David Hall
"Following on from a record performance in 2016 I am confident that our strategic development initiatives will continue to deliver growth ahead of the market."

Our record performance during 2016 and continuing growth underscores the strength of the Polypipe business model and the robust fundamentals underlying the majority of our market segments. In a period of heightened political and market uncertainties, Polypipe continued to focus on its priorities and delivered results toward the top end of our expectations. The drivers of our main UK market remain positive and I am confident that our strategic development initiatives will continue to deliver growth ahead of the market.

Following the acquisition of Nuaire last year, using cash and our debt facilities, our immediate focus has been to integrate the acquisition and to reduce our level of debt. I am extremely pleased to report that Nuaire has been successfully integrated and continued to perform well under our ownership, maintaining its previous growth trajectory as well as developing the sales synergies that we had envisaged. The highly cash generative nature of our business has enabled us to reduce net debt to 1.9 times EBITDA at the end of the year compared to 2.5 times at the end of 2015, delivering on our stated aim to reduce towards 2.0 times. We expect this downwards trend to continue but at the same time we have sufficient financial headroom to continue to develop our investment opportunities and will continue to seek compelling “bolt on” acquisition opportunities.

Our customers rely on our ability to deliver the vast majority of their orders within a very short lead time and carrying the right level of inventory across such a broad product range is a key capability of the Group. Our ability to respond and flex rapidly with demand, allowed us to not take any precipitative action with regard to capacity in the immediate period of uncertainty following the EU Referendum result. Whilst market forecasts were unsettled by the outcome, the majority of our UK market sectors were largely unaffected with our order intake showing no discernible impact. Political will, especially following the changes in Government leadership, to improve the housing shortage and national infrastructure is evident and has helped maintain and bolster confidence in the construction sector overall. Whilst we took a measured response to slow capital expenditure relating to capacity expansion, in the immediate aftermath of the EU Referendum, as our confidence returned we recommenced those projects, which has the effect of having pushed forward around £3m of expenditure originally planned for 2016 into 2017. Despite this rescheduling, we still invested £19.1m during the year, some £2.8m ahead of depreciation.

The sharp downward movement in exchange rates coupled with increases in crude oil prices, resulted in a steady increase in virgin polymer prices over the second half of the year. This was a significant reversal of trends seen in the first half and had an increasing impact on margins during the final quarter. In general, our products represent a small part of overall project costs and because of the historical volatility in commodity polymer prices, customers recognise the need for us to pass through both price increases and decreases in our selling prices. Although there is an inevitable lag in achieving full pass through, and we do all that we can to ameliorate price increases, Polypipe is well experienced and has a good history of recovering input cost inflation, even in difficult market conditions.

In the UK residential sector our core products and systems targeted at the new build market showed strong growth with further ongoing substitution of alternative traditional materials and our comprehensive range of carbon efficient solutions. We continued to enjoy success with our underfloor heating offer with a well-received launch of a new range of aesthetic and intuitive TFT touch-screen smart controls. In residential ventilation, our Silavent range benefited from further leverage of Nuaire’s routes to market, whilst Nuaire themselves have continued to innovate with the launch of the energy efficient Drimaster-Eco range of positive input ventilation for both new build and retrofit residential applications.

In Commercial and Infrastructure Systems - UK, Government and legislative focus on flood alleviation continued to drive strong sales growth for our comprehensive range of engineered water management solutions. In addition to providing an increasing number of SUDS (sustainable urban drainage solutions) to developers for a variety of different contracts, we were specified for a number of significant projects helping to design some innovative prefabricated solutions, minimizing site work and time, enhancing quality and health and safety. In one London development project alone, we installed a shallow Permavoid system, designed to handle a one-in-one-hundred-year storm event and capable of handling 1.5 million litres of storm water. Further north, our 1.5m diameter Ridgistorm-XL catchpits were pre-fabricated off-site and helicoptered into position as part of SSE’s repair programme on the Loch Sloy Hydraulic Power Station in the Highlands.

