Genuit Group plc (GEN) Earnings Call Transcript & Summary

Good morning, and welcome to the Genuit Group plc Interim Results for the 6 months ended 30th of June 2021. My name is Seth, and I'll be the operator for your call today. [Operator Instructions] I will now hand the floor over to Martin Payne, Chief Executive Officer, to begin. Please go ahead.

Thank you, Seth, and welcome, everybody, to what I think the first presentation under the new Genuit name. I'm joined by Paul James, CFO, and we're going to give you a quick run-through of the results to the half year. So on Page 3, the introduction slide, Yes. Look, we continue to prioritize health, safety and well-being of our colleagues through what has been still a very tough 6 months from COVID. But despite that, we've had a strong half 1 performance, and it's not only COVID that the business has had to contend with, it's some of the supply constraints that you'll have read about in the last 6 months and also the ensuing cost inflation as well. So a strong half 1 performance. Revenue is up 32.4% on H1 2019. And what we'll do through this presentation is really compare numbers to 2019 in the most part because '20 I think is not a meaningful comparison to '21, we'll harp back to '19. And actually against '19 on a like-for-like basis, excluding acquisitions, we're 13.8% up. So strong top line performance. All 3 acquisitions have performed well in the first 6 months, the acquisitions that we made in February of this year with Adey really continuing to exceed expectations. And we've continued to invest in new products in line with our strategic growth drivers. And we've made some good progress on our 2025 ESG targets as well, and we'll talk a little bit more about that later on. In the more short term, we've had a good start to the second half, and that gives the Board confidence to expect underlying operating profit for the year to be ahead of our previous expectations. So that's that in summary. I'm going to hand over to Paul now to take you through the financial highlights.

