SIG Regulatory News (SHI)

24 September 2020

SIG plc

Results for the six months ended 30 June 2020

Successful recapitalisation provides foundation for new growth strategy

SIG plc ("SIG", "the Group" or "the Company") is a leading supplier of specialist building solutions to trade customers across Europe, with strong positions in its core markets as a market leading supplier of insulation and interiors solutions to the construction industry, and a specialist merchant of roofing materials for small to medium sized construction businesses. The Group today announces its half year results for the six months ended 30 June 2020 ("H1 2020" or "the period").

Strategic and operational highlights

· New leadership team appointed

· Successful restructuring of the Group's financing facilities and capital raise of £165m, concluded in July, including £83m equity investment by Clayton, Dubilier & Rice LLC

· Post capital raise, substantial liquidity headroom provides security against ongoing market uncertainty and confidence to invest in new growth strategy, with a net cash position at 31 August of £29m, pre IFRS 16

· Branch and customer-centric restructuring in the UK progressing to plan; Germany and Benelux also refocusing under new combined team

· The Group has been able to trade safely, working closely and flexibly with our employees, customers and suppliers to adapt to new Covid-19 norms

Financial results

· Like-for-like H1 sales down 23.9% on prior year, impacted by Covid-19

· Gross margin down 50bps due to lower volumes. Group underlying operating loss of £43.2m (H1 2019: £29.1m profit)

· Underlying LBT of £53.7m (H1 2019: £17.4m profit) and underlying loss per share of 9.1p (H1 2019: 2.1p earning per share)

· Statutory loss before tax from continuing operations of £125.4m (H1 2019: profit before tax of £2.2m) reflecting £71.7m of Other items, including £42.8m of impairment of goodwill in the UK businesses, mainly reflecting the impact of Covid-19

· Net debt, pre IFRS 16, down to £90.0m (H1 2019: £158.2m), helped by sale of Air Handling division in January

Current trading and outlook

· Market fundamentals remain sound and near-term order books give an element of encouragement, but there remains significant economic uncertainty

· Trading following initial estimates of immediate H1 Covid-19 impact was better than anticipated, and the Board now expects full year sales to be moderately higher than guided in May

· H2 expected to remain loss-making, but at a lower rate than H1

· Net cash outflow expected in H2 due to unwind of tax deferrals (government supported Covid-19 schemes) and cessation of some historical year-end and half-year working capital practices

1. Underlying operations excludes businesses divested or closed, or which the Board has resolved to divest or close by 23 September 2020.

2. Like-for-like (LFL) is defined as sales per working day in constant currency excluding acquisitions and disposals completed or agreed in the prior year, or before announcement of the Group's results for the relevant period. Sales are not adjusted for branch openings or closures. LFL sales differ from the previous trading statement primarily as a result of the reclassification of non-core businesses.

3. Underlying represents the results before Other items. Other items relate to the amortisation of acquired intangibles, impairment charges, profits and losses on agreed sale or closure of non-core businesses and associated impairment charges, net operating profits and losses attributable to businesses identified as non-core, net restructuring costs, investment in omnichannel retailing, other specific items, fair value gains and losses on derivative financial instruments, the taxation effect of Other items and the effect of changes in taxation rates. Other items have been disclosed separately in order to give an indication of the underlying earnings of the Group.

4. Statutory results of Continuing operations only.

5. Statutory results including both Continuing and Discontinued operations.

Commenting, Steve Francis, Chief Executive Officer, said:

"I would like to thank all our people for their resilience and commitment in the face of the very challenging circumstances of recent months, the effects of which clearly impacted our first half results. Providing a safe environment and instilling an even greater focus on good health and safety behaviours have been a major focus of the new management team.

"In mid-summer, we concluded the successful restructure of our financing facilities and a £165m capital raise. These, along with our careful management of working capital and cash in recent months, have created a sound financial base on which we can rebuild the business.

"The new management team has started to execute its strategy and implement its organisational model, which focuses on our local branch teams, enabling growth and returning to active industry leadership. As previously stated, the essence of our new strategy is re-connection with our people - employees, customers, suppliers and the communities in which we do business. We are a local, sales and service-driven business. We firmly believe that our new strategy for growth will provide the basis, not only for the restoration of profit and strong cash conversion, but also serve as a foundation to play a leading role in our industry in the years to come.

"Long term fundamentals remain sound in the Group's markets across Europe. In the short term, significant economic uncertainty remains in all of our markets, although government stimulus for the construction sector, notably in the UK, is welcome.

"Trading was better than anticipated during the peak lockdown months of March to May, compared to our initial estimates of the possible Covid-19 impact, and the Board now expects full year sales to be moderately higher than guided in May. Group sales in July and August were encouraging although down year on year, and market share losses during 2019, particularly in the UK distribution business, will take time to recover. The second half of 2020 is expected to remain loss making, but at a lower rate than the first despite some increased pressure on gross margin in the UK.

