Annual Report 2017
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 (“RMI”) 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 649 branches and has in the region
of 13,000 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 £2.7 billion and adjusted
profit before tax of £157.2 million for 2017.
Contents
Grafton at a Glance
2017 Highlights
Strategic Report
Chairman’s Statement
Chief Executive Officer’s Review
Strategy
Business Model
Key Performance Indicators
Sectoral and Strategic Review
UK Merchanting
Irish Merchanting
Netherlands Merchanting
Belgium Merchanting
Retailing
Manufacturing
Financial Review
Risk Management
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
Chairman’s Annual Statement
Remuneration Policy Report
Annual Report on Remuneration
Report of the Directors
02
06
10
14
17
20
22
24
26
30
32
34
36
40
44
48
54
64
66
73
77
79
79
81
87
96
Further investor and shareholder
information is available at
www.graftonplc.com.
Financial Statements
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 Statement of Changes in Equity
Notes to the Company Financial Statements
102
103
111
112
113
114
115
117
177
178
179
Supplementary Information
Supplementary Financial Information
Grafton Group plc Financial History – 1996 to 2017
Corporate Information
Financial Calendar
Location of Annual General Meeting
190
194
196
196
197
01
Grafton at a Glance
Grafton trades from
649 branches and
has in the region of
13,000 employees.
85
489
58
17
UK
Ireland
Netherlands
Belgium
70%
of Group
Revenue
22%
of Group
Revenue
5%
of Group
Revenue
3%
of Group
Revenue
Builders merchanting
1st
Plumbers merchanting
Mortar manufacturing
1st
DIY retailing
Builders and plumbers
merchanting
1st
Ironmongery, tools
and fixings segment of
Merchanting market
2nd Merchanting market
3rd
4th
1st
02
Grafton Group plcAnnual Report & Accounts 2017 Merchanting
The Merchanting segment distributes
building materials from 603 branches
in the UK, Ireland, the Netherlands and
Belgium.
Buildbase is the UK’s third largest builders’
merchants trading from more than 180
branches with a strong presence in the
South East, Midlands and North of England.
Selco is a trade and business only builders’
merchants that operates a retail style
self-select format. Its unique products
and service model is primarily focused on
customers engaged in small residential
RMI projects.
Selco, the UK’s fourth largest merchanting
brand, trades from 59 branches including 35
that are located within the Greater London
Area.
Merchanting
revenue up 8.3%
to £2.5bn
(up 6.6% in constant currency)
buildbase.co.uk
selcobw.com
Plumbase is the fourth largest plumbing
and heating merchant in the UK with
a network of over 160 branches. It has
a strong presence in the South East,
Midlands, East Anglia, West Country and
Scotland.
As one of the country’s leading suppliers
of plumbing and heating products, it
focuses on a customer base of domestic and
commercial gas engineers, plumbers and
maintenance contractors.
MacBlair is the leading builders’ merchant
in Northern Ireland where it trades from 17
branches.
The business supplies the trade, DIY and
self-build markets providing “a one stop
shop” for building materials, timber,
doors and floors, plumbing and heating,
bathrooms and landscaping products.
Leyland SDM is one of the most
recognisable and trusted decorating and
DIY brands in Central London selling paint,
tools, ironmongery and accessories from 21
branches.
plumbase.co.uk
macblair.com
leylandsdm.co.uk
03
Grafton at a Glance (continued)
Chadwicks is a leading builders’ and
plumbers’ merchants in the Republic
of Ireland where it has a strong market
position in the Greater Dublin area and
provincial locations.
The business distributes a full range of
building materials principally to the
residential RMI and new build markets.
Heiton Buckley is a leading builders’ and
plumbers’ merchanting business trading
from branches in Dublin, provincial cities
and towns where the Chadwicks brand
is not represented. It also incorporates
Ireland’s largest steel stockholding
business.
Isero is the leading specialist distributor
of tools, ironmongery and fixings in the
Netherlands.
Isero trades from 44 branches under
the Gerritse, Breur Ceintuurbaan, Van
der Winkel and Scholte de Vries-
Estoppey brands. The business offers a
comprehensive range of quality products
to trade professionals supported by an
exceptional level of customer service.
chadwicks.ie
heitonbuckley.ie & heitonsteel.ie
isero.nl
Gunters en Meuser is the market leader in
the distribution of tools, ironmongery and
fixings in the Greater Amsterdam Area. It
is a high quality business and brand that is
synonymous with the ironmongery market
in Amsterdam where it has traded for over
190 years.
YouBuild is a builders’ merchants trading
from ten branches located mainly in the
Flanders Region of Belgium where it has a
strong market position.
MPro is a six branch builders’ merchants
with a strong market position in Brussels
and the Wallonia Region.
guntersenmeuser.nl
youbuild.be
mpro.be
04
Grafton Group plcAnnual Report & Accounts 2017
Retailing
The Group is the largest DIY retailer in
Ireland trading from 35 branches
Woodie’s is Ireland’s market leading DIY,
Home and Garden retailer with 35 stores
nationwide offering an extensive range of
DIY products, paints, lighting, homestyle,
housewares, bathroom products and fitted
kitchens. Woodie’s is also a leading retailer
of seasonal categories including gardening
and Christmas ranges.
Retailing
revenue up
14.8% to £180.4m
(up 7.4% in constant currency)
woodies.ie
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
12.5% to £66.1m
(up 12.0% in constant currency)
MFP is a manufacturer of a comprehensive
range of drainage and roofline products and
is also a distributor of selected ranges from
other manufacturers.
CPI Mortars is the market leader in dry
mortar manufacturing in the UK, operating
from 10 strategically located factories
that provide almost national coverage.
The portable silo system, which contains
aggregates, sand and cement, provides
customers with a constant supply of high
quality mortar and creates other benefits
for customers through improved site
management, savings on labour costs and
reduced waste.
cpieuromix.com
mfp.ie
05
2017 Highlights
Revenue
17
16
Adjusted
Operating Profit
Adjusted Operating Profit Margin
before Property Profit
17
16
17
16
£2.7bn
up 9%
£163.7m
up 15%
5.9%
Up 40bps
Cash Generation
from Operations
Dividend
Net Debt
17
16
17
16
17
16
£210.7m
Up 25%
15.50p
up 13%
£62.9m
decreased
by £33.4m
Return on Capital Employed
Adjusted Earnings
Per Share – Basic
17
16
17
16
13.6%
up 110bps
54.9p
up 15%
Key Performance Indicators
pages 22 - 23
06
Grafton Group plcAnnual Report & Accounts 2017 Record revenue reflects strong organic
growth
Adjusted operating profit before property
profit up 17%
Growth in profitability in all segments and
geographies:
• Strong organic growth in Irish Merchanting,
Woodie’s DIY and Mortar Manufacturing
• Acquisitions and organic growth increase
scale and profitability of Dutch merchanting
business
• Continued investment in Selco with a record
number of branch openings
• Traditional UK Merchanting business
benefits from growth and prior year
restructuring
Record cash from operations of £210.7
million (2016: £168.6 million) finances
investment and strengthens balance sheet
Investment of £119.1 million (2016:
£72.3 million) on capital expenditure and
acquisitions
Progressive dividend policy - growth of 121%
over the past five years
Read more on pages 44 - 47
Read more on pages 14 - 16
Read more on pages 10 - 13 and 44 - 47
Financial Summary
£m*
Revenue**
Adjusted***
Operating profit before property profit
Operating profit
Profit before tax
Earnings per share – basic
Statutory results
Operating profit
Profit before tax
Earnings per share – basic
Dividend
Net debt
Gearing
Adjusted operating margin before property profit
2017
2,716
160.9
163.7
157.2
54.9p
160.9
154.5
54.0p
15.50p
62.9
5%
5.9%
2016
Change
2,496
+9%
137.1
142.0
136.2
47.7p
120.1
114.2
39.6p
13.75p
96.3
9%
5.5%
+17%
+15%
+15%
+15%
+34%
+35%
+36%
+13%
(£33.4m)
(400bps)
+40bps
Return on capital employed
13.6%
12.5%
+110bps
*Additional information in relation to Alternative Performance Measures (APMs) is set out on pages 190 to 193.
**2016 revenue has been updated to reflect a change in the presentation of rebates payable to customers and the
segmental presentation has also been updated. There was no impact on operating profit as a result of this change.
***The term “adjusted” means before amortisation of intangible assets arising on acquisitions and exceptional items of
£19.7 million in 2016.
Financial Review
pages 44 – 47
Financial Statements
pages 100 – 187
07
08
Grafton Group plcAnnual Report & Accounts 2017 Strategic
Report
Chairman’s Statement
Chief Executive Officer’s Review
Strategy
Business Model
Key Performance Indicators
Sectoral and Strategic Review
UK Merchanting
Irish Merchanting
Netherlands Merchanting
Belgium Merchanting
Retailing
Manufacturing
Financial Review
Risk Management
Corporate Social Responsibility
••
10
14
17
20
22
24
26
30
32
34
36
40
44
48
54
09
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Chairman’s Statement
The creation of a more
balanced portfolio
of businesses
internationally,
by seeking growth
opportunities in new
geographic markets,
continues to be a high
strategic priority for
the Board.
10
Grafton Group plcAnnual Report & Accounts 2017 Dear Shareholder,
I am pleased to report that 2017 was another year of
strong growth and development for Grafton.
The strong results for the year were driven principally
by organic growth. The traditional UK merchanting
business benefitted from growth and the prior year
restructuring and we continued to invest in Selco with
a record number of branch openings. Strong organic
growth was reported by the Merchanting and DIY
businesses in Ireland and the mortar business in the
UK. Acquisitions and organic growth contributed to
growth in the Netherlands merchanting business and
the Belgian merchanting business returned to profit.
Results
Cash Flow
Cash generated from operations was a record £210.7
million (2016: £168.6 million) driven principally by
increased profitability. Our priorities for the use of
free cash flow remain broadly unchanged. We will
continue to invest organically in businesses that have
been prioritised for development, pursue acquisition
opportunities in existing and new geographic
markets in line with the Group’s development
strategy and maintain a progressive dividend policy.
The Board is also committed to maintaining a strong
balance sheet and to retaining its investment grade
credit rating.
The Group reported a significant improvement in
key measures of financial performance including an
increase in return on capital employed (“ROCE”) by
110 basis points from 12.5 per cent to 13.6 per cent.
Revenue grew by 9 per cent to £2.7 billion (2016: £2.5
billion) and by 6.8 per cent in constant currency.
Adjusted operating profit increased by 15 per cent
to £163.7 million (2016: £142.0 million) and adjusted
profit before tax increased at the same rate to £157.2
million (2016: £136.2 million). Adjusted earnings per
share was also up by 15 per cent to 54.9p (2016: 47.7p).
Dividend
A second interim dividend of 10.25p (2016: 9.0p) was
approved to give a total dividend for the year of 15.50p.
This represents an increase of 13 per cent on total
dividends of 13.75p paid for 2016. The increase reflects
the Board’s policy which is based on increasing
dividends in line with increases in earnings.
Dividend cover remained constant at 3.5 times.
11
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Chairman’s Statement (continued)
Further progress
was made during
the year by the
Group’s executive
management team
in refining and
implementing the
Group’s medium
term strategy.
12
Strategy
Further progress was made during the year
by the Group’s executive management team
in refining and implementing the Group’s
medium term strategy.
The Group built on its entry into the
Netherlands merchanting market at the end
of 2015 with the acquisition during 2017 of
Gunters en Meuser and Scholte & de Vries –
Estoppey, which provided a leading position in
the Greater Amsterdam Area. The Netherlands
business now has a strong presence in each of
the country’s five largest cities.
Selco continued to be the focus of development
activity in the UK merchanting market with
the opening of twelve new branches during
the year which increased the estate to 59 at
the year end. The acquisition last month of
Leyland SDM, London’s largest independent
decorators’ merchant, provides access to a new
and resilient specialist segment of the RMI
market.
The strong growth in profitability in the
merchanting and DIY markets in Ireland
continued to be generated organically by
market leading brands and businesses
operating branch networks that provide
almost national coverage.
The Board’s strategy for the future growth
and development of Grafton is based on
strengthening existing market positions
in the merchanting markets in the UK and
Ireland, continuing to build on the relatively
recent successful entry into the Netherlands
merchanting market and increasing
profitability in the Belgian merchanting
business. The creation of a more balanced
portfolio of businesses internationally,
by seeking growth opportunities in new
geographic markets, continues to be a high
strategic priority for the Board. The Group’s
excellent cash generation from operations,
good liquidity and strong balance sheet should
continue to support its strategic growth plans.
Board Composition and Renewal
I noted in my statement last year that Mr.
Roderick Ryan and Mr. Charles Fisher would
retire from the Board at the conclusion of
the 2017 AGM having completed eleven years’
and eight years’ service respectively as Non-
Executive Directors.
Mr. Ryan was succeeded as Senior Independent
Director by Mr. Paul Hampden Smith and
by myself as Chairman of the Nomination
Committee and Mr. Fisher was succeeded as
Chairman of the Remuneration Committee by
Mrs. Susan Murray. These changes took effect
on 9 May 2017.
The appointments of Mrs. Susan Murray and
Mr. Vincent Crowley to the Board in October
2016 were made in anticipation of planned
retirements from the Board in 2017. The
Board is now comprised of two Executive
Directors, Gavin Slark and David Arnold, four
Independent Non-Executive Directors and
myself as Non-Executive Chairman.
On behalf of the Board, I would like to thank
Roddy and Charles for their significant
contribution to Grafton over a long period.
Grafton Group plcAnnual Report & Accounts 2017 Board Evaluation
Outlook
The Board is positive about the overall growth
prospects for 2018 and potential opportunities
to continue creating shareholder value over the
medium term.
Michael Roney
Chairman
An internal evaluation of the Board, its Committees
and individual Directors was conducted during 2017
having been externally facilitated by the Institute of
Directors in Ireland during 2015. Each Director and
the Company Secretary independently completed a
questionnaire covering the running of an effective
board, relationships with management, oversight
and development of strategy, monitoring financial
and operating performance and shareholder value
creation. The overall result was very positive with
a high and improved level of satisfaction among
Directors concerning the matters covered by
the evaluation. The report noted that the Board
continued to function effectively and operate to a
high standard of governance.
Annual General Meeting
In line with the policy adopted in recent years, all
Directors will retire and seek re-election at the 2018
AGM. Each Director performs effectively and has
demonstrated a strong commitment to the role and
I strongly recommend that it is in the interests of
shareholders and the Board that each of the Directors
going forward be re-elected at the Annual General
Meeting.
Colleagues
The results for the year are a testament to the quality
of the management teams in our businesses under
the strong leadership provided by Gavin Slark. I
have been consistently impressed by the quality
and commitment of colleagues that I have had the
opportunity to meet since I joined the Board in May
2016. The hard work and dedication of our 13,000
colleagues is a critical element in our success and,
on behalf of the Board, I would like to extend our
appreciation to each of them for their contribution
and commitment to the progress made during 2017.
13
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Chief Executive Officer’s Review
Grafton achieved a
strong set of results
for the year driven
principally by
organic growth,
an improvement
in the Group’s
gross margin and
good cost control.
14
Grafton Group plcAnnual Report & Accounts 2017 “2017 was a very good year for Grafton that saw all
segments and geographies contribute to strong revenue
growth and a 15% increase in adjusted profit before tax
and earnings per share. Our expectations are positive
for the current year and we remain confident about the
potential to take advantage of opportunities that create
value for shareholders.”
Group Results
Grafton achieved a strong set of results for the
year driven principally by organic growth, an
improvement in the Group’s gross margin and good
cost control all of which combined to produce a
further improvement in financial performance. The
Group also benefitted from its exposure to multiple
geographic markets and a well diversified customer
base.
of the Netherlands business in what was only the
Group’s second full year of trading in that market.
The business is now established as a significant
contributor to Group profitability and a sound
platform for future growth.
The Belgian merchanting business responded
positively to the actions taken in recent years and
returned to profitability.
The UK merchanting business made good progress
and saw operating profit exceed £100 million as
it benefitted from internal initiatives and the
restructuring undertaken in 2016 which delivered
in line with the Group’s expectations. Selco had its
most active year ever on the development front with
the opening of twelve branches. The traditional
UK merchanting brands had a successful year and
reported good progress in growing profitability.
The market leading merchanting business in Ireland
continued to be an important and consistent growth
engine for Grafton delivering double digit revenue
growth and a strong increase in profitability for the
fourth successive year. The operating profit margin
before property profit increased by 70 basis points to
8.5 per cent.
Good organic growth in a favourable market
together with the completion of three acquisitions
substantially increased the scale and profitability
The Woodie’s DIY, Home and Garden retailing
business in Ireland delivered high levels of growth
in revenue and profit that reflected the success in
repositioning the business and the positive response
from customers to the store upgrade programme.
The operating profit margin progression was very
strong increasing by 150 basis points to 6.2 per cent.
CPI EuroMix, the market leading UK mortar business,
reported an excellent set of results for the year and
the segment operating margin increased by 220 basis
points to 22.9 per cent.
Cash generation from operations was very strong at
a record £210.7 million (2016: £168.6 million). These
funds were used to invest in future growth through
organic initiatives and selective acquisitions,
increase the dividend, reduce net debt to its lowest
level in almost two decades and strengthen the
Group’s investment grade credit rating.
15
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Chief Executive Officer’s Review (continued)
We remain
confident about
the prospects for
growth in the
current year and
in our potential
to take advantage
of future
opportunities to
create value for
shareholders.
The Belgian merchanting business should
continue to benefit from internal initiatives
and the modest recovery in the economy.
Total revenue growth in the period from 1
January 2018 to 18 February 2018 was 6.8%.
Average daily like-for-like revenue increased
by 3.8 per cent in the overall Group, 1.0 per cent
in the UK merchanting business, 5.6 per cent
in Irish merchanting business, 11.0 per cent in
the Dutch merchanting business and 7.2 per
cent in the Belgium merchanting business.
Like-for-like revenue was ahead by 17.0 per cent
in the retailing business in Ireland and by 25.7
per cent in the manufacturing business.
We remain confident about the prospects for
growth in the current year and in our capacity
to take advantage of future opportunities to
create value for shareholders.
Gavin Slark
Chief Executive Officer
Outlook
We anticipate that overall conditions in the
UK merchanting market are likely to remain
relatively flat and that further progress
in 2018 will continue to be dependent on
realising benefits from self-help and other
opportunities.
Activity levels in the UK housing RMI market
are expected to remain subdued, sensitive
to changes in housing transactions and
consumer confidence and spending. House
building is expected to remain strong
supported by good underlying demand, the
availability of mortgages and the Help to Buy
scheme.
The outlook for the Group’s businesses in
Ireland is favourable with balanced growth
forecast to continue albeit at a more moderate
rate than experienced in recent years. Demand
in the merchanting and DIY markets should
continue to benefit from increased consumer
spending and investment in residential
RMI, house building and non-residential
construction.
The prospects for the Dutch economy are
positive with broadly based growth forecast
to continue boosted by international trade
and increased public spending. Demand in
the secondary and new housing markets is
expected to continue to exceed supply.
16
Grafton Group plcAnnual Report & Accounts 2017 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.
A Strong
Financial Base
Excellence
in Service
Organic Growth
and Acquisitions
Maximising long term returns for
shareholders supported by three
financial pillars:
• 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.
Deploying mature acquisition
and integration skills to complete
transactions and realise synergies.
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.
A Supportive Organisational
Structure and Management
Ethics and
Integrity
Operating a decentralised organisational structure that confers
significant autonomy on local management teams within a tight
Group accounting, risk management and control environment.
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.
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.
17
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Strategy (continued)
A Strong
Financial Base
Excellence
in Service
Progress in 2017
Priorities for 2018
KPIs
Link to Risk
Continued focus on operational and commercial performance across the Group’s businesses during
the year resulted in Group revenue growth of 9 per cent.
A Group priority for 2018 is to grow like-for-like revenue in
• Revenue
• Macro-Economic Conditions
its markets and to exert tight control over costs.
• Adjusted EBITA Margin before Property Profit
• Competition
• Adjusted EBITA Margin
• Acquisition and Integration of
Adjusted EBITA margin before property profit increased by 40bps to 5.9 per cent.
Capital turn increased from 2.2 to 2.3 times and return on capital employed increased by 110 basis
points to 13.6 per cent.
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 Turn
• Adjusted EBITA
• Free Cash Flow
capital employed.
• Adjusted Earnings Per Share
• ROCE
2017 saw the introduction of a number of new trading initiatives and innovations in the Group’s
merchanting businesses.
The Group will continue to pursue opportunities for
• Revenue
innovative customer propositions and routes to market.
• Adjusted EBITA Margin before Property Profit
The Irish merchanting business opened three new branches in Dublin providing convenient
collection points for customers.
The maintenance of a customer service-focused approach
• Adjusted EBITA
to branch operations will remain a priority.
• Adjusted Earnings Per Share
• Adjusted EBITA Margin
• ROCE
The Woodie’s store upgrade programme has helped to provide an improved customer experience
and ensure that it retains its strong market leadership position.
Organic Growth and
Acquisitions
The Group continued its expansion in the Netherlands with the acquisition of Gunters en Meuser,
a distributor of tools, fixings and ironmongery from 14 branches. Two further acquisitions were
made in the Netherlands during the year.
Grafton will continue to pursue organic growth in its
• Revenue
• Macro-Economic Conditions
established businesses.
• Adjusted EBITA Margin before Property Profit
• Competition
Expansion of the Selco branch network continued during the year with the opening of twelve new
branches.
Three new branches were opened in the Irish merchanting business in areas of Dublin that are
expected to benefit from increased construction activity over the coming years, increasing the
number of branches in the network to 49 including 20 in the Greater Dublin Area.
In February 2018, the Group completed the acquisition of Leyland SDM, a 21-branch decorating
and DIY business that complements the Group’s larger Selco merchanting branches in the Greater
London Area.
A Supportive
Organisational Structure
and Management
The Group 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
• Revenue
• Colleagues
the Group’s management teams and provide opportunities
• Adjusted EBITA Margin before Property Profit
• IT Systems and Infrastructure
for developing key leadership competencies.
• Adjusted EBITA Margin
The Group will continue to allocate capital for new
branches in strategic locations and acquisition
opportunities that complement existing branch locations.
• Adjusted Earnings Per Share
• Adjusted EBITA Margin
• Adjusted EBITA
• Free Cash Flow
• ROCE
Growth in new geographic markets continues to be a high
strategic priority.
• Capital Turn
• Adjusted EBITA
• Free Cash Flow
• Adjusted Earnings Per Share
• ROCE
• Lost Time Injury Frequency Rate
Ethics
and Integrity
A Group-wide programme to implement processes for compliance with the General Data
Protection Regulation (GDPR) was developed during 2017. The Group also developed procedures to
confirm supplier compliance with regulatory requirements including the UK Modern Slavery Act.
The maintenance of high ethical standards for the benefit
• Lost Time Injury Frequency Rate
of all stakeholders remains an integral part of the Group’s
• Group Co2 Emissions
strategy.
The Group Code of Business Conduct and Ethics, and existing policies relating to Anti-Bribery and
Corruption and Competition Compliance were reviewed and updated during the year.
The Group will continue to roll out its ethics training
programme to all Group employees.
An external effectiveness review carried out during 2017 found that the Group’s Internal Audit and
Risk Management procedures were fit for purpose and suggested a number of actions for further
development.
The recommendations set out in the external effectiveness
review carried out during the year will be addressed as
part of the Internal Audit and Risk Management objectives
Group carbon emissions reduced by 3.1% in 2017.
for 2018.
a key priority.
Reducing the frequency and severity of accidents remains
18
New Businesses
• Credit Risk Relating to
Customers
• Supplier Rebates
• Internal Controls & Fraud
• Stock Management
• Competition
• Colleagues
• IT Systems and Infrastructure
• Cyber Security & Data
Protection
• Supplier Rebates
• Internal Controls & Fraud
• Stock Management
• Acquisition and Integration of
New Businesses
• Cyber Security & Data
Protection
• Health & Safety
• Acquisition and Integration of
New Businesses
• Internal Controls & Fraud
• Colleagues
• Health & Safety
• Internal Controls and Fraud
• Non-Ethical and Anti-
Competitive Practices
Grafton Group plcAnnual Report & Accounts 2017 Progress in 2017
Priorities for 2018
KPIs
A Strong
Financial Base
Continued focus on operational and commercial performance across the Group’s businesses during
the year resulted in Group revenue growth of 9 per cent.
A Group priority for 2018 is to grow like-for-like revenue in
its markets and to exert tight control over costs.
Adjusted EBITA margin before property profit increased by 40bps to 5.9 per cent.
Capital turn increased from 2.2 to 2.3 times and return on capital employed increased by 110 basis
points to 13.6 per cent.
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
2017 saw the introduction of a number of new trading initiatives and innovations in the Group’s
merchanting businesses.
The Group will continue to pursue opportunities for
innovative customer propositions and routes to market.
The Irish merchanting business opened three new branches in Dublin providing convenient
collection points for customers.
The maintenance of a customer service-focused approach
to branch operations will remain a priority.
The Woodie’s store upgrade programme has helped to provide an improved customer experience
and ensure that it retains its strong market leadership position.
Organic Growth and
Acquisitions
The Group continued its expansion in the Netherlands with the acquisition of Gunters en Meuser,
a distributor of tools, fixings and ironmongery from 14 branches. Two further acquisitions were
Grafton will continue to pursue organic growth in its
established businesses.
made in the Netherlands during the year.
Expansion of the Selco branch network continued during the year with the opening of twelve new
branches.
Three new branches were opened in the Irish merchanting business in areas of Dublin that are
expected to benefit from increased construction activity over the coming years, increasing the
number of branches in the network to 49 including 20 in the Greater Dublin Area.
In February 2018, the Group completed the acquisition of Leyland SDM, a 21-branch decorating
and DIY business that complements the Group’s larger Selco merchanting branches in the Greater
London Area.
The Group maintained its focus on leadership development with training programmes operating
across a number of Business Units.
The Group will continue to allocate capital for new
branches in strategic locations and acquisition
opportunities that complement existing branch locations.
Growth in new geographic markets continues to be a high
strategic priority.
The Group will continue to focus on the development of
the Group’s management teams and provide opportunities
for developing key leadership competencies.
A Supportive
Organisational Structure
and Management
Key Performance Indicators
pages 22 – 23
Risk Management
pages 48 – 53
• Revenue
• Adjusted EBITA Margin before Property Profit
• Adjusted EBITA Margin
• Capital Turn
• Adjusted EBITA
• Free Cash Flow
• Adjusted Earnings Per Share
• ROCE
• Revenue
• Adjusted EBITA Margin before Property Profit
• Adjusted EBITA Margin
• Adjusted EBITA
• Adjusted Earnings Per Share
• ROCE
• Revenue
• Adjusted EBITA Margin before Property Profit
• Adjusted EBITA Margin
• Adjusted EBITA
• Free Cash Flow
• Adjusted Earnings Per Share
• ROCE
Link to Risk
• Macro-Economic Conditions
• Competition
• Acquisition and Integration of
New Businesses
• Credit Risk Relating to
Customers
• Supplier Rebates
• Internal Controls & Fraud
• Stock Management
• Competition
• Colleagues
• IT Systems and Infrastructure
• Cyber Security & Data
Protection
• Supplier Rebates
• Internal Controls & Fraud
• Stock Management
• Macro-Economic Conditions
• Competition
• Acquisition and Integration of
New Businesses
• Revenue
• Adjusted EBITA Margin before Property Profit
• Adjusted EBITA Margin
• Capital Turn
• Adjusted EBITA
• Free Cash Flow
• Adjusted Earnings Per Share
• ROCE
• Lost Time Injury Frequency Rate
• Colleagues
• IT Systems and Infrastructure
• Cyber Security & Data
Protection
• Health & Safety
• Acquisition and Integration of
New Businesses
• Internal Controls & Fraud
Ethics
and Integrity
A Group-wide programme to implement processes for compliance with the General Data
Protection Regulation (GDPR) was developed during 2017. The Group also developed procedures to
confirm supplier compliance with regulatory requirements including the UK Modern Slavery Act.
The maintenance of high ethical standards for the benefit
of all stakeholders remains an integral part of the Group’s
strategy.
• Lost Time Injury Frequency Rate
• Group Co2 Emissions
The Group Code of Business Conduct and Ethics, and existing policies relating to Anti-Bribery and
Corruption and Competition Compliance were reviewed and updated during the year.
The Group will continue to roll out its ethics training
programme to all Group employees.
An external effectiveness review carried out during 2017 found that the Group’s Internal Audit and
Risk Management procedures were fit for purpose and suggested a number of actions for further
development.
Group carbon emissions reduced by 3.1% in 2017.
The recommendations set out in the external effectiveness
review carried out during the year will be addressed as
part of the Internal Audit and Risk Management objectives
for 2018.
Reducing the frequency and severity of accidents remains
a key priority.
• Colleagues
• Health & Safety
• Internal Controls and Fraud
• Non-Ethical and Anti-
Competitive Practices
19
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Business Model
Creating value for
our stakeholders
Inputs
The continued success of
the Group is based on
Business Activities
We add value by building on our strengths and
leading market positions
Strong partnerships
with our customers.
Key Strengths
Leading market positions and brands
in each of the countries in which the
Group operates.
Sound financial metrics based on excellent
cash generation, a strong balance sheet and
the financial resources to fund ongoing
development activity.
A geographically diversified network of 649
branches with opportunities for further
growth through acquisition and organic
development.
A portfolio of highly cash generative and
profitable businesses.
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.
Core Values
Be Brilliant for Our Customers
Value Our People
Ambitious
Trustworthy
Entrepreneurial and Empowering
The contribution and
commitment of our
colleagues.
An efficient network
of trusted suppliers.
A strong financial
base to fund ongoing
development and
acquisition activity.
Recognising our
responsibility as
a member of the
communities where
our branches are
located.
20
Grafton Group plcAnnual Report & Accounts 2017 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.
Outputs
Growing our business
internationally
Outcomes
And sharing the resulting value
with our stakeholders
Operating Segments
Merchanting
Retailing
Manufacturing
91%
of Group
Revenue
(2016: 92%)
7%
of Group
Revenue
(2016: 6%)
2%
of Group
Revenue
(2016: 2%)
Revenue
£2.7bn
Adjusted Group
Operating Profit
£163.7m
Almost
13,000
colleagues in 649 branches
and support offices
3.1%
reduction
in CO2e Emissions
Over
£500,000
raised for charities
Shareholders
Increasing profitability and
earnings
Customers
Being brilliant for our
customers
Colleagues
Retaining a loyal, engaged and
well trained workforce
Suppliers
Building relationships to grow
our businesses
Communities
Engaging with local
communities
21
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Key Performance Indicators
The Key Performance Indicators (“KPIs”) below are used to track
performance and increase value for shareholders.
KPI
Definition and Relevance
Performance Trend
2017 Performance
Link to Risk
Link to Strategy
Revenue
Group revenue for the year is
a measure of overall growth.
2013 2014 2015 2016 2017
n
b
9
.
1
£
n
b
1
.
2
£
n
b
2
.
2
£
n
b
5
.
2
£
n
b
7
.
2
£
%
1
.
4
%
3
.
5
%
5
.
5
%
5
.
5
%
9
.
5
%
1
.
4
%
3
.
5
%
8
.
5
%
7
.
5
%
0
.
6
s
e
m
i
t
9
.
1
s
e
m
i
t
1
.
2
s
e
m
i
t
1
.
2
s
e
m
i
t
2
.
2
s
e
m
i
t
3
.
2
m
2
.
7
7
£
m
1
.
0
1
1
£
m
3
.
7
2
1
£
m
0
.
2
4
1
£
m
7
.
3
6
1
£
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 performance.
(The term “adjusted” means
before amortisation of
intangible assets arising on
acquisitions and exceptional
items of £19.7 million in
2016).
Adjusted EBITA
Margin
Capital Turn
Revenue divided by average
capital employed where
capital employed is the sum
of total equity and net debt at
each period end.
Adjusted EBITA Profit before intangible asset
amortisation on acquisitions,
exceptional items, net
finance expense and income
tax expense.
22
Group Revenue for 2017
was a record £2.7 billion,
an increase of 9 per cent
on 2016 and represented
the fifth successive year of
growth.
• Macro-Economic
Conditions
• Competition
EBITA margin before
property profit increased
by 40bps to 5.9 per cent.
• Macro-Economic
Conditions
• Competition
Increased by 30bps to 6.0%. • Macro-Economic
Conditions
• Competition
Capital turn increased to
2.3 times from 2.2 times.
• Macro-Economic
Conditions
• Competition
The Group delivered
growth in adjusted
operating profit for the
eighth successive year.
