SIG plc (SHI) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to SIG's 2019 results, a new growth strategy proposed equity rates of GBP 150 million. Seeing today. I'm Andrew Allner, Chairman. I have with me, Steve Francis, our new Chief Executive Officer. Steve started in February, had about 3 weeks before we went into lockdown and also with us is Kath Kearney-Croft, who's validly stood in as interim CFO during this period. I'm going to make a few comments, and I'll hand over to Kath, who will deal with the financials, and Steve who will talk about the future. So our 2019 results. Our underlying profit before tax was in line with the guidance that we issued in January. However, that was significantly lower than our earlier expectations. And quite clearly, the results are very disappointing. Our strategy was poorly executed. We tried to do too much too quickly. We didn't take our people with us, and we aggressively increased prices. The result of that was an accelerating decline in sales with an adverse impact on profitability. As I said, our profit is significantly short of the expectations we had earlier in the year, and we carried out a full investigation of January profit warning. I should stress here that we have investigated the matter fully, we've taken actions coming out of that investigation, and we regard it as extremely important that we have proper systems and internal control financial added to our systems and our procedures. I think importantly, SIG retains its strong positions in its core markets. And my final point on this slide is that in terms of our response to COVID-19, our primary concern has been to preserve the health and safety of our colleague, customers and suppliers. My final slide is the actions that the Board has taken. We have just taken decisive actions. Firstly, we've got new leadership in place. So Steve, we have a new CFO, Ian Ashton, whose appointment was announced this morning. And we have new managing directors of the U.K. and German businesses. Our new strategy focuses on the customer, and goes back to our core USPs of proximity, expertise and service, that will restore the group's historical differentiators. Also, we've taken decisive action to strengthen the group's capital structure for the long-term, so we have a proposed equity raise of approximately GBP 150 million. Clayton, Dubilier & Rice has conditionally agreed to invest up to GBP 85 million, and acquired a stake of up to 29.9% in enlarged share capital. Our largest shareholder, IKO, has indicated its intention to subscribe for its full entitlement as the equity raise. And discussions are ongoing with our RCF lenders and private placement noteholders to reset covenants and agree other amendments to our financing facilities alongside the equity raise. And my determination, that of the Board, is to restore value to shareholders. And with that, let me now hand over to Kath, who will take you through the financials.

Thank you, Andrew. Hello, I'm Kath Kearney-Croft. I've been with the company since January, and I've been supporting Steve on the various work streams to date. I spent my career in FTSE-listed businesses with over 20 years in finance, and most recently as the Group Finance Director of the Vitec Group. The financial statements are complex for 2019 as they include continuing operations, assets held for sale, which are Air Handling and Building Solutions, split between discontinued operations and other items, along with the first year of IFRS 16. I'm going to start by giving an overall summary and then take you through some of the detail. Moving to Slide 6. In line with previous guidance, underlying profit before tax, including assets held for sale of GBP 41.9 million. Revenue is mainly down due to the U.K. and Germany with other operating companies showing growth on a like-for-like basis. We made good operating progress, particularly with further developments of new technologies, such as inventory and transport management systems, ecommerce and functionalization. Gross margins increased and costs were lower than prior year. Unfortunately, though, we recorded a statutory loss primarily due to other items, including booking and impairment charge of GBP 90 million, primarily related to the U.K. distribution business as a result of deterioration in profitability, and in Riviera in France due to the need to rightsize the historical carrying value of goodwill. Net debt reduced to GBP 162.8 million at the end of 2019, resulting in covenant leverage of 2.1x below the covenant threshold of 3x. The rest of the presentation will focus on underlying numbers. I'll now take you through a bit more detail on the key financials. So moving to Slide 7. Revenue was down 7.6% on a like-for-like basis due to the combination of market share losses in Germany and the U.K.'s Distribution and Exteriors businesses, resulting from poorly executed rapid transformation. The U.K. businesses were also impacted by increased political and macroeconomic uncertainty in the lead-up to Brexit and the December election. The group's other operating companies together recorded a like-for-like sales growth of 1.4%, which included the impact of the ransomware attack in France in Q2 2019. The focus on margin improvement through pricing and customer portfolio refinement where we exited low-margin and loss-making businesses resulted in an underlying increase in gross margin of 60 basis points. Operating costs were lower by GBP 6 million as a result of footprint reduction, the new operating model and good cost control. Despite good progress being made with margin improvement and cost savings, they were insufficient to stop a deterioration in bottom line profits, resulting in profit before tax of GBP 15.6 million for continuing operations on a post-IFRS 16 basis or GBP 20.6 million on a pre-IFRS 16 basis. Working capital was reduced in the year with progress made on inventory management. But as I'll show you in a moment, the reduction is at unsustainable levels and at year-end was almost half the level of 2018 on the working capital to sales basis. The reduction in working capital significantly helped bring net debt down to GBP 162.8 million on a pre-IFRS 16 basis. And as previously announced, we are not recommending a final dividend. And the figure here reflects the interim dividend declared and paid in 2019. Moving to Slide 8. We'll take a closer look at the geographic performance. Here, we can see the significant decline in performance in the U.K. and Germany businesses with absolute sales down 14%. Excluding Germany, the rest of Europe showed stability on the top line. And the table shows most of the operating profit decline within the U.K. and operating profit margins are much lower in the U.K. and Germany, averaging at 1.4%, lower than the rest of Europe, averaging at 3.9%. You'll hear from Steve later that restoring revenue margin is a key part of the plan going forward. On the next slide, we'll look at the impact disposals. Here, the profit numbers that we've seen earlier with the GBP 41.9 million underlying profit before tax, including assets held for sale, stripping our Air Handling, Building Solutions and the IFRS 16 adjustment results in a reported underlying PBT of GBP 15.6 million for continuing operations, a number you will see in the P&L. This is important as it's the starting point for 2020. As we move to look at the balance sheet, you'll remember I talked earlier about the working capital squeeze and how important this was to the year-on-year reduction in net debt. On Slide 2 -- sorry, Slide 10 shows the GBP 77 million reduction in working capital. Other inflows relate primarily to net proceeds from disposal of businesses, including a net inflow of GBP 10.4 million for WeGo FloorTec, the sale of fixed assets and FX. CapEx spend relates to systems investment, such as the new technologies I mentioned earlier, health and safety and property improvements. Dividends paid reflect the 2018 final dividend and the 2019 interim dividend, both paid during 2019. There was a reduction in net debt factoring from the end of 2018, with factoring in place in U.K., Germany and France and we are not currently factoring in U.K. and Germany, but do have a lesser amount currently in France. As we move on to this next slide and look at the net debt in Q1 2020, we can see how the working capital unwound in the quarter. Net debt at March end reduced to GBP 105 million with the key movements being working capital and the receipt of proceeds from the Air Handling disposal. As noted earlier in the press release, the company is in discussions with its RCF lending group and private placement noteholders to amend its financing facilities. And turning now to my last slide for current trading. As we previously announced, we saw the trend that Q4 2019 continue through the first 2 months of 2020 in the U.K. and Germany. Whilst trading in the rest of Europe was relatively stable. January and February were not impacted by COVID-19, and revenue for these 2 months was GBP 296 million, a like-for-like decline of circa 11%. The reduction resulted in the group posting an underlying operating loss of circa GBP 9 million on a pre-IFRS 16 basis for the first 2 months of the year. In March, we started to see the impact of COVID-19 and revenues were particularly impacted in March and April in U.K., Ireland and France. For Germany, Poland and Benelux have traded largely as normal in March and April. And revenue from March and April was GBP 235 million down just under GBP 140 million from the prior year. During this period, we've taken decisive cost actions in response to C-19 and to access government supported job retention schemes. Resulting in a reduction in group operating costs year-on-year, and Steve will be giving more detail on this later. As we moved into the uncertain C-19 basis, we had a very different view in terms of managing our liquidity. But we have continued to carefully manage our liquidity position during the uncertain time, and as of the 30th of April, we have GBP 155 million in cash and a pre-IFRS 16 net debt of GBP 114 million. And with that, I'd like to hand it back to Steve.

