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Edited Transcript of PLP.L earnings conference call or presentation 13-Aug-19 8:00am GMT

Half Year 2019 Polypipe Group PLC Earnings Call

DONCASTER Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Polypipe Group PLC earnings conference call or presentation Tuesday, August 13, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Glen Sabin

Polypipe Group plc - COO & Executive Director

* Martin K. Payne

Polypipe Group plc - CEO & Executive Director

* Paul James

Polypipe Group plc - CFO & Executive Director

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Conference Call Participants

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* Christen David Hjorth

Numis Securities Limited, Research Division - Analyst

* Gavin Jago

Peel Hunt LLP, Research Division - Analyst

* Toby Russell Thorrington

Edison Investment Research Limited - Analyst

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Presentation

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [1]

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So good morning, everybody, and welcome to Polypipe's 2019 Interim's Presentation. I'm Martin, Payne, Chief Executive. I've got with me today Paul James, Chief Financial Officer; and Glen Sabin, Chief Operating Officer; and Emma Versluys, Group Legal Counsel.

So just to introduce, I think we've had a strong first half performance. Revenue, 6.2% higher with a strong contribution from our recent acquisitions. Within that Residential Systems revenue of 8.4%, with again Manthorpe performing very well. I'll talk a bit more about that later on. Commercial infrastructure revenue up 3.4%. That's despite some challenging conditions in the U.K. market in this particular sector. I'm also very pleased to say that we've improved margins by 30 basis points to 17.6% in the half, and we've resolved the half 2 2018 inefficiencies that we experienced due to some capacity constraints in our Broomhouse Lane plant. And then through the first half we've also implemented some selective cost reductions. The second half started well. So I'm encouraged by that, and that's led the Board to leave this profit expectations unchanged for the year.

So with that, I'll hand over to Paul, let him take you through some of the numbers.

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Paul James, Polypipe Group plc - CFO & Executive Director [2]

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Thank you, Martin. Good morning, everybody. Yes, very pleased to report that for the half group revenue was 6.2% higher, and that's 1% higher on a like-for-like basis. It's worth mentioning that when we reported the 4 months of April, we had a like-for-like increase of 3%. So with the 1% for 6 months, it illustrates that we had an element of destocking in Q2 in May and June. But we've had a good start to July, and Martin is going to talk about that a little bit more in detail later. Underlying operating profit was 8.3% higher at GBP 39.3 million. That number is reported according to IFRS 16, accounting for leases. You'll see a little bit more detail on that later as well. Underlying earnings per share 8.9% higher at 14.7p. And cash generated from operations was at GBP 21.7 million, and this reflects the normal increased working capital for our first half normal seasonality pattern you'd expect to see.

Net debt at the end of June was at GBP 178.5 million which is 1.8x last 12 months EBITDA and we're on track to meet management expectations for the year. And the interim dividend increased by 8.1% to GBP 0.04 per share in line with our results.

Let's just have a quick look at the underlying results summary. And I'll just pick out a few highlights, and we'll go into a bit more detail later on in the presentation. You'll see, first of all, that we have a good record of good operating leverage benefit. So with the revenue increased 6.2%, we have an underlying profit before tax increase over the period of 8.2%. We have increased gross margin by 50 basis points, and operating margin is, as Martin has said, 30 basis points higher since last year, same period last year.

If I look at finance costs, we have the new revolving credit facility in place, which is at this level of leverage 10 basis points lower than the old facility. And we [purged] out GBP 3.7 million. With the seasonality of our net debt, we are typically lower net debt in the second half than the first half. I think we're well on track for consensus of GBP 7.2 million for the year. And the underlying tax rate came in at 17.7%. It was 15.6% for the whole of 2018 and 18.2% for the half. That just reflects, may I remind you that in the second half of last year, we've [released] a number of tax provisions. We're guiding for 17.7% this year.

Go to the next slide. This is the bridge, which you've seen before, this template, revenue along the top and underlying operating profit or EBIT along the bottom, left-hand side last year's results through to this year's half results. First thing I want to say is that on the first column, you'll see the price increase. We achieved approximately a 3% price increase giving us GBP 6.2 million, and you'll see the drop-through to EBIT, all of that absorbed by cost inflation. And a reminder, we compensate for cost inflation and actually (inaudible) status and that has a margin diluted effect, a 3% increase for the target margin by 30 to 40 basis points. But bearing in mind -- particularly when you think that we've [actually] increased margins by 30 basis points. That's a good reference.

