SIG Regulatory News (SHI)

9 March 2018

SIG plc: Results for the year ended 31 December 2017

SIG plc ("SIG" or "the Group"), a leading European supplier of specialist building products with strong positions in its core markets of insulation and interiors, roofing and exteriors, and air handling, today issues its results for the year ended 31 December 2017 ("FY 2017").

Highlights

· Business stabilising, balance sheet strengthening and portfolio being rationalised

· Underlying revenue +7.4% and LFL2 sales +3.8% (2016: +0.4%). Statutory revenue +1.2% (2016: +10.9%)

· Underlying PBT of £79.2m (2016: £75.9m) in line with expectations

· Underlying PBT excluding property profits of £65.5m (2016: £72.6m)

· Statutory loss before tax of £51.2m after £130.4m of non-underlying items

· ROCE improved to 10.3% (2016: 10.2%)

· Underlying basic EPS of 9.8p (2016: 9.7p). Statutory basic loss per share of 10.1p (2016: 20.6p)

· Final dividend of 2.5p per share in line with 2-3x cover policy

· Review of medium-term strategy complete - highly disciplined execution now key to delivering significant operational and financial improvement

Alternative performance measures are referred to as "underlying" and "like-for-like". These are applied consistently throughout this document and the calculations to these are found in Note 10 and below.

Commenting, Meinie Oldersma, Chief Executive Officer, said:

"In a year of challenge and change for SIG, I am pleased to be reporting results for 2017 in line with expectations, delivering the first improvement in underlying operating profit for three years, including the benefit of property profits.

We have achieved much this year, beginning to stabilise the business, returning SIG Distribution to underlying profitability and rationalising the loss-making UK Offsite Construction division. We have begun to get a grip on operating costs and working capital and we have made significant steps in refocusing the portfolio, exiting from eleven businesses, as we continue to strengthen our balance sheet.

As the Group moves into 2018, we are seeing increasingly confident markets across Mainland Europe and Ireland, but also the first signs of capacity and labour constraint in buoyant construction markets. In contrast, we are seeing an increasingly challenging environment in the UK created by macro uncertainty and recent events in the construction industry. Notwithstanding this outlook, we see considerable potential for a significant improvement in operational and underlying financial performance, with execution largely within management's control, and we are working hard to ensure effective delivery."

Analyst presentation (9am today)

A briefing to analysts will take place today at 9am at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD. A live webcast of the presentation will be on www.sigplc.com, a replay of which will also be available later in the day.

1. Underlying operations excludes businesses sold or closed before 9 March 2018. Revenue and LFLs2 differ from the January trading statement due to the exclusion of GRM, Building Systems and IBSL which have been disposed of since 9 January 2018.

2. Like-for-like (LFL) is defined as sales per working day in constant currency excluding acquisitions and disposals. Sales are not adjusted for branch openings or closures.

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

Enquiries

Overall performance

In 2017, the Group delivered its first improvement in underlying operating profit in three years as well as an improvement in its underlying profit before tax ("PBT"), up 4.3% to £79.2m (2016: £75.9m). Progress has been made in the year against the Group's medium term financial targets of like-for-like sales and headline financial leverage, with return on sales and return on capital employed stabilised at similar levels to the prior year.

Included in the underlying PBT for the year is £13.7m (2016: £3.3m) of property profits relating to ongoing property portfolio management. On a statutory basis, the Group made a loss before tax of £51.2m in the year (2016: £110.0m) after £130.4m of non-underlying items (2016: £185.9m).

Stabilising the business

Following a disappointing 2016, the Group has taken a number of preliminary actions over the past year to stabilise the business under its new leadership. In particular, management has restored customer focus by reducing the distraction from internal initiatives, is bringing operating cost increases under control, is starting to reduce levels of working capital and debt (including through debt factoring) and is simplifying the business through ongoing portfolio management.

Internal initiatives which have been stopped or slowed down during 2017, in order to free time for branch employees to refocus on customers, include the suspension of the Group's Regional Distribution Centre programme and the completion of the roll-out of a new ERP system across the core UK businesses. In combination with improving construction market conditions across Mainland Europe and Ireland, this renewed focus on our customers has helped the Group to deliver LFL sales growth of +3.8% in 2017 (2016: +0.4%).

The Group has also looked to address the rapid rise in costs across the business, eliminating duplication and reducing discretionary expenditure. Group functions have been significantly scaled back and a number of layers of management have been removed, including the UK & Ireland executive management team. The back office support functions for the insulation and roofing businesses in the UK have been combined and co-located in a single shared services centre in Sheffield. A number of headcount reductions have also been made in the back office team in Germany. The Group has terminated the lease on its corporate office in Paddington and will move to smaller, fit-for-purpose premises next month. SIG's historical head office in Hillsborough, Sheffield, has been sold and will be vacated later this year.

