Sheffield Insulations Group

everyone. And great to see so many people here in the room as well. So welcome to the results for SIG for the first half of 2023. For those of you who don't know me, I'm Gavin Slark. I am the CEO. And I'm joined today by Ian Ashton, who is our group CFO. Our programme for this morning is relatively simple. I will give you just a few opening remarks and a few comments. I'll then pass you over to Ian, who will take you through the detail of the numbers for the first half. And then I shall come back on at the end for a little bit of a business review, looking at some of the individual opcos and also then moving into Q&A. Before we start, I thought it would be just worth spending a moment on my initial views after almost exactly six months of being within SIG as I started on February the 1st. And I think looking at some of the things that I've found over that period of time, First of all, I do believe we've got a really good business platform that's right for long-term growth. We have that natural diversity of geography. We're spread in different geographies. We're operating in different sectors. We have different customer groups and different product types, which means at no point are we overly reliant on one market, one product, or one customer sector. And I think the base that we have today gives us a really good platform in which to grow for the future. Also, reiterating again our conviction in that medium-term 5% operating margin target. And I think although we have got short-term market pressures, that short-term market pressure does not change our view on the medium-term plan and the medium-term 5% margin target. I have found across the group some really good and really talented and committed operational management and people that I'm very, very happy to be working with and driving the performance of the business going forward. And also we've found opportunities and we've got more opportunities to continue to progress with opportunities for self-help, which given the current market, I think is really important to recognize there's things that we can do within our own business to make our business even better. Of course, we're looking at what I would call standard operational productivity measures, things like gross profit per head, gross profit per vehicle on delivered sales, optimization of the property portfolio, but also utilizing digital technology to make certain processes within the business more efficient. So when you look at areas like transport compliance, you look at health and safety compliance, you look at onboarding of new colleagues, really utilising digital technology to make those processes more efficient and to help the modernisation and productivity of the group as a whole. You'll see there in the box at the bottom as well that we are going to hold a capital markets event in London on the afternoon of November the 23rd. Obviously, more details will follow. I'm sure spaces will be well sought after, a bit like the Taylor Swift tour. So get your application for tickets in early. But we'll put more details into the market about the capital markets day as we go forward. In terms of the first half of 2023, just looking at the overall overview of those results, I think it's fair to say that in our largest businesses, we have seen, in a difficult market, a resilient performance. And obviously, as you all know, France, Germany and the UK, by far our biggest markets. We are managing those near-term margin pressures. And as I said just a moment ago, we are looking at costs, we're looking at how we manage margins, and we're looking at how we improve productivity. I think recognizing that the difficulties of the market is really important, but it's also important that we take that opportunity to make sure that our business is in the best possible shape to make sure that as the market improves, we're in the right place, rightly equipped to take advantage and to generate more profitable market share. And managing that volume versus margin mix is a really important point because this is not about market share at any cost. This is about developing the business sensibly and carefully and making sure that we drive it profitably. The financial discipline is really important and it's key to our future to make sure that whatever we do financially, we're very careful with it with our money and we have real discipline over the way that we actually manage the finances of the group. We showed this slide when we announced the four-year results earlier in the year, but just to reiterate the breakup of SIG and where the turnover and where the profit comes from. And I think what you can see from that chart now is that 70% of our profit is driven from outside of the UK. So yes, you've got France and Germany in the UK, by far the biggest businesses, but obviously you've got about 64% there now between France and Germany. So really important market to us. important markets to us and underline that natural strength in geographic diversity. So what I'll do now is I'll pass you on to Ian who will take you through the detail of the financial results and I will come back onto the microphone in just a few moments. Ian.

Thanks Gavin. Good morning everybody, hope you're all well. So, first slide, the key financial metrics for the half. So, in H1, we continued to make solid financial progress in challenging markets, as we've noted. Group sales were flat over the prior year on a like-for-like basis, a resilient result given the further softening demand from that which we had seen in H2 of last year. It was helped again by the tailwind from inflation on input costs, much of which reflected the impact of last year's H2 increases, as we've reported before. The revenue performance, combined with higher than normal inflation within OPEX, led to an underlying operating profit of £33 million at a margin of 2.3%, a bit lower than last year, as expected. And after finance costs, this resulted in a profit before tax of £15 million. 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 3 million for the half. Approximately half of this was the usual amortization of intangibles on historic acquisitions. And full details of other items are included in the appendix to this slide deck. Free cash in the half was an outflow of 20 million pounds, reflecting the usual seasonality in working capital as we go from December to the much busier summer period. And it was in line with our expectations. Our leverage increased slightly due to the lower profitability. And again, I'll discuss cash flow and the balance sheet further in a few minutes. So this slide shows the key movements within the revenue number for the half. As we announced in early July, market conditions were challenging across the half and with a notable weakening in Q2 in some places. For the half, the resulting volume declines were offset by the ongoing impact of input cost inflation, both approximately 9%, and hence we had flat like-for-like sales. Last year's acquisitions, Meyers in the UK and Thermadem in Germany, both in H2, added 37 million pounds of incremental sales this half. Both are trading well and very much in line with expectations. And so this added 3% to our reported growth and with an additional 2% tailwind in the half from FX and a very small impact from the impact of sales days, we've reported a 5% total increase in sales versus prior year. The details of that flat like for like number are shown by business on the right hand side of the page. Our larger businesses, as Gavin mentioned, are all performing robustly and are managing well the challenging dynamics they're facing in the current tougher conditions. Gavin will discuss these results a bit later. Of our smaller operating companies, Poland and Ireland, we're up against stronger comparators than most, and market demand weakness has also been more marked there. We have strong management teams in both and are very confident their numbers will soon reflect the work they are doing as demand returns. Benelux continues to grow the top line as they recover from the missteps of two to three years ago. Our new MD starts there in October, and we expect the business recovery to pick up even more pace at that point. So operating profit, this bridge shows the year-over-year drives of operating profit. Of course, those sales figures seen on the prior slide are the biggest driver. This shows the gross margin impact of both the volume decline and the inflation tailwind. And over to the right, the profit from acquisitions that I mentioned. The other factors are the movements on gross margin percentage and movements on operating costs. Gross margin fell slightly from 26.2% to 25.6%, as seen on the first slide, leading to the £7 million impact shown here. This reflects some pricing pressure, inevitable in a much tougher demand environment, and we're happy with how the businesses are handling that and the trade-offs they're making. It also reflects quite a strong comparator, including some marginal one-time benefits we had from management of pricing in last year's highly inflationary environment, which we talked about last year. Inflation within our operating costs is higher than normal, as we expected and as we reported previously. Employee costs are around 50% of total OPEX and have arisen about 5% to 6%, which accounts for about half of the £13 million number shown here. The balance is spread across other areas, property and energy costs being the main elements. We've also made around £8 million of net underlying savings on OPEX versus the prior year. Whilst we're avoiding cost initiatives that will harm the long-term prospects of the business, we're cutting our cloth to adapt to the current conditions where we can, as you'd expect. There are areas where we think there are opportunities to operate more efficiently in the future, and those are being grasped. More broadly on profitability, we've been very clear for some time that A, we believe strongly in our ability to get to 5% margin in the medium term and then beyond it. And that B, the path there may not be linear, notably in periods of demand softness. And that's obviously what we're seeing at present. Free cash flow. As I mentioned, we're pleased with the cash discipline the business showed in the first half, and we expect this to continue. In the appendix, we've included the usual slide showing the details of the cash flow and net debt. This slide here summarises the free cash flow. It bridges from EBITDA to free cash, showing the key drivers broadly from more fixed or at least more predictable items on the left across to inherently more variable on the right. EBITDA was £72 million. This was at an EBITDA margin of 5.1% for the half. And then looking at the bars in turn, cash tax has increased a little, reflecting payments on the high profits made in 22 versus 21, notably in France and Poland. Of 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 that in the technical guidance in a minute. The largest item on here, lease payments on our fleet and estate, will grow slightly over time with the business, as I've said before, and with inflation, but it is a relatively stable number. CapEx, we're a CapEx-like business, as you know, and it was actually slightly lower number than we expected and planned in H1. And finally, working capital was an outflow in H1, as is always the case due to the seasonality of the business, as I mentioned. In H2, that working capital number will reverse, and so we expect a strong free cash inflow in H2. And for the full year, we continue to expect to be broadly neutral at a free cash flow level. A balance sheet and financing, just a reminder here of our financing position and debt profile. In short, we have a robust balance sheet with good liquidity and long-term funding in place, and with that funding at good rates. Looking at the left-hand side first, liquidity is healthy at just shy of 200 million pounds. As you may recall, in November of last year, we took advantage of the accordion facility that was built into the new RCF agreement we'd agreed with our banks a year earlier and added a further 40 million to the facility, taking it to 90. Firstly, this increased our liquidity buffer, albeit we don't expect to need it. And secondly, it does create some additional potential firepower for smaller bolt-on M&A of the type we've done over the last couple of years. Obviously, absent any such uses of the cash, we would expect cash and liquidity to rise towards the end of this year, as I mentioned. The RCF was undrawn at the half year, as you can see, and remains undrawn today. Leverage nudged up slightly in the half due to the lower EBITDA. And net debt was also slightly higher given the increase in lease liabilities, largely inflation-driven. Again, the positive cash we expect in H2 will bring that 3.2 down during the second half. And longer term, we remain very focused on getting it down to our target of 2.5 times. Pre-IFRS 16 leverage, not shown on here, is at 2.4 times. And that should be down a bit closer to 2 times by the end of the year. And on the right-hand side, a brief reminder of the terms of our financing arrangements. In short, we have 5.25% fixed rate debt via our bond until late 2026. And the RCF terms are as shown. So final slide for me, technical guidance on product costs. We expect very little additional net inflation on input costs during the second half, and the positive year-over-year impact will continue to decline gradually, as it did during H1, as we lapped the increases that took effect throughout H2 last year. We remain well-placed, we believe, to manage these inflationary dynamics. CapEx, based on the H1 run rate I mentioned, we're now guiding to a slightly lower number for 2023, as shown. On interest, in contrast, the increases in IFRS 16 leases I mentioned and more significantly the interest rates therein will lead to a slightly higher interest cost we expect in the range of 35 to 37 million. And on tax, as reported previously, we have tax assets in the UK which are unrecognised from an accounting point of view. And as such, we don't expect to pay UK corporation tax for some time. We do have tax liabilities in our other operating companies where we generate profits or taxable profits. Our cash tax for 2023 will be a little higher than last year as we pay the tax on the high profits generated in 22 versus 21. And it will be in the range shown on here, 15 to 16 million pounds. So that concludes the financial update. In summary, H1 was a period of further good financial progress in a tough trading environment. We're pleased with the way the businesses are responding to those market conditions so far. More broadly, we believe that as a group, we're in a much better position to manage through them and emerge strongly on the other side than we were two to three years ago. I'd just like to finish by thanking all of our colleagues for their significant efforts so far this year, and we'll now hand it back to Gavin.

Brilliant. Thanks, Ian. So just in terms of the business itself, there's just a few topics I really want to cover this morning. And looking at this map I've put on the screen now, and you come up, why have we put a map on the screen? It really is to try and show that there are many markets in which we operate where we don't actually trade as SIG. We have a really interesting mix of businesses. And if you work your way from east to west, in Poland, we do predominantly trade as SIG. But when you get into Germany, our principal business is Vigo and VTI, which is a technical insulation business that we have in Germany. But nowhere in Germany, one of our biggest businesses, do we actually trade as SIG. In the Benelux region, we do have some business branded as SIG, but we also have secondary brands in Benelux as well. And if you look at France, again, we don't trade as SIG, but we have La Riviere, which is our exterior business in France, and Leet, which is the interior business. And if you look at why are we successful in Germany and France, one of the key things I believe here is we've actually got very strong indigenous local brands that we trade with. In terms of the UK, obviously our principal brands are SIG, but we also have a number of other businesses in the UK. Businesses like Myers Construction Products, Stedman's, Trimform, Ockwells, AIM and others. And these all trade into specialist niche market sectors. And these are some of the businesses that we'll be giving more airtime to in the Capital Markets Day to really help people understand how our business is made up as well as giving exposure to some of the broader European leadership team as well. In terms of our strategic priorities going forward and continuing that path towards the 5% operating margin, obviously driving like-for-like sales, particularly in a difficult market, is really important to us. And having branches that are genuinely empowered to look after their customers and deliver excellent levels of service. And that's really important when you have a decentralized model and a decentralized structure. You want local teams looking after local customers and driving local business and understanding the local nuances far better than we ever could at the center. And that smart pricing and smart promotions, again, back to a point I made earlier, this is not about market share at any cost. This is about intelligent selling and making sure that we're managing that balance between volume and margin really carefully. rolling into that kind of mix and margin category as well. So looking at higher margin, particularly ancillary products, but also private label. And private label does give us an opportunity, not just in terms of margin, but also in terms of differentiation as well. And being a specialist distributor takes us into that area of specialist solutions and specialist advice and really giving us a differentiator against generalist distributors. In terms of driving productivity, some of that is about OPEX control and some of it is about process. Ian's spoken about how we're going to control the costs, but looking at processes and how we actually do what we do is making sure that we've got processes that are fit and proper for a very advanced 21st century business. And developing our digital capability, developing our omnichannel channel to market as well is really important. Poland would be our leader in that. At the moment, even today, around about 20% of our Polish business goes through that omnichannel process. And we have about 13% or 14% of the Polish business that is purely transacted online. And we've got more developments coming in different businesses in terms of digital capability towards the end of this year and the beginning of next year. Investing in future growth is also a critical part of our future and bringing talented people into the group. And talented people should see SIG as a great place to build a career and a great place to develop. And that financial discipline in future growth as well, really coming down to capital allocation and selective M&A. And selective M&A recognising we want to bring into the group good businesses that can bring really good long-term, both strategic and financial value to the group. The path to 5%, as Ian said, it won't be linear. And there isn't one silver bullet that suddenly changes the makeup of the business. But it is the accumulated effect of a number of smaller actions. And product mix is really important to us in this. increasing higher margin categories, and that means really developing and enhancing our skills in terms of category management, making sure that we're getting the cross-selling right, making sure that we're selling full systems and maximising the margins that we have, as opposed to just being focused on what I would call bulk product categories, making sure we're selling the full system. In terms of private label that I mentioned earlier, there's a lot of development that's actually gone into private label already, and during the first half of this year in particular. Remerchandising some of the shop areas, giving our customers more reason to buy more product from us. Those brands that you can see on the slide there, so Irondale is one of our French private labels. Prefix is a very strong Polish brand. Fixar and Speedline being very strong private labels within the UK market. But this is actually a really important part of going forward, managing the product mix and managing the margins. And as I said earlier, enhancing the processes, making sure that our processes are absolutely right for the way the business is going to drive forward. And even when you look at pricing tools, even when you look at training and development, utilizing those digital channels that we have available to us and making sure that our marketing and promotion is very specific, is very targeted, and is very focused. But that whole area of category management and product mix, really important to our self-help program as we go forward. I'm very conscious on this slide there is a huge amount of information and genuinely I don't intend to go through this slide line by line. But what it shows when you get the time to read it is in all of our geographies there are regulatory changes coming that should provide a future tailwind into the specific categories in which we're very strong. and also into the specific markets where we're very, very strong. And if you look at that right-hand column in terms of larger, more complex projects, absolutely plays into our heartland and the strength of SIG. And specialist contractors who need to be buying from specialist distributors, again, those tailwinds are coming further down the line. But the really reassuring thing from our point of view is is in all of our geographies, as well as what we do for ourselves, as well as the overall market dynamic changing as we go forward, there are going to be regulatory tailwinds coming which should prove positive. Ian mentioned the like-for-like performance just a few moments ago. And I think it's really important to look at the like-for-like performance and compare that to the scale of the operating businesses that we're looking at. So when you look at our UK interiors business, which by revenue would be the largest business that we have, like-for-like growth of 4% there. Strong like-for-like growth in terms of France and in terms of Germany holding its market position flat. So I think recognising there that France, Germany and the UK are our most important markets. However, even in the first half of this year, the smaller businesses of Poland, Benelux and Ireland, really important components of our group. You've got around 200 million of revenue there, even across those smaller businesses. So getting the like-for-like growth in the right place... is really important to us and how we develop going forward. We do talk a lot about operating margin, and we talk a lot about that journey towards 5%. And when you look at the operating margin, again, that we have in those larger businesses, you look at the French interiors business, you look at French exteriors, one just over 5%, one just below 5%. As you work your way down that chart and you get down to something like UK interiors, recognising that at 1.7%, that's at the lower end, and that's a real area of focus. And I think also, you know, without giving too many secrets away, we'll get to the capital markets event in November and talk to you more about how we intend to drive the performance in particular of UK interiors. And as Ian mentioned just a moment ago, recognising that difficult performance in Benelux, but Bert, who's our new MD, joining us on the 1st of October, really good mix of experience, really good personality fit, understands that Benelux market very well, understands our product sector very well. So we do see that as a really good appointment for us going forward. In terms of the operating platform we have as a distributor, obviously people, branches, productivity, really important to us. And when you look at the people, we want to make sure that we keep investing in the people in the business, that we offer the right training, we offer the right development. We want to be sure that we've got the right people with the right skills at the right time within our business and really developing that people-centered culture that SIG ought to have. In terms of the branches, we have spent quite a bit of time and effort in the first half of this year, re-merchandising some of our self-select areas and shop-in-shop areas, giving the customers more opportunity and more reason to buy higher margin products from us rather than going elsewhere, and reinforcing the fact that across the whole of the organisation, the branches are absolutely key to our sales effort. In terms of productivity, I spoke about some of the measures that we're looking at earlier in terms of gross margin per head, in terms of gross margin per delivered sales. But it's how we do things and it's the processes that we have within the businesses that will really help to drive productivity going forward. Just as a matter of interest, that shiny truck you can see there on the slide is actually one of our brand new trucks that we have in Krakow. The interesting thing about that is that Moffat truck that you can see by its side is one of our new generation of electric Moffat trucks. So all driving down that sustainability route and making sure that even when we have opportunities in a small way, we're trying to do things right. And making sure that across the people and the branches and everything that we do, that we encompass everything within that right culture, not just of sustainability, but also of health and safety and making sure that we keep everyone safe every day. Thank you. Just a few moments on some of the individual businesses. And if you look at the French exteriors business, our France business is structured at two levels. And we have a country MD who is a guy called Julien Montero. And then we have two individual business MDs who look after the day-to-day operation of the main businesses. So La Riviere, we have a managing director called Nicolas Balland. In that exteriors business, we have just over 100 different branches across France. So really good nationwide coverage. And I think it does share one characteristic with the UK exteriors business, which is more than 75% of the revenue in this particular business is driven by residential markets. That's residential RMI and residential new build. If you look at the strategic development slide on that bottom left-hand corner, and just reiterating there how we're developing and how we're looking to drive the margin improvement ourselves, but things like the private label, looking at category management, looking at how we get that shop-in-shop working better for us, looking at more digital processes. And France is one of the businesses where we'll have a launch of a new generation of kind of online trading towards the end of this year. On the right-hand side, we do mention there about the sort of strong growth in the small but expanding solar market in France. And just to put some context around that, in the first half of last year, our sales into solar in France were about €5 million. In the first half of this year, it's about €15 million. So relatively small in terms of number, but very significant in terms of growth and giving us an area that we can develop into going forward. Just staying in France, we have our interiors business, which is all branded as LEIT. 39 branches across France and led by a lady called Valérie Galliardi, who's the operational managing director for the French interiors business. You'll see there again, even in a difficult market, operating margins still north of 5%, really important to us. This is one particular business where updating the branches, making sure that the portfolio has been modernized, making sure that the self-select areas and the availability of private label products has been really key to this business in the first half of this year. And again, we will give you some access to sort of some of the French management team at the Capital Markets Day in November. In terms of UK interiors, so this is, again, one of the businesses that's branded as SIG, 61 branches across the UK. You will see, even though it's one of our lower operating margin businesses, first half of this year, that operating margin improved from 1.1% in the first half of last year to 1.7% this year. So, still making good progress, even in a very, very difficult market. Within our interiors business, we do have these construction accessories businesses as well. So Meyers that was acquired last year, F30 that was acquired the year before. Both of those businesses performing well, both performing to plan. And if you look at that picture in the bottom right hand corner, I'm sure that some of you are looking at it and going, why is a tunnel on HS2 relevant to SIG's interiors business? And what I would say is that special markets business we have, the construction accessories business, is very, very focused on large infrastructure projects. So projects like HS2, projects like nuclear power stations. And again, we'll give more colour on that particular part of this business at the Capital Markets Day, because I think it's a part of our group that the market really ought to be understanding better than perhaps it does. Our UK Exteriors business, 114 branches in the UK. Managing Director is a guy called Chris Lodge who's been in SIG for a long time, but only recently took up the position as Managing Director of the Exteriors business in January of this year. And again, if you look at the operating margin movement there from 5% down to 2.7, but over 75% of this business is driven by residential, both RMI and new build. So those pressures in the residential market really manifest themselves in this business. But I would say, if you look at the strategic development box, some of the actions that we've been taking, particularly on product mix, category management, improving the products that we have on offer, actually giving us the opportunity of selling higher margin product through this business. If you look at the branch openings, Carlisle is a genuine branch opening, new site, new location, and a brand new site in the first half of this year. Maidstone is a relocation, so continuing to invest within this business and making sure that the branch portfolio is fit for purpose. And actually Luton is a reopening. It's a branch that SIG closed some time ago, We still had the property on the portfolio, looked at the numbers, looked at the data and made the decision that we would reopen the Luton branch. And it actually reopened last week. But early indications there, very, very strong and very good feedback from our customers. Employee engagement. We have talked before about our employee net promoter score. Employee engagement is really important. And actually, it's even more important in a difficult market and sort of slightly difficult times. And you might think that doing things like branch of the month and making sure we've got employee of the month, utilizing our internal social media platform might sound very simplistic, but it really isn't. helps in getting colleagues engaged with what's going on in the business, making sure they understand what's important and their role that is actually critical in driving the future growth of the overall business. So the last of our larger businesses, being Germany, the managing director is a guy called Alphonse Horn. Alphonse had been in SIG. He left some years ago. He came back just under two years ago. But Alphonse has got well over 20 years experience in this German market and the market in which we operate. Again, you can see there in Germany, first half of this year, operating margin improving from where it was last year, going over 4%, even in a challenging market. Strategically, the German business is a little bit different to the UK and to France. So in the UK and France, we have a very distinct interiors business and exteriors business that are very clearly defined. In Germany, we don't do roofing at all. So all of our products are interior products. But we do have a business in Germany which does about 100 million euros a year in screed flooring, which is quite a Germanic trait in terms of how construction works. And that's not a business that we have elsewhere. So even within Vigo, we have some differentiation that sets us apart from the general distributors, even within the German market. And since Alphonse has returned to the business, I think it's fair to say that his engagement with customers has improved really significantly. And the way that the customers view Vigo now is quite different to what it was two to three years ago in Germany. So in summary and looking going forward, if you look at those first half of 2023 results, I would say, look, the most important thing about 2023 for us is we cannot be immune from what the market is doing. But what we can do is focus on improving our own business, making it more productive and making sure that we are fit and ready for when the market does turn and gives us some support. In terms of the second half of this year, I mean, I'm sure there are many people in the room who've got a view on what the second half of 23 will look like. But I think it's fair to say for us, focusing on those operational improvement areas, people, branches, productivity, really important again during the second half of this year and not relying on the market coming back strongly in the second half of 2023. In terms of longer term, absolute conviction around that 5% operating margin target going forward. And what I would say is, you know, myself and Ian and the rest of our executive leadership team, we don't look at 5% as an endpoint. We see 5% as a staging post. And I'm sure we've got businesses that will do better margins than 5% and to keep moving that overall group operating margin higher over the medium to longer term. We do talk there about M&A, and as I said earlier, it really is important for us recognising the availability of capital that we have within the group, that we're very disciplined when it comes to looking at M&A, that we do make sure we're looking at good businesses that have both a strategic and a financial value, but very, very confident as we go forward that we can create significant shareholder value within SIG over the medium to long term once we get through these short-term margin pressures. Thank you very much.