Half-year Report

9 August 2022

SIG plc

Results for the six months to 30 June 2022

A strong half demonstrating continued progress

 

SIG plc ("SIG", "the Group" or "the Company") today announces its half year results for the six months ended 30 June 2022 ("H1 2022" or "the period").

 

	H1 2022	Restated3 H1 2021	Change vs 2021
Revenue	£1,358.5m	£1,108.2m	22.6%
LFL1 sales growth	21.2%
Gross margin	26.2%	25.9%	30bps
Underlying2 operating profit	£42.5m	£13.9m
Underlying2 operating margin	3.1%	1.3%	180bps
Underlying2 profit before tax	£28.9m	£3.3m
Underlying2 earnings/(loss) per share	1.6p	(0.3p)	1.9p
Net debt	£431.8m	£289.4m
Net debt (pre-IFRS 16)	£164.4m	£57.5m
Statutory results	H1 2022	H1 2021
Revenue	£1,358.5m	£1,108.2m
Operating profit	£39.8m	£8.0m
Profit/(loss) before tax	£26.2m	(£2.6m)
Total profit/(loss) after tax	£15.9m	(£9.1m)
Basic earnings/(loss) per share	1.4p	(0.8p)

 

1. Like-for-like ("LFL") is defined as the growth/(decline) in sales per working day in constant currency excluding any current and prior year acquisitions and disposals. Sales are not adjusted for branch openings or closures.

2. Underlying represents the results before Other items. Other items have been disclosed separately in order to give an indication of the underlying earnings of the Group.

3. H1 2021 restatement is due to the change in accounting policy regarding configuration and customisation costs incurred in implementing cloud computing arrangements following the IFRS Interpretations Committee (IFRIC) Agenda Decision published in 2021.

 

Financial highlights

·    Strong commercial execution, together with price increases, delivered Group like-for-like ("LFL") sales growth of 21% on prior year, despite some variability in demand

·    Consistent margin progression continues

o  H1 2022 gross margin of 26.2%, 30bps higher than H1 2021 as trading volumes drove higher rebates, coupled with front-end margin improvement in UK, France and Poland

o  Underlying operating profit margin of 3.1%, up 180bps on H1 2021, reflecting price and volume growth in sales more than offsetting inflation in salaries, energy and fuel costs

·    Post IFRS 16 leverage reduced over the 12 months from 3.9x to 3.0x (pre-IFRS 16 from 4.2x to 2.1x), with investment and inflationary pressures in working capital more than offset by increase in profitability

·    Robust liquidity, with gross cash of £113m and the revolving credit facility ("RCF") of £50m undrawn at 30 June 2022

 

Strategic highlights

·    Two year strategy of investing for growth has driven sustainable structural improvements across our businesses and, along with pricing tailwinds, has moved the Group back to 3% underlying operating margin, ahead of plan

·    Growth has been delivered across the business; continued strength in France, Poland, Ireland and UK Exteriors; UK Interiors in continuous improvement mode; turnaround well underway in Germany

·    Sustainability drivers continue to benefit the outlook

·    Diversification by geography, end-market, customers and products continue to provide active resilience and flexibility in uncertain market conditions

·    Immediately accretive acquisitions of Miers Construction Products in UK and Thermodämm in Germany, both completed after the period end in July 2022

 

Outlook

·    Market conditions, demand patterns and inflation dynamics have been variable across the Group's geographic and end market segments through the second quarter, and we expect this backdrop to persist in the second half

·    Return to positive free cash flow expected in H2 as seasonal working capital unwinds, with the full year also expected to be positive, although we will remain committed to maintaining product availability and superior service

·    The Board remains confident in delivering its expectations for the full year

 

Commenting, Steve Francis, Chief Executive Officer, said:

 

"SIG is a structurally different business to two years ago - more specialist, more local, more productive, more flexible. Over this time, we have delivered above market performance and enabled a rapid return to robust profitability, along with a rhythm of steady progress. The first half of 2022 in particular saw significantly stronger growth than originally planned, which resulted in margin improvement across our operations.

"SIG today is resilient, flexible and sustainable: 80% of our products serve the insulation and building energy efficiency markets. We are by far the largest independent supplier in Europe of these products, which are needed now more than ever.

