SIG Regulatory News (SHI)

9 August 2016

SIG plc

Half Year results for the six months ended 30 June 2016

Solid first half performance

* Underlying is before the amortisation of acquired intangibles, restructuring costs, acquisition expenses and contingent consideration, other one-off items, the defined benefit pension scheme curtailment loss, unwinding of provision discounting and fair value gains and losses on derivative financial instruments.

** Like-for-like ("LFL") is constant currency sales per working day excluding acquisitions and disposals.

Highlights

· Group sales up 11% benefiting from acquisitions and foreign exchange

· LFL** sales increased 0.7%; UK & Ireland up 2.3% and Mainland Europe down 1.2%

· Underlying PBT excluding property disposals up 14% to £45.2m

· Air Handling sales ahead by 36% to €128m

· Positive early signs from new Regional Distribution Centre opened in Dublin

· £6m incremental benefit from the Strategic Initiatives

· Successfully refinanced £130m private placement notes with existing debt providers

· Reduced net debt and leverage despite seasonal working capital peak

· Statutory profit before tax increased by 43% to £38.4m

Commenting on the results and outlook, Stuart Mitchell, Chief Executive, said:

"The Group delivered a solid first half performance with good progress on its Strategic Initiatives offsetting the twin pressures of variable trading conditions, particularly in Mainland Europe, and a competitive market environment.

"The reshaping of our supply chain has started well and we are encouraged by the initial performance of our new Regional Distribution Centre in Dublin, which marks the first time products from all of SIG's businesses have been available on a single site.

"With regard to the EU referendum, we observed a slowing of UK construction market activity immediately prior to and following the vote. As a result our like-for-like sales in the UK were flat in June and July, although there was some improvement in trading as July progressed. It should also be noted that SIG is not materially exposed to cross-border transactional risk as we buy and sell the vast majority of our products within country.

"Clearly the uncertainties caused by the referendum have made it more difficult for us to assess the trading outlook, particularly in the near-term, and we are therefore closely monitoring market developments in order to address any variances that arise. That being said, based on our current experience, we continue to expect to make progress this year as the Group benefits from the Strategic Initiatives, acquisitions and value added sales, together with foreign exchange translation on its earnings in Mainland Europe."

Enquiries

SIG plc

FTI Consulting

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 will be available on the investor relations section of www.sigplc.com which will also be available on replay later in the day.

Overview

Group revenues increased 10.6% to £1,375.2m (H1 2015: £1,243.6m), with acquisitions contributing 4.6% to growth, foreign exchange 4.0% and working days 1.3%. As a result, Group like-for-like ("LFL") sales were ahead by 0.7%.

SIG experienced product price inflation of 0.2% and volume growth of 0.5% in H1 2016. The Group estimates that its overall market, weighted according to the sectors in which it operates, declined by 0.7% in the period, corresponding to an outperformance of 1.4%.

In the UK & Ireland revenues from continuing operations increased 8.8% to £738.9m (H1 2015: £679.2m), having benefited from acquisitions, and were up 2.3% on a LFL basis. In Mainland Europe sales increased 12.7% to £636.3m (H1 2015: £564.4m), benefiting from foreign exchange and acquisitions. In what continue to be variable trading conditions, the Group's LFL sales in Mainland Europe decreased by 1.2% during the period.

The Group continues to make good progress on its Strategic Initiatives to improve business performance. These have delivered an incremental net benefit after costs of £5.7m in the first half, mainly sourced from procurement. SIG continues to have a high degree of confidence in achieving its target of an incremental net benefit of at least £10m this year. In addition the Group also delivered £0.9m savings from the reshaping of its supply chain in H1 2016.

Although the Strategic Initiatives added 40bps to SIG's gross margin in the first half, a competitive market environment, weak trading conditions in Mainland Europe and changes to product mix offset this improvement, resulting in the Group's gross margin being broadly flat at 27.0% (H1 2015: 27.1%).

