8 August 2017

SIG plc: Half Year results for the six months ended 30 June 2017

Business stabilised; leverage down

SIG plc ("SIG") is a leading distributor of specialist building products in Europe, with strong positions in its core markets of insulation & energy management, interior fit out and roofing.

Alternative performance measures are used as a guide to underlying performance, with calculations found in the notes.

1 Continuing operations excludes businesses sold or closed in 2017 or currently under review.  Revenue and LFLs differ from the July trading statement due to the exclusion of Building Plastics and Middle East.

2 Underlying results are stated before the amortisation of acquired intangibles, impairment charges, losses on agreed sale or closure of non-core businesses and associated impairment charges, net operating losses attributable to businesses identified as non-core, net restructuring costs, acquisition expenses and contingent consideration, the defined benefit pension scheme curtailment loss, other one-off items, unwinding of provision discounting, fair value gains and losses on derivative financial instruments, the taxation effect of Other items and the effect of changes in taxation rates.

3 Like-for-like (LFL) is defined as sales per day in constant currency excluding acquisitions and disposals.

Highlights

·     Revenue¹ +8.6%  and LFL³  sales +2.8%; Mainland Europe +4.3%  and UK & Ireland +1.3%

·     Underlying PBT, excluding property profits, of £30.1m, in line with guidance

·     Underlying PBT of £38.3m including underlying property profits

·     Statutory loss before tax of £10.7m after £49.0m of non-underlying items

·     Strong focus on cash resulted in a £93.4m reduction in net debt and leverage down to 1.6x

·     Disposed of UK Building Plastics business since period end for up to £20.3m

·     Review of Group strategy underway; intend to report progress in Q4 2017

·     Interim dividend of 1.25p per share in line with rebased cover ratio

·     Expectations unchanged for the full year

Commenting, Meinie Oldersma, Chief Executive, said:

"In the first half of 2017 the business delivered underlying PBT in line with guidance.  Although lower than the first half of last year, as previously indicated, it represents an increase on H2 2016, providing some evidence that business performance has stabilised.  However, there remains considerable work to be done to improve returns over the medium term.

"Following management actions taken in the first half to strengthen the Group's balance sheet we have made good initial progress on our key short-term priority to reduce leverage, which has decreased to 1.6x (net debt to EBITDA).  We will continue to focus on leverage reduction in order to deliver our targeted range of 1.0 - 1.5x during 2018.

"Following my appointment as CEO, I commissioned a comprehensive review of the Group's strategy, use of capital and cost base.  The initial phase confirms that the business has real opportunity to improve profits and returns over the medium term, but also highlights the execution challenges in delivering these upsides.  We intend to report progress from this review in Q4 2017.

"In terms of outlook the key risk is the challenging environment created by macro uncertainty in the UK, although this may partly be mitigated by continuing improvement in confidence in Mainland European markets.   However, we continue to expect the business to show a stronger second half (excluding H1 property profits) and our expectations for the full year are unchanged." 

Analyst presentation (8.30am today)

A briefing to analysts will take place today at 8.30am at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD.  A live webcast of the presentation will be on www.sigplc.com, a replay of which will also be available later in the day.

Business performance stabilised

The Group delivered an underlying PBT, excluding property profits, of £30.1m in H1 2017 (H1 2016: £45.4m), an increase of 19.0% compared to H2 2016 (£25.3m), demonstrating that the renewed focus on the customer, together with a reduction in the scale of change initiatives and improving market conditions in Mainland Europe, have started to deliver an improved operational performance.  The second half of this year is expected to see a step up in profitability, excluding first half property profits.

On a statutory basis the Group made a loss before tax of £10.7m in H1 2017 (H1 2016: profit of £38.4m) after £49.0m of non-underlying items.

Property profits

As part of its measures to reduce leverage, the Group sold and leased back three properties in the first half of 2017 for a total net cash consideration of £24.0m on which it realised an underlying profit of £8.2m and a non-underlying profit of £5.5m.  Including these underlying property profits, SIG's H1 2017 underlying PBT was £38.3m (H1 2016: £47.9m).

SIGD returns to profitability

While still remaining competitive, pressures in the UK specialist insulation and interiors sector moderated somewhat during H1 2017 as the market continued to adapt to an environment of ongoing higher supplier price inflation.

This improvement in market conditions, along with the actions taken by the SIG management team to refocus on its customers and improve its service proposition, meant SIGD LFL revenues grew by 1.6% in the first half, and by 4.6% in the second quarter as the Group sought to recover or otherwise mitigate cost price inflation.  Gross margin improved by 160bps from the second half of last year to 24.5% in H1 2017.

As a result, and from being in a position where SIGD made a small loss of £0.5m in the second half of last year, the business returned to profitability in H1 2017 with a continuing operating profit of £6.3m in H1 2017 (H1 2016: £17.4m) on revenue of £399.6m (H1 2016: £389.7m). The business is projecting continued profitability in the second half, subject to any impact from macro uncertainty in the UK and ongoing supplier price inflation.

