Good morning. My name is Joe Vorih. I'm Chief Executive Officer of Genuit Group. I'd treally like to welcome you here today, especially to those of you who were able to make it here in person in Stonehouse, but of course to our online audience as well. I'd like to again welcome you to this Genuit 2022 capital markets day. I truly hope you'll find this time well invested, really a pleasure again to have you all here. Since I joined Genuit in March, a team of leaders has been working together across the business, and of course, in addition to their regular work, to refresh our strategy. Fundamentally, that's what we're gonna be talking about today.
I'm pleased to present together several of my colleagues, the components of that strategy, and explain the sustainability focus that we've built into the very core of our business, as well as our growth plans, and how we'll deliver significant shareholder value through this, our sustainable solutions for growth. We have what I believe will be an exciting and informative day for you today. I'll first review our refresh strategy, outline the key initiatives to deliver this strategy, explain how we'll organize going forward to best realize that growth, and what results we expect to achieve. Several of our executives are here to present today, and they'll present their businesses in a new and more focused organization. Matt Weber will present Climate Management Solutions. Steve Durdant-Hollamby will present Water Management Solutions.
Matt Pullen, our Chief Operating Officer, who several of you have met, will be presenting Sustainable Building Solutions, our third business unit, in place of Steve Currier, who's just joined the company and I'm pleased to have here today. We'll then hear from our CFO, Paul James, who many of you know quite well. He'll present our financial guidelines and further explain the targets that we expect to achieve with this newly refreshed strategy. I anticipate ample time for Q&A at a session when we wrap up the presentation, so I'd ask that you hold your questions and we'll take them all at that time. In addition, after the Q&A, Matthew Webber will come and introduce the Adey business to you.
After that, we'll have a light lunch available throughout and some interesting demonstration stations right behind this wall here, so that you can get hands-on with the wide range of solutions and products that we in Genuit actually can bring to our customers. We also have several tours of the Adey facility, and we'll get into the logistics of organizing that afterwards. Needless to say, my fellow leaders and I will be here throughout, and lots more chance for one-on-one discussions and questions as well. Let's get into it. It's worth revisiting the history of Polypipe and Genuit to understand the journey that we've been on and how we've come to be the Genuit Group of today.
The company is more than 40 years old and started making a range of plastic building materials, including plastic bathroom and garden products, but especially pipes and fittings. Throughout the early 2000s, the business continued to expand its core plumbing and drainage business under the Polypipe brand. The sorry, the 2015 acquisition of Nuaire, in fact, marked the start of a series of important and strategic acquisitions. They're quite successful and have significantly improved and diversified the business. Today, after 10 acquisitions since the IPO, we've expanded the business intentionally into a much broader provider of climate and water management solutions, as well as, of course, still being the leading provider of plastic plumbing and drainage solutions in the UK.
We've also made choices to strengthen the business, including divesting the French business, more recently, exiting the U.S. small UFCM business, and we'll continue to review our portfolio on an ongoing basis. Successful strategic M&A has been an important contributor to the Genuit of today. In 2021, of course, we also renamed the group Genuit to reflect the new character and potential of the business. Genuit, through its recognized brands, is a leader in the U.K. construction industry and is known for the expertise our people provide to our customers. Since I joined, again, nearly 8 months ago, I visited our sites, met our customers, talked with our people. We've surveyed our people. We've conducted numerous town halls. I am absolutely struck by the strengths that we have here in the group. All of our businesses are known for deep application knowledge.
We have a portfolio of leading brands that plumbers ask for, builders specify, and merchants simply prefer to carry. Our British manufacturing know-how has always been a core strength of the business. Increasingly, customers are seeing us as the leader in recycled polymer solutions for construction. We continuously invest in new product development with push-fit plumbing, modular stack drainage for higher productivity, innovative blue-green roof solutions, and the best boiler protecting filter on the market, and of course, many, many more. Finally, we have relationships and market influence that helps ensure that these differentiated solutions are available across the U.K. and increasingly beyond. What matters most is not what we think, but what our customers say about working with us. I've talked to many of them myself, and you can see here just a few of the things that they've said in their own words.
That's really pleasing, of course. 2 years ago, we renamed the company Genuit and set out our sustainability targets. Now, as we're beginning the journey to become the Genuit of the future, we're already known for application expertise, leading brands, and strong commercial presence. Our clear sustainability goals and progress toward these have been well received. Our decentralized and even fragmented operating model has both been a strength, but it's also meant at times that our strategy was less clear and that unrealized synergies and too much cost remained. Simply put, what worked when we were a smaller collection of businesses in a group half the size we are now just really isn't suitable, and didn't take a full advantage of the benefits that our new scale could bring.
Still, I have to say, I found that our people believed in the intrinsic purpose of what we were doing and were very optimistic about the future of what Genuit could become. What next? I don't need to remind you there's significant economic uncertainty around, at the same time, I'm convinced that we globally have passed an important tipping point, that the climate agenda is driving investment. That the imperative of predictions of solving this climate crisis will drive GBP billions of further investment. That's quite a macro tailwind for us. Further, increased labor costs and a critical skill shortage remain. This means increasing productivity is more valuable than ever in our industry. Building reforms are driving technology integration and the reconfiguration of our urban landscapes is essential. With change comes opportunity, we continue to build the Genuit of the future.
We will be more focused. We'll deepen our expertise, especially in Climate Management Solutions and Water Management Solutions. We will lead the way in recycling, lower carbon solutions, and sustainability to become the partner of choice for Sustainable Building Solutions. We'll continue to put our customers and our people first, clear in our purpose and the social impact that we can and frankly, our employees expect of us, and in turn, create and foster a great work environment. For our investors, which by the way, includes over a third of our own employees, we must be a sustainable investment as well. We'll leverage our scale, create better integration to deliver solutions across our businesses, leverage synergies to grow and lower costs, and embed lean into the very fabric of our business. How will we do this?
Let me now introduce you to the framework of our sustainable solutions for growth strategy. First, we will focus on higher growth, sustainability-driven markets. Second, we will strengthen our current position by becoming the lowest carbon choice supplier for our customers. Third, we will simplify the business, making it more focused, agile, and profitable. Fourth, we've committed to creating increased value for all of our stakeholders as we develop and embed the Genuit Business System in all that we do. Fifth, we will use that stronger platform to make disciplined and strategic M&A when the time is right. Of course, success depends on our people and a strong culture, the most important investment of all, I'm sure you'll agree. I'll take you through each point of that strategy. The first pillar of our strategy focuses on the higher growth, sustainability-driven markets.
As you can see, we compete in a very broad market in the UK alone. We estimate that this UK market accounts for over GBP 9 billion of products sold. That's the broader market. The products and solutions that we have today enable us to serve GBP 3 billion of this market. As you can see, as we've embarked on a strategic expansion into ventilation and heating over the last few years, this has actually increased our served available market by nearly 50%. We will continue to look for ways to expand into adjacencies that make sense for our customers and for us. Again, despite some short-term uncertainty, we do expect that the UK construction market will return to growth. I have to emphasize that we're really only counting on the broader construction market approaching 1% annual market growth over the next few years.
Genuit is broadly exposed to faster-growing segments of this market, and our underlying markets should actually grow at closer to 1.5% CAGR, nearly double the broader market growth rates during this time. I have to emphasize that subsegments of these markets will do even better still. A significant investment needed to address the climate and sustainability challenges, and as markets return to health, we believe in turn, our tailwinds will strengthen. Even in these challenging times, we have ample headroom for growth with an overall market share of just approaching 20% and no single large competitor across all markets. Most of our markets still have many smaller players, and that fragmentation does still allow for share gain and consolidation.
Clearly, we intend to outperform the broader construction market in the UK as we historically have done, and I'll outline now just how we plan to do that. Climate management and water management are both sustainability-driven segments that will be key to our above-market growth plans. These two markets are driven by significant regulatory and macro tailwinds. For climate management, Part L and F of the building code and the Future Homes Standard will actually drive the need for lower carbon heating solutions, renewable energy, and much better ventilation solutions as well. Climate change, of course, is driving increased interest in cooling following the hottest weather that we've ever seen here in England.
An increased focus on clean and healthy air, definitely not unfavorably impacted in that sense by the pandemic, is actually driving new commercial building standards yet to come that will actually mean for stricter ventilation standards. The rising energy costs only accelerate public energy awareness for the need for lower carbon, more energy-efficient heating solutions. To maximize efficiency and minimize cost and be more user-friendly, all of these varied heating, ventilation, and energy management components need to increasingly be controlled together. Designing and delivering complete solutions will become more important, which plays to the strengths of a larger group like Genuit Group. Water management has been growing in importance as sustainable urban drainage requirements and the Flood and Water Management Act drive the need for more resilient storm water mitigation. These are, again, being further tested as weather events become more extreme.
