SIG Regulatory News (SHI)

14 March 2017

SIG plc: Results for the year ended 31 December 2016

SIG plc ("SIG") is a leading distributor of specialist building products in Europe, with strong positions in its core markets of insulation & energy management, interior fit out and roofing.

* Continuing operations excludes businesses sold or agreed to be sold (Carpet & Flooring, Drywall Qatar).

** Underlying results are stated before the amortisation of acquired intangibles, goodwill and intangible impairment charges, profits and losses on agreed sale or closure of non-core businesses and associated impairment charges, net operating losses attributable to businesses identified as non-core in 2016, net restructuring costs, acquisition expenses and contingent consideration, the defined benefit pension scheme curtailment loss, other one-off items, unwinding of provision discounting, fair value gains and losses on derivative financial instruments, one-off recognition of deferred tax assets, the taxation effect of Other items and the effect of changes in taxation rates.

*** Like-for-like (LFL) is defined as sales per day in constant currency excluding acquisitions and disposals.

Highlights

· Underlying PBT of £77.5m in line with previously stated £75-80m range

· LFL*** sales increased 0.4%; UK & Ireland up 1.2% and Mainland Europe down 0.4%

· Refocusing on customers and sales growth to generate cash and improve ROCE

· Net debt of £259.9m with leverage of 2.1x as at 31 December 2016

· Actions already identified to reduce leverage; key short-term priority for the Group

· Meinie Oldersma appointed as Group Chief Executive

· Trading in first two months of 2017 in line with Board's expectations

Statutory

· Statutory loss before tax of £106.3m after £183.8m of non-underlying items

· £100.4m non-cash impairment charge on French roofing business, Larivière

· Rebased final dividend of 1.83p per share in line with 2-3x cover policy

Commenting, Mel Ewell, Chief Executive, said:

"We have delivered underlying PBT in line with our previously stated range, but we are disappointed with the overall financial performance of the Group in 2016.

"Although the Board believes that the Group's strategic direction is correct, implementation has proved challenging. Accordingly, since November we have slowed or stopped a number of internal initiatives, which will allow our team to refocus on customers and sales growth in order to generate cash and improve ROCE. This will ensure that we build on SIG's significant potential in 2017.

"One consequence of our 2016 profit is that leverage is now higher than our targeted 1.0 - 1.5x range. Leverage reduction is a key short-term priority and we have already identified a number of actions to strengthen the balance sheet, including the rebasing of our dividend. Going forward, we will take all necessary steps to ensure the Group's balance sheet is able to withstand any near-term fluctuations in market demand.

 "We have also announced today the appointment of Meinie Oldersma as our new Group Chief Executive. Meinie brings over 30 years of distribution experience and a strong customer focus to SIG. Together with the recent arrival of Nick Maddock as Chief Financial Officer this completes the recruitment of the executive team to take the business forward. In the meantime I remain fully committed to the business until Meinie is on board.

"Trading in the first two months of 2017 has been in line with the Board's expectations, although markets remain competitive and we are experiencing some supplier price inflation. The longer term outlook in our core markets continues to offer considerable opportunity and SIG remains a good business with strong market positions which is capable of delivering much more."

Analyst presentation

A briefing to analysts will take place today at 9.00am 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.

Building on our potential

The Group delivered an underlying PBT of £77.5m in 2016, in line with its previously stated £75-80m range. However, SIG recognises that its transformational change programme, while taking the Group in the right strategic direction, distracted the business during 2016. This resulted in a loss of customer focus and impacted performance. Leverage has risen above an acceptable level and specific performance challenges were seen in SIG Distribution ("SIGD"), the UK insulation and interiors business, and in the Offsite Construction business in the UK.

SIG has identified that it needs to balance better its change programme with the day-to-day operations of the Group. Since November, therefore, SIG has reassessed its internal initiatives in order to free time so that branches can refocus on customers and drive sales growth. As a result, SIG has slowed or stopped a number of initiatives. SIG has reviewed its UK eCommerce programme, suspended its Regional Distribution Centre ("RDC") programme, and is targeting to complete substantially the roll-out of its new UK ERP system in April. SIG has also reviewed its cost base to eliminate duplication and reduce discretionary expenditure.