Continuing challenges in Offsite Construction

Following the closure of Metechno, the Group's Offsite Construction business now consists of RoofSpace, which makes room-in-roofs for residential buildings, and Building Systems, which produces modular housing units.

RoofSpace continues to perform well and reported an underlying profitable first half performance.  Although Building Systems made progress in terms of production levels, significant operational challenges remain and SIG is keeping the performance of this business under review.

On a continuing operations basis (i.e. excluding Metechno) revenue in Offsite Construction decreased by 2.9% to £13.2m in H1 2017 (H1 2016: £13.6m) and the business made an operating loss of £2.0m (H1 2016: £1.8m).

Leverage down

Following an increase in leverage to 2.1x as at 31 December 2016, based on net debt of £259.9m, management made leverage reduction a key short-term priority for the Group and took a number of actions to strengthen the balance sheet including asset disposals, debt factoring and a tighter control over cash, short-term working capital management and capex. 

The Group's balance sheet has responded quickly to these actions, which, together with a £41.3m cash inflow from operations, resulted in a £93.4m reduction in net debt to £166.5m as at 30 June 2017, as detailed in the table below.   

* 2015 final dividend was paid in May 2016 and the 2016 final dividend was paid in July 2017.

This improved net debt position, which reflected more substantial and earlier one-off actions than initially expected, enabled leverage to decline from 2.1x at 31 December 2016 to 1.6x as at 30 June 2017 (30 June 2016: 1.6x).  SIG anticipates that leverage will remain broadly unchanged at the 2017 year end and continues to target a further reduction in leverage next year as it aims to return to a 1.0 - 1.5x range during 2018.

Ongoing review of strategy

SIG is currently conducting a comprehensive review of its strategy, use of capital and cost base.   The aim of the review is to assess the potential profits and returns achievable by the Group over the medium term and to identify the key strategic levers that will drive a step change in performance.

The Group intends to report on progress from this review in Q4 2017.  In the meantime SIG is targeting shorter term quick wins to benefit profitability in 2018, including some portfolio reshaping and ongoing reductions in headcount.

Changes to portfolio

As previously announced, during the period to 30 June 2017 SIG disposed of Carpet & Flooring, Drywall Qatar, WeGo Austria and closed Metechno.   All of these businesses were exited for strategic reasons as they were either unprofitable or sub-scale in their respective markets, or a combination of both.

Since 30 June 2017, and subsequent to the Group's July trading update, SIG has agreed to sell its UK Building Plastics business, which is part of SIG Exteriors, to GAP Plastics Ltd, for up to £20.3m, comprising an initial cash payment of £18.0m plus up to £2.3m contingent consideration payable in July 2019.  SIG believes that there were limited opportunities for it to grow this business profitably in a market dominated by vertically integrated players.

In addition SIG has also decided to review its operations in the Middle East, potentially including a divestment, as it assesses the scale of ongoing growth opportunities in what is a relatively volatile market.  The revenues and profit of this business have therefore been treated as non-underlying.

A reconciliation of H1 2017 underlying to statutory revenue as a result of these portfolio changes is set out below, with the impact on 2016 comparatives also detailed later in this statement.

Non-underlying items

Non-underlying items during the period, on a pre-tax basis, amounted to £49.0m (H1 2016: £9.5m) and were:

·     Losses on sale, closure or review of businesses and associated impairment charges of £30.4m (H1 2016: nil) and H1 2017 operating losses of £5.2m (H1 2016: £0.2m) relating to Carpet & Flooring, Drywall Qatar, WeGo Austria, Metechno, Building Plastics and Middle East;

·     Amortisation of acquired intangibles and contingent payments of £5.2m (H1 2016: £8.5m);

·     Impairment of £6.8m of the carrying value of the UK ERP system, Kerridge K8 (H1 2016: nil);

·     Net restructuring charges of £3.4m (H1 2016: £2.4m), an impairment of £2.3m (H1 2016: nil) on the fixed assets in Building Systems, and other one-off items of £1.2m (H1 2016: £1.2m); offset by

·     Non-underlying profit on the disposal of property of £5.5m (H1 2016: £2.8m).

Outlook

The Group's outlook is unchanged from that stated in its July post-close trading update.  The Board continues to expect the business to show a stronger second half this year (excluding first half property profits), with expectations for the full year unchanged.  The key risk remains the challenging environment created by macro uncertainty in the UK, although this may partially be mitigated by continuing improvement in confidence in Mainland European markets.

The Group intends to report progress on its review of Group strategy in Q4 2017, along with a further update on second half trading.