"I am extremely encouraged by the energy and excitement with which our people have embraced the new strategy and by the initial progress made in a short space of time.

"The Group demonstrated agility and resilience in the first half of the year, dealing with an unprecedented external challenge, and significant internal change and activity. Coupled with a strengthened balance sheet, the foundations are now in place for the business to grow."

Investor and Analyst presentation (9am today)

A webcast of the Group's briefing for analysts and investors will take place today at 9am, a recording of which will also be available later in the day on the investor page of the company's website, www.sigplc.com.

Please click this URL to join. https://storm-virtual-uk.zoom.us/j/81232011672

Or join by phone:United Kingdom: +44 203 481 5240 / +44 203 901 7895 / +44 131 460 1196 / +44 203 051 2874 / +44 203 481 5237Webinar ID: 812 3201 1672International numbers available: https://storm-virtual-uk.zoom.us/u/kbsO8Tkr7C

LEI: 213800VDC1BKJEZ8PV53

Enquiries

The first half has been a transformational period for the Group. In order to return to profitable growth and win back market share, a new management team has been appointed to develop a new, customer-centric strategy that reprioritises sales and re-establishes SIG's traditional strengths of being an experienced, technically strong and service-focused local sales business. In July, the Group concluded the successful renegotiation of its debt arrangements and capital raise. These actions, along with careful management of working capital and cash in recent months, have created a sound financial base on which to rebuild the business.

Covid-19

We acted quickly to develop a coordinated and decisive response to Covid-19 to support our operating companies, to ensure the health and safety of our people, customers, suppliers and local communities within which we operate and to minimise the adverse impacts on our businesses. Collective actions across all central support and operations functions at branch, regional and Group management levels were implemented, under demanding circumstances, in accordance with local government guidelines.

In response to the challenges posed by the pandemic, we acted swiftly to reduce costs, optimise cash flow, protect the Group's liquidity and, where necessary, change our ways of operation and how we interacted with both suppliers and customers.

The furloughing of employees for a limited period, combined with other wage saving initiatives and, where available, accessing various government support schemes in all of its countries of operation, enabled the Group to support its cash position in the period. From 1 April to 30 June 2020, the Board of Directors and the Group Executive Leadership Team took pay reductions. Additionally, the majority of the UK and Ireland employees took lower pay during April, the period when those businesses were, effectively, closed.

The Board also took the decision not to declare a full year 2019 dividend.

The ability of the Group to respond effectively to the Covid-19 pandemic and to maintain its liquidity position during this unprecedented period of extreme uncertainty reflects the effectiveness of the mitigating actions initiated by the Board, and the agility and resilience of the organisation, and points towards the successful adoption of the new strategy as the Group emerges from this period of business disruption.

H1 Trading

Overall, the Group performed better than initial internal estimates made at the beginning of the pandemic. Nevertheless, trading in the first half was significantly impacted by Covid-19, particularly in March and April during the most severe lockdown period in the majority of markets. With the easing of lockdown restrictions in May and June, the Group saw a gradual improvement in trading performance, accompanied by a corresponding improvement in profitability.

January to February

The Group's underlying revenue for the two months ended 29 February 2020 was £296.0m, down by £36.9m from the prior year (two months ended 28 February 2019: £332.9m), a like-for-like decline of 11.1%. Trading in the UK and Germany saw a continuation of the challenging trends seen in the last quarter of 2019, whilst trading activity in the rest of Europe was relatively stable.

Due to reduced sales volumes in key markets, the gross profit margin fell compared to the prior year period (two months ended 28 February 2019).

March to April

As announced on 29 May 2020, the Group's underlying revenue for the two months ended 30 April 2020 was £235.0m, down by £138.8m from the prior year (two months ended 30 April 2019: £373.8m). Revenues in the period were significantly impacted by the Covid-19 outbreak, particularly in the UK, Ireland and France, with the Group's underlying like-for-like revenues down 37.7% over the two months.

On 30 March 2020, the Group announced that large parts of its UK market had seen sales fall away rapidly, in common with the broader construction industry. It was concluded that it was necessary and appropriate to temporarily close UK operations. Trading sites in Ireland were also temporarily closed due to restrictions implemented by the Irish Government. The UK and Ireland businesses remained open to service critical and emergency projects only, such as for the NHS, energy and food sectors.

Trading activity in France was affected by the short-term closure of all branches for three days in mid-March, which was followed by a staged reopening throughout April. Like-for-like revenues in France during this two-month period were down 39.0%.