Because the next one you'll see currency, we're 89%, 90% U.K. based. So fairly small effects there. And then the next column is organic volume, and you'll see that we have a 2% decline, GBP 4.4 million. We'd normally expect to see it drop-through 33%, 35%. But you can see it actually we've got [dropped to only 20%] in the (inaudible) the savings initiatives achieved in the first half as Martin has alluded to. If we look -- the cost savings we've done, adjusting things like a number of factory heads, cutting down on discretionary spend, [operating vacancies] et cetera, et cetera all the good housekeeping work you expected to see in the circumstances. And you can -- we could guide that we'll be carrying on with those savings for the full H2. We'll also have overcome inefficiencies from last year, Martin just mentioned earlier, and other cost savings gets us in a good position to increase margin to [17.6%] and achieve consensus.

Final column -- sorry, the next column is the acquisitions where you can see that the contribution of the new businesses is considerable, and I'm pleased to report that we have a 33% operating margin from those businesses. It is very pleasing to see. And the final column is just showing the IFRS 16 effect. At EBIT level, it's pretty minimal. It's the half, it's GBP 100,000 effect.

A few words on the balance sheet. Again, just a few highlights, and there's a little bit more detail later [on some of the lines]. I just want to draw out the new item, which is the capitalization of right-of-use assets at GBP 12.7 million at the end of the half. And you see a bit further down, lease liability is the same number, GBP 12.7 million. So that's the [grossing up] capitalization effects of IFRS 16. Goodwill's unchanged. Net working capital, net debt, as I said, there'll be more about it later. And it's just a reminder to say that we don't have a defined benefit pension scheme in our balance sheet, and therefore, it also didn't provide a cash flow drag.

Few words about net working capital then. You'll see that the first half, already alluded to this. We typically have an increase in working capital as part of our normal cycle, and it will come down again towards the end of the year. But within the half, we have slightly elevated stock levels, and that -- we talked about this before, that is proportionally measures -- proportionate measures in relation to Brexit. And in order to secure the supply chain and avoid the effects of short-term shocks in the supply chain and we expect that to unwind once Brexit has finally happened and there is clarity at least on Brexit. The other working capital days broadly in line with June 2018.

Next is cash flows. Again, I'll just highlight a few items. First of all, if you look at 2018, you'll see that cash flow was somewhat flatter by the receipts of the disposal process of the French business, GBP 13.8 million. And if I turn to 2019, it's worth noting that capital expenditure of GBP 8.7 million is somewhat below same period last year by GBP 2 million, and we're guiding the CapEx this year to be more like GBP 20 million of PolyPipe, somewhat below the GBP 25 million, GBP 26 million that we previously talked about. And again, it's just a sensible precautionary measure [indiscernible] that we've taken.

Movement in working capital, this GBP 27.8 million reflects normal seasonality and within there, as I already mentioned, we've got that -- a little bit of stock [bloating] going on. And then if you drop down to the bottom you see the conversion rate of 30%, slightly lower conversion ratio than we had same period last year. Again, that's due to the working capital stock bloating for Brexit, somewhat offset by the CapEx reduction.

Few words on the statutory results then. The first number, the 0.5, that's just a accrual for contingent consideration for the business that we've acquired, and that will continue as we move on. And the GBP 3.7 million amortization of intangible assets that has, obviously after the acquisitions, the amortization has stepped up compared to what it was before.

Finally, banking facilities. Yes, we have the new revolving credit facility in place from November. We have the improved terms up until 2025. We have a good strong syndicate, and on top of this facility we have an uncommitted GBP 50 million accordion. You'll see that we ended the period with a headroom of GBP 120 million, and we're well within our covenants under the RCF. And I'd also just included the lease liability amount GBP 12.7 million (inaudible) So that was a quick run through the results, and I will hand back to Martin. Thank you.

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [3]

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So thank you, Paul. What I'm just going to do now is just talk a bit about the businesses and the markets they've been operating in. But just to remind you, before we get started, a chart that you'll have seen over the years, just updated for our performance to the end of June. And this shows the demand drivers that sit behind our businesses. So if, for example, there is a new house build program going on that needs road going to it, if this drainage is going under that road, that would be reported in our Civils and Infrastructure business, but the demand driver is the house build project in the first place. So in this chart, we're looking at that demand driver rather than the application. And you can see that [basically] 90% of our business is U.K., with 10% coming from -- equally from Europe and the rest of the world. And within that, you can see we've got a balanced exposure to the different segments of that construction market. So roughly 1/4 RMI, just short of 40% U.K. new build now, 20% commercial and then 5% infrastructure. So a balance across all the different segments. And this gives us resilience through the cycle. These -- all these different segments move at different paces with different economic drivers at different times, we're in each of them. So if one's up and the other's down, we tend to get exposed to all of it. So that gives us the resilience through the whole cycle. And historically, if I look back maybe 3, 4 years, to the sort of pie charts we were looking at there, I'd say that new house builds has probably grown as a proportion of the business from roughly 1/3. That's partly down to acquisitions such as Manthorpe being in the residential space, but also new build has been really the driver of the construction markets that we operate in for a couple of years now, 2 or 3 years. So again, they've grown sort of relative to the others quite a bit more.

And then if you look at the RMI and commercial markets, they have broadly been flat, maybe slightly down in commercial with the more recent market performances; and infrastructure, probably a little bit less as the rest of this has grown. We've carried on doing what we do in infrastructure. So generally, a good balance of exposure to those different drivers.

If we turn to -- yes. Sorry, just having a few technical glitches here. Excellent, well done. So in terms of the elements of those markets, the residential markets first. CPA and their summer forecast recently have forecasted for new House build to be 0.6% lower in 2019. And RMI to be a little bit more down in '19 at 1.5%. And the geographic story in there is that we're still seeing the Midlands and the North strong. Go to Manchester, Birmingham, it's very strong, and Leeds as well. But London and the Southeast absolutely weaker. And the graphs there that you see that the bars show the progressive forecast from CPA since the summer last year, the winter forecasts and the summer forecast this year.

So when you track 2019, obviously, there's been a sort of a downward trend in terms of forecast for this year, I think, reacting to the more recent market information. You'll see a couple of bars missing there. That's where the number is actually 0. So it's not that we've forgotten to put the bar in or anything, it's actually 0.

I think the point I would make, though, here which gives me the confidence in this market, the fundamentals are still very strong. We've still got structural housing shortage between 200,000, 400,000 depending on whose numbers, we believe. You can track housing formation statistics from the ONS versus housing completions. And since about 2007 there's a divergence from those. And if you look at that, it's anywhere between 200,000 and 400,000 houses. We've got historically low interest rates. We've got Help to Buy in place till 2023. And we've got real wage growth that's driven by a near full employment at the moment. So in any other environment, they will be extremely strong positive drivers for our construction market. And I think that still remains the case despite the short-term uncertainties that we're seeing.

If we turn, hopefully, to the commercial and infrastructure markets, again, the same sort of charts on the left which is tracking CPA forecasts. The commercial market in the U.K. is forecasted to be 6.9% lower in 2019. But within that positive for hotels, positive for warehousing and high wide -- rise resi, not so quite for offices and retail, and I think you probably understand why that might be. But on the positive side as well, the roads infrastructure market is forecast to grow, and we can see that inside our businesses as well. The smart motorway upgrades are going well. I think (inaudible) reported similar sort of comments earlier in the month. And there's some delays on new road projects, but they're still growing and the A14 project, for example, for us, is pulling hard and well into it -- well into the swing of things now.

And again, I would say, fundamentals still strong in this sector as well, particularly in the infrastructure sector. Road Investment Strategy 2 was announced recently and GBP 25.3 billion of funding allocated to that through to 2025. So really, there's a good solid in plan there. It's all about delivery. And again, RIS1 maybe not quite got there, but it's -- it will get there even if it's a little late. So I think we've got confidence that investment will come. And if anything does happen with the economy, back to the resilience point that the government's got the [joke] about investing in infrastructure to get us out of that, the trickle-down effect. So I feel confident in that sense in this market as well.