"Our strong market position, growth strategy and decentralised model will continue to enable us to navigate the pricing environment well and drive market share gains.

"In addition, our scale, diversification and resilience in uncertain markets mean that we are confident both in delivering the Board's expectations for the year and in our growth path to 5% operating margin in the medium term."

 

A live presentation and Q&A session, hosted by Steve Francis, CEO, and Ian Ashton, CFO, will take place at 10:00am on Tuesday 9 August 2022. The presentation and Q&A session will be webcast live and a recording of both will be available after the event.

 

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Enquiries

SIG plc			+44 (0) 114 285 6300
Steve Francis	Chief Executive Officer
Ian Ashton	Chief Financial Officer
FTI Consulting			+44 (0) 20 3727 1340
Richard Mountain
Peel Hunt LLP - Joint broker to SIG			+44 (0) 20 7418 8900
Mike Bell / Charles Batten
Investec Bank plc - Joint broker to SIG			+44 (0) 20 7597 5970
Bruce Garrow / David Anderson

 

 

 

OPERATIONAL REVIEW

 

Strategic progress

 

We launched the Return to Growth strategy two years ago in response to a period of share loss and profit decline that pre-dated Covid. We said that through investing in growing and empowering our decentralised model across our 436 branches, and focusing on availability, superior service, local proximity and specialist expertise, we would drive revenue growth, enhance margin mix and improve productivity to return to 3% Group operating margin in two to three years, with a longer term goal of 5%.

We are delivering on our plan ahead of expectations, having transformed our customer engagement, market share, profitability, financing, leadership bench strength, industry reputation and commitment to sustainability. Since the start of Return to Growth, every business has gained share and improved margin (except Benelux, which represents four percent of Group sales), becoming more valuable to our customers and suppliers as a result.

The result of this strategic progress has also provided our OpCos with a wider range of commercial and operational levers that they can use to respond effectively and dynamically to variations in market conditions, which is showing real benefits amidst the current uncertain backdrop.

SIG was "Born Green", and we are committed to meeting our previously published sustainability goals, against which we are making good early progress. We also believe we are well placed to benefit from sustainability tailwinds that will result from well publicised pan-European commitments to energy conservation, notably through improved insulation.

Combined with earlier acquisitions, made in 2021, we have continued to supplement the strong organic growth with selective, accretive acquisitions, in line with our strategy.   We acquired two businesses in July 2022, after the period-end.  Miers Construction Products is one of the UK's leading suppliers of specialist construction materials, broadening our UK offering in high-performance construction accessories and fixings. Thermodämm is a small technical insulations business in Germany. 

SIG is a structurally different business to two years ago - more specialist, more local, more productive, more flexible. Together with our scale, diversification and performance momentum this gives us resilience in uncertain market conditions, and confidence in our growth path to 5% operating margin.

 

Trading overview

 

H1 2022 LFL revenue grew 21% compared with the prior year.  Reported Group revenue from underlying operations was 23% higher, including an adverse 2% currency movement and 4% uplift from acquisitions. This growth has been enabled by our ability to work successfully with suppliers and customers in managing the high levels of price volatility experienced across all geographies so far this year.   

 

1 January to 30 June LFL Sales Growth	2022 vs 2021	2022
		£m
UK Interiors	24%	332
UK Exteriors	13%	224
UK	19%	556
France Interiors	13%	111
France Exteriors	18%	240
Germany	17%	225
Poland	44%	115
Benelux	20%	56
Ireland	55%	56
EU	23%	803
Group	21%	1,359

 

Our higher performing businesses have accelerated to new levels of performance. France's profit is now more than double than that achieved in H1 2019, while Poland grew its LFL sales over 40% and achieved over 5% operating margin for the first time ever in this half.  Both reflect the success of re-establishing and re-enforcing SIG's decentralised business model, with a focus on driving operational performance at branch level, along with investment to modernise the business. Re-merchandising 85% of branches in France to drive private label growth, and growing e-commerce and its related productivity benefits in Poland (e-commerce now represents 16% of its sales) have all contributed to the positive performance of these OpCos.