The Group's operating companies in Germany, Poland and Benelux were also impacted by government measures, albeit to a lesser extent.

Similar to the first two months, the Group's gross profit margin in March and April was negatively impacted by the decline in overall sales, combined with a shift in mix away from the more profitable roofing merchanting businesses in the UK and France.

During this period, the Group took a number of decisive cost saving actions and also accessed government-supported job retention schemes, resulting in a reduction in its operating costs year on year.

May to June

The Group witnessed a gradual improvement in trading performance throughout May and June 2020, particularly in the UK and Ireland where branches continued to reopen during May as lockdown restrictions were eased. The Group's underlying like-for-like sales over May and June were down 21.7%, with May 35.7% down and June improving to just 8.0% down on 2019.

In the UK and Ireland, average daily sales began to recover in May, at which point all but two of the UK and Ireland sites had reopened. This positive revenue trend continued throughout June with combined like-for-like revenues in May and June down 40.9%.

France also demonstrated a strong recovery during May, despite the fact that parts of the French construction market were not fully open, reflecting the release of pent-up demand during the lockdown period, and signalling optimism for the early summer trading period when sales are seasonally strongest. Average daily sales continued to improve in June.

Sales in Germany, Poland and Benelux remained stable during May, with further improvement during June. On a combined basis, like-for-like sales were 10.0% behind prior year over the two-month period.

Profitability across the Group also improved materially during May and June, albeit the Group was still loss making overall. The improvements were driven by a combination of the improved trading performance, particularly in the UK and Ireland, the decisive cost actions by management, and continued governmental support.

Liquidity and balance sheet strengthening

The successful renegotiation of the Group's debt facilities in the summer resulted in a resetting of its covenant requirements, with consolidated net debt and liquidity covenants to be tested monthly through to February 2022. From March 2022, covenants over the Group's liquidity, leverage and interest cover will be tested on a quarterly basis. Consolidated net worth will also be tested, throughout the above periods.

The significant loss of revenues in 2020 impacted profitability, cash generation and therefore debt levels, though the immediate and comprehensive set of actions enacted across the business around cash conservation, coupled with the receipt of the sale proceeds of the Air Handling division, meant that the Group was able to preserve its liquidity throughout the period.

In the announcement of its full year 2019 results on 29 May 2020, the Group reported that it had cash resources of £155.3m as at 30 April, with a net debt position, pre IFRS 16, of £114.1m. As at 30 June, the cash position had improved to £197.3m with net debt, pre IFRS 16, of £90.0m. This improvement reflects improved levels of profitability, a continuation of cost control actions and utilisation of government support schemes, as well as an ongoing rigorous, though careful, management of working capital.

In mid-July, the Group completed a successful capital raise, as previously announced, raising gross proceeds of £165m (£153m net of related costs). In addition, approximately £13m costs were paid in relation to the debt refinancing.

As at 31 August, the Group had cash resources of £267.5m, with a net cash position, pre IFRS 16, of £29.2m. Approximately £13m of deferred payments relating to government support schemes will unwind over the coming months, the majority doing so in H2 2020. The settlement of these deferrals, the cessation of some historical year-end working capital practices, as well as a carefully managed increase in stock levels in parts of the business to improve the service to customers and to support the Group's sales growth, will result in working capital levels increasing over H2. This increase in working capital will be funded from the Group's available resources.

Strategy update: re-connect, re-energise and re-set

On 29 May, the Group launched its new strategy for growth. The restructuring of its debt facilities and the successful capital raise provide firm and stable foundations for this strategy to be delivered. Fundamental to the new strategy is the recognition that SIG is a sales-led organisation, where the ability to grow its customer base through the provision of high levels of customer service and disciplined pricing are critical. The establishment of strong customer relationships, by empowering and energising key account and branch teams, and promoting an entrepreneurial spirit throughout the company's extensive branch network, is key to this objective.

With a strong executive team in position, and the strengthening of the senior management teams across a number of areas of the business over the past few months, particularly in the UK and Germany, the Board is confident that the Group will deliver a significant improvement in its operational and financial performance over the medium term and achieve its vision of being the leading B2B distributor of specialist construction products in the markets in which it operates.

The implementation of the strategy is now underway. In the UK and Germany, where the Group's operational and financial performance has seen greater deterioration, the new strategy is initially focusing on repairing the operational foundations of these businesses so as to provide the appropriate platform from which market share can be recaptured and profitable growth restored. In France, Benelux, Poland and Ireland, where the Group's operational and financial performance has been more stable, the new strategy is empowering the Group's operating companies to move onto a growth footing.

