Genuit Group plc (GEN) Earnings Call Transcript & Summary

So good morning, ladies and gentlemen. I've just got a couple of words to say, after which I'll hand over to the professionals. But welcome, good to see so many people here this morning. And good to see the share prices start off on the right side, which is always an encouraging start to the day. The main thing I want to say really is that Genuit, previously Polypipe, has been through a bit of a journey in terms of the stability of the executive team because at the time of the IPO, the entire team was intent on moving on because it was such a successful IPO, it went very well, everybody made a lot of money that was keen to have a lifestyle, which enabled them to take advantage of newfound wealth. But progressively, we've replaced David, Peter, Paul and finally, Glen. So Glen is the last one to move on, replaced by Matt. Matt, who you'll see that to our new COO, who a number of you have met and you'll hear a bit from later on. So we now have real stability in the team with all new refreshed executives. And going forward, we're looking forward to take advantage of that level of stability. I'd like, first and foremost, of course, to welcome Joe. Because Joe is, you may find it difficult to believe that he's made much of an impact up to this stage. But in actual fact, he's -- because we've had a good relationship with Spectris, we've seen something of Joe in the course of the last couple of months. And it's great that is that mutual respect between the Joe and the incoming executives. So that's good. And all I already want to, at this stage, is to welcome Joe and hand over to him. So thank you very much, Joe.

Thank you, Ron, and welcome, everybody. It's really a pleasure to be here. I think what I'd do is I'm going to save my first impressions and comments for after. But if it's all right with you, I'd like to turn the floor over to Paul, who will take you through Genuit's results for 2021 and a bit of our outlook, and then I'll come back with a little bit of my thoughts and first impressions. Paul?

Great. Thank you, Joe. Thank you, Ron. If we could just turn to Slide 4 and just look at the key highlights. I should say, first of all, a very warm welcome as well. Good to see a lot of people in personal for a very long time. Our 2021 results demonstrate a year of strong progress with continued market outperformance and like-for-like volume growth versus 2019 of 2.6% versus a decline of 3.6% in the market as a whole over the 2 years. And this growth is core to Genuit, its organic strength. We achieved a record operating profit underpinned by this organic growth and our ability to recover significant levels of materials and energy cost inflation. Our strategy works, driven by sustainable growth drivers such as green urbanization and lower carbon use. And I'm pleased to report that all of our acquisitions we made last February are performing well with Adey ahead of expectations. The audience who has already made a positive mark on the business and probably you'll hear a bit more about that later. And finally, we've had good progress on our sustainability initiatives that revealed at the Capital Markets Day in November 2020. Despite the challenges of last year, we've made good progress, and we're absolutely committed to be net zero by 2050. Now let's look a little bit more detail at those sustainability initiatives on the next slide. We achieved a 44% reduction in carbon intensity driven by a switch to green energy contracts with only the recent acquisitions waiting to be switched over. And the commitment of net zero includes a commitment to use science-based targets with a more challenging 1.5-degree Celsius limit ambition. I'm very pleased that we have increased the proportion of recyclate that we use to 49.4% despite the headwinds such as mix changes in our portfolio. Many of you know, we not only buy recyclates, but we also operate our own purpose-built recycling facility in Lincolnshire. We are also investing heavily in technology that allows us to expand the use of recyclate including GBP 2.5 million spent on a multilayer extruder in Aylesford and Kent last year. It's worth noting that 2 of our key materials now have far higher levels of recyclate use, and we are actively investing in new kits that allows us to push the bounties further towards our goal of 62% by 2025. Now as for creating greater diversity of opportunity in our talent base, we are now at Silver Status in The 5% Club, and I very much look forward to pushing this further. And finally, Vitality. GBP 120 million of our sales comes from newly developed products, and we are well on track for the 25% level. It's worth noting that we achieved this level despite much design effort expended on product redesign to overcome component shortages. Now let's just turn to the financial results, please. Versus 2020, we have grown revenues by nearly 50% from robust demand in comparison to the market as well as price leadership in that market. Meaning that we achieved an EBIT margin of 16%, well ahead of 2020's 10.6%, and our recovery continues as we speak. This is despite an inflation headwind and our price increases are designed to offset material cost inflation by the end of Q1 '22, i.e., around about now, with more normal looking operating margins following thereafter sequentially into Q2. Underlying basic EPS is up 126.7%, and the delivery of a year-end leverage of 1.2x EBITDA is well inside expectations, and these are testaments to the strength of the group's performance. CapEx was in line with the technical guidance I gave 6 months ago and announced a final dividend of 8.2p per share means a dividend of 12.2p for the year as a whole, a record. The 3 acquisitions are performing very well, I'm pleased to report. If we then go to the next slide, and here are the numbers in a bit more detail, showing 2021's EBIT of GBP 95.3 million, 125% up on last year. It's worth noting that the margin recovery journey we are on doesn't just involve price leadership, but will also involve maximizing operating efficiencies when we find them. I should note at this point that the senior management bonus scheme for 2022 now carries an equal weighting for EBIT percentage as it does for absolute EBIT. Financing costs are lower than last year as we do not have the costs associated with the financial activities we undertook in 2020 in response to the pandemic, including a full drawdown of the RCF at the time in our efforts to reinforce the balance sheet. And as I said, this culminated in the record underlying EPS for the year of 30.6p and a dividend of 12.2p for the year. Now the next slide is one of my favorites. I show it every time and it helps to perhaps illustrate how we've evolved the numbers over the year. This one is actually comparing to 2019, so it's a bridge, 2019 to 2021. The top row is revenue and the bottom row is EBIT. And if you take the first column, if you like, you'll see that the group's response to significant levels of cost inflation by a series of up to 4 we announced in the year of robust price increases has happened and with us generally taking price leadership in the market. You may recall at half 1 that the lag effect on drop-through of the price increases at that time in H1 was GBP 4.8 million, so the drop through price down to EBIT level. It's now GBP 6.3 million for the year. So therefore, the so-called lag effect has diminished markedly in H2 as price increase decisions taken early in the year have taken effect, and we've executed those increases better with amended terms to reflect the high inflation environment we are in. With more, let's talk to the next slide. Volume growth has been strong with full year like-for-like volume growth of 2.6% compared to 2019, significantly ahead of the market overall, which has experienced a 3.6% decline. The acquisitions Adey, Nu-Heat and Plura performed well with an operating margin between them of 23.7%. As we are predominantly a U.K. business, 90% in the U.K. on our activities, the FX effects are, as always, pretty immaterial. Overall, the group has an EBIT margin of over 16% in challenging inflationary conditions compared to an EBIT margin in the more benign 2019 of 17.4%. And I expect operating margins to reach more normal levels at the end of this quarter and into Q2 by month sequentially now if we just turn to the next slide. This is where we touch a little bit more on cost inflation in a bit more detail. And it shows really what we, as a business, has been up against. In this chart, on the slide, I took PVC as an example. Our spend on this material represents about 1/5 of our overall -- prime PVC represents about 1/5 of our total materials expenditure and so it's highly representative. Over the course of the year, this category material increased in cost by 50%. And in our businesses where we have heavy PVC usage, we announced up to 4 price increases, increases that are designed to restore margin, no long to pass on inflation in absolute pound note terms, but to restore margin. It's what we know today about inflation. These increases have the aim to take us to return to normal margins by the end of Q1 and following on as Q2. Generally, competition has followed as they are mostly all U.K.-based and subject to the same economic pressures as we are. We've undertaken contractual price increases and where we have persisted with these. We've used our position to market to negotiate shorter implementation periods, reducing that lag effect you saw earlier in the earlier chart. With nearly half of our input material now coming from recyclates, this represents something of mitigation in of itself. Recyclate is usually at a discount to prime material and is less volatile as it has absorbed pound sterling making up much of its cost. Okay. So that's a little bit detail on inflation, gives you idea of the scale of the issue we've successfully dealt with. Then turn to the segment review, Residential Systems. Within this, our Building Products business appears to have taken some market share and assisted by ability to use scale to support -- secure raw materials during those difficult months. Building Products has also benefited from the housebuilders rebalancing more towards starts, particularly in H2, which generally favors our product portfolio after an extended period of focusing on completions. I'd also like to highlight the ongoing success of our recent acquisitions, including Manthorpe, which grew 34% versus prior year, and it continues to enjoy good financial performance. If you just now turn to the next segment, Commercial and Infrastructure Systems. The commercial sector remains a difficult trading environment relatively. But nonetheless, Nuaire grew 12% versus prior year, and this was in the face of key component shortages in areas such as printed circuit boards. It is a testament to the entrepreneurial nature and ingenuity of our people, their agility, that much of our R&D resource diverted away from new product launches and towards the more pressing issues around product redesign to try to circumvent these component issues. Our sewers and green urbanization business grew 21.6% versus 2019 as their solutions for inner-city drainage and improved urban spaces continue to gain traction. Right, over to the next slide, please. Now we just take a look at nonunderlying items, otherwise known as exceptionals. It shows a big uptick on the previous year, driven by the increase in amortization of intangible assets from the recent acquisitions we made in February. Acquisition costs cover the 3 M&A deals we did, but also include the cost of repairing some damaged underground tanks installed by the previous owner of a business we acquired in 2019, totaling some GBP 2.6 million. By spending this money, we hope to have dealt with this issue, where we keep an open eye on it, but it's not being dealt with. Contingent consideration is there to cover the eventual acquisition of the remaining 49% of Plura. The restructuring costs are for the closure of a small business called Offsite. This venture was a useful experience for us, and we learned much about offsite manufacturing, but we feel this segment has not yet reached the level of development in this country to sustain a large viable business for us just yet, but we learned a lot. The unwind of inventory fair value