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.

Thanks, Liam. I'm from Investec. I think I've got three. Just in terms of your three big markets, France, Germany and the UK, just interest a bit more colour. Are you taking market share in those markets or at least holding it? Just interested in what you're seeing there. And then secondly, just on the stock gains, obviously, you've had lots of price inflation. You mentioned some price deflation in commodities for UK exteriors. Was that a big impact in terms of, presumably, timber, steel? And does that improve or get worse even in the second half? And then thirdly, just on the cost cutting, you got the benefits in the first half. Does that get bigger in the second half? You mentioned some of the kind of efficiencies and improvements you're making there. Thanks.

I'll let Ian pick up the inflation point. I'll do the other two for you. So in terms of our large markets, are we taking share? Are we holding share? The key thing for us, as I said earlier, it's not about growing share at any cost. Managing this balance between volume and margin is really important to us because we could increase market share. even more by just being cheaper than everybody else. But actually, that doesn't really bring significant long-term financial value. But we do measure the market share. We do manage what we're doing. There are, in different countries, I'm sure, as you can imagine, you've got varying qualities of data and sort of the touch points that you can then measure market share against. But we absolutely do. And what I would say at the moment is we're very confident that we're not losing market share – that we wouldn't necessarily want to lose. I'm very happy with that. In terms of cost cutting, I think, look, we said when we did the full year results that we would cut our cloth accordingly and make sure that we're managing the cost very carefully. That's not to say that this is a huge cost reduction programme. There is no branch closure programme coming. There is no sort of mass redundancy programmes as we've seen elsewhere. So this is about making sure that we're prudent. It's about making sure that we have that really good balance between the costs that we absolutely need in the business today, but making sure that we're also in the right place when the market comes back in the future. So I think we will continue to manage the cost very carefully during the second half, but it's not what I would call a huge cost-cutting programme. It's about managing those costs appropriately for where we are today and where we believe we'll be in three, six and nine months' time.

And on inflation, deflation, yeah, so as we've talked about, we're going to have still a net positive from inflation in the second half. And overall, we're still seeing additional inflation coming through, obviously much less than we saw previously. There's pockets of deflation. UK Exteriors, which you mentioned, Ainsley, that is the business that is a bit more exposed to commodities, so timber and steel, particularly one small part of Exteriors that's sort of buried in that number. is more exposed to steel in particular, did have a bit of a benefit last year, and it's probably gone the other way this year. So that is a part of a driver for why that UK exteriors number is down year over year.

Come down to you next, Charlie.

Amigala from Citi. A few questions for me as well. The first one on the French roofing business, the broadening of the solar product range. I appreciate you starting from a low point. But in terms of the take-up today, is it more coming from the new build or is it from the renovation end? And do you stand to benefit from the renovation subsidies in France into next year? The second one, just as a base level, what's the current own label mix as a percentage of sales across your businesses? The third one, just a technical one, cloud computing costs. I mean, is there any pipeline in terms of the IT costs around cloud that step up over the years? And one on just current trading. As we think about order intake trends, do you have any visibility of how the order books of your customer base are moving as we kind of think about July and into forward?

OK, good questions. So in terms of solar in France, I would say, first of all, it's predominantly in the residential market as opposed to in the commercial market in France, but a pretty good mix between what we're seeing on new build and what we're seeing on renovation. There's also some quite interesting movements in France on things like car parks and so forth, where if you have a car park in France with more than a specific number of parking spaces, they're now bringing in legislation that means you have to put a solar canopy above that car park and provide vehicle charging points using solar power on canopies, and that actually brings an opportunity as well. So, I think in terms of the renovation subsidies going forward within the French market, I would say, yes, we would hope to benefit from that, but it is really early and really quite small for us to put a number around that. In terms of putting numbers on private label, it is a good question. As you can imagine, it varies quite significantly from different businesses across the group, some of which are quite high and some of which are quite low. It is one of the areas we are going to give more detail and more colour on at the capital markets event. But it does vary quite significantly depending on the businesses. But I think also, when you start looking at some of our more specialist businesses that kind of sit below those main brands. So you look in the UK, as an example, you look at one of our businesses, which is Stedman's. I mean, basically, there is a lot of fabrication in Stedman's, so virtually everything it sells is technically private label. But we will give more colour and more breakdown on that at the Capital Markets event. And again, order books, it is really quite difficult because where you've got like the large national house builders, you know, we have those kind of conversations. We know how many plots they're putting down. We know the kind of build schedule going out. But particularly when you look at businesses like our exteriors business, where we have a huge amount of small jobbing builders working. who are customers, they tend not to talk to us about order books. It's very much about they turn up on a Tuesday and order what they want for the following week or the following month. So, again, it is very mixed in terms of what we see going forward. But I think most smaller tradesmen that you talk to in all of the markets, they still view their own jobs going forward. They're still reasonably busy. I mean, I don't know whether any of you have tried to get hold of a roofer or, you know, they're very, very difficult to get hold of because they've still got their own kind of forecast going forward that see them as quite busy. But the smaller the contractors tend not to look at an order book as we would look at with, say, the larger national contractors. And those larger national contractors in the UK and in Germany and in France, we obviously have greater visibility. But some of that is obviously commercially sensitive when they're talking on a one-to-one with us. But it is quite, quite a mix between waiting to see who walks through the door and having good visibility on some of the larger contracts.

Just cloud computing very quickly. So, I mean, the short answer is it will move around a little bit. It's not going to sort of rise inexorably. It will be sort of flattish. It will be a little bit lumpy depending on when we do certain specific ERP-type projects over time.

Can we just bring the microphone down to Charlie on the front row, because he's had his hand up for the last three times. I don't want you to feel victimized, Charlie.

No, thanks, Rosh. Better be good. Charlie Campbell of Librem, yeah. A couple of questions. Interested in what you said about the German business with the screed activities. Is that structurally lower margin or higher margin, just to give us a sense of maybe where Germany can get to in terms of margin? And then secondly, UK interiors. Clearly, there's been a lot of movement in staff there, I guess, at all levels. Lots of people left the business and then came back. Where do you think you now are in terms of that and in terms of having the right people to service sort of the customer base on that front?

Yeah, so the Screed business in Germany, the margin is actually quite attractive to us, Charlie. And as I said, it's a differentiator as well, which always helps the margin profile. So is it a business that we would look to continue to grow and to develop? Yes, it is. Organically, we have been investing in the specialist vehicles that we use for that particular business as well. So there's a little bit of investment gone in there. in terms of the specialist vehicles that are used for that product, and also the Thermadam acquisition that was made, which I've been out, I've seen, I've met the guys there. That screed flooring is something else that they specialise in, which was one of the reasons bringing it into the SIG group was, it really increased our specialisation knowledge there. So I think, is screed flooring something that we'll continue to look at and grow in the German market? Is it an attractive market, attractive margin? Yes, it is. In terms of UK interiors and looking at people, you're absolutely right. Richard Burnley, who's the operating MD for that business, He was one of the people who previously left SIG and then came back last year, took up the position as MD of the interiors business towards the end of last year. And from what I've seen, Chad, I think we've now got quite a nice blend of people who have come back, people who have continued with SIG, and people who've come in from different markets and brought a slightly different perspective. So, certainly from my experience over the first six months, I think we've now got really quite a nice blend of a different skill base, different experiences that actually puts us in a really good place going forward. But absolutely no doubt, the ability to bring a number of those people back over the past 18 or 24 months has really helped us in terms of where that interiors market is in the U.K. today. It has been a really important characteristic of the last couple of years.

Good morning. Sam Callan from Bill, and I've got three also, please. First one's on Omnichannel. I think you said Poland was 20% and 13%, 40% just pure online. Is that the right number? Is that where you want to get all of the groups? Are there different regional product variations, which would mean 20% is the wrong number in some places? On product mix, when you talked about... getting more value-added products into the mix would you pull back on some of the bolt products also or do you just want to grow value-added at twice the rate of bolt going forward or whatever it might be and then lastly just on given the current backdrop how you think about the leverage and m a opportunities i'm sure you'll say it depends but That depends. How do you think about it going forward? OK.