The Group's new strategy for growth is shaped around seven key pillars which have been developed over the past few months and can be summarised as follows:

o Sustainable behaviours: establishing a sustainable and wholly recognisable set of behaviours across the Group's workforce so that our people feel safe, valued and proud to be SIG employees

o Branch focus: developing our branch-based employees to create an entrepreneurial and well-trained workforce

o Sales and customer focus: driving a sales-led culture by strengthening sales capacity and productivity, with the key focus being one of customer service

o Superior expertise: re-establishing specialist focus and expertise across all customer-facing functions of the organisation

o Closer to suppliers and markets: gaining market share through enhanced customer proximity and service, and re-partnering with suppliers

o High productivity: investing in consistent and highly productive support functions, with a strong governance framework and robust financial disciplines

o Expansive vision: recognising and building on the company's core strengths as a platform for acquisitive growth

Through the implementation of these strategic pillars, supported by the strengthened balance sheet and strong leadership teams across the organisation, the Board is confident that SIG will return to sustainable and long term profitable growth, recognising that the primary short term focus for the Group is to recapture the market share that it has lost over recent years.

Market share recapture plan

The Group's market share recapture plan, particularly for SIG's UK businesses, Distribution and Exteriors, as well as for its Germany and Benelux businesses, is built upon five key enablers.

Merger of leadership of UK Distribution and Exteriors

The UK's Distribution and Exteriors businesses have now been merged to create a single UK division, with a combined leadership team replicating the model already deployed in SIG France, which will leverage potential synergies in support functions whilst maintaining separate commercial organisations and footprints (primarily branches). The new regional structure of the combined business will focus on promoting local entrepreneurship, accountability and P&L account responsibility.

Combined Germany and Benelux businesses

A similar combined management approach to that now deployed in the UK and France is close to finalisation across the German and Benelux businesses. Due to their geographic positions, the cost synergies are expected to be less than those in the UK.

A clearer understanding of "core" business

In light of the new strategy for growth, the Group has now commenced a review to refine the definitions of its marketplace and thereby revise and expand the definition of "core" business. This is designed to facilitate the development of a more expansive growth strategy in each of the Group's countries of operation. The Company expects this review to highlight opportunities, consistent with the Group's USPs (Expertise, Proximity, Service), to widen its product offering and expand its geographic coverage.

Energise sales and market share recovery and growth efforts

The Group plans to improve proximity to its customers by identifying and filling gaps in its geographical coverage. Sales forces are being expanded and up-skilled by restoring their historic industry-leading, bench-strength of specialist local expertise in areas such as fire protection, energy efficiency and sustainable materials. Salesforce productivity will also be increased through enhanced sales management and training, supported by salesforce management tools, disciplines and aligned incentives, with customer reconnection a top priority.

Facilitate growth through better operations

A number of actions are underway in the Group's operations to increase efficiency and service levels to boost the sales effort, including:

o pricing tools and training for key account and branch managers, providing enhanced visibility and autonomy to set pricing quickly and competitively;

o improved product availability through the use of enhanced systems and more accurate operational key performance indicators, such as stock availability;

o enhanced on time and in full delivery; and

o additional training, which is being provided to the Group's workforce in order to promote operational excellence and customer service.

Portfolio management

As announced on 3 February 2020, the Company completed the sale of its Air Handling division to France Air Management SA for an enterprise value of €222.7m (c.£187.0m) on a cash free, debt free basis on 31 January 2020. The net proceeds received by SIG were €180.9m (c.£151.9m), exclusive of the repayment of debt owed to SIG by the Air Handling division of €40.9m (c.£34.3m). The results from this business have been excluded from the reported underlying results and are shown as a discontinued operation in order to provide a better understanding of the Group's underlying performance in the continuing businesses.

The Building Solutions business was classified as held for sale at 31 December 2019, as a sale to Kingspan had been agreed and was due to complete in first half of 2020 subject to approval from the UK Competition & Markets Authority (CMA). On 21 May 2020, the Group announced that the parties had agreed to terminate the sales agreement as terms could not be agreed for the extension of the agreement to enable the completion of the CMA phase 2 investigation. The business continues to be classified as non-core but does not meet the criteria to be presented as held for sale at 30 June 2020.

Dividend

The Board took the decision not to declare and pay a final dividend for the 2019 financial year, in the interest of preserving the Group's liquidity position. No interim dividend for the current year will be paid (2019: 1.25p) under the terms of the Group's amended debt arrangements and nor will a final dividend be declared.

People

The Board would like to thank all employees of SIG for their continued commitment and resilience in what has been a challenging six months, particularly in relation to the ongoing Covid-19 pandemic. The key priority for the Group continues to be ensuring that all necessary measures are taken in line with government safety guidelines to protect the health and safety of employees, suppliers, customers and other partners. The Board is pleased to report that of the c.2,000 Group employees who were put on furlough (principally in the UK, Ireland and France), the vast majority are now back at work.

