SIG plc (SHI) Earnings Call Transcript & Summary

Good morning, and welcome to the H1 presentation of SIG. I'm joined here by my colleagues, Chris Lodge, the MD of our U.K. Roofing division; and Simon Kesterton, our CFO. Simon joined 1st of May. I'm delighted he's joined us. As some of you may be aware, I've worked with Simon for over six years at RPC Group plc and subsequently, Simon had a stint of six years at Kier Group, during which time he was part of management teams, which were able to create significant amount of shareholder value. In terms of an overview, the H1 results have been resilient, I would say, in light of difficult market circumstances. Q2 actually did show a like-for-like growth compared to last year versus a weather-impacted Q1. Pleased to report that the Benelux business has returned to profitability and indeed, further cost savings across the group have been realized, and we are maintaining good liquidity. Beginning of this year, we launched the Vision 2030 strategy. But against the backdrop of subdued markets for the foreseeable future, we have identified more opportunities going forward. So we accelerate actions, but also extended our management actions with the team now in place. Numbers-wise, we are targeting a GBP 50 million improvement in operating profit run rate admittedly by mid-2028. We're aiming to reduce our leverage, to improve leverage, I would say, to generate at least GBP 100 million of cash by the end of 2027. Our longer-term target, as we announced at Vision 2030 remains a 3% to 5% operating margin through the cycle whilst being cash generative. We have a net debt-to-EBITDA target of less than 3x. And we are focusing more than perhaps we did do in the past on latest technology, AI, in particular, to enhance our key processes, which are in sales, supply chain management and procurement. Before we move further on the value creation plan, we first go back to what's happened in the half year, handing over to Simon on that one.

Many thanks, Pim, for your introduction. Good morning to everyone. It's good to meet many of you in person this morning. Having joined the group in May, I've been encouraged by the SIG culture, our people, the market positions we occupy. This gives me great confidence that the significant self-help opportunities available to improve profitability and cash generation can be delivered. So moving on now to the results, Slide 7. This slide sets out our high-level results. Despite difficult end markets, as Pim mentioned earlier, and a weather-affected first quarter, the group delivered a resilient first half. Trading improved throughout the period, returning to growth in Q2, whilst our management actions delivered GBP 10 million of benefits, and we maintained strong liquidity. Revenue in the period is lower than HY '25 and reflects the weak demand across our end markets made worse by the poor weather in the first quarter of the period. This resulted in like-for-like sales declining 1.5%. Lower volume in Q1 resulted in underlying operating profit declining GBP 5 million to GBP 10.5 million and margins falling 40 basis points to 0.8% due to a competitive market chasing low demand. The free cash outflow of GBP 16 million reflects a normal working capital seasonality. However, the opportunity to build stock levels ahead of price increases and higher prices during Q2 is partly offset by other working capital improvements. The group has robust liquidity and long-term financing is provided through EUR 300 million senior secured notes which are due in October 2029. And despite leverage being high at 5x net debt to EBITDA, we have a clear plan to reduce it to below 3x. Turning to Slide 8. I'll walk you through the Group's revenue change. On the right-hand side, we see a strong month-on-month growth. Pricing impact was largely flat as the group was able to pass through cost inflation, an impressive result bearing in mind the competitive scenario low demand created. The key point is that the exit rate had recovered and was materially better than the start of the year. Moving on to explain how the like-for-like sales translated to the overall revenue change. We start on the left with the previous period revenue of just over GBP 1.3 billion. The next two bars show the like-for-like sales changes split between volume and price, which I've just explained, and volume decline, partially mitigated by some pricing pass-through. The impact of closed and exited business has resulted in a 0.7% decline in revenue in the period. As a reminder, in 2025, we closed 14 sites, six in each of the U.K. and France and one site each in Germany and the Benelux divisions. We closed a further net one site in the half year 2026. Across the geographies we serve, there were fewer working days in the first half of the year, and this combined with translation gains results in a revenue growth of 1.3%. This resulted in revenue of just below GBP 1.3 billion during the period, a solid performance considering January and February revenue. Moving now to the underlying operating profit bridge. We start on the left with the previous period's underlying operating profit of GBP 15 million. The volume decline seen, especially in the first quarter resulted in lost margins of GBP 6 million, GBP 9 million negative in the first two months of the year and GBP 3 million positive during the following four months. Pricing growth contributed GBP 2 million. Closures mentioned on the previous slide, alongside the impact of other gross margin impacts has reduced margins by a further GBP 3 million. Overhead cost inflation was around 2% or GBP 6 million during the period. We delivered GBP 10 million of management actions in the period. That more than offset the GBP 6 million of inflationary headwinds and went some way to mitigating the volume impact from January and February. Of this, around GBP 3 million related to restructuring and branch closure projects and a further GBP 3 million came from increased focus on procurement across the group. The balance came from a range of overhead and property actions, which we expect to accelerate given the continued absence of a market recovery that Pim touched on earlier. The overall result is an underlying operating profit of GBP 11 million, a good result considering the first two months of the year and the continuing weak market conditions, materially contributed to by our self-help initiatives. Now let's turn to our free cash flow. We did an underlying EBITDA of GBP 51 million during the period. We paid GBP 36 million in lease payments and CapEx in the period amounted to GBP 6 million. There was an GBP 8 million working capital inflow, a great performance despite investing in stock ahead of price increases. This reflects the stock build ahead of a price increase and the impact of higher prices during the last quarter, partly offset by receivables and other working capital improvements. Branch closures and other restructuring activities resulted in a GBP 6 million payment in the period. The group generated GBP 11 million of operating cash in the period, a 104% conversion of operating profit. The interest and financing payments were GBP 26 million in the period, and this results in the free cash outflow of GBP 16 million. This slide sets out the long-term funding arrangements the group currently has in place. The long-term financing of the group is provided through EUR 300 million senior secured notes, which are due in October 2029. And this, combined with a GBP 90 million revolving credit facility, which runs to [ April 2029 ], gives us significant long-term liquidity. The RCF was undrawn and combined with GBP 64 million of cash at the period end, gave us a robust liquidity of GBP 154 million. The only facilities in the next three years due are GBP 13.5 million of fixed rate secured notes. GBP 322 million of the group's total net debt of GBP 532 million are IFRS 16 capitalized leases related to our operating assets, resulting leverage of 5x EBITDA. As I mentioned earlier, whilst leverage remains high, we have substantial liquidity, no near-term financing issues and a clearly defined plan, which I'll walk through later to reduce leverage to below 3x net debt to EBITDA. And now I'll hand back to Pim for the business review.

