SIG PLC

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Earnings Call Transcript 2021-Q4

[Stephen Roland Francis, executive]

Good morning, everyone, and welcome to SIG's 2021 final results presentation. I'm Steve Francis, Chief Executive Officer of SIG. I'm delighted to be joined today not only by Ian Ashton, our CFO, but also by Phil Johns, U.K. MD, who rejoined us 2 years ago to rebuild the U.K. business.

Phil is here to give you a more operational view on the tremendous progress he and his great team have made there. Ian will take you through the 2021 results, and then Phil and I will jointly take you through the excellent progress that's been made with the growth strategy.

And today, we'll also articulate more clearly our path to 5% margins, strong cash generation and how we're putting sustainability at the heart of our growth planning as a group.

Today is an exciting day in the 65-year history of SIG. I'd like to start by thanking our colleagues for the mighty shift they put in so far. We wouldn't be here without them. And also thank you to our supplier partners for their support in helping us to maintain stock availability in such volatile market conditions in 2021.

We have returned to winning ways. We've got momentum into 2022, enabling us to accelerate our growth strategy. And I'm delighted to be able to report that our profit turnaround is today in an advanced stage and ahead of expectations. Our business model is delivering. We're taking share and growing again, 8% versus 2019 overall. And in many markets, growing at rates not seen in SIG for many years. And furthermore, we're able to deliver strong margin management, demonstrating the resilience of our franchises. Not only are we gaining share, but also gratifyingly our employee engagement has increased markedly, and we're winning industry awards again.

This is a powerful virtual cycle -- virtuous cycle. We have seen accelerating profit momentum throughout 2021 and Ian will take us more through this. But looking back today at our 2021 full year growth rates and margins, it seems rather outdated given the acceleration that we've seen throughout 2021 and into '22.

We saw record performances in France and Poland. In the second half France, Poland and the U.K. exteriors were over 20% up on 2019 revenues. There's been a significant upswing in margins, and over half the group by revenues is trading around 5% margins already. Our maiden Eurobond issue last November was also both an important milestone for the group, but also an early affirmation of our rapidly improving outlook and strengthening finances.

In 2022, we continue to see strong trading momentum, aided once more by strong stockholding positions intentionally and disciplined recovery of input price inflation. Our accelerating recovery enables us to move to the next level of performance.

The accelerating trading performance gives us the confidence to elaborate our goals more clearly, clear organic growth path to 5% operating margins, EBIT and strong cash generation through consistent application of operational excellence. Investing in expertise, talent, network expansion, the customer-centric digitalization of our business and fleet modernization, new branches. Exploring the growth potential of our heritage as a group that was quite literally born green in the late 1950s and more of that later. Accordingly, we have adopted carbon and waste zero targets as a group. This organic growth is supplemented by an increasing array of attractive investment opportunities. So it has been successful year on many fronts, underpinning our confidence in the future.

I'll now hand over to Ian to take us through the 2021 results, Ian.

[Ian Ashton, executive]

Thanks, Steve. Hello, everybody. I hope you're all well. So firstly, key financial metrics. 2021 was a pivotal year for the group, and we made very good financial progress. We delivered a 24% increase in group sales over the prior year and more meaningfully 8% over 2019. And an underlying operating profit of GBP 41 million, well ahead of where we had expected earlier in 2021 and a profit before tax of GBP 19 million. These numbers are in line with the trading statement we issued in January. I'll look in more detail in a moment at the key elements within these numbers.

Below underlying profit, other items were GBP 35 million for the year. Details of these other items are shown in the appendix to this presentation. Net debt post-IFRS 16 finished at GBP 365 million. Pre-IFRS 16, this was GBP 129 million. Within net debt, gross cash balances at the period end were GBP 145 million. Our new RCF facility of GBP 50 million remained and remains undrawn. We therefore retain substantial liquidity.

Net debt increased over the year due mainly to a well-flagged and well-managed increase in working capital and I will add more detail on that and cash flow in a few minutes. This chart shows very simply the growth in our like-for-like sales over both 2020 and 2019.