In H1 2016 SIG's underlying operating cost base increased by £26.0m to £317.1m (H1 2015: £291.1m) mainly due to a currency impact of £11.7m, additional costs from acquisitions of £14.8m, and cost inflation of £2.0m, offset by £2.5m of property profits.

Underlying operating profit increased 19.9% to £54.3m (H1 2015: £45.3m), with the Group's underlying operating margin up by 30bps to 3.9% (H1 2015: 3.6%). In the first half SIG made a number of property disposals relating to its branch network, on which it realised £2.5m of additional profit. Excluding these disposals, the Group's underlying operating profit increased 14.3% to £51.8m and underlying operating margin was up 20bps to 3.8%.

Despite underlying net finance costs increasing to £6.6m (H1 2015: £5.5m), mainly due to higher borrowings, underlying profit before tax increased 19.8% to £47.7m (H1 2015: £39.8m). Excluding property disposals, underlying profit before tax was up 13.6% to £45.2m. Underlying basic earnings per share increased 24.5% to 6.1p (H1 2015: 4.9p).

On a statutory basis profit before tax increased 43.3% to £38.4m (H1 2015: £26.8m) and basic earnings per share increased 54.8% to 4.8p (H1 2015: 3.1p).

Return on Capital Employed

Post-tax Return on Capital Employed ("ROCE") is the key metric for the Group 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 30 June 2016 SIG's ROCE was 9.8% (H1 2015: 10.0%).

Going forward SIG remains committed to increasing ROCE. As well as taking a disciplined approach to its capital management, SIG seeks to achieve this through further improvements in its gross and operating margins.

Refinancing and debt

During the period the Group successfully refinanced £130m of private placement notes, which are due to mature in November 2016, on attractive terms with existing debt providers. This refinancing was achieved through the issuance of £89m of new private placement notes (at current exchange rates) on a bilateral basis, with a ten year maturity, and by increasing the Group's existing revolving credit facility by £100m to £350m, with a five year term.

As a result the Group's total debt facilities are expected to increase by £59m to £542m (at current exchange rates after the £130m private placement notes are repaid), with key terms and covenants unchanged.

Net debt at 30 June 2016 decreased £3.1m to £232.8m compared to 31 December 2015, when it was £235.9m, despite working capital typically being at a seasonal high during the summer months. As anticipated, net capital expenditure (excluding one-off fixed asset disposals) decreased to £17.8m (H1 2015: £23.4m). This represents 1.2x depreciation of £14.8m (H1 2015: £12.5m).

The Group's leverage (net debt to EBITDA) fell to 1.6x as at 30 June 2016 compared to 1.8x as at 31 December 2015 after benefiting from lower acquisition and capital expenditure, together with good operational cash management, with SIG generating £40.6m of free cash flow (H1 2015: cash outflow of £8.5m). Going forward SIG continues to target leverage of c.1.5x in the medium-term.

Acquisitions

As previously guided the Group has slowed the pace of its acquisition programme, spending £14.6m in the first half of the year (H1 2015: £34.0m). Subsequently, in July, the Group made one further acquisition in the air handling sector, providing it with an entry point into the strategically important German market. This takes total acquisition expenditure for the year to c.£21m.

Despite the near-term slowing of this programme, infill acquisitions remain an important element of SIG's medium-term growth strategy, with those businesses acquired by the Group in recent years continuing to perform strongly.

Supply Chain

The Group is adopting a two-step approach to reshaping its supply chain in order to maximise returns whilst minimising risk to the business.

The first step, from which SIG is targeting £20m annual savings by 2018, and at least £3m in 2016, is centred around utilising SIG's existing network and moving to a hub and spoke model. This is progressing well, with the Group delivering £0.9m savings in the first half of the year.

In the UK, the Group's Exteriors business now has nine hubs which are fully operational, with the remaining nine targeted for completion by the end of the year. In Poland the first of six hubs is also up and running with positive early results, including reduced stock and improved buying terms as full loads are delivered to one location.

SIG Distribution, in conjunction with Unipart, the logistics specialist, launched 'The SIG Way' in February. This significant change programme is focused on further improving the efficiency of stock, warehouse and delivery management as well as delivering an even better service to customers. Having been successfully launched in the Group's Leeds branch, this programme is now being rolled out across the rest of the network.

The second step involves trialling Regional Distribution Centres ("RDCs"), potentially working with third-party logistics providers. If successful, the Group believes that a move to RDCs could secure an additional £30m in savings.

SIG's first new RDC opened on schedule in Dublin in April 2016. Although still early days, the initial performance has been positive. In particular, the use of third party transport providers for customer deliveries has significantly increased the flexibility of its cost base, reducing transportation costs. The second RDC is on track to be opened in the North West of England towards the end of this year.

Strategic Initiatives

SIG continues to make good progress on its Strategic Initiatives to improve business performance, delivering incremental savings of £5.7m in H1 2016, almost all sourced from its procurement initiative, of which £1.7m was in UK & Ireland and £4.0m was in Mainland Europe.

Category management is now fully embedded in the Group and is business as usual. Purchasing is now the responsibility of procurement specialists and is conducted through six international category forums covering roofing, ceilings, technical insulation, structural insulation, air handling and dry lining. This has enabled SIG to consolidate volumes and better leverage its size.

SIG has a high degree of confidence in achieving its 2016 incremental net benefit targets of at least £10m net savings, with further efficiencies thereafter.

Air Handling

SIG Air Handling has continued to grow rapidly, increasing revenues in H1 2016 by 36% to €127.8m, having benefited from acquisitions. On a like-for-like basis sales were up 10%.

In addition SIG has made two acquisitions in the sector this year, providing a platform to enter the strategically important German and Austrian air handling markets. These acquisitions also further enhance the Group's project offering, where it designs and delivers complete system solutions to customers.

SIG is on track to meet its target of growing sales to at least €400m by 2018, mainly from organic growth, with an operating margin in the range of 7-8%.

Offsite Construction

The Group has three businesses, Insulshell, RoofSpace and Metechno, which together provide a single offsite construction proposition. During the first half SIG increased its offsite construction sales by 42% to £14.3m. The business has a strong order book and is benefiting from high levels of customer demand as traditional construction methods are displaced.

The Group is on track to increase sales to at least £150m by 2018, with a double-digit operating margin.

Dividend

SIG is declaring an interim dividend of 1.83p per ordinary share, an increase of 8.3% compared to last year's interim dividend of 1.69p per ordinary share. This increase reflects the Board's commitment to a progressive dividend policy, while maintaining a dividend cover of 2-3x on an underlying basis over the medium term.

The interim dividend will be paid on 4 November 2016 to shareholders on the register at close of business on 7 October 2016. The ex-dividend date is 6 October 2016.

Non-underlying items

Non-underlying items before taxation during the period totalled £9.3m (H1 2015: £13.0m) and included amortisation of acquired intangibles of £5.1m (H1 2015: £4.5m), restructuring costs and other one-off items of £(1.1)m (H1 2015: £4.1m), defined benefit pension scheme curtailment loss of £0.9m (H1 2015: £nil), acquisition expenses and contingent consideration of £3.4m (H1 2015: £3.1m), and net fair value losses on derivative financial instruments and unwinding of provision discounts of £1.0m (H1 2015: £1.3m).

UK & Ireland

· Sales increased 8.8% to £738.9m (H1 2015: £679.2m)

· Underlying operating profit ahead 20.9% to £34.7m (H1 2015: £28.7m)

· Statutory operating profit up 46.5% to £29.0m (H1 2015: £19.8m)

LFL sales for SIG Distribution, the Group's UK Insulation and Interiors business, increased by 2.2% as the business continued to benefit from the sales and operational restructuring undertaken last year. However, trading conditions in the first half remained competitive, particularly in more commoditised product areas.

Following a challenging 2015, with LFL sales declining by 4.3% in the second half, LFL sales in SIG's UK Exteriors business were down 1.0% in H1 2016, suggesting that at least prior to the EU referendum that there were signs that the UK Repairs, Maintenance and Improvement market was stabilising.

SIG delivered good growth in Ireland as the recovery in the construction market continued. Having begun in the residential sector, this recovery has now spread to the commercial market. The Group's Irish business is also benefiting from efficiencies gained from the opening of the new RDC in Dublin.

Mainland Europe

· Sales increased 12.7% to £636.3m (H1 2015: £564.4m)

· Underlying operating profit ahead 10.7% to £23.7m (H1 2015: £21.4m)

· Statutory operating profit up 13.4% to of £21.1m (H1 2015: £18.6m)

* Includes Air Trade Centre

France

The French construction market remained challenging during the first half, with the Group recording a LFL sales decrease of 3.6% in the period. SIG's second quarter performance deteriorated compared to the first quarter, in part, the Group believes, due to widespread industrial action and exceptionally wet weather, which resulted in significant flooding across the country.

SIG is taking a number of actions to improve its performance in France, closing three Larivière branches as part of its supply chain review and increasing its focus on pricing and gross margin as well as keeping a tight control on its cost base.

Furthermore the Group anticipates that the improving residential indicators in France should benefit SIG towards the end of this year and then into 2017, particularly as SIG provides products that are used later in the building cycle.

Germany & Austria

Following a disappointing recent performance, SIG has taken a number of actions to improve the profitability of its business in Germany & Austria.

This includes the appointment of a new management team (Managing Director and Finance Director), additional sales resources, and repositioning its technical insulation business towards higher growth markets. The new MD, Mark Hamori, joined SIG in March 2016 from the Würth Group, a market leader for the distribution of fasteners and tools.

The long-term dynamics of the German construction market remain positive and as market leader in the German specialist insulation and interiors sector SIG believes that it is well positioned to benefit from this growth, particularly under its new leadership team.

Benelux

The Group delivered good growth in the first half in Benelux with sales increasing by 39.7% (including Air Trade Centre), benefiting significantly from air handling acquisitions, and 5.3% on a LFL basis. While the construction market in The Netherlands has continued to recover, led by the residential sector, the non-residential sector has also improved compared to prior year. There are also some initial signs that market conditions in Belgium are starting to stabilise, both in the residential and non-residential sectors.

Poland

Although the residential market in Poland remained robust, the non-residential and industrial sectors, to which SIG is 75% exposed, were very weak in the first half of the year. In this context SIG delivered strong like-for-like sales growth of 4.4% and significantly outperformed the market.

Group outlook

With regard to the EU referendum, SIG observed a slowing of UK construction market activity immediately prior to and following the vote. As a result its like-for-like sales in the UK were flat in June and July, although there was some improvement in trading as July progressed. It should also be noted that SIG is not materially exposed to cross-border transactional risk as it buys and sells the vast majority of its products within country.

Clearly the uncertainties caused by the referendum have made it more difficult for SIG to assess the trading outlook, particularly in the near-term, and therefore the Group is closely monitoring market developments in order to address any variances that arise. That being said, based on its current experience, SIG continues to expect to make progress this year as it benefits from the Strategic Initiatives, acquisitions and value added sales, together with foreign exchange translation on its earnings in Mainland Europe.

Responsibility Statement

We confirm to the best of our knowledge that:

(a) the condensed interim set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union;

(b) the Interim Report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the Interim Report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

Cautionary Statement

This Interim Report has been prepared in accordance with the requirements of English Company Law and the liabilities of the Directors in connection with this Interim Report shall be subject to the limitations and restrictions provided by such law.

This Interim Report is prepared for and addressed only to the Company's shareholders as a whole and to no other person. The Company, its Directors, employees, agents or advisors do not accept or assume responsibility to any other person to whom this Interim Report is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed.

Certain information included in this Interim Report is forward looking and involves risk and uncertainties that could cause the actual results to differ materially from those expressed or implied by forward looking statements. 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 future outcomes to differ from those foreseen in forward looking statements, including but not limited to, the level of market demand in SIG's operating markets, competitors and margin management, commercial relationships, government legislation, debt, working capital and cash management, IT infrastructure and cybersecurity and availability and quality of key resources. All statements in this Interim Report are based upon information known to the Company at the date of this report. The Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise.

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

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

Notes to the Condensed Interim Financial Statements

1. Basis of preparation of Condensed Interim Financial Statements

The Condensed Interim Financial Statements were approved by the Board of Directors on 8 August 2016.

The Condensed Interim Financial Statements do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The interim results to 30 June 2016 and 30 June 2015 have been subject to an Interim Review in accordance with ISRE 2410 by the Company's Auditor. The financial information for the full preceding year is based on the audited statutory accounts for the financial year ended 31 December 2015 prepared in accordance with IFRS as adopted by the European Union. Those accounts, upon which the Auditor issued an unqualified opinion, have been delivered to the Registrar of Companies. The Auditor's Report did not draw attention to any matters by way of emphasis and contained no statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

The Group's Condensed Interim Financial Statements have been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union and the accounting policies included in the Annual Report and Accounts for the year ended 31 December 2015, which have been applied consistently throughout the current and preceding periods with the exception of new standards adopted in the current period (see below).

The areas of critical accounting judgments and key sources of estimation uncertainty set out on page 114 of the 2015 Annual Report and Accounts are considered to continue and be consistently applied.

As at 30 June 2016, the Group has tested goodwill and the related intangible assets and property, plant and equipment associated with the Larivière CGU, noting a reduction in headroom. The current forecasts provide headroom of c.€2m (30 June 2015: c.€82m; 31 December 2015: c.€49m). The Board has actively reviewed the forecast associated with Larivière, considering the assumptions used and, in a challenging economic environment, its continued outperformance of the markets in which it operates, and is satisfied that no impairment is necessary. If a 5% reduction in revenue were to arise from the forecast used in the impairment review of Larivière, with no mitigating actions undertaken, there would be an impairment of c.£37m.

All results are from continuing operations under International Accounting Standards as the operations closed in 2015 did not meet the disclosure criteria of IFRS 5 "Discontinued Operations" since they did not represent a separate major line of business or geographical area of operation. In order to give an indication of the underlying earnings of the Group, the results of these businesses have been included within Other items in the Condensed Consolidated Income Statement. The comparatives for the period ending 30 June 2015 have been re-analysed to present operating losses and business closure costs of £0.7m associated with the Group's operations in the Kingdom of Saudi Arabia, which were closed in the second half of 2015, within Other items.

Going Concern

The Directors have considered the Group's forecasts which support the view that the Group will be able to continue to operate within its banking facilities and comply with its banking covenants. Through its various business activities the Group is exposed to a number of risks and uncertainties (see Note 14), which could affect the Group's ability to meet these forecasts and hence its ability to meet its banking covenants. The Directors have considered the challenging trading conditions, the current competitive environment and markets in which the Group's businesses operate and associated credit risks, together with the available ongoing committed finance facilities and the potential actions that can be taken, should revenues be worse than expected, to protect operating profits and cash flows. After making enquiries, the Directors have formed a judgment that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the going concern basis has been adopted in preparing this Interim Report.

Changes in accounting policy

Adoption of new and revised accounting standards

Since the 2015 Annual Report and Accounts were published no significant new standards and interpretations have been issued.

The following new and revised standards became effective during 2016:

· IAS 1 "Disclosure Initiative" - effective for accounting periods beginning on or after 1 January 2016;

· IAS 16 and IAS 38 "Clarification of Acceptable Methods of Depreciation and Amortisation" - effective for accounting periods beginning on or after 1 January 2016;

· IAS 27 "Equity Method in Separate Financial Statements" (amendments) - effective for accounting periods beginning on or after 1 January 2016; and

· IFRS 11 "Joint Arrangements" (amended) - effective for accounting periods beginning on or after 1 January 2016.

The adoption of these standards has not had a material impact on the financial statements of the Group.