Earnings Call: H1 2019

Jul 25, 2019

Good morning, everybody. Thanks for coming, and welcome to everyone who's joining us on the webcast. Can I start by introducing our new Chairman, Amit Bhatia? As you know, he succeeded Peter Tom in June, and we're delighted he's agreed to lead our board through the next stage of Britain's development. If you haven't had the chance to meet him yet, he'll be around after the meeting. It'd be great if you can catch up with him. But taking out any account, we've also brought Ross MacDonald, who runs shotgun with Amit because there's a couple unscrupulous questions will come from certain people in the audience. And we want to make sure we don't throw ammo under the cosh immediately. We're really pleased to be reporting a strong set of results for the first half. We've delivered a resilient performance in a very challenging construction market here in Great Britain and a solid result from Cement and an excellent outturn from our Irish business. The team continues to do a great job. I'll go into detail on the operational performance in a few minutes. But first, Rob will take you through the figures. Thanks. Thank you, Pat. Good morning, everyone. As you can see from the financial highlights, we have once again reported an improved performance. We have delivered revenue growth of 18%, underlying EBIT growth of 18% and achieved an underlying EBIT margin of 11.1%. Excluding the impact of acquisitions and disposals, revenue was up 2% and underlying EBIT improved by 11% and reflected the timing of the second shutdown at Hope that will be in the second half of this year price progression offset by the impact of a challenging market in GB. Profit before tax was up 30%, and on an underlying basis, it was up 13%. This all translated to an underlying basic EPS growth of 4%. These results incorporate the adoption of IFRS 16 in respect of leases, but the impact of this on the income statement is not material. However, the impact on the balance sheet and specifically net debt is more material. At the half year, the closing net debt of GBP 343,700,000 includes an IFRS 16 element of £45,900,000 and represents leverage of 2.0 times. Excluding the impact of IFRS 16, net debt was €297,800,000 and leverage was 1.8x. This compares with leverage of 2 times, 2.0 times at the 31 December 2018, 2.3 times at the 30th June 2018 and 2.6 times at the time of the Lagan acquisition in April 2018. This deleveraging clearly demonstrates the highly cash generative nature of the group. For complete transparency in respect to IFRS 16, we have also prepared the financial highlights on a pre IFRS basis. And as you can see, highlighted in yellow, the only material impact is on net debt. Turning to the income statement and revenue, which at €447,400,000 was up 18%. Again, as I mentioned before, excluding the impact of acquisitions, it was up 2%. At the earnings level, the underlying EBITS of And again, excluding the impact of acquisitions and disposals, it was up 11% for the reasons already highlighted. The increased interest costs of £7,400,000 reflect higher level of net debt post the acquisition of Lagun, but also the adoption of IFRS 16. Non underlying items of £2,600,000 were primarily comprised of amortization costs and reorganization costs. Resulting profit before tax at €39,500,000 was up 30%. And the tax charge of €7,500,000 reflects the tax rate of just under 19%. All this translated into underlying basic earnings per share of 2.03p, up 4% on 2018. Now turning to the segmental performance. Our GB business performed well overall despite the challenging market, whilst our business in Ireland enjoyed a strong 6 months. Our Cement business also delivered a solid performance and successfully completed 2 of its 3 scheduled annual shutdowns during the first half. In Great Britain, revenue was flat against 2018. Underlying EBIT was up £300,000 or 1%, and the underlying EBIT margin was 10.3%. In Ireland, revenue was up 153 percent, underlying EBIT was up £4,500,000 or 102 percent, and the underlying EBIT margin was 9.5%. In Cement, revenue was up 20%. Underlying EBIT was up £3,800,000 or 32%, and the underlying EBIT margin was 16.9%. It's worth flagging that Ireland's margin decline year on year just reflects the fact that the business was only acquired in April 2018, and therefore, the 2018 margin is not a true comparison. In addition, the 2019 cement margin is impacted by the timing of the 2nd kiln shutdown at Hope that will be in the second half. Lastly, it's probably an appropriate time to comment on the status of the Lagom synergies. The current run rate is £4,000,000 and this puts us on track to deliver our commitment of £5,000,000 per annum by the end of next year. Turning to our products. Reported aggregates volumes grew by 6%. On a like for like basis, this was a decrease of 8%. Reported asphalt volumes grew 20%, and on a like for like basis, this was a decrease of 4%. Reported concrete volumes declined by 5%, but on a like for like basis, there was an improvement of 2%. And lastly, reported cement volumes grew 19%, but on a like for like basis, this increase was 5%. For clarity purposes, the percentage movements on the slide are based on actual volumes and