• Macro-Economic
Conditions
• Competition
Strong Financial
Base
Excellence in Service
Organic Growth and
Acquisitions
Organisational
Structure &
Management
Strong Financial
Base
Excellence in Service
Organic Growth and
Acquisitions
Organisational
Structure &
Management
Strong Financial
Base
Excellence in Service
Organic Growth and
Acquisitions
Organisational
Structure &
Management
Strong Financial
Base
Organisational
Structure &
Management
Strong Financial
Base
Excellence in Service
Organic Growth and
Acquisitions
Organisational
Structure &
Management
Grafton Group plcAnnual Report & Accounts 2017
Certain KPIs are used as financial measures
to incentivise executives. For 2017 these were
Adjusted Earnings per Share and Return on
Capital Employed which are identified below
with the symbol
Risk
Management
pages 48 - 53
Strategy
pages 17 - 19
KPI
Definition and Relevance
Performance Trend
2017 Performance
Link to Risk
Link to Strategy
Free Cash Flow Cash generated from
2013 2014 2015 2016 2017
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.
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.
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 injuries per
100,000 hours worked.
Adjusted
Earnings Per
Share
ROCE
Lost Time
Injury
Frequency
Rate
Group Co2
Emissions
The total tonnes of
greenhouse gas emitted by
Group activities, referred to
as our carbon footprint.
m
3
.
6
6
£
m
4
.
6
2
1
£
m
7
.
4
0
1
£
m
8
.
3
3
1
£
m
5
.
3
6
1
£
p
3
.
2
2
p
4
.
4
3
p
2
.
1
4
p
7
.
7
4
p
9
.
4
5
%
8
.
7
%
1
.
1
1
%
2
.
2
1
%
5
.
2
1
%
6
.
3
1
2
0
.
1
2
2
.
1
3
1
.
1
6
1
.
1
9
0
.
1
4
1
2
,
9
8
8
4
3
,
7
8
0
3
6
,
4
8
Free Cash Flow was up
£29.7m or 22 per cent in
2017.
• Macro-Economic
Conditions
• Competition
Adjusted EPS increased by
15 per cent to 54.9 pence
in 2017 from 47.7 pence
in 2016.
• Macro-Economic
Conditions
• Competition
Return on Capital
Employed (ROCE)
increased by 110 basis
points to 13.6 per cent.
• Macro-Economic
Conditions
• Competition
Strong Financial
Base
Organic Growth and
Acquisitions
Organisational
Structure &
Management
Strong Financial
Base
Excellence in Service
Organic Growth and
Acquisitions
Organisational
Structure &
Management
Strong Financial
Base
Excellence in Service
Organic Growth and
Acquisitions
Organisational
Structure &
Management
Lost Time Injury
Frequency Rate decreased
by 6 per cent since 2016.
• Health & Safety
Organisational
Structure &
Management
Ethics & Integrity
Group carbon emissions
reduced by 3.1 per cent
since 2016.
• Non-Ethical &
Ethics & Integrity
Anti-Competitive
Practices
23
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
24
Grafton Group plcAnnual Report & Accounts 2017 Sectoral & Strategic Review
Merchanting Segment
Revenue
2017
£’m
2016
£’m
Actual
Change
2,469.4
2,280.6
+8.3%
Adjusted operating profit before property profit
148.9
130.3
+14.3%
Adjusted operating profit margin before property profit
Adjusted operating profit
Adjusted operating profit margin
6.0%
151.6
6.1%
5.7%
135.2
5.9%
+30bps
+12.1%
+20bps
Merchanting is a core business
and competence of Grafton,
accounting for 91 per cent of
revenue from businesses in the
UK, Ireland, the Netherlands and
Belgium. The businesses in each
of these countries, all of which
have leading market positions,
reported increased revenue and
adjusted operating profit before
property profit for the year.
25
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Sectoral and Strategic Review (continued)
UK Merchanting
The UK Merchanting segment trades from 479
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.
Revenue
Adjusted operating profit before property profit
Adjusted operating profit margin before property profit
Adjusted operating profit
Adjusted operating profit margin
2017
£’m
2016
£’m
Actual
Change
1,845.1
1,762.3
100.9
5.5%
102.6
5.6%
94.8
5.4%
99.7
5.7%
+4.7%
+6.5%
+10bps
+2.9%
(10bps)
The UK Merchanting business delivered a good
performance despite relatively weak growth
in the UK economy. The business traded
against the backdrop of low volume growth in
the residential RMI market and a significant
pick-up in the rate of building materials price
inflation. Mixed trading conditions were
influenced by general economic and household
uncertainty and a competitive pricing
environment. The pace of growth in house
prices slowed and the number of housing
transactions, a driver of RMI spending, was
flat at 1.2 million for the fourth successive year.
Against this challenging backdrop, average
daily like-for-like revenue grew by 4.5 per cent
comprising volume growth of 2.0 per cent and
inflation of 2.5 per cent.
Revenue growth in the like-for-like business
was £70.8 million and new branches and
developments generated revenue of £56.5
million. These gains were partly offset by a
revenue decline of £44.7 million due to the
closure of 47 Plumbase and Contracts branches
in the fourth quarter of 2016.
Market Positions
Builders Merchanting
Plumbers Merchanting
No. 3
No. 4
Proportion of Group Revenue
68%
Key Brands
26
Grafton Group plcAnnual Report & Accounts 2017 The adjusted operating
profit margin before
property profit
advanced by 10 basis
points after absorbing
an increase of £3.0
million in Selco store
opening costs.
An increase in the gross margin by 30 basis
points was due to a favourable change in mix
related to increased revenue in Selco.
of five branches in the first half and seven
in the second half of the year. The business
traded from 59 branches at the year end.
The adjusted operating profit margin before
property profit advanced by 10 basis points
after absorbing an increase of £3.0 million in
Selco store opening costs.
Selco increased its high level of operating
profit before store opening costs which were
ahead of the prior year by £3.0 million.
Selco Builders Warehouse, the retail style
merchanting model for trade and business
customers, expanded its branch network
organically at the fastest rate in its history.
Reported revenue growth of 15 per cent for the
year came principally from the opening of new
branches.
Average daily like-for-like revenue growth
moderated in the Greater London Area,
which accounted for three quarters of
revenue, following a sustained period of
outperformance. Like-for-like revenue growth
was also influenced by the transfer of revenue
from a number of long established branches,
that were trading at record levels of activity
and with limited spare capacity, to a number
of new branches that were opened over the
past eighteen months. There was a significant
increase in market coverage with the opening
Development of Selco’s multi-channel offering
continued with the launch of a new on-line
platform with enhanced click and collect
functionality and a new App that allows
customers to prepare lists of building materials
required for individual projects, receive quotes
and place orders through their smartphones or
other devices.
Buildbase performed well despite mixed
market conditions that saw weak volume
growth in the residential RMI market and
stronger house building activity. Commercial
initiatives drove like-for-like volume growth in
revenue and the business recovered significant
supplier price increases related to the effects of
sterling exchange rate weakness and increased
commodity prices.
The gross margin was maintained in a
competitive market aided by procurement
27
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Sectoral and Strategic Review (continued)
UK Merchanting (continued)
gains, a more favourable product mix and
targeted price adjustments. Overall, Buildbase
recorded an improvement in operating profit
and margin in the year.
The process of upgrading the Buildbase
legacy trading and back office systems is
at an advanced stage following two years
of planning and development activity. The
trading system recently entered the parallel
pilot phase of testing in a number of branches
with rollout to the branch estate expected to
commence towards the end of this year. The
expected incremental costs of implementation
and user training in the current year is circa
£3.0 million and the annual amortisation
charge following full deployment across the
branch network will be circa £3.2 million per
annum.
Plumbase profitability was substantially
improved from a low base despite revenue
being lower due to branch closures in 2016.
Management were successful in growing
like-for-like revenue and in maintaining gross
margin discipline in a very competitive market
environment. Actions taken in Plumbase to
improve the customer mix and the initiatives
taken over the past eighteen months started
to deliver benefits. The bathroom distribution
business continued to deliver a strong level of
operating profit and a good operating margin.
Buildbase Civils, a distributor of heavyside
building materials, made good progress under
new management increasing revenue and
operating profit. The business benefitted from
the branch consolidation and restructuring
undertaken last year and from positive
trading conditions in the new housing and
infrastructure markets. The branches in
Scotland, that trade under the PDM brand,
successfully responded to the completion of a
number of major hydro electric projects with
new business wins for the supply of materials
to groundworks projects and reported a good
outcome for the year in a more challenging
trading environment.
T.G. Lynes, a leading distributor of pipes and
fittings to commercial heating, plumbing and
mechanical services contractors delivered
strong revenue and profit growth. The
business leveraged its selling and logistics
capability and realised significant economies
of scale from its single site facility in Enfield
that services customers operating primarily
within the M25 Motorway. The small network
of Plumbase Industrial branches, that also
trade in this market, achieved a significantly
improved result.
MacBlair, the Northern Ireland merchanting
business, realised good revenue and profit
growth in its provincial branch network and
made an encouraging start to realising gains
from investment in the branch infrastructure
in the Greater Belfast Area which represents a
future growth opportunity.
28
Grafton Group plcAnnual Report & Accounts 2017 UK Merchanting Strategy in Action
The key elements of the Group’s UK merchanting strategy are:
• Focusing on the 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
attractive segments of merchanting market as a
preferred buyer;
• Developing sustainable position in the electrical
distribution market;
• Growing hire centre revenue in builders
merchanting branches; and
• Expanding selectively in complementary product
markets.
During 2017 this strategy was implemented through
continued organic development of the Selco branch
network, with 12 new branches opened during the year and
plans to open seven new branches this year and to relocate
its sizeable long established branch at Cricklewood to a new
store nearby.
Selco continued to implement a clear and well-focused
strategy that is based on an opportunity to grow revenue
and the scale of the business. This involved increased
investment and a step-up in the number of branch
openings and is supported by a very successful operating
model.
The acquisition in February 2018 of Leyland SDM, a
21-branch decorating and DIY business, complements the
Group’s larger Selco merchanting branches in the Greater
London Area.
29
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Sectoral and Strategic Review (continued)
Irish Merchanting
The Irish Merchanting segment trades mainly
under the Chadwicks and Heiton Buckley brands
in the Republic of Ireland.
2017
£’m
2016
£’m
Actual
Change
Constant
Currency
Change
Revenue
403.6
347.3
+16.2%
+8.9%
Operating profit before property profit
Operating profit margin before property profit
Operating profit
Operating profit margin
34.5
8.5%
35.5
8.8%
27.1
7.8%
27.1
+27.3%
+19.7%
+70bps
+31.2%
+23.3%
7.8%
+100bps
2017 was another year of consistent market
outperformance by the Irish Merchanting
business and the fourth consecutive year
to report double digit like-for-like revenue
growth. The business continued to achieve
excellent growth in operating profit.
Management used the increased scale and
operational leverage of the business to achieve
procurement gains and efficiencies across the
branch network resulting in an increase in
the pre-property operating profit margin by 70
basis points to 8.5 per cent.
The Irish Merchanting business used
the benefits of national scale to continue
developing close relationships with customers
supported by competitive pricing and great
service. Initiatives to increase the gross profit
margin were successful and more than offset
the adverse impact of a change in the mix of
business related to increased revenue from
residential and commercial new build projects.
Some of the gains from increased revenue were
reinvested in the businesses to support the
higher level of activity in the branch network
and to provide for further progress in a market
that offers significant growth potential. This
involved creating 60 new roles that will
allow the business to continue to leverage its
leadership position as the market returns to
a more normalised level of activity over the
coming years.
Overall activity in the construction sector
increased during the year although growth
was uneven across the industry. Recently
published Government statistics show that just
10,283 new build homes were sold last year, an
increase of 42 per cent on 2016 but well short
of the estimated 30,000 new homes required to
meet long term annual demand. This points
to a more sustained but measured increase in
new builds over the coming years.
Home owners opted to renovate their existing
homes as transactions in the secondary
housing market remained low due to a
lack of supply. A pick-up in non-residential
construction was concentrated in the office,
retail and hotel sectors in the Dublin Area.
Although the civils and infrastructure sector
was softer in 2017 following the completion of
a number of major projects in 2016, prospects
for 2018 are very encouraging due to the
current pipeline of projects.
Market Positions
Builders Merchanting
Plumbers Merchanting
Steel Stock Holding
No. 1
No. 1
No. 1
Proportion of Group Revenue
15%
Key Brands
30
Grafton Group plcAnnual Report & Accounts 2017 Irish 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 and acquisitions.
The opening of three branches in Dublin, that provide
convenient collection points for customers, increased the
branch network to 49 nationally including 20 in the Greater
Dublin Area. We also continued to invest in customer
service related opportunities with the opening of three
small plant and tool hire implants and the introduction of a
range of commercial plumbing products.
31
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Sectoral and Strategic Review (continued)
Netherlands Merchanting
Grafton trades under the Isero and Gunters en
Meuser brands in the Netherlands.
Revenue
Adjusted operating profit
Adjusted operating profit margin
2017
£’m
131.0
12.6
9.6%
2016
£’m
87.7
9.1
Actual
Change
Constant
Currency
Change
+49.4%
+39.8%
+38.1%
+29.3%
10.4%
(80bps)
The Netherlands business delivered revenue
growth of 49.4 per cent, increased adjusted
operating profit by 38.1 per cent and expanded
the branch network by 19 to 58 with the
completion of three acquisitions. The business
has significantly evolved, under a strong
management team, since the Group entered
the Netherlands market at the end of 2015 with
the acquisition of Isero. A leadership position
and strong presence has been established
in the tools, ironmongery and fixings
segment of the merchanting market which
has a significant addressable market and
opportunities to make bolt-on acquisitions.
Like-for-like revenue grew by 5.4 per cent
in the Isero business. Strong growth in the
branch network, driven by an increased focus
on smaller projects that generate higher
returns, was partly offset by lower revenue
from larger projects.
The like-for-like gross margin improved due
to positive mix effects and procurement
gains. Growth in operating profit and in the
operating margin in the Isero business was
partly offset by operating costs incurred on
a new on-line platform and on the planned
relocation of the central distribution facility to
support recent and anticipated growth in the
branch network.
Market Position
Builders Merchanting
(ironmongery, tools and fixings)
No. 1
Proportion of Group Revenue
5%
Key Brands
32
Grafton Group plcAnnual Report & Accounts 2017 Netherlands 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
The 14 branch Amsterdam based Gunters en Meuser business
acquired on 5 January 2017 traded ahead of expectations and
made a strong operating profit contribution for the year. The
business is primarily focused on the maintenance of private
and public sector housing and public sector non-residential
properties.
attractive segments of the merchanting market; and
• Using Group scale and expertise to enhance product
ranges in existing branch network.
The small single branch business acquired in Wijchen, Eastern
Netherlands was fully integrated and improved its market
position in the town.
Scholte & de Vries – Estoppey, a third generation family
business, trading from four branches located primarily in the
Greater Amsterdam Area, was acquired in November 2017.
33
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Sectoral and Strategic Review (continued)
Belgium Merchanting
Grafton trades under the YouBuild and MPRO
brands in Belgium.
Revenue
Operating profit/(loss)
Operating profit margin
2017
£’m
89.6
0.9
1.0%
2016
£’m
83.4
Actual
Change
Constant
Currency
Change
+7.5%
+0.5%
(0.7)
+234.4%
+220.0%
(0.8%)
+180bps
Market Position
Merchanting Market
No. 2
Proportion of Group Revenue
Like-for-like constant currency revenue
increased by 1.4 per cent in a more stable
market that saw a return to modest growth
in the second quarter that continued through
to the year end. The customer base was
reoriented towards a small to medium sized
trade customer collected business model
that led to a reduction in distribution costs.
New procurement arrangements and cost
reduction initiatives also contributed to the
improvement in performance.
Prior to the year end, the Group acquired the
35 per cent shareholding in YouBuild that it
did not already own. YouBuild trades from
11 branches that are located mainly in the
Flanders region and accounts for over half
of the Belgian revenue. The Central Brussels
branch was recently relocated to a new
purpose built facility on an adjoining site
significantly expanding the range of products
on offer and improving branch merchandising
and logistics.
3%
Key Brands
34
Grafton Group plcAnnual Report & Accounts 2017 Belgium Merchanting Strategy in Action
The Group’s Belgium Merchanting strategy focuses on:
• Increasing profitability in existing estate;
• 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 and acquisitions if the projected returns meet
the Group’s hurdle rates.
35
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information 36
Grafton Group plcAnnual Report & Accounts 2017 Sectoral and Strategic Review
Retailing
Revenue
Operating profit
Operating profit margin
2017
£’m
2016
£’m
Actual
Change
Constant
Currency
Change
180.4
157.1
+14.8%
+7.4%
11.2
6.2%
7.3
+53.1%
+44.3%
4.7%
+150bps
The Group is the largest DIY,
Home & Garden retailer in
Ireland trading from 35 stores
nationally under the Woodie’s
brand.
37
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Sectoral and Strategic Review (continued)
Retailing
Woodie’s, Ireland’s number one retailer for DIY,
Home & Garden products, expanded its market
position with like-for-like revenue growth of 9.1
per cent.
Market Position
DIY Retailing Ireland
No. 1
Proportion of Group Revenue
7%
Key Brand
The strong performance for the year reflected
the positive response from customers to the
transformation programme implemented in
recent years. This programme sought to build
a business for the future to meet the evolving
needs of customers while recognising the
unique heritage of Woodie’s in the Irish retail
market. Woodie’s traded strongly though the
year in a favourable economy and achieved
above market growth from improved and
extended product ranges and initiatives in the
Seasonal, Kitchens and DIY categories.
Eight stores were upgraded taking the
number completed to 20 by the year-end
representing two-thirds of revenue. Woodie’s
online presence, which allows customers the
convenience to shop at any time using the
direct delivery service or to click-and-collect
from stores, was enhanced with a new website
and on-line revenue doubled.
Woodie’s retained its Great Place to Work
status and almost one third of colleagues
completed accredited educational programmes
which are important in continuing to deliver
a market leading service and a good shopping
experience for customers.
The benefit of increased revenue was
optimised by tight control of costs and
operating profit increased by 53.1 per cent. The
operating profit margin advanced by 150 basis
points to 6.2 per cent and has grown by 360
basis points over the past two years.
38
Grafton Group plcAnnual Report & Accounts 2017 Retailing Strategy in Action
The Group’s Retailing 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 continued
to be upgraded in line with evolving
technology and retail trends. It now
allows the convenience to shop at any
time using the direct delivery service or
to click-and-collect from stores.
Social media continues to be an integral
part of ongoing marketing programmes.
The business has over 94,000 Facebook
likes and almost 8,000 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
in 2017 following the successful
rollout in 2016 of the new layout and
merchandising concept. This took the
number of branches completed to 20 by
the year-end representing two thirds
of total revenue. The newly formatted
stores deliver an improved shopping
environment, enhance performance
and protect Woodie’s strong market
leadership position.
39
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information 40
Grafton Group plcAnnual Report & Accounts 2017 Sectoral and Strategic Review
Manufacturing
Revenue
Operating profit
2017
£’m
66.1
15.1
2016
£’m
58.7
12.1
Actual
Change
Constant
Currency
Change
+12.5%
+12.0%
+24.5%
+23.9%
Operating profit margin
22.9%
20.7%
+220bps
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.
41
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Sectoral and Strategic Review (continued)
Manufacturing
CPI EuroMix consolidated its market leadership
position in the dry mortar market in Britain
where it operates from ten plants. The business
had another successful year under an excellent
management team that is focused on industry
leading standards and continuous performance
improvement.
Market Position
Mortar Manufacturing UK
No. 1
Proportion of Group Revenue
Revenue growth was driven by increased
volumes in a strong house building market,
product innovation, customer service
initiatives that differentiate the business in
the market place and recovery of raw material
price increases. There was significant growth
in revenue from EuroMix pre-mixed bagged
products and concrete in a competitive pricing
environment.
The gross margin was stable and overheads
were down despite the increase in volumes.
Operating profit increased by 24.5 per cent and
the operating profit margin was up by 220 basis
points and has increased by 410 basis points
over the past two years.
2%
Key Brands
42
Grafton Group plcAnnual Report & Accounts 2017
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.
43
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Financial Review
The Group retains
its medium term
objective of
achieving a Group
operating margin of
seven per cent and
a return on capital
employed of fifteen
per cent.
44
Grafton Group plcAnnual Report & Accounts 2017 Our three strategic pillars are based on increasing
revenue, operating margin and capital turn. The Group
reported revenue of £1.8 billion, an operating margin
of 3.4 per cent and capital turn of 1.8 times for 2012
and since then has achieved strong increases in each
of these metrics such that, in the financial period just
ended, revenue had grown by 54 per cent to £2.7 billion,
the adjusted operating margin was 260 basis points
higher at 6.0 per cent and capital turn improved to 2.3
times. As a consequence, adjusted earnings per share
has increased by 263 per cent from 15.1 pence to 54.9
pence and return on capital employed has grown from
6.1 per cent to 13.6 per cent.
Significant improvement in the Group’s financial
returns have been made over the last five years and
the Group retains its medium term objective of
achieving a Group operating margin of seven per cent
and a return on capital employed of fifteen per cent.
Revenue
Group revenue increased by 8.8 per cent to £2.7 billion
(2016: £2.5 billion) and by 6.8 per cent in constant
currency. Volume and price growth of 5.3 per cent in
the like-for-like business increased revenue by £131.4
million. Acquisitions and new branches contributed
revenue of £92.9 million which was partially offset
by a revenue decline of £52.3 million from branch
closures and divestments. A favourable currency
translation gain, due to the strengthening of the euro,
increased sterling revenue by £47.4 million.
Adjusted Operating Profit
Adjusted operating profit of £163.7 million (2016:
£142.0 million) increased by 15.2 per cent driven
principally by strong growth in the like-for-like
business. The profit contribution from development
activity reflected a good contribution from the
Gunters en Meuser acquisition that was partially
offset by increased store opening costs in Selco.
Operating profit before property profit increased by
17.4 per cent to £160.9 million (2016: £137.1 million).
Property profit declined to £2.7 million from £4.9
million.
Growth in the adjusted operating margin by 30
basis points to 6.0 per cent and by 40 basis points
to 5.9 per cent excluding property profit was due to
volume growth and efficiencies across the businesses
including a focus on tight control of overheads in
45
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Financial Review (continued)
the like-for-like business and benefits from
successfully restructuring the UK Plumbing,
Heating and Contracts businesses in the last
quarter of 2016.
Net Finance Income and Expense
The net finance expense increased to £6.4
million (2016: £5.9 million). The net bank
interest payable declined to £4.2 million (2016:
£4.7 million). The benefit of lower average net
debt and an easing of market rates for the euro
was partially offset by the adverse impact on
translation of interest payable on the Group’s
euro denominated debt. The net cost of defined
benefit pension scheme obligations increased
to £0.7 million (2016: £0.5 million). There was
a net foreign exchange loss of £1.0 million
(2016: £0.2 million) that arose primarily on the
translation of Euro and US dollar denominated
cash and overdrafts.
Taxation
The income tax expense of £26.6 million (2016:
£21.1 million) was equivalent to an effective
tax rate of 17.2 per cent (2016: 18.5 per cent).
The underlying rate for the year was 18.5
per cent (2016: 19.0 per cent). Non-recurring
tax deductions accounted for the difference
between the effective rate and underlying
rate of 18.5 per cent. The underlying tax
rate is impacted by the disallowance of a tax
deduction for certain overheads including
depreciation on property. The underlying
tax rate for the Group is most sensitive to
changes in the UK rate of corporation tax
which declined by one per cent to 19 per cent
with effect from 1 April 2017. A further two
percentage point reduction to 17 per cent will
take effect on 1 April 2020.
Capital Expenditure and Investment in
Intangible Assets
Gross capital expenditure was £73.7 million
(2016: £50.1 million) and there was expenditure
of £7.7 million (2016: £10.3 million) on
intangible assets. Proceeds of £8.8 million
(2016: £10.0 million) were received on disposal
of fixed assets. The net investment on capital
expenditure and intangible assets was £72.6
million (2016: £50.4 million).
by a decline of 30 basis points to 2.6 per cent
in bond yields used to discount UK scheme
liabilities.
Development expenditure of £41.6 million
(2016: £27.2 million) was concentrated on
new Selco branches, the purchase of freehold
interests in two merchanting branches in
Ireland, increasing the merchanting network
in Dublin, branch upgrades across the Group’s
estate and other projects to grow future
profitability. Asset replacement expenditure
of £32.1 million (2016 £22.9 million), which
compares to the depreciation charge of £39.5
million, related to the distribution fleet
that supports delivered revenue, replacing
equipment, plant and tools that are hired to
customers and other assets required to operate
the Group’s network of 649 branches.
An investment of £7.7 million (2016: £10.3
million) was made on the new IT platform in
Buildbase and in other software development
projects across the Group.
In 2018, development and replacement
expenditure is anticipated to be approximately
twice the level of depreciation excluding
acquisitions.
Pensions
The Group’s main pension arrangements
are operated through defined contribution
schemes which apply to over 90 per cent of
colleagues. The net deficit on the defined
benefit pensions schemes declined by £7.8
million to £23.5 million (31 December 2016:
£31.3 million). The schemes, which are closed
to new members, have 900 current and 1,800
deferred members and pensioners.
The reduction in the deficit was mainly
attributed to good returns on scheme assets
which were valued at £239.4 million at the year
end. Updated mortality assumptions and a fall
in expectations for future inflation reduced
scheme liabilities and the deficit in the UK
schemes. These gains were partially offset
Net Debt
Year-end net debt declined by £33.4 million to
£62.9 million (31 December 2016: £96.3 million).
The translation of euro denominated debt
at the year-end sterling-euro exchange rate
increased the Group’s net debt by £9.5 million.
The Group’s gross debt is drawn in euros and
provides a hedge against exchange rate risk on
euro assets invested in the Group’s businesses
in Ireland, the Netherlands and Belgium.
The gearing ratio declined to five per cent (31
December 2016: nine per cent). The Group
remains in a very strong financial position
with EBITDA interest cover of 48.4 times (31
December 2016: 37.9 times) and net debt of 0.31
times EBITDA (31 December 2016: 0.54 times).
The Group’s leverage policy is to maintain its
current investment grade credit rating.
Financing
The Group had bilateral loan facilities of £528.3
million with six relationship banks at the year
end. In March 2017, an option was exercised
to extend facilities of £430.7 million with five
banks for a further year to March 2022. The
average maturity of committed facilities of
£528.3 million, including a facility of £97.6
million maturing in March 2021, was 4.0
years at 31 December 2017. A further one-year
extension option was exercised in February
2018 for facilities of £430.7 million with five of
the Group’s six relationship banks.
The Group’s key financing objective is to
ensure that it has the necessary liquidity and
resources to support the long term funding of
the business.
At 31 December 2017 the Group had undrawn
bank facilities of £213.1 million (31 December
2016: £217.6 million) and cash balances and
deposits of £253.7 million which together with
46
Grafton Group plcAnnual Report & Accounts 2017 strong cash flow from operations provide good
liquidity and the capacity to fund investment
in working capital, replacement assets and
development activity including acquisitions.
Shareholders’ Equity
Shareholders’ equity increased by £112.5
million in the year to £1.2 billion. The effect of
profit after tax of £127.7 million less dividend
payments of £33.7 million increased equity by
£94.0 million. Equity increased by £6.4 million
due to a remeasurement gain on pension
schemes and by £4.1 million due to a currency
translation gain on euro denominated net
assets.
Return on Capital Employed and Asset
Turn
ROCE increased by 110 basis points to 13.6 per
cent (year to December 2016: 12.5 per cent)
and capital turn increased to 2.3 times from
2.2 times in 2016. The generation of increased
returns on capital employed is a key financial
metric in the creation of shareholder value and
was achieved through increasing profitability
in existing businesses and allocating
development capital to acquisitions and
organic developments that meet a demanding
hurdle rate of return on capital employed.
David Arnold
Chief Financial Officer
47
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information 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 risk 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 and 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
processes that fulfil the Board’s corporate
governance obligations and support the
Group’s strategic objectives. The Board is
responsible for establishing and maintaining
risk management processes 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 UK Corporate Governance 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 closely controlled
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 also significant 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 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 the Group Head Office in Dublin.
The Group’s financial reporting process is
controlled by reference to the Group Financial
Accounting Policies and Procedures Manual,
which sets out the general accounting
principles, requirements and internal controls
applicable to all Group businesses.
Group Risk Committee
The Group has established a Group Risk
Committee (“GRC”) whose membership
reflects a range of executive functions, skills,
expertise, experience and business activities
within the Group. The GRC is responsible for
the 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
48
Grafton Group plcAnnual Report & Accounts 2017 and report them quarterly to the GRC. The
management team in each Business Unit is
responsible for identifying risks and for the
day to day management of those risks.
The GRC initiates Group-wide actions to
manage risks. Recent GRC initiatives and
actions have included:
• Development of procedures to confirm
supplier compliance with regulatory
requirements and ethical standards;
• Defining and communicating
responsibilities of the Group and Business
Units in relation to the management of risk;
• Monitoring the roll-out of Ethics training
and Business Continuity Planning across
the Group;
• Sharing of good practice and lessons
learned;
• Actions to support the Group’s information
security programme; and
• Monitoring of relevant legislative and
regulatory developments and the Group’s
response to these, including Modern Slavery
Act, Gender Pay Reporting, GDPR, Payment
Practices Reporting, and Corporate Criminal
Offences, including updates to Group
Policies where necessary.
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.
In line with best practice, the Group’s Risk
Management and Internal Audit procedures
are subject to a review of their effectiveness by
an independent third party on a periodic basis.
An effectiveness review was carried out in
2017 by KPMG, which found that both Internal
Audit and Risk Management procedures
in the Group were fit for purpose, whilst
setting out a number of recommendations
for further development of each function.
These recommendations form part of Internal
Audit and Risk Management objectives to be
addressed in 2018.
The Risk Management Framework diagram
below illustrates the key responsibilities
within the Group’s risk management structure.
In the Board’s view, the ongoing information it
receives is sufficient to enable it to review the
effectiveness of the Group’s system of internal
control. The Directors confirm that they have
reviewed the effectiveness of internal controls.
In particular, during the year the Board has
considered the significant risks affecting the
business and the way in which these risks are
managed, controlled and monitored.
The Board of Directors
• Maintaining risk management and internal control systems
• Determining and reviewing risk appetite, and establishing risk management
strategies
• Monitoring principal risks
Audit and Risk Committee
• Monitoring and reviewing the effectiveness of the Group’s risk management and
internal control systems
Internal Audit
• Receiving reports from management on its review of risk management and internal
The Group Internal Audit function focuses
on areas of greatest risk to the Group,
by developing and executing an annual
programme of audit work which is based
on covering the key risks to the Group and
Business Units as set out in their risk registers.
It monitors compliance and considers the
effectiveness of internal control throughout
the Group. Where appropriate this involves co-
ordinating work with audit teams based in the
businesses who perform compliance reviews
of branch level procedures, health and safety
and transport.
The Audit and Risk Committee approves the
Internal Audit Plan, reviews Internal Audit
Reports and meets with the Group Internal
Audit and Business Risk Director in order to
satisfy itself of 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
controls
• Reviewing principal risks as documented on the Corporate Risk Register
• Approving the internal audit plan and reviewing reports from Group Internal Audit
• Receiving reports on internal control from the External Auditors
Group Risk Committee
Internal Audit
• Maintaining the Corporate Risk
• Establishing a risk based annual
Register
internal audit plan
• Determining and maintaining risk
management policies and procedures
• Reviewing business unit risk registers
and sharing risk management practices
between businesses
• Initiating Group-wide risk
management actions
• Reviewing internal controls
• Reporting to the Audit and Risk
Committee, including on the
completion of internal control actions
Business Units, Functions and Employees
• Sharing responsibility for effective management of risk
• Maintaining risk registers and monitoring the management of risk at business unit
and functional levels
• Identifying and reporting emerging risks
49
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Risk Management (continued)
Risk Movement
Link to Strategy
Key Risks
New
Unchanged
Increased
Decreased
Strong Financial Base
Excellence in Service
Organic Growth and Acquisitions
Organisational Structure & Management
Ethics and Integrity
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 Movement
Link to Strategy
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 at least a
further 12 months 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.
50
Grafton Group plcAnnual Report & Accounts 2017
Competition in
Merchanting, DIY and
Mortar Markets
Risk Movement
Link to Strategy
Colleague Recruitment,
Engagement, Retention
and Skills
Risk Movement
Link to Strategy
IT Systems and
Infrastructure
Risk Movement
Link to Strategy
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.
Risk Description
The Group has in the region of 13,000 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.
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 legacy systems. These changes have the potential to
disrupt operations.
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.
The Group has established and continues to develop
online sales capability to respond to changing customer
requirements. 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.
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. This enabled a
number of Business Unit CEO roles to be filled internally
during 2017.
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. System changes are
subject to rigorous testing and confirmation that they
meet defined business acceptance criteria prior to full
implementation. Regular progress reports are made to
the Board and planning and implementation is subject
to review by Group Internal Audit.
