Genuit Group plc (GEN) Earnings Call Transcript & Summary

And it's really a very interesting time, and I'm pleased to give you a bit of an update as to how we've been doing, as we're now really coming up to 3 years in on our sustainable solutions for Growth strategy. So with no further ado, welcome, and let's get into it. So as always, I'll give you just a short sort of overview and then turn it over to Tim, who can run you through the numbers and some of the details there, and then, I'll come back and give you an update on our strategy -- sustainable solution for growth strategy, take it through some of the different pieces, and then, we'll aim to leave ample time for Q&A. So just -- first, let me start off by saying a couple of things. I mean, obviously, very, very proud of the effort that the entire team has put in to deliver an increase in our operating margins from 16 to 16.4 basis point, yes, 40 basis points increase. This is really a testament to the fact that our strategy and our execution is working so that despite a revenue reduction of a bit over 4% this margin improvement shows the quality of the business improving day in and day out. That was accompanied by very strong cash generation. You recall, we've set our midterm targets to be over 90% cash generation, particularly strong year, around 99%, which, of course, helps delever. That's taken us down to about 0.9x leverage on the balance sheet. You can do the math there. That leaves us ample firepower for further M&A investment as well as organic investments in the business. To that end, you'll recall that last summer, we had 2 acquisitions of Omnie & Timoleon, strengthening our under-floor heating business, and Sky Gardening, investing in the fast-growing green-blue roof space, both exciting. And quite frankly, you shouldn't be surprised if there's more to come. So the group does intend as a result, based on the Board's confidence and our confidence on our midterm execution capability and the growth prospects to go ahead and increase our dividend to 12.5p, in line with our progressive policy -- progressive dividend policy. So if I think about the market for a minute, I mean, longer term, our prospects, sort of the mid-term, long-term, are excellent, right? We've got a government that is absolutely committed and focused on improving house building here in the U.K. and addressing that structural shortage. A lot to be said about that, but it's headed in the right direction and that focus is welcome. We know that we're getting closer now to mobilizing for the future home standard, and we're seeing signs of that across the industry as we're actively working with customers to accommodate that. And importantly, and this is something that really has picked up steam, AMP8 is out, 86% plus increase in capital spending from 7 to 8 AMP cycles, meaning the water industry is going to be investing heavily in stormwater management to protect the -- our sewage and waste systems across this country. That plays to one of our strong suits as well. And I'd be remiss if I didn't point out that the labor shortage, which we're all worried about, as we increase productivity in this or increase this industry, means that we've got to focus on productivity, which means that those of us, manufacturers, who provide better value solutions and more productive applications of our products, are well suited to benefit there as well. Now, obviously, this year, we've been focused on -- or this past year, we've been focusing on outperforming what is a challenging market. We know that there's been plenty of economic uncertainty. Obviously, that -- some of that remains. There's concern over interest rates, perhaps fewer reductions than anticipated. Consumer confidence is important. And if you look at some of our key indicating segments last year, they were down. We saw new housebuilding starts about 20% down. We saw private housing and RMI was down also. The boiler market was down again. When you take all this together and you look back to around 2019 levels, we're still running 20% to 30% below volumes that we saw then. But we've been improving our profitability for 2 years running, as we've become a leaner, more fit organization. So if I think about that, we're confident going into next year. We saw trading open '25 in line with our expectations. I would describe sort of the market conditions are pretty similar to what we're seeing at the end of last year. We're waiting for a strong uptick, and we are absolutely ready for when it comes. Let me turn it over to Tim, and he can rattle through some of the numbers for you. Tim, over to you.