I'll let Ian answer that one. In terms of omni-channel, is 20% the right level? It's a really good question. And actually, because our group effort has been driven by a guy called Bartosz, who's the guy who put that sort of Polish process in place, really bright and impressive young man. I don't know if 20% is the right answer. What I will say to you is we absolutely know across the other businesses it should be a higher level than what it is now. And we do have that data and we do have the management information that shows that actually the margin impact of our customers who buy through Omnichannel, they are buying more and it's at a more attractive margin than we would get if they were just buying it over the counter. Is it something that we are keen to develop? Yes, it is. And with France and Germany, we've got one going live at the end of this year, one going live at the start of next year. So we are using Bartosz's skills and what he learned in Poland to roll that forward. So genuinely don't know if 20% is the right answer, but it is a very attractive route to market for us when you look at what the customers are spending and the margins that we're generating from it. In terms of product mix and would we want to pull back on some volume as opposed to growing higher volume products, I think probably the right way to answer that is to say we'd like to grow the higher margin products at a faster rate than we would grow the lower margin products. So that's not to say that we would definitely pull back in certain areas, but we absolutely recognize there are opportunities. for us to develop our margins better if we can grow those higher margin categories more quickly. Volume is not a problem in itself, as long as you can get the volume sales at a margin that is attractive and at a margin that is sustainable. So I think it's not a case of saying we'd pull back. I'd say we want to grow those higher margin categories more quickly.

And just M&A and leverage? I mean, yes, it depends. I mean, I would say, you know, we've been pretty clear, I think, about the criteria that we use to sort of assess potential deals. And those still apply. So the bar is set pretty high, particularly maybe more so now than it was a year ago, just given the broader environment. But certainly, you know, we still, you know, there's a pipeline of deals. Things are out there. And so we look at things. But the bar is set pretty high. You know that Gavin touched on the capacity that we do have. So whatever we do in anything in the near term would be sort of smallish and bolt-on. But the key thing is that they would have to be, as Gavin said earlier, financially and strategically accretive.

Sorry, Steve, can I just have one follow-up on the Omnichannel stuff? Are you finding that people are buying more in the basket because you're saying, would you like to also buy X, Y, and Z along with product Y? Or are they sort of effectively purchasing time in terms of they don't spend the time arguing with the branch manager about a discount?

No, it's a really good point. Actually, my general experience of selling to trade customers and selling online is that your pricing generally is better than if they're standing at the trade counter. But I think it's a combination of a number of things. I mean, yes, you can suggest add-on sales online that actually make sort of that overall basket more attractive. But I also think it's a very convenient way for the customer to purchase. And some of our larger customers in Poland, what will happen is one of the reasons there's a difference between that 13% pure online and 20% via omnichannel is if you're a large contractor in Poland, you may well talk to somebody in the branch and they would input that order electronically onto your omnichannel account for you, whereas that 13%, is purely our customers who are entering the orders on their own devices and that's why the omnichannel is really important because actually whether our customers want to buy in branch over the telephone via an email online we should make it very easy for them to transact that business but our experience is it is better for the margins than necessarily people standing at a trade counter

Thanks. Hi. Stephen Rawlinson from Applied Value. Can I ask you a few questions, actually? Probably more than three, but we'll just go through them as quick as I can. On property, having arrived at the business, Gavin, is there a case for Maggie pushing the property profits a little bit farther than they have in the past? Because historically, that sort of hasn't been a feature of SIG, and it's tended to lease a lot of its properties. And going on to the leases, are we past the hump in the increase in the lease charges for this year? Because quite clearly, obviously, inflation and interest rates have been higher this year. But obviously, the cost has gone up quite a lot this year compared with last. Are we past the worst on that and should be seeing some mitigation next year? Second one, in terms of seasonality, I'm a bit puzzled because working capital has gone up 24 million from seasonality. But is there something different about the season this first half than there was about the season last first half? Are you sort of raising the level of stock that you require? Because I think historically, Gavin, you've always said, if I haven't got it on the shelf, then I can't get somebody to buy it because it's not there. And the final one from me is on IT. And again, you've given your reflections on the first six months, but are you content with the IT? You've talked a little bit about omni-channel, a little bit about digital, but not made that a major aspect of what you're saying compared with one or two others. Is there something going on there that you see that you may be getting in the data, getting digitalization, getting the customers more attuned to more IT-based systems of making orders? So three there, one around property, one around... seasonality, and the third around IT.