51
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Risk Management (continued)
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
Key Risks (continued)
Cyber Security and Data
Protection
Risk Movement
Link to Strategy
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, including the risk of a
material loss of revenue, steal information or commit
fraud.
Theft of data relating to employees, business partners or
customers may result in a regulatory breach and could
impact the reputation of the Group.
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.
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.
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.
Health and Safety
Risk Movement
Link to Strategy
Acquisition and
Integration of New
Businesses
Risk Movement
Link to Strategy
Credit Risk Relating to
Customers
Risk Movement
Link to Strategy
52
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 has put in place a Cyber
Insurance Policy to provide additional cover against
cyber risk.
A programme to oversee the actions required for GDPR
compliance has been established at a Group level,
with leads established in each business unit to co-
ordinate activities. The Group has also established an
Information Security and GDPR Steering committee
to monitor and oversee the delivery of the Information
Security and GDPR Programmes.
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.
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, and the sharing of any lessons learnt
identified by those reviews.
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 and Irish merchanting
businesses. Past-due receivables are monitored and
actively managed on an on-going basis and bad debt
provisions are made as required. Enforcement action is
taken against customers who do not fulfil their payment
obligations where it is anticipated that all or part of a
debt will be recovered.
Grafton Group plcAnnual Report & Accounts 2017
Supplier Rebates
Risk Movement
Link to Strategy
Internal Controls
and Fraud
Risk Movement
Link to Strategy
Risk Description
The total value of income the Group receives from
its suppliers in the form of volume rebates and other
amounts, including product and marketing support,
represents a material percentage of its operating
profit. There is a risk that the Group does not collect all
supplier rebates receivable or that rebates are accounted
for incorrectly.
Risk Description
The Group is exposed to the risk of failure in financial
or operational controls in individual Business Units,
including the failure to prevent or detect fraud. A
breakdown in controls of this nature could lead to a
financial loss for the Group.
Non-Ethical and Anti-
Competitive Practices
Risk Movement
Link to Strategy
Risk Description
Non-ethical behaviour by any of the Group’s employees
may result in a breach of legislation, and potentially
significant fines and penalties, as well as damaging
the Group’s reputation. In particular, given the market
leading position of many of the Group’s businesses there
is a risk that anti-competitive practices could result in
the imposition of a penalty against the Group under
competition law.
Mitigation
The Group seeks to put in place written agreements with
all key suppliers detailing the terms and conditions of
rebate arrangements. Finance and procurement teams
work closely to validate amounts due from suppliers
based on these agreements and quantities purchased.
Rebates receivable are regularly reviewed and Business
Units engage in dialogue with suppliers regarding
collection. A proportion of rebate agreements provide
for repayment of rebates at regular intervals throughout
the year thereby reducing the amount receivable by the
Group at the year end.
Mitigation
The Group has established a framework of controls
incorporating a “three lines of defence” model to
protect against significant control deficiencies and the
risk of fraud. This includes documented policies and
procedures for key financial and operational processes,
ongoing monitoring of management accounts both
at Group and Business Unit level, monthly sign-off of
Business Unit accounts by local finance directors and
an annual compliance statement. Business Units also
complete a six monthly self-assessment of key financial
controls which is subject to validation by Group Internal
Audit. Branch procedures are subject to regular review
and audit by Business Unit internal audit and loss
prevention teams.
Mitigation
The Group has established a Code of Business Conduct
and Ethics which sets out the high standard of
behaviour expected from the Group’s employees and
businesses. This is supported by a number of Group
policies which are cascaded down into Business
Units setting out the requirements in areas including
Anti-Bribery and Corruption and Competition Law.
These policies are communicated to all employees and
reinforced through mandatory on-line training which
also forms part of employee induction programmes.
“SpeakUp”, the Group wide, independently run, reporting
function, allows employees to anonymously report
any suspected wrongdoing or unethical behaviour. All
reported cases are investigated, which is overseen by
Group Internal Audit, with appropriate disciplinary
action taken where necessary.
Stock Management
Risk Movement
Link to Strategy
Risk Description
Inadequate stock management and control procedures
could result in a misstatement of inventory balances
and the holding of excessive inventory which may have
to be written down to realisable value which may result
in financial loss. In addition poor stock management
practices which lead to non-availability of products
required by customers will result in loss of revenue and
profit.
Mitigation
Each business has its own specific inventory
management practices and controls in place to
minimise excessive stock holding and avoid stock-outs,
including regular reviews of slow moving inventory
across branch networks. Inventory is counted and
verified on a regular basis at branches through either
full stock counts or regular checks on a rotation basis
of stocks that are controlled by perpetual inventory
systems.
53
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Corporate Social Responsibility
Some Highlights of our Performance in 2017
Over £500k
Raised by the Group’s
businesses for various
charities
30,000
Hours of training delivered
by Woodie’s across various
training modules
10,000
Employees
now registered with MyHub
employee portal
25,345km
cycled by colleagues
for various charities
2,500
Children helped by
Woodie’s Heroes campaign
funding a portable ultrasound
monitor at Temple Street
Children’s Hospital
77.1%
Of waste recycled across the
Group’s businesses
62%
Of branches accredited to ISO 14001,
the International Environmental
Management System
35.6m
Steps taken by CPI Euromix
colleagues as part of the 4-week
Pedometer Challenge that raised
£8k for the British
Heart Foundation
3.1%
Reduction in carbon
emissions compared
with 2016
54
Grafton Group plcAnnual Report & Accounts 2017 Grafton is committed to conducting its business in a socially responsible
manner. This is demonstrated in the way we engage with our colleagues,
customers, suppliers and with the communities in which we trade. The
Group is also committed to taking a balanced view on economic, social and
environmental issues when making business decisions.
The Group continues to recognise the importance of a strategic and coordinated
approach to the many aspects of its corporate social responsibility (“CSR”).
2017 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
The Group’s Code of Business Conduct and
Ethics and associated policies and training
modules are fundamental to establishing
the basic standards of behaviour which all
colleagues (and also contractors, agents and
business partners) of the Group are expected
to follow and to ensuring that the Group’s
principles of ethical behaviour are embedded
across all Business Units. The Group tracks
completion of online ethics and regulatory
training modules across all Business Units.
During the year the training modules were
translated into Dutch and rolled out in the
Netherlands business.
The Group’s commitment to ethical business
and good corporate governance was further
strengthened during the year with the
establishment of a Group-wide programme
for compliance with GDPR, the development
and piloting of procedures to confirm supplier
compliance with regulatory requirements
including the UK Modern Slavery Act, and the
completion of an external effectiveness review
of the Group’s risk management processes
which resulted in a number of actions that
55
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Corporate Social Responsibility (continued)
require further development.
Community and Charity Support
Grafton recognises its responsibility as a
member of the communities in which we
conduct business and we are committed
to developing links to those communities
through a range of community and charitable
initiatives supported by local colleagues and
management. The Group also supports a range
of charitable causes mainly at a local level
through its branch network. In 2017, Grafton
businesses raised over £500,000 in support of
charities.
The very successful “Woodie’s Heroes”
fundraising campaign raised a total of
€275,000 in 2017 and over €750,000 to date for
various children’s charities. The campaign
included cycling events, the recording of a
charity single and various other initiatives
across the branches. The charities benefitting
from the campaign in 2017 were Make a Wish
Ireland, Temple Street Children’s Hospital, Act
for Meningitis and The Jack and Jill Children’s
Foundation.
The Irish merchanting business supported
a number of charitable initiatives during
the year in support of various charities such
as Barnardos and St. Vincent de Paul. The
business also continued its 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 raising over £50,000
through a number of events and initiatives. A
further £80,000 was raised for various other
charities. Colleagues from across Buildbase
and Hirebase spent seven weeks in Tanzania
during the year assisting with the construction
of sanitary facilities for a local school in
partnership with Raleigh International.
In June 2017, Grafton Group plc sponsored
its sixth consecutive cycle challenge. The
four day challenge covered over 300 miles
from Poland to Prague. A team of senior
56
executives completed the challenge and raised
over £10,000 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
£118,000 in 2017 and almost £500,000 to date
through a variety of sporting events and
community initiatives. Selco also donated
to local charities as part of its new branch
opening activity.
The Netherlands merchanting 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 continues
to support a number of childrens’ charities
including the Children’s Cancer Foundation
and the “Music for life” and “Viva for Life”
campaigns which focus on the relief of child
poverty.
Colleagues from across
Buildbase and Hirebase spent
seven weeks in Tanzania
during the year, assisting with
the construction of sanitary
facilities for a local school,
in partnership with Raleigh
International.
Woodie’s colleagues took part in the Heroes cycle in August 2017, covering
over 1,500km in five days as part of a campaign to raise funds for Irish
children’s charities.
Grafton Group plcAnnual Report & Accounts 2017
Our values
Be brilliant for our customers
Value our people
Ambitious
Trustworthy
Entrepreneurial and empowering
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.
62 per cent of the Group’s branches are
accredited 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 and Belgian merchanting
businesses source timber from suppliers that
are FSC/PEFC certified.
Modern Slavery Act
The Group has issued a Modern Slavery
Policy Statement in respect of the year ended
31 December 2017, 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.
Carbon Footprint and Energy Reduction
Greenhouse Gas Emissions
Group CO2e Emissions
(Tonnes of CO2e)
2017
84,630
2016
87,348
Overall CO2 emissions for the Group decreased
by 3.1 per cent in 2017, in part due to the cleaner
energy now being supplied in the UK energy
market.
Ongoing renewal of the Group’s fleet and
continued installation of LED lighting have
also contributed to the Group’s lower carbon
footprint. In 2017 the Group invested in 177
new vehicles that comply with the latest and
most stringent Euro 6 low emission standard.
The Isero business in the Netherlands has
invested in a number of electric vans to reduce
emissions.
Energy Efficiency
During 2017 we have continued to install LED
lighting across our branch networks. All new
Selco stores have installed LED lighting and
energy management systems that reduce the
gas used in heating. The UK merchanting
business continues to issue monthly energy
reports to all branches to promote energy
saving at a local level.
57
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Corporate Social Responsibility (continued)
Pollution and Waste
Colleagues
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.
Recycling rates in 2017 remained static at
77.1 per cent. However it is hoped that the
rate will increase in future years following
the introduction of a new waste recycling
initiative in the UK merchanting business
during 2017.
The Belgian business participates in the
“Clean Site System” which aims to increase
collection and recycling of plastic waste on
construction sites by allowing customers to
purchase empty waste bags in the branches
and return them once full to branches
where they are stored and collected by an
accredited firm for recycling.
During 2017, MacBlair introduced a waste
recycling initiative for cardboard, plastic
and timber resulting in the business being
shortlisted for the ‘Waste Reduction Project
of the Year’ in the 2017 Business Eye awards.
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. The Group provide incentives to
employees through remuneration policies
that promote commitment and reward
achievement.
The Group’s Equality and Diversity Policy
states that Grafton will not tolerate
harassment or discriminatory practices
based on age, ethnicity, marital status,
medical condition, disability (both mental
and physical), nationality, religion, political
affiliation, gender, 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.
Grafton’s aim is to promote equality and to be
a welcoming, inclusive, diverse and safe place
to work for everyone. Gender Pay information
will be published on the websites of those 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,
with significant attention and resources
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 giving people
opportunities through internal promotions
and to complement internal appointments
with recruitment from outside of the
organisation.
The Irish merchanting business uses its
Leadership Academy to develop and retain
strong talent. Successful participants are
conferred with a City & Guilds Diploma. The
business also operates the ‘GMROI Sales
Academy’ which equips colleagues with the
essential tools required to develop their careers
as sales representatives.
The Group’s commitment to career
development has been reinforced by the
introduction of the Apprenticeships Levy
in the UK whereby a proportion of payroll
costs of UK employer companies are used
to recruit entry-level apprentices and
fund the development of future talent.
Existing employees can also benefit from
apprenticeship training programmes that lead
to level 3 and 5 ILM qualifications.
58
Grafton Group plcAnnual Report & Accounts 2017
Our values
Be brilliant for our customers
Value our people
Ambitious
Trustworthy
Entrepreneurial and empowering
Both Selco and the traditional
UK merchanting business
participated in the UK Best
Companies Survey which
resulted in ‘One to Watch’
accreditations, while Woodie’s
was recognised as a ‘Great
Place to Work’.
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. A training
program was also introduced to develop
Experts in key areas of customer support.
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 platform.
The Belgian business increased investment
in training, including management and
leadership programs, and training in sales,
driver and crane safety and first aid.
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. Both Selco and the traditional UK
merchanting business participated in the UK
Best Companies Survey which resulted in ‘One
to Watch’ accreditations, while Woodie’s was
recognised as a ‘Great Place to Work’.
The Group continued to roll out its cloud
based HR solution which currently allows
almost 10,000 colleagues to access and
update their employee records from a range
of devices. Colleagues in the UK 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.
The Group operates a Revenue-approved
Save as You Earn (SAYE) Scheme that enables
eligible UK colleagues to share in the success
of the overall Group. A scheme launched in
2014 matured in December 2017 that gives
participating employees the option to purchase
Grafton Units at a discount to the market price
of the shares at the time the options were
granted. A new SAYE scheme was launched
in 2017 which will mature in 2020. Colleagues
have the opportunity to benefit from any
increase in the share price over the three
year savings period. The Irish Merchanting
business also operates a Revenue-approved
profit sharing scheme.
Colleagues in the UK, have access to an
Employee Helpline, a confidential helpline
service available online or by telephone which
provides instant and unlimited 24/7 access to
them and their immediate family, to help and
support on a wide range of everyday issues
covering work, relationships, family matters,
financial, legal and health.
Colleagues also have access to “Speak-Up”, the
group-wide confidential reporting service
which provides 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. The Speak-Up line
will also be utilised for whistleblowing under
the Group’s GDPR compliance programme.
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.
59
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Corporate Social Responsibility (continued)
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.
A new electronic incident reporting system
was introduced across most of the Group in
2017 utilising the ‘Safety Cloud’ system. This
system has been used to encourage more
open reporting of all incidents. It is intended
that Safety Cloud will be further developed to
become the ‘one-stop-shop’ for safety rather
than simply being an incident reporting tool.
Online training, safety bulletins, audits and
checklists will be added to the system as they
are developed during the year.
The Group’s Lost Time Injury Frequency Rate
(LTIFR) reduced by 6 per cent to 1.09 lost time
injuries per 100,000 hours worked.
Looking ahead to 2018, the ongoing embedding
of local safety teams alongside the operational
leadership teams will form a significant part of
the Group’s health and safety activity using a
revised methodology that is based on a Group
average of 39 hours per working week.
Group-wide initiatives will continue to focus
on three high risk areas: the management
of pedestrians and vehicles in branches, safe
product storage and handling practices and
safe delivery to customers. Behavioural safety
leadership is fundamental to the Group’s
successful transition from a ‘Must Do’ safety
culture to a ‘Choose To’ safety culture and will
be a focus for all business leaders in 2018 and
beyond.
Health and Safety
The Group is committed to achieving the best
practicable standard of health and safety for
its colleagues, customers and visitors. Health
and safety is regarded as a vital element in the
overall management of the Group’s businesses
and is an agenda item for all meetings of the
Grafton Group plc Board and at Business Unit
review meetings. Effective health and safety
management is driven by the Board and senior
management.
The Group’s health, safety and environment
support teams were further strengthened
in 2017 with the recruitment of additional
advisors and the re-alignment of teams within
each business to increase local ownership and
leadership of safety. Senior management in
each business will directly manage their local
safety support teams to promote responsibility
for health and safety and to ensure that the
health and safety agenda is driven alongside
all other business priorities. During the year
the Group appointed Mike O’Hara as Group
Safety, Health, Environment and Quality
Director to strengthen its focus on behavioural
safety leadership to support and challenge the
Business Unit leaders and to provide overall
strategic direction and guidance to individual
Business Units. These changes to our safety
leadership and support teams further
demonstrate the Group’s ongoing commitment
to the health, safety and environment agenda.
Health and Safety improvement plans are in
place in each of the businesses which allow
for the measurement of future performance
against agreed improvement objectives. The
Group Health and Safety Policy, which sets out
the key responsibilities for health and safety
management across the Group, was reviewed
and updated during the year. Every employee
is expected to fulfil their responsibilities
as effectively as possible and to raise any
concerns about safety. The Group’s health
and safety training programmes develop
60
A new electronic incident
reporting system was
introduced across much of
the Group in 2017 utilising
the ‘Safety Cloud’ system.
This system has been used
to encourage more open
reporting of all incidents.
ISSUE 1 - OCTOBER 2017
DRIVER
NEWS
Written by drivers for drivers
VEHICLE CCTV
UPDATE – P.5
WHAT MIRRORS CAN HIDE P.6
“FANTASTIC KIT”
HIGHGATE DRIVER REVIEWS
BRANCH’S NEW TRUCK PAGE 7
NEW DRIVERS
FORUM MAKES
ITS MARK Buildbase drivers are putting their views to the
The first meetings have already taken place
with managers using driver feedback to help
make decisions. l FULL STORY – PAGE 2
people at the top of the company with a new
Drivers’ Forum.
WIN! £250 OF HIGH STREET VOUCHERS
TRY OUR QUIZ ON PAGE 8
Managing
Health & Safety
Practical advice and guidance to help
you manage the risks in your branch
Grafton Group plcAnnual Report & Accounts 2017
Our values
Be brilliant for our customers
Value our people
Ambitious
Trustworthy
Entrepreneurial and empowering
Case studies: Health and safety
MacBlair introduced a number of safety initiatives including mandatory eyesight testing for
all commercial vehicle drivers and alcohol and drugs testing after any incident and in certain
other circumstances.
Plumbase continued its drive to increase awareness of health and safety with its new
management handbook which contains practical advice and guidance for branch management.
Buildbase set up two drivers’ forums for delivery drivers from several branches, chaired by
the Regional Managing Directors.
Various strategies were introduced by Selco to reduce noise pollution from branches located in
residential areas.
CPI Mortars, the Group’s mortar manufacturing business, was the winner of the Mineral
Products Association (MPA) Occupational Health and Wellbeing Award during 2017 in
recognition of improvements achieved in the workplace by the fitting of hepa-filters to its
mobile skip-vac units. These filters virtually eliminate respirable crystalline silica (RCS)
emissions from the vac exhaust systems. This is an area of significant focus within the
industry as RCS is a known carcinogen.
CPI Mortars also held a Vulnerable Road User Awareness day in partnership with a primary
school to raise awareness of safety around heavy goods vehicles.
61
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information 62
Grafton Group plcAnnual Report & Accounts 2017 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
Chairman’s Annual Statement
Remuneration Policy Report
Annual Report on Remuneration
Report of the Directors
64
66
73
77
79
79
81
87
96
63
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Board of Directors and Secretary
Legend
Audit and Risk Committee
Finance Committee
Nominations Committee
Remuneration Committee
Committee Chairman
Michael J. Roney (USA), MBA
Non-Executive Chairman
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 Non-Executive
Chairman on 1 January 2017.
Career
Mr. Roney 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 formerly Non-
Executive Director of Johnson
Matthey Plc.
Current external appointments
Non-Executive Chairman of Next
plc, the FTSE 100 listed UK retailer.
Non-Executive Director of Brown-
Forman Corporation, the US based
spirits business and of Azelis SA, a
private company.
Gavin Slark (UK)
Chief Executive Officer
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.
David Arnold (UK), BSc,
FCMA, FCT
Chief Financial Officer
David Arnold joined the Group as
Group Chief Financial Officer on 9
September 2013.
Career
Mr. Slark was previously Group Chief
Executive of BSS Group plc, a leading
UK distributor of plumbing, heating,
pipeline and mechanical services
and products.
Career
Mr. Arnold was Group Finance
Director of Enterprise plc, the UK
Maintenance and Support Services
business, from 2010 to 2013 and was
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.
Current external appointments
Non-Executive Director of Galliford
Try plc, a UK housebuilding and
construction group.
Current external appointments
None.
Board Length of Service: 1.9 years
Board Length of Service: 7.0 years
Board Length of Service: 4.5 years
Finance Committee
Membership
G. Slark (Chairman)
D. Arnold
C. Rinn
Length of
Service*
7.0 years
4.5 years
14.0 years
Charles Rinn, MBA, FCCA
Group Financial Controller &
Secretary
64
Grafton Group plcAnnual Report & Accounts 2017
Frank van Zanten (NL), MBA
Non-Executive Director
Frank van Zanten was appointed to
the Board on 13 May 2013.
Paul Hampden Smith (UK), FCA
Non-Executive Director
Paul Hampden Smith was appointed
to the Board on 27 August 2015 and
was appointed Senior Independent
Director with effect from 9 May 2017.
Susan Murray (UK)
Non-Executive Director
Susan Murray was appointed to the
Board on 14 October 2016.
Vincent Crowley (IRL), BA, FCA
Non-Executive Director
Vincent Crowley was appointed to
the Board on 14 October 2016.
Career
Mr. van Zanten is Chief Executive
of Bunzl plc, the FTSE 100 UK
international distribution
and outsourcing Group with
operations across the Americas,
Europe and Australasia. 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.
Career
Mr. Hampden Smith 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 was previously Non-
Executive Director and Chairman of
the Audit Committee of Pendragon
plc, Redrow plc, DX Services plc and
Clipper Logistics plc.
Career
Mrs. Murray 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.
Career
In the course of a 24 year career
with Independent News & Media
PLC, a leading Irish newspaper and
media business, Mr. Crowley 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.
Current external appointments
Chief Executive of Bunzl plc.
Current external appointments
Non-Executive Director, Chairman
of the Audit Committee and a
member of the Nomination and
Remuneration Committees of
Bellway plc.
Current external appointments
Non-Executive Director of 2 Sisters
Food Group, a food manufacturing
company, and of Hays plc, a
provider of recruitment and human
resources services.
Current external appointments
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.
Board Length of Service: 4.8 years
Board Length of Service: 2.5 years
Board Length of Service: 1.4 years
Board Length of Service: 1.4 years
Remuneration Committee
Nomination Committee
Audit and Risk Committee
Membership
Length of
Service*
Membership
Length of
Service*
Membership
Length of
Service*
S. Murray (Chairman)
1.1 years
M. Roney (Chairman)
1.8 years
P. Hampden Smith (Chairman)
2.5 years
F. van Zanten
2.2 years
F. van Zanten
2.7 years
V. Crowley
P. Hampden Smith
2.2 years
P. Hampden Smith
2.6 years
S. Murray
1.1 years
0.2 years
S. Murray
V. Crowley
1.0 years
1.0 years
*All lengths of service are as at 12 March 2018
65
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Board Tenure
Executive and Non-Executive
Director Balance
14%
57%
29%
14%
29%
57%
More than 5 years
3-5 years
1-3 years
Executive Directors
Non-Executive Directors
Chairman
Directors’ Report on Corporate Governance
Compliance with the 2016 UK Corporate Governance Code
Grafton Group plc (“the Company”) is incorporated in Ireland and
is subject to Irish company law. Its Units (shares) are listed on the
London Stock Exchange and the Group is subject to the UK Corporate
Governance Code (“the Code”) which 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 during the year.
The Board believes that the Company has, throughout the accounting
period, complied with all relevant provisions of the Code.
LEADERSHIP
The Board of Directors
Role of the Board
Matters Reserved for Board Decision
The Board is responsible for the oversight and success of the Group’s
business. The Board’s responsibilities 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.
It is Board policy that no individual or small group of individuals can
dominate its decision-making.
The Board has delegated some of its responsibilities to the Audit and Risk,
Remuneration, Nomination and Finance Committees.
The Board has a formal schedule of matters specifically reserved for its
decision, covering:
• Strategic decisions;
• Risk management and internal controls;
• Acquisitions and capital expenditure above agreed thresholds;
• Approval of interim and final dividends and share purchases;
• Changes to the capital structure;
• Tax and treasury management;
• Approval of half-yearly and annual financial statements; and
• Budgets and matters currently or prospectively affecting the Group
and its performance.
Audit and Risk Committee
Nomination Committee
Remuneration Committee
Finance Committee
Supported by
Monitors the appropriateness and
integrity of the Group’s financial
reporting, external audit, internal
audit and risk management
processes.
Evaluates the composition of
the Board to ensure an effective
balance of skills and experience
and considers succession
planning for directors and senior
executives.
Determines the policy for
remuneration of the Chairman,
the Executive Directors, the
Company Secretary and such
other executive management as
it is designated to consider.
Considers the financing
requirements of the Group,
amendments to the terms of
existing bank facilities, finance
and operating leases for assets
other than property up to a
specified level and litigation
matters.
See page 73
for more information
See page 77
for more information
See page 79
See page 68
for more information
for more information
66
Grafton Group plcAnnual Report & Accounts 2017 Chairman and Chief Executive Officer
Board Tenure
Executive and Non-Executive
Director Balance
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 responsibilities of each role were documented in
a schedule approved by the Board during the year. The Chief Executive
Officer is responsible for day-to-day management of the Group including
implementing the 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.
Board meetings
The Board met on nine occasions during 2017. The Board also maintains
contact between meetings as required. These contacts are for the
purpose of receiving updates on developments from management. The
Board takes the major decisions while allowing management sufficient
scope to run the business within a centralised reporting framework. The
Group has arranged insurance cover up to a specified limit in respect of
legal actions against directors and officers.
Non-Executive Directors
Non-Executive Directors act constructively to challenge management
proposals and review the performance of the business and management.
During the year, the Chairman and Non-Executives met without the
Executives present.
Senior Independent Director
Mr. Paul Hampden Smith was appointed Senior Independent Director
with effect from 9 May 2017. He succeeded Mr. Roderick Ryan who
14%
57%
29%
14%
29%
57%
More than 5 years
3-5 years
1-3 years
Executive Directors
Non-Executive Directors
Chairman
retired from the Board on that date. Mr. Hampden Smith 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.
Company Secretary
The Directors have access to the advice and services of the Company
Secretary, Mr. 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.
Attendance at Board and Board Committee Meetings during the Year Ended 31 December 2017
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. Roney
G. Slark
D. Arnold
P. Hampden Smith
F. van Zanten
S. Murray
V. Crowley
C. M. Fisher
R. Ryan
9
9
9
9
9
9
9
3
3
9
9
8
9
8
9
9
3
3
-
-
-
4
4
-
3
2
-
-
-
-
4
2
-
3
1
-
-
2
2
-
-
-
-
-
-
-
2
2
-
-
-
-
-
-
-
-
-
5
5
5
-
3
-
-
-
-
5
3
5
-
3
-
3
-
-
3
3
1
1
2
2
3
-
-
3
3
1
1
2
2
67
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Directors’ Report on Corporate Governance (continued)
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 and length of
service of Board Committees is shown on pages 64 to 65. Ms. Susan
Lannigan, Deputy Company Secretary is Secretary to the Audit and Risk
Committee. Mr. Charles Rinn and Ms. Paula Harvey, Group HR Director,
jointly act as Secretary to the Remuneration Committee. Mr. Charles
Rinn is Secretary to the Nomination Committee.
The Finance Committee is chaired by Mr. Gavin Slark, Chief Executive
Officer and also comprises Mr. David Arnold, Chief Financial Officer
and Mr. Charles Rinn, Group Financial Controller and Secretary. The
Committee considers the financing requirements of the Group,
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 Board is briefed on key discussions and decisions by each
Committee Chairman at the Board meeting following the relevant
committee meeting and minutes of committee meetings are circulated
to the Board.
What the Board Did This Year
The activities of the Board are structured so as
to enable the delivery of the Group’s strategic
priorities within a transparent governance
framework. The key activities of the Board during
2017 are set out below:
January
March
May
June
• Reviewed trading and
financial performance
• Reviewed Health & Safety
• Reviewed trading and
financial performance
• Reviewed Health & Safety
• Reviewed trading and
financial performance
• Reviewed Health & Safety
• Reviewed trading and
financial performance
• Reviewed Health & Safety
performance
performance
performance
performance
• Considered findings of Board
evaluation
• Received an update from the
Remuneration Committee
Chairman on response
from investors to proposed
changes to remuneration
policy
• Approved the appointment
of Mr. Vincent Crowley to the
Audit and Risk Committee
• Approved the appointment
of Mrs. Susan Murray to the
Remuneration Committee
• Approved the 2016 Final
Results Announcement
• Approved the 2016 Annual
Report, Notice of AGM and
noted interim dividend
proposal
• Received a presentation
on market dynamics and
competitive landscape in the
UK merchanting market
• Approved Trading Update
• Participated in the Annual
• Approved the guarantee of
General Meeting
the liabilities of certain group
subsidiaries
• Approved policy statement
on the UK Modern Slavery Act
• Updated key Corporate
Governance documents
relating to the division
of duties between the
Chairman and CEO, the Role
of the Senior Independent
Director, the Schedule of
Matters reserved for the
Board, the operation of the
Board and its Committees,
and the approvals process
for acquisitions and capital
expenditure
68
Grafton Group plcAnnual Report & Accounts 2017 EFFECTIVENESS
Board Composition
It is the Company’s policy that the Board comprises a majority of Non-
Executive Directors. At 31 December 2017, the Board of Directors was
made up of seven members comprising the Non-Executive Chairman,
two Executive Directors and four independent Non-Executive Directors.
The Board considers that its proposed size and structure 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 international business 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 prior to the AGM.
Directors’ Independence and Board Balance
The four Non-Executive Directors, 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.
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. However, in
accordance with the provisions of the Code, the Board has decided that
all Directors should retire at the 2018 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.
June
August
October
December
• Considered and approved
a proposal to launch a new
grant of the Save As You
Earn scheme for eligible UK
employees
• Meeting to consider
strategic development of
Business Units organically
and through acquisition,
growth opportunities in new
geographic markets, trends
in the merchanting market,
on-line trading and changes
in the competitive landscape
• Considered proposed
appointments to a number
of senior management
positions in the Group
• Reviewed trading and
financial performance
• Reviewed Health & Safety
performance
• Update from the
Remuneration Committee
Chairman on the
Committee’s work
programme
• Received a report from the
Audit and Risk Committee
Chair in relation to the
findings of both the
External Auditor’s and the
Committees review of the
Interim Results for 2017
• Approved the Interim Results
for 2017 and noted the
interim dividend proposal
• Reviewed trading and
financial performance
• Reviewed Health & Safety
• Reviewed trading and
financial performance
• Reviewed Health & Safety
performance
performance
• Attended offsite Board and
Committee meetings in
Amsterdam which provided
an opportunity to visit
branches and meet with the
local executive team
• Reviewed and approved an
update to the Group’s Share
Dealing Code
• Received an update on
acquisition opportunities
• Approved a proposal to
acquire Scholte & De Vries –
Estoppey BV, an Amsterdam-
based ironmongery, tools and
fixings business
• Received a report on talent
and succession planning
• Received presentations from
a number of Business Unit
management teams that
included a review of 2017 and
plans for 2018
• Considered and approved the
Group Budget for 2018
• Provided feedback to the
Group’s Internal Audit and
Business Risk Director in
relation to the key Group
risks
69
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Directors’ Report on Corporate Governance (continued)
Further details on the Board evaluation are set out below.
The overall composition and balance of the Board is kept under review
as outlined in the programme of work undertaken by the Nomination
Committee in its report on pages 77 to 78. The Board will continue to
manage the orderly succession of Non-Executive Directors who were
appointed between 2013 and 2017.
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. 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 sufficient time to enable them
to prepare for Board and Committee meetings. All Directors receive
monthly management accounts and board reports covering the Group’s
performance, development proposals and other matters to enable them
to review and oversee the performance of the Group on an ongoing
basis. The Board devotes one of its meetings to strategy and one to
the following year’s budget. The strategy meeting covers the macro-
economic, political and social systems in existing and prospective
countries of operation for the Group. It also covers distinctive segments
of the merchanting market, competitive landscape and possible
acquisition opportunities.
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 visits branches and meets with senior
management annually in order to help Directors gain a deeper
understanding of the Group’s operations, markets, performance and
development. These contacts also provide an opportunity to get to know
local management and to listen to their views.
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 Chairman during the
year ended 31 December 2017. An externally facilitated evaluation was
conducted during 2015 by the Institute of Directors in Ireland, with
whom the Group has no other connection. The Chairman, Group CEO
and Company Secretary met to discuss the findings of the 2016 Board
evaluation and agreed a number of actions that were notified to the
Board and implemented.
The internal evaluation conducted in 2017 involved each Director and
the Company Secretary independently completing a 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.
Mr. Niall Quinn, Assistant Company Secretary, collated the responses
to the questionnaire and prepared a report on the findings of the
evaluation for the Chairman who reported the results to the Board.
The overall results of the evaluation were very positive with a high and
improved level of satisfaction among Directors concerning the matters
covered by the evaluation.
The Non-Executive Directors met without the Chairman present
to appraise his performance. The evaluation of individual directors
involved a meeting between each of them and the Chairman.
The Board confirms that each of the Non-Executive and Executive
Directors 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 increasing scale, geographic spread and
complexity of the Group’s operations.
