Grafton Group Plc Annual Report

Transcription

1 2001 Grafton Group Plc Annual Report

2 Financial Highlights Group Profile 2 Financial Highlights 3 Board of Directors 4 Group Brands and Divisions 4 Chairman s Statement 6 Performance by Region and Division 16 Trading Locations 17 Financial Review 1987 to Report of the Directors 20 Corporate Governance 22 Directors Report on Remuneration 24 Statement of Directors Responsibilities 28 Independent Auditors Report 29 Group Profit and Loss Account 30 Other Statements 31 Group Balance Sheet 32 Group Cash Flow Statement 33 Company Balance Sheet 34 Accounting Policies 35 Notes to the Financial Statements 37 Principal Operating Subsidiary Undertakings 55 Corporate Information and Financial Calendar 55 Group Profit and Loss Account (Translated into Sterling) 56 Grafton Group plc Annual Report

3 Group Profile Grafton Group plc is an independent, profit growth oriented company, operating in the UK and Ireland whose main activities are builders and plumbers merchanting, DIY retailing and manufacturing. The Group aims to achieve above average returns for its shareholders. Grafton's strategy is to build on strong positions in businesses serving the UK and Irish construction sectors, to develop in related markets, and to grow in businesses with which it is familiar. In Great Britain, Plumbase is one of the largest chains of plumbers merchants with 93 branches located mainly in England. The Group also has 76 builders merchants outlets trading principally under the Buildbase brand and is the market leader in silo mortars operating from 6 plants in the London, Glasgow, Manchester, Birmingham and Cardiff areas. In Northern Ireland, Macnaughton Blair is one of the leading builders merchants trading from 9 locations. In the Republic of Ireland, the Group includes Chadwicks the leading builders merchant chain with 23 locations. The Group is the clear market leader in DIY retailing with 12 Woodie s stores nationally and amongst other activities, has manufacturing interests in plastics and concrete products. Since becoming an independent Public Company in 1987, Grafton has increased its earnings per share at an average annual rate of 29%. Grafton Group plc shares are listed on the Irish and London Stock Exchanges. 2 Grafton Group plc Annual Report 2001

4 Financial Highlights Change Turnover ( '000) 988, , % EBITDA ( 000) 101,474 81, % Profit before taxation ( 000) 67,236 52, % EPS 33.61c 26.61c +26% EPS before goodwill amortisation and property profit 34.09c 28.06c +21% Dividend per share 8.0c 6.5c +23% Dividend cover (times) Interest cover (times) Cash flow per share* 46.2c 36.2c +28% Net assets per share 150.2c 124.3c +21% Net debt to shareholders' funds 74% 71% - Depreciation charge ( 000) 18,756 14,008 Goodwill amortisation ( 000) 3,096 2,495 Acquisition and investment expenditure ( 000) 61,842 56,646 Capital expenditure ( 000) 42,003 43,151 *Based on profit after tax plus depreciation and goodwill amortisation Turnover million Profit Before Tax million EPS Before Goodwill Amortisation and Property Profit cent Dividend Per Share cent Grafton Group plc Annual Report

5 Board of Directors Michael Chadwick BA, MSc Executive Chairman Michael Chadwick (50) joined the Group in 1975 and was appointed to the Board in He was appointed Executive Chairman in Norman D. Kilroy FCA Managing Director Norman D. Kilroy (62) was appointed Managing Director in 1990 having previously been appointed a non-executive director in He is a Director of Banque Nationale de Paris in Ireland, The Carton Group and PEI. He is a past President and Life Fellow of the Irish Management Institute and previously served as an Authority Member of the IDA and as a member of the Irish Trade Board. Colm Ó Nualláin B Comm, FCA Finance Director Colm Ó Nualláin (48) joined the Group as Financial Controller in 1989 and was appointed Finance Director in He previously held senior financial positions in a number of public and semistate companies. Fergus Malone BE, MBA Executive Director Fergus Malone (59) joined the Group s Plastics division in 1972, having previously worked as an engineer in various industries. He was appointed to the Board in 1978 and is responsible for the Group s manufacturing businesses in the UK and Ireland. Group Brands & Divisions Britain & Northern Ireland EuroMix Builders Merchanting Plumbers Merchanting Builders Merchanting Silo Mortar Manufacturing 4 Grafton Group plc Annual Report 2001

6 Anthony E. Collins MA, B Comm, Solicitor Deputy Chairman Non-Executive Anthony Collins (62) became a non-executive director in 1988 and was appointed Deputy Chairman in A former President of the Law Society of Ireland, he is Senior Partner of Eugene F. Collins, Solicitors and Chairman of the Advisory Board of the Automobile Association Ireland. Gillian Bowler (UK) Non-Executive Director Gillian Bowler (49) joined the Board in She is Chairman of Budget Travel Ltd, President of the Institute of Directors and a Director of Irish Life & Permanent plc, Tedcastle Holdings Ltd and the VHI. She formerly served as Chairman of The Irish Museum of Modern Art and as a member of the Independent Radio and Television Commission. She is a fellow of the Marketing Institute of Ireland, a fellow of the Irish Management Institute and holds an honorary doctorate in Laws from the National University of Ireland. Richard W. Jewson MA (UK) Non-Executive Director Richard Jewson (57) joined the Board in He is Chairman of Eastern Counties Newspapers Group Ltd, Queens Moat House plc, Savills plc, InterX plc, Octagon Healthcare (Holdings) Ltd., East Port Great Yarmouth Ltd., Deputy Chairman of awg plc and a Director of Temple Bar Investment Trust. He is former Chairman and Group Managing Director of Meyer International plc, the UK timber and builders merchants Group. Board Committees Audit A.E. Collins G. Bowler R.W. Jewson Remuneration A.E. Collins G.Bowler R.W. Jewson Charles Rinn MBA FCCA Secretary & Group Financial Controller Nomination M. Chadwick A.E. Collins G. Bowler R.W. Jewson Finance M. Chadwick N.D. Kilroy C. Ó Nualláin Ireland EuroMix Builders Merchanting DIY Retailing Plastics Manufacturing Concrete Products Manufacturing Grafton Group plc Annual Report

7 Chairman s Statement The success of the Group s strategy of diversifying its earnings base was reflected in increased sales and profits from the Group s UK operations. Over the last five years since 1996, the Group s UK turnover has increased eight fold to million, and UK operating profit has grown 15 times to 40 million I am pleased to report record results for the year ended 31 December 2001, with pre-tax profits growing by 27 per cent to 67.2 million (2000: 52.8 million). Earnings per share, before goodwill and property profit, increased by 21 per cent to 34.09c (2000: 28.06c). It is proposed to pay a final dividend of 4.75c, making a total of 8.0c for the year (2000: 6.5c), an increase of 23 per cent. The Group continued to develop and implement its proven strategy in pursuit of profitable growth in the UK and Ireland, and enhanced its performance in both markets. The UK now accounts for 66 per cent of Group turnover and 50 per cent of Group operating profit. UK turnover grew by 26 per cent to million, while UK operating profit increased by 37 per cent to 40 million, at an improved margin of 6.1 per cent (2000: 5.6 per cent). In Ireland, margins excluding income from financial assets improved to 11.8 per cent (2000: 11.6 per cent) with profits up 9 per cent to 39.2 million, on turnover up 7 per cent to million. Group pre-tax profit growth before property profit and dividend income in the first half was 31 per cent, with continuing strong growth in the second half of 21 per cent. Group turnover grew by 19 per cent to million, in trading from over 230 locations, as Grafton continued to strengthen its market positions in both the UK and Ireland. Group operating profit grew by 21 per cent to 79.1 million at an improved margin of 8.0 per cent (2000: 7.9 per cent). In the UK, the Group s builders and plumbers merchanting divisions experienced turnover growth ahead of the market. Five new greenfield locations were opened, and a further 22 new locations were added as a result of 11 acquisitions made during the year. The Group s EuroMix mortar business enjoyed strong sales growth, further penetrating the market, and opened its fifth dry mortar plant at Bilston, near Birmingham. All UK divisions enjoyed strong like for like sales growth and increased their contribution to Group profits. The Group s Irish operations performed well with improved results from all divisions. This performance was achieved despite a slowdown in growth in the Irish economy and in the construction sector in particular. Turnover grew by 7 per cent to million and operating profit increased by 9 per cent to 39.2 million. The Group utilised the strong cashflows from its businesses to fund expenditure of 61.8 million on acquisitions and investments and a further 42.0 million on capital projects. EBITDA for 2001 was million up 25 per cent. Year end Shareholders funds were million (2000: 216.5) and net bank debt amounted to million giving a debt to equity ratio of 74 per cent (2000: 71 per cent). EBITDA interest cover increased to 8.2 from 6.9 times. Top left: Buildbase continued to invest in its branch network including the refurbishment of its branch at Bordesley Green, Birmingham. Top right: A Selco store for trade customers was opened at Dudley, Birmingham. Middle: The three branch BSG acquisition included a branch at Basildon, Essex. Bottom: The acquisition of Days increased the Group s presence on the South Coast particularly in the Portsmouth area where the largest of the seven branches acquired is located. 6 Grafton Group plc Annual Report 2001