The turnaround of UK Interiors is complete, and the business is now in continuous improvement mode, recovering share and demonstrating robust volume growth. Sales per working day has risen consistently and is now above 2019 levels as we recapture share with specialist contractors. Gross margins rose through pricing discipline, better rebates and terms, and improving product mix, and have driven the business to positive operating profitability.  This recovery in UK Interiors, and the strength of UK Exteriors, reflects the benefits of our decentralised model and our deep supplier partnerships, plus our investments in sales capacity, branch manager talent and training, and modernisation of warehouse and transport management systems.  The acquisition of three businesses over the last 18 months, namely Penlaw, F30, and Miers, the latter in July 2022, brings over £120m of revenue at an average operating margin of 7%, as well as leadership and specialist expertise, notably in construction accessories.

In Germany, the turnaround is well underway.  17% LFL sales growth, and operating margin up nearly 250 bps versus H1 2021, are the result of re-energising our sales force, simplifying and decentralising the organisation, and boosting specialist expertise in key categories. In July 2022 we acquired Thermodämm, a small technical insulations business, as part of our plans to restore our position in this attractive category.

Benelux continues to make progress in regaining share in the Netherlands under its new management team, and the other aspects of the turnaround plans are being implemented.

 

In Ireland, the exceptionally strong H1 growth partly reflects the extended lockdown that applied uniquely to that market in H1 2021, but also a continued strong underlying performance.

 

Where possible and appropriate we have continued to hold increased inventory levels to mitigate supply challenges, as well as purchase price increases.  As anticipated, some but not all of the investment made during H2 2021 unwound in the period.  Our strong balance sheet can accommodate this investment in inventory, whilst our solid liquidity provides an appropriate buffer given the prevailing macro-economic uncertainties.  

 

 

Outlook

 

The Group has continued to improve its positions in its core markets, and the fundamentals of those markets remain attractive. The Board believes that the current performance provides evidence that we have the right strategy and foundations in place to deliver sustainable and profitable growth into the future.

 

The business benefited from the combination of high price volatility and solid overall demand in H1 2022, although both of these conditions varied, in some cases significantly, across the Group's different geographic and product markets. This backdrop has persisted into the second half of 2022 to date, with continued inflationary pressures and varying demand conditions.  Mindful of the current macroeconomic uncertainties, we expect these market conditions to remain similar over the remainder of the year.

 

Notwithstanding this uncertain market backdrop, the Board remains confident in the full year performance, and in our growth path to 5% operating margin in the medium term. We benefit from broad sector, product and geographic diversification, with our OpCos now benefitting from an increasing range of operational levers that are allowing the businesses to respond quickly and effectively to market conditions.

 

We also expect to return to free cash flow generation for the full year, absent any material change to the trading environment, although we will remain committed to maintaining product availability and superior service.

 

 

FINANCIAL REVIEW

 

Revenue and gross margin

 

The Group saw a 21% increase in its LFL revenue over the same period last year, with Group underlying revenue up to £1,358.5m (H1 2021: £1,108.2m), driven by the effective implementation of the Return to Growth strategy as well as the inflationary tailwind.  Statutory revenue is equivalent to underlying revenue for both H1 2022 and H1 2021.

Pass through of product price inflation added to the top line in all geographies in H1 2022. The impact on revenue for the half year across the Group was estimated to be c.19%. 

Underlying and statutory gross profit increased 24% to £355.7m (H1 2021: £287.0m) with a gross profit margin of 26.2% (H1 2021: 25.9%). This reflects front-end margin improvements and increased rebate income due to increased sales.

Operating costs and profit

 

The Group's underlying operating costs were £313.2m (H1 2021 restated: £273.1m). The increase was primarily due to the impact of inflation on salaries, energy and fuel costs, and modest increases in bad debt reserves in light of the macro-economic environment. 

 

The Group's profitability continued to improve in H1 2022 compared to H1 2021, with underlying operating profit of £42.5m (H1 2021 restated: £13.9m), and statutory operating profit was £39.8m (H1 2021: £8.0m) after Other items of £2.7m (H1 2021 restated: £5.9m).