The Nomination Committee takes account of the skills, knowledge and
experience, including international business experience, required by
the Board. It also considered Board 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.
The Board considers senior management succession planning on a
regular basis with a view to developing, over the coming years, a strong
succession pipeline for key positions up to and including Executive
Director level.
70
Grafton Group plcAnnual Report & Accounts 2017 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 and Risk Committee. Details of how these duties were
discharged is set out in the Audit and Risk Committee Report on pages
73 to 76.
An assessment of the viability of the Group over a three year period
to December 2020 was carried out by the Board and details of this
assessment are set 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 2020, taking account of the Group’s current position
and prospects, the Group’s strategy and principal risks and how they are
managed as documented on pages 50 to 53. 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 2020.
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 and reasonable scenarios, and the
effectiveness of mitigating actions that could be taken to avoid or reduce
the impact or occurrence of the underlying risks that would realistically
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
also considered the Group’s very effective response following the 2008
global financial crisis.
the Group’s cost base, capital expenditure, dividend payments and the
Group’s ability to generate positive cash inflows in a scenario of falling
revenue as working capital invested in the business is unwound. These
mitigating actions were tested during the downturn in the Group’s
businesses from 2008 to 2012 which highlighted the resilience of its
business model to a severe and protracted economic downturn.
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 of pay are both stretching and rigorously
applied. The Board has established a Remuneration Committee
comprising three independent Non-Executive Directors. Details of the
committee’s key responsibilities and a description of its work during
2017 are contained in the Report of the Remuneration Committee on
Directors’ Remuneration on pages 79 to 95.
COMMUNICATIONS 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 issued trading updates in January, May,
July and November of 2017.
Presentations to analysts were held in London on 7 March 2017 and 31
August 2017 following the announcement of the Final Results for 2016
and the Interim results for 2017 respectively. The presentation by the
Chief Executive Officer and the Chief Financial Officer was broadcast
live on www.graftonplc.com/webcast and can be viewed or downloaded
at www.graftonplc.com.
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. As noted above, the Group also issues regular
trading updates on the performance of the overall group and individual
business segments.
The Directors have determined that the three-year period to December
2020 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 five per
cent, its strong financial position and headroom on loan facilities in
place over the period, its key potential mitigating actions of reducing
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 maintained through the Chief
Executive Officer 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 feedback from investors following
meetings with management following the announcement of the Final
Results and the Interim Results and also receives analysts’ reports on
71
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Directors’ Report on Corporate Governance (continued)
Company specifies the record date for the general meeting, 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 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 five 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 three 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.
the Group. The Chairman is offered an opportunity to attend meetings
with major shareholders. The Chairman attends the presentation of the
interim and annual results.
All shareholders are invited to attend the Annual General Meeting.
This provides an opportunity for shareholders to put questions to
the Chairman, the Chairman of each of the Board Committees and
Executive Directors and to meet informally with Directors before
and after the meeting. The Company Secretary communicates with
shareholders on corporate governance matters, particularly in the lead
up to the AGM.
Disclosure Committee
The Disclosure Committee is a management Committee comprising
Mr. Gavin Slark, Group CEO and Mr. David Arnold, Group CFO. The
Committee holds meetings formally and informally as required to
ensure the accuracy and timeliness of compliance with the EU Market
Abuse Regulation.
General Meetings
Grafton Group plc is incorporated, managed and controlled in Ireland
and the Company’s Annual General Meeting (AGM) is held in Dublin.
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. In view of the Group’s
international shareholder base, it is the Board’s policy to give 21 days’
notice of EGMs unless the Directors believe that a period of 14 days
is merited by the business of the meeting and the circumstances
surrounding the business of the meeting.
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
72
Grafton Group plcAnnual Report & Accounts 2017 Audit and Risk Committee Report
Dear Shareholder,
As Chairman of Grafton’s Audit and Risk
Committee, I am pleased to present the report of
the Committee for the year ended 31 December
2017.
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
“Code”).
The Committee is satisfied that its role and authority include those
matters envisaged by the 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 three Non-Executive Directors:
• Mr. Paul Hampden Smith, Chairman,
• Mr. Vincent Crowley and
• Mrs. Susan Murray
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;
Mr. Charles Fisher was a member of the Committee until his
resignation from the Grafton Board on 9 May 2017. Mr. Frank van
Zanten stepped down from the Committee on 15 December 2017 and
Mrs. Susan Murray was appointed to the Committee on the same date.
Overseeing the relationship between the Group and the
External Auditor including the terms of engagement
and scope of audit;
All members of the Committee are determined by the Board to be
independent Non-Executive Directors in accordance with provision
B1.1 of the Code. In accordance with the requirements of provision C.3.1
of the Code, I am designated as the Committee member with recent
and relevant financial experience. The biographical details on page 65
demonstrate that all members of the Committee have a wide range of
financial, taxation, commercial and business experience relevant to the
sector in which the Group operates.
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.
73
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Audit and Risk Committee Report (continued)
Meetings
The Committee met four times during the year and attendance by each
Committee member is set out in the table on page 67.
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 a regular basis
on the work of the Audit and Risk Committee and on its findings and
recommendations.
Key Areas of Activity During 2017
A summary of the key activities of the Committee during the year is set out below:
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 Report of PwC following their audit and 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 page 76.
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 48 to 53. 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.
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 recommended actions. The Committee considered and approved the programme
of work to be undertaken by the Group’s internal audit function in 2018.
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.
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 a full
strategic business case and a risk analysis was conducted for each project. The Committee continued to
monitor implementation of the AX Trading Platform and the quality of the processes in place in relation to
its development and planned roll out across the branch network.
Financial Reporting
Risk Management and
Internal Control
Internal Audit
IT Systems
74
Grafton Group plcAnnual Report & Accounts 2017 External Auditor
The Committee reviewed the External Auditor’s overall audit plan for the 2017 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.
Non-Audit Services
Whistleblowing and Fraud
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 Irish Auditing and
Accounting Supervisory Authority’s Ethical Standards for Auditors (Ireland). 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 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 2017 is disclosed in Note 3 on page 129. The Committee
has undertaken a review of non-audit services provided during 2017 and is satisfied that these services,
which were very 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 and monitored by 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,
anonymously if they wish, 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.
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. The Group Anti-Bribery and Corruption Policy was reviewed during 2017.
It sets out the core standards and procedures to be observed and provides 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 exposed to higher risk of conflicts of interest, including employees who have
responsibility for contract negotiations with customers and suppliers.
75
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Audit and Risk Committee Report (continued)
Estimates and Judgements
The Committee reviewed in detail the following areas of significant judgement, complexity and estimation in connection with the Financial
Statements for 2017. 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 103 to 110. The Committee also had an in-depth discussion on these matters with the external auditors.
Goodwill
Recognition of Supplier
Rebates
Valuation of Inventory
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 2018 and internal forecasts for the years 2019 to 2022 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 year-end reviews across a sample of significant Business Units with
the primary objective of providing independent assurance on the accuracy of rebate receivable balances at year-
end. These reviews included re-performing calculations on a sample of rebate income for 2017 with 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 2017.
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.
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
12 March 2018
76
Grafton Group plcAnnual Report & Accounts 2017
Nomination Committee Report
Dear Shareholder,
I am pleased to present my first report as Chairman
of the Nomination Committee having taken on the
role after my predecessor Roderick Ryan stepped
down from the Board at the end of the 2017 AGM.
The Committee’s primary responsibility is to ensure that the Board is
comprised of individuals with the skills, knowledge, independence and
expertise to enable it to discharge its responsibilities to shareholders.
Membership
The Committee currently comprises myself as Chairman and all four
Non-Executive Directors:
• Mr. Paul Hampden Smith,
• Mr. Frank van Zanten,
• Mrs. Susan Murray and
• Mr. Vincent Crowley.
The biographical details of each Committee member and their length
of service on the Committee are set out on pages 64 to 65. 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.
77
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Nomination Committee Report (continued)
Activities of the Committee During 2017
The Nomination Committee met formally on three occasions during the
year. The principal activities undertaken by the Committee during the
year are set out below:
Changes to Board
In March 2016, the Group announced the planned retirement of Mr.
Michael Chadwick as Non-Executive Director and Chairman and the
appointment of myself as Chairman Designate. I was very pleased to
succeed Mr. Chadwick as Chairman with effect from 1 January 2017.
Mr. Roderick Ryan retired from the Board at the conclusion of the 2017
AGM having completed eleven years as Non-Executive Director. Mr.
Charles Fisher also retired from the Board at the conclusion of the 2017
AGM having completed eight years as Non-Executive Director.
Mr. Paul Hampden Smith succeeded Mr. Ryan as Senior Independent
Director, Mrs. Susan Murray succeeded Mr. Fisher as Chairman of the
Remuneration Committee and I succeeded Mr. Ryan as Chairman of the
Nomination Committee. These changes took effect on 9 May 2017.
Mrs. Susan Murray and Mr. Vincent Crowley were appointed Non-
Executive Directors in October 2016 in the context of the Board’s
succession planning and in anticipation of planned retirements.
Committee Changes
The Committee reviewed the composition of Board Committees
during the year and recommended the appointment of Mr. Vincent
Crowley to the Audit and Risk Committee and Mrs. Susan Murray to the
Remuneration Committee. These appointments were approved by the
Board with effect from 19 January 2017.
On the recommendation of the Committee, Mrs. Susan Murray and Mr.
Vincent Crowley were appointed to the Nomination Committee with
effect from 3 March 2017.
independence and diversity deemed appropriate and reflecting the
international nature of the Company.
The Nomination Committee also makes recommendations to the Board
concerning the reappointment of any Non-Executive Director at the
conclusion of their specified term and the re-election of all Directors
who are the subject of annual rotation. Appointments to the Board
are for a three year period, subject to shareholder approval and annual
re-election, after consideration of annual performance evaluation. The
terms and conditions of appointment of Non-Executive Directors are set
out in formal letters of appointment.
Diversity and Inclusivity
The Group wants to recruit, retain and develop diverse and talented
colleagues and to generate an inclusive working environment where a
range of views are considered. The Board is very supportive of initiatives
that promote diversity and inclusivity across the Group’s businesses.
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. Differences in background,
skills, experiences, nationality and other attributes including gender, are
considered in determining the optimum composition of the Board. All
Board appointments are made on merit, with due regard to diversity.
The Year Ahead
The Committee believes that all Directors have the right blend of skills
and experience to advance the interests of shareholders and to build
on the Group’s track record of profitable growth. In the year ahead, we
will continue to keep succession planning under review to ensure that
the Group can retain, attract and develop the best people available to
implement its strategy and grow profitability.
Mr. Frank van Zanten indicated that he wished to step down from
the Audit and Risk Committee and, on the recommendation of the
Committee, the Board approved the appointment of Mrs. Susan Murray
to the Committee. This change took effect on 15 December 2017.
Michael Roney
Chairman of the Nomination Committee
12 March 2018
Details of the current membership of Board Committees are shown
within each Committee report and on pages 64 to 65.
Nomination Process
There is a formal, rigorous and transparent procedure determining the
nomination for appointment of new Directors to the Board. Candidates
are identified and selected on merit against objective criteria and with
due regard to the benefits of diversity on the Board. The Committee
engages specialist recruitment consultants to assist in the identification
and selection process. The Committee makes recommendations to
the Board concerning appointments of Executive or Non-Executive
Directors, having considered the blend of skills, experience,
78
Grafton Group plcAnnual Report & Accounts 2017 Report of the Remuneration Committee
on Directors’ Remuneration
Chairman’s Annual Statement
Dear Shareholder,
I am pleased to present my first report as Chairman
of the Remuneration Committee having taken over
the role from Mr. Charles Fisher who stepped down
from the Board at the conclusion of the 2017 AGM.
Although not required under the Irish Companies Act 2014, 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 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 2017 and how it is
proposed to apply the policy in 2018. 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 successfully implement 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;
The Policy became effective from the close of the 2017 AGM and the
following pages describe how the policy has been applied in 2017 and
how it will apply in 2018.
Performance Outcome for 2017
The key features of a good performance by the Group for 2017 are
summarised as follows:
Revenue up 9% to a record £2.7 billion – 7% increase in
constant currency;
Adjusted* Group operating profit growth of 15% to
£163.7 million (2016: £142.0 million);
Adjusted* Group profit before taxation up 15% to £157.2
million from £136.2 million;
Adjusted basic earnings per share up 15% to 54.9p;
• Taking into account the need to attract, retain and motivate
ROCE increased by 110bps to 13.6%;
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.
These principles underpinned the Remuneration Policy put to
shareholders at the Annual General Meeting (“AGM”) of the
Company held on 9 May 2017. I was very encouraged by the level of
shareholder support for our remuneration related resolutions with 96.9
per cent of votes cast in favour of the new Remuneration Policy and 99.5
per cent of votes cast in favour of the Annual Report on Remuneration.
Record cash generation from operations of £210.7
million (2016: £168.6 million) and year-end gearing of
just 5% (2016: 9%);
Investment of £119.1 million on acquisitions and capital
expenditure to support future growth; and
13% increase in dividend in line with progressive
dividend policy.
* Before amortisation of intangible assets arising on acquisitions and exceptional items
of £19.7m in 2016.
Remuneration for 2017
The Committee agreed to award an increase in basic salary of two per
cent to the Chief Executive Officer and Chief Financial Officer for 2017.
This reflects a salary cap which limits increases to current Directors to
that of the general workforce.
79
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Report of the Remuneration Committee on Directors’ Remuneration (continued)
The annual bonus for 2017 was based on two financial performance
targets being earnings per share and return on capital employed.
Reflecting the very strong financial performance set out above, a bonus
of 120 per cent of basic salary, out of a potential bonus opportunity of
120 per cent of basic salary, was made to the Chief Executive Officer. The
bonus award made to the Chief Financial Officer was 100 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 2015, that
covered the performance period of three years ending on 31 December
2017, were based on growth in Adjusted Earnings Per Share (EPS)
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 2017 being
in the range of 52.0 pence to 60.0 pence. As the Adjusted Earnings Per
Share of 54.9 pence for 2017 was within the target range 51.72 per cent of
this half of the award will vest.
The Remuneration Committee is satisfied that the short and long-term
elements of remuneration reflect the performance of the Group both in
2017 and over the three years to the end of 2017.
Remuneration Policy for 2018
Following a comprehensive review of remuneration and consultation
with major shareholders and institutional investor bodies, a
new Remuneration Policy was put to a vote at the 2017 AGM and,
as previously noted, was passed with very strong support from
shareholders. The changes included a salary cap that limited increases
to Director’s salaries over the life of the policy (i.e. for 2017, 2018 and
2019) to the average increase for the general workforce, an increase
in the LTIP award level alongside a toughening of the LTIP targets
and the introduction of a two-year post-vesting holding period, a
strengthening of our recovery (clawback) provisions, and an increase in
our shareholding guidelines from 100 per cent to 200 per cent of salary.
The way in which we will be implementing our policy for 2018 will
remain largely unchanged from the application of the policy in 2017.
The Committee approved a salary increase of 1.75 per cent for 2018 which
is lower than the rate of increase for the general workforce.
The annual bonus opportunity remains at 120 per cent of salary for the
CEO and 100 per cent of salary for the CFO. The 2018 bonus will be based
on two critical measures of financial performance for the Group being
operating profit (70 per cent) and ROCE (30 per cent). These measures
are intended to focus the executive team on both profitability and the
maintenance of a disciplined approach to the use of capital.
LTIP awards will continue to be made at 200 per cent of salary to the CEO
and at 175 per cent of salary to the CFO. Half of the award will be based
on a TSR performance condition and half based on an adjusted EPS
performance condition. This is in line with awards made in 2017 and
prior years.
The TSR performance condition will be measured, in line with the new
policy, 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 representative of the
Group’s overall trading and financial environment and is considered to
be an appropriate measure of outperformance. 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. 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.
The proposed EPS range for the 2018 LTIP award is 69p to 80p for the year
ended 31 December 2020 which compares to adjusted EPS of 54.9p for
2017. The lower end of the target range (threshold) is above consensus
Brokers Forecasts for 2020 which were available when the range was
approved on 9 March 2018 and reflects changes made to forecasts
following the publication of the Final Results for 2017 on 1 March 2018.
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.
The Remuneration Policy is set out on pages 81 to 86.
Shareholder Engagement
The Committee is committed to ongoing dialogue with shareholders
and institutional investor bodies on remuneration matters and
welcomes feedback as it helps to inform its decisions. The Committee
actively engaged with major shareholders and institutional investor
bodies in 2017 concerning the new Remuneration Policy and altered its
original proposals in some areas 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 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.
Susan Murray
Chairman of the Remuneration Committee
80
Grafton Group plcAnnual Report & Accounts 2017 Remuneration Policy Report
This part of the Directors’ Remuneration Report sets
out the 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. This Policy
Report was approved by shareholders 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 policy, the Remuneration Committee took into
account all factors which it considered 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 the
new Remuneration Policy. The Committee also takes on board any
shareholder feedback received prior to and during 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 93 and in the Chairman’s Annual Statement on page 79.
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.
81
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Report 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 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
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 is 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
To provide market
competitive
benefits to ensure
the well-being of
Directors
Pension
To provide market
competitive
benefits
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.
Not applicable
Relocation or other related expenses
may be offered, as required.
Relocation expenses
must be reasonable and
necessary.
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.
82
Grafton Group plcAnnual Report & Accounts 2017 Element, purpose and
link to strategy
Operation
Maximum opportunity/limit
Performance targets/comments
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.
Clawback 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.
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).
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.
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 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 clawback 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 is a holding period of two
years on shares received by Executive
Directors from LTIP awards that vest
after taking into account any shares
sold to pay tax and other statutory
obligations.
The maximum value of
awards which may be
granted in any financial
year is 200% of salary.
LTIP awards vest subject to the achievement of
challenging financial and total shareholder return
performance targets measured over a three year
performance period.
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 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.
83
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Report 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
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.
Minimum 200% of basic
salary to be held in
Grafton shares, built up
over time.
Not applicable
Not applicable
Details of the outcome
of the most recent fee
review are provided in the
Annual Remuneration
Report.
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).
84
Grafton Group plcAnnual Report & Accounts 2017 Annual 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. 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):
• 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 status (in addition to other 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
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.
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.
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 value created for shareholders
and remuneration received by 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.
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.
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.
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.
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.
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
contract but the Group reserves the right to pay a bonus for the notice
period subject to performance conditions; and
85
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Report of the Remuneration Committee on Directors’ Remuneration (continued)
Remuneration Policy Report (continued)
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
2018 for Executive Directors vary under three performance scenarios –
Minimum, In line with Expectation and Maximum.
Chief Executive Officer (£’000)
Chief Financial Officer (£’000)
2,680
44%
26%
1,736
34%
20%
791
1,638
43%
25%
1,082
33%
19%
526
100%
46%
30%
100%
48%
32%
Minimum In line with
expectation
Maximum
Minimum In line with
expectation
Maximum
Long-Term Share Awards
Annual Bonus
Fixed
Chart labels show proposition of the total package comprised of each element.
Assumptions:
Minimum = fixed pay only (2018 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.
No account has been taken of any share price increase in respect of LTIP
awards.
• 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.
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;
• 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. 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.
86
Grafton Group plcAnnual Report & Accounts 2017 Annual Report on Remuneration
Although not required under Irish
Companies legislation, this report
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 Mrs. Susan Murray, Chairman, Mr.
Frank van Zanten and Mr. Paul Hampden Smith, all of whom are Non-
Executive Directors determined by the Board to be independent. Mrs.
Susan Murray was appointed to the Committee on 19 January 2017 and
assumed the role of Chairman at the conclusion of the 2017 AGM which
was held on 9 May 2017. Mr. Charles M. Fisher stepped down from the
Board and as Chairman of the Committee at the conclusion of the 2017
AGM.
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 Roney, the Chairman, attended meetings of the Committee
during 2017 by invitation and participated in discussions. The Committee
also consulted with the CEO as appropriate and periodically invited him
to attend certain parts of meetings of the Committee. The Chairman of
the Committee was assisted in her work by Mr. Charles Rinn, Company
Secretary and Ms. Paula Harvey, Group HR Director. No Directors or
the Company Secretary take 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 £38,332. The Group has no other connection with New Bridge
Street (“NBS”), other than that another subsidiary of Aon plc, its parent
company, provides pension advice. During the year NBS provided a
market practice update to the Committee on remuneration trends and
governance and also provided advice on the fulfillment of the TSR vesting
condition for the LTIP and general advice to the Committee Chairman on
remuneration matters.
Activity During The Year
3 March 2017
• Determined bonus awards under the 2016 bonus scheme for
Executive Directors and the Company Secretary;
• Determined extent to which the vesting conditions were met
for the LTIP awards granted in 2014;
• Agreed the quantum of the 2017 LTIP awards to be granted
to the Executive Directors and Company Secretary subject
to shareholder approval of the new Remuneration Policy in
respect of the increased limits;
• Determined and approved the basis for calculating the EPS
target range for the 2017 LTIP award;
• Considered and approved the Report of the Remuneration
Committee on Director’s Remuneration; and
• Determined the EPS Target for the 2017 Bonus Award.
12 April 2017
• Approved the vesting of LTIP awards granted in 2014.
8 May 2017
• Determined arrangements for the vesting of the 2014 LTIP
award.
23 October 2017
• Considered the AGM vote on remuneration resolutions and the
feedback from shareholder advisory groups;
• Reviewed Directors’ remuneration and considered a market
practice update from New Bridge Street;
• Considered the framework and conditions for financial targets
for the 2018 bonus scheme;
• Agreed the basis for setting the Adjusted EPS range for the 2018
LTIP Award;
• Considered the disclosure requirements of the Shareholder
Rights Directive; and
• Reviewed and updated the Committee’s Terms of Reference.
14 December 2017
• Agreed the rate of increase in basic salaries for 2018;
• Approved the framework for measuring financial targets for the
2018 bonus scheme;
• Reviewed compliance with minimum share ownership
guidelines;
• Provisional discussion on forecast bonus awards for 2017 and on
vesting of LTIP awards granted in 2015; and
• Initial consideration of 2018 LTIP participants, award levels,
performance measures and targets.
87
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Report 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 2017 and the prior year.
Salary/Fees (a)
Bonus (b)
Pension (c)
Other Benefits (d)
Long Term
Incentive Plan (e)
Total
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
Executive Directors
G. Slark
D. Arnold
Non-Executive Directors
M. Roney (i)
P. Hampden Smith
F. van Zanten
S. Murray (ii)
V. Crowley (iii)
M. Chadwick (iv)
R. Ryan (v)
C. M. Fisher (vi)
580
397
977
230
61
61
61
61
-
22
22
518
569
390
959
77
57
57
12
12
123
57
57
452
696
397
1,093
411
234
645
128
79
207
128
78
206
73
41
114
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
53
42
95
-
-
-
-
-
-
-
-
-
213
122
335
531
303
834
1,690
1,036
2,726
1,692
1,047
2,739
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
230
61
61
61
61
-
22
22
518
77
57
57
12
12
123
57
57
452
3,191
Total Remuneration
1,495
1,411
1,093
645
207
206
114
95
335
834
3,244
(i) Mr. Roney was appointed Deputy Chairman and Chairman Designate on 1 May 2016
(ii) Mrs. Murray was appointed Non-Executive Director on 14 October 2016
(iii) Mr. Crowley was appointed Non-Executive Director on 14 October 2016
(iv) Mr. Chadwick retired from the Board on 31 December 2016
(v) Mr. Ryan retired from the Board on 9 May 2017
(vi) Mr. Fisher retired from the Board on 9 May 2017
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 (e) 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 £1,114,000
(2016: £811,000) in respect of the Long-Term Incentive Plan (LTIP).
Notes to the Directors’ Remuneration Table:
(a) This is the amount of salaries and fees earned in respect of the financial year. Fees payable to Non-Executive Directors were unchanged at
€70,000 in constant currency.
(b) This is the amount of bonus earned in respect of the financial year.
(c) 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.
(d) Benefits comprise permanent health and medical insurance, the provision of a company car and, in the case of Mr. Slark, a rent allowance.
(e) For the year ended 31 December 2017, this is the value of LTIP awards that will vest in May 2018. The value of the awards is based on the average
share price of £7.90 for the three months to 31 December 2017. The vesting of these awards was subject to performance conditions over the period
from 1 January 2015 to 31 December 2017. For the year ended 31 December 2016, this is the value of LTIP awards that vested in May 2017. The value
of this award has been updated from that disclosed last year to reflect the share price of £7.92 on the date of vesting.
88
Grafton Group plcAnnual Report & Accounts 2017 Fixed pay in 2017
Salary and Fees
total pension benefit was £128,000. The pension benefit for Mr. Arnold
was paid as a taxable non-pensionable cash allowance.
Having taken account of both external market developments and
internal Group considerations, the Committee agreed in January
2017 that the basic salary of the Chief Executive Officer and the Chief
Financial Officer would increase by 2 per cent for the year ended 31
December 2017. This reflects a salary cap in the Remuneration Policy
which limits increases to current Directors’ to that of the general
workforce.
G. Slark
D. Arnold
Salary/Fees
2017
£’000
580
397
2016
£’000 % Change
569
390
2%
2%
Non-Executive Directors’ fees were paid at the rate of £61,000 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. Roney, who assumed the position of Non-Executive Chairman on
1 January 2017 having previously been Deputy Chairman and Chairman
Designate, was £230,000.
Benefits
Benefits comprise permanent health and medical insurance, the
provision of a company car and, in the case of Mr. Slark, a rent allowance.
Health
and
Medical
Insurance
£’000
Provision
of a
Company
Car
£’000
Rent
Allowance
£’000
Total 2017
Taxable
Benefits
£’000
Total 2016
Taxable
Benefits
£’000
9
7
35
34
29
-
73
41
53
42
G. Slark
D. Arnold
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.
2017 Base
Salary
£’000
580
397
% of
Salary
22.1%
20.0%
2017 Pension
Contribution
£’000
2016 Pension
Contribution
£’000
128
79
128
78
G. Slark
D. Arnold
Mr. Slark’s pension benefit comprised a payment made to a defined
contribution scheme and a taxable non-pensionable cash allowance. The
Pay for Performance
Annual Bonus
The maximum bonus opportunity for Mr. Slark and Mr. Arnold was 120
per cent and 100 per cent of salary respectively. The bonus was based on
two financial measures.
The table below analyses the composition of the bonus awards for the
year:
Percentage of Basic Salary
Earnings
Per Share
Return on
Capital
Employed
84%
70%
36%
30%
Bonus
Payable
120%
100%
G. Slark
D. Arnold
Financial targets were set at the beginning of the year by reference to
the Group’s budget for 2017. The actual targets and performance against
those targets are set out in the table below for 2017:
Threshold
(0%
Payable)
Budget
(50%
Payable)
Stretch
(100%
Payable)
% of
Maximum
Payable
Actual
Earnings per share
46.6p
49.0p
51.5p
54.9p
100%
Return on capital
employed*
11.0%
11.5%
12.1%
13.0%
100%
* 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 105 percent of the Group’s budget for 2017. No bonus was
payable if performance was below a minimum threshold of 95 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 105 per cent of
budget.
The Committee considered the extent to which these targets were
achieved and agreed a payment of 120 per cent of salary for Mr. Slark
and 100 per cent of salary for Mr. Arnold out of a maximum bonus
opportunity of 120 per cent and 100 per cent of salary respectively.
89
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Report of the Remuneration Committee on Directors’ Remuneration (continued)
Annual Report on Remuneration (continued)
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 2017
The performance conditions for LTIP awards made in April 2015 were
based on growth in EPS 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 Adjusted EPS for the financial year ended 31
December 2017.
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 2017 being in the range of 52 pence
to 60 pence. The Adjusted EPS for 2017 of 54.9 pence lies within the lower
and higher targets of the range and 51.72 per cent of this part of the
award will vest.
In aggregate 25.9 per cent of the 2015 LTIP awards will vest.
The number of Grafton Units granted to Mr. Slark on 17 April 2015 was
104,314 of which 26,976 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 17 April 2015 was
59,534 of which 15,395 will vest under the Adjusted 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 £213,000 and
£122,000 respectively on the basis of the average price of a Grafton Unit
of £7.90 over the three months to 31 December 2017.
Mr. Slark was granted an award on 12 April 2017 valued at 150 per cent
of his base salary in the form of nil cost Grafton Units. Mr. Arnold was
granted an award on 12 April 2017 valued at 125 per cent of his base salary
in the form of nil cost Grafton Units. Following the approval of the new
Remuneration Policy at the 2017 AGM, LTIP policy limits were 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. Mr. Slark and Mr. Arnold were
each thereby granted an additional award on 10 May 2017 valued at 50
per cent of base salary in the form of nil cost Grafton Units.
The 2017 awards to Mr. Slark and Mr. Arnold are subject to the
achievement of TSR and Adjusted EPS performance conditions.
Half of these awards will vest depending on the Group’s TSR
performance over a three-year period commencing on 1 January 2017,
with no opportunity to re-test. TSR will be compared to 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.
TSR Rank
Below median
Median
Median – 80th percentile
Above 80th percentile
% of Total
Award Vesting
0%
12.5%
12.5%-50%
50%
The level of outperformance for full vesting has been increased under
the new policy. Previously full vesting was set at upper quartile
performance and for awards granted in 2017 and going forward full
vesting will be at the upper quintile. 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.
LTIP Awards Granted During the Year Ended 31 December 2017
The following awards were made during the year ended 31 December
2017:
The other half of these awards will vest subject to the Adjusted EPS
performance condition as follows:
Date of
Grant
Number of
Units
Share Price
at Grant
Date
Value of
Award at
Grant Date
EPS for Year Ending 31 December 2019
12 Apr 17
121,654
7.15
£870,130
10 May 17
37,497
7.74
£290,039
12 Apr 17
69,432
7.15
£496,612
Below 59p
59p
59p – 66p
10 May 17
25,681
7.74
£198,643
66p or above
Clawback provisions will apply.
% of Total
Award Vesting
0%
12.5%
12.5% - 50%
50%
G. Slark
G. Slark
D. Arnold
D. Arnold
90
Grafton Group plcAnnual Report & Accounts 2017 External Appointments
Annual Bonus
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.
The maximum potential performance related bonus pay award for the
Chief Executive Officer for 2018 is 120 per cent of basic salary and the
maximum bonus opportunity for 2018 for the Chief Financial Officer is
100 per cent of salary. These limits also applied in respect of 2017. The
measures and weightings for 2018 are as follows:
Mr. 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 2017.
Loss of Office Payments and Payments to Past Directors
No loss of office payments or any payments to past Directors were made
during the year.
Application of Remuneration Policy in 2018
Salaries
The Remuneration Policy for 2018 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 salaries of
Directors than the rate of increase applied to the general workforce.
The following salaries will apply for 2018:
CEO Bonus Based on
Operating profit
Earnings per share
Return on capital employed
CFO Bonus Based on
Operating profit
Earnings per share
Return on capital employed
% of Salary
2018
% of Salary
2017
84%
-
36%
-
84%
36%
% of Salary
2018
% of Salary
2017
70%
-
30%
-
70%
30%
G. Slark
D. Arnold
2018
Base Salary
2017
Base Salary
% Increase
£590,236
£580,085
£404,243
£397,290
1.75%
1.75%
Operating profit is a key performance indicator for the business and
replaces earnings per share which is a performance measure that
applies to half of the awards granted under the LTIP.
The actual bonus targets are commercially sensitive and will be
disclosed in the 2018 Annual Report.
Chairman and Non-Executive Directors’ Fees
Non-Executive Directors’ fees are payable in Euro and will remain
unchanged at €70,000 to cover all Board and Committee duties. The
sterling equivalent was £61,000 in 2017. The fee paid to Mr. Roney as
Chairman will remain at the rate of £230,000 per annum.
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 2017.
The annual bonus is payable in cash subject to part investment in shares
if required under the Group’s share ownership guidelines as set out in
the Remuneration Policy.
Clawback provisions will operate as set out in the Remuneration Policy.
Long-Term Incentives
Awards to be made in 2018 will be at the same level as 2017 being 200 per
cent of salary for the CEO and 175 per cent of salary for the CFO. Vesting
of the 2018 award will continue to be based on relative TSR (50 per cent)
and on EPS (50 per cent) performance conditions.
The TSR performance condition will continue to be measured against
a comparator group consisting of the constituents of the London Stock
Exchange’s FTSE 250 Index excluding investment trusts.
91
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Report of the Remuneration Committee on Directors’ Remuneration (continued)
Annual Report on Remuneration (continued)
The performance measures were toughened for the 2017 award and are
similarly stretching for the 2018 award as follows:
TSR Rank
Below median
Median
Median – 80th percentile
Above 80th percentile
Relative Importance of Spend on Pay
The following table sets out the percentage change in dividends and
overall spend on employee pay in the 2017 financial year compared with
the prior year.
