Half-year Report

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

1.      Basis of preparation

Genuit Group plc (previously known as Polypipe Group plc) is incorporated in the UK. The condensed set of consolidated financial statements have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and UK adopted IAS 34, Interim Financial Reporting.

The annual financial statements will be prepared under UK-adopted IAS (UK-adopted IFRSs).

As required by the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, the condensed set of consolidated financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2020, except for the definition of non-underlying items that now includes the unwind of inventory fair value adjustment as a result of the Adey acquisition.  These statements do not include all the information required for full annual consolidated financial statements and should be read in conjunction with the full Annual Report and Accounts for the year ended 31 December 2020.

The comparative figures for the financial year ended 31 December 2020, where reported, are not the Group's statutory accounts for that financial year. Those accounts have been reported on by the Group's auditors and delivered to the Registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

There were no accounting standards or interpretations that have become effective in the current reporting period which had an impact on disclosures, financial position or performance.

The condensed set of consolidated financial statements are prepared on a going concern basis. The Directors have made enquiries into the adequacy of the Group's financial resources, through a review of the Group's budget and medium-term financial plan, including cash flow forecasts. The Group has modelled a scenario with the base forecast being one in which, over the 17 months ending 31 December 2022, sales volumes continue to recover to pre-Covid-19 pandemic levels and then grow in line with external construction industry forecasts. In addition, reverse stress testing has been performed to identify the necessary reduction in profitability or growth in net debt required to result in a breach of the Group's banking covenants. The reverse stress test showed significant headroom existed throughout the assessment period.

At 30 June 2021, the Group had available £102.0m of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. These borrowing facilities are available until at least November 2023, subject to covenant headroom. In addition, on 11 February 2021, the Company conducted a non-pre-emptive placing of new ordinary shares generating gross proceeds of £96.3m and drew down £120.0m net from the RCF as part of the post year end acquisition funding. The Directors are satisfied that the Group has sufficient liquidity and covenant headroom to withstand reasonable variances to the base forecast. In addition, the Directors have noted the range of possible additional liquidity options available to the Group, should they be required.

As a result, 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 17 months. Accordingly, they continue to adopt the going concern basis in preparing the condensed set of consolidated financial statements.

There have been no related party transactions in the period to 30 June 2021.

Four non-statutory measures have been used in preparing the condensed set of consolidated financial statements:

·     Underlying profit and earnings measures exclude certain non-underlying items (which are detailed in Note 4) and, where relevant, the tax effect of these items.  The Directors consider that these measures provide a better and more consistent indication of the Group's underlying financial performance and more meaningful comparison with prior and future periods to assess trends in our financial performance.

·      Underlying cash generated from operations is defined as cash generated from operations, adjusted for non-underlying cash items, after movement in net working capital and capital expenditure net of proceeds from disposals of property, plant and equipment.

·      Leverage is defined as net debt divided by pro forma EBITDA. Net debt within the leverage calculation is defined as loans and borrowings net of unamortised issue costs less cash and cash equivalents, excluding the effects of IFRS 16.

·     Pro forma EBITDA is defined as underlying operating profit before depreciation, for the 12 months preceding the balance sheet date, adjusted where relevant, to include a full year of EBITDA from acquisitions made during those 12 months.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

2.      Financial risks, estimates, assumptions and judgements

The preparation of the condensed set of consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from estimates.

In preparing the condensed set of consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2020.

3.      Segment information

The Group has two reporting segments - Residential Systems and Commercial and Infrastructure Systems.  The reporting segments are organised based on the nature of the end markets served. There are no significant judgements in aggregating operating segments to arrive at the reporting segments. Inter-segment sales are on an arm's length basis in a manner similar to transactions with third parties.

* Underlying operating profit is stated before non-underlying items as defined in the Group Accounting Policies in the Annual Report and Accounts and is the measure of segment profit used by the Group's CODM. Details of the non-underlying items of £12.7m (2020: £4.3m) are detailed in Note 4.

Geographical analysis

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

4.         Non-underlying items

Non-underlying items comprised:

The unwind of the inventory fair value adjustment relates to the fair value uplift of the inventory acquired as part of the Adey acquisition that has subsequently been sold. Acquisition costs in 2021 relate to the acquisitions of Adey, Nu-Heat and Plura and also include an accrual for the earn out associated with the Plura acquisition (see Note 9). The non-underlying tax charge includes £8.5m in respect of restating the deferred income tax liability on intangible assets as a result of the change in the main UK corporation tax rate (see Note 6).

5.         Finance costs

6.         Income tax

Tax has been provided on the profit before tax at the estimated effective rate for the full year of 31.7% (2020 full year: 22.3%).  Tax on underlying profit before tax was 17.6% (2020 full year: 17.6%).

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

6.         Income tax (continued)

The Finance (No.2) Act 2015 reduced the main UK corporation tax rate to 19%, effective from 1 April 2017. A further reduction in the main UK corporation tax rate to 17% was expected to come into effect from 1 April 2020 (as enacted by the Finance Act 2016 on 15 September 2016). However, legislation introduced in the Finance Act 2020 (enacted on 22 July 2020) repealed the reduction of the rate, thereby maintaining the current rate of 19%. Deferred income tax on the balance sheet at 30 June 2020 was therefore measured at 19% (2019: 17%).

The Finance Act 2021 (enacted on 10 June 2021) included an increase to the main UK corporation tax rate to 25% effective from 1 April 2023. Deferred income tax on the balance sheet at 30 June 2021 was therefore measured at 19% or 25% (2020: 19%) depending on when the deferred income tax asset or liability is expected to reverse.

7.         Earnings per share

Basic earnings per share amounts are calculated by dividing profit for the period attributable to the owners of the parent company by the weighted average number of ordinary shares outstanding during the period. The diluted earnings per share amounts are calculated by dividing profit for the period attributable to the owners of the parent company by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of potential ordinary shares that would be issued on the conversion of all the dilutive share options into ordinary shares.

The calculation of basic and diluted earnings per share is based on the following: 

Underlying earnings per share is based on the result for the period after tax excluding the impact of non-underlying items of £7.1m (2020: £4.1m).  The Directors consider that this measure provides a better and more consistent indication of the Group's underlying financial performance and more meaningful comparison with prior and future periods to assess trends in our financial performance. The underlying earnings per share is calculated as follows:

8.         Dividends

The Directors have proposed an interim dividend for the current year of £9.9m which equates to 4.0 pence per share.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

9.         Acquisitions

Acquisition-related deferred and contingent consideration comprised:

Acquisition-related cash flows comprised:

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

9.         Acquisitions (continued)                                          

Nu-Heat

On 2 February 2021, the Group acquired 100% of the voting rights and shares of Nu-Heat (Holdings) Limited (Nu-Heat), the leading supplier of sustainable underfloor heating solutions, air and ground source heat pumps, and other renewable heating systems, for a cash consideration of £27.0m on a cash-free, debt-free basis. The total cash consideration of £24.8m included a payment of £5.7m for net cash on completion and was net of loans and borrowings at acquisition of £6.7m. Additional debt and debt like items amounted to £1.2m.

Details of the acquisition, including provisional fair value adjustments, were as follows:

The 'Nu-Heat' brand, order book and customer relationships have been recognised as specific intangible assets as a result of this acquisition. Fair value adjustments principally relate to the recognition of intangible assets and deferred income tax arising on these adjustments and are provisional. The goodwill arising on the acquisition primarily represented the assembled workforce, technical expertise and market share. The goodwill is allocated entirely to the Residential Systems segment.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

9.         Acquisitions (continued)

The fair value of trade and other receivables was £0.7m. The gross amount of trade and other receivables was £0.7m and it is expected that the full contractual amounts will be collected.

Post-acquisition Nu-Heat contributed £6.6m revenue and £1.0m underlying operating profit which were included in the Group income statement. If Nu-Heat had been acquired on 1 January 2021, the Group's results for the six months ended 30 June 2021 would have shown revenue of £296.8m and underlying operating profit of £48.5m.

Acquisition costs of £0.4m were expensed and are included in non-underlying items in administration expenses. Acquisition costs of £0.6m were fully cash settled in the period, including £0.2m that was included in trade and other payables at 31 December 2020.

Plura

On 5 February 2021, the Group acquired 51% of the voting rights and shares of Plura Composites Ltd (Plura) for an initial cash consideration of £1.25m, and a further payment in respect of the remaining 49% of between £6.0m and £16.4m depending on the EBITDA performance of Plura in the 12 month period ending no earlier than 5 February 2024 and no later than 31 July 2024.  Plura provides a range of products for utility companies, road and rail operators, network builders and designers in the construction and maintenance of their networks. Plura's manufacturing expertise lies in pultrusion, compression moulding, injection moulding and fabrications.

Details of the acquisition, including provisional fair value adjustments, were as follows:

Customer relationships is the only material intangible asset that has been recognised as a result of this acquisition. Fair value adjustments principally relate to the recognition of intangible assets and deferred income tax arising on these adjustments and are provisional. The goodwill arising on the acquisition is immaterial.

The fair value of trade and other receivables was £1.7m. The gross amount of trade and other receivables was £1.7m and it is expected that the full contractual amounts will be collected.

Post-acquisition Plura contributed £3.2m revenue and £0.2m underlying operating profit which were included in the Group income statement. If Plura had been acquired on 1 January 2021, the Group's results for the six months ended 30 June 2021 would have shown revenue of £296.0m and underlying operating profit of £48.5m.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

9.         Acquisitions (continued)

Acquisition costs of £0.3m were included in trade and other payables at 31 December 2020 and have been fully cash settled in the period. No further acquisition costs have been charged to the income statement in the period.

Contingent consideration at fair value of £2.6m has been recognised at 30 June 2021. Of this, £1.5m is contingent on EBITDA performance in the third year of trading following acquisition and has been included in the purchase consideration. The balance of £1.1m has been included in non-underlying items and is contingent on EBITDA performance in the third year of trading following acquisition as well as the continued employment of key personnel. This second payment is being accrued over the three-year period. Of the £1.1m, £0.8m was included in administration expenses and £0.3m included in finance costs.

Contingent consideration was determined using the Directors' assessment of the likelihood that financial targets will be achieved. The fair value of the consideration has been derived by discounting the estimated cash consideration at 10.0% (being the Group's estimated risk adjusted cost of capital). The estimated cash consideration is derived from the budgets and forecasts for Plura.

Adey

On 10 February 2021, the Group acquired 100% of the voting rights and shares of London Topco Limited (Adey) for a cash consideration of £210.0m on a cash-free, debt-free basis. Adey is the UK's leading provider of magnetic filters, chemicals and related products, which protect against magnetite and other performance issues in water-based heating systems and improve energy efficiency, operating in predominantly residential end markets. The cash consideration of £86.6m included a payment of £7.5m for net cash on completion and was net of loans and borrowings at acquisition of £129.3m. Additional debt and debt like items amounted to £1.6m.

Details of the acquisition, including provisional fair value adjustments, were as follows:

Customer relationships, the 'Adey' brand and patents have been recognised as specific intangible assets as a result of this acquisition. Fair value adjustments principally relate to the recognition of intangible assets and deferred income tax arising on these adjustments and are provisional. The goodwill arising on the acquisition primarily represented the assembled workforce, technical expertise and market share. The goodwill is allocated entirely to the Residential Systems segment.

The fair value of trade and other receivables was £12.8m. The gross amount of trade and other receivables was £13.1m and it is expected that the full contractual amounts will be collected.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

9.         Acquisitions (continued)

Post-acquisition Adey contributed £25.3m revenue and £8.0m underlying operating profit which were included in the Group income statement. If Adey had been acquired on 1 January 2021, the Group's results for the six months ended 30 June 2021 would have shown revenue of £307.0m and underlying operating profit of £50.5m.

Acquisition costs of £2.8m were expensed and are included in non-underlying items in administration expenses. Of the £2.8m acquisition costs, £2.6m were fully cash settled in the period in addition to £0.4m that were included in trade and other payables at 31 December 2020. A further £0.2m is included in trade and other payables at 30 June 2021.

Tree Ground Solutions

On 3 May 2021, the Group acquired the remaining 50% of the share capital of Tree Ground Solutions BV, taking the total shareholding to 100%, for a cash consideration of £0.2m (€0.25m). The cash consideration of £0.2m included an immaterial payment for net cash on completion.

Details of the acquisition were as follows:

There have been no fair value adjustments following the acquisition. The goodwill arising on the acquisition primarily represented the assembled workforce, technical expertise and market share. The goodwill is allocated entirely to the Commercial and Infrastructure Systems segment.

The fair value of trade and other receivables was £0.4m. The gross amount of trade and other receivables was £0.4m and it is expected that the full contractual amounts will be collected.

Due to the timing of the acquisition, TGS contributed an immaterial amount to the revenue and underlying operating profit of the Group.

Acquisition costs were negligible and have been expensed and included in non-underlying items in administration expenses.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

9.         Acquisitions (continued)

Following these acquisitions, the carrying amount of goodwill and other intangible assets is as follows:

Impairment testing of goodwill

Goodwill is not amortised but is subject to annual impairment testing (at 31 December). Goodwill has been allocated for impairment testing purposes to a number of cash-generating units (CGUs) which represent the lowest level in the Group at which goodwill is monitored for internal management purposes.

Impairment tests on the carrying amounts of goodwill were performed by analysing the carrying amount allocated to each CGU against its value-in-use. Value-in-use was calculated for each CGU as the net present value of that CGU's discounted future pre-tax cash flows. These pre-tax cash flows are based on budgeted cash flows information for a period of one year, construction industry forecasts of growth for the following year and growth of between 2.68% to 2.80% thereafter. A pre-tax discount rate of 10.0% was applied in determining the recoverable amounts of CGUs. The pre-tax discount rate was estimated based on the Group's risk adjusted cost of capital. The Group applied sensitivities to assess whether any reasonably possible changes in assumptions could cause an impairment that would be material to these consolidated financial statements. The application of these sensitivities did not cause an impairment of goodwill.

However, the headroom resulting from the value-in-use calculations at 31 December 2020 indicated that the Alderburgh CGU was sensitive to changes in the key assumptions. Accordingly, whilst not identifying any further specific indicators of impairment at 30 June 2021, management reperformed these calculations at 30 June 2021. Management considers that a reasonably possible change in any single assumption could give rise to an impairment of the corresponding carrying amount of goodwill and other intangible assets of £2.5m (2020: £2.5m) and £4.1m (2020: £4.3m), respectively. The achievement, or otherwise, of the key assumptions is dependent on maintaining the continued recovery in Alderburgh's chosen markets. The detailed sensitivity analysis indicates that the following changes in each of these key assumptions would result in the headroom being eliminated and thus an impairment recognised:

·      Operating margins declining to 7.9% (2020: 7.7%) per annum from that used in the value-in-use calculations of 10.2% (2020: 10.3%) per annum.

·      The pre-tax discount rate increasing to 12.1% (2020: 12.5%) from that used in the value-in-use calculations of 10.0% (2020: 10.0%).

·      A reduction of 22% (2020: 25%) in the overall forecast operating cash flows used in the value-in-use calculations.

It should be noted that a deterioration in a combination of these key assumptions could result in a larger reduction in assessed headroom.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

10.       Analysis of net debt

On 19 November 2018, the Group entered into an Amendment and Restatement Agreement with various lenders in respect of the Group's previous revolving credit facility agreement dated 4 August 2015. The bank loan, which comprised a £300.0m revolving credit facility and £50.0m uncommitted accordion facility, was secured and would have matured in November 2023 (with two further uncommitted annual renewals through to November 2025 possible). The Group incurred £1.7m of debt issue costs in respect of entering into the Amendment and Restatement Agreement dated 19 November 2018 which were capitalised and are being amortised to the income statement over the term of the facility to November 2023.

On 4 May 2020, the Group entered into a revised Amendment and Restatement Agreement with its banking group to provide the additional £50.0m Covid-19 facility for a period of 12 months, leaving the Group with £350.0m of total revolving credit facilities for the next 12 months. The Group also secured agreement from its banking group to temporarily waive certain requirements within the Group's revolving credit facility and suspend the June 2020 quarterly leverage covenant test. The Group incurred £0.3m of debt issue costs in respect of entering into the revised Amendment and Restatement Agreement which were capitalised and amortised to the income statement over the 12-month term of the facility. The facility expired in May 2021.

Interest is payable on the bank loan at LIBOR plus an interest margin ranging from 0.90% to 2.75% which is dependent on the Group's leverage (net debt excluding lease liabilities as a multiple of pro forma EBITDA) and reduces as the Group's leverage reduces. The interest margin at 30 June 2021 was 1.65% (2020: 1.65%). Pro forma EBITDA at 30 June 2021 was £116.2m (2020: £66.7m) and is defined as pre-IFRS 16 underlying operating profit before depreciation for the 12 months preceding the balance sheet date, adjusted where relevant, to include a full year of EBITDA from acquisitions made during those 12 months.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

10.       Analysis of net debt (continued)

At 30 June 2021, the Group had available, subject to covenant headroom, £102.0m (2020: £125.2m, excluding the £50.0m Covid-19 facility) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met.

Euro-Commercial Paper

On 1 May 2020, the Group entered into a £100.0m Euro-Commercial Paper Programme with Citibank N.A. (acting as Issuing and Paying Agent) under the UK Government's joint HM Treasury and Bank of England Covid Corporate Financing Facility (CCFF). On 14 May 2020, the Company drew down £99.463m under the CCFF and issued £100.0m of Euro-Commercial Paper to the Bank of England at a coupon rate of 0.65% per annum maturing on 12 March 2021. On 8 September 2020, the Euro-Commercial Paper was bought back for £99.710m inclusive of accrued coupon. The Company incurred minimal costs in respect of entering into the CCFF, which have been charged to the income statement in 2020.

11.       Other financial assets and liabilities

Fair values of financial assets and financial liabilities

The book value of trade and other receivables, trade and other payables, cash balances, bank loan and other liabilities equates to fair value.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

for the six months ended 30 June 2021

11.       Other financial assets and liabilities (continued)

The fair values were determined as follows by reference to:

·      Forward foreign currency derivatives: quoted exchange rates.

·      Interest rate swaps: market values.

·      Deferred and contingent consideration: Directors' assessment of the likelihood that financial targets will be achieved (see Note 9).

·      Lease liabilities: present value of lease payments to be made over the lease terms.

Fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

The fair values disclosed above, with the exception of deferred and contingent consideration, which is categorised as Level 3, all relate to items categorised as Level 2.

There have been no transfers in any direction between Levels 1, 2 or 3 in the period.
 

INDEPENDENT REVIEW REPORT TO GENUIT GROUP PLC

Conclusion

We have been engaged by the Company to review the condensed set of consolidated financial statements in the interim financial report for the six months ended 30 June 2021 which comprises the Interim Group Income Statement, the Interim Group Statement of Comprehensive Income, the Interim Group Balance Sheet, the Interim Group Statement of Changes in Equity, the Interim Group Cash Flow Statement and the related Notes 1 to 11. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of consolidated financial statements.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the interim financial report for the six months ended 30 June 2021 is not prepared, in all material respects, in accordance with UK adopted IAS 34 and the Disclosure Guidance and Transparency Rules of the UK's Financial Conduct Authority.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in Note 1, the annual consolidated financial statements of the Group will be prepared in accordance with UK adopted IFRSs. The condensed set of consolidated financial statements included in this interim financial report has been prepared in accordance with UK adopted IAS 34, Interim Financial Reporting.

Responsibilities of the Directors

The Directors are responsible for preparing the interim financial report in accordance with the Disclosure Guidance and Transparency Rules of the UK's Financial Conduct Authority.

Auditor's Responsibilities for the Review of the Financial Information

In reviewing the interim financial report, we are responsible for expressing to the Company a conclusion on the condensed set of consolidated financial statements in the interim financial report. Our conclusion, is based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our Report

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements (UK and Ireland) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Ernst & Young LLP

Leeds

17 August 2021