Mel Elwell
"The Group has targeted improved business performance by refocusing on its customers and service proposition"

Mel Ewell

Chief Executive

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 ("LFL") 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.

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).

UK & Ireland

Continuing operationsRevenue £mChangeLFL changeGross marginChange
SIG Distribution769.54.5%1.1%24.6%(70)bps
SIG Exteriors477.84.7%(0.9)%29.2%(70)bps
Offsite Construction27.420.7%6.3%17.9%(460)bps
UK & Ireland*1,392.16.3%1.2%26.0%(80)bps

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

2016 revenue in SIG Distribution, 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

France589.213.9%(1.9)%27.7%No change
Air Handling*130.566.0%8.5%36.4%80bps
Mainland Europe1,347.716.8%(0.4)%27.4%20bps

* 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 a £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 began 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.


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 the triggering of Article 50 in the UK and forthcoming elections in France and Germany. Notwithstanding this uncertainty, the Board sees significant opportunity within the business to drive improved operational performance.