Genuit Group plc (GEN) Earnings Call Transcript & Summary

Good morning. Welcome. For those of you here last year, you might remember, it was actually really, really warm up here. We were all thinking about how we needed more cooling solutions. Trust me, those days are still coming even if this summer might not feel like it. Well, welcome to the Genuit Half-1 results. Really pleased to be here. And as some of you said, good job in the results today, but I have to say that it's really the work that the team has been doing over the past couple of really 18 months now that makes the story easy to tell. So let's get on with it. We have been focused on executing our strategy to deliver operational progress and what I think you'd all agree, are extremely challenging market conditions. Sorry, you can go ahead to the first slide, if you like. I'll try to queue as we go through. So as I said, exiting our strategy is the way you deliver operating progress, especially when the markets are challenging. As a result of this, we've delivered underlying operating profit, which is 50 basis points up on the same period last year. This is driven largely by the self-help measures that we've been undertaking as well as a very balanced approach to price and cost management to the market. This is despite revenue being down 4.2% versus the same time last year and importantly, volume down 14.5% underlying. This is, we believe, in line with market conditions, but clearly, focuses the mind on the self-help and the work that we need to do internally to manage costs. You'll recall at the Capital Markets event last autumn that we reorganized the business into three business units. So we'll talk about our results and our strategic progress in this sense. Sustainable Building Solutions continued its solid performance, delivering operating profit that was 220 basis points up on same period last year despite being nearly 11% down in revenue. A strong focus on cost managed by a talented leadership team there has delivered that result. Water Management Solutions, importantly, as I know we've all been watching, was up 180 basis points and well on the way to getting back to the 15% profitability level, which we clearly set at the Capital Markets Day. Climate Management Solutions perhaps is sort of the most complex story with revenues up nearly 9%, although this is due to an easier comp last half as the last -- first half of last year, we had the impact of the cyber event. We invested heavily in that business to bring it up to speed as we integrate it as a business unit -- as the newest business unit, really within the company. We made strong investments in IT and cybersecurity. And this onetime step-up in overhead costs did contribute together with the remaining soft boiler market conditions to actually hit 400 basis point decline in operating margins as reported. I would note, however, that underlying this from an operating standpoint, they improved sequentially from the second half of last year to the first half of this year. And we believe that they've clearly turned the corner and that the momentum will continue. Net debt reduced from 1.5 turns last times coverage last year to 1.3. And we believe we're on track to hit the 1 turn largely, which is expected by the end of this year, which is important in this time of higher interest rates to be focused on paying down debt and positioning ourselves well for M&A in the future when the time is right. Accordingly, we confirmed a 4.1p -- plan to pay a 4.1p dividend which is the same as last year, but I think helps you understand our confidence in our progress. As such, you'll recall that at the spring trading update, we actually guided up expectations for the full year, and we now expect to be at the top end of those upgraded expectations. All that's fine, but good progress on our sustainable solution for growth strategy, and deploying that throughout the business is even more important. Our simplified business model is helping us to realize synergy costs as well as group-wide benefits of scale. An example of this more integrated approach to selling is the cross-selling that we see now within Climate Management Solutions as our Nuaire direct solution -- sorry, our Nu-Heat direct solution channel, which provides renewable heating solutions to customers. They are now integrating our 80 filters and our Nuaire MVHR solutions into their product offering as they begin to propose solutions to customers and are starting to see sales from that. It's very encouraging. The Genuit business system deployment is a cornerstone of our strategy, and we now have two lean transformation sites underway, Adey, which we started at the end of last year and Polypipe Building Products in Doncaster, which we started in the first half and are already making rapid improvements. Restructuring and purchasing savings have been very important to our results and have actually delivered GBP 3.7 million of savings in the half. You may recall that in the fall of last year -- sorry, the autumn of last year, we did discuss a GBP 6 million annualized savings target from the initiatives we've already announced, so we're actually outperforming that. We've identified more projects, and more annualized improvements will come. At the same time, we've been investing in higher growth. We've been strengthening our talent, deepening our bench, making sure that everybody can tie their goals to our purpose and our strategy as well as strengthening diversity and inclusion and training the awareness across the group in the first half. We spent a lot of time investing in successful new product launches, and I'll share some results of some of those to come, but they include our MRXBOX Hybrid Cooling Solution, SubTerra CT and the Polypipe Advantage product line. Importantly, we remain focused on maintaining our leadership position as the lowest carbon choice for our customers. Speaking of carbon, our path to net 0 is important and core to our actual strategy. So we've been driving good progress on our operating sustainability as we maintain that goal to be the lowest carbon choice supplier. Our recycled materials last half were 48.4% of our total polymer inputs as everything that we buy in terms of plastics. Just up from the end of last year, and while we've had to make significant investments in projects coming online, we do now see a clear path to that 62% by 2025, which is also part of our long-term incentives. The group's carbon intensity on a rolling 12-month basis is something we're now focused on much more than in the past. It was broadly in line with the half year. And that's important despite the lower volume conditions. So it's quite a good accomplishment by the team. Sales of new products were just around the 25% -- just under the 25% level. As we said, that will change a bit as older products roll off and newer products come in, but that continued investment is really important, as we maintain that target. Again, we'll share some more of those as we come up. 3.2% of our group was actually -- of our group team were actually employed in work and learn programs. And we've actually strengthened our programs there in each business unit to ensure that we can hit that 5% target. Quite ambitious but quite important, and I think it's a really fantastic investment in our people. So with that overview, let me turn this over to Paul, who can walk through the results in some more details. Paul, over to you.