Current trading and outlook

Long term fundamentals remain sound in the Group's markets across Europe. In the short term, significant economic uncertainty remains in all of our markets, although government stimulus for the construction sector, notably in the UK, is welcome.

Trading was better than anticipated during the peak lockdown months of March to May, compared to our initial estimates of the possible Covid-19 impact, and the Board now expects full year sales to be moderately higher than guided in May. Group sales in July and August were encouraging although down year on year, and market share losses during 2019, particularly in the UK distribution business, will take time to recover.

The second half of 2020 is expected to remain loss making, but at a lower rate than the first despite some increased pressure on gross margin in the UK.

As at 31 August, the Group had cash resources of £267.5m, with a net cash position, pre IFRS 16, of £29.2m. Approximately £13m of deferred payments relating to government support schemes will unwind over the coming months, the majority doing so in H2 2020, and in aggregate H2 is expected to generate a cash outflow, as previously outlined above.

The Group demonstrated agility and resilience in the first half of the year, dealing with an unprecedented external challenge, and significant internal change and activity. Coupled with a strengthened balance sheet, the foundations are now in place for the business to grow.

Revenue and gross margin

The Group saw a 23.9% decline in its like-for-like (LFL) revenue over the period, including a favourable 0.1% currency movement and an adverse 0.3% impact from fewer working days. Group underlying revenue was down 23.7% to £817.7m (H1 2019: £1,071.5m), impacted by Covid-19.

Underlying results exclude the results from the businesses that are classified as non-core in order to provide a better understanding of the underlying performance of the Group. These businesses reported sales of £22.4m (H1 2019: £41.8m). On a statutory basis, Group revenue was £840.1m (H1 2019: £1,113.3m).

The Group's underlying gross margin decreased by 50bps to 24.8% (H1 2019: 25.3%) and underlying gross profit reduced by £68.2m to £203.0m (H1 2019: £271.2m), reflecting lower rebate receipts due to decreased revenue volumes. On a statutory basis, the Group's gross margin decreased by 40bps to 24.9% (H1 2019: 25.3%) and statutory gross profit fell from £282.1m to £209.5m.

Operating costs and profit

The Group's underlying operating costs were £246.2m (H1 2019: £242.1m). The increase is primarily due to the release of a number of one-off accruals and provisions in H1 2019, which reduced the comparator, some temporary costs related to the UK and broader Group reorganisations, additions to bad debt reserves in response to Covid-19 uncertainty, and cost inflation. These increases were partially offset by c.£10m benefit from furlough schemes and wage saving initiatives. The Group's underlying operating loss was £43.2m (H1 2019: £29.1m profit) and at a statutory level the Group's operating loss was £102.9m (H1 2019: £14.2m profit) after non-underlying items of £59.7m (H1 2019: £14.9m), including £42.8m impairment charges relating to impairment of goodwill in the UK businesses following the reassessment of trading expectations to reflect the impact of Covid-19, £6.9m costs associated with refinancing, and £4.1m costs relating to investment in omnichannel retailing.

The Group's underlying net finance costs decreased to £10.5m (H1 2019: £11.7m), resulting in underlying loss before tax of £53.7m (H1 2019: £17.4m profit). On a statutory basis, the Group saw a loss before tax of £125.4m (H1 2019: £2.2m profit) after non-underlying items of £71.7m (H1 2019: £15.2m), including a £11.3m loss on modification recognised in relation to the private placement notes.

The Group's underlying tax credit for the period was £0.1m (H1 2019: £4.7m charge), representing an underlying effective tax rate credit of 0.2% (H1 2019: 26.7%). After Other items, the total tax credit was £0.8m (H1 2019: £1.5m charge).

Segmental analysis

As a result of recent organisational changes, we have reassessed our operating segments to ensure they are appropriate. In 2019, the reportable operating segments were grouped on a line of business basis with subtotals for Specialist Distribution and Roofing Merchanting. There is no change to the reported operating segments from those reported in the 2019 Annual Report and Accounts, but the segments are now grouped on a geographical basis instead of on a line of business basis. This reflects the way in which information is reported and reviewed by the Chief Operating Decision Maker (CODM) following the change in management and strategy during 2020.

UK

Underlying revenue in UK Distribution, a market leading specialist insulation and interiors distribution business, was down 47.5% to £154.9m (H1 2019: £295.2m). Underlying gross margin dropped to 22.9% (H1 2019: 24.9%). The lockdown during March and April severely impacted UK trading and as a result, combined with some continued underlying weakness in performance, underlying operating loss for the half year was £27.4m (H1 2019: £6.8m profit). On a statutory basis, after taking into account Other items, notably an impairment charge of £31.0m due primarily to the Covid-19 impact, UK Distribution reported an operating loss of £61.0m (H1 2019: £2.6m profit).