Great. Thank you, Joe. Thank you all for coming this morning. I appreciate it on what I know is a busy week for results. I'm delighted to present our results this morning, what represents a really resilient performance, we think. Revenue down 4% year-on-year based on volume reduction of about 4% as well, so a strong outperformance, we think, versus some of those market stats, which Joe has just talked us through. And importantly, pleased to present that we're improving our operating margin here by 40 basis points, which really represents strong progression towards that medium-term target of over 20% operating margin for the group. So EBIT of about GBP 92 million for the year is down just 2%, given that improvement in margin. Really strong cash conversion as well, though. So 99% conversion on cash, and that's meant that we continue to delever our balance sheet, now at 0.9x levered, which gives us plenty of firepower to invest in the future of the group, both organically and inorganically, which Joe will talk a bit more about later on. And also then with that balance sheet strength and because of the Board's confidence in the future direction of the business and our execution of our medium-term strategy, we're proposing an increase in our dividend to 12.5p. So let's dig into a little bit more detail on the P&L. Here, you can see that topline performance of 4% down. Really strong gross margin performance here, 220 basis points improvement in gross margin, which is underpinned really by 2 key things, one is improving the purchasing in the group, that's both buying more strategically and also aggregating the spend of the group better. And then secondly, the productivity improvements that come from the Genuit Business System, which is really gaining momentum now in the business and coming through and hitting that gross margin line means that you can see the real sustainability of that margin improvement. With good control in this current environment on our SG&A line, that filters through into that 40 basis points improvement on our operating margins, as you can see there. Net finance costs are reduced in the year because of our reduced borrowing, and you can see the effect of the annualization of tax coming through on our earnings per share, and hence, why we're confident still to increase our dividend even though that's slightly lower. It's worth pointing out the resilience really in our revenue performance comes from the breadth of the portfolio. So you'll be familiar with our 3 business units. We're operating across sustainable building solutions, climate management and water management, approximately 40%, 30%, 30% across the business units. But also if you cut the business differently by U.K. new house building, U.K. non-housing and also the RMI sector, you can see it's about 30% or so for each of those sectors, and again, with about 11% for international business, which we do aim to grow over the medium term to a bigger proportion of revenue as well. So real resilience in the portfolio that we've seen this year. And that's helped as well as the improvement in the business that we've achieved in the profitability. We've got that productivity and the purchasing savings coming through. And as Joe mentioned, we've maintained capacity throughout this period. So we simplified the business, you might remember, in 2023. We've further improved it in 2024. And we've got that 20% to 30% capacity, which would easily be able to support 20% to 30% revenue growth, which will take us back to that period, kind of 2017 to '19, where we saw more normal levels. Importantly, there's negligible P&L cost of holding on to that capacity, and that's one of the benefits of our business model. That's important to recognize. There is a headwind coming in the cost base in terms of the national insurance and minimum wage increases from the U.K. government budget in the autumn. We will remind you of that. That's about GBP 5 million that we talked about last November. Our aim is to try and offset that through balanced price management and productivity savings and continue that improvement journey on an underlying basis. So if we look at a bridge of the business from 2023 to 2024, you can see all 3 business units are down, but importantly, looking at the right-hand chart there, you can see the improvement, particularly in CMS and SBS. So despite that revenue reduction, we've actually increased the magnitude of profitability in both of those businesses, so really strong performance there. And WMS, even though that's down, actually, there's a drop-through there that is commensurate with the kind of operating deleverage that you would expect in that business with volumes down. That's a business which is more project-based and explains the reduction. But let's dig into those business units a little bit more, starting with our Climate Management Solutions. Here, our revenue was down 2.6% for the year, about 4% on a like-for-like basis. We did see some headwinds continue in that market, particularly within the commercial ventilation market and the boiler market as well, which affects Adey sales. But actually, Adey did improve towards the back end of last year. So Q4 was a strong quarter for Adey, which is really encouraging to see. And actually, we had some really good growth in our residential ventilation as well, which is a multiyear trend based on the need to solve the damp and mold problems in social housing in particular. This is a business unit, which has deployed the Genuit Business System to really great effect. We've got some great case studies here, and 120 basis point improvement in their operating margin is a really good result for the team there, who also integrated the omni business during the year as well to strengthen that offering in the underfloor heating space, which is a small but due to be rapidly growing sector of the market, thinking ahead to things like the future home standard. Moving on to Water Management Solutions. Revenue 5.6% lower during the year, at 7.5% on a like-for-like basis. We did see subdued volumes here. Project-based business, as I say, is -- much higher proportion of revenue here. And that can be affected when you have poor weather or you have lower business confidence, you saw in the back end of last year. So a degree of operational deleverage during the year, but we have a long way to go to be able to improve that business. It started the Genuit Business System journey probably later than in Climate Management or Sustainable Building Solutions. And so we're accelerating now into WMS to improve this business this year, and we'll expect to see the margins improving here. And again, an integration in this business with Sky Garden, really exciting vertical integration opportunity with our Permavoid business and our Keytec installation business offering that full solution in blue green roofs, like with underfloor heating. It's a small, but due to be rapidly growing market over the next couple of years. And then finally, our largest business, Sustainable Building Solutions. And here, we have to give credit to the team for a really resilient and strong performance. This is a business that has great products, great market share, great innovation in the year as well and product launches and has achieved a revenue performance, which is only slightly down in what was a very challenging market, which I think shows how well the team have managed there. Operating margin, up 160 basis points, which really shows what can be achieved with the Genuit Business System. And so we're really pleased with the results in this business unit. Just to note then on some of our nonunderlying items affecting our reported profitability, and most of these actually were affecting the first half of the year, so we're in our interim results. And actually, most of this is noncash, so about GBP 24.4 million of the GBP 33 million is noncash impacting items. Noncash amortization is the usual amortization line there. We had an impairment charge in the first half of the year related to the Adey business, and that was really based on the continuing subdued boiler market. But as I say, there was improvement there in the second half, which is encouraging. And we did have a one-off software dispute charge in the first half of the year that was fully settled and completed within the second half of the year. We did benefit from some proceeds from sale. You'll remember that we've closed 6 sites to date under our simplification journey that we started a couple of years ago. And so we were still getting the cash benefit of exiting those sites during the year. Speaking of cash, strong cash generation, as I mentioned. So cash conversion of over 99% with GBP 91.6 million or so of cash. We've been really focusing on working capital improvement this year, and we've actually seen a 10% improvement in our stock turns, which has really underpinned that performance. And we remain committed to achieving over 90% cash conversion with continued focus on working capital through the cycle. Capital allocation, we spent about GBP 26 million of capital in 2024 compared to GBP 30 million to GBP 35 million of guidance, so slightly lower. That was really just due to the phasing of when we entered into commitments at the end of the year, and some of that will flow through into early 2025. So again, we're reiterating capital spend of around GBP 30 million to GBP 35 million for 2025. And we've got a really strong balance sheet now with that deleveraging. So as well as investing in the capital of the business, we are also prosecuting that M&A pipeline. And we shouldn't be surprised if we do something within the year, which Joe will talk some more around, and we'll continue with that progressive dividend policy as well to return value to shareholders. So that's the financials. Happy to answer questions at the end. But for now, Joe will take us through our strategic developments.

Thank you, Tim. Much appreciated. Just a quick kind of review of some of the strategic progress we made during the year. As a bit of a reminder, with our purpose, together, we create sustainable living. We laid out at the end of '22 a 4-piece sort of focused plan. One was to really focus on driving organic and synergistic inorganic growth that can position us well for further organic growth, focused on sustainable end markets where our differentiation really makes -- can have an impact on our ability to have long-term above-market growth rates. Sustainability remaining at the very core of everything we do, the products we deliver and how we make them. That's important all around, of course. Leveraging the Genuit Business System really embedding lean thinking, a lean thinking culture across the business, beginning to see that take root and investing heavily in our people and our culture so that we can track the most diverse and talented workforce and see them thrive and have, therefore, a competitive advantage. If I just focus on some of the growth bits, obviously, Tim took you through the financial shape of each of the 3 divisions. But I thought I'd just highlight a couple of growth points here. We mentioned strong residential ventilation. This is a market that's actually growing ahead of house building right now, as we see products like mechanical ventilation heat recovery, mechanical ventilation recovery with cooling penetrate into that market. Other areas that you see here, for example, is a regulatory tailwind that are coming into place, obviously, with the future home standard and with Awaab's Law, which comes in later on this year, driving compelling social housing improvements, which means better ventilation is a key part of that as well. As Tim mentioned, Adey's strong performance, I mean this is still a really good business. It's a business that's got the ability to expand overseas, to continue to find new ways to drive heating accessory innovation across the business. And, of course, Omnie is an acquisition that came not only with additional presence in underfloor heating solutions, but with a new product line, these emitter boards, which they're really good at and lead the market. So that actually improved the offering that we have in the growing underfloor heating segment. So folks going forward, clearly very much being ready to take advantage of the future home standard, the eventual -- eventually, we've got to get into the repair, or I should say, the upgrade of all the other existing homes in the future and the solution selling that becomes more important, both in residential ventilation and in some of the solutions we can provide in commercial and sort of light buildings like schools, which are a big focus going forward. So great business unit, I mean, showing the improvement in profitability already, and we're confident it's going to have outstanding long-term growth potential. In Water Management, this is a business where we are well positioned for a wave that's coming. So stormwater management is, of course, increasingly important. We saw it in the Middle East this past year, where they, too, are seeing some of these regional focuses that are meaning they've got to invest more in stormwater attenuation. Our business is well positioned there. We've seen it in the U.K., as we tee up and are ready for AMP8, which is shifting a lot of the focus from repairing drinking water and potable water piping and supply to now how do we protect the stormwater and sewer systems from stormwater incursion. This is going to be a really important focus going forward. And that 86% increase in AMP8 spending compared to AMP7 is heavily weighted towards stormwater management, stormwater protection. That's positive. We're integrating Sky Garden, which gave us much more exposure to the blue green roof and pedestal space. We figure that's a GBP 300 million market just in the U.K., growing at 17% to 18% per year CAGR, exactly the type of acquisition we want that takes us into higher growth segments. Importantly, as Tim alluded to, this is the business unit that kind of started on the GBS journey's last, still has the most upside potential. And I'd reiterate the fact that at our Capital Markets Day, we said we believe this will be a good growth business and can reach 15% EBIT targets, set back with the volume issues this past year. We're still committed to those targets, so a lot to come. And I would say that the same approach we've taken, this has been so successful in SBS, it is now showing success in CMS. We'll work here, too. Speaking of SBS, we've been focused here on cementing our already good share and gaining further. We've been able to introduce new products to market like PolyPlumb Enhanced, which is a new line of push fitting with extra security, which plumbers love. Our Polypipe Advantage is really an added value solution capability, where we can do preassembled sets of products, which allow for much reduced labor time, much reduced transportation, decreasing the carbon that's on-site, and of course, improving the lead time -- shortening the lead time for building. This is really important as we're facing a labor-constrained market going forward. And lastly, new-build underfloor heating actually is something that SBS is also exposed to as they've been working with a wide range of national and regional house builders to get them ready for bulk introduction of underfloor heating at scale, as we approach the future home standard, something that we've seen ample signs of commitment toward, and we remain excited about. Going forward for this business is to continue to focus on gaining share, to manage the business incredibly well, be ready for the future home standard, and again, focus on expanding the range of value-added solutions and the modern methods of construction and engagement that we can have with off-site manufacturers and the divisions of some of the housebuilders as well. Lots to play for here, great business, great execution, good results last year, well positioned for the market recovery. Often get a lot of questions around the Genuit Business System and what does this mean and give me some examples, Joe, could you please? Yes, I will. Here we go. So these are -- I've just got 3 simple case studies. I won't go into detail. Happy to discuss later, but I want to share some of the results we're seeing across the business. Last year, we did over 20 Kaizen events. These are week-long, rapid, continuous improvement events. Over 15% of our workforce has now participated in these Kaizen events and in-depth training, which means, by the way, 85% to go and still lots more room to run in terms of driving productivity through the business. This is one example where a team in our Aylesford site focused on single-minute exchange of die. That's a rapid tool change. So as you move from one product being molded to another, you reduce the downtime from when you're not producing parts, which is not helpful, right, from 4 hours down to less than an hour, right? So that's an 80% reduction in nonproductive time on the machines. Across that whole department, as they complete the rollout, that will basically be 10,000 more hours of machine productivity without a single capital dollar spent -- capital pound spent. Really impactful. And, of course, these are tools which apply everywhere, but the best way is to see case studies. In terms of sustainability, GBS and sustainability play together well. We use environmental product disclosures. They're essentially the passports, the carbon passports for all of our products. As a leader in this industry, we've committed to making sure that our product range is substantially covered by environmental product disclosures so that our customers who insist on this know that they're getting the lowest product -- lowest carbon product. This is a time-consuming process. They're independently verified outside by a third party, and it was taking us too long to do it. So we actually took a Kaizen event approach, and we're able to increase the pace. We're doing this from 1 every 5 months to 4 a month. That's a 20-fold productivity improvement in a back-office process. That's actually pretty important, and it shows the power of GBS across the back office as well as on the shop floor. So that's in line with our ambition to be able to do 25 EPDs per month, as we grow going forward and a great result for the team. Another example that's related to sustainability is the team has a carbon reduction tool that they've now embedded into the way we're operating inside so that the teams can come up with ideas for how we reduce carbon in the way we operate the business, not the products, but the way we operate the business. They used daily management and process improvement tools in a Kaizen setting and identified the opportunity to take out about 1,600 tons of carbon, which also represents about a GBP 400,000 annualized savings. So again, not bad for a week's work, right? So those are a few examples of GBS in action. But importantly, as I mentioned earlier, it's the people who make GBS work. And GBS turns out to be one of the best engagement tools there is. There's nothing really better than telling somebody who's skillful and experienced saying, you know what, go ahead and improve your business. Here are the tools. So really positive engagement opportunity, and it fits with our commitment to having the best people and culture you can possibly have. In an age where there's a lot of scrutiny around diversity and inclusion, I want to be really clear. We view diversity and inclusion as an absolute competitive advantage for Genuit, and we are not rolling back one bit. This is important. We want to be the place where people want to come work, can build their careers. They know we'll invest in their capabilities, so a few things that we've done. We actually have over 18% of our workforce now in earn-and-learn programs. These are everything from internships to graduate schemes, apprenticeships, and this is powerful. We're part of the 5% club, which is the industry group that's committed to reinvesting in our future generation. And we've earned gold status last year. Frankly, 18%, 2 more years, we're on track for platinum status and maybe they'll invent a new category at some point. This is investment in our people that is really valuable, and it helps them know that they can build a career here. Over 15% of our people were involved in GBS training. That's going to keep going up every year. Somebody asked me, could that go faster? Sure. But what's more important is that it goes well and that the people really see that benefit, and the momentum is really building this year at GBS. And over half of our Genuit leadership team have actually gone through our new Genuit leadership program. Think of it as sort of our internal leadership college. So that is really exciting, too, and we've got quite a bit more to come. And then also, we continue to make progress on diversity and inclusion. Over 30% of our internal promotions last year were female, strong commitment there as well, lots more to do, but it is absolutely the right thing. And I'm really proud to be part of a company that places this first. On M&A, Tim mentioned our ample firepower. We figure we've got GBP 125 million to GBP 150 million available on our balance sheet. Obviously, we've got the optionalities to go and use equity for a particularly compelling story for our shareholders. Sky Garden and Omnie were a good example of the strategic application that fit well with our solution infill for our water management and climate management business units, respectively. We have a significant pipeline activity. We've done a lot of work in the last 2 years, making sure that in line -- I don't expect you to read the chart on the bottom right, but you saw that one at our last Capital Markets update. What it says basically is that we'll add to Water Management Solution capability, we'll add to Climate Management Solution capability. We'll look for good quality bolt-ons that we can integrate well across the business. And we'll look in the U.K., of course, as well as further field in Europe and in North America, where we believe climate management and water management can play particularly well. This is a very active area for us. And as Tim mentioned, don't be surprised if you see some news from us this year. We believe this is key to the Genuit strategy in the long term. Finally, just kind of closing up for questions. As I mentioned before, trading for '25 has started in line with management expectations. I would describe it as broadly similar to what we're seeing at the end of last year. We are targeting, as Tim said, offset the employment costs with a balanced approach, as we've done before, with cost, price and productivity. We do expect to deliver, and we remain committed to delivering our 20% mid-term margin target through a mix of productivity and operational leverage as we continue to grow organically and inorganically. And the group is confident that the medium-term growth drivers that we have, facing up against the challenges that we've got to fix here with more housing, better stormwater management, decarbonization and addressing the labor shortages, really position us well for the future. So that's what we brought. We've got our investment case. I think this is exactly the one you've seen before. We believe in the long term, and I'd like to thank every single one of our 3,200-plus people for incredibly hard work they did last year. So, all right, with that, I think we're ready for questions. Why don't you come back up here, Tim? I always like to have Tim here, so I hand him all the tough ones, right? So we've got the same system here -- that's not showing -- it is showing here now, that we've used in prior years. You've got a little button besides you that you can push. We can see the queue. I'd ask my esteemed analyst friends to keep the number of questions down to a memorable number. We will come back if needed. And we do have a roving mic if it's not quite loud enough. There is micing around, but you just need to speak up a little bit.

