Sheffield Insulations Group

Well, good morning, everybody. And thank you for those of you who've braved that half a centimetre of snow to make it through to the building today. Really appreciate it. And welcome to the results for SIG for the year to December 2022. For those of you who don't know me, my name is Gavin Slark. I'm the CEO, and I've been the CEO here for the grand total of five weeks. I'm joined by Ian Ashton, who's obviously been here a little bit longer. But obviously, even as my first results as CEO of SIG, great to see so many familiar faces in the room today as well. The plan for this morning is relatively straightforward. I will just give you a very short introduction. I'll then hand you over to Ian, who will take you through a little bit more detail of the financial results and obviously the business review of last year, which Ian's going to do because primarily he was here last year and I wasn't. Then I will come back on at the end for a little summary of how we've gone through this morning's process. And that should leave us some decent time at the end for Q&A as well. So in terms of the highlights for 2022, what I would say is for SIG, 2022 was a year of continued recovery, with significant progress in terms of revenue, the operating profit almost doubling up by 94% on the previous year, and significant movement in terms of the operating margin as well. Within the financial progress, obviously that return to free cash flow is really important, albeit modest free cash flow, but you'll hear us talk a lot about cash today and a lot about cash going forward. And also the balance sheet being in a pretty robust state, and Ian will talk in more detail about that later on. From an operational point of view, continued really good performance from the French business with a margin in excess of 5%. And obviously significant improvement in both the UK interiors business and in terms of the German business. And the importance of those businesses, I'll touch on more in just a moment. You'll also see there the net promoter scores from both a customer and a colleague point of view. The customers are really important for us, and as a business selling building materials to local builders and to local customers, we need to stay really close to our customer base. And that's why that net promoter score there is really important to us. And obviously, from an employee point of view, it's our colleagues who will deliver the plan that we have to deliver for SIG over the next three to five years. And being a really important employer in the sector is very important to us. What we're hoping to show with this chart really is what SIG isn't. And what SIG isn't is a UK business with a few interesting European bits. It is actually a properly pan-European distribution business. And if you look at the pie chart on the left, you'll see that in terms of turnover, the one on the right in terms of profit. But what you will also see there is just how important those French and German markets are to us. And in terms of revenue, France and Germany combined is now as large as the whole of the UK. If you look at the right-hand side pie chart, you'll see there that almost 70% of our profit last year came from businesses outside of the UK. And by geography, the largest single profit contributor was actually the French business. So it's really important to recognise that this is not just a UK-centric business, but actually the European markets are really important to us now and also still give us significant scope to grow. In terms of the products that we sell, about 80% of what we sell in SIG is insulation or involved in the building envelope, which gives us that roughly two thirds going into interiors product and one third going into exteriors product. And I don't intend to go through every line on the slide and talk about each individual product sector. But what you will see from that is going forward, energy efficiency, decarbonisation, sustainability are core to what we sell within SIG. And that's really important to us when you look at the growth drivers that we have in taking the business forward. For those of you who've known me for quite a long time, I know there's a lot in the room who have, you'll know that I love a league table. Nothing to do with being a Sunderland supporter, I hasten to add. But what you'll see there on those individual businesses is where the operating margins are within the operating companies now. And it's really important for me now to take the opportunity to reiterate that journey towards a 5% operating margin. And I absolutely believe that in the medium term, getting to 5% is the right target for us to have. It's a credible target for us to have. And it's also something that I believe is very achievable. If you look at those businesses down the left-hand side, you'll see where they are now. So you've got Ireland and France both already ahead of that 5% operating margin target. And obviously, France being a large business, that's really important to us. If you look at the operating margin progress in businesses like Germany and businesses like UK Interiors, you'll see that we are making real progress in terms of the profitability and the operating margin. I'm very conscious that those 2020 figures obviously are quite skewed by COVID and what was going on, but we had to take a starting point of somewhere. We took the starting point of 2020. But I think if you look at where we are heading for in terms of that 5% operating margin, there's a number of triggers that we can use in terms of moving the business forward. And those areas of strategic focus are really about improving the mix and about improving the margin that we have within the business. really growing things like private label, making sure that we're driving the higher margin sectors that we have and playing on the specialism that SIG has within its individual markets. The productivity gains through process automation is really about modernization and about utilizing the strength of digital within our business. And what's really important to remember is when we talk about digital, that's not just about having a web shop that looks like Amazon. It's about utilizing the way that we communicate with our colleagues, the way we communicate with customers, the way we manage our fleet, the way that we manage our warehouses. And utilizing digital technology is a really important part of how we believe that we can drive the operating margin going forward. And that bottom point there in terms of branch network expansion, what I would say is we have a desire to grow the business, we want to keep developing the business, but we will always be very careful about the way that we deploy capital and we'll make sure that there is a compelling case for capital allocation within the business. But that target to 5% absolutely remains core to the journey that we are on. I'm very conscious that I've only been here for five weeks. So in terms of early impressions and what I have seen I'm also very aware that you know a lot of you will know I've known this business from the outside as a competitor and there's something within the sector for quite some time. And we were very very fortunate during January with my predecessor, Steve, that we were able to have a really good and a really detailed handover process. So by the time I landed here on February the 1st, I'd already had the opportunity to meet most of the senior team to see some parts of the business as well. So that handover was absolutely textbook. But what I would say is, in terms of where we are as a pan-European business, we are a really well-established pan-European business. And a lot of those European businesses, you look at Vigo in Germany, you look at Leet in France, you look at La Riviere, and they really are very well-established businesses with very strong brands that we can build on. In terms of the culture, I have found some great and talented people within the business. And what I would say is if you're trying to give one overarching message of the people that I've met across SIG, there is an appetite for success and there is a desire to be better than what we are now. The business has made really good progress over the last two years. And the work that Ian and Steve did during that period, that is what has given us this platform to build on and the platform to go forward and to build on the momentum that we actually have within the group. And that platform for growth is really important to us. And as I said earlier, if you look at that range of opportunities that we've got to facilitate growth, and look at how the market is moving and the market in which we operate, but that whole area of the sustainability in construction agenda, decarbonisation, energy efficiency, really plays to what I think the future of SIG should look like. On that note, I shall pass you across to Ian, who will inform and entertain you with the detailed financial results for 2022.

Thank you, Gavin. Not sure about entertainment, but see what we can do. Morning, everybody. I hope you're all well. So, we'll start with the key financials for the year. And as Gavin mentioned, in 2022, we continue to make good financial progress, as noted. We delivered a 17% like-for-like increase in group sales over the prior year, a strong result. achieved despite some softening in demand in H2 that had been expected, but helped by the tailwind from ongoing inflationary pressures on input costs. The revenue performance, as Gavin mentioned, drove a near doubling in underlying operating profit to £80 million at a margin of 2.9%, both ahead of where we'd expected at the beginning of the year. So after finance costs, this resulted in a profit before tax of 52 million pounds. And I'll look in more detail in a moment at the key elements within these sales and profit numbers. Below underlying profit, other items were at 24 million for the year. The largest component of this by far is a 16 million pound impairment charge booked in H2 related to our Benelux business. That business has shown good growth this year as it recovers from some operational missteps of two to three years ago, but progress on operational efficiency has taken a bit longer than previously expected. We do expect continuing progress there on the top and bottom line. Other items also includes approximately £5 million for the usual amortisation of intangibles on historic acquisitions. Full details on the other items are included in the appendix to this slide deck. Again, as Gavin mentioned, we returned to positive free cash flow in the year in line with our target, with the H1-H2 split that you can see here, reflecting the usual seasonality in working capital. And our leverage also continues to move in the right direction, moving towards the 2.5 times and 1.5 times post and pre IFRS 16 that we're targeting. And I'll discuss cash flow and balance sheet further in a few moments. So revenue, this shows how the good revenue growth was delivered across all of the businesses. The bars show the growth in pounds over last year, or over 21. Within the UK interiors number of 195 million is 90 million pounds of additional year-over-year revenue from the F30 and Penn Law acquisitions completed in 2021, and the Myers acquisition completed in July 22. All of these are performing to plan. The balance of that UK interiors growth of 105 million is from very robust light for light underlying growth of 23%, as now shown, and that growth was quite consistent between H1 and H2. The French business remains the other biggest sales growth driver at £86 million between interiors and exteriors, along with Germany, which is getting very firmly back on track. And I'll look at France, the UK and Germany in a little more detail shortly. Of our other opcos, Poland's growth and overall performance remain very strong. partly due to particularly high inflation and with solid volume growth in H1 before a slight drop-off in H2 year-on-year volumes that had been anticipated. Benelux's trading is improving, as I mentioned. with strong year-on-year improvement, albeit off a slightly weakened comparator. Ireland reported exceptionally strong growth in H1, given the COVID-related restrictions on construction that were in place there in the early part of the prior year, whereas H2, in contrast, saw year-over-year volume declines in the market. Pass-through of input cost inflation benefited all areas of the business, resulting in a group impact of around 17% for the full year. And all the businesses except Poland were within a few percentage points up or down of that group number. And regarding the H1-H2 split, the like-for-like group growth of 21% and 13% in H1-H2, as shown on the last slide, included inflation of approximately 19% and 15% respectively, i.e. with market volumes softening as we'd expected. It's softening in H2 as we'd expected at the half year. The profit bridge by Opco, this bridge just shows the year-over-year drivers of that operating profit growth, and again, you can see the contributions to growth are across the group, with the biggest drivers by some margin, in fact, being UK Interiors and Germany. UK Exteriors had a material customer bad debt write-off during H2, as we've mentioned in our January trading update, when one of their largest roofing customers, Avonside, went into administration, and this resulted in a write-off of around £5 million. Just more broadly, although credit risk is certainly higher now than 12 to 18 months ago, and we've seen a modest increase in actual bad debts, it is in line with what we'd expect in the current market environment. And of course, we're managing it with appropriate diligence. The side and circumstances around Avonside really did make it, in our view, an unusual and extreme case. Just a slide on the progression of profitability and the key drivers overall. You can see it as a group, we're making good progress. And just to look at the key components. Firstly, gross margin was broadly flat at around 26%. Pricing discipline and mix continue to be key, of course, in addition to successfully managing the input cost inflation. And all of the businesses delivered in this regard and saw very stable gross margins versus 21. The one exception to this which drove a slight drop at the group level was in UK exteriors which had a particularly strong comparator, partly mixed driven. Secondly, operating costs as a percentage of sales have come down to 23%. We continue to leverage the fixed elements of the cost base whilst also investing selectively. OPEX was up on prior year in absolute terms by about 10%, excluding the impact of the OPEX in the acquired businesses. This 10% included around 5% of inflation on indirect costs, with energy cost increase as a factor, as you would expect, albeit in absolute terms, energy costs are not a huge element of the total OPEX base. Bad debt charges, including Ameside, increased, as mentioned, and we did make some investments in branches and other growth drivers across the group, most notably in France. So overall, we saw that 1.1% increase in margin getting back up to around the 3% level. And if you look at the chart on the bottom right, which we've shown before, you can see the consistent upward momentum showing the rolling 12-month margin over the last four years. The blue line is as reported, and the red adjusts for the material COVID impact in 2020. So looking forward, 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 better processes and productivity, including through technology, as Gavin mentioned. It remains an absolute imperative to further reduce our OPEX to sales ratio as we push towards our medium-term 5% goal, which, as Gavin mentioned, we reiterate today. And the path to that 5% may not be linear, notably during times of weaker market demand, as we're seeing at present, but we remain very confident in delivering it. Free cash flow, we guided that we'd return to positive free cash flow for the year and I'm pleased to say that we did. This slide bridges from EBITDA to that free cash showing the key drivers broadly from the more fixed or at least more predictable items on the left across to inherently more variable elements on the right. EBITDA is obviously the key driver and at 157 million pounds, this was at an EBITDA margin of 5.7% for the year. Then looking at the green bars in turn, the interest charge roughly half relates to our bond and half to leases. On the forward view of both interest and tax, I'll cover in the technical guidance. The largest item on here, lease payments on our fleet and estate, will grow slightly over time with the business, but is a pretty stable number. CapEx, we're a CapEx-like business, as you know, and that number was actually slightly lower than we expected in 2022. Working capital was an outflow in H1 and inflow in H2, as shown in the breakout box, and that was due to the usual seasonality in the business, which sees inventory and working capital fall significantly in December during what's by far the quietest time of year. So the full-year outflow on working capital of $14 million is, in our view, a solid result given the strong sales growth. Year-end over year-end inflation, which is the pertinent number when looking at that, was approximately 13%. I think overall we believe working capital is at a sensible level now. There's certainly more that can be done to optimise it and we're very focused on embedding the right disciplines across all the businesses and have made good progress there. But we'd expect the future cash flows from working capital to be predominantly driven by the levels of growth in the business. Just the final element on here is the other items. The only comments of note on these looking forward are that they include legacy SAP cash costs of £7 million which will be materially lower and indeed end in 2023 and on phasing the material items within that number such as those SAP costs and our contributions to the UK pension scheme all tend to occur in the first half. For completeness, this more detailed slide shows the total cash flow in a standard format and with comparators. Just briefly on acquisitions, as announced at the time and at the half year in July, we acquired, firstly, Myers Construction Products in the UK for a potential total price of 35 million, of which 27 was payable on closing, less debt acquired of 3 million, so 24. And secondly, Thermoderm, a German technical insulation business, was bought in Germany, acquired for £4 million approximately. So after this £28 million payable in the year on acquisitions and the £11 million of free cash flow, we finished the year with £130 million of gross cash balances. As you can see, this means that after some FX movements in our bond debt, we finished with pre-IFRS 16 net debt of 160 million. After including leases, the post-IFRS 16 net debt was 444 million, the least number reflecting some new commitments related to branch openings and an unusually high number of renewals, notably in the UK. So just a brief summary here of our financing position and debt profile. Taking a step back and looking at the changes made in the last couple of years, we now have a robust balance sheet with good liquidity and long-term funding in place. Just looking at the left-hand side first, we further reduced leverage during 22, as I mentioned, now 2.8 times on a post-IFRS 16 basis, driven by that higher EBITDA and the improving cash flow. And we do remain very focused on getting that down to 2.5 times. Liquidity is healthy. In November, we took advantage of the accordion facility that was built into the new RCF agreement we'd agreed with our banks a year earlier during the refinancing, and we added a further £40 million to the facility, taking it to £90 million. We did this primarily because it just increases our liquidity buffer as we grow, and secondly, it creates additional potential firepower for smaller M&A of the type we've done over the last two years. The expanded RCF was undrawn at the year end and is undrawn today, to be clear. And on the right, just a brief reminder of the terms of our financing arrangements. In short, we have 5.25% fixed rate debt via the bond until late 2026. And the RCF terms are as shown there. Just a brief reminder of the key points on those two deals I mentioned a moment ago. Meyers has given us a platform to grow our construction accessories business in the UK, a higher margin segment in a growth category where we're very confident we can build a strong position. And Thermadem is a specialist interiors and flooring business that's a very good strategic fit with our re-energized German business. Capital allocation, this slide is broadly as presented previously, I won't dwell on it long, but of course the margin focus and disciplined cash and working capital management I've mentioned all feed into a long-term capital allocation framework to deliver long-term value. We've adhered to this policy through the investments into the business we've made to support organic growth and supplemented with a creative M&A that help us add expertise and growth in priority categories, as I mentioned. And the two deals that I just talked about certainly met those important criteria. Just finally, a comment on dividends. Timing-wise, as we've said, we will start, indeed want to start, paying a dividend once we believe it's prudent to do so, which to the board means once we're consistently generating free cash and when we've further improved our leverage. And Gavin and I will, of course, update you further on our thinking on that at future results presentations. On technical guidance, product cost inflation, we expect some modest additional inflation on input costs during 2023, and we've seen some of this already with expected increases coming through in January, but the positive year-over-year impact will continue to decline gradually as it did over the course of 2022 as prior year increases annualise. Overall, we remain, we think, well-placed to manage these inflationary uncertainties. CapEx, we expect to be up to around £20 million in 2023. On interest, the increases in IFRS 16 leases I mentioned and the interest rates therein will lead to a slight increase in financing costs in 23. We expect in the range of 32 to 34. And on tax, as reported previously, we have 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. On cash tax for 23, that will be higher than last year as we pay the tax on the higher profits generated in 22 versus 21, and broadly we expect in the mid-20s of millions of cash tax, which is around 10 million higher than in 2022. So I'll now turn to the business review and start off with France. So in France, as most of you will be aware, we have our exteriors business trading as La Riviere and our interiors business which trades as Leet. Both have performed strongly over the last two to three years, driven by a very good management team who have executed well on what was always a very sound strategy. Exterior has delivered 15% light for light revenue growth to $466 million. That overall top line was certainly partly driven by input price inflation, as I've referenced in the context of the group numbers, which the French team, like others, have continued to manage well. Exterior has also made further very good progress operationally, delivering year-over-year margin improvement, and indeed very good progression since 2019. During 2022, they continue to successfully drive better margin mix, and this has included more sale through their shop-in-shop and own label sales. I think it's fair to say solid management of the basics of branch performance has also helped, as it always does. These initiatives, alongside the benefits from new branches opening in 2022, will, we believe, enable continued strong performance in Le Riviere in 2023 and beyond. In interiors, Leet grew by 12% on a like-for-like basis, with growth broadly stable across the year, thereby maintaining their very good position in the SME specialist interiors market. We held the margin broadly stable at 5.6%. which reflects the good leadership we've had in that business for a number of years and their consistent execution on the strategy. As I've mentioned previously, we have invested in the last year to ensure we can continue to improve the business and take advantage of the strong position that we've created there. Germany, our German business had an excellent year. Revenue was up 16% and we saw 280 basis points improvement in margin to 3.7% despite the volume declines that we saw in H2. Germany has been a turnaround focus for us since 2020 and we've returned the focus back to where it should be, i.e. on the customer, local branch empowerment and better operational performance and cost management. And in doing so, we've steadily started to rebuild our market position. The acquisition that I mentioned is adding flooring expertise, and that's part of our strategy to drive product mix into higher margin categories over time. Alphonse Horn, our German MD, rejoined us in 2021, and he and the team are doing a great job at bringing the VEGO and VTI brands back to where we believe they should be, and we're very confident there's more to come in the future. So in the UK, interiors improved their performance further in 2022, as Gavin had mentioned, with light-for-light revenue up 23%, and importantly, returning back to profit, obviously a key milestone. Margin was 2% in 22, which is a solid improvement from when we started to rebuild in 2020. And as we've talked about before, since then, we've rehired experienced leaders and really doubled down on consistent local execution across what are now much more accountable branches. Process-wise, we've made good progress in category and pricing management, so we have a better collective focus on margin across the business, and this will continue. And of course, continuous improvement in the business, and especially in the margin, remains a priority for that business in particular, and indeed for Gavin and me. Exteriors had a solid year with revenue up 7% despite H2 volume slowing due to a weaker UK market in RMI and also being up against particularly strong prior year comparators. The Avon side bad debt of course impacted margins as well, which was down to 4.1%. Setting those factors aside, this business has performed very well and built on its position since 2020 as the leading specialist roofing distributor in the UK market. In both interiors and exteriors in the UK, through the work we've undertaken over the last couple of years with Phil and the team, we believe we're in a much better place to manage through weaker near-term market conditions than we were three years ago and much better placed for the longer term. Quick word on the branch network. For the group overall in 2022, we've continued to invest in our branch network. We opened nine new branches during the year, as well as the eight that we acquired, bringing our combined total since 2020 to 28. And the goal with branch openings is to ensure our network is aligned to local market growth opportunities and to do so in a very disciplined way. In addition to opening new branches, we've also completed an even greater number of relocations, renovations and branch refreshes, as well as a much smaller number of branch closures. And I'll now turn just finally for me to our ESG performance as a group in 2022. In the left, in the turquoise box, you can see our five long-term ESG commitments. And on the right-hand side, you can see how we've performed against a selection of data points that help us to measure our progress against these goals, which the board and the management team take extremely seriously. Overall, we've made good progress in 2022 under each. I won't go through each one, but our ESG report in the annual report, which we've also published today, provides a detailed breakdown of our performance and quite a lot more colour on all of those. I would just highlight for now that employee engagement, as mentioned through the Net Promoter Score results from our annual survey, has continued to trend up year over year since 2020, and we do see this, as Gavin mentioned, as an absolutely key metric. So that concludes the financial update and the business review. In summary, 2022 was a year of more progress. And we of course see continued opportunity and need for further improvement. And we're looking forward to delivering that. I'd just like to finish by thanking all of our colleagues for their significant efforts and achievements during the year. And with that, I'll hand it back to Gavin.

Brilliant. Thanks, Ian. Appreciate that. Just in terms of going forward, what we see is the growth drivers for our business over the next few years. And those three categories you can see there, sustainable construction, industry growth and market share. And again, I don't intend going through line by line on every one of those. But what I would say is, as I said earlier, if you look at sustainable construction, energy efficiency, sustainability, decarbonisation are and should be core to everything that we're doing going forward. And as I said earlier, you've got about 80% of what we sell is either affecting insulation or the building envelope, which I think is a really important and positive sector for us to be in going forward. In terms of industry growth, recognising that obviously not all of our markets are at the same point of maturity, not all of the markets are going to move at the same rate, but I think we have got a really well-balanced portfolio of businesses, not only in terms of geography, and that geographic diversification does give you a natural hedge against where some of the markets move, but also the fact, in broad numbers, our business is split between residential and non-residential, roughly 50-50, and also between New Build and RMI, roughly 50-50. So I think if you look at what we've got from a geographic point of view, look at what we've got from a business spread point of view, we've got a really nicely balanced portfolio of businesses helping us to drive forward. And taking market share and selling more is really important. But it's also important to recognise this is not about taking market share at any price. This is about profitable market share. It's about being really good at what we do, delivering fantastic service for the customers and really understanding that to drive that market share we need local people looking after local customers in local markets and understanding local businesses and really making sure that we've got a very empowered workforce in driving that profitable market share going forward. So in terms of the summary and the outlook, I think 2022, we've said everything that needs to be said, but really important to bear in mind that, as Ian really articulated, we're in a very good financial position going into 2023. I think everybody recognises, particularly here in the UK, there's a little bit more uncertainty as you look forward into 2023, but the business is very well positioned to weather whatever comes through during that time. And also in terms of going forward, we are planning and we are managing for that medium to long term target of a 5% operating margin. And we are on a journey towards that 5% target. In terms of the longer term, some key points there really, that increasingly meaningful cash generation is really important. And moving that margin to 5%, managing the cost base with the level of revenue that we have can be transformational in terms of the cash generation within the business. And that increasingly meaningful cash generation gives us real optionality going forward, whether that's paying dividends, whether it's returning cash to shareholders, investing in the business and organic growth, looking at M&A. But that cash generation is absolutely core. The M&A opportunities, obviously the guys were looking at some opportunities before I arrived. We're going to spend some time looking at what those opportunities are, recognising the size of capital pot that we have. But we will be very, very disciplined in that capital deployment and make sure that we have got a compelling case for anything that we go forward with. And I think all of that coupled together gives us that real opportunity for sort of long term meaningful shareholder value and really driving SIG to be that decentralized customer focused sales led business that I believe it really needs to be. That's the end of the presentation. Now, we are going to move into Q&A. Before we do, just a little bit of housekeeping on Q&A, because I'm very conscious we're going to have questions from within the room and also questions from people that are watching the webcast. We're going to start with the questions in the room. If you have a question, if you could raise your hand, we'll bring a microphone to you. If you could give us your name and the organisation that you represent and then ask your questions, that means that people watching the webcast will be able to hear the questions and the answers as well. So, thank you very much. Shall we start down the front here and we can work our way backwards?

Thanks very much. Ainsley Laman from Investor. I think I've got two. Just on the obviously early days, but a good start to the year, January and February trading. I wonder if there are any kind of significant better trends or worse than expected trends within that mid single digit improvement you've seen in like across your businesses that you'd want to kind of pull out. And then secondly, just on kind of maybe looking at the outlook for this year, when you think about potential cost cut in, what levers are there you can pull in a lower volume environment without sacrificing all the investment you want to do structurally and improve the business? How do you think about that?

If I take the second one first, I'll let Ian comment on the sort of January, February trading. I think the most important thing to recognise is that there's a lot of work being done over the past couple of years to get that cost base right and to get the infrastructure right within the business. So the one thing I can say, Ainsley, is look, there's There's no plan in my back pocket for kind of like major reorganization and restructuring charges and things like that. I think generally speaking, if you look at the branch network we've got, we need to make sure we continually maximize the cost base that we have. But I don't see any need for any kind of major reorganization or major restructuring. I think with whatever the market throws at us in 23, we can handle that operationally reasonably effectively. Do you want to comment on January and February?

Yeah, I mean, the short answer is we've not seen huge variations. There's been, I would say, in terms of the volume declines, it's been broadly similar across especially the larger businesses. I think the only area that's been notably weak so far has been Ireland, actually, which is obviously a relatively small business. And that was well-flagged. We expected it to be weak exiting 22, and that's continued. And we expect that to pick up during the year. But that's been a bit weaker so far. Beyond that, there's no great particular points of weakness.

OK. Just directly behind you, Amy.

Yeah, Amigala from Citi. Just a couple from me as well. The first one was on gross margin outlook. I wonder if you could give us some directional trends of how should we think about gross margins exiting from last year, especially considering the volume headwinds that could come from lower rebates. The second one really is you've touched quite a bit about the opportunities within the French footprint, which already is at a good margin today. Can you give us some color as to what is the level of own label mix today? What are the opportunities of category expansion that you've talked about in that business? And where could the sort of growth and margin profile in that business move forward? And the last one, just again, coming back to the outlook and how should we think about your markets, if you could touch a bit about the non-residential new build market and any visibility that you have in terms of order pipeline there. Thank you.

Do you want to comment on gross margin? And then I'll pick up on sort of the own label and product mix and category stuff.

Yes, I mean, I think the trends in gross margin, we've not seen and we don't expect any sort of significant variation, I think, for the year. Clearly, in the environment we're in, there's always pressure on gross margin. I think we've shown that the teams can actually manage that pretty well over the last couple of years and we expect them to continue to do that. And, you know, we don't... I mean, you asked about rebates. Rebates are obviously an important component of the model in the gross margin. But I think we've done a very good job on that. There's always more that can be done. But we don't expect a lot of that is value-based, if you like, as opposed to volume, if that's sort of what you were getting at. So there may be some slight pressure on the gross margin. I think we're pretty confident that that can stay relatively stable in 23.

Just back to your question about sort of categories and private label and so forth. Again, I think it varies quite a lot across the different operating companies. I mean, we were recently in France together, you know, and within the interiors business within Leet, they have literally just launched that kind of private label, small tools selection area, which we'll obviously monitor as we go forward. We were in Poland the week before last. And again, I think Poland have made some good progress in terms of private label product. Perhaps a different mix to what we've seen in the UK, because in the UK, from what I've seen, one of the most profitable private label areas we have is the metal work that's associated with the dry lining business. So I think one of the things that I would say is we see different opportunities in different businesses. But we are very, very focused on the fact that areas like private label can be really helpful in terms of gross margin, can be a differentiator in terms of other competitive businesses. And what I can say to you is, as we go forward, we'll give you more information on where we are with private label, how we're driving it in the different businesses. Because I haven't got all of that detail, obviously, today. But we do see... managing private label, managing those self-select areas where you get that kind of high margin pickup kind of product, and looking at the business by category is actually something that we're doing right now to give us that route map going forward. And as we do go forward, Ami, we will give you more information on the progress that we are making there. In terms of residential versus non-residential, again, it's interesting. It varies by geography. So talking to the French business recently, I think it's fair to say that the exteriors business that we're seeing in the French business has had a slightly stronger start to the year than the interiors business. And you've got that sort of non-residential feel is still feeling fairly robust. If you look at the UK, obviously the house builders have been quite vocal recently about where they see their market going. But we are still seeing quite a lot of activity and projects starting in areas like schools and healthcare and prisons and so forth. And I think I know it was very broad numbers and we say, well, we're kind of 50% RMI, 50% new build, 50% resi, 50% non-resi. But I think that whole mix is actually going to be quite helpful to us along with that geographic spread as we go forward. And again, as I get a better handle on where those are in the business, we can share more information with you. But even in the short period of time I've been here, I do think that balance across the whole portfolio is actually going to be really helpful to us in keeping that momentum towards 5% moving. just to the right there.

Good morning, everyone. Sam Cullen from Pill Hunt. I've got four, I think. The first one is on the geographic mix of the business that you flagged at the start. That's 60-40 revenue split, Europe, UK. Do you see that diluting towards the UK going forward as the portfolio shifts? And I guess related to that, I think in your previous lines, Gavin, you talked about the three Gs on the acquisition front. Is there any advance on that sort of framework for things going forward for SIG? That's number one. And then in terms of the margin opportunity going forward, and this is particularly related to UK in series and Germany, should we be thinking more about a top line growth and overhead recovery type story to get those margins up or continued evolution of the gross margin in terms of the mix and the own label stuff you were talking about to Ami? And then two final ones, I guess, probably more related to Ian. I think Gavin mentioned digital. Is there any investment that we need to see in terms of digital investment going through the cash flow going forward, and then just some numbers around the working capital you think you might be able to squeeze out of the business going forward?

Okay. So in terms of geography and the evolution of the business, again, obviously it's very, very early days, Sam, but it's kind of – I think one of the things that's really important to us is to maintain that spread. So with what we've got now, we don't have a particular overexposure to any one market or to any one sector. And I think that's a really positive place for a distribution business to be. And certainly, from my own experience, from conversations that Ian and I have had with the strategy team within SIG, I think there definitely are M&A opportunities outside of the UK, as well as, for instance, businesses like Myers that were sitting within the UK. So I think we are very conscious that we want to maintain that balance and we don't want to become over reliant in one particular market. I'm pleased that you were listening in a previous life when I talked about the three G's and in terms of M&A. And I think, look, the really important thing for us is when we're looking at a proposal for an acquisition, recognizing the limits that we have around capital within the group, we've got to make sure that it's a really compelling case. Is it a business that has good potential? Is it a business that's operating in a good and sensible market? Can we add value to it? Is it going to bring something new and interesting to the group? So I think those kind of principles of looking at what makes a good acquisition still very, very much hold water. But we need to make sure that if we do buy something that we're buying really well, that we can look shareholders in the eye two, three years down the line and really justify that spending shareholders' money on those acquisitions was a good thing to do. So it's about a disciplined approach and really making sure that there's a compelling case for spending the money.

Shall I take the others? Yeah. So UK interiors and Germany and margin, I mean, I think... sort of all of the above of what you mentioned, frankly. I mean, that sounds like a sort of obvious answer, but I do think those are the two businesses, probably more than any others, where there is clearly scope for us to just put more capacity through what we have. And so I think the momentum that we've got sort of commercially, you know, medium, long term is going to be very helpful there just to drive more capacity through. We've obviously been regaining share in both. We think there's certainly scope to continue that, as I say, largely through the existing capacity. I do also think that all of the businesses have opportunities for enhanced productivity. Some of that's digitalisation, technology-related, some of it's just more process-driven. Again, I think both of those businesses you mentioned have made good progress. I think the UK interiors business has certainly got more to do on that. The team would recognise that. And I think Alphonse Wood in Germany too. There's probably maybe... Yeah, both of them have got progress to make on that front, just driving more efficiency. So I think it's both. And just driving the gross margin itself and category management, I think it's a bit early to say there whether they have more opportunity, frankly, versus the other businesses. I think probably similar to the other opcos in terms of the opportunity there in driving higher margin category stuff. On digital investment, yes, I mean, there is already spend going on and that will obviously continue and over time increase. I don't know how material that would be, certainly in 23. I mean, it's sort of low single-digit millions, let's put it that way. That may increase over time, but it's not sort of material to the overall number. But it will increase in 23 and 24, certainly. And then on working capital, as I mentioned, I think we've made some very good progress. I think the big change we've seen in the last 12 months is we really have embedded, partly through incentivization plans, embedded a focus within the operating companies on working capital and driving cash flow, which might sound fairly basic. But in some of the businesses, there was a lot of competing priorities if you went back a couple of years. So I think we've made some real progress there. And people get it. They understand the message about cash flow generation and what that means for the long-term health of the business and the opportunities that Gavin described. So we'll continue to focus on it. As I mentioned, I don't think there's sort of huge scope for us to take that overall percent, you know, 10, 11% of, you know, sales. Can we sort of, you know, move that materially over the next year or two? I don't think so, but we can certainly squeeze, you know, a little bit more out of it.

Okay. Do you want to come across to the other side to Charlie on the outside and then we can work our way back through?

Thanks very much. Charlie Campbell at Liberum. I've got three, I think, but they're all quite quick. First of all, just as a question to Gavin coming in from outside, one of the things that has always surprised me in terms of the group is that in terms of building materials, there always seems to be a kind of a scale advantage. So Normally, in most product categories, we find that the bigger the distributor, the better the margin. And that doesn't seem to be the case necessarily in SIG's businesses. So just wondering if you coming in from the outside, you can help us understand why some of those businesses haven't got the economies of scale that you see in other parts of the industry. Secondly, right at the beginning, you talked about kind of energizing employees and also customers. How do you think the relationship is with suppliers, manufacturers, and is that an area you need to think about? And last one, just checking something. The full-year acquisition contribution from the 22 acquisitions, I think that's about $3 million of incremental profit. Have I done that sum correctly?

Three to four. Three to four. Thank you. That really was a quick answer, wasn't it? I think in terms of scale, it is quite interesting. One of the things that's really quite difficult to deliver, Charlie, is those international cross-border buying benefits. So having scale within the individual countries is really important. But a lot of our suppliers are set up in such a way where they manage country by country. Now, we do need to make sure that we are absolutely maximising what we do as a group in those different European territories. But generally speaking, I think if you look at the markets in which we operate, we are either at a leading or a top three position in each of those markets. And we absolutely need to make sure that we are maximising what we can from our supplier base. I would say generally diplomatic relations with our supplier base seem to be pretty good. I'm quite fortunate because a lot of the supplier base I know quite well. So hopefully we can continue to build and develop those relationships as we continue to develop, as we continue to develop the sort of business generally. And I think overall there's nothing from a commercial point of view in the last five weeks that I've seen, or even in the period when Steve and I were doing the handover, there's nothing that I've seen that kind of makes you, you know, recoil. There's a lot of positivity in here. And actually, I think one of the things about the group as a whole I think there's a lot of really good elements to SIG that possibly the outside world in some ways hasn't noticed the really good parts before. And I think, you know, part of what we need to do and part of that sort of league table of the Opco operating margins is about that recognition that we've got some really good parts of the group already and some parts of the group that we know we need to improve. You know, if you look at Benelux, first bases, let's get it back into profit. If you look at UK interiors, scale-wise, that's a big business. So anything we can do on the operating margin there is going to make a difference. And part of driving the operating margin is about the way that we interact with our supplier base, the way that we are buying, the way that we can drive private label products in certain categories. So that whole commercial area is really key to how we get from where we are now to moving towards that 5%. Right next to you.

Sam Lindell from Stifel. Three from me, please. Firstly, on the dividend, how should we think about that? Is the under two and a half times leverage a hard target to get to play out to pay the dividend, and should it be funded from free cash flow? Secondly, on M&A, how should we think about headroom in the current year? Would you be able to do deals of a similar value to last year? appreciate the macro uncertainty and where your leverage is. And finally, on the portfolio, I think, you know, Gavin, you're very good at graphs and changing the portfolio in terms of exiting Belgium and buying high margin businesses. Is that something I appreciate very early days now? But could you do that here in terms of either entering new countries or, you know, the Benelux if it's still underperforming in two to three years? Is that something you look at?

Thanks. Well, if we work our way backwards, and I'll let Ian pick up on the dividend point, I think in terms of portfolio management, I mean, you're absolutely right. I've looked at the business from outside, but I've been here for five weeks and really understanding, sorry, what we've got and what we haven't got. But as I said to Charlie earlier, I've been really quite pleasantly surprised by some of the component parts that we have within the portfolio. And I think there are some of those component parts that we can actually improve as we go forward over the next three to five years. I think the other thing that I would say is quite different to some businesses in my previous life. We've got really good market positions here. And I think having those strong market positions is a really important component in helping us to drive that forward. So our agenda is very much about improvement. It's about growth. We will obviously keep a constant eye on what we've got in terms of the portfolio within the group. But I'm not coming in here with sort of like some big divestment agenda. This is very much about development, about growth. and using those really good market-leading positions that we have already. If an M&A opportunity comes up that takes us into a different territory, then obviously we'll have a look at that, but it's back to the point that Sam made earlier. It's got to be a sensible market, a sensible business, a management team that we can work with. But it's very much about growth and development and moving the business forward and utilising the portfolio that we have. In terms of M&A headroom and dividend... I'll let Ian pick it up.

Yeah, I mean, so, I mean, on the dividend, I mean, hopefully sort of made clear it's, you know, we want to reinstate the dividend when we sensibly can. Now, when, you know, how hard is the target, two and a half times, I think it's pretty important. Do we absolutely have to be sort of there or beyond it before we declare a dividend? I mean, you know, we'll take a view at the time. I think it's a combination of that plus how we view free cash flow generation at the time and the prospects for that. So we'll sort of take a rounded view and continue to keep it under close review. And linked to that, I mean, M&A, Headroom, yes, we have liquidity. Yes, we could do deals in the coming months, the rest of this year. I wouldn't want to put a number on it. But clearly, there's scope to do small deals if we found the right ones. And that's the key, as we've said.

got any more questions in the room just just behind you over your right hand shoulder there thank you morning toby thorrington from equity development i've got two questions please one's a clarification uh and the other one's another supply chain question so firstly um clarification point on the medium-term margin target of five percent could you just help us um understand whether that's going to apply to all geographies um or whether there will be a range, obviously, but whether that's a threshold for all geographies in the first instance?

So the 5% is a group-wide target. So recognition, to get the group to 5%, I've got absolutely no doubt that when the group gets to 5%, we'll have some geographies or businesses that are over 5% and some that would still be below. But it's a group target of 5%, not necessarily 5% in every individual business.

Right, okay, thanks. And on supply chain, could you just update us sort of current status in terms of any pinch points, availability issues and those kind of things, please?

The honest answer is very little. You know, we've got, as an example, in the French business, we've got one particular product category where one particular supplier has a particular production problem. But in terms of where our business is now compared to where the industry was maybe 12 months ago, I think our supply chain is in a lot better shape now than it was 12 months ago. And we really don't have those kind of daily phone calls of, you know, I've got this product on allocation, I've got that product on allocation. I can think of two products in the French business at the moment where we're working quite hard, but it's a relatively small problem compared to what it was before.

Good to hear. Thank you.

I think we probably need to move on to any questions we've got that have come in from the webcast. Do we have any?

Yes, we do have a question from Simon from the Carlisle Group. Can you please comment on the cost inflation you are seeing in Q1 across the group when it comes to product sourcing and operating costs, in particular labour?

One for the CFO, I think.

Yes, the input inflation in the first part of the year, and it's obviously early days, but we saw that input inflation tailwind, sort of the positive number decline a bit into the second half. The second half was about 15%. So that's continued to decline. So it's sort of, I would say, low double digits in the first part of the year. And then on input costs, I mean, the biggest drive there in energy was obviously more of a factor last year. It's not actually energy, utilities, fuel is not actually a huge factor. part of our OPEX base. In terms of wages and salaries, our salary increases have been a bit higher this year, kind of around the 5% range, which is obviously higher than sort of recent history. But that's what we're seeing at the moment.

We do not currently have any more questions on Zoom. However, if you'd like to ask a question, you can do so by typing in the Q&A box. Please include your name and organisation with the question or you can raise your hand and we'll then bring you into the meeting to ask you to unmute and ask your question. Back to you, Gavin.

Thank you. Well, in the absence of any other questions, it just remains for me to say thank you very much for coming in this morning. And for those of you who've taken the time to come on via the webcast, really appreciate your time, really appreciate your interest. Ian and I will be around for a short while afterwards if you've got any difficult questions that you want to ask Ian. And then I very much look forward to interacting with you over the years to come. So thank you very much, guys. And thank you for everyone watching online. Thank you.