UK Exteriors, a market leading and national specialist roofing merchant, saw underlying revenue fall by 27.6% to £104.1m (H1 2019: £143.5m). Gross margin decreased 170bps to 27.2% (H1 2019: 28.9%). As a result of the trading impact of Covid-19, the business saw an underlying operating loss of £8.9m (H1 2019: £5.1m profit). On a statutory basis, after taking into account Other items, notably an impairment charge of £11.8m due primarily to the Covid-19 impact, UK Exteriors reported an operating loss of £23.4m (H1 2019: £2.0m profit).

France

Trading activity suffered a temporary setback in France following the short term closure of all branches for three days in mid-March. The businesses then commenced a staged reopening through into May.

In France Distribution, trading as LiTT, a leading structural insulation and interior business, underlying revenue decreased by 20.6% to £73.8m (H1 2019: £93.0m), impacted by the aforementioned temporary lockdown. However, underlying gross margin increased 280bps to 26.4% (H1 2019: 23.6%), largely enabled by the introduction of a new pricing framework during the latter stages of 2019. The reduction in revenue, offset by improved margin, resulted in a £5.3m decrease in underlying operating profit to £1.3m (H1 2019: £6.6m). On a statutory basis, after taking into account Other items, France Distribution reported an operating profit of £1.3m (H1 2019: £6.6m).

Underlying revenue in France Exteriors, trading as Larivière, a market leading specialist roofing business, decreased by 10.4% to £154.4m (H1 2019: £172.4m), also impacted by the lockdown. Underlying gross margin remained relatively stable at 23.6% (H1 2019: 23.3%). This resulted in a £2.6m decrease in underlying operating profit to £1.6m (H1 2019: £4.2m). On a statutory basis, after taking into account Other items, France Exteriors reported an operating profit of £1.1m (H1 2019: £2.8m).

Germany and Benelux

The Group's operating companies in Germany and Benelux were impacted by government measures due to Covid-19 but to a lesser extent than in the UK, Ireland and France, and trading continued from all sites throughout the period.

Underlying revenue in a specialist insulation and interiors distribution business in Germany, trading as WeGo/VTi, fell by 7.5% to £177.1m (H1 2019: £191.5m). In addition to Covid-19, trading in Germany saw a continuation of the challenging trends seen in the last quarter of 2019. However, underlying gross margin increased 60bps to 28.2% (H1 2019: 27.6%) assisted by further enhancements around pricing controls. As a result, underlying operating loss for the period was £1.3m (H1 2019: £3.3m profit). On a statutory basis, after taking into account Other items, Germany reported a loss of £1.1m (H1 2019: £1.9m loss).

Underlying revenue from the Group's distributor of insulation and interiors in the Benelux region fell by 11.3% to £47.7m (H1 2019: £53.7m). Underlying gross margin decreased slightly to 24.5% (H1 2019: 24.8%). As a result, operating profit decreased to £1.8m (H1 2019: £2.9m). On a statutory basis, after taking into account Other items, Benelux reported an operating profit of £1.4m (H1 2019: £2.7m).

Ireland

In Ireland, a specialist distributor of interiors, insulation and construction accessories, revenues in March to April were significantly impacted by the Covid-19 pandemic, with a gradual improvement in performance in May to June as branches began to reopen. Underlying revenue declined by 29.7% to £33.4m (H1 2019: £47.5m). Underlying gross margin dropped to 21.9% (H1 2019: 24.9%). Underlying operating loss was £1.4m (H1 2019: £2.9m profit) and on a statutory basis, after taking into account Other items, Ireland reported an operating loss of £1.4m (H1 2019: £2.1m profit).

Poland

In Poland, a market leading distributor of insulation and interiors, underlying revenue fell to £72.3m (H1 2019: £74.7m). Whilst also impacted by government measures, trading continued from all sites throughout the period. However, underlying gross margin increased slightly to 20.6% (H1 2019: 20.3%), reflecting a change in customer sales mix during the period, with greater volumes coming from its sole trader and small company customer base, where margins are usually higher. The business delivered an underlying and statutory operating profit of £0.6m (H1 2019: £1.3m).

Air Handling disposal complete

The Group completed the sale of its Air Handling division on 31 January 2020. The Air Handling division delivered revenue for the period of £25.4m (H1 2019: £159.3m) and underlying operating profit of £1.1m (H1 2019: £9.2m). The results from this business are shown as a discontinued operation.

