Genuit Group plc

Interim results for the six months ended 30 June 2023

2023 operating profit at top-end of expectations

Genuit Group plc ("Genuit", the "Company" or the "Group"), the UK's largest provider of sustainable water, climate and ventilation solutions for the built environment, today announces its unaudited interim results for the six months ended 30 June 2023.

Joe Vorih, Chief Executive Officer, said:

"Genuit has made good progress in the first half of the year. Ongoing self-help measures, deployment of the Genuit Business System and continued business simplification enabled improvements in the quality of operating margin despite deteriorating market conditions.  

The Group continues to make measurable progress towards our mid-term commitments. Our sustainability plans, including our Science-Based Targets, are progressing well and we continue to focus on being the lowest carbon supplier of choice for our customers. Despite more challenging conditions notably in the residential new build and RMI markets, we upgraded market expectations in May and expect Group full year operating profit to be at the top-end of current full year analyst expectations¹. Whilst the economic situation remains challenging, we have good momentum moving into the second half as we focus on improving efficiency, creating value and enabling growth."

Financial Results

^{1 Underlying operating profit (EBIT) consensus as compiled by Genuit Group plc is £88m with a range of £85m - £89m.}

 ^{2 Alternative performance measures (APMs) are used by the Group to assess the underlying performance of the business. A definition of all the APMs is set out in note 1 of the interim condensed consolidated financial statements on page 14.}

Financial Highlights

·      Revenue decrease of 4.2%, 5.0% lower on a like-for-like basis, driven by a volume decline of 14.5% offset with successful new product launches and balanced price and cost management.

·      Underlying operating margin improvement of 50 basis points, with sequential month-on-month improvement in margins from April onwards. This was driven by efficiency and cost reduction actions, improved portfolio profit mix, ongoing action on lower margin business and balanced pricing offsetting inflationary headwinds.

·      Sustainable Building Solutions' 10.7% revenue decrease driven by lower market volumes yet, despite this, underlying operating margin rose 220 basis points through self-help measures.

·      Water Management Solutions revenue declined by 4.0%, outperforming the market and with self-help measures driving 180 basis point underlying operating margin growth.

·      Climate Management Solutions revenue grew by 8.9%, recovering from last year's isolated cyber-incident and benefitting from stronger demand for residential ventilation. To reduce the risk of a recurrence, the Group has invested heavily in cyber defence and insurance for this business to bring it up to Group standards. This step up in costs plus short term boiler market weakness contributed to an operating margin that was 400 basis points below last year, but this investment masked sequential underlying operating profit margin improvement since the second half of last year and which management expects to continue.

·      Net debt reduced from 1.5 times to 1.3 times pro forma EBITDA in line with expectations.

·      The Group intends to pay an interim dividend of 4.1 pence per share (2022: 4.1 pence per share).

ESG Highlights 

·      The Group is focused on serving the needs created by sustainability-linked growth drivers:

o  Increasing need for resilient drainage;

o  Need for green urbanisation;

o  Increased focus on clean healthy indoor air and ventilation; and

o  A move towards a low, or zero carbon, built environment.

·      The Group continues to make progress on operating sustainably, in order to be the lowest carbon supplier of choice for the Group's customers:

o  Recycled materials formed 48.4% of our polymer inputs (2022: 47.1%). We remain the European leader in the sector for use of recyclate.

o  The Group's carbon intensity on a rolling twelve-month basis is broadly in line with the last year end, despite the impact of lower volumes.

o  Sales of new products was £146.8m resulting in a Vitality Index of 24.1%, on track to achieve the 25% 2025 target.

·      The Group's commitment to employee development and social mobility is reflected in its membership of The 5% Club:

o  3.2% of the Group's workforce were in accredited work and learning programmes - largely in line with the figure reported in the Group's 2022 Annual Report.

·      In April 2023, the Group's Science-Based Target's (SBTs) were approved by the Science-Based Targets initiative, which dovetail with the Group's existing 2025 targets adding further goals for 2027 as the next milestone on the Group's pathway to reaching net-zero by 2050.

Outlook

·      The Group's performance during the first half of the year has been better than management's earlier expectations - driven by self-help actions including organisational simplification, procurement benefits and the initial roll-out of the Genuit Business System ("GBS").

·      The market remains challenging, with macro expectations lower than at the start of 2023 notably in the new residential and RM&I portions of the market, while other areas of the construction economy are less affected. An improvement in market conditions in the current year is unlikely given the macroeconomic environment, though Genuit's proven resilience provides scope for ongoing financial outperformance.

·      Pent-up boiler and heating system demand is expected to be released as the economic situation stabilises, providing scope for recovery of demand within the climate management space. We remain confident that the tailwind of increasing energy efficiency in heating and ventilation, stormwater management and lower carbon building materials will benefit our businesses.

·      The benefits from self-help measures are building and give management the confidence that, notwithstanding the uncertain market backdrop, the Group expects to deliver a financial performance at the top-end of current market expectations.

Enquiries:

A copy of this report will be available on our website www.genuitgroup.com today from 0700hrs (BST).

There will be a presentation for analysts and investors today at 0830hrs (BST) at Brunswick Group's offices, 16 Lincoln's Inn Fields, London, WC2A 3ED. Please contact Genuit@brunswickgroup.com to confirm your attendance.

The presentation will also be available to listen into via webcast. Please register for access to the webcast via the following link:

https://www.investis-live.com/genuit-group/64b920430120c60d00ff322a/hstr

We recommend you register by 0815hrs (GMT). The webcast will be recorded, and a replay will be available shortly after the webcast ends via the same link above.

The presentation is also available on the Reports, Results and Presentations page on our website at https://www.genuitgroup.com/investors/

Notes to Editors:

Genuit Group plc ("Genuit", the "Company" or the "Group"), the UK's largest provider of sustainable water, climate and ventilation solutions for the built environment, and among the ten largest manufacturers in Europe, of piping systems for the residential, commercial, civils and infrastructure sectors by revenue. It is also a leading designer and manufacturer of energy efficient solutions in water-based heating systems in the UK. The Group operates from twenty nine facilities in total and manufactures the UK's widest range of solutions for heating, plumbing, drainage and ventilation. The Group primarily targets the UK and European building and construction markets with a presence in Italy and the Netherlands and sells to specific niches in the rest of the world.

The Group was established in 1980 and has been listed on the premium segment of the London Stock Exchange since 2014.

Group Results

Revenue for the six months ended 30 June 2023 was 4.2% behind the prior year at £304.8m (2022: £318.0m), driven by a volume decline of 14.5% that was broadly in line with the market, offset by new product launches and balanced price and cost management. The Group remained focused on its medium-term drivers - a structural UK housing shortage, water and climate management regulatory and environmental tailwinds, and indoor air quality.

The Group demonstrated a 220 basis points gross margin improvement versus 2022 H1. Underlying operating profit was £47.0m (2022: £47.4m), broadly in line with the prior year and ahead of expectations, driven by the Group successfully delivering on cost reduction targets of £3.7m and balanced pricing management offsetting ongoing inflationary pressures. This represented an underlying operating margin of 15.4% in the period, an improvement of 50 basis points on the prior year. Sequential month-on-month improvement in margins from the second quarter are expected to come through more fully in the second half of the year.

Underlying finance costs rose to £6.7m (2022: £2.8m), but were broadly in line with expectations, due to significantly higher Standard Overnight Index Average (SONIA) interest rates partially offset by lower RCF borrowings and a component of the Group's borrowing derived from a Private Placement tranche of £25m with interest cost fixed at 4.4%. The Group had, as ever, a keen focus on cash management during H1 2023 to ensure RCF borrowings are as low as possible to reduce interest impact.

Non-underlying operating costs of £10.6m (2022: £11.7m) were driven by transformation costs, as the Group continued to implement its Sustainable Solutions for Growth strategy, and amortisation of intangible assets arising from acquisitions, offset by a gain on sale from disposal of a property.

The total tax charge was £6.4m (2022: £7.9m). The underlying tax charge of £9.5m (2022: £9.8m) represents an effective underlying tax rate of 23.6% (2022: 22.0%), the marginal increase driven by the increase in the statutory tax rate from April 2023.

Underlying profit after tax was lower than the prior year at £30.8m (2022: £34.8m) due to the increase in finance costs. Underlying basic earnings per share was 12.4 pence (2022: 14.0 pence).

Including non-underlying items, profit after tax was £23.3m (2022: £25.0m), and basic earnings per share was 9.4 pence (2022: 10.1 pence).

The Board recognises the importance of dividends to shareholders and has declared an interim dividend of 4.1 pence per share. This dividend will be paid on 27 September 2023 to shareholders on the register at the close of business on 1 September 2023.

Business Review

* relates to assets held for sale which are not reported as part of the Group's Strategic business units.

* Return on sales (ROS) is equivalent to underlying operating margin (underlying operating profit : revenue)

** relates to assets held for sale which are not reported as part of the Group's Strategic business units.

Following the Group's announcement of its Sustainable Solutions for Growth Strategy in November 2022 and moving to the new operating structure in January 2023, the Group has continued to focus on profitable growth and improving operating margin despite challenging markets.

The Group has now deployed GBS via Lighthouse Projects at two sites and management is now seeing improvements in customer service, efficiencies, and inventory levels. GBS, coupled with the Group's existing self-help measures and procurement savings, has enabled the Group to grow operating margin despite seeing volume reductions.

The increased collaboration of the Group's teams following the transformation of the business structure is enabling the Group to realise synergies and react quicker to market changes ultimately ensuring that it is agile in decision-making to protect or improve operating margin levels towards its mid-term goals.

The Group has completed the closure of two UK facilities (Glasgow distribution centre and the exit of the Kirk Sandall site) as it continues to review operating footprint. The Group has also announced the closure of its site in Birmingham and will continue to serve customers of these businesses from alternative facilities.

Revenue, in the Strategic business units, for the six months ended 30 June 2023 was 3.9% lower than the prior year at £300.3m (2022: £312.4m). On a like-for-like basis, excluding the impact of acquisitions, revenue was 5.0% lower than prior year.

Sustainable Building Solutions

Trading in the Sustainable Building Solutions ("SBS") business unit performed better than management's expectations, with revenue of £127.5m (2022: £142.8m), 10.7% lower than prior year. Market volume decline in the UK residential new build sector and planned exit of low margin business within SBS was offset with continued balanced price management.

Despite volume challenges, underlying operating profit margin improved by 220 basis points, driven primarily by effective cost management. Management has launched an operating footprint consolidation plan and has completed the sale of the Glasgow distribution centre and exit of the Kirk Sandall site, both of which have been integrated into the remaining Doncaster facilities.

The lean transformation is underway with deployment of GBS at Building Products (Doncaster) in progress, alongside the completion of a significant equipment refresh programme, which is demonstrating a substantial reduction in past due orders with targeted efficiency and inventory benefits. The business unit remains focused on its priorities of growing solutions sales, operational and sales excellence and sustainability.

Water Management Solutions

Water Management Solutions ("WMS") revenue of £88.1m (2022: £91.8m) declined by 4.0% versus 2022 (7.0% on a like-for-like basis). Trading activity for the first six months was relatively strong considering the difficult UK economic dynamics, particularly in residential, and WMS outperformed the market overall. Underpinning this level of activity was the launch of new products to the USA and expansion into further territories in the Middle East, exploiting joint opportunities across the business unit and wider Group and an increased focus on product family specification.

The business unit reported an underlying operating margin of 10.0% during the period, 180 basis points improvement versus prior year, with cost and efficiency initiatives offsetting general inflationary pressures and foreign exchange impacts. Capital investment projects in the first half were focused on site and product development to underpin future growth.

Climate Management Solutions

Revenue of £84.7m (2022: £77.8m) in Climate Management Solutions ("CMS") improved by 8.9% versus 2022. Lost volume following the 2022 isolated cyber-incident has been fully recovered and underlying revenue for CMS, normalising for this event, showed growth of 1.2%. Whilst still having supply constraints they are not as severe as in 2022, however, these are demanding significant time and resource from the business.

Last year's shortages of supply in the boiler market have been overtaken by reduced demand for new boiler and heating system installations, however, revenue has remained broadly flat on 2022 H1 levels. The boiler market remains subdued, but we expect improvement in time, releasing pent-up demand.

The CMS business unit reported an underlying operating margin of 13.5% during the period, 400 basis points lower than H1 2022. The Group has invested heavily in cyber defence and insurance for this business unit, contributing to all the underlying operating margin deterioration. This does not reflect, that since the second half of last year, the underlying operating profit margin has been improving due to self-help measures and momentum in the Nuaire business. Progress on cost reductions has not yet taken full effect but management expect this to improve into the second half of the year.

Environmental, Social & Governance

The Science-Based Targets initiative ("SBTi") has approved Genuit Group's near-term science-based emissions reduction target. The Group has also committed to set long-term emissions reduction targets with the SBTi in line with reaching net-zero by 2050. The Group continue to place innovation at the heart of its business, ensuring it has the solutions for the emerging challenges faced by the construction sector.

Financial Review

Finance Costs

Net underlying finance costs for the six months ended 30 June 2023 rose to £6.7m (2022: £2.8m) due to significantly increased interest rates offset by lower level of RCF borrowing through the first half of the year.  Interest was payable on the Group's RCF at the Standard Overnight Index Average (SONIA) plus an interest rate margin ranging from 0.90% to 2.75% depending on leverage. The interest rate margin at 30 June 2023 was 1.65% (30 June 2022: 1.40%).

Taxation

The Group's tax charge for the six months ended 30 June 2023 decreased to £6.4m (2022: £7.9m). The underlying tax rate (underlying tax: underlying profit before tax) has been provided at the estimated full year rate of 23.6% (2022 full year: 15.6%).

Dividend

The Group's dividend policy is normally to pay a minimum of 40% of the annual underlying profit after tax. The Directors intend that the Group will pay the total annual dividend in two tranches, an interim dividend and a final dividend, to be announced at the time of announcement of the interim and preliminary results respectively with the interim dividend being approximately one half of the prior year's final dividend.

Cash Flow and Net Debt

Cash generated from operations during the period amounted to an inflow of £31.7m (2022: £18.4m inflow), as the Group continued to improve its working capital cycle.

Capital expenditure increased to £12.5m (2022: £9.4m). The full year 2023 is expected to be below £40m, with a primary focus on key, strategic and innovative projects.

Net debt (including unamortised debt issue costs but excluding the effects of IFRS 16 capitalisation) decreased to £154.6m at 30 June 2023 (30 June 2022 £167.9m, 31 December 2022: £143.1m). Leverage was in line with expectations at 1.3 times pro forma EBITDA (30 June 22: 1.5 times pro forma EBITDA).

Going Concern

The Group continues to meet its day-to-day working capital and other funding requirements through a combination of long-term funding and cash deposits. The Group's bank financing facilities consist of a £350.0m Sustainability-Linked Loan with an uncommitted 'accordion' facility of £50.0m and a seven-year private placement loan note of £25.0m with an uncommitted shelf facility of £125.0m. At 30 June 2023, liquidity headroom (cash and undrawn committed banking facilities) was £217.9m (2022: £131.7m). The Group's focus will continue to be on deleveraging and its net debt to EBITDA ratio stood at 1.3 times pro forma EBITDA at 30 June 2023 (30 June 2022: 1.5 times pro forma EBITDA), increasing to 1.5 times pro forma EBITDA including the effects of IFRS 16. This headroom means the Group is well-positioned with a strong balance sheet.

The Directors have satisfied themselves that the Group has adequate financial resources to continue in operational existence for a period of at least the next 18 months. Accordingly, they continue to adopt the going concern basis in preparing the condensed set of consolidated financial statements.

Principal Risks and Uncertainties

The Board continually assesses and monitors the key risks of the business and Genuit has developed a risk management framework to identify, report, and manage its principal risks and uncertainties.  The principal risks and uncertainties that could have a material impact on the Group's performance and prospects, and the mitigating activities which are aimed at reducing the impact or likelihood of a major risk materialising, have not changed from those which are set out in detail in the principal risks and uncertainties section of the 2022 Annual Report and Accounts.

These principal risks and uncertainties include macro-economic and political conditions; climate change; raw materials supply and pricing; information systems disruption; reliance on key customers and recruitment and retention of key personnel.

A copy of the 2022 Annual Report and Accounts is available on the Company's website www.genuitgroup.com.

Forward-Looking Statements

This report contains various forward-looking statements that reflect management's current views with respect to future events and financial and operational performance. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other factors, which may be beyond the Group's control, and which may cause actual results or performance to differ materially from those expressed or implied from such forward-looking statements. All statements (including

forward-looking statements) contained herein are made and reflect knowledge and information available as of the date of preparation of this report and the Group disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements due to the inherent

uncertainty therein. Nothing in this report should be construed as a profit forecast.

 Directors' Responsibility Statement

We confirm that to the best of our knowledge:

·      The condensed set of consolidated financial statements has been prepared in accordance with UK-adopted International Accounting Standard (IAS) 34, Interim Financial Reporting; and

·      The Interim Management Report includes a fair review of the information required by:

(a)  DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of consolidated financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

(b)  DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last Annual Report and Accounts that could do so.

This report was approved by the Board of Directors on 14 August 2023 and is available on the Company's website www.genuitgroup.com.

The Directors of the Company are:

By order of the Board: