Sheffield Insulations Group

Good morning, everyone. It's good to see a large number braving the holiday trains packed full of holidaymakers in one or two suits like us. So good morning, everyone. Welcome to SIG's first half results for 2022. I'm Chief Steve Francis, Chief Executive Officer of SIG. I'm joined today here by Ian Ashton, our CFO. Ian's going to take us through the H1 results, and then I'll summarize the progress we've made and the actions we're taking to continue our growth towards 5% margin. SIG has delivered a strong first-half performance in volatile markets, thanks to our colleagues, who've again delivered superior availability and service through their passion, their professionalism, and dedication across all seven countries of our operation. Two years ago, I communicated our plan to grow back to 2019 levels after the falls since then, and back to 3% margins by 2023, by the end of 23. I'm pleased to say that we've far exceeded these plans. So the revenues in the first half were not only higher than 2019, they were 15% higher than 2018. And the first half margins were in excess of 3% over a year ahead of plan. This was driven by broad-braced share gains across the group, record performances in France and Poland, and further momentum in our UK interiors business, now well back into profit. SIG is performing because it's today a structurally different business after two years of investment and execution of our strategy of investing to become a more local, more specialised, and a superior service business. We've built this on the foundation stone of making every one of our 7,000 employees feel proud, cared for and rewarded. We all face particularly uncertain times, highlighted by the unprecedented Bank of England announcements last week. SIG today, more than ever, is resilient, flexible and sustainable. 80% of our products serve the insulation and building efficiency markets. We're by far the largest independent supplier in Europe of these products. So never more in the last 50 years have these products been more needed than now. SIG is the most diversified distributor. 59% of our revenues are from the EU across six different countries. And each of our 444 branches operates with local teams, providing a tailored expertise and service for local customer needs with agility every day. We're a local trading business. This provides flexibility and resilience, as we've demonstrated in the last two years. We're confident both in delivering our expectations for this year, but also in our path to 5% margins in the medium term. And we plan to continue relentless execution of our seven pillar strategy for growth, continuing to invest in expertise, in talent, in modernizing the business and in growth. As an example, mergers and acquisitions, we've completed acquisitions adding 140 million of revenues on an annualized basis at an average margin of 7%, also bringing enhanced expertise and market position, and thereby accelerating our strategy. We can and will continue on our steady course to our destination of 5% margins. I'm now going to hand over to Ian to talk us through the financial outlook.

Thank you, Steve. Hello, everybody here in the room and on the webcast. I hope you're all well. So the first slide I will cover is the key financials. So in the first half, we continued to make very good financial progress. We delivered a 21% increase in group sales over the prior H1, a strong result, which includes volume growth in almost all markets, as well as the tailwinds from ongoing inflationary pressures on input costs. The revenue performance drove an underlying operating profit of £42 million at a margin of 3.1%, both ahead of where we'd expected at the beginning of the year. This resulted in a profit before tax of £29 million, and I'll look in more detail in a moment at the key elements within these numbers. Below underlying profit, other items were modest at £3 million for the half. This number consists almost wholly of the normal amortisation of intangibles related to historic acquisitions. I've spoken previously about our desire and clear intent to keep this other items number low. We of course can't and don't rule out appropriate one-off items in the future, but this sort of size of number is very much where we want it to be. Our leverage continues to improve, moving towards the two and a half times or one and a half times post and pre IFRS 16 that we're targeting. Our improvement in profitability is more than offsetting the inflationary headwinds in working capital and investments in inventory we made in H2 of last year. We do remain very focused on reducing leverage. And I'll discuss net debt and cash flow in a few minutes. So next slide, revenue. This shows clearly that the growth has been seen across the business. The bars show the growth over last year in absolute terms. The largest drivers against H121 were the UK and France. Within the UK interiors number of 93 million is 39 million of additional year-over-year revenue from the F30 and Penn Law acquisitions completed in April and November of 2021 respectively, both of which are performing well. The balance of that UK interiors growth is from very robust like-for-like underlying growth of 24%, as is now shown. The French business remains the other key growth driver, a £53 million growth between the interiors and exteriors parts of the French business. Poland's growth remains exceptionally strong, partly due to a very high inflation number, but also equally high volume growth. And Steve will talk more about the progress made in both countries in a few minutes. Germany is getting very firmly back on track and Benelux's trading is improving. As expected, Ireland reported strong growth following COVID-related restrictions on construction that were in place there in the early months of last year, which you may recall. But underneath that number there was also some very solid real growth. So the overall picture for H1 was very encouraging. A pass-through of input cost inflation has benefited all areas of the business to differing degrees, with France at the lower end and Poland, as mentioned, at the higher end, resulting in a group impact in the high teens. We've seen volume growth in all areas bar two, namely UK exteriors, partly due to extremely strong comparatives in 2021, rather than any material drop-off in normal activity levels, and our French interiors business, where we've continued to take share in a slightly softening market. So gross margin and OPEX and operational leverage. Gross margin percentage finished 30 bps ahead of prior year. Pricing discipline and mix continue to drive real underlying improvement with year-over-year improvements in most parts of the business, most notably UK interiors and the French businesses. And as mentioned, we remain able to pass on cost inflation successfully. OPEX fell further as a percentage of sales to just below 23% as we continue to leverage the fixed elements of the cost base. OPEX was up on prior year in absolute terms as to be expected given the £250 million of higher sales. In addition to some additional freight and other handling costs on volumes, we've seen inflation on indirect costs of approximately 5% and have also added modestly to our bad debt reserves in light of the current macro environment. We'll continue to focus on driving more volume through our existing capacity, notably in the UK and Germany, and in driving efficiency in OPEX through increasing modernisation. It remains an imperative to further reduce our OPEX to sales ratio as we push towards our medium-term 5% margin goal. So this slide on operating margin demonstrates the consistent upward momentum that we've shown, showing a rolling last 12-month margin over the last three and a half years. The blue line is as reported and the red adjusts for the material COVID impact in 2020. As well as the recent improvement, this highlights that in prior years we were operating at a margin higher than 3% and also that we were in a period of decline pre-COVID. We've managed inflation well over the last year or so, and with much work by the commercial teams, have been able to pass this on, as I mentioned, helped by our high customer service and levels of product availability. Overall, this has helped operating margin in recent quarters, but absent that, we would still be showing a notable improvement over that period. Looking forward, the rate of improvement shown on here will slow compared to the exceptional improvement of the last 18 months and given some of the uncertainties in the macro environment. But we're confident of delivering to our expectations for full year 2022, as advised in April, and in getting to our medium-term operating target of 5%. Cash flow and net debt. I'll look at the drivers of free cash flow on the next slide, but just for completeness and clarity, this more detailed, quite busy slide shows the total cash flow in a standard format and with comparators. We finished the period with £113 million of gross cash balances and, not shown on here, an undrawn RCF of £50 million. After the end of the half, we acquired Mies Construction Products for a potential total price of £36 million, and £28 million of that was payable on closing. We also recently acquired Thermadem, a German technical insulation business, for around £4 million. And you can see at the foot of the table the wreck from cash to net debt. So pre-IFRS 16 net debt closed the half at £164 million and post-IFRS 16 at £432 reflecting our lease commitments. These lease liabilities of course grow over time as the business grows and we've also seen slightly more new and renewed leases in recent months. So looking at free cash flow, looking at the big picture, we've been very clear for some time that at 3% margin, we get to positive free cash flow on a full year basis. And we expect this year's full year numbers to demonstrate that. Of course, whilst input price inflation is a tailwind to profitability, it's also a headwind on working capital, but we're expecting that the latter effect will be partially offset over the full year by the unwind of last year's investment inventory. So back to the H1 picture, this slide, consistent with our presentation of the full-year bridges from EBITDA to free cash flow, showing all the key drivers. And we hope we'll also help provide some clarity on how we see cash flow evolving over the second half and beyond. So to that end, I've split some of the items before and after the £4 million or £3 million number, rather, in the middle of the page to broadly articulate the distinction between H1 numbers and how we expect the shape of the bridge to differ in H2. You may recall that we invested in working capital in the second half of 2021, in light of the supply situation at the time, and that there was also a strong inflationary headwind from June to December, and so hence we saw an outflow in H2 of last year. We did not expect that this year. H1 EBITDA of £80 million was at an EBITDA margin of 6%. The first four red bars are generally quite predictable, and worse so this half. Interest and tax going forward I'll cover in a few minutes. The largest item, lease payments, on our fleet and estate, as I said, will grow slightly over time with the business, but is a pretty stable number. CapEx was a bit lower than expected in H1. In 2021, we expect slightly more in H2. The other items on this bridge, i.e. working capital and the other or exceptional items, are inherently more variable. We've broken them both out for the reasons mentioned, namely they'll move in different ways in H2 and indeed beyond. Working capital was an outflow in the half as shown in the box in the top right of the page. This is the norm in our business given its seasonality, i.e. December is an extremely quiet time of year, unlike June. You can see the three key elements within working capital within that separate table. And looking at those in turn, firstly, continued inflation since January 1st of about 10%, drove around £25 million of increase affecting all three elements of working capital. Numerically, the largest element of these is debtors, obviously, as you'd expect. Secondly, we saw a modest underlying improvement of £6 million in management of debtors and inventory, and that will, of course, remain a focus. And thirdly, the seasonality that I mentioned drove an excess of £30 million of increase in H1. As you'd expect, that will reverse in H2, i.e. it will be a positive on this chart for the second half. That £30 million plus in the first half was offset by some initial unwinding of the tactical buying we saw in H2 last year, as noted on the slide. The final elements on here are the exceptional and other items. I think the only comment of note on those is that the material items such as our contribution to the UK pension scheme and legacy SAP costs, while they will mostly recur next year, all tend to occur in H1 and hence the split shown on here. So looking forward, given the ongoing macro uncertainties, we'll continue to make the right decisions and trade-offs for the business around levels of investment and inventory. But we expect robust cash generation in H2 that will deliver modest but positive free cash flow for the full year. And we remain confident in driving continuing sustainable cash flow in 2023 and beyond. Medium-term goals, a brief reminder on the goals that we've set ourselves. These are unchanged versus our previous communications on this. The only point I would highlight is leverage, which, as I mentioned, was at three times June or 2.1 times on a pre-IFRS 16 basis. And that 3x is down from 3.9 a year ago and 3.3 in December 21. And we expect it to continue to move further downwards by the end of the year. The Myers acquisition will have a minor short-term impact on this. Capital allocation, I presented this slide at the finals in March, so I won't dwell on it. I would just say that in the first half, we've been very true to this policy. On organic growth, I've talked about inventory. Steve will also reference our branch openings programme in a few moments. And on M&A, the Myers and Thermaden deals in the UK and Germany clearly meet the important criteria shown here. And finally, dividends, timing-wise, as we've said, we'll start paying a dividend again once we sensibly can, which to the board means once we are consistently generating cash. So on guidance, a very quick comment on current trading. It's very early, obviously, but it's been solid in the first weeks of the second half. Supply shortages have continued to abate, as we expected, and are currently not a material factor. But we're, of course, very mindful of the possible impact on both supply and demand of current macro uncertainties. So on inflation, we expect some additional inflation on input costs in H2, but the year-over-year impact will in all probability decline versus what we saw in H1 due to the annualisation of the high increases seen in H2 last year. Overall, we remain well-placed to manage these inflationary uncertainties. Cash I've talked about already. CapEx, as mentioned, was lower than planned in H1, and we now expect closer to around £20 million for the full year, rather than the £25 million previously guided. On interest, no change to our guidance, and likewise on tax. As reported previously on tax, we've got tax assets in the UK unrecognised from an accounting point of view, so we don't expect to pay UK corporation tax for some time. We do pay tax in our other operating companies. Our expected cash tax for this year is in the mid-teens of millions. So that concludes my update. We're pleased with the first half. There's still scope for further improvements in the business and its financial performance, which we're determined to deliver. We are mindful of the increasingly uncertain macro outlook, but SIG is in increasingly good shape, and we've confidence in both the strategy and in our team's ability to execute. And with that, I'll hand it back to Steve.

Thank you. I'll now detail how SIG is a structurally different business from the business two years ago when we launched the return to growth strategy. Again, investing in empowering our 444 branch teams with a decentralized model to deliver superior service, superior expertise, great availability on a consistent basis. I'll explain why SIG is resilient, delivering with flexibility and agility every day, and lay out the basis for our confidence in 5% margins. So what have the teams done to deliver a structurally different business? SIG, a bit of history, SIG grew reported revenues from 1991 to 2007 consistently at a compound annual growth rate of 20%. and margins of 5% to 7% throughout that period, that long period. How? on a decentralized lean central model focusing on delivering specialist expertise, superior service, and great availability. We are now back to that model. We returned to that model in summer of 2020, and we modernized it through, as you can see here, our seven pillar strategy for growth implemented consistently across all countries of operation. And that consistency and clarity of strategy is new to SIG for many years. Pillar number one, the foundation pillar, and I'm not going to go through all the details of the stats on this page, but just highlight a few. Pillar number one is about being responsible for our people, our communities, and the environment. And it is genuinely the foundation stone for what our people would say has been the difference in our business. We enhanced incentives for management and in the branches, and have invested in physically upgrading the branches Our people are more engaged. There was an eight percentage point employee engagement at the end of the first year. We're about to launch our second employee survey in the autumn, and we expect further improvements. We've opened 11 new branches after years of reducing the network. Every one of our 444 branch managers has P&L responsibility and the tools to help them deliver locally. We've invested also in superior product availability, as Ian has described, particularly when supply has been challenged, and that's been immediately beneficial to our revenue growth strategy. Our scale and strengthened customer supplier partnerships have been instrumental in this. We brought in greater expertise to understand their products and sell more and higher value products, helping to drive up our gross margin on a consistent basis. In the UK alone, we hired more than 150 specialists with an average of 15 years of industry experience. Just think about that, 14 football teams of the very best in our industry in the UK. That's a huge intake of knowledge and experience and the trust that comes with the customer and supplier relationships built over many years that they brought back to us. Our suppliers have backed us and benefited from it with superior growth themselves, given our scale and the rate of share gain that we've enjoyed over the last two years. This has structurally improved the productivity of our network, with OPEX to sales now 3.3% lower and revenue per head up 33% on two years ago, and employees on an employee workforce up 6%. As I've said, we've already made several small accretive and strategically accelerating acquisitions, adding around 5% to our revenues at group level, with superior margins. So today, SIG is a structurally different business from two years ago. We're more specialist, we're more local, we're more productive, our people are more engaged, we're more valuable to our suppliers, and we're more flexible. And this has delivered a step change in performance. I summarized some of these statistics here to put some context on it. In the first quarter of 2020, immediately prior to COVID, the group reported negative EBIT of 10 million, which was around about a 2.2% of sales loss in margin terms. So from that position of minus 2.2 before COVID, we're now back at 3% operating margins, a year ahead of expectations. Today, over 50% of revenue is generated from operating companies already trading at 5% operating margins or higher. Sales per working day at group level is up 39%. It's the strongest organic growth period this group has seen for 15 years since the late 2000s. We've seen acceleration of high-performing businesses, especially France, where profit doubled versus 2019, and Poland, like-for-like growth up over 40% versus prior year, an operating margin now over 5% for the first time in its history. UK Interiors is out of turnaround. In the first quarter of 2020, the business was delivering losses of 7.5% of sales. And now it's back in profit at 1.2% of sales. Germany, the turnaround's well underway. Margins are 2.4% up versus prior year. Every business has gained share and improved margin, except our Benelux business, which is 4% of revenue. Two years ago, as you can see on this chart, which plots both operating margin and share gain on two different axes, two years ago, all but two businesses were delivering sub-3% margins or losing market share, and in the case of the UK businesses, as you can see, heavily loss-making and losing share rapidly. Customers, key employees, suppliers were voting with their feet due to the policy of centralizing, standardizing service, and reducing local leadership and autonomy. And we reversed this approach 180 degrees in the summer of 2020 back to the time-honored way of running the business. As you can see on the right, this is the picture today. The majority of our businesses are delivering 5% plus margins and gaining a share. Both UK and areas of Germany are gaining share and profitability. They're well on the way. The small Benelux business is earlier on its journey. But the same formula is applied in the UK as being applied in the German business and the Benelux business. There's a lot of information here, but this gives you a feel for how we're running the business, how we think about it. We categorize them into three groups, largely. So the first group, the high performers, high revenue growth, margins over 5%, UK exteriors, France, Poland, Ireland. These businesses are focusing on network expansion, opening branches, widening the product range, especially private label, which is under-penetrated in most of our markets, driving process automation and exploiting the opportunities of e-commerce. And they've got lots of opportunity to improve further. The UK interiors business, which has 24% of revenues, has gone from deeply loss-making, as I've said, to making a profit, as I said, recorded 1.2% margins in the first half of 2022. And there we've been carefully rebuilding margin, increasing the quality of the product mix, and tackling underperforming branches and customer segments bit by bit. The third group, which we've labelled temporarily as EU turnarounds, Germany and Benelux, have got different starting points, but they're starting to benefit from the same growth formula that we've applied in the UK and in the higher performing EU businesses. As you can see from this page, 5% is not a magical ceiling for our businesses. Our French and Polish businesses are performing at record levels by investing behind the seven pillars approach. Although in Poland, we do have a wary eye on developments in the wider economy there, given the war on their borders. We will return to the 5% operating margin target by continuing to execute based on the same performance levers we've deployed over the last two years. There's lots of opportunity. I'm going to talk about a few of the country businesses in a bit more detail, just to bring this a bit more to life. The France interiors business, Leet, as you can see, it's been under the same management for eight years now. It's delivered consistent improvements in profitability and performance. and is now at new levels. The exteriors business on the chart below, La Riviere, has benefited from empowering the people in the branches, investing in their businesses, and now performing at new levels, as you can see. The 6.7 and 6.4% margins of these businesses and the share gains that have powered them attest to the potential of the SIG model. Our Polish business, in many ways, it's our model business. Management in place for a long time, for many years generating steady growth, but low margins of 1-2%. And it's now powered back to a new level of 5% on the back of significant share gains, strong market conditions. The business has won many awards. Best employer, the MD was voted top construction executive in Poland. Best e-commerce leader in Poland, acknowledged for our CSR work. Selected KPIs that sort of illustrate the true structural improvement. Customer growth of 29% in two years. Online sales now mushroom to 16% of total sales. With all the associated productivity benefits you get of an online relationship with customers. We've grown our own label. We've opened three new branches there after a decade of the business in hibernation. UK Interior's business completely rebuilt, and you can see this path over the last two years financially. We've put it back to being a decentralised business. We appointed 32 branch managers in late 20. We've hired 240 sales recruits, bringing back expertise and relationships. We've opened four new branches, and we've made three add-on acquisitions. Based on improved supplier relationships, we've also enjoyed better rebates and terms. We've enhanced the sales skills in the teams and given them new tools. We've also put in new disciplines and systems, so their performance is visible to Ian and myself every day. This has driven a transformation in performance. Sales per working day immediately prior to COVID were 1.4 million per working day, and they're now at 2.6 million. During that period, gross margins have improved by 4%. So high growth and improvement, significant improvement in growth margin. Productivity has gone from driving OPEX sales from 29.9%, a very high number, in the quarter immediately prior to COVID hitting, to now 24.1%. And sales per FTE in that business are up 58%. Now this is a large, mature business, and these are very unusual numbers. Operating margins are up by 7.5%. Germany. So Alphonse Horn, who was the MD for eight successful years until 2016 when he left. He came back last autumn. He's been with us around 10 months. Applying the same formulas in the UK. He thinned down the head office a bit. He re-empowered the branches. As he put it, re-empowering the touchpoints with customers. He improved product availability and rose sales productivity. So from breakeven, it's now trading at around 3.7% margins in the first half, driven by a 31% increase in sales. There's more to go. He's only one year in the job after all. Our branch network. For many years, SIG was closing branches. If you take this back a few more years, you'll see far more closures. So since 2020, we've been starting to open branches. We've opened 11. We've got another 35 to 40 to come across all markets. So it's our fragmented markets with the underlying demand for our products is so strong, such a significant growth opportunity. The scarce resource on branch openings holding us back is we need to find great local teams with experience and relationships, and we need great locations. And in our business, branch network growth is low capex intensity with paybacks typically quite fast. So it's attractive when we have the opportunity to do it. on M&A. Why M&A? Well, it's an accelerator to our seven-pillar strategy. It's not a diversion from it. Our markets are very local. They remain very fragmented. There are many small businesses out there in all of our countries of operation who now want to join our success story, attracted by the entrepreneurial, decentralised seven-pillar business model we deploy and the strong name of SIG in the market. Add-on acquisitions typically entail low integration risk and high supply-side synergies that enables accretive M&A to take place. So the story so far, as I've said, 140 million of revenues and average margins of over 7% at accretive prices. There's more to come as opportunities present, subject to our overriding objective, as Ian stated, of maintaining our ability to deliver superior stock availability to our existing business. As you can see on this page, we're twice the size in the interiors markets of the next largest player in Europe and three times the size of the next largest player in exteriors in Europe. We have long-established and strong partnerships with majors like Saint-Gobain, Knauff and Rockwall, uniquely having board-level access to them. We're their largest European customer by far for these products. We've got significant scale advantages on competitors on a pan-European basis. And that also makes us multi-diversified by geography, by region, by end use. We're not exposed to retail. And under 15% of our business, for example, is exposed to UK residential RMI. We're an EU business and very diversified. We view our 444 branches operating independently and trading independently with the flexibility to source both locally and centrally and manage price and demand trade-offs locally as another source of diversification and resilience. SIG was born green as a business, as an insulation supplier in the early beginnings of the use of specialist insulation materials on large-scale construction in the late 50s. 65 years later, we're the number one distributor in Europe of insulation products. They're over 80% of our revenues. 22 has seen a further increase in the focus on insulation due to new legislation like the UK Building Safety Act this June, further government incentive schemes, and the prospect of further government support is expected across Europe as people face high energy costs this winter. These forces provide a strong underpinning for demand, even when the economic activity in the wider economy is subdued. So our recipe for further share gains, margin growth, will remain the same. regardless of the economic conditions. Relentlessly driving our seven pillar specialist, high service and availability model, and continuing to invest, as we have been, in branch openings, product expansion, better merchandising in shops, increasing our focus on own label, high margin products, and increasingly using new and more sustainable materials and systems. We're driving growth in productivity through e-commerce. And we have a large modernization program, as we call it, to accelerate that progress. And in short, we're making the business easier to work for, buy from, and sell to using digitalization. And this is a really important group program that we'll talk about more in the spring and beyond. And lastly, M&A. And thereby, we're going to continue to take share, continue to build leading positions, improving the product mix, reducing reliance on lower margin categories, drive up productivity of our branch and fleet. We're going to remain capital light, and we're going to progress towards 5% margins at the group level and generate cash. So in summary, we've achieved 3% ahead of plan. We've got a resilient and flexible model. We've got confidence in our path to 5%. The UK turnaround's complete. Germany's progressing well. And more than 50% of sales of our operating companies are operating at 5% margins or more. We're structurally different from two years ago. We're more specialist. We're more local. We're more service-driven, more productive. And we have a resilience to the diversification of the business, its scale, the operational flexibility, and the strength of our franchise across all our countries of operation. We're going to continue to benefit from the fact that we have 80% of products in insulation building energy efficiency, so we're well-placed for the sustainability tailwinds that that generates. We've got multiple levers for capital-light growth, mixed improvement, and productivity gains. And we'll be returning to cash generation with a demonstrated ability to execute investment-led growth both organically and via M&A. So the economic outlook may look uncertain, but I'm delighted to say that because of the hard work of our teams, SIG is in better shape than it has been for many years. We look forward to the future with confidence. Thank you for listening, and we'll now go to Q&A. So you can tell it's live because I'm moving straight from lectern to table. So I think we'll start with some questions from the audience.

Amigala from Citi. Just a few from me. The first one just on Outlook. If you can talk about the net benefit of the sort of restructuring that you've gone through over the last few years. Where do volumes sit in your business versus 19, which are like you've kind of highlighted the UK in exteriors business has definitely had quite a strong performance. It would be useful to get some color around volumes where they sit. The second one was on corporate costs. Is this the right level as we kind of think moving forward and the investments that you've talked about? Is that the base that we should think about or should we also see corporate costs moving higher? And the last one is really on the order book. What sort of visibility do we have into the second half? Are there is there have you seen projects being delayed because of repricing, which could potentially come through in the second half, which is part of the pipeline ahead?

Okay, so on the volume question. So we measure, obviously volume, but we measure share gains slightly differently by country. It depends on the data that's available from the market. And what's very clear is that in all markets, we've gained significant market share. I think you can, if you want to... If you look at external references, there are some, for example, Sangoban, which is our largest supplier, they've got a lot of public information and you can do some comparators. But over that period, some of those growth numbers we showed, and the reason we went back two years, by the way, was to gain that wider perspective of way, way, way beyond inflation. So strong volume growth across all the businesses. You ask about corporate costs. By all means. We don't have big corporate costs, but Ian, by all means.

No, it's been pretty stable now. And I think there might be around the margins some investment in some of the areas like modernization. There may be a little bit of that, but broadly, it's really marginal. So I think the corporate costs will be pretty stable going forward.

On order book, I mean, we typically don't have a long forward order book as a business, you know, a project sort of three to six months out. A lot of our trade is spot. There's a lot of cash trade in the business. So, I mean, all we can say is what our customers say and the pattern that we've seen this year, which is very, very varied by country. You know, some countries have had stronger order books recently than in the first quarter and others the other way around. It's a real mixed bag. I mean, in a way, we see that as part of the diversification benefit because it's different everywhere you look.

And we do, you know, I think your point about sort of, you know, ordering ahead and, you know, does that skew things? I mean, again, there's bits of that we see, but it varies a bit by market, by segment, but it's really, you know, it's very marginal.

Ainsley Lemon from Investec. I think I've got three, actually. Just on UK interiors, obviously seeing good improvement and momentum in the margins there. I mean, from here, do you need to increase the scale of that business deal and take market share, or is it more about kind of shifting product mix, better price management, et cetera? Just wondered where you are with that and how the kind of competitive environment looks, how they're reacting on the ground at the key competitors. And then secondly, just on acquisitions, you mentioned there's a good pipeline. Just wonder what your appetite was there. Is that something, obviously, you've just done the good acquisition in the UK. Would you kind of hold off now until maybe next year, given the macro backdrop? Or should we expect a few kind of bolt-ons coming through? And then thirdly, just kind of H1, H2 profit split. Now the business, as it normalises, what would be a normal kind of H1, H2? Obviously, there's lots of distortion impacts from the pandemic and price inflation, but the guidance kind of implies a second half drop-off, just trying to get structurally what the H1, H2 profit split would say.

So I'll take the first couple, Ian will take the last. So UK interiors scale, when obviously the first part of this, we had a sort of, if you like, relatively underutilized network at the beginning. It's grown significantly so that the rate of growth of scale in the next sort of two, three years will be lower. And so the teams are moving their focus much more to improving the margin mix. So, for example, Myers is a business which is highly specialized in construction products. That's the acquisition we made last month. Much higher margins than the legacy core business. And we've hired more people into those sectors within the business, into those category teams. So we'll be driving more, if you like, the quality of the mix as we go forward, and less, if you like, the revenue growth. It'll still be a lever. And the next one, obviously, is productivity. I would say the UK is less advanced than some of our other markets within our business on the sort of productivity gains we can get from digitalization. They put a lot of effort into it at the beginning of this year, so we expect that to kick in in the two or three years hence. On M&A, we've got a guiding principle that M&A is essentially there to enhance the organic strategy. So the primary requirement of the business is to maintain our ability to deliver superior availability. to our existing customers through our existing network. And if we find we need to make a trade-off, we're going to trade off in favor of the organic. And we'll be opportunistic, but obviously at the end of the day, Ian gives me permission on that front because we want to make sure that above all that, our financial targets, our leverage targets are adhered to.

Well said, Steve. Yeah, on the H1-H2 Ainslie, I mean, it's broadly, in a normal year, if you like, which I think was your question, it is actually pretty even between the two. You know, you think about the impact of winter, sort of December, January, February, and then you've got August in the summer, particularly France, so it's pretty even. I would say this year, you know, Q1 was very strong, so probably this year it's probably slightly skewed to H1, which is kind of what you've seen. But as a general rule, there's not a huge amount of seasonality sales-wise. Working capital, clearly there is.

Joe, I didn't answer your question on competitive threat, competitive intensity. So what we said two years ago, I think, was some level of disbelief that we could grow quickly and grow margin at the same time. The only way you do that is by growing through service. and availability and being local and being trusted. You don't do it through price. So that's going to maintain, continue to be our approach. In the UK, in the dry lining market, for example, which is the most competitive segment, the management there have been very carefully rebuilding volume, turning away low margin opportunities, or if competition on a particular project is intense, we just leave it behind and move on to the next. And we'll continue to do that.

Three questions from me, please. Firstly, in Poland, very good margin progression. How much of that is due to the omnichannel growth, and is it easy to export that to other geographies? Secondly, on operating margins, obviously the 5% target, I think in the past, It's supported by the air handling business, which is now disposed of many years ago, which is a very good margin. How confident are you of getting to that target without further M&A? And then finally, on the dividend, should we see the leveraged target as a hard target before reintroducing the dividend, or is there any flexibility around that? Thanks.

So as before, I'll have a crack at the first two and then the third. So Omnichannel, margin impact. Yes, so... In Poland, our Polish business has had a very significant impact. By omnichannel, it means we're using e-commerce as another way to get to our existing customers. We don't use it as a new customer acquisition tool. So it's a way of extending our traditional business model at the same sorts of prices using the same fulfillment. So in and of itself, it doesn't drive margin. But what we've found is that customers who buy the same high-volume products from us, they'll still have a touchpoint in the same branch. They've got the same salesperson. But they'll also, out of hours, if you like, they'll go online to fulfill those orders, and they'll tend to buy in a large number of accessory products where there are higher margins. And that's a phenomenon we've seen. And the other aspect of that is that the salesperson, so it's the same person responsible for the physical and the e-commerce relationship, they're made far more productive. because a lot of that activity is moved online and frees them up for other things. We do see that as transferable. It's not a one-for-one transferability to other countries because it depends on the customer buying preference. For example, in Ireland, we have the same physical capability, but the market is slightly different. The customer is genuinely not as likely to pick up on an e-commerce opportunity or availability. So that is a big part of our program over the next two or three years, where, you know, in the UK and France and Germany, our e-commerce is, you know, in the very, very early stages. So on 5% target confidence, well, I suppose hopefully the presentation made it clear we're very confident why we're pulling the levers that, you know, which levers we're pulling. We're confident because we're seeing it done in most of our business already. And the way that we're looking at the businesses like UK Interiors is to disaggregate the categories one by one to make sure they've all got the margin potential. They've all got slightly different flavors of approach towards it. So, you know, the lower margin is much more productivity driven. making sure that we make, if you like, the volume level we need for 5% will bring that volume level down. And in others, it's a case of driving the higher margins. But, you know, very high confidence on that. I'm going to ask Ian, to talk about the dividend point.

Yeah, so, Sam, thanks for the question. I mean, we obviously want to get back to a dividend and reinstate the dividend when we sensibly can, just to be clear. But we'll stick with the capital allocation priorities we've laid out. and including the underpinning of the leverage target, which you alluded to, and sort of a base liquidity level. I think on both of those, you know, if anything, we see those as more important now than they maybe even were six or eight months ago, given the broader environment. So, you know, we'll kind of keep an eye on that. But the other priorities are organic growth, M&A, where we sensibly can and do, you know, really good accretive deals, and dividend. Is it hard? You know, I think the... the cash generation point will take care of itself a little bit. Once we get to the right level of cash generation, the leverage will be where it needs to be.

Good morning, Steven Rawlinson from Applied Value. A few questions from me. Just on the first half margins, could you just help me out a little bit here? Are those rebates that you've referred to a number of times in the texts actually secure or are they contingent in some way or other on full year volumes? And I guess it's my ignorance here, forgive me, in and around whether your rebate structures are monthly, quarterly, half-annual or whatever. but what i'm just trying to get at is is there some way in which um the second half should we see some decline in in the in the sector that your those rebates that we see in the first half somewhere other are eroded um in in some way in the second and and that also leads on to another question and around whether those rebates because 60, 70% of your sales are probably five or six European-based manufacturers, are they dependent on your European performance or on a country-by-country performance? If you could just sort of remind me of that, please, forgive me for not knowing it now, but it would help if, for example, one territory started to operate quite differently in terms of its marketplace than others. So I'll just leave it there for the minute, if you don't mind.

So, yeah, the... So rebates, we've got... hundreds of different rebates structures. They're all based on the same principle, which is that there's a certain level of rebate which is not volume sensitive. There are other rebates which are volume sensitive. And one of the complexities around it, and indeed the flexibility, is that rebates are available both centrally, in the kind of central relationships, but they're also available to help local representatives of our suppliers drive volume based on particular promotion activity or regional focuses they have. So the skill is the ability to utilise local rebates as well. And that's something that where you've got a big branch network and specialists in the branches, you're able to tap into those as well as the central ones. But the way the rebates work is because there are so many of them, it's quite a damped relationship. So the way to think of it is there's a relatively smooth relationship between volume and level of rebate. The sort of big step threshold levels, there may be a relevance in a given local area, but if you then sum up across SIG, it's a pretty smooth function. Are they back-end loaded? No. Well, some of them are based on full year. But they'll have been based on a monetary amount of the invoice, not on the volume. So you can appreciate in a year like this year, the rebate levels will be relatively healthy. And I think that answers your question on H2 risk as well. Because we don't, you know, there's a smooth relationship on volume.

Yeah, what I was just trying to understand properly is whether that 3% margin in the first half, which is great, is contingent in some way or other on second half performance. And it was just better to understand that particular piece.

Your second question then on by country. So all of our manufacturers are very much run by country and by region. So there's a completely different set of rebate arrangements country by country.

I get that. Just one further thing. You talked about volume gains. But if I take the 19% inflation and the 2% sort of delta, which combines the acquisition uplift and the FX change, the volumes seem to be sort of around level. So I'm just a bit puzzled there. But you talked a lot about volumes going up. So 19% inflation, plus minus 2% on acquisitions and FX. So that gets me to a fairly level volume.

I'll take that. Yeah, so the 21 is the number to focus on as the like-for-like growth. So that strips out working days, acquisitions, etc. So you compare that to the inflation. So yeah, you then get to sort of low single-digit volume growth. So it obviously varies across the different operating companies.

What we have seen this half, I guess more Q2 than Q1, is there is an elasticity between price and volume. So this notion that somehow inflation is an automatic increase in revenue, an automatic increase in gross margin, the reality is much more complex. Because when you have this level of inflation, then the price-volume trade-off, as you can see in these numbers, becomes quite visible. So quite often we trade off down to a different product set that might be a different price point. Some people might delay projects as a result of it. And so what you're seeing and what we see across our business is quite a varied picture. Some businesses have grown volume significantly, even in the second quarter. Others have been flatter on volume but have grown share. And we know that because we know from our suppliers how much volume they do in the market. It's concentrated supply base, so it's fairly visible. So, I mean, our focus has been and will continue to be on growing share. And it's a tyranny to think about volume as a standalone variable because it's not. We're trading the two off all the time.

Please may I ask one further question around the employees. You're onboarding at quite a fast rate, which you alluded to, and the whole room and you are aware of what's going on in terms of inflation and employee costs. Is that a constraint, a meaningful constraint for you in terms of what you just described as trying to grow the business at a fast rate, either in terms of the increase in costs that it might mean for your employees or just in terms of availability? Can you just talk a little bit further about that, if you don't mind, please?

Yeah, I suppose, you know, I go back to our strategy. Pillar number one of our strategy is about, you know, responsibility to our people and engaging and energising our people. And so our focus throughout the last two years has been making sure they feel that they've got all the tools they need to deliver. And so when you have... And they enjoy the team environment locally. So when you've got teams who feel like that, they feel safe, valued, rewarded, it's a much better relationship between, if you like, the business and our people. And so as a result of that, we do what we need to do from a market perspective to be competitive. But we also have really focused on incentives, both financial and non-financial incentives, over the last two years. And so that's been a really strong factor. I think the other thing I wouldn't underplay is that in the last two years and whatever's ahead of us, the fact that SIG has such a well-established name in the markets is both a big attractor, it's also a big retainer. And so we preserve that as one of the most important assets we have as a business. So, you know, you can take it as read that whatever sort of wage pressures there might be across Europe over the next several months will make sure that we're competitive because they're the most valuable asset we've got. In terms of availability of people, I think it's true the broader economy has got issues. I think we're lucky in the sense that we began with, if you like, a slightly oversized network compared to the volume of the business. which means that we've got less need to, if you like, hire lots of people to fuel our growth. And our productivity programs are having a measurable impact. So, for example, in our Polish business, which has grown 40% year on year, If you'd asked Marcin, who runs it, back in the summer of 21, and I did, how is it you're generating these margins with the same employee base? He said, at one level, I don't know. I'm surprised. He'd run it for 20 years by then. He said, they're just covering more ground. They're more energized. They get more into the day. And these tools like the e-commerce channel and the modernization of how we run the company are giving them more productive capacity. So the formula has been and will be make sure we look after our people, give them the best tools, make them more productive.

Hi, Sam Cullen from Peel Hunt. I've got three, I think. Can you talk us through gross margin by country? Obviously, it's expanded across the group, but are there any particular kind of positive performers on a divisional basis to that number? And is every division positive in that regard? It would be interesting to know. Secondly, kind of related to that, you mentioned private label penetration. I think it was with respect to France. Can you give us an idea of where that is across the business and the divisions and the potential upside and the margin delta on private label and what's kind of... within your kind of gift to improve there and then secondly just a clarification on the working capsule unwind in the second half are you saying that that 23 million seasonality is that is that the ceiling or should we expect it in flow over and above that that 23 in the second half of the year yeah so um let's just the last one first

Samson, the working capital. So we've netted off a couple of things on there. So the 23 is, yes, essentially it's a higher number as the seasonal impact, which we should see reversing in the second half. Is that your question? I think on gross margin, yes, we've, I mean, barring, in fact, Benelux, where we've actually started to regain share nicely, but in a sort of the lower margin part of that business. But it's good early progress, but... but the mix doesn't help the gross margin. Apart from there, we've seen increases across the board, across all of the operating companies. I think the UK interiors continues to do a very good job on that, and Steve's pointed to some of the things that have driven that. In particular, this focus on disaggregating the business, focusing on the category margins, and getting the teams to think about margin enhancement more, as well as volume. The two in tandem, I think, has been a big... a big sort of mindset shift. But we've seen improvements to varying degrees across all the opcos.

I think the thing to – I think it was a couple of presentations ago we talked about the levers that UK Interiors were using on gross margin. There is a direct relationship between the amount of specialism and experience you have and the margins you get. If you have, if you're like a young team, they'll sell the high volume, lower margin product on its own. the more experienced teams will sell the system. So that might be 10 components in the dry lining system. And they'll learn how to sell up. So, you know, that's been one of the big drivers, this focus on specialism. And I think in Benelux, the phenomenon we're seeing there is they're earlier in their development of building specialism back into the business. Just on working capital, just to give you a sense of it, if you do the historical analysis over, I don't know, 10, 15 years, working capital to sales has varied from sort of 10% to 12% of sales. And what was it at June?

So we're about 11.5% for the last, you know, the half-year number on an LTM basis. And by the end of the year, you know, that will be more in the 9% to 10% range. So that's the sort of part of the seasonality and improving efficiencies. So it's, you know, going forward, I think big picture, that's the way to think about working capital is in that sort of 10%, 11% range.

So it's not moved into a new zone. It's just a function of the level of business. I mean, if you think about how much we've grown as a business in the last two years, that's just going to drag a fair amount of working capital using that ratio. Private label opportunity. Well, one thing's true, private label, particularly when we're not using it to compete on high volume products with our major suppliers, because that History says that's not a great thing to do. So this will not be high volume products competing against our main suppliers. This will be smaller volume accessories which are less competitive with our main suppliers. They tend to be much higher margin, 5%, 10%, 15% higher gross margin for those products. They tend to be driven by the ability you have to merchandise in store, in branch, or the ability you have to merchandise through e-commerce. And it's wherever we've had a focus on it, and we have, for example, in the Riviera in France over the last two years, you've seen that huge increase in margin. Although it's really small sales, the margin contribution is really quite material. The UK business is quite well penetrated in its own label from history, but I would say the opportunities for doing more are both there but also across all of the businesses. You know, it's one of the many areas in which we've enjoyed good advice from our CD&R board directors because they own businesses in other areas that have used this tool very effectively. I think that's covered. Yeah, that covers it. I've got a question from... Any more in the audience physically present?

Any online questions? All done.

Excellent. OK, well, thanks very much, everyone. Thank you very much. Enjoy the rest of your summer.