Genuit Group plc (GEN) Earnings Call Transcript & Summary

Hi, well, welcome. Great to have everybody here. I know we're getting sort of late in the season and so, I think about half of the room is probably heading off the holiday after this. But I think we've got a good message here and really looking forward to giving you a quick update as to how Genuit and the whole team fared in the first half of, admittedly, an interesting year. So, let's dive into it. So, as usual, I'll give you just a quick opening introduction, set the stage a little bit, turn it over to Tim, our CFO, who will take you through the numbers. I'll come back and I think quite an interesting bit on strategy progress because it's been, I think, quite a meaningful half of the year for us in that sense. So, unless anything else let's dive right in. So, first, in terms of highlights, look, I'm very pleased that the team through all the work that we put in place in the last 2.5 years is set the groundwork for actually what's been a 60 basis points profit improvement in what has been a difficult market condition. Our top line was down about 10.6%. And, as we'll go through on the next slide, a broad different set of market exposures, but we believe our share is solid and, in fact, in some areas, gaining. But that good operational gearing is a testament again to a lot of the work we've done. You know that we had a GBP 15 million savings program that's essentially in place. We did complete the last 2 site closures in the half. And that's really helpful, of course, because we're really well positioned now and have all of that behind us during what's been a slower period. So, like I said, with no reduction in capacity, well positioned for the recovery and, of course, for the growth that we're starting to put in place. Our underlying operating profit was very strong. The cash generation was very strong. You know that normally, the first half of the year is our weaker cash generation period. However, 40% up from prior year is really a testament to doing a lot of the fundamental things right. That helped bring our net debt down to about 1.1 turns, again, normally higher in the half, so that was good progress and it provides additional optionality for further M&A in addition to the 2 that we did after the half closed. On that point, you may have seen last week, we announced 2 smaller but really good strategic fit acquisitions. One was Sky Garden, one of the U.K. leaders in the green side of Blue green roofs and the other was Omnie & Timoleon strong players with great innovative products in the underfloor heating space. I'll talk more about those later on. All of that, despite the fact that our earnings per share was actually down about 10%, our confidence in our cash generation, in our strategic execution and in the outlook for the markets in the short and the midterm gave the Board the confidence to go ahead and confirm and reaffirm our 4.1p interim dividend. So, in terms of the market, it's been an interesting time, as I said. Across our end sectors, we've seen, of course, new house building expected to be down another 11% this year. Commercial construction still down and at a very low level of activity really since 2019. Private RMI, off a bit more after a couple of years of lack of confidence and decline. And boiler sales something that we're a bit more exposed to than some with 80, down just under about 10% in the half. Now, all of that is what we see externally, right? In addition to sort of broader market conditions, there definitely was an impact of project delays in the first half of the year due to excessively wet weather. It's ironic, right, that for our storm water management business, the increasing flooding and wetness is actually a great long-term tailwind, but you can't put that stuff on the ground when the holes fill up with water as soon as you dig them. So, that combined with a high-interest rate environment, definitely is that same sort of uncertain backdrop that we've seen, and I think all of our peers have seen as well. However, I mean, I firmly believe this is a really good time to be in our business today. When you look forward, the tailwinds are gathering. It's a question of when and not if things start to recover and recover in a good way. Obviously, housing market volumes remain low but the robust pricing that you see in that market demonstrates the pent-up demand. We're clearly buoyed by the new government targeting of 1.5 million homes. That's going to take a bit, but all of that is helpful and a good part of that would take us well above the levels that we've seen in recent history. We're well positioned to benefit from that, of course, with about 1/3 of our business there. We do see real evidence that the market and our customers are gearing up for the future home standard. That's actually taking into real effect now. We're starting to actually ship some underfloor heating systems, we've got commitments from customers so, we know that momentum is building, and that's very encouraging. Another thing I would flag is with our storm water management focus, we're well positioned to benefit from off what's next set of directives and the AMP8 spending increase for the water company is about 73% from AMP7 to AMP8, most of which or a good portion of which is going to be directed toward storm water management protection to keep our wastewater systems from being overwhelmed. So, that's a really important tailwind for us. And, of course, we do see signs of life in the commercial sector. Crane starts were actually up in the first half of this year. That usually is a lead indicator by about 12 months for us. So, while we probably don't expect to see much pickup this year, next year, there is an indication we'll see more activity. The other thing I would add is, we're seeing more activity in some of our modern methods for construction, Polypipe advantage, some of the work we're doing with some off-site manufacturers on the commercial side. So, there too, that's important because I think that will help address some of the labor shortage that's well trailed in the press. So, to kind of summarize, first half was, as we kind of expected a bit of a down half. However, we do see the tailwinds gathering, and we believe we're well positioned to take advantage of that as and when that happens. With that, let me turn it over to Tim to kind of walk through the financial results, and then I'll come back and cover strategy. Over to you, Tim.