2017
£’000
2016
£’000
Percentage
change
Dividends payable
36,775
32,490
13.2%
% of total award
vesting
0%
12.5%
12.5%-50%
50%
Employee
remuneration costs
395,358
362,905
8.9%
Percentage Change in CEO Pay
The table below 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.
Chief Executive Officer
– Salary
– Benefits
– Bonus
Average employee
2017
£’000
2016
£’000
Percentage
change
580
73
696
569
53
411
2.0%
37.7%
69.3%
– Salary, Benefits and Bonus (£)*
28,264
26,997
4.7%
* based on average number of persons employed during the year. The increase in
constant currency was 2.5%.
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.
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.
The proposed EPS range for the 2018 LTIP award is 69p to 80p for the year
ended 31 December 2020. The lower end of the target range (threshold)
is above consensus Brokers Forecasts for 2020 of 68p which were
available when the range was approved on 9 March 2018 and reflects
changes made following the publication of the Final Results for 2017 on
1 March 2018. Consistent with prior years, the upper end of the range is
appropriately stretching.
EPS for Year Ending 31 December 2020
Below 69p
69p
69p – 80p
80p or above
% of Total
Award Vesting
0%
12.5%
12.5% - 50%
50%
A holding period of two years will apply to LTIP awards received by
Executive Directors that vest, after taking into account any shares
sold to pay tax and other statutory obligations in line with the new
Remuneration Policy. Shares held during the two-year holding period
will be deemed to be part of an executive directors’ shareholding, for the
purposes of monitoring the shareholding guidelines. The vesting period
and the holding period will be five years in total.
92
Grafton Group plcAnnual Report & Accounts 2017
Performance Graph and Single Total Figure of Remuneration
Total Shareholder Return
The graph below 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 2017.
Grafton Group plc
FTSE 250 Index
450
400
350
300
250
200
150
100
50
0
)
d
e
s
a
b
e
r
(
)
£
(
e
u
l
a
V
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Source: Datastream (Thomson Reuters)
The table below shows the total remuneration figure for the position of CEO over the nine years to 2017.
2009
2010
2011
2012
2013
2014
2015
2016
2017
CEO single total figure of
remuneration (£’000)
Annual bonus payout relative to
maximum
LTIP vesting
589
570
1,151
1,001
1,524
3,080
2,255
1,692
1,690
0%
N/A
0%
N/A
16%
N/A
49%
N/A
49%
45%
98%
100%
53%
87%
60%
50%
100%
26%
Statement of Shareholder Voting at the 2017 AGM
The new Remuneration Policy received the following votes from
shareholders:
The 2016 Annual Report on Remuneration received the following votes
from shareholders:
For
Against
Total
Total Number
of Votes
% of Votes
Cast
154,103,858
96.88
For
4,965,700
3.12
Against
159,069,558
100.00
Total
Total Number
of Votes
% of Votes
Cast
158,340,815
756,456
99.52
0.48
159,097,271
100.00
The number of votes withheld was 33,435. 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.
The number of votes withheld was 5,722.
93
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Report of the Remuneration Committee on Directors’ Remuneration (continued)
Annual Report on Remuneration (continued)
Directors’ and Secretary’s Interests
The beneficial interests of the Directors in the share capital of the
Company were as follows:
Director
G. Slark
D. Arnold
31 December
2017 Grafton
Units*
31 December
2016 Grafton
Units*
Unvested
LTIP
Awards**
Unvested
SAYE
Options***
316,925
283,692
382,359
-
53,628
24,100
222,504
1,329
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 100,000 (31 December 2016:
200,000) Grafton Units at 31 December 2017 at a price of €1.66 subject to
the rules of the 1999 Grafton Group Share Scheme. An interest to acquire
100,000 Grafton Units lapsed during the year.
F. van Zanten
3,000
3,000
P. Hampden Smith
32,990
32,990
11,529
8,000
-
11,529
8,000
-
M. Roney
V. Crowley
S. Murray
Secretary
C. Rinn
-
-
-
-
-
410,932
400,124
58,998
* At 31 December 2017 and at 31 December 2016, 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.
*** Option to buy shares at the agreed price at end of the three year period on 1
December 2020.
The closing price of a Grafton Unit on 31 December 2017 was 802p (31
December 2016: 550p) and the price range during the year was between
540.5p and 841p (2016: 440p and 752p).
-
-
-
-
-
-
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.
There have been no changes in the interests of the Directors and
Secretary between 31 December 2017 and the date of this report.
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.
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.
To further align the interests of senior management with those of
shareholders, Executive Directors are subject to share ownership
guidelines. Executive Directors are required to build a holding of shares
in the Company with a minimum value of 200 per cent of their salary.
Directors are 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.
Mr. Slark held shares at the year-end valued at 4.4 times his salary. Mr.
Arnold held shares at the year-end valued at 1.1 times his salary.
During the year, Mr. Arnold exercised options to purchase 3,015 Grafton
Units on the maturity of the 2014 SAYE scheme.
94
Grafton Group plcAnnual Report & Accounts 2017 Directors’ and Secretary’s Interests under the 2011 Long Term Incentive Plan
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
2017 Granted
Lapsed
Shares
Received
31 Dec
2017
EPS
Condition
TSR
Condition
Performance Period
Vesting Date**
Number of Units
G. Slark
16 April 2014
£6.20
134,181
17 April 2015
£8.18
104,314
14 April 2016
£7.18
118,894
-
-
12 April 2017
10 May 2017
£7.15
£7.74
-
-
121,654
37,497
(67,090)
(67,091)*
-
-
-
1 Jan 2014 – 31 Dec 2016
16 April 2017
-
-
-
-
-
-
-
-
104,314
52,157
52,157
1 Jan 2015 – 31 Dec 2017
17 April 2018
118,894
59,447
59,447
1 Jan 2016 – 31 Dec 2018
14 April 2019
121,654
60,827
60,827
1 Jan 2017 – 31 Dec 2019
12 April 2020
37,497
18,749
18,748
1 Jan 2017 – 31 Dec 2019
10 May 2020
357,389 159,151
(67,090)
(67,091) 382,359 191,180 191,179
D. Arnold 16 April 2014
£6.20
76,582
17 April 2015
£8.18
59,534
14 April 2016
£7.18
67,857
-
-
(38,291)
(38,291)*
-
-
-
1 Jan 2014 – 31 Dec 2016
16 April 2017
-
-
-
-
59,534
29,767
29,767
1 Jan 2015 – 31 Dec 2017
17 April 2018
67,857
33,929
33,928
1 Jan 2016 – 31 Dec 2018
14 April 2019
12 April 2017
10 May 2017
£7.15
£7.74
-
-
69,432
25,681
69,432
34,716
34,716
1 Jan 2017 – 31 Dec 2019
12 April 2020
25,681
12,841
12,840
1 Jan 2017 – 31 Dec 2019
10 May 2020
203,973
95,113
(38,291)
(38,291) 222,504
111,253
111,251
C. Rinn
16 April 2014
£6.20
21,616
17 April 2015
£8.18
14,640
14 April 2016
£7.18
18,534
-
-
-
(10,808)
(10,808)*
-
-
-
-
-
14,640
18,534
-
7,320
9,267
-
1 Jan 2014 – 31 Dec 2016
16 April 2017
7,320
1 Jan 2015 – 31 Dec 2017
17 April 2018
9,267
1 Jan 2016 – 31 Dec 2018
14 April 2019
12 April 2017
10 May 2017
£7.15
£7.74
-
-
20,269
5,555
20,269
10,135
10,134
1 Jan 2017 – 31 Dec 2019
12 April 2020
5,555
2,778
2,777
1 Jan 2017 – 31 Dec 2019
10 May 2020
54,790
25,824 (10,808)
(10,808) 58,998 29,500
29,498
* The market price at the date of vesting was £7.92.
** This is the earliest date for vesting except for the vesting in 2017 which is the actual date of vesting. The actual date of vesting is subject to approval by the Remuneration
Committee.
The Group’s previous 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 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, 14 April
2016, 12 April 2017 and 10 May 2017.
Susan Murray
Chairman of the Remuneration Committee
12 March 2018
95
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Report of the Directors
The Directors present their report to the shareholders together with the
audited financial statements for the year ended 31 December 2017.
Group Results
Group revenue increased by £0.2 billion to £2.7 billion in 2017. Adjusted
operating profit before property profit increased 17 per cent to £160.9
million compared to £137.1 million in 2016.
The net finance expense was £6.4 million (2016: £5.9 million). Group
statutory profit before taxation amounted to £154.5 million compared
with £114.2 million in the previous year.
The income tax expense of £26.6 million (2016: £21.1 million) was
equivalent to an effective tax rate of 17.2 per cent (2016: 18.5 per cent).
The underlying rate for the year was 18.5 per cent (2016: 19.0 per cent).
Non-recurring tax deductions accounted for the difference between the
effective and underlying rate of 18.5 per cent.
Basic earnings per share were 54.0 pence compared with 39.6 pence
in the previous year. Adjusted earnings per share (before intangible
amortisation on acquisitions and before exceptional and non-recurring
items) increased by 15 per cent to 54.9 pence from 47.7 pence in 2016.
The Group and Company financial statements for the year ended 31
December 2017 are set out in detail on pages 100 to 187.
Dividends
The payment in 2017 of a second interim dividend for 2016 of 9.0 pence
on the ‘C’ Ordinary shares in Grafton Group (UK) plc from UK-sourced
income amounted to £21.3 million. A 2017 interim dividend of 5.25
pence per share was paid on 6 October 2017 on the ‘C’ Ordinary shares in
Grafton Group (UK) plc from UK-sourced income and amounted to £12.4
million.
A second interim dividend for 2017 of 10.25 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 9 March 2018 (the ‘Record Date’).
The dividend will be paid on 6 April 2018. A liability in respect of this
second interim dividend has not been recognised at 31 December 2017 as
there was no present obligation to pay the dividend at the year-end.
Review of the Business
Shareholders are referred to the Chairman’s Statement, Chief Executive
Officer’s Review, Sectoral and Strategic Review and Financial Review
which contain a review of operations and the financial performance
of the Group for 2017, the outlook for 2018 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.
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 conditions, 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. You should not place
undue reliance on forward looking statements. These forward looking
statements are made as at the date of this Directors Report. The
Company and its Directors expressly disclaims 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 risk factors included on pages 50 to 53 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.
96
Grafton Group plcAnnual Report & Accounts 2017 Board of Directors
Disapplication of Pre-emption Rights
Mr. Roderick Ryan and Mr. Charles Fisher both retired from the Board
at the conclusion of last year’s Annual General Meeting. In line with
the provisions contained in the UK Corporate Governance Code, all
other Directors retired at the same meeting and being eligible offered
themselves for election/re-election and all were elected/re-elected to the
Board on the same day.
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
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 2018 Annual General Meeting and offer
themselves for re-election.
Share Capital
At 31 December 2017, 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 2018 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:
Continuation in Office of Auditors
While it is not required under Irish law, an advisory, non-binding
resolution is being presented in relation to the continuation of PwC in
office as Auditors.
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 26 per cent of the issued share capital of
the Company at 12 March 2018. The Directors have no present intention
to make a share issue other than in respect of employee share schemes.
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 €594,760 representing five per
cent of the nominal value of the issued ordinary share capital of the
Company. Under the Articles of Association, shareholders are required
to renew this power at each year’s Annual General Meeting. The
Directors confirm their intention to follow the provisions of the Pre-
emption Principles regarding cumulative usage of authorities within
a rolling three-year period. These principles provide that companies
should consult shareholders prior to issuing, other than to existing
shareholders, shares for cash representing in excess of 7.5% of the
Company’s issued share capital in any rolling three-year period.
Authority to Make Market Purchases of the Company’s Own
Shares
At the 2017 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 have no present intention to exercise this authority.
However, the Directors consider it appropriate to maintain the flexibility
that this authority provides. 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 2019 or 15
months after the passing of these resolutions.
97
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Report of the Directors (continued)
Report of the Remuneration Committee on Directors’
Remuneration
In line with best practice, the Board is proposing to submit the
Chairman’s Annual Statement and the Annual Report on Remuneration
of the Remuneration Committee (other than the Remuneration Policy
Report which was approved at last year’s AGM), as set out on pages 79 to
80 and 87 to 95, to a non-binding advisory vote.
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 of the Meeting.
Substantial Holdings
So far as the Company is aware, the following held shares representing
3 per cent or more of the ordinary share capital of the Company
(excluding treasury shares) at 31 December 2017 and 12 March 2018:
Name
31 December 2017
12 March 2018
Holding
%
Holding
%
The Capital Group
Companies, Inc*
Investec Asset
Management Limited*
Franklin Templeton
Institutional, LLC*
EdgePoint Investment
Management Inc.*
21,282,251
8.97
18,700,194
7.88
Mr. Michael Chadwick**
21,926,409
9.24
21,926,409
9.24
18,886,930
7.96
18,886,930
7.96
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, Ireland.
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.
As required by company law, the Directors have prepared a Report on
Corporate Governance which is set out on pages 66 to 72 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. This includes
the Report of the Audit and Risk Committee. Details of the capital
structure and employee share schemes are included in Notes 18 and 33
respectively.
10,073,498
4.25
10,073,498
4.24
Directors Compliance Statement
Kames Capital plc ***
7,193,797
3.03
-
-
Blackrock, Inc.*
7,121,919
3.00
7,121,919
3.00
Dimensional Fund
Advisors LP
7,112,538
3.00
7,112,538
3.00
* The Company has been advised that these units are not beneficially owned.
**Beneficial holding of 19,436,079 Grafton Units and non-beneficial holding of 2,490,330
Grafton Units.
*** The Company has been advised that this holding has fallen below 3 per cent.
Apart from these holdings, the Company has not been notified at 12
March 2018 or at 31 December 2017 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.
98
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.
30,491,000
12.85
30,491,000
12.84
Corporate Governance Regulations
Grafton Group plcAnnual Report & Accounts 2017 Principal Risks and Uncertainties
their remuneration will be submitted to the Annual General Meeting.
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 50 to 53 and are deemed to be
incorporated in this section of the Report of the Directors.
Transparency Regulations 2007 and applicable provisions of
the European Union (Disclosure of Non-Financial and Diversity
Information by Certain Large Undertakings and Groups)
Regulations 2017
The report on Corporate Social Responsibility set out on pages 54 to 61,
is deemed to be incorporated in this part of the Report of the Directors
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.
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.
Subsidiaries
On behalf of the Board
The Group’s principal operating subsidiary undertakings are set out on
pages 186 to 187.
Gavin Slark
Director
12 March 2018
David Arnold
Director
Political Contributions
There were no political contributions which require disclosure under
the Electoral Act, 1997.
Events after the Balance Sheet Date
On 16 February 2018, the Group completed the acquisition of LSDM
Limited (“Leyland SDM”). Leyland SDM is regarded as one of the
most recognisable and trusted decorating and DIY brands in Central
London selling paint, tools, ironmongery and accessories. The Leyland
SDM “small box” convenience trading format is a proven business model
in Central London that complements the Group’s larger Selco branches
located in Greater London. Leyland SDM trades from 21 branches. The
total consideration payable was £82.4 million on a debt-free, cash-free
basis and was funded from the Group’s cash and debt facilities.
There have been no other material events subsequent to 31 December
2017 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
99
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Financial
Statements
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 Statement of Changes in Equity
Notes to the Company Financial Statements
102
103
111
112
113
114
115
117
177
178
179
100
Grafton Group plcAnnual Report & Accounts 2017 101
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Statement 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 Generally Accepted
Accounting Practice in Ireland (accounting standards issued by the
Financial Reporting Council of the UK, including Financial Reporting
Standard 101 Reduced Disclosure Framework, and promulgated by the
Institute of Chartered Accountants in Ireland) and Irish law.
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
as at the end of the financial year and the profit or loss of the Group for
the financial 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 Group financial statements comply with IFRS as
adopted by the European Union, and as regards the Company, have
been prepared in accordance with Generally Accepted Accounting
Practice in Ireland (accounting standards issued by the Financial
Reporting Council of the UK, including Financial Reporting Standard
101 Reduced Disclosure Framework, and promulgated by the Institute
of Chartered Accountants in Ireland) and Irish law; 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.
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 corporate and financial information included on the company’s
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
64 to 65 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 Generally Accepted
Accounting Practice in Ireland (accounting standards issued by the
Financial Reporting Council of the UK, including Financial Reporting
Standard 101 Reduced Disclosure Framework, and promulgated by
the Institute of Chartered Accountants in Ireland) and Irish law, 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 2017 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 50 to 53; 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
The Directors are responsible for keeping adequate accounting records
which disclose with reasonable accuracy at any time the assets,
liabilities, and financial position, 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
Gavin Slark
Director
12 March 2018
David Arnold
Director
102
Grafton Group plcAnnual Report & Accounts 2017
Independent auditors’ report to
the members of Grafton Group plc
Report on the audit of the financial statements
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 2017 and of the Group’s profit and 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 Generally Accepted Accounting Practice in Ireland
(accounting standards issued by the Financial Reporting Council of the UK, including Financial Reporting Standard 101 “Reduced Disclosure
Framework” and promulgated by the Institute of Chartered Accountants in Ireland and Irish law); 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.
We have audited the financial statements, included within the Annual Report, which comprise:
• the Group Balance Sheet as at 31 December 2017;
• the Company Balance Sheet as at 31 December 2017;
• the Group Income Statement and Group Statement of Comprehensive Income for the year then ended;
• the Group Cash Flow Statement for the year then ended;
• the Group Statement of Changes in Equity for the year then ended;
• the Company Statement of Changes in Equity for the year then ended; and
• the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit and Risk Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (Ireland) (“ISAs (Ireland)”) and applicable law. Our responsibilities
under ISAs (Ireland) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe
that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements
in Ireland, which includes IAASA’s Ethical Standard as applicable to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by IAASA’s Ethical Standard were not provided to the Group or
the Company.
Other than those disclosed in Note 3 to the financial statements, we have provided no non-audit services to the Group or the Company in the period
from 1 January 2017 to 31 December 2017.
103
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Independent Auditor’s Report
to the Members of Grafton Group plc (continued)
Our audit approach
Context
Overview
Materiality
• Overall Group materiality: £7.3 million (2016: £6.3 million) based on approximately 5% of profit before tax.
• Overall Company materiality: €7.2 million (2016: €5.5 million) based on 1% of total assets.
Audit scope
• We conducted an audit of the complete financial information of 14 of the Group’s 18 reporting components across the
United Kingdom, Ireland, Netherlands and Belgium. These accounted for 97% of revenue, 95% of profit before tax and 97%
of total assets.
Key audit
matters
Key audit matters
• Valuation of goodwill
• Recognition of supplier rebates
• Valuation of inventory
The scope of our audit
As part of designing our audit, we determined materiality and assessed 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.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the
auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts
of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our
audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is
not a complete list of all risks identified by our audit.
104
Grafton Group plcAnnual Report & Accounts 2017 Key audit matter
Valuation of goodwill
How our audit addressed the key audit matter
Refer to page 76 (Audit and Risk Committee Report), Note 1 Summary of
significant accounting policies and Note 12, Goodwill.
We agreed the underlying cash flow forecast models for each of the
groups of CGUs to the management approved budgets and checked the
mathematical accuracy of the impairment models.
Goodwill amounted to £591.7 million at 31 December 2017. Goodwill
is allocated to 7 groups of Cash Generating Units (“CGUs”) in order
to conduct impairment testing. These groups of CGUs represent the
lowest level within the Group at which goodwill is monitored for
internal management purposes.
Goodwill must be tested for impairment on at least an annual basis.
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 2018 to 2022
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 and estimates, in particular
estimating the growth and gross margin in the period 2018 to 2022,
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, which
accounts for 27% of total assets at 31 December 2017. The Directors’
assessment of the carrying value of goodwill involves complex and
subjective judgements about the future results of the business.
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 2018 – 2022. We compared the growth
rates to external data and considered them to be in reasonable ranges.
We considered the reliability of management’s forecasting process by
reviewing how actual results compared to forecasts for the years 2014 to
2017, which we considered to be reasonable.
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 in the goodwill
impairment model. In particular, we focused on the Belgium Merchanting
group of CGUs which has lower headroom and consequently is most
sensitive to changes in key assumptions. We assessed the disclosure of
the sensitivities in the financial statements in respect of the Belgium
Merchanting group of CGUs and found them to be appropriate.
We assessed the appropriateness of the other related disclosures in Note 12
to the Group’s financial statements.
105
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Independent Auditor’s Report
to the Members of Grafton Group plc (continued)
Key audit matter
Recognition of supplier rebates
Refer to page 76 (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 finalised or 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 2017 involves the use of
estimates and judgements due to the complex rebate arrangements in
place.
How our audit addressed the key audit matter
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 related work performed by
Internal Audit to ensure there was no findings that would impact our audit.
We assessed the reasonableness of any significant estimates and
judgements made by management in the calculation of rebate income and
rebate receivables.
On a sample basis, we recalculated rebate income and receivables by
agreeing inputs to supplier agreements and purchases reports
For a sample of suppliers, we agreed the rebate receivable to third party
confirmation of rebate income and rebates due at 31 December 2017.
Where responses were not received we completed alternative procedures
including obtaining rebate agreements and re-computing rebate income
and rebates receivables.
We also considered the actual results of the collection of rebates during the
year including those relating to the prior year, which we compared to the
rebates receivable recognised at 31 December 2016 noting that there was no
significant variance from the amount estimated.
Valuation of inventory
Refer to page 76 (Audit and Risk Committee Report), Note 1, Summary
of significant accounting policies and Note 16, Inventories.
For each in scope component we obtained an analysis of inventory on hand
by location.
Inventory is carried at £328.5 million at 31 December 2017. The
Group holds a significant number of product lines across its branch
network in the UK, Ireland, Belgium and the Netherlands. Significant
judgement is exercised by management in assessing the level of
inventory provision in respect of slow moving inventory.
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.
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 assessed the appropriateness of Group policy by reference to past
experience and the provisions were considered reasonable. Where
appropriate, we recomputed and agreed the provisions recorded in line
with the Group policy.
We also 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 recalculated a sample of allocations of rebate deductions to inventory
by reference to the volume and value of inventory sourced from specific
suppliers and the related rebate arrangements with those suppliers. The
rebate deducted from inventory was considered to be reasonable.
106
Grafton Group plcAnnual Report & Accounts 2017
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 structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
The Group financial statements are a consolidation of 18 reporting components across 4 geographical markets. The Group’s accounting process
is structured around a local finance function for each of the reporting components. These functions maintain their own accounting records and
controls and report to the head office finance team in Dublin.
In establishing the scope of the Group audit, we identified 3 reporting components, which in our view required an audit of their complete financial
information due to their size and financial significance to the Group. A further 11 reporting components had an audit of their complete financial
information based our risk assessment, the materiality of the reporting component and statutory audit requirements.
This resulted in a total of 14 reporting components which were subject to an audit of their full financial information. For the remaining components,
the Group audit team performed other procedures including analytics at a Group level to consider our assessment that there were no significant
risks of material misstatement within these components.
The Group audit team performed the work on 4 components. 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. The group audit team visits the component teams on
a rotational basis. During the year, senior members of the Group audit team visited 7 in scope locations. The Group audit team attended all of the
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 findings reports from all component teams. In addition, the Group audit team reviewed working papers
of the auditors for the significant components.
The full scope audits of reporting components and Group functions accounted for 97% of revenue, 95% of profit before tax and 97% of total assets.
Materiality
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 in aggregate 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 materiality
Group financial statements
£7.3 million (2016: £6.3 million)
Company financial statements
€7.2million (2016: €5.5 million)
How we determined it
Circa 5% of profit before tax
1% of total assets
Rationale for benchmark applied We have applied this benchmark as profit
before tax is a key accounting benchmark,
which is also a key performance indicator for
the Group.
We considered total assets to be the most relevant
benchmark as the Company is primarily an investment
holding Company. The Company primarily holds
investments in subsidiaries and receivables from Group
companies.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. Certain components
were audited to a local statutory audit materiality that was also less than our overall Group materiality. The range of materiality allocated across
components was between £0.1 million and £6.2 million.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £350,000 (Group audit) (2016:
£250,000) and €360,000 (Company audit) (2016: €274,250) as well as misstatements below that amount that, in our view, warranted reporting for
qualitative reasons.
107
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Independent Auditor’s Report
to the Members of Grafton Group plc (continued)
Going concern
In accordance with ISAs (Ireland) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw attention to in respect of
the directors’ statement in the financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting in preparing the financial statements
and the directors’ identification of any material uncertainties to the Group’s or the Company’s
ability to continue as a going concern over a period of at least twelve months from the date of
approval of the financial statements.
We have nothing material to add or to draw
attention to. However, because not all future
events or conditions can be predicted, this
statement is not a guarantee as to the Group’s
or the Company’s ability to continue as a going
concern.
We are required to report if the directors’ statement relating to going concern in accordance
with Rule 9.8.6R(3) of the Listing Rules of the UK Financial Conduct Authority is materially
inconsistent with our knowledge obtained in the audit.
We have nothing to report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon.
The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude
whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to
report based on these responsibilities.
With respect to the Report of the Directors, we also considered whether the disclosures required by the Companies Act 2014 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (Ireland), the Companies Act 2014 (CA14) and
the Listing Rules applicable to the Company (Listing Rules) require us to also report certain opinions and matters as described below (required by
ISAs (Ireland) unless otherwise stated).
108
Grafton Group plcAnnual Report & Accounts 2017 Report of the Directors
• In our opinion, based on the work undertaken in the course of the audit, the information given in the Report of the Directors for the year ended
31 December 2017 is consistent with the financial statements and has been prepared in accordance with the applicable legal requirements.
(CA14)
• Based on our knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not
identify any material misstatements in the Report of the Directors. (CA14)
Corporate governance statement
• In our opinion, based on the work undertaken in the course of the 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 Corporate Governance Statement, is consistent with the financial statements and has been prepared in accordance with
section 1373(2) of the Companies Act 2014. (CA14)
• Based on our knowledge and understanding of the Company and its environment obtained in the course of the 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 Corporate Governance Statement. (CA14)
• In our opinion, based on the work undertaken during the course of the audit of the financial statements, the information required by section
1373(2)(a),(b),(e) and (f) is contained in the Corporate Governance Statement. (CA14)
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of
the Group
We have nothing material to add or to draw attention to regarding:
• The directors’ confirmation on page 48 of the Annual Report 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.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The directors’ explanation on page 71 of the Annual Report 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 to report having performed a review of 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 state-
ments are in alignment with the relevant provisions of the UK Corporate Governance Code (the “Code”); and considering whether the statements
are consistent with the knowledge and understanding of the Group and the Company and their environment obtained in the course of the audit.
(Listing Rules)
Other code provisions
We have nothing to report in respect of our responsibility to report when:
• The statement given by the directors on page 102 that they consider the Annual Report taken as a whole to be fair, balanced and understandable
and provides the information necessary for the 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 obtained in the course of performing our audit.
• The section of the Annual Report on pages 73 to 76 describing the work of the Audit and Risk Committee does not appropriately address matters
communicated by us to the Audit Committee.
• The directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant provision
of the Code specified, under the Listing Rules, for review by the auditors.
109
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Independent Auditor’s Report
to the Members of Grafton Group plc (continued)
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ Responsibilities set out on page 102, the directors are responsible for the preparation of the
financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view.
The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either
intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs (Ireland) will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the IAASA website at:
https://www.iaasa.ie/getmedia/b2389013-1cf6-458b-9b8f-a98202dc9c3a/Description_of_auditors_responsibilities_for_audit.pdf
This description forms part of our auditors’ report.
Use of this report
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.
Other required reporting
Companies Act 2014 opinions on other matters
• 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.
Companies Act 2014 exception reporting
Directors’ remuneration and transactions
Under the Companies Act 2014 we are required to report to you if, in our opinion, the disclosures 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 this responsibility.
Appointment
We were appointed by the directors on 4 July 2016 to audit the financial statements for the year ended 31 December 2016 and subsequent financial
periods. The period of total uninterrupted engagement is 2 years, covering the years ended 31 December 2016 to 31 December 2017.