As a result, operating costs (excluding profits from property disposals) have now begun to fall as a percentage of underlying revenue, to 23.3% in the second half, from a peak of 23.9% in the first half. Further progress is expected in 2018, benefitting from the full year impact of actions taken during 2017, and from some further initiatives currently in progress.

Initial steps have also been taken to bring levels of working capital under control. Working capital as a percentage of sales fell from 9.9% at the end of 2016, to 9.0% at the end of 2017, benefitting from non-recourse debt factoring arrangements and other short term actions to improve the balance sheet. Management continues to focus on delivering sustainable improvements in the Group's level of working capital, in particular its levels of stock, with the aim of reducing average working capital levels throughout the year and beyond.

Subdued UK trading environment

The UK & Ireland business generated 1.6% like-for-like sales growth, primarily reflecting industry price inflation, with volumes falling 2.9%. Operating margins fell 50bps as the business only partially recovered the deterioration in performance seen in the second half of 2016.

UK trading conditions have become increasingly challenging in recent months, reflecting increased macro uncertainty and recent events in the construction industry. Whilst new housing starts continued to grow, RMI markets remained subdued and there have been some delays to new starts in commercial new build.

Return to underlying profitability in SIG Distribution

On 1 February 2018, the Group announced that it had identified accounting irregularities relating to rebates and other potential supplier recoveries at SIG Distribution, the core insulation and interiors business in the UK, resulting in an overstatement of profit for the years ended 31 December 2016 and 31 December 2015, further details of which are set out below. In addition, the business saw intensified competition and a weaker performance during 2016, resulting in the business falling into loss in the second half of the year.

From this loss making position, management has made some initial progress during 2017 in restoring underlying profitability to SIG Distribution. The business returned to underlying profitability in the first half of 2017 and delivered full year underlying operating profit of £9.9m (2016 restated: £18.2m) on revenue of £797.5m (2016: £781.2m).

The business has a new leadership team which is placing particular focus on operational efficiency through improved cost and working capital control, and on customer value from effective pricing pass-through and improved management of customer profitability. Following the accounting irregularities identified during the year, the team is also further developing the controls environment within SIG Distribution.

Although there remain competitive pressures in the UK specialist insulation and interiors sector, the business is optimistic that it can make further increases in profitability in 2018 at both a gross and operating margin level.

European recovery

The Group's Mainland Europe businesses benefitted from improving construction market confidence during 2017, with LFL revenues increasing by 5.9% for the full year. Underlying revenues increased by 12.8% to £1,473.2m (2016: £1,305.9m). Margins were largely in line with 2016 and, as a result, underlying operating profit increased by 23.5% to £59.4m (2016: £48.1m).

In particular, SIG France posted an improvement in underlying operating profit, up £1.8m on 2016 at £26.2m. Underlying revenues grew by 12.1% to £660.7m, with LFL sales in France up by 5.9%. SIG operates three market leading businesses in France, and management anticipates all three continuing to grow through 2018.

The Group's Air Handling business also finished the year on a record high, delivering growth of 22.2% in underlying revenues, benefitting from a healthy LFL sales growth of 10.9%. Management expects the air handling market to continue to outperform the wider construction sector due to continuing strong demand drivers, including higher energy efficiency and air quality standards.

As we move into 2018, the early signs are that the market confidence witnessed across our European businesses through 2017 is continuing and we do not expect any erosion in gross margin. However, management recognises that there were some indications of both labour and capacity constraint during the second half of the year, and so will continue to monitor developing trends closely.

Ongoing portfolio management

The Group's medium term strategy recognises that there are a number of smaller businesses which are peripheral to its core focus. Management has identified a number of these businesses as potential exit candidates, representing around 13% or £0.4bn of the statutory Group revenues (as reported at the FY 2016 results), either because they have limited fit with Group strategy or because their small scale is a management distraction. In many cases, these businesses are also suffering from poor financial performance.

At the end of FY 2016, the Group announced the disposal of Carpet & Flooring, a UK distributor of floor covering products, as well as the sale of its joint venture interest in Drywall Qatar, an independent materials supplier and specialist installer of interior finishing materials. During the first half of 2017, the Group closed Metechno, the offsite manufacturer of bathroom pods and utility cupboards (part of its UK Offsite Construction division) and exited its small scale Austrian operation, WeGo Systembaustoffe Austria. During the year, the Group also completed the disposal of Building Plastics, a leading provider of roofline, drainage and building plastics products to the UK construction industry.