Other items

Other items, being items excluded from underlying results, during the period amounted to £71.7m (H1 2019: £15.2m) on a pre-tax basis, and comprised:

· Amortisation of acquired intangibles of £2.8m (H1 2019: £3.1m);

· Impairment charges of £42.8m (H1 2019: £nil), relating to impairment of goodwill in the UK businesses following the reassessment of trading expectations to reflect the impact of Covid-19;

· Profits and losses on the sale or closure of non-core businesses and associated impairment charges of £1.4m profit (H1 2019: £0.9m loss), together with net operating profit from those businesses of £0.1m (H1 2010: £1.4m);

· Net restructuring costs of £3.5m comprising property closure costs of £0.7m (H1 2019: £0.5m), redundancy and staff related costs of £0.8m (H1 2019: £6.1m), impairment of non-current and current assets due to restructuring of £0.1m (H1 2019: £0.5m), restructuring consultancy costs of £1.7m (H1 2019: £5.1m) and £0.2m other (H1 2019: £nil), primarily incurred in connection with the fundamental restructuring of the target operating model of the major operating companies in the UK, Germany and France;

· Costs relating to investment in omnichannel retailing of £4.1m (H1 2019: £nil);

· Costs associated with refinancing £6.9m (H1 2019: £nil);

· Other specific items of £1.1m (H1 2019: £0.1m), including £1.7m of fees in relation to a PwC independent review offset by £0.6m gain in forward currency options;

· Non underlying finance costs £12.0m (H1 2019: £0.3m), including £11.3m loss on modification recognised in relation to the private placement notes.

Impact of non-core businesses

H1 2019 has been restated to reflect the business divestments classified as non-underlying subsequent to the 2019 interim announcement (Building Solutions and Maury) and the presentation of the Air Handling division as discontinued. Please refer to the table below.

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 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 such responsibility or liability is expressly disclaimed.

This Interim Report 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 Interim Report 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, market conditions, competitors and margin management, commercial relationships, fluctuations in product pricing, changes in foreign exchange and interest rates, government legislation, availability of funding, working capital and cash management, IT infrastructure and cyber security and availability and quality of key resources.

The Company's Shareholders are cautioned not to place undue reliance on the forward-looking statements. This Interim Report has not been audited or otherwise independently verified. The information contained in this Interim Report 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 Interim Report during the financial year ahead.

* Underlying represents the results before Other items.

** Other items relate to the amortisation of acquired intangibles, impairment charges, profits and losses on agreed sale or closure of non-core businesses and associated impairment charges, net operating profit/(losses) attributable to businesses identified as non-core, net restructuring costs, investment in omnichannel retailing, other specific items, fair value gains and losses on derivative financial instruments, non-underlying finance costs, the taxation effect of Other items and the effect of changes in taxation rates. Other items have been disclosed separately in order to give an indication of the underlying earnings of the Group. Further details can be found in Note 4.

^ The results for the period to 30 June 2019 have been restated to present Air Handling as a discontinued operation. See Note 1 and Note 8 for further details.

* As part of the changes to the debt facility agreements on 18 June 2020 (see Note 1), £70.0m drawn under the existing revolving credit facility was converted into a £70.0m term facility, with no additional repayment or drawdown made.

** Cash and cash equivalents comprise cash at bank and on hand of £197.3m (30 June 2019: £153.1m; 31 December 2019: £145.1m) less bank overdrafts of £nil (30 June 2019: £5.6m; 31 December 2019: £nil)

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 represent movements in the Condensed Consolidated Balance Sheet as a result of movements in exchange rates and movements in the fair value of cash flow hedges 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 24 September 2020.

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 2020 and 30 June 2019 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 2019 prepared in accordance with IFRS as adopted by the European Union. Those accounts have been delivered to the Registrar of Companies. The Auditor's Report was (i) unqualified, (ii) contained a number of material uncertainties in respect of going concern to which the auditor drew attention by way of emphasis without modifying their report and (iii) did not contain statements under Section 498(2) or Section 498(3) of the Companies Act 2006 in relation to the financial statements.

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 2019, which have been applied consistently throughout the current and preceding periods. In 2019 the reportable operating segments were grouped on a line of business basis with subtotals for Specialist Distribution and Roofing Merchanting. There is no change to the reportable operating segments from those reported in the 2019 Annual Report and Accounts, but the segments are now grouped on a geographical basis instead of a line of business basis. This reflects the way in which information is reported and reviewed by the Chief Operating Decision Maker (CODM) following the change in management and strategy during 2020.

The areas of critical accounting judgements and key sources of estimation uncertainty set out on pages 154 to 155 of the 2019 Annual Report and Accounts are considered to continue and be consistently applied. The impact of Covid-19 on the key sources of estimation has been considered. The carrying value of non-current assets has been reviewed, which has resulted in an impairment of £42.8m being recognised at 30 June 2020 in relation to the UK Distribution and UK Exteriors CGUs. Provisions for expected credit losses in relation to trade receivables have been considered, but this has not resulted in any significant increase in the level of provision required.