Paul O’Connor
for and on behalf of PricewaterhouseCoopers
Chartered Accountants and Statutory Audit Firm
Dublin
12 March 2018
110
Grafton Group plcAnnual Report & Accounts 2017 Group Income Statement
For the year ended 31 December 2017
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
12 March 2018
David Arnold
Director
Notes
2017
£’000
2016
£’000
2
3
4
7
7
9
11
11
2,715,830
2,507,276
(2,557,654)
2,722
(2,372,349)
4,923
160,898
-
160,898
(7,122)
675
154,451
(26,622)
139,850
(19,713)
120,137
(7,166)
1,276
114,247
(21,128)
127,829
93,119
127,719
110
127,829
93,347
(228)
93,119
53.95p
39.56p
53.80p
39.44p
111
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Group Statement of Comprehensive Income
For the year ended 31 December 2017
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 gain/(loss) 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
12 March 2018
David Arnold
Director
Notes
2017
£’000
2016
£’000
127,829
93,119
26
32
26
4,146
-
20,374
1,221
(202)
336
(30)
4,250
7,438
(1,069)
6,369
10,619
(461)
258
26
21,418
(13,810)
2,102
(11,708)
9,710
138,448
102,829
138,338
110
138,448
103,057
(228)
102,829
112
Grafton Group plcAnnual Report & Accounts 2017
Group Balance Sheet
As at 31 December 2017
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
12 March 2018
David Arnold
Director
Notes
2017
£’000
2016
£’000
12
15
13
13
26
32
14
13
16
17
20
18
18
19
19
19
19
19
18
19
20
23
32
22
26
20
24
23
591,746
54,340
504,412
22,056
11,867
1,527
126
1,186,074
5,055
328,525
413,095
253,659
1,000,334
2,186,408
8,494
212,167
621
13,327
8,744
(427)
77,505
858,053
(3,897)
1,174,587
-
1,174,587
315,165
21,888
25,006
484
37,986
400,529
916
572,130
27,613
10,633
611,292
1,011,821
2,186,408
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
113
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Group Cash Flow Statement
For the year ended 31 December 2017
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
(Profit)/loss on sale of property, plant and equipment
Property profit
Loss on sale of Group businesses
Contributions to pension schemes in excess of IAS 19 charge
Decrease 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
Acquisition of non-controlling interest
Payment on finance lease liabilities
Cash flows from financing activities
Net increase/(decrease) 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
114
Notes
7
7
13
15
33
23
27
28
15
13
10
2017
£’000
154,451
(675)
7,122
160,898
39,455
4,032
4,908
(3,094)
329
(737)
(2,722)
3
(1,840)
9,506
210,738
(6,438)
(18,157)
186,143
3,100
5,708
512
675
9,995
(37,732)
(7,687)
(73,729)
(119,148)
(109,153)
1,941
34,355
36,296
(31,439)
(33,708)
(2,630)
(439)
(68,216)
(31,920)
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)
45,070
(12,461)
205,857
2,732
211,565
6,753
253,659
205,857
253,659
205,857
Grafton Group plcAnnual Report & Accounts 2017 Group Statement of Changes in Equity
l
a
t
o
T
y
t
i
u
q
e
0
0
0
’
£
0
0
0
’
£
-
n
o
N
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
l
a
t
o
T
0
0
0
’
£
0
0
0
’
£
s
e
r
a
h
s
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
i
s
g
n
n
r
a
e
e
v
r
e
s
e
r
e
v
r
e
s
e
r
e
v
r
e
s
e
r
e
v
r
e
s
e
r
e
v
r
e
s
e
r
t
n
u
o
c
c
a
0
0
0
’
£
l
a
t
i
p
a
c
y
r
u
s
a
e
r
T
d
e
n
i
a
t
e
R
n
o
i
t
a
l
s
n
a
r
t
e
g
d
e
h
d
e
u
s
s
i
e
b
n
o
i
t
a
u
l
a
v
e
R
n
o
i
t
p
m
e
d
e
r
i
m
u
m
e
r
p
e
r
a
h
s
y
t
i
u
q
E
n
g
i
e
r
o
F
y
c
n
e
r
r
u
c
w
o
l
f
h
s
a
C
o
t
s
e
r
a
h
S
l
a
t
i
p
a
C
e
r
a
h
S
9
2
8
,
7
2
1
0
1
1
9
1
7
,
7
2
1
9
6
3
,
6
4
0
1
6
4
1
,
4
9
1
6
,
0
1
-
-
-
-
9
6
3
,
6
4
0
1
6
4
1
,
4
9
1
6
,
0
1
8
4
4
,
8
3
1
0
1
1
8
3
3
,
8
3
1
)
8
0
7
,
3
3
(
1
4
9
,
1
8
0
9
,
4
-
9
3
4
-
-
-
-
-
-
-
)
0
3
6
,
2
(
)
2
3
2
,
3
(
)
8
0
7
,
3
3
(
1
4
9
,
1
8
0
9
,
4
-
9
3
4
2
0
6
-
)
0
5
0
,
9
2
(
)
2
3
2
,
3
(
)
8
1
8
,
5
2
(
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9
1
7
,
7
2
1
9
6
3
,
6
-
-
9
6
3
,
6
-
-
-
6
4
1
,
4
6
4
1
,
4
8
8
0
,
4
3
1
6
4
1
,
4
)
8
0
7
,
3
3
(
-
-
-
2
0
6
0
8
1
9
4
0
,
5
)
7
7
8
,
7
2
(
-
-
-
-
-
-
-
-
-
-
4
0
1
-
4
0
1
4
0
1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9
3
4
8
0
9
,
4
)
9
4
0
,
5
(
-
-
8
9
2
-
-
-
-
-
-
-
-
-
-
-
-
)
0
8
1
(
)
0
8
1
(
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6
9
8
,
1
-
-
-
-
-
-
-
5
4
-
-
-
-
-
6
9
8
,
1
5
4
9
8
1
,
5
6
0
,
1
2
2
1
,
3
7
6
0
,
2
6
0
,
1
)
7
9
8
,
3
(
2
4
8
,
1
5
7
9
5
3
,
3
7
)
1
3
5
(
6
4
4
,
8
7
0
5
,
3
1
1
2
6
1
7
2
,
0
1
2
9
4
4
,
8
)
x
a
t
f
o
t
e
n
(
s
n
o
i
s
n
e
p
n
o
n
i
a
g
t
n
e
m
e
r
u
s
a
e
m
e
R
t
e
n
(
e
v
r
e
s
e
r
e
g
d
e
h
w
o
fl
h
s
a
c
n
i
t
n
e
m
e
v
o
M
)
x
a
t
f
o
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
o
l
a
t
o
T
r
a
e
y
l
a
i
c
n
a
n
fi
e
h
t
r
o
f
x
a
t
r
e
t
f
a
t
fi
o
r
P
n
g
i
e
r
o
f
n
o
t
c
e
ff
e
n
o
i
t
a
l
s
n
a
r
t
y
c
n
e
r
r
u
C
s
t
n
e
m
t
s
e
v
n
i
t
e
n
y
c
n
e
r
r
u
c
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
o
l
a
t
o
T
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
l
a
t
o
T
t
n
e
r
a
P
e
h
t
f
o
s
r
e
n
w
o
h
t
i
w
s
n
o
i
t
c
a
s
n
a
r
T
y
t
i
u
q
e
n
i
y
l
t
c
e
r
i
d
d
e
s
i
n
g
o
c
e
r
7
1
0
2
r
e
b
m
e
c
e
D
1
3
o
t
r
a
e
Y
7
1
0
2
y
r
a
u
n
a
J
1
t
A
e
v
r
e
s
e
r
d
e
u
s
s
i
e
b
o
t
s
e
r
a
h
s
m
o
r
f
r
e
f
s
n
a
r
T
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
-
n
o
n
f
o
n
o
i
t
i
s
i
u
q
c
A
e
v
r
e
s
e
r
n
o
i
t
a
u
l
a
v
e
r
m
o
r
f
r
e
f
s
n
a
r
T
e
g
r
a
h
c
s
t
n
e
m
y
a
p
d
e
s
a
b
e
r
a
h
S
s
t
n
e
m
y
a
p
d
e
s
a
b
e
r
a
h
s
n
o
x
a
T
)
0
1
e
t
o
N
(
d
i
a
p
s
d
n
e
d
i
v
i
D
s
t
i
n
U
n
o
t
f
a
r
G
f
o
e
u
s
s
I
7
8
5
,
4
7
1
,
1
-
7
8
5
,
4
7
1
,
1
)
7
9
8
,
3
(
3
5
0
,
8
5
8
5
0
5
,
7
7
)
7
2
4
(
4
4
7
,
8
7
2
3
,
3
1
1
2
6
7
6
1
,
2
1
2
4
9
4
,
8
7
1
0
2
r
e
b
m
e
c
e
D
1
3
t
A
115
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Group Statement of Changes in Equity (continued)
9
1
1
,
3
9
)
8
2
2
(
7
4
3
,
3
9
)
8
0
7
,
1
1
(
)
7
7
1
(
4
7
3
,
0
2
1
2
2
,
1
0
1
7
,
9
-
-
-
-
-
)
8
0
7
,
1
1
(
)
7
7
1
(
4
7
3
,
0
2
1
2
2
,
1
0
1
7
,
9
9
2
8
,
2
0
1
)
8
2
2
(
7
5
0
,
3
0
1
5
0
5
2
3
2
,
3
)
9
4
3
(
)
8
4
0
,
0
3
(
-
-
)
0
6
6
,
6
2
(
-
-
-
-
-
-
-
5
0
5
2
3
2
,
3
)
9
4
3
(
)
8
4
0
,
0
3
(
-
-
)
0
6
6
,
6
2
(
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7
4
3
,
3
9
)
8
0
7
,
1
1
(
-
-
-
)
8
0
7
,
1
1
(
9
3
6
,
1
8
)
8
4
0
,
0
3
(
-
-
-
7
6
1
5
0
6
,
3
)
6
7
2
,
6
2
(
-
-
-
4
7
3
,
0
2
1
2
2
,
1
5
9
5
,
1
2
5
9
5
,
1
2
-
-
-
-
-
-
-
-
-
)
7
7
1
(
-
-
)
7
7
1
(
)
7
7
1
(
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
)
9
4
3
(
2
3
2
,
3
)
5
0
6
,
3
(
-
)
2
2
7
(
-
-
-
-
-
-
-
-
-
-
-
-
)
7
6
1
(
)
7
6
1
(
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1
6
4
-
-
-
-
-
-
-
-
4
4
-
-
-
-
1
6
4
4
4
0
2
0
,
9
8
9
0
5
3
,
3
0
7
6
,
5
8
9
)
7
9
8
,
3
(
9
7
4
,
6
9
6
4
6
7
,
1
5
)
4
5
3
(
8
6
1
,
9
4
7
6
,
3
1
1
2
6
0
1
8
,
9
0
2
5
0
4
,
8
f
o
t
e
n
(
s
n
o
i
s
n
e
p
n
o
)
s
s
o
l
(
t
n
e
m
e
r
u
s
a
e
m
e
R
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
o
l
a
t
o
T
r
a
e
y
l
a
i
c
n
a
n
fi
e
h
t
r
o
f
x
a
t
r
e
t
f
a
t
fi
o
r
P
)
x
a
t
f
o
t
e
n
(
e
v
r
e
s
e
r
e
g
d
e
h
w
o
fl
h
s
a
c
n
i
t
n
e
m
e
v
o
M
)
x
a
t
6
1
0
2
r
e
b
m
e
c
e
D
1
3
o
t
r
a
e
Y
6
1
0
2
y
r
a
u
n
a
J
1
t
A
n
g
i
e
r
o
f
n
o
t
c
e
ff
e
n
o
i
t
a
l
s
n
a
r
t
y
c
n
e
r
r
u
C
s
t
n
e
m
t
s
e
v
n
i
t
e
n
y
c
n
e
r
r
u
c
n
g
i
e
r
o
f
n
o
t
c
e
ff
e
n
o
i
t
a
l
s
n
a
r
t
y
c
n
e
r
r
u
C
t
e
n
s
a
d
e
t
a
n
g
i
s
e
d
s
g
n
i
w
o
r
r
o
b
y
c
n
e
r
r
u
c
s
e
g
d
e
h
t
n
e
m
t
s
e
v
n
i
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
o
l
a
t
o
T
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
l
a
t
o
T
t
n
e
r
a
P
e
h
t
f
o
s
r
e
n
w
o
h
t
i
w
s
n
o
i
t
c
a
s
n
a
r
T
y
t
i
u
q
e
n
i
y
l
t
c
e
r
i
d
d
e
s
i
n
g
o
c
e
r
e
v
r
e
s
e
r
d
e
u
s
s
i
e
b
o
t
s
e
r
a
h
s
m
o
r
f
r
e
f
s
n
a
r
T
e
v
r
e
s
e
r
n
o
i
t
a
u
l
a
v
e
r
m
o
r
f
r
e
f
s
n
a
r
T
e
g
r
a
h
c
s
t
n
e
m
y
a
p
d
e
s
a
b
e
r
a
h
S
s
t
n
e
m
y
a
p
d
e
s
a
b
e
r
a
h
s
n
o
x
a
T
)
0
1
e
t
o
N
(
d
i
a
p
s
d
n
e
d
i
v
i
D
s
t
i
n
U
n
o
t
f
a
r
G
f
o
e
u
s
s
I
9
8
1
,
5
6
0
,
1
2
2
1
,
3
7
6
0
,
2
6
0
,
1
)
7
9
8
,
3
(
2
4
8
,
1
5
7
9
5
3
,
3
7
)
1
3
5
(
6
4
4
,
8
7
0
5
,
3
1
1
2
6
1
7
2
,
0
1
2
9
4
4
,
8
6
1
0
2
r
e
b
m
e
c
e
D
1
3
t
A
l
a
t
o
T
y
t
i
u
q
e
0
0
0
’
£
0
0
0
’
£
-
n
o
N
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
l
a
t
o
T
0
0
0
’
£
0
0
0
’
£
s
e
r
a
h
s
y
r
u
s
a
e
r
T
i
d
e
n
a
t
e
R
i
s
g
n
n
r
a
e
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
0
0
0
’
£
e
v
r
e
s
e
r
e
v
r
e
s
e
r
e
v
r
e
s
e
r
e
v
r
e
s
e
r
e
v
r
e
s
e
r
t
n
u
o
c
c
a
0
0
0
’
£
l
a
t
i
p
a
c
i
n
g
e
r
o
F
y
c
n
e
r
r
u
c
w
o
l
f
h
s
a
C
o
t
s
e
r
a
h
S
l
a
t
i
p
a
C
e
r
a
h
S
n
o
i
t
a
l
s
n
a
r
t
e
g
d
e
h
d
e
u
s
s
i
e
b
n
o
i
t
a
u
l
a
v
e
R
n
o
i
t
p
m
e
d
e
r
i
m
u
m
e
r
p
e
r
a
h
s
y
t
i
u
q
E
116
Grafton Group plcAnnual Report & Accounts 2017
Notes to the Group Financial Statements
1. Summary of Significant Accounting Policies
Statement of Compliance
The consolidated 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 IFRSs applied in these financial statements were those effective for
accounting periods ending on 31 December 2017.
New Standards, Amendments and Interpretations
No new standards, amendments or interpretations, effective for the first
time for the financial year beginning on or after 1 January 2017, have 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 2017, 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. It replaces the guidance in IAS 39 that relates to the
classification and measurement of financial instruments.
IFRS 9 retains but simplifies the mixed measurement model and
establishes three primary measurement categories for financial assets:
amortised cost; fair value through other comprehensive income;
and fair value through profit or loss. The basis of classification
depends on the entity’s business model and the contractual cash flow
characteristics of the financial asset. Investments in equity instruments
are required to be measured at fair value through profit or loss with
the irrevocable option at inception to present changes in fair value
in other comprehensive income, not recycling. An expected credit
losses model replaces the incurred loss impairment model used in IAS
39. For financial liabilities, there are no changes to classification and
measurement, except for the recognition of changes in own credit risk
in other comprehensive income, for liabilities designated at fair value
through profit or loss.
IFRS 9 relaxes the requirements for hedge effectiveness by replacing the
bright-line hedge effectiveness tests. To qualify for hedge accounting,
it requires an economic relationship between the hedged item and
hedging instrument, and for the ‘hedged ratio’ to be the same as the
one that management actually uses for risk management purposes.
Contemporaneous documentation is still required, but it is different
from that currently prepared under IAS 39. There is an accounting
policy choice to continue to account for all hedges under IAS 39.
The Group is working towards the implementation of IFRS 9 on 1
January 2018. It anticipates that the classification and measurement
basis for its financial assets and liabilities will be largely unchanged
by adoption of IFRS 9, and expects to take the accounting policy choice
to continue to account for all hedges under IAS 39. The main impact
of adopting IFRS 9 is likely to arise from the implementation of the
expected loss model. The Group’s initial assessment is that there will be
no material impact on adoption of the standard.
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. Variable
consideration is included in the transaction price if it is highly probable
that there will be no significant reversal of the cumulative revenue
recognized when the uncertainty is resolved.
The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction
contracts’ and related interpretations. The Group is working towards
the implementation of IFRS 15 on 1 January 2018 and has carried out
a review of existing contractual arrangements as part of this process.
Additional disclosures will be required under IFRS 15. The Directors
anticipate there will be no material impact for the Group’s revenue
streams.
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.
The distinction between operating leases (off balance sheet) and finance
leases (on balance sheet) is removed for lease accounting. The principal
difference to lease accounting at present under IAS17 is the requirement
to bring almost all leases onto the balance sheet except for leases with
a term of less than 12 months and leases of low value assets. The Group
expects to adopt IFRS16 by applying the modified retrospective approach
and to recognise a lease liability and corresponding right of use asset.
The right of use asset is initially measured at cost and subsequently
measured at cost less accumulated depreciation and impairment losses,
adjusted for any remeasurement of the lease liability. The lease liability
is initially measured at the present value of the lease payments that are
not paid as of that date. Subsequently, the lease liability is adjusted for
interest and lease payments, as well as the impact of lease modifications,
amongst others.
117
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
1. Summary of Significant Accounting Policies
(continued)
The standard is expected to have a material impact on the Group with the
recognition of lease liabilities and right of use assets. As outlined in note
31, the total operating lease commitments of the Group at 31 December
2017 is £700.5 million (2016: £649.2 million).
In 2017, the operating lease expense recognised in the income statement
was £68.7 million (2016: £59.6 million). In future periods, the operating
lease charge will be replaced by a depreciation charge on the right of use
asset recognised in operating expenses and an interest cost on the lease
liability recognised in finance costs.
The Group expects to adopt IFRS 16 by applying the modified
retrospective application as permitted by the standard.
The directors are in the process of reviewing contracts to identify lease
arrangements that would need to be recognised under IFRS 16.
Basis of Preparation
The consolidated Financial Statements are presented in sterling, 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, 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.
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.
118
Grafton Group plcAnnual Report & Accounts 2017 1. 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.
119
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
1. Summary of Significant Accounting Policies
(continued)
Goodwill is subject to impairment testing on an annual basis and at any
time during the year if an indicator of impairment exists.
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
assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is recognised
immediately in the income statement.
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.
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.
120
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 of purchase price and any other directly attributable
costs.
Computer software is recognised if it meets the following criteria:
• An asset can be separately identified;
• It is probable that the asset created will generate future economic
benefits;
• The development cost of the asset can be measured reliably;
• The completion and implementation of the asset is technically
feasible;
• It is probable that the expected future economic benefits that are
attributable to the asset will flow to the entity; and
• 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 plcAnnual Report & Accounts 2017 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.
1. 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 - 10 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
121
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
1. Summary of Significant Accounting Policies
(continued)
collect all of its receivables when they fall due. Bad debts are written-off
in the income statement on identification.
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.
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
Trade and Other Receivables and Payables
operation.
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
122
Grafton Group plcAnnual Report & Accounts 2017 1. 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.
123
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes 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
124
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 plcAnnual Report & Accounts 2017 1. 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.
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.
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.
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 649
branches in Britain, Ireland, the Netherlands and Belgium.
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.
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.
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.
125
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
2. Segment Information (continued)
Group Income Statement
Continuing operations – Year Ended 31 December
Merchanting
Retailing
Manufacturing
Group
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
Segment revenue
Less: Inter-segment revenue
Segment operating profit
Property profits
Amortisation of intangible assets arising on
acquisitions
Exceptional items (Note 4)
Segment operating profit after exceptional
and non-recurring items
2,469,350
-
2,469,350
148,877
2,722
2,290,568
-
2,290,568
130,264
4,923
180,391
-
180,391
11,179
-
157,090
-
157,090
7,304
-
78,009
(11,920)
66,089
15,125
-
74,358
(14,740)
59,618
12,149
-
2,727,750
(11,920)
2,715,830
175,181
2,722
2,522,016
(14,740)
2,507,276
149,717
4,923
(2,756)
-
(2,198)
(16,933)
-
-
-
(2,020)
-
-
-
-
(2,756)
-
(2,198)
(18,953)
148,843
116,056
11,179
5,284
15,125
12,149
175,147
133,489
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
2017
£’000
2016
£’000
175,147
(14,249)
-
160,898
(7,122)
675
154,451
(26,622)
127,829
133,489
(12,592)
(760)
120,137
(7,166)
1,276
114,247
(21,128)
93,119
126
Grafton Group plcAnnual Report & Accounts 2017 2. Segment Information (continued)
Group Balance Sheet
Continuing operations – as at 31 December
Merchanting
Retailing
Manufacturing
Group
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
Segment assets
1,816,532
1,695,668
59,348
55,570
43,349
41,769
1,919,229
1,793,007
Reconciliation of total assets
Deferred tax assets
Retirement benefit assets
Other financial assets
Cash and cash equivalents
Total assets in the Group balance sheet
11,867
1,527
126
253,659
2,186,408
15,718
796
125
205,857
2,015,503
Continuing operations – as at 31 December
Merchanting
Retailing
Manufacturing
Group
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
Segment liabilities
545,941
502,871
43,657
41,451
15,053
14,106
604,651
558,428
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
316,081
25,006
37,986
27,613
484
1,011,821
301,477
32,081
36,429
21,224
675
950,314
127
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
2. Segment Information (continued)
Other Segment Information
Continuing operations – Year Ended 31 December
Merchanting
Retailing
Manufacturing
Group
2017
£’000
67,087
7,628
5,508
34,462
4,030
2016
£’000
44,937
10,343
2,815
29,931
3,121
2017
£’000
3,491
-
-
2,635
-
2016
£’000
2,790
-
-
2,661
-
2017
£’000
3,151
59
-
2,358
2
2016
£’000
2,374
-
-
2,337
-
2017
£’000
73,729
7,687
5,508
39,455
4,032
2016
£’000
50,101
10,343
2,815
34,929
3,121
Capital expenditure
Investment in intangible assets
Intangible assets acquired
Depreciation
Amortisation of intangible assets
Geographic Analysis
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
UK
Group
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
2017
£’000
2016
£’000
Segment revenue (continuing operations)
89,613
83,462 588,030
509,074
131,028
87,712 1,907,159 1,827,028 2,715,830 2,507,276
Capital expenditure
Investment in intangible assets
Intangible assets acquired
2,156
-
-
1,108
-
-
13,061
-
-
6,868
-
-
1,223
-
5,508
700
-
-
57,289
7,687
-
41,425
10,343
2,815
73,729
7,687
5,508
50,101
10,343
2,815
Segment non-current assets
Properties held for sale
Inventories
Trade and other receivables
Total segment assets
25,066
23,264
298,556
282,046
79,830
49,649
769,102
739,271 1,172,554 1,094,230
8,407
5,055
292,681
328,525
397,689
413,095
1,919,229 1,793,007
Segment liabilities
15,728
13,384
180,919
167,905
15,580
7,809
392,424
369,330
604,651
558,428
*Includes Poland which is immaterial
128
Grafton Group plcAnnual Report & Accounts 2017 3. Operating Costs and Income
The following have been charged/(credited) in arriving at operating profit:
(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
(Profit)/loss on disposal of property, plant and equipment
Loss on disposal of Group businesses
Selling, distribution and administrative expenses
The following services were provided by the Group’s Auditor:
Audit services (i)
- Group Auditor – PwC Ireland
- Other network firm – PwC
Other assurance services (ii)
- Group Auditor – PwC Ireland
- Other network firm – PwC
Auditor’s remuneration - Group and subsidiaries (i) & (ii)
Other non-audit services
- Group Auditor – PwC Ireland
- Other network firm – PwC
Tax advisory services
- Group Auditor – PwC Ireland
- Other network firm – PwC
Total (including expenses)
- Group Auditor – PwC Ireland
- Other network firm – PwC
2017
£’000
(24,481)
1,850,037
395,358
996
39,455
68,733
4,032
(737)
3
224,258
2,557,654
2016
£’000
(2,160)
1,712,918
362,905
808
34,929
59,619
3,121
19
392
199,798
2,372,349
2017
£’000
374
601
975
9
12
21
996
-
-
-
-
-
-
383
613
996
2016
£’000
344
443
787
13
8
21
808
-
32
32
-
-
-
357
483
840
129
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
4. Exceptional Items, Non-Recurring Operating Income and Operating Costs
Exceptional items
Exceptional items presented separately in the income statement
Exceptional items
2017
£’000
2016
£’000
-
(19,713)
There were no exceptional items in 2017. Exceptional items of £19.7 million in 2016 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 off of inventory
balances.
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 **
2017
£’000
2,909
335
3,244
207
207
2016
£’000
2,357
834
3,191
206
206
* For the year ended 31 December 2017, this is the value of LTIP awards that will vest in May 2018. The value of the awards is based on the average share price of £7.90 for the three
months to 31 December 2017. The vesting of these awards was subject to performance conditions over the period from 1 January 2015 to 31 December 2017. For the year ended 31
December 2016, this is the value of LTIP awards that vested in May 2017. The value of this award has been updated from that disclosed last year to reflect the share price of £7.92 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 2017 (2016: 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 79 to 95.
130
Grafton Group plcAnnual Report & Accounts 2017 6. Employment
The average number of persons employed during the year by segment was as follows:
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 charged to operating profit
Net finance cost on pension scheme obligations (Note 32)
Charged to income statement
Remeasurement (gain)/loss on pension schemes (Note 32)
Total employee benefit cost
2017
2016
10,903
1,077
214
28
12,222
10,492
1,080
208
29
11,809
£’000
£’000
345,439
36,466
4,908
2,353
6,192
395,358
721
396,079
(7,438)
388,641
318,804
33,316
3,232
2,263
5,290
362,905
510
363,415
13,810
377,225
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 £2.7 million (2016: £2.5 million).
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
2017
10
2017
£’000
3,255
1,223
268
4,746
2016
11
2016
£’000
2,581
895
263
3,739
131
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
7. Finance Expense and Finance Income
Finance expense:
Interest on bank loans and overdrafts
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:
Interest income on bank deposits
Net finance expense recognised in income statement
*Net bank/loan note interest of £4.2 million (2016: £4.7 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
2017
£’000
4,902 *
336
188
721
975
7,122
(675)*
(675)
6,447
6,786
(675)
4,146
-
(202)
336
4,280
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
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 2017 was Stg87.67 pence (Year ended 31 December 2016: Stg81.95 pence).
The sterling/euro exchange rate at 31 December 2017 was Stg88.72 pence (31 December 2016: Stg85.62 pence).
132
Grafton Group plcAnnual Report & Accounts 2017 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
2017
£’000
1,005
23,134
24,139
1,765
(415)
1,133
2,483
26,622
2016
£’000
89
16,212
16,301
1,902
(820)
3,745
4,827
21,128
The income tax expense of £26.6 million (2016: £21.1 million) is equivalent to an effective tax rate of 17.2 per cent (2016: 18.5 per cent). The underlying
rate for the year was 18.5 per cent (2016: 19.0 per cent). Non-recurring tax deductions accounted for the difference between the effective and
underlying rate of 18.5 per cent. The underlying rate is based on the prevailing rates of corporation tax and the mix of profits between the UK,
Ireland, the Netherlands and Belgium. The underlying tax rate is impacted by the disallowance of a tax deduction for certain overheads including
depreciation on property. The underlying tax rate for the Group is most sensitive to changes in the UK rate of corporation tax which declined by one
per cent to 19 per cent with effect from 1 April 2017. A further two percentage point reduction to 17 per cent will take effect on 1 April 2020.
Taxation paid in 2017 of £18.2 million (2016: £16.3 million) reflected the availability of tax allowances and various reliefs carried forward from prior
years.
The amount shown for current taxation reflects tax uncertainties and is based on the Directors’ single best 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.
133
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
9. 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% (2016: 12.5%)
Effects of:
Expenses not deductible for tax purposes
Differences in effective tax rates on overseas earnings
Effect of change in tax rates
Items not previously recognised for deferred tax
Other differences
Total income tax expense in income statement
(c) Deferred tax recognised directly in equity/other comprehensive income
Actuarial movement on pension schemes
Employee share schemes
Financing – cash flow hedge
2017
£’000
154,451
19,306
3,652
6,094
(415)
(2,999)
984
26,622
2017
£’000
1,069
(439)
30
660
2016
£’000
114,247
14,281
5,670
5,353
(820)
(2,917)
(439)
21,128
2016
£’000
(2,102)
349
(26)
(1,779)
At 31 December 2017 the Group recognised deferred tax assets on tax losses of £4.2 million (2016: £6.2 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 9.0p per Grafton Unit – paid 13 April 2017
Interim dividend of 5.25p per Grafton Unit – paid 6 October 2017
Interim dividend of 8.0p per Grafton Unit – paid 15 April 2016
Interim dividend of 4.75p per Grafton Unit – paid 7 October 2016
2017
£’000
21,267
12,441
-
-
33,708
2016
£’000
-
-
18,825
11,223
30,048
The payment in 2017 of a second interim dividend for 2016 of 9.0 pence on the ‘C’ Ordinary shares in Grafton Group (UK) plc from UK-sourced income
amounted to £21.3 million. An interim dividend for 2017 of 5.25 pence per share was paid on 6 October 2017 on the ‘C’ Ordinary shares in Grafton
Group (UK) plc from UK-sourced income and amounted to £12.4 million.
134
Grafton Group plcAnnual Report & Accounts 2017 10. Dividends (continued)
The Board has agreed to pay a second interim dividend of 10.25 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 9 March 2018 (the ‘Record Date’) and the cash
consideration will be paid on 6 April 2018. A liability in respect of this second interim dividend has not been recognised at 31 December 2017, as there
was no present obligation to pay the dividend at the year-end. The dividend payable on 6 April 2018 of £24.3 million will be recognised in 2018.
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
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
2017
£’000
2016
£’000
127,829
(110)
127,719
-
-
2,756
(618)
129,857
93,119
228
93,347
19,713
(2,231)
2,198
(564)
112,463
Number of
Number of
Grafton Units
Grafton Units
236,746,881
235,942,078
662,760
237,409,641
726,245
236,668,323
53.95
53.80
54.85
54.70
39.56
39.44
47.67
47.52
The weighted average potential employee share entitlements over 707,588 Grafton Units (2016: 593,675) which are currently anti-dilutive are not
included in the above calculation for diluted earnings per share and adjusted diluted earnings per share.
135
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
12. Goodwill
Cost
At 1 January
Arising on acquisitions (Note 28)
Measurement period adjustment
Disposal of Group businesses
Translation adjustment
At 31 December
Goodwill Acquired
2017
£’000
2016
£’000
566,237
17,671
-
(89)
7,927
591,746
521,521
5,380
(500)
(549)
40,385
566,237
Goodwill acquired during the year in the amount of £17.7 million (2016: £5.4 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
There was no measurement period adjustment in the current year. In 2016, 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.
Disposal of Group Businesses
The branch closures in the traditional UK merchanting business in 2016 resulted in a write off of goodwill amounting to £0.5 million.
Goodwill Impaired
There were no impairments during the year (2016: £Nil). Total accumulated impairment losses at 31 December 2017 amounted to £Nil (2016: £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. 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. A total of seven CGUs (2016: seven) have been identified and these are analysed between the three reportable segments as
follows:
Cash-generating units
Goodwill
2017
Number
2016
Number
4
1
2
7
4
1
2
7
2017
£’000
589,582
-
2,164
591,746
2016
£’000
564,073
-
2,164
566,237
Merchanting
Retailing
Manufacturing
136
Grafton Group plcAnnual Report & Accounts 2017
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 (2016: £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 2018 and management forecasts for each of the following years from 2019 to 2022 inclusive. The terminal value was
calculated using a long-term growth rate in respect of the years after 2022. 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 9.1 per cent to 10.2 per cent (2016: 8.6 per cent to 10.9 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 (2016: 2 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:
UK Merchanting
Irish Merchanting
2017
2016
2017
2016
Goodwill (£’000)
Recoverable amount basis
Revenue growth rate average
Long term growth rate
Discount rate (pre-tax)
363,878
Value-in-use
2.8%
2.0%
9.4%
363,967
161,283
Value-in-use Value-in-use
7.3%
2.0%
9.1%
2.4%
2.0%
8.9%
155,648
Value-in-use
8.1%
2.0%
8.6%
The remaining goodwill balance of £66.6 million (2016: £46.6 million) is allocated across three CGUs and the goodwill amounts of these CGUs are not
significant either individually or in aggregate.
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 appropriate. 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.
137
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Notes to the Group Financial Statements (continued)
13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties
13. (a) Property, Plant and Equipment
Cost
At 1 January 2016
Additions
Acquisitions
Disposals
Reclassifications
Reclassification to properties held for sale
Reclassification to investment properties
Exchange adjustment
At 1 January 2017
Additions
Acquisitions (Note 28)
Disposals
Reclassifications
Reclassification to properties held for sale
Reclassification from properties held for sale
Reclassification from investment properties
Exchange adjustment
At 31 December 2017
Depreciation and impairment
At 1 January 2016
Charge for year
Disposals
Reclassifications to properties held for sale
Reclassification to investment properties
Impairment *
Exchange adjustment
At 1 January 2017
Charge for year
Disposals
Reclassifications
Reclassification to properties held for sale
Reclassification from investment properties
Impairment
Exchange adjustment
At 31 December 2017
Net book amount
At 31 December 2017
At 31 December 2016
Freehold
Leasehold
Plant machinery
land and
improvements /
buildings
buildings
£’000
£’000
and motor
vehicles
£’000
306,805
854
4,404
(800)
(1,085)
(2,179)
(1,152)
16,956
323,803
6,400
4,699
(443)
(4,699)
(223)
497
757
4,528
335,319
33,483
3,453
(771)
(478)
(535)
1,091
3,340
39,583
4,747
(199)
(783)
(9)
371
300
926
44,936
85,333
10,610
-
(335)
1,085
-
-
5,593
102,286
13,862
148
(362)
4,323
-
-
-
1,449
121,706
38,148
3,835
(82)
-
-
264
3,449
45,614
4,591
(336)
783
-
-
-
962
51,614
305,020
38,637
1,396
(14,848)
-
-
-
20,957
351,162
53,467
738
(22,942)
376
-
-
-
5,715
388,516
195,411
27,641
(13,105)
-
-
1,967
18,480
230,394
30,117
(20,848)
-
-
-
-
4,916
244,579
Total
£’000
697,158
50,101
5,800
(15,983)
-
(2,179)
(1,152)
43,506
777,251
73,729
5,585
(23,747)
-
(223)
497
757
11,692
845,541
267,042
34,929
(13,958)
(478)
(535)
3,322
25,269
315,591
39,455
(21,383)
-
(9)
371
300
6,804
341,129
290,383
284,220
70,092
56,672
143,937
120,768
504,412
461,660
* The impairment charge in 2016 arose as a result of the branch closures in the traditional UK merchanting business.
138
Grafton Group plcAnnual Report & Accounts 2017 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
2017
£’000
-
-
-
-
2016
£’000
198
(198)
-
30
2017
£’000
6,718
(3,922)
2,796
273
2016
£’000
6,610
(3,544)
3,066
266
The Group repaid finance leases amounting to £0.4 million (2016: £0.4 million) and entered new leases during the year of £Nil (2016: £Nil).
13. (b) Properties Held for Sale
At 1 January 2016
Transfers from property, plant and equipment
Transfers from investment properties
Impairment during the year
Disposals
Translation adjustment
At 31 December 2016
Transfers from property, plant and equipment
Transfers to investment properties
Transfers to property, plant & equipment
Disposals
Translation adjustment
At 31 December 2017
Carrying Amount
£’000
10,805
1,701
(930)
(314)
(3,328)
473
8,407
214
(157)
(497)
(2,986)
74
5,055
During the year one Irish and 10 UK held for sale properties were sold. One property was transferred from property, plant and equipment. One
property was transferred to investment properties. The total number of properties held for sale at 31 December 2017 was 11 (2016: 22), of which 10
(2016: 19) are located in the UK and one (2016: two) in Ireland. In 2016 one property was located in Belgium. These properties are shown in the
balance sheet at the lower of their carrying amount and fair value less any disposal costs. Three properties are included at a fair value of £2.8 million
(2016: six properties at £4.5 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 in an orderly manner.
139
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties (continued)
13. (c) Investment Properties
At 1 January 2016
Transfers from properties held for sale
Transfers from property, plant & equipment
Fair value gain
Translation adjustment
At 31 December 2016
Transfers from properties held for sale
Transfers to property, plant & equipment
Fair value gains/(losses)
Translation adjustment
At 31 December 2017
Fair Value
£’000
17,797
930
617
302
2,103
21,749
157
(386)
(29)
565
22,056
Following completion of a review of the Group’s estate in 2017 a reduction in the fair value was recorded on a number of Irish properties, as a result
of an increase in the rate of stamp duty giving rise to a fair value loss of £0.4m. One Irish investment property was revalued with a fair value gain
of £0.4 million. One property in Belgium was transferred to investment property from properties held for sale. The total number of investment
properties at 31 December 2017 was 23 (2016: 22) of which six (2016: six) are located in the UK, 16 (2016: 16) in Ireland and one (2016: Nil) in Belgium.