Great. Thank you, Joe. Welcome, everyone. I appreciate you attending this morning. It's my pleasure to take you through the detail of our financial results today for the first half of the year. The highlights, first of all, as you can see and as Joe referenced, our revenue down by about 11% year-on-year, really within those subdued market conditions, but in line with the market. Our margin though, as really solid performance with the effect of our business simplification and the emerging results of deploying the Genuit Business System to the group, up 60 basis points to 16%. Our EBIT down about 7% year-on-year at GBP 43.6 million, really as a result of that volume reduction, but also what we really see importantly is a normalizing cost environment. Cash conversion, as Joe referenced, has been strong, particularly for our first half performance, so 85.8% cash conversion, which means that when we look at our net debt, that's coming down, still deleveraging about 1.1x at the half. And that, of course, gives us that strategic optionality that Joe referenced. And also, the confidence to reiterate a dividend in line with last year, so, 4.1p despite a reduction in earnings per share. And that's really part of our progressive dividend policy that we announced at our full year results last year. So, if we look at the summary P&L, you can see that revenue reduction, but at the gross profit level, a really solid performance there, up from 41% to 44.6% of the gross margin level, demonstrating that improvement in the operations of the business. And we've really maintained control over our overheads in the business as well during this market downturn. So, keeping finance costs, which means that actually the EPS reduction is limited to about 10% year-on-year. So, if we break the results down a bit more, we can see in terms of our revenue split, fairly consistent with what we reported for the whole year last year. So, when we look at it in terms of sector, we can see that U.K. new-build remains about 1/3 of the business with just under 30% in both the RMI market and also in the U.K. commercial market with about 11% of revenues continuing to come from international. If we split that by business unit, you can see SBS, Sustainable Building Solutions business remains the largest of our segments at GBP 111 million of revenue with our climate and water management about equal size alongside that. In terms of our profit performance, really highlighting again that 60 basis points improvement. Here, we see the effects of the business simplification program. We talked before around the closure of 6 sites last year, 4 of those were complete by the end of the year with 2 to be completed by the first half of this year. Those are all done. So, that aspect of our cost reduction is complete. And all of that is done as a reminder, without any reduction in manufacturing capacity. And that's really important as we think about the recovery and the volumes coming back and our ability to scale with that. We only need to hire a few extra people. We've got all of the sites and the capital equipment to increase volume by about 20%. Genuit Business System continues to be deployed throughout the business. This is really a momentum play. So, over time, more and more people will be trained on structured learning programs here, and undertaking projects and really gathering momentum to increase the productivity and efficiency of the business. And, importantly, costs are well under control. We see the inflation environment has normalized, things like energy costs have come down. Wage expectations are coming more in line with long-term averages. And so, here, we're seeing a really normal pricing environment to go with that cost environment. Depicting this as a bridge, you can see how the split between the business units in terms of revenue drop, each of the business units reducing in terms of revenue, probably CMS really being the standout performance where you can see that the actual amount of profit has increased despite this. So, if we dig into these business units a little bit more, climate management first of all, so this is the business where we are selling ventilation, water treatment and underfloor heating solutions for customers. Here, revenue has been tax sales at AD. Things are recovering slower there than we would like, we still expect that to come back, where there hasn't been the case so far. One standout positive has been in the ventilation market for the residential sales, so particularly there, we talked previously around social housing and the need for better ventilation there, and that continues to be a tailwind in that business. And here, a really strong profit performance, where we've increased 160 basis points at the operating margin level. In Water Management, this is the sector that was most affected by the wet weather that Joe was referencing earlier. Here, as Joe says, we can't actually put the stuff in the ground when it's water logs, but it really does underline the need for more and more of the store water attenuation systems. This is the business unit as well where we sell the Bluegreen roof offering that we've added to with the acquisition just recently. And here, we've actually managed to hold our margins constant despite that reduction in revenue, which is demonstrating that improving operating gearing within this business. And we've completed those 2 site closures within the half as well that will further improve our profitability going forward. So, finally, our biggest business unit, Sustainable Building Solutions, SBS, here, we've seen a revenue reduction of over 12% year-on-year. The exposure here is greater to the new house build market, which we know has been significantly down in the first half. The RMI market also has remained soft, which affects this business. But, despite this, we've been able to increase our operating margin here as well, so, 60 basis points improvement. And again, this is driven by business simplification, the effects of site closures we did last year flowing through to the bottom line and the emerging benefits of the GBS deployment as well. So, just touching on non-underlying items as well. We've talked about our kind of underlying trading performance. There's a couple of things to note here as to why these have increased year-on-year, really 2 key things. One is the impairment of goodwill at 80, and this is really the result of that delay to the recovery of the boiler market. We've still got absolute confidence in the size and the profitability that this business can get back to as the boiler market returns. And also, in this business ability to service the market for exhaust heat pumps as well with filtration products but for now, things remain subdued and consumers are delaying purchases and so, that has resulted in an impairment of circa GBP 12 million. Also, of note is a provision that we've made for a dispute with a third-party software company. I'm sure you'll appreciate the details of that remain confidential, so as not to prejudice the outcome. And these are slightly offset by a reduction in our restructuring costs. So, last year, we incurred restructuring costs to go along with the business simplification program, those site closures. So, you can see as we've completed that and having booked as a provision, all those costs at the end of last year, those have come right down. In terms of cash flow, a strong performance here with an 85.8% conversion, as we say. We continue to invest. This is the point in the cycle where we're not going to predict the recovery, but we know it's going to come and making sure we've got the modern facilities, the capacity in order to service that is important. So, we expect around GBP 30 million to GBP 35 million of capital expenditure for the full year. We've had just over GBP 12 million for the first half. We continue to improve working capital and this is an important aspect of the Genuit Business System. It's not just around manufacturing operations, it's also around our back office and how we get that efficient. So, lots of focus on that, which is having a good effect. Some acquisition costs in there. Those actually relate to the Plura acquisition previously made that was deferred consideration and all of this is bringing our leverage down. So, 1.1x at the half, and we expect, excluding any further M&A that, that will be further down to about 1x by the end of the year. So, that's our financial results. I'll be happy to take any questions at the end. But for now, to take you through our strategic progress. I'll welcome back, Joe.

