The Group has achieved all of its 2014 financial objectives and has a strong balance sheet to support its medium-term strategic plans.
Doug Robertson Finance Director
|Profit before tax||39.0||2.1||+1,757%||98.1||90.0||+9.0%|
|Basic earnings/(loss) per share (pence)||5.6p||(2.5)p||+8.1p||11.9p||10.7p||+1.2p|
|Total dividend per share (pence)||4.40p||3.55p||+0.85p||n/a||n/a||n/a|
|Working capital to sales||n/a||n/a||n/a||8.1%||8.9%||(80)bps|
|Post-tax Return on Capital Employed||n/a||n/a||n/a||10.3%||9.4%||+90bps|
* Underlying is before the amortisation of acquired intangibles, restructuring costs, 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, goodwill impairment charges, unwinding of provision discounting, fair value gains and losses on derivative financial instruments, one-off recognition of deferred tax assets, the taxation effect of these items and the effect of changes in taxation rates.
Achieved all 2014 financial objectives
Increase post-tax Return on Capital Employed
Gross margin enhancement
Improve operating margin
£1m-£5m net benefit from strategic initiatives
Closing working capital 8-9% of sales
Year end leverage of c. 1.0x
SIG made good progress in 2014, delivering a net benefit on its Strategic Initiatives of £10.1m, well ahead of its original £1m-£5m target, and increasing its post-tax Return on Capital Employed ("ROCE") by 90bps to 10.3% for the year ended 31 December 2014 (2013: 9.4%).
As ROCE of 10.3% compares to a Group Weighted Average Cost of Capital ("WACC") of 7.2% for the same period (2013: 8.3%), SIG has therefore met its ROCE target of exceeding WACC by 300bps. However, the Group does recognise that this achievement has been in part due to a lower WACC, and is therefore targeting a ROCE in excess of 11.0% in 2015.
During the year the Group refinanced its Revolving Credit Facility, securing a £250m five-year facility with five relationship banks, assuring sufficient funding headroom to support its medium-term strategic plans and safeguarding the financial position of the Group.
Ice Energy (50.6% stake)
Sales attributable to divested businesses
* Continuing sales represents total sales less sales attributable to businesses divested in both 2014 and 2013.
In order to provide a better guide to the future earnings of the Group, the results of the three businesses divested in the period, together with their comparatives, have been classified as "Other items" within the Consolidated Income Statement.
Group sales from continuing operations in Sterling grew by 2.5% to £2,602.9m (2013: £2,539.7m). Eliminating the impact of foreign exchange rate movements, total continuing sales grew by 5.6% in constant currency. The incremental impact of acquisitions made in the current and prior year contributed 1.8% to this sales growth, and therefore, excluding 2014 and 2013 acquisitions, the Group's sales on a constant currency basis were up 3.8%. The weighted number of trading days in the year ended 31 December 2014 compared to the prior year had no impact on the like-for-like sales performance of the Group as a whole.
Like-for-Like Constant Currency Sales Performance^
^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 grew by c.1.0% in 2014. Given the Group achieved a like-for-like constant currency sales growth of 3.8%, this equates to a market outperformance of c.2.8%. A key element of delivering this sales outperformance has been the continued expansion of the Group's branch network. A further nine branches have been opened in the year (2013: eight openings).
The Group's underlying gross profit margin has increased by 50bps to 26.9% (2013: 26.4%), with both the UK & Ireland and Mainland Europe operating segments reporting 50bps improvements. The majority of the gross margin improvement when compared to 2013 arises from the Group's Strategic Initiatives, specifically the procurement and branch network initiatives. Excluding the benefit of the Strategic Initiatives, the Group's gross margin would have remained level year-on-year at 26.4%, a good performance given challenging markets in Mainland Europe.
Gross margin at 26.9% has increased by 110bps since 2010 (25.8%). Obtaining the best possible returns from the Group's assets is a fundamental component of SIG's strategy and therefore, as detailed in Our Four Strategic Initiatives, SIG intends to continue to target gross margin improvement through further development of its procurement initiatives and by continuing to work closely with its key suppliers.
