Genuit Group plc (GEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to today's Polypipe full year results 2020 call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Martin Payne, Chief Executive Officer, to begin. Martin, please go ahead.

Thank you, and good morning, everyone. Welcome to Polypipe Group's 2020 results announcement, and thanks for taking the time to join us. I'm joined by Paul James, CFO, and will take you through a quick introduction to the presentation. Paul will then take you through the financials. I'll come back and talk a little bit about strategy, the market update and outlook. And then we'll summarize and then go to Q&A at the end. So Mike, if you can turn to Page 3 of the presentation, please. I think just before we get into the financials, just an intro slide. I think we've positioned the group well for the future. We've had a robust response to 2020 and the COVID challenges that we've had in 2020. I think we've got a clear strategy that's focused on sustainable growth drivers. And a lot of the actions that we took during 2020 allowed us to be proactive and continue investing in the group in new products and in acquisitions, which you'd have seen just recently. And really, the logic for all of that was to really put us on the front foot coming out of the pandemic, and I think that's exactly what we're doing. We've put sustainability at the heart of our strategy. You'll have seen back in November, we stepped up our ESG targets. And we'll talk a little bit more about that later on in the presentation, but we've got a clear program in place for delivery of those targets. And I think finally, I'd just like to say a big thank you because a lot of what we've or all of what we've achieved through 2020 and into '21 would not have been possible without the ongoing dedication and fantastic efforts from all of the employees of the Polypipe Group. And I'd like to, as I say, thank each and every one of them for the efforts they've put in, in getting us to this point. With that, I'm going to hand over to Paul, and he'll take you through the financials.

Okay. Thank you, Martin. And if we could just turn then to Slide #5, the financial highlights. Well, first of all, full year revenue was a decline of 10.9%, reflecting the unprecedented trading environment we found ourselves in Q2. And we had an almost overnight, in fact, an overnight reduction in volume at the end of March, beginning of April of 2/3. But we had a strong recovery and with second half in line with prior year overall. We had tight cost control and a real focus on cash flow, and that really was the hallmark of finance management throughout the year. And I think we did pretty well there. Underlying operating profit was severely impacted by the reduced volumes in H1 and COVID-19 compliance costs, but with a much improved second half. And underlying basic earnings per share of 13.5p. Now we talked a lot earlier about H1 a few months ago about the actions we took to deal with the pandemic with a capital raise, and we did actually manage to strengthen the balance sheet. And we ended out the year with a pro forma leverage of 0.3x compared to 1.6 a year earlier. So a good strong balance sheet at the end of the year. We continued the strategic investment in our business. Now I guided some time ago that we'll be spending CapEx in 2020 in the range of GBP 20 million to GBP 25 million. We came at the top end of that range. And I think that reflects the recovery and also our confidence and the opportunities to invest and grow the business going forward. We have a proposed final dividend for 2020 of 4.8p per share. And in the first part of 2021, we acquired 3 businesses: Plura, Nu-Heat and Adey. And we were strongly supported by the GBP 96 million capital raise to fund Adey from the shareholder base. So that's a good set of financial highlights there. If you then just turn to the next slide, Slide 6, and this is the underlying results summary. So there, you see the revenue decline of 10.9% overall and H1 down 22% for the half. H2 revenue, therefore, was essentially flat. Operating margin at 10.6%, that's some 680 basis points down on 2019, but with Q4 monthly return on sales approaching that of pre-COVID levels and overall 14% for H2. I'd also note that we have finance costs for the year of GBP 6.5 million and underlying tax of GBP 6.3 million, and those are close to the numbers I've previously guided for the year. And we had dividends per share, you see at the bottom there of 4.8p per share. Now if you just turn to the next slide, which is Slide 7. This is the waterfall chart which I hope you're all familiar with. For those who are not, the top row just walks from prior year to current year 2020 for revenue. And then down below, you've got the same walk-through year-on-year for underlying operating profit. The first column, you'll see the selling price. So that's the same price of approximately 2%, just over 2%. And all that benefit we used to net off cost inflation, so normally drop throughs is close to 0 in the case here. We are a 90% U.K. company so the currency column is normally steady, negligible, and just a GBP 0.1 million on the revenue line there and nothing really at the operating profit level. And there you see the organic volume decline over the year, GBP 70 million, with a drop-through of just over 50% down to operating profit, reflecting the severity and suddenness of that decline we had. And you can see the acquisitions, the Alderburgh business we bought in October 2019. And you can see like the rest of the group it's been similarly impacted by COVID in the year. Ending out the year GBP 398.6 million revenue and GBP 42.2 million of operating profit, fairly close, perhaps very slightly ahead of average consensus for the year. So that's a good picture of how things shaped up for the year. If you then just turn to the next slide, Slide 8. And what I've done is just provided a bit of a picture of how the business traded by quarter. So the revenue is revenue. It excludes the effects of Alderburgh so it's like-for-like. And the revenue tracks the impact of COVID-19 with that 2/3 loss of volume in April 2020. But Q1 was close to normal. The impact of the COVID did actually happen at the last week of March, you remember, with the lockdown, first lockdown. But you can see that rather dramatic decline in Q2 year-on-year of revenue, down 46%, and operating margin loss of over 15%. And then came that strong recovery in Q3 with an element of pent-up demand as we said. And then the recovering momentum continuing into Q4 and New Year and with minimal impacts on operations from this current lockdown. So I hope that gives you a picture of how we traded quarter-by-quarter, year-on-year during the year. So then just turn to the segments then on Slide 9 and looking first at Residential Systems. You'll see that we had a 14% decline in revenue driven by COVID, but we were ahead of the overall market. With that stronger H2 performance, with revenue decline just 0.2% below prior year. New house starts are down 32% in 2020 with that complete shutdown between April and May. But as we said, once the housebuilders opened up again, they came back quite strongly, perhaps a little bit behind the commercial infrastructure contractor guys. Underlying operating profit is down 44%, with a margin impact of 720 basis points, but with H2 margin at 17% versus 8% in H1 and still being impacted by those COVID-19 costs and associated inefficiencies and also a more recent trend, the increase in virgin polymer prices starting in H2 and currently with us. Now the sector has been helped by stimulus packages from the U.K. government. We've got the extension of both the stamp duty holiday on the Help to Buy scheme, and that undoubtedly helped quite a bit that sector. And also RMI has been very resilient, and that's been a story all the way through this. I think with the high levels of disposable income available to people, I myself have a new drive, which would have been difficult in Yorkshire, for example, and I think that's been the case right across the board and hope that remain resilient. If we then go to the next slide to just have a look at Commercial and Infrastructure, revenue down 6.7%, with like-for-like down 12% after the effects of the Alde acquisition, the Alderburgh acquisition in October 2019. And then with a significant recovery in H2, with like-for-like revenues just 2.5% down. So the U.K. revenue, overall, down 7%. Contractors were quick to implement COVID-19 safe operating procedures. They were very quick to get back up through the initial lockdown, and large-scale infrastructure projects have continued. The CPA data shows Commercial new work market 18.6% down the prior year, but exports revenue was 6% lower. Permavoid has improved its geographic reach in European results, but the Middle East last year did remain difficult. An underlying operating margin of 7.1%, recovered from 3.8% in H1 to 9.9% in H2, and still affected by those COVID costs and the increased prices in polymer. If we then just turn to the next, Slide 11, just having a look at the statutory results. So we're just taking the underlying operating profit and just looking at the items we normally call exceptionals. We've got the usual amortization of intangible assets, slightly increased after the acquisition of Alderburgh. We've got some contingent consideration driven by the payment for Permavoid with it having met its performance targets. And we've got GBP 1.1 million restructuring costs for the redundancies, 104 redundancies we made in Q3 as a response to the then reduced volumes we were then experiencing. Okay. If you turn to the next slide and just talk a little bit about cash flow, Slide 12. I guess the key thing here is that we did continue to invest in our business in capital expenditure, and we accelerated that in H2 after a quite extreme constraint in CapEx in the immediate aftermath of the first lockdown. So we came in at GBP 25 million for the year. Capital expenditure for 2021, we expect to be around about GBP 34 million. And that, of course, is including the acquisitions that we made a few weeks ago. During the course of 2020, we had low levels of debtor delinquency, I'm pleased to report. But we had reduced inventory levels in the second half, which contributed to overall small working capital movements, and that really was a sign of the recovery that we're having towards the end of last year. And the final 2019 dividend was canceled and there was no interim dividend paid for 2020. And also included in the cash flow, we've got the issuance and redemption of the CCFF facility that we took on between March and August. And we have the proceeds from the equity placing that we made in May. Next Slide 13, we just have a look at working capital. I've already mentioned that we had lower levels of inventory as we went through the second half of 2020 and trading recovered quite strongly. Trade debtors higher than 2019 because of trading right up and beyond Christmas. It was a bit of contrast to the year before to cope with that demand. And trade creditors are higher because of enhanced purchasing of materials and services in December. And also, we had a VAT creditor, which we paid after year-end as part of the deferral measures we had with HMRC in the wake of the pandemic. If you then just turn to the next slide. This is Slide 14. And this covers off the banking facilities. So we have the GBP 300 million revolving credit facility. On top of that, we have the committed COVID-19 facility of GBP 50 million on top. And throughout the whole of 2020, we did not have any covenant breaches. Now having come in at GBP 6.5 million net financing costs for 2020, I expect net finance charges for 2021 to be in the range of GBP 7 million to GBP 8 million, and that's due to the higher post-acquisition drawdown of revolving credit facility after we bought those 3 businesses a few weeks ago. And for year-end net debt, for year-end leverage, I expect it to be under 1.5x EBITDA for the year after the effect of the acquisitions in Q1 and the GBP 96 million equity raise. So that's a walk-through the financials. And with that, I'd like to hand back to Martin. Thank you.