Yes. Thank you, Martin, and good morning, everyone. So the next slide, Slide 5, financial highlights. As Martin said, net revenue up 32.4% ahead of 2019. We are comparing most of our numbers to 2019. And on a like-for-like basis, net revenue 13.8% higher and actually does show the good performance of the recent acquisitions made in February. The underlying operating profit, GBP 48.6 million, 23.7% above H1 2019 and the underlying operating margin of 16.4% with profit before tax at GBP 33.8 million, 7.6% above. Net debt, we've had good performance on cash flow. The net debt is coming in at 1.5x pro forma EBITDA, and that's in line with expectations. And the group will pay an interim dividend of 4p per share. If we then go to the next slide, this is just this underlying results summary. I just want to highlight a few items before we get on to the waterfall chart. First of all, underlying basic EPS is up 7.5%, with underlying profit after tax, up 30%. And the reason for the difference is due to the dilution effect of the 2 equity raises that we have done in recent times, one in May 2020 and the other one in February '21. The gross margin has been impacted by raw material cost inflation. So there's an impact there of down 140 basis points, and I'll talk a little bit more about that in a second. Selling, distribution and admin costs broadly in line with 2019 as a percentage at around 25%. And we've had lower net financing costs, and this is primarily being driven by reduced levels of borrowing compared to prior periods and good cash flow performance therein. If I then turn to the waterfall chart on the next slide, Slide 7. This is a chart that walks us from H1 2019. So it's a 2-year bridge for both revenue and then down below underlying operating profit walks us across from then to the current result for H1 '21. And what you'll see in the first column are the price increases that we've put through to deal with cost inflation. And the drop through, you'll see that due to the lag effect, there is still a bit of cost inflation still showing at operating profit level. But we've taken the necessary measures to catch up, and we will do so as we go. You'll see a good volume performance, up about 6.5% versus 2019 with a 35% drop through. So I'm pleased about the level of drop-through as the business has recovered. And then you see the acquisitions. So they're performing well with Adey ahead of expectations, and those expectations are set when we bought those businesses in February, and we laid out our plans at that time. So I'm very pleased at how that's all gone so far. So that's how we got to the numbers for this year. Then a little bit of color on the next slide around the 2 segments. First one, residential systems. You'll see like-for-like revenue growth in residential, up 63% versus 2020 at this time. and that's being driven by the housing market recovery and the government stimuluses such as the Stamp Duty holiday Help to Buy, but also the move away from cities. We've got a 17.8% like-for-like revenue growth versus 2019. Underlying operating profit is almost 5x higher than 2020 and the margin recovery being at 1,150 basis points, and that's just 110 basis points below 2019. Private starts completions, 36% and 21% higher than 2020 in Q1. And the CPA full year estimate is for housing output to be slightly behind 2019 levels. We have had issues around the availability of materials, labor as a possible constraining factor on the wider construction activity, that's something to watch out for. And Adey and Nu-Heat acquisitions have performed strongly with, as I said, AD performing ahead of expectations. And finally, the mix has been towards a less volatile RMI market since the acquisitions. I think at the year-end we've showed RMI being about 40% of the mix. It's now higher than that 46%. Then turn to next slide, look at commercial infrastructure. Like-for-like revenue up 34.2% versus 2020 and 8.3% higher than 2019. And sales in ventilation products is benefiting from the increased focus on air quality in the workspace as a result of the pandemic, not least. We've had strong demand for water management systems resulting from rapid build-out rates and completions in H2 2020. And the conversion sector remains subdued. CPA forecasting is newbuild construction to be 10% below 2019 levels in 2023. Infrastructure is the strongest performing segment, benefiting from large-scale projects and the CPA forecast 2021 levels, 23.4% ahead of 2020. Underlying operating profit is more than 4x higher than 2020 and in line with 2019 with an operating margin of 11.4%. And Plura, our acquisition is performing in line with expectations. They manufacture a range of products for utility companies, road and rail operators. Then turn to the next slide and just have a look at the statutory results. So this is basically taking us for underlying operating profit to statutory profit or profit for the year, as it's called. You'll see the key items in H1 '21. Amortization has increased, and that's due to the acquisitions. Acquisition costs relate to the acquisitions of Adey, Nu-Heat and Plura. We've got the unwind of industry fair value adjustment in relation to the Adey acquisition, and we got a revaluation of deferred tax balances due to the change in the statutory tax rate to 25%. And many of these adjustments made in relation to acquisitions are -- well, they're all through exceptions. There are account adjustments associated with acquisitions, and they do not affect underlying operating results. If we then turn to the cash flow on the next slide and a few things to highlight there. CapEx investment is strong and we're now guiding to around GBP 35 million, mid-30s million for the full year. The overall working capital movement is in line with the historical seasonal profile. There's plenty to invest in, net things like next-generation plumbing and also multilayer extrusion and that latter investment will help us have a positive impact on recycling use going forward. The GBP 11.9 million dividend in H1 was the full and final dividend of 4.8p per share for the year 2020. And the Adey acquisition, as you can see, was part funded by the group's revolving credit facility. And then turn to next slide, just a brief look at net working capital. I think the main thing to point out is that inventories have been somewhat reduced over the recovery period after -- for the first onset of the pandemic. And we've had -- it's been driven by pent-up demand and material supply issues. But I think there is a slow buildup -- backup of inventory going forward, hopefully. And receivables and payables, they just reflect the impact of increased demand as we headed towards the end of the half year. And then if I go to the next slide and just looking at banking facilities. I just want to highlight that we had a pretty healthy headroom of GBP 130 million at the end of the half. We were well within our covenants. And then just to remind ourselves that last year, we did model the business going forward, and we modeled that Q1 would be the sort of pinch point in terms of covenant performance, but I'm pleased to say we passed through that after the equity raises fairly comfortably. And the revolving credit facility is with 6 banks, matures in 2023, and we have an extension beyond that possible. So that's a brief run through. And with that, I'd like to hand back to Martin.