Okay. Thank you, Joe. So if we turn to Slide, I think it's 8, I'll take you through the financial results. The group achieved an underlying operating profit or EBIT of GBP 47 million and an operating margin of 15.4%. That's up 50 basis points on the same period last year. I'm particularly pleased with this outturn in profitability as we experienced the first half of volume decline, as Joe said, of some 14.5%, which is in line with the overall market. This was achieved primarily through balanced cost management and pricing execution, in other words, self-help. Despite borrowing levels sharply lower at GBP 160 million, last year it was GBP 218 million. Borrowing costs were GBP 6.7 million, up 137% from last year's GBP 2.8 million, and this was driven by an increase in base rates, particularly from the second half of 2022. We have GBP 25 million worth of private placement loan notes that we took out in August '22 at what looked like now very preferential rates of just over 4%. And this does act as something of a mitigation. We're now guiding that 2023's financing costs will be in the range of GBP 14 million. Underlying basic earnings per share is down 11.4%. And interim dividend per share, as Joe said, is unchanged since last year at 4.1p per share. Now I hope Slide 9 will make things a little bit clearer, when it comes to revenue and underlying operating profit. The waterfall chart many of you should be familiar with. Top row is showing the walk-through of revenue from last year to this. And the bottom row is underlying operating profit or EBIT. And if I go from left to right on the columns and just talk you through them. Overall, revenue was down 4.2% with balanced pricing execution being offset by a volume decline of over 14%. We had a small element of continued deliberate volume decisions to further improve the quality of our portfolio, but I anticipate that this has largely played out as a significant factor in our future results. Pricing increases for the half were perhaps more moderate than they have been in recent times but had continued to Q2. As inflationary pressures, we have experienced, particularly in raw materials have started to abate. The drop-through to operating profit from volume and price is therefore close to 0 rather than the buoyant larger drop-throughs we have seen last year. Operating margin improvement has come through self-help measures, and these can be clearly illustrated here at GBP 3.7 million. As we announced in November '22, we have taken additional measures to simplify the business by taking out layers and reviewing spans of control as well as better leveraging our scale for procurement benefits. Towards the end of the first half of 2023, we focused on operating footprint and began to close smaller sites. So far, three sites have been -- have announced closures, and we are continuing our review. We've seen some cost increases, though, and I've draw them out here. There's no one dominant factor driving this increase, but it consists of such elements of loss of some profit disposals enjoyed last year, a small amount of foreign exchange and the cost of upskilling. Our more recently enhanced investment program has driven an uptick in depreciation, but I expect this to stabilize into next year. Now if we move to the next slide, Slide 10. And we just look at our performance by business units, starting with Sustainable Business Solutions or -- Building Solutions, sorry, or SBS. This has been a particularly well-managed business unit, where the team there have managed to offset volume declines and improve the quality of portfolio with some planned exits and to get a grip on their cost base. The result is a 220-basis point improvement in operating margin despite a not insignificant market-driven volume headwind. They have disposed of a site in Glasgow and exited the warehouse site in Doncaster. And they are well on the way with the GBS or Genuit Business System rollout. As for Water Management Solutions, or WMS on the next slide. Trading in the half year was relatively strong, particularly in the first quarter, outperforming the market somewhat in this case. Primarily, though, they are well -- their own well-executed self-help measures and a focus on portfolio improvement, they also delivered a substantial improvement in operating margin to 10%, that's up 180 basis points from last year. On the next slide, Slide 12. You can see the outturn for Climate Management Solutions, or CMS. This was the part of the business that suffered the isolated cyber instant last year, and the group has invested heavily to bring this business unit up to group standards in this regard. The boiler market remains subdued, but demand is stored and will come back once the cost-of-living crisis starts to ease more. This is a quality business and once the market starts to come back and management deliver on self-help margins, margins should come back sharply. And as JV noted, there has been an underlying improvement in the business since the second half of last year. Slide 13 shows the breakdown of nonunderlying items. I think it's worth emphasizing that we do include amortization of intangibles in this. And if you exclude that, the total comes to a little over GBP 3 million. The total is GBP 10.6 million. Most components of nonunderlying items are similar to the first half of 2022. The exceptions being increased costs associated with all the group's recent restructuring activity and a profit and disposal of the Glasgow site that we've had to include into exceptionals. Restructuring costs will diminish after this year as we draw the matter to a close after optimizing efficiencies in the current year. At the year-end, you will recall that we had a GBP 12 million impairment of acquired goodwill driven by the forecast performance of Adey. We conducted a review at the half year in conjunction with the auditors and concluded that no further impairments of acquired goodwill is necessary. But we'll keep this under constant review going forward. Now for the next slide and cash flows and just a couple of highlights. Operating cash flow is sharply up on last year's first-half performance with an improved conversion rate. With similar levels of capital investments, we have seen the fruits of hard work in reducing inventory levels, partly delivered through the generic business system. And working capital is GBP 3 million or 5% lower than last June's. We anticipate that full year capital expenditure will be under GBP 40 million. Despite the uptick in financing costs, net cash flow delivery was stronger than last year with an outflow down to GBP 11.5 million, albeit there were no acquisitions in this year's period. Leverage at the end of June, as Joe has noted, was 1.3x pro forma EBITDA compared to last year's last June's 1.5x, and we are on track to deliver leverage at the end of this year down to close to 1x. As for the banking facilities shown on the next slide, 15. I already mentioned the gross lending at the end of the period was substantially down on 2022 -- June '22 at GBP 160 million. Given the increase in base borrowing rates, the team is focused on cash flow forecasting more acutely to bring down the level of almost noninterest earning cash or the float. We said at the year-end announcement that we would, "Work harder to carry a smaller cash balance to help mitigate costs." At the 31st of December 2022, this was GBP 50 million. And here, you can see it's just GBP 28 million. The upshot of all this is the balance sheet is even stronger, and we remain well within our covenants. My final slide repeats the points I've made during the last few minutes with respect to technical guidance. CapEx is forecast to be below GBP 40 million, and I expect cash flow conversion to be in the region of 70%, making further progress towards our midterm target of 90%. Net financing costs will be higher at GBP 14 million, although I hope to mitigate this slightly with lower levels of cash and focus on debt reduction for this year. The underlying effective tax rate will be around 23%, and I expect leverage will all things being equal to be around 1x at the end of the year. That's enough for me for now. So thank you. Back to Joe.