In short, it was a strong year. Against 2019, the more meaningful comparator, you can see the growth trajectory accelerated as the year progressed. Q1 was still negative due to the trajectory of the U.K. Interiors business around 2 years ago. And that business's turnaround was the largest driver of the improvements from Q2 onwards and notably in Q4.

We've been able to pass on input cost inflation during the year, and this had an estimated impact of approximately 8% on the full year number. In the second half, it was around 12%. These numbers are not materially different when comparing to 2019 or 2020.

On the next slide, this shows clearly that the growth has been seen across the business. The bars show the growth over last year. The largest drivers against 2020 were the U.K. and France, which as well as being the largest businesses were also the most affected by COVID in the spring and early summer of 2020.

The lower arrows now shown here show the movement versus 2019 in both value and percentage terms. This highlights the headwind of U.K. Interiors in the first half when comparing to '19, which then turned positive in H2. Phil will expand further on that in a few minutes as well as on the very strong performance in U.K. exteriors.

The French and Polish results were the other standout performances in the year. Poland was the most affected by inflation but still delivered very strong volume growth within that total number. Benelux's decline over 2019 was due to both internal and external factors we've referred to previously. We have a new management team in place there and they're making good early progress. The fundamentals of that business remain robust. I'd also just add a reminder that Ireland continued to suffer from significant COVID restrictions in the first 4 months of 2021 and then rebounded very robustly thereafter as we had expected.

Gross margin percentage finished 1.2% ahead of prior year. COVID, of course, had a negative impact in 2020 with lower sales leading to lower rebates. However, more importantly, pricing discipline and mix continued in 2021 to drive real underlying improvement. As mentioned already, we have been able to pass on cost inflation successfully. OpEx was well down as a percentage of sales as we leverage the fixed elements of the cost base and up on prior year in absolute terms, as is to be expected, given the GBP 420 million of higher sales.

In addition to the additional freight and other handling costs on those sales, we've seen inflation on indirect costs of around 2.5% and additional employee incentives in light of the strong results. And finally, further benefits in 2020 were, of course, not repeated.

The cost reduction program in the Corporate Center related to simplification of structure was completed by the start of Q2 and delivered savings to plan. On operating margin, this chart demonstrates the consistent upward momentum in margin, showing the rolling last 12 months margin over the last 3 years. The blue line is as reported and the red, adjust for the COVID impact last year. As well as the recent progress, this highlights that in 2018 and early 2019, we were at a margin higher than 3%, albeit this was helped by some of the short-term pricing decisions, which caused some of the subsequent sales declines in U.K. Interiors.

Looking forward, although the rate of improvement shown on here will inevitably slow slightly compared to the exceptional improvements over the last 12 months, we're confident of continued improvement and hence of getting back to 3% in full year 2023 and then beyond that to 5%.

Next cash flow. I will look at the free cash flow on the next slide, but for completeness and clarity, this slide shows the total cash flow in a standard format and with comparators. As mentioned previously, we finished the period with GBP 145 million of gross cash balances. Below free cash flow, you can see the net cash receipts of GBP 52 million from the refinancing as with the bond, we raised a number that was in excess of our previous debt. And we spent a net GBP 11 million cash on M&A in the year, mainly on the acquisition of Penlaw in the U.K. in November.

There were unusual, if not unique, circumstances affecting cash flow last year. This slide bridges from EBITDA to free cash flow, showing the key drivers, and we hope will also help provide clarity and color on how we see cash flow evolving over next year and beyond. To that end, we have split some of the items before and after the GBP 38 million number in the middle of the page to broadly articulate the distinction between 2021 numbers and how we expect the shape of the bridge to differ in '22, '23.

EBITDA of GBP 113 million was at a margin of 4.9%. We expect this EBITDA margin to increase at a similar rate to operating margin and of course, on a growing sales number. The first 4 red bars will, of course, move over time, but are relatively predictable. Interest and tax will rise modestly, and I'll cover those in the technical guidance. The largest item on here, lease payments on our fleet and estate will grow over time with the business, but it is a relatively stable number. CapEx was slightly lower than normal in 2021, but will remain fairly static in the mid GBP 20 million in 2022 and beyond. And as a fundamental, we've invested and we'll continue to invest in on-site safety and sustainability. The other items on the bridge are more inherently variable, we've broken them out for the reason mentioned above, they will move in different ways in the future.