2014 v 2013 Operating Cost Bridge
Underlying operating costs increased by £21.1m (3.7%) in 2014. On a constant currency basis, underlying operating costs increased by £39.3m (6.9%).
During the year SIG has made a number of investments in organic growth initiatives (£3.7m) and new branches (£2.7m) that will support future growth. In addition, acquisitions have increased the Group's operating costs by a total of £8.5m year-on-year. The Group also experienced an increase of £5.7m in incentive charge reflecting the exceptionally strong performance in the UK & Ireland in 2014.
The Group has continued to review its operational efficiency in 2014 and has identified further annualised cost savings of c.£5.4m with associated restructuring costs of £9.2m. Approximately £4.5m of these savings are expected to be realised in 2015 (£2.3m being in relation to the Group's Strategic Initiatives).
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) decreased by 20bps to 0.3% of sales (2013: 0.5% of sales, 2012: 0.6% of sales), an exceptional performance in uncertain market conditions. This is testament to the quality and strength of our credit control teams and our strong credit control procedures. Despite this improvement, the Group is very mindful of the risk of bad debts increasing. The Group's credit control policies and procedures are regularly reviewed and, where considered commercially appropriate, the Group's businesses have credit insurance to protect them from bad debts rising above prescribed aggregate loss levels.
Taking into account the investment made during the year, the Group experienced operating cost inflation in the year of 2.5%. Net of cost savings from 2014 and 2013 actions, operating cost inflation was 1.7% in 2014 (2013: deflation of 0.1%).
In order to provide an indication of the continuing earnings of the Group, the Group separately identifies "Other items" on the face of the Consolidated Income Statement. These items are separately reported due to their non-recurring, significant or unusual nature and their impact on the performance of the Group.
|Underlying profit before tax||98.1||90.0|
|Amortisation of acquired intangibles||(19.6)||(20.6)|
|Goodwill impairment charge||–||(2.0)|
|Profits and losses arising on sale of businesses and associated impairment charges||(14.0)||(42.8)|
|Net operating losses attributable to businesses divested in 2014||(6.7)||(1.8)|
|Share of loss of associate||–||(0.1)|
|Net restructuring costs||(9.2)||(18.0)|
|Other one-off items||(7.5)||(0.7)|
|Net fair value losses on derivative financial instruments and unwinding|
of provision discounting
|Total other items||(59.1)||(87.9)|
|Statutory profit before tax||39.0||2.1|
Amounts reported in the "Other items" column of the Consolidated Income Statement which in total amounted to a loss before tax of £59.1m (2013: £87.9m) are as follows:
- Amortisation of acquired intangibles – £19.6m (2013: £20.6m). In response to the economic downturn, SIG halted its acquisition activities between 2008 and 2012. Intangible amortisation is therefore expected to fall significantly in future years as the intangible assets realised through the acquisitions in 2008 and prior become fully amortised. This is expected to outweigh the increase in amortisation arising from acquisitions made since 2012. The Accounting Policies section and Note 13 to the Accounts provide details of what is included within intangible assets and over what periods the assets are amortised;
- Goodwill impairment charge – £nil (2013: £2.0m). An impairment of £2.0m was made in the prior year relating to the UK Energy Management Cash Generating Unit (the Miller Pattison operating business) that was subsequently divested in 2014;
- Profits and losses arising on sale of businesses and associated impairment charges – £14.0m (2013: £42.8m). The non-recurring charge was recognised in respect of the divestment of the Group's German Roofing, Miller Pattison and Ice Energy (50.6% stake) operating businesses that were divested during the year. Further detail of the nature and breakdown of this non-recurring charge can be found in the Divestments section of the Financial Review and Note 11 to the Accounts;
- Net operating losses attributable to businesses divested in 2014 – £6.7m (2013: £1.8m). The 2014 results of German Roofing, Miller Pattison and Ice Energy, together with their 2013 comparatives have been reported as "Other items" on the basis of their non-recurring nature. A detailed breakdown of their individual impact can be found in the Divestments section of the Financial Review;
- Net restructuring costs – £9.2m (2013: £18.0m). 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 £3.9m (2013: £7.6m), property closure costs of £3.1m (2013: £5.8m), asset write down costs of £nil (2013: £0.2m), rebranding of £2.2m (2013: £3.7m) and other restructuring costs of £nil (2013: £0.7m);
- Other one-off items – £7.5m (2013: £0.7m). Included within other one-off items are acquisition expenses and contingent consideration linked to employment contracts totalling £3.9m (2013: £1.4m) which will vary depending on the number of acquisitions per year, their nature and their future profitability. Other one-off items also include the impairment of a freehold property of £6.1m following the sale of part of the property in the period (2013: £nil). These one-off charges are partially offset by the reversal of certain onerous lease property provisions of £1.6m (2013: £0.1m) previously provided through "Other items" whereby the Group has negotiated the surrender of the leases in 2014 and other one-off credits of £0.9m (2013: £0.6m); and
- Net fair value losses on derivative financial instruments and unwinding of provision discounting – £2.1m (2013: £1.9m). These items are explained in more detail in the Finance Cost section of the Financial Review.
Operating profit and OPERATING margin
|UK & Ireland||65.9||50.3||+31.0%|
|Head office costs||(9.9)||(8.0)||+23.8%|
On an underlying basis, operating profit increased by £8.9m (8.8%) to £110.2m (2013: £101.3m). Foreign exchange rate movements decreased the Group's operating profit by £3.3m year-on-year. Therefore, on a constant currency basis, underlying operating profit increased by £12.2m.
Acquisitions completed during 2014 and 2013 made a contribution of £3.3m to operating profit in the year (2013: £1.6m).
Underlying Operating Margin %
Overall, the Group's underlying operating profit margin at 4.2% was 20bps higher than the prior year (2013: 4.0%). Given the operational gearing impact of the business with the majority of operating costs being fixed, it is envisaged that the Group's operating margins will continue to improve as the Group experiences further sales growth.
The Group recorded a statutory operating profit of £53.2m (2013: £15.4m) after recognising a number of "Other items" that are described above.
Net finance costs on a statutory basis increased by £1.0m to £14.2m in 2014 (2013: £13.2m).
Finance costs included in the "Other items" column of the Consolidated Income Statement amounted to £2.1m (2013: £1.9m).
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 £2.0m (2013: £2.1m). 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 four years, is £5.5m (2013: £7.5m).
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 2014 was £0.3m.
Also included within finance costs is a credit of £0.1m (2013: £0.2m) relating to hedge ineffectiveness incurred on the Group's financial instruments and a charge of £0.2m in respect of unwinding of provision discounting (2013: £nil).
Net finance costs before "Other items" increased by £0.8m to £12.1m in 2014 (2013: £11.3m).
Further details of SIG's interest rate policies are provided in the Interest Rate Risk section.
Profit before tax
Underlying profit before tax increased by £8.1m, or 9.0%, to £98.1m (2013: £90.0m). On a constant currency basis, underlying profit before tax increased by £11.2m to £101.2m.
On a statutory basis, profit before tax increased by £36.9m to £39.0m (2013: £2.1m).
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, cooperative 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 £27.6m (2013: £26.6m) which represents an underlying effective rate of 28.1% (2013: 29.6%). On the statutory profit before tax of £39.0m (2013: £2.1m), the effective income tax charge of £4.5m (2013: £16.4m) represents an effective rate of 11.5% (2013: 781.0%). These differences arise as a result of amounts included as "Other items" in the year.
Cash tax payments amounted to £16.9m, £10.7m below the £27.6m 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 tax losses. The Group has recognised a deferred tax asset of £14.9m in respect of the remaining balance of the 2008 UK foreign exchange rate losses, which the Group considers will be utilised in future periods to reduce UK taxable profits.
In 2015, the Group's underlying effective tax rate will continue to depend on the mix of Group profits from different jurisdictions, although it is anticipated that the Group's underlying effective tax rate in 2015 will decrease slightly to c.27.5%, reflecting the known reduction in the UK domestic corporation tax headline rate.
Earnings per share ("EPS")
|Underlying basic earnings per share||11.9p||10.7p||+1.2p|
|Statutory basic earnings/(loss) per share||5.6p||(2.5)p||+8.1p|
Underlying basic EPS from continuing operations amounted to 11.9p (2013: 10.7p), which represents an increase of 1.2p. Total basic EPS amounted to 5.6p (2013: loss per share of 2.5p), which takes into account a number of "Other items". The weighted average number of shares in issue in the period was 591.1m (2013: 590.9m).
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.
Based upon improved underlying business performance and financial stability, SIG continued to increase its dividend payments in 2014 with an interim dividend of 1.42p per share (2013: 1.15p).
SIG has proposed a final dividend of 2.98p per share (2013: 2.40p), taking the 2014 full year dividend to 4.40p per share (2013: 3.55p), representing a 24% increase in total dividend year-on-year. A total dividend of 4.40p represents a dividend cover of 2.7x in 2014 on an underlying basis.
Shareholders' funds decreased by £28.8m to £663.7m (2013: £692.5m). The decrease comprised the following elements:
|Profit after tax attributable to equity holders of the Company||33.0|
|Exchange differences on assets and liabilities after tax||(32.9)|
|Gains and losses on cash flow hedges||(1.4)|
|Movements attributable to share options||1.2|
|Actuarial loss on pensions schemes (net of deferred tax)||(6.0)|
|Effect of change in tax rates on deferred tax||(0.1)|
|Dividends paid to equity holders of the Company||(22.6)|
|Decrease in Shareholders' funds||(28.8)|
Cash flow and financial position
In 2014, the Group generated £95.6m of cash flow from operating activities to help support its strategy of investment in both organic and acquisition-based growth, and its progressive dividend policy. The following table explains the movement in SIG's net debt:
|Cash generated from operating activities||95.6||86.2|
|Interest and tax||(28.5)||(26.3)|
|Maintenance capital expenditure*||(24.0)||(23.7)|
|Free cash flow available for investment||43.1||36.2|
|Investment capital expenditure||(12.6)||(14.4)|
|One-off sale of freehold property||8.1||–|
|Acquisition investment (including deferred consideration)||(19.0)||(16.4)|
|Movements relating to the sales of businesses||(2.6)||(0.1)|
|Dividend payments to non-controlling interests||–||(0.3)|
|Foreign exchange losses||0.2||(1.0)|
|Issue of shares||–||0.2|
|Dividends paid to equity holders of the Company||(22.6)||(18.6)|
|Other items (including fair value movements)||(0.3)||(1.5)|
|Movement in net debt||(5.7)||(15.9)|
|Opening net debt||(121.2)||(105.3)|
|Closing net debt||(126.9)||(121.2)|
* 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.
The key working capital measures are set out below on a constant currency basis (continuing operations):
|Trade receivable days||43||44|
|Trade payable days||36||37|
|Working capital to sales||8.1%||8.9%|
The Group's working capital to sales ratio (on a constant currency basis for continuing operations) at 31 December 2014 was 8.1% (2013: 8.9%). This ratio benefited from £12.6m of contingent consideration recognised in respect of current and prior year acquisitions (2013: £0.6m). The Group's working capital to sales at 31 December 2014 excluding contingent consideration was 8.6% (2013: 8.9%), in line with the Group's objective of no more than 9.0%.
Net capital expenditure (including computer software) decreased in the year by £9.6m to £28.5m (2013: £38.1m), representing a capex to depreciation ratio of 1.19x (2013: 1.61x). Capital expenditure includes new vehicles, new brownfield sites, a number of relocations to larger trading sites and investment in the new UK IT platform.
During the year, the Group sold a freehold property, with net cash proceeds of £8.1m. Excluding this one-off receipt, the capex to depreciation ratio was 1.53x. It is anticipated that the level of capital expenditure will be in the region of 1.5x-2.0x of depreciation in 2015, 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 rate||Movement||Closing rate||Movement|
The impact of exchange rate movements on the translation of the Group's overseas earnings streams, net assets and net debt can be summarised as follows:
|Impact of currency|
movements in 2014
|Underlying operating profit||£(3.3)m||(3.3)%|
|Consolidated net assets||£(26.2)m||(3.8)%|
As can be seen 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.
The Group operates five (2013: five) pension schemes which provide defined benefits based on final pensionable salary, the largest of which is a funded scheme held in the UK. The remaining four 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 four book reserve schemes are referred to as "defined benefit pension schemes".
The overall gross defined benefit pension schemes' liability increased during the year by £3.2m to £28.7m (31 December 2013: £25.5m). This can be broken down as follows:
|Actual return above expected return on assets||(6.7)|
|Change in financial and demographic assumptions in all schemes||14.4|
|Profit and loss charge below cash contributions to the schemes||(3.9)|
|Effect of change in exchange rates||(0.6)|
|Increase in defined benefit pension scheme liability||3.2|
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 29c to the Accounts.
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 total net consideration of £19.0m. Seven of the acquisitions were in the UK, three were in France, one was in Germany, and one was in The Netherlands.
Contingent consideration relating to the 2014 acquisitions not specific to employment criteria of £11.8m has been recognised and included within goodwill. Contingent consideration of £2.9m, which is in part conditional on the continued employment of specific individuals, has not been recognised as an investment cost but instead will be accounted for as an employment cost in the Consolidated Income Statement as earned. Including total contingent consideration and deferred consideration of £1.9m, the total spend on 2014 acquisitions would increase from £19.0m up to £35.6m.
Acquisitions remain subject to strict financial return criteria, with all acquisitions required to achieve a post-tax ROCE in excess of the Group's WACC in the first full year of ownership. Since restarting its acquisition programme in 2012, newly acquired infill businesses are performing well and meeting their targets. On a collective basis they are delivering returns that are higher than the Group's ROCE.
The Group is targeting total expenditure of around £200m on infill acquisitions over the next three years.
Further details of the Group's acquisitions can be found in Note 14.
During the year SIG divested three businesses whose returns were below the Group's WACC and whose prospects of significantly improving performance over the medium-term were deemed to have a low probability. These disposals were:
- The Group's German Roofing business, which was acquired by The Gores Group, a US private equity firm in February 2014;
- Miller Pattison Limited, a residential insulation installation and contracting business, which was sold to Help-Link UK in April 2014; and
- The Group's 50.6% stake in Ice Energy Technologies Limited, a renewable energy solutions provider of air and ground source heat pumps, which was sold to the Ice Energy management team in October 2014.
The following results have been included in the "Other items" column of the Group's Consolidated Income Statement in order to provide an indication of the continuing earnings of the Group.
|German Roofing||Miller Pattison||Ice Energy (50.6% stake)||Total|
|Goodwill and intangible asset impairment||–||(21.5)||–||(2.0)||(3.3)||–||(3.3)||(23.5)|
|Loss arising on the sale of businesses and associated impairment charges||(1.7)||(21.3)||(12.9)||–||(4.3)||–||(18.9)||(21.3)|
|Exchange and minority interest reserve recycling||6.7||–||–||–||1.5||–||8.2||–|
|Total Other items||5.0||(42.8)||(12.9)||(2.0)||(6.1)||–||(14.0)||(44.8)|
The Group manages its capital structure to ensure that it will be able to continue as a going concern 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 its capital structure is aligned to its 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 2014 was 1.0x (31 December 2013: 1.0x).
Gearing, being net debt divided by net assets, increased during the year from 17.5% to 19.1%.
As at 11 March 2015, SIG's share price closed at 191.5p per share, representing a market capitalisation of £1,132.0m at that date. SIG monitors relative Total Shareholder Return ("TSR") for assessing relative financial performance. The Group's TSR performance has been detailed in the Directors' Remuneration Report.
The Directors' view of the outlook and prospects for the Group are set out in the Chief Executive's Statement.