Thank you, Paul. So turning now to the group strategy, the next page. You all recognize this slide largely driven -- derived from our Capital Markets Day. As we embed our sustainable solutions for growth strategy within the Genuit Group. There are four key pillars of that strategy. One is focusing on growth, driven by climate-driven market adaptation -- sorry, climate mitigation and climate adaptation market themes. In addition to organic growth focus, which we'll talk more about, we remain open to and we'll be actively looking for good solid acquisitions, which can help turbocharge that growth. In terms of sustainability, we remain focused on being the lowest carbon choice solution provider. And we continue to invest in that accordingly. We are embedding the Genuit business system, the lean principles, that continuous improvement mindset across the entire business, unleashing the full potential of our 3,000-plus employees, so that everybody comes to work thinking about how we can make this in a better place, produce ways [ and ] actually invest in our future. And it'd be very important to focus on the best team possible, because I do believe that the best team wins and investing in talent and recruiting, promoting and developing the best talent and then, building the kind of place where everybody wants to come to work is truly in our best interest. The one thing that is different on this slide actually results from part of that group of people. In fact, it's our Genuit leadership team, our roughly top 70 leaders across the business. We have a group that's been working together now, a subgroup of that team on refining and improving our culture and purpose. That culture work stream team actually went and rethought our purpose, because we felt that we needed to make the intrinsic purpose of the Genuit Group extrinsic. And I'm pleased to say that we've adopted a new purpose that is together, we create sustainable living. This was, again, came from our people and has been incredibly well received in the group, and I think helps everybody better align with what it is that we come in to do every day at work. So if I go to the next page, let me touch quickly on the strategic progress for each of those business units. Starting with Climate Management Solutions. You know we have the highest organic growth expectations for this platform. We've strengthened the leadership team of this group. We've -- in our Nuaire business, they have a new managing director with great lean operating experience, a new commercial leader with industry and best-in-class sales experience. We've actually cross-promoted somebody into the finance director position for this business unit and recruited an absolutely top shelf Human Resources Officer, People Person for that business. They have -- that team has actually led their Strategy Day, and they're focused on five key priorities that they're exiting as part of their strategy deployment to ensure that they deliver on their midterm and long-term ambitions for growth. We mentioned earlier that our Surestop business, a small, highly profitable, very focused and innovative business based in Birmingham is now being consolidated into our Adey site [Indiscernible]. This is a good example of being able to actually leverage the capabilities of the Adey business more to benefit a previous acquisition. And it's the type of integration of acquisitions that you should expect more from us in the future. We're actively deploying lean across this entire business unit as Adey was the first site to enjoy the exposure and the benefits of the Genuit Business System beginning from last autumn. The results that we showed here with about 50% reduction in operating space and about a 25% improvement productivity demonstrated in two cells now are being rolled out to their 10 assembly cells through the remainder of this year. And you can easily see how these will begin to underpin financial improvements in the future. Of course, importantly, the Genuit Business System is, first and foremost, about delighting our customers and eliminating any waste on opportunity to create value for our customers in the process. Moving on to Water Management. This business, as I said, had a very nice result of 180 basis points improvement which was key to them as they know they're on the march to get back to the 15% level they've been at in the past and beyond. They did continue their geographic expansion, particularly in the Middle East. We launched the SubTerra CT product line, which is targeted toward the U.S. markets, more on that in a couple of slides. And we've increased the specification focus in this business with a broader range of products. And this has predictably, although pleasingly, resulted in more quotations and more orders that involve multiple products as we move more from a product provider to a solution provider. There are significant synergies to be had in this business. And there are plans in place, and we'll share more of those in due course as we're able to announce those. I turn to Sustainable Building Solutions. Here, too, we strengthened the leadership team particularly with best-in-class commercial and operations leadership in our core business. And as Paul noted earlier, this business has been executing very, very well. They have a solution-based sales strategy that they're also advancing. Their focus on working together with the homebuilders as they choose the solutions to meet the future home standard. They've been strengthening their modern methods of construction offering with Polypipe Advantage, and they've launched the second Lean Lighthouse in Doncaster and have made really good progress. So far, they've actually reached a record low of past due orders and have seen significant and sustained improvements in on-time delivery that's customer service, which is really important in this business. Their focus going forward is very much on rationalization. Two sites have already been announced on increasing their recycling content, working to catch up with WMS and exciting series of product launches, which will be coming in the second half that have already been the subject of significant investment on our part. If I turn the page to just recap some of the key points of the Genuit Business System. As you know, this is something that we're embedding into everything we do. We have a significant number of associates who have been participating in Kaizens and getting training as we go through this. This really becomes the flywheel for the business that unlocks then realized synergy within our existing business and helps to more quickly integrate acquisitions going forward and realize the synergies of those. We're launching our third Lighthouse site in the second half of this year. We're actually doing the preparation work for that. That will be at our Horncastle facility in Lincolnshire. And it's brilliant to see the energy and the passion of our people and then just share enthusiasm they share for this process. They realize that this is a great way to make the business they love even more efficient and more productive for our customers. Turning to the next page. This is a slide I'm particularly proud of. And it just underpins the fact that innovation in product development has to be at the heart of organic growth. So here, top to bottom, what you see on the slide, I know the pictures are small in there, but happy to show you more as we go forward. Those of you at the Capital Markets Day saw a demonstration of our MRXBOX Hybrid Cooling Solution, which we had just launched. This is an incremental cooling solution, which helps lower the temperature in flats and houses during those hottest days, which were expected to have many, many more in the U.K. than we've ever had before. Pleasingly, in its first half year, we've taken over GBP 1.7 million of orders, and the demand for this product line is proving to be very strong. Second, we launched a 100% recycled body SubTerra CT. This is actually an underground ducting chamber solution, which is used as part of the fiber WiFi rollout. In this case, the initial launch partner was in the United States, there's significant investment included in the Inflation Reduction Act, which I think we all know is really an infrastructure bill. And what we're seeing already is over GBP 5 million of orders in the first half alone, and again, this will help march us toward our 62% short-term recycling target. Great product in a great market and driving organic growth outside the U.K. as well. Finally, Polypipe Advantage, which we actually launched probably 2 years ago, really started to grow last year. And we've invested also in both, our Genuit Business System, applying those tools to the production facilities, so we can start on lead times as well as strengthening the team and the marketing approach for that business. Orders in that business are up 29% this year over same period last year as well. Just to kind of recap our pathway to shareholder value creation on the last slide -- not the last slide, but the last slide of this section. As you remember, we said that our sustainable growth and free cash flow is really going to come from three key elements. One is outperforming the market through the cycle by 2% to 4%. New product development and share gains through better customer service are key to achieving that. And I think you can see how the efforts we're putting in place should lead to that. Operating margin progress is important, and the improvement we saw this half is a good start, and we see progress in all of our business units. And as I said earlier, even Climate Management Solutions, the underlying operating progress is improvement. So we're quite confident in hitting our 20% target in the midterm. In cash conversion, as Paul noted, is nearly twice what it was this half last year. Good attention to the basics and fundamentals of the business to managing inventory better to managing our customer flow better and just better cash management and focus overall should help us meet that 90% cash conversion target. Where we continue to invest in growth. I've shown you examples of [ data innovation ], the efficiency gains and sustainability that we invest in. While we didn't make any acquisitions in the half, we've actually been enriching our funnel, with a significant number of targets identified in both, our Climate Management and Water Management businesses. We've kept our stable dividend policy, and our funding diversity has proven to be a benefit. All in all, we are -- intend to hit those long-term outcomes of 15%-plus return on capital employed, our 2.5x dividend cover and using our balance sheet, getting down toward the lower end of that 1x to 2x range now, but to having ready the fire power, when we come up with good targeted, highly strategic acquisitions. So I close sort of the outlook. In summary, our 2023 profit, we now expect to be at the top end of the expectations which we guided up in the trading update a few months ago. The Half-1 performance is better than management expectations, largely through self-help, simplification, purchasing wins and some early GBS wins, all of which played a role in delivering this result. So as I said earlier, I'm standing here to tell you the result of a team that worked extremely hard in the first half. The market remains challenging. The industry outlook has been lowered since the beginning of this year. And quite frankly, we don't see scope for much improvement in 2023. However, our group resilience and our focus on factors that we can control delivered improvements with continued scope to outperform. Climate Management Solutions, importantly, should improve eventually as pent-up boiler and heating system demand returns with consumer confidence. But the strong midterm tailwinds remain intact. Increased demand for more efficient heating and cooling solutions and ventilation solutions increased need for more resilient stormwater management and increased focus on lower-carbon building material solutions through the purchasing process of our customers. The group's self-help momentum increases our confidence in delivering performance at the top end of our current expectations. That's all I wanted to say about results, but I think I'd be remiss if I didn't also recognize that this is Paul's last results event with us. I want to personally thank Paul for his incredible contributions over the last 18 months. He's been a good friend, gave me great guidance and confidence in this process as I've stepped up to take the reins here at Genuit. And I think you all know that we'll miss his contributions immensely. We wish him well as he heads on. And I'd also add that our CFO search process is well in hand, and you should be seeing some updates from this in the very near term. So please join me and do thank Paul for all his hard work. Thank you, Paul. With that, I think we're good for questions. I'll sit down here, so I can write all the tough ones down in my low chair. Should we start with Christen here?

Christen Hjorth from Numis. Three for me, if that's okay. First one for Joe, you mentioned and you touched on culture, but just be interested in a little bit more color on how things are going there. Obviously, a significant change in the approach of the group, what you've seen in terms of staff turnover, et cetera, and sort of getting everyone along on that journey. The second one, maybe for Paul, just what guidance means and implies for H2 in terms of how you think volumes and price might look. Obviously, comps are part of the story in terms of year-on-year growth as well. And then just finally, just on cost inflation and in some cases, deflation, and I suppose the confidence in holding price as we look forward to the remainder of this year and perhaps into 2024 as well.

I'll take the first one. I think the other two are for you, right? We want to make sure that you have good questions to go out on, right? So I'll take culture first. That's right. You have several more. You come back in the queue, right? So on culture, Christen, it's really important. The company is only as good as its people, right? And strengthening culture is easy to say and quite frankly, hard to do. One of the important ways to measure this, I think, is when you look at the strength of the leadership team. I mentioned the Genuit leadership team, which is roughly the top 70 leaders across the entire business. That team is now working together as a group, and we've significantly strengthened that team. We've been able to recruit and attract some really great talent as the purpose and strategy of the business is quite clear. We've promoted people from within. And frankly, we have some people on the team, some leaders who are just much more energized by the clear strategy and the clear focus on continuous improvement across the business. Building a high-performance culture takes time. And we're 18 months into what's probably a several year journey to really have that flywheel going. But we're seeing the right energy and momentum in the business. And I can't -- I know it might seem small to have updated our purpose statement, but having a clear purpose that everybody can personally resonate with is absolutely core to a strong culture. You asked about turnover. I mean look, in these markets, I mean, it is a highly competitive job environment still, which is one of the things that I think bodes relatively well through this relatively weak economic time. So clearly, some people will decide that this culture isn't for them. That's okay. But I'm buoyed by the fact that we're seeing the kind of talent we need, really happy to come and join this journey with us. So I hope that gives you a bit more color. Over to you.