Working capital was a large outflow in the year as shown in the top right of the page and as previously reported, the vast majority was inventory being GBP 76 million of the GBP 85 million total. And you can see the 3 key elements in that separate table. Looking at those 3 in turn, trading volume growth drove a GBP 22. Million increase year-end over year-end inflation of about 12% to 13% drove another GBP 29 million, clearly an unusually high headwind. And as previously mentioned, we quite deliberately invested another GBP 25 million to make sure we could maintain and optimize customer service during the exceptional circumstances of last year.

In 2022, we expect that investment to largely unwind, the balance of inventory will broadly increase with sales, resulting in, we expect an overall modest net decrease in inventory, i.e., cash inflow in 2022. All the rest of working capital, in aggregate, was a modest outflow of GBP 9 million in 2021, the top item in that table despite the inflation headwind on debtors and creditors and a significant increase in sales. We expect this bucket to be broadly cash neutral in 2022.

The final elements on this bridge are exceptional and other items. And again, we split these 2 buckets in order to give some indication as to how we see these in the future. Exceptional cash flows of GBP 28 million are detailed in the appendix. GBP 17 million of this number relates to the refinancing, shown separately here and clearly very much a one-off. The remaining exceptional cash restructuring cash was modest at GBP 3 million, and we expect it to remain around that level or less. The balance of GBP 8 million in exceptionals shown towards the bottom right of the page is split equally between cash paid under owners contracts and on IT projects.

Of other items, which totaled GBP 15 million, this includes purchase of shares to fund share fund obligations and contributions to the U.K. pension scheme. Both were higher than normal in 2021, and we expect this other bucket to reduce in 2022, hence the split shown on this slide.

So overall, looking forward, our expectation is that 2022 will be broadly cash neutral overall, assuming no further significant inflation impact with the business moving clearly and sustainably cash positive from 2023 as margin and EBITDA continue to increase.

Capital allocation. We want to provide some clarity on how we're thinking about capital allocation. Firstly, and fundamentally, the return to growth strategy is an organic growth plan. We want to invest in our existing businesses, which are strong and have great potential. This may take the form of, for example, branch openings or investment in commercial talent or as in recent months, temporary investments in certain categories of inventory.

Secondly, we believe there will be further opportunities to acquire good businesses that fit well strategically. And when we can do that at prices that will be value accretive, we will look to do so. And Steve will talk further on this.

Finally, dividends. Now we're profitable again. This is clearly a question the Board is considering carefully. Timing-wise, we will start paying a dividend again once we sensibly can, which the Board means once we are generating cash and on the path to reducing our leverage. Underpinning the above priorities are the targets we have set around liquidity, leverage and credit ratings. We want over time to improve the latter, although we're happy with the ratings we received in November. And on leverage, we've been clear that our goal is to get down to 2.5x on a post-IFRS 16 basis, equivalent to around 1.5x on a pre-IFRS 16 basis. And today, we're at around 3.2x on the post-IFRS 16 basis.

So our medium-term goals, a brief reminder on the goals we've set ourselves. These are unchanged versus our previous communications on this. And I've touched on them all already to some degree or another. Trading has been good so far this year, and we expect demand to remain robust. As we've previously indicated, we see the supply shortages continuing to abate over the coming months, albeit not completely disappearing. We expect continued solid volume growth across the business as a whole. Inflation was well managed in 2021, as we've mentioned, and we'll be positive on the top line in at least H1 as last year's increases annualize. We've started 2022 with continued input price inflation. The current global situation is likely to lead to further inflationary pressure with macro uncertainties in energy supply and potentially some downward pressure on demand. Overall, SIG is relatively well placed to manage these uncertainties. As a result of the above and the continuing momentum in the business, we feel confident about the full year, and we're ahead of plan after the first 2 months.

Cash, I've talked about already. CapEx, as mentioned, we expect spend to be in the mid GBP 20 million for the full year, lower than the GBP 30 million per annum we've previously guided for the medium term, although that drop is partly due to the changed accounting for costs on projects involving Software as a Service.

On interest, our cash interest will increase slightly as we've more debt and cash following the refinancing. In addition, the accounting credit we were seeing related to the amortization of early modification of debt has also now been unwound with the refinancing. As a result, our interest charge will be around GBP 28 million to GBP 29 million in 2022. And finally, on tax. As reported previously, we have tax assets in the U.K. unrecognized from an accounting point of view. And so we do not expect to pay U.K. corporation tax for some time, we do pay tax in our other operating companies. Given the U.K. situation, the group's effective tax rate is not very stable and not very meaningful as a metric. Our expected cash tax for 2022 is in the mid-teens millions of pounds.

That concludes the update on the financials and the outlook. We're very pleased with progress. And more to the point, also excited that there remains significant scope for further improvements in the business and its financial performance. I'd like to thank all of our colleagues for all that was achieved over the last 12 months, and will now hand it back to Steve.

[Stephen Roland Francis, executive]

Thanks, Ian. You can really see how our strategic progress has driven rapid profit improvement as increasing the value of our franchises. This is an investment-driven strategy that's paying off. We've been investing in people, expertise, incentives in our supplier partnerships in stock availability and range and in new branches. We now have a strengthened leadership team, and there's an infectious enthusiasm in our branches, and you could see that in the eyes of our people. We're gaining share in most markets in the U.K., France and Poland, we're back to winning ways.

We are applying a tried and tested formula success embodied in our 7-pillar operating model through our strong relationships with suppliers and customers in a period of global uncertainty. Supplier partnerships have helped secure scarce inventory at one of the most difficult supply years. Product availability and superior service has been reflected in market share gains, and empowering our branches with flexibility and tools to trade and after all, people engagement scores and growth go hand in hand.

We're future-proofing our model, enabling greater resilience and agility across -- locally and across our supply chain. The long-term value of the SIG franchises are growing. We have a clear sight of the path to 5% operating margins from further upside in our high-performing businesses. Then the second year of the U.K. Interiors profit improvement plan and that same formula being applied in Germany and the Benelux. And we're now seeing that the strength of RMI spend across Northern Europe is more than a COVID blip. There are strong industry demand tailwinds for the next several years.

We're simplifying and digitalizing. We're making SIG, in simple terms easier to work for, buy from and sell to. The productivity prize plus e-commerce opportunities are underexploited. Our reputation has been regained, as illustrated by recent industry awards such as Best Supplier for our U.K. Interiors business. And for Lariviere, our French Exteriors business, the Best Specialist Distributor of the Geste D'Or awards. SIG was born green and 65 years later, we're building capability to take on a leadership role in product carbon footprint and traceability and opportunities for circularity.

I'm now going to hand over to Phil Johns, U.K. MD. SIG is fortunate to have been able to attract Phil back to lead the business. And it's in large part due to his standing in the industry that he's been able to attract over 100 senior leaders to join SIG and provide the impetus for the U.K. progress and outlook. Phil will now elaborate how the excellent progress has been made in the U.K. businesses. Phil?

[Philip Johns, executive]

Thank you, Steve, for the introduction, and good morning, everyone. As Steve said, I rejoined SIG in 2020, having left in 2015 after being with the group for 28 years, including 10 years as MD of SIG Exteriors. When I left, I moved to MKM Building Supplies as CEO and was part of the team that led the sale to Bain Capital. MKM was the largest and fastest-growing independent merchant in the U.K. with a highly incentivized branch model. As I watch from a distance, it was clear that SIG was losing focus on its markets and its specialist value in the chain. And worse, the business became disconnected from customers, suppliers and employees.

So why did I rejoin? Firstly, I could see that Steve had grasped the DNA of SIG very quickly. He focused on specialist expertise and reconnecting with our stakeholders. Secondly, I really care about the business. I saw the potential to return SIG in the U.K. to winning ways and was delighted to have the opportunity to rejoin.

Steve and Ian have spoken regularly to you about the turnaround we have achieved in the U.K. and our plans for future performance. So today, I'm going to spend the next few minutes providing a little more insight into what we've done to deliver that turnaround and the plans we have in place to drive growth and returns.