Dividend

In 2016 the Group rebased its dividend, paying 3.66p per share in total for the year.  At that time SIG stated its policy was to pay dividends in line with 2 - 3x earnings cover, with a third of the total dividend paid at the interim stage.

Consistent with this policy, SIG is declaring an interim dividend for 2017 of 1.25p (H1 2016: 1.83p).  The interim dividend will be paid on 3 November 2017 to shareholders on the register at close of business on 6 October 2017.  The ex-dividend date is 5 October 2017.

Financial performance

Revenue and gross margin

On a statutory basis Group revenue was up 4.7% to £1,439.2m (H1 2016: £1,375.2m), with revenue in the UK & Ireland of £715.5m (H1 2016: £738.9m) and £723.7m in Mainland Europe (H1 2016: £636.3m).

On a continuing operations basis, Group revenue increased 8.6% to £1,375.4m (H1 2016: £1,266.4m), benefiting from foreign exchange translation (+5.4%), acquisitions (+0.5%) offset by working days (-0.1%).  As a result LFL sales were ahead by 2.8%, which is different from the figure reported in SIG's July trading update as it excludes the results from UK Building Plastics and the Middle East.

In the UK & Ireland, revenue from continuing operations increased 2.5% to £659.2m (H1 2016: £642.9m), benefiting from acquisitions (+0.6%) and currency (+0.6%).  LFL sales increased 1.3%.  In Mainland Europe revenue from continuing operations increased 14.9% to £716.2m (H1 2016: £623.5m), benefiting from foreign exchange translation (+10.3%), acquisitions (+0.4%) and offset by working days (-0.1%).  Sales on a LFL basis were up 4.3%.

Although the Group's underlying gross margin declined by 40bps to 26.8% compared to a strong performance in H1 2016 (27.2%), it increased by 60bps compared to H2 2016 (26.2%).  In the UK & Ireland underlying gross margin declined by 100bps to 26.0% (H1 2016: 27.0%), and Mainland Europe was flat at 27.5% (H1 2016: 27.5%).  On a statutory basis the Group's gross margin was 26.4% (H1 2016: 27.0%).

Operating costs and profit

On a continuing operations basis SIG's operating cost base increased by £32.2m to £322.5m in H1 2017 (H1 2016: £290.3m) due to a currency impact of £16.1m, additional costs from acquisitions of £2.7m, and other net cost increases of £13.4m.

The combination of lower gross margin and higher operating costs meant that the Group's underlying operating profit declined 16.1% to £45.7m (H1 2016: £54.5m) with underlying operating margin declining 100bps to 3.3% (H1 2016: 4.3%).

In the UK & Ireland, underlying operating profit fell 21.7% to £27.5m (H1 2016: £35.1m) and underlying operating margin declined by 130bps to 4.2% (H1 2016: 5.5%).  In Mainland Europe, underlying operating profit increased slightly, by 2.1% to £24.0m (H1 2016: £23.5m), with underlying operating margin decreasing 40bps to 3.4% (H1 2016: 3.8%).

SIG's underlying net finance costs increased by £0.8m to £7.4m (H1 2016: £6.6m), mainly due to higher borrowings which, together with the decline in operating profit, resulted in underlying profit before tax decreasing 20.0% to £38.3m (H1 2016: £47.9m).  Excluding underlying property profits the decline was 33.7% to £30.1m (H1 2016: £45.4m).   On a statutory basis the Group made a loss before tax of £10.7m (H1 2016: profit of £38.4m) after non-underlying items of £49.0m (H1 2016: £9.5m).

Underlying basic earnings per share from continuing operations declined 23.0% to 4.7p (H1 2016: 6.1p).  On a statutory basis the Group made a basic loss per share of 2.7p (H1 2016: earnings per share of 4.8p).

Return on Capital Employed

Post-tax Return on Capital Employed ("ROCE") is one of the Group's primary performance metrics and is calculated on a rolling 12 month basis as underlying operating profit less tax, divided by average net assets plus average net debt.   As at 30 June 2017 SIG's ROCE was 8.4% (30 June 2016: 12.9%).

UK & Ireland

*The 'other' segment has been removed as it principally related to SIG's activities in the Middle East, which are now under review.   SIG Spain, which was also part of 'other' and had revenue of £0.9m in H1 2017 (H1 2016: £0.7m), is now reported in SIG Distribution.

Revenue in SIG Distribution ("SIGD"), the Group's market leading specialist UK insulation and interiors distribution business, was up 2.5% to £399.6m (H1 2016: £389.7m) and by 1.6% on a LFL basis, as the highly competitive market conditions experienced in the second half of last year eased somewhat and the business improved its customer focus.

Although underlying market demand for insulation and interior products in the UK remains relatively soft, the Group has so far been able either to mitigate or recover cost price inflation, with gross margin improving by 160bps from the second half of last year to 24.5%.  This was identified as a key risk to the business at the beginning of the year.