not the rounded ones shown. Over and above the challenging GB markets, like for like aggregate and asphalt volumes were impacted by the phasing of major projects in Scotland and the shift towards higher value aggregates in England. In terms of pricing, progression in excess of inflation has generally been achieved, And Pat will comment further on the market shortly. Now turning to net debt, which stands at £343,700,000 at the half year. Putting the adoption of IFRS 16 to one side, the net debt has reduced by £12,900,000 from £310,700,000 at the end of 2018 to £297,800,000 and this movement reflected the underlying EBITDA of £81,100,000 a £32,900,000 pounds seasonal working capital outflow. And just for your information, the prior comparative to that was an outflow of 31,500,000 in the first half of twenty eighteen. Interest and tax paid of a combined €15,500,000 and a €19,400,000 CapEx outflow net of disposal proceeds. I know I've already highlighted leverage, but I just wanted to reinforce the message. Excluding the impact of the adoption of IFRS 16, leverage is now 1.8 times compared to the 2 at the end of 2018, 2.3 times this time last year and 2.6% at the time of the acquisition. In summary, it's been a half a further improvement for the group, and we are confident that we will continue to make progress in 2019. Whilst talking about 2019, it's worth commenting on current market expectations. Full year market consensus is currently distorted due to the adoption of IFRS 16 as some analysts have reflected the adoption and some have not. The guidance we gave at the time of the 2018 results was for underlying EBIT of £115,000,000 on a pre IFRS 16 basis and £116,000,000 on a post IFRS 16 basis. We also gave out net guidance of £250,000,000 on a pre basis and £295 €1,000,000 on a post IFRS 16 basis. We remain comfortable with these post IFRS 16 numbers of €116,000,000 €295,000,000 euros I'll now pass you to Pat, who will take you through his group and operational review. Okay. Talking about the market in general. We can see there's been little or no growth in the GB market. If we look at the aggregates, asphalt and concrete volumes for Q1, you can see there was a reduction. And it's our view that, that will that's continued throughout Q2. And perhaps from Britain's perspective, that's maybe even compounded a bit further in aggregates because part of our self help program is always about optimizing our aggregates and optimizing pricing in the market. And that sometimes means that we will reduce volume in some of our plants, optimize the costs and drive into the market. And we've seen that in reducing aggregate volume a bit, but we've also seen that in improving the margins overall. So that was a positive move. Not all of our self help is operational in the business. Commercially, we will attack those areas as well. In Ireland, growth has been more robust, particularly in the South, and we've been very pleased to have that contribution throughout this year. Most parts of the business have improved performance, and that's delivered the result improvement overall. We have a benefit of 6 months' contribution from LAGEN, and it's been most welcome. And positively, as you can see, Rob talked about leverage at 2. The strong cash generation that this business has demonstrated has continued to be demonstrated with the Lagan acquisition. So again, that hasn't changed the profile of our cash generation. It's a healthy positive. And now over the course of the period since we bought LAGEN till now, we've reduced debt by well over GBP 150,000,000 and that itself gives us the confidence to keep the dialogue going in the acquisition pipeline, which we would consider today, taking major deals like lagging out the equation, I'd consider it to be more healthy today than 12 months ago. So that's a positive, and that's a testament to the activities that go on through our business in generating those those opportunities. July started well. Q1 for us was strong. Q2 slowed a bit, but we were conscious that we could see a higher level of start in July, maybe apart from the weather today. But being Scottish, I should never complain about hot weather ever. So we would make the statement that the board remains confident of meeting full year expectations. Business reviews in general. The Northern business in GB has been very successful over the past few years in winning major projects and delivering solutions to those major projects. And we've suffered a little bit by delays to projects that have been awarded but haven't been executed. So that's caused a volume variance for us, but we're happy to see that those projects are kicking off and starting now. But I'm very confident that in spite of the reduced volume for breeding, we're maintaining our market leadership position in our Northern business. We've got a good broad based performance and improvement across England and Wales, and that's many areas of the business operationally and commercially have delivered that improvement, and I would expect that to continue. We've invested approximately £20,000,000 capital investment in the business. And some of the significant projects that we brought forward are we completed an asphalt plant in one of our quarries in Doulu. And we bought we've secured significant mineral resource at our Home Hall quarry, which is one of the most profitable quarries we have in the group, and we've secured its life for the next several years. That's a positive. And some of the existing previous acquisitions are continuing to perform well, and that's something we're very conscious about because we never want to fall into the trap of being focused on the next acquisition and never really quite delivering the results from the prior ones. So even as we move forward and some of those acquisitions here are not significant scale compared to lagging or hope, they get as much focus in our business as some of the major acquisitions. In Ireland, in 2018, we saw a dramatic increase in the level of inquiries for road maintenance contracts in the south of Ireland. That's continued throughout 2019. In 2018, we had the benefit of a very large project we were supplying in Southern Ireland. We don't have that for 2019, but our volumes are still maintaining or improving against those levels even without a significant major project. And the White Mountain business in Northern Ireland, whilst execution of local government contracts in the North is a little slow, they've been very successful. I've continued to secure small infrastructure projects in England, primarily in Wellingborough, in Kettering and laterally at DP World. And the delivery and execution of those projects and the margins in those projects are probably a little ahead of where we would have anticipated, and we're bidding them. So it's great performance by White Mountain also. And we make the comment a solid performance with cement with 2 of the 3 shutdowns completed. I think that's a fair comment, but it's somewhat understated because cement businesses are they're quite complicated businesses, and you have one time a year when you can secure your raw materials and execute your price increase. So as long as you achieve that, you can secure your delivery of results for it. So that's why we describe it as solid. But for 2 cement plants being integrated, that's a huge plus for the management team within the cement business. From an outlook perspective, we would anticipate in GB improved trading conditions in H2. That's based on: 1, the level of inquiries we've been experiencing to some of the major projects we anticipated to be ongoing in H1, moving to H2. And as we can and then as I say, the level of inquiries are very positive. And in the 1st few weeks in July, trading has been strong. I think we'll continue to see regional variations in the business. We are not heavily exposed in London, but I think we can still see activity levels in our minor participation struggling a little bit in London. Some of the highways work might still be slow to execute. And whilst we are not a primary player there, some of the primary players as the struggle may dip in the other parts of the market. So I would expect to see regional variations throughout the rest of the year. One of the benefits we do have is this time last year, we were sort of facing bitumen increases, hydrocarbon increases face on. We're now sort of 10 months past that. So we don't anticipate the same headwinds in that, which we see as a plus for H2 as well. The market in Ireland, as I say, the forecast continue to grow by 17% through 'twenty one. And even in the North, there'll be modest growth. And I'm maybe I'll remake the statement I always make. For us, we're happy with flat markets. Don't get me wrong. We're happy with high growth markets like the Republic of Ireland as well. But in a flat market, we're very comfortable that we can focus on improvements in the business operationally and commercially and deliver our numbers. And when you look at the volumes we've had in the markets we've had this year, I think the first half and the cash generation in the first half demonstrates that we're able to do that, and we'll continue to do that. We also continue to invest capital. Our target at the start of the year was approximately 100 percent of depreciation would be invested in the business, and we and that's still the target. We anticipate doing that. We're still striving for people in the business to bring forward projects. Many of the projects we bring forward kind of a 6 month payback. So for us, we're looking for projects that can execute and deliver today, but the priority is that they're going to deliver for years to come. We're not going to speculatively spend money and capital today to deliver a result for the next 6 months. These are investments that are right for the long term and have to give a short term benefit for us as well. I think in Primary, I've covered the last points on breeding. Again, maybe the final statement is we're confident of meeting full year expectations. And at this point, we maybe long as the country doesn't stall, I maybe see more things helping us in H2 than headwinds that we've had in H1 or H2 last year. So but I think confidence as far as we're going to go in that statement. So I get we're happy to take questions now. Thanks, Matt. Could I just ask people in the room, when you asked your question, could you just give your name and house just for the benefit of the people on the call? Many thanks. I thought we were getting away with being succinct. Yes. Clive Lewis at Peel Hunt. Couple, if I may. 1 on acquisitions, and if you could appreciate the comments about sort of the pipeline looking pretty good. Can you give us a little bit more flavor as to whether it's this side of the ROC or the other side? And whether, again, there's a sort of a bias in terms of sort of the end product that's sort of coming through to you? Also the second one was on pricing. Obviously, you've got a mix change certainly within aggregates in the U. K. Can you just maybe give us a little bit of help in terms of sort of the quantity that you've seen in terms of sort of pricing in some of those key areas? And the last one was on investment projects. I mean, with CapEx sort of looking like it's going to be matching depreciation this year, what would be the sort of the biggest 2 or 3 projects in terms of sort of spend? I mean, you've obviously highlighted Dowlo and I think Holm Hill. Would those be the biggest 2? Or would there be other projects in there that would be bigger? From an acquisition perspective, we it's the quality of acquisition and the quality of sort of earnings enhancement that we're interested in, whether that's in Ireland or in GB. So we're open to both. I think we have more history and relationships in GB, so I would expect more opportunities to come from GB initially. But what we are seeing is some traction in Ireland. Our teams in Ireland have a lot of good relationships. So I could literally, at this point, it could come from Ireland or it could come from GB. I mean we have we're quite active in both areas. Will be about the quality of the transaction more than anything. And the Republic of Ireland has to be very much aggregates driven because they have a great asphalt business and a great asphalt footprint, very small ready mix business in Cork, nothing in Dublin. But that's not anything we need to rush into. They have the dormant quarry program that they're reopening dormant quarries and developing that part of the business. I think that will have to be complemented by bolt on acquisitions in the aggregate side of the business, so I can see that. And then from the GB side, we have a lot of relationships and potential opportunities out there. We just never control the time of when they come. And it's like buses, I guess. When one comes, more than one comes. And we just have to be ready. And I said at the time before we did the lagging deal from a management bandwidth perspective, we're in better shape today than we were 12 months ago. Again, we got in some great people with the Lagan acquisition. And pleasingly for us, some of the smaller bolt on deals in GB don't come from our group level. They come from operations directors and general managers throughout the business. That's what we're seeing in Ireland as well. The depth of relationship that those guys have over in the business there will bring opportunities to us. So it doesn't stretch us at group level. It might stretch Rob's purse strings if it comes at the wrong time. So very positive. So I'd cover quickly the other 2. Pricing, I mean, generally, we've at least recovered inflation, generally ahead of that. For a number of the products, Clive, we had a cost bow wave last year. So we've been able to move prices further forward to recover those costs. And the one I will mention is that in the English business where we talked about mix and to the higher priced aggregates, we've recovered the volume through improved pricing. So it will be ahead of inflation. And maybe one even in the parts of the market, Clyde, where it's competitive and volume's down, we may not have seen as dramatic a price increase we wanted, but we haven't seen erosion. And then in CapEx, I mean, the guidance that we gave out for the year was, as Pat said, 100%, but circa £60,000,000 I mean, there's no particular product that's sort of more than a few single digit millions. So it's not there isn't one that's £10,000,000 or £15,000,000 But the more interesting element is just the guidance we've given out and have continued to give out that probably 50% of our CapEx spend is what we would call stay in business, and the other 50% has an element of enhancement. And at the most extreme, it will be full enhancement as a new plant, for example. At the minor point, it could just be operational improvement or efficiency. Yes. And it come in both, guys. It's an interesting project we're doing at the moment. We're relocating 1 of our ready mix plants to our quarry in the Northeast. And what that will allow us to do is close 3 ready mix 3 remote ready mix plants. So it gives us the efficiency of getting material to it. It takes 3 plants out of our population of plants, 2 of which were becoming fairly high maintenance costs, And the 3rd plant will be turned over to a mortar plant. So those type of I can't how much was that, Rob? Can you remember? It's not a small amount. It's probably less than £500,000 but the impact to that is significant, and the timing of that is almost immediate. And those are the kind of projects that we're seeing coming to us sort of now. Christian York from Numis. Just a couple from me. Firstly, could you just touch a bit more on the lag in integration? And also, the synergies seem coming through strongly, whether you see scope for upside, I suppose, to that GBP 5,000,000 target? And then also, you alluded to perhaps some of the larger infrastructure projects having an impact and maybe some of those larger players moving more towards the Breeding areas. So just wondering if you've actually seen any of that yet or it's more of a risk to watch out for in H2? You want to do it? I'll do it. So yes, no, I mean, the synergies and delivery of them is progressing well. I mean, as I said, the run rate we're at a run rate of €4,000,000 We are comfortable, and I mentioned before, we are comfortable in achieving the €5,000,000 It's the same as when we talked about the Hope acquisition. We won't stop when we've delivered those numbers. They tend to be underpinned by overhead and administration costs. And on top of that, we've got all the commercial and operational improvements. You will just see those flow through the business as the business improves in the years ahead. From a major project perspective, we've probably been seeing that over the years. I mean you always get I we always talk about we are 65% exposed to safety, infrastructure and homebuilding. But to me, those are dynamic. So we will always we'll always see people if they're slow in a certain part of the market, we'll move. And the others, we do it ourselves. We've we always say a breed and focus in a low end of the market. But what we delivered on A9 previously and AWPR and A9 now, you would consider that not traditionally to be parts of the Breeden market. But for us, we are very comfortable in small local jobs now. We're very comfortable in large projects if there's value in them, not just productivity because we've got enough experience up here that we don't need to buy any more experience for delivering projects for nothing. David O'Brien from Cowen. A couple for me. Firstly, just following up on pricing. And you said you're pretty confident that the momentum is there. But would we refer to say that there's no real benefit in the H1 number to positive pricing impacts, and it will be more H2 weighted, underpinning your guidance? Secondly, you alluded to competitive trading conditions. Could you just give a little bit more color where you're seeing the biggest pinch points? And finally, a follow-up on Clive's point on acquisitions. How have you seen vendor expectations evolve over the last 6 months as the environment got more difficult? Sorry, how much the second one again? Just the second one, the competitive trading conditions that you point to. Can you give a little bit more color where the biggest pinch point is? So I do, pricing. Yes. So on the pricing, I mean, we H1 has been about delivering that improvement. H2 is about sort of seeing the benefits of it flow through. So that's quite normal in the industry. Yes. I don't think the market's been any more competitive. Certain pockets has been competitive. In areas where maybe our large project's finished and the other one hasn't started, you would expect to see activity levels dropping and be a bit more competitive. But again, I think it's maybe we haven't seen pricing go backwards. We haven't seen it go overly competitive. We might just not have seen the increase in pricing that we would like to have seen. And that may well be as a result of what people have secured bitumen in the past, and they might be still running. If they're running through some high priced secured bitumen, they will obviously be driving price to recover it. So there's fluctuations in that, but not material, not material in its impact to us. And the third one was valuation and stuff. And we haven't seen any material change in valuation aspirations, I mean, depending on how you want to value it. But we for us, we have a tried and tested formula. We have our own internal hurdle rates, and we evaluate acquisitions using those. It's Kevin Camac at Senkos. Could you just delve slightly into the what's driving a lot of the growth in the Republic of Ireland? Is it public sector, private sector, housing infrastructure, commercial, etcetera? And also, how your the makeup of your business is currently address and serve those particular markets, the balance of where those that growth is? So in terms of what's driving it, I mean, I think it's quite publicly commented on, but there's 2. 1 is housing and secondly, infrastructure spending. And the national infrastructure spending plan for Ireland has significant growth in it. And those projects are being delivered upon. Interesting comparison to GB, Kevin, is that they a lot of those projects are funded on balance sheets. And every quarter, you hear that the tax receipts in the Republic of Ireland are in surplus to their budgeting. And so they're in a very good position to be able to fund some of the spending in their plan in the years ahead. In the South, it tends we in the North and the South, we have significant market share in the highway maintenance area. And you tend to find in the South that they're all very short term projects that are usually bid and executed in the same year. Whereas in the North, we have several framework agreements with the local authorities that will span several years. So kind of very different way to execute the programs, but ultimately, the market share in both is probably not far off. It's probably the same in both areas. And it's true. In the last couple of years, probably Dublin has been the focus. But interestingly, the spending is starting to cascade out of Dublin, and that will be beneficial for our business. And we tend to be stronger outside the biggest cities? In the South, for aggregates, we don't have a significant aggregate business there yet. That's on the slate for development. Ready mix, we're in ready mix in Cork, nowhere else. But from an asphalt perspective, we are everywhere we want to be or what is pleasing. And we kind of we knew it, which is why we didn't change the names. But the LAGEN brand in the South as far as asphalt paving goes and the White Mountain brand in the North are 2 tremendous brands. And maybe we got a bit lucky keeping the brand there, but the recognition of those brands and the quality of work that they do is impressive. John Messenger from Redburn. I think I've got 3, if I could. First was just when you talk about major projects and some of the things that didn't come through awarded but haven't secured volumes yet, Is that a mix of public and private? Or is it predominantly kind of public sector stuff that you think will kick on? Or just to understand a little bit about it in terms of those delays and what can happen clearly with the political backdrop in terms of those kicking on for the second half volume. Second one was just on the ready mix. To understand, obviously, the minus 5 to the plus 2, was that cork ready mix? So just to understand why I know that not big volumes, but was there a deliberate move to sort of cut out some maybe less profitable ready mix volume in terms of what happened there? And the third one was just on the shutdowns. What do they obviously doing well in the second half? Is that normal? Or is this because of some specific CapEx that's going to go into Hope? And what does a shutdown typically cost you in terms of disruption? Or is it effectively volume built up? You're sitting with the cement, and therefore, there's no issue in terms of trading in the second half? That's it. Yes. Maybe we're overplaying the major projects. And there's 2 projects specifically I'm thinking of is A9, which we've been awarded. We would have anticipated starting supplies to that in March, and we've started now. And then one we haven't been awarded. We've just bid, but there's a significant project RAF Lossiemouth, which we would have expected to be awarded again in the spring and will probably be awarded September October. So I can't remember. Maybe I was talking to David earlier, but we were having I was having a conversation with Alan Mackenzie a little bit ago and about the delays to a couple of those projects. And he said, well, the last thing with delays like that was at the Scottish referendum and then the time after it was Brexit. And the reality is these projects will always get delayed. And we always look for something to tag it onto. And at the moment, it's Brexit. And I really don't think it is. I just think it's the nature of our business that we anticipate the projects will come quicker and will be supplying. And inevitably, they take longer. So it's definitely a factor in H1. But probably the most significant project is the A9 that's impacted there. We haven't seen a lot of other projects, sort of delays in push in commercial type work. We're not seeing that stalling. In terms of the ready mix, John, it's the tarmacs what we did last year. So it's simple as that. So in terms of the shutdowns, traditionally, Hope would do both shutdowns in the Q1. And makes completely logical sense to do it when power costs are most expensive and everything. But what it does do is it puts the supply chain under the most constraints just as you're moving into the busy summer season. So what we took a decision a couple of years ago was to try and migrate it so we didn't have both shutdowns before the busy season when we're trying to build stock and that we moved it to the Q4. And in effect, last year, if you remember, we moved 1 and we managed to do 1 in June July, and we've then managed to move it again this year, which will now be done in September, October. So it was really just to make sure that we were in the best possible place in terms of stock availability. And when Rob gave the team that sort of guidance that you gave them, the sort of latitude to say, we want to move the shutdowns to these periods, but we don't want to change the risk profile of the business. So if it takes you 3 years to get there, it takes you 3 years to get there. But we're delighted what they've got to now. And like is there a way of thinking of just what they hit you for cost? Or is it a $500,000 event or Yes. I think we've said it before. No, it's I would say it's probably $2,000,000 2,500,000 a kiln. Okay. If that's it, then I appreciate everybody taking the time to come. And as fully dressed as you are considering the temperatures outside, but I appreciate it. Thank you. We're happy to chat a little bit after