Thanks, Paul, for the financials. We're going to take a quick look at strategy now and then move into market update and outlook and then summarize. But if we're on Page 16 now, please, Mike. I think strategy, we talked a lot about that in November at the Capital Markets Event, but our strategy remains unchanged. We've aligned the business to its structural growth drivers. We've got leading positions in those structural growth markets with strong brands in climate management and the water management space. And the drivers behind those 2 segments are providing tailwinds, which will allow us to outperform the market in the years to come. And the real key drivers behind the business are the environmental and the regulatory, sustainability-led growth drivers in areas such as resilient drainage, in green urbanization, in clean, healthy air and low and zero carbon in heating and more widely across the construction industry. And we're really positioning the group to benefit from those drivers. We've got the material substitution drivers as well that we've talked about a lot in the past, trying to use, trying to replace the historic materials out there with the plastic products that we have in the portfolio. And we're also trying to increase our geographic reach in a targeted approach, leveraging our expertise at the product groups that we know and love in other markets, particularly with things like Permavoid, where those technologies can apply to the problems in overseas markets as well. So that's really another key string to the bow. We've got selective and organic and inorganic opportunities that fill our product gaps and adjacencies, really trying to leverage the relationship that we have with our customers and providing that complete solution in the space that we're operating in. And again, that's driven a lot of inorganic and organic developments. And as you've seen, we've put sustainability at the heart of how we run our businesses as well as the products and the solutions we're trying to bring to our customers. And how we run the business is important in terms of innovation, in terms of recycling, carbon reduction, digital and making sure that we've got a talented and diverse set of employees keep driving the business forward. And again, we'll talk about that a little bit in a couple of slides time. So turning to Slide 17. As I said, both organic and inorganic growth is key to the development of the group. And just focusing on the organic side of things, we've continued to drive the business forward despite the COVID crisis through 2020. And I just thought I'd pick out a couple of things that we've been up to during the year. Our Manthorpe business won Product of the Year at the Housebuilder Awards this year for Redshield, which is a fire retardant cavity closer for windows. So a great development there from Manthorpe. Our Polypipe Building Products business was voted Category Supplier of the Year in the plumbing and heating category by the Builders Merchants Journal, so very pleased there. And also our innovation processes were Kitemark-ed by BSI under ISO 56002. Again, just to show that the process that we've got around innovation are robust, and that's a pleasing result from the guys there as well. And then just at the bottom right there, another Manthorpe product, the Thru-Air product, which allows installers to cope with different wall thicknesses and gap thicknesses when building houses with a product that comes out of the box so it doesn't need any alteration on-site. So again, focusing not only on the product performance, but also on making it easier for the contractors and the installers to use. So very pleased in the residential space there. Turning to Page 18 as well. Similar in the Commercial and Infrastructure segment, we talked quite a bit about Safe Haven in November. Wayne took you through quite a detailed presentation on that. That is launched fully and is getting a lot of interest from the market in all sorts of sectors, so not only the health and care sectors, but also schools and offices as well. And very big hopes for that Safe Haven project. And again, had it not been for the capital raise back in May, we might have had to have slowed that development down, but we didn't, and we now have product out there which is good. If you remember, Safe Haven is a systems design for local ventilation with an ultraviolet filter in it which kills 95% of airborne viruses in that ventilation space. So yes, very high hopes for that product over the coming months and years. But it's not just that. In terms of other products in Nuaire, they were in the H&V News, the product winner with the XBoxer Hybrid, and that's in the H&V News. Click Weld technology was launched as part of the MecFlow product, which out of our Building Services business, which is a really neat bit of IP around electrofusion jointing in pressure systems. And that's again about making it easy on-site for installers to install and actually reduces significantly the amount of waste on-site as well, so very interesting product there. And not just specifically U.K., we won an award for Permavoid in the Qatar Sustainability Awards in 2020 as well. So getting recognition in the Middle East as well as the U.K. So a lot been going on through the crisis and very pleased with how the business has continued to develop products. Key, as I say, that we get those organic developments to continue driving the business forward. And then turning to Page 19. On the inorganic side, we've got obviously clear acquisition objectives. I think right now we're obviously focused on integrating the acquisitions we've just made. But generally, we're interested in businesses that are driven by environmental and regulatory tailwinds that will allow them to deliver above-market growth. We're interested in market-leading brands, businesses that are consistent with our ESG objectives that are trying to operate sustainably, obviously, with above sector average profitability and cash flow generation in keeping with Polypipe's wider performance. Businesses that are generally U.K.-focused, looking at those product gaps and adjacencies that leverage our existing customer relationships. And businesses that are based on competitive advantage through technical know-how, application knowledge, intellectual property. So I think we're very clear on what is attractive to us. But as I say, in the very short term, perhaps more focused on integrating what we've just acquired. But that gives you a flavor for the inorganic side as well as the organic. And then really just turning to the more recent acquisitions given those criteria on Page 20. The Adey acquisition, very pleased to get that one away. I mean, it ticked all the boxes that we've just been through for us and in that sense, squarely on strategy. It was for an enterprise value of GBP 210 million, which represents an EBITDA multiple of 11.8x. And that was funded via GBP 96 million equity raise with the rest through debt. And was very pleased with the strong shareholder support we got for that capital raise, which is an endorsement of the strategy we're trying to pursue. Adey actually gives us a market-leading position in the protection products for water-based heating systems. Very important that those water-based transmission systems, as we move towards low and zero energy heat sources for residential and commercial spaces actually, it's important that you've got