Thanks, Kath. Good morning. My name is Steve Francis. I'm the new CEO of SIG. I'm delighted to be here at an important time for the Group. I'm delighted to talk about a new growth strategy for the Group. As CEO and a number of roles, I've taken businesses through difficult times. And I believe the role of CEO is to release businesses and to release our people to reach their potential with pace and with urgency. SIG is a great business. It's in its 63rd year of carrying a proud heritage of trust and service in our industry. And we're already well on the way to building and empowering great teams and rekindling our important customer and supplier relationships. Moving on. SIG's new growth strategy. I'm particularly delighted to announce a GBP 85 million investment from CD&R this morning, which is not only a powerful vote of confidence in the business, the team and our new growth strategy, but it also represents a valued partner to me and our leadership team as we seek to grow into the future. I'm going to cover us -- the strength of our market position, and the growth potential from it, talk a little a bit in order to give context about some things that haven't gone so well in the recent period, particularly in the U.K. and Germany. And then to make it clear, there has been a decisive line in the sand moment and there's decisive management change and a new approach. We're going to talk about the new customer-centric strategy, and then what we've been doing during COVID-19 to trade through it. And really, I have to say it's been quite inspiring to see how well this business has pulled itself together with strong management response and robust trading. And almost the jealousness with which we preserved our liquidity to maintain the Group's health through this difficult period. And then finally, talk about the intention of the Group, really to hit the financial reset button. We've got a new growth strategy. We need to have a financial strategy and the financing behind it that enables that growth and so with that in mind, we're raising GBP 150 million. It's a large issue, but it's an important issue for us. And critically, I'm delighted to say that we have new money coming in from Clayton, Dubilier & Rice, one of the most preeminent financial investors in the world. And believe you me, they have not invested without seriously reviewing the business, the strategy, the team and the plans. And it's also important that our major shareholder, IKO, which is also our trading partner, and so they got a deeper insight into our business, and they've owned shares in our company for over a decade. They've also supported this funding. I'm going to go to the next page now. We play an important role in our industry. We're not a distributor selling commodities at the lowest price. We're a lot more than that. We're a balancing force. I mean our leadership role comes from the fact that we balance that high-volume of traffic of commodity products sold at low prices with, on our side, a focus on proximity being close to the customer and really understanding their needs, expertise, that’s to know not just about the product, but about how to use it and in what circumstances and what are the latest regulations, and how does that impact how you use the product and how you deploy it. Then service. Not just serving the customer when times are going well, but serving customer in difficulty when they need it, going the extra mile. And lastly, scale. Because we're a large Pan-European distributor, and we can and do leverage the benefits of that scale. We've also been investing to differentiate our business. We've been modernizing the operating model over the last few years. There have been some very good things. One of them, Valor Park, I'm about to show a video shortly about our new facility there, which is a state-of-the-art center. We've been investing in Warehouse Management Systems, and in Descartes On Demand, which is a freight optimization system as well as launching ecommerce platforms across our business. [Presentation] COVID has hit our industry hard, but our industry is better placed than most to recover from COVID and to trade in the new normal. Not only have we got support in the short term, but we have tailwinds in our industry in the long-term fiscal stimulus, the U.K. housing shortage, the position in the cycle and that we have positive drivers in the climate and environmentally friendly products into the future. So we've got tailwinds that support growth in our industry. Coming to the next page. I'm going to talk about a little bit about the past, and it's primarily here to go into the recent performance to give detail and some context to the current focus of our actions and to our new strategy. Here on Page 19, we talk about history and previous strategies. And you may say, why go back 6 decades? Well, it's important because the fundamental building blocks that were built over those first 6 decades have not changed. Yes, the world has changed somewhat. All that time, it was a growing federation of local branches. And then through until, I guess, until 2014, the business continued in a similar fashion. But around about then, the strategy, the underlying strategy of the business started to focus more on themes around cost reduction, debt reduction, disposal of business, delayering and in short, contracting. The theme from 2014 to '16 was what you might call retail-ization, the belief that we should have retailer-type relationships with our suppliers and our customers. And that led to some form of commoditization of our service proposition. And then more recently, 2017, 2019, a continuation of those themes of cost reduction, the divestment of noncore operations, the focus on debt reduction and then what was new here was functionalization. This is a recognition and a necessary one that we had to improve our efficiencies and reduce inconsistencies in the way we operated. More cooperation, better visibility and [indiscernible] around the network. And those themes drove us to a more centralized approach. So the business -- more in the U.K. and Germany than other parts of our business, mistook functionalization, which is specialism to get better at that function with centralization, which, in reality, became a detachment, a disempowerment of our sales force, a reduction in the branch network, a disconnection from our customers, our suppliers and ultimately, our people. So I go on to the next page, you start to see some of those actions. I'm going to summarize it. This is not the performance in financial year '19, and the fall off in sales, particularly in the latter part of '19, is not a Q4 iceberg, if you like. It's not an accounting issue. It is a long-term gradual fall in market share. And we've got a chart here, which illustrates it and I'll take you through it. On the left here, I list some of those things that I've just talked about. I won't go through all of them now. But on the right, I talk about SIGD, which is our U.K. distribution business. The revenues over the last few years compared to those of are local and sometimes quite small competition. And as you can see, every one of our competitive players has grown. And as you can see by going into companies, how they've grown on strong margins. So they've not grown by discounting price. They've grown because we've given them our market share. Very clearly shown here. So this is not SIG in a difficult industry, this is SIG giving share to competition. On to the next page. Now this self-harm, and this page, for most people is to some extent, shocking. This shows the sales on a monthly basis from March '18. And I group them by country. So you can see the blue line at the bottom is the U.K. businesses. The next slide up that finishes at 75 is the German business. And the rest of the businesses, which is essentially the EU businesses other than Germany, up-cycling seasonally around 100%. In other words, not growing but not shrinking. So the issue here is 2 countries out of our group, not the whole group. And those 2 countries show the same phenomenon, which I show on the left. So you've got sales restructuring. So you've got less salespeople in branches. You've got less specialization salespeople, more generalists. You've got the centralization of procurement, inventory management. So simplistically, salesmen on the phone, where is that part, I can't find it. A branch rationalization, which is that if you're not in the high street, you're not there. And if a competitor's there, they get the business. And you get price increases. Now, yes, we have to manage price all the time. We have to pass it through when our raw material costs go up, et cetera. But it has to be done with sensitivity, has to be done with a view to the customer, the range of products we