adjustments in relation to Adey you saw in H1 and we have had the effects on deferred tax items we carry from the change in statutory tax rates in April 23 from the current 19% to the planned 25% as the last item on that table. So that's a quick run through the exceptionals. Next slide is -- next couple of slide deals with our cash flow. Delivery of good cash flow remains core to the group's strategy. We've achieved an operating cash flow of GBP 57.2 million, which is some 46% higher than 2020. Within that, we increased capital investment in the year by nearly GBP 10 million to a level in line with the technical guidance I gave some months ago at GBP 34 million. And part of that investment we already mentioned, namely investing in new technology that allows us to increase the use of recyclates. But it's probably easier to visualize how we've done on cash flow with the waterfall chart shown on the next slide, which shows the progression on net debt from year-to-year. I think what I would like to add, looking at this slide, if you look at working capital, there is an uptick in working capital, but this has been driven by a number of items. One is a rebuild in inventory after depletion that we underwent following the initial rebound in demand in 2020, as well as some increase in WIP. In some of our businesses, we weight the arrival of components and, of course, inflationary effects. It's worth noting that in the first part of this year, we repaid nearly GBP 10 million of deferred VAT deferred from 2020, a deferral that was part of the government's then support schemes for business. I would expect working capital growth to revert to its more normalized higher single-digit millions going forward. I'd also expect cash flow conversion, therefore, going forward to resume to levels north of 80% -- 80%-plus range. I should also like to reiterate that at 12.2p per share, we are paying a record dividend in absolute terms. We closed the year with a leverage of 1.2x EBITDA, as I said before, well inside our expectations. The next slide is -- deals with financing. And it just illustrates the fact that we have plenty of headroom, GBP 150 million, and you'd be pleased to know we were well inside our covenant, the bankers amongst you. Right. So that was the run through the financials. I'll now just take you through the business review. So the next slide, this slide shows the spread of our business by geography and construction sector. And as we've seen during the post-pandemic period, indeed, historically, the U.K. construction sector does not behave homogeneously. Factors such as government stimulus programs, consumer confidence and more recently, issues like working patterns, all impact different sectors at different times. And therefore, we view this spread as a key source of resilience for Genuit. As we communicated last year, our Adey acquisition increased our exposure to residential RMI, which is also a strategic objective, given it is typically less cyclical than other segments when viewed over the medium term. The split of broadly a third residential newbuild, 1/3 residential RMI and 1/3 the rest is, we believe, currently appropriate, although it represents a slight underinvesting in infrastructure. If we go to the next slide, dealing market outperformance and how we do it. Having looked at the even spread of our business and how it provides resilience, this slide highlights those drivers, which provide tailwinds for our ongoing market outperformance, and which will underpin our ongoing growth trajectory. Our market-leading brands such as Nuaire, Adey, Nu-Heat and of course, Polypipe, are all in strong positions in specific sectors attached to the 4 sustainability link drivers shown on the slide. And I would like to take this opportunity to remind you that the substitution of legacy materials, such as clay, concrete and copper continues and continues to provide growth headroom for us. Indeed, that substitution trend is itself consistent with the sustainability agenda as customers increasingly consider the carbon impact of their material choices when designing buildings. We continue to grow over the seas in absolute terms, although it remains around 10% of our revenues. And many of our businesses are enjoying export sales growth. There are numerous opportunities for our businesses to grow in existing and new markets overseas, and as the sophistication of our product ranges and solutions continues to increase, then so the economics of export potential also improves. As evidence of that, in 2021, Nuaire increased their sales in the Middle East, Adey grew in APAC and Europe, and our Permavoid business continued to expand its active presence around the world. Okay. Now the next slide, innovation. Alongside M&A, organic growth remains a core pillar of our strategy. Specifically, our businesses are focused on looking for the innovation opportunities, which are linked to those growth drivers and how they apply in their particular sectors or application areas. As I reported earlier, innovation is core to the DNA of Genuit, and indeed, those businesses which we acquire. And as evidence of that, our sales of GBP 120 million in 2021 or products launched within the last 5 years, the Vitality Index, represents a 56% increase on that category since 2019. The projects you see on the slide is a great example of our existing product technology being combined with digital capability. In order to add value for our customers in the sweet spot of 2 of our growth drivers, resilient drainage and green urbanization. This project features the installation of a groundbreaking climate and water-resilient roof in the heart of Manchester. The smart bluegreen roof developed by Polypipe sewers and green urbanization, stores and reuses rainwater at roof level, which reduces the volume of service runoff entering the sewer network. As a result, it will help lower the risk of flooding associated with prolonged high-intensity storms that are becoming more frequent climate change. And one of the challenges in such installations is the balance need to store water to maintain greenery while also providing water storage capacity in the event of increased rainfall. The breakthrough technology uses Internet-enabled devices so that the system has access to local weather forecasts every 15 minutes, so the system can then decide whether to store or discharge water, protecting green airs during periods of drought, reducing use of potable water during hot weather and it helps to enhance biodiversity by maintaining flora in optimum growing conditions. So there's a great bit of innovation. If we then look just through a summary of the acquisitions. 3 businesses acquired in early 2021, and I'm delighted to report for us today, Adey, the largest of the acquisitions and funded by an extremely well-supported equity raise, has exceeded our revenue and earnings expectations with an excellent execution of their plans. Even more exciting is that these results are part of a growth trajectory and are derived from specific initiatives such as the activity around building the international team or continue to expand our water testing footprint, which provide momentum and platform for ongoing growth. Nu-Heat has met our expectations despite some challenges in its supply chain. And in line with our acquisition rationale is increasingly supplying holistic solutions, including heat pumps, for example, as customers want to use underfloor heating as an enabler to move to low-carbon renewable energy. And finally, Plura, the smallest of the 3 businesses also continues to progress, and we are beginning to see the expected commercial synergies as we marry their innovative solutions with the commercial resources and channel presence, which we have via our Polypipe civils and green urbanization business. So now turn to the outlook. The outlook of our businesses and the business in our near term, this slide in this chart is from the Construction Products Association forecast, and we have excluded infrastructure given the timing volatility of some of the marquee projects such as HS2 and so on and also that it only represents 5% of our revenue. The U.K. construction market has shown terrific resilience during the pandemic when compared to manufacturing more widely or the service sector. A combination of policy decisions such as those around stamp duty, alongside practical pandemic issues such as reduction in opportunities for consumer spending, and the outdoor nature of construction work have all played a role in mitigating the potential effects. Consequently, the near-term outlook reflects a continuation of many of these positive trends. Residential RMI was at an all-time high in 2021. And whilst not expected to yield further growth, it is expected to maintain those levels, sustained by high levels of housing transactions, which have historically been closely correlated with RMI expenditure. The major housebuilders have generally given positive outlook statements, particularly regarding forward order book levels. And we also see that post the rush to completions linked to stamp duty and help to buy deadlines they need to open more sites and rebuild their work in progress. And as a general point, we are generally more exposed to the earlier parts of that build cycle, and we view this as a positive market context. So then turn to the outlook slide. We have a vast exposure to the U.K. construction market with robust growth drivers, and execution strategy through organic and M&A investment with recent acquisitions performing well. And I'd like to highlight again our organic performance growth of 2.6% like-for-like versus 2019 against the backdrop of market decline. Housebuilder sectors -- house building sector is encouraging start to 2022, which starts exceeding completions and demand being strong. RMI remains strong with improvement in commercial infrastructure markets, and we have market-leading price increases offsetting cost inflation. The Board is mindful of the global economic uncertainty out there, particularly from the ongoing tragic events in Ukraine. The group continues to have strong momentum and is well positioned to make further progress in 2022. So thank you for listening. I'm now going to hand over to Joe for his thoughts.