So against that backdrop, if we look at our individual business units, a segment review for Residential Systems, you'll see that we've had 8.4% revenue growth with a strong contribution from Manthorpe. So very pleased with that business, and we'll talk a little bit about that in a couple of slides' time. Behind that, like-for-like revenue growth at 0.8% and as Paul alluded to earlier, we have seen that the drive is merchant destocking impact us in the first half, partly as a result of the price increases that we've put through on the 1st of January, which causes the merchant to stock. And if you remember, we had a very strong second half in residential at the back end of 2018. The merchants then destock in the first part of the year. And I think as Paul alluded, again, May and June, where it was somewhat softer as well for us. And again, we can identify that particularly as we've seen what's happened in July afterwards. That there was some further merchant destocking in the lead up to their half years. I think having planned for a March exit, stocking up for that event. And then it not happening, they then realized they have to sort of manage balance sheets' through to the half year. I think that the early part of July, I'm encouraged because I think they're putting a little bit of that stock back in. So it's very difficult within all of that to just sort of work out what's happening.

Very pleased with the underlying operating profit performance up 11.8%, with a margin improvement of 60 basis points. As we said earlier, the H2 capacity constraints and inefficiencies that we had in Broomhouse Lane have been resolved. Not least, because we've -- we invested, if you remember, about GBP 1 million of CapEx in developing some land that we had to give ourselves a little more space. If you remember, this is all about the ability to load trailers in our plant in Broomhouse Lane. Our sort of product is a very space-hungry product, and we literally ran out of space to load trailers safely. And safety is our paramount objective in anything that we do. So we weren't going to -- to [challenge us.] So we needed to invest in some more land and some more [hard] standing space. So that's done and resolved -- and then in this segment as well, we've put some selective cost reductions through the first half process, just taking few heads out across the businesses, constraining discretionary spend in certain areas as well. So very pleased with all of that. And we've not been standing still, letting all this happen to us either. We put our fourth multilayer extrusion facility in our Broomhouse Lane plant at the beginning of the year, and that's increasing our use of recycled materials, and again, multilayer means you get an outer skin of virgin material, an inner skin of virgin material, down the middle of the pipe keep putting recycled materials. So good ESG storing really sort of reinforces our ESG credentials in that area. And also, I think, I might have mentioned it at the last results announcement, even at the Capital Markets Day, our Noxmaster product in Nuaire which was the carbon filtration system that removes about over 90% of NOx particles from air coming into a house. That won the prestigious award of the H&V New Air Movement product of the year. So the guys are really making some interesting inroads into that air quality space that we've talked about before. I hope we'll have a bit more to say about that at the end of the year.

Just off to the left there, just for your information, we've put the pie chart in that shows -- in terms of that first pie chart that we showed you looking at demand drivers. What this looks at is the demand drivers within the residential sector. It's no surprise that it's all, mostly RMI and new house build. But -- as you'll expect, probably a little more interesting when we get to the commercial infrastructure slide.

So turning to that slide, again, with Commercial and Infrastructure Systems division, revenue at GBP 94.3 million, 3.4% higher than last year despite some of the challenging conditions, particularly in the commercial space that I've just talked about. Like-for-like revenue is 1.1% higher, it's actually 2.7% higher in the U.K. This is where we have quite a bit more export business. And we did see our exports lower by 5.3% predominantly Middle East and predominantly within that, the UAE [credit still drying and] making construction difficult in the Middle East. We know that Expo 2020 is going to happen, and there's going to be kind of a [power wave] at some point. But that's still difficult at the moment. So -- but 2.7% in the U.K., relatively pleased with that performance.

Underlying operating profit up 1.6%. And again, with some selective cost reduction measures in this business. But as Paul alluded to earlier, price increases do dilute our margins because we recover on a [pound notes] basis. So margin down very marginally, just 13.5%.

And again, some excellent progress within the businesses on product launches and projects. We launched Polystorm Deep, which is there to address the forthcoming CIRIA737 regulations, is basically allowing us to go deeper in terms of tanks [but this] is a stronger tank. And, again, plays to our advantages versus the competition where we can offer a range of attenuation cells that can be geared towards individual projects' requirements. So quite often where we're working on competing against a one-size-fits-all type attenuation cell and by its nature it is generally over-specced for quite a number projects it's going for. So we have the specific products that vary depending on whether how deep they go, the load-bearing requirements, the ground conditions, and we can usually generate a solution for the customer that's more cost efficient.

So again, in that vein very pleased with that product launch. And related to that, we launched our "Inspiring Green Urbanization" design guide earlier in the year, again, presenting to the real decision-makers in construction. So the design is for clients, the architects to try and start to show them what's possible, beyond the possible with green infrastructure. We've got to get into the front end of the process. So that guys can start speccing this through, now if you're getting to the contractors building it, it's too late. We've got to get up the chain. So very pleased with that launch and it was highly acclaimed.

And then finally, our Fuze product, which is a high-density polyethylene soil stack with electrofusion jointing which was launched right at the back end of '17. And very pleased with the way that's gone. And just to give you an example, we've just gone on the tallest prefabricated twin tower that's ever been built or is being built in Essex House. So very pleased with that. So some good progress in terms of products in this segment. So across both of those segments, we're very pleased with the performance and plenty more to come, I think.

So just a quick update on acquisitions. If you remember, at the back end of last year in pretty quick succession, we did (inaudible) Manthorpe. We'll start with Manthorpe, again very pleased with how that's integrated into the group. The integration plans continue, just have some IT -- remaining IT issues to get resolved. That will be done by the end of the year. The commercial and cost synergies, we're beginning to see those come through. The strategy of using our leverage with customers, both in terms of housebuilders [and merchants] and roofing contractors are beginning to show benefit. Manthorpe maybe didn't get as far as they could have done as a small business, but Polypipe Group (inaudible) into a little bit more and starting to see some inroads come there.

In terms of product, very pleased, again, if you remember, there a lot of IP around the products in this business. They won the Housebuilder product award for 2019 for the underfloor -- the telescopic underfloor void ventilator. This is a product that allows builder to vent the underside of floors, but bring the inlet of air higher upwards [indiscernible] prevention mechanism. So you're not have new airbricks right low down. You're having them higher up. The way it's assembled means the builder can't get it wrong and -- as some of the previous products they managed to find ways of getting it wrong. So very pleased with that. Yes, good ideas, but simple ideas, but they really do make a difference. And again, performing in line with expectations. So again, pleased, pleased there.

Let me turn to Permavoid. The integration of Permavoid is now complete. Basically, now that's integrated and again is forming part of our green infrastructure drive "Inspiring Green Infrastructure" (sic) ["Inspiring Green Urbanization"]. It's very much based around Permavoid as well as other products in the group. Project quote logs look healthy. Very pleased with how that's going, although they're not immune to some of the delays that we're seeing in the commercial environment more generally. But that's just a short term thing, long term the product is in a good place. As an example of the sort of things that we're doing with Permavoid. You can see there, the England Hockey Trust put a portable pitch up at the Stoop at the Harlequin's rugby ground. The concept being if you can put international standard hockey pitches in grounds like rugby grounds or football grounds, you can put the big games on, get a decent audience there. Take the pitch down and take it off somewhere else. So that pitch there is laid on Permavoid and hosted GB versus New Zealand in June. So I've got some really good feedback as well so. Again, great ideas in the sports arena and the green environment we're driving it with green infrastructure. So very pleased with that and again, performing in line with expectations.