Yes. So first question, what does guidance mean for the second half, particularly in notes about volume and price? I think just reflecting on the first half, when we did the AGM trading update, we talked about volumes being down around about 10%, 11%. And obviously, for the first half, 14.5%. So math tells you that the Q2 volumes were down a bit more and in line with market. What we're seeing, as we speak, is things are pretty stable, okay? The teams are performing well, but we're not seeing, I don't think any further deterioration from what we've seen in Q2. So that's one element. And on pricing, well, pricing, as we said, was balanced and well executed. And obviously, we'll spend the carried on into Q2. And we'll expect that benefit to roll forward, obviously into the second half. So I think we're well set. The reason why the profit is where we're at is because it's a bit of caution because in H2, we still have to execute quite a few things on the self-help side of things. So we talked about the start to the footprint review, for example, where three site closures have been announced. And further reviews will be conducted. And in there is a lot of effort to drive value benefits due to this rollout, et cetera. So a bit of caution there, but that's the reason why we've come to the profit figure, we've come to, if that makes sense. As far as cost inflation is concerned, yes, I'm hoping that going forward, as an ongoing shareholder of Genuit that we'll see, hopefully, that extreme inflation in the rearview mirror as an issue. Just to paint a better picture, PVC, which is our largest single raw material category, that went up to extremely high levels, sort of GBP 1,400 a tonne towards the end of last year. It has come off somewhat, but off a very, very high peak. So inflation has mitigated somewhat, but it's still very expensive. But I think going forward, we will hold price largely that obviously, conversations are interesting in some places. We will hold price largely. But I think going forward, there'll be some more moderation in those price increases as inflation starts to come off, more normality coming back into the equation, I think. Is that okay?

Jon Bell from Deutsche Bank. I've got two. The first one is, can you talk a little about labor availability and pay awards quite topical today, of course, given the jobs report? And the second one is on M&A. It doesn't feel like you're ready for a big deal, but curious about scope for bolt-ons. You've said that the funnel has got bigger, particularly in climate and water, any extra color you could give us there?

Look, in terms of labor availability, I mean, like I said, while for the macro content -- sort of context, having a tighter job market is probably bodes well, especially when you think about supporting sort of the housing market long term. It's a key difference from where we were now versus, say, the great financial crisis, where unemployment led to quite a collapse in housing market. So on the one hand, that's a good thing for us. We -- what I would say is, clearly, it's a competitive job market still. And that's a good thing in a lot of ways, because it does mean that those of us who have a more compelling value proposition and a better strategy and a more clear purpose, I think, can hold up well. I would say that for us, labor availability isn't an issue right now. Broadly speaking, we're able to overcome that with the investments we've made in our human resources and talent teams. And in terms of wage inflation, look, I mean, we -- I think we got through that well last year. We gave people a good graduated increase that received well, and we'll take a similar view to make sure that we're competitive this year. In terms of M&A, so in terms of color on the process, I mean, I think the right way to do M&A is to start with your strategy, right? Look at what each business unit needs to fulfill and expand its solution portfolio strategically. And then we've been actually working through a long list of potential companies that we thought would be great to join the Genuit team. So by building up that funnel, we'll actually have more companies in the hopper and therefore, more options at any given time. We still see it as a very target-rich environment in that sense. So there's plenty of potentials and while we didn't do anything in this half, obviously, getting the debt leverage down to where we'd like to be, means that we'll have plenty of fire power when the right deals come along. So we're not concerned about the long-term scope for good bolt-on acquisitions. And yes, I think that we don't see anything massive right around the corner. But we're very active, and we have been active in processes already.

Sam Cullen from Peel Hunt. I've got three, I think. Can we explore maybe the gross margin performance in the period? And you've given a bit of color on Slide 9, I think it is, but can we explore maybe a bit more sort of the pure sort of price versus cost dynamic that you saw in the first half? And then the portion that you think was delivered via the various changes you've made to production lines, for example? Secondly, your comments around kind of further business consolidation and site consolidation. Should we think about more sort of exceptional property profits coming through in the short or medium term? And then the last one is one for you, I guess, Joe, in terms of your comments around solutions relative to product supplier. How much of the stuff you're selling at the moment, would you classify as a solution rather than a product? And what does kind of good look like in the medium term for solutions sales relative to product sales?

You want to take the first two, and then I'll take the last one?

Sure. Okay. So I think -- so overall, just to recapitulate slightly. On the volume performance, there was a lower year-on-year performing performance versus '22, okay? Probably high teens percent reduction, okay? And that we think that was in line with the market. So that's really clear. I think the -- and there was an additional [ smaller, ] which we showed on that waterfall chain. Obviously, deliberate decisions still for us to come out of lower quality, lower profitable business. And as I said in my [indiscernible], I think that story line is probably coming to an end. We've done a lot of that clearing out of the tables, and I think you can put that to one side going forward, largely, okay? And then on the pricing side, we -- I think that we've been very successful in getting the prices through. We have all the way through the inflation period led on price increases by and large, in the market that hasn't always been the case this year so far. So others have led in places. So that's good to see actually. There's a bit of that dynamic in place out there. And by and large, those -- the execution of price increases has been successful, and they have stuck, okay? It has been a more interesting period in pricing discussions. I have to say with customers because, of course, they see what's happening in inflation, so they're very alive to the fact that pricing perhaps can't be to the level it has been in the past, and that's only natural. But so far, so good. The volume side of the equation is pretty stable as we speak, and the pricing side is pretty much stuck. So I've got some confidence there, okay? In terms of the exceptionals, as you saw for the first half GBP 10.6 million, I mean, GBP 7 million of which is amortization, so it's GBP 3 million, but you've got the GBP 4 million profit on disposal there. That was a very nice thing to have. I did ask the auditors once, whether I can put it into underlying, and they said no, but you've got to ask. I can't promise that we're going to have such a large [ process ] on disposal going forward. What I will say is that the process is very well executed. So we've got a very experienced team in terms of property and disposal like that. So watch this space. I can't promise that.

Yes. I think we've been -- I'll answer the last question, and we'll keep coming [indiscernible]. Yes. No, clearly, there's more scope for footprint work to come. On the solutions, today, we don't -- we need to track that better going forward. I would estimate that it's clearly less than 20% of group sales today. Exactly what I don't have a precise number for you. But I'll give you a couple of examples of where we're picking it up in each of the businesses. I mentioned Climate Management Solutions. We're wrapping together all the products required for a future home solution or a retrofit energy transition project such as Nuaire delivers is a really good example of that, and that's clearly growing. And Water Management Solutions, a lot of it is about moving upstream to the specification phase to work with the engineering design and contract companies on either a Bluegreen roof or a complete stormwater management solution and then being able to pull through the complete range of products, which were we're heavily focused on and have invested a lot in terms of the capability to do that. And in Sustainable Building Solutions, really two examples. One would be advantage, which is sold and designed as a complete solution and delivered preassembled as part of the offsite construction approach. And we're also working on pilots with some of the house builders around sort of kitting and figuring out how we can deliver packages of products that are actually ready to fit in each of their houses. So early days, but these are the kinds of solutions we have to work closely with our customers on to drive that growth.

Just a couple of questions, I think, for me with a couple of subs to it. On GBS, you seem to have been pleasantly surprised by the benefits which you have accrued so far, perhaps you can share with us what sort of areas they have been. Can you also update us on the roadmap for the full execution of that program, including whether there will be any additional external costs associated? That's the first question. And secondly, on recyclate volumes, even if volumes stay the same, you're effectively suggesting there's going to be a 25% uplift in your requirement for recyclate material. Obviously, more than that if the underlying volumes go up. Can you give us some assurances, tell us what work you've been doing on securing those additional volumes, please?

Sure. I guess I can take those. So in terms of the Genuit Business System, so the roadmap essentially is to start by making sure that in each of the key lighthouse sites, we call them that way, because we focus our efforts on sort of a front-to-back transformation and getting that cultural adoption there. And we've identified three sites, one in each of the business units, right, so that there's a clear example of what good looks like in each of those business units. Like I said, the third one is starting. And we were clear that we were getting some outside help, as you said, from Lean Focus. That's always the most intense in the beginning, but tapers off as we've recruited, promoted and engaged people inside the business who want to become GBS Continuous Improvement Leaders. So that's the first key step. The second step is then within each of these businesses to see the pull as the other businesses with -- there are sites in that business unit are enthused by the early results. So a good example here would be at Nuaire where the GBS launch actually, the Lighthouse started at Adey. But as that business unit starts to work together, and Adey has shown the productivity and the delivery benefits that they can get from their assembly cells. Nuaire actually started as well, and they've actually started to cross-pollinate between those businesses, and they're now putting in place daily management and problem solving techniques. And together with the Managing Director, has got a strong lean background as well that they're now rolling that out. So broadly speaking, it takes a couple of years really to see that sort of momentum to the point where you can't undo it, right, and to be fully embedded but that's kind of the path that we're on. And I'm pleased with where we are. But look, there's a lot more to come and more results to follow. In terms of recycling volumes, that's right. I mean with constant volumes, we'd have to purchase roughly 25% more. It's an interesting market. I guess two things that are really important to remember. One is we currently recycle probably around 10% of the post-consumer plastic in the United Kingdom. So we need to partner with the trash and recycling providers to make sure that we've got a constant stream. We've upgraded the capacity and capability of our own recycling plant. And so far, we've been able to purchase what we need. So it's an evolving market, but clearly, it's a market that needs to mature and expand at pace as well. So no reason to think that we're going to run in trouble at this point, but we'll keep investing to make sure, right?

Priyal Woolf from Jefferies. I've got two questions. So the first one is just on cross-selling. You mentioned in CMS during the presentation. It sounds like a sensible and I suppose, fairly obvious strategy given the broad range of products you've got within the portfolio. Is the timing of the rollout of that cross-selling in line with what you expected, or were there hurdles along the way? And then just how much more scope is there for cross-selling going forward? I know you gave some examples of solutions in the other divisions. Are those already rolled out, or is that yet to be done? And then the second question is just in terms of your comment on confidence on hitting the targets in the midterm. Could you just give us a tighter timeline on what midterm means given that the targets over 20%, and we're now at 15.4%?

I like the second question. I like the first question, too, to be clear. On cross-selling, let's start there. I'm glad it's an obvious approach. It seemed like a really logical place for us to start as well. And we knew that getting Adey filters into the Nu-Heat sales channel was an easy win. And that was already done, and we've seen benefits from that. I mean, relatively small because Nu-Heat itself is one of our smaller businesses. But what was really pleasing was the willingness of the teams and of the customers to begin embracing mechanical ventilation heat recovery as part of that solution. That's actually probably come a bit earlier to begin. It's still early, because it's more complex part of the sale. They literally have to redo the engineering calculations for the solution and include MVHR as part of that balance. So it's a bit more sophisticated, but that's a really talented team that's embraced that. So I'd say that's, if anything, moving a bit ahead. What I would say is that by and large, a lot of the solutions [ selling ] we're talking about, the benefits are still to come. So it's not like we've tapped out and it's embedded in the results so far. There's much more to come ahead. In terms of your second question, a lot of people have said, what do you mean by midterm? And I want to stick by what we said at the Capital Markets Day, that a lot of people sort of when you think about that, you think, well, that's probably a 3- to 5-year timeframe, right? And whether it's sooner or later, has a lot to do with what happens with the market, right? We'll get there no matter what. But obviously, a bit of market recovery sort of in '24 or '25 would certainly be welcomed and would help us get there a bit sooner. But we're sticking with those targets. I hope that's a good enough non-answer for you.