With some supplier price inflation being seen, particularly in SIGD, the Group will continue to drive its procurement programme in order to help mitigate margin pressures. SIG's supply chain initiative is being embedded fully into business as usual and will continue to support ongoing improvement in the Group's cost to serve.

Driving improved performance in SIGD

During 2016 the market for specialist insulation and interiors products remained competitive, with other market participants investing in an attempt to grow market share. While SIGD achieved like-for-like sales growth of 1.1%, this was at the expense of margin, with operating profit declining by £6.8m to £19.2m (2015: £26.0m) on revenue of £769.5m (2015: £736.5m).

Since November the Group has targeted improved business performance by refocusing on its customers and improving its service proposition, upgrading its sales and pricing capabilities, and by better exploiting logistics and warehouse efficiencies using data now available from its newly implemented UK ERP system.

There are some positive early signs that this strategy is beginning to make a difference and sales momentum is improving, with the business delivering positive LFL sales growth since November.

Expanding capacity in Offsite Construction

Offsite Construction increased revenue by 20.7% to £27.4m in 2016 (2015: £22.7m), but the business made an operating loss of £4.2m (2015: profit of £0.3m), reflecting production challenges in the modular housing part of its Building Systems division.

SIG has already doubled daily production of modular housing compared to 2016 and is expecting Offsite Construction to return to profitability by the end of this year. In order to achieve this SIG is re-engineering and streamlining its production line and has recently appointed a new Managing Director with significant offsite manufacturing experience.

Offsite Construction continues to have a strong order book and is benefiting from high levels of demand due to the UK housing shortage and as traditional construction methods are displaced.

Reducing leverage

Largely as a result of the Group's profit out-turn, year-end leverage (net debt to EBITDA) increased to 2.1x (31 December 2015: 1.8x) with net debt as at 31 December 2016 of £259.9m (31 December 2015: £235.9m). In response, management has made leverage reduction a key short-term priority, particularly given that leverage is likely to increase to June 2017 due to the seasonality of the Group, and has identified a number of actions to strengthen its balance sheet. These include:

· Targeting significant asset disposals, and in this context SIG has disposed of Carpet & Flooring and has agreed to sell, subject to contract, Drywall Qatar;

· More tightly focusing on cash generation and working capital management;

· Moderating capital expenditure;

· Suspending its infill acquisition programme; and

· Rebasing the dividend.

While SIG's medium-term target remains to return leverage to a 1.0 - 1.5x range, the Group recognises that this may take until 2018 to achieve. In taking actions to reduce leverage the Group will therefore ensure that its balance sheet is able to withstand any near-term fluctuations in market demand.

Notwithstanding the current higher leverage, SIG retains significant funding headroom, having successfully refinanced £131m of private placement notes in June 2016, on attractive terms with existing debt providers. This refinancing was achieved through the issuance of £89m of new private placement notes on a bilateral basis, with a ten year maturity, and by increasing the Group's existing revolving credit facility ("RCF") by £100m to £350m, with a five year term.

As a result, the Group increased its total debt facilities by £75m to £549m as at 31 December 2016 (31 December 2015: £474m), and only £162m was drawn from the Group's £350m RCF at the year-end.

Non-underlying items

Non-underlying items during the period totalled £183.8m (2015: £37.3m) and were:

· A non-cash goodwill and intangible impairment charge of £100.4m (2015: nil) in relation to the Group's French specialist roofing business, Larivière (acquired by SIG in May 2007 for €297m), reflecting more cautious market forecasts and broader market uncertainty. However, Larivière retains a strong market leading position and good long-term prospects. The remaining carrying value of the goodwill associated with this business is €80.5m;

· Losses on sale or agreed sale of businesses and associated impairment charges of £40.1m (2015: nil) and 2016 operating losses of £5.8m (2015: £1.2m) relating to the disposal of Carpet & Flooring and the agreed sale, subject to contract, of Drywall Qatar;

· Non-cash impairment charges of £10.2m (2015: nil) relating to goodwill associated with the Group's Polish business;

· Net restructuring charges of £13.3m (2015: £8.3m) mainly relating to the Group's supply chain programme;

· Amortisation of acquired intangibles of £10.3m (2015: £10.3m); and

· Other one-off items of £3.7m (2015: £17.5m).