efficient transmission systems because that low energy will not cope with inefficient heating transmission systems going forward so. And you can see that coming through in regulation, the latest draft of Part L mandates the use of filters in new build, which hasn't been the case up until now. So as Part L kicks in and starts to cope with those low energy and more efficient heat sources for houses, the transmission systems are needing to get more efficient, as we say. I'm very pleased with what we've found in the business or more pleased than the day we signed on the dotted line, having seen what we've seen. The 100-day plan is progressing very well with no issues identified. And we've had a really positive reaction from customers, from employees and obviously, as I said earlier, from shareholders as well. So very pleased with Adey and looking forward to working with the team over the coming months and years. Just turning to Page 21, again, on Nu-Heat. That was the other acquisition that we did in February. That was an enterprise value of GBP 27 million, and that represented 8.4x EBITDA. And again, Nu-Heat gives us a market-leading position in underfloor heating and renewables packages, including heat pumps and the integration of heat pumps into those underfloor heating systems. Polypipe itself has been in underfloor heating, but this direct sales model is additive to Polypipe's existing merchant channel activity. So we're pleased to have this business on board and looking forward to the developments that we can do, particularly alongside the Nuaire business where we can start to work on integrating heat pumps into our ventilation systems and look at having a solution for both air-based and water-based transmission systems when we move to low energy heat sources. So again, squarely on strategy, and again, very pleased to have Nu-Heat on board and the team there. Turning to Page 22, just on the Plura acquisition. This was a smaller acquisition, but nonetheless just as exciting, I think, in terms of what we're doing in this space. We invested GBP 1.25 million in 51% of Plura with an option to buy the remainder in 2024. And what Plura brings to the Commercial and Infrastructure segment is an entry into the rail and communication sectors with products ranged around chambers and platform accessories. And the logic here really is, again, partly the manufacturing technology because of its pultrusion technology, we believe their manufacturing technology may well be transferable to water management ranges, particularly chambers there. But also in terms of giving us exposure to that wider rail sector. The rail market hasn't been a great stomping ground for us over the years because, as we've said before, rail is laid on gravel generally and that drains naturally. But certainly, HS2 is going to be very interesting for the wider group because the rails are being laid on concrete. And that, therefore, needs drainage solutions across the length of the line. So again, from the wider Civils business, we are quoting significant amounts around HS2. But the Plura acquisition gives us access to the more broader range of rail products and ability to transfer some of that technology into water management as well. So look, very, very pleased with the acquisition of Plura, will be very interesting and exciting to integrate that into the group and start trying to leverage their manufacturing technology as well. And obviously, it gives us a bit of a balanced focus with Adey and Nu-Heat being very much in the residential space, a bit of a balanced focus on the infrastructure and the commercial side. So look, very pleased with the acquisitions that we've done. And just turning to Page 23. What we've tried to do here is just show you what the shape of the group will look like on a full year basis after all those acquisitions. The pie charts, you will have seen many times before. And before acquisitions, we've got the split of the group there, 25% U.K. RMI, 37% new build, 11% overseas, and then the rest in Commercial and Infrastructure. And looking to the right, you'll see that balance change slightly, a better balance between RMI and new build, so 31% RMI, 33% new build. And bear in mind, this is obviously percentages of a much bigger pie with the acquisitions. So getting a better balance between RMI and new build there. Geographically, really nothing changes because the acquisitions that we've made have been very much in line with Polypipe's geography and therefore, bring some opportunities to grow overseas, but it's predominantly U.K.-focused. So just a quick turn to Slide 24. I said we'd pick up on our ESG targets and the winning sustainably projects. I've set out there the metrics that we talked about in November, and we did commit to report those on a more frequent basis, and that's exactly what we're doing now. I'm not going to go through all of them. I'm just going to pick out 3 really. Firstly, the carbon reduction targets that we set. We set in November a target to reduce our Scope 1 and 2 emissions by 66% by 2025, and that's without offsets. Pleased to report that in 2020, we improved emissions by 7.8% and got them down to 0.252 per tonne of output. So making some great progress there and some interesting projects ongoing within the group to get that down further. And we have now signed the Pledge to Net Zero by 2050. Again, that's consistent with our objectives, obviously, a longer-term objective. I think when we talked in November, I was very keen on making sure we had shorter-term targets that we, as management, could be held responsible for and accountable for. And that's really what we stuck to. But we have signed up to that net zero pledge by 2050. Turning to the circular economy and recycled materials. If you remember again, in November, we set out to get to 62% of our polymer consumption should be through recycled materials. And that number came from looking at the broad product mix that we currently have and looking at what is possible within the standards that are currently set for product development. So we've got a challenge to get to 62% there. We did see it come down a little bit in 2020 to 46%, largely around COVID disruption to our product mix and so on and so forth. But still very keen to get that up to 62%. I'm absolutely convinced we can get there. And the team is very much focused on taking actions to ensure that we do get there. So lots to do there. And then finally, just picking out the development of our workforce. We've signed up to the 5% Club, and that means basically getting 5% of our employees into some sort of learning activity, be it through apprenticeships, graduate training or on-job training as well. We've managed to increase that to 3.8% of our workforce during the COVID crisis. So again, a great focus of efforts through what has been a difficult year, and that's up from 2.8% in 2019. So some good progress there, and the team is very well focused on getting to that 5% target by 2025. And I think importantly, what we've done with our long-term incentives is change them this year so that 25% of senior management LTIPs are now driven by those 3 ESG KPIs and achieving those 2025 targets. So we're very much linking an element of remuneration to these targets as well. So yes, everybody is focused on the right sort of things. So that's ESG. Just turning to Slide 25. The other thing we've done today is announced a name change for the group, from the Polypipe Group to the Genuit Group. I think many of you will have seen the evolution of the group over the years from what was back in the day, very much a plastic pipe and drain focused business. And I think you've seen, and we've certainly got a strategy to try and develop those, the product offer that we have into the wider climate and water management sectors. And I think increasingly, the Polypipe name doesn't reflect the sort of breadth of our product portfolio in terms of where we are today and in terms of the future and where we want to be. It will be an important part of what we do, but not the only thing. I think we've broadened the product range. We've broadened the pool of brands that we have within the group now as well. We have some strong brands in their own right, which started with the Nuaire business back in August 2015. And you've seen recently, over the last 2 or 3 years, the strong brands that we brought into the group, such as Adey, Manthorpe, Permavoid, Alderburgh, Nu-Heat, Plura and others. And to say, obviously, Polypipe is a very strong trade brand in its own right and will continue to be so. But I think we got to the conclusion that the group name no longer accurately reflects the extent of our products or our market sectors that we serve. And as I say, we remain committed to those strong consumer-facing trade brands, including Polypipe, but we're reflecting the breadth of the product range and the brand that we have within the group now with this name change. And I think it also allows our colleagues around the group to feel equal citizens as part of a larger group, but still maintaining their affinity to their strong trade brands and serving the customers that those brands serve. So for all of those reasons, we are going to change the name of the group from the Polypipe Group to the Genuit Group, and that will be effective on the 6th of April 2021. So a lot of news in there. We're just going to turn now to the market update and outlook, so if we can turn to Slide 27, Mike. You can see that the residential new build markets look, the markets that we're operating in the U.K., construction markets, and a lot of this is CPA data that we utilize quite heavily. You'll see that the overall market for residential new build was down 20% in 2020, with public housing seeing the most extreme decline. Private new build was down 18.1%. And you know the story there with the shutdown in April and most of May, and then coming back as markets began to open, again, coming back to the levels we've seen just recently and quite a strong improvement. So obviously, when you look at the starts data and the completions data, that paints a slightly more bigger decline in starts, down 32%, whereas completion is down 22%. And we saw that through the summer and into the autumn of housebuilders very much focusing on completing houses that they've already started on. And I think as we look forward into '21, the government stimulus has been very welcomed around stamp duty, around Help to Buy and around the recently announced government mortgage guarantee scheme. And although I don't think we're going to get back to 2019 levels in 2021, we will see a good recovery and probably back to or slightly exceeding 2019 levels in '22. So I think it's been a tough year for the markets as we all know, but I think looking forward, we look forward with confidence in the resi market. And turning to residential RMI. I think as Paul noted, the RMI market really held up somewhat better during the COVID crisis than the new build market, down only 11.5%. And again, people, I think, focusing very much on home improvements because of the lack of ability to go on holiday partially and partially because they're spending more time in their homes. So we've seen a good performance there. We think '21 will be slightly down on '19 levels. But getting into '22, we should see it recover back to '19 levels again and replacing a lot of that lost ground. So very confident again about the RMI markets going forward. And then in Commercial and Infrastructure on Page 29, you can see, again, the commercial market declined, down 18.6% in the year. We saw project awards dip heavily in Q2, as you'd expect, but then start to come back. Obviously, offices and retail both suffered, but again, starting to bounce back now. I think turning to infrastructure as well. The road sector has actually done very well through 2020 and into '21. I guess it suffered less from the social distancing issues that Tier 1s had in the commercial markets and working inside buildings. So that carried on well. And I think the government gets the joke about infrastructure investment as a way of pump priming the economy coming out of a crisis. And I think we'll see the roads programs, in particular, continue. And obviously, we've got HS2 coming in that space as well. So again, I think I look forward with confidence in those markets as well. So really turning to Page 30 just to summarize the outlook. Our markets do continue to recover. The recent extensions to the stimulus programs, such as stamp duty, Help to Buy, the government mortgage guarantee scheme, it does give us confidence in new house building. And together with continued improvement in RMI and recovery in commercial, infrastructure markets, I think it gives us that confidence in our markets going forward. I think on the more medium-term front, the demand drivers that have driven our business and continue to drive our business will still be there post-COVID. We will still have a structural housing shortage in the U.K. Those environmental and regulatory drivers around water and climate management will be stronger, if anything, coming out of COVID than they were before and will provide increasingly strong and helpful tailwinds as we go forward. So a lot of reasons to be confident around the medium term. Coming back to the shorter term, our businesses have started strongly in the new year. We've not seen any discernible impact from the current lockdown. And therefore, for all those reasons, the Board believes the group is in a strong position to deliver improved performance in 2021. So turning to Slide 32 just to summarize. As I said at the outset, I think the business is well positioned for the future. We took robust actions in 2020 to put the business on the front foot coming out of this crisis. We've continued to outperform construction markets. We're seeing evidence of that recovery in half 2 with revenues broadly in line with prior year and a strong start to '21. We've got a clear strategy focused on those sustainable growth drivers. We've taken the actions through '20 and into '21. We've continued investing in new products. We were on the front foot to be able to sort of act on the acquisitions that we've just made and very pleased to have them on board. And I think we're doing what we said we'd do coming out of this on the front foot. Sustainability is at the core of our strategy, and we will continue to report against those targets through the next years. And we've got a clear program in place for delivery of those targets as well. So trading conditions and structural drivers continue to provide confidence. And again, as I say, we're confident in that outlook for the medium term. So I think with all of that and notwithstanding the technical glitches for which I apologize, we are ready for Q&A. So if I can hand back to Mike and Jordan to take that on.

[Operator Instructions] Our first question comes from Toby Thorrington of Edison.

A couple of forward-looking questions, please. Can you confirm you can hear me first of all?

Yes, Toby, how are you?

Yes, pretty good. Pretty good and nice to be communicating again. I'll get over the question quickly, forward-looking ones. First of all, I think you're saying pretty much all sectors have a positive outlook for you, less of a surprise in RMI and infrastructure, more so in commercial, I think. Perhaps you could give us a bit more color around that and comments on maybe whether there's a difference between -- you're seeing a difference between public and private? That's the first one. And secondly, a couple of guidance questions to Paul, probably. Given the nature of the group has changed a bit, can you give us a feel for whether the enlarged group what the guidance would be sort of towards gross margin and any tweaking up or down? Actually interested to know whether the sort of slight under-recovery at the EBIT level in the second half due to polymer prices and COVID efficiencies, whether you're now sort of on top of that for FY '21? So that's the margin question. And if you could give some tax guidance for the group as well, that would be helpful.

Thanks, Toby. So I'll pick up the commercial question then hand over to Paul for the other 2. But in terms of of the markets, yes, look, I mean, we did see project awards dip a little bit around Q2 as we were in the height of the crisis. And if you remember, we've got a 6- to 9-month lag on those. So project award to actually taking product from us is about 6 to 9 months. So I think we said through the back end of last year that we did expect to see a slight dip around Q1. And we have seen that in the commercial space. I think the confidence that I was talking about going forward comes from the fact that the pipeline then filled back up quite strongly through Q3 and Q4. And certainly, the things that we can see and talking to our customers into Q2 and half 2, if you like, that's where the confidence is coming back from commercial. But undoubtedly, we're seeing a little bit of softness around it right now. But yes, looking forward, I'm still confident in that space. And again, with a lot of the products that we've got and launches that we've made like Safe Haven, like the XBoxer, I think that gives me confidence that we can do well in that commercial space as well.

Sorry, is that private and public sector then, Martin?

Yes. I mean, certainly, again, when you talk about Safe Haven, I mean, we've got it going into 3 schools actually on test to sort of develop there. So again, a lot of that air quality side of things is driven primarily in the shorter term by schools, by health, by care, which I guess will be more of the public side of things. But obviously, there's a lot of interest in it from offices and the ventilation of offices post-COVID as well. So I'm not really putting too much distinction on that. Paul?

Yes. Sorry, just coming off mute there. In terms of gross margin guidance, the groups we've acquired had pretty good gross margin, good operating margin levels so I don't see an effect, certainly an impact there. Obviously, we'll be overall carrying some extra COVID costs in 2021. Hopefully, they will start to diminish as we go through the year and the vaccine kicks in and that reduces. So I think the current consensus we've got around margins are pretty comfortable with that operating margin level, something in the 16%, 17% for 2021. And I've always said that 2022 is probably the year where, I think Martin intimated this, where we should start to see numbers that look like pre-COVID if you're still with me. So I think good margin performance, and we had obviously a solid good start to the year. As far as tax guidance is concerned, yes, this year, we've got some re-evaluation of deferred tax balances. So I'm guiding that the effective tax rate for '21 would probably be something like 23%. And then we've got these super deduction capital allowances coming to effect from 1st April this year. And they'll start to kick in this year and into next. And so the effective tax rate actually will probably, for next year, be somewhat below what it has historically has been, sort of 15%, 16% level for 2022. So there's a bit of a fluctuation in tax, but I think that's a common story across the corporate sphere at the moment.

We now have a question from Christen Hjorth of Numis.

I've got 3 questions, if that's okay. Just a bit of color perhaps on the competitive backdrop. I know a lot of the raise, equity raise last year was to ensure that Polypipe could remain on the front foot perhaps when others were more focused on balance sheet, et cetera. So just any commentary around there would be greatly appreciated. Also, some commentary on the future home standards. Obviously, you talked about that in relation to the Adey acquisition, but just perhaps benefits more wider across the group. And then third one, just on margins and notwithstanding the macro impact of passing on cost increases. Where do you think sort of the right level of margins are for the different divisions? And perhaps maybe specifically on Commercial and Infrastructure because if you look back into 2019, I suppose margins were lower than where they were 2 or 3 years before that. So just any commentary on where you think the right level of margins will go there?

Sure. And yes, I'll take the first 2 and maybe hand the third one to Paul. But certainly, in terms of the competitive backdrop, I think when we did the capital raise, it was very much around trying to get on the front foot coming out of this. And we undoubtedly have seen benefits from getting our sales and commercial teams and engineer teams back perhaps earlier than the competition. I think anecdotally there's a lot of projects. We've done better on our project win statistics than perhaps we would expect to otherwise. And I think that's because we got our teams back again earlier. And certainly, manufacturing-wise, the operations have kept going through all of this. And I think we've managed to keep supply going through the entire crisis, actually, and I think that's a testament to the guys and what they've been doing in the factories themselves. So I think we've seen some advantages and certainly bits of market share again coming back out of the crisis. That's possibly been added to as we've come into the back of the year. Paul intimated it as well. It's well-known out there that there is some supply challenges around PVC, particularly, and some of the other polyethylenes as well. And again, our guys have been taking bold actions to secure supplies through Q1 and into Q2 to make sure that we can continue supplying our existing customer base. And that isn't being replicated across the entire industry. So I think we're probably doing very well on that front as well. So I think the business and the competition that we've seen out there, I think we have sort of got back quicker and been more agile coming out of this, and we've seen a bit of market share gain because of that. In terms of the future home standard, yes, I mean, focused very much on the Adey acquisition and the Nu-Heat acquisition. But more broadly, the changes that are coming in Part L and others actually, but Part L mainly, are going to benefit the group. And that's because the whole drive for low energy heat sources in houses and low-carbon heat sources in houses are either going to drive new build down, probably a heat pump route and sort of the other competing technology is obviously hydrogen, for hydrogen boilers. And I think whatever happens, whichever heat source wins out, and I think that might be different in different sectors, segments, what you absolutely need is a more efficient transmission system of that heat around the house. And that will mean generally having larger heat emitters in housing, which means more underfloor heating, largely on the ground floor, potentially upstairs, larger radiators because, again, you need to get the same energy into a room. You need larger heat emitters operating at lower temperatures to sort of fit with the lower carbon heat sources. And because of that, that transmission system will be larger and will need to be that much more efficient. At the moment, if you've got an inefficient transmission system because it's gummed up with magnetite sludge, you just turn the boiler up a little bit and you're away, you don't notice it. With a low energy heat source, you won't be able to do that. So it's very much more important that we have those energy heat sources. So a lot of opportunity for underfloor heating and the Adey businesses, Nu-Heat as well, and also looking at integrating heat pumps with ventilation systems as well and ultimately, trying to come up with a whole house climate management system. And we're beginning to place ourselves in a unique position to have all the various elements of a whole house climate management system. And that's really where a lot of the product development drive is going to be over the coming months. But let's not forget the water management and the storm water side and green urbanization. Again, that is increasingly becoming important. And the group is well placed on its green urbanization programs product offer and service offer to really leverage on that side of things as well. So yes, there's a lot going on with those future home developments and the wider construction market, which we're trying to position Polypipe for, Genuit for the future. Paul, I'm going to hand over to you on the margin question, if that's all right.