So just on M&A, we did a couple in quick succession in half 2 of last year. Not got one away in the first half of this year, but that's -- I can assure you we're still working very hard. And what I wanted to do is just try and update you on our M&A structure, and remind you in fact [speculate] with 2 track, twin-track M&A strategy that we've got. The first one is Bolt-on M&A to fill product gaps and adjacencies that provide a one-stop shop to our customers. And the example I think I would use is, in a tall building, we can do all the plumbing, we can do all the soil and waste, the ventilation, the underfloor heating, the outside rainwater capture, the drains below ground, we can't get high-pressure, high-temperature water up a building. And it's the same [M&A] contractor. They sat down over the other side of the desk from us, but do all the things that we can do, but also does high-pressure high temperature. So why wouldn't you when you got the customer over the [other side of the] desk from you. Why would you not want to try and leverage that relationship further. And so that approach across the business with plenty of opportunities like that around the business where we can fill product gaps to leverage our relationship with the customer. And in doing so, it's adding to our IP and technology that we've got in the businesses. Again, the products that we've built in Manthorpe and with Permavoid really giving us a portfolio of good technological products and intellectual property that we can protect and capitalize on. It will be primarily plastic, but other materials considered. We're not just talking about plastic here. We will consider other materials as we go around that process. And the pipeline's encouraging in terms of options out there. And again, as I say, we're working hard to bring some of those to the fore. The second strategy or second track of the strategy is to try to leverage our products across a wider geography. We're looking for businesses with established market and manufacturing positions in other geographies, with which we can leverage our IP, our technology, our skills across a wider market. The sort of problems we are solving in terms of water management, green infrastructure, climate management and ventilation, they're global problems. They're not U.K. problems. The U.K. is 1.5% of the global market. We'd like to try and leverage those products and solutions across a wider geography. And that's in our water management solutions, water distribution, stormwater management and climate management space.

They are few and far between, but we -- the options that we've got there, if they did come up we will obviously want to look at them. But we will maintain and continue our disciplined approach to acquisitions making sure that there's a good strong commercial strategic fit, the financials all stack up as well. So we'll continue that disciplined approach whilst I'm at the helm. So I think that's a bit of a [mid] ground. So to summarize, again, I think strong first half performance. Revenue, 6.2% higher with a strong contribution from acquisitions. But the key thing for me is those medium-term fundamentals remain strong. We've got good drivers for growth. We are mindful of the continued political and economic uncertainty. But those medium-term drivers are still going to be there. We've instigated some self-help cost reduction initiatives just to see us through whilst this uncertainty remains, and I think with the encouraging start to the second half that we've had. I think the Board, well I know the Board's profit expectations remain unchanged for the year.

So that concludes the presentation. I'll throw it open to questions, I think.

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Questions and Answers

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [1]

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[indiscernible] feel there could be certain [trend with destocking pattern?]

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [2]

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Yes.

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [3]

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(inaudible) normal year, how pronounced have they been just relative to the last couple of years, you'd typically see it as the price increases. Is it Brexit that's really driven the other issues you've see?

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [4]

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Yes, I mean, know what happens when we put the price increases through, the merchants tend to buy forward at the old price, put in stock and then sell that at the new price and make a bit of profit on the turn. That's not unusual. I think the slightly unusual thing this year is we went early because we saw what was happening with inflation. And the 1st of January, pushed a lot of that demand into the second half of last year. So year-on-year, it's sort of complicates things a little bit. But the driver is the same. Yes, I think it's that. As I said, I think what the merchants generally have done is build stock for a March exit, it didn't happen. They've taken it back out again to get to the half year and then I think they'll take a view as to what they put back in. I mean, we're planning, we're not planning on them putting an awful lot back in. But if they do, then we're there to help them.

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [5]

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Second was just on visibility for rest of the year. Can you give a sense of [forward orders is the right way] to describe it, but we've got some of the larger projects visibility [indiscernible] at this point?

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [6]

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Yes. I mean, our business is difficult to get too much visibility on. I mean, there are very basic terms we get orders. We deliver them within 3, 4 days. So in that sense you don't get an awful lot particularly in the residential space. Yes, you can see what the housebuilders there trying to do with the housing [staff] and their build plans to get an idea, but really in terms of hard numbers is difficult. In the commercial space, again, you get a bit more visibility in terms of project quote logs. You can do a lot of work quoting for individual projects. You know when they're going to come up, but then it goes quiet again. And then the contractor digs the hole and then places the order and expects it there the next day sort of thing. So again, a bit tricky. But I think, Jago, if you look at those project quote logs, (inaudible) I'm encouraged by the number of products that are in there. I think we can see that the plans are still there. It's a case of how much delay is in those projects because I think people are either just holding off or they're getting to finish first fix but then going slow on second fix because as they sell out maybe apartments or whatever. So it's the timing that's the more tricky thing to [indiscernible] it's difficult, [of all-time] with what's happening or -- may or may not be happening in October. It's a difficult time to be forecasting. (inaudible) long way of saying indiscernible

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [7]

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The CapEx of the -- with (inaudible) done this year. (inaudible) around what's within that but this similar things, smaller project. (inaudible) last year, which should have been (inaudible) CapEx. So what's been delayed [indiscernible]

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [8]

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Project by project, probably not (inaudible) I would characterize it more than anything that's based on capacity expansion at this stage, which is going to -- taking a raincheck until we've got a little bit more visibility. But the cost -- bear in mind that even the GBP 20 million we're ahead of depreciation, so it's not like we're [running it] back in that sense. We're still investing in projects that will drive efficiency gains and help us. So the money that we've spent on the land in Broomhouse Lane. We're actually putting a CHP unit in our plant in Aylesford and try and take energy cost down. So things like that. So we're driving efficiency gains, but anything that's capacity expansion at the moment, we're just thinking a little harder about it.

Toby?

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Toby Russell Thorrington, Edison Investment Research Limited - Analyst [9]

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(inaudible) whether there are further costs being taken out in the second half. (inaudible) first half.

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Paul James, Polypipe Group plc - CFO & Executive Director [10]

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So yes, we have the annualized effect, [indiscernible] getting rid of the inefficiencies we had second half last year. And yes, there will be some additional cost savings [taken as well] on top of [those 2.] Yes.

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Toby Russell Thorrington, Edison Investment Research Limited - Analyst [11]

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Right, and on a slightly longer term [timer,] could you just explain or tell us where you on[HSBC?] How far [indiscernible]

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [12]

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Glen, do you want to take that?

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Glen Sabin, Polypipe Group plc - COO & Executive Director [13]

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(inaudible) some of the premium works we're [doing] at present. In terms of large-scale supply [indiscernible] any time in the next [6,] 12, 18 months before [indiscernible with the review that's obviously going to be undertaken. We're not actually factoring it into our plans, we are just maintaining contact with all the people, we are doing the technical work and when we're ready, if required, but the enabling works are still [completing,] so short-term (inaudible) more medium term, yes, it's on the books but not [one more banking one.]

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [14]

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We did HS1. So down [to the plumbing] in the 90s we did the drainage for that [system.] To remind anybody, HS 2 rail, isn't normally a very big sort of area for us in terms of drainage because rails are laid on gravel, gravel drains naturally. So there isn't a -- say you get station work and so on and so forth. But with HS2 with the rails being laid on concrete because (inaudible) All of a sudden you got a hard surface which under the (inaudible) you need to -- you need to have the drainage solution too. So it is an opportunity for us that we have experience of having done it in the 90s so, not that too many of us were here in the 90s, but we've got the (inaudible) remembers it.

Yes, Christen?

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [15]

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And just 3 really from me. First of all, [indiscernible] how you think of you've performed in volume terms versus the general market in the first half. And I suppose related to that, what you're seeing from competition? Have you seen similar levels of price increases, coming through from others or indiscernible on price. And then this third one is just on commercial. I mean, I think you previously alluded to sort of an 18-month cycle from start, to actually coming through there in a market type of year. I'm just wondering where you sort of see Polypipe indiscernible the market more generally in that sort of process?

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [16]

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Yes. Okay. So let's take care of the market first. So yes, volume, I think, when we did the maths in the bridge is about 2% lower. And I think that's very much been impacted by the de-stocking that we're seeing in the merchant base. Yes, we had a weaker comparatives in the first half of last year because of the weather, but that destocking effect that happened in the first part of the year [down to the] price increase was unusual because of the timing of it all. And bear in mind, we had a very strong second half in the residential segment. So it comes on the back of that. And then the second part of the destocking [effect,] as I said earlier, was the merchants managing their balance sheet. So I think market-wise, once you -- once you have [stripped out] those 2 short-term effects, I think we're performing at or even probably slightly better than the market. In terms of competitive price increases, yes, we've seen roughly similar sort of numbers. And if you bear in mind, in our industry, although our main competitors may be owned by overseas businesses, they're generally manufacturing in markets. In our industry, you generally do manufacture in market because of the logistics cost being prohibitive. And because of that, our competition will face the same economics. So things like exchange rates, for example, we're not in a position where we're competing with imports, which you had a change in exchange rates, you can change the competitive landscape quite quickly. But because we're all manufacturing in the same market, we're all facing the same economics, exchange rates, plastics prices, they all affect us in roughly the same way. So it's not a surprise that really we're doing the right things to protect our own businesses. So we're not out of line with any of that.

And in the commercial space, yes, I mean, our first fix businesses. So this will be more likely to Terrain business, where they're putting soils stacks in, they are about a 12-month from project start to us going in. Project award, sorry, to us going in and fixing. Second fix businesses like the Nuaire ventilation business, they're not put in until rather the later stages of our construction. So they are more than 18-month lead time. And I think we've seen signs of that commercial markets impacting on our Terrain business, certainly in the latter few months. Nuaire again still going increasingly strong because they're probably later on in the cycle. So -- but encouraging signs that, again, the quote logs in these businesses are still -- in terms of numbers are still strong. So I think we get -- we can see a little bit of softness in our Terrain business. But that, again, showing early signs of coming back. So again, that should filter through to the Nuaire business 6 months [so late.] So very difficult to read-at-the-moment, Christen, because the project delays is not about the project numbers, really, it's about how delayed (inaudible) the speed at which they're going.

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [17]

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I just had one more small one [indiscernible] relates to Permavoid. indiscernible you've mentioned that the manufacturing assets indiscernible have that (inaudible) IP in that business. Just wondering (inaudible), just wondering, are you going to (inaudible) in international markets and [other than the] U.S. (inaudible)?

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [18]

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Yes. So the [multiple] we're using with Permavoid internationally is one of subcontract manufactures that we've got an agent in the U.S. that is manufacturing under license from us and developing that market. They have started (inaudible). Actually, very pleased with how that's going and some good quote logs in there. Again, project life times mean that you don't get immediate reaction to that in terms of the numbers, but the pipeline is coming through quite [nicely.] So pleased with that. In Europe, they've always been relatively strong, but again, the green infrastructure markets in Germany, Holland, the lowlands, if you like, are very strong, and they've used a subcontract model for manufacturing over there. And actually, we dip in and out if we either got capacity or the subcontract manufacturers (inaudible). So with these things, it's about having the tooling, making sure you've got control of the tooling. You've got (inaudible) injection mold as you can do. I think, again, it's a bit like what we've done in the Middle East. We've used a subcontract manufacturing model there. We have the tooling. We moved the tooling to where the demand is. And that's the most efficient way of doing it really because the product is 95% void because that's the nature of the product. So you don't want to be transporting it very far.

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Paul James, Polypipe Group plc - CFO & Executive Director [19]

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Okay. Just to sort (inaudible) interesting thing about (inaudible) what Martin is talking. Of all these questions that come up (inaudible) products. It's a variety of applications for the product. And then you're dealing with specialist people in those markets. So in Germany, we've teamed up with a business called Optigreen, they're a green roofs specialist. And that's their specialist subject they (inaudible) system, all benefit, but it (inaudible) but, people are (inaudible) on top (inaudible) we've got inquiries (inaudible) but the lead time of all of that is longer, and again, specialist contracts [with the] specialist design, and you need to be with a partner who understands how to go out into those markets. And the interesting thing about the guys in the U.S. is that [the whilst there are] (inaudible) Business [is leading] a drainage. (inaudible) So they're well connected in the sports community. So again, they get a lot of inquiries (inaudible) Applications. And what we've done with the [indiscernible] business is work with the founders to actually set up a proper licensing model (inaudible) go and make friends with people indiscernible try and get some sort of relationship going (inaudible) but it wasn't (inaudible) [professionally technical] approach. It wasn't very systematic in terms of the [conversions.] So that's what we've been refining since we've owned it.

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Martin K. Payne, Polypipe Group plc - CEO & Executive Director [20]

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Any other questions? That looks like it's no then. So it just leaves me to say thank you for coming [indiscernible] today. And yes, we'll see you all again soon. Thank you.