Doug Robertson

The Group has exceeded its stated objective of delivering £20m of net benefit through its Strategic Initiatives programme

Doug Robertson Finance Director

Group performance

Underlying*Statutory
2015
£m
2014
£m
Change2015
£m
2014
£m
Change
Sales2,566.42,602.9(1.4)%2,566.42,633.9(2.6)%
Gross margin26.8%26.9%(10)bps26.8%26.7%10bps
Operating profit98.7111.2(11.2)%65.953.223.9%
Profit before tax87.499.1(11.8)%51.339.031.5%
Basic earnings per share (pence)11.2p12.0p(0.8)p6.1p5.6p0.5p
Total dividend per share (pence)n/an/an/a4.60p4.40p0.20p
Working capital to sales9.1%8.0%110bpsn/an/an/a
ROCE9.3%10.4%(110)bpsn/an/an/a

* Underlying is before the amortisation of acquired intangibles, restructuring costs, acquisition expenses and contingent consideration, other one-off items, profits and losses arising on the sale of businesses and associated impairment charges, trading profits and losses associated with disposed businesses, unwinding of provision discounting, fair value gains and losses on derivative financial instruments, one-off recognition of deferred tax assets, the taxation effect of "Other items" and the effect of changes in taxation rates.

Overview

The Group has made good progress in the delivery of its Strategic Initiatives despite difficult market conditions, and has continued to successfully implement its infill acquisition programme. The Group has exceeded its stated objective of delivering a cumulative net benefit of £20m through its Strategic Initiatives programme in 2015, and acquisitions in 2015 and 2014 added an additional £8.8m of operating profit compared to 2014.

In a year that saw challenging market conditions, particularly in the second half, a ROCE of 9.3% (2014: 10.4%) falls some way short of SIG's target, which was for ROCE to exceed 11% in 2015. However, ROCE remains comfortably ahead of SIG's Weighted Average Cost of Capital ("WACC"), which for the year ended 31 December 2015 was 7.1%, and therefore creates economic profit for Shareholders.

Revenue

Group sales from continuing operations fell in Sterling by 1.4%, but increased 3.7% on a constant currency basis. The incremental impact of acquisitions made in the current and prior year contributed 3.4% of this sales growth in the year; excluding 2015 and 2014 acquisitions the Group's sales on a constant currency basis were up 0.3%.

The weighted number of trading days in the year ended 31 December 2015 had no impact compared to the prior year.

Total Group sales in Sterling fell by 2.6% to £2,566.4m (2014: £2,633.9m).

Like-for-like constant currency sales performance^GroupUK &
Ireland
Mainland
Europe
First half0.6%2.8%(1.5)%
Second half0.0%0.2%(0.3)%
Full year0.3%1.5%(0.9)%

^ Like-for-like constant currency sales performance represents the growth/(decline) in the Group's sales per day excluding any acquisitions and disposals completed or agreed in the current and prior year. Sales are not adjusted for organic branch openings and closures.

SIG estimates that overall its markets contracted by c.1.3% in 2015. Given that the Group achieved a like-for-like constant currency sales growth of 0.3%, this equates to a market outperformance of c.1.6%. This has been achieved against a backdrop of strong competition in SIG's core markets in 2015. In delivering this outperformance, the Group has opened a further seven branches in high-potential locations (2014: nine openings), three in the UK & Ireland, two in Germany and one each in France and Belgium. As part of its Supply Chain initiative, the Group also closed 16 branches in 2015, ten in the UK, four in Germany and two in Poland.

Gross margin

Gross margin

The Group's underlying gross profit margin at 26.8% was down 10bps on the prior year (2014: 26.9%), with the UK & Ireland down 10bps and Mainland Europe marginally ahead of prior year. The Group's Procurement Strategic Initiative delivered significant benefit in the year and was instrumental in protecting gross margins against strong pricing competition in many of SIG's core markets.

Maximising returns remains a fundamental component of SIG's strategy. SIG intends to continue to target gross margin improvement through further development of its Procurement Initiative, reshaping of its Supply Chain and greater focus on value added sales.

Operating costs

2015 v 2014 Operating cost bridge (£m)

Operating-costs

Underlying operating costs increased by £0.3m (0.1%) in 2015; on a constant currency basis, underlying operating costs increased by £31.0m (5.3%).

The biggest impact on operating costs in the year has come from the movement in foreign exchange rates, which have reduced costs in Sterling by £30.7m. During the year SIG has continued to invest in its branch network and other local initiatives (£5.0m), acquisitions (£14.3m) and Strategic Initiatives (£2.1m). The Group's incentive charge has fallen by £10.6m in 2015. The lower sales volumes experienced in 2015 have also reduced variable costs by £4.7m.

The Group has continued to review its operational efficiency in 2015, including a comprehensive review of its Supply Chain in the United Kingdom, France and Germany, and has initiated actions which are expected to deliver annualised cost savings of c.£5.4m with associated restructuring costs of £8.3m. Approximately £4.3m of these savings are expected to be realised in 2016.

The Group's bad debt charge on an underlying basis (being both bad debts written off and the movement in the allowance for bad and doubtful debts) was maintained at 0.3% of sales (2014: 0.3% of sales), an exceptional performance in difficult trading conditions. This is testament to the quality and strength of our credit control teams and the Group's credit control policies and procedures, supported by credit insurance policies where appropriate.

Taking into account the factors noted above, the Group experienced operating cost inflation in the year of 2.1%.

Other items

In order to provide an indication of its continuing earnings, the Group separately identifies "Other items" on the face of its Consolidated Income Statement. These items are separately reported due to their non-recurring, significant or unusual nature.

2015
£m
2014
£m
Underlying profit before tax87.499.1
Other items
Amortisation of acquired intangibles(10.3)(19.6)
Profits and losses on sale of businesses and associated impairment charges(14.0)
Net operating losses attributable to businesses divested in 2014(6.7)
Acquisition expenses and contingent consideration(14.3)(3.9)
Restructuring costs(8.3)(9.2)
Other one-off items0.1(4.6)
Fair value gains and losses on derivative financial instruments and unwinding of provision discounting(3.3)(2.1)
Total Other items(36.1)(60.1)
Statutory profit before tax51.339.0

Amounts reported in the "Other items" column of the Consolidated Income Statement, which in total amounted to a loss before tax of £36.1m (2014: £60.1m), are as follows:

  • Amortisation of acquired intangibles – £10.3m (2014: £19.6m). Intangible amortisation is expected to vary significantly over time, and is dependent upon the number and value of acquisitions made by the Company over time. The Statement of Significant Accounting Policies section and Note 12 to the Accounts provide details of what is included within intangible assets and over what periods the assets are amortised;
  • Profits and losses on sale of businesses and associated impairment charges – £nil (2014: £14.0m). The non-recurring charge in 2014 was recognised in respect of the divestment of the Group's German Roofing, Miller Pattison and Ice Energy operating businesses;
  • Net operating losses attributable to businesses divested in 2014 – £nil (2014: £6.7m). The 2014 results of German Roofing, Miller Pattison and Ice Energy were reported as "Other items" on the basis of their non-recurring nature;
  • Acquisition expenses (£1.9m) and contingent consideration (£12.4m) – £14.3m (2014: £3.9m). Acquisition expenses and contingent consideration linked to employment contracts vary depending on the number, size and future profitability of acquisitions;
  • Restructuring costs – £8.3m (2014: £9.2m). The Group has taken a number of actions during the year to improve the efficiency of its fixed cost base. These one-off actions have resulted in redundancy costs of £0.9m (2014: £3.9m), property closure costs of £4.6m (2014: £3.1m), rebranding of £0.2m (2014: £2.2m) and supply chain consultancy costs of £2.6m (2014: £nil);
  • Other one-off items – credit of £0.1m (2014: charge of £4.6m). Other one-off items include operating losses and closure costs associated with the Group's operations in the Kingdom of Saudi Arabia of £3.6m (2014: £1.0m), fair value losses on fuel hedging contracts of £0.4m (2014: £nil), and income from the sale of land of £1.1m (following the related impairment charge in 2014 of £6.1m). They also include credits arising on the discounting of provisions of £nil (2014: £0.5m), the reversal of property provisions of £2.4m (2014: £1.6m) previously provided through "Other items" whereby the Group has negotiated the surrender of the leases in 2015, and other one-off credits of £0.6m (2014: £0.4m); and
  • Fair value gains and losses on derivative financial instruments and unwinding of provision discounting – £3.3m (2014: £2.1m). The finance costs section below explains these items in more detail.

Operating profit and operating margin

Underlying2015
£m
2014
£m
Change
UK & Ireland61.066.9(8.8)%
Mainland Europe45.154.2(16.8)%
Head office costs(7.4)(9.9)25.3%
Group98.7111.2(11.2)%

On an underlying basis, operating profit decreased by £12.5m (11.2%) to £98.7m (2014: £111.2m). Foreign exchange rate movements decreased the Group's operating profit by £5.1m year-on-year. Therefore, on a constant currency basis underlying operating profit decreased by £7.4m.

Acquisitions completed during 2015 and 2014 made a contribution of £10.4m to operating profit in the year (2014: £1.6m).

Underlying operating margin

Underlying operating margin

Overall, the Group's underlying operating profit margin at 3.8% was 50bps lower than the prior year (2014: 4.3%). Given the operational gearing of the business, with the majority of operating costs being fixed, it is envisaged that operating margins will improve as the Group's sales grow.

The Group recorded a statutory operating profit of £65.9m (2014: £53.2m) after recognising a number of "Other items" that are described above.

Finance costs

Net finance costs on a statutory basis increased by £0.4m to £14.6m in 2015 (2014: £14.2m).

Net finance costs included in the "Other items" column of the Consolidated Income Statement amounted to £3.3m (2014: £2.1m).

Following the Group's equity issuance in H1 2009 and the subsequent reduction in the Group's level of net debt, SIG cancelled certain interest rate derivative contracts at a cash cost of £32.2m. This termination payment did not increase the Group's overall level of debt as this payment cancelled the mark-to-market liability already included in the Group's Consolidated Balance Sheet. The amounts previously recorded in reserves are being amortised through the Consolidated Income Statement over the life of the associated debt to 2018 in line with the relevant accounting standards. The amortisation included within the "Other items" column amounted to £1.9m (2014: £2.0m). The remaining balance recorded in reserves in relation to the settlement of interest rate derivative contracts, which is to be amortised in the Consolidated Income Statement over a period of three years, is £3.6m (2014: £5.5m).

In February 2014 the Group cancelled a further two interest rate derivative contracts that swapped floating rate debt into fixed rate debt at a cash cost of £2.0m. The amounts previously recorded in reserves are being amortised through the Consolidated Income Statement as an underlying item over the life of the associated debt to 2018 as this cancellation reflects the ongoing management of the Group's interest rate hedging policy. The amount amortised in 2015 was £0.4m (2014: £0.3m).

Also included within finance costs is a credit of less than £0.1m (2014: £0.1m) relating to hedge ineffectiveness incurred on the Group's financial instruments and a charge of £1.5m in respect of unwinding of provision discounting (2014: £0.2m). £1.4m of the unwinding of provision discounting has been included within "Other items" to reflect the fact that the related provisions are non-underlying in their nature.

Net finance costs before gains and losses on derivative financial instruments, unwinding of provision discounting and financing items relating to defined benefit pension schemes (i.e. net borrowing costs) decreased by £1.1m to £10.1m in 2015 (2014: £11.2m).

Further details of SIG's interest rate policies are provided in the interest rate risk section of the Treasury risk management.

Profit before tax

Underlying profit before tax decreased by £11.7m, or 11.8%, to £87.4m (2014: £99.1m). On a constant currency basis, underlying profit before tax decreased by £6.9m to £92.2m.

On a statutory basis, profit before tax increased by £12.3m to £51.3m (2014: £39.0m).

Taxation

The Group's approach to tax matters is to comply with all relevant tax laws and regulations, wherever it operates, while managing its overall tax burden. The Group seeks to pay the correct amount of taxes due, both direct and indirect, in accordance with the laws of the territories in which it operates.

The Group takes appropriate advice from reputable professional advisers to ensure compliance with applicable rules and regulations, and to consider potential mitigating actions in order to manage tax risks. The Group seeks to be transparent in its dealings with local tax authorities; where differences of opinion do arise, these are dealt with in a professional, co-operative manner.

The Board has overall responsibility for managing and controlling risk, including tax risk, within the Group. The Group has a Tax and Treasury Committee that provides regular updates to the Board, and this enables the Board to consider the tax implications of significant strategic decisions on a timely basis.

The Group recorded an income tax charge on underlying profits from continuing operations amounting to £21.0m (2014: £27.8m), which represents an underlying effective rate of 24.0% (2014: 28.1%). Excluding the effect of prior year credits, the effective tax rate was 24.8%. On the statutory profit before tax of £51.3m (2014: £39.0m), the income tax charge of £15.0m (2014: £4.5m) represents an effective rate of 29.2% (2014: 11.5%). These differences arise as a result of amounts included in "Other items" in the year.

Cash tax payments amounted to £11.1m, £9.9m below the £21.0m income tax charge on underlying profits, primarily as a result of the restructuring costs incurred in the year included within "Other items" and also the utilisation of the Group's brought forward UK non-trading losses (c.£27m gross utilised in the year). The Group's underlying effective tax rate in 2016 will be determined by the mix of profits from different jurisdictions. It is anticipated that the underlying effective tax rate in 2016 (excluding any prior year effects) will be c.24%, due to the full year impact of the reduction in the UK domestic corporation tax headline rate to 20% from April 2015, and the removal of the surcharge applied to the French domestic corporation tax rate.

Earnings per share ("EPS")

20152014Change
Underlying basic EPS11.2p12.0p(0.8)p
Statutory basic EPS6.1p5.6p0.5p

Underlying basic EPS from continuing operations amounted to 11.2p (2014: 12.0p), which represents a decrease of 0.8p. Total basic EPS amounted to 6.1p (2014: 5.6p), taking into account a number of "Other items" as described in the Other items section. The weighted average number of shares in issue in the period was 591.2m (2014: 591.1m).

Dividends

The Board is committed to a progressive dividend policy while maintaining a dividend cover of 2x–3x (on an underlying basis) over the medium term. SIG continued to increase its dividend payments in 2015 with an interim dividend of 1.69p per share (2014: 1.42p). SIG has proposed a final dividend of 2.91p per share (2014: 2.98p), taking the 2015 full year dividend to 4.60p per share (2014: 4.40p), representing a 4.5% increase in total dividend year on year. A total dividend of 4.60p represents a dividend cover of 2.43x in 2015 on an underlying basis.

The Company has sufficient distributable reserves to pay dividends for a number of years, and when required the Company can receive dividends from its subsidiaries to further increase distributable reserves.

Shareholders' funds

Shareholders' funds decreased by £15.0m to £648.7m (2014: £663.7m). The decrease comprised the following elements:

£m
Profit after tax attributable to equity holders of the Company36.0
Exchange differences on assets and liabilities after tax(22.1)
Gains and losses on cash flow hedges(1.9)
Movements attributable to share options(0.5)
Issue of share capital0.1
Actuarial gain on pensions schemes (net of deferred tax)1.7
Effect of change in tax rates on deferred tax(0.7)
Dividends paid to equity holders of the Company(27.6)
Decrease in Shareholders' funds(15.0)

Cash flow and financial position

In 2015, the Group generated £61.6m of cash flow from operating activities to help support its strategy of investment in both organic and acquisition-based growth, and progressive dividend policy. The following table explains the movement in SIG's net debt:

2015
£m
2014
£m
Cash generated from operating activities61.695.6
Interest and tax(20.6)(28.5)
Maintenance capital expenditure*(26.0)(24.0)
Free cash flow available for investment15.043.1
Investment capital expenditure(20.3)(12.6)
Sale of land1.18.1
Acquisition investment (including deferred consideration)(75.3)(19.0)
Movements relating to the sales of businesses(2.6)
Foreign exchange gains0.80.2
Issue of shares0.1
Dividends paid to equity holders of the Company(27.6)(22.6)
Other items (including fair value movements)(2.8)(0.3)
Movement in net debt(109.0)(5.7)
Opening net debt(126.9)(121.2)
Closing net debt(235.9)(126.9)

* Where net capital expenditure is equal to or less than depreciation (including amortisation of computer software), all such net capital expenditure is assumed to be maintenance capital expenditure. To the extent that net capital expenditure exceeds depreciation, the balance is considered to be investment capital expenditure.

Working capital

The key working capital measures are set out below on a constant currency basis (continuing operations): 


2015
£m
2014
£m
Inventory days4643
Trade receivable days4543
Trade payable days3936
Working capital to sales9.1%8.0%

The Group's working capital to sales ratio (on a constant currency basis for continuing operations) at 31 December 2015 was 9.1% (2014: 8.0%), 10bps above the Group's target. Working capital days increased by two days to 52 days (2014: 50 days). In part, this increase arises as a result of a stronger sales performance in the final quarter compared to the prior year.

Fixed assets

Net capital expenditure (including computer software) increased in the year by £16.7m to £45.2m (2014: £28.5m), representing a capex to depreciation ratio of 1.74x (2014: 1.19x). Capital expenditure includes new vehicles, new brownfield sites, investment in plant and machinery and in the new UK IT platform.

It is anticipated that the level of capital expenditure will be in the region of 1.0x-1.5x of depreciation in 2016, reflecting the Group's continuing investment in the business.

Foreign currency translation

Overseas earnings streams are translated at the average rate of exchange for the year while balance sheets are translated using closing rates. The table below sets out the principal exchange rates used:

Average rateClosing rate
2015201420152014
Euro1.381.251.361.28
Polish Zloty5.785.235.825.54

The impact of exchange rate movements on the translation of the Group's overseas earning streams, net assets and net debt can be summarised as follows:

Impact of currency movements
in 2015
£m%
Continuing sales(131.6)(5.1)%
Underlying operating profit(5.1)(5.2)%
Underlying PBT(4.8)(5.5)%
Consolidated net assets(22.1)(3.4)%
Net debt(0.8)(0.3)%

As demonstrated above, fluctuations in exchange rates give rise to translation differences on overseas earnings streams when translated into Sterling. Further details of SIG's foreign exchange policies are detailed in the foreign currency risk section on the Treasury risk management.

Pension schemes

In total, the Group operates six (2014: six) defined benefit pension schemes, the largest of which is a funded scheme held in the UK. The remaining five defined benefit pension schemes are unfunded book reserve schemes held in the Group's Mainland European businesses. Together the UK defined benefit scheme and the five book reserve schemes are referred to as "defined benefit pension schemes".

The overall gross defined benefit pension schemes' liability decreased during the year by £4.9m to £23.8m(31 December 2014: £28.7m). This can be broken down as follows:

Decrease/ (increase) in pension scheme liability £m
Actual return below expected return on assets(2.7)
Change in financial and demographic assumptions in all schemes4.6
Amounts recognised in the Income Statement(2.2)
Cash contributions to the schemes and other movements4.7
Effect of change in exchange rates0.5
Decrease in pension scheme liability4.9

In addition to the defined benefit pension schemes, the Group also operates a number of defined contribution pension schemes. Further details of the pension schemes operated by SIG are set out in Note 28c to the Accounts.

Alcester lockeroom

Acquisitions

Acquisitions are a key component of SIG's growth strategy, supplementing organic growth. A total of twelve acquisitions were completed in the year for a net consideration of £68.5m. Six of those acquisitions were in the United Kingdom, two were in The Netherlands and there were also acquisitions in France, Germany, Switzerland and Qatar. Consideration of £4.1m was paid during the year in respect of prior period acquisitions.

Contingent and deferred consideration relating to the 2015 acquisitions not specific to employment criteria of £8.9m has been recognised and included within goodwill. Contingent consideration of £12.4m, which is in part conditional on the continued employment of specific individuals, has not been recognised as an investment cost but instead is accounted for as an employment cost in the Consolidated Income Statement as earned.

Acquisitions remain subject to strict financial return criteria, with all acquisitions required to achieve a post-tax ROCE of at least 300 basis points in excess of the Group's WACC in the first full year of ownership. Recently acquired infill businesses are performing well and meeting their targets, and collectively are delivering returns that are higher than the Group's ROCE.

Further details of the Group's acquisitions can be found in Note 13 to the Accounts.

Capital structure

The Group manages its capital structure to ensure that entities in the Group will be able to continue as going concerns while maximising the return to Shareholders through the optimisation of the debt and equity balance.

The main measure used to assess the appropriateness of the Group's capital structure is its net debt to EBITDA ratio (i.e. leverage), thus ensuring that the Group's capital structure is aligned to the Group's debt covenants. The Group's long term target is to manage its leverage ratio within the range of 1.0x–1.5x. The Group's leverage position at 31 December 2015 was 1.78x (31 December 2014: 0.98x). Gearing, being net debt divided by net assets, increased during the year from 19.1% to 36.3%.

As at 8 March 2016, SIG's share price closed at 144.7p per share, representing a market capitalisation of £855.7m at that date. SIG monitors relative Total Shareholder Return ("TSR") for assessing relative financial performance. This has been detailed in the Directors' Remuneration Report.

Outlook

The Directors' view of the outlook and prospects for the Group is set out in the Chief Executive's Statement.

Forklift