So who would like to open? There's a button right next to you. Okay. Please.

I have a couple, if I may. How should we think about...

Sorry, I forgot to ask you. Please introduce yourself, too. Sorry.

Sorry. Axel Stasse, Morgan Stanley. How should we think about the price or the cost being through a decline? And specifically, on cost, can you elaborate a bit more on, for example, the wage inflation, on energy cost inflation, if you would expect them to [indiscernible]?

Yes. Our strategy with price is very much to recover the cost inflation that we see. Underlying, we actually see that inflation has come to more normalized levels for the U.K., both in terms of wage inflation, the settling down of energy costs and also input inflation in things like polymers and so on have stabilized. We do obviously have the headwind of the NI and minimum wage, which needs to be recovered on top. And so we're very focused on productivity improvements as well as price. We do think that the price increases for the NI and minimum wage things need to be staggered to support the industry with its recovery cycle, so don't expect to see that all coming on price in the beginning. That might mean that there's a bit more pressure in the first half of the year than the full year. But as we've said in our outlook, we are targeting to offset that at the operating margin level by the end of the year.

Okay. Thanks, Axel. Aynsley, I think you're next.

I've got 3 questions actually. Just first of all, you've obviously mentioned M&A potential quite a bit this morning, just interested your kind of views on North America versus Europe, just in terms of acquisition multiples, attractiveness of the market, where your kind of affinity and preference lies there. That's the first question.

We can take them one at a time if you want. It's fine. If you've got them written down, that's easier.

Okay. And then second is just on the AMP8, obviously, a big boost to capital spend. So when would you start to expect to see that actually coming through to work on the ground for the...

I'm sorry, on what?

The AMP8 waters.

Yes. Okay. On AMP8, yes. So acquisitions, AMP8, yes.

And then third question, just on SBS. I think in the past, you mentioned the competitor X Q4. Is there more of that to come this year in terms of market share gains maybe as it compares to...

Okay. I'll take the first 2. You want to take that one?

Yes.

Okay. So on M&A, first of all, in terms of where, so what we see is that water management is a business that actually the trend towards stormwater management and the solutions needed is actually quite global. And so that we see as target -- sort of a target-rich environment in sort of Central and Northern Europe as well as in North America, and we've been actively cultivating in both areas. So I think there definitely are plenty of things available in a reasonable size and range for us. In terms of climate management, Europe is actually a better market for us because the U.S. market tends to be dominated a bit more by the air conditioning sort of world. So we've been more focused on ventilation and heating in Europe as well. Of course, importantly, we remain a consolidator here in the U.K., and we do see opportunities for bolt-ons and strategic infills in the U.K. as well. In terms of valuations, it's a great question. I mean, 2 years ago, I would have said we're waiting for valuations to come down. I definitely think that there is -- we don't think there's a shortage of things that are actionable from a valuation perspective for us. So perhaps it's a better environment. I mean, private equity has been, I think, dealing with higher inflation rate for some time. So I don't believe that valuation is going to be the obstacle to us getting some good quality deals done. On AMP8, so we're now in year 1 of a 5-year cycle. And normally, you'd expect to see sort of peak spend midway through, so sort of years 3 and 4. It's -- a lot of these are project tenders. We've been actively working with -- we've been in contact with water companies, with some of the Tier 1 contractors getting out and seeing these projects. So it's not something that we expect to see a big input to our revenue book this year, but definitely, we'll continue to build the outgoing years. I should also add that when you talk to people in that industry, this is also not a won and done. This is something that's probably going to take us 2 or 3 cycles to completely address. So it is a mid- to long-term growth driver for us.

Yes. In terms of market share, as you know, there's a key competitor that exited the market last year. We estimate around GBP 40 million worth of drainage business per year. We've already signed contracts to secure 1/4 of that, give or take, on an annualized basis, but we're targeting more of that as well. We've started to see some of that revenue come through in Q1, and that will have a material effect from Q2 onwards.

Okay. Tania, I think you're next.

Okay. Maybe now you hit the button. Can you just -- can you talk a bit about your purchasing savings and how sustainable...

I'm sorry, I can't quite hear you.

Can you talk about your purchasing savings and how sustainable those are going forward? And then Second question, just characterize some of the new projects you're winning in terms of scale and scope? And how competitive are those contract wins?

Shall I take the first? You take the second.

Yes, go ahead. Sure. Yes.

So in terms of procurement savings, very sustainable in the broader sense, actually. So this is aggregating spend for the group. You may recall that previously, the group was managed on a more distributed basis, so where we can buy together things like polymers or energy or so on, we're doing so, but we're also making sure that they're sustainable in terms of security of supply. And this is buying with more strategic agreements, longer-term agreements, which is great for both parties. It's better for us to get more secure pricing and availability to products, which is important as volumes come back, but it also gives more visibility in terms of forecast to our suppliers as well to help us work together.

And I'm really sorry, I just didn't quite get your second question. It's my hearing. So go ahead.

It's okay. And just can you characterize some of the new project wins that you've mentioned?

Some of the new project wins?

Yes. And talk about competitive...

Yes. Sure. I mean, we've -- there's quite a bit across all 3 businesses. I mean, we've won underfloor heating installation projects with some of the national and regional house builders. We expect those to result in even bigger tenders and awards going forward. In terms of water, we do quite a lot of stormwater management projects today, and those tend to be project-oriented businesses. And in the ventilation business as well, we see the opportunity in areas like schools and residential buildings, like flats, for example, will often have anywhere from a few dozen to 100 or more MVHR. So in all 3 of our businesses, we actually -- project wins are a key piece of that. Did I get your point there?

Yes.

Great. Okay. Thanks. Sorry about that. Okay. Let's see. Where to next? Right here.

Christen Hjorth from Deutsche Numis. 3 from me as well, please. First of all, you hinted out more transformational M&A potentially. Just sort of trying to get a sense of size, what you'd be willing to do, et cetera. Secondly, in WMS, just to touch on the competitive backdrop there, I know you sort of -- previously at Capital Markets Day, you talked about maybe some competitors catching up, just whether sort of the catch-up has come back from WMS as well. And then finally, just in SBS, the sustainability of that margin and whether the margin in '24 is a good, normalized margin even if volumes recover or we could see a little bit more on that as well.

Okay. Let me take them in that order. I'll take 2 and you take 1.

Okay.

So in terms of transformational M&A, I mean, we've been clear from the beginning that we -- one of the reasons we love this space, particularly in Climate and Water Management, but also bolt-ons is that there are ample bolt-ons which would fit well within our existing firepower. So you could think of deals that could easily be sort of GBP 50 million to GBP 100 million deals. A lot of those are quite strategic as well, so that's good. The nice thing about this space, too, is, look, in the fullness of time, there definitely are transformational things that we could do. That's not our first priority right now. But I would say that it's something that's incredibly compelling for shareholders. We do think we've got good support, and we would feel free to bring those to those shareholders because, obviously, that would take some equity thinking. But look, the nice thing is I think we've got optionality at both ends of the scale. Your second question was?

The second question was on the competitive backdrop...

All right, on WMS. Sure. So Water Management Solutions on a product base, so just drain pipes and fittings and stuff is a fairly competitive market. There are some smaller players. They have been investing in a downturn in the market. You do see some price competition there. Importantly, though, we've been on a journey to shift upstream to be closer to solutions. This is something we've been doing for several years, probably 5 years or more. The further we go there, the much less -- the smaller competitors, I think, are well positioned to compete for larger contracts and tenders, the type that we'd expect to see coming out of AMP8, for example. So in general, moving upstream into solutions is very good for that business, whether it's in the stormwater attenuation side or in the blue green roof and green urbanization side. Both of those are good as we move away from just drainage products, although large drainage products. The other thing I would say is that from a sustainability basis, this is a business unit that is 80%-plus recycled material that leads the industry in its category, and that will be more important going forward because these are large products, too. So we've got excellent coverage with our environmental product disclosures there. And these are also competitive advantage that smaller players may struggle to catch up on. So we always try to increase the width to the moat.

In terms of SBS, really strong margin performance, of course, and sustainable in the sense that this is a really well-run business, really great products, great, strong brand and reputation with customers, which gives us stickiness. Probably at a slightly higher end of the range, we'd expect to achieve for this margin, boosted by internally generated savings from procurement and productivity. And, of course, we do have some headwinds coming with the National Insurance and minimum wage. So when I think around our margins as a group, as I say, if we can offset -- target to offset the increased employee cost that we've got, that will be a good result for the year. And within that, we might see WMS coming up slightly in margin as we improve that business and perhaps a slight pullback in SBS. But through the cycle, we still believe low 20% margin for that SBS business is very sustainable.

Okay. Going back over to this side of the room. Go ahead.

Jeremy Caspar from JPMorgan. Just keeping on the margin topics. I was a bit surprised by WMS step down in H2. Just wondering what was driving that. Was it something apart from volumes?

Sure. You want to take that?

Yes. So really, it is volume related, and it's the operational deleverage that you get with that reduction in volumes. So it is particularly project-based business that it doesn't have the same specification element that you might see in SBS, for example, where you've got more surety over those longer-term revenues. But we're convinced in the longer-term drivers for that business. You only have to look around at the flooded fields in the U.K. and Dubai Airport under water or whatever it may be, the world needs more stormwater attenuation to deal with these increased risk of flood events. So we see the longer-term drivers are there. And as that volume comes through, the operational benefits on the profits can really be seen. We saw that actually in October and November last year, where you get a seasonal uptick in most of our businesses. Actually, we saw much stronger margins in that business as well. We know it's there, but we need that volume to come through to really see it. In the meantime, we are focused on improving that business as we've talked about, and there is things that we can do to do that through productivity.

Yes. Yes, the playbook that we've used in SBS and CMS will absolutely work there. They're just a bit further behind in -- it's interesting, this is the kind of volume performance you tend to see in this type of industry and business. We're just starting to get people used to not seeing that, which is fantastic. We just need to get that there, too. Sam, I think you're next.

Sam Cullen from Peel Hunt. I've got 2 as well. First one is on margin again. Just if you look at the group gross margin, is that -- should we view that as sort of peak because you've got a bit of a favorable mix benefit with SBS being better than WMS and probably a favorable price/cost mix? Or is that a sustainable level for the group going forward?

Absolutely. As I say, you might see that SBS pulls back a little bit and WMS improves, but if we can get to the same level this year, we'll have done well to offset that cost. And of course, our medium-term target is over 20% operating margins, which can really come through the operational gearing of the group. It's great to report a 40 basis point improvement in margin. But for me, the most exciting thing is how much that operational leverage is really improving so that as we get that market recovery. If you go back to that period we often talk about, 2017 to '19, where volumes were 20% to 30% higher, as Joe has talked about, we've got the capacity to serve that from our existing site footprint. So with the drop through you get from that, that will drive that profitability even higher.

The second one is on underfloor heating in the newbuild space. How do those contracts work? Do you win the contract to serve a site? Do you serve a house -- a regional division of a house builder? Did you get a national contract with house builder? Did you set a framework with other suppliers? Just interested to explore that.

Yes. We're working through this, right? I mean, this is early, but what we did initially is we agreed to quite a few cases where we demonstrated the ability to deliver entire sites. We shared Bucklington, for example, last year, we did with -- it was a pilot of 300 homes. That's complete. So we took that and made sure that this is a win-win situation. And we are -- it's a range, right? In some cases, we've got builders that are looking to have a national tender for this. In other cases, there will be probably a regional sort of project basis. But in general, what we found through that industry is that as the SBS team has been in there working on this, we've often been the first one in to really take a holistic approach and to work directly with them. So that's been well received. So there could be a range of solutions, but we're well positioned. Okay. Let's see. Yes, over here.

I have a couple of questions. The first one was, can you just confirm you don't need additional capacity to support demand if there was a volume uptick in 2025? Is that the case?

Yes, we've got 20% to 30% capacity in place across the group. Typically, it's machine time or even idle machines. So we have a lot of injection -- I mean, think of it this way, we've got hundreds and hundreds of injection molding and extrusion machines as well as assembly benches. Some of them are not working 3 shifts. Some of them are only working one shift. Some of the machines themselves are idle or remain dedicated to single product lines. And with our single-minute exchange of die capability, we can turn them over and then free up more utilized time. So it is there. We'll just need some more people, fewer than we used to have and a little bit higher electricity bill. And, of course, ordering more raw material.

Okay. And then my second question is, can you quantify the GBS cost efficiency attribution in 2025 compared to 2024 to get a sense on how profitability can improve if we assume volumes low single digits, price costs flat by the end of the year, gross margin same level? Just to quantify a bit where profitability can end up in 2025.

Yes. It's not quite that simple because as you probably got a sense from the different case studies, it's organic and throughout the business. What I would say, though, is a statistic that we shared back 2.5 years ago, mature businesses that have been on this journey for a while, typically get 3% to 5% productivity savings every year, right? So you know that we're not at sort of full momentum yet. So we're not getting all of that. But we're definitely seeing in places where we're implementing it, some of the CMS business, for example, our SBS business, we're seeing more than that in terms of productivity gains. So a couple of percent per year productivity gain is absolutely reasonable. It might take us a year or 2 to get in. And that's why, as Tim said, when we're confronted with something like the National Insurance increases, whatever we don't get through balanced cost and price could take a little bit, but we're confident we can get there. Let's see. I think that's pretty much wrapped it up for questions. I don't see any more buttons here. One more, go ahead, free all. I was almost disappointed there.

It is just 1 question. You talked about the sector is now mobilizing for future home standard. Can you just give a little bit more detail on that? Are you just at the stage where you're trying to lock yourself in for use? Are you actually selling into homes, which are being built according to that standard? And what's your latest sense on how Genuit is being considered versus alternative products?

Sure. We could actually spend 20 minutes on that topic, but we won't. It varies. First of all, what we see across the house builders is actually good support for that. There's a little bit of work left to do to kind of finalize everything, including some of the details around timing. Best estimates I've heard, we're expecting to be really starting that certainly by the end of this year. So as we transition into '26, this is going to take a bigger impact. What I would say is quite a few house builders are already starting to build towards those standards and either have committed to say underfloor heating or air source heat pumps, broadly, are expected to be the preferred solution. In discussions with some of the leaders of the different housebuilders, being constrained around everything, from not putting gas mains into new sites, where they know they'll go to be future homes eventually. They'll go electric now rather than have 2 sources of energy. So the industry is clearly going that way, and my sense is that over the next 18 to 24 months, we are going to have made that transition. And so accordingly, we are selling products now, some cases ahead of the legislation, in some cases driven by the building code updates 2 years ago, which really presaged a lot of what's in there. And I would say this, the other parts where there's a fewer remaining bits to be sorted around the future home standard, don't tend to affect the products that we sell from what I've seen. So we remain confident. It's just a question of making sure that we continue to do everything to make it as easy as possible for our housebuilding customers to achieve these standards. Okay. All right. That was you. I think this is it. Okay. Thank you all for coming. Just to kind of wrap up, look, this was another year where we made good progress on our strategic execution. Our team delivered an incredibly resilient performance, improved operating margins despite volume and revenue decline. We're well positioned for the future. We've got great firepower. We know there are lots of exciting additions to the business to be made. And importantly, the Genuit Business System gains momentum, and people are excited about our future. I hope you are, too. So thank you all for coming. We'll be around for questions. And worst case, we'll see you in 6 months. Thank you.