This means our solutions will be more important, designed in earlier and become more sophisticated. Increasing population density is further stressing the drainage networks in our cities, and hotter weather is elevating the need for green urbanization. Here too, systems are becoming more complex. Sensing, controls, runoff separation are just a few of the components that are increasingly being specified into these solutions. Again, driving complexity and importantly, the need for integration solution providers. Look, I would point out that both of these key challenges, climate management and water management are in fact global challenges and not limited to the U.K. More on these two focus areas will come. The second pillar of our strategy is to leverage sustainability leadership for growth. Our core business is still building materials. We're already and must remain the champion of the most Sustainable Building Solutions, leveraging our plastic recycling leadership position.
Today, plastic pipes already have on average 60% less carbon emissions over their life cycle than legacy material alternatives. Shifting to modern methods of construction, and especially reducing and simplifying on-site work, is expected to reduce carbon emitted during the construction process by 45%. 45% of FTSE companies and the majority of developers and contractors, our customers, have already committed to their net zero targets. They will absolutely need to find the lowest carbon suppliers to enable them to meet their Scope 3 reduction commitments. We've been on this journey for some time, with recycled plastic already accounting for 50% of all that we used in 2021. To date, we've invested over GBP 10 million in recycling capability and in specially designed molding and extrusion equipment to use this recycled material.
We continue to invest and are on track to meet our goal of 62% recycled polymers by 2025. We can't, and we won't stop there, as we continue to find ways to increase recycling use and develop lower carbon alternatives to virgin oil-based polymers to benefit our customers. While our focus on driving more revenue from climate-driven solutions and being the lowest carbon supplier of choice will be our core DNA, these are on top of our operational sustainability commitments that have been so well received. We submitted our science-based targets and have further committed to reducing our Scope 1 and 2 emissions by 25%.
We recognize our role in driving carbon from our supply chain. We'll ensure that 70% of our suppliers, which by the way account for 90% of our purchase carbon, have their plans in place for their science-based targets. With our pathway to net zero, we will first reach 62% recycled plastic target we've already set forward, but we have actually now committed to push beyond that. All of this is on top of the good progress that we've already made. In the two years leading up to setting these targets, we'd already reduced our carbon intensity by nearly 50%, the 25% is on top of that. Okay? We've also, as we said, reached the 50% level of recycled plastic and committed to go beyond.
We've released an electric and vehicle hybrid program for all of our employees, and 90% of the electricity that we purchase today is green. We're committed to clarity and effectiveness of this plan as well. That transparency does matter. We'll publish our pathway to net zero in a holistic sustainability report in 2023. We will also include our TCFD disclosures in our 2022 annual reports and accounts coming up. I know you would expect Genuit to continue to be sustainability champions, and we will. Our third strategy pillar, shifting gears, is to simplify the business. Genuit has been a decentralized collection of independent businesses, all good in their own right, but with very little synergy and collaboration.
Until now, we've also operated in four divisional segments: residential systems, climate and ventilation, building services, and infrastructure and landscape. Our reporting structure actually cut across these divisions, and at times has not been clear for our investors and quite frankly, for our own people. Most importantly, this lack of synergy and coordination has held back our ability to sell full solutions. While the individual businesses were very much customer-focused and agile, they sometimes lacked scale, resource allocation was not always optimized, and we carried too much structural cost. Businesses that were non-core and with lower margin expectations needed addressing. As we announced at the half year and in a recent trading update, our self-help efforts are already underway. We've exited some lower margin product lines and businesses and have already identified GBP 8 million of annualized savings.
With uncertainty ahead, we can improve our business through self-help and releasing unrealized synergies. More will come on this, and we'll be more specific in due course. It's also become increasingly clear to us that the organization needed to evolve to accelerate growth, remove decision layers, and reduce waste. Again, all to benefit our customers. Today, we're pleased to announce a new organizational structure for Genuit. Going forward, we'll operate in three businesses: Climate Management Solutions, Water Management Solutions, and Sustainable Building Solutions. Each of good scale and with clear long-term green revenue drivers. Climate Management Solutions is a GBP 153 million revenue business with over 20% EBIT margins. It is focused on solving the challenges of low carbon heating, energy efficiency, and clean, healthy air, and includes Nuaire, Nu-Heat, and Adey.
Our Water Management Solutions business has approximately GBP 170 million turnover and an EBIT of 11%. I should note that all three of our businesses have good potential to improve margins, but this business has the most potential to improve, including returning to its historic levels. It includes some of our compelling blue-green roof and stormwater attenuation businesses with the potential to offer more complete solutions and move upstream in the design and specification cycle. Polypipe Civils & Green Urbanisation, Permavoid, Plura, and Algebra, along with our latest Keytec acquisition, which brings services to the business, form part of this platform. Of course, our Sustainable Building Solutions business is the strong core of Genuit and includes Polypipe Building Products, Manthorpe, and Polypipe Building Services.
Together, these businesses are just over GBP 265 million of revenue with EBIT margin of about 17.5%, with strong market share and the potential to continue to drive share as the lowest carbon choice supplier for builders. We believe that this structure will leverage our larger scale and our lower cost base while providing greater strategic alignment and a clear focus for growth. We will make this our reporting structure from next year onward, transparency that should help our people and our investors track the results of our strategy. Our fourth strategic pillar is the creation of value through the Genuit Business System. Some of the world's best manufacturing companies have based their improvement on a well-bedded and lean business system. I personally worked in and led lean transformations for more than 30 years at Danaher and Spectris, among a few.
While lean may be less known across the U.K. building materials sector, I am absolutely confident in the success that we will have. Lean is focused on creating value for the customer, on eliminating waste in every facet of the business, and in driving organic growth through better performance. Frankly, I don't know of a business that can't benefit from this type of a business approach. Companies that have been on this continuous improvement path will usually see results such as 3%-5% annual productivity gains, so important in tight and inflationary labor markets. Improving inventory turns by a turn or more each year to free up cash. Improving customer satisfaction by cutting lead times dramatically while improving on-time delivery to be 90% or better consistently. Most importantly to me, lean thinking engages the hearts and the minds of all of our people.
Look, there are many good examples of great companies who have found success with lean core to their strategy, including multinationals like Danaher, Honeywell, and Eaton. Here in the U.K., with Spectris and Unipart, and some of our construction peers like ADS and Saint-Gobain. In fact, myself and several of our leaders have experience from these very companies. We've already begun our lean thinking journey, and we've had some early wins. I've shared just a few with you. One of our plants has sustained a 20% improvement in on-time deliveries already. Disciplined analysis and problem-solving, that lean thinking, has led to one-time energy savings of GBP 2 million and another GBP 2 million of annualized purchasing savings. We are just starting the journey.
Taking the next step now as we've partnered with Lean Focus, who and together, we've kicked off our first lean transformation lighthouse site right here at Adey last week. I was pleased to actually be here with the Adey team to kick it off. We'll be starting our second lighthouse lean transformation site early next year. I absolutely look forward, and I know my team does, in sharing the results with you in time. I have to emphasize, this will be a continuing journey as we build the Genuit Business System to include the lean tools that we'll use to improve our back office processes, our factories, the growth tools that will then help accelerate product development and improve our customer experiences, and the leadership tools that will help unlock the very best from our people and our businesses.
Simply put, this is a proven way to create shareholder value. Our fifth area of focus is on disciplined strategic M&A. After driving organic growth, self-help by simplifying our business and installing the flywheel of our lean business, Genuit Business System, these, and I would say the Genuit Business System in particular, will increase our ability to derive synergy from disciplined and strategically important M&A when available. Among the 10 acquisitions that we've completed since the IPO, let me now just draw your attention to a few, a case study, if you will, in which we've built a leading Climate Management Solutions business through three key acquisitions. We brought together Nuaire, obviously the U.K. leader in ventilation performance. Nu-Heat, many of you know, is one of the largest and fastest-growing providers of underfloor heating and low carbon and renewable heating solutions.
Adey, the inventors of the magnetite filter, right here today, and clearly leaders in making and boiler protection in the U.K. market. Together, they create what is already a leading Climate Management Solutions business here in the U.K., and now accounts for over 30% of group EBIT. In addition, this business is growing internationally faster than the rest of the group and will help take us beyond our current 10% of group revenues internationally. The next step, of course, is to get these businesses working more closely together to cross-sell solutions, complete the portfolio with some additional technologies such as controls and low carbon emitters, and increase value-added services, as well as continuing successful international growth. Our healthy balance sheet and a fragmented and innovative market driven by strong expansion tailwinds will, in time, provide additional runway for M&A.
These five points outline how we will grow organically, improve our profitability and cash generation, and add disciplined acquisitions where appropriate. Let me emphasize that the foundation of Genuit is, and must continue to be, our great people. We must invest in three key areas: talent, engagement, and culture, to unlock the full potential of the business and to secure Genuit's position as a premium employee brand with full recognition as a great place to work, this being so crucial to attracting and retaining the best talent and so important in these times.