8 Grafton Group plc Annual Report

9 Chairman s Statement Operations Review United Kingdom UK profits increased significantly in 2001 due to organic growth, the benefits of scale flowing from the Group s growing market presence, and the integration of acquisitions. The Group traded from over 185 locations in the UK at the end of The acquisition of 11 businesses trading from 22 locations and the greenfield development of a further five locations increased market penetration and complemented the existing branch network. These initiatives provide a solid platform for future growth. The total spend on UK acquisitions was 46 million and annualised turnover from these at the date of acquisition was 92.4 million (Stg 57.5 million). The success of the Group s strategy of diversifying its earnings base was reflected in increased sales and operating profit contribution from UK operations. The UK businesses accounted for 66 per cent (2000: 63 per cent) of Group sales and 50 per cent (2000: 45 per cent) of Group operating profit. UK sales increased by 26 per cent, including organic growth of 7.8 per cent, to million (Stg million). UK operating profit increased by 37 per cent to 40 million (Stg 24.8 million), with similar strong growth in both halves of the year. UK Builders Merchanting The Group s UK builders merchanting division made solid progress during the year. Its market position was strengthened with the acquisition of nine businesses trading from eighteen locations and the opening of one new branch taking the divisional total to 85. The most significant acquisitions were G A Day, a Portsmouth based builders merchant which trades from seven locations mainly on the South Coast, and BSG a heavyside builders merchant trading from three locations in London and Essex. The Group also acquired its first branch in Scotland. The division increased sales and operating profit as a result of like for like growth, maximising buying efficiencies and continued improvement in the performance of prior year acquisitions. Buildbase is now a well recognised brand in the UK builders merchanting sector enjoying a strong market position in the South and Midlands. The business improved the operating profit margin of its established branches and continued the re-branding and integration of acquisitions. In Northern Ireland, Macnaughton Blair had another good year achieving significant growth in sales and operating profit at higher operating margins. Macnaughton Blair grew sales and profits strongly in its established branches and also benefited from the successful integration of the three branch Lowden acquisition made in November Macnaughton Blair is a leading builders merchant in Northern Ireland trading from nine locations and is well placed to take advantage of further expansion opportunities which may arise. UK Plumbers Merchanting Plumbase achieved significant growth in sales and operating profit aided by like for like growth and the incremental effect of two substantial acquisitions, Thompsons and Essex Heating, made during the first half of Operating profit margins were also higher due to the successful integration of acquisitions, and the benefits of scale associated with the enlarged business, including purchasing benefits and improved efficiencies. Plumbase is the leading regional plumbers merchanting business in the South and Midlands trading from 93 branches at year end. Plumbase strengthened its branch network with the Plumbase increased its branch network during the year with the opening of four new branches including Bedford, Bedfordshire (top) and Eastbourne, East Sussex (middle left and bottom left). The Haywards Heath, West Sussex showroom is also shown (bottom right). 8 Grafton Group plc Annual Report 2001

10 Grafton Group plc Annual Report

11 Chairman s Statement opening of four new branches during the year and a further three since the year-end. Four branches were added to the network through two bolt-on acquisitions. UK Manufacturing EuroMix, producing a range of silo based mortars using the latest technology, strengthened its market leadership position with the opening of a fifth dry mortar plant in Bilston near Birmingham. The business is well positioned to achieve further market penetration and to service customer demand in a growing market on a nationwide basis. EuroMix is now an established supplier of silo mortar to the UK s leading building and construction companies. All plants enjoyed strong volume growth which was reflected in significantly higher sales and operating profit. Operations Review Republic of Ireland In Ireland, the inevitable return to more normal and sustainable levels of economic growth continued throughout the year. In the construction sector, the first six months of 2001 continued to show real growth, with a slowdown occurring in the second half. HomeBond registrations have been declining since August 2000 and it is estimated that private residential completions in 2001 fell while publicly funded housing completions increased. The DIY and Repair, Maintenance and Improvement (RMI) markets remained buoyant. Against this background, Irish results were strong. Irish turnover grew by 7 per cent to million, and margins improved to 11.8 per cent (2000: 11.6 per cent), resulting in an increase of 9 per cent in operating profit to 39.2 million, compared to 36.1 million in Strong double digit profit growth was experienced in the first half with modest single digit growth in the second half. These results were further improved by a property profit of 2.3 million on the sale by Chadwicks of its Kilkenny branch property, prior to relocation in Irish Merchanting Irish Retailing Irish Manufacturing Chadwicks builders and plumbers merchanting business continued to concentrate on profitable growth in Turnover grew by 2.4 per cent to million, and operating profit improved considerably as a result of Group synergies, management s focus on the RMI market and credit management. During the year a new Chadwicks Plumb Centre at Navan was opened and work progressed well on Chadwicks relocation programme for its Clonmel and Kilkenny branches. Towards the year-end, Grafton acquired Pulsar Direct, a Cork based business serving the plumbing trade. Woodie s achieved strong turnover growth of 19 per cent to 85.2 million, growing like for like sales by 16 per cent in a favourable but competitive market. Woodie s development programme included the refurbishment of its Swords and Lucan stores, and increases in the size of its stores in Cork and Waterford. Woodie s increased further its product offering to the public. Expansion plans for further stores in Newbridge and Tralee are well underway. Woodie s contributed strongly to the successful performance of the Group s Irish operations. Manufacturing turnover increased by 9 per cent to 29.9 million, compared to 27.4 million in CPI, serving the greater Dublin market, grew its concrete and EuroMix silo mortar turnover and operating profit in a highly competitive market, developing its product range and increasing its average number of silos on site throughout the year. MFP increased its plastics business and improved its profitability, despite weak selling prices in the market. The EuroMix business supplied mortar for use in several prestigious projects during 2001 including construction of the Almondvale Shopping Centre in Livingston, West Lothian (top) and the refurbishment of The Scotsman s building in Edinburgh (bottom right). EuroMix was also supplied to infrastructural projects including the Southern Cross Motorway in Dublin (middle left). EuroMix product development included the introduction of a sprayed render system seen here being demonstrated (bottom left). 10 Grafton Group plc Annual Report 2001

12 Grafton Group plc Annual Report

13 Chairman s Statement Financial Review Like for like sales growth of 6 per cent in Ireland and 7.8 per cent in the UK, together with improved operating margins in both Ireland and the UK, resulted in a strong increase in like for like operating profit in both the UK and Ireland. The Group s results were further enhanced by the improved profitability of businesses acquired in the year 2000, with significant contributions to Group operating profit coming from Essex Heating Supplies Ltd and E J Thompson & Company. The Group s EuroMix mortar manufacturing business also made a strong contribution to Group operating profit growth. The growth in operating profit produced a material increase in cash generated by the Group. Net cash inflow from operating activities, having taken account of the increase in working capital (required to support the increase in activity levels), was up 16.4 million or 25 per cent to 82.4 million. The Group s ongoing development programme resulted in 47.2 million being invested in new acquisitions and 42 million being spent on a range of capital expenditure projects. During 2001 the Group s capital programme represented 4.2 per cent of turnover and just over 2.2 times depreciation. Although the Group continues to utilise its debt capacity at higher levels to part fund the Group s acquisition activity, improved operating profits and margins together with lower interest rates have once again increased the Group s interest cover to 6.7 from 5.7 times. During 2001, both euro and sterling based interest rates were reduced on a number of occasions and the Group benefited significantly. The Group s net debt increased by 26 per cent to million, while net interest costs only increased by 5 per cent to 12.4 million. At the end of the year, the Group s net debt represented gearing of 74 per cent (2000: 71 per cent). Shareholders funds increased by 22 per cent to million. EBITDA for the year increased by 25 per cent to million. Strong cash flow and high interest cover are expected to continue to underpin the financing of continuing bolt-on acquisitions and organic developments. During the year the Group increased its stake in Heiton Group plc from 14.4 per cent to 23.8 per cent. This investment, which cost 33.5 million or an average of 2.84 per share, continues to be treated as a financial asset on the face of the balance sheet, with only dividend income of 1.3 million included in the profit and loss account. As stated at the time of our interim results, the Group has adopted the policy of converting the UK results at the average rate of exchange for the year rather than the year end rate as in previous years. Accordingly, the UK results have been converted at the average rate of exchange of Stg62.2p to the euro. Had the previous policy been maintained, and UK earnings converted at the closing rate, the UK operating profit reported would have been circa 0.9 million or 2 per cent higher and Group profit before tax would have been circa 0.5 million higher. The euro / sterling exchange rate at 31 December 2001 was Stg60.8p (31 December 2000: Stg62.4p). Top: Chadwicks new Kilkenny branch under construction will enable the relocation of the existing branch to a state-ofthe-art facility during Middle right: Chadwicks opened a new Plumb Centre and Bathroom Showroom at Navan during Bottom left: Chadwicks supplied scaffolding for this mixed residential and office development in central Dublin. Bottom right: A consignment of timber for Chadwicks is unloaded at Wicklow port. 12 Grafton Group plc Annual Report 2001

14 Grafton Group plc Annual Report

15 Chairman s Statement Management and Staff Strategy A key strength of the Group is the quality, commitment and loyalty of the management and staff of its businesses. On behalf of the Board and our Shareholders, I extend our appreciation to all employees who contributed to the strong performance achieved by the Group during The success of the Group s strategy of diversifying its earnings base was reflected in increased sales and profits from the Group s UK operations. Over the last five year since 1996, the Group s UK turnover has increased eight fold to million, and UK operating profit has grown 15 times to 40 million. Performance Record Average Compound Growth Rates 5 Year 10 Year Since 1987 Turnover 32% 23% 22% Adjusted earnings per share 29% 31% 29% Dividend per share 29% 26% 24% Group Outlook The Group s consistent and focused strategy in building strong market positions and brands across the UK and Ireland has created a broadly diversified earnings base as a sound platform for continuing growth. The contribution of UK operations to Group turnover and profitability has been increasing rapidly, now accounting for 66 per cent of turnover and 50 per cent of profits. In the UK, trading conditions in a sound economy have been favourable. The significant exposure of the Group's UK merchanting businesses to the Repair, Maintenance and Improvement (RMI) markets provides opportunities for both organic and like for like growth. There remains scope for the Group to continue to be value acquirers through bolt-on acquisitions in a market that remains fragmented. The Group's EuroMix silo mortar business enjoys market leadership nationally, and is seeking suitable sites for further market penetration. In Ireland, the pace of economic growth has slowed and in the construction sector, housing starts, which first began to decline in the second half of 2000, continued to decline throughout The partial reversal in Budget 2002 of measures that penalised the residential investor are expected to improve the new residential market later in Prospects for continuing growth in the RMI and DIY market are positive. Overall the Group remains confident that its sound finances, strong market positions, and diversified earnings base provide opportunities for further profitable growth in the year ahead. Michael Chadwick Chairman 1 March 2002 Woodie s refurbished its Lucan (top left) and Swords (bottom) stores in 2001 and continued to enhance its product offering including the range of own brand paints (middle left) and tiles (top right). 14 Grafton Group plc Annual Report 2001