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 £22.1 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, consideration of residual value 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 121, 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 and Ireland. Investment properties, comprising land and buildings located in the UK, Ireland and Belgium, 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 carrying amount of £2.2 million (2016: £3.9 million) and properties held at a fair value of
£2.8 million (2016: £4.5 million). Investment properties are held at a fair value of £22.1 million (2016: £21.7 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.
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.
140
Grafton Group plcAnnual Report & Accounts 2017 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:
At 31 December 2017
Properties Held for Sale
Merchanting segment
Investment Properties
Merchanting segment
Manufacturing segment
Total
At 31 December 2016
Properties Held for Sale
Merchanting segment
Investment Properties
Merchanting segment
Manufacturing segment
Total
Comparable
Offers
market
from third
transactions
£’000
parties
£’000
Total
2017
£’000
2,595
248
2,843
Comparable
market
transactions
£’000
17,978
2,871
20,849
Other
methods
£’000
-
1,207
1,207
Comparable
Offers
market
from third
transactions
£’000
parties
£’000
Total
2017
£’000
17,978
4,078
22,056
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
Total
2016
£’000
17,665
4,084
21,749
141
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
13. 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 2017 balance for level 3 fair values:
Balance at beginning of year
Transfers from property, plant and equipment
Transfers to property, plant and equipment
Transfers to investment properties
Disposals
Fair value gains/(losses)
Foreign exchange movement
Balance at end of year
Recorded at fair value
Recorded at cost
Total
Properties
Investment
held for sale
properties
2017
£’000
8,407
214
(497)
(157)
(2,986)
-
74
5,055
2,843
2,212
5,055
2017
£’000
21,749
-
(386)
157
-
(29)
565
22,056
22,056
-
22,056
During 2017 one Irish investment property was revalued with a fair value gain of £0.4 million. A fair value movement of £0.4m was recognised on a
number of Irish properties as a result of an increase in the rate of stamp duty.
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
Investment
properties
2016
£’000
10,805
1,701
(930)
(3,328)
(314)
-
473
8,407
4,452
3,955
8,407
2016
£’000
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.
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.
142
Grafton Group plcAnnual Report & Accounts 2017 13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties (continued)
Properties Held for Sale
Valuation technique
Significant unobservable inputs
fair value measurement
Inter-relationship between key unobservable inputs and
Comparable market transactions -
price per square metre:
UK - Regional (excluding major cities)
The estimated fair value would increase/
(decrease) if:
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
• Comparable market prices per square metre
£130 - £456 per square metre.
were higher/(lower).
• Comparable industrial development land
prices of £200,000 - £1,000,000 per acre.
Offers from third parties:
UK - Regional (excluding major cities)
The estimated fair value would increase/
(decrease) if:
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.
• Two offers for warehouse property at £130 -
• Final offer price increased/(decreased).
£411 per square metre.
• One offer for industrial land at £198,000
per acre
UK - Urban (major cities)
• One retail property under offer at £3,125 per
square metre
Residual Valuation:
Ireland - Urban
The estimated fair value would increase/
(decrease) if:
• Redevelopment site residual valuation of
• Comparable market prices per square metre
£1.901m per acre
were higher/(lower).
143
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
13. Property, Plant and Equipment, Properties Held for Sale and Investment Properties (continued)
Investment Properties
Valuation technique
Significant unobservable inputs
fair value measurement
Inter-relationship between key unobservable inputs and
Comparable market transactions -
price per square metre:
Ireland - Urban
The estimated fair value would increase/
(decrease) if:
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
• Comparable market prices per square metre
of £477 per square metre.
were higher/(lower).
• Comparable minimum warehouse market
prices of £231 per square metre.
• Comparable agricultural land market prices
of £13,308 per acre.
• Comparable industrial or development land
prices of £88,720 - £295,733 per acre.
Ireland - Regional
• Comparable warehouse market prices of
£29 - £434 per square metre.
• Comparable market prices of development
land £44,360 - £443,600 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 2016
Translation adjustment
At 31 December 2016
Translation adjustment
At 31 December 2017
Other investments represent sundry equity investments at cost less provision for impairment.
Other
Investments
£’000
122
3
125
1
126
144
Grafton Group plcAnnual Report & Accounts 2017 15. Intangible Assets
Cost
At 1 January 2016
Additions
Acquisitions
Translation adjustment
At 1 January 2017
Additions
Acquisitions (Note 28)
Translation adjustment
At 31 December 2017
Amortisation
At 1 January 2016
Charge for the year
Translation adjustment
At 1 January 2017
Charge for the year
Translation adjustment
At 31 December 2017
Net book amount
At 31 December 2017
At 31 December 2016
Computer
Software
£’000
Trade
Names
£’000
Customer
Relationships
£’000
15,869
10,343
-
13
26,225
7,687
91
(3)
34,000
570
923
(3)
1,490
1,276
1
2,767
2,343
-
225
255
2,823
-
534
83
3,440
66
274
12
352
336
9
697
15,468
-
2,590
1,719
19,777
-
4,883
591
25,251
404
1,924
71
2,399
2,420
68
4,887
Total
£’000
33,680
10,343
2,815
1,987
48,825
7,687
5,508
671
62,691
1,040
3,121
80
4,241
4,032
78
8,351
31,233
24,735
2,743
2,471
20,364
17,378
54,340
44,584
Computer software of £31.2 million at 31 December 2017 (2016: £24.7 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 8 years (2016: 9 years).
The amortisation expense of £4.0 million (2016: £3.1 million) has been charged in operating costs in the income statement. Amortisation on acquired
intangibles amounted to £2.8 million (2016: £2.2 million).
145
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
16. Inventories
Raw materials
Finished goods
Goods purchased for resale
The inventory provision at 31 December 2017 was £36.4 million (31 December 2016: £31.7 million).
17. Trade and Other Receivables
Amounts falling due within one year:
Trade receivables
Other receivables
2017
£’000
1,325
1,350
325,850
328,525
2016
£’000
1,117
1,307
290,257
292,681
2017
£’000
2016
£’000
290,045
123,050
413,095
282,551
115,138
397,689
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
2017
£’000
298,676
75,558
23,914
14,947
413,095
2016
£’000
302,459
66,072
15,529
13,629
397,689
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. A number of businesses also have credit insurance policies in place which provide cover for
the most significant amounts receivable from customers in the UK and Ireland.
146
Grafton Group plcAnnual Report & Accounts 2017 17. Trade and Other Receivables (continued)
The ageing of trade and other receivables at 31 December was:
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
Gross Value
Impairment
2017
£’000
2017
£’000
Carrying
Amount
2017
£’000
Gross Value
Impairment
2016
£’000
2016
£’000
Carrying
Amount
2016
£’000
293,471
-
293,471
280,715
-
280,715
96,823
17,737
15,200
129,760
423,231
(1,411)
(1,418)
(7,307)
(10,136)
(10,136)
95,412
16,319
7,893
119,624
413,095
89,592
17,991
18,373
125,956
406,671
*Includes an amount of £0.1 million in 2016 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
(734)
(2,117)
(6,131)
(8,982)
(8,982)
2017
£’000
8,982
(4,829)
5,843
140
10,136
88,858
15,874
12,242
116,974
397,689
2016
£’000
7,943
(4,189)
4,688
540
8,982
2017
€’000
2016
€’000
15,000
300
15,300
15,000
300
15,300
147
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
18. Share Capital and Share Premium (continued)
Year ended 31 December 2017
Issued and fully paid:
Ordinary shares
At 1 January
Issued under UK SAYE scheme*
2011 Long Term Incentive Plan
Date awards granted
April 2014 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 2017 and 2014 SAYE Schemes.
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
148
Issue Price
Number of Shares
£’000
2017
Nominal Value
236,795,887
322,165
Nil
667,497
237,785,549
4,025,530,079
16,824,254
4,042,354,333
8,427
12
33
8,472
22
-
22
8,494
Issue Price
Number of Shares
£’000
2016
Nominal Value
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
Grafton Group plcAnnual Report & Accounts 2017 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 2017
2017
£’000
210,271
1,896
212,167
2016
£’000
209,810
461
210,271
The number of Grafton Units issued during the year under the Group’s Executive Share Schemes and the UK SAYE scheme was 989,662 (2016:
1,074,452) and the total consideration received amounted to £1,941,000 (2016: £505,000). Costs relating to the issues were £Nil (2016: £Nil).
Grafton Units
At 31 December 2017 and 31 December 2016, a Grafton Unit comprised one ordinary share of Euro five 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.
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 2017, 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 (2016: 500,000) Grafton Units at a cost of £3,897,000 (2016: £3,897,000) as treasury shares.
149
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
19. 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
In December 2017, the Group acquired the non-controlling interest of YouBuild NV (formerly BMC Groep NV), a Belgian builders Merchanting
business. This is now accounted for as a 100% subsidiary undertaking.
20. Interest-Bearing Loans and Borrowings
Non-current liabilities
Euro bank loans
Finance leases
Current liabilities
Euro bank loans
Sterling bank loans
Finance leases
2017
£’000
2016
£’000
312,980
2,185
315,165
297,870
2,556
300,426
478
-
438
916
442
203
406
1,051
The increase in non-current interest bearing loans and borrowings largely reflects net borrowings drawn during the year and the foreign exchange
movement on translation of the Group’s euro denominated bank loans into sterling at the year end.
150
Grafton Group plcAnnual Report & Accounts 2017 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
2017
£’000
478
254
207
51,071
261,428
20
313,458
2017
£’000
438
438
438
438
438
433
2,623
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
2017
£’000
916
692
645
51,509
261,866
453
316,081
484
316,565
(253,659)
62,906
1,174,587
5%
Total
2016
£’000
1,051
749
542
495
297,708
932
301,477
675
302,152
(205,857)
96,295
1,062,067
9%
The following table indicates the effective interest rates at 31 December 2017 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.
Effective
Interest Rate
Euro deposits
Sterling deposits
Cash at bank
Total cash and cash equivalents
0.00%
0.37%
(0.40%) - 0.45%
Total
£’000
9,771
59,273
184,615
253,659
6 months
or less
£’000
9,771
59,273
184,615
253,659
Floating rate debt:
Euro loans
Total floating rate debt
Fixed rate debt:
Euro loans
Finance leases
Total fixed rate debt
Derivatives
Total Net Debt
0.84%
(251,354)
(251,354)
(251,354)
(251,354)
1.41%
6.00%
(62,104)
(2,623)
(64,727)
(484)
(62,906)
(62,104)
(219)
(62,323)
(484)
(60,502)
6 to 12
months
£’000
1-2 years
2-5 years
£’000
£’000
More than
5 years
£’000
-
-
-
-
-
-
-
(219)
(219)
-
(219)
-
-
-
-
-
-
-
(438)
(438)
-
(438)
-
-
-
-
-
-
-
(1,314)
(1,314)
-
(1,314)
-
-
-
-
-
-
-
(433)
(433)
-
(433)
151
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
20. Interest-Bearing Loans and Borrowings (continued)
Borrowing Facilities
The Group had an undrawn committed borrowing facility at 31 December 2017 of £213.1 million (2016: £217.6 million) in respect of which all
conditions precedent were met. The Group had bilateral loan facilities of £528.3 million with six relationship banks at the year end. In March 2017,
an option was exercised to extend facilities of £430.7 million with five banks for a further year to March 2022. The average maturity of committed
facilities of £528.3 million, including a facility of £97.6 million maturing in March 2021, was 4.0 years at 31 December 2017. A further one-year
extension option was exercised in February 2018 for facilities of £430.7 million with five of the Group’s six relationship banks.
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 in 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
Total 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)
(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
£’000
2-5 years
£’000
More than
5 years
£’000
-
-
-
-
-
-
-
-
(203)
(203)
-
(203)
-
-
-
-
-
-
-
-
(406)
(406)
-
(406)
-
-
-
-
-
-
-
-
(1,218)
(1,218)
-
(1,218)
-
-
-
-
-
-
-
-
(932)
(932)
-
(932)
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 2017
Other financial assets*
Trade and other receivables*
Cash and cash equivalents*
Interest rate swaps
Euro bank loans
Finance leases
Trade and other payables*
Fair value
Available
Cashflow
through profit
Loans and
Liabilities at
for sale
£’000
hedge
£’000
and loss
receivables
amortised cost
£’000
£’000
£’000
126
-
-
126
-
-
-
-
-
-
-
-
-
(484)
-
-
-
(484)
-
-
-
-
-
-
-
-
-
-
413,095
253,659
666,754
-
-
-
-
-
-
-
-
-
-
(313,458)
(2,623)
(572,130)
(888,211)
Total
carrying
value
£’000
126
413,095
253,659
666,880
(484)
(313,458)
(2,623)
(572,130)
(888,695)
Fair value
£’000
-
-
-
-
(484)
(316,495)
(2,623)
-
(319,602)
152
Grafton Group plcAnnual Report & Accounts 2017 21. Financial Instruments and Financial Risk (continued)
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*
Fair value
Available
Cashflow
through profit
Loans and
Liabilities at
for sale
£’000
hedge
£’000
and loss
£’000
receivables
amortised cost
£’000
£’000
125
-
-
125
-
-
-
-
-
-
-
-
-
-
(675)
-
-
-
-
(675)
-
-
-
-
-
-
-
-
-
-
-
397,689
205,857
603,546
-
-
-
-
-
-
-
-
-
-
-
(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)
*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 (Interest rate swaps)
The fair values of 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.
153
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
21. 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.
2017
Total
£’000
(484)
(316,495)
(2,623)
(319,118)
2016
Total
£’000
(675)
(298,312)
(203)
(2,962)
(301,477)
2017
Level 1
£’000
2017
Level 2
£’000
2017
Level 3
£’000
-
-
-
-
2016
Level 1
£’000
-
-
-
-
-
(484)
(316,495)
(2,623)
(319,118)
2016
Level 2
£’000
(675)
(298,312)
(203)
(2,962)
(301,477)
-
-
-
-
2016
Level 3
£’000
-
-
-
-
-
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
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
154
Grafton Group plcAnnual Report & Accounts 2017 21. Financial Instruments and Financial Risk (continued)
Fair Value (continued)
Level 2 Fair Values
Type
Valuation technique
Significant
unobservable inputs
Inter-relationship between key
unobservable inputs and fair value
measurement
Financial assets and liabilities measured at fair value
Interest rate swaps
Not applicable
Not applicable
The fair value of interest rate swaps
is calculated as the present value of
the estimated future cashflows based
on observable yield curves
Financial assets and liabilities not held at fair value
Other financial liabilities*
Discounted cash flows
Not applicable
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 and Irish merchanting businesses. 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.
155
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
21. 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 2017.
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 2017 and 31 December 2016 was:
Trade and other receivables
Cash and cash equivalents
2017
£’000
413,095
253,659
666,754
2016
£’000
397,689
205,857
603,546
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
Republic of Ireland banks
Netherlands banks
Belgian banks
Carrying Amount
2017
£’000
208,926
41,220
2,617
896
253,659
2016
£’000
168,428
34,900
1,005
1,524
205,857
The cash on deposit and cash balances are 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
2017
£’000
280,845
(27,186)
253,659
2016
£’000
245,742
(39,885)
205,857
*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.
156
Grafton Group plcAnnual Report & Accounts 2017 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 their functional currencies. 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 proportion of the Group’s net worth is denominated in euro. This is reflected in 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 2017
10% strengthening of sterling currency against the euro
31 December 2016
10% strengthening of sterling currency against the euro
Hedging
Equity
Profit after tax
£’000
£’000
(23,784)
(3,436)
(19,045)
(1,851)
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 £62,104,000 (2016: £59,934,000) and the period hedged is from December 2014 to May 2019
(2016: 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 2017 was
a liability of £0.5 million (31 December 2016: a liability of £0.7 million). A net credit of £134,000 (31 December 2016: charge of £203,000) was recorded in
the cash flow hedge reserve in other comprehensive income and a balance of £Nil (31 December 2016: £Nil), being the ineffective portion of the hedge,
was taken to the Group Income Statement (Note 7).
157
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
21. Financial Instruments and Financial Risk (continued)
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 £1.6 million (2016: £1.5
million) on the basis of the Group’s gross debt of £316.6 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 £0.8 billion at 31 December 2017.
At 31 December 2017 the net debt to equity ratio was 5 per cent and shareholders’ equity was £1.2 billion. EBITDA for the year was £204.4 million and
underlying EBITDA interest cover for 2017 was 48.4 times.
158
Grafton Group plcAnnual Report & Accounts 2017 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 £253.7 million (31 December 2016:
£205.9 million) which together with undrawn bank facilities of £213.1 million (2016: £217.6 million) and cash-flow from operations provides flexibility
in financing its operations.
The following are the undiscounted contractual maturities of financial liabilities, including interest payments.
31 December 2017
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 2017.
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.
Carrying
Amount
£’000
Contractual
Cash Flow*
£’000
Within 1
Between 1 and
Between 2 and
Greater Than 5
Year
£’000
2 Years
£’000
5 Years
£’000
313,458
2,623
572,130
484
888,695
328,404
10,103
572,130
443
911,080
3,476
755
572,130
333
576,694
3,244
755
-
110
4,109
321,664
2,264
-
-
323,928
Carrying
Amount
£’000
Contractual
Cash Flow*
£’000
Within 1
Between 1 and
Between 2 and
Greater Than 5
Year
£’000
2 Years
£’000
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
Years
£’000
20
6,329
-
-
6,349
Years
£’000
-
7,131
-
-
7,131
159
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
21. 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.
Carrying
Expected Cash
6 Months
Amount
£’000
Flow
£’000
or Less
£’000
6 to 12
Months
£’000
1 to 2
Years
£’000
(484)
(443)
(170)
(163)
(110)
Carrying
Expected Cash
6 Months
Amount
£’000
Flow
£’000
or Less
£’000
6 to 12
Months
£’000
1 to 2
Years
£’000
2 to 3
Years
£’000
-
2 to 3
Years
£’000
3 to 4
Years
£’000
-
3 to 4
Years
£’000
4 to 5
Years
£’000
-
4 to 5
Years
£’000
(675)
(644)
(160)
(153)
(237)
(94)
-
-
31 December 2017
Interest rate
swaps
31 December 2016
Interest rate
swaps
22. Derivatives
Included in non-current liabilities:
Fair value of interest rate swaps
2017
£’000
2016
£’000
(484)
(675)
The decrease in derivatives (non-current) at 31 December 2017 is due to movements in the fair values of the interest rate swaps.
Nature of derivative instruments as at 31 December 2017
Hedge Period
Nature of hedging instrument
outstanding
outstanding
Notional payable
amount of
contracts
Notional
receivable
amount of
contracts
Fair value
Fair value
asset
£’000
liability
£’000
Interest Rate Swap
Dec 2014 to May 2019
Floating interest rate to
fixed interest rate
€70,000,000 €70,000,000
-
(484)
Nature of derivative instruments as at 31 December 2016
Hedge Period
Nature of hedging instrument
outstanding
outstanding
Notional payable
amount of
contracts
Notional
receivable
amount of
contracts
Fair value
Fair value
asset
£’000
liability
£’000
Interest Rate Swap
Dec 2014 to May 2019
Floating interest rate to fixed
interest rate
€70,000,000
€70,000,000
-
(675)
160
Grafton Group plcAnnual Report & Accounts 2017 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
Foreign exchange
At 31 December
Non-current
Current
Provisions
At 1 January
Charge in year
Utilised/released
Paid during the year
Foreign exchange
At 31 December
Non-current
Current
2017
£’000
9,453
7,111
5,324
21,888
3,791
2,738
1,663
2,441
10,633
2016
£’000
9,110
9,144
4,131
22,385
3,951
3,519
3,415
1,458
12,343
Insurance
Onerous Leases
Dilapidations
2017
£’000
13,061
6,437
(3,601)
(3,120)
467
13,244
9,453
3,791
2016
£’000
11,942
4,496
(2,805)
(2,525)
1,953
13,061
9,110
3,951
2017
£’000
12,663
577
(3,737)
-
346
9,849
7,111
2,738
2016
£’000
7,980
5,007
(1,599)
-
1,275
12,663
9,144
3,519
2017
£’000
7,546
1,439
(2,053)
-
55
6,987
5,324
1,663
Restructuring
Other Provisions
Total
2017
£’000
-
-
-
-
-
-
-
-
2016
£’000
-
4,180
(4,180)
-
-
-
-
-
2017
£’000
1,458
964
-
-
19
2,441
-
2,441
2016
£’000
1,190
1,244
(1,022)
-
46
1,458
-
1,458
2017
£’000
34,728
9,417
(9,391)
(3,120)
887
32,521
21,888
10,633
2016
£’000
4,350
3,225
(219)
-
190
7,546
4,131
3,415
2016
£’000
25,462
18,152
(9,825)
(2,525)
3,464
34,728
22,385
12,343
161
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Notes to the Group Financial Statements (continued)
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 both individual and aggregate 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 2018 is expected
to be at a similar level to 2017. Based on historical experience, it is the Directors best estimate that the balance of claims which are provided for at 31
December 2017 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.
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 it 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 related 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 related to the branch closures in the traditional UK merchanting
business.
Restructuring Provision
The restructuring provision recognised in 2016 primarily related to the branch closures in the traditional UK merchanting business and includes
severance payments.
Other Provisions
Other provisions relate to pension contributions, legal provisions, deferred consideration and WEEE provisions. None of these are individually
material to require separate disclosure in the financial statements.
162
Grafton Group plcAnnual Report & Accounts 2017 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
755
3,019
6,329
10,103
2017
Interest
£’000
317
1,267
5,896
7,480
Minimum lease
Principal
payments
£’000
£’000
438
1,752
433
2,623
673
2,692
7,131
10,496
Under the terms of the leases, no contingent rents are payable.
2017
£’000
440,616
91,888
4,384
6,748
28,494
572,130
2016
Interest
£’000
267
1,068
6,199
7,534
2016
£’000
409,020
78,610
3,936
6,079
26,055
523,700
Principal
£’000
406
1,624
932
2,962
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
2017
£’000
(2,501)
(667)
(55)
(901)
-
(4,162)
(3,581)
(11,867)
Net (assets)/
Liabilities
liabilities
2017
£’000
31,177
-
-
953
5,856
-
-
37,986
2017
£’000
28,676
(667)
(55)
52
5,856
(4,162)
(3,581)
26,119
Assets
2016
£’000
(3,175)
(528)
(85)
(1,000)
-
(6,231)
(4,699)
(15,718)
Net (assets)/
Liabilities
liabilities
2016
£’000
31,244
-
-
827
4,358
-
-
36,429
2016
£’000
28,069
(528)
(85)
(173)
4,358
(6,231)
(4,699)
20,711
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 a decrease in the deferred tax asset on the pension schemes deficit.
At 31 December 2017, there were unrecognised deferred tax assets in relation to capital losses of £0.6 million (31 December 2016: £1.2 million), trading
losses of £3.4 million (31 December 2016: £3.2 million) and deductible temporary differences of £nil (31 December 2016: £2.6 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.
163
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
26. Deferred Taxation (continued)
Analysis of Net Deferred Tax (asset)/liability
£’000
£’000
£’000
£’000
£’000
Balance
Recognised in
comprehensive
Recognised
in other
Foreign
exchange
Arising on
1 Jan 17
profit or loss
income
retranslation
acquisitions
Property, plant and equipment
Employee share schemes
Financing
Other items
Intangibles
Tax value of losses carried forward
Pension
28,069
(528)
(85)
(173)
4,358
(6,231)
(4,699)
20,711
(77)
300
-
408
(616)
2,268
200
2,483
-
(439)
30
-
-
-
1,069
660
Recognised
in other
Balance
Recognised in
comprehensive
684
-
-
38
144
(199)
(101)
566
-
-
-
(221)
1,970
-
(50)
1,699
Foreign
exchange
Arising on
1 Jan 16
profit or loss
income
retranslation
acquisitions
Analysis of Net Deferred Tax (asset)/liability
£’000
£’000
£’000
£’000
Property, plant and equipment
Employee share schemes
Financing
Other items
Intangibles
Tax value of losses carried forward
Pension
22,149
(1,192)
(50)
665
3,942
(8,150)
(2,599)
14,765
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
£’000
763
-
-
-
507
-
-
1,270
Balance
31 Dec 17
£’000
28,676
(667)
(55)
52
5,856
(4,162)
(3,581)
26,119
Balance
31 Dec 16
£’000
28,069
(528)
(85)
(173)
4,358
(6,231)
(4,699)
20,711
Trade and other
Trade and other
Inventory
receivables
£’000
£’000
payables
£’000
Total
£’000
276,229
13,980
872
(560)
2,160
292,681
4,008
(342)
7,697
24,481
328,525
355,752
13,084
1,853
(1,433)
28,433
397,689
3,631
(245)
6,667
5,353
413,095
(465,914)
(21,923)
(3,300)
1,040
(33,603)
(523,700)
(5,752)
161
(3,499)
(39,340)
(572,130)
166,067
5,141
(575)
(953)
(3,010)
166,670
1,887
(426)
10,865
(9,506)
169,490
27. Movement in Working Capital
At 1 January 2016
Translation adjustment
Acquisitions
Disposal of Group businesses
Movement in 2016
At 1 January 2017
Translation adjustment
Disposal of Group businesses
Acquisitions (Note 28)
Movement in 2017
At 31 December 2017
164
Grafton Group plcAnnual Report & Accounts 2017 28. Acquisition of Subsidiary Undertakings and Businesses
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. G&M trades from 14 branches. In April 2017, a small
single branch business was acquired in Wijchen, Eastern Netherlands which provides a good platform to develop a strong market position in the
town. On 21 November 2017, 100% of the issued share capital of Scholte & de Vries – Estoppey B.V. (“SV-E”) was also acquired. SV-E is a third generation
family business that distributes ironmongery, tools and fixings from four branches located primarily in the Greater Amsterdam Area.
Goodwill on these acquisitions reflects the anticipated purchasing and operational synergies that should be realised as part of the enlarged Group.
The acquisitions completed during the year are not considered individually material to require separate disclosure.
The provisional fair values of assets and liabilities acquired in 2017 are set out below:
Property, plant and equipment (Note 13)
Intangible assets – customer relationships (Note 15)
Intangible assets – trade names (Note 15)
Intangible assets – computer software (Note 15)
Inventories (Note 27)
Trade and other receivables (Note 27)
Trade and other payables (Note 27)
Retirement benefit liabilities
Deferred tax liability (Note 26)
Deferred tax asset (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
5,585
4,883
534
91
7,697
6,667
(3,499)
(198)
(1,970)
271
51
20,112
17,671
37,783
37,783
37,783
(51)
37,732
Acquisitions would have contributed revenue of £45.5 million and operating profit of £3.1 million in the year ended 31 December 2017 on the
assumption that they had been acquired on 1 January. Acquisitions completed in 2017 contributed revenues of £32.3 million and operating profit of
£3.0 million for the period from the date of acquisition until the year end.
In 2017, the Group incurred acquisition costs of £0.7m (2016: £0.7m). These have been included in operating costs in the Group Income Statement.
165
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
28. Acquisition of Subsidiary Undertakings and Businesses (continued)
The fair value of identifiable net assets acquired in 2017 was £20.1 million.
Total acquisitions
Fair Value
Consideration
£’000
£’000
Goodwill
£’000
20,112
37,783
17,671
Any adjustments to these provisional fair values within the twelve month timeframe from the date of acquisition will be disclosed in the 2018
Annual Report as stipulated by IFRS3 Business Combinations.
There were no adjustments processed during the year to the fair value of business combinations completed during the year ended 31 December 2016.
29. Reconciliation of Net Cash Flow to Movement in Net Debt
Net increase/(decrease) in cash and cash equivalents
Net movement in derivative financial instruments
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
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
Amounts relating to intangibles included above
166
2017
£’000
45,070
264
(2,477)
42,857
(9,468)
33,389
(96,295)
(62,906)
2016
£’000
(12,461)
(203)
68,144
55,480
(38,217)
17,263
(113,558)
(96,295)
2017
£’000
7,935
71,180
79,115
2017
£’000
73,436
2,944
547
2,188
79,115
2,450
2016
£’000
5,773
67,505
73,278
2016
£’000
67,678
2,873
421
2,306
73,278
3,025
Grafton Group plcAnnual Report & Accounts 2017 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
2017
£’000
64,521
234,579
385,199
684,299
Other
2017
£’000
6,722
9,489
-
16,211
Total
2017
£’000
71,243
244,068
385,199
700,510
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
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 2017 £68.7 million (2016: £59.6 million) was recognised as an expense in the income statement in respect of
operating leases.
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.
167
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Notes to the Group Financial Statements (continued)
32. Pension Commitments (continued)
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.
Financial Assumptions
The financial assumptions used to calculate the retirement benefit liabilities under IAS 19 were as follows:
At
At
At
At
31 Dec 2017
31 Dec 2017
31 Dec 2016
31 Dec 2016
Irish schemes
UK schemes
Irish schemes
UK schemes
Valuation method
Rate of increase in salaries
Rate of increase of pensions in payment
Discount rate
Inflation rate increase
*2.65% applies from 2 January 2019 (31 December 2016: 2.50% 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%**
3.10%
2.90%
2.20%***
0.00%**
3.10%
2.60%
2.10%***
2.65%*
-
1.85%
1.45%
2.50%*
-
1.80%
1.30%
The future life expectancy at age 65 for males and females (currently aged 55 and 65), inherent in the mortality tables used for the 2017 and 2016 year
end IAS 19 disclosures are as follows:
2017 Mortality (years)
Ireland
UK
2016 Mortality (years)
Ireland
UK
Future Pensioner aged 65:
Current Pensioner aged 65:
Male
Female
Male
Female
22.5
24.8
21.2
23.7
22.2
24.3
21.6
23.5
Future Pensioner aged 65:
Current Pensioner aged 65:
Male
Female
Male
Female
22.4
24.7
21.1
23.6
22.5
24.8
21.7
23.8
168
Grafton Group plcAnnual Report & Accounts 2017 32. Pension Commitments (continued)
Scheme Assets
The assets in these schemes are analysed below:
UK equities
Overseas (non- UK) equities
Government bonds
Corporate bonds
Property
Diversified growth funds
Other
Cash
Actuarial value of liabilities
Deficit in the schemes
Represented by:
Retirement benefit assets
Retirement benefit obligations
%
3
43
15
3
3
31
1
1
100
2017
£’000
7,424
104,374
34,890
6,734
8,195
74,877
1,616
1,253
239,363
(262,842)
(23,479)
1,527
(25,006)
(23,479)
%
23
42
10
4
4
9
5
3
100
2016
£’000
50,271
92,264
23,258
9,595
10,129
20,313
10,158
5,978
221,966
(253,251)
(31,285)
796
(32,081)
(31,285)
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 2017 (31 December 2016: £Nil).
The net pension scheme deficit of £23,479,000 is shown in the Group balance sheet as (i) retirement benefit obligations (non-current liabilities) of
£25,006,000 of which £13,038,000 relates to the Euro schemes and £11,968,000 relates to a UK scheme and (ii) retirement benefit assets (non-current
assets) of £1,527,000 relating to another UK scheme (£1,040,000) and a Euro scheme (£487,000).
In 2016, 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 a UK scheme and (ii) retirement benefit assets
(non-current assets) of £796,000 relating to another UK scheme (£449,000) and a Euro scheme (£347,000).
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
Diversified growth funds
Other
Total
2017
£’000
2016
£’000
16,867
22,535
2017
Quoted
£’000
7,114
103,846
34,559
6,201
8,089
1,237
74,877
-
235,923
2017
Unquoted
£’000
310
528
331
533
106
16
-
1,616
3,440
2017
Total
£’000
7,424
104,374
34,890
6,734
8,195
1,253
74,877
1,616
239,363
2016
Quoted
£’000
49,870
91,877
23,100
9,029
10,000
5,925
20,313
8,652
218,766
2016
Unquoted
£’000
401
387
158
566
129
53
-
1,506
3,200
2016
Total
£’000
50,271
92,264
23,258
9,595
10,129
5,978
20,313
10,158
221,966
169
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Group Financial Statements (continued)
32. Pension Commitments (continued)
Sensitivity of Pension Liability to Judgemental /Assumptions
Assumption
Change in Assumptions
Impact on Scheme Liabilities
Discount rate
Rate of salary growth
Rate of inflation*
Life expectancy
Increase by 0.25%
Increase by 0.25%
Increase by 0.25%
Increase by 1 year
Reduce by 4.5%
Increase by 0.7%
Increase by 2.7%
Increase by 3.7%
*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.