In the U.K., we've executed the turnaround in 3 stages. The first was a reality check, understanding what we had become and what needed to change. The organization have become disconnected, a centralized generalist, with morale and expertise undermined by numerous cost-out programs. Reputation was at an all-time low and competitors took market share at our expense quite often with SIG alumni, they'd recruited.

Our second stage was to rebuild the U.K. organization. We recruited and redeployed huge talent into the organization. I reshaped the U.K. Board, creating a flat structure, including 5 new operational directors with an average of 27 years' experience. This is a highly capable driven and committed team. Together, we reduced central overhead by GBP 4 million and reinvested in our local network. We established 380 specialist roles recruiting 240 externally, some returning alumni and others from competition, keen to be part of SIG's exciting journey. 140 were existing employees who were underutilized, and we redeployed them into roles where the talents could be fully maximized. This was the platform to return SIG to a decentralized specialist and reconnect with our customers and suppliers at national, regional and local level.

And finally, to Stage 3. Here, we are focusing on our return to growth strategy. Starting in quarter 4, 2020 we continually gained and build momentum despite the challenges of product availability and inflation. For my management team, the SIG ethos and values are so critical, creating the conditions for the whole team to own the turnaround. And I'm delighted with the progress and success we've already achieved whilst recognizing there is still much to do.

A clear strategy was fundamental to creating success. So I worked with Steve and colleagues early on to create the 7 pillars, an operational future-focused playbook for sales and branch managers that forms the basis of our go-forward approach. We've set ambitious goals across all 7 pillars, but I would like here to highlight a few areas of particular note.

The first pillar, responsible actions. This sets the tone for the values and professionalism of the whole business. Behavior, making sure people went home in the same health and condition that they left for work. Traffic management, reviewing every branch and introducing traffic management plans to reduce risk and upgrading sites to improve staff welfare, a GBP 5 million facilities program is now almost complete.

Moving to the second pillar, winning branches. This is fundamental to our strategy. We empowered our people to provide quality service locally, and they are highly rewarded on exceptional results. We look to create a local business, flexible and agile with the benefits of being part of a national company. The fifth pillar, valuable partnerships. We have placed a huge focus on reconnecting with key suppliers at all levels. We want them to see SIG as the best route for their products. We focus on creating a genuine win-win relationship, where value is gained by both sides and a key win for us has been the ever-improving support on stock allocation as a result.

And the last pillar is focused growth. As you've heard from Ian, we've made some targeted acquisitions and open new branches. These have all been successful and are performing ahead of plan. So there's been a lot going on across the U.K. business, but in a very focused way and with clear signs of success.

By example, market share gain and margin improvement went hand-in-hand with employee engagement, which has moved from a negative to a positive score and a significant improvement in our customer NPS score is good progress in a year of major supply disruption and price inflation. U.K. Interiors was the most adversely affected business. We're now in profit and our focus is on growth and improving returns as we drive towards 5% operating margin. Under the previous strategy, the business was completely centralized. Branch Directors positions were taken out and local P&L is removed. As you can see here on the left, after we reorganized in quarter 3, 2020, average daily sales increased steadily and would have been stronger in quarter 3 2021, were it not for the product availability challenges, which the team managed extremely well.

In quarter 4 2021, when supplies eased, we returned to growth, and this momentum has continued into 2022. At the same time, gross margins also steadily increased following purchasing and pricing initiatives as we successfully negotiated our value in the following ways: supply negotiation at all levels of contact, management of price inflation, stronger pricing guidelines and constantly looking to improve mix by focusing on higher margin products. And as a result of the team's efforts, I am delighted that all SIG's U.K. businesses have now returned to profit. Interiors dramatic collapse is highlighted here in half 1 2020, when customer and staff confidence was at an all-time low. 2021 sales growth of 38%, gross margin uplift to 2.6% and nearly 10 percentage points improvement in OpEx ratio propelled the business back to profit in half 2. But there's still a significant opportunity ahead as we continue to drive share recovery and execute skillful mix and price management.

Exteriors was not as badly affected in the previous centralization program and giving branch managers control of stock and logistics transformed the business immediately. Sales have reached 2016 market share levels and operating profit margin exceeded 5% in half 2, 2021. That reflects great execution on the basics and also on the value of our unique expertise and fabrication businesses.