Current trading and outlook

Trading in the first two months of 2017 has been in line with the Board's expectations, although markets remain competitive and we are experiencing some supplier price inflation. The longer term outlook in our core markets continues to offer considerable opportunity and SIG remains a good business with strong market positions which is capable of delivering much more.

For 2017 SIG continues to expect the new build residential market to be the best performing sector in the UK construction market, with the commercial sector more uncertain. In Mainland Europe economic indicators have strengthened and we have seen improving quarterly LFL sales performance.

Our major markets face increased political uncertainty, with Article 50 expected to be triggered in the UK this week and forthcoming elections in France and Germany. Notwithstanding this uncertainty, the Board sees significant opportunity within the business to drive improved operational performance.

The Group will provide a further update on trading and outlook on the day of its Annual General Meeting on 11 May 2017.

Dividend

The Board has proposed that the final dividend be rebased to 1.83p per ordinary share in line with its dividend policy of 2 - 3x earnings cover.

Together with the interim dividend of 1.83p, this provides a total dividend of 3.66p for the year (2015: 4.60p). Subject to approval at the Group's AGM, the final dividend is expected to be paid on 7 July 2017 to shareholders on the register at close of business on 9 June 2017. The ex-dividend date will be 8 June 2017.

Financial performance

Revenue and gross margin

Group revenue from continuing operations increased 11.2% to £2,739.8m (2015: £2,463.1m), benefiting from foreign exchange translation (+6.8%), acquisitions (+3.7%) and working days (+0.3%). As a result LFL sales were ahead by 0.4%. On a statutory basis Group revenue was up 10.9% to £2,845.2m (2015: £2,566.4m).

In the UK & Ireland, revenue from continuing operations increased 6.3% to £1,392.1m (2015: £1,309.6m), benefiting from acquisitions (+4.0%), and currency (+1.1%), LFL sales increased 1.2%. In Mainland Europe revenue increased 16.8% to £1,347.7m (2015: £1,153.5m), benefiting from foreign exchange translation (+13.4%), acquisitions (+3.2%) and working days (+0.6%). Sales on a LFL basis were broadly flat, down 0.4%.

Continuing operations excludes the results from Carpet & Flooring and Drywall Qatar, which were previously reported in the UK & Ireland segment. These businesses incurred a combined operating loss of £5.8m in 2016 (2015: £1.2m) on sales of £105.4m (2015: £103.3m).

The Group's underlying gross margin declined by 30bps to 26.7% (2015: 27.0%) due to an 80bps decrease in the UK & Ireland to 26.0% (2015: 26.8%), offset slightly by a 20bps improvement in Mainland Europe to 27.4% (2015: 27.2%). The decrease in gross margin in the UK & Ireland is largely attributable to the market and operational challenges at SIGD and Offsite Construction. On a statutory basis the Group's gross margin decreased by 40bps to 26.4% (2015: 26.8%).

Operating costs and profit

SIG's underlying operating cost base increased by £74.6m to £639.5m in 2016 (2015: £564.9m) due to a currency impact of £39.9m, additional costs from acquisitions of £23.6m, and net cost inflation of £11.1m.

The combination of lower gross margin and higher costs meant that the Group's underlying operating profit declined 8.6% to £91.3m (2015: £99.9m) with underlying operating margin declining 80bps to 3.3% (2015: 4.1%). In the UK & Ireland, underlying operating profit fell 14.5% to £53.2m (2015: £62.2m) and underlying operating margin declined 90bps to 3.8% (2015: 4.7%). In Mainland Europe, underlying operating profit increased 8.4% to £48.9m (2015: £45.1m), including £5.8m foreign exchange benefit, with underlying operating margin decreasing slightly, down 30bps to 3.6% (2015: 3.9%). The Group made a statutory operating loss of £91.0m (2015: profit of £65.9m) in 2016.

SIG's underlying net finance costs increased by £2.5m to £13.8m (2015: £11.3m), mainly due to higher borrowings which, together with the decline in operating profit, resulted in underlying profit before tax decreasing 12.5% to £77.5m (2015: £88.6m). Underlying basic earnings per share from continuing operations declined 14.2% to 9.7p (2015: 11.3p).

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 2016 SIG's ROCE was 9.4% (2015: 11.5%). Going forward, SIG is focusing on sales growth and cash generation in order to improve its ROCE.

Acquisitions

In 2016 SIG acquired six infill businesses for a gross cash consideration of £21.1m (2015: £78.1m), together with a contingent consideration of up to £10.8m dependent on future performance. Three of the acquisitions were in the UK and three were in Mainland Europe. SIG has since suspended its infill acquisition programme as part of its actions to manage leverage.

UK & Ireland

* On a statutory basis (including Carpet & Flooring and Drywall Qatar) 2016 revenue was £1,497.5m.

2016 revenue in SIG Distribution ("SIGD"), the Group's market leading specialist UK insulation and interiors distribution business, was up 4.5% to £769.5m (2015: £736.5m), having benefited from the acquisition of SAS Direct, a leading specialist supplier of partitioning and suspended ceiling products.

The specialist insulation and interiors market in the UK, however, remained competitive, with other market participants investing in new branches and price in an attempt to grow market share. In this environment SIGD continued to grow LFL sales (up 1.1% in the year), but this growth was at the expense of gross margin.

The Group's response has been to slow or stop a number of its internal initiatives so that its branches can refocus on customers and drive sales growth. In addition it has upgraded its sales and pricing capabilities and is improving its warehouse and logistics efficiency using improved management information from its newly implemented ERP system.

In December SIGD opened its first RDC in Manchester. This new facility provides customers with a wide range of SIG's product range including structural and technical insulation, interiors, construction accessories and fixings. Having suspended the roll-out of other RDCs, at least temporarily, SIG will now monitor progress on this new site, along with its other recently opened RDC in Dublin, before deciding on the next appropriate steps for this programme.

In 2016 revenue in SIG Exteriors ("SIGE"), the market leading and only national specialist UK roofing business, benefited from acquisitions and was up 4.7% to £477.8m (2015: £456.4m).

SIGE's LFL sales declined by 0.9% due to ongoing challenging trading conditions in the UK Repairs, Maintenance and Improvement sector, to which the business has a relatively high degree of exposure, accounting for 64% of revenue, and due to weaker demand for building products in the public sector. Notwithstanding these market dynamics, SIGE continues to be one of the highest margin businesses in the Group, reflecting its strong position as the largest and only national player in the UK market.

In Ireland SIG grew revenue by 18.6%, benefiting from foreign exchange movements, and by 3.8% on a LFL basis. The construction market in Ireland continues to recover and, having begun in the residential sector, this recovery is now spreading into the commercial market. The Group's Irish business is also benefiting from efficiencies gained from the new Dublin RDC, which opened in April 2016.

Although revenue in Offsite Construction increased by 20.7% to £27.4m, the business made an operating loss of £4.2m (2015: profit of £0.3m) due to a significant production shortfall in its volumetric housing business. The Group is addressing its production challenges in this business and expects Offsite Construction to return to profitability by the end of 2017.

Other revenue, which largely relates to the Group's business in the Middle East, increased by 45.7% to £31.9m (2015: £21.9m).

Mainland Europe

* previously reported as Air Trade Centre in the Benelux.

In France SIG operates three businesses: Larivière, its market leading specialist roofing business; LiTT, its leading structural insulation and interior business; and Ouest Isol / Ouest Ventil, which is the leading supplier of technical insulation in the country and a leading air handling distributor.

Market conditions in France were challenging, with the LFL sales decreasing by 1.9% in the year. This decline, along with more cautious market forecasts, has resulted in an £100.4m impairment of Larivière. However, SIG recorded an improved second half performance, with LFL sales flat compared to a decline in H1 2016 of 3.6%. Reported revenue however benefited from foreign exchange and acquisitions, growing by 13.9%. SIG also maintained gross margin in France compared to prior year.

The Group anticipates that the improving market conditions in France, particularly in the residential sector, which accounts for 53% of its revenue in the country, may benefit SIG in 2017, particularly as many of the products it sells are used in the later stages of the building cycle.

SIG operates two businesses in Germany: WeGo, a leading insulation and interiors business; and vti, which is the largest supplier of technical insulation in the country.

