Annual Report 2016 Grafton at a Glance Grafton Group plc (“Grafton” or “the Group”) is an international distributor of building materials to trade customers who are primarily engaged in residential repair, maintenance and improvement projects and house building. The Group has leading regional or national market positions in the merchanting markets in the UK, Ireland, the Netherlands and Belgium. Grafton is also the market leader in the DIY retailing market in Ireland and is Further investor and the largest manufacturer of dry mortar in Britain. shareholder information is available at Grafton trades from 631 branches and has in the region of 12,000 employees. www.graftonplc.com The Group’s origins are in Ireland where it is headquartered, managed and controlled. It has been a publicly quoted company since 1965 and its Units (shares) are quoted on the London Stock Exchange where it is a constituent of the FTSE 250 Index and the FTSE All-Share Index. The Group reported revenue of £2.5 billion and adjusted profit before tax of £136.2m million for 2016. Merchanting The Merchanting segment distributes building materials from 585 branches in the UK, Ireland, the Netherlands and Belgium. Merchanting revenue up 13% to £2.3bn (up 10.3% in constant currency) Retailing The Group is the largest DIY retailer in Ireland trading nationally from 35 stores. Retailing revenue up 19.5% to £157.1m (up 5.6% in constant currency) Manufacturing The Manufacturing segment operates the market leading dry mortar business in Britain from 10 plants and a plastics manufacturing facility in Dublin. Manufacturing revenue up 12.8% to £59.6m (up 11.9% in constant currency) 2016 Highlights Revenue Adjusted Group Operating Profit ྲ Strong organic growth in the Irish Merchanting, Woodie’s DIY and Manufacturing £2.5bn £142.0m businesses ྲ Isero acquisition in the 15 15 Netherlands contributed £9.1 up 13% up 12% 16 16 million to operating profit, an EBITA margin of 10.4% and is a strong platform for expansion EBITA Margin before Property Profit Cash Generation from Operations ྲ Continued successful investment in Selco with the 5.5% £168.6m opening of seven branches in 2016 and the planned opening 15 15 of at least ten branches in 2017 constant up £29.3m 16 16 ྲ Strong cash generation from operations of £168.6 million (2015: £139.3 million) resulting Dividend Net Debt in net debt reduction by £17.3 million and year-end gearing 13.75p £96.3m of just 9% ྲ Investment of £72.3 million 15 15 on acquisitions and capital 16 up 10% 16 decreased expenditure to support future by £17.3m growth 10% increase in dividend in Return on Capital Employed Adjusted Earnings Per Share ྲ line with progressive dividend 12.5% 47.7p policy 15 15 16 up 30bps 16 up 16% Financial Summary1 £m 2016 2015 Change Revenue 2,507 2,212 13% Adjusted2 Operating profit 142.0 127.3 12% Operating profit before property profit 137.1 120.6 14% read more: Profit before tax 136.2 119.4 14% Sectoral Review – UK Merchanting Earnings per share – basic 47.7p 41.2p 16% (page 21) Statutory results Operating profit 120.1 128.2 (6%) Profit before tax 114.2 120.3 (5%) Earnings per share – basic 39.6p 41.6p (5%) Dividend 13.75p 12.50p 10% Net debt 96.3 113.6 (£17.3m) EBITA margin before property profit 5.5% 5.5% - Return on capital employed 12.5% 12.2% 30bps 1. Additional information in relation to Alternative Performance Measures (APMs) is set out on pages 166 to 169. 2. The term “adjusted” means before amortisation of intangible assets arising on acquisitions and exceptional items of £19.7 million in 2016 and a net non-recurring credit of £1.4m in 2015. Contents Strategic Report Chairman’s Statement 4 Chief Executive Officer’s Review 6 Business Model 8 Strategy 10 Key Performance Indicators 12 Risk Management 14 Sectoral and Strategic Review 20 UK Merchanting 21 Irish Merchanting 24 Netherlands Merchanting 26 Belgium Merchanting 27 Retailing 28 Manufacturing 30 Financial Review 32 Corporate Social Responsibility 34 Corporate Governance Board of Directors and Secretary 40 Directors’ Report on Corporate Governance 42 Audit and Risk Committee Report 47 Nomination Committee Report 52 Report of the Remuneration Committee on Directors’ Remuneration 54 Chairman’s Annual Statement 54 Remuneration Policy Report 57 Annual Report on Remuneration 63 Report of the Directors 71 Financial Statements Statement of Directors’ Responsibilities 76 Independent Auditor’s Report 77 Group Income Statement 85 Group Statement of Comprehensive Income 86 Group Balance Sheet 87 Group Cash Flow Statement 88 Group Statement of Changes in Equity 89 Notes to the Group Financial Statements 91 Company Balance Sheet 153 Company Cash Flow Statement 154 Company Statement of Changes in Equity 155 Notes to the Company Financial Statements 156 Supplementary Information Supplementary Financial Information 166 Grafton Group plc Financial