Thanks, Simon. So here, you see a slide with an overview of the various businesses. A couple of remarks on this slide. The presentation is following the management structure. So there has been some streamlining in the organization. So you can see U.K. Interiors has been combined with Ireland. Second remark is no loss-making divisions anymore given the fact that Benelux turned around into a profit. And you can see that the main markets we have in France, Germany and the U.K. are the most difficult ones, but we do have some bright spots when you look at Ireland, Poland and the Netherlands. I'll give some more background of the various divisions in the coming slides. And also Chris is here, who will take in a bit more depth through the U.K. Roofing division. As you can see on this slide, actually our star performer certainly this half year with GBP 7.3 million operating profit, a like-for-like growth of 1.7%. France and Germany, two of our challenged markets in terms of overall market environment. In France, you see a drop in revenue, although that was compensated in Q2 partially. It remains challenging. The reduction in profitability has indeed reflected that challenging market, though we are taking further action, one of them has been the closure of our Lyon branch. Perhaps also to note, we're trying to balance the cost reduction with also continuing to progress our customer proposition. So we have made good progress implementing AI tools, particularly in France. We went live with something called La Bonne Réponse, which is a quoting tool, which we developed over six months with an AI start-up, basically reducing the time for quotations from 6-plus hours to 30 minutes. So that's now in action and it's also very much improved the quality of the quotations. Within the group, we have our building an AI road map, which we are deploying centrally to make sure we learn from each other. So perhaps more than before, we are focusing on technology, helping improve our key processes being sales, customer service as well as dynamic pricing, supply chain management and procurement. Germany, a significant drop at 5.5% in terms of the market compared to that drop, still a resilient performance in operating profit, as you can see, 0.7% reduction. Costs have been taken out and will be taken out. And as we see it, actually, the market there is very challenging, and we think we are doing better than most of our competitors there. Clearly, we know the long-term incentive plan of the German government hasn't kicked in just yet its effect. But hopefully, in the not-too-distant future, we see some effects in the general market circumstances. Again, also here, we try to give the balance between cost and continuing to improve our customer proposition. So last year, we introduced the omnichannel digital project also in Germany. So we can see some momentum gathering in Germany as well vis-a-vis our customer base. Some bright spots in the half year. SIG in Poland had the harshest winter since the last 20 years in Poland. That impacted sales quite dramatically in January and February, as you can imagine, on the construction sites. Nonetheless, we've recovered subsequently growth of 4% year-on-year in the first half, continuing to gain market share. A part of the reason also there is the digital omnichannel capabilities driving market share. And also in Poland, we're some way down the line in terms of developing and starting to implement the AI road map. Benelux, I already referred to that, turned to profit this year from a loss last year. They have been in a reorganization for the better part of two years, and they're now regaining their market position and retaking market share. In those numbers, we still included the company called MPA, which is a heavily loss-making Belgian subsidiary, which we've announced closure in the H1 towards the back end of H1, which closure the process will be concluded in H2. So clearly, we have a path going forward where Benelux should enhance its profitability. U.K. and Ireland, Interiors, as I said, we changed the reporting line, simplified the organization structure. So that's now in one. You can see, though, a recovery in market share, where you may recall that we lost some market share in the second half of last year. That's now recovered. And Ireland is improving its profitability. But in the U.K., particularly our insulation and dry lining business is having a tough time as have our competitors. We remain profitable, but it's been very intensive competition volume-wise, housing new builds. And I think my colleague, Kevin mentioned the Southeast high-rise buildings market not being great, and we're suffering from exactly that same impact. So cost measures, further cost measures are under consideration. The division is larger than that. So we also announced recently the restructuring of two smaller businesses called Euroform and CMS Danskin, and there was still a separate management structure called Performance Technology business that also has been dissolved. So there's further measures to come in that -- on that front. U.K. Roofing, as I said, our star performer is market leader in roofing. It's continued to take market share in difficult markets. Chris will talk about that. But it also includes Building Solutions, where we've actually seen a significant growth in H1, 13% up, and indeed, it's improved its profitability. But having said that, I'll hand over to Chris to deep dive a little bit more in U.K. Roofing. Chris?