Thanks, Paul. Yes. So we'll have a quick look at markets and a few other things in the next section. So if we could turn to Slide 15. Thank you. Many of you will be familiar with this slide, the broad story remains the same. What we're looking at here is demand drivers within the group. And you can see there that we continue to be around 90% U.K.-based, with the other 10% coming broadly equally from Europe and then the rest of the world. And then within that U.K. space, RMI at 30% of demand U.K. newbuild at 32%; commercial across private and public at 22% and infra at 6%. And that balanced exposure to the different segments of the U.K. construction market does provide us with some resilience through the cycle because through most of the cycle, each segment moves at different paces with different drivers. I think as we'll see as we come on to look at some of the sectors at the moment, a lot of these sectors are pulling very hard maybe with one exception together. But nonetheless, provides us resilience through the cycle. And actually, we've increased our exposure to RMI with the Adey acquisition. If you remember, Adey very much an RMI business at the moment, although If you remember from the acquisition presentations that we see a lot of opportunity in new house build for Adey with part of the regulations coming in. But nonetheless, a bigger exposure to RMI, which I think with the way the market has been going, is a good place to be. But that sets the market slides in context. So if we turn to the next slide, Slide 16. What we've done here is just mapped out the U.K. construction market, excluding infrastructure. And the reason we've excluded infrastructure is that way ONS collect data around large projects like Hinkley Point and Thames Tideway tends to pollute the numbers a little bit. So we've looked at it excluding infrastructure. And you can see there that from 2019 to 2020, the market declined 15.3% to GBP 126 billion, for reasons we all know and are aware of. 2021 looks to be bouncing back with 12% growth in that low base. But I think importantly, what that's showing is that the overall market is 5.2% below that of '19 based on the latest forecast. Now this is a CPA forecast. It is perhaps a little cautious. But nonetheless, I think when you compare that to our performance at the half year versus '19, it's -- we are considerably ahead of the market, whichever way you look at it. And I think demand remains strong across many of the sectors, and we'll look at the sectors in more detail. with that strength of demand, I think the issue is going to be around supply constraints and whether they limit any further growth, and we'll talk a little bit about that in each of the segments. But nonetheless, by 2022, getting back to sort of 2019 levels. And if we look then at some of the segments, if we go to Slide 17, the residential markets to start with. New house builders, the momentum that we saw in half 2 2020 is carried on through into '21. And we've seen some strong starts activity within all of that as the house builders start to rebuild WIP. The extension of the Help to Buy and Stamp Duty schemes has helped activity as well as Paul mentioned people looking outside of the cities post pandemic, and we can certainly see some good strong activity in the regions. The CPA forecast again for '21 looks like it will be about 8% below '19 levels. And I think this is perhaps where the prudence might be in some of these forecasts. But nonetheless, getting back to '19 levels in 2022 again. So very strong performance from the new house build and you can see all of that in the house builders' announcements recently. If we move just to the housing RMI. As we've said before, the RMI markets remain pretty resilient through the whole of the COVID crisis. Well, certainly after post -- after Lockdown 1, and half 1 '21 has continued that performance. We're seeing a lot of activity with people not going on holidays, spending their money on their houses, whether that's in the gardens, whether that's putting extra space on in terms of office space and working space for the post-pandemic world seen a lot of that. And certainly, 2021 looks like it's going to be back to '19 levels. So perhaps a stronger bounce back from and then getting above '19 levels in 2022. So again, RMI, a good place to be certainly through this -- the first part of this year. If we just turn to the next slide and look at commercial. Commercial's maybe the one area that hasn't quite bounced back in the same way as others. We have seen a bit more subdued activity in the commercial newbuild space. That's -- we are aware of the structural issues going on within the commercial space between retail and logistics space and offices to a certain extent. But I think certainly post-pandemic, a lot of the contractors did exactly what the house builders did and concentrated on building out the starts they already had at the -- when the pandemic struck. Now the house builders, that can be 12 weeks; for commercial projects like this, it can be between 6 months and a year. So I think process has been going on, and it's been impacted a little bit as well by structural steel shortages. But we've got a good, strong pipeline in our commercial businesses on newbuild, and we think that will come back certainly towards the end of half 2 and into next year. And there is light as well within this area. The RMI markets in the commercial space have shown some strong signs, obviously, with a lot of repurposing of spaces, but also improvement in ventilation, certainly in high occupancy buildings. And we're seeing a lot of RMI work there. So that's good. So it's been a bit subdued in the first half, but signs are that it will pick back up again. And then finally, on infrastructure, we've graphed here the roads' markets as we have done in the past because it's the most relevant to us. And again, we sort of avoid the lumpiness of things like Hinkley Point and Thames Tideway. And actually, roads has been very strong and Highways England have been getting on with the work at hand with RIS2. I guess, perhaps a little easier to stay socially distant when you're on a road program. So the roads programs did continue through the crisis pretty well. And as you can see there, the markets actually grew in '20 and '21 in roads. And we're seeing some good project work, Highways England after a little bit of a slow start on RIS2, we are now making good progress. So we're seeing a lot of work coming from the smart motorway upgrades on junction 3 to 12 of the M4 from the junction improvements at 25 and 28 on the M25 and then smaller projects, the A1 upgrade between Scotswood and North Brunton. So Highways England making some good progress, and we're pleased with the way that's been going. So all in all, market, I think, is pretty positive with the only one being commercial is slightly subdued in half 1, but with signs of coming back as well. So -- and I think our performance in the context of that market has been very good in the first half. So if we just turn to Slide 19, just to update you a little bit on how the acquisitions are going. You'll remember that we did 3 acquisitions in February of this year. The largest one being Adey, but Nu-Heat as well and Plura Innovations. So in summary, very pleased with the acquisitions and how they've performed since we acquired them. Adey, the U.K. leading provider of Magnetic filters, chemicals and related products, as you remember. And across all 3 businesses, 100-day plans have been implemented. And in Adey's case, performance has been considerably ahead of our original plans. So extremely positive performance there. All businesses have integrated well into the group. The 100-day plans have thrown no material issues. So that's all good news. And we crack on developing those businesses as part of the Genuit Group. And certainly, in terms of Adey, customer reaction has been very positive, very pleased that Adey will be able to continue its product development and looking at the longer term under our ownership. And we've also seen some very strong overseas growth and a bit better than expected, particularly in Europe. So lots of opportunities still out there. So extremely pleased with the way Adey has integrated. As I am, Nu-Heat, the leading provider of sustainable underfloor heating solutions, again, strong order book. But again, a little bit of component shortages, certainly around PCBs and some of the inbound imported product. But those component shortages have delivered plan or despite those component shortages, we've delivered on-planned performance there. So very pleased with that and it looks good going forward. So again, pleased how that's integrated. And finally, Plura, the manufactured chambers and platform accessories. I know the thing that we were interested very much in was the pultrusion technology it was using to make those products. And we saw the ability of that technology to be used in the wider Genuit offer, particularly around water management. So again, 100-day plans going well and performing to plan. Strong order books. Again, like everybody suffered a little bit of resin shortages. So being on plan despite those shortages, again, a very good performance and bodes well for second half and into next year. Development work started on the range expansion, as I said, of pultrusion products into that water management space. So very pleased with how they're all performing and I'm looking forward to seeing them continue to develop in half 2 and beyond. So turning to Page 20 in the presentation. We said we'd update you on sustainability performance. Now the group continues to have sustainability at the heart of the business. And not only are we placing great stock by the environmental drivers behind our growth plans, we are trying to operate our businesses in an increasingly more sustainable way as well. So we did say we'd report on the various KPIs that we targeted ourselves with. So just on that slide, carbon intensity, we had a target of 66% reduction by '25. We've reduced by 53% in half 1, largely around the renewable energy contracts and sources that we've put in place around the group. We've got 95%-ish of our energy contracts from renewable sources now and really the 5% that aren't to those that we inherited with the acquisitions which we are busy working on at the moment. So good performance there, but it will get increasingly more difficult to get from that 53% to the 66%. But Some really interesting projects out there around biodiesel and actually energy usage reduction as well that will help drive that. We've also signed the Pledge to Net Zero, and we're in the cohort that we'll have science-based targets ready for 2022. So again, things moving on there and very much keen on getting those in place and driving the agenda even further forward. So turning to recycled materials. We've got a target of 62% by 2025. And if you remember, that target set basically looking at what the product standards as they are currently set would allow us to use. And we were at 49% in 2020. We've actually dropped to 47.6% in the first half of this year. We did have some product mix headwinds. So definitely around residential drainage, around-the-house drainage, very much all virgin PVC. That's pulled hard in the first half as we supported the house builders on their starts, which has not helped this percentage recycled materials. But certainly, in Q2, we're at 50%, so starting to drive forward again. So again, and