Thank you, Paul. A very good job indeed. Again, it's a pleasure to be here today. So thank you all for coming. I very much appreciate the interest and certainly the respect you're giving the company as in the past and probably some curiosity as to a little bit about me. So I thought I would do is to tell you a little bit about why I came to Genuit, and what I've found since I've been here in just over 2 weeks, 2 weeks and 2 days. But as I said, first, I think it's a challenging time, certainly an unsettled time in the market. It's a good time to be joining a U.K.-focused company with a long-term green strategy, which I think is perhaps even more important as we consider sort of the security and the issues around the supply of carbon-based fuels. That said, it's a great time to be joining such a good company at the same time. It was a careful decision for me that goes back several months, obviously. And it's a great next step in my 35-year-or-so industrial career, the last 6 of which I spent at Spectris, as Ron noted. And so as I was looking for opportunities, I was sizing up Genuit, and I said to myself, "Look, this is a clearly a well-respected business, right?" First as Polypipe and more recently with the shift to a sharper green strategy as Genuit. Very strong brands, obviously, well known, Polypipe, Adey, Nu-Heat, Nuaire, quite a few really interesting brands with great positions, well respected by customers. A record of growth and probability, which is always good to see. So there's a good foundation to build from. And of course, a successful record of some disciplined and highly strategic M&A., which is good to see and certainly matches my experience. I was quite pleased by the coherence of the strategic shift as Polypipe became Genuit and communicated a focused green strategy, which I think is really important because there are quite a few companies who are busily trying to improve the ESG credentials of their business. Instead, what I see here is in addition to those efforts, I think Genuit is well positioned to continue to actually advance the green agenda of the construction industry as a whole, which is really important. So our innovation is largely, as I have seen or surmised from the outside, going toward new products that actually help our customers and the end users become more green. So you see that in, for example, the focus on the decarbonization of heating. It's a brilliant time, as I said, to be doing that right now. Better climate and ventilation, which helps to create healthier and more energy-efficient environments as well. And as Paul referenced recently with the example of the Permavoid green roof solution and Smart Sync, the storm water management and mitigation of environmental risks and threats. So fundamentally interesting technologies to focus on and global challenges to face. In terms of the focus and experience that I bring, I spent most of my career strengthening leadership and culture and businesses. Because in the end, the best team does win and focusing on strategy, but more importantly, in the execution of that strategy. So that we build a strong track record of delivering on what we said we would do for our customers, our people and our investors. Focusing on that lean mindset, this is quite important and actually stretches all the way back 35-or-so years to my first forays, including experience in Japan, visiting and learning the total production system. And ever since I haven't found a business yet that can't be improved through the mindset that you can continually improve and improve the business at all levels. And of course, driving profitable growth. We love organic growth. That organic growth needs to be profitable, and I'm looking for indications that those innovations can help not only our customers but also our margins as well. And in addition, good M&A, continuing that disciplined approach that allows us to add strategic solutions to our portfolio. So to me, after discussions with Ron and the Board, I found this was really an exciting opportunity and a great business to take forward to the future. Before I advance, I wanted to share these -- a few pictures here just to drive home 1 point. This was from my recent visit to Horncastle, which some of you may have seen, but it's our main recycling plant and also is our extrusion plant for some of our largest drainage solutions. At the top, we're loading in milk bottles, Domestos containers and all. They're washed, recycled, turned into pellets, which we then use an injected mold into some of the [indiscernible] state-of-the-art drainage materials. That plant averages over 80% recycled material. And it's frankly limited primarily by regulations on the use of virgin materials. So we have experience in the group to go much beyond our 62% targets, and we'll be looking for ways to do that. So this was, you can imagine, as a new CEO, really satisfying to see that the group actually had more potential than perhaps first met the eye. If I turn to the next page. So my first impressions. I mean, the first thing I'd like to say is thank the executive team, the Board, of course. But the executive team was really ready and very helpful in my onboarding process. Most of them are here today. Thank you for that. They are working together as a group, and I'm blessed to be surrounded by the kind of talent we have. It's been a busy 2 weeks, as you could imagine. I wanted to make sure that I've been around and kicked the tires in the company before I had to come and tell you what I thought about it. So I have crisscrossed the U.K., I've visited with all 4 of our divisional management teams. I have walked through the sites, which probably the largest sites would probably account for about 60-or-so percent of our revenue, very enlightening, very satisfying. I've met probably more than 40 of our top leaders and several hundred more of our associates and have been listening to our people at all levels to really understand. And so I'm really looking forward to now engaging with the investment community and getting their perception of the business. But then getting back to the road, getting back around to the rest of our business and make sure to get a very complete idea of the culture, the people, the innovation and all of the opportunity that we have in front of us. Look, it's really reassuring though. What I've seen so far reinforces the reasons that I came, right? Our people are experienced, knowledgeable. They're passionate. They love the business we're in. They feel strongly about delivering for our customers and perhaps most impressively to a person, they all believe that this company has far more room for growth than we're able to untap today. That's always exciting when you see that in your people. So I believe there is untapped value. Some of that comes in the form of innovative solutions like the one that Paul shared today, the ability to add items to our portfolio that allow us to move further in the direction of solutions and really just the ability to innovate and invest in organic growth as well. Our long-term sustainable strategy set, I think, is truly important and differentiated, right? A lot of what we do, most of that organic growth in that Vitality, you'll see is actually in solutions that fundamentally help move the needle toward building greener homes and greener businesses. That's our part on helping. Of course, as you know, from the targets that have been set out in the Genuit well on the line of meeting, we continue to improve our business itself, too. So doing both is important, not just becoming a green company, but helping the world and our customers and the construction industry as a whole do better for our world. And of course, importantly, as I've gone around, I've had that lens of continuous improvement, that lean mindset on, and I see tremendous opportunity to improve the operation of this company. And I do see, while it's early to tell you when or how much, I do fully expect that we'll be able to be in a position to continually improve our approach and our margins. So there will be more in future sessions, of course. But I do want to let you know that I'm absolutely delighted to be here. My first 2 weeks have been very good and very reassuring. And I absolutely look forward to being able to tell you more about that journey, our long-term goals and our success in the future. So with that, I'd like to draw to a close for our presentation. We are absolutely open for questions. What I would say is, please, we do have a few microphones here. And our experts here have asked that we do use the microphones because we have 30-some-odd people on the call. And otherwise, they won't be able to answer -- hear your questions. Okay? Sure. Go ahead. You'll have to understand. I'm still remembering all the names. Jon, right?

Jon Bell, Deutsche Bank. I've got 2 actually. Look, you've had a flurry of acquisitions back in February last year. And M&A has been a key growth driver of the business over the years. I just wonder how the pipeline currently looks? And does Joe share the view that M&A will form an important part going forward? And then the second question is on Nu-Heat. I could be wrong, but I think the -- at the time of the acquisition, the business hadn't addressed the new build residential market. Has that changed? And what's been your experience so far?

Okay. I'll take the first one. During the first 2 weeks, I did a sit down with our divisional leaders as well as our Martin Gisbourne, who heads our strategy and M&A, and have assessed the fact that what has the disciplined approach that has resulted in a successful M&A in the past as a machine that continues to work. My experience, as you could probably tell, is that of successful M&A as well. And so far, I think the highlights for Genuit are certainly appropriate going forward: find businesses that fundamentally bring good strategic additions to our portfolio and will unlock future organic growth, remain disciplined about that and then execute well. So certainly nothing to argue about there. Paul, did you want to comment on Nu-Heat?

Yes. I mean, Nu-Heat, as I said, it's a great business. You're right, Jon, that wasn't absolutely the focus at the beginning, but there's no reason why they can't branch into new sectors such as residential new build. It's a highly innovative business, and there's great potentially, as you know with the future home standard for their sort of technology and the holistic solutions. So it's definitely an area of interest for us to expand in.

Sure. Go ahead, Christian. I'm sorry, I didn't see you Priyal, but go ahead, Priyal.

Shall I go first? Okay. It's Priyal Woolf here from Jefferies. I think I've just got 3 questions. So the first one, the Adey acquisition. You've obviously said it's performed ahead of expectations. I think at the time of the acquisition, you said that margins have sort of been very elevated because they've taken out a lot of operating costs due to COVID, and they were expected to regress a little bit. Is it fair to say that actually those margins have continued to go up when you say performed better than expectations? The second one is just to follow up on the M&A pipeline. You've alluded a lot to sort of heating decarbonization, taking more importance now could that be more of a focus within that M&A pipeline? Any sort of change in your focus there? And then the last question is just on that 62% target for recycled material. It sounds like you're keen to go ahead of that, and it's more inhibited by regulation. How do we move that 62% forward? Is it just discussions with regulators, et cetera? How does that pan out?

Do you want to take the first 1 on Adey?

Yes, sure. So yes, absolutely. Adey, you're absolutely right, Priyal, you remember correctly. What I will say is when we buy a business that they have the management case, we have our business case, and then we haircut it. Put it bluntly, the performance of Adey since acquisition has being much closer to their original management case. So that's what we mean by ahead of our expectations. So they've done very well. Yes, there were some movements in the overall margin up and down related to the factors you talked about. But overall, they're pretty much close to where they thought they were going to be, which is very pleasing to see. So very strong performance.

And on your question about the M&A and the potential shift toward decarbonization, I would point out, by example, Nu-Heat actually is a really good example of an acquisition that squarely target on for decarbonization because what new heat fundamentally does is brings underfloor heating solutions paired with heat pumps, right? So that's an excellent example of having already invested in decarbonization. So I don't know that it's a shift. But you could imagine that good targets that bring decarbonizing solutions would certainly be on the radar. And on the recyclate?

So exactly right. The 62% was calculated by us as being the upper limit we get to based upon current regulations. A lot of the regulations in place governing material usage are quite old, going back to the '80s and '90s. And they're quite prescriptive about what material you use. I don't so much talk about the performance of the material, but it's actually dictate you may not use recyclate. So the effort to get to 62% and beyond, particularly, is as much to do with technology as it is to do with, frankly, lobbying to get the regulations modernized. So yes, effort going forward will be in that area, too.

Okay. Christen?

Christen Hjorth from Numis. I've got 3, if that's okay. The first one, I was just hoping for a little bit more color at trading at the start of the year. You may not give the actual numbers, but any detail there would be greatly appreciated. Just a little bit more color on the price and the work on price leadership, how that works in practice. And you did mention competitors, but just any more color on competitor reactions there? And then in 2019, I think it was an 18.5% EBIT margin pro forma. Is that a reference point at all? Is that something we should think about as cost inflation normalize on a 3- to 5-year view type of thing?

I'll start on the trading and the perhaps 18% margin, and will let Matt talk on pricing.

Yes, sure. So trading, very good start to the year, frankly. So very strong demand across the board. Good volumes, et cetera, so I'm pleased about that. The price increase that we announced towards the end of last year has come into -- have started coming to effect in February, so sharp, and Matt will talk about in a minute. So we've led in the market and others are following. So I can't -- I'm -- I think it's a good start. As reference points, yes, 18.5% absolutely could be deemed to be a reference point, but I think despite the strong start, we have to be cognizant of some of the uncertainty in the market currently. So I'd be reluctant to put a number on it just yet, but absolutely as an ambition, why not?

And I'd like to sort of formally introduce Matt Pullen, our Chief Operating Officer, who started what, over 3 months ago. And I think it would be fair to say that a lot of his focus is on driving better execution across the business, including on pricing, Matt? Right?

Yes. Thanks, Joe. I suppose my background, I was previously MD of AkzoNobel in the U.K. and Ireland, and then went on to be the MD of British Gypsum for Saint-Gobain. And so my experience of managing through fairly difficult circumstances, whether it's raw materials, supply shortages or pricing inflation, I've got some good experience in that. And I think when I came into the business, the thing that was really good to see the increased focus on looking at price increase and the management of that cost input inflation and to look at that very, very frequently. It's almost continuous in the type of market we're operating in, which is so uncertain. The good thing is we've regularly reviewed pricing. Paul talked about 4 price increases during the last year in some parts of our business, the latest one that took effect in February 1. It is market-leading price increases. It's a necessary offset of the cost inflation that we're seeing across the marketplace and we're making it stick and building momentum. And that's really important. Critically, what we've been doing is looking at some of the notice periods. We've shortened them. We were moving deferrals because these things have existed in the industry for some time. You cannot operate like that in a market that is inflation that you're seeing inflation come through regularly. So they're challenging conversations, but they're sticking. We're building momentum. I set to see that coming through in our performance, as Paul has alluded to, through back end of this quarter and into quarter 2. So good performance. I think the other bit, just to note. I think it's a really important shift is the shift to actually incentivizing our senior leaders equally on EBIT margin and absolute pound notes because it is about recovering margins. And that's a really important shift in the way that our leaders behave out with our customers in the marketplace. And I think your other question was around competition. I think sometimes you can sit there saying when you got market-leading price increases, are you going to get to a point where there's bit of a tipping point or are you going to start seeing some business being eroded? All of the issues that we're seeing are the same for our competition. And broadly, they pretty much followed where we've been going with price increases. They're all feeling the same pressure. We've all got to act and pass on those cost inflations into the marketplace. So I think, at this point, the only other thing I'd say, market demand is pretty strong. And that's a good sign. Yes, there's uncertainty. But at the moment, market demand across the U.K. is pretty strong.

Okay. Thank you, Matt.

Toby Thorrington from Edison. I've got 4, I think. Three are interlinked and 1 is random. So the first one relates to financial performance in FY '21. It appears, quick stab at the numbers, that the margins in the second half improved in resi and were lower in C&I. I think I understand the reasons behind that, i.e., recovery and perhaps order book progression in the second case, but perhaps you could give your take that. Could I also ask, relatedly, what the C&I order book looks like at the beginning of the year, please? And on the same division, since you mentioned, Paul, in the presentation that in revenue terms that the company underindexes on infrastructure, is that -- does that form part of the M&A strategy? I think that's only 3 questions so far. And the fourth question was could you just -- the company engages with the national house builders broadly across the group. Could you just give us some kind of sense of where you think you are across the group with the top 10 house builders highlighting strengths? And maybe anything you can improve on, please? And that completes the voting.

Got that. Paul, if you could?

Yes. We'll run it down. Okay. Yes, I mean, there is a slight differential in the performance on the margin between the 2 segments, absolutely right. There's -- it's explained by just the factors around the decisions taken by management in those divisions that own those segments on pricing and how well they perform to getting those pricing to stick, and how well they called out inflation. And that's -- those are difficult judgment calls to make actually. The key point is that we think we've got the judgment calls right now, okay? We've learned a lot about what's happening in inflation across the board. We've put in place the price increases at the end of last year. So yes, there are differentials in performance in H2, you can't really get it. But the key point is sterling with a strong demand -- strong performance at the beginning of this year. By end of Q1 '22, we should be getting back to what looks like more normalized margins and Q2 this year back to where we should be. So I think the order book situation is extremely strong. So we come into this year across -- again, across the board and Matt contradict me, but across the board, order books are pretty much record highs. It's very strong out there.

Yes. I mean I think the ventilation or Ventilation and Climate order book was the strongest it's been at the end of January. So the demand is extremely strong. The constraint is component supply and adjusting to that and adapting and being agile to meet that demand, which the business is doing very successfully at this point.

And as for infrastructure, it's about 5% of our turnover. We actually did acquire Plura, which plays in the infrastructure space last year. It's a small business in Italy, but they operate in the rail area with their product offerings. I don't think, in fact, when it comes to M&A, we apply the same criteria around strategic fit around financial performance, and we judge each one on their merits. So -- and if there had to be an infrastructure segment, so did, and Plura was it could equally be in other segments. It depends on the merits of that particular M&A deal. And I'm not going to prejudge Joe's call on how we proceed with M&A going forward just yet, but yes. Okay. National house builders, top 10 house builders strengths. We have good exposure to the national house builders, the big players, absolutely. And I think the relationships are pretty good. people like Barretts, et cetera, via the merchant base. Yes, it's -- I think what underpins the relationship is that we have very good commercial terms and arrangements with them in terms of how we incentivize with the rebate schemes, that seems to work quite well and they are strategic partnerships and they've been around for a very long time. I don't know if you want to say more on that?

Yes, I'd probably just add to that. I mean you think about where new house build is going and the drive towards energy efficiency and more comfortable homes, Genuit Group is really well positioned with the type of solutions it's got, not just across the Polypipe businesses, across ventilation climate as well. And I think there's much more we can do to help them with that journey. And it's something that we've got to focus on as part of the opportunity, I think, that we can see over time.

Thank you. So a mic over here.

Sam Cullen from Peel Hunt. I've got I think it's 5, but 2 of which are kind of interlinked, right? So the first one is on volumes. I was just interested in your comments on the RMI market being flat versus last year. I would have thought given recent spikes in energy, costs to your products would be more attractive to people renovating their home with also the housing transaction kind of backlog coming through from last year's very elevated numbers. Is there anything you're seeing in the order book to make you more cautious on that outlook? The second one is on pricing and coming back really to Christen's question around that pro forma margin. You seem to be saying that on an underlying basis, you're offsetting price inflation on a margin basis by the end of this quarter or in Q2, correct me if I'm wrong. If I then add the mix effect from Adey from last year, which you said is performing better than you expected, why can we not kind of commit to an 18.5% margin, which is probably on a pro forma basis? Or what am I missing essentially? Or is it just caution? The second one on pricing is if we see input costs normalize over the next 9 months, what's the scope for deflation in 2023 given some of your contracts were kind of index-linked, no doubt? And the last couple, just on the overseas development, is there any investment you need there to push that business forward? And then the last one, on the balance sheet, really, if you -- at 1.2x net debt-to-EBITDA currently if we delever it half a turn broadly, by the end of next year or into next year, how should we -- if you don't do any more acquisitions, how should we think about the scope for cash returns?

Okay. Right Okay. So RMI, as I said, it's at record levels, and the CPA forecast states that it's going to not reduce markedly. It's going to stay at the elevated levels sustain by the transactional base. I like RMI because it's a profitable segment for us. And I think overall, we're pretty confident about it. And our products do fit very well and work very well with people doing RMI-type work. So I'm positive at RMI. I don't see a negative there at all at the moment. The 18.5%, yes, you'd love me to commit to 18.5%. I think that for me personally as CFO is a laudable ambition to get to, but there is still uncertainty in this market. There might be another bout of inflation, which we're going to have to deal with. So all I'll say is I get your logic. I think it's a laudable ambition to get to, but there's sufficient uncertainty at the moment. I don't want to change where we're at with the consensus just yet. And I've spoken to the other analysts this morning in I think there's a broad agreement, that's the sensible approach to do. As far as input costs, scope for deflation, I think generally speaking, and Matt help me out here, but generally speaking, we've -- what we have done contractual price increases, they are negotiated, they are contractual and they are sticky. So there's not that much scope for rapid deflation in pricing if inflation abates suddenly.

I mean I'd agree with that. The fact that we've gone through its contractual price increases, and they are sticky. I think we'll just have to look at as we travel forward. what happens in the marketplace. But at the moment, I'm seeing those signs of that inviting and saying where it is. So we'll always keep an eye on it. We've always got to be competitive. But these are contractual price increases.

And as for balance sheet, 0.5 delivery is, for me, a little ambitious, Sam. I'm more in the 0.3 territory myself. But -- so I think consensus 1.2 down to 0.9 at the end of the year is a sensible trajectory to go on if we don't do any M&A. And that's what I would expect to happen. We have, as you know, a good track record on delivering a good strong cash flow. So that's, I think, in the right ballpark of the consensus too at the moment.

And I would just come back to your point 4 question around the investment need to expand overseas. Sorry, that's okay. That's fine. I'll come back on that one. As in the past, Genuit said the top of the priority for use of cash is investment in organic growth. And the types of requests that we've seen so far for those business to grow have been well within the scope and the budget of what we can do. So we don't see any constraints there at this point. Thank you, though. Other questions? Do we have some on the line?

We have 3 from the webcast. Joe, if that's okay. I'll start with Graeme Kyle at Shore Capital Security, if that's okay with you. Regarding new product development, a, how focused is this on environmental products? B, does this structurally improve EBIT margins for the group? And c, could you provide some guidance on expected R&D spend in the next 3 years?

Yes. Okay. I mean, absolutely, the new product development, environmental design considerations are front and center of what we do. So it's products that in climate ventilation that allow homes to use less carbon, so carbon-friendly moves there. It's right across the board, a material substitution by me in to the fact that they're choosing to use a large diameter underground pipe made from a recyclate versus concrete straight where you're providing an environmental benefit. So that is front and center of NPD for us at the moment. As far as these products and the effects on margins, one of my favorite bits of analysis was done by an analyst or one of our investors where he looked at our historical vitality index performance, and he correlated it to EBITDA margin performance, and we came up with a correlation of 0.9, which I quite like. So there's a clear influence that absolutely new products do help sustain and drive profitability in the business. So I do believe in that. As far as R&D spend is over the next 3 years, it's -- the overall spend is in the single-digit millions. Could it be more? Absolutely. But on top of that, we also have a lot of capital investment as well in new product designs. So it's a significant level of spend. And at the moment, it's working. There is -- as you've seen with the vitality index, a very healthy pipeline in NPD at the current side. Certainly something I'll be looking at as well as we go forward.

Great. Second one from Stephen Rawlinson at Applied Value who asked, "Given the expected increase in the share of modular/offsite, can you expand a little on what you've learned? And what the plan is there?"

Yes. I think the learning is -- first of all, we did learn a lot, okay? It was a worthwhile venture, but I think it's just the market at the moment is a bit too nascent. It needs to develop a bit more in this country and get to the sort of scale you see in the Nordics, you see in Germany as well. So I think the issue was we, as a supplier, probably weren't yet big enough. And so it was difficult to actually gauge and work with the bigger manufacturers that are developing in this country at the moment. So it was tough for a small player to come in from scratch and build up a business that was viable in the short term or the near term or the medium term even. So we took the view. We've learned a lot, let's pull up stumps and keep an open mind about the future. I don't know, Matt, if you would build on that?

Yes, I think so. I think that off-site/modular construction market is growing. I think we struggled with building that critical mass as someone who operates and our capabilities and competencies are around manufacturing a large-scale component manufacturing, this was much more smaller scale. It wasn't really playing to our strengths and our efficiencies. And I think we've learned a lot around what not to do, but also what to do. I think there are probably other people better placed at the moment to supply into that industry. That's not to say we'll never go back to that as you see the scale increase, but it just wasn't for us at this point. Valuable earnings, as you say, around how to do things and how not to do things, which we'll take on board.

And of course, we'll continue to supply product to the people who do succeed in those markets.

Great. And then 1 more from Mark Atkinson, ATK Invest, specifically on the Nuaire air side, have you had any difficulties sourcing components? And has this led to any lost sales?

Matt, do you want to?

Yes, I suppose yes, that there have been difficulties on supply of components, whether it's printed circuit boards or other things. But we have a wide ranging sourcing policy from many different suppliers. And what's great about Nuaire is the technical know-how in the business to adapt to the different types of product that we can get in as components to complete the end products that we want to put out into the marketplace, and we've been doing that extremely well. constraint probably it's why the order books are so high, and we've got to keep meeting that demand, but we're adapting really well. We hope in time that you start to see that whole component supply stabilize, and that business will continue to progress and probably accelerate in what is a fast-growing part of the marketplace. So but we're adapting really well to those challenges. And they're challenges that everyone has, not just new air, but everyone operating in that market. And even in other sectors, you see it across many different sectors. But we're doing very well and our sourcing policy is helping us.

Any questions online?

No more questions.

Any other in the room? Okay. Well, with that then, I would just like to end by saying it's an absolute pleasure to be here. I'm really looking forward to sharing with you our results as we progress over the coming months and years. As you noted, I hope you would agree, a very pleasing set of results given all the challenges last year. And despite the fact that we find ourselves in a relatively uncertain market time, I mean I do believe from what I've seen in the last 2 weeks, and from what Paul and Matt and the team have shared, that we are well positioned to manage through that. We've reviewed this with the board, and I think their confidence is absolutely there as well. We will be focused on profitable growth and good execution and finding ways to improve that day in and day out. And we absolutely look forward to telling you more about how we'll continue to grow this fantastic story that is Genuit. So with that, I'll close and look forward to more conversations meeting all of you in turn. Thank you very much.

Thank you.

Thank you.