Key performance indicators

In order to evaluate success against the Group's financial and strategic objectives, the Board has identified six key performance indicators against which it monitors and assesses the Group's performance.

Their relevance to our strategy and our performance against these measures are explained below:

Links to our Strategic Pillars

Pillar one

Outstanding customer service

Pillar two

Sales outperformance

Pillar three

Gross margin enhancement

Pillar four

Operational efficiency

Pillar five

Financial returns

Pillar six

Exceptional people

Remuneration

Certain KPIs are used as a measure in the incentives plans for the remuneration of executives.

For 2015 this includes Return on Capital Employed, identified below with the symbol ®.

Like-for-like sales

Like for like sales

Underlying gross margin

Underlying gross margin

Underlying operating margin

Underlying operating margin

Definition

The percentage growth/(decline) in the Group's sales per day (in constant currency) excluding any current and prior year acquisitions and disposals. Sales are not adjusted for organic branch openings and closures.

The ratio of underlying gross profit to underlying sales (excluding divested businesses).

The ratio of underlying operating profit to underlying sales (excluding divested businesses).

2015 Performance

SIG's sales were adversely affected by weak trading conditions in Mainland Europe and the UK RMI sector. As a result, SIG estimates that overall its markets declined by c.1.3% in 2015.

Like-for-like sales grew by 0.3% when compared to the prior year, which equates to a market outperformance of c.1.6%.

Increased competition, particularly in the UK, resulted in a slight shortfall to the 2.0%-3.0% market outperformance target set for 2015.

Although the Strategic Initiatives added 50bps to SIG's gross margin in 2015, weak trading conditions, which particularly impacted the Group's higher margin UK Exteriors business, changes in product mix and competitive pressures offset this improvement, resulting in the Group's gross margin declining by 10bps to 26.8% (2014: 26.9%).

Despite the protective measures undertaken, gross margin being 10bps lower than the prior year fell slightly short of the continuous improvement target set for 2015.

The operating margin for the Group decreased by 50bps when compared to the prior year.

This was due to an 11.2% decline in operating profit as a result of the weak trading conditions and the impact of adverse foreign exchange rate movements.

In order to provide the required infrastructure to support the continued organic growth of the business, the Group has invested in a number of initiatives and new branch openings, which increased the Group's operating costs by £5.0m year-on-year.

2016 Target

  • Market outperformance of c.1.0%-2.0%
  • Continuous improvement
  • Continuous improvement

Strategic focus

LIKE-FOR-LIKE SALES

Pillar onePillar twoPillar six

UNDERLYING GROSS MARGIN

Pillar onePillar twoPillar threePillar fivePillar six

UNDERLYING OPERATING MARGIN

Pillar onePillar twoPillar threePillar fourPillar fivePillar six

Principal risk

  • Market conditions
  • Government legislation
  • Commercial relationships
  • Competitors and margin management
  • Commercial relationships
  • IT infrastructure

Like-for-like working capital to sales®

Return on capital employed®

Employee engagement

Overall Engagement

2014:

74%

Definition

Working capital to sales is defined as the ratio of working capital (including provisions but excluding pension scheme obligations) to annualised sales (after adjusting for any acquisitions and disposals in the current and prior year) on a constant currency basis.

The ratio of underlying operating profit less taxation divided by average capital employed (average net assets plus average net debt).

ROCE is then compared to the Weighted Average Cost of Capital ("WACC"). The difference between ROCE and WACC determines whether the Group is creating an economic profit for its Shareholders.

The delivery of SIG's strategy depends on its exceptional people. The engagement of these individuals is therefore a key measure of performance of the Group.

Engagement is measured by considering "what our people 'say' about SIG", "are they committed to 'staying' in SIG" and "they 'strive' to go the extra mile".

2015 Performance

The Group recorded a working capital to sales ratio of 9.1% in 2015 (2014: 8.0%). The ratio was slightly in excess of the target of no more than 9% due to the lower overall sales volumes in the third quarter combined with a relatively strong final quarter.

The Group recorded a post-tax ROCE of 9.3% in 2015, 110bps below prior year (10.4%) and 170bps below the 2015 target (11.0%) but 220bps above WACC (7.1%).

Assuming a full year contribution from acquisitions completed in the year, ROCE would have been 40bps higher.

Going forward SIG is committed to increasing ROCE. SIG seeks to achieve this by taking a disciplined approach to capital management and by further improvements in gross and operating margins.

SIG performed its second Group-wide employee engagement survey during 2015. Overall, 78% of employees took part in the survey (81% in 2014), with 76% participation in UK & Ireland and 80% in Mainland Europe.

Of the responses, 73% of all employees reported as "being engaged" (2014: 74%), which aligns to industry benchmarks, although slightly below the prior year target of maintaining the overall level of engagement. In a year of significant change for SIG, this is a positive result.

Following the survey, working groups have been established at Group and local level. Group-wide actions are focusing on the key areas of connecting our people with the Group's strategy and goals, and communicating successes as part of recognising people's achievements. Local teams are acting to improve employee engagement within their respective branches and departments by responding to local drivers of engagement.

2016 Target

  • Working capital to sales of no more than 9%
  • To drive improvements in the Group's ROCE
  • Continuous improvement in overall engagement

* Target is to maintain existing overall engagement level in a year where significant change is planned

Strategic focus

LIKE-FOR-LIKE WORKING CAPITAL TO SALES®

Pillar fourPillar fivePillar six

RETURN ON CAPITAL EMPLOYED®

Pillar onePillar twoPillar threePillar fourPillar fivePillar six

EMPLOYEE ENGAGEMENT

Pillar six

Principal Risk

  • Working capital and credit management
  • Market conditions
  • Competitors and margin management
  • Working capital and credit management
  • Availability and quality of key resources