Thanks, Martin. Yes, look, pre-COVID levels, 2019, we had, you see it in the presentation, just over 20% from resi and about, just over 13% on Commercial and Infrastructure. And as I've said all along, once we get to 2022, I see no reason why we can't get back to those levels. 2021, it still is a bit of a year of transition. As I've said a couple of times, we've got off to a good start. But we've got, obviously, some COVID costs we're carrying. And we do have that famous margin dilution effect of the price increases we're going to put through to compensate for cost inflation. I mean, I remember very well saying that a 3% price increase has a 40 basis point margin dilution effect. I'm not saying we're necessarily doing 3%, but that's the statistic I remember. So that gives you some idea of the slight headwind. So yes, 2021 margins, operating margins, I expect to be recovering. Obviously, far better than 2020, but maybe 1 or 2 percentage points below 2019, but coming back strongly, I would just say.

Our next question comes from Clyde Lewis of Peel Hunt.

Two, if I may. One was, I suppose, on the sort of pro forma, sort of route to market now that you've post the acquisition. I'm just sort of trying to think how much is sort of, I suppose, sort of specified and how much is really sort of sold through merchants, probably be a little bit of overlap there. And then how much is maybe through, I suppose, more online sort of pick up and go type models in the Screwfix and Toolstation, et cetera? And how that sort of changed compared to before? And the second one, I suppose, going back to public sector RMI, I mean, certainly, we've heard a lot from others that very little activity went on last year. And I think you're flagging sort of flat spend this year. But are you starting to see local authorities thinking ahead a little bit about some of the renovation projects that they're going to have to catch up on in this year and next?

Sure. Thanks, Clyde. Yes. I mean in terms of the route to market, I mean, if you remember, our business model is very much around focusing on specification side of things, and that can mean different things in different sectors. So I mean the developers, we very much operate on a specification basis there with the larger housebuilders. Obviously, our route to market to those developers are through the merchants. So the merchants are very key and important to us in terms of getting our products out there. In terms of the commercial and infrastructure space, very much more specification project-wise. And again, we've got a great reputation out there for our technical know-how and our ability to work on with end users, so groundworks contractors, M&E contractors on those bigger projects. So specification is still very important to us, and it will continue to be with the acquisitions that we've had, and again, specifically Adey. I think as we said at the acquisition time, a lot of the, for example, the boiler manufacturers understand that having a clean, filtered transmission system improves the performance of their boilers and helps with servicing and warranties. Well, so again, we'll work closely with those guys as well. And obviously with Part L, developers are going to be specifying, and we'll do our damnedest to make sure it's an Adey product that they're specifying. And again, we've got the relationships with the housebuilders to sort of help drive that. So the specification is still extremely important to us. The over-the-counter business in merchants and again, we saw some interesting things during the COVID crisis where we did do more direct-to-site deliveries. We do, do that and have done that particularly in the commercial, infrastructure space for a long time. But again, just making sure the product was getting to site. We've seen a little bit more of that through COVID. But that over-the-counter business and the services the merchants provide us is still very, very key to us, and we'll continue to develop that with the merchants themselves. So I think we're well placed for all of those fronts. And the acquisitions fit very neatly into the business models that we've got within the Genuit Group already. So that's good. In terms of the public sector RMI, yes, I mean, we're starting to see some interesting developments there. We think there will be a fair focus from the social housing markets and social RMI more generally -- public RMI more generally on the post-Grenfell type activities. But undoubtedly, government has got the drive on some of the environmental targets it's got to hit and the social housing stock is a key part of that as well. So we are working as best we can on some of those projects to help drive forward the government's agenda on those things. We're yet to see how the spending works over the next couple of years on social and public RMI, but I think the government has got to improve its funding of that side of things, and we're well placed to sort of benefit from that if they do.

Our next question comes from Jon Bell of Deutsche Bank.

I think I've got 2. I got cut off myself so apologies if these have been already asked. The first one is February, obviously, a very active month on the acquisitions front. I'm wondering whether we should expect a slightly quieter period between now and the year-end? Perhaps a quick one for you to answer. And then the second one, and I know you did touch on this, but in the short period of time that you've owned Adey, any revised thoughts about how impactful the acquisition could be?