We've started by strengthening our focus on talent, adding a group talent director, rolling out a new talent development process which now covers our top 120 leaders, creating our very own talent pipeline, including expanding our commitment to those coming into the business in graduate schemes, apprenticeships, and strengthening our accredited learning programs, all of which have been core to Genuit. We've already achieved silver status in The 5% Club, and we are well on our way to their stated goal of reaching gold status by 2025. In addition, we're investing in technology that will connect our people. We're installing Workday as our human resources information systems platform, Peakon as a class-leading engagement tool I've used before, and Workplace to help connect all of our people and get them working together.
Since I've joined, we've been doing monthly town halls with all of our key leadership. We started group people broadcasts to help share information and drive the awareness of the Genuit purpose, its potential, and its performance. Building culture takes time. There's no doubt. Basing it on the things that matter most, including elevating diversity and inclusion, absolutely something that's near and dear to my heart and something I'm very passionate about, are absolutely key to what we need to do. I have to say, we don't forget to have fun. Seeing more cross-business events, such as a recent Yorkshire Three Peaks event in which over 100 of our people from across the business raised money for the Construction Youth Trust. That was very satisfying.
Bringing our Genuit team together matters, as we collaborate, grow, create solutions, and innovate, this collaboration with a common purpose will make all the difference. Let me summarize our sustainable solutions for growth strategy and introduce the outcomes we intend to achieve. One, we will focus on and invest in higher growth, sustainability-driven markets, notably Climate Management Solutions and Water Management Solutions. Two, we will strengthen our core position by being the lowest carbon choice supplier for our customers and the champion for sustainability in our sector. Three, we will simplify the business, unlocking profit and cash, and becoming more agile in the process. Four, we will create lasting value creation by spinning up the flywheel of continuous improvement with the Genuit Business System. Five, when the timing is right, we will leverage disciplined and strategic M&A to expand our solution portfolio.
As we take Genuit through this transition, we have set ambitious but achievable midterm targets. We will work to outperform the U.K. construction market, growing by 2%-4% through the cycle organically above the market. We intend to drive operating margin expansion to 20% and beyond with self-help, continuous improvement, and some operating leverage. We will return to and then maintain 90%+ cash conversion, and we will drive our return on capital to 15%+. Of course, we will keep to plan for our net zero commitments and our science-based targets and invest in our people with a measurable goal of achieving gold status in The 5% Club. Let's look more closely at the Genuit of today and the growth drivers for the future.
For that, I'd like to hand you over to Matt Pullen, our Chief Operating Officer, who will give you an introduction to our business unit leadership. Matt, over to you.
Thanks, Joe, good morning, everybody. For those of you who don't know me, I'm Matt Pullen. I'm the COO of Genuit Group, I joined the group just one year ago from Saint-Gobain, where I was MD of the British Gypsum business. Prior to that, I led the U.K. and Ireland decorative paints and coatings business for AkzoNobel, including the 220 strong Dulux Decorator Center national merchant chain. Before we give an overview of the three new business units, I'd like to introduce the three business unit managing directors. Matthew Webber, who will lead Climate Management Solutions. Matthew joined Genuit Group when we acquired the Adey business in 2021, where he was CEO and led the sale process from private equity.
Matthew spent nearly 18 years in the heating, ventilation, air, and climate sector, including at Wolseley UK, across both residential and commercial markets, and has significant M&A and international experience. Steve Durdant-Hollamby will lead Water Management Solutions. Steve has been with Polypipe Group and Genuit for 4 years and has over 30 years' experience in the UK and international construction industry. With much of that time spent in senior roles across civils, infrastructure, and water management. Steve Currier joined Genuit on the 7th of November, will lead our Sustainable Building Solutions unit. Steve joins from Eaton Corporation has a successful track record in leadership roles encompassing operations, sales, and general management in FMCG, electrical, and automotive businesses, including Eaton, ArvinMeritor, and GKN. We thought it might be a bit too soon for Steve to present today, I'll be covering Sustainable Building Solutions later.
let's start with Matthew and Climate Management Solutions.
Thank you, Matt. Okay, good morning, everyone. When 21 months ago, AVA acquired by what is now the Genuit Group, the team and I were delighted as our purpose and vision was so aligned in terms of sustainability. We're also extremely keen to benefit from being part of the wider trade group with all of its additional skills and support on offer. As Matt said, I now have responsibility for the Climate Management Solutions business, which has revenue of GBP 153 million, and a group leading 20.2% EBIT. In total, we have five strong brands which operate across the following four key segments. Those are commercial and residential ventilation, heating efficiency improvement, underfloor heating solutions, including renewable energy sourcing, and last but not least, heat recovery systems.
As you can see on the slide, the midterm outlook on growth is relatively strong with 5% and 3% predicted in the heating systems and then ventilation and cooling areas respectively. Overall, those markets we operate in are worth GBP 900 million, and we already have market leading positions within both arenas. Thinking specifically of the market for improving heating system efficiency, I would now like to play you a brief video we created here at AVA for consumers, which highlights the damaging effects of sludge in heating systems.
Sludge is the number one cause of central heating breakdown. Do you have cold areas within your radiators? Are you always turning up the heating to make your home warmer? Do you have to regularly restart your boiler? Are you having to take cold showers? You might be the victim of sludge. Sludge is the buildup of magnetite, debris, and rust in your heating system, which can lead to a whole range of expensive problems. As sludge builds up and travels through your system, it can cause blockages and corrosion, stopping the heating from working efficiently and damaging the expensive parts of your boiler. This is the most common cause of central heating breakdown, and it could even result in you having to replace your boiler. We have the solution. Sludge can be removed quickly and effectively with an ADEY MagnaCleanse RapidFlush.
This environmentally friendly process provides a solution for the removal of sludge and ongoing protection of your central heating system. You will see a real difference after a MagnaCleanse system clean. Your boiler will become more reliable with less chance of breakdown. Radiators will get hotter, making your home warmer without using more energy, and as a result, you could see your energy bills reducing by up to GBP 80 a year. You are being kinder to the planet as you lower your carbon emissions by 7% a year. By fitting an ADEY MagnaCleanse filter, your boiler will be protected all year round from breakdown caused by sludge. Contact your local heating engineer and ask about a MagnaCleanse RapidFlush.
Okay. I don't know if that any of that resonates with any of you people in the room. I know even amongst my sort of friends and family, there's often discussions around this. The process you've just seen there is part of our AV best practice approach for cleaning and maintaining heating systems to keep them running efficiently. Never has that been more important than now with the global focus on heating efficiency and, of course, with energy costs soaring. As an example of this, the saving we mentioned in that video has since doubled. It probably gives you an idea of the savings that can be had. Okay. On the previous slide, we saw the predicted growth, organic growth for heating systems and ventilation and cooling separately.
If you blend the two, it actually comes out as a midterm market growth of 4%. Our plan as a business will deliver 3%-4% above that, which equates to 7%-9% growth in total. Historically, both AV and Nu-Heat have regularly achieved at the upper range of this performance. As outlined by Joe earlier, there are several key drivers of above construction market growth, and within the Climate Management Solutions space, including regulatory tailwinds, climate change, focus on clean air, and of course, as just mentioned, the spiraling energy costs. Additionally, the low carbon and efficiency solutions we're focused on have stronger tailwinds than the heating and ventilation average.
In terms of very practical low-hanging fruit, as was mentioned earlier, we will implement several cross-selling synergies across the business, whether it be including packaging of mechanical ventilation with heat recovery, aka MVHR, or cross promotion of AD products via Nu-Heat. These and other synergies will provide significantly greater share of wallet from some existing customers and projects, and we all know that achieving that via those existing customers is, of course, slightly less challenging than having to create brand-new relationships. Finally, we will continue to deliver significant growth in our overseas markets using both existing AV ranges plus some additional technology. We already have structures and partnerships established across Europe, North America, and most latterly, Asia Pacific, and our annual growth in international markets over the last few years has been 9.3%.
Okay, finally, I wanted to talk about the many opportunities we have available to us regarding future innovation and inorganic growth. On this slide, you can see illustrations both of both a residential property and a multi-occupancy building. On the slide we've highlighted core products we already have and provide in orange, additional components which we could bring in to enhance solutions in purple, and then finally, other long-term potential components in gray. Some of these would be achieved through innovation by ourselves and others via M&A. A great example of the former is the innovation by AD of our Sense range of products, which work remotely and open up an unrivaled and very customer-centric proposition.
