Genuit Group plc (GEN) Earnings Call Transcript & Summary

Good morning, everybody. Thanks for making the time to join us. We're going to talk about the acquisition of ADEY, which we're very excited about. But just before we do that, I should just frame where we are with the wider Polypipe business. So [ Isabella ], if we could just turn to Slide 4, please. I think Polypipe is well positioned for the future. I think we've managed our way through the COVID crisis very well. As you know, we took significant actions to strengthen our balance sheet and increase financial flexibility back in May last year, and that's allowed us to continue investing in some of those key strategic growth projects that we talked about then. Most notably Safe Haven, if you remember, that's the ultraviolet filter in ventilation systems that will kill viruses. That got launched at the back end of the year and is doing extremely well, and we're very excited about that. And in more general trading, consistent with the update that we gave on the 2nd of February, trading continued to recover well towards the end of 2020. And I'm pleased to report that, that momentum has continued into the new year with no discernible impact of lockdown through on-demand levels, so very pleased with where the business is on that -- in that regard. And we'll update you further on the 16th of March on trading when we do our prelims. I guess, as I said, as our markets have continued to recover, we talked last time we did the capital raise about trying to gain market share by being nimble and agile coming out of this crisis. And I think that's exactly what we've done. And we've also said we wanted to pursue the organic and inorganic opportunities that arise or were obviously going to arise out of the -- coming out of this crisis. And I can point you as well to last week's acquisition of Nu-Heat, GBP 27 million in, the other floor-heating space but with some really interesting heat pump technology as well. So I hope you can see we're doing what we said we'd do back in the capital raise in May and really try to come out of this crisis on the front foot. And I guess, [ Isabella ], just turning to Page 5. The acquisition of ADEY is again in that same vein. ADEY is the leading manufacturer of filters, chemicals and related products used to protect water-based heating systems. We'll go into a little bit more about exactly what they do in a slide or 2's time. But just to give you an overview of the transaction. The cash consideration of GBP 210 million on a cash and debt-free basis, that implies a multiple of 11.8x 2020 ADEY's underlying EBITDA. Now I have to stress that, that EBITDA number is not adjusted for COVID. We took the view that, that was a bit of a waste of time, and you're seeing their numbers based on a clean 2020. And to put that in perspective, we paid -- back in August 15, we paid 11.4x to Nuaire, which has been a very successful acquisition for us. And more recently, about 18 months ago, John Guest was acquired by RWC. John Guest being at one of our biggest competitors in plumbing was required to 12.4x. So that puts that in perspective. And on a forward-looking basis, Polypipe is around the 14x level. So hopefully, that frames the 11.8, and I think that we're comfortable at that level from what is a quality business. We're going to fund that, as we've said, through GBP 120 million of bank debt and the placing that was successfully got away overnight of around GBP 90 million. I think we actually did it at GBP 96 million in the end. And that's been designed to leave us with leverage at the end of '21 somewhere below 1.5x. So giving us a more efficient balance sheet coming out of this crisis and getting back to leverage levels that we were used to operating under before the COVID crisis. So I think an appropriate view on leverage there. I think more importantly, there's a compelling strategic rationale for this acquisition. It's a market-leading brand that will enhance Polypipe's portfolio of leading brands and solutions in this market. I think most importantly, it gives us access to an attractive market driven by those regulatory and environmental tailwinds that is the cornerstone of Polypipe strategy. And that's expected to continue to deliver above-market growth. And then, obviously, putting the 2 businesses together, I think there's some significant growth opportunities, which we'll talk about as well. Just in terms of the financial benefits as well, some significant benefits there. So EPS is expected to be double-digit accretive in the first full year of ownership. And ROIC is expected to be in line with Polypipe's cost of capital in the second full year of ownership. And expected to enhance group growth, margins and free cash flow. So [ Isabella ], just turning to Page 6. There's a couple of slides coming that just tell you a bit more about ADEY. So ADEY is the market-leading manufacturer of filters and chemicals used to protect water-based heating systems. Now you may well have come across this, but I certainly have, when you bleed radiators, you get -- sometimes it's some sludge comes out and that heating system suffer from the buildup of magnetite, which is various material, washed up inside the water-based heating system. And that can clog systems up. And ADEY's products basically try to clean that system up, and let it operate that much more efficiently. And we'll talk a bit more about that as we go through, but an important part of keeping an efficient heating system. It's a strong brand. It was the pioneer of magnetic filtration technology starting back in 2003. It's offering its products across the residential, commercial and water testing. And more recently, the commercial water testing markets, but predominantly residential, and we'll talk about that in a second. It's got a multi-route to market strategy. So embedded long-standing relationships with all the major players. So that's the merchants that we know and love, the boiler manufacturers, the plumbing and heating community out there that will be installed in these products. So a lot of commonality with what Polypipe does and knows. And it's got a good strong market position, #1 in the filters market with a 70% share of the residential filters market and 35% of the U.K. residential chemicals market. It's demonstrated strong organic growth, proven track record of delivering that growth ahead of the U.K. construction market. It's delivered a CAGR of 7% per annum on average over the last 3 years. And bearing in mind, that finishes in 2020, which is -- which has to be a COVID-effective number. So I think they've got pretty strong performance. And it's got best-in-class margins. So average 33% EBITDA margins over the last 3 years, driven