Thank you, Pim. Good morning, everyone. Before I talk about performance, I'd like to start with what sits at the heart of SIG Roofing. Our purpose is simple: to be the home of roofing. And for us, that means creating a place where customers, suppliers and importantly, our colleagues feel that they belong. We believe sustainable outperformance is built on the strength of that ecosystem. It starts with investing in our people, maintaining the highest standards of health and safety and developing expertise and creating a culture that puts the customer first. The result is stronger engagement, stronger customer relationships, better service and ultimately, market share gains. So the home of roofing is more than a slogan. It is the foundation of our strategy and ultimately the reason why we continue to outperform the market. So with that in mind, let me briefly explain the scale and capabilities that sit behind that proposition. We are the #1 specialist roofing merchant in the U.K., operating out of 108 locations and employing 920 colleagues. Our focus is entirely on the specialist trade of roofing, which differentiates us from general merchants. We provide specialist expertise through pitched, flat, industrial and increasingly solar roofing solutions. Alongside the SIG Roofing core business, we have complementary specialist capabilities through AccuRoof, SR Timber, and Flex-R. This enables us to support customers across specification, waterproofing and timber solutions. So this specialist positioning, combined with national scale, gives us a strong platform to regain and win share and support customers regardless of the market conditions. So on to 2026 today. Firstly, the point is the markets remain challenging. Industry forecasts have market volumes in private new build and private RMI down 10% and 8%, respectively. Now given that 2/3 of our exposure is in these markets, we are certainly not immune to these conditions. Against that backdrop, I'm pleased with the resilience of our performance, also the inclement weather that we experienced in Q1, January and February and now the weather extremes that we are seeing in June and July have impacted demand, and I'm pleased with the performance and how we've come through that. And we estimate we've outperformed the market by 4%. This continues a multiyear trend of share gains driven by our laser focus on our customer proposition, commercial discipline and growth initiatives. Importantly, we balanced growth and profitability despite ongoing cost inflation, our operating margin improved, and we also generated GBP 6 million of free cash flow, supported by strong working capital discipline. So while the market remains subdued, the business continues to demonstrate resilience on sales, profit and cash. Looking ahead, we remain realistic about the market conditions. We expect the roofing demand to remain challenging throughout 2026 and not assuming any near-term recovery. However, our focus remains on the factors that we can control. First, continuing to invest in our people and our customer proposition. Second, supporting customers and accelerating targeted growth areas such as solar, where training and technical expertise are becoming increasingly important differentiators. Third, expanding customer proximity through both digital capability and selective network expansion. We believe increasing our local market coverage remains one of the most effective ways to drive growth above market levels. And finally, we are progressing our AI road map, focused in practical applications like inquiry and pricing optimization and inventory management that will simplify the front line, allowing us to provide an enhanced customer service. And of course, beyond the current cycle, we remain very positive on the medium-term outlook, structural housing undersupply and eventual recovery in RMI activity should support roofing demand greatly over time and enhance margins further.

Thanks, Chris. So on to the strategy and outlook. And just as a reminder, 2030 was launched Vision 2030 beginning of this year, has two legs, optimizing our operating leverage and then optimizing the business portfolio. We do not expect the markets to recover in the foreseeable future. So our action plan is against that backdrop. Key actions there, you can see it on the slide. One is to simplify the business portfolio, but also the property portfolio and indeed, the branch network. We are simplifying the organization as well in terms of the organization structure, some of the things that you've already seen, U.K. Specialist Markets no longer there, PGG no longer there, consolidation of Ireland into U.K. Interiors. Reaffirming our operating model. Again, we've stated at the beginning of this year, we anticipate procurement to have a benefit of at least 1% of our procurement spend. It is network driven. So no big central department. It's really revitalizing and sharing best practice and indeed information. We are reviewing our logistics models and we're also looking how to more efficiently use our capital structure. But Simon is our expert in that. Mentioned a couple of times, we're embracing AI and enabling technologies. We are -- and that's part of the GBP 50 million operating profit improvement target. Some of it is what I would call traditional. Some of it is really enhancing our processes, as I said, on sales, where everybody is looking to further implement dynamic pricing, customer service, Chris already mentioned it, supply chain management, procurement, visibility of the data. So that road map is in development for the group, and we will invest more going forward in order to indeed become a higher-quality distribution platform. So our target remains the same, 3% to 5% operating margin through the cycle and create a best-in-class distribution platform. However, the more short- to medium-term plan is clearly how do we get to the GBP 50 million operating profit by mid-2028 -- how do we achieve cash generation of at least GBP 100 million by the end of next year and indeed the target leverage of less than 3x net debt to EBITDA. And to that, I'll hand over to Simon to go through the next slide.

Thanks, Pim. I'd like to explain how we intend to create value over the next few years. Importantly, this plan is not dependent on a market recovery, as Pim mentioned, in our end markets. A market recovery would clearly provide additional upside, but the majority of these opportunities are management controlled and can be delivered irrespective of market conditions. The program is focused on three financial objectives: improving profitability, generating cash and reducing leverage. On profitability, we're targeting a GBP 50 million operating profit run rate improvement by mid-2028, as Pim mentioned earlier. This will be delivered through a combination of procurement savings, back-office simplification, organizational efficiencies, footprint optimization and over time, market share gains. Procurement alone represents a significant opportunity with a further of GBP 25 million of benefits targeted. Alongside this, we see substantial opportunities to improve cash generation through tighter working capital management, optimization of stock and receivables, selective asset disposals and further operational efficiencies. We are targeting at least GBP 100 million of cash generation by the end of 2027. Technology and AI, as Pim explained earlier, will act as accelerators across many of these initiatives. Our focus is practical, improving pricing decisions, supporting procurement, optimizing inventory, space and distribution costs and simplifying support functions to enhance productivity across the group. Importantly, these opportunities are not theoretical. The actions already taken in the first half provide evidence of the potential. We delivered GBP 10 million of management actions in H1, including procurement savings, restructuring initiatives and organizational improvements whilst also significantly reducing working capital as a percentage of sales. Taken together, we believe these initiatives provide a clear path to a significantly more profitable, more cash generative and lower leveraged SIG. As we execute the plan, our target is to reduce leverage to below 3x EBITDA while building a higher-quality specialist distribution platform supported by technology, including AI capable of delivering sustainable operating margins of 3% to 5% through the cycle. I'll now hand back to Pim for the outlook and takeaways.

Thanks, Simon. So in terms of the outlook for the second half, as I said before, main markets are expected to remain subdued in the second half. The full year operating profit is expected to be around GBP 25 million, as we highlighted two weeks ago. We aim to reduce the net debt in H2, expect to maintain healthy levels of liquidity going forward. And as we alluded to, we are really accelerating our value creation plan. So to conclude, what are the investment takeaways. Strong markets in what we shouldn't forget are structural growth markets. We are in a downturn of the cycle, which is longer than anybody apparently ever experienced before, but those are structural growth markets, and we do have strong market position. You heard about our extension and an acceleration of our self-help. So those targets you've already seen, and we aim to reshape SIG to a higher-quality distribution platform going forward. With that, I think we're now over to Q&A. Let's start in the room with Q&A. We go lady with the mic.

I'm Aynsley from Investec. Just two for me, actually. Just to clarify the GBP 50 million run rate and profit improvement, the way we should think about that, is that -- if we assume the market just stays as it is now, then the kind of base is GBP 25 million for this year, I think consensus said it's GBP 50 million on top of that. And then just wondered how back-end loaded that is? Is it a smooth kind of development to FY '28? First question.

Yes, you're absolutely right, Aynsley. I mean you think about it, the first priority is to realize the capital which you're going to invest in really improving the business performance. So you just think about it developing towards a full run rate of that GBP 50 million by the second half of 2028. So you're at full run rate through 2029. And you'll be, I would imagine, quite close to a full run rate through 2028 as well, won't you?

Great. And then just on -- maybe if you could give an update on the kind of inflation you're seeing both on COGS and OpEx as you look going into the second half?

Yes. So I touched on the inflation. It was GBP 6 million in the first half on OpEx effectively. We see that modest inflation continuing. We're not expecting that to drop off. And then we've seen a tremendous amount of pricing inflation through the first half of the year, I think up to sort of 9%, but we've successfully passed on as you've seen.

Alastair Stewart from Progressive Equity Research. A couple of questions. One, actually continuing from Aynsley's much more short term, looking to the second half, you're looking for a delta in second half versus first half operating profit of about GBP 5 million. Bearing in mind your comments on the underlying market, is that really just the removal of the two months of bad weather in the first half. That's -- you've nodded I assume that's...

Yes. I mean the removal of the two months of bad weather is GBP 6 million in itself. So I think, yes, that's effectively what...

The second question, in terms of insulation, the mood music changed from keeping heat in to keeping heat out. Are you planning any innovations, new products, systems on the back of that? And not unrelated in your continental markets, sadly France in particular, do you see any retro work on the back of the horrible fires they've had?

Not as we speak today. I think it's a conservative market. Insulation continues to do exactly that. So I mean, in terms of weather-related changes, might not be on insulation. I think, Chris, you can talk a little bit about our solar activities in the U.K. perhaps now is the time. Not to do with insulation, but...

Yes. I mean we see solar as a very big growth area. We're seeing it in our numbers this year. We've had very strong growth this year. We had strong growth last year. We're investing in the specialist expertise. That market is at the moment and traditionally through the electrical wholesale market. And actually, we're trying to give that value to roofers who have the specialism to work on a roof. So that's where we see that we can add value into the market through training and expertise, and we are seeing some good wins through that. And of course, for us, that solar panel is taken up space that tile used to be in. So it's very important that strategically, we take a foothold in that market, and it's important for our customers.

Adrian Kearsey, Panmure Liberum. One on branches. On roofing, Chris, you've got 108 branches. And I think you mentioned about -- selective openings sort of going forward. Is that in terms of on a gross or a net basis? So are -- will you be closing branches and relocating? I'm just trying to think of -- and how quickly will that process take?

As we're going through those plans again through the second half of this year. We have a network design and strategy that has identified locations where we would like the business to be. Of course, if you compare it to the general merchant sector, 108 locations actually isn't that many and proximity to customers remains the #1 demand that a customer would like. There is still a demand to have a branch or an outlet within 20-minute drive time of a customer. So it still is a strong demand from the customer network. Although we have 108 locations, we cover around about 40% of the U.K.'s population. So we still see that as an opportunity as well as looking at our current network and seeing where we can optimize on the space because in the main, we are in the conurbations that we need to be in. It's just about being in the right place.

Clyde Lewis at Peel Hunt. I think I've got three, maybe four, so apologies. Could you give us an idea of the scale of the losses at MPA? And presumably, they were included in the first half and they'll be excluded from the business once you sell it or exit it. In July, any different trends in July versus the second quarter? And then I suppose, geographically, would you still expect Poland, Benelux, Ireland, U.K. Roofing to be positive territory and Germany, France, U.K. Interiors to still be in a negative situation for the second half of the year? And finally, the last one was, I suppose, price inflation. Simon, you mentioned obviously big numbers in the first half. Can you maybe update us as to what you're hearing out of the manufacturers in terms of sort of price rises that they're trying to push down the pipe?

So if I take the MPA and the geographic development and you pick the other two, July results.

I'll pick the remaining three, I think I heard.

My price inflation. Anyway, so MPA, yes, they have been making losses and included in the half year results about GBP 0.5 million loss. So you can see that's a significant improvement opportunity. Geographically, I see Ireland, Netherlands, Poland, continuing those markets to grow, and we're outgrowing those markets. So I don't see any change. I think the big markets -- I mean, in Germany, as I said during my presentation, we're actually even at the 0 results seem to be outperforming our competition. If you look at the indicators, there are some green shoots. Time will tell. What we have done in Germany is taking costs out and likely to take more costs out, but at the same time, have been investing, as I said, omnichannel is one, have been investing in certain regions, specifically approaching some teams from the competition, and that takes some time to mature. So I think in Germany, we are good to -- on the short to medium term to continue to take market share, take costs out. And that overall initiative in Germany as has been well touted eventually will come true in that sense. U.K., you've heard from Chris, we don't expect any change, but he has a very successful -- he and his team have a very successful track record of continuing to take market share. Hotspot clearly is, and you've heard Travis Perkins say that is in the insulation, the U.K. Interiors market. I think that is where the battleground is. This is where we are still making a profit. And this is where measures are being contemplated in order to -- we don't anticipate any improvement, but you never know. The new government leader may actually start to unlock some of the new build houses, and we would benefit from that. But at this moment in time, we're aiming to improve on the small profit we had in H1 by also internal measures. You've got price inflation.

Yes. So I think July was the first one. So in terms of sort of how we see the market looking through the second half, it's still quite grim, isn't it? So I don't see anything that's indicating it will be significantly up or down. I expect July and August to be pretty similar to the prior year. In terms of -- then you talked about Poland, Benelux and Ireland, yes, we do expect those to continue to remain profitable for the foreseeable future. And then in Germany and France, still negative. I think the second half last year is a slightly better comparator, but yes, possibly still down, I think, during the second half as well. And finally, was price inflation. Yes, so we've seen that flattening off. But of course, that's no indication. What we can be sure of, though, is we've done very well passing through those price increases, and we'll continue to do that.

I've got a mic. So I'll go. Ben Varrow, RBC. First one, is it fair to say that at the end of so H2 '28, you target to be at the 3% or between 3% and 5%. And at that point, could you give us an idea of the run rate operating cash flow, free cash flow, excluding the sort of one-off cash benefits you unlock? And then on that point, can you also split the GBP 100 million into the different buckets, if possible? And last point is just the costs to deliver that plan.

They all look like Simon questions.

They are all my questions. I'm doing well here, collecting questions. Yes. So the 3% to 5%, I think, obviously, it depends on mix changes and other events. But I don't see you getting to that by the end of 2028. It'd be tight. You might be close to the bottom end of that by the end of '28 because you haven't got the full run rate. Going through 2029, you might be getting quite close to the bottom end of that range. And it is a through-the-cycle number. So you'd obviously expect to be at the bottom end of the range. The GBP 100 million buckets, it's an at least number. We don't give that because some of the actions will be interdependent. Obviously, if there's some disposals, you can't then improve the working capital of the business that you've disposed of. But it's an at least number. And I think even without disposals, you will be getting the majority of that GBP 100 million anyway. And then in terms of cost, it's a net number. So that GBP 100 million includes the costs of getting there as well.

The other one was on the run rate. So if you do get to [indiscernible] run rate..