The sale of SIG's majority shareholding in its small Air Handling business in Turkey, ATC Turkey, was also finalised in December 2017. In the same month, SIG Poland ceased the processing of insulation product at its Sitaco subsidiary.

Since the 2017 year end, the Group has confirmed the disposal of the trade and assets of SIG Building Systems, its UK modular offsite construction business, and also of GRM, a small manufacturer of phenolic pipe insulation serving the UK's industrial and HVAC markets. The Group has also disposed of IBSL, a UK fabricator and supplier of cryogenic and high-temperature insulation solutions used by the petrochemical, power generation and offshore exploration industries and SIG has recently announced the exit from its Dubai-based distribution business, SIG Middle East, which will be completed over the coming months.

A reconciliation of underlying revenue to statutory revenue for 2017 as a result of these portfolio changes is set out below, with the impact on 2016 comparatives also detailed in the Financial Review section.

*SIG also ceased the processing of insulation products at its Sitaco subsidiary in Poland. However, as it will still continue its distribution activities, the sales have not been reclassified. 

In total, this means that the Group has exited 11 businesses since 2016, representing 9.1% of statutory Group revenue reported in the FY 2016 results. The Group continues to review its ownership of a number of other peripheral businesses, and will update on further changes to the portfolio in due course.

Rationalisation of UK Offsite Construction division

As part of the portfolio rationalisation, the Group continued to review the potential for sustainable profits from the UK Offsite Construction division during the year and, as a result, has now completed the exit from two of the three businesses in that division. The only remaining offsite construction business is RoofSpace, a panelised room-in-roof manufacturer serving the UK new build residential market, which continues to deliver above-market growth at attractive margins and has been transferred into SIG Distribution for management and reporting purposes.

Initial progress on leverage

At 31 December 2016, the Group reported headline financial leverage of 2.1x, based on net debt of £259.9m, and made leverage reduction a key priority for the Group during 2017. Management accordingly took a number of short term actions to strengthen the balance sheet, including asset disposals, debt factoring and a tighter control over cash, coupled with some short term working capital improvements and temporary constraints over capital expenditure. In the first half of the year, this enabled the Group to reduce headline financial leverage to 1.6x (as reported at the half year).

On 9 January 2018, the Group announced that it had identified a historical overstatement of net cash and trade payables related to cash cut-off procedures in SIG Distribution, associated with the issue of cheques around previous period ends. This resulted in an overstatement of net cash of £19.8m at 31 December 2016 which, when adjusted, led to a restated net debt at 31 December 2016 of £279.7m and headline financial leverage of 2.4x. The restated headline financial leverage at 30 June 2017 increased to 2.0x.

The Group ended the year with net debt of £223.8m and headline financial leverage of 1.9x, an improvement of 0.5x on the restated 2016 closing position. A reconciliation of the improvement in net debt in the year is set out below.

* Cash inflow from trading before the impact of Other items for the year ended 31 December 2017 was £106.2m (2016: £112.7m).

This is still considered by management to be a higher level of leverage than desirable, taking into account cyclical risk, and further leverage reduction remains a key priority. Accordingly, a number of actions have been initiated, with the aim of delivering sustainable reductions in levels of working capital, as well as seeking to monetise a number of businesses for cash proceeds as part of the refocusing of the portfolio.

These actions are expected to deliver further reductions in net debt during 2018 which, coupled with improvements in the level of profitability, mean the Group continues to target a 1.0-1.5x leverage range during the current financial year. SIG's infill acquisition programme remains suspended until leverage has been brought under control, and the Group continues to target leverage below 1.0x over the medium term.

Notwithstanding the current levels of leverage, the Group retains considerable headroom against its financing facilities, with total debt facilities of £553m as at 31 December 2017 (31 December 2016: £549m), and only £78m (2016: £162m) drawn from the Group's £350m Revolving Credit Facility at the year end.

Significant benefit from property profits

One of the actions taken by the Group to reduce leverage during 2017 was the sale of a number of properties across the Group's portfolio for a total net cash consideration of £33.4m (£5.7m being received in January 2018), and on which it realised an underlying profit of £13.7m and a non-underlying profit of £5.8m. The non-underlying element relates to the unutilised proportion of property and land and therefore not related to the ongoing operations of the Group.

Excluding the underlying property profits, SIG's underlying PBT was £65.5m (2016: £72.6m).