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
2017
£’000
221,966
-
5,296
4,193
688
(8,179)
-
-
-
-
-
-
-
-
-
-
11,571
3,828
239,363
2016
£’000
186,807
-
6,235
3,610
731
(6,942)
1,162
-
-
-
-
-
-
-
-
-
16,300
14,063
221,966
2017
£’000
(253,251)
(198)
-
-
(688)
8,179
-
(2,677)
282
98
(56)
-
(6,017)
183
(6,216)
1,900
-
(4,381)
(262,842)
2016
£’000
(203,430)
-
-
-
(731)
6,942
(1,162)
(2,411)
-
-
148
169
(6,745)
(2,196)
(29,364)
1,450
-
(15,921)
(253,251)
2017
£’000
(31,285)
(198)
5,296
4,193
-
-
-
(2,677)
282
98
(56)
-
(6,017)
183
(6,216)
1,900
11,571
(553)
(23,479)
3,581
(19,898)
2017
£’000
2,677
56
(98)
(282)
2,353
721
3,074
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
510
2,773
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
Settlement gain
Other long term benefit (expense)/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 Income Statement
Current service cost
Other long term benefit expense/(gain)
Settlement gain
Past service credit
Total operating charge
Net finance costs on pension scheme obligations
Total expense recognised in income statement
170
Grafton Group plcAnnual Report & Accounts 2017 32. Pension Commitments (continued)
Recognised Directly in Other Comprehensive Income
Remeasurement gain/ (loss) on pensions
Deferred tax on pensions
2017
£’000
7,438
(1,069)
6,369
2016
£’000
(13,810)
2,102
(11,708)
Actuarial Valuations – Funding Requirements
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 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 2018 total approximately £4.0 million.
Average duration and scheme composition
Ireland
UK
Average duration of defined benefit obligation (years)
Allocation of total defined benefit obligation by participant
Active plan participants
Deferred plan participants
Retirees
2017
19.00
2016
19.00
2017
18.96
2017
36%
29%
35%
100%
2016
18.90
2016
36%
29%
35%
100%
171
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information 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 £4,908,000 (2016: £3,232,000), analysed as follows;
LTIP
UK SAYE Scheme
Details of the schemes operated by the Group are set out below:
Long Term Incentive Plan (LTIP)
2017
£’000
4,574
334
4,908
2016
£’000
3,046
186
3,232
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 79 to 95. Awards over 876,455 Grafton Units were granted under the plan on 12 April 2017 and awards over 68,733 Grafton Units
were granted under the plan on 10 May 2017 (2016: 837,007 on 14 April 2016).
A summary of the awards granted on 12 April 2017 and 10 May 2017 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
Grafton Group
Grafton Group
LTIP
2017
LTIP
2017
LTIP
2016
10 May 2017
12 April 2017
14 April 2016
£7.74
N/A
3
68,733
3 years
28.1%
3 years
3 years
0.38%
1.74%
£7.15
N/A
211
876,455
3 years
27.9%
3 years
3 years
0.42%
1.91%
£7.25
N/A
215
837,007
3 years
23.7%
3 years
3 years
0.45%
1.75%
Binomial model
Binomial model
Binomial model
Black Scholes/
Black Scholes/
Black Scholes/
Monte-Carlo
Monte-Carlo
Monte-Carlo
£7.34
£5.79
£6.75
£4.98
£6.88
£3.94
The expected volatility, referred to above, is based on 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 for 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.
172
Grafton Group plcAnnual Report & Accounts 2017 33. 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
2017
Number
2016
Number
2,343,298
945,188
(121,609)
(116,190)
(667,497)
2,383,190
2,563,157
837,007
(144,797)
(30,677)
(881,392)
2,343,298
#Share entitlements forfeited by employees who have left the Group and have no further entitlements under the scheme.
At 31 December 2017 and 31 December 2016 none of the LTIPs were exercisable as the conditions for exercise were not fulfilled before the year-end.
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 (2016: Nil). Entitlements outstanding
at 31 December 2017 amounted to 1,505,001 (2016: 2,440,001). Grafton Units may be acquired, in accordance with the rules of the scheme, at a price of
€1.66 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:
2017
Weighted average
exercise price
2016
Weighted average
exercise price
Outstanding at 1 January
Forfeited#
Expired*
Outstanding at 31 December
Number
€
Number
2,440,001
-
(935,000)
1,505,001
4.27
-
8.48
1.66
3,524,501
(257,000)
(827,500)
2,440,001
#Share entitlements forfeited by employees who have left the Group and have no further entitlements under the scheme.
*Performance conditions not met.
€
5.94
3.86
11.50
4.27
173
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Notes 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 1.2 years (2016: 1.6 years).
At 31 December 2017 none of the share entitlements were exercisable as the conditions for exercise were not fulfilled before the year-end.
UK SAYE Scheme
Options over 1,395,276 (2016: 593,675) Grafton Units were outstanding at 31 December 2017, pursuant to a new 2017 and existing 2014 three year saving
contract under the Grafton Group (UK) plc 2011 Approved SAYE Plan at a price of £6.77 and £5.97 respectively. These options are normally exercisable
within a period of six months after the third anniversary of the savings contract, being December 2020 for the 2017 SAYE scheme and December 2017
for the 2014 SAYE scheme.
The number of Grafton Units issued during the year under the 2014 SAYE Scheme was 322,165 (2016: 4,925) and the total consideration received
amounted to £1,923,000 (2016: £30,000). Options forfeited in the year were 43,878 (2016: 127,375).
A reconciliation of options granted under the 2014 Grafton Group (UK) plc 2011 Approved SAYE Plan is as follows:
Outstanding at 1 January
Forfeited
Exercised
Outstanding at 31 December
A reconciliation of options granted under the 2017 SAYE is as follows:
Outstanding at 1 January
Granted
Forfeited
Outstanding at 31 December
The weighted average share price for the period was £7.31.
2017
Option price
2016
Option price
Number
£
Number
593,675
(43,878)
(322,165)
227,632
5.97
5.97
5.97
725,975
(127,375)
(4,925)
593,675
£
5.97
5.97
5.97
2017
Option price
£
-
6.77
6.77
Number
-
1,175,426
(7,782)
1,167,644
At 31 December 2017 none of the 2017 UK SAYE shares were exercisable. The weighted average remaining life is 2.8 years.
174
Grafton Group plcAnnual Report & Accounts 2017 34. Accounting Estimates and Judgements
The Group’s main accounting policies affecting its results and financial condition are set out on pages 117 to 125. 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:
Goodwill
The Group has capitalised goodwill of £591.7 million at 31 December 2017 (2016: £566.2 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. 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. There were no such adjustments in 2017.
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 £262.8 million at 31 December 2017 (2016:
£253.3 million). Plan assets at 31 December 2017 amounted to £239.4 million (2016: £222.0 million) giving a net scheme deficit of £23.4 million (2016:
£31.3 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 £13.2 million (2016: £13.1 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 £9.8 million (2016: £12.7 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.
The amount shown for current taxation reflects tax uncertainties and is based on the Directors’ single best 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.
Investment Properties and Properties Held for Sale
The Group holds investment properties of £22.1 million (2016: £21.7 million) and properties held for sale of £5.1 million (2016: £8.4 million). Details of
the fair value of investment properties and properties held for sale are set out 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 income 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 supplier
confirmations.
175
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes 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 2017 amounting to £36.4 million (2016: £31.7 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 2017 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 79 to 95 provides detailed disclosure for 2017 and 2016 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, two Directors resigned from 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 16 February 2018, the Group completed the acquisition of LSDM Limited (“Leyland SDM”). Leyland SDM is regarded as one of the most recognisable
and trusted decorating and DIY brands in Central London selling paint, tools, ironmongery and accessories. The Leyland SDM “small box” convenience
trading format is a proven business model in Central London that complements the Group’s larger Selco branches located in Greater London. Leyland
SDM trades from 21 branches. The total consideration paid was £82.4 million on a debt-free, cash-free basis and was funded from the Group’s cash and
debt facilities. 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 value of assets and liabilities or the goodwill amount associated with this acquisition.
There have been no other material events subsequent to 31 December 2017 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 111 to 176 on 12 March 2018.
176
Grafton Group plcAnnual Report & Accounts 2017 Company Balance Sheet
As at 31 December 2017
Fixed assets
Intangible assets
Tangible assets
Financial assets
Total fixed assets
Current assets
Notes
2017
€’000
2016
€’000
4
4
5
126
421
535,130
535,677
130
578
531,186
531,894
Debtors (including €12.7m (2016: €14.0m) due after more than one year)
6
1,159,400
1,103,336
Cash at bank and in hand
Total current assets
Creditors: amounts falling due within one year
Net current assets
Total assets less current liabilities
Net assets
Capital and reserves
Called-up share capital
Share premium account
Capital redemption reserve
Shares to be issued reserve
Profit and loss account
Treasury shares held
Shareholders’ equity
6,091
5,372
1,165,491
1,108,708
7
(453,723)
(391,364)
711,768
717,344
1,247,445
1,249,238
1,247,445
1,249,238
11
11
11,930
302,508
905
10,433
927,415
11,880
300,345
905
10,617
931,237
(5,746)
(5,746)
1,247,445
1,249,238
There was a loss after tax of €9.6 million (2016: profit of €577.0 million) attributable to the parent undertaking for the financial year.
On behalf of the Board
Gavin Slark
Director
12 March 2018
David Arnold
Director
177
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Company Statement of Changes in Equity
Share
Capital
Shares to
Equity share
premium
redemption
be issued
Profit and
Treasury
capital
€’000
account
reserve
reserve
loss account
shares
Total equity
€’000
€’000
€’000
€’000
€’000
€’000
Year to 31 December 2017
At 1 January 2017
Loss 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
11,880
300,345
905
10,617
931,237
(5,746) 1,249,238
-
-
-
50
-
-
50
-
-
-
2,163
-
-
2,163
-
-
-
-
-
-
-
-
-
-
-
5,598
(5,782)
(184)
(9,604)
-
(9,604)
-
-
5,782
5,782
-
-
-
-
-
-
-
(9,604)
-
(9,604)
2,213
5,598
-
7,811
At 31 December 2017
11,930
302,508
905
10,433
927,415
(5,746)
1,247,445
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
11,826
299,782
905
10,964
-
-
-
54
-
-
54
-
-
-
563
-
-
563
-
-
-
-
-
-
-
-
-
-
-
3,951
(4,298)
(347)
349,954
576,985
-
576,985
-
-
4,298
4,298
(5,746)
667,685
-
-
-
-
-
-
-
576,985
-
576,985
617
3,951
-
4,568
At 31 December 2016
11,880
300,345
905
10,617
931,237
(5,746)
1,249,238
178
Grafton Group plcAnnual Report & Accounts 2017
Notes to the Company Financial Statements
1. Basis of Preparation
The financial statements have been prepared on a going concern basis under the historical cost convention in accordance with the Companies
Act 2014 and Generally Accepted Accounting Practice in the Republic of Ireland (Financial Reporting Standard 101 Reduced Disclosure Framework
(FRS101)). Note 2 describes the principle accounting policies under FRS101, which have been applied consistently.
For the financial year ended 31 December 2017, the Company transitioned from IFRS to FRS101. In the transition to FRS101, the Company has applied
IFRS 1 First-time Adoption of International Financial Reporting Standards, whilst ensuring that its assets and liabilities are measured in compliance
with FRS 101.
The Company’s date of transition was 1 January 2016. There were no adjustments to the total equity of the Company on transition or to the profit for
the financial years ending 31 December 2016 and 31 December 2017 between IFRS as previously reported and FRS 101.
In these financial statements, the company has applied the exemptions available under FRS 101 in respect of the following disclosures:
• Cash Flow Statement and related notes;
• Comparative period reconciliations for tangible fixed assets and intangible assets;
• The option to take tangible and intangible assets at deemed cost;
• Disclosures in respect of transactions with wholly-owned subsidiaries;
• Disclosures in respect of financial risk management;
• Disclosure of key management compensation;
• An opening Statement of Financial Position at the date of transition;
• Certain requirements of IAS 1 Presentation of Financial Statements;
• Disclosures required by IFRS 7 Financial Instrument Disclosures;
• Disclosures required by IFRS 13 Fair Value Measurement; and
• The effects of new but not yet effective IFRSs.
As the consolidated financial statements of Grafton Group plc include the equivalent disclosures, the Company has also taken the exemptions under
FRS 101 available in respect of the following disclosure:
• IFRS 2 Share Based Payments in respect of group settled share based payments.
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.
2. Accounting Policies
Key accounting policies which involve estimates, assumptions and judgements
Preparation of the financial statements requires management to make significant judgements and estimates. The items in the financial statements
where these judgements and estimates have been made include:
Financial assets
Investments in subsidiaries, are stated at cost less any accumulated impairment and are reviewed for impairment if there are any indicators that the
carrying value may not be recoverable. Impairment assessment is considered as part of the Group’s overall impairment assessment.
179
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Company Financial Statements (continued)
2. Accounting Policies (continued)
Loans receivable and payable
Intercompany loans receivable and payable are initially recognised at fair value. These are subsequently measured at amortised cost, less any
provision for impairment.
Other significant accounting policies
Operating income and expense
Operating income and expense arises from the Company’s principal activities as a holding company for the Group and are accounted for on an
accruals basis.
Foreign currencies
The functional and presentation currency of the Company is euro. Transactions in foreign currencies are translated at the rates of exchange ruling
at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated into euro at the rates of exchange ruling at
the balance sheet date, with a corresponding charge or credit to the profit and loss account.
Share issue expenses and share premium account
Costs of share issues are written off against the premium arising on issues of share capital.
Share-based payments
The Company has applied the requirements of Section 8 of FRS 101. The accounting policy applicable to share-based payments is addressed in detail
on page 124 of the Consolidated Financial Statements.
Treasury Shares
Own equity instruments (i.e. Ordinary Shares) acquired by the Company are deducted from equity and presented on the face of the Company Balance
Sheet. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s Ordinary Shares.
Dividends
Dividends on Ordinary Shares are recognised as a liability in the Company’s Financial Statements in the period in which they are declared by the
Company.
Dividend income
Dividend income is recognised when the right to receive payment is established.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Property, plant and equipment are
depreciated over their useful economic life on a straight line basis in line with Group policy as noted in Note 1 to the Consolidated Financial
Statements.
180
Grafton Group plcAnnual Report & Accounts 2017 2. Accounting Policies (continued)
Intangible assets (computer software)
Acquired computer software is stated at cost less any accumulated amortisation and any accumulate impairment losses. Cost comprises of purchase
price and any other directly attributable costs. Computer software is recognised in line with the criteria as outline in Note 1 to the Consolidated
Financial Statements.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances held for the purpose of meeting short-term cash commitments and investments which are
readily convertible to a known amount of cash and are subject to an insignificant risk of change in value. Bank overdrafts are included within
creditors falling due within one year in the Company Balance Sheet.
3. 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
2017
€’000
60
207
33
114
4,589
The Directors’ remuneration is set out in detail in the Report of the Remuneration Committee on Directors’ Remuneration on pages 79 to 95.
The average number of persons employed by the Company during the year was 28 (2016: 29).
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
2017
€’000
5,478
297
1,654
563
7,992
-
7,992
-
7,992
2016
€’000
60
205
28
114
3,866
2016
€’000
5,099
313
1,292
439
7,143
-
7,143
-
7,143
181
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Company Financial Statements (continued)
4. Tangible & Intangible Assets
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
2017
€’000
Intangible
Assets*
2017
€’000
3,019
50
3,069
2,441
207
2,648
421
578
158
29
187
28
33
61
126
130
*The computer software additions reflects the cost of the Company’s investment on upgrading the IT systems and infrastructure.
5. Financial Assets
At 1 January 2016
Capital contribution – share-based payments
Additions in the year *
Impairments during the year**
At 31 December 2016
Capital contribution – share-based payments
At 31 December 2017
Investments
Other
in subsidiary
investments
undertakings
€’000
€’000
13
-
-
-
13
-
13
373,768
2,660
169,750
(15,005)
531,173
3,944
535,117
Total
€’000
373,781
2,660
169,750
(15,005)
531,186
3,944
535,130
* During 2016 the Company acquired shares in a number of subsidiary companies which were satisfied by the assignment of intercompany receivables.
** The impairment charge during 2016 largely relates to subsidiaries which were liquidated.
Other investments represent sundry equity investments at cost less provision for impairment.
182
Grafton Group plcAnnual Report & Accounts 2017 6. Debtors
Amounts falling due within one year:
Amounts owed by subsidiary undertakings
Deferred tax
Other receivables
Amounts falling due after one year:
Amounts owed by subsidiary undertakings
7. Creditors
Amounts falling due within one year:
Accruals
Deferred tax
Amounts owed to subsidiary undertakings
8. Deferred Taxation
Recognised deferred tax (assets) and liabilities
Other items
Assets
2017
€’000
(214)
Net (assets)/
Liabilities
liabilities
2017
€’000
-
2017
€’000
(214)
Recognised
in other
Balance
Recognised in
comprehensive
2017
€’000
2016
€’000
1,141,848
214
4,606
1,146,668
1,081,436
362
7,547
1,089,345
12,732
13,991
2017
€’000
2016
€’000
7,096
-
446,627
453,723
6,749
26
384,589
391,364
Assets
2016
€’000
(362)
Net (assets)/
Liabilities
liabilities
2016
€’000
26
2016
€’000
(336)
1 Jan 17
€’000
income
€’000
income
retranslation
acquisitions
€’000
€’000
€’000
Foreign
exchange
Arising on
Balance
31 Dec 17
€’000
Other items
(336)
122
-
-
-
(214)
Balance
Recognised in
comprehensive
Recognised
in other
Foreign
exchange
Arising on
1 Jan 16
€’000
income
€’000
income
retranslation
acquisitions
€’000
€’000
€’000
Balance
31 Dec 16
€’000
Other items
(440)
104
-
-
-
(336)
183
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Company Financial Statements (continued)
9. 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
10. Pension Commitments
Land and
Land and
Buildings / Other
Buildings / Other
2017
€’000
142
660
141
943
2016
€’000
114
217
-
331
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 2017 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 2017
At 31 Dec 2016
Company scheme Company scheme
Projected Unit Projected Unit
-
-
1.80%
1.85%
1.30%
1.45%
The Company’s obligations to the scheme at the end of 2017 and 2016 were limited to providing a pension to an executive who retired in 2009 on a
fixed pension.
184
Grafton Group plcAnnual Report & Accounts 2017 10. Pension Commitments (continued)
At 1 January
Interest income on plan assets
Benefit payments
Interest cost on scheme liabilities
Remeasurement gains/(losses)
At 31 December
Related deferred tax asset (net)
Net pension liability
Assets
Liabilities
Net asset/(deficit)
Year ended 31 December
2017
€’000
1,356
24
(76)
-
5
1,309
2016
€’000
1,306
30
(76)
-
96
1,356
2017
€’000
(1,356)
-
76
(24)
(5)
(1,309)
2016
€’000
(1,306)
-
76
(30)
(96)
(1,356)
2017
€’000
2016
€’000
-
24
-
(24)
-
-
-
-
-
30
-
(30)
-
-
-
-
No contributions are expected to be paid to the Company’s defined benefit scheme in 2018 (2017: €Nil).
11. 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.
Issued and fully paid:
Ordinary shares
At 1 January
Issued under UK SAYE scheme*
2011 Long Term Incentive Plan
Date awards granted
April 2014 LTIP
April 2013 LTIP
At 31 December
‘A’ ordinary shares
At 1 January
‘A’ ordinary shares issued in year
At 31 December
Issue Price Number of Shares
€’000
€’000
2017
2016
Nominal Value
Nominal Value
236,795,887
322,165
Nil
Nil
667,497
-
237,785,549
4,025,530,079
16,824,254
4,042,354,333
11,841
16
33
-
11,890
39
1
40
11,787
10
-
44
11,841
39
-
39
Total nominal share capital issued
11,930
11,880
* Refer to Note 33 to the Group Financial Statements which outlines the issue price of both the 2017 and 2014 SAYE Schemes.
Share Premium
Company
At 1 January
Premium on issue of shares under UK SAYE scheme
At 31 December
2017
€’000
300,345
2,163
302,508
2016
€’000
299,782
563
300,345
185
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Notes to the Company Financial Statements (continued)
12. Share-Based Payments
Please refer to the Group Share-Based Payments Note 33 set out on pages 172 to 174.
13. 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
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 its subsidiaries of €11.7 million (2016: €11.0 million) for the year ended 31 December 2017; and
Loans were granted to and by the Company to its subsidiaries.
Post-Employment Benefit Plans
Pension commitments to existing and former employees under defined benefit pension scheme arrangements are disclosed in Note 10 to the
Company Financial Statements.
14. Principal Operating Subsidiaries
The principal operating subsidiaries operating in Ireland are:
Name of Company
Grafton Merchanting ROI Limited
Chadwicks Limited
Woodie’s DIY Limited
Nature of Business
Builders merchants
Builders merchants
DIY superstores
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
Nature of Business
Grafton Merchanting GB Limited
Macnaughton Blair Limited
Selco Trade Centres Limited
CPI Mortars Limited
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.
186
Grafton Group plcAnnual Report & Accounts 2017 14. Principal Operating Subsidiaries (continued)
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 registered office of Binje Ackermans S.A. is Rue Nestor
Martin 315, BE-1082 Brussel, Belgium.
The principal operating subsidiaries in the Netherlands are Isero IJzerwarengroep B.V., Pijnenburg Bouw en Industrie B.V. and Gunters en Meuser
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. The registered office of Gunters en Meuser B.V. is Egelantiersgracht 2-6, 1015
RL Amsterdam, the Netherlands.
15. Section 357 Guarantees
Each of the following Irish registered subsidiaries of the Company, whose registered office is c/o Grafton Group plc, Heron House, Corrig Road,
Sandyford Industrial Estate, Dublin 18 may avail of the exemption from filing its statutory financial statements for the year ended 31 December 2017
as permitted by section 357 of the Companies Act 2014 and, if any these Irish registered subsidiaries of the Company elects to avail of this exemption,
there will be in force an irrevocable guarantee from the Company in respect of all commitments entered into by such wholly-owned subsidiary,
including amounts shown as liabilities (within the meaning of section 357 (1) (b) of the Companies Act 2014) in such wholly-owned subsidiary’s
statutory financial statements for the year ended 31 December 2017:
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, Deltana 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 Treasury 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, 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.
16. Other Guarantees
The company has declared and assumes joint and several liability for any obligations arising from the legal acts of Grafton Holding Netherlands
B.V., Isero B.V., Isero IJzerwarengroep B.V., Pijnenburg Bouw en Industrie B.V., Gunters en Meuser B.V., Toolrent Midrecht B.V. and Scholte & De Vries
– Estoppey B.V. 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 €355.3 million at the balance
sheet date. The Company has also guaranteed certain property lease obligations of subsidiary undertakings.
17. Approval of Financial Statements
The Board of Directors approved the Company Financial Statements in respect of the year ended 31 December 2017 on 12 March 2018.
187
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Supplementary
Information
Supplementary Financial Information
Grafton Group plc Financial History – 1996 to 2017
Corporate Information
Financial Calendar
Location of Annual General Meeting
190
194
196
196
197
188
Grafton Group plc
Annual Report & Accounts 2017
189
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Supplementary 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 2016 are available in the 2016 Annual Report.
APM
Description
Adjusted operating profit/EBITA 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
margin before property profit
Adjusted profit before tax
Adjusted operating profit/EBITA before property profit as a percentage of revenue.
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.
Free cash flow
Cash generated from operations less replacement capital expenditure (net of disposal proceeds), less interest
paid (net) and income taxes paid.
Gearing
The Group net debt divided by the total equity attributable to owners of the Parent times 100.
190
Grafton Group plcAnnual Report & Accounts 2017
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/EBIT margin
Profit before net finance expense and income tax expense as a percentage of revenue.
Return on capital employed
Adjusted 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
Adjusted operating profit/EBITA before property profit
Adjusted operating profit/EBITA margin before property profit
Operating Profit/EBIT Margin
Revenue
Operating profit
Operating profit/EBIT margin
Adjusted Operating Profit/EBITA & Margin
Operating profit
Exceptional items charged in operating profit
Amortisation of intangible assets arising on acquisitions
Adjusted operating profit/EBITA
Adjusted operating profit/EBITA margin
2017
£’m
2016
£’m
2,715.8
2,507.3
160.9
(2.7)
-
2.8
160.9
5.9%
2017
£’m
2,715.8
160.9
5.9%
2017
£’m
160.9
-
2.8
163.7
6.0%
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
5.7%
191
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Supplementary Financial Information (continued)
Adjusted Profit before Tax
Profit before tax
Exceptional items charged in operating profit
Amortisation of intangible assets arising on acquisitions
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
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
EBITDA Interest Cover
EBITDA
Net bank/loan note interest
EBITDA interest cover - times
192
2017
£’m
154.5
-
2.8
157.2
2017
£’m
127.8
-
-
2.8
(0.6)
130.0
2017
£’m
127.8
-
6.4
26.6
39.5
4.0
204.4
2017
£’m
204.4
62.9
0.31
2017
£’m
204.4
4.2
48.4
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
2016
£’m
177.9
4.7
37.9
Grafton Group plcAnnual Report & Accounts 2017
Free Cash Flow
Cash generated from operations
Replacement capital expenditure
Proceeds on sale of property, plant and equipment
Proceeds on sale of properties held for sale
Interest received
Interest paid
Income taxes paid
Free cash flow
Gearing
Total equity attributable to owners of the Parent
Group net debt
Gearing
Return on Capital Employed
Operating profit
Exceptional items charged in operating profit
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
2017
£’m
210.7
(32.2)
3.1
5.7
0.7
(6.4)
(18.2)
163.5
2017
£’m
1,174.6
62.9
5%
2017
£’m
160.9
-
2.8
163.7
1,174.6
62.9
1,237.5
1,065.2
96.3
1,161.5
1,199.5
13.6%
2017
£’m
2,715.8
1,199.5
2.3
2017
54.85
15.50
3.5
2016
£’m
168.6
(22.9)
1.7
8.3
1.3
(6.9)
(16.3)
133.8
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
2016
47.67
13.75
3.5
193
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information
Grafton Group plc Financial History - 1996 to 2017
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
Acquisitions & investments
Purchase of fixed assets / investment in
intangible assets
2017
£’m
2016
£’m
2015
£’m
2014
£’m
2013
2012‡
£’m
£’m
2011
£’m
2010
£’m
2009
£’m
2008
£’m
2007
£’m
2,715.8
158.2
5.8%
-
2.7
(6.4)
154.5
(26.6)
127.8
2,507.3
134.9
5.4%
(19.7)
4.9
(5.9)
114.2
(21.1)
93.1
2,212.0
121.5
5.5%
-
6.7
(7.9)
120.3
(23.8)
96.5
2,081.7
110.1
5.3%
-
-
(8.9)
101.2
(21.2)
80.0
1,899.8 1,760.8
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
1,782.5
47.5
2.7%
(27.8)
-
(10.8)
8.9
(6.7)
2.2
1,719.4
41.5
2.4%
(13.2)
-
(6.4)
21.9
33.0
54.9
1,763.8
21.3
1.2%
(17.0)
-
7.8
12.1
(0.2)
11.9
2,128.5
92.7
4.4%
(13.7)
-
(28.0)
51.0
(5.1)
45.9
2,193.3
180.4
8.2%
-
5.0
(24.0)
161.4
(21.0)
140.4
2017
£’m
2016
£’m
2015
£’m
2014
£’m
2013
£’m
2012
£’m
2011
£’m
2010
£’m
2009
£’m
2008
£’m
2007
£’m
646.1
504.4
0.1
136.3
(49.4)
1,237.5
610.8
461.7
0.1
141.5
(52.6)
1,161.5
554.2
430.1
0.1
149.6
(31.3)
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
476.2
458.3
0.2
133.7
(85.9)
982.5
474.9
471.9
0.1
121.2
(58.4)
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
516.0
603.2
0.2
193.0
(69.9)
1,242.5
448.7
516.1
0.6
256.9
(35.7)
1,186.6
1,174.6 1,062.1
3.1
96.3
1,161.5
-
62.9
1,237.5
985.7
3.4
113.6
1,102.7
902.3
4.0
75.3
870.3
4.0
133.7
981.6 1,008.0
813.5
4.1
164.9
982.5
821.0
-
188.7
1,009.7
852.5
-
219.6
1,072.1
809.7
-
286.4
1,096.1
827.6
-
414.9
1,242.5
783.0
-
403.6
1,186.6
40.4
11.9
98.6
33.1
5.9
17.6
11.1
2.1
6.1
22.4
61.0
81.4
121.8
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
Depreciation and intangible amortisation
43.5
38.1
33.1
32.5
31.5
33.9
37.1
40.1
44.7
45.0
40.4
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
2017
54.9
15.5
72.4
495.0
48.4
3.5
5%
13.6%
2016
47.7
13.8
64.0
449.5
37.9
3.5
9%
12.5%
2015
41.2
12.5
54.9
419.0
27.3
3.3
12%
12.2%
2014
34.4
10.8
48.4
387.9
19.4
3.2
8%
11.1%
2013
22.3
8.5
39.5
374.4
11.0
2.6
15%
7.8%
2012‡
15.1
7.0
29.9
350.6
8.6
2.2
20%
6.1%
2011
13.4
6.5
24.9
354.1
6.4
2.1
23%
4.6%
2010
15.9
6.0
44.8
368.5
10.0
2.6
26%
3.8%
2009
4.8
4.5
26.6
351.0
5.6
1.1
35%
1.8%
2008
25.6
11.9
39.6
359.5
4.5
2.1
50%
7.6%
2007
57.7
15.1
74.1
341.2
8.2
3.8
52%
16.1%
The summary financial information is stated under IFRS for 2004 to 2017 and under Irish GAAP for all years from 1994 to 2003.
*
** Excluding net debt/(cash)
*** Before amortisation of intangible assets arising on acquisitions in 2017. 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
194
Grafton Group plcAnnual Report & Accounts 2017
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
Acquisitions & investments
Purchase of fixed assets / investment in
intangible assets
2006
£’m
2005
£’m
2004
£’m
2003
£’m
2002
£’m
2001
£’m
2000
£’m
1999
£’m
1998
£’m
1997
£’m
1996
£’m
2,000.0
165.4
8.3%
-
25.9
(21.4)
169.9
(22.0)
147.9
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
2006
£’m
2005
£’m
2004
£’m
2003
£’m
2002
£’m
2001
£’m
2000
£’m
1999
£’m
1998
£’m
1997
£’m
1996
£’m
400.3
460.8
0.3
225.4
(35.8)
1,051.0
681.1
-
369.9
1,051.0
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
59.4
326.7
60.2
152.3
55.8
38.4
34.5
41.9
36.2
21.7
6.5
84.8
144.2
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
37.8
34.5
23.5
26.0
16.7
13.6
10.1
8.3
4.9
3.9
3.4
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
2006
53.2
12.8
68.4
284.7
10.2
4.2
54%
2005
46.4
10.8
60.4
234.9
9.4
4.3
72%
16.5% 18.8%
2004
38.1
8.8
49.1
163.7
9.9
4.3
70%
19.3%
2003
31.2
7.3
40.6
149.1
9.1
4.3
69%
17.1%
2002
23.3
5.3
32.7
118.1
9.1
4.4
75%
16.5%
2001
20.0
4.7
27.9
91.4
8.2
4.3
74%
17.4%
2000
15.8
3.7
22.1
77.6
6.9
4.3
71%
17.4%
1999
12.8
3.0
18.1
65.2
7.2
4.3
59%
16.9%
1998
9.6
2.2
13.1
59.9
8.3
4.3
42%
18.2%
1997
8.5
2.0
11.5
33.3
12.9
4.3
30%
23.1%
1996
7.3
1.7
9.9
34.4
20.2
4.3
-
22.2%
# 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.
‡
The comparatives for the year ended 31 December 2012 have been restated.
IAS 19 (Revised) ‘Employee Benefits’ has been adopted as required by IFRS from the year ended 31 December 2013.
195
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Corporate 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
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
Link Asset Services
Link Registrars Limited
2 Grand Canal Square, Dublin 2, D02 A342
Phone: 00353-1-553 0050
Email: enquiries@linkgroup.ie
www.linkassetservices.com
Financial Calendar
Results
Half-Year Results for 2017
Final Results for 2017
Annual General Meeting
2018 Half-Year Results
Interim Dividends
Record date
Record date
31 August 2017
1 March 2018
9 May 2018
22 August 2018
8 September 2017
9 March 2018
196
Grafton Group plcAnnual Report & Accounts 2017 Location 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 Wednesday 9 May 2018 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
N
1
1
T
O
C
I
T
Y
S
T
I
L
L
O
R
G
A
N
D
U
A
L
I
C
A
R
R
A
G
E
W
A
Y
S
A
N
D
Y
F
O
R
D
R
O
A
D
C L O N A R D R O A D
I M I
Tr
c
lights
Tr
c
lights
Sandyford
Industrial
Estate
Exit 14
AVID
Technology
S
O
U
T
H
B
O
U
N
D
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
197
Strategic ReportCorporate GovernanceFinancial StatementsSupplementary Information Heron 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