lots of good projects around the place getting us to that 62%, one of which Paul alluded to earlier, an investment in our Aylesford plant for some further multilayer extruded pipe. We've had that in building products in Broomhouse Lane for a while now, but expanding it into the commercial space, again, will continue to drive that percentage recycled materials up and lots more interesting projects out there as well. So really getting to grips with the projects that will drive those achievement of those targets. In terms of people and talent, we've targeted to get to 5% in earn and learn jobs by 2025. So that's anybody who's working for us, who is in a learning role, doing learning, so graduate schemes, apprentice schemes, evening education and all that good stuff. So very much driving that forward. So 3.5% at the end of half 1. So we've increased the number of people in earn-and-learn jobs from 107 to 120. And -- but obviously, the denominators up a little bit with the acquisitions we've made as well. So we are working hard on that. And obviously, at the end of June, we're sort of almost between school years as well. So we may well see that increase in the second half with the new year of school-leavers. We've also been awarded the 5% Silver Status award, which are very pleasing and shows that we're making progress again with that scheme. So very pleased to have had that. And then finally, on the Vitality Index, obviously, innovation being driven by this index or trying to measure this index. We're targeting 25% of our revenues by 2025 to be in products that have been developed in the previous 5 years. Our H1 Vitality Index is actually 30%, but obviously, there's a lot of product there from pre-pandemic, which is growing, which you've got to fill the hopper as fast as it comes out. So by 2025, a lot of that product will have dropped out of the statistics. So the challenge is to make sure we're filling that hopper faster -- as fast or faster than it's dropping out. So again, a lot of interesting projects on the go at the moment for new product development. And actually, looking at different levels of innovation as well to make sure that this is real true innovation as well as the housekeeping that you have to do with product development. So very interesting developments there as well, which we'll talk about more in coming presentations, I'm sure. If we just turn to Page 21, then just to refresh and remind you on strategy. I think as we did in our Capital Markets Day back in November and at the finals presentation in March, the strategy that we have in place will deliver growth ahead of that U.K. construction market over the cycle by focusing on segments that are going to grow faster because they have that sustainability and environmental drive. So the 4 areas that we're looking at, the increasing demand for resilient drainage, the trend towards green urbanization, the requirement for clean air, fresh, healthy air, again, in a post-COVID world, never more important. And quite topically as well with the government's announcement on the hydrogen policy today, that move towards low and zero carbon heating and more generally in the construction industry, we're aligning the business its products and its offers to those 4 drivers. And because they will grow faster than construction markets overall, that's why we think we will continue to grow. We also have that material substitution dynamic which we've had for a long time, which is substituting plastic for copper and for copper in plumbing, substituting plastic for plain concrete in below ground drainage all helping to drive volumes up. And by increasingly offering that broad package solutions to our customers with some of the acquisitions, filling in gaps in our product portfolio as well. So a lot of good opportunities there. And we're achieving that through organic means with product developments, as I say, coming through as well as our M&A activity, which we've obviously demonstrated in the first half of this year. But as well as aligning the business to those environmental drivers, we're also trying to operate our businesses in a sustainable way as possible as well as you can see by some of the KPIs we've just talked about. So in a nutshell, that's our strategy to really grow ahead of that U.K. construction market. And I think you can see in the results that we've had today and some of the achievements we've made on those KPIs, the acquisitions that we made that we're very capable of demonstrating that strategy in action and the success of that strategy. So -- and I see a lot more opportunity along the same lines over the next few years as well for the group. So that's that. So if we just then summarize and we'll go to Q&A. So yes, look, I think a very strong set of results, revenue and underlying operating profit. And that's despite continuing to manage the COVID-19 crisis, the material supply constraints that we've seen within our supply chain and the ensuing cost inflation that Paul has talked about. So very strong results, given all of that. The 3 acquisitions we've made in the period are performing well and obviously, Adey, as we've said, exceeding those expectations. And I think you can see from the markets, certainly in the medium term, the fundamentals of our markets remain strong, as strong as ever. And we've got those resources to invest in those opportunities as they come up. So I think we're in an excellent place. And in the shorter term, trading started well in the second half, and I think that all gives the Board confidence to say that they now expect underlying operating profit for the year to be ahead of management's previous expectations. So yes, a strong half year. So I think with that, we'll go to Q&A if we can.

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

A few bits and pieces for me, please. First of all, can you just give us a bit of insight regarding acquisition? What their influence would be on the group at the gross margin line? Were those sort of accretive or dilutive? That's the first question. Interested to know also what the experience has been in terms of sourcing secondary raw materials on virgin polymers whether supply has been firm or otherwise? And one question on tax, please. Could Paul perhaps give us some guidance on tax rate for the next 2 or 3 years and also cash tax for this year, please?

Okay. Thanks, Toby. I'll pick up the sourcing question and then maybe Paul take up the acquisition GM question and definitely the tax rate question. So just in terms of sourcing, yes, it's been a difficult 6 months. I think the biggest issue we've had is around PVC supply, virgin PVC supply. That has been very difficult. And again, across the industry, been very difficult. And it's a global issue. I think partly starting with a series of unfortunate events, particularly over in the U.S., when a big PVC manufacturer knocked out. And then force majeures came in. But then with demand strong demand coming from the U.S. and Asia, generally, PVC has been in very short supply. So we have been hand to mouth. We have just about managed our way through it. I have to say that back to the sustainability slide with nearly half of our plastic consumption in recycled materials, we have not seen the same sort of supply issues in the recycled side that we have in the virgin side. So that's been a bit of a blessing for us. So that's been the plastic side of things. And I think July, in terms of the main grades of PVC has been the first month that we've basically had full supply, which is good news. I think the other areas that have affected us more in the ventilation side has been, as I said, I think I intimated to one of this, the Nu-Heat acquisition, PCB has done a critical issue that we've not been able to sort of get in as much as we'd like. The guys have done a sterling job multi-sourcing those products and getting them where we can. And I think steel as well has been in short supply and the guys have had to manage that as well. So we have seen a little bit of impact in the last couple of months in the ventilation area, just struggling with that sort of supply. But I've got great faith in the people we've got in the group to make sure that they get over these issues as best they can. And so far, they've been doing a sterling job to do that. So we go into the second half yet with issues, but continuing to manage them. Paul, do you want to pick up the other 2 questions?

Yes, sure. Toby. So on the acquisitions front, the impact of the acquisitions' margins is overall accretive. You may recall that when we presented the results around Adey, I think are right saying we're achieving EBITDA margins of about 33-or-so percent. They had a growth in revenue since 2017 of 7% CAGR and EBITDA of 14%. So put that into the mix, that is overall accretive to the group. And the other 2 acquisitions, although smaller, were in margin terms, probably broadly in line with the ambient group as it stands. In terms of the tax rate, because I'll pick this a little bit. So the underlying tax rate and underlying results is about 17.6%, and I expect that to be broadly similar for the remainder of the year. If you included the exceptional sort of full statutory effective tax rate that comes up to about 22-or-so percent, maybe a tad more. Now the only other thing to bear in mind is we're putting through these PPA adjustments, purchase price allocation adjustments, and there's a number of items going through exceptional as well. So that will have an impact on that wider statutory effective tax rate. But the underlying tax rate will be about 17.6%. And going forward, we expect a slightly lower underlying effective tax rate into next year and beyond, and that's primarily because we've got the benefit of the [ Richisonax ], 130% super capital allowances kicking in. So you may recall that we actually delayed a bit of CapEx in March and by a month or 2 just to take advantage of those new capital allowance rates as they came in. Is that okay? Okay.

Yes, just cash tax guidance for this year, Paul, please.

So it's going to be around 18%, I'd say.

Okay. Right. Okay. Sorry. And one additional question, perhaps back to Martin, I remember from previous presentations, you were introducing or trialing a new ventilation sort of retrofit subsystem, name escapes me for the time being, but obviously stimulated by the pandemic, and there's a graphic involved as well. Just wondering what kind of traction you're getting with that at the moment?

Yes. No, it's going extremely well. So it was called Safe Haven, Toby, and was not only the sort of the UV filter in the ventilation system, which killed 95% of airborne viruses. It was also a different concept of ventilating space. So a lot of product out there at the moment is recirculating air around a room even if it's trying to clean it up, the motion of the air is a recirculation, which in a COVID world is not what you want to do. What you want is clean air coming in at the top of the room and dirty air being extracted at the ground level. So the air flow is from top to bottom rather than all around. And it's really struck a chord. Order banks are very strong. Obviously, these projects need planning and the gestation period for them is 6 to 9 months, but we're seeing some very strong order intake on Safe Haven generally and particularly in some of the schools and health applications. So very pleased with that. But actually, we'll start hitting numbers sort of in half 2, really.

[Operator Instructions] Our next question is from Jon Bell at Deutsche Bank.