by its premium positioning, its significant added value, its IP, its application knowledge, its technical know-how and its affinity with the customer. For those regions, we think it's continuing to be sustainable. And I think most importantly for us, it's an experienced management team. I think there's a good, strong cultural fit between Polypipe and ADEY. We know the senior guys quite well. The MD was [indiscernible], so we know him as a customer in the previous life, and a number of our senior sales guys have spent time in -- earlier in their career in the heating and plumbing industry, so they're much close to ADEY. So we know the guys well. We think they'll fit well. They're fired up. They see Polypipe as a very good home for ADEY and are looking forward to challenge. So very pleased to have them onboard. [ Isabella ], if you could just turn to Slide 7 then, please. So ADEY is about cleaning, flushing, maintaining, protecting and testing residential and commercial heating systems. The magnetite sludge that builds up in systems makes those systems very inefficient. The benefits -- sort of benefits we're talking about here, 80% of boiler breakdowns in the first 5 years are due to magnetite sludge. So the boiler guys are getting the joke about filters and chemicals helping protect their systems. I think, importantly, for consumers, having an efficient heating system can save you up to GBP 80 on your average annual energy bill, so at the end, not insubstantial there. And from an environmental point of view, reduces household carbon emissions by 7% just by having an efficient system. And the products that we've got in ADEY cover a whole range. So magnet -- MagnaClean, you can see there is the thing that fits into the water system. We've got flushing systems that help you clean up systems that have not been looked after. We've got the chemicals to clean and protect those systems and then a test and maintain facility where you can send samples the water off for testing, and we make recommendations for treatments to make that heating system more to quality, at the right sort of quality. So a full range of products there trying to tackle the efficiency of those water-based heating systems. Just turning to Page 8, [ Isabella ]. Just a quick whistle-top of their revenue analysis. By geography, ADEY is 92% U.K.-based with 8% overseas. So again, a very good fit with Polypipe, which, if you remember, is 90% U.K., 10% overseas. So we're sticking to the knitting. We're sticking to the markets and customers we know and love. But there's a nice bit of overseas growth potential there as we can penetrate out into other markets. So I think it's the right balance geography-wise. In terms of end markets, it's predominantly residential RMI, which would give us, as a group, a little more exposure to RMI currently, which is probably no bad thing. A little bit in commercial, but I think there's some great opportunities for Polypipe to develop that commercial space, along with ADEY. And then the international and more interesting businesses there as well. In terms of product, it's just over half filters on their own. We do sell chemical and filter packs, so there's another 20% circa and then chemicals and water testing again. So a broad brush review of their revenues, but I think a really, really good fit for Polypipe. Turning to Page 9, which I think is the most important slide in the deck, really. These are -- this is describing why we believe it's an attractive market that will be driven by those regulatory and environmental tailwinds. And on the left-hand side, we start with the RMI market. There's approximately 21 million U.K. heating systems out there that aren't adequately protected with a filter or chemicals. That's about 75% of the installed base. So a huge market to go after out there in RMI terms. But Part L of the building regs and the benchmark scheme, they're both driving greater adoption of filters and chemicals by installers. The boiler manufacturers promoting filters more and more because they get the joke about a clean, efficient system reduces warranty costs and makes the performance of their boilers that much better. So they're at the top end of their boiler ranges beginning to insist on having a filtered chemically dosed system alongside that boiler for the warranty to be effective. So they're getting the joke as well. And we think that will come down into the mass market ranges as well. I think more importantly, under the regs replacement heating systems, they need radiators to work at 55 degrees centigrade. So that's about future-proofing heating installations for the oncoming low-carbon, low-energy heat sources that are going to be part of residential heating systems in the future. And that really plays to the premium on operating efficiency. As you reduce the temperatures of the system, it's less capable of coping with that inefficiency. But the moment with an inefficient system, gas boilers dense, you just crank them up, and there's more heat going through them to overcome that inefficiency. As you drop that temperature and as we get more energy-efficient with our heating units, that system, water-based transmission system has to operate more efficiently. And you can see that as well in the growth of mix on the floor heating and radiator installation. So under floor heating, generally, with low-energy, low-carbon heat sources, you need to be heating a larger surface area to a lower temperature to get the same energy into a room to keep it warm. Under floor heating, it's growing. And certainly, at the ground floor level is a way of getting that heat transmitted to that larger area. Upstairs, it's more likely that we'll go to larger format radiators because you need, again, a larger heat [ emitter ] to get a lower temperature, delivering the right amount of energy. And there's some interesting technology developments going on around whether we can have in-wall heating units between the stud walls -- or sorry, between the [ plus ] board wall's surfaces and a stud wall. But whichever way that goes, it's going to be a larger format heat emitter, and that is going to mean more radiation material in the systems, and that is going to mean more magnetite, more ferrous material inside that water system. So they're greater need for filters and chemicals to keep that at bay. So I think plans to go out in the RMI market and the sort of the regulatory drivers there. I think that the even more exciting bit for us, I think, and where Polypipe can really help ADEY is in the new build sector. So you all may be aware that the building regs are going through a bit of a revamp at the moment. Certainly, Part L is in response to the government's future home standards. Now the existing Part L already requires cleaning and inhibitor chemicals to be put into new build heating systems, but there is no filter mandate. The building regulation changes that are coming, the new Part L, which is expected in 2022, some say late '21, but let's say, 2022, the latest consultation draft, the January 21 draft, mandates the use of filters in addition to those cleaning chemicals for new heating systems. So the regulations get it again, future-proofing heating systems for low-energy heat sources. Now that's huge. And that -- as we all know, the new build market is around, let's say, about 180,000 units a year. And if you put that in context, ADEY has been doing about 0.75 million units a year in terms of filters. So that puts that potential growth in perspective. Now that isn't going to happen overnight. The way regulations change and the way it interacts with planning commissions is something we've been used to with the SuDS regulations over the previous 10 years or so. But what will happen is, once the building rates change, obviously, when developers go in and put planning commission in per site, the building rates get locked at that point in time. And we know that the developers then take -- could be up to 2, 3 years to build out a site, but they're unlocked building rates to make sure the whole site is build with the same standards. So what will happen when Part L kicks in is there'll be a ramp of over 3 or 4 years as developers cycle through their planning commissions and start building on new planning commissions that have been granted under the new Part L. So it's not a step-change. It will be a ramp of over 3, 4, 5 years. But nonetheless, very exciting. And the beauty here is, obviously, ADEY doesn't operate particularly in the new build market, a very little bit at the top end. But in terms of mass market, we've got the relationships with the big house builders. Now we work with Barratts, for example, on their future homes designs. I think we can get ADEY into places that it perhaps can't get to on its own in this space. And so we can help it on this new build side. So that's very exciting for us. The one point I wanted to make, both in terms of new build and in terms of RMI, and I hope it was sort of becoming obvious from what I'm talking about, the ADEY technology, the filtration and chemical technology is agnostic to the source of the heat in the residential heating systems. So as heating systems develop, whether it goes down the route of hydrogen pipe boilers or whether it goes down the route of air source or ground source heat pumps, the need to have a filtered efficient operating transmission system, water-based transmission system is going to be increasingly important. And that's why I think the products that ADEY are manufacturing and the problems it's trying to solve are going to become more and more important as time goes along. [ Isabella ], if you could just then turn to Page 10. And look, the guys have demonstrated sort of growth that those drivers can deliver over the past few years, some very strong growth there. Compared to the U.K. construction market, we have excluded infrastructure from the statistics because that can be lumpy, but more relevant to ADEY is what we've got here. And that growth has been consistently above the U.K. construction market. And I'll just point to 2020. And reminding you that these are COVID-unadjusted numbers to deliver 4.6% growth in the year that the construction industry has just had, I think, is phenomenal and really does speak to the strength of some of the drivers that this business has got. So just turning to Page 11. I mentioned it earlier, but we have focused very much on the U.K. growth and what's happening in the U.K. market. There are some useful growth opportunities out in -- outside of the U.K. market as well. And ADEY has started to leverage themselves across some of those markets. You have to be selective because although that -- the fundamental issues that ADEY is trying to solve here are global, obviously, different countries have different heating systems, different traditions. And so maybe some of them do things slightly differently. But in the segments that -- in the countries that we can, there's certainly good growth starting to come in Europe. Some interesting tie-ups in the U.S., which may lead to some significant growth there. Asia Pacific, I think we need to tread very carefully in that market. And in terms of the things that we're promising ourselves in the future that's fed into our financial evaluation, we've had cut quite significantly the plans on international. That's not to say we're not going to go for them. But we're going to be selective about the ones we go for and try to deliver some useful growth that will augment what we're trying to do in the U.K. So some interesting opportunities there. And then, finally, [ Isabella ] on Page 12. I think ADEY is an excellent fit with the Polypipe strategy that we, again, reiterated back in November last year. It's a business that's exposed to growth and markets driven by environmental and regulatory tailwinds. We do expect it to deliver above-market growth. It's a market-leading brand, #1 in both its markets in the U.K. It's consistent with our ESG objectives, both in terms of the sort of products and solutions its trying to bring to construction. But also actually, in the way that it's operating, ADEY has done a lot of good stuff in terms of trying to operate as a sustainable business as well. And a lot of things in common with Polypipe in that respect. So I think, together, we can do drive forward on those objectives. It's a very profitable business, as you can see, and cash flow generative. It's got a great geographic fit with Polypipe, so U.K.-focused, sticking to the knitting, but with some useful growth opportunities in overseas markets. We can leverage those existing customer relationships, and the housing developers, specifically for Polypipe with ADEY, but both of us have exposure to and good relationships with the heating and plumbing installers, the community out there. And I dare say that when we put our database together with their data base, the whole will be greater than the sum of the parts, and we can start to get to even more plumbers and heat -- and installers as a combined entity. And then, finally, it's a business that's based on competitive advantage from technical know-how, intellectual property, application knowledge as well. So for all those reasons, we think those margins are sustainable. Right. So I think before my voice goes, I'm going to hand over to Paul, who's just going to take a whistle-stop through the financials, and then we'll come back for a summary and Q&A. So over to you, Paul.

Thank you, Martin. And [ Isabella ], would you mind turning to Slide 14? Good morning, everyone. Yes. I'm going to just take you through the financial profile of the company. I am generally very enthusiastic about this acquisition. You'll see that the company has had strong financial growth, is highly profitable and good cash flow generation. If you look at the charts, you'll see that net revenue up until 2020, the company was achieving a growth rate of 7% or so on net revenue. And it has, as Martin said, consistently outperformed the market. And despite the impact of COVID-19, it achieved over a 4% year-on-year growth in 2020 in net revenue. Now that momentum is provided by a number of factors, some of which have already been mentioned. You've got the regulatory and environmental drivers that Martin talked about, i.e., the greater adoption of filters and buy sides. They've got new commercial agreements with manufacturers and customers, which are driving the business forward. And there's been overseas growth, although at the moment, as you've seen, non-set U.K. sales represent 8%, but there is potential for overseas growth going forward. So overall, there are a number of drivers that have given the business momentum and achieved that result. When you look at the EBITDA margins, you'll see again, historically up until 2020, they achieved an average of about 33% EBITDA margin, best-in-class. And they did that by sustaining material margin through smart product redesigns, better use of resources. They in-sourced production to their plant at [ Chapman ], and that also had a beneficial effect. And then in 2020, they brought forward some restructuring because of COVID, resulted in headcount reductions that predominantly was more senior management and support functions. If we think about the outlook then for this business, we would expect a volume bounce back in 2021, not dissimilar to what Polypipe is currently experiencing and other business in the sector and a low double-digit percentage growth in '21 year-on-year. Into 2022 and beyond, we then expect revenue growth to revert to the more historical norm of around 7% sustained going forward. And as for margins, last year, they took those actions to save costs during the height of the pandemic, and many of those savings were sustainable, we believe, but not all. And for that reason, we expect EBITDA margins to continue in line with the historical average of circa 33% going forward. And again, these are best-in-class margins. If I look at how the company has been invested in over the recent period, CapEx has historically been in the region of about GBP 3 million a year, but there's a forecast uptick in 2021 this year for construction work at their production facility. But going forward, we think -- having been well invested in, we think, continued CapEx investment levels of about GBP 3 million a year is sensible and appropriate. Depreciation stands at just over GBP 2 million a year and is trending up turning upwards slightly towards CapEx levels, reaching 90% in the outer years of our model. And overall, the business is strongly cash flow-driven with the conversion rate at roughly 80%. So a good set of financials. [ Isabella ], if we just turn to Slide 15 then, I'll just talk about why we think this deal is attractive to shareholders. Now similar to Nu-Heat, ADEY is consistent with our focus, which we laid out in the Capital Markets Day recently on low 0 carbon heating as a growth driver. And we think we've got the skills, knowledge and abilities to help drive that growth further. We do expect group margins to be enhanced. And you'll see on the right-hand side, we've got net revenue and EBITDA pro forma numbers. These are, by the way, based on statutory 2019 figures pre-COVID-effective figures. And we've also included Nu-Heat, our recent acquisition, in that pro forma. So it gives you a sense of scale and what the margins will do. We expect EPS to be double-digit accretive in the first full year of ownership. And we expect return on invested capital to be in line with our Polypipe's cost capital in the second full year of ownership. [ Isabella ], if we just then turn to Slide 16, please, I'll just talk a little bit about how we've done this. So we've got the cash consideration of GBP 210 million. The transaction was both financed through the equity placing as Martin has talked about, and we got gross proceeds last out -- of about GBP 96 million, and we have a drawdown -- will be left with a drawdown on our RCF about $120 million from the 5 syndicate banks. We expect pro forma leverage by the end of the year to be below 1.5x, and this will allow us to maintain maximum financial flexibility. As far as integrating this business, it will be part of the Residential Systems division and will continue to be led by those guys we've got to know quite well over the recent weeks and months and respect. And there are potential opportunities for the technology in this company to be combined with our broader portfolio, and that includes that we acquired in Nu-Heat as well recently. So a great deal, very enthusiastic, looking forward to cracking on with this business. And with that, back to Martin. Thank you.

Thanks very much, Paul. So [ Isabella ], just on Page 18 then. Everybody, just in conclusion there, I think Polypipe -- ADEY will be an excellent fit with Polypipe. It fits very well with its existing strategy. It will give us another strong platform for growth, and we're very excited about it joining the group. It's got that exposure to those markets driven by environmental and regulatory tailwinds. It's expected to deliver above-market growth in the coming years. It's a market-leading brand. It's consistent with our ESG objectives. It's above-average profitability for the sector and cash flow generation. It's a great geographic fit for Polypipe as well and really does leverage or have the ability for us to leverage existing customer relationships to help with buying entity further. And finally, driven by competitive advantage, which comes from intellectual property, application knowledge, know-how and proximity to customers. So look, for all those reasons, I think it's a great fit. We're very excited to have it onboard. And I think just going back to the previous capital raise, we said at that time that we wanted to do all of this so that we could come out of this crisis on the front foot. I hope you could see in some of the things we've talked about today that I think we've really delivered on what we said we'd do back in May last year. And I'm equally convinced that we can deliver and will deliver on, they're making this a really good quality acquisition for Polypipe. So with that, I think that brings us to the end of the presentation material. We are going to go to Q&A. So [ Isabella ], if you can just go to Page 20. Guys, up on your screen, you should see the dial-in details there to get in and ask questions. And right now, then I'll hand back to Seb just to manage that with the process and look forward to answering your questions.

Our first question today comes from Sam Cullen at Peel Hunt.

I've got a couple of questions. First, just firstly, just a clarification. The revenue numbers you've given for ADEY, just to confirm that on an organic basis, there's not been any kind of small acquisitions in those numbers for the underlying business would be helpful. And then, do these filters fall under the Green Homes Grant, do you know? That would be interesting to know for the consumers. And then also, what's the main method of demand for the filters? Are they -- are these retrofitted into existing boiler systems? Or are they -- they just installed into new boilers when a home owner replaces their boiler? I'll leave it at that.

Okay. Thanks, Sam. I'll take the -- in reverse order, if I can. Demand filters -- the demand for filters in the RMI markets coming in a number of ways. I have to say less usual to go and fit a filter to an existing boiler system. It tends to happen more when the new boiler -- when a boiler is replaced that the filter goes in as well. And as I said earlier in the presentation, the -- for the manufacturers get the joke around it, helping improve the performance of their products and improving their warranty costs. So generally, that's one of the ways that it goes in. And sometimes, that could be sold via the boiler manufacturer themselves. They'll sell a package, including either an ADEY-branded filter or an own brand filter that's manufactured by ADEY, or the plumber will buy the boiler and acquire the filter from the merchant channels that we know and love. About -- just short of 50% of the business is through the merchants, about another 33% in the various boiler manufacturers and then others through independents and other markets. So it's a mixture of everything. And increasingly, that is just the RMI market. Obviously, as that new build market will kick in, the process will be, again, I dare say, similar to what we've just described, a mixture of installers using merchants, and all of it coming with a boiler. So that's on the demand. I'll have to get back to you on the Green Homes Grant. I don't know whether it actually fits within that Green Homes Grant, but it's a good point, and I will get back to you on that, Sam. And I'm just going to hand over to Paul on the organic revenue side of things. Paul, do you want to just pick that point up?

Yes, Sam. I think overall, yes, it's organic growth. There was a small acquisition of a water laboratory testing business right at the beginning of 2019. But apart from that, it's pretty much all organic.

Our next question is from Toby Thorrington at Edison.

Thanks for the presentation. Nice deal, and well done with the fundraising. I've got a few questions, please, one high-level one and a few sort of granular ones. Could you just explain, first of all, what the sort of IP protection is around this business, please?

Yes. Toby, good to hear from you. It's twofold, really. If you talk about the filters, the IP around the filters, ADEY was the pioneer of magnetic filtration. So IP around the design and sort of magnet that's used but also around the fluid motion and fluid -- the way the fluids move across the -- the fluid dynamics that make the fluid flow across the magnet, making sure that the magnet or the fluid touches as much of the surface of the magnet as possible. So there's quite a bit of stuff within the filter that's protected there. And roughly 80% of sales of filters are covered by some sort of IP protection. When you move to the chemical side of the business, they haven't registered the chemical mixes there for IP. And it's the old Coca-Cola recipe argument, which is, as soon as you register your recipe, you broadcasted to the world, and people can go and play. So they keep that very much a secret sort of blend, but haven't gone down the IP registration. But it still affords them as it does Coca-Cola has some pretty strong protection.

Sure, Martin. That leads me into the next question, really. So if I'm installing a new boiler with ADEY add-on now, so are there any warranties provided with the -- for the product? And does that include -- am I mandated to use proprietary chemical like ADEY chemicals only? And how long does a filter last? How long before I had to replace the filter, would you say?

So the filter replacement cycle is pretty much in line with the boiler replacement cycle. So it's that sort of installation period, although you do need to maintain and clean the filter periodically. And I think, as we move forward into lower-energy heat sources and having to have more efficient transmission systems, we are all, and I count myself in this category, going to have to get better at maintaining and having our boilers looked [ under them ] more frequently. So you do need to look after them, but the filter itself, the actual housing and everything, it's pretty much in line with the boiler. There are warranties with the filter itself. But again, the real drive for this is potentially the boiler manufacturers making their warranty dependent on having a proper filter and cleaning system in. And that's driving demand certainly in the RMI market. And there are other things we're looking at to make that stickier, particularly under the new Part L regs, which I would class as the commercially sensitive bit, but certainly something we're looking at.

Understood. Right. And final question. You mentioned there were some personnel changes understandably over the course of FY '20. How many people does the group employ? And what's the sort of rough split between production and sales, would you say?