16 Grafton Group plc Annual Report

17 Performance by Region and Division The Group continued to develop and implement its proven strategy in pursuit of profitable growth in the UK and Ireland, and enhanced its performance in both markets. Divisional Turnover % 22% 9% 3% 9% 3% 63% 2000: 830m 66% 2001: 989m UK Operations Irish Merchanting Irish DIY Retailing Irish Manufacturing Operating Profit % 55% 50% 50% 2000: 65.3m* * Before goodwill amortisation and property profit 2001: 79.1m* UK Operations Republic of Ireland Operations 16 Grafton Group plc Annual Report 2001

18 Trading Locations Plumbers Merchanting Builders Merchanting Manufacturing DIY Retailing Birmingham Area Locations London Area Locations Dublin Area Locations Grafton Group plc Annual Report

19 Financial Review Profit and Loss Accounts m m m m m Turnover Operating profit Exceptional profit Interest payable (net) (12.4) (11.8) (8.1) (4.9) (2.4) Profit before taxation Taxation (8.7) (6.9) (4.6) (4.0) (3.5) Profit after taxation Balance Sheets m m m m m Employment of capital Intangible assets goodwill Tangible fixed assets Financial fixed assets Net current assets Other liabilities (17.7) (16.1) (14.1) (12.4) (1.2) Financed as follows: Ordinary shareholders funds Net debt/(cash) Other Information Acquisition & investment expenditure Purchase of tangible fixed assets Total capital and investment expenditure Depreciation and goodwill amortisation Financial Highlights Earnings per share before goodwill & exceptional profit (cent) Dividend per share (cent) Cashflow per share (cent) Net assets per share (cent) Interest cover (times) Dividend cover (times) Net debt to shareholders funds 74% 71% 59% 42% 30% 18 Grafton Group plc Annual Report 2001

20 m m m m m m m m m m (1.3) (1.1) (1.2) (0.9) (1.6) (1.6) (0.7) (0.8) (0.5) (0.6) (2.9) (2.5) (2.1) (1.1) (1.2) (1.1) (2.1) (1.8) (0.7) (0.4) m m m m m m m m m m (1.1) (1.1) (1.1) (1.1) (1.0) (1.0) (1.0) (0.6) (0.5) (0.2) (1.7) % 17% 23% 22% 31% 28% 2% 19% 16% Grafton Group plc Annual Report

21 Report of the Directors Year ended 31 December 2001 The Directors present their report to the shareholders, together with the audited financial statements for the year ended 31 December Group Results Dividends Review of Business Board of Directors Share Capital Group turnover of million was 19% higher than Group turnover of million in Group profit before taxation amounted to million compared with million in the previous year, an increase of 27%. Earnings per share amounted to 33.61c compared with 26.61c in the previous year, an increase of 26%. Adjusted earnings per share (before goodwill amortisation and property profit) increased by 21% to 34.09c compared to 28.06c in After deducting taxation of 8.7 million and dividends on ordinary shares of 14 million, retained profit of 44.5 million has been transferred to reserves. The financial statements for the year ended 31 December 2001 are set out in detail on pages 30 to 54. An interim dividend of 3.25c per share was paid on 21 September 2001 and the Board are recommending the payment of a final dividend of 4.75c per share to be paid, subject to shareholder approval, on 2 May 2002 giving a total dividend of 8.0c per share for the year. This represents an increase of 23% on the total dividend of 6.5c paid for the year ended 31 December Shareholders are referred to the Chairman's Statement which contains a review of operations, the financial performance of the Group for the year, recent events and the outlook for the Group. Mr. A. E. Collins and Mr. J. F. Malone retire from the board by rotation and, being eligible, offer themselves for re-election. The Directors seeking re-election do not have service contracts with the Company. At the AGM on 2 May 2001 shareholders approved a proposal that each Grafton Unit, which comprises of one ordinary share of 5c in Grafton Group plc and one C ordinary share of Stg0.0001p in Grafton Group (UK) plc, be subdivided into ten Grafton Units. The split took effect on 14 May 2001 and the number of Grafton Units in issue increased accordingly. All comparative numbers have been adjusted to reflect the ten for one split. Substantial Holdings So far as the Company is aware, in addition to the Chairman, Mr. Michael Chadwick, whose holding of 17,899,090 ordinary shares represents 10.16% of the shares in issue, the following held shares representing three per cent or more of its ordinary share capital at 1 March Name Holding % Bank of Ireland Nominees Ltd NRI Account * 44,373, Nortrust Nominees Ltd Exempt Account 12,074, Bank of Ireland Nominees Ltd NRS Account 12,021, Citibank Nominees (Ireland) Ltd 9,584, Scottish Provident (Irish Holdings) Ltd 5,771, Clydesdale Bank (Head Office) Nominees Ltd 5,500, *This shareholding relates to 57 different holdings. Directors and Secretary s interests in the share capital of the Company are set out in the Directors Report on Remuneration. 20 Grafton Group plc Annual Report 2001

22 Report of the Directors Year ended 31 December 2001 Accounting Records Health and Safety Subsidiaries Auditors Annual General Meeting The Directors are responsible for ensuring that proper books and accounting records are kept by the Company as required by Section 202 of the Companies Act, 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 experience and expertise. The books of account of the Company are maintained at Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18. The Safety, Health and Welfare at Work Act, 1989 imposes certain obligations on employers and the relevant Group companies have taken appropriate action to ensure that health and safety standards are complied with and meet the requirements of the Act. The Company's principal operating subsidiary undertakings are set out on Page 55. In accordance with Section 160 (2) of the Companies Act, 1963, the Auditors, KPMG, Chartered Accountants are willing to continue in office. The Annual General Meeting of the Company will be held at the Radisson SAS, St. Helen s Hotel, Stillorgan Road, Co. Dublin on 1 May 2002 at 12.30pm. The letter to shareholders from the Chairman and Notice of Annual General Meeting, included in a circular which accompanies this report, set out details of matters to be considered at the Annual General Meeting. On behalf of the Board M. Chadwick C. Ó Nualláin Directors 1 March 2002 Grafton Group plc Annual Report

23 Corporate Governance Year ended 31 December 2001 The Directors are committed to maintaining the highest standards of corporate governance and support the principles set out in the Combined Code published in The following statement describes how the relevant principles set out in the Combined Code are applied. Board of Directors The Board comprises the Executive Chairman, three executive Directors and three nonexecutive Directors who are independent of management and free from any current direct business or other relationship with the Group other than as shareholders. The three independent non-executive Directors are Anthony E. Collins, Gillian Bowler and Richard W. Jewson and their biographies appear on Page 5. The senior non-executive Director is Anthony E. Collins who is Deputy Chairman of the Board. The Board believes that it is in the interests of shareholders that the Executive Chairman, Michael Chadwick, continues to hold the combined roles of Chairman and Chief Executive. The Board meets at least six times a year and there is contact between meetings as required in order to progress the Group's business. The Board takes the major decisions while allowing management sufficient scope to run the businesses within a centralised reporting framework. All Directors have full and timely access to all relevant information in a form appropriate to enable them to discharge their duties. The Board has a formal schedule of matters specifically reserved to it for decision, which covers the key areas of the Group's business including financial statements, budgets, acquisitions, major items of capital expenditure and the strategic development of the Group. All Directors have access to the advice and services of the Secretary who is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Board Committees The Board is assisted by committees of Board members, which focus on specific aspects of its responsibilities. The Audit Committee, which comprises only the three non-executive Directors, meets at least twice each year and assists the Board in its responsibilities for financial reporting and internal control. The Committee reviews the interim and annual financial statements including the accounting principles, policies and practices adopted. The Committee discusses the results and scope of the audit with the Group s Auditors who have direct access to the Committee Chairman at all times. The Committee also reviews the cost effectiveness, independence and objectivity of the external auditors and the scope and findings of the Group s internal audit function. The Nomination Committee comprises the three non-executive Directors and the Executive Chairman. The Committee is responsible for proposing any new executive and non-executive appointments to the Board having regard to the balance and structure of the Board. The Remuneration Committee, which consists solely of the three non-executive Directors, makes recommendations to the Board, within agreed terms of reference, on the Group's framework of executive remuneration and on specific remuneration packages for each of the executive Directors. The Executive Chairman is fully consulted about remuneration proposals and outside advice is sought by the Remuneration Committee when necessary. The remuneration of the non-executive Directors is determined by the Board within limits set out in the Articles of Association. The Finance Committee comprises the Executive Chairman, the Managing Director and the Finance Director. The Committee deals with capital expenditure and treasury activities within prescribed limits and other management issues. 22 Grafton Group plc Annual Report 2001

24 Corporate Governance Year ended 31 December 2001 Internal Control The Directors acknowledge that they have overall responsibility for the Group s system of internal control and for reviewing its effectiveness. The Directors recognise that such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against material misstatement or loss. A process for identifying, evaluating and managing significant risks faced by the Group, in accordance with the Guidance for Directors on the Combined Code, has been in place throughout the accounting period and up to the date the financial statements were approved. Group management are responsible for implementing strategy and for the continued development of the Group s businesses within parameters set down by the Board. Similarly, day to day management of the Group s businesses is devolved to operational management within clearly defined authority limits and subject to very tight reporting of financial performance. Group and operating company management are responsible for internal control including the identification and evaluation of significant risks and for the implementation of appropriate internal controls to manage risk. Group management report to the Board on key risks and internal control issues including the way in which these are managed. The key features of the Group s system of internal control are: A clear focus on implementing the Group s strategy. Defined structures and authority limits for the operational and financial management of the Group and its businesses. A comprehensive system of reporting on trading, operational issues and financial performance incorporating results and cash flows, working capital management and return on capital. Board approval of capital expenditure and acquisition proposals. The internal audit function focuses on areas of greatest risk to the Group, monitors compliance and considers the effectiveness of internal control throughout the Group. The audit committee receives reports and meets with internal and external auditors in order to satisfy itself on the adequacy of the Group s internal control system. The Chairman of the audit committee reports to the Board on significant matters considered by the committee. The Directors confirm that they have reviewed the effectiveness of internal control. In particular, they have considered the significant risks affecting the business and the way in which these risks are managed, controlled and monitored. Going Concern Communications with Shareholders The Directors, having made enquiries, believe that the Group has adequate resources to continue in operational existence for the foreseeable future and, on this basis, they continue to adopt the going concern basis in preparing the financial statements. The company recognises the importance of communications with shareholders. Presentations are made to both existing and prospective institutional shareholders principally following the release of Interim and Annual results. The Annual General Meeting provides individual shareholders with an opportunity to raise questions. The Company s website presents information about the Group including Interim and Annual results and other announcements. Statement of Compliance with the Combined Code The Directors confirm that, in applying the Principles of Good Governance, the Group has complied throughout the accounting period with the Code of Best Practice as set out in the Combined Code. Grafton Group plc Annual Report

25 Directors Report on Remuneration Year ended 31 December 2001 The Remuneration Committee, which comprises Anthony E. Collins (Committee Chairman), Gillian Bowler and Richard W. Jewson, all of whom are non-executive Directors with no personal financial interest other than as shareholders in the matters to be decided by Committee, no potential conflicts of interest arising from cross-directorships and no day to day involvement in the running of the business. The Committee is responsible for the formulation of the Group s policy on remuneration in relation to all executive Directors. The remuneration of the non-executive Directors is determined by the Board within the limits set out in the Articles of Association. Remuneration Policy Service Contracts Basic Salary and Benefits Performance Related Bonus Pensions Share Option Scheme In making its recommendations the Remuneration Committee has given consideration to the provisions of the Combined Code and the Irish Stock Exchange s requirements on Directors remuneration. The remuneration policy adopted by the Group is to reward its executive Directors competitively having regard to comparable companies and the need to ensure they are motivated to perform in the best interests of the shareholders. The Executive Chairman is fully consulted about remuneration proposals and outside advice is sought by the Remuneration Committee when necessary. The elements of the remuneration package for executive Directors are basic salary and benefits, performance related bonus, pension and the ability to participate in the Grafton Group Share Option Scheme and the Grafton Group Share Participation Scheme. No service contract exists for any Director. The basic salaries of executive Directors are reviewed annually having regard to personal performance, company performance and competitive market practice. The level of performance bonus is determined for each individual executive Director. The level earned in any one year depends on the Remuneration Committees assessment of each individual s performance for that year and also on an assessment of the overall performance of the Group. Executive Directors participate in either a defined contribution scheme or a Group defined benefit scheme. Pensions are calculated on basic salary only in the case of the defined contribution scheme and in the case of the defined benefit scheme on basic salary and bonus which is limited to a pre-determined maximum percentage of basic salary. The calculation of pensions under the defined benefit scheme is consistent with the calculation of pension benefits for certain senior executives in the Group except that pensions are calculated on basic pay and full bonus for the senior executives. It is the practice of the Group to grant share options periodically to key executives throughout 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 Option Scheme, two types of options are available subject to the conditions set out below: (i) Basic options which cannot be exercised before the expiration of five years after the date upon which they were granted unless the Remuneration Committee agrees to a shorter period which shall not be less than three years and only then, if 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. (ii) Second tier options cannot be exercised before the expiration of five years after the date upon which they were granted. Second tier options are exercisable if over a period of at least five years subsequent to the granting of the options, the growth in the Group s earnings per share would place it in the top 25% of the companies listed on the Irish Stock Exchange Index 24 Grafton Group plc Annual Report 2001

26 Directors Report on Remuneration Year ended 31 December 2001 over the same period; provided that second tier options shall in any case be exercisable if the Company s earnings per share growth over the relevant period is greater, by not less than 10% on an annualised basis, than the increase in the Consumer Price index over that period. The share option scheme has a ten year life and the percentage of share capital which may be issued under the scheme and individual grant limits comply with Institutional Guidelines. Share Participation Scheme The Grafton Group Share Participation Scheme is open to all Irish based employees who have at least eighteen months continuous service and Executive Directors are entitled to participate in the scheme on the same basis as all other employees. Directors Remuneration and Pension Entitlements The following table sets out the remuneration of the Directors in accordance with the Irish Stock Exchange Listing Rules. Basic Performance Other Remuneration Total Total salary related bonus benefits waived Executive Directors M. Chadwick (425) N. D. Kilroy C. Ó Nualláin J. F. Malone , (425) 1,078 1,012 Fees Total Total Non-Executive Directors A. E. Collins G. Bowler R. W. Jewson Sub-total 1,192 1,126 Pension contribution on behalf of Executive Directors Total 1,781 1,633 Grafton Group plc Annual Report

27 Directors Report on Remuneration Year ended 31 December 2001 Directors Pensions The pension contribution shown on page 25 includes a contribution of 92,000 (2000: 86,000) to a defined contribution pension scheme on behalf of Mr. Norman Kilroy. Pension benefits earned by Directors who are members of a defined benefits pension scheme were as follows:- Transfer value of the Increase in accrued Accumulated total increase in accumulated pension during accrued pension at accrued benefits the year year end at year end M. Chadwick C. Ó Nualláin J. F. Malone Directors and Secretary's Interests The beneficial interests of the Directors in the share capital of the Company were as follows: 31 December 31 December Grafton Units Grafton Units of 5c each of 5c each M. Chadwick 17,899,090 17,895,050 A. E. Collins 360, ,000 N. D. Kilroy 48, ,650 J. F. Malone 426, ,870 C. Ó Nualláin 428, ,310 G. Bowler 100, ,000 R. W. Jewson 35,170 35,170 Mr. M. Chadwick also holds a non-beneficial interest in 2,806,560 (2000: 2,850,110) ordinary shares in his capacity as a Trustee of a family trust. Mr. M. Chadwick and Mr. C. Ó Nualláin have a non-beneficial interest in 1,168,110 (2000: 777,590) shares in their capacities as Trustees of the Grafton Group plc Share Participation Scheme. There have been no changes in the interests of the Directors between 31 December 2001 and the date of this report. Mr. C. Rinn, Secretary, had an interest in 15,900 ordinary shares at 31 December 2001 (2000: 11,860). 26 Grafton Group plc Annual Report 2001

28 Directors Report on Remuneration Year ended 31 December 2001 Directors and Secretary s Share Options The interests of the Directors in options, granted in accordance with the Company's share option scheme, to subscribe for shares in the Company are given below: Number of options Dates on Market Dates from which price on 1 January Excercised 31 December Second Exercise which options date of Basic Tier Price exercisable expire exercise N. D. Kilroy 262, , Oct 2000 Oct * 68,200 68,200 68, April 2000 April , , April 2000 April , ,500 68,200 68,200 C. Ó Nualláin 100, , Oct 2000 Oct , , April 2001 April , , , April 2002 April , , , June 2003 June , ,000 85,000 65, June 2004 June , ,000 80,000 70, April 2005 April ,000 # 5, , April 2006 April , , , , ,000 J. F. Malone 125,000 60,000 65,000 65, Oct 2000 Oct ,000 80,000 80, April 2001 April , , , April 2002 April , , , June 2003 June , ,000 85,000 65, June 2004 June , ,000 80,000 70, April 2005 April ,000 60, , , ,000 * This represents the weighted average market price at the dates of exercise. # These options were granted during the year. The conditions associated with the exercise of basic options and second tier options are set out in the Directors Report on Remuneration on pages 24 and 25. The mid market price of an ordinary share at 31 December 2001 was 3.25 and the price range during the year was between 2.19 and Mr. C. Rinn, Secretary, had options to subscribe for 215,000 shares in the company at 31 December 2001 (31 December 2000: 180,000). There has not been any contract or arrangement with the Company or any subsidiary undertaking during the year in which a Director of the Company was materially interested and which was significant in relation to the Company s business. Grafton Group plc Annual Report

29 Statement of Directors Responsibilities Irish Company law requires the Directors to prepare financial statements for each financial year which, in accordance with applicable Irish law and accounting standards, give a true and fair view of the state of affairs of the Company and of the Group as at the end of the financial year and of the profit or loss of the Group for that year. In preparing those 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; comply with applicable accounting standards, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. The Directors are responsible for keeping proper books of account which disclose with reasonable accuracy at any time the financial position of the Company and of the Group and which enable them to ensure that the financial statements comply with the Companies Acts, 1963 to 2001 and all Regulations to be construed as one with those Acts. They are also responsible for safeguarding the assets of the Company and of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. On behalf of the Board M. Chadwick C. Ó Nualláin 28 Grafton Group plc Annual Report 2001