We have continued to invest and maintained our focus on our rate of development in new products and enhancement of existing ranges. During the period many new products were introduced across our businesses, including a new easy-to-install push-fit stainless steel manifold for our underfloor heating range, a range of cast-iron effect PVC rainwater hoppers, a squeezable cavity closure which requires no cutting on site, HDPE 4-way boss pipes and low-level manifolds, a range of guardrail and chain assembly accessories for Ridgistorm-XL installations, Permavoid capillary cone cells, and an upright Boxer packaged solution air handling unit from Nuaire, incorporating high efficiency heat recovery and the latest generation of ecosmart controls. Progressive introduction of new products enables the Group to win an increasing number of high profile project specifications and secure further penetration into the sectors of the construction industry that offer opportunities for us to add value.

Our most significant operational development project during 2016 was the setting up of a manufacturing facility in the Middle East. After careful consideration of several options with regard to location we chose the Jebel Ali Free Zone in Dubai. Being in the Free Zone enables us to have 100% ownership of the operation which we believe gives us flexibility and has also been one of the reasons we have been able to move with such pace. Presently, we have set up one manufacturing cell for our geocellular storm water attenuation products which are the most space hungry items we export to the region. All of our other products and ancillaries continue to be manufactured in the UK and exported as previously. The building is on a relatively short lease, whilst we evaluate the potential opportunity, and the production cell mirrors those in the UK. This means we have in-depth knowledge and experience of operating the equipment but also minimises risk should we decide at a future date to repatriate the equipment to one of our UK facilities. After a very fast set up, we started to manufacture samples for test in July and fulfilled sales of £3.8m from the facility during the year. This is an excellent start, however we will continue to move forward cautiously as we refine our knowledge and skills of operating in the region, to ensure we can as closely as possible match supply and demand in an arena where the average project is considerably larger than those we are used to supplying in the UK.

The Group continued to invest in its capability to reprocess consumer waste into durable, long lifecycle, high performance systems. Approximately one third of our UK production utilises reprocessed polymer, making a considerable contribution to the circular economy with Polypipe one of the largest recyclers of household plastic waste in the UK. Our latest investment is in state-of-the-art multilayer technology for sewerage pipe within our Building Products business, which will come on stream in early 2017. Whilst there are some benefits to lower and more stable input costs, these are largely offset by the investment needed and higher processing costs. Nonetheless, we are committed to continue to increase our use of recycled polymer and believe our customers regard it as an important factor in their environmentally responsible sourcing strategies.

We were honoured to receive the Queen’s Award for Enterprise: International Trade, which was announced on 21 April 2016, to coincide with the 90th birthday of Queen Elizabeth II. The Group was recognised for delivering significant growth in export activity, not least to the Middle East, where Polypipe recently solidified our presence in the region with the opening of our first overseas Technical Training Centre in October 2015.

Group revenue

£436.9m

Increase

23.8%

Underlying operating profit

£69.4m

Increase

28.0%

The following tables set out Group revenue and underlying operating profit by operating segment:

REVENUE2016
£m
2015
£m
Change
%
LFL
Change*
%
Residential Systems207.6182.613.76.6
Commercial and Infrastructure Systems – UK184.2131.540.116.1
Inter-segment sales(11.0)(10.2)
UK Operations380.8303.925.310.5
Commercial and Infrastructure Systems – Mainland Europe57.950.414.92.4
Inter-segment sales(1.8)(1.4)
Group revenue436.9352.923.89.1
UNDERLYING OPERATING PROFIT2016
£m
2015
£m
Change
%
Residential Systems39.132.819.2
Commercial and Infrastructure Systems – UK29.020.144.3
UK Operations68.152.928.7
Commercial and Infrastructure Systems – Mainland Europe1.31.3n/a
Group underlying operating profit69.454.228.0

* Like for like (LFL) measures exclude acquisitions, where relevant, and are at constant currency translation.

RESIDENTIAL SYSTEMS

Revenue from the residential systems segment was £207.6m all of which was in the UK and Ireland and represented 46% of overall Group revenue in 2016.

Growth in activity in private residential new build has continued to be driven by the national housebuilders, whilst smaller builders still appear to be constrained or reluctant to commit capital investment to enable higher volume growth. The much reported trend of the slowing rate of growth in the London market is evident with faster growth in the regions and in particular some of the larger regional cities. Public sector housing starts fell again during the year being impacted by budgetary concerns arising from Government funding and obligations.

Private Renovation, Maintenance and Improvement (RMI) activity has grown at a slower pace than market conditions would suggest. Although the second hand housing market, which is historically a driver of RMI, has remained very sluggish, the rise in real incomes and strong mortgage availability coupled with a slow housing market would have been expected to have driven more improvement activity by those who cannot move. There were no significant changes to Government funding to help alleviate the squeeze on public housing RMI budgets resulting from the impact of policies such as Right to Buy and the obligation to reduce rents. The combination of these factors led to overall housing RMI output to decline marginally during the year.

Residential systems delivered an underlying operating profit of £39.1m, an increase of 19.2% over the prior year.

Commercial and infrastructure systems – UK

Revenue from our UK commercial and infrastructure systems segment was £184.2m and represented 41% of overall Group revenue in 2016.

Although there is some uncertainty over the timing of the Governments £15.2 billion Road Investment Strategy a number of significant road projects were commenced and our products are installed towards the front end of those works. As a result, 2016 was a strong year for demand from this sector and the additional schemes which have been tendered and are starting to be initiated for 2017, are encouraging.

Although private commercial project awards faltered during the middle of the year, picking up again towards the end, the long gestation period of these kind of projects meant site activity remained good throughout the period. Infrastructure related to residential development also performed well and combined with the increase in the construction of high rise multi occupancy buildings in London, and more recently in other major cities, provided a good level of demand for our commercial systems, including the Nuaire ranges.

Export revenue is predominantly from our commercial and infrastructure systems product portfolio and is primarily targeted at the Gulf states, although we also won some notable projects in other British Standard regions of the world. We report sales from our new Middle East facility in this segment as the products are combined with pipes, fittings and ancillaries which are exported from the UK. Including locally manufactured products, export revenue grew by 28.7% over 2015.

Commercial and Infrastructure Systems – UK delivered an underlying profit of £29.0m, an increase of 44.3% over the prior year.

Commercial and infrastructure systems - mainland europe

Revenue from our Mainland Europe segment was £57.9m and represented 13% of overall Group revenue in 2016. When translated into Sterling this is an increase of 14.9% on prior year, compared to an increase of 2.4% in local currency.

Although traditionally the French market improves as construction and municipal spending is accelerated towards an election period, we saw little evidence of improvement during the year. During the first half we ran some distributor incentives to encourage them to build stock, however given the market picked up less than had been hoped, this had the effect of pulling forward some sales into the first half of the year to the detriment of our sales in the second half of the year, resulting in only a small incremental volume growth overall. Nonetheless, our management initiatives are delivering a gradual improvement, maintaining profitability despite the lag in passing through the adverse impact of higher raw material costs in this segment, where materials represent a higher proportion of input costs.

Underlying operating profit was flat at £1.3m, a slight decrease in local currency.

Outlook

The new year has started well, with the underlying momentum in our main UK market carrying through from a strong final quarter, boosted by some pre-price increase orders from our stockists. Market forecasts coupled with statements made by contractors and housebuilders regarding their anticipated activity levels, suggest that the overall UK construction market will continue to grow. We intend to maintain our focus and investment on those development opportunities which enable us to add value to our customer proposition and deliver growth ahead of the market. Whilst the level of uncertainty appears to have eased since the immediate reaction to the outcome of the EU Referendum, we remain alert to market risks and are confident in our ability to adapt to any changes in market conditions quickly and from a position of strength.

Passing on the impact of input inflation on our base polymers and other costs is one of our most immediate priorities. Whilst doing everything we can to alleviate the need for selling price increases, we are confident that our customers expect us to pass on essential increases. We expect to see the impact of these price increases coming through as we move into the second quarter, delivering our planned margin over the year as a whole, albeit resulting in a different profile through the year when compared to 2016.

The combination of forecast market growth, our focus on executing our strategic development initiatives and resolve to recover input cost inflation mean that we look forward to 2017 being a further year of progression for the Group.

David Hall

Chief Executive Officer