Non-underlying items

Following the extensive operational changes and portfolio management carried out during the year, SIG has sought to provide a clear understanding of the underlying and continuing performance of the businesses making up the Group, by separating and disclosing significant non-underlying items. Total non-underlying items during the year amounted to £130.4m (2016: £185.9m), on a pre-tax basis, and comprised:

· Losses on agreed sale or closure of non-core businesses and associated impairment charges of £72.4m (2016: £40.1m), together with net operating losses from those businesses in 2017 of £14.3m (2016: £7.9m);

· Amortisation of acquired intangibles of £9.3m (2016: £10.3m);

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

· Net restructuring costs relating to the supply chain review and other restructuring costs of £21.1m (2016: £13.3m) and other specific items of £0.3m (2016: £8.7m);

· Acquisition expenses and contingent consideration costs of £9.8m (2016: credit of £4.6m);

· Fair value gains and losses and other finance charges of £2.2m (2016: £1.5m);

being offset by

· Non-underlying profit on the disposal of property of £5.8m (2016: £2.8m).

The impact on net debt of these non-underlying items was £18.0m (2016: £44.4m).

SIG expects to disclose further non-underlying items in 2018, as management continues to restructure the Group and simplify its portfolio.

Strategy review - building on our potential

In parallel with operational improvements to stabilise the business, management conducted a review of the Group's strategy during 2017. This review concluded that there is considerable opportunity for a significant improvement in the operational and financial performance of the Group over the medium term. To deliver that improvement, management is focusing on the execution of initiatives across the operating companies in support of three key strategic levers: customer service, customer value and operational efficiency.

Customer service activities focus primarily on investment in sales capability and the effectiveness of the sales effort to deliver LFL sales growth and gross margin improvement. Customer value targets improved management of pricing and customer profitability, along with the development of the Group's specialist and own-label product offerings to further drive LFL sales growth and gross margin improvement. Operational efficiency seeks to deliver improved control over operating costs and working capital, to improve return on sales and return on capital employed.

Delivery of these initiatives is being supported by investment in three key enablers: data, IT and capability. During 2018, SIG is rolling out a consistent data foundation, making it easier to analyse and improve performance. In IT, SIG is working towards a common infrastructure and central portfolio management, with projects delivered under a standard framework, building a platform for future integration. In parallel, SIG is reinforcing the breadth and depth of its people and management capability to improve on a poor track record of delivering successful changes to the business.

During the initial weeks of 2018, the leadership team presented the strategy and detailed action plans directly across the operating companies to around 1,200 managers from eleven countries, followed by a cascade of the same key messages to all employees across the Group. All parts of the business have aligned around the key strategic priorities, with robust messaging about the need to simplify, focus and deliver. Performance management mechanisms have been revised to promote the strategy, with tools now in place for close monitoring and support, and the realignment of reward structures up and down the organisation.

There remains considerable work to be done to improve returns over the medium term and highly disciplined execution will be critical to success.

Current trading and outlook

It has been a year of challenge and change for SIG, reporting an underlying profit before tax of £65.5m, excluding property profits, for 2017.

As the Group moves into 2018, we are seeing increasingly confident markets across Mainland Europe and Ireland, but also the first signs of capacity and labour constraint in buoyant construction markets. In contrast, we are seeing an increasingly challenging environment in the UK, created by macro uncertainty and recent events in the construction industry. Notwithstanding this outlook, we see considerable potential for a significant improvement in operational and underlying financial performance, with execution largely within management's control, and we are working hard to ensure effective delivery.

The Group will provide a further update on trading and outlook on 10 May 2018, when it will hold its Annual General Meeting.

Dividend

In 2017, the Group delivered underlying earnings per share of 9.8p (2016: 9.7p). As a result, the Board is recommending payment of a final dividend for the year of 2.5p (2016: 1.83p) per share. Together with the interim dividend of 1.25p (2016: 1.83p) per share, this gives a total dividend for the year of 3.75p (2016: 3.66p) per share, in line with the Group's stated policy to target dividend cover in the range of 2-3x underlying earnings per share.

In determining the final dividend, the Board has considered the current defined benefit pension deficit and ongoing discussions with regard to the triennial valuation and recovery plan that is due to be finalised by the end of March 2018.

Subject to approval at the Group's Annual General Meeting, the final dividend is expected to be paid on 6 July 2018 to shareholders on the register at the close of business on 8 June 2018. The ex-dividend date will be 7 June 2018.

Overview

The Group delivered higher revenues and like-for-like sales growth which, together with return on sales at similar levels to 2016, enabled it to deliver an improved underlying operating profit performance for the first time in three years and an increased dividend. Net debt came down sharply, principally due to debt factoring and the sale of property, despite the adverse impact of a historical overstatement of net cash, meaning that headline financial leverage fell. Return on capital employed stabilised at a similar level to 2016.

Revenue and gross margin

Group revenue from underlying operations increased 7.4% to £2,778.5m (2016: £2,587.4m), benefitting from foreign exchange translation (+3.9%) and acquisitions (+0.2%), though offset by fewer working days (-0.5%). As a result, LFL sales were ahead by 3.8%. On a statutory basis, Group revenue was up 1.2% to £2,878.4m (2016: £2,845.2m).

In the UK & Ireland, revenue from underlying operations increased 1.9% to £1,305.3m (2016: £1,281.5m), benefitting from acquisitions (+0.2%) and foreign exchange translation (+0.5%), offset by fewer working days (-0.4%). LFL sales increased 1.6%. In Mainland Europe, revenue increased 12.8% to £1,473.2m (2016: £1,305.9m), benefitting from foreign exchange translation (+7.3%) and acquisitions (+0.2%), offset by fewer working days (-0.6%). LFL sales increased 5.9%.

Underlying operations excludes the results from the businesses divested during the year, or in the process of being divested as at 31 December 2017, in order to give a better understanding of the underlying earnings of the Group. These businesses reported a combined operating loss of £14.3m in 2017 (2016: £7.9m) on sales of £99.9m (2016: £257.8m).

The Group's underlying gross margin declined by 20bps to 26.5% (2016: 26.7%), due to a 40bps decrease in the UK & Ireland to 25.5% (2016: 25.9%), and by a 10bps decrease in Mainland Europe to 27.4% (2016: 27.5%). On a statutory basis, the Group's gross margin decreased by 20bps to 26.1% (2016: 26.3%). The decrease in gross margin in the UK & Ireland is largely attributable to the market and operational challenges at SIG Distribution, which had a significant impact on underlying profitability in the business from the second half of 2016, albeit with some initial recovery seen in 2017.

Operating costs and profit

SIG's underlying operating cost base, excluding the benefits of property profits, increased by £51.2m to £655.9m in 2017 (2016: £604.7m), due to a foreign exchange translation cost of £23.6m, the full year impact of additional costs from 2016 acquisitions of £3.2m, and other cost increases of £24.4m. As a result, operating costs (excluding property profits) as a percentage of sales increased from 23.4% in 2016 to 23.6% in 2017. Costs peaked in the first half of 2017 at 23.9% of sales.

The LFL sales growth and the favourable impact from the foreign exchange translation of improved European profitability were partially offset by lower gross margins and higher costs. This meant that the Group's underlying operating profit increased by 5.1% to £94.3m (2016: £89.7m) with the return on sales, one of the Group's primary performance metrics, decreasing 10bps to 3.4% (2016: 3.5%).

In the UK & Ireland, underlying operating profit fell 9.2% to £47.6m (2016: £52.4m) and the underlying operating margin declined 50bps to 3.6% (2016: 4.1%). In Mainland Europe, underlying operating profit increased by 23.5% to £59.4m (2016: £48.1m), including a £3.7m foreign exchange translation benefit, with the underlying operating margin increasing slightly, up 30bps, to 4.0% (2016: 3.7%). The Group made a statutory operating loss of £33.9m in 2017 (2016: £94.7m).

SIG's underlying net finance costs increased by £1.3m to £15.1m (2016: £13.8m), mainly due to higher average borrowings during the year, which offset some of the increase in operating profit, resulting in underlying profit before tax increasing 4.3% to £79.2m (2016: £75.9m). Excluding underlying property profits, underlying profit before tax declined 9.8% to £65.5m (2016: £72.6m). On a statutory basis, the Group made a loss before tax of £51.2m (2016: £110.0m) after non-underlying items of £130.4m (2016: £185.9m).

The Group's underlying tax charge for the year was £20.5m (2016: £18.1m), representing an underlying effective tax rate of 25.9% (2016: 23.8%). After Other items, the total tax charge decreased by £4.2m to £7.4m (2016: £11.6m).

Underlying basic earnings per share from underlying operations increased by 0.1p to 9.8p (2016: 9.7p). On a statutory basis, the Group made a basic loss per share of 10.1p (2016: 20.6p).

Return on Capital Employed

Post-tax Return on Capital Employed ("ROCE") is one of the Group's primary performance metrics and is calculated on a rolling 12 month basis as: underlying operating profit less tax, divided by average net assets, plus average net debt. As at 31 December 2017, Group ROCE was 10.3% (2016: 10.2%).

This improvement primarily reflects reduced levels of working capital and debt at the year end, with working capital falling from 9.9% of sales in 2016 to 9.0% of sales at 31 December 2017, and debt falling from £279.7m to £223.8m.

UK & Ireland

* Before results attributable to businesses identified as non-core.

** On a statutory basis, 2017 revenue was £1,385.6m, operating loss was £62.2m and operating margin was (4.5)%. The Other division reported in previous years has been removed in 2017 as it primarily related to SIG's activities in the Middle East which are in the process of being closed. SIG Spain, which was also part of Other and had revenue of £1.8m in 2017 (2016: £1.5m), is now reported in SIG Distribution. The UK Offsite Construction division has also been removed as SIG has exited from two of the three businesses in that division, with the remaining business, RoofSpace, transferred to SIG Distribution for management and reporting purposes. RoofSpace had revenue of £17.6m in 2017 (2016: £15.0m).

*** Reported operating profits/(losses) are shown on a segmental basis including the operating result of the non-core businesses.

Underlying revenue in SIG Distribution, the Group's market leading specialist UK insulation and interiors distribution business was up 2.1% to £797.5m (2016: £781.2m) and by 2.3% on a LFL basis. The underlying operating margin for the full year of 1.2% represents a decline on 2016 (2.3%). As a result, underlying operating profit for the full year of £9.9m reflects a decline of 45.6% on 2016 (£18.2m). Excluding property profits, underlying operating profit decreased by 39.6% to £9.0m (2016: £14.9m). On a statutory basis, after taking into account Other items, SIG Distribution reported an operating loss of £25.1m (2016: operating profit £5.7m).

SIG Exteriors, the market leading and only national specialist UK roofing business, saw underlying revenues down by 1.3%, at £409.5m (2016: £414.8m), and by 1.1% on a LFL basis. As expected at the half year, trading conditions in the second half continued to be weak in the UK Repairs, Maintenance and Improvement ("RMI") sector, to which the business has a high degree of exposure. As a result, the business saw underlying operating profit fall by £5.3m to £25.2m. Including £7.7m of property profits recognised by the division, total underlying operating profit was £32.9m (2016: £30.5m).

In Ireland & Other UK, SIG grew underlying revenue by 15.0%, benefitting from foreign exchange translations, and by 8.1% on a LFL basis, as the business continues to benefit from favourable market conditions in Ireland. This helped the business grow underlying operating profit by £1.1m to £4.8m. On a statutory basis after taking into account Other items, Ireland & Other UK reported an operating loss of £39.9m (2016: £49.3m).

Mainland Europe

* Before results attributable to businesses identified as non-core.

** On a statutory basis, 2017 revenue was £1,492.8m, operating profit was £41.0m and operating margin was 2.7%.

*** Reported operating profits are shown on a segmental basis, including the operating result of the non-core businesses.

Revenue in France, where SIG operates three businesses (Larivière, the market leading specialist roofing business; LiTT, the leading structural insulation and interior business; and Ouest Isol/Ouest Ventil, a leading supplier of technical insulation and air handling products), increased by 12.1% to £660.7m (2016: £589.2m), having benefitted from foreign exchange translation. On a LFL basis, sales were up by 5.9%.

Improved market conditions in France have helped revenue this year, particularly in the residential sector, which accounts for 64% of revenue in the country. The business has also benefitted from some of the actions taken at LiTT to drive improved operational efficiency, which are now also being applied to the Larivière business. As a result, SIG France had a strong year, delivering underlying operating profit of £26.2m, up £1.8m on 2016.

Underlying revenue in Germany grew by 10.5% to £425.9m (2016: £385.6m), as it benefitted from foreign exchange translation. LFL sales grew by 4.8%, as the Group sought to improve its performance and to reposition the business towards the higher growth segments of the German market, such as the residential sector. Underlying operating profit increased by £3.8m to £11.5m (2016: £7.7m). Excluding property profits, underlying operating profit decreased by 9.1% to £7.0m (2016: £7.7m).

In Poland, SIG grew revenues by 24.1% to £142.8m, benefitting from strong sales performance and foreign exchange translation. Following last year's subdued performance, resulting from political and economic uncertainty, construction markets stabilised in the first quarter of 2017. There was then significant improvement during the remainder of the year, leading to a 13.7% increase in SIG's LFL sales growth for the year. After operating cost inflation and other cost increases, the business delivered an underlying operating profit of £1.0m (2016: £1.1m).

Air Handling, the largest pure-play specialist air handling distributor in Europe, grew underlying revenue by 22.2% as it benefitted from a healthy LFL growth of 10.9%, and from acquisitions and foreign exchange translations. The air handling market continues to grow at a faster rate than the wider construction sector due to strong demand drivers, including higher energy efficiency and air quality standards. As a result, Air Handling delivered an improved underlying operating profit performance, up £3.6m to £14.4m.

The 2% increase in underlying revenue in the Benelux reflects foreign exchange translations, with LFL sales decreasing by 4.3%. Following a construction market recovery during 2016, conditions became tougher in 2017, with increased price competition for interior products and a weaker demand for technical insulation. However, robust cost management ensured that underlying operating profit improved by £2.2m to £6.3m.

Historical overstatements

On 9 January 2018, the Group announced that it had identified during initial year end close processes, historical overstatements of net cash and trade payables related to cash cut-off procedures, associated with the issue of cheques around previous period ends. There was no impact from this on the Group's income statement, but it resulted in an understatement of net debt of £19.8m (comprising £19.5m in SIG Distribution and £0.3m in Ireland) at 31 December 2016 and £27.2m at 30 June 2017 (£26.9m in SIG Distribution and £0.3m in Ireland).

As a result, net debt has been restated to £279.7m at 31 December 2016 (previously reported £259.9m) and to £193.4m at 30 June 2017 (previously reported £166.5m) and headline financial leverage has been restated to 2.4x at 31 December 2016 (previously reported 2.1x) and 2.0x at 30 June 2017 (previously reported 1.6x).

In addition, on 1 February 2018, the Group announced that following a whistleblowing allegation of potential accounting irregularity at SIG Distribution, it had identified that a number of balances relating to rebates and other potential supplier recoveries were overstated at 31 December 2016, in some cases intentionally. This resulted in an overstatement of profit for the year ended 31 December 2016 of £3.7m, with a further £0.4m overstatement of profit relating to the year ended 31 December 2015, and a further £2.5m overstatement of profit for the half year ended 30 June 2017.

Both of these overstatements have been restated in the results being presented today. In response to these issues, the Group has implemented a number of priority controls recommendations in relation to both rebates and cash. With support from KPMG, the Group has completed a review of financial reporting controls at SIG Distribution, which has identified no further material accounting cause for concern, although it has made some controls recommendations which are now being implemented. A number of employees are leaving the business following disciplinary investigations into the circumstances.

SIG is in the process of formalising and rolling out a key controls framework across the business to provide additional discipline around the appropriate design and effective operation of key controls going forward.

The Board is determined to hold itself and the broader Group to the highest standards of ethical and professional practice, and will not tolerate any breaches of these standards. Robust action has been taken by management, in conjunction with the Audit Committee, in relation to the controls issues identified during the year. The historical overstatements have been thoroughly investigated and reported, and we have moved swiftly and decisively to address these serious matters.

Impact of non-core businesses and historical overstatements

The revenue and profits of businesses that have been divested, closed or were under review at the year end, and which are therefore now being treated as non-underlying, are set out in the table below. The table also highlights the impact on profit of the historical overstatements, in order to derive comparatives for the underlying business:

1. First announced at SIG's 2016 full year results on 14 March 2017.

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

3. First announced at SIG's half year results on 8 August 2017.

4. First announced in SIG's trading update on 9 January 2018.

5. First announced on 28 February 2018.

6. First announced in this statement.

Directors' Responsibility Statement on the Annual Report

The responsibility statement below has been prepared in connection with the Company's full Annual Report for the year ended 31 December 2017. Certain parts solely thereof are not included within this announcement.

We confirm that to the best of our knowledge:

· the Financial Statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

· the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

· the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

This responsibility statement was approved by the Board of Directors on 8 March 2018 and signed on its behalf by:

Cautionary Statement

This announcement has been prepared to provide the Company's Shareholders with a fair review of the business of the Group and a description of the principal risks and uncertainties facing it. It may not be relied upon by anyone, including the Company's Shareholders, for any other purpose.

This announcement contains forward-looking statements that are subject to risk factors including the economic and business circumstances occurring from time to time in countries and markets in which the Group operates and risk factors associated with the building and construction sectors. By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions because they relate to events and/or depend on circumstances that may or may not occur in the future and could cause actual results and outcomes to differ materially from those expressed in or implied by the forward-looking statements. No assurance can be given that the forward-looking statements in this announcement will be realised. Statements about the Directors' expectations, beliefs, hopes, plans, intentions and strategies are inherently subject to change and they are based on expectations and assumptions as to future events, circumstances and other factors which are in some cases outside the Group's control. Actual results could differ materially from the Group's current expectations.

It is believed that the expectations set out in these forward-looking statements are reasonable but they may be affected by a wide range of variables which could cause actual results or trends to differ materially, including but not limited to, changes in risks associated with the level of market demand, fluctuations in product pricing and changes in foreign exchange and interest rates.

The Company's Shareholders are cautioned not to place undue reliance on the forward-looking statements. This announcement has not been audited or otherwise independently verified. The information contained in this announcement has been prepared on the basis of the knowledge and information available to Directors at the date of its preparation and the Company does not undertake any obligation to update or revise this announcement during the financial year ahead.

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

The share option reserve represents the cumulative equity-settled share option charge under IFRS 2 "Share-based payment" less the value of any share options that have been exercised.

The hedging and translation reserve represents movements in the Consolidated Balance Sheet as a result of movements in exchange rates which are taken directly to reserves.

1. Basis of preparation

The Group's financial information has been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and on a basis consistent with that adopted in the previous year.

The financial information has been prepared under the historical cost convention except for derivative financial instruments which are stated at their fair value.

Whilst the financial information included in this Preliminary Results Announcement has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with IFRS.

The Preliminary Results Announcement does not constitute the Company's statutory accounts for the years ended 31 December 2017 and 31 December 2016 within the meaning of Section 435 of the Companies Act 2006 but is derived from those statutory accounts.

The Group's statutory accounts for the year ended 31 December 2016 have been filed with the Registrar of Companies, and those for 2017 will be delivered following the Company's Annual General Meeting. The Auditor has reported on the statutory accounts for 2017 and 2016, and their reports, which included no matters to which the Auditor drew attention by way of emphasis, were unqualified and did not contain statements under Sections 498 (2) or 498 (3) of the Companies Act 2006 in relation to the financial statements.

The following new and revised Standards and Interpretations have been adopted in the current period:

· Annual Improvements to IFRSs 2014-2016 Cycle - various standards (amendments to IFRS 12 "Disclosure of Interests in Other Entities")

· Recognition of Deferred Tax Assets for Unrealised Losses (amendments to IAS 12 "Income Taxes")

· Disclosure initiative - amendments to IAS 7 ("Statement of Cash Flows")

Adoption of the above standards has not had a material impact on the Accounts of the Group.

At the date of authorisation of this financial information, there are a number of new standards and interpretations issued but not yet effective (some of which are pending endorsement by the EU), which the Group has not applied in this financial information. These are detailed in the Group's Annual Report and Accounts for the year ended 31 December 2017.

Prior year restatements

Following a whistleblowing allegation in SIG Distribution, the core insulation and interiors business in the UK, the Group has identified a historical overstatement of profit relating to the years ended 31 December 2016 and 2015 due to overstatement of balances recognised in relation to rebates receivable from suppliers. This error has been corrected by restating the prior year comparatives, reducing prepayments and accrued income (included with trade and other receivables) by £3.3m and trade and other liabilities by £0.8m at 31 December 2016 and prepayments and accrued income by £0.4m at 1 January 2016. The impact on the Consolidated Income Statement for the year ended 31 December 2016 is an increase in cost of sales (before Other items) of £3.7m resulting in an increase in operating loss and loss before tax of £3.7m and an increase in loss after tax of £3.0m. Net assets are £3.3m lower than previously reported at 31 December 2016 and £0.3m lower at 1 January 2016. There is no impact on the Consolidated Cash Flow Statement for the year ended 31 December 2016. The restatement increased basic and diluted loss per share from 20.1p per share to 20.6p per share for the year ended 31 December 2016. Notes 2, 3, 4, 5 and 10 have also been restated where relevant to incorporate these changes.

During 2017 year end close procedures the Group also identified a historical overstatement of cash and trade payables in relation to cash cut-off procedures associated with cheques issued around previous period ends. This error has been corrected by restating the prior year comparatives, reducing cash and cash equivalents (reduction in cash £0.6m and increase in bank overdrafts £19.2m) and trade payables by £19.8m at 31 December 2016. This restatement had no impact on the reported consolidated income statement or net assets. The consolidated cash flow statement has also been restated, with cash and cash equivalents at 1 January 2016 reduced by £23.9m to £62.8m and at 31 December 2016 by £19.8m to £104.3m, resulting in an increase in net cash generated from operating activities of £4.1m to £29.9m for the year ended 31 December 2016. Notes 2, 6 and 10 have also been restated to incorporate this adjustment.

The effect of the prior year restatement on each financial line item affected is shown in Note 11.

The above restatements impacted net debt and EBITDA which had an impact on leverage and interest cover covenant calculations, but the Group remained within covenant requirements for all relevant periods. Additional interest payable as a result of the restatements has been accrued for in this financial information.

Further details regarding the restatements are provided in the Audit Committee Report in the Group's Annual Report and Accounts for the year ended 31 December 2017.

2. Revenue and segmental information

Revenue

An analysis of the Group's revenue is as follows:

^ Inter-segment revenue is charged at the prevailing market rates.