Revenue in SIG Exteriors ("SIGE"), the market leading and only national specialist UK roofing business, was marginally up, by 0.4%, at £200.4m (H1 2016: £199.7m) and by 0.3% on a LFL basis.  Trading conditions in the UK Repairs, Maintenance and Improvement ("RMI") sector, to which the business has a relatively high degree of exposure, remain weak, and were not helped by the recent UK General Election, which injected a further degree of uncertainty into the marketplace.  The challenging conditions in the UK RMI market are expected to continue into the second half of the year.

In Ireland SIG grew revenue by 15.3%, benefiting from foreign exchange movements, and by 4.6% on a LFL basis as the business benefited from favourable market conditions.    These conditions are anticipated to continue in the second half and in addition the Group is expected to benefit from a number of larger projects to supply interior products.

Continuing revenue in Offsite Construction decreased slightly by 2.9% to £13.2m with an operating loss of £2.0m due to continuing production issues in its modular housing business.  The Group is keeping the performance of this business under review.

Mainland Europe

Continuing revenue in Mainland Europe increased by 14.9% to £716.2m (H1 2016: £623.5m), having significantly benefited from foreign exchange translation.

LFL revenues benefited from improving market conditions as the first half of 2017 progressed, increasing by 7.5% in Q2 2017 compared to an increase of 1.3% in the first quarter. 

Revenue in France, where SIG operates three businesses (Larivière, its market leading specialist roofing business; LiTT, its leading structural insulation and interior business; and Ouest Isol / Ouest Ventil, which is a leading supplier of technical insulation and air handling products), increased by 13.8% to £324.3m (H1 2016: £285.0m), having benefited from foreign exchange.  On a LFL basis sales were up by 5.0% and gross margin declined slightly, by 30bps to 27.6%.

As anticipated, the improving market conditions in France, which have been present in the construction market since the end of 2016, particularly in the residential sector, have begun to benefit SIG this year as many of the products the Group distributes are used in the later stages of the building cycle.  This improving sales trend was particularly prevalent in the second quarter, when the Group recorded LFL sales growth of 8.5%, following 1.5% growth in Q1 2017.

SIG operates two businesses in Germany: WeGo, a leading insulation and interiors business; and vti, which is the largest supplier of technical insulation in the country.

Continuing revenue in Germany grew by 11.5% to £201.4m (H1 2016: £180.6m) as it benefited from movements in foreign exchange.  LFL sales in the first half also recorded their first increase, by 1.8% as the Group sought to improve its performance and reposition the business towards the higher growth segments of the German market, such as the residential market.  Similar to France, LFL sales growth accelerated in the second quarter in Germany, with an increase of 5.9% compared to a decline of 1.9% in Q1 2017.

In Poland SIG grew revenues by 23.0% to £63.6m and LFL sales by 9.6%.  Following a subdued performance last year due to political and economic uncertainty, construction markets stabilised in the first quarter of 2017 and then improved significantly in Q2, leading to a 15.9% increase in SIG's LFL sales growth for April to June.

In the Benelux while revenue was up 5.1%, this growth was foreign exchange related and LFL sales decreased by 4.8%.  Following a recovery in construction markets during 2016 the market became tougher in 2017, with increased price competition for interior products and the demand for technical insulation particularly weak. Gross margin improved however, by 60bps to 25.8%

Revenue in Air Handling, which is the largest pure-play specialist air handling distributor in Europe, grew by 31.8% as it benefited from good LFL growth of 12.0%, acquisitions and foreign exchange movements.  The air handling market continues to grow at a faster rate than the wider construction sector due to strong demand drivers including higher energy efficiency and air quality standards.

Restatement of 2016 comparatives

The 2016 revenue and profits of businesses that have been divested, closed or are under review, and which are therefore now being treated as non-underlying, are set out in the table below in order to derive comparatives for the continuing business:

* First announced at SIG's 2016 Full Year results on 14 March 2017.

** First announced in SIG's AGM trading update on 11 May 2017.

*** First announced in this statement.

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 IAS 34 "Interim Financial Reporting" as adopted by the European Union;

(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

Cautionary Statement

This Interim Report has been prepared in accordance with the requirements of English Company Law and the liabilities of the Directors in connection with this Interim Report shall be subject to the limitations and restrictions provided by such law.

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 any such responsibility or liability is expressly disclaimed.

Certain information included in this Interim Report is forward looking and involves risk and uncertainties that could cause the actual results to differ materially from those expressed or implied by forward looking statements. 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 future outcomes to differ from those foreseen in forward looking statements, including but not limited to, market conditions, competitors and margin management, commercial relationships, government legislation, availability of funding, working capital and cash management, IT infrastructure and cybersecurity and availability and quality of key resources. All statements in this Interim Report are based upon information known to the Company at the date of this report. The Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise.