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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good. Good morning and welcome to our interim presentation for the first half of 2019 where we are basically saying our transformation is really taking shape. It is -- it's delivering for us. Just to remind you, we are, as a company, not making a forecast, so this presentation is not a forecast of any numbers. And if we have not met before, my name is Meinie Oldersma. I'm the CEO of SIG in the group.Looking at today's agenda, I'll start talking about the highlights and give you an update on the continued transformation of the organization. Then I'll pass over to Nick, who will give you an update on our financial review for the period. And then I'll try to finish with trading and outlook before we open up for questions.So jumping straight into the 2019 highlights where we are saying increased profit and reduced debt. That is on the back of a failing and falling construction activity where profits are up by 20% to GBP 30 million, and our gross margins are up by 70%. At the same time, our operating costs are lower. Also, our net debt is down to below GBP 160 million, and our headline financial leverage is down to 1.4x, and that is pre-IFRS 16.If I take you back to November 2017, we set out our strategic vision to significantly improve our operational and financial performance. What we set out there was not depending on growing the business, so it was a non-sales growth strategy. We are focused on strengthening the balance sheet and capital discipline. To simplify our focus is we only highlighted 3 strategic levers, which was all about our customer service, customer value and operational efficiency. And we are working on 3 enablers, which is basically capability of the organization, our IT in terms of supporting the strategy and data to enhance our ability to take factual decisions on a day-to-day basis. So we're actually executing based upon what we put out so far. If I then look at the market, where the market backdrop is increasingly challenging, realizing that we had a good performance in the first half of the year, if we look at what's happening in the U.K. and in Germany where we see since April-May a declining trend, whereby in the U.K., the PMI were -- went from 50 to 45 over that period; and in Germany, from 53 to 46. What we're not getting yet is why France is still very positive, so France seems to be slightly different. So against that backdrop, looking at the transformation, the transformation is delivering an increased profit, and we are focusing on what we can influence. And that is resulting in a positive performance on our key financial metrics.If I then take you into our U.K. region, then further margin improvements in U.K. & Ireland. And we are there or thereabouts with our review of nonprofitable business, and that is, consequently, putting our gross margins up by 150 basis points to well over 26% gross margin and continued focus on pricing. If I give you one example, despite a market backdrop, we are also faced with severe allocation on plasterboard. And we have, due to the fact that there is severe allocation, put our prices up on plasterboard. And that, let's say, short term we're not making an awful lot of friends, but we are doing -- making our shareholders more happy at the moment. Operating profit, as a consequence, is up 4.2% to a return on sales of 4.4%. The operating cost has come down from GBP 134 million to GBP 121 million. If I would say on the back of -- as an example, of functionalization of our operating business model, that basically transforms the company from a branch-led organization to a functional-led organization, where functions like sales are a separate function from purchasing and operations where we have put in place a hub-and-spoke. So that is an update on our U.K. business.If I would then highlight the transformation in our Distribution business in the U.K., which is now largely complete, we have focused on a more profitable business, where you see the average daily sales coming down and has now stabilized. And you see the gross margin effect, on the right-hand side of the slide, taking hold to a more smaller but more profitable business -- base business going forward.If I then take you into Europe, then the transformation being rolled out across Mainland Europe is well underway. We are seeing financial benefits already, and that is despite the ransomware attack in France where we had disrupted revenues, gross margin and cost. And if you see the gross margin and the operating cost being affected basically by head count reductions, where we are really taking down cost, and that is on the basis of a functional model where also we are putting in the same functional model as that we have implemented in the U.K. And we are taking pricing actions over there, which despite the ransomware attack where we had a GBP 3 million cost to the organization, we believe we have made quite a step forward. If I take you then into France, then in France, we are now back to a upward trend following that ransomware attack where it was quite painful for us with that GBP 3 million impact in our core business in France. But since then, the upward trend is there.On the Air Handling business, we had a very strong growth in the Air Handling business first half year trading as a combined entity where we have put, let's say, the U.K. and the France business in the Air Handling division. And also there, because the biggest division in the Air Handling business is also in France, where we also had -- were affected by the ransomware attack, an additional GBP 2 million, that amalgamates to a GBP 5 million effect on the first half year trading. So despite that, we still have a 20% improved performance in the first half year. The review of our strategic options are well advanced, and we'll update you further when it is appropriate later in the year.If I would then, let's say, try to measure our sales as progress towards our return on sales target that we set in November 2017 as being a 5% target on the medium term, we've made very good progress in the U.K. Those are the first 3 blue bars you're seeing. And you have seen that the transformation of the rollout in Mainland Europe, which are the red bars, has started, started in terms of some pricing actions, some operating model actions. And based upon the regulations in Mainland Europe, we will see that taking hold over the next 12 months in terms of making progress.If I look at what our transformation activities focused upon, then we are continuing that journey. We started out with our initial focus heavily on cash. We then defined our strategy and are executing upon our strategy, as we defined earlier on, of operational and financial improvements. And you see the transformation basically under the entrance of new leaders into the countries, those are the yellow asterisks or stars you see, where we are really rolling this out. We are now coming to a point where we are starting to work upon our vision longer term for the organization. So that is setting out the stall. I will hand over to Nick to give a little bit more color about our financial performance before I come back and talk about our outlook. Nick?
Good morning, everybody. For the couple of people in the room I don't yet know, I'm Nick Maddock. I'm the Chief Financial Officer of SIG. The first thing I really wanted to pick out from the financial performance over the period is just to show you how much of a change and remind you just how far we've taken our balance sheet over the past couple of years since Meinie and I came into the business. We pretty much halved debt from the level that we inherited at the start of 2017, and we brought our headline financial leverage now down to 1.4x. And we think this has been really important in delivering a stronger balance sheet and shareholder value over the past couple of years. And we now think that our medium-term target to get headline financial leverage below 1x is well within our reach as a result of the actions that we're continuing to take. There should be further progress on this in the second half. So it's my job to give you some financial color around some of the themes that Meinie has talked about. This is the table of headline financials. You can see here the decline in like-for-like sales, reflecting partly weaker market conditions in the first half of this year compared with last year and partly our focus on profitability over volume, particularly in SIG Distribution. And you saw from Meinie how we tracked the sales down in the latter part of last year, early part of this year, and you saw the corresponding increase in gross margins that compensated for that reduction in revenues.Coupled with the tighter cost discipline that we brought to the business, costs are significantly lower than they were 12 months ago. That's given us a 20% growth in profit before tax in the first half of the year, a 23% growth in earnings per share. As a result of the combination of lower debt and higher profit, our return on capital employed continues to move forward. We're now up to 11.5% on a post-tax weighted average capital employed basis. That's 250 basis points ahead of where we were. And as I have already said, our net debt is now down to GBP 158 million, and our headline financial leverage is at 1.4x, and those will continue to fall in the second half of the year.If I give you some more color on some of those specific lines now. If you look at our underlying revenues, we reported in the first half of 2018 just under GBP 1.4 billion of revenues. We have sold or closed a small number of businesses in the past 12 months in keeping with the strategy that we announced to trim away some of the peripheral businesses that don't fit in our portfolio. And that results in a pro forma adjustment of GBP 33 million as a result of those portfolio changes. So you can see on a rebased basis GBP 1.3 billion of revenue in the first half of this year -- first half of last year. What we've delivered in the first half of this year is GBP 1.26 billion, so you can see a little bit of a decline there. And you can see that, that decline is primarily around the U.K. & Ireland. So those 2 factors of weaker market conditions and our deliberate actions to reduce our base of business to make the group more profitable have resulted in that decline in U.K. & Ireland revenues. And then Mainland Europe and Air Handling have both increased revenues year-on-year.The benefits of those actions around revenue to increase our profitability are really starting to show up in our gross margins. You saw from Meinie how they show up in the Distribution business. At a group level at the whole, from a business that was typically delivering 26.5% gross margin, we're up above 27% in the first half of this year, and it tends to be higher in the second half with seasonality. That's a very significant step-up in a market that's not necessarily been very helpful and reflects what we've been doing around pricing controls, around the performance management of our sales force, around our pricing strategies in our business. We think we've got further upside to come from this. We've done a lot of work on this in the U.K. in the Distribution and the Exteriors businesses. But we've only started to roll these things out in France and Germany in recent months, and so we think you should be looking for more gross margin improvement over the next 12 months as a result of what we're doing in those businesses.In operating cost terms, those who've been following us for a while know that operating costs were getting drastically out of control when we arrived in the business. It took us most of our first year to stop them from rising further. And you can see, as we came into 2018, we started to strip operating costs out of the business. We now have operating costs well under control. They were GBP 304.8 million in the first half of this year compared with GBP 304.0 million in the first half of last year, and that's despite inflationary increases and wage rises and those sorts of things. So you can see how we've got a grip on our operating cost base. That reflects the changes that we've been making to our operating models in the U.K. with a move to a more integrated functional model in Distribution and more of a hub-and-spoke basis in the Exteriors business. It reflects some branch network optimization, some fleet optimization as well and some significant reductions in head count. And you can see a further 398 heads have come out of head count in the first 6 months of this year.As we look forward, we think we've done the job in the Distribution and the Exteriors businesses. We're still working on taking out further OpEx in the French and German businesses. It takes a little while to do that in European markets. And so we think you start to see some of the benefit of that coming through in our figures as we move into 2020, so we think there is more OpEx improvement to come.And so this translates overall into a 20% increase in profit before tax or a 23% increase in earnings per share. It is worth pointing out on this page, Meinie talked about the ransomware attack that we suffered in April and May this year, which in aggregate cost us GBP 5 million from our profit before tax, so GBP 3 million in our French segment, GBP 2 million in the French business within our Air Handling segment. And you can see that if you've added that GBP 5 million back, we would have demonstrated a 40% year-on-year profit before tax increase, which I think is really a testament to the way that we're transforming this business. I'm told that many businesses might even have moved that GBP 5 million to exceptionals, but we like to keep things nice and clean in this business we're in.And then in terms of our progress on the balance sheet, we've continued to reduce structural levels of working capital in the business. We've been focused particularly on stock. We've taken stock down again in the first half of this year. We think there is more to go after. You can see that translating into a 60 basis point reduction in working capital as a percentage of sales. And bear in mind that's on a sales figure that has fallen for the reasons I've described, so you can see the progress that we've been making there. And that is a key reason for the improvement in return on capital employed, which you can see has dramatically changed over the past couple of years in this business. We're making a lot more money for shareholders now. Those structural reductions in working capital reflect actions around centralization of inventory management in the hands of professionals in businesses, improving the capability both through the people that we hire and the tools that we have in place and more performance management and incentivization around stock, so actually getting people in the business to care about whether they're holding too much stock. And so as a result, net debt and leverage continue to fall. We inherited a business with just shy of GBP 300 million of net debt. By the end of last year, we brought that down to roughly GBP 190 million. We've now brought that down to GBP 158 million. This shows you where the cash has come from and where the spend has been. So we've made cash flow from our profits from trading. We've delivered a reduction in working capital that feeds through to cash flow. We spent a little bit of that on CapEx. CapEx levels are relatively modest in this business. A little bit of that on financing and tax in the year. And then we have been investing in the restructuring and the transformation, and that is the cash cost of that restructuring, that transformation during the first half of this year. That takes us to GBP 158 million at the end of the first half; headline financial leverage of 1.4x. You know that we announced the disposal of WeGo FloorTec, a raised access flooring manufacturing business, in early July. We have now received approximately GBP 12 million of proceeds for that business. If we have received to that at 30th of June, we would already be down to 1.3x headline financial leverage. So you can see why we're now confident that our target of 1x is well within reach. And we think we've -- we're well on the way to finishing the job of sorting out the balance sheet that we inherited.There's a lot of detail on IFRS 16 in the announcement. We've tried to be really transparent for people to help you understand the impacts of IFRS 16. There's a page here which sets it out. As you know, crudely, what it does is it increases your EBITDA as you no longer have operating lease rentals coming out as an expense. But it increases your finance cost as well, and therefore, your operating profit goes up a touch, and your profit before tax comes down a touch. Our profit before tax came down GBP 2.7 million as a result of the application of IFRS 16, so crudely, GBP 5 million is what you might expect for the full year. And then in terms of the balance sheet, what it does is it grosses up a right-of-use asset and a liability on the balance sheet to the tune of about GBP 300 million, small, small differences between the 2. And the result of putting that GBP 300 million liability or GBP 291 million liability onto the balance sheet is you see GBP 291 million added to our net debt on an IFRS 16 basis. What we've done in the announcement is we've put all of our numbers on a pre-IFRS 16 basis, so you can draw the comparison with 2018, so you can see the real performance of the business. And then we've translated it into post IFRS 16, so you can see what IFRS 16 does to our numbers. And we've done that not just at the front end but also in the appendices on a company-by-company basis. For those of you who've got as far as Page 46, you'll see Note 17 has a lot of detail on this. And for anybody who'd like a detailed technical accounting session on IFRS 16, I suggest you come and see me at the end.Lastly, our dividend. We've announced a dividend in line with last year and in line with our policy to pay dividends in a 2 to 3x earnings cover range. That is an interim dividend of 1.25p, and we intend to pay that on the 8th of November to shareholders on the register at the close of 4th of October. So that's how I wanted to summarize the financials. It's back to Meinie to give you a perspective on current trading and outlook.
Thank you, Nick. And the gloomy picture already reveals that that's against a backdrop that is not very -- not looking very clever. So despite the very strong performance in the first half year with profits up and debt down, the challenging market conditions we've seen in the first half year, we see slightly worsening into the second half of the year. We will continue to see benefits from our transformational activities, as I mentioned earlier and Nick mentioned as well, across our group business activities. However, with the increased market uncertainty, we have already taken additional actions in anticipation of further market weakness. So we are not sitting still. We see it deteriorating, and we are taking actions to basically counter that. So before we open up for questions, I'd like to say, in summary, we had strong first half 2019. The transformation continues to deliver increased profit and reduced debt, but political and macroeconomic uncertainty continues to increase. So on that backdrop, we really like to open this up for questions, and we have microphones coming in the back. So Aynsley, over to you.
Aynsley Lammin from Canaccord. Three questions, please. You probably won't want to give like-for-like numbers for July and August trading, but if you could just maybe give us a pattern of what you've seen in Germany and the U.K. compared to kind of the trend for May, June in both Germany and U.K. for like-for-likes. And secondly, you talked about the kind of market weakness you've already taken actions. Have you got a number in terms of cost savings maybe you've already taken now? What type of actions have you taken? And then lastly, if you look at SIGD, the gross margin improvement, how much of that is just a function of the fact that you've turned away low-margin sales versus actually better buy-in pricing? Are you able to give kind of percentage maybe estimate on that, please?
Good. Three very good questions actually. If I remind you to Page 2 of our presentation, we are not necessarily forecasting in our business. And July and August as summer months, are smaller months for us, and therefore, the like-for-likes are not an indication necessarily for the full year, but they did not look very clever. The biggest months are still coming. And the actions we are taking is basically the expenditures that we can do without. So ancillary cost, travel expense, everything that is not necessary, we'll take actions. Where possible, we'll try to accelerate our implementation of target operating model. I think that Nick already made reference that we are quite well able to control our cost levels. And the real change of cost in this business is basically continuing on the implementation of our target operating model and, therefore, our strategy that takes a little bit longer, especially across Mainland Europe. But that doesn't mean that there are no actions we can take earlier than later. And I realize I have not given you a lot of specifics other than directional, let's say, guidance. Is there anything, Nick, you want to add to that?
I think there's -- the third question is one on SIG Distribution. So it's not as easy to say this proportion of business, we walked away from that business. We chose not to do that business, and therefore, X percent of the margin improvement comes from this, and this proportion comes from price increases. Because in practice, what you do is you put your prices up in places, and some people go with the prices, and some people don't. And some people don't because they don't have any business that month, and some people don't because they've gone elsewhere. So on picking that into a detailed variance analysis is quite difficult. But when you look at that gross margin improvement, you should consider that, that is as a result almost entirely of our actions opposite our customers rather than opposite our suppliers. So it's not that we're looking particularly to buy a lot better from our suppliers. Actually, what we're looking to do is make sure we optimize the margin that we make on the front end.
One follow-up.
Yes?
And that seasonally low activity within August get worse than July in Germany and in U.K.?
So in Germany and U.K., if you look at the shape, the -- probably from about Easter onwards, the U.K. has been harder work than it was last year. From late May, early June onwards, Germany has been harder work. It's been up and down in both markets over those periods. I would say June was pretty miserable in both markets, but you could attribute quite a bit of that to extreme weather in the first part of the month. July was better in both markets, and August was worse again. That's in contrast to what we're seeing in France, which remains incredibly optimistic both in terms of the external indicators and what we're seeing in our business. Our order books in France at the start of September are about as full as they've ever been. So this part, I'm quite pleased that France is 1/4 of our business.
Did that answer your questions, Aynsley?
Yes.
Okay. Priyal, behind you. Yes.
Ami Galla from Citi. Just a few questions from me. In terms of the deterioration of the market backdrop that you've seen so far in U.K. and Germany, how have you seen the competitive backdrop evolve? To an extent, do you find it more difficult to defend your gross margin? And how confident are you that you can actually incrementally make more progress on that and defend pricing? Connected to that, on pricing, another question on plasterboard and the allocation out there. What is the sort of conversation that you have with customers in this backdrop? I mean realistically, you are in a market where the supply is quite tight, and you have all the levers for increasing prices out there. But from a manufacturing perspective, input cost inflation is definitely coming off on plasterboard. So what is the sort of conversation that you have with customers in that backdrop? And the third one is really on rebates. I mean you've mentioned earlier that the rebates are more regular now. But when we look at our second half estimates of operating profit, how dependent would volume-linked rebates be into the numbers?
So if I first try to answer the competitive environment, we see our competition putting up prices quite strongly at the moment. They are faced with the same market conditions as we are, so we do not see an increased competitiveness across our total portfolio, I have to say. Your second question was about, let's say, the ability to manage allocation and pricing discussions with our customers. Most of our customers understand that this is a basket of products they buy from us, and that is how the conversations are going rather than just only on plasterboard and allocation. So we are not necessarily making ourselves more or less competitive. If you look to your third question, remind me again.
Rebates.
Rebates.
So rebates.
I'll try to answer that.
Yes. Yes.
We -- so one of the things that we have been flagging quite strongly since we came in is that we don't like the way that the industry has historically been built up with a lot of volume-based annual rebate structures which risk that if you fall below a particular level of volumes, you get to a cliff edge on rebates. And so the past couple of years, we've been negotiating away from those sorts of structures. We've been moving annual schemes to semiannual, quarterly, monthly schemes. We've been moving the volume thresholds so that they don't apply to current year but so that you go for a renegotiation for the next year. And the practical upshot of that is we have no real cliff edge as a result of rebates in our numbers. So we could see a material decline in our revenues and not suffer a material decline in the percentage rebate that we would enjoy.
Good.
I'm Priyal from Jefferies. I've got 2 questions. So firstly, just on that GBP 5 million perhaps from the ransomware, it sounded as though it was more on the costs side rather than lost revenues. So the question then is, is that lost revenue lost from the full year PBT number, or is it something which can be recovered in the second half of the year. And secondly, just on that 5% margin as well, given you've said that your strategy isn't based on sales growth, clearly, you've got 2 divisions where you're close to 5% or above it already. Is that something which can sustain for the full year? And what's the sort of timing, I suppose, division by division for hitting that 5% target as well, do you think?
You take the first.
Okay. So the GBP 5 million impact from -- estimated impact from the cyberattack, the ransomware attack, that showed up in 3 places in our P&L. That showed up in our revenues because some customers said we don't want to deal with you while we have to fill out orders on pieces of paper. That showed up in gross margins because some customers said, "Look, we're happy to keep dealing with you. We realize it's difficult time. But in return, you've got to cut me a deal on price." So they used that as an opportunity to chip. And that showed up in costs because we brought a lot of people together in a hurry to put our systems back together and get them up and running, so there was remedial cost associated with that. But the bulk of it actually, more of it was in gross margin than the other 2. So it was more keeping the business and accepting that, that was going to cost us a bit. And if you look at the French numbers, you'll see that is the one business where the gross margins came off in the first half of this year compared to last year.
So then your next question was about target on 5%, where some of the businesses are already there. What you're seeing is basically that our execution now is roughly 18 months, and we already started the execution in the other businesses. So you could see that in the next 12 to 18 months, we will be able to reach those type of targets in terms of profitability. Not sure what the market effect is, but clearly, the trend is there. John?
John Messenger from Redburn. I think -- sorry, I've got -- I think I've got about 5 here. You wouldn't expect any less. Just coming back on ransomware in France, is it -- was it a unique system to the French business? Were you kind of deliberately targeted in some way? And when you look at the repercussions of this, is there anything you've had to do elsewhere around the group, or are you totally comfortable that your IT kind of protection and everything else is where it needs to be? Second one was just on the U.K. in terms of that sales decline in U.K. Distribution, can I just understand, was the mix of it kind of a factor as well in that, did you give quite a lot of direct sales relative to delivered just in terms of has the mix of how you're selling and that customer base and the channel changed materially? And did those direct sales -- and I'll take your point, Nick, about the mix of where is this gross margin shift coming. But were those sales lost at usefully lower gross margins effectively because of the direct? Also, in the U.K. though, the 16.6% down in the first half, 12.5% for the U.K. overall, in the second half, how do you look at the shape? And if the market is going to be off 4% or 5%, would you guys now -- given what you've done on cleaning out the sales base, are you looking at that being much closer to that number? Or are you going to lose another 2% or 3% in the second half in terms of your selectivity? Working capital to sales, 6.6, it's about 1 month if I think of it group-wide. Is that -- given things like plasterboard, there are certain areas where actually you'd probably want to have more, I would have thought, and play the stockholding game. Is there -- and if you look on some of the websites around the world, and you have to be careful about things like Glassdoor and others, but quite a lot of your workforce -- people who are still there, not those who've left, are saying, "Look, actually, we've got an issue in that, sometimes, we just don't have the inventory." Now they may be being unfair, but is there an issue? And just how far should you squeeze that? And is it not potentially going to knock your top line? And then finally, Air Handling, could you just give us a view in time frame terms? Obviously, we've seen on the world news wires, [ lots had got ] appointed. Is this something you'd hope to deliver, I guess, by the end of the year? Lots of questions. Sorry.
So there are, Nick, 5 questions or 6. If I start with the cyberattack, you can prepare a little bit on the other questions. On cyberattack, really, this was a very sophisticated, let's say, United States-developed cyberattack being used by other nations like Russia and North Korea. This level of cyberattack is quite strong. We were attacked through mail, phishing e-mails that we were not able to capture. We were in the midst of a rollout that would have protected us from these type of activities. On the same night that this happened, 15 other companies in France were attacked by the same cyberattack whilst doing the upgrade at the same time, so not sure how that all happened. The first thing we did is we pulled the plug on our European-wide network so that other parts of the company would not be affected. We have not only put all of our systems, servers and desktops with the right applications to -- for that not to happen anymore. You said almost a guarantee can that not happen anymore. I think that's hardly impossible to come up with a guarantee. But I think that we have made a substantial step forward in protecting the organization. I have to say one thing is quite positive. The industry is probably 20 years behind other industries, and therefore, the level of digital transactions is quite low in this sector. Regardless of that, we have done some investigation, and we are making some further investments, not to protect us more but to enable our recovery quicker if, God forbid, it would ever happen again. So would that help a little bit in terms of the answers you were looking for?
So second question was on sales and how's the mix of business in SIG Distribution changed. And you were specifically looking at [ ex works ] which tends to be on a lower margin because there's no cost of delivery for us versus delivered. Actually, over the past 12 months, we've done a little bit more on [ ex works ] than we have done historically. We quite like that business because we organize it, but it doesn't cost us anything in terms of the logistics but not a huge -- that would marginally drag the gross margin down, but it's not a huge mix change, just a little bit more. The principal mix change actually has been away from -- we're doing a lot less commodity plasterboard in the mix than we were doing 12 months ago. So just shipping 150 mm plasterboard by the truckload for next-to-go margin is the sort of business that's not very appealing. If we can ship commodity plasterboard and the fixings that attach it, where we make more money, and a basket of other goods alongside, that's much more appealing for us. So that's where the shift has been away from the commodity plasterboard towards the better-margin stuff.In terms of like-for-like sales in the second half, so you saw the chart that showed our average daily sales had come down from GBP 3.3 million a day in the second quarter of '18 to GBP 2.6 million in the last quarter of '18. So as you look at like-for-like sales, all other things being equal, you should expect our like-for-like sales still to be negative until right at the end of this year because we'll be comparing with a number that we have deliberately reduced in the latter part of last year. So I don't think you should be looking for like-for-like sales growth in this business until we get into 2020. In terms of our daily sales number, you'll see that, that had flattened out in the fourth quarter last year, first half of this year. So you can see that we've broken the back of the job that we wanted to do to reduce the size of the business and increase the profit. Now can we grow from here? That depends on market constraints. And you've heard that we're not feeling -- we're not exactly giving bullish messages about the state of the U.K. market today. But I think our performance will be much more closely linked to market over the second half of this year than to the actions that we've been taking to reduce the size of our business and increase our profit.On working capital to sales, I think there are parts of the business where we've taken that probably most of the way that we'd like to take it. We've got stockholdings in the Distribution business in the U.K. down below 30 days. But stockholdings in the French business, for example, is still up around 80 days. So as you look across OpCo by OpCo, you can see places where the mismatches suggest that there is still quite a lot to go after. Is there a point at which you start to compromise your sales? Yes, if you don't manage it in the right way. If you take -- if you decide to reduce your stock by 1/3 and you reduce every line by 1/3, then you'll reduce the lines that sell quickly as well as the ones that sell slowly. So part of what we've been doing with the centralization in each business of inventory management with the introduction of new tools to help us is we've been trying to make sophisticated choices about where do we reduce stock levels because we don't sell very much of it. And to be honest, people will wait 3 days for it to get delivered to them. And where do we need to have the stuff in stock because people need it the next morning. So it's a long-winded way of saying I think there's more to go out.And the final question was what is the time frame on Air Handling. So we're reviewing strategic options. You know that one of those options is a disposal, and you know that we've been running a process around that since earlier this year. These processes take a while, and they don't always give the outcome that you would like, so there are still a number of alternatives for the outcome of our review of strategic options. But we are on with it, and we are well advanced, so I don't think you should be expecting 2020 or 2021 for us to reach a conclusion.
Okay. Charlie?
Yes, it's Charlie Campbell, Liberum. Some questions on cash flow, really. Just in view of the leverage coming down, do you think that factoring -- have you stopped factoring or unwind that in the second half now that leverage has come down or into next year? And secondly, I suppose in view of the more difficult environment, do your CapEx plans come down? I just wondered what CapEx guidance looks like. And then just thirdly, and sorry, this is probably because I'm not an accountant, but just looking at the cash flow statement, just wondering if you can help us with the way that IFRS 16 impacts the cash flow statement. And there's obviously some new lines in there, particularly there's a GBP 35 million amount for repayment of lease liabilities, so just to make sure I understand what that number is in an IFRS 16 world.
They all sound like questions for me. So on factoring, when we started doing the debt factoring in 2017, we made it clear that, that was a tactical step to give us additional headroom against our lending covenants whilst we got our leverage down. And also marginally, it gave us some financial benefit as well because the cost of the factoring is relatively cheap. The -- there will come a point at which we get to our 1x headline financial leverage target, and that's the point at which we'll start asking ourselves whether factoring is a strategic part of our financing over the long term. I don't think it will be. I think when we've got our leverage down, we don't need factoring. When will that happen? So we've said today that we think that 1x is within reach. Clearly, if there was a large disposal coming at some stage, it would be even closer than just within reach. In terms of CapEx guidance, our CapEx typically runs at about the level of depreciation or historically a bit below; or going forward, I'd like to think a bit above. So depreciation last year was GBP 24 million, so something beginning with a 2 is probably a sensible number for CapEx for a year. I don't see -- unless things got very extreme in the market, I don't see us cutting back on the CapEx. It's a relatively modest number. Our balance sheet is coming under control anyway. And to be honest, I think we've been a little bit underinvested over the past few years in CapEx, and so one of the things that we've been doing, for example, is refurbishing trade counters in our roofing branches in the Exteriors business in the U.K. And every time we do that, we get an uplift in sales and profitability. So we think that's a good thing to keep doing even if the market was turning against us. IFRS 16, I'm sure that, that was going to be a special teacher session at the end, Charlie, rather than a question in the meeting. But crudely, what happens to your cash flow is IFRS 16 does not affect your cash, but it affects where the flows appear in your cash flow statement. So your interest costs rise, so more goes through the financing cash flows, but your trading cash flows rise as well because you no longer have operating lease rentals. So you should see essentially an equal and opposite match between your trading and your financing cash flows. It's not quite that simple. I'm happy to take through more color at the end in the remedial class.
Clyde Lewis at Peel Hunt. Three, if I may. I think there was 12 and a bit million of restructuring costs in the first half of the year. Can you give us a bit of a guide as to what you think that might be in the second half of the year? Presumably most of that will be focused on the continent?Second one was on the transformation changes that you've made already; particularly, I'm thinking SIGD. Which ones have gone well, and which ones you're sort of disappointed on? I mean in terms of your expectations, where have been the positives and negatives within what you've managed to already deliver within SIGD? And then the second (sic) [ third ] one was on the end markets that you've seen within the U.K., particularly in the last couple of months, I mean, obviously, roofing, big RMI exposure to housing and wet June. Was July a bounce-back as everybody has realized their roofs were leaking, and yes, they've sort of sorted that out? But I suppose going through that RMI, the new housing, the sort of commercial market, just a little bit more color on that I think would be useful.
Good. Let me first start with your first question in terms of what went well and what went less well on the transformation. If you see the financial effect, then we should be very pleased on what we are doing. I think that our target setting is quite aggressive, so against our internal target versus what we have already produced, I would say what went well was the level of agility to respond from the organization to a change from a branch-led organization to a central-led organization. I think that every organization that goes through the size of change we are going through becomes a little bit too internal focused and, therefore, less customer attention. So other than the element of pricing where we took a decision to walk away from revenue, I think we did not show equal love to all of our customers. And I think that was probably more negative than we expected. We thought we would cover that and tackle that, and I think we learned from that. So rolling it out in Mainland Europe, we are a little bit more cautious, and therefore, we'll put up the protection against revenue loss based upon our focus a little bit more. So rather than doing line item by line item in terms of categories and what works and what doesn't work, I think that the implementation of the target operating model went extremely well. I think that our ability to put tools in very quickly takes slightly longer. And I think that the protection against revenue loss was slightly worse than we would have anticipated, but we are learning from that. And happily enough, we are starting on one end, and we are now sequentially going through the organization. So I think we are able to cover that.And in terms of -- what was the second question again?
Markets.
Markets. In terms of markets, especially RMI and commercial buildings, that is where we have seen the biggest drop. And already now for 1.5 years, we've seen a commercial market coming off by more than 20%, and RMI is increasingly becoming tough, specifically in the U.K. Do you want to add something to that, Nick?
Well, there was one question right at the start as well on the restructuring costs. Restructuring costs in the first half of the year were GBP 12 million. Last year, for the full year, they were a touch over GBP 28 million, so you can see the level is just starting to come down a bit. I'm not going to give you a number for the second half not least because one of the things that we're looking at right now is whether we could accelerate the final stages of our transformation over the next few months to get us lean and fit quicker for anything that might happen in markets, so we might put through a little bit more cost to make that happen quickly. But as a general direction of travel, you should expect our restructuring cost to be falling quite sharply once we get through 2019. I'd be disappointed if we had a substantial number in 2020.
Did we answer your questions?
Probably.
Anybody else? If not, we are happy to take questions with a cup of coffee next door, if that is -- so thank you for attending our interim presentations and for your questions. Thank you.
Thank you.