Manfredi from Morgan Stanley. Just a quick follow-up on the margin question. How much do you think of improvement from here will be driven from your self-help plans versus market recovery? And in terms of footprint optimization, you said process under review, and you keep reviewing different business units. When should we expect further optimization measures? Will it be something imminent such as H2? Or will it be more focused towards 2024 and onwards?

You want to take, or I take?

Go ahead on the first one. I'll answer the second one, how's that?

Okay. Yes. Self-help versus market recovery. Yes, I think you've actually highlighted a very important point, which is that when we had the Capital Markets Day 2022, we talked about those medium-term targets of 20% operating margin. There is operating leverage component to that. So it's not insubstantial component, okay? But it's just one part of all the other things that we can do. Now I'm not going to create hostages to fortune for my colleagues in the future by giving you a pie chart of exactly where that is. But certainly, it is a component of that margin recovery. I think the other thing I will say, and I've said this to many of the analysts already in private conversation is when we stood up on that stage in November 2022 and talked about a 20% operating margin, medium-term target here, there is a spreadsheet, okay, behind that number, and it doesn't say 19%. So we've got very, very clear plans about how to get to that number and a pretty clear understanding of how long it's going to take and what effort is needed. And I think what I will say is the stuff that's already been delivered in this first half since November '22 in terms of the simplification side of things in terms of the work and the quality of the portfolio, all that does bode well for those plans, I think, so far.

Manfredi, I think the only thing I would add to that is that the one thing that we aren't expecting is a big piece of margins in the second half is market recovery. I think we're pretty clear. We're not really expecting or counting on that. So as Paul said, it's a mix of the other factors. In terms of footprint review, look, I think you all appreciate. We can't talk about projects before we've actually taken the steps and announce them to our people, right? But I'll just highlight a couple of things I've said, which I think paints the picture of the time scale. One is that there's a lot of ongoing work around evaluating our footprint in several of the businesses, and we've announced three sites so far. So, is there more to come? Yes, there clearly is more to come. In terms of timing, the other thing that we've said is we expect our exceptional and restructuring costs to be significantly less or largely completed this year, and therefore, significantly less going into next year, which implies obviously that a good part of it needs to be announced this year. So I hope that's a good enough answer to your timeframe. We're trying to get this done. I guess the last thing I would say is, when the market is down, it's a good time to do this work. When the market comes back, we want to be fully focused on outperforming.

Clyde Lewis with Peel Hunt. Three, if I may. A couple of weeks ago, we had the revised forecast from the CPA out. There weren't major changes for '23 or '24, but going slightly lower, but they did revise down '25 a fair bit. And listening to your comment this morning, obviously, [indiscernible] too drawn on where you think the market is going. But when you look at those CPA forecasts in terms of the mix around new housing, renovation, infrastructure, some of your key end markets and you look at the breakdown there, what is your view on those sort of forecasts that the CPA have got within that? And the second one was on boiler replacement. You sort of flagged it very clearly as an issue in the outlook statement. It'd be interesting around your thoughts of how you think it comes back? And how much you think the debate around swapping from gas to air source heat pumps is having maybe in terms of that boiler replacement market. So it's not -- maybe not just consumer confidence and affordability. And the third one was on coming back to pricing around competitors. And have you seen any change in behavior from the competitors yet on pricing at all? I'm thinking particularly the resin heavy products.

What's in there, a lot to unpack. All right. Let me start through and then Paul will jump in if I forget something. So Clyde. On the CPA, they did revise down forecasts. They've been doing that fairly regularly. If anything, perhaps following kind of market sentiment a bit. And they are showing growth in 2025, a little bit next year, a little bit in '20 to '25. I don't think anybody really knows what the outlook for '25 is comparing -- considering importantly, we have an election coming up in about 18 months, and I think that, that will probably change a lot between now and then. So what is clear is that the underlying pressure to build more houses to solve the housing crisis, because you see absolutely -- rents are still very high, if anything, increasing. So I think the will to solve the problem we have in the U.K. is still got to be addressed. So I think too far out to figure out if 2025 will be up some or up a lot. Let's see what happens. For us, overall, like I said, we remain focused on strengthening ourselves internally. And importantly, there are other overlays, which are key, which are much beyond just the housing market volume. 2025, we also have the future home standard taking effect, right? And that's going to significantly increase the proportion of spend of a house to get spent on products that we can and should supply. So we believe that even in a flat market, we have the ability to outperform significantly. I'd add that. We'll have to see. We'll clearly keep an eye on that. But I'd say that it's just one factor as opposed to the only factor in our ability to grow. In terms of the boiler market, so some really good points, and we track data from the Heating and Hotwater Industry Council on this. And what we saw is that the boiler out sales in the first half were down about 13%. Probably boiler in, meaning into distributors were probably down more than 20%. And what we've seen historically from our team who've been in this industry a long time, I've track this, is that every single time that demand has come back. Numbers-wise, 90% of boiler sales go into RMI and not new build, just rough proportion, about GBP 1.6 million, about 10% going to new build, depending on the year, of course. What I would say is there is currently no requirement from the government to the banning gas boilers yet. That's been talked about. In some countries like France, they've moved along more quickly. So we do think that in the shorter term, we're likely to see boiler RMI demand replacement demand tick up first. At the same time, we've been clear the air source heat pump conversion, which we think will really continue to be a factor, especially as remember that the boiler upgrade scheme is still in existence. It's just that people's ability to pay right now has caused them to defer projects. We benefit from that just as much or more than we do in the actual boiler market. So I think we're very well positioned for both, what should be resilient in the boiler market in time and then longer term, that conversion to air source seat pumps. Let's see. Your last question was around change in behavior from key competitors. Look, I mean -- well, I think Paul was pretty clear, right? Resin prices certainly have come off their all-time peaks, but they are nowhere near the levels that they were when all this inflation started, say, 2 years ago. And the change has been significant enough that you have to be thinking a little more long term than just short-term margin gains. And so we've seen is while there's certainly a demand for price decreases in the market, I think the fact that housing prices haven't really significantly come down and that most of our competitors are still seeing a broad range of inflationary pressures and rising prices, which have yet to come back to where they were. So far, while competition is tight, we don't see that as being a major impediment to our balanced approach to price and cost management.

Paul from Investec. And a bit of a follow-up to Clyde's question, I think. Given the restructuring that's going on, is the business set up and ready if the market comes back quicker than I think most people in the room would expect, i.e., if '24 ends up being better, can you take advantage of it?

Good question. The answer is yes. So what I would emphasize is that what we have not done is actually decreased our capacity. First of all, a lot of the consolidations we're doing have really been decreasing our overhead and essentially kind of the roofs over that capacity. We haven't taken machines out. We haven't reduced our fundamental ability to produce. The other thing we're doing is by deploying the Genuit business system and getting that lean productivity focus in each of our sites, we're actually unlocking more capacity from the investment base we already have. So I think we're well positioned, and we would welcome a faster snapback. Good question. Thank you.

Robert Chantry from Berenberg. Just two questions from me. Firstly, just on the volume decision on Page 9, that kind of bar chart or the waterfall chart. Clearly, a lot smaller number than last year, but could you just give a bit more detail on that price point decision-making? Because the business has clearly got a lot better at product margin isolation and optimization, how much is still marginal, how much is that to go on improving that product margin dynamic? And then the second question was just a bit more Nuaire really, because it's quite a complex ventilation product build with quite a complex supply chain. And it's had a few issues in the past couple of years, and the slide talks of lots of senior management changes. I think Joe called out three, if not, I'm mistaken. So what are the previous guys get so wrong and what the new guys are going to do so differently on Nuaire specifically?

Okay, you want to take the first one? And I'll come back and talk about Nuaire.

Yes. You'll appreciate, Rob, I'm not going to mention the name of the customer. It wouldn't be polite, but it was a very, very clear sort of segregate a bit of business that was very low margin. I've alluded to this actually a little bit before the past of similar phenomenon. During this period of inflation, we're having a lot of tough conversations with customers about pricing. And as you know, price leadership in the market, by and large, we've got them through. This particular one, for whatever reason, it proved more difficult. So we saw a lot of margin erosion happening. So it became, in the end, a very, very straightforward decision to take. And as I said, it was a highly segregated business, so it didn't bleed across the effects into other parts. So it was straightforward. And then to finish the answer, I've [indiscernible] leaving, but I don't see this storyline considering much longer. I don't -- there aren't any other obvious candidates like this at the moment that I can see.

So in terms of client management and Nuaire, I mean, maybe a little careful what I say here because, I mean, it's a really good business. It's been part of the portfolio for 8, 9 years. And actually is one of our largest single sites with a fantastic team with a track record of product development and innovation and being one of the market leaders, one of the -- really one of the key market leaders in the U.K. market for ventilation. That said, it's also one of the businesses which is some of the best tailwinds. There's a lot going on in the ventilation market, whether it's reducing mold, whether it's improving heat recovery and ventilation. And we feel that the business probably hasn't been able to fully realize that because of some of the operational sort of commercial execution that just wasn't as good as it could be. And it's clearly a good to great story. I mean it is a good business. And as we've strengthened the team largely around better operational prowess, starting to get that lean mindset in, because they've got quite a few people and can -- it's a good example of a business where they can improve productivity and improve throughput, because it's largely an assembly operation. The production side of it is quite well invested. And so we do think, and our new leadership team has got significant confidence that they'd improve that business. And I guess the other thing I would say is that on the sort of commercial and engineering side, I mean they're sitting with significant product innovation opportunities. The MRXBOX Hybrid Cooling is a really good example of a solution that's perfectly timed for the market we're in. And as they've gotten that out and got a much better and focused commercial team together, they're seeing that result. So it isn't any one thing. It isn't the business that was horribly broken, but it is clearly a good to great story, and we think there's quite a bit more to come. I hope that helps. Anything else?

Not actually a question from me. I just thought a few words for Paul from the analyst community on your last results presentation for Genuit. You've obviously been with the group for a little over 5 years. A lot has happened over that period from COVID to ramp into inflation, Adey acquisition, new name, new strategy, new CEO, and you've been a constant through all. I know it's a bit of sweet to be leaving at this exciting time. But on behalf of all of us, I want to wish you good luck, and thank you for all your help.

Thanks Christen. Appreciate that.

No questions online, great. Thank you very much for coming. This is a significant journey that we're on. And like I said from the very outset, I think apart from especially recognizing Paul's contributions, I mean there's 3,000-plus team members here who make this happen. My job in some ways is the easiest of all. It's relaying to you the good work of that team. So we look forward to seeing you again soon. And we'll keep this chair warm and ready. All right. Thank you, Paul. Thank you, everybody.