The Air Handling business, which has been sold during the period, was classified as a discontinued operation in the 2019 Annual Report and Accounts and the results for the period to the date of disposal continue to be classified as discontinued in these interim financial statements, together with the gain on sale. The comparatives for the period to 30 June 2019 have been restated to present the results for Air Handling on a consistent basis. Other businesses identified as non-core in 2019 did not meet the disclosure criteria of being discontinued operations as they did not individually or in aggregate 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 2019 have been re-analysed to present net operating profits of £1.6m attributable to businesses identified as non-core in the second half of 2019 within Other items.

Significant changes in the current reporting period

The Covid-19 pandemic has had a significant impact on the global and UK economies and on the Group's results for the period ended 30 June 2020, as explained in more detail below and in the operational and financial review. The Group has completed the sale of the Air Handling business during the period, with further details of the impact on the results for the period included in Note 8 to these interim financial statements. The Group has also amended the terms of its financing arrangements, as explained below and in Note 4.

As disclosed in the 2019 Annual Report and Accounts, the project to implement SAP 1Hana in Germany and France has been paused during the period in light of the Covid-19 situation and to allow new senior management to fully assess the overall IT strategy. A decision will be made over the coming months to determine the future direction and feasibility of the project. Costs of £13.6m are included in intangible assets at 30 June 2020.

Going Concern

The Group closely monitors its funding position throughout the year, including monitoring compliance with covenants and available facilities to ensure it has sufficient headroom to fund operations.

Following a challenging trading period in 2019 and a change in its Executive Directors in February 2020, the Group undertook an extensive review of its business and operating strategy together with potential growth opportunities. During these reviews, it became clear that revised lower forecasts for future earnings for 2020 to 2022 were likely to leave the Group with higher than anticipated leverage levels during this period. In turn, these highlighted that the Group's capital structure needed to be addressed and, as a result, the Group sought to raise new equity in order to support its ability to successfully deliver the Group's new strategy while at the same time managing liquidity.

In July 2020 the Group successfully raised £165m of equity through a firm placing and placing and open offer in order to reduce net debt and strengthen the Group's balance sheet. Alongside this, as announced on 19 June 2020, the Group also agreed amended debt facility agreements in respect of its Revolving Credit Facility (RCF) and private placement debt.

Following the conclusion of the refinancing in June, the Group is, or will be, now subject to covenant testing as follows:

• Leverage (net debt/EBITDA) and interest cover (EBITA/interest) will not be tested until March 2022, from which point they will be tested every quarter, the tests being applied to the prior 12 months.

• From 31 July 2020 until 28 February 2022 the Group must ensure that Consolidated Net Debt (CND) does not exceed £125m for each test date in 2020 and £225m for each test date thereafter. As at 30 June 2020, the CND was £82.2m. However, following completion of the equity raise, the Group is currently in a net cash position.

• Consolidated Net Worth (CNW) must at all times not be less than £250m. At 30 June 2020 the CNW, under frozen GAAP, as reported herein, was £257.2m. After the equity raise, completed on 10 July 2020 this rose by approximately £152m.

• The Company must ensure that Liquidity of the Group is not less than £40m from the date of signing the amendments (18 June 2020).

The forecasts which underpin our going concern assessment, and specifically our ability to meet the CND, CNW and liquidity tests above, look out to 30 September 2021. These forecasts reflect the more normal trading levels seen since the worst of the Covid-19 impact, as well as the expected positive impact of the strategic actions being undertaken to improve future performance, notably in the UK. Management have continued to manage liquidity, such that cashflow performance is better than initial expectations for the current period and continue to monitor the Group's forecast liquidity position to ensure it does not fall below minimum required levels. The forecasts indicate that the Group will be able to operate within the covenants for at least 12 months from the date of approval of this half-year report. This is also the case under a plausible downside scenario, which was prepared for the equity raise and assumed a decline in sales volumes across most of the Group's end use markets, and specifically assumed an impact from further potential Covid-19 related restrictions. It also assumed a slower turnaround in our UK business.

After careful consideration, the Directors therefore believe that it is appropriate to prepare the financial statements on a going concern basis.

New standards, interpretations and amendments adopted by the Group

A number of amended standards became applicable for the current reporting period. These standards did not have any impact on the Group's accounting policies and did not require retrospective adjustments.

2. Revenue from contracts with customers

Set out below is the disaggregation of the Group's revenue from contracts with customers:

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

Set out below is the disaggregation of the Group's revenue from contracts with customers:

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

Set out below is the disaggregation of the Group's revenue from contracts with customers: