SIG plc (SHI) Earnings Call Transcript & Summary

Welcome to the SIG Half Year Results live Q&A. [Operator Instructions] So I will now hand over to Steve Francis, Chief Executive Officer. Steve, over to you.

Thank you very much. Good morning, again, everyone. I hope you had a chance to see the presentation. We're now going to start the live question-and-answer session. So just to reiterate, the growth strategy is gathering momentum. The plan is being delivered ahead of expectations, and the building blocks for future growth are in place. We benefit from healthy long-term industry fundamentals, and are very confident across our businesses in the longer-term business potential. And in short, SIG is back to profit and back to health. So with that, I'm going to hand over for questions.

Lovely, we have a raised hand from Charlie Campbell.

Just wondered if I -- sorry just -- okay, yes, just if I could ask 3 actually, if I can, hopefully quite quick. But just going back to Slide 20. You very kindly gave us the sales per day in the U.K. Now if I sort of adjust the price, I mean, it maybe that volumes might be as much as -- it's still about 25% down compared to the beginning of that series. So I just sort of wondered, yes, if that's right, first of all. And then secondly, how you're doing in terms of getting back in with customers? Whether there's still some customers that you can't get back into or you've reopened all the accounts again? Just wanted a bit more granularity around that really. Second one is a quick question just on the U.K. Exteriors business. Just wondering what sort of percentage of sales come from renewables, sort of solar or whatever? And then the third question on Germany. Just wondering how you get to 5% margins in Germany. Do you need to change the mix of that business at all? Yes, just maybe a bit more granularity around that because that's always been one of the lower margin parts of the group. I'm just wondering kind of what sort of plans you have in place to get to 5 there.

Yes. Sure, Charlie. I'll take the first bit on the U.K. sales. So Ian, on the numbers here, could you just share what you think or estimate the inflationary impact Q1, Q2 in those sales numbers?

Yes. So there is an inflationary impact, as you know, and as we flagged up obviously, that will get a bit steeper in the second half, but there was an impact in here in the kind of low to mid-single digits in Q2. I think Q1 is pretty unaffected. And I think as you can see from this chart, the key point, obviously, as you allude to is that, that recovery is well on track. We have talked about the fact that when we compare to 2019, as we have done, obviously, to make the comparators meaningful, U.K. distribution in the first half remained a drag. I think this slide highlights why, that because of the deterioration from sort of early mid-2019. And as you can see that's -- we're getting beyond that now. So we do expect U.K. distribution literally as sort of -- as we speak, to turn the corner in terms of growth over 2019.

So to take Ian's point, if you take the Q2 number, 1.74 and you shave off maybe sort of circa 3% or thereabouts, it doesn't change the trend. I think the broader point I made is that we're kind of halfway back to that share recovery of the points -- of the shares levels that we had in early 2019. How are we doing it? I think in terms of the larger key customers, we know we're getting a higher share of wallet with that and in some cases, more than before, in some cases, less. So it's a blend. Large customers are a small part of our group. So the vast majority of it, though, is at the branch level where we do have, as you know, in each branch hundreds or even thousands of customers. And what we're seeing is customer numbers are increasing, but they're not yet back to the levels of 2019. And the way that we think about business is that it's a function of the sales productivity in the branch of the sale and of the sales force. So if you have a very large sales force, and it's the productivity of individuals and that's -- and the sales force increases across the board, we'll see further increases in the months to come. On the U.K. Exteriors percentage of renewables. So solar -- for example, solar is a product that we started selling in our French business. And I'm not aware that we sell it in appreciable numbers at all in the U.K. Exteriors, but renewables are a fundamental part of what our industry has sought to do is to produce more sustainable raw materials into production, in installation, in dry lining and what have you. So there isn't any one product that would be more or less renewable than any other. And it is one area that we're focusing on is to create correct, most accurate suite of KPIs that will track this in the future. We'll talk more about that in March. As to the German margin -- very good question. So Germany, as you rightly pointed out, has got a different structural setup from other markets and that the cooperative distributors are a larger part of the market. And so I'd say, for the sake of a number, I would say even up to 100 basis points of margin is probably a reduction in the marketplace due to that competition compared to other markets. So in the U.K., U.K. Exteriors, for example, has in the past got even to 7% or 8%. In France, we're now trading north of 5%. In Germany, we don't expect -- we don't target it to get as far as 5%. The sorts of things that will help are, number one, pulling more large volume through the network that we've got, increasing the utilization of the network we've got and that will be -- that higher utilization of the overhead will push up margin. I think the other and more fundamental thing, and one of the reasons we're so delighted to have Alfons Horn rejoin us as MD of the German business is that it's all about making sure that you reduce complexity in the field. The vast majority of cost inflation that we've seen in our German business from when Alfons left in about 2015 has been in the way in which we operate the freight system in terms of use of third-party trade, when we need to, et cetera. And so it's in optimizing the way -- the efficiency and reducing the waste in branch and in our kind of logistical movements is where the cost is in that business. So it isn't necessarily and the fact it won't be going out to customers to increase price per se. There will be an element of product mix improvement, enriching the margins. But the vast majority of it will be operating more efficiently and more simply. Does that cover it, Charlie?

Yes.

So our next raised hand is from Christen Hjorth.

I've got 3, if that's okay. First, just a little bit on the guidance for the second half. I know you sort of pointed to maybe doubling revenue from the first half. But just looking at the profit, I suppose there's sort of 2 bits. There's U.K. distribution, and then there's the rest of the group ex U.K. distribution. So should we look at U.K. distribution as being able to breakeven for the year overall? Is that something that we should be targeting? And then also with the rest of the group, is there any reason that we wouldn't maybe see sort of H1 profitability being sort of repeated in H2? I know you sort of pointed to some product availability issues and things like that. But just a little bit of color there would be very helpful. The second one is just on the 3% EBIT margin target. And clearly, as you sort of rightly stated, things are going well and ahead of plan. Can you give maybe a bit more color on when you think that 3% could be hit, i.e., which year overall? And then on the U.K. distribution as well, just a bit of color on the competitive backdrop would be quite useful. Because as you say, you are sort of regaining share. I'm just wondering if there's sort of any competitor action there that we should be aware of.

So the first couple?

Yes. Yes. Let me take the first question for sure. Yes. So Christen, thanks for the questions. So in terms of the U.K. distribution business, your question was breakeven for the year. Overall, we're very -- obviously very happy with the way that, that business is progressing. And for the year overall, I think on [ life, ] that will get to breakeven given where we're in the first half, but certainly improved in H2 and certainly getting very close to breakeven and profitability for the half. And from a group point of view, the H1 number, I think -- we think we can improve the profitability in the second half, as we said on the back of broadly a similar sales number. But given also the confidence around gross margin, et cetera, some of the cost phasings that we've talked about, we think if anything H2 will be -- should be a little ahead of H1. In terms of your second question, 3% target, we've -- no change on that from our point of view. We think we'll exit 2023 at around 3%, whether we get to 3% for the full year, we'll see, but that's currently our ambition and expectation is that we exit 2023 at around 3%.

Thanks, Ian. Competitive reaction, we are in a competitive market. The margins, as you know, are broadly, relatively low. And so of course, there's competition. But we said before, and I'll repeat again today that our business model is not to compete on price. We're winning the share back based on service expertise. By expertise, I mean here in the U.K., if I take that example, these are, in many cases, people that customers have traded with for many, many years for in other companies, who come back to join us. And it's natural to trade with people, you've got long relationships with. So it's -- I would say it's relationship and expertise-driven competition. And of course, extending our local footprint because we exited certain geographies. We've now started to reopen branches to go back into those geographies, bringing back the people in many cases, who were in those branches before. So an example being tremendous performance of our [indiscernible] branch, which was closed. We reopened it, and it's been like a train since we've reopened it. I suppose from a kind of metric perspective, how do you look at this? I think probably the 2 pages, 20 and 21, make the point themselves that we simultaneously brought back a lot of volume and evidentially, much more than the industry is growing in our distribution business. So therefore, market share growth. And at the same time, rebuild margins which we describe on Page 21. So to do those at the same time, you cannot compete on price. You've got to compete on, as I said, service expertise being local.

So we've got 2 more raised hands. Our first one, Shane [indiscernible]

And my first one kind of follows on nicely from what you were just saying there. Just in terms of the gross margins in the U.K. distribution business, obviously, they've built quite well over Q1 into Q2 and right into July and August. So kind of with that as a backdrop, you're kind of talking about, I suppose, group gross margins in the second half being a broadly flatter up, but does that look perhaps a little bit conservative in terms of momentum we're seeing in the U.K. distribution business? That's the first one. And the second question was just on, I think in the conference call earlier, you were talking about kind of healthy M&A pipeline out there. If you could just give us a little bit more detail on that, that would be quite helpful.

Yes. Would you like to take the gross margin?

Yes. I mean I think -- thank you, Shane. I think we're obviously very happy with what the U.K. distribution margin is headed. We -- it -- there's obviously uncertainty out there at the moment in the sort of general environment. But to your question, is there some conservatism, we would hope so, maybe very slightly. But at the moment, we'd be very happy if they continue to do the same gross margin in H2 as we did in H1.

Yes. I mean I would say that the U.K. distribution recovery is kind of in place. We were covering a lot of -- some COVID related and some business-related shortfalls in gross margin. We're happy with the margins in the business now. You rightly say that there is going to be a slow secular upward drift in gross margins, as we push harder into the higher-margin category. So for example, construction accessories in the U.K. distribution business, which is a higher-margin category has pushed on well this year. And we expect it to push much faster as we go into the future. We just acquired a small business F30, which is a specialist in that sector with higher margins. And so that -- one of the reasons why we see a momentum in margin in the medium term is that we're continuing and looking to improve the product mix towards high-margin categories that we can sell with the more experienced and more expert sales force. As to the M&A pipeline, yes, it's healthy and as much as -- there are 2 -- for us, there are 2 functions of M&A. It does play and will play an important role in the next phase of the U.K. market share recovery because some of it we win in the market and other parts of market share, simply, there are a lot of players in the market that maybe weren't in the market or weren't very large in the market 4, 5, 6 years ago when SIG started to lose share. And so a part of that recovery is going to be M&A at a good prices of small businesses. And by that, I mean normally even below GBP 30 million, but never above, say, GBP 60 million, GBP 70 million turnover. And that pipeline is building. There's lots of opportunity. It's a relatively fragmented market not only in the U.K. but in other countries of operation. So we have a pipeline in France, for example, and we've encouraged the businesses in other countries to build their pipelines as well. With that said, however, '21 for us is always the year of operational delivery. It was the year in which we bed down the 7 pillars strategy as to how we run the company. But we've bed down the service proposition. We get that service proposition back to where it should. And then as we now transition into '22, the focus is moving clearly more towards M&A. It's one of the 2 I should stress in growth rather than something, if you like, inorganic. It's almost like organic add on as part of our business. And by the way, those of you who know us from the past, that's how SIG Group in the first few decades of existence. We can go back to that mode going forward. I hope that covers your questions, Shane?

Yes. That's really helpful.

So our next raised hand comes from Clyde Lewis.

I think I've got 3 as well, if I can. You very kindly gave us an idea that sort of July and August trends have been pretty solid. That was obviously sort of an overall group comment. Have you noticed any sort of different patterns across the geographies I suppose in the last couple of months? That was the first question.

You're a little faint, Clyde. Can you just speak up a little, Clyde? Sorry.

Sure. Apologies. Hopefully it's a little bit better. So yes, the first one was around sort of July and August, whether you've seen different trends across the different geographies in the last couple of months. The second one I had was on operating costs, and I suppose where the key pressures have been there. And I suppose linked into that is sort of a sub question around HGV drivers and your ability to find sufficient drivers to keep the product moving. And the third one was coming back on Charlie's comment about sort of solar/renewables. And I'm just sort of wondering whether within the U.K., you're starting to see some changing patterns in the inquiries from housebuilders, in particular, about what sort of product they are looking to buy from you and how they might be changing their sort of build techniques and approaches, as they try and adapt to sort of what the building regulations you're going to throw at them going forward?

Okay. Thanks, Clyde. So Clyde, I'll take the first one on July and August. Generally speaking, no, I mean, no change in terms of the trend in H1. So I mean, obviously, August is a slightly odd month in France, in particular, but other countries as well. But in terms of growth trends, whether you're looking over 2019 or over a sort of an adjusted 2020, the trends were pretty similar Exteriors, Poland, all strong. So no huge changes there.

Yes. I mean I think that what we will see and why there's obviously a lot of focus on September, as Ian said, August is always a strange month. July, August also was the first time that many people could take holiday, proper holiday where you might be able to travel in the U.K. or any of other [indiscernible] countries. And so we sort of [ perceptible taking a breathe, ] particularly in France for a week or 2. But actually, because our customers also took the same holiday, we've seen that kind of come back more strongly in September, so it kind of washed through. In terms of operating cost pressures, I wouldn't say operating cost pressures, I think we have kept costs tightly under control at group level. We've now completed our program of kind of streamlining the head office costs, which happened on time as planned, largely by the beginning of Q2. In terms of the operating businesses, we've intentionally allowed them to maintain -- the way we look at it is operating cost as a percentage of sales is what we're targeting rather than the absolute number because we're looking for productivity, we're looking for what we call network utilization to be high. And obviously, if you're growing, let's say, our Polish business is right now 40% year-on-year, you're going to allow those operating costs to support that increased revenue because it's part of our promise to customers. So for us, the key thing, it's a revenue-driven strategy, and we want to maintain costs in proportion to sales, and we're not focusing on reducing absolute costs. We're focusing on taking out inefficiency in the way our network operates. And it references back to what I said about Germany. Those points are true in all of the countries of operation. In terms of HGV drivers, I guess the first thing I'd say is that compared to other industries, ours is less affected. We have -- and particularly our business model, our drivers, we have less agency in our business, and drivers are part of branch teams. And so they have a sort of, if you like, they tend to have a longer-term allegiance to SIG rather than, if you like, any [indiscernible] because they're an intrinsic part of our service proposition. Now having said that, of course, we have vacancies. It's -- I would say it's very much a second order effect. The first order effect on supply for us is product availability. But for example, increasingly, we're offering to send trucks to pick up product from manufacturers because they don't have the drivers available to drive and deliver to us. So it's second order, but it is definitely an issue in our business. With regards to renewables, I mean, I know there are a lot of questions here that imply that there's a sort of step change in focus on the renewable topic. I mean our business has been in renewables almost since its inception. And then there's an acceleration of focus on these issues, but making products more sustainable and environmentally effective has been an industry trend for well over a decade. And so I don't say that there's a change in pattern, particularly to the housebuilders. Has there been a marked change in the last year, I wouldn't say so. Is it a key and central part of our product development proposition with housebuilders, yes, of course, always. But there hasn't been a step change. And as I said before, one of the things that we haven't, Ian and myself, sought to focus on is to gain visibility and develop metrics in that area today, but it is something that is very much in focus as we look forward.

We've got a typed question from Kevin Cammack. He asked tactically, is it right to be rebuilding market share in U.K. distribution in today's market climate with shortages and well-documented supply chain issues. Don't you risk disappointing customers before you've regained their confidence in you? And a second part to that is, are you having to ration or quota any products?

Yes. Well, it's a good question. Is it right to -- well, we're here to put the -- what we like to think is the best business in our industry back into the right shape to be if you like, the supplier of choice for the customers. So we're on with that task. In terms of can we supply those customers, what we've made a commitment to do and I know it comes up in the discussion [ of cash is ] we've said, look, to our teams, we have the capability to put in a slightly higher stock levels to make sure we maintain availability. And we've encouraged our teams in all countries, including the U.K., to take on additional stock to maintain availability. And we've been working with suppliers to make sure that we have wherever we can, superior availability. Now what that's meant is as you kind of indicated in your question, Kevin, we've been able to gain new customers because we have availability when other suppliers don't and that's been a feature. But the other is, it's allowing us to service our customers, our core customers to make sure we have the availability. Now what's -- what we are seeing, and this is an industry-wide phenomenon, is those delivery times are getting stretched further and further from a week or 2 to 6 weeks and sometimes 8 to 10 weeks. And so for every customer, they're having to wait longer for product. And it's across -- I'm sure the question may come as across all categories. The availability changes literally on a week-to-week basis. The allocations that we're on most -- with most suppliers on most products, those allocation percentages change literally week on week. But what we've done through to bringing back so much expertise and so many good relationships with suppliers is to make sure we position ourselves to superior access to product compared to others in the market and give ourselves the best possible opportunity of giving service.

We have a final raised hand from Sam Dindol.

A couple of questions from me. Firstly, on price inflation, you flagged mid-single digit in the second quarter. I am just wondering if you could say at what level do you think that will peak and sort of when and then this will unwind next year? And then secondly, on France, obviously, very impressive margin recovery in that business. Is that as far as the margins go there? And is there any learnings you can take from that into other geographies, which is still sort of on that margin progression journey?

Yes. Thank you, Sam. Do you want to take the first, Ian?

Yes. So inflation on the top line in the second half, we expect it to increase further probably for reasons. So for the first half in aggregate, it was low to mid-single digits. But obviously, that was growing through the half. So in the second half, it's going to be high single digits in places. Certainly in certain categories or geographies could be into low double digits. So yes, that's how we see it. In terms of has it peaked, we don't know. I think we -- I think there's probably -- we wouldn't rule out spikes in certain categories, points in the future. I think overall, one would hope that it's peaked and overall certainly plateau and over time may begin to come down again. But none of us clearly quite know how it's going to play out over the coming months. Our assumption in terms of our forward-looking numbers and outlook is that, over the coming weeks and months, things broadly stay the same in terms of input inflation and our own prices to customers.

Yes. So your -- Sam, thanks for the question on France. I mean, France has been a business that's generated margins of 5%, 6% in the past, and it's now back to that sort of level again. What we have seen though in France is an acceleration of growth that we've not seen before. And that growth at the end of the day is what comes to the overheads that generates the bottom line margin. French gross margins have not moved up markedly. It's the net margin. So they're getting much better utilization out of the branch network. Now are there lessons for others? Yes, well, there are all series of programs that Julien Monteiro and his team put in place over a year ago. He would say and with some justification that he adopted our strategy, If you like, before the rest of the group. And he's very pleased that we've caught up in thinking with what he and his team were doing anyway. And to be fair, he is in large part, correct. So the sort of things he's been doing is to drive things like the shop-in-shop aspect of the business, so to improve both the merchandising and ranging in the branches. And that business is a much higher margin business, and it's growing at much greater growth rates than the rest of the business. And the thing that's driving revenues is in part the incentive programs have been revamped. We run -- unlike in other parts of the group, we started running promotions in branch and some of those are quite local. And that's something that the rest of the group hasn't done typically, and it's been piloted last year and rolled out this year to great success. And there are incentives in the branches paid not only to sales teams, but to everyone in branch for driving that performance. So it becomes a little bit of a snowball that one indiscernible] from the French business. This was from one of the branches who was asked feedback on the strategy. And they said, we love the strategy, the strategy of growth, just the very simple way of growth is the strategy that we understand is our strategy in the branch. And to use the phrase, it was the French word [Foreign Language] the strategy. They literally do all the strategy of being empowered to grow the business with those incentives. And we're seeing them make their own innovations. So one branch will innovate and go and speak to a supplier about a new product. So we started selling solar panels earlier this year in France, and it was a result of being, if you like, release to innovate locally. So are there lessons for the rest of the group? Absolutely. And if you like, France is trailblazing ahead. We're seeing in Poland also now growth rates that the Polish business hasn't seen for many years based on the same sorts of things, in fact, [indiscernible] who runs the Polish business, said to us a couple of weeks ago. He said he was genuinely surprised by how successful some of these initiatives are, and he's been running that business since 1999. So he's seen a lot. So if there are no other questions, I'd just like to summarize by saying the return to growth strategy is gathering momentum. As the questioning has shown, we operate in pretty volatile times, but SIG is a very strong franchise in all the countries of operation. Both Ian and I and the Board are confident that this momentum will gather as we go forward. Thanks, everyone.

Thank you.