SIG grew revenue in Germany by 12.2% in 2016 as it benefited from movements in foreign exchange. While LFL sales declined by 1.2%, similar to France, the German business recorded an improved second half performance, with LFLs only down 0.6%. During 2016 the Group appointed a new management team to improve its performance and reposition the business towards the higher growth segments of the German market.

In Poland SIG grew LFL sales by 2.1% and reported revenues by 11.1%. Construction markets were subdued due to political and economic uncertainty, which led to lower public expenditure as well as in the private sector. This resulted in weak demand in the non-residential and industrial markets, which account for 75% of the Group's revenue in Poland, and impacted gross margin. Although there is some evidence that construction markets stabilised and begun to improve in the first two months of 2017, the reduction in profitability and slower than originally anticipated recovery resulted in an impairment of £10.2m.

In the Benelux the Group delivered revenue growth of 16.3%, with LFL sales increasing by 2.5% and gross margin improving. The construction market in The Netherlands has continued to recover, led by the residential sector, and the non-residential sector has also improved compared to prior year. Market conditions in Belgium also stabilised during 2016, both in the residential and non-residential sectors.

Revenue in Air Handling, which is the largest pure-play specialist air handling distributor in Europe, grew by 66.0% as it benefited from good LFL growth of 8.5%, acquisitions and foreign exchange movements. 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. Gross margin also improved as the business grew its higher value whole system solution, which encompasses design to supply.

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 2016. Certain parts thereof are not included within this announcement.

We confirm that to the best of our knowledge:

· the Accounts, 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, which is incorporated into the Company's full Annual 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 Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company's performance, business model and strategy.

This responsibility statement was approved by the Board of Directors 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.

Inside Information

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 2016 and 31 December 2015 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 2015 have been filed with the Registrar of Companies, and those for 2016 will be delivered following the Company's Annual General Meeting. The Auditor has reported on the statutory accounts for 2016 and 2015, 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 standards were amended in the current period:

· Defined Benefit Plans: Employee Contributions (amendments to IAS 19 "Employee Benefits")

· Annual improvements - 2010-2012 cycle

· Annual improvements - 2012-2014 cycle

· Disclosure Initiative (amendments to IAS 1 "Presentation of Financial Statements")

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

In March 2016, the IFRS Interpretations Committee issued an agenda decision which clarified the circumstances in which certain Balance Sheet items can be offset in accordance with IAS 32 "Financial Instruments: Presentation". It was determined that where a Group does not expect to settle subsidiaries' bank balances on a net basis, these balances cannot be offset. In response to this, the Group has reviewed its cash pooling arrangements which has resulted in changes to the amounts that can be offset. Comparative information for the year ended 31 December 2015 has been restated. The impact of this change on 2015 is to increase both cash and cash equivalents and bank overdrafts in the Consolidated Balance Sheet by £57.2m. In addition, the Group has also reviewed the presentation of its supplier rebates receivable; in particular supplier rebates where there is no right to offset against trade payable balances. As a result comparative information for the year ended 31 December 2015 has been restated. The impact of this change is an increase in respect of both prepayments and accrued income and trade payables of £53.2m. There was no overall impact on net debt or net assets from either restatement.

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 2016.

2. Revenue and segmental information

Revenue

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

b) Revenue by product group

The Group focuses its activities into three product sectors: Insulation and Energy Management; Exteriors; and Interiors.

The following table provides an analysis of Group sales by type of product:

c) Geographic information

The Group's revenue from external customers and its non-current assets (including property, plant and equipment, goodwill and intangible assets but excluding deferred tax and derivative financial instruments) by geographical location are as follows:

*Includes SIG Air Handling.

There is no material difference between the basis of preparation of the information reported above and the accounting policies adopted by the Group.

3. Income tax

* Includes a charge of £0.1m (2015: credit of £0.5m) in respect of the change in rate.

The total tax charge for the year differs from that resulting from applying the standard rate of corporate tax in the UK at 31 December 2016 of 20.0% (31 December 2015: 20.0%). Due to the effect of Other items presented of the Consolidated Income Statement and their impact on a Group blend rate of tax, the reconciliation of total income tax expenses has been presented against the UK standard rate of tax, reflecting the tax residency of SIG plc. The differences are explained in the following reconciliation: