note 3 of Group Financial Statements)
Depreciation
Intangible asset amortisation
Operating lease costs
Directors’ remuneration

2016

€’000

60
205
28
114
3,866

The Directors’ remuneration is set out in detail in the Report of the Remuneration Committee on Directors’ Remuneration on pages 54 to 70.

The average number of persons employed by the Company during the year was 29 (2015: 25).

The aggregate remuneration costs of employees were:
Wages and salaries
Social welfare costs
Share-based payments charge
Defined contribution and pension related costs
Charged to operating profit

Net finance cost on pension scheme obligations
Charged to income statement

Actuarial loss on pension scheme
Total employee benefit cost

Key Management

The cost of key management including Directors is set out in the table below:

Number of Individuals

Short-term employee benefits
Share-based payment charge
Retirement benefits expense
Charged to operating profit

156

2015

€’000

60
196
-
114
4,012

2015

€’000

5,160
288
1,523
521
7,492
-
7,492
2
7,494

2016

€’000

5,099
313
1,292
439
7,143
-
7,143
-
7,143

2016

2015

2016

€’000

3,148
1,093
321
4,562

2015

€’000

3,193
1,156
354
4,703

Grafton Group plc3. Property, Plant and Equipment & Intangible Assets

Plant and Equipment & Intangible Assets in the Company are stated as follows:

Company

Cost

At 1 January
Additions
At 31 December

Depreciation

At 1 January
Charge for year
At 31 December

Net book amount

At 31 December

At 1 January

Plant and Equipment

Intangible Assets*

2016

€’000

3,010
9
3,019

2,236
205
2,441

578
774

2015

€’000

2,879
131
3,010

2,040
196
2,236

774
839

2016

€’000

2015

€’000

105
53
158

-
28
28

130
105

-
105
105

-
-
-

105
-

*The computer software additions of €0.1 million at 31 December 2016 (2015: €0.1 million) reflects the cost of the Company’s investment on upgrading the IT systems and
infrastructure.

4. Financial Assets

At 1 January 2015

Capital contribution – share-based payments
At 31 December 2015

Capital contribution – share-based payments
Additions in the year *
Impairments during the year**
At 31 December 2016

Other
investments

Investments
in subsidiary
undertakings

€’000

13
-
13
-
-
-
13

369,145
4,623
373,768
2,660
169,750
(15,005)
531,173

Total

€’000

369,158
4,623
373,781
2,660
169,750
(15,005)
531,186

* During the year the company acquired shares in a number of subsidiary companies which were satisfied by the assignment of intercompany receivables.
** The impairment charge during the year (2015: €Nil) largely relates to subsidiaries which were liquidated.

Other investments represent sundry equity investments at cost less provision for impairment.

157

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Company Financial Statements

(continued)

5. Trade and Other Receivables

Amounts falling due within one year:

Amounts owed by subsidiary undertakings
Other receivables

Amounts falling due after one year:

Amounts owed by subsidiary undertakings

6. Share Capital and Share Premium

Details of equity share capital and share premium are set out below and in Note 18 to the Group Financial Statements.

2016

€’000

1,081,436
7,547
1,088,983

2015

€’000

680,140
6,305
686,445

13,991

17,820

Issue Price Number of Shares

2016
Nominal Value
€’000

2015
Nominal Value
€’000

235,721,435
193,060

Nil
Nil

881,392
-
236,795,887

4,007,264,395
18,265,684
4,025,530,079

11,787
10

44
-
11,841

39
-
39

11,655
79

-
53
11,787

39
-
39

11,880

11,826

2016

€’000

299,782
563
300,345

2015

€’000

295,360
4,422
299,782

Issued and fully paid:

Ordinary shares

At 1 January

Issued under UK SAYE scheme*
2011 Long Term Incentive Plan

Date awards granted
April 2013 LTIP
April 2012 LTIP
At 31 December

‘A’ ordinary shares

At 1 January

‘A’ ordinary shares issued in year
At 31 December

Total nominal share capital issued

* Refer to Note 33 to the Group Financial Statements which outlines the issue price of both the 2014 and 2012 SAYE Schemes.

Share Premium

Company

At 1 January

Premium on issue of shares under UK SAYE scheme
At 31 December

158

Grafton Group plc7. Financial Instruments and Financial Risk

There is no difference between the fair value and carrying value of the financial assets and financial liabilities for the Company.

The maximum credit risk is represented by the carrying amount of the asset. The cash held at the year-end is primarily held with Bank of Ireland
and HSBC.

The majority of foreign exchange exposure in the Company relates to inter-group balances and transactions.

There is no significant cashflow sensitivity for variable rate instruments in the Company.

31 December 2016

Non-Derivative Financial Liabilities

Payable to Group companies

31 December 2015

Non-Derivative Financial Liabilities

Payable to Group companies

8. Trade and Other Payables

Trade and other payables

Accruals
Amounts owed to subsidiary undertakings

Carrying
amount

€’000

Contractual
cash flow

Within 1 Year

€’000

384,589
384,589

Carrying
amount

€’000

Contractual
cash flow

Within 1 Year

€’000

408,956
408,956

2016

€’000

6,749
384,589
391,338

2015

€’000

11,075
408,956
420,031

159

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Company Financial Statements

(continued)

9. Deferred Taxation

Recognised deferred tax (assets) and liabilities

Assets

2016

€’000

Liabilities

2016

€’000

Net (assets)/
liabilities

2016

€’000

Assets

Liabilities

2015

€’000

2015

€’000

Net (assets)/
liabilities

2015

€’000

Other items

(362)

(336)

(511)

(440)

Recognised in
income

Recognised
in other
comprehensive
income

Foreign
exchange
retranslation

Arising on
acquisitions

€’000

Balance
1 Jan 16

€’000

Balance
31 Dec 16

€’000

Other items

(440)

104

(336)

Recognised in
income

Recognised
in other
comprehensive
income

Foreign
exchange
retranslation

Arising on
acquisitions

€’000

Balance
1 Jan 15

€’000

Balance
31 Dec 15

€’000

Other items

(639)

199

(440)

10. Movement in Working Capital

At 1 January 2015

Movement in 2015
At 1 January 2016

Movement in 2016
At 31 December 2016

11. Reconciliation of Net Cash Flow to Movement in Net Debt

Net (decrease)/increase in cash and cash equivalents
Change in net debt resulting from cash flows

Net cash at 1 January
Net cash at 31 December

Trade and other
receivables

Trade and other
payables

€’000

4,660
1,645
6,305
1,242
7,547

(10,441)
(634)
(11,075)
4,326
(6,749)

2016

€’000

(2,979)
(2,979)
8,351
5,372

Total

€’000

(5,781)
1,011
(4,770)
5,568
798

2015

€’000

4,428
4,428
3,923
8,351

160

Grafton Group plc12. Operating Leases

Total commitments payable under non-cancellable operating leases are as follows:

Operating lease payments due:
Within one year
Between two and five years
Over five years

13. Pension Commitments

Land and
Buildings
2016

€’000

Land and
Buildings
2015

€’000

114
217
-
331

114
331
-
445

A defined benefit scheme and defined contribution pension schemes are operated by the Company and the assets of the schemes are held in
separate trustee administered funds.

The actuarial reports are not available for public inspection.

IAS 19 – Employee Benefits

An actuarial valuation was updated to 31 December 2016 by a qualified independent actuary.

Financial Assumptions

The financial assumptions used to calculate the retirement benefit liabilities under IAS 19 were as follows:

Valuation Method
Rate of increase of pensions in payment
Discount rate
Inflation rate increase

At 31 Dec 2016

At 31 Dec 2015

Company scheme

Projected Unit Projected Unit
-
2.35%
1.40%

-
1.80%
1.30%

The Company’s obligations to the scheme at the end of 2016 and 2015 were limited to providing a pension to an executive who retired in 2009 on a
fixed pension.

161

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Company Financial Statements

(continued)

13. Pension Commitments (continued)

Assets

Liabilities

Net asset/(deficit)

Year ended 31 December

2016
€’000

1,306
30
-
-
(76)
-
-
-
-
96
1,356

2015
€’000

1,382
28
-
-
(76)
-
-
-
-
(28)
1,306

2016
€’000

(1,306)
-
-
-
76
-
-
-
(30)
(96)
(1,356)

2015
€’000

(1,382)
-
-
-
76
-
2
-
(28)
26
(1,306)

At 1 January

Interest income on plan assets
Contributions by employer
Contributions by members
Benefit payments
Current service cost
Past service credit
Settlement loss
Interest cost on scheme liabilities
Remeasurement gains/(losses)
At 31 December

Related deferred tax asset (net)
Net pension liability

Expense recognised in operating costs

Past service credit
Total operating credit

Recognised directly in other comprehensive income

Remeasurement loss on pensions

The credit is recognised in the following lines in the income statement:

Operating credit
Net finance cost on pensions scheme obligations
Total operating credit

No contributions are expected to be paid to the Company’s defined benefit scheme in 2016 (2015: €Nil).

14. Share-Based Payments

Please refer to the Group Share-Based Payments Note (Note 33) set out on pages 148 to 150.

15. Related Party Transactions

2016
€’000

2015
€’000

-
30
-
-
-
-
-
-
(30)
-
-
-
-

2016

€’000

-
-

2016

€’000

-
-

2016

€’000

-
-
-

-
28
-
-
-
-
2
-
(28)
(2)
-
-
-

2015

€’000

2
2

2015

€’000

(2)
(2)

2015

€’000

(2)
-
(2)

The principal related party transactions that require disclosure under IAS 24: Related Party Disclosures relate to subsidiaries, key management
personnel and post employment benefit plans.

162

Grafton Group plc15. Related Party Transactions (continued)

Subsidiaries

The consolidated accounts of the Company and its subsidiaries include the following transactions that have been eliminated on consolidation:
Management charges made by the Company to the subsidiaries of €11.0 million (2015: €11.2 million) for the year ended 31 December 2016; and
Loans were granted to and by the Company to its subsidiaries.

Key Management Personnel

The term key management personnel comprise the Board of Grafton Group plc and the Company Secretary/Group Financial Controller. The cost
of key management personnel is analysed in Note 2 to the Company Financial Statements and in Note 6 to the Group Financial Statements. The
Report of the Remuneration Committee on Directors’ Remuneration on pages 54 to 70 provides detailed disclosure for 2016 and 2015 salaries, fees,
performance-related pay, pension allowance, other benefits and entitlements to acquire Grafton Units in accordance with the rules of the Grafton
Group Share Scheme, and awards granted under the 2011 LTIP.

Post Employment Benefit Plans

Pension commitments to existing and former employees under defined benefit pension scheme arrangements are disclosed in Note 13 to the
Company Financial Statements.

16. Principal Operating Subsidiaries

The principal operating subsidiaries operating in Ireland are:

Name of Company

Grafton Merchanting ROI Limited
Chadwicks Limited
Woodie’s DIY Limited
Panelling Centre Limited

Nature of Business

Builders merchants
Builders merchants
DIY superstores
Kitchen/Bedroom Panel Products

The Company owns 100 per cent of the ordinary shares, the only class of shares in issue, of its principal operating subsidiary undertakings. The registered
office of principal subsidiary undertakings operating in Ireland is c/o Grafton Group plc, Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18.

The principal operating subsidiaries operating in the United Kingdom are:

Name of Company

Grafton Merchanting GB Limited
Macnaughton Blair Limited
Selco Trade Centres Limited
CPI Mortars Limited

Nature of Business

Builders merchants
Builders merchants
Builders merchants
Mortar manufacturers

The Company owns 100 per cent of the share capital of its principal subsidiary undertakings operating in the UK. The registered office of Grafton
Merchanting GB Limited is PO Box 1586, Gemini One, John Smith Drive, Oxford Business Park South, Oxford, OX4 9JF. The registered office of Selco
Trade Centres Limited is First Floor, Boundary House, 2 Wythall Green Way, Wythall, Birmingham, B47 6LW. The registered office of CPI Mortars
Limited is Oak Green House, 250-256 High Street, Dorking, Surrey, RH4 1QT. The registered office of Macnaughton Blair Limited is 10 Falcon Road,
Belfast, BT12 6RD, Northern Ireland.

The principal operating subsidiaries in Belgium are YouBuild NV (formerly BMC Groep NV) (Builders merchants) and Binje Ackermans S.A.
(trading as MPRO). The registered office of YouBuild NV is Ropswalle 26, 8930 Menen, Belgium. The Company owns 65 per cent of the share capital
of YouBuild NV. The registered office of Binje Ackermans S.A. is Avenue du Port 25, 1000 Brussels, Belgium.

The principal operating subsidiaries in the Netherlands are Isero IJzerwarengroep B.V. and Pijnenburg Bouw en Industrie B.V. The registered office
of Isero IJzerwarengroep B.V. is Barwoutswaarder 1, 3449 HE Woerden, the Netherlands. The registered office of Pijnenburg Bouw en Industrie B.V.
is Pegasusweg 4, 5015BZ Tilburg, the Netherlands.

163

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Notes to the Company Financial Statements

(continued)

17. Section 357 Guarantees

Pursuant to the provisions of Section 357, Companies Act, 2014, the Company has guaranteed the liabilities of certain wholly owned subsidiaries in
the Republic of Ireland for the financial year ended 31 December 2016. The following subsidiary undertakings have been exempted from the filing
provisions of Section 347, Companies Act, 2014 and Regulation 20 of the European Communities (Accounts Regulations), 1993, as the conditions set
out in the act have been satisfied.

This guarantee applies to the following wholly owned subsidiaries, whose registered office is c/o Grafton Group plc, Heron House, Corrig Road,
Sandyford Industrial Estate, Dublin 18: Absolute Bathrooms Limited, Athina Limited, Atlantic Home and Garden Centre Limited, Barretts of
Ballinasloe Limited, Beralt Developments Limited, Bluebell Sawmills Limited, Cardston Properties Limited, Chadwicks Limited, Chadwicks
Holdings Limited, Cheshunt Limited, Cork Builders Providers Limited, CPI Limited, Davies Limited, Denningco Limited, Doorplan Ireland
Limited, Drainage Systems Dublin Limited, Dunmore Holdings Limited, Eddie’s Hardware Limited, F&T Buckley (Holdings) Limited, F & T Buckley
Limited, Frank Barrett & Sons Limited, Garvey Builders Providers Limited, Gillespie Building Supplies (Carlow) Limited, Grafton Group Holdings
Limited, Grafton Group Investments Limited, Grafton Group Management Services Limited, Grafton Group Secretarial Services Limited, Grafton
Group Finance plc, Grafton Merchanting ROI Limited, Heatovent Ireland Limited, Heiton Buckley Limited, Heiton Group plc, Heiton McCowen
Limited, Heiton McFerran Limited, House of Woods Limited, J.E. Telford Limited, Jarkin Properties Limited, Kenn Truss Limited, Knottingley
Limited, Lacombe Properties Limited, Leeway Properties Limited, Leo Wright Holdings Limited, Market Hardware Limited, MB Doorplan
Limited, MFP Plastics Limited, MFP Sales Limited, Mooney & O’Dea Limited, Morgan McMahon & Co. Limited, Multy Products (Ireland) Limited,
Paddy Power (Kilbarry) Limited, Panelling Centre Limited, Payless D.I.Y. Limited, Perchura Limited, Plumbing Distributors Limited, Plumbland
Limited, Pouladuff Developments Limited, Pouladuff Manufacturing Limited, Powlett Properties Limited, Grafton Group Treasury Limited,
Resadale Properties Limited, Sam Hire Holdings Limited, Sam Hire Limited, Stettler Properties Limited, Telford Group Limited, Telfords (Athy)
Limited, Telfords (Portlaoise) Limited, Timber Frame Limited, Tiska Limited, Titanium Limited, Topez Limited, Tribiani Limited, Tullamore
Hardware Limited, Universal Providers Limited, W&S Timber Components Limited, Weeksbury Limited, Woodies DIY (Irl) Limited, and Woodie’s
DIY Limited.

18. Other Guarantees

The company has declared and assumes joint and several liability for any obligations arising from the legal acts of Grafton Holding Netherlands
BV, Isero BV, Isero IJzerwarengroep BV and Pijnenburg Bouw en Industrie BV in accordance with article 2:403 paragraph (f) of the Dutch Civil Code
and such declarations will be filed at the Dutch commercial register (Kamer van Koophandel) in accordance with article 2:403 paragraph (g).

The Company has given guarantees in respect of the bank borrowings of subsidiary undertakings which amounted to €351.2 million at the
balance sheet date. The Company has also guaranteed certain property lease obligations of subsidiary undertakings.

19. Approval of Financial Statements

The Board of Directors approved the Company Financial Statements in respect of the year ended 31 December 2016 on 15 March 2017.

164

Grafton Group plcSupplementary
Information

165

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Supplementary Financial Information

Alternative Performance Measures

Certain financial information set out in this consolidated year end financial statements is not defined under International Financial Reporting
Standards (“IFRS”). These key Alternative Performance Measures (“APMs”) represent additional measures in assessing performance and for
reporting both internally and to shareholders and other external users. The Group believes that the presentation of these APMs provides useful
supplemental information which, when viewed in conjunction with IFRS financial information, provides readers with a more meaningful
understanding of the underlying financial and operating performance of the Group.

None of these APMs should be considered as an alternative to financial measures drawn up in accordance with IFRS.

The key Alternative Performance Measures (“APMs”) of the Group are set out below. As amounts are reflected in £’m some non-material rounding
differences may arise. Numbers that refer to 2015 are available in the 2015 Annual Report.

APM

Description

Adjusted operating profit

Profit before amortisation of intangible assets arising on acquisitions, exceptional items, net finance
expense and income tax expense.

Adjusted operating profit/EBITA

before property profit

Profit before profit on the disposal of Group properties, amortisation of intangible assets arising on
acquisitions, exceptional items, net finance expense and income tax expense.

Adjusted operating profit/EBITA

Adjusted operating profit/EBITA before property profit as a percentage of revenue.

margin before property profit

Adjusted profit before tax

Profit before amortisation of intangible assets arising on acquisitions, exceptional items and income tax
expense.

Adjusted profit after tax

Profit before amortisation of intangible assets arising on acquisitions and exceptional items but after
deducting the income tax expense.

Capital turn

Constant currency

Revenue for the previous 12 months divided by average capital employed (where capital employed is the sum
of total equity and net debt at each period end).

Constant currency reporting is used by the Group to eliminate the translational effect of foreign exchange
on the Group’s results. To arrive at the constant currency change, the results for the prior period are
retranslated using the average exchange rates for the current period and compared to the current period
reported numbers.

Dividend cover

Group earnings per share divided by the total dividend per share for the Group.

EBITDA

Earnings before exceptional items, net finance expense, income tax expense, depreciation and intangible
assets amortisation. EBITDA (rolling 12 months) is EBITDA for the previous 12 months.

EBITDA interest cover

EBITDA divided by net bank/loan note interest.

Gearing

The Group net debt divided by the total equity times 100.

166

Grafton Group plc
Alternative Performance Measures (continued)

APM

Description

Like-for-like revenue

Like-for-like revenue is a measure of underlying revenue performance for a selected period. Branches
contribute to like-for-like revenue once they have been trading for more than twelve months. Acquisitions
contribute to like-for-like revenue once they have been part of the Group for more than 12 months. When
branches close, or where a business is disposed of, revenue from the date of closure, for a period of 12 months,
is excluded from the prior year result.

Operating profit margin

Profit before net finance expense and income tax expense as a percentage of revenue.

Return on capital employed

Operating profit divided by average capital employed (where capital employed is the sum of total equity and
net debt at each period end) times 100.

Adjusted Operating Profit/EBITA before Property Profit

Revenue

Operating profit
Property profit
Exceptional items charged in operating profit
Amortisation of intangible assets arising on acquisitions
Defined benefit pension scheme past service credit
Asset impairment charge in Belgian business
Adjusted operating profit/EBITA before property profit

Adjusted operating profit/EBITA margin before property profit

Operating Profit/EBITA Margin

Revenue
Operating profit
Operating profit/EBITA margin

Adjusted Operating Profit/EBITA

Operating profit
Exceptional items charged in operating profit
Amortisation of intangible assets arising on acquisitions
Defined benefit pension scheme past service credit
Asset impairment charge in Belgian business
Adjusted operating profit/EBITA

2016

£’m

2015

£’m

2,507.3

2,212.0

120.1
(4.9)
19.7
2.2
-
-
137.1
5.5%

2016

£’m

2,507.3
120.1
4.8%

2016

£’m

120.1
19.7
2.2
-
-
142.0

128.2
(6.7)
-
0.5
(2.9)
1.5
120.6
5.5%

2015

£’m

2,212.0
128.2
5.8%

2015

£’m

128.2
-
0.5
(2.9)
1.5
127.3

167

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016
Supplementary Financial Information

(continued)

Adjusted Profit before Tax

Profit before tax
Exceptional items charged in operating profit
Amortisation of intangible assets arising on acquisitions
Defined benefit pension scheme past service credit
Asset impairment charge in Belgian business
Adjusted profit before tax

Adjusted Profit after Tax

Profit after tax for the financial year
Exceptional items charged in operating profit
Tax on exceptional items
Amortisation of intangible assets arising on acquisitions
Tax on amortisation of intangible assets arising on acquisitions
Defined benefit pension scheme past service credit
Tax on defined benefit pension scheme past service credit
Asset impairment charge in Belgian business
Tax on asset impairment charge in Belgian business
Adjusted profit after tax

Reconciliation of Profit to EBITDA

Profit after tax for the financial year
Exceptional items charged in operating profit
Net finance expense
Income tax expense
Depreciation
Intangible asset amortisation
EBITDA

Net debt to EBITDA

EBITDA
Net debt
Net debt to EBITDA - times

168

2016

£’m

114.2
19.7
2.2
-
-
136.2

2016

£’m

93.1
19.7
(2.2)
2.2
(0.6)
-
-
-
-
112.2

2016

£’m

93.1
19.7
5.9
21.1
34.9
3.1
177.9

2016

£’m

177.9
96.3
0.54

2015

£’m

120.3
-
0.5
(2.9)
1.5
119.4

2015

£’m

96.5
-
-
0.5
(0.1)
(2.9)
0.5
1.5
(0.5)
95.5

2016

£’m

96.5
-
7.9
23.8
32.2
0.9
161.3

2016

£’m

161.3
113.6
0.70

Grafton Group plcEBITDA Interest Cover

EBITDA
Net bank/loan note interest
EBITDA interest cover - times

Gearing

Total equity
Group net debt
Gearing

Return on Capital Employed

Operating profit
Exceptional items charged in operating profit
Non-recurring defined benefit pension credit
Non-recurring asset impairment charge in Belgian business
Amortisation of intangible assets arising on acquisitions
Adjusted operating profit

Total equity - current period end
Net debt - current period end
Capital employed - current period end
Total equity - prior period end
Net debt - prior period end
Capital employed - prior period end
Average capital employed
Return on capital employed

Capital Turn

Revenue
Average capital employed
Capital turn - times

Dividend Cover

Group adjusted EPS – basic (pence)
Group dividend (pence)
Group dividend cover - times

2016

£’m

177.9
4.7
37.9

2016

£’m

1,062.1
96.3
9%

2016

£’m

120.1
19.7
-
-
2.2
142.0

1,065.2
96.3
1,161.5
989.0
113.6
1,102.6
1,132.0
12.5%

2016

£’m

2,507.3
1,132.0
2.2

2015

£’m

161.3
5.9
27.3

2015

£’m

985.7
113.6
12%

2015

£’m

128.2
-
(2.9)
1.5
0.5
127.3

989.0
113.6
1,102.6
906.3
75.3
981.6
1,042.1
12.2%

2016

£’m

2,212.0
1,042.1
2.1

2016

2015

47.67
13.75
3.5

41.17
12.50
3.3

169

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016
Grafton Group plc Financial History - 1995 to 2016

Group Income Statements

Revenue

Operating profit

Operating margin %

Restructuring (costs)/credit
Property profit
Finance (expense)/income (net)
Profit before taxation

Taxation
Profit after taxation

Group Balance Sheets

Capital employed

Goodwill and intangibles
Property, plant and equipment
Financial assets
Net current assets**
Other net non-current liabilities

Financed as follows:

Shareholders’ equity
Non-controlling interest
Net debt/(cash)

Other Information

2016
£’m

2015
£’m

2014
£’m

2013
£’m

2012‡
£’m

2011
£’m

2010
£’m

2009
£’m

2008
£’m

2007
£’m

2006
£’m

2,507.3 2,212.0 2,081.7 1,899.8 1,760.8 1,782.5
47.5
2.7%
(27.8)
-
(10.8)
8.9
(6.7)
2.2

134.9
5.4%
(19.7)
4.9
(5.9)
114.2
(21.1)
93.1

121.5
5.5%
-
6.7
(7.9)
120.3
(23.8)
96.5

110.1
5.3%
-
-
(8.9)
101.2
(21.2)
80.0

59.1
3.4%
(21.2)
-
(12.9)
25.0
6.6
31.6

77.2
4.1%
2.8
-
(12.3)
67.7
(5.6)
62.1

1,719.4 1,763.8 2,128.5
92.7
4.4%
(13.7)
-
(28.0)
51.0
(5.1)
45.9

41.5
2.4%
(13.2)
-
(6.4)
21.9
33.0
54.9

21.3
1.2%
(17.0)
-
7.8
12.1
(0.2)
11.9

2,193.3 2,000.0
165.4
8.3%
-
25.9
(21.4)
169.9
(22.0)
147.9

180.4
8.2%
-
5.0
(24.0)
161.4
(21.0)
140.4

2016
£’m

2015
£’m

2014
£’m

2013
£’m

2012
£’m

2011
£’m

2010
£’m

2009
£’m

2008
£’m

2007
£’m

2006
£’m

610.8
461.7
0.1
141.5
(52.6)

554.2
430.1
0.1
149.6
(31.3)
1,161.5 1,102.7

481.0
485.9
413.4
423.4
0.1
0.1
136.5
112.8
(40.6)
(23.0)
981.6 1,008.0

474.9
476.2
471.9
458.3
0.1
0.2
121.2
133.7
(85.9)
(58.4)
982.5 1,009.7

479.7
489.6
3.4
122.2
(22.8)
1,072.1

489.3
537.1
3.5
122.6
(56.4)
1,096.1

448.7
516.1
0.6
256.9
(35.7)

516.0
603.2
0.2
193.0
(69.9)

400.3
460.8
0.3
225.4
(35.8)
1,242.5 1,186.6 1,051.0

1,062.1
3.1
96.3

985.7
3.4
113.6
1,161.5 1,102.7

902.3
4.0
75.3

870.3
4.0
133.7
981.6 1,008.0

813.5
821.0
4.1
-
188.7
164.9
982.5 1,009.7

852.5
-
219.6
1,072.1

809.7
-
286.4
1,096.1

827.6
-
414.9

783.0
681.1
-
-
369.9
403.6
1,242.5 1,186.6 1,051.0

Acquisitions & investments
Purchase of fixed assets / investment in intangible
assets

11.9

98.6

33.1

5.9

17.6

11.1

2.1

6.1

22.4

61.0

59.4

60.4
72.3

51.6
150.2

46.9
80.0

24.7
30.6

23.0
40.6

30.6
41.7

8.2
10.3

11.0
17.1

62.6
85.0

71.7
132.7

84.8
144.2

Depreciation and intangible amortisation

38.1

33.1

32.5

31.5

33.9

37.1

40.1

44.7

45.0

40.4

37.8

Financial Highlights

Adjusted EPS*** (pence)
Dividend/share purchase per share (pence)
Cashflow per share (pence)#
Net assets per share (pence)
Underlying EBITDA interest cover (times)
Dividend/share purchase cover
Net debt to shareholders’ funds
ROCE

2016

2015

2014

2013

2012‡

2011

2010

2009

2008

2007

2006

47.7
13.8
64.0
449.5
37.9
3.5
9%

41.2
12.5
54.9
419.0
27.3
3.3
12%
12.5% 12.2%

34.4
10.8
48.4
387.9
19.4
3.2
8%
11.1%

22.3
8.5
39.5
374.4
11.0
2.6
15%
7.8%

15.1
7.0
29.9
350.6
8.6
2.2
20%
6.1%

13.4
6.5
24.9
354.1
6.4
2.1
23%
4.6%

15.9
6.0
44.8
368.5
10.0
2.6
26%
3.8%

4.8
4.5
26.6
351.0
5.6
1.1
35%
1.8%

53.2
57.7
25.6
12.8
15.1
11.9
68.4
74.1
39.6
284.7
341.2
359.5
10.2
8.2
4.5
4.2
3.8
2.1
50%
54%
52%
7.6% 16.1% 16.5%

The summary financial information is stated under IFRS for 2004 to 2016 and under Irish GAAP for all years from 1994 to 2003.

*
** Excluding net debt/(cash)
*** Before exceptional items and amortisation of intangible assets arising on acquisitions in 2016. Before pension credit, asset impairment and amortisation of intangible

assets arising on acquisitions in 2015 (restated). Before pension credit and property impairment in 2013 and before restructuring costs and intangible amortisation in 2012
and taxation credits in both years. In previous years before intangible amortisation, onerous lease provision and impairment, restructuring costs (net), taxation credit in
2010 and investment profit in 2009 and excluding material property profits in previous years

170

Grafton Group plcGroup Income Statements

Revenue

Operating profit

Operating margin %

Restructuring (costs)/credit
Property profit
Finance (expense)/income (net)
Profit before taxation

Taxation
Profit after taxation

Group Balance Sheets

Capital employed

Goodwill and intangibles
Property, plant and equipment
Financial assets
Net current assets**
Other net non-current liabilities

Financed as follows:

Shareholders’ equity
Non-controlling interest
Net debt/(cash)

Other Information

2005
£’m

2004
£’m

2003
£’m

2002
£’m

2001
£’m

2000
£’m

1999
£’m

1998
£’m

1997
£’m

1996
£’m

1995
£’m

1,798.1
146.2
8.1%
-
6.6
(21.4)
131.4
(17.8)
113.6

1,270.5
109.3
8.6%
-
5.1
(15.5)
98.9
(13.5)
85.4

1,035.2
80.1
7.7%
-
2.4
(11.9)
70.6
(10.6)
60.0

724.6
56.4
7.8%
-
2.3
(8.3)
50.4
(7.5)
42.9

614.9
48.1
7.8%
-
1.4
(7.7)
41.8
(5.4)
36.4

506.2
39.4
7.8%
-
-
(7.2)
32.2
(4.2)
28.0

408.6
30.5
7.5%
-
-
(5.4)
25.1
(3.0)
22.1

289.7
22.4
7.7%
-
-
(3.3)
19.1
(2.7)
16.4

239.1
18.7
7.8%
-
-
(1.8)
16.9
(2.5)
14.4

197.1
15.4
7.8%
-
1.5
(1.1)
15.8
(2.3)
13.5

156.7
11.4
7.3%
-
0.6
(0.9)
11.1
(2.0)
9.1

2005
£’m

2004
£’m

2003
£’m

2002
£’m

2001
£’m

2000
£’m

1999
£’m

1998
£’m

1997
£’m

1996
£’m

1995
£’m

375.4
427.1
0.2
207.8
(52.4)
958.1

557.7
-
400.4
958.1

174.2
286.4
33.2
137.6
(35.8)
595.6

349.4
-
246.2
595.6

148.6
244.4
23.7
139.9
(19.9)
536.7

317.0
-
219.7
536.7

65.3
196.6
21.9
93.9
(11.7)
366.0

209.5
-
156.5
366.0

38.0
153.0
20.5
78.8
(10.8)
279.5

160.9
-
118.6
279.5

32.3
130.8
11.7
66.5
(10.0)
231.3

135.1
-
96.2
231.3

19.7
109.4
11.8
47.4
(8.8)
179.5

112.7
-
66.8
179.5

6.9
99.2
0.1
42.5
(8.7)
140.0

98.6
-
41.4
140.0

-
42.1
8.5
20.1
(0.8)
69.9

53.6
-
16.3
69.9

-
37.8
0.1
16.7
(0.9)
53.7

55.0
-
(1.3)
53.7

-
35.1
-
17.5
(0.9)
51.7

46.9
-
4.8
51.7

1.1

6.2
7.3

2.9

Acquisitions & investments
Purchase of fixed assets / investment in intangible
assets

326.7

60.2

152.3

55.8

38.4

34.5

41.9

36.2

21.7

6.5

68.8
395.5

60.3
120.5

48.0
200.3

42.8
98.6

26.1
64.5

26.3
60.8

19.4
61.3

14.0
50.2

10.7
32.4

6.1
12.6

Depreciation and intangible amortisation

34.5

23.5

26.0

16.7

13.6

10.1

8.3

4.9

3.9

3.4

Financial Highlights

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

46.4
10.8
60.4
234.9
9.4
4.3
72%

38.1
8.8
49.1
163.7
9.9
4.3
70%
18.8% 19.3%

23.3
31.2
5.3
7.3
32.7
40.6
118.1
149.1
9.1
9.1
4.4
4.3
69%
75%
17.1% 16.5%

20.0
4.7
27.9
91.4
8.2
4.3
74%
17.4%

15.8
3.7
22.1
77.6
6.9
4.3
71%

12.8
3.0
18.1
65.2
7.2
4.3
59%

7.3
9.6
1.7
2.2
9.9
13.1
34.4
59.9
20.2
8.3
4.3
4.3
-
42%
17.4% 16.9% 18.2% 23.1% 22.2%

8.5
2.0
11.5
33.3
12.9
4.3
30%

5.2
1.2
7.2
29.8
17.1
4.3
10%
17.6%

‡

Based on profit after tax before depreciation, 2016 exceptional items, 2015 pension credit, 2013 pension credit, intangible amortisation, onerous lease provision, impairment
and excluding material property profits in previous years.
IAS 19 (Revised) ‘Employee Benefits’ has been adopted as required by IFRS from the year ended 31 December 2013.
The comparatives for the year ended 31 December 2012 have been restated.

171

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Corporate Information

Auditor

Bankers

Solicitors

Stockbrokers

Corporate & Registered Office

Registrars

PricewaterhouseCoopers

Bank of Ireland
HSBC Bank plc
Ulster Bank
Barclays Bank plc
ABN AMRO Bank N.V.
Lloyds Bank plc

Arthur Cox, Dublin
A&L Goodbody, Dublin
Squire Patton Boggs, London
Allen & Overy, Amsterdam
Norton Rose Fulbright, London
Lyons Davidson, Bristol

Goodbody, Dublin
Numis Securities Limited, London

Heron House
Corrig Road
Sandyford Industrial Estate, Dublin 18
Phone: 00353-1-216 0600
Fax: 00353-1-295 4470
Email: email@graftonplc.com

Capita Asset Services
Shareholders Solutions (Ireland)
2 Grand Canal Square, Dublin 2, D02 A342
Phone: 00353-1-553 0050
Email: enquiries@capita.ie
www.capitaassetservices.com

Financial Calendar

Results

Half-Year Results for 2016
Final Results for 2016
Annual General Meeting
2017 Half-Year Results

Interim Dividends

Record date
Record date

31 August 2016
7 March 2017
9 May 2017
31 August 2017

9 September 2016
17 March 2017

172

Grafton Group plcLocation of Annual General Meeting
Location of Annual General Meeting

Location of Annual General Meeting

The Annual General Meeting of the Company will be held on 9 May 2014 at 10.30 am in the
The Annual General Meeting of the Company will be held on 29 April 2009 at 10.30am in the
The Annual General Meeting of the Company will be held on Tuesday 9 May 2017 at 10.30 am in the
IMI Conference Centre, Sandyford Road, Dublin 16. Tel: (01) 207 8400
IMI Conference Centre, Sandyford Road, Dublin 16. Telephone: (01) 207 8400
IMI Conference Centre, Sandyford Road, Dublin 16. Telephone: (01) 207 8400

I
T

T
I
L

C
A
R
R
A
G
E
W
A
Y

C L O N A R D R O A D
I M I

Tr
c
lights

Sandyford
Industrial
Estate

Exit 14

AVID
Technology

LUAS

Recommended
routes to IMI

Enniskerry

Wexford

BY CAR
Should you require any assistance, or have any queries on the day of the AGM, please call 087 971 0851.

From the North, West and South

From the East and South East

Using the M50 going south, take Exit 13
(Sandyford/Dundrum/R113), then take the Green
Route to Sandyford Industrial Estate. Turn left onto
Blackthorn Drive at Beacon Court.
At the next T-junction, turn right onto Sandyford Road.
IMI is the next turn left, 100 yards away.

Travelling north on the N11, take the M50 at
Loughlinstown. Take Exit 13 to Sandyford Industrial
Estate.
Turn left onto Blackthorn Drive at Beacon Court.
At the next T-junction, turn right onto Sandyford Road.
IMI is the next turn left, 100 yards away.

BY LUAS
Should you require assistance, or have any queries on the day of the AGM, please call 087 971 0851.

For shareholders’ convenience, courtesy buses will depart from the Sandyford LUAS plaza (last stop) at 9.50am,
10.00am and 10.10am. Buses will return to the Sandyford LUAS plaza following the meeting.

Should you have any queries on the day of the AGM, please call 087 971 0851.

182 Grafton Group plc Annual Report 2013

173

Strategic ReportCorporate GovernanceFinancial StatementsSupplementary InformationAnnual Report & Accounts 2016Heron House
Corrig Road
Sandyford Industrial Estate, Dublin 18
Phone: 00-353-1-216 0600
Fax: 00-353-1-295 4470
Email: email@graftonplc.com
Web: www.graftonplc.com