 

Segmental analysis

 

UK

	Underlying revenue H1 2022 £m	Underlying revenue H1 2021 £m	LFL sales H1 2022	Underlying operating profit H1 2022 £m	Underlying operating profit/(loss) restated H1 2021 £m
UK Interiors	331.9	239.3	24%	3.8	(5.0)
UK Exteriors	224.0	199.2	13%	11.1	8.1
UK	555.9	438.5	19%	14.9	3.1

Underlying revenue in UK Interiors, a specialist insulation and interiors distribution business, was up 39% to £331.9m (H1 2021: £239.3m). This included a 17% impact from acquisitions in 2021.  LFL growth was 24% reflecting the success of the Return to Growth strategy as well as benefitting from input price inflation. The improved revenue drove an underlying operating profit of £3.8m for the half year, compared to a restated underlying operating loss of £5.0m in H1 2021, with the business pushing the additional volumes through the existing capacity in the network.

UK Exteriors, a specialist roofing merchant, which also includes our Building Solutions business, continued to trade well despite some initial signs of softening in the RMI market, benefitting from both the strong demand environment, strategic stock management and purchase price inflation with underlying revenue of £224.0m (H1 2021: £199.2m), a LFL increase of 13%. The increase in revenue, further benefit from an increased margin due to rebates, and favourable product mix resulted in an underlying operating profit of £11.1m (H1 2021 restated: £8.1m).

 

 

France

	Underlying revenue H1 2022 £m	Underlying revenue H1 2021 £m	LFL sales H1 2022	Underlying operating profit H1 2022 £m	Underlying operating profit restated H1 2021 £m
France Interiors	111.2	101.1	13%	7.4	6.2
France Exteriors	239.8	206.4	18%	15.3	10.5
France	351.0	307.5	16%	22.7	16.7

France Interiors, trading as LiTT, a structural insulation and interiors business, saw underlying revenue increase by 10% to £111.2m (H1 2021: £101.1m), and by 13% on a LFL basis. The increases in revenue, coupled with an improved gross margin as a result of increased supplier rebates, partially offset by higher operating costs due to trading levels and inflation, resulted in a £1.2m increase in underlying operating profit to £7.4m (H1 2021: £6.2m).

Underlying revenue in France Exteriors, trading as Larivière, a specialist roofing business, increased by 16% to £239.8m (H1 2021: £206.4m), and by 18% on a LFL basis.  Demand remains strong in the French RMI market and revenue also benefited from pass through of significant input price inflation.  The increase in revenue together with increased supplier rebates and strict pricing discipline, partially offset by increased costs to fulfil higher trading volumes, resulted in an underlying operating profit increase of £4.8m to £15.3m (H1 2021 restated: £10.5m).

 

Germany

	Underlying revenue H1 2022 £m	Underlying revenue H1 2021 £m	LFL sales H1 2022	Underlying operating profit H1 2022 £m	Underlying operating profit H1 2021 £m
Germany	224.5	194.3	17%	8.3	2.6

Underlying revenue in WeGo/VTi, our specialist insulation and interiors distribution business in Germany, increased by 16% to £224.5m (H1 2021: £194.3m) and by 17% on a LFL basis.  Germany saw the early benefits of the turnaround, as well as benefitting from the pass through of significant input price inflation and proactive stock management.  The increased revenue resulted in an underlying operating profit of £8.3m (H1 2021: £2.6m).  The progress made in 2021 has continued to deliver results in H1 2022.

 

Benelux

	Underlying revenue H1 2022 £m	Underlying revenue H1 2021 £m	LFL sales H1 2022	Underlying operating (loss) H1 2022 £m	Underlying operating (loss) H1 2021 £m
Benelux	56.1	47.1	20%	(1.7)	(0.0)

Underlying revenue from the Group's business in Benelux increased by 19% to £56.1m (H1 2021: £47.1m) and by 20% on a LFL basis.  Revenue benefitted from increased volumes but strong competitive pressure in the Netherlands and product mix led to a decline in gross margin in the period. This, along with an increase in the cost base necessary to improve operational effectiveness has resulted in an underlying operating loss of £1.7m (H1 2021: £0.0m).  The management team appointed in mid-2021 have delivered early progress in regaining market share, and continue to address the operational issues.

 

Poland

	Underlying revenue H1 2022 £m	Underlying revenue H1 2021 £m	LFL sales H1 2022	Underlying operating profit H1 2022 £m	Underlying operating profit H1 2021 £m
Poland	115.1	83.5	44%	5.9	2.5

In our Polish business, a market leading distributor of insulation and interiors, underlying revenue increased to £115.1m (H1 2021: £83.5m), with LFL sales up 44% due to an increase in market share, branch openings and pass through of significant price inflation. The Polish business also saw gross margin improvement and generated underlying profit of £5.9m (H1 2021: £2.5m).

 

Ireland

	Underlying revenue H1 2022 £m	Underlying revenue H1 2021 £m	LFL sales H1 2022	Underlying operating profit H1 2022 £m	Underlying operating profit/(loss) H1 2021 £m
Ireland	55.9	37.3	55%	3.0	(0.2)

Our business in Ireland is a specialist distributor of interiors and exteriors, as well as a specialist contractor for office furnishing, industrial coatings and kitchen/bathroom fit out.  The business was affected by further Covid-19 related Government restrictions in the Republic of Ireland in H1 2021 but saw a strong rebound in the second half of 2021 that continued into 2022. Underlying revenue increased by 50% to £55.9m (H1 2021: £37.3m), and by 55% on a LFL basis. Underlying operating profit improved by £3.2m, finishing at £3.0m (H1 2021: loss £0.2m), reflecting the increased revenue and a shift in sales mix towards higher margin offerings.

 

Reconciliation of underlying to statutory result

 

Other items, being items excluded from underlying results, during the period amounted to £2.7m (H1 2021 restated: £5.9m) on a pre-tax basis and are summarised in the table below:

	H1 2022 £m	Restated H1 2021 £m
Underlying profit before tax	28.9	3.3
Other items - impacting profit/(loss) before tax:
Amortisation of acquired intangibles	(2.4)	(2.3)
Net restructuring costs	-	(2.2)
Costs associated with acquisitions	(0.2)	(0.3)
Cloud computing configuration and customisation costs	(0.8)	(1.3)
Other specific items	0.7	0.2
Total Other items	(2.7)	(5.9)
Statutory profit/(loss) before tax	26.2	(2.6)

 

Taxation

 

The effective tax rate for the Group on underlying profit before tax of £28.9m (H1 2021 restated: £3.3m) was 36.3% (H1 2021 restated: 206.1%). As the Group operates in several different countries, tax losses cannot be surrendered or utilised cross border. Tax losses are not currently recognised in respect of the UK business, which also impacts the overall effective tax rate. The combination of these factors means that the effective tax rate is less meaningful as an indicator or comparator for the Group.

In accordance with UK legislation, the Group publishes an annual tax strategy, which is available on our website (www.sigplc.com).

 

Pensions

 

The Group operates four (H1 2021: four) defined benefit pension schemes and a number of defined contribution pension schemes. The largest defined benefit scheme is a UK scheme, which was closed to further accrual in 2016.

The total net pension liability in relation to defined benefit pension schemes at 30 June 2022 is £8.1m (30 June 2021: £17.2m; 31 December 2021: £10.7m), including £0.9m surplus in the UK scheme. The movement in the period relates to an actuarial gain of £0.6m together with the recognition of the scheduled annual contribution of £2.5m in the UK.

 

Financial position

 

Overall, the net assets of the Group increased by £14.8m to £279.5m from £264.7m at 31 December 2021, with a cash position at the period end of £113.2m (30 June 2021: £173.9m; 31 December 2021: £145.1m) and net debt (post-IFRS 16) of £431.8m (30 June 2021: £289.4m; 31 December 2021: £365.0m).

 

Cash flow

	H1 2022 £m	H1 2021 £m
Underlying operating profit	42.5	13.9
Add back: Depreciation	36.0	33.1
Add back: Amortisation	1.7	1.9
Underlying EBITDA	80.2	48.9
Increase in working capital	(42.0)	(41.0)
Repayment of lease liabilities	(31.1)	(29.2)
Capital expenditure	(6.9)	(10.4)
Cash exceptionals	(6.6)	(6.7)
Other	(2.4)	0.8
Operating cash flow	(8.8)	(37.6)
Interest and financing	(13.9)	(10.3)
Tax	(8.7)	(5.5)
Free cash flow	(31.4)	(53.4)
Acquisitions	(0.9)	(2.3)
Repayment of debt	(0.2)	(0.3)
Total cash flow	(32.5)	(56.0)
Cash and cash equivalents at beginning of the year	145.1	235.3
Effect of foreign exchange rate changes	0.6	(5.4)
Cash and cash equivalents at end of the year	113.2	173.9

 

Free cash flow represents the cash available after supporting operations, including capex and the repayment of lease liabilities, and before acquisitions and any movements in funding. 

During the period, the Group reported a free cash outflow of £31.4m (H1 2021: £53.4m outflow), mainly as a result of the increased underlying operating profit in the period being offset by an increase in investment in working capital, which includes a significant seasonal impact. Capex during the period was £6.9m, a reduction from £10.4m in H1 2021 due to phasing of certain projects, with capex for the current financial year expected to be weighted to the second half of the year. Additional payments included interest, tax and capital and exceptional cash flows.  "Other" included £2.5m payment to the UK Pension Scheme and £4.0m payment to the Employee Benefit Trust to fund share plans, offset by non-cash items of £2m and proceeds on sale of property, plant and equipment.

 

The two key factors driving the increase in working capital in the period were the usual sales seasonality and year-over-year inflation.  Given the continued macro uncertainties, we continue to retain slightly higher than normal inventory holding levels in certain segments, albeit lower than at December 2021, in order to help ensure we were able to meet our customers' needs.    

 

Financing and funding

 

The Group's liquidity position remained solid throughout H1 2022 with the capital structure comprising €300m 5.25% fixed rate senior secured notes and an RCF of £50m.  These mature/expire in November 2026 and May 2026 respectively.  The senior secured notes are subject to incurrence-based covenants, and the RCF has a leverage maintenance covenant which only applies if the facility is over 40% drawn at a quarter end reporting date. The RCF was undrawn throughout H1 2022.

On the basis of current management expectations the Group is expected to remain in compliance with all banking covenants throughout the forecast period to 30 September 2023.

 

Dividend

 

No interim dividend will be paid for 2022.  However, continued successful execution of the strategy, including sensible investment where appropriate, will return the Group to sustainable, profitable growth and cash generation, supporting a range of capital allocation priorities. The Board reiterates its commitment to reinstating a dividend, appropriately covered by underlying earnings, once it is sensible to do so.

 

Responsibility Statement

We confirm to the best of our knowledge that:

 

(a) the condensed interim set of financial statements has been prepared in accordance with UK adopted IAS 34 "Interim Financial Reporting";

 

(b) the Interim Report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

 

(c) the Interim Report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

 

By order of the Board

 

Steve Francis	Ian Ashton
Director	Director
08 August 2022	08 August 2022

 

 

Cautionary statement 

 

This Interim Report is prepared for and addressed only to the Company's Shareholders as a whole and to no other person. The Company, its Directors, employees, agents or advisors do not accept or assume responsibility to any other person to whom this Interim Report is shown or into whose hands it may come and such responsibility or liability is expressly disclaimed.

 

This Interim Report contains forward-looking statements that are subject to risk factors including the economic and business circumstances occurring from time to time in countries and markets in which the Group operates and risk factors associated with the building and construction sectors. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions because they relate to events and/or depend on circumstances that may or may not occur in the future and could cause actual results and outcomes to differ materially from those expressed in or implied by the forward-looking statements. No assurance can be given that the forward-looking statements in this Interim Report will be realised. Statements about the Directors' expectations, beliefs, hopes, plans, intentions and strategies are inherently subject to change and they are based on expectations and assumptions as to future events, circumstances and other factors which are in some cases outside the Group's control. Actual results could differ materially from the Group's current expectations.

 

It is believed that the expectations set out in these forward-looking statements are reasonable but they may be affected by a wide range of variables which could cause actual results or trends to differ materially, including but not limited to, market conditions, competitors and margin management, commercial relationships, fluctuations in product pricing, changes in foreign exchange and interest rates, government legislation, availability of funding, working capital and cash management, IT infrastructure and cyber security and availability and quality of key resources.

 

The Company's Shareholders are cautioned not to place undue reliance on the forward-looking statements. This Interim Report has not been audited or otherwise independently verified. The information contained in this Interim Report has been prepared on the basis of the knowledge and information available to Directors at the date of its preparation and the Company does not undertake any obligation to update or revise this Interim Report during the financial year ahead.