sell, our relationship. And it is best done locally based on knowledge of the customer and of that product range. And it is not best in the center via software and a pricing specialist, and that directly led -- and you can see this on the chart from May '19 to year end, a distinct acceleration in loss of market share directly attributed to the pricing action, loss of senior salespeople and then the market share loss almost simultaneously. Now the good news, if there is good news in this, is that rate of loss of senior high-performing salespeople in the U.K. had pretty much disappeared by the end of calendar '19. So it was at its worse in the summer '19, and by the end of '19, that phenomenon disappears. So what we've seen since is much flatter performance. So this is not just a falling knife. That fall has now stopped, but it is a significant loss of market share. We'll go to the next page. Let's not forget, and it's easy to when you see a chart like that because it is scary. Let's not forget, this business has for a long time had stable revenues. This is from 2009 through till 2018, stable revenues, stable operating margin, large market share, experience and knowledgeable workforce, national coverage, extensive -- most extensive range in the industry and connecting leading suppliers to a very wide customer base from the largest customers to the smallest, a strong and stable business. On to the next page, separately from that, and it's easy to lose focus because this might be seen as a U.K.-centric story, do not forget that we have a large business. In fact, half the Group, more than half the Group now is outside the U.K. and here, too, and again, going back 2009 to now, stable revenues, growing more recently and stable margins, and the same phenomenon of strong market positions. So I'm coming on to the next page. Then the question is asked, I've been asked a question or almost in every meeting I've gone into, given all of that, can this business return to past glories? And I spent a lot of my time talking to people, to suppliers, not only to senior managers, but walking around in branches, talking to people at lower levels of management in different functions, in the warehouse or to alumni, former CEOs, they all say the same thing. It's rare, in my experience, ever to get such consistency of message about 3 or 4 things: 1, what makes this business great and continues to make it so; 2, what's gone wrong with the business; 3, what needs to be done about it. Now that's the rarity, that powerful coalition for change. When you're in my position, the role is essentially releasing people to do their jobs, is a fantastic platform for change and actually quite rapid change. And I've had that experience in other roles like it, where if you find out what that -- what those issues are, and you align line people up and run in the same direction, they're already lined up here. SIG is ready for change today. So today, I can tell you today is actually a true historical turning point and direction for the business. We're going to go from, say, 6 years of contraction into growth. Moving to the next page. So our new strategic focus. I'll go back to this history page. Our new strategy, therefore, reaches back to our tried and tested core strengths of proximity, expertise and service, but also points us towards the future. And the phrase here, it's a dangerous phrase to use, I know, and I know it doesn't translate well into French or German, but we're going to have a local business, but they're served in a franchise style manner. And what that means is it's highly customer-centric, consistent culture around service, encouraging entrepreneurship locally, encouraging ownership locally, training people to do things in a consistent way and then giving a wraparound of consistent well-invested systems, inventory management, freight management, pricing management, best product knowledge, best category knowledge as a reinforcement together with -- and this is important, given recent experience in our business, very clear information, not just financial operational information and clear governance and controls. So delegation, empowerment, with a franchise style consistency and measures and controls. And in that way, we're seeking to lead the industry in what we call an omnichannel way. What we mean by that is a physical channel plus digital channels, ecommerce channels, et cetera. So moving on to the next page. Now this page, in a sense, you could read it and go back 2 or 3 years and say, actually, that looks kind of like the old strategy. But I put this in the presentation to make the point that when I arrived, I got a sense, this business has lost its sense of identity. As a business, people wonder what's happened. And I can tell you today, we're already rediscovering that sense, who we are? What our USPs are? Why we exist? What causes that passion of service that I've seen in the business? Particularly watching the guys in France in responding to how do you trade during the COVID environment? And this identity is not expressed in terms of financial words or concepts. As you'll find in dare I say it, many, many kind of recent documents, it's expressed in terms of the passion for service of our customers and our role as leaders and as a trusted shepherd in our industry. And that is the core of what you sort of see in the words on its page as a clear sense of who we are and a common marching song, if you like, for the business. Going to Page 27, what's changing. I've made the point already, this is a point in time. And I know many of you will say, well, okay, every time a new CEO turns up, they all kind of use the same language. It sounds good. And then nothing much changes. Well, I'm here to say there are 180-degree changes in how we're doing things already. Number one, we're not making decisions based on does it save money. And sometimes, as you know, penny wise pound poor, you can make a decision that's the lowest cost, but you actually get an inferior outcome as a the result. We're making decisions based on what grows the business. And me as an ex-rower will do whatever it takes to make the boat go faster. What does it take to grow? And this is how we lay ourselves out to be judged, read through this in detail. Look at us over the months and years to come and judge us on these changes, have they changed fundamentally. The KPIs we're using going forward are less financial, but they're more focused on customer satisfaction, selling effectiveness, service, true supplier partnerships and employee satisfaction. So a suite of operational and strategic KPIs going into the future. Turning to the next page. Our plan to return to profitable growth and this is true in all the countries, but I'm going to apply it more in here to the U.K. The key themes of this plan are to rediscover ourselves as a local business, rediscover our localness, to free up our salespeople and our branch colleagues and to be led by expertise and going the extra mile for our customers. Now by saying this, I know many people will say, well, you do that already in your business. Yes, we do. But in parts of what we've done in the U.K. and to a lesser extent, Germany, we've forgotten those principles. So plank 1 here local P&Ls within a franchise so operating model I've talked about that. And these are the 7 pillars. I won't go into the detail now, but they're reinforcing the points I've made earlier in the presentation. Next page makes the point that, as you can tell, the business is at a different stage of evolution and of implementation of strategy, so really our strategy, although they're both focused on growth through the top line through revenue. In Germany, we need to revitalize our sales, our commercial organization. We've already taken actions on that. We've got a new MD, and we've hired a sales director into the business after 1-year vacancy in that position. And to ask the other businesses to remember how to grow, now that sounds like a funny expression. But if you've got a bird that's been in the cage for 10 years and you open the gate -- the door to the cage, sometimes they don't fly out. So we need to rekindle that, if you like, that animal spirit of growth in those businesses because they have that potential there. There are so many opportunities. And we're going to develop those ideas over the coming months and years. On the other side, we've got the U.K. business, equally strong core franchise, but they need to return to profitability, we need to energize a sales force, and we need to finish that implementation of functionality, but do it in a different way, doing it led by customers, doing it local, and then making sure that the support functions are efficient and as well-invested as possible. So on the next page, I talk about the sort of phasing, if you like, of the U.K. market share recovery plan. Phase I, we say merge the U.K. businesses. What I mean by that is initially we're merging the leadership teams. I'm absolutely delighted to welcome back Phil Johns, who's rejoined SIG after 30 years in the industry, have 27 of them in SIG, 10 of which running the U.K. roofing business. He's one of the most respected people in the industry and in our business. And I found him, even in the -- when he joined the beginning of April, but even in the short weeks working together, we're already forging a true partnership. I'm an industry newbie, but I've got a lot of experience for the challenges they have in the business functionally. And he knows everything there is to know about this industry. So we're forging already a true kind of mutual partnership there. Then the next step is making sure that we preserve the commercial go-to-market of the roofing and the insulation, make sure that we get the synergies of the back office or the functional support of the shared service center to make those efficient. And then to enable growth. And what I mean by that is enhancing our service measures on time and full, providing the systems and the visibility to the sales force to do the job and to rebuild supplier relationships. I've heard so many times from our key suppliers that we disconnected from them in 2014, or thereabouts, and became transactional. And when I talk about our strategy, and I hear them talk about what they think our strategy should be, it's like an echo chamber. I mean we joke about it. And that's not just with one of our major suppliers, with all of them. So rebuilding a multiple point supplier relationship, where we think the best way to get the most out of both of us is to do it together and not by having a transactional relationship. And then thirdly, with those enablers in place, then to energize the sales force, more entrepreneurship, bringing people back into the business who left us despairing that we've lost our way and we're already talking to 2 or 3 really good senior commercial leaders in the U.K., an approach which is culture and values-led. People say, well, Steve, how long -- what are the key things you need to do? Do we have to invest money? How long is it going to take? It's going to be based on that culture and values that I've been talking about: entrepreneurship, local empowerment. If you get that right, the energy you can create can be really quite quick, it can be like a fire burning through the business and energizing itself because losing is a habit. And as you well know, if you turn it into winning that can become its own habit. And it's about giving great people the chance to do well, sales-led local business. And as we move on, sometimes it will be organic sales, we'll win in the market. Sometimes we might acquire small businesses. And then over time, as the business gets back to profitability, we will look around for adjacent products and additional service niches that fit our business model. And all the time and notwithstanding the fact we're doing a turnaround of the revenue. All the time, we'll be thinking, what can we do to add a digital side to the things we do. So we're not going to do a start-up off to the side. We're not just going to have an ecommerce window front -- shop front on a traditional back. We'll be looking at ways of digitizing and future-proofing the business. So going on to Page 31, where does this go? What's our vision? And this is expressed financially without apologies to what's forgone. All of our operating companies have shown the ability to trade at around 5% operating margin, as you've seen over the long period. And so we're targeting to get back to that level at the operating company level and not more, by the way, we're not targeting margin as a target because we know that if you charge too much, then you're going to lose some market share. So we're targeting 5% and it's not 1% or 2% because we are a premium value-added business. And we've been looking for other products and niches that can sustain and increase that value added. But the Group as a whole is targeting to get back as soon as we can to our traditional level of 3%. And then part of the difference between 3% and 5% is that 1 or 2 operating companies are slower getting back to that level. And there might be a market where it's not possible to get quite to that level. But at the same time, we'll be looking at what we see as, if you like, the corporate drag. If there are any corporate costs or ways in which we do things that add cost into the business. And that should trend us not towards 5%, but not much beyond 3% in the early stage. So that's our philosophy on margin. On financial leverage, we're looking for a headline financial leverage of 1.5x once we're into steady state. And as we move to that point, we'll obviously begin again paying dividends and seek to get to get a dividend cover of 2x to 3x, once we've reached a leverage that we're comfortable, is consistent with that dividend policy. Page -- the next page, decisive change. As I've already made clear and hopefully, very clear to you. This has been a period in which there has been decisive change and a very different approach in the business. And it has approached about being -- doing things in a way that we've done them before, do them better, back to basics. So on Page 33, I talk about those specific actions: 1, change in our upgraded leadership and management. There have been a lot of changes, not only a new U.K. MD. There's a new MD of Benelux, Germany. We've got a new sales director. We've got a new Finance Director, joining us. Secondly, a clear and complete assessment of what went wrong. I think it's been a very cathartic experience for people to be able to talk openly about the things that they felt the business could be doing better. And that feeling, that commonality of view, also builds to force for change. And that's been great because it means we know exactly what has gone wrong, and I've got a pretty good idea of exactly what you need to put it right. There are no mysteries there. Number 3, and it's something that -- it's something I hold dear, is the role of management is to forecast the business. If you can't forecast the business, you can't be a good manager. So no surprises is embedded in the kind of center of our kind of management philosophy and the way in which we set budgets and forecasts, review them. We don't punish people for missing. We punish people for not understanding why they missed, if you like. And embedded on a stronger governance and financial management of the business. And number 4, we've been connecting with colleagues, customers and suppliers, as I've said, and that's built this sort of common sense of what we need to be doing next; and number 5, we need to have a reset. I mean, I'll be clear with you, and we've been clear with the market in signaling that the financing structure that Kath and I inherited back in February was no longer appropriate for the business that we had. There’s been lots of disposals, the profit levels for the time being are much lower and that we needed a financial reset. Now we needed it before COVID. And with COVID, obviously, that strengthens the requirement. So today, we're talking about a reset button to put a strong financing in place to support that growth strategy into the future. I'm not going to go through this in detail on the page that followings, but our strengthened executive team, I'll highlight a few. Firstly, I'd like to say thanks to Kath who was pitched in days before lockdown into a business which doesn't have the strongest financial management and quickly put in place a very effective management of cash, closed out a complex audit, at the same time, has overseen quite a complicated financial strategy reset. And she's worked extraordinary hours. I'd like to thank her for that. We are delighted to also announce this morning that in Ian Ashton will be joining us on the first of July, most recently, Group CFO at Low & Bonar. And to be straight with you in looking for a CFO, I was looking in part for someone who has an undoubted kind of PLC finance director background because that's not the strong part of my bow, if you like. And so that complementarity of having someone like Ian in place is really important to me, and I'm delighted he's joining us. I've talked about Phil Johns, who's already making a huge impact in the U.K. He's locked and loaded. He knew exactly what to do. He knew which covers to open, he knew with buttons to press, day 1, and has really made an extraordinary start despite the fact we're in lockdown. And I'm going to mention also Julien in France, experienced MD, who's managed that business superbly through transition. They've been growing their sales throughout the transition from being closed to being, if you like, now COVID-open. And that business has performed well through that. And at the end of the day, our strategy, and this is a "Steve proved to me" question. Our strategy is about winning back market share. And that's about winning back confidence. And a good strategy and plan and presentations like this for a start. But in the end, it's the actions, it's the kind of show me and the palpable sense of energy that comes from people who sort of set up, they set up and go, you know what, these guys are really doing things different. And it's those actions that then start to make people -- things are changing. So putting this team in place and taking those decisions is an important building block for us. If I talk on the next page about 2 strong businesses, I won't go into the detail, but essentially, we've taken an established business model in France under Julien. We have 2 businesses under one leadership, and we look for the synergies in management, in support services and in supply chain. But we keep the commercial operations separate. We've taken that concept and applied it under Phil Johns in the U.K. and we're also now applying it under Ronald Hoozemans, who's done a super job running Benelux. And last week, we appointed him to run a newly formed Benelux German leadership team, combining the most -- the experience across both teams to run business, commercially independent, but a centralized leadership and support services. So we've now got strong leadership in each of our operating companies, and I can tell you we're ready to go. COVID-19. Well, hopefully, I've given you a clear view of the actions over the past 3 months we've been taking. I want to talk now about our experience of trading through COVID-19. And as I've mentioned before, it's actually been inspiring to me to see our organization respond. Our focus on making sure we operate safely for our people and our customers, the can-do attitude and the swiftness and professionalism that the management have shown both centrally but in each of the operating company in reacting quickly to revenue force to manage costs and preserve cash. On the next page, I'm not going to go through this in detail, but we've been managing all of the levers you can manage quickly to make sure that we're managing our business, at least through COVID-19. The new management teams grasped the issues quickly and effectively, we made use of government support. We have adapted ways of working and managed cash, as I say. And just to illustrate that, our cash at the end of April, I think we announced it GBP 155 million cash at bank. As we entered lockdown, it was about -- I think it was GBP 134 million going into lockdown. And actually, today, it's sort of at the same level as it was at the end of April. So we preserved liquidity despite the harshest possible trading conditions. And here are some of the actions that we've been taking on this page. Going to the next page, I talk about here impacts of COVID bearing by geography. So this page basically takes our daily sales indexed to 100% and 100% is the average from January 6 to March 23, and it's being grouped according to 3 groupings. Grouping number 1 is the red line, which is the U.K. businesses. And you can see until lockdown until Boris' fateful speech on the 31st of March, we were trading nearly normally. And then a very rapid fall at the -- the lowest level around about 9% of normal levels. And that was from what we could tell, the industry was kind of around 9% to 15%, depending on which part of the industry. So the whole industry shut down. And we've seen it gradually move up as we've been opening the network. And now today, as I speak, I think virtually the whole network is open apart from parts of our Scottish operation or where we're doing capacity balancing. So 53% of sales is a recent average, but that's actually increased further. So the Group as a whole, on average, we're now at about 80%. And the next one is to look at France, which didn't close so quickly because the French government's incentives required you to remain open. So the businesses operated at rotating rotas of staff and we kept trading. So our minimum was at about 40%. And as you can see in France, notwithstanding social distancing and the fact that certain sectors are not quite fully open, we're now back at 100% of pre-COVID levels in France. And the blue line shows that in Germany, Poland and Benelux, in fact, the businesses have traded pretty much at 100% with the month normal monthly variation that you can see on this chart throughout this period. So we've been learning literally daily about how do you manage through COVID, but also how is this likely it evolve. So for example, is there going to be a second wave? And if there is, what's the impact on the business? And what's the likely financial impact? These are things that we've learned a lot about. We've really benefited from having that kind of geographic spread of businesses and the different ways in which governments have addressed the C-19 prices. And to a certain extent, as the U.K. has been a bit of a lag, we've seen policies, if you like, forestalled in other parts of our network. So coming on now to our financing strategy. I should say that probably the very strongest endorsement of a strong business, its management and plan and its ability to attract equity finance. And again, I want to reiterate, I'm delighted that CD&R have decided to support our business with GBP 85 million investment, which, as you know, is more than half of our total requirements on the equity raise. I'm equally delighted that the ownership of IKO through their shareholding, which is about 15%, are fully supportive of the management plan, the business and they are trading partners. So they know the business. And they will support us in the issue as well, which is great. So that's an endorsement. And in a way, that's the most important building block of our financing strategy. And so the announcements this morning really do move us quite a long way towards our objectives there. On Page 40, I'll just summarize the status of discussions. So kind of key point 1, raise GBP 150 million in new equity. And a lot of you will say that's a lot of money. That seems a lot more than we might have expected. And I'll say, first, a fair amount of this is to make sure we've got the money to grow. So it's a combination of 2 things. You've seen many companies coming into the market to raise funds, if you like, to replenish as a result of the COVID trading environment. But this is both. It's both growth and COVID replenishment. So Clayton, Dubilier & Rice conditionally agreed to invest up to GBP 85 million. The equity offered structured in 2 inter-conditional tranches, GBP 60 million place firm to CD&R and the second tranche of GBP 90 million offered to a broader range of investors. I've talked about IKO. Now in order to facilitate the equity raise, we've obviously been in discussion with our lenders. We're conscious that there's a kind of tug and pull effect between them. It was our judgment that it was better to get as far as we could on the equity because that gives comfort to the lenders in their discussions. And so the fact that equity has got to where it is means that we're now in a position to conclude discussions and they're going constructively with our lenders. And further details will be provided as soon as we can on that. And alongside this process, we've obtained a waiver in relation to a consolidated net worth covenant, and at other waivers needed here. And I think if necessary, we can obviously cover that detail elsewhere. But I think the message here is that it's a 2-step process or 3-step: 1, is to get the cornerstone investors in place, which we have, we're delighted and to launch the issue; and 2, is then to put in place the adjusted lending facilities. So in summary, the last page, I'm not going to talk to the words here. This is a decisive turning point for SIG. It's -- we're going back to the basics in the business. We've got a growth strategy that will really exploit our strong market position in an industry with the growth potential. We've got market share out there, which we believe should be ours. If we operate in an effective way to be -- our smaller competitors will struggle to hold on to that share. We'll get that back. And to support that, we've got strong management in place. We're locked in and ready to go. We've got a clear customer centric strategy, which is about connecting with customers, suppliers and our people. And it prioritizes a sales-led local approach at the heart of it. And our refinancing strategy is well underway now, as you can tell. So thank you very much. And with that, I'd like to open up for questions.

[Operator Instructions] Our first question comes from Robert Eason.

Steve, it's Robert Eason here. Sorry, we couldn't be all together on today. And look, a number of questions. And forgive me if they have a bit of a cynical tone to them because I've been through many revised strategies with SIG. And I just wanted to just get an understanding of -- and you've alluded to some points. What is going to be different this time? Because I thought -- my understanding of the last couple of years, there was a big shift to that more kind of customer-centric approach and a sales driven mentality. What got lost there? Did it just get all lost in the centralization of the functionality and it just got sucked in? And kind of -- that's kind of my first sort of question. And just kind of giving this comfort at last. And kind of second question is on just better understanding the market share shifts in the U.K. because we were showing a graph a number of years ago, in terms of the percentage of the U.K. business that was effectively on a gross margin loss. So it was business that just didn't make sense at all. Are you saying that some of the business that lost, shouldn't have been lost at the end of the day? That it is profitable? And kind of related to that, does the U.K. business need a master overhaul in terms of -- if you just look at simple kind of term -- or simple metrics in terms of the number of depots that you have on the distribution side, you could argue, is there too many, given that it's effectively a delivery model. So maybe just discuss, is there a lot of restructuring to be had in the U.K., especially on the network side? I'm sorry -- and my final question is, I don't know whether it was -- it's purposely done in the slide presentation, but it's the first time I've seen an explicit breakdown of the group, specialist merchanting and Roofing. It's normally done on a geographic basis. And a kind of related question all around that is, do you believe that the group should stay in the same composition as it is now, i.e., what are the synergies between Roofing and specialists, and indeed, what are the synergies across countries within the specialists? Because if you see the trends over the last 5 years, distribution businesses have tended to break up more into national businesses. So sorry, a lot of questions there. Apologies.

Gosh, I don't know how much time people have. I'm going to pull this into different pieces. I'm going to put point 1 question to Kath, and I'll cover the others, if that's okay? Kath, could you answer the question on how we're thinking about reporting on a segmented basis?

Yes, requirements to report on a segmental basis is based on how the information has been presented in the year to the Chief Operating Decision Maker. And so the change had happened in 2019, hence why we have reflected that in the results announcement. Going forward, under the new strategy, this will be looked at by Steve and by Ian, when he joined in terms of how will we report the businesses, particularly with the change of Phil Johns coming in and managing the U.K. and Ronald, managing Germany and Benelux. And so we will provide additional guidance on that when we have landed on that position.

Thanks, Kath. I'm going to take your questions in a kind of slightly different hierarchy, if I may. I'll take the one that's kind of most fundamental first, which is probably the last one. It's very easy to define core strength in a very, very narrow way and end up with one business in one geography. And I think to a certain extent, a series of our corporate strategies have done that. It was expressed around disposals, non-core this, non-core that. And we've taken the decision here that this business in its current form is the basis for growth. So yes, there are synergies between the Roofing and specialist operations. Do they extend through to full merger? No, they don't. Are we going to be exploring how to get best synergies? Yes, we will. But this is a starting point for a more expensive expression in which we look for synergies carefully, as I said, customer by customer, function by function, but not as an overarching bland statement, number one. Number two, on country synergies, we are not seeking to create a unified pan-European business. I think one of the things that we had with lots of IT initiatives and either that we're seeking to create a kind of European common platform. We don't see that level of synergy into the country. The synergies are more about how we go about doing things and about our USPS and our culture. Those are synergistic across the business. And the role of corporate is quite narrow in that respect. We're to facilitate peer-to-peer -- sharing a best practice across the businesses. The customer base doesn't overlap particularly. And it surprisingly so, although we have common suppliers, they tend to be run on a very localized basis, even within countries on a localized basis. So the synergies are more ways of working than they are kind of full country synergies. Secondly, expression of share in the U.K. Again, the same thing, if you try to increase your profit threshold, your desire for only the most profitable customers and get rid of those that are not, only the most profitable products, only the most profitable regions or branches and then you spend your time shopping, if you like, out those businesses that happen maybe temporarily, to be less profitable, that's a recipe for not growth but shrinkage. So our approach and [unless] you're saying what's different this time, and this is one of those key elements. On the mass overhaul of the U.K. and the delivery model, no, the footprint of this business has been trimmed. We have 1 or 2 small geographic gaps as a result. There's a very key turning point principle here. And as I, sort of, said about actions, it's very important for people to know that we're not in the business of closing branches and physically withdrawing from geographies. I made the decision not to close one branch within a month of arriving to send a signal to people, and the decision had been made to close it, to send the signal that we're not retracting geographically. But by the same token, we're not talking about a huge investment in a new network. We think physical presence locally is important. So we will close local facilities only after very much thought. And a preference not to do so. I hope that answers your question. You asked a very broad question around what's different this time from before. And I hope my presentation -- combination of that with my answers covered your question, Robert. Thanks very much. Any other questions?

Our next question comes from Clyde Lewis.

Steve, Kath, a couple of questions, if I may. Firstly, probably one in that sort of cash and sort of cash, I suppose. Just dotting a few Is and crossing some Ts. In terms of the disposal cash that you put up the [ 163 ], Kath, can you take us through the difference between that number and the [ 187 ] that was obviously sort of flagged for what you got for Air Handling. The second one was on the sort of deferrals, I suppose, in terms of cash on tax due, unless you expect probably some rent, and how that might evolve through the balance of this year. And the one I had for you, Steve, was really sort of around sort of sales and sort of how you motivate the staff to, as you said, get the fire going throughout the whole organization, but particularly with the sales staff, given that you flagged them as has that been the sort of one of the biggest levers you've got for sort of getting the business going again? How do you motivate them? Have you changed the bonuses? Have you sort of set a very different target to sort of get them reinvigorated?

Kath, will you take the first couple of questions?

Yes. So on the on the Air Handling and the difference on that is as it relates to working capital differences. And then -- sorry, can you just remind me of your second question because I was thinking about the [indiscernible]

That -- yes, that's fine. The other question was on the deferred cash outflow, I suppose, from the last few months, whether it's sort of tax or rent or other sort of cash that you would normally have spent at this point of the year. How would you expect that to play out over the sort of coming 6 months?

Yes. So we would expect most of the deferrals to have played out by the end of the year. The one area that we expect not to have played out by the end of the year is around the tax referrals, which roll into next year, and we're estimating that circa GBP 10 million at this point in time.

Okay. Thanks, Kath, for those. I'll take on the sales question, Clyde. How do you motivate staff? Well, of course, it's multilayered. But I guess, the very first thing you've got to do is give them back the tools to do the job. Those would be local pricing flexibility, number one, and by the way, my answer to you is informed not just by kind of a strategic boardroom thinking. It's by talking to experienced sales leaders in the business. And that -- this is from them directly saying to me, Steve, we want back the ability to price. We want to see the rebate structures, for example. By all means put controls around it, but we need to see how to price because otherwise, we can't compete, number one. Number two, we want to know if products in the warehouse are not. It's not in our warehouse, where it is and how quickly we can get it to the customer. And number three, we want you to let us do the job. Give us a good target, good incentives. We -- I know Phil has already started refreshing the incentive model for the business to make it a more powerfully incentive driven business. And then lastly, the sales management process is to put in place what I would call, kind of business-to-business sales management 101 disciplined process, pace, pipeline management, good training, fast rhythm, celebrate winning, lots of kind of, if you like, short-cycle incentives to keep that reinforcing kind of snowball effect of winning. Hope that answers your question, Clyde? Any other questions?

Our next question comes from Aynsley Lammin.

Great. Excellent. I've got, I think, 4 questions actually. So first question, can I -- the 3% medium-term operating margin target. Is that comparable to the [ 1.6 ] on a pre-IFRS 16 basis that you reported for '19. So are we starting at [ 1.6 ] billion. Secondly, the GBP 500 million lower group revenue expected for this year, could you just walk us through the assumptions you've made for H2 in terms of trends and run rates in the key markets? And third question, in terms of CapEx, do you think there's a significant amount of CapEx we need to invest to compete with the kind of minster, CCF effectively to gain that market share? And then lastly, fourth question. Just on Germany and France. Obviously, revenues recovered quite nicely back to pre-COVID levels. How much of that do you think is the kind of pent-up demand finishing off projects? And how do you expect those markets to unfold in terms of underlying demand as we go through the year?

Okay. Thanks, Aynsley. Okay. Operating margin, a quick answer. Yes, it's fully comparable on the 3% to the current '19 number. Number two, the -- how do we cover up the revenue number. Answer is it's bloody difficult. I think like many other companies, it's exceptionally difficult to give guidance this year, and many companies have avoided doing it. I think we've done quite a big statement of actually putting that number out there already. And we've done it, as I've shown earlier, with the analysis of the daily sales and really trying to look forward and I'll answer your last question about pent-up demand now in this, if I may. As you look forward and what we can see, and there are signs of it in places like Poland, that you're right, there's big order books. They're in place and guys are rushing to fulfill their current book. There is clearly and surely, going to be, as all industry commentators say, if you like, a gap in that pipeline. Our new orders and order books being built today or in the next few months at the same rate as they would have been pre-COVID, the answer is clearly not. So there's going to be a slow recovery as the ability to trade opens up. But it's our view, and we factored into our forecast and our kind of discussions with bankers about financing and our planning that there could be a second wave. And it's our view that also 2021, this isn't going to be a V shaped recovery. We're expecting it to be quite a difficult '21 as well. And all of that's factored into our planning and thinking. So we don't expect the business to roll back. Having said that, we're a priority industry. So we are confident, and we want to play a leading part in making sure that those -- that dip is minimized. Lastly, on CapEx. Listen, the business has spent about 130% of depreciation most years. Kath and I inherited a much bigger CapEx plan. And the first thing we did was to put on ice quite big programs on IT. There was a huge element of kind of pan group IT. What do we need going forward? This is not an investment led strategy. This is a people led strategy. We've got quite enough under that kind of umbrella, that ceiling of circa GBP 25 million of CapEx. We've got quite enough to redeploy, to make sure we invest behind kind of investment behind sort of software and warehouse management, et cetera. It's not big ERP programs. We're not building any more big facilities. We just opened a fantastic facility at Heathrow. We've got that in place. Now it's about local investment and investment in IT, but tactically to help management locally. Hope that answers your question, Aynsley?

Our next question comes from Charlie Campbell.

A couple of questions really. And sort of a detailed one, first one, on the U.K. My understanding that part of the market share loss in 2019 was down to plasterboard availability and sort of the view that maybe the group was less successful in managing that than others. So I just wondered how confident you are in managing across the Board availability in 2020. And then secondly, just to kind of try and get my idea of to help us think about the rest of the year. Clearly, kind of new commercial is quite a big segment of demand. Just wondering what you've seen in terms of tendering activity. So what sort of activity your customers putting through the group in terms of helping with their tenders so what does that activity look like compared to normal sales across the group, the bat signal that you track? That would be very helpful for us to understand.

Okay. Thanks for that question. On the U.K. plasterboard, yes. I mean, there was a problem. But availability is also a function of how well we manage our suppliers. How well, we let them know what our forward demand is. And the quality of our relationships with them. And I think 1 of the key focuses that Phil's got in the U.K. and across all of our business, with major partners like Saint-Gobain, is to make sure that we have forward forecasts, and we plan around what we've got, and we sell what we've got. But importantly, we get from our scale, a priority in those allocations. So better management of the suppliers, I think it's a thing. So yes, high confidence in talking to them, I've been talking to the CEO there. We're already having a much more connected discussion. Regarding commercial tendering activity, like actually -- sorry to say, like many things, in this business, it's not tracked centrally. One of my philosophies that I'm kind of bringing to the business is, is I want everyone in the business locally to have all the resources and information they need locally and empowerment. But I also like to have more information at the center so that we've got visibility at my level of what's going on, and I don't have to have extensive review meetings, et cetera, to see it. So today, no, I don't have visibility, but I can tell you there isn't an awful of new tendering activity at the moment.

Our next question comes from Ami.

Yes. Just a couple of questions for me. The first one, [a follow up] on investment in the digital infrastructure that you've touched upon. I mean, can you give us some sense of where the sort of system that you have inherited today? Where do things stand? And this sort of transparency or information availability that you would want at the central level. At what point would you get that in place for the organization as such? My second question was really on the central overheads that we should expect the business to have from here onwards? Can you give us some color as to the level that on a normal run rate basis that we should expect? And the third one really is on your point on reengaging with your customers. In terms of your discussions with some of your key customers, what according to them has been the key areas of dissatisfaction on service in general?

Okay. Now those are 3 questions. So I think we're pretty close to a hard start. So I'm going to, if I may be very quick, Ami, in answering those. Digital infrastructure, we're redirecting our investment efforts there. There was a program to do a kind of off-line start-up. We're actually -- we've stopped that. We're focusing more on building our kind of within division, e-commerce and digital infrastructure. There is no plan at this stage to produce a singular data set for the entire business. We will be looking into that as part of our strategy. So the whole area of digital strategy is under review, and we'll come back in the coming months on that one. Central overheads, I think the simple answer to that is if you take the kind of trend level of 2018, central overheads, and project through, right now, it's in a slightly distorted state. It's going to probably go back to that sort of level as before. Thirdly, what were the kind of key disappointments of customers? I think, hopefully, I've covered them. One, unilateral increases of price that were imposed from the center but without discussion. So talk to us about it, number one. But I think more importantly, it was just where's the service gone. I'm talking to someone who's a generalist now, where was my specialist, who knows me better. Where is that expertise? So I think those proximity, service expertise. Other customers said, you're not here anymore, because your branch closed, and we prefer to go to the local players. So they've said we want proximity back. We want expertise back and we want service back and priced in a way that is in dialogue with us across our needs. Okay. Hopefully, that one. I know [sure answered] your question. Now I'm conscious, it's 18 minutes past 10, and we're getting close to a hard stop. I've got time for probably one more question, just one. If I may.

Our next question comes from Christen Hjorth.

I just one, obviously. So clearly, you mentioned that the issues over the last sort of 18 months in the U.K. have been sort of lower volumes at a higher price. And then clearly, the change now is to go to higher volumes at a lower price. Just to understand why that drives the margin up from here? Is it just sort of the operational gearing on the fixed costs that drives that margin improvement? Or is to rebates carry a significant benefit as scale improves? Just sort of trying to square the circle on those 2 dynamics?

Yes. Thanks, Christen. I'll say, firstly, very, very clearly. And this is kind of -- I'll state it in simple terms, this is not a price-driven growth strategy. We're not going to drop price to grow. The customers have said, give us service and expertise and proximity, and we'll trade with you again. They haven't said drop the price. So we're not seeking to do that. We're seeking to gain share through that. Secondly, I think one of the things about dealing with our suppliers is that a really good understanding of their strategy around local growth drives their thinking about local rebate pockets. And if you centralize procurement, you lose visibility of quite a few of those kind of more tactical rebate levers that our suppliers are deploying. So through that disconnection with suppliers, we probably lost quite a lot of rebate or rebate opportunity, which in turn means that we're disadvantaged in the market. So without affecting our gross margin, better supplier relationships gives us a better product pricing into the market. And then yes, obviously, our broad philosophy here is in the U.K., particularly, we have a choice. Either you cut the overheads to the revenue level because we have an [indiscernible] structure that suits a bigger business at the moment or -- and this is -- we're looking for synergies at the center, but fundamentally, we're going to use revenue growth to give us that operating leverage on the overheads we've got. So Christen, hopefully that's answered your question. Listen then, I'd like, on behalf of Kath and Andrew, to thank you for your time and questions this morning. We're very excited this morning. This is a new dawn for SIG. It really is a new dawn for the company. I talked about it, it's a clear line in the sand, hopefully, made it very clear that it's different this time. We've got strong and widespread support for our new growth strategy. Defining changes have already been made and more underway. And I look forward to updating you all with progress as we go. Thank you very much.