So we've already made great progress, but there's much more to come, especially in interiors. And we have a very clear road map to deliver further margin uplift towards 5%. We have a robust, resilient and responsive plan, detailed down to a product, customer and branch level. You can see some of the key elements here.

The first element is all about mix and pricing. We will grow higher margin categories to shift profitability as we add volume. At the same time, we will continue to negotiate our value, looking at lower margin segments and ensuring strong price management. Each branch has a plan on these key areas based on local market opportunity and branch capacity to create the right mix for each business. We will also develop our added value areas such as designer technology and SIG 360 Technical Services, where we have an enhanced offer over our competition.

The second element is the biggest profitability driver, driving operating leverage from regaining lost share, while containing fixed costs and utilizing share capacity. Productivity gains will also come from further digitalizing our business, introducing warehouse and transport systems, streamlining our order to cash process and improving CRM.

And the third element will be further targeted expansion of our network. New branches will focus on a streamlined offering our highest margin categories, plus some geographic infill. We will also look at acquisitions that will complement our network, our capability and accelerate our strategy.

So that's a brief update on the progress we have made and are continuing to deliver in the U.K. business. In summary, we've restored the ethos of SIG as a locally empowered business with specialist expertise. This has allowed us to reenergize our employees and reconnect with our customers and our suppliers, driving up volumes and restoring profitability across the business. It's been a great journey so far and there's much more for us to go to, for us to continue the growth momentum.

And with that, I will now hand over to Steve. Thank you.

[Stephen Roland Francis, executive]

Thank you, Phil. Today, we'll articulate our confidence in reaching 5% margins and with its strong cash generation in the medium term. We'll elaborate why we believe we can lead moves towards sustainable construction and what that means and position the role of M&A is an accelerator of that path to 5%.

We've come a long way since early 2020. The turnaround is largely behind us. As we indicated in 2021, we would return to profit, both at group and U.K. levels, regain significant U.K. market share, strengthen the management team across the group. And all of those have been completed as well as our maiden Eurobond issue enabling us to have longer-term financing.

We also committed to carbon 0 and waste targets and made 2 small acquisitions in the U.K. Looking forward, our next financial milestones are, respectively, to be cash positive largely through increased earnings, to recommence paying dividends and to pass through the 3% LTM underlying operating profit margins on the way to 5%. And in parallel, we'll be increasingly focused on M&A activities to supplement organic growth, as we see significant opportunities in all of our markets. Our clear medium-term target is to recover to 5% operating margins and beyond. In 2021, our high-performing businesses, which are about 57% of group revenues averaged just under 5% EBIT margins already. Those businesses grew by 18% versus 2019. So they're high growth, good margin. They've got strong platforms for the next stage.

Secondly, the U.K. Interiors business, which is 23% of sales went back into profit in the second half of '21, as you've heard from Phil. And there's more to come. And thirdly, that cluster there on the left, Germany and Benelux, again, about 21% of sales are under new management and have significant turnaround potential.

We have been and will continue to apply the same approach to all of these businesses, strong and consistent operating disciplines and culture, the 7 pillars as described by Phil earlier, reestablishing connections with our people, our customers and suppliers and empowering our people locally, decentralizing the way we run the business and providing incentives behind that.

We make sure we have the right stock range availability and a high flexible service culture, supported by disciplined pricing and a focus on the elimination of waste in operations and fixing low-margin business. In addition, we focused as well on selling more value-added products, making SIG easier to work for, buy from and sell to operational productivity improvement and always looking for quick solutions to use technology and digitalization is an enabler of that.

And lastly, we focus on the actions to accelerate growth further. New branches either to infill regional gaps, improved coverage around major conurbations or opening specialist niche branches. We ask, can we promote lower carbon products or methods? Can we expand into adjacent categories, particularly from a sustainability perspective? In the end, with the objective to build market share and to truly lead our industry.

Our path to 5% in the medium term will be driven to a similar extent by each of the 3 groups of businesses on this chart on the right. And they're there and proportioned roughly equivalently for good reason. But tailored to where they are in the journey. So firstly, further investing behind the existing high performers to continue their growth; secondly, continuing the excellent work in the U.K. interiors business to recover its leadership; and thirdly, applying that successful U.K. turnaround formula in Germany and the Benelux businesses.

As I've said, focused M&A will accelerate our strategy. SIG has got a successful 40-year history of growth through M&A, and these deals were largely small add-ons to our core business, supplemented from time to time by midsize, what we call platform deals to enter slightly adjacent markets.

All of these deals were designed with specific objectives, consolidating fragmented core markets, expanding into specialist segments, entering new geographies with common suppliers and market structures or norms and exploring value chain adjacencies to deepen our expertise and sharpen our competitive advantage.

We've recommenced this strategy on a smaller scale at this stage. Small initial U.K. acquisitions have performed well, and we apply a disciplined approach overseen from the group M&A team, finance team and legal teams that executed in each operating company. Emerging from the pandemic, the industry is in a period of accelerated reshaping. So from an M&A perspective, it's an opportunity and a rich environment for SIG.

We anticipate a gradual increase in M&A activity in 2022 as a, our financing capacity increases with performance, b, our pipeline continues to grow, and lastly, our businesses continue to demonstrate the operational and leadership credentials for that investment. Sustainability is not only obligation, it's a fundamental and long-term growth driver across our business. Our confidence and ambition is fueled by a more favorable industry backdrop than has been the case for many years. There's so much to do to modernize and future-proof the built environment. Current geopolitical events and renewed focus on the sources and cost of energy will, if anything, reinforce these trends.

SIG has always performed at its best in such markets as we did in the 1970s and 1980s. The new focus on a broader concept of sustainability and circularity is a reminder of SIG's traditional leadership of such trends. SIG was born green. Sustainability is in our DNA. And this is not an idle claim. SIG has played a leadership role within our industry in each conservation era, starting like marketing the use of new insulation materials in construction in the late 1950s. In 1982, Sir Norman Adsetts, then Chairman, was the first Chairman of the Association of Conservation of Energy in the U.K. lobbying the U.K. government on an energy policy to great effect.

And we began measuring and publishing our carbon footprint back in 2007. So we have a pivotal role to play in sustainable construction, both in-house, minimizing emissions and waste in our transport and operations and in the market as a whole by partnering with customers and suppliers.

What does that mean? It means understanding the carbon footprint of products and solutions throughout their life cycle, utilizing our expertise to give customers transparency and helping them make trade-offs, helping reduce wastage on construction sites, digitalizing the supply chain to enable better capture and use to product data at point of purchase but throughout the life cycle. And this is now backed by our commitments about our business.

Our Scope 1 and 2 emissions are 35% lower than 10 years ago, but we need to accelerate that progress. Accordingly, we've adopted target net carbon 0 by 2035, zero waste to landfill by 2025. So SIG is well positioned to lead the industry shift towards sustainability. In summary, today is an exciting day in the 65-year history of SIG. I'm delighted to be able to report that our profit turnaround is [ sway ] at an advanced stage, and all of our major operating businesses are back in profit.

Operating margins have improved significantly in the last year. And that's an extraordinary achievement, particularly as it's been driven by revenue growth and at the same time, margin discipline rather than cost reduction.

Today, we talk of a new era for SIG. The accelerating trading performance gives us the confidence to elaborate our path to 5% and strong cash generation through consistent application of operational excellence. SIG is at an inflection point, there's a renewed focus on the criticality of energy in our lives, both its cost and availability. And this will only increase given the seismic geopolitical shifts underway.

Ours is a highly diversified and resilient franchise at the heart of sustainable construction. We have a proven business model, proving once again in 2021 and ready to do so in the years to come. Strong inflation management and disciplines are also in our DNA. The experienced leadership team is in place and delivering. Our employees and suppliers are fully engaged with us and we carry strong significant trading momentum into 2022 as we quickly move towards our initial targets of cash generation, resumption of dividends, 3% margins and on towards our medium-term target of 5% organically. In addition, we have a growing number of attractive investment opportunities to provide further acceleration toward these targets. On behalf of my colleagues, I'd like to conclude that we're excited that SIG has reached this point so soon and look forward to 2022 and beyond with confidence. Thank you very much.