OK. Well, if I pick up the IT one first, because it's the one that's sort of there, I think in terms of our customer interaction, you've got varying degrees of customer interaction that sort of varies on the kind of customer that you're dealing with. some that would go down a full kind of EDI type route as opposed to buying a smaller contract or buying directly online via web trading. I think overall what I would say is there's been very little data or management information that I haven't been able to get hold of that I've asked for. And sometimes it's taken some of the guys who are in the room a little workaround in terms of the center to get that data into usable management information because there's quite a difference between pages of data and really useful management information. But I don't think there's anything that I've asked for in the first six months that I haven't been able to get hold of and have something that is usable. I think if you roll on in terms of IT as well and look at the overall ERP setup within the group and the actual trading systems that we have within the businesses. Again, they're at different points in their evolution. We don't have one ERP system across the whole group because of the way the group has evolved. We have different ERP systems in different groups. But as an example, during the first six months of this year, we've turned on a brand new ERP system within the Benelux business, which I think as we get that business improvement coming through within Benelux, that'll start to bring benefits through as well. So I think constantly, the IT sort of landscape within the group is being looked at constantly to make sure that we've got right technology, right place, but also making sure that we do it in such a way that we don't trip over ourselves, which is why taking the time, learning from Poland, understanding what worked and what didn't, and getting the same guy to drive the process in France and Germany is really important, because the first one being Poland, there would inevitably have been a few challenges and a few hurdles that we had to jump. If we can eliminate those hurdles in France, eliminate those hurdles in Germany, it actually makes that implementation much easier. And I think, you know, we've definitely got some customers now that basically manage their whole business online. You know, it's a generational shift and we have to make sure that we are in the right place for both of those different kinds of customer. In terms of property, I'll let Ian come back on working capital. What I would say is we've got quite limited freeholds within the group. So the group is predominantly a leasehold model. So I think occasionally there may be a one-off property profit that we can bring through, but it's not something that I would build into a plan on a year-on-year basis. We just don't have that level of freehold property. And a number of the freeholds are actually in branches that are trading very well. So, why change it? So, I don't think property profits will be a significant characteristic of SIG going forward.

And I think on your point about inflation on property cost, Stephen, I mean, are we past the hump? I think we've seen a bit of a bump up. It varies by market. But as we renew leases, by definition, they're sort of X years to run. And so when you renew them, they tend to be at sort of higher rates generally. And we've probably seen a bit more of that recently than even in the past given the changing environment. So, I think as a general rule, those costs will sort of bump up over time, but it won't be sort of massively out of kilter with the way that the business grows or sort of general inflation, I don't think. And on seasonality, When we talk about that in terms of the cash flow, we're talking about H1. So we're looking at December versus June. So that's what we mean by that. So particularly inventory, but working capital generally rises from December to June when things are a lot busier and then unwinds. If you actually look year over year, I think it actually looks pretty good. And if you look at our inventory days, in fact, our inventory days at the half year were slightly better than they were at the end of 22, for example. If that answers the question.

No, that's fine. Thank you. I just sort of wonder what was different about this year than last for obvious reasons. But quite obviously, I can see when you're turning your stock over 10 times a year, then 20 million is a bit sort of in the margin, if you know what I mean. Just one further one. Can I ask about the UK exteriors business? Obviously, due to Grenfell and other issues. there's been change in trend and change in pattern on the sort of materials that are used for exterior cladding um is that an opportunity have you been left with stranded stock uh just talk us through a little bit of observations to regard what's been going on in exteriors not that i'm suggesting it would cause the the profits to alter in the way they have but nonetheless um you know there have been big changes there in the materials to be used and possibly also channels to market yeah but one thing to recognize is our exteriors business is principally a roofing business

So the vast majority of what we do is as a specialist roofing distributor rather than sort of large-scale external cladding and so forth. So there's no significant impact on our exterior business of what you mentioned.

Thank you very much. Mark Howson from Delgate Capital. The first question, just following on from Ainsley's comment, and you said there was no planned branch closes, et cetera. Is there any proportion of your turnover, you know, sales that you just say, actually, just given the ROIC on that, it's just not worth doing, you know, given the margin? I mean, and are you measuring these businesses that you're looking at on just margin performance or turnaround performance, or is it including return on invested capital in that assumption? That's the first question. So we absolutely do measure.

I mean, it's predominantly margin on a sort of weekly, monthly basis, but return on capital as well. But margin is sort of more meaningful, more manageable by the branches. So it's absolutely something that we look at across the network. Yeah, that's it. I mean, I think return on capital, I would say, as a group, we look at that. We don't report on that externally, which is something probably over time we will start to do. But we certainly look at Roic across the – at a branch level, but certainly across the different businesses and the segments within the businesses is certainly something we look at.