Sure. Thanks, Jon. Yes, I think it was a tough few months in the lead-up to doing the acquisitions. So I think, I did say the team could take a couple of weeks off on all of that so. But joking aside, look, we've done a lot in those few months. And I think our focus is very much on bedding those acquisitions down and getting them integrated into the group. If you remember, we take a relatively light touch integration approach to acquisitions. We don't want to corporatize the acquisitions that we've made to the extent that you lose the entrepreneurial spirit and drive that's made them attractive businesses to us in the first place. So the management team stay in place. We obviously, there's some minimum integration that we do need to do, getting the minimum control frameworks of a PLC in there and the reporting, and making sure that going forward you can leverage the benefits and synergies of being in a group without sort of impacting hugely on the entrepreneurial spirit and decision-making at the coalface. So it's something that's worked for us over the years and will continue to work for us. I think looking forward, I think as Paul intimated, we're looking at leverage somewhere at or below 1.5x by the end of the year. And the whole M&A space, as you know, is very busy at the moment and lots of opportunities out there. If we see the right opportunity out there that we think would be a great fit, and we've highlighted the criteria that we use on acquisitions, and we will keep our financial heads on as well as we look at these things and make sure that the businesses not only fit commercially and strategically, but we maintain our financial discipline on them as well. Then if there's something that comes up in the balance of the year, we will look at it in the context of where the business is at the time. I think at 1.5x, we've got a little bit of space to do something, maybe room for one more small bolt-on, but it's certainly something that we're alive to. If something bigger comes along that is absolutely the right one, then again, we'll have to consider everything at the time that, that happens. But certainly, for the short term, it's about bedding in the acquisitions that we've made in February and getting them up and running. And in that context, it is early days with Adey. But again, the interactions that we've had with the management team, it's a real quality business. And I think, if anything, the sort of ideas that are starting to promulgate when you put the 2 teams together and they start talking, it gives me even more confidence that there's plenty of opportunities out there, particularly around the relationships we have with the housebuilders and getting Adey into that new build sector. That's going to be needed as we come up with the new Part L regs. But also just integrations, for example, between Adey and our Surestop business, which, if you remember, has some really neat IP around water shut-off valves, utilizing the pressure in the water system itself to shut valves, integrating that with the Adey filter and some of the Internet of Things. Again, it's about being able to sort of understand what's going on with heating systems digitally on your phone. And Adey is already there in terms of some of the IoT developments, but there's a lot more that I think we can do as a combined entity. So again, there are some really exciting opportunities there.

Our next question comes from Alastair Stewart of Progressive Equity Research.

Can you hear me?

Yes. Can hear you, Alastair. Yes.

A couple of questions based really on the pie charts on Slide 23 and where some of the smaller slices might be in 2 or 3 years' time. First of all, on the private and public commercial, how do you see that market developing? On one hand, you've got desire for the, among occupiers for the clean air, the safer air aspects of your technology. But also pulling things back, there's a bit of a question mark about office space usage. So the first question is, how do you see those 2 dynamics playing each other out? And then the second question is on the 11% total non-U.K. A lot of your higher-value products, I'm sure, could travel. Do you see that 11% going any higher? And within the 11%, do you see a shift between the EU and non-EU end markets?

Sure. Thanks, Alastair. In terms of the commercial space, I think there is a lot going on there. I'm certainly of the opinion that the virtual world is not the answer to the way we work going forward. It will be a useful and an increased part of what we do, but it's not going to remove the need for office space. And as you rightly say, a lot of focus is going to be on making sure as businesses return to normality that those offices are safe places for businesses, employees to return to. So I think the office side of things is going to be a very interesting space for us going forward. And actually, the sort of projects that are coming up, I think you'd be slightly surprised at the degree that there is office projects still being developed. So I think for both of those reasons, I'm confident around that side of the commercial business. Yes, I mean, I guess, when you start looking at things like retail, obviously, retail was going through a structural change and decline really, certainly the physical side of retail before the COVID pandemic. And as we can all see, that's potentially being accelerated as we go through and come out of the COVID crisis. But on the other hand, there's been a lot of development on warehouse space because, again, what's replacing that physical retail is the warehousing and distribution models of the online businesses. And so we are equally interested in those sort of projects because there's a lot of hard standing areas, a lot of water management needed in those sort of projects. So the shape of things may change a little bit. But nonetheless, I think I'm confident around some of those developments. I think just to sort of, just before we get on to the non-U.K. as well, in terms of the infrastructure space, I think I would like to see a slightly bigger part of the pie in that infrastructure space because, again, I think the government is going to spend hard on infrastructure. We're already good on the roads programs. We've got HS2 coming and the acquisition of Plura as well. We think we can do more in that infrastructure space as well. In terms of the overseas side of things, look, I think as we are fairly clear in our strategy, our focus is on filling product gaps and adjacencies that leverage our U.K. customer base. And that doesn't mean that our M&A has to be a U.K.-based business. It can be an overseas business if that has a neat bit of IP and product that will work within our U.K. product offer. But as you can see as well, those overseas markets do provide some very interesting and great opportunities to augment the growth in the U.K. And the guys that are working in the Middle East are showing that the Middle East actually is showing some signs of recovery. The oil price coming back up again is giving a bit of a renewed confidence out in the Middle East. So there's some really useful and exciting projects out there which the guys have started to get us into as well. So I think there is a lot we can do with those overseas businesses, leveraging what we've got, leveraging the products that we've got, being clever about how we do it. So utilizing licensing models, having flexible manufacturing by moving tooling around subcontract manufacturers. So lots to go and do on that front. But in terms of, I think that the Middle East does seem to be picking up a little bit again out there because of the oil price so. And the whole situation between Qatar and the Emirates seems to have settled down again now. So with Expo coming and the World Cup, I think, we've got a renewed, a bit of renewed confidence in that Middle East side.

[Operator Instructions] We have no further questions on the phone line, so I hand back.

Great. Well, thank you, everybody, for taking the time to spend with us on our results. And yes, I look forward to speaking to you all individually at some point in the future. Thanks very much.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.