A great example of an additional component which would enhance our solution would be HVAC controls as future low carbon heating requires integrating systems and technologies to optimize their performance. This will allow us to bring several of our existing solutions together more seamlessly from a customer proposition perspective. Some of our M&A targets will indeed be overseas. Those targets will allow us to integrate technology into our UK market footprint. They may also offer a scale presence in their home market and provide access for our existing ranges in those markets. Later on, Paul will refer to our seven-point acquisition criteria, which has been executed successfully on several previous transactions. In summary, Climate Management Solutions is an exciting growth area for us with many additional opportunities supported by tangible market drivers.
We will deliver above-market growth by further leveraging our market-leading positions, delivering innovation, which will continue to be imperative to us, as will the skills and passion of our teams and our people. Thank you for your time. I'll now pass over to Steve.
Thank you, Matt, and good morning to you all. I will now present to you our water management proposition, where we are helping to drive climate adaptation and resilience through integrated surface drainage solutions. The Water Management Solutions business unit's revenue in 2021 was GBP 170 million and an EBIT margin of 11%. The business unit consists of five leading trading brands: Polypipe, Aldera, Permavoid, Plura, and Keytec. Key segments that we focus on are sustainable urban drainage, handling natural water processes in an efficient manner. Green urbanization, our own ability to achieve government green infrastructure targets that manage wet weather impacts, creating many community benefits. High-capacity stormwater drainage, applications where impermeable surfaces require volume water runoff, particularly found in heavy infrastructure projects. Attenuation, storage, and reuse, where discharge rates have been restricted, therefore creating systems to store water that gives various options on reuse.
We operate in a share of an GBP 800 million preserved available market, and as you can see, we are in a market-leading position and best placed to offer our whole-solution offering to this sector. Water Management Solutions organic growth above market sector. Whilst our sector CAGR is only 1%, our business unit will drive to achieve a Genuit Water Management Solutions CAGR of 3%-4%. This is aided by a subsector in green urbanization, which is forecasted to grow between 5%-10%, backed by regulatory drivers such as the government Green Finance Strategy. Organic growth around our continued expansion into specialist installations of tanks and value-added services in maintaining these systems. Our alignment to the support the Flood and Water Management Act, a regulatory tailwind for the management of stormwater.
We also drive to increase our EBIT margin to be at least 15%. We get confidence to achieve this from the following pathways. Our largest business in water management is Polypipe Civils & Green Urbanisation, and has operated at these levels before the pandemic, and therefore has the historic trading and plans in place to return to these margins. By selling solutions, our focus has shifted to a specification creation rather than a spec break-in, which generally allows you to gain higher margin sales further through the customer sales journey. We also see pricing and margin benefits of package selling, including our additional service offering. With our solution of brands, we also have seen benefits to optimize our operational footprint and identify cost reduction initiatives. I would now like to share with you a case study on one of our green roof applications.
You will see a blue-green roof installation sited at Bloc in Manchester, which is said to be a perfect example of future workscapes of tomorrow, today. With the innovative roof set to provide a climate resilient vision for Manchester, the city center workspace that has been transformed by Bruntwood Works as part of its GBP 50 million pioneer redevelopment program. The blue-green roof from Polypipe Civils & Green Urbanisation will help to develop a greater understanding of how new construction and data technologies can help cities and urban developments to mitigate the impact of climate change and population growth while enhancing biodiversity. We will now show you a video of this blue-green roof installation. Unlike conventional green roofs, which use a drainage layer to simply remove rainwater, the 525 sq m blue-green structure retrofitted to Bloc's flat roof stores rainwater beneath the planted surface.
Just about every building out there could be retrofitted with this technology, which is really exciting. Advanced passive irrigation components within the attenuation layer draw water up through the structure to the underside of the green roof substrate to support surface planting. The breakthrough technology protects green areas during periods of drought, reduces possible water demand during hot weather, and enhances biodiversity by maintaining flora in optimum growing conditions, all while being used as a method of storing excess storm water in flash floods. Water Management Solutions, inorganic growth and new product development. This slide sets out our water management playground. The first drawing being our total potential solutions on any given project. There's regulation with storm events having ever-increasing rainfall intensities to deal with short time intense storms. We have restriction at outfall on all projects to public sewer or watercourse.
Our outlook is to capture anywhere on the surface using aesthetically pleasing and performance enhanced systems, utilizing green and engineered systems. Underneath the surface is where our true DNA is performed, conveying the water to technically design storage areas that allow for cleaning, attenuating, reuse, and slowly releasing at required levels into the sewer watercourse. The technology is forever advancing here too, as we add smart systems throughout the system, measuring intensity forecasts, storage capacities, and leak detection. The process flow set out at the bottom of this slide details our various product ranges as they connect into a system. We look to have collection at the surface, either within high-capacity drainage systems or by green spaces. We then convey the water using pipes of various dimensions and strength specifications.
We store and reuse to hold the water on a project and reuse into the site asset using attenuation crates or smart tanks. We can then clean any part of the system by removing of silt and pollutants using separators and filters. We then design mechanically releasing valves to slowly release the water to required discharge rates, and afterwards, maintaining and measuring the performance of the system with smart detectors and tracing equipment. This model allows us to prioritize our new product development and seek our key M&A opportunities, all of which we would be able to leverage through our existing channels and structures. Targets may also have greater technological capability and IP, which will drive the value add. As demonstrated through this presentation, Water Management Solutions is in a market leading position and best placed to offer a whole solution offering to this sector.
We will continue to move to a specification sale, incorporating a complete solution of products while being able to maintain and monitor the performance of the systems. I'd like to thank you for listening. I would now like to pass over to Matt Pullen.
Thanks, Steve. Let's move on to the final business unit, Sustainable Building Solutions, which as I said at the start, will be led by Steve Currier. This is the traditional heartland of the Genuit Group, encompassing the Polypipe Building Products, Polypipe Building Services, and the Manthorpe Building Products acquisition, which cumulatively in 2021 delivered GBP 265 million in revenue with an EBIT margin of 17.6%. These businesses provide a range of solutions to reduce the carbon content of the built environment. Products and system solutions from residential and commercial drainage to internal hot and cold water distribution systems to roofing, floors, and wall ventilation and air leakage prevention. Are already a central part of the sustainable solutions within low-rise residential homes and high-rise multi-occupancy residential and commercial buildings.
The internal water management market alone is worth over GBP 1 billion and is a market we believe we are well positioned to grow ahead of the market average and create greater value. Whilst the midterm growth of the segment we forecast to be in line with the UK construction market at 1%, we believe we can grow ahead of this at 2%-3%, leveraging our strong market shares, brands, and product systems. This market will continue to benefit despite the near term macroeconomic challenges from three core drivers. First, the continued structural housing shortage. In the UK, we continue to only build out at around 200,000 new homes a year, when clearly the need is to be well over 300,000. Second, the increasing importance of modern methods of construction to address the increasing skill shortage.
Third, the increasing need for decarbonization through material substitution and modern methods of construction. Genuit has a clear opportunity to create more value growth through decarbonization, leveraging our expertise in material science to create more sustainable choices for specifiers, developers and contractors that can reduce Scope 3 carbon impacts. This will become increasingly critical for the sector, given the clear net zero commitments of all the major players in the construction sector and the increasing drive towards lower carbon content in the built environment. In this regard, Genuit has much sector leading credentials that can be leveraged beyond Sustainable Building Solutions into our businesses in Water Management Solutions and Climate Management Solutions too. We are the number 1 user of recycled polymers amongst our European peers.
To give us some scale to this, in 2021, we used more recycled plastics at 61,000 tons than the whole of Wales collected. In 2021, 49% of our tonnage was sourced from recycling, with a committed target of 62% by 2025. Post 2025, we will innovate beyond current standards to move towards zero virgin oil-based polymers. Just one example of the advantage in our core materials is demonstrated in the carbon equivalent impact of a cast iron pipe versus virgin PVC and 65% recycled PVC. A sevenfold advantage. In fact, when we make our recycled PVC product, the advantage is even greater due to our use of renewable energy.
Modern methods of construction will also play an increasingly significant role in supporting decarbonization, as well as helping to address the skills shortage and the rising cost of labor through generating less material waste in manufacturing processes on site, more efficient transport options direct to site, and improving ease and speed of installation, enabling faster project completion. Just one example of this is our current Polypipe Advantage solution, a drainage and water solution that uses a high recycled content up to 65% and is an end to end service from initial design and bespoke specification through precision factory controlled fabrication to scheduled delivery at the time required to suit the build schedule of complex projects. Let's have a look at the short video.
The opportunity exists to expand the Advantage solution and the expertise we have developed in this from high-rise commercial into the domestic residential sector to create greater value for our customers. Underpinning our value creation and growth for our customers in the construction industry is our commitment to investing in R&D and innovation. This goes beyond leveraging our market-leading expertise in material science and investment in R&D to investment in innovation of our products and system solutions to drive efficiency and productivity for our installers and investment in leading manufacturing technologies and equipment. In the near term, we will be bringing market-leading innovation in hot and cold water push-fit ranges that improve quality and speed of installation, and traps ranges that focus on speed and ease of installation.
This innovation, alongside innovation in our Climate Management Solutions and Water Management Solutions business units, will continue to ensure we deliver on our 25% vitality targets. This year alone, we'll have invested over GBP 20 million in new equipment and technologies in our Doncaster plants at Broomhouse Lane and Neale Road, that will drive production efficiencies and use less energy in the future. This, coupled with a focus on optimizing our manufacturing footprint, logistics operation, and a lean approach as part of the Genuit Business System, will increase productivity and availability. Ensuring that we are well-placed to deliver a brilliant customer experience. That is Sustainable Building Solutions, a business unit where we believe we are well-positioned with our strong market shares, brands, and products and systems to create more value and grow ahead of the sector over the medium term.
Between Matthew, Steve, and I, we have summarized our sustainable solutions for growth strategy through the lens of our three new business units: of Climate Management Solutions, Water Management Solutions, and Sustainable Building Solutions. Our strategy is focused on higher growth, sustainability-driven markets, strengthening our current position by becoming the lowest carbon choice supplier for our customers. Simplifying the business, making it more focused, agile, and profitable. Creating more value as we develop and embed the Genuit Business System. We'll use this stronger platform to make disciplined and strategic M&A when the opportunity and time is right. Through our strategy, we will unleash the value creation and potential of the Genuit Group. On that note, I'll hand you over to Paul.
Okay. Thank you, Matt. Well, good morning, everyone. It's a great pleasure to be here, and I would very much like to take you through our financial framework in one slide that describes the pathway to shareholder value, building on what my colleagues have presented to you so far today. Now, we are a highly cash-generative business, and we intend to augment free cash flow delivery through continued market outperformance and increasing the operating margin to over 20% in the medium term. More about that in a moment. Cash flow conversion remains key as we sustain discipline over levels of working capital and drive further optimization through initiatives such as lean manufacturing, increasing stock turns, production harmonization, and improvement in our planning processes. Continuing strong cash conversion, market outperformance, and margin expansion will deliver significant increases in free cash flow generation over the next few years.
This will allow for increased levels of investment in organic and M&A opportunities. Organic investment includes a significant element of innovation, which is a driver of margin performance and is one of the reasons why Genuit Group has among the highest margins in the industry. It's also about getting after those efficiency gains. Efficiency gains that have already started to yield fruit, and driving forward our commitment to sustainability you've heard so much about so far today. As for M&A, we have strict criteria, which I'll take you through later on. For me as CFO, it is important that we aim to achieve return on capital employed ahead of WACC within two years of acquisition. Our track record on this has, in the main, been impressive over the past eight years.
The additional levels of cash generated will provide for heightened levels of investment, meaning that we can sustain a level in excess of 15% for ROCE as an outcome. Management of the group is very aware of the importance of shareholder returns, the past year has not been easy. We are committed to a stable dividend policy of two and a half times cover, as we have done almost without exception for many years, the only exception, in fact, being the immediate aftermath of the first COVID lockdown. As far as our balance sheet is concerned, we have and will remain operating in the space between 1-2x EBITDA as a level of leverage. However, until the clouds of the U.K. economy begin to lift, we will remain below 1.5x EBITDA.
Many of you may be aware that we refinanced our old revolving credit facility in the summer. With strong bank syndicate support, we evolved that into a Sustainability-Linked Loan, with finance costs partially linked to us achieving our published ESG targets. We have also diversified our funding and taken advantage of a private placement facility, in addition to the Sustainability-Linked Loan. This pathway to positive outcomes comes from a strong platform driven by strong stewardship of this business. Let's look a little more closely at operating margin expansion, or OMX, and what needs to be done to achieve a sustainable level of 20% over the medium term. To do this, it is worth looking a little more closely at recent history.
Prior to the COVID pandemic and the impact of cost inflation and economic recession, the group enjoyed operating margins in excess of 17%. With the acquisition of Adey, a pro forma operating margin should be more than 18%. Already this year, management began several self-help measures in the realms of business simplification and gaining greater leverage from group-wide procurement, but with sustained levels of investment in innovation, also driving margin performance. I think it's fair to say that much of what we have achieved so far is derived from furthering the integration of acquired businesses and challenging some of the established ways of doing things.
More of these sorts of initiatives are yet to come. One area of innovation that is worth emphasizing is the commercial advantage to be gained by delivering products that are decreasing levels of Scope 3 impacts on our customers own carbon intensity. A particular advantage when competing against legacy material products. We have recently invested in production equipment that enhances the proportion of recycle that we use in our products. It's worth emphasizing that our trajectory for margin expansion does not rely on margin enhancing acquisitions going forward. What about operating cash flow conversion? It's true, until recently, the group delivered cash flow conversion of some 90%, and we intend to return to those levels.
In the last 12 to 18 months, this level of conversion has been impacted by the need to rebuild inventories after a fairly severe depletion following the so-called COVID bounce back, and more recently, the tailoff in demand over the past quarter. Going forward, the group in growth mode will return to delivering conversion rates at or more than 90%. A few words about our M&A track record. Since 2014, we have successfully executed 10 acquisitions of varyingly sized businesses. All but one were acquired from existing balance sheet resources, and that exception being Adey in February last year. The criteria we set ourselves are consistently applied and strictly adhered to. Either they come with the business or we can fix them if they are absent.
We look for strong management teams, indeed here today is Matthew Webber, formerly CEO of Adey, and now one of our forthcoming 3 business unit directors. Above average market growth opportunities you can see in businesses such as Nu-Heat, where the drive towards more sustainable ways of heating dwelling spaces drives that business forward. Sustainability is at the heart of everything we do, and the strain runs through every part of the group. It's worth mentioning that the acquired businesses financial performances generally tend to be close to, or above, or well above overall group operating margin at the time of acquisition. Reinforcing the point that we look for businesses with a strong financial track record and potential. M&A is an enabler of accelerated growth. What is our investment case?
Well, we're the market leader with balanced exposure across market segments with outperformance underpinned by climate driven megatrends, such as the drive to a more sustainable future for the people on this planet. Helping businesses and economies become more resilient in the face of increasingly damaging effects of climate change. The Genuit Business System, it's focused on growth, lean, and leadership. I am very excited about what is a truly paradigm shifting innovation for how the group is to be run. There are substantial levels of innovation driving profitability to levels amongst the highest in the industry and providing more complete solutions to our end customers. Sustainability, as I've already said, is at the heart of everything we do.
With those medium-term targets driving our decisions, driving our focus, these being the proportion of raw materials derived from recyclate, the lowering of carbon intensity, and a number of colleagues, the number of colleagues within structured training programs. We have disciplined M&A as a driver of growth. The group already has a proven track record of executing integrated M&A lasting over many years. The M&A radar, as I call it, is never switched off. We have resilient financial performance through the cycle with high levels of cash conversion and a cost base that readily responds to volume changes in the market. Well, many thanks for listening to me. With that, I'd like to hand back to Joe to wrap up the session. Thank you.
Thank you, Paul. I hope this has been really helpful and that you now understand our sustainable solutions for growth strategy. One more time, let me recap. One, we will focus on and invest in higher growth, sustainability-driven markets. We will strengthen the core of our business and our position as being the lowest carbon choice supplier for our customers. We will simplify the business to be more agile and more profitable. Four, we'll create lasting value creation by spinning up the flywheel of continuous improvement with the Genuit Business System. Five, when the timing is right, we will leverage disciplined and strategic M&A to expand our solution portfolio. I believe our midterm targets are ambitious but achievable. Despite current market uncertainty and excluding the potential of further benefit of acquisitions, we intend to outperform the construction market by 2%-4% through the cycle.
We'll target operating margins of 20% plus from self-help in the Genuit Business System and some operating leverage. We aim to return to 90% plus cash conversion and get back to a 15% or better return on capital employed after the disruption of the past few years. Of course, we will keep our plan for net zero commitments and our science-based targets and invest in our people. On behalf of the board, the leadership team, myself, we are committed to our climate-driven purpose, the Genuit Journey, and excited about our future. I thank you. At this point, we're actually gonna go to a live and online Q&A session. We've got roughly 30 minutes planned for this, which I hope will be ample time.
As a reminder for those of you staying around, our leadership to be around afterwards for the duration of the event as well. With that. Who would like to go first? If I could point of order, Mel here has a microphone. For the benefit of those online, please hold off. In addition, if you'd like to refer to a specific slide, you can let us know which one, and we can flip back to that.
Good morning. It's John Bell at Deutsche Bank. The question is on M&A. Accepting Paul's comments on leverage parameters, how do you see the M&A pipeline? Do you see the equity market valuations that we've seen through the course of the year translating to private market valuations as well?
Hi, John Bell. Good to hear from you. Great question. I would say that, as Paul James said, the radar is always on. Importantly, we actually are filling our M&A portfolio by looking at our strategic needs. Of course, as you've seen through the past, some of these are small to mid-sized private companies as well. Some could be larger, of course. What I would say is, you know, a lot of times those valuations are somewhat independent of what's happening in the market. It's about cultivating the right relationships, having multiple opportunities and being able to stay disciplined. Let's see. Let's go right behind John Bell first. Again, if you could just state your name and your company.
Hi, Robert Plant from Berenberg. Just two questions, I guess, on innovation. The first is, do you have any explicit targets or disclosure on R&D investments, percentage of sales or its quantum, and how you expect that to trend in the coming years? Secondly, I know a lot of other businesses when they have a strategic refresh, in this way, they look at targets, the number of new products or innovative products as a percentage of sales on a rolling basis. Is that something that you believe is relevant here and is something you'll be disclosing?
Let me make sure I heard your questions right, Rob. The first is around R&D spend as a % of sales and how we see that progressing, and the second is do we have set targets for the number of new products. Is that right?
Yes.
Okay. Paul, you wanna take that, and then I can, top off if anything's needed?
Yeah, sure. I mean, we haven't published a target of R&D spend as a percentage of sales, but obviously it is significant. You know, we will keep that under review, and if we need to push it further, we will do so. Of course, R&D is pure R&D, but also capital investment as well, in new equipment and machinery as well as products. I mean, that's basically it. In terms of us monitoring the proportion of our sales, if I answered the question correctly, from newly developed products, we of course have the published Vitality Index, which is 25%. We actually, at the end of last year, hit that target. The aim is to sustain it going forward.
I will say about the Vitality Index, though, it's quite a lumpy measurement, so things do drop off and things have to come on again. There's a rotational effect. Certainly, we're up there at 25% at the moment.
Good. Okay, next question, right up here. Mel, if we can come up right here in front.
Christian Yates from Numis. Two questions from me, if that's okay. First of all, maybe just looking back at the Water Management Solutions margin. Clearly, that's fallen quite significantly from that 15%+. Sort of just understanding what has driven it down to maybe more understand why you're confident of getting it back up to above 15%. Second, just in the Climate Management Solutions, just a little bit more color on the products that are maybe missing there. To what extent they could be added through organic means, and if not M&A. I suppose just trying to understand the benefits of holistically selling that full solution. Is there a major benefit of being able to provide underfloor heating and ventilation together? Does that create a key competitive advantage? Thanks.
Okay. Paul, if you wanna start with the comments on margin and, then if we can go to Matt, if you wanna talk about some of the products.
Yeah.
Christian's question around your organic growth from those.
Yeah, sure. I mean, Steve sort of covered the point a bit in his presentation, which is that historically, that part of the business would typically get operating margins in the mid-teens %. It is kind of a return to and hopefully a bit beyond where we used to be. I mean, the reasons are many and varied, okay? It's an incredibly competitive market in many ways. Obviously going through the various crises we've gone through hasn't helped. As Steve said, it's the shift away from breaking spec to actually molding specification. That is the pathway to getting back to those higher profitable levels. As Steve has already said, our plans are quite advanced and quite granular about how we're gonna do that.
Okay.
To pick up on the second area around Climate Management Solutions. I think if I got the question right, the first part was around , I think what are the, what are the best products to add into the solution, et cetera. I definitely highlighted that earlier with the controls aspect. I think that's the easiest way to bring a lot of our solutions together. To answer your question in terms of would you do that through innovation or M&A, I think we have both opportunities, and it's about working out which is the best way from that perspective. There's opportunities to do both.
Just that sort of final on the sort of the more holistic sales lead. If you're going to, I don't know, maybe a house builder with ventilation and underfloor heating, does that create a competitive advantage versus a peer that maybe just does, you know, one of the two, et cetera?
Yeah, we absolutely believe so. That complete solution, if you think about, I think someone mentioned earlier about, you know, bringing heat in, cooling importantly, and ventilation together as one solution is really powerful.
Excellent. Thank you.
Okay. Thank you. Let's see. Other questions in the room here.
Mel?
No.
Just this lady.
Oh.
Just there.
Thank you. Hi, it's Priyal here from Jefferies. I think I've got three. The first one, you obviously discussed the target of 62% of your inputs coming from recycled material by 2025, but then the potentially the ability to go beyond that. Previously, you've sort of talked about hindrances needing to lobby just because of some of the regulation around that. Are you now more comfortable that that is less of a hindrance beyond 2025, which is why you're more comfortable saying that you could exceed that over the longer term? The second question is just in terms of implementing these three new business units, obviously quite a change from, you know, how you've been reporting previously.
Has that carried any unexpected costs, any unexpected sort of obstacles, you know, in terms of the actual implementation within the business? The last question is just on that midterm outperformance target of 2%-4%. That's obviously been mentioned previously. Should we see that as realistic or actually quite conservative given, you know, a lot of the regulatory changes, and, you know, energy crises, et cetera, do seem to be moving your way more recently.
Sure. Thank you, Priyal. Good to hear from you. Actually, I should actually introduce Martin Gisbourne, who's our Head of Group Strategy, and Marketing. If you could take the first question, Martin, and then I'll talk about the business unit structure. Actually, Martin, if you wanna then cover the part about the 2%-4% outperformance. I think you could do both of those, and I'll come back on the business structure.
Yeah, yeah. Thanks for the question. The short answer to the first question is yes. We see two things happening at once. Firstly, yes, we're trying to do that lobbying and change of standards. Firstly, and it's important to say that those standards historically have related to the way you make a product as well as just the performance of the product. What we can do is achieve the performance that's required but make them in a more modern way. Yes, we're lobbying, and we think we're gonna get success in having those standards change.
Increasingly importantly, and probably more importantly, customers are so inclined towards the sustainability credentials of the product, that if it will achieve the performance they want and has got a lower carbon content, then actually they will prefer that over something that complies with, you know, increasingly out-of-date standards. The carbon content in this case is a proxy for the, for the use of recycling.
Mm-hmm. If you wanna go and take the 2-4 outperformance point, yeah.
Yeah, so by definition, we view it as realistic, as that's the range of numbers that we're talking about. You know, there are plenty of moving parts across those segments, and we're talking about a medium term, you know, with some fairly choppy waters ahead that fit into that medium-term horizon. You know, I'd put it in the realistic category.
Yeah. Well, obviously, if we just, if we choose to update those in time, we'll let you know. On the business unit structure, your question fundamentally was, as we move to this user business, new business structure, are there costs or obstacles, typically? I would actually say it's quite the opposite. This new structure, as I've said, is actually something that we view as simpler, as lower cost, and actually has really freed up and enabled potential. As we've looked across implementing, no, we don't actually see any major obstacles. In fact, it's making it easier for the businesses. It will make it easier for the businesses together to collaborate. We already have a quite flexible approach to our information and data systems that should actually make this a pretty straightforward transition. I see upside.
Thank you.
Thank you, Priyal. See, middle here.
Hi, it's Manfredi Pizzarotti from Morgan Stanley. I had a question on the Water Management Solutions. Are there any synergies between the above ground and below ground products we should be aware of, or are they completely different markets? At the same time, you mentioned you plan on expanding the margin there, which I think is 11%. What do you see as a normalized level of margin there? Thank you.
Mm-hmm. Okay. Steve, you wanna take the-
Yeah, take the question on the above ground and below ground that you asked. Generally, yeah, there isn't much difference because the 2 regulatory drivers are literally what's coming from the sky in rainfall intensities and then your outfall. Actually, what's happening now, generally it was collected under the surface, most of the water, so you had large tanks under the ground. As you get urbanization growing in the cities, they can no longer do that. Hence why you've then got a lot more options using green surfaces or just below the surface in what we call Permavoid, which we'll see a bit later on. I don't know if that answered. There isn't really any difference. It's just a shift in the market-
Mm-hmm
actually to help aid those regulatory points.
Good. In terms of the margins, I mean, I think I said right at the beginning, you know, this has the most room for potential. As Steve said, parts of the business have been at and above our targeted midterm improvement of 400 basis points or so. In addition, I mean, the self-help and lean business system approaches, we believe, will be very applicable in that segment as well. I'd say that our midterm target is sound. We're confident in that, and the question really is how much beyond that can we go? Obviously, every bit helps. Yep, behind you there. Yep. One.
Yeah. Hi, Stephen Rawlinson with Applied Value. 2 questions from me. More practical, I think, perhaps. One is with regard to the number of SKUs that you carry. I mean, if you are expanding and innovating at the pace you describe, how will you sort of retire other products such that you actually have a manageable number of SKUs. I think it's really sort of quite a number, a very large number indeed, because you're selling systems and each part of the system is necessary. Can you talk a little bit about that and how you intend to retire that, and also in relation to capital employed, because obviously carrying that working capital is a burden.
The other areas with regard to the use of IT and digitization, I mean, you've talked about lean manufacturing, but you haven't really gone into any sort of advances that you might make in that, particularly not just in the manufacturing zone, but also actually downstream in your distribution channels as to how you might help your customers manage their stock levels, and therefore, actually, help you get that market share. Can you talk a little bit about that if that's been part of the process?
Sure. Actually, I think, Matt, you'd be well suited to answer both of those.
Yeah, let me go to the managing of the portfolio, if you like, and the SKUs. He's right, we have a lot of SKUs and systems and products across all of our businesses. I think if you relate it back to the Genuit Business System, part of that is how do you manage your product life cycle. You know, the rigorous nature of that is constantly reviewing your product and portfolio against the needs of the market and retiring things when they're, you know, they're starting to fade, but bringing the new things in. I think some businesses that can get slightly out of control, and you forget to take away stuff as you're bringing new. That's gotta be a really rigorous approach across all of our businesses. That's really.
It's one of the tools that we can use as part of a Genuit Business System to really establish that. It's done well in some businesses. It can be done better in others. I think that's the way we will approach that. I've got a lot of experience of that through my times in Saint-Gobain and AkzoNobel, where it was done really, really well. I'm gonna try and remember the question of the.
It was around the whole use of IT and digitization. You focused on lean, you haven't talked about the enablers to get to that lean output in the way that in any depth. Maybe that's going down too more detail than you wish to today, but it was on two levels. One is in and around the whole manufacturing process and your decisions about how to switch factory outputs. The other bit was about managing the distribution channels so that your channels have got on a better understanding of what they've got in stock to help you upstream manage your production processes.
I mean, again, I think this comes back to the way we think about the Genuit Business System and an end-to-end business system which isn't just about the manufacturing environment. It actually goes much beyond that from point of a demand forecast, the way you collaborate with your customers really well to get clarity on that for-forecast over as much, you know, foresight as you can get in order to be able to plan your business really well, to supply, you know, plan your manufacturing and your supply to them in the right way. I think, you know, really strong SIOP processes, you know, sales and operational planning are absolutely vital to that. I know, you know, Steve recently come in, he's very well versed in that, as are the other business unit MDs.
I think it's very much about this approach, is the tools that you can use within the Genuit Business System, that lean thinking approach end to end. Absolutely how we work with customers and their supply chains and collaborative forecasting and planning, it's got to be a critical enabler.
What's new? Because you must have been doing this to date. What would be new in the future that gives you these higher returns on Capital Employed.
High margins? What's new about that?
I wouldn't say it's new. It's about doing that really, really well. In some businesses that are younger, we, you know, we're not doing that using the information systems and the data in the right way, and I think we're investing in that heavily. It's probably a conversation we can have in more detail outside. I think look, you know, yes, it's not new. We just have to do it well.
Can I just add that the lean journey is relatively new for this company, right? It can unlock actually significant improvements in addition to fast significant reductions of lead times. When you reduce those lead times, it actually makes the discussion with your customers much easier. You can also, as Matt said, work with them on the complete value stream and look for places of value all along the way. Who's stocking what? You know, how you load the trucks. How you make it easier for them to actually then turn the products around to their customers. It is a different approach, and I am actually confident we're gonna unlock significant value that we haven't found yet. Let's see. There we go.
Hi, it's Rob Plant from Berenberg. Could you just talk a bit more about some of the on-the-ground experiences with smaller competitors, how they're evolving, how they're adapting, are there any that you're particularly conscious of? Because clearly, these drivers are there for everyone to look at in terms of the structural drivers. Any kind of new European companies coming into the market, any kind of adapting, et cetera? Thanks.
Let's see. You wanna talk about some of the smaller companies? Either Matt or Steve, do you wanna do that?
Sure.
Yeah. Go ahead.
I think the key is what we talk about is in solutions. Majority of our competitors have very much been on the product line. The large players just follow us in our core markets, where our core market has been. Whereas no one's really at the moment putting that whole solution together. It will come, 'cause regulation is there. But generally, 'cause there's quite a lot of IP or new innovation of product, the majority of the competitors that we see actually in solutions are smaller base companies, start-ups with some IP or, you know, new innovation into that whole solution. Our competitors currently are mainly just focused on the core.
I think you'll find that across our businesses, actually. The one thing I would add, too, that we take quite seriously is please remember that the type of investment and the infrastructure that we've built up to begin to meet the sustainability targets required in this industry are very significant. We do think that that will be a continued, and in fact, opening advantage for us versus our smaller competitors in time. Okay? Thank you. See, right behind you, Graeme, here.
Graeme Kyle, Shore Capital. Just a quick question on the operating margin target. Getting from 16%-20% plus, in reality, does that mean you'll be exiting business areas or divesting businesses? If so, could you please quantify that?
Let me be clear. As I said, we'll always keep our portfolio under review. You've seen us do a few things in that line. If it's appropriate, we'll do that. I would say that we expect the bulk of the business to come with us on this journey to 20%. We'll be mindful, and if appropriate, we'll keep it under review. Okay?
Tobias Lunt. Margin supplementary question for Paul, please. The 400 basis point increment to where we are now, can you give us some kind of sense, just indications rather than decimal places, as to how much of that will come from operational leverage, 'cause that was mentioned during the presentation, and how much from an as-is situation. If I can, how much of the latter, as is, will come from COGS and how much from SG&A, would you say?
Okay. To build up to the margin enhancement to 400 basis points, 20%, yes, there are various different components. I think the first way to look at it is there's also an element of phasing. Okay? Getting to there, we're obviously we've started with the self-help initiatives, so the simplification, if you like, of the business, looking at things like procurement, et cetera. That gets us a good way back to, up to that level. We'll be moving more and more into the benefits of lean, yeah, and the efficiency gains that we're gonna get from that. Clearly, we're going into, as I said in my speech, some choppy waters with the U.K. economy, right?
Once that starts to pick up again, then we can start to take full advantage of the operating leverage. I'm not really gonna quantify each individual component, of course, but, you know, I see it in a quite a phased way. You know, I am pretty confident about getting to that 20%. I think the building blocks are there, and they're pretty granular and pretty clear to us.
Thank you.
Yeah. Oh, sure, go ahead.
Sorry, one related question, really. There's several references across the businesses during the course of the presentation to sensors and controls.
Mm-hmm.
Making the systems intelligent as such.
Mm-hmm.
Does that sort of generate a sub-business in terms of, ongoing recurring revenue, with the customers managing and monitoring those systems? Therefore, do you need a, to build a field of service engineers to go with it?
Sure. Yeah, look, I'll, I'll answer at a high level and if any of my colleagues wanna top in. Having been in a lot of businesses like this in the past, the obvious answer is it can. It depends on the business. It depends on what point you are in the value stream chain and who has access to the customers. Without, you know, forecasting the future, obviously, if there's sensors on, if systems need to be monitored, then the question is who does it? As of course, as we make sure that we have the service and end customer access, we could be, depending on the industry, in a good position for that. It's early to say there, and that's not something that, you know, we're baking in yet, but we see as potential upside. Yes, anything else?
Yeah. If I might, sir.
Please.
For sure that, sir, but also that there's steps to get there, right? The first step is more about interface controls. You know, to Matthew's presentation, actually in the home of the future with different heating technologies, you want something that actually allows them to complement each other rather than compete, whereas fragmented controls actually cause technology competition. That's building Bloc A. Of course, when you start down that pathway, you know, you are by definition getting into data management, and that creates some opportunities as well. When you go around the trade show afterwards, there are a few things that we'll talk about there that talk a bit about some of that stuff. Indeed, Steve will put some more detail about the Bloc case study, for example.
Exactly
which actually has got a data management and control aspect to it as well. Yeah, it's a pathway and a journey, for sure.
I think what you'll see is in sort of residential markets, it'll tend to be the discreet controls. In commercial and infrastructure type markets, there's a probably a bigger monitoring opportunity. Sorry, do you have another question or.
No.
Okay. I'll tell you what, we've got one question online. Let me pop to that while we, you make up your mind on other questions here. I've got a question here from Pam Liu from Morgan Stanley. If you wanna scroll that one. "With the new business structure," Pam asks, "what about cross-selling potential between Climate Management Solutions and Building Solutions? For example, when you sell plumbing pipes and fittings from Building Solutions, how does the new org structure enable you to add products from Climate Management Solutions to the package? Who'll be driving such revenue synergy?" See, Matt and Matt, I guess, one of you wanna take that?
I think a very simple answer to that is absolutely, that will be possible and there are some opportunities for that. You know, today, you know, in prior times it was probably slightly more silos, but the idea is now that we work across the whole breadth of the Group together for the better. I would say yes.
I think the only thing I would add to that is that, increasingly we're having discussions with builders around lowering the carbon efficiency, lowering the carbon footprint of the house. That is both in installed carbon, so the pipes, the products and all that goes into it, and an in-operation carbon, which includes the heating systems and ventilation systems. They're looking at a holistic problem, and we're well positioned to take that on. Her second question is, "Within climate management, do these brands, Adey, Nuaire, have the shared distribution channel and customers? Tell us a little more about the cross-selling opportunities." Matthew, I think that's for you again.
Yes. Yeah. I think, t o my point just now, you know, in the past that work wouldn't have happened so much. Bringing the brands together, bringing those management teams together to work through, what are the biggest opportunities. I mentioned sort of low-hanging fruit. What are the easiest things to go for initially? Then, as we've alluded to, looking at this complete solution across the piece, that will require all of those people to come together, which is exactly what we are doing. Again, I think it's very, very positive on that front.
The only thing I would add to that is, really interestingly, those three businesses all do sell direct today. They sell either direct to contractors in the case of, Nuaire. They sell, direct to customers online or through a remote process in the case of Nu-Heat. Adey has direct relationships and through contractors, which actually makes it quite easier to then increase your package and take it direct to the customer because you can change your selling proposition literally overnight. Let's see. Matt, keep the microphone. Within Climate Management Solutions, for future products in this space, such as sensors and controls, how do you think about growing those capability versus white labeling other brands? In other words M&A versus invest to grow your own. A bit like the question we had earlier.
Yeah, no, absolutely. I mean, Adey is a good example. I mentioned during the presentation that Adey have over the last few years, launched a range of ADEY Sense products., we've obviously had to bring in additional skill sets to do that, we do work with some other people as well outside, but we're looking to bring that more and more in-house so we've got the capabilities here. We certainly have that across this business unit in terms of people within Nu-Heat and Nuaire as well. Again, it's about really collaborating between those. That will be really important. There are obviously opportunities outside of that as well to potentially supercharge your M&A.
Okay. Pam has a fourth question. The additional inventory turn you mentioned is a result of the lean program. Could you please tell us more about how to achieve that and quantify how that would impact working capital? Okay. Well, I'll talk a little bit about how to go get it. Paul, if you wanna perhaps give it the size of the bread box there. In terms of how you actually drive improvements in inventory and lean transitions, there's quite a few things are done. First of all, you work on the value stream complete end to end. As Matt said earlier, you make sure that planning is better throughout the factory.
You actually work on shortening lead times in the factory, which means that you actually have less inventory work in process, and then you work with your suppliers to help them shorten their processes, which means less held on hand. Typically, when you work through all of these, and you also make it so you can deliver, shorten your lead times and deliver to the customers more quickly, you'll see all three traditional components of inventory come down: finished goods, work in process, and raw materials. Paul, Pam's question is, what's an inventory turn worth effectively, right?
Well, it's, I mean, if I, if I hark back to how we've modeled it, if you look over the full life of the period we're modeling, typically in the past, working capital in a, in our growing business would absorb about single digit millions, high single digit millions. T hat is gonna be considerably better going forward down to the, to certainly low single digit millions, if I want to put some idea of the value of that.
Okay. let's see. Before I go back to online, anybody else in the room?
There's a gentleman at the back.
Sorry. Just, you know, don't let me forget you there.
Sure. Flora Dower from Jefferies. A couple from me. Just one, I presume the incentive structures across the group are increasingly aligned with the kind of targets you set out, both in terms of sustainability and actual performance. Secondly, I guess this one's for Paul, just a sense of what the level of capital employed is in the business as by way of reference.
Okay. I'll take the first, and Paul can take the second. The short answer is yes, but if you'd like, I'd say a little more. I mean, if you think about it, our short-term incentives are increasingly focused on operating margin, and not just absolute operating profit, which drives that mindset of continuous improvement. We also incentivize to make sure that we manage cash better. Those are typically the kinds of things you'd see in the shorter term incentives. Of course, as many of you know, we were actually one of the first in our sector, I think, to fully embed the ESG targets into, significantly into our LTIPs. I think you'd find that our STIPs and LTIPs are quite well aligned with our strategy. Of course, we'll keep trying to make sure it's even more so. Paul?
Okay. Capital employed, it's well into the GBP 600 million, GBP 700 million, almost GBP 700 million at the moment. You know, obviously, that's gonna improve over time as we get through this period, hence driving the returns.
Okay. Let's see. I'll go to online question. Anything, anyone else in the room that I've missed so far? I don't want to miss anybody like Flora. Okay. I'll take the online question. Gerard O'Doherty from Deutsche Bank asks, "Good afternoon." Yes, it is afternoon now. Will the three new business units be set individual free cash flow, cash conversion targets and ROCE targets in order to help achieve the group's objectives? As we're announcing this today, we're still in the process of setting the budgets for next year. Yes, the all of the businesses will have the appropriate targets deployed down to the three business units.
Exactly what those are, clearly, we're not gonna disclose those here right now, but you can rest assured that we will make sure that the three business units are well incentivized to meet the group targets. Let's see. Another question from Pam Liu. Hi, Pam. Further questions for me. Water management. Okay. You ready, Steve? Margin recovery, how long will it take to get back to 15%? I'll take that one. What risk could be to delivering that? Let me make this a little easier on Steve. We said they were midterm targets. We're confident in hitting those in the midterm. Yeah, I'm sure your follow-on question would be, what do you mean by midterm? I would just remind you that obviously in the short term, we've got some market uncertainty that could accelerate or decelerate deliveries.
We generally think of the midterm as sort of the 3-5-year range, and I'm absolutely comfortable that we'll get there in that timeframe. Let's see. Did I miss 1 part of her question? Can you scroll back a sec? What risk could be to delivering that? As Steve already said, because parts of the business have already been there, and because as we've looked at our two internal levers, self-help levers of simplifying the business and the lean thinking, we've actually looked and sized up that opportunity and believe we can get there through a combination of just getting back, sort of getting through the disruption, getting the historical businesses back, and then with the rest of the platform, applying those self-help tools. Fit for the group. Perhaps a more thorough, a more thought-provoking one.
Given water management is relatively lower growth margin, it's not about inside the building like Climate Management and Building Solutions, does Genuit need to own it? Understand the question. I would actually phrase it differently. I think that if you look at the sustainability drivers and what's gonna actually drive a lot of investment, it is a fertile area. It's also a really good area, as Steve explained, for completing the solution portfolio. It is a significant piece of our business today, and because it's already been at better margins, I'd say our decision today is that we're gonna grow it and try to get it to be the very best it can, and we see that it fits with our strategy. Sorry, Steve, I answered them both for you. Go ahead, Christian, with the mic.
Christian Yates again from Numis. You've talked a few times in the presentation about international. I know it's mostly around the climate side of things, but I suppose just looking back at Genuit Polypipe's history, there was sort of a move into the Middle East at one point, which, you know, then reversed in terms of manufacturing over there. Could you just touch a little bit more on the international ambitions and how should we think of that as more a longer term type thing or midterm, et cetera? Thank you.
Sure. I guess I would say this. Today, our revenues are roughly 10% international. We do think that over the course of the next sort of 5 years or so, that's likely to grow, right? It's, it's not gonna completely change the character of the group in the midterm, organically to be sure. In terms of sort of what we've done in the past and how it plays to the future, I mean, the disposal of France was deemed a non-core business and just a market that was tough to win in. In terms of the Middle East, actually, we have a fantastic business in the Middle East, and it's actually been growing quite well. It's just the initial operating model wasn't best suited.
The current one has been working better for the past few years. I guess what I would point to also in international is that several of our businesses, Adey, notably, has been growing at a much faster pace in the international markets. In fact, they're some of our fastest-growing markets over the last year. it is something that we expect to continue to diversify the group over time, but it is a longer-term play at this point. Any other questions in the room? Okay. Well, great. Thank you very much for the questions. Thank you online. I know a couple of our people couldn't be here today, but it was great to see you participate online.
I wanna thank you very much for your attention and for those of you here for attending our 2022 Capital Markets Day. Obviously, if you've got further questions, please do not hesitate to contact us. I'd also like to take this opportunity to thank and recognize the rest of our leadership team, including Martin Gisbourne, who you just heard of as our Group Head of Strategy and Marketing, Emma Versluys, our GC and Company Secretary, both of whom have played key leadership roles in helping to see through the strategy process and the Capital Markets Day planning. Claire Taylor, our Chief People Officer. Don't need to say how much. You've heard me say how much that's important, and her leadership is really important to us.
We're pleased to have Kevin Boyd with us in the front row here, who's recently stepped up as Chairman of the Board and brings just a wealth of experience that we're delighted to have. I really appreciate Kevin's newfound support. I'd also like to just close by thanking the people of Adey here who've allowed us to have this event here, and of course, it's been a bit disruptive, but as you might appreciate, the great culture here and the flexibility of their people has meant that they're incredibly supportive. Thank you very much.