And the revenue, any of it that's just not worth doing?

I mean, yes. And I think looking at branches and which are, and I think in the current climate, inevitably you focus even more on sort of poorer performing branches. So that's just part and parcel of running the business. And I think all the businesses have a very, very clear view of the relative branch performances. And if there's some that clearly can't or won't make money for whatever reason, geographic location, competition, whatever, then they make decisions accordingly.

I think it also, Mark, it really highlights the importance of getting into real granularity when it comes to things like category management, because you can look at a product sector and a headline, you can say, well, the margin on product sector is X. But when you start then slicing and dicing that by route to market, by channel, by customer type, there may well be certain products that we're selling to certain customers that don't make sense, but selling that product to a different set of customers does make sense. So, that granularity of category analysis is going to be a really important factor going forwards.

Second question for me, just on omnichannel and then own label separately. I mean, it may or may not be that 20% might be the target for omnichannel. You don't know yet. But can you just say what that omnichannel is as a percentage of the group now and also a percentage of the group now that is own label?

Okay, the own label question we got asked earlier, I said it varies quite significantly by business and we will give more clarity on where we are in terms of private label at the capital markets event. I think the omnichannel piece, what I would say is Poland is by far our leader. So Poland is the most advanced omnichannel business we have at 20%. There's a little bit of online business in other parts of the group. We'll make some major step changes in France and Germany over this winter. At the moment, that 20% in Poland is by far the predominant part of our omnichannel business, Mark.

And finally, just for thickies like me, can you just remind us what the net debt to EBITDA covenant levels are? So, you're talking about two times without the lease adjustment by the year-end. Can you just remind us what the covenant is? Thank you.

Yeah, so on the RCF, if we're 40% drawn, then the covenant limit is 4 and 3 quarter times. 4 and 3 quarter times, yeah. And just on the private label, I mean, this sounds like a kind of round number answer, but it's actually about right. So give or take 10% of the group as a whole is private label. But it does vary, as Gavin said, quite a lot by geography.

Thanks very much. Johnny Cooper at Numis. Just two questions from me, please. Firstly, on OPEX, in terms of the increase in wage or employee costs this year, you mentioned wage increases. But beyond that, when you're talking about doing employee engagement initiatives, has the business seen any increase in absenteeism or any other – such issues through COVID that are being addressed. And then the second question would be the impact of deflation. And you mentioned you're seeing it in UK exteriors and building solutions. I understand the stock losses, but beyond that, could there be any margin benefit from delayed pass-through of deflation?

I'll take the second one. Well, I mean, in terms of, yeah, OPEX and sort of employee costs and absenteeism, I think one of the things you have to bear in mind is the vast majority of our colleagues are working in branch locations. So unlike in the surroundings in which we find ourselves today where many people can choose to work sort of Tuesday, Wednesday, Thursday and, you know, Monday, Friday at home, actually our colleagues are in the branch every day of the week because that's where the customers are taking place. So I think certainly in my six months in the business, nothing's been brought to my attention or I haven't seen anything that makes it look as if we have an issue in terms of absenteeism and so forth. I think, you know, in any branch-based business, if you go back to sort of 2020, which is now, you know, COVID was like three years ago. But branch-based businesses like ours, particularly in trade environment, our colleagues were back at work pretty quickly and they've been back at work ever since. So, I don't see that as a particular issue.

No, I agree with that. And just on deflation, I mean, you know, we mentioned exteriors where they're more exposed to commodities, which, you know, over the last couple of years go up and down. In terms of the more core products, you know, as we said, I mean, we're just not seeing that yet. Net-net, you know, we're still going to see year-over-year inflation in the second half. And there are pockets in certain categories, certain geographies where we might get bits of deflation, but net-net it's still inflation at the moment. And we frankly don't see much sign of that changing.

Thank you everyone for your questions. Sorry, I'm afraid we have now run out of time. Just to say any submitted questions that we haven't been able to answer will be responded to directly after the call. Gavin, I'll now hand back to you to close.

Brilliant. Thank you. I was just about to say, I'm very conscious of where we are time-wise and making sure. Obviously, we've got a busy day. I'm sure you have. But just thank you for taking the time to attend and for those people who are looking at the webcast. We really appreciate your interest. We really appreciate your support and look forward to seeing as many of you as possible at the Capital Markets event in November. So, thank you very much.