History - 1995 to 2016 170 Corporate Information 172 Financial Calendar 172 Location of Annual General Meeting 173 Grafton Group plc 2 Strategic Report Corporate Governance Financial Statements Supplementary Information Strategic Report Annual Report & Accounts 2016 3 Chairman’s Statement Dear Shareholder, I am pleased to present my first Chairman’s Statement to shareholders and to report that 2016 was another year of growth and development. The executive management team, led by Group CEO Gavin Slark, made good progress during the year responding to a challenging market backdrop in the traditional UK merchanting market while continuing to implement strategic growth initiatives that strengthened the position of the Selco merchanting model. The Group continued to build on its strong leadership positions in the merchanting and DIY markets in Ireland and completed a successful first full year of trading in the Netherlands merchanting market. Results the Netherlands at an attractive stage in the ྲ The acquisition of The Group reported a strong financial economic cycle. This move was complemented Isero at the end of performance for 2016. Revenue grew by 13 by the recently completed acquisition of 2015 represented a per cent to £2.5 billion (2015: £2.2 billion) and Gunters en Meuser which provides Isero with a significant opportunity by 10 per cent in constant currency. Adjusted market leadership position in the Amsterdam for the Group to enter operating profit increased by 12 per cent market and the overall business with a strong the merchanting to £142.0 million (2015: £127.3 million) and presence in the country’s top five cities. market in the adjusted profit before tax was ahead by 14 per Netherlands at an cent to £136.2 million (2015: £119.4 million). The growth of Selco organically continued to attractive stage in the Adjusted earnings per share increased by 16 be the primary focus of development capital economic cycle. per cent to 47.7p (2015: 41.2p). in the UK merchanting market and this was complemented by two bolt-on acquisitions in Dividend the traditional merchanting market. Strong A second interim dividend of 9.0p (2015: 8.0p) growth in Ireland continued to be driven was approved to give a total dividend for the by leveraging our market leading brands year of 13.75p. This represents an increase of from branch networks that provide national 10 per cent on total dividends of 12.5p paid coverage. for 2015. The increase is in line with the Board’s policy of increasing dividends as The Board’s broad strategy for the development earnings increase and reflects both the strong of Grafton is based on strengthening existing cashflow from operations and relatively low market positions in the merchanting markets level of year-end net debt. The dividend cover in the UK and Ireland, continuing to build on increased to 3.5 times from 3.3 times. the recent successful entry into the Netherlands merchanting market and returning the Belgian Strategy business to profitability. The creation of a more Significant progress was made during the year balanced portfolio of businesses internationally by the Group CEO and senior management by seeking growth opportunities in new in developing and implementing the Group’s geographic markets is also a strategic priority for medium term strategy as agreed by the Board. the Board. The Group has a strong balance sheet The acquisition of Isero at the end of 2015 and excellent cash generation from operations to represented a significant opportunity for the support its strategic growth ambitions. Group to enter the merchanting market in read more: Strategy (page 10) Grafton Group plc 4 Strategic Report Corporate Governance Financial Statements Supplementary Information Board Composition and Renewal Nomination Committee. Mr. Fisher will be the Board and its Committees. The report Mr. Michael Chadwick retired as Non-Executive succeeded as Chairman of the Remuneration noted that the Board continued to function Director and Chairman on 31 December 2016. Committee by Mrs. Susan Murray. These effectively and operate to a high standard of Mr. Chadwick joined Grafton in 1975, was changes will take effect on 9 May 2017. governance. appointed to the Board in 1979 and served as Executive Chairman from 1985 to 2011 when he Following the retirement of Mr. Ryan and Mr. Annual General Meeting was appointed Non-Executive Chairman. Mr. Fisher, the Board will be comprised of two In line with the policy adopted in recent years, Chadwick continued a long tradition of family Executive Directors, Gavin Slark and David all Directors, with the exception of Mr. Ryan association with the management and share Arnold, four Independent Non-Executive and Mr. Fisher as noted above, will retire and ownership of Grafton that dates back to the Directors and myself as Non-Executive seek re-election/election at the 2017 AGM.