Great. Thanks, Tim. All right. So, let's get into it. So, you'll recall, I think all of you at this point know that we set our purpose pretty clearly last year as together we create sustainable living and that is really what's behind our strategy. The strategy also hasn't changed. It's been consistent for about 2 years now, focusing on growth, really with sustainable end market tailwinds. Obviously, through strong organic growth in product innovation. But also, as you've just seen, with some strategic M&A, which we believe can further accelerate organic growth sustainability at the very core of what we do, the transition to lower carbon options to being that low carbon supplier of choice for our customers, embedding the genuine business system in every piece of our life, I'll give you an update on that and, of course, focusing on creating the very best culture, the very best place to work so we can attract and retain the best talent. So, that remains the same. Just a couple of maybe proof points for each of these. In terms of growth, obviously, you see the recent acquisitions expand our presence into the underfloor heating market at a time where we know that's going to become more important with the switch to renewable energy and filling out our green roof presence so we can address a bigger market there. Modern methods of construction project wins are quite important, this is one of those ways that we can turn labor shortage and essentially save money for our customers and then add product value and margin for us while helping solve a clear problem. And then, of course, focusing on market share gains. We have seen a bit of consolidation in the market, and that's an opportunity for those of us who are able to invest, retain our capacity and be ready for both share changes as well as market recovery. So, we're well positioned on the growth side. In terms of sustainability, we actually maintained our carbon intensity despite the volume decline. It may not sound like much, but when you think about it, that's actually quite important because your facilities often have a base load so you've got to actually continue to improve energy efficiency and work on those projects in order to keep that coming down. So, it's actually tougher to do right now. Recycled materials were up to about a bit over 51%, and we've got a strong pipeline of funded projects that are coming on that will keep pushing that upwards. And a bit esoteric here, but environmental product disclosures, think of them as essentially the carbon passports for the products that we sell to our customers. There's actually quite a bit of work because those have to be third-party verified and we actually took a look at this and used the lean principles from the Genuit Business System on the process of developing and generating environmental product disclosures and actually, we're able to, in one of our businesses make a sixfold improvement in how quickly we could develop and get those out to our customers. So, something that's going to need to be done in much higher numbers going forward. While we're on the Genuit Business System, our third lighthouse, Horncastle, so now we have 1 operating in each of our 3 business units is online. They've done some Value Stream Mapping work stream analysis as well as total productive maintenance focused on increasing the uptime of the equipment there. It's quite a capital-intensive site, so that's a really good use for that work. We did, as I'll share with you in a few minutes, I'll give you a case study, including a 30% output improvement in the same cell at Nuaire and we have now over 400 Genuit employees already well trained and participating in some of these Kaizens. The interesting thing about that, of course, is there's still over 2,600 people to get engaged and so much more opportunity ahead of us. Last but definitely not least, we launched our Genuit trademark behaviors. These are essentially those behaviors that we think underpins everything about what we do. It's we work together; we take ownership and we find a better way. This has resonated really, really well with our people. And that, together with the engagement from the lean system, really gets everybody's hearts and minds in the business. Many of you know, we've been members of the 5% club for quite some time. We do expect to be awarded gold status because we've actually passed not 5%, but 10% of our employees in earn-and-learn programs now. That's a key milestone, 3 years of that, and we'll keep moving up above gold. So, more importantly, that actually shows the investment in our people, and that's what's so important. We've also gotten quite a few other awards for recognition for the amount of work that we're putting in to making our business green, diverse and inclusive. So, I won't go into those here, but it does so importantly to me that our people are getting recognition for the work they're putting in. So, just double-clicking on a few things. I won't cover everything in each business unit. But remember that climate management is one of our business units that's really set up to benefit from the shift to renewable energy and essentially the electrification of our building infrastructure. As such, we do see that some strength in residential ventilation has continued to offset some of the weakness in commercial markets. Although, as I said earlier, we do see signs of life there as well. So, Nuaire continues to perform strongly. Nu-Heat has held its own in a market that's been definitely a bit challenging because their business part is new-build, but part sort of executive new-build. Part of it is RMI, too and that RMI piece, of course, is still waiting to see a lowering of interest rates and a bit more consumer confidence. But on a bright spot, one of the businesses that we don't talk much about is actually the chemicals and water treatment business, which is part of 80. This actually works for both residential and commercial offerings. We have 3 water testing laboratories across the U.K., and we recently moved our Manchester or our Northern lab into a new purpose-built facility to better cover the country and to provide us additional capacity for great margin growth there. They've got a lot ahead continuing to work on the ventilation sales as well as new product development, cross-selling across the whole climate offering, getting GBS to work and focusing on growing internationally, organically with AD. While we're on climate management, let me talk a little bit about the Omnie & Timoleon acquisition we did last week. So, with just GBP 2.7 million of cash, we were able to fund this out of our cash, of course, we actually added about GBP 8 million of revenue in underfloor heating, mostly in the U.K., although they do have a business in Poland, which we think gives us an opportunity as well. They're really well positioned, but with different product sets. So, one of their specialties, as you see on this is actually the special boards that are used to actually create heat emitters on the floors. They can be structural, they're really well done, and they're viewed as the market leader here, so, we were delighted to be able to add that to our portfolio. And we do think that, that positions us even better for the growth that's coming first with the future home standard and then with RMI as well because this is a preferred product for an RMI application in addition. So, about 90 people, we've welcomed them in. They're about 20 miles or not even 20 miles, probably 15 miles away from Nu-Heat. So, they'll be working together to see what synergies they can get there. On water management, yes, definitely. We've seen sort of a sage start to the season. But this is the unit that probably was third in terms of the sequence of the self-help. The 2 facilities that closed in this half were both actually water management solutions facilities. So, while their margin was flat half-on-half, what we did see is because of the volume decline for 2 halves now, that operational gearing is showing through, and we remain committed to getting this business unit above 15%. We talked about the Lean Lighthouse already. So, when you look forward, I think one of the most exciting things here would be focusing on 2 key growth vectors, one's definitely the water sector where AMP spending is going to be directing more toward storm water management and sort of cleaning up and controlling waste water overflows. We are already shipping prototype products, we're supplying those into that sector and we're well positioned with the product offering we have now, and so, that's going to be a good growth vector going forward. And then, of course, continuing to bring together our range of solutions around blue green roofs. We already have Permavoid, which is our blue roof infrastructure system, we've got Keytec installation services, which can work above and below ground, we've got Polypipe green urbanization and now we added Sky Garden. So, Sky Garden is what he would say. It's what's on the tin, right? This is the green and blue green roofs. It's a really need company that's well positioned, they're one of the market leaders in the U.K. And what we see is about a GBP 300 million market opportunity in the U.K. alone that's growing at about a 15% CAGR. And now, we've got a much better offering to continue to grow in that sector. It's about a 7.5-million-pound business, about 46 people. They're in Tewkesbury, so, actually reasonably close to the rest of the businesses. And with about GBP 2.5 million of cash consideration, again, we think we've really added capability for the future. As we mentioned, these 2 acquisitions together won't really impact profit this year, but we're very confident these are going to be a good part of our portfolio going forward. So, again, high market growth, great products, the ability to leverage some of the systems we have in cross-sell certainly in the U.K., but they've done projects overseas, and we think that will be an opportunity as well. In terms of Sustainable Building Solutions, as Tim alluded to, it's our biggest business unit. It's a very interesting part of the market. Clearly, this is the unit that probably had the most benefit from our simplification strategy early, we've seen that operational gearing and resilience play out. Their site consolidation has been completed. The new product launches, so PolyPlumb Enhanced is going well in the market, and we actually relaunched and expanded a product called MecFlow. These are essentially commercial pressurized water, click and then weld solutions. So, this takes us much more into water supply and other products, it's a really great product line. We did a couple of launches across the country, very well received, and we're starting to see growth already, more often when the market is a bit slower. We talked about underfloor heating on the other side of the business. But here, Polypipe actually supplies into the new house builders, and we've already gotten 15 different commitments to put these products into actual building sites. So, that's exciting and as I alluded to earlier, it gives us confidence that the future home standard preparedness is on track. So, there too continue to grow, essentially the modern methods of construction offering, the Polypipe Advantage, the MecFlow offerings. Focused on market share gains, we're in a good position because we've done all of our work quite some time ago without reducing any of our productive capacity, we're quite ready and continue to invest for the future. So, well positioned for any share that we can gain, which is happening and with any market growth as and when it comes. So, I promised a business sort of case study on the Genuit Business System and this is a great example. So, what we do, the real focus here is identifying key business needs and opportunities. In this case, we know that we've got a fantastic commercial ventilation modular product offering, okay? We continue to evolve that product line, but we've improved the selling process, and we see future demand opportunities. So, we wanted to make sure that we can actually grow capacity in that product line quickly. So, we had a 4-day Kaizen workshop with the colleagues who actually work the assembly line, the engineers, some of the product managers, people from other business units. And in the space of 4 days, they actually identified ways that they can prove and relay out that line into a simple manufacturing cell and demonstrated that week by Friday, they could increase the output by 30%. That, by the way, with the same team, which implies there's a 30% efficiency productivity gain there as well. So, this is a good example of the continuing types of gains that we see and why we remain very bullish about the long-term contribution of the Genuit Business System, not just to the customer experience, but also to the operating margins of the company. So, quite exciting and as any of you visit our facilities, I love to take you on examples of that. I think we've got a few people actually scheduled to visit, New air later this year. So, if I could wrap this up with the outlook. Obviously, the market is subdued, and we do think it's going to remain a bit more subdued. While there's a lot of optimism about the future, it just hasn't really started to show through in the volumes yet. But we're ready, and we do believe that as interest rates improve, as the government's targeting starts to take effect and as consumer confidence returns that we're going to see that growth, we just don't know exactly when. So, as a result of all of this and our strong cash performance and our confidence in the future, the Board feels very confident in reaffirming our guidance so that we think we'll be in that same range that we've been of the analyst forecast. We think that the Omnie & Timoleon and Sky Garden acquisitions are great strategic infills. We did amount of cash. We've still got plenty of leverage left to go do more, and we have an active pipeline. So, as I said before, with all the simplification work now done, with the capacity not decreased 1 bit, with continuing to invest in our capital, in our infrastructure and our new product development, we're really well positioned to benefit from the improving environment when that comes. And, as I said, this improved operational gearing has left us with that ability to increase and already at 16%, we remain committed to exceeding the 20% targets that we set in the midterm. We set those 2 years ago, they remain true today. And, with that, that's basically what we brought. So, love to take questions at this point.

We do have a new system. So, if you haven't been to this absolutely brilliant Deutsche Bank facility, [Operator Instructions]. Tim and I will take them. [Operator Instructions]. So, let's give it a shot. We do have backup mics, but we tested the tech yesterday and so far, so good. So, with that, who'd like to go first? Let's see C30, right up here. That must be you. It's you Christen? Yes. Okay. I'm still learning this. There you go.

Christen Hjorth from Deutsche News. I have 3 questions for me, if that's okay. Very interesting on the 20% facility. How should we think about the drop-through, such a lot work you've done there on the fixed cost base? I know previously you talked of 85% recovery, how should we think of that and the profit levels on that recovery levels volume. Are you going to do one at a time maybe?

Yes. So, I think on the top 2, we've always said around 30% to 35% and I think we confirm it's 30% to 35% plus, right? Some of the work we've been doing on the operational efficiencies, will clearly improve that, but it is dependent on volume and the economies of scale coming through. So, I think we can assume that as a minimum.

And then the second one would be obviously a tough first half. Your view on current trends, how you're seeing the start the second half and the trading et cetera in the July and first half?

Yes. Look, I'd say, as we said all along, and we think the second half is going to be a bit like the first half. However, there are certain areas that we talked about commercial, for example, where we're seeing a bit of a pickup there, too. So, it just depends on the sector, but certainly not worse.

And then finally, just on M&A. Obviously, you did the 2 smaller, can you just remind us international is an opportunity?

International apartment in Poland. So, yes, definitely. So, as we said, and I think you'll see we're starting to tick some of the boxes, right? Our primary focus is on buying companies that bring product expansion and solution expansion to our climate management and water management solutions. So, here, we've done that, right? We've added the Board technology, which we didn't have, we used to buy from somebody else, we still doing. I mean this is only a week ago. But that's a great opportunity for us and a company that's got a presence and reputation in a different part of the endo-floor-heating market and, of course, brings access to a new market in Poland. On the Sky Garden side, adding that green layer, this is the actual, the stem, the wild flowers, the expertise in growing that as well as getting into biosolar. So, that takes us into more offerings that we didn't have. So, product expansion, synergistic organic growth is there, focusing on WMS and CMS because we think they've got the best long-term growth drivers. Look, in terms of size, these were on the smaller side. The nice thing about those is they're relatively easier tuck-ins, they're cash deals, right? But clearly, we've got the ambition to deploy more capital. We've said that we could take our leverage up to 1.5 or go beyond up to 2 if it's a really good deal. And we would definitely like to see the international footprint continue to expand.

So, just 3 questions from me. So firstly, capacity. So, volume is down 2.5% in the period last year and '22 was weak as well, and you're saying there's only 20% spare capacity. And you have a slide talking about production efficiencies as well, so can you just kind of put into context why is it only 20%? Why do you seek more organic capacity expansion potential on a recovery?

Yes. It's a great point. We would say, by the way, at least 20%. So, if I didn't emphasize that, that's the case. It varies by product line. Obviously, some of our businesses are down more than others, so it's at least 20%. We want to make sure that we keep really good service levels as we go forward. So, I would say that, that's sort of a minimum that we can expect, but we continue to expand. And one of the good things about good cash generation is we've continued our CapEx spend at about the same level, GBP 30 million to GBP 35 million. So, that means we're continuing to do things to improve our productivity and improve our capacity as well. So, I would just say, look, take that as a baseline, parts of our business could certainly go faster.

Secondly, in terms of Ofwat, obviously, big numbers in terms of the step-up in the amount of CapEx spend. Can you just kind of run through what percentage of revenue in the business actually goes directly to the water companies? And do you think you could be doing more organically or through M&A to kind of capitalize on that because there's a huge CapEx spend? And I'm not sure the exact proportion of business that you have with them. Where could that go to?

So, the actual proportion of direct business with water companies would be close to 0 at the moment because that's not our route to market. And to be honest, that probably won't change. What has changed is the ability to solution sell and have that direct dialogue with the water company. So, we've been engaged with the strategic department of a few of those water companies in recent months. And the aim here is really to explain what we can do, how we can help solve the problems that they have and get specified in. Our customers will be the contractors essentially who are then delivering those within the same way that we get specified by a housebuilder who might deliver through a merchant, we would aim to get specified and sell through those customers.

And then thirdly, Joe, you mentioned market consolidation in kind of various end lines. Can you just expand a bit? Are that people leaving the market buying each other?

Yes. I mean, without getting too specific, right? I mean, there have been some announcements, well, pending announcements of at least one manufacturer in our space who plans to exit the market, they're under consultation right now. We've seen a lot of activity, people coming to us and do you have capacity? The answer, of course, is yes. And we've already started to secure some of that additional volume. So, more on that probably as that rolls out. I think by the end of second half, we can probably say more. But we're really well positioned as one of the strongest players and one with plenty of extra capacity to go for now with the ability to then invest behind that because to state the obvious, you don't want to take a bunch of share and then be unable to deliver the recovery, we can do both.

I have 3, please, 2 on cash questions. So, given the business improvement program, the fairly unusual first half in terms of working capital performance. Could you just give us an overall picture of where we are in sort of group working capital requirements on a current stand-alone basis and also in the higher volume scenario? That's the first one.

Yes. I think there's always improvement to make. So, we've made some improvements, I think this is a sustainable level for us. I think as we talk about the Genuit Business System, there are always things where you can look at to try and get even more efficient on that. As we go forward, clearly, there'll be a bit of a working capital increase if we're growing but within our balance sheet, there's plenty of headroom there.

What would your rule of thumb be for an additional GBP 30 million of revenue, I guess, it depends across the business…

Specific at this point, I think it really depends on how much improvement we can get out to offset that as well. So, I think more on that as we grow.

Could you just remind us what the maintenance CapEx figure is in the group?

That will be single-digit millions within that GBP 30 million.

Just finally, first half '23, was slightly skewed by house builder activity in the very early part. So, hopefully, comp is getting a bit easier as the year goes on. Can you just remind us if there's anything unusual that we should be aware of in the second half of last year? Anywhere in the business that would affect comparisons?

I don't think we've had a usual half in quite a while right now. But no, I'd say, look, the comp does get easier. As you recall, Q1, we were still coming down fairly dramatically, so that certainly gets easier. Water management seen definitely saw a tougher half back end of last year. So, I think broadly, let's see what the market brings and what we're really looking for is some of that recovery to start to show through and while we're counting on it, perhaps more next year, we'll see what happens. Nothing comes to mind that I think I need to flag you. Okay. Do I make some, yes. Let's see. But like I said, I can't wait for a normal year. It's been, I think, 2018, maybe, I don't know.

Just one really, just on the gross margin performance in the first half, very impressive. And just some more color, I guess, on the drivers, whether that's kind of efficiencies, price cost mix going your way and sustainability going forward.

Yes, certainly sustainable as long as the cost environment, I think, remains on a normalized level. So, I think we're past the peakiness of some cost inflation. We've seen some level of cost reductions, reference energy as an example. And so, overall, probably low single digits in terms of costs and then we've achieved a number of price increases at very low single digit as well. So, in the main, the mix is generally volume, if you look at 10.5% down on volumes and just over 10.5% down on revenue.

Yes, I think that's right. Broadly stabilized, which is good. And the pricing environment out there is a lot more rational to right now. So, we negotiate things, we don't expect big changes.

We also get a bit of benefit with new launches we talked about PolyPlumb Enhanced, the MecFlow System and so on, newer products tend to earn slightly better margins as well.

Biel? Welcome back.

Just 2 questions from me actually. Just some follow-ons. So, the first one is just on that 20% spare capacity. I just wanted to double check what exactly does this mean? Is it sort of empty space in factories as it's sort of fewer shifts. I'm just trying to work out, is there much in the way of cost to have that sort of at least 20% spare you have? And I guess what's the rationale? I'm guessing, is it just a long lead time to getting production up as and when the market improves. And then just the second one is to do with that over 20% margin target. What's the latest in terms of timing on that? I guess.

Okay. I'll answer one of those well, and I'll probably be a little dodgy on the second one. So, your first question, that's a really good question on the timing. So, the way to think about this is when we did the site consolidations, any productive equipment was kept maintained, in some cases, upgraded or improved and moved into other facilities. So, the equipment, the tooling, all of the know-how, everything that we have, the actual sort of capacity, the physical capacity is sitting there ready to go. It's not just empty space that you have to buy equipment for, so there's effectively no lead time there. Basically, you just have to increase material orders and we'll need to increase some labor. However, at the same time, you see the kinds of productivity gains we're getting to, which means that whatever labor we need, we'll be able to bring in less as we continue to make productivity gains. Obviously, there's some lead time there. But we look ahead and make sure that we've got some additional capacity. So, we think we're well positioned and should be able to respond as faster, faster than anybody else. On your second question, yes, I'm not going to get drawn into exactly when. The faster the market comes back, the faster we'll get to 20%, but we remain confident that, that is still the right target to hit and then exceed. So, I said 2 years ago midterm. So, ask me again next year.

Just one more. It's interesting based on the comments made household's [indiscernible] regulation to see what comes just says about that. But can you just touch a little bit in more detail about the conversations around things like ventilation and BHL as well as [indiscernible].

Yes. Obviously, there are certain projects we can talk about publicly because they're known. I mentioned last time the Barratt Bucklington sites. We've got 15 different projects like that where there's already commitments to put in underfloor heating on that side. So, actually improving an MVHR offering to go into a new house build situation would be much better for single-family homes. A lot of MVHR market today is flat. They're pretty big boxes that don't fit really well into the first floor of a home. So, we're actively developing that, and we believe that's going to continue to be a good opportunity. The new regulations do push you more in the direction of water treatment, potentially filtration as well. So, across the whole piece, we see continuing tailwinds in the direction of essentially the products that we put together in our portfolio. So, that activity is ongoing, and we've got high-level discussions with quite a few of the major housebuilders on that.

We've got one from the webcast from Axel Stasse of Morgan Stanley. You mentioned during the presentation, your focus on market share gains in some end markets. Does this mean that price cuts could appear in second half or in FY '25? And if costs remain low, could that lead to Genuit reduce prices going forward?

Yes. Good question. Thank you. I would say that, first of all, we think that the situation has stabilized. And I think that if you look all the way through the houses, right, house prices haven't changed that much. The pressure that we're seeing sort of in the market is more about stabilization. As Tim mentioned earlier, we have actually gotten some price increases this year, modest price increases but it does indicate that the market is pretty well stabilized. And in terms of the share gains, I mean, when somebody pulls out of the market, there's a vacuum there. And I will say that as concern for recovery improves, we do see that ability to supply during the recovery is what's really important and that does tend to minimize downward sort of deflationary pressure. So, broadly speaking, we don't think that's a big concern right now and largely built into what you're already seeing. Thank you all for coming. Great to see you. We've got plenty of meetings ahead, obviously, with our investors, but feel free to reach out if you have more questions. We're really happy to obviously take you out to visit our sites, if you'd like to, especially those who haven't been out for a while, see some of the GBS in progress and just continue to help you understand how well positioned we think the group is despite having a difficult market condition through all the strategic execution we've put in place over the last period. And I just want to thank the Genuities. Thank you very much. I think there's some refreshments outside. Feel free to grab a coffee and a croissant and I'll be around if you have questions. Thank you.