Good morning. Welcome to Keller's interim results presentation for 2023. First, a couple of housekeeping points. There are no planned fire alarms this morning, so if the alarm does go off, it is for real. If you could exit the door to the back there and move off to the left and follow one of the team from Investec, I'm sure we'll find ourselves to a safe haven. Secondly, I'd ask if you could all switch your phones to silent, please. As a result of the hard work of the entire Keller team, David and I have the pleasure and privilege of presenting to you a great set of results this morning.
There are three points that I want to impress upon you throughout the presentation: We've had a record performance in the first half, we have a very positive outlook as we move into the second half, and finally, as a result of these two, the board has decided to continue the progression of the dividend and increase it by a further 5%. The agenda which we'll follow is our normal agenda. I will talk to the summary. David will follow that with some details in terms of filling in the, the financial backer up to the results. I will then follow with some further insight into the business performance and the Group strategy, round off with a summary and outlook, and then we'll move on to questions and answers.
In terms of the summary, as I said, we have a record performance in the first half. Just under GBP 1.5 billion. Revenue's grown by 6%, demonstrating the strength of our diverse and resilient revenue streams. Operating profit, at GBP 67 million, increased 50% on the previous year at constant currency, and pleasingly, the margin moved forward as well to 4.6%. The profit was driven by a very good improvement in the North American foundations, and David will cover that a little bit later in his profit bridge. Strong margin in terms of Suncoast, the transient pricing effect there, offset by some legacy project losses at Austral and some, a competitive pricing environment in Europe. Nonetheless, good progress. Earnings per share also moved forward following the operating profit.
Free cash flow and net debt, I will leave to David to talk about, but suffice to say at this point that we made some very good progress in terms of working capital. Order book, second highest order book that we've ever recorded, just around GBP 1.5 billion, with a very good spread across the business. We've returned to good progress as far as safety is concerned. I'll cover that a little bit later, but some good progress statistically and some very good initiatives. Finally, off the strength of the first half results and the prospects for the second half, the board has decided to increase the dividend a further 5%, reflecting the confidence in the future. With that, I'm gonna hand over to David to give you a little bit more detail.
Thank you, Mike. Good morning, everybody. In the financial results section today, the key areas of focus will be the greatly improved underlying operating profit performance, noting that given our diverse portfolio, we didn't exactly have it all our own way in the first half. The cash performance, highlighting the pleasing return to cash flow from operations, talk through why for H1, that hasn't led to a decrease in net debt. In the look-ahead modeling considerations, where we'll give some guidance in respect to the second half. Okay, let's start with the P&L. This is the full P&L, showing the underlying operating profit of GBP 67 million, non-underlying of GBP 10.4 million, with a resulting statutory operating profit of GBP 56.6 million, an increase of 86% versus half year 2022. Let's look at underlying first. Box number one there, revenue.
Year-on-year revenue in half year 2023 increased on a constant currency and organic basis by 5.8%. Volume was down in North America by 3.9% due to the reduced volume in Suncoast, driven by the contraction of the residential sector and the drop-off in revenues following the completion of the large LNG contract in RECON. Despite tough market conditions, Europe did increase revenue by 8.4%, and EMEA increased revenue by 53.8%, driven predominantly by large projects in Australia and the execution of the first Work Order on NEOM. We are very pleased to see our underlying operating profit increase by 49.8% on a constant currency basis, and our margin rate increasing 140 basis points to 4.6%. I'll bridge that operating profit in the following slide.
Net finance costs have increased by GBP 8.5 million, driven by increasing interest rates and the higher average borrowing levels. Taxation at GBP 11.8 million is at an effective rate of 22%, in line with the full year rate for 2022. The underlying earnings per share has increased by 48% to 56p, driven by improved underlying profitability, with higher finance costs preventing the full profit increase drop-through. The board have agreed an interim dividend of 13.5p, a 5% increase on half year 2022, which is payable on the 8th of September. We'll now move on to the operating bridge slide. Moving from left to right, with last year's restated underlying profit of GBP 42.3 million, there is an FX benefit of GBP 2.4 million, given the stronger US dollar in the early months of 2023.
Coming to the North America division first, which is up $33.6 million year-over-year. This is a really pleasing result, given the issues in 2022. In North America foundations, volume was up as more work was executed, but the margin improvement was really significant at $18.5 million, which is a mixture of improved project management and commercial discipline following the issues of last year, along with some larger profitable contracts, offset by lower volumes at our Specialty Services business unit and issues on some legacy contracts. Given the residential volume declines in the last quarter of 2022, we would have expected Suncoast to be a red block on this bridge. Despite the drop-off in volume, Suncoast grew profitably as their pricing proved more inelastic than expected, and the volume didn't decline as much as expected.
Turning to Europe, where it was GBP 10.3 million down overall, volume was up GBP 4 million, but margin was hit by a more competitive pricing environment, given the softer demand in the commercial and residential sectors across the whole of Europe, generally, a change in contract mix, and a challenging performance in Northeast Europe due to the effects of the war in Ukraine. The EMEA division was up marginally with a mixture of performances amongst the business units. Australia performed very well, with volume up and an associated drop-through to profitability as large infrastructure projects came on stream in the first half. The Middle East region has the positive impact of the execution of the NEOM Work Order One included, offset by contract issues on projects in the UAE.
The closeout of legacy projects in Austral has resulted in losses of GBP 11 million, as the new management has tackled the nearshore marine projects. We expect Austral to turn a profit in the second half. Moving to the next slide, I'll cover off non-underlying items. The income statement, this time focusing on the middle column, non-underlying. The analysis box shows the items that make up the GBP 10.4 million, which we've split between cash, being the ERP and restructuring, and non-cash, being acquired intangible amortization. Let's move on now to talk about cash. This page shows the summary net debt flow from underlying operating profit down to net debt. We are pleased to see the strong operational inflow of GBP 40.8 million, versus an outflow of GBP 41.6 million last year.
Our working capital has normalized, with inventories in Suncoast reducing, and the movement in receivables and payables more reflective of the growth dynamic of the group as the supply chain pressure abated, particularly in North America. As mentioned earlier, despite this improved operational cash generation, net debt has actually increased. This is driven by increased interest payments and a significant increase in tax payments in the U.S., with the 2022 liability of circa GBP 22 million and provisional payments for H1 all being paid in the first half. The other call-outs are the increased level of CapEx, given the investment on the NEOM project, and cash outflow from non-underlying is increased, given the ERP costs and the payment of a claim on a legacy project that was provided in 2022.
In the bottom box, on the right, we highlight the net debt on an IFRS 17 covenant basis of GBP 244.6 million. Leverage on a lender covenant basis at the half year was 1.2x , within our target range of 0.5 to 1.5. We'll talk more on net debt later. Let's just turn to the summary balance sheet. This slide shows a summary balance sheet with comparatives for December 2022 and H1 of last year. For reference, we set out the movements in the boxes, which are pretty standard and with no particular call-outs. I think we'll move on. This next slide provides some detail on the net debt profile during the year.
Looking at the trend, the debt level was stubborn around the $245 million mark throughout the year to date, with tax and interest payments depressing the generation of cash from operations. We have operated well within our covenants, with a leverage at 1.2x at the half year against a limit of 3x, and interest cover at 11.2x against a minimum of 4x. This slide contains details of our current facilities. In June, we signed a note purchase and guarantee agreement regarding a proposed private placement of $300 million of loan notes at an average headline rate of 6.4%. The funds are due on the 10th of August. They will be used to repay current debt and reduce our RCF.
Coming on to the look-ahead modeling considerations, the purpose here is to give some guidance on H2. On Suncoast, pricing will reduce, so margins will tighten to normal levels. Europe, we expect improved profitability as larger projects come on stream in the second half. On Austral, we expect it to be profitable in the second half as the new management have got to grips with the legacy contracts. The Middle East region currently expects the Work Order Two later in the second half. On operating profit phasing, we've had a very strong H1, so for the full year, we're more evenly weighted with H1, H2. Interest will be evenly weighted H1, H2.
Tax rate, there will be upward pressure on the tax rate because of North America profitability, but we expect to be around 22% for the full year. Cash tax normalized in H2 after the 2022 liability payments in H1. On cash and debt, we will be in the range of 0.5 to 1.5. NEOM will be a factor as to where we end up either side of the medium one times. That's it for me. Thank you for your attention, and I now pass you back to Mike, who will take you through the business performance update.
Thank you, David. Great insight to great set of results there. Moving on to the business performance, first of all, safety and wellbeing. Some great progress here. I think John Raine and his team and indeed the whole of operations have, have made some excellent progress here. We've reduced the AFR down to 0.09, and that really reflects the last 12 months, 15 accidents, five of which were classed as critical, and that's across our workforce of roughly 10,000 people. In the same period, there was 40 recordable incidents, and that contributed to the TRIR.
If you look beyond the statistics, which is pleasing that we're back on an improving trend, there's some great initiatives beneath all of that, and the one which I'm particularly pleased in is the assurance program, which has been undertaken this year. That assurance program basically has made sure that the standards and policies and practices which we've put in place the last two, three years are actually embedded in the business and are actually making traction. At the same time, you know, actually dipping to make sure that the safety culture is improving as well. Beyond that, I mentioned there or drew out there another initiative, that being the Global Safety Week. We launched that last year, if you recall.
Second time around this time, and this, this time we'll be focusing specifically on suicide prevention, which, given the male workforce that we employ, often remotely, is a key thing which we're focusing on. Last but not least, across the whole of the workforce, this week, in fact, we've launched a global welfare and health initiative, which hopefully will keep the whole workforce a little bit more mobile, a little bit more active. Moving on to a second aspect of ESG, that of the action on reducing carbon emissions. You can see here that I've slightly changed the order of the scopes, and really to reflect the timeline of which we are working them, on them to actually get them to net zero.
Scope two by 2030, Scope one by 2040, and then finally, Scope three by 2050. Pleasingly, the one we focused on first, Scope two, you can see there that we're looking for a further 10% reduction this year on last year, and we're roughly just below 38% below our benchmark that we set in 2019. If we follow that particular trajectory, we will indeed make that net zero by 2030, and we're pretty confident of doing that. Work is also being undertaken on Scope one, which I'll cover in a minute, and indeed, Scope three.
Both of these are, you know, somewhat more nascent in terms of development, but they are bigger scopes, and therefore, you know, it is important that we, we do address them, we do address them as a matter of urgency. Moving on to further action in terms of Scope one, you can see there that at the photo of our new KB0E. It's a, it's a jet grouting rig. It's proprietary to us, and it's something which typically you'll use in an enclosed environment, in a very specialist application. We're particularly pleased with this because this has just been completed last month and will go into trials in the autumn, and as soon as it's completed those trials, you know, we'll start serious production.
Clearly, this is a significant reduction in, in, in the case of we've reduced, replaced all of the diesel-driven parts with electric motive units. Some great improvements there. In addition to this, we're also trialing third-party rigs in terms of piling rigs across the company. One in particular is just in use as we speak in Sweden, which is a Liebherr model. Next slide, please. Right. Moving on to the order book. The order book at 1.5 billion, as you can see from the graph, is the second highest we've ever recorded. In terms of profile, it's pretty evenly spread geographically and roughly gives the whole company six months' worth of work across the whole company. Slightly weaker in Europe.
I'm not so bothered about that because they actually had some good wins in, in July, but it is reflective, I think, of the market there being pretty tough at the moment. Overall, though, the order book, I'd stress, is, is robust and actually gives us confidence as we move into the second half. Moving on to North America. North America was very pleasing in this particular period. As David spoke to earlier, you know, there's some great improvements there in terms of the foundations business in terms of their, their contract performance and their execution on projects, be it operationally or indeed from the commercial discipline. There's also some, you know, useful pickups there in terms of automotive projects they've picked up.
All of that, I think, has actually been very, very well executed by the team in the period, and I'm looking for that to be sustained as we move forward. Suncoast, volume down compared to the previous years, they did benefit from the transient effect on pricing as, you know, the lower stone price came through. There's a slight delay in that being fed through to the customer end-user pricing. Overall, though, you know, strong order book, that, as I say, will set us up well as we move into the second half.
Europe was a little bit disappointing in contrast, but there again, it's a very, very tough market in Europe at the moment, evidenced by a number of external events, and you can see that being reflected in terms of the, the pressure on pricing and therefore the margin compression, which we, we can see. There will be, I think, in the second half, a little bit more benefit from some of the larger projects coming through, which incrementally we, we expect to give us a little bit of an uplift, but we don't expect the market to do us any favors in the second half at all. Moving on to AMEA. Here, it's a bit of a mixed bag, with some very good performances from Australia.
Of course, you've also got the benefit of NEOM in the Q1, and all of that was good news. Unfortunately, the legacy contracts and the closing out of those projects in the first half, was, was a bit of a headwind. We do expect Austral, that, that those projects are now cleared out and tidied up, and that Austral will return to profit in the second half. Overall, you know, the order book is strength is slightly down, but that's nothing to be concerned about. Finally, on that slide, you see at the bottom, that we are, we've after a further strategic review, we've decided to, to exit our business and activities in Egypt. Moving on to strategy.
The strategy slide you see before us is completely unchanged, and is indeed the one, the slide out of all of my slides that I use, that I use the most, both internally and externally. It is, you know, there to make, to make sure that the actions of the company and actions of the management are, are aligned to it. If you look at the way in which we have implemented it, you can see over time there's a progression, three logical steps, and it's almost a shrink, concentrate, grow type of approach when you think about it. You know, two, three years ago, we did some pretty significant changes to the portfolio, as you'll see in a moment. That particular aspect is something which is always ongoing, as evidenced by our decision to exit Egypt.
Operational execution has been particular focus in the last two years. You know, I'd suggest very strongly that the improvement in North America is evidence of that, but there are, you know, other initiatives which we've, we've been taking as well. Finally, market penetration. This market penetration is there really to get us operational leverage in our chosen markets and is both, is affected both by organic initiatives and indeed, acquisitive ones, as you can see there. We move on to the summary and outlook. Here I'm gonna finish with the same three messages that I started with. You know, we have had a record first half performance, both in terms of revenue and profit.
We've increased the margin, and the performance has demonstrated the resilience of the markets that we've chosen to be in, the revenue streams we derive from them. You know, all of that's being coupled with a strengthening earnings and a strengthening cash flow. We've got a positive outlook as far as H2 is concerned. You know, the order book and the strength of the order book, and the spread of it underpins our confidence as we move forward. You know, our expectations for the full year are unchanged. We continue to execute the strategy which I've just highlighted. All of those things have meant that the board has great confidence in increasing the dividend a further 5%, and continuing the progression that we've had since listing.
With that, I'm gonna close the presentation and open the floor to questions and answers.
Yeah, morning, Sam Cullen from Peel Hunt. I've got three, and I think they probably fit into your kind of three points of the strategy, actually. In terms of, I guess, point number one is the scale. You kind of mentioned that portfolio management is ongoing. Can you give some color around sort of potential scale of further portfolio management? Are we kind of really at the, the tail end of, of that management, or are there kind of bigger things in the, in the pipeline you might look at? Secondly, on the sort of operational focus and, and the particular things you mentioned in the U.S. and the improvement in foundations and, and the kind of super normal profits, I guess, in, in Suncoast margins, are those have those things washed through in the first half now?
We should expect sort of a normal performance in inverted commerce, i.e., no more improvement in foundations in H2 or, or next year and, and a return to normal in Suncoast. Then, lastly, just on the potential scale of the, the swing back that NEOM could, could bring if WT comes forward by two months or gets pushed back by two months, just a sense of, of how big that, that might be in terms of the numbers for either back end of this year or next.
Okay. Well, I'll, I'll have first pass at all three of those, but David, chip in.
Yeah, sure.
As you see fit. In terms of portfolio management, I think that, I guess I'd stress two elements to that. Firstly, you know, a lot of the heavy lifting we, we did two, three years ago. And I think as we move forward, this is really about, you know, incrementally looking at things which are in the gray area, especially post-COVID. When we went through COVID, there was a time where all the markets were up and down all over the place, and it was hard to read what the sustainable business would be in a given territory or country, and whether it was worth staying there or not. Now we're kind of two, two years downstream of that. It's much easier to make a read on that.
Egypt, for instance, that, that economy is, is in a tough place at the moment. Certainly, the level of activity there doesn't lend itself for us to be a, you know, profitable entity there. Therefore, we've redeployed most of those assets and resources to Saudi, where we will get, you know, much better returns for, for that effort. That's the sort of thing which we will incrementally do. There will be, you know, further reviews on some of our smaller activities, and that's just, you know, quite natural, and I think it's also very healthy. In terms of operations and in the North American activities, I'll leave you to talk about Suncoast
In terms of the rest of the business, apart from Suncoast, I think that, you know, the, the improvements which we have seen in the first half are sustainable. You know, I'd hope that over time we will see progressively, you know, a further nudge, a further improvement. I think it's as you get, I think we've, we've accessed a lot of the low-hanging fruit in terms of improvements, and I think it will get progressively harder. There will be, you know, ups and downs as we, we go through the, the period. I think generally, I expect there to be a, you know, a further improvement over the next two, three years. Suncoast?
Suncoast, I think in terms of volume this time last year were particularly high, and they are, they are, they are down year-on-year. We saw that volume reduce in the second half last year, so I don't think there'll be as much of a, a differential from a volume perspective in the second, in the second half. From a profitability perspective in terms of margin, I think we have had this transient pricing on the slab on grade. I think that'll work its way through in the, in the second half. I think by the time we exit, by the time we exit 23, we'll be back to a normalized, normalized level in terms of the profitability on Suncoast.
Then with respect to NEOM, NEOM is tremendously difficult in terms of being specific about at the moment. The client, I think, has done a very sensible thing in, in terms of they've revised the way in which they're approaching the hidden marina, and they've effectively lowered the work front for foundations down to the base level of the marina rather than ground zero, which is typically what you'd do. And I think that's entirely sensible because it means that when you're building the basement, if you will, of the major modules, you're actually doing it in free air, free space, and you can therefore have a much higher quality build than if you actually be doing it subterraneously. I, I think what they're doing is entirely sensible.
What it does mean, though, is they've got another 20 meters worth of earth to remove before we can start work, and it's by we, I mean all the piling specialists. Everybody at the moment is delayed by another sort of three, four months. I don't expect us to be starting work until, you know, the final quarter, and probably, you know, reasonably late in the final quarter. That having been said, there are new opportunities and new information that, you know, crop up every week during our, you know, weekly review meeting. I don't know whether you want to comment on the financials at all, I think is.
In terms of Neom, yeah, I mean, it, you know, an investment in working capital will be required on Neom. I did mention in there about whether we'd be on either side of the median at one times, and that really is all around at what point will we crank up on, will we crank up on Neom? Because if that happens in December, we'll probably be around the one mark or, slightly less. If it happens in September, we'll probably be above the one times mark because there'll be more working capital tied up, at year-end, just in terms of the billing cycle and getting the payments in.
Talking about payments, actually, to date, they have paid us pretty much when they're supposed to, and there's been some pretty big payments, and the most recent one, they paid two days early.
Yes.
Good morning, Joe Brent at Liebherr. May I just follow up on Liam and NEOM and get your understanding or expectation of the trajectory in, say, the next five years and where you think it might peak? Secondly, you mentioned two large European projects in the second half. Could you elaborate on those? Then finally, dividend cover now stands at 4x. Could you remind me of your dividend policy and where that cover could go?
Okay. I will, I will talk to NEOM. I'll let you talk to the European projects, and we'll both come back on the dividend. NEOM, as I said a little bit earlier, is tremendously difficult to call in terms of timing and trajectory. I do think, I do hope, I do expect that once we start the work on the hidden marina, that, you know, that will continue at a steady state for a reasonable period of time, should do logically. I think that once we start work on that and they build up momentum on it, at that point, you know, it should become more steady state. I expect at the tail end of next year, we'll probably get to a reasonable run rate.
What that run rate is will really depend upon circumstances at that time. We are being very measured about NEOM. We don't want to overextend ourselves, we don't want to become over dependent on it, but neither do we want to ignore the opportunity that it gives us. You know, in terms of risk management, on all fronts, you know, we're being very considered about that.
Yeah, in terms of the European projects that are coming on stream in the, in the second half is Tanganyika and Sedated . I think I'm pronouncing that right. They have, they have started, but there's not that much in the first half, and actually, they, they start to come through more, more in the, in the second half. Also, the SMS project that got stopped last year, there's an element of that that has come back, and we're just starting that piece of work as well.
In terms of the dividend, I mean, the dividend and dividend policy is something which the board, you know, reviews as you'd expect it to at points in time. You know, we have a history of paying a dividend throughout the cycle. We, we are in a cyclical industry, and whilst the company as itself does have various characteristics which actually dampen that cycle, nonetheless, the, the macro which we work in is, is very much cyclical. Against that, you know, we have progressively increased the dividend over time since listing. That's what I think we will continue to do, and that demonstrates the strength of the cash generation and the earnings generation of the business over time.
I don't think that, you know, we'll be necessarily looking at big increases, but if, you know, if appropriate, we will, you know, look at special events and circumstances as they unfold.
Yep.
Thanks. Jonny Cooper at Numis. Can I ask firstly on North America foundations, and you've spoken about it already, but it was a massive increase in profitability, I think GBP 18 million year-over-year. Could you give us a bit more detail around what those operational improvements were and the improvement in commercial discipline? Then also on North America, what's your strategy now for steel price exposure? Do you view that as something you'd like to hedge in case they go back up, or is it a price risk you're just gonna carry? Then if I could also ask on CapEx, which was up a lot in H1, why that was. Then any updates on where you are with the ERP investment. Thanks very much.
I like your question because I'll do the first one, and you can do.
Right
The remaining three, if you don't mind. In terms of North America foundations, if you step back from, from our business and you step back from the presentation we've, we've given you today, the company is in fact the consolidation of roughly 6,000 projects every year. Think about those as 6,000 PNLs. That's the way we're encouraging people to actually think about the business. Each project is a profit and loss, and needs to be driven as such.
I think what they've really done this year is got a lot more sharp in terms of the contractual side of it and pricing up front, to make sure that in terms of the risks that we carry, as opposed to the, our suppliers or indeed our clients, are more appropriate and, and frankly, a lot more disciplined about the way we approach it, in particular, things like inflation. North America, I think has been a pretty benign environment as far as inflation is concerned, for a long period of time, up until recent times. In contrast to, you know, parts of Asia, which, you know, inflation is, is a lot higher, and therefore, contractual protections were always in place. In North America, that wasn't always the case.
There's things like that on the contractual side of things, but also operational execution. You know, they are a lot sharper, this year in terms of, you know, monitoring progress on projects and responding early both positive and negative to events as they unfold. It's actually, you know, both commercial and operational improvement, which has, you know, served to improve that margin.
Okay. On the steel price, I mean, when you look back at 2021, 2022, in terms of where steel, the steel price went, it felt a bit like a, a black swan, a Black Swan event, in terms of the impact and the volatility that it threw into the Suncoast business. We did set an objective for ourselves, actually, to try and see if we could hedge that away. We have, fairly honest, we've struggled to find a, a hedging instrument that can do it, because there, there is none that seems to just follow the steel strand, steel strand price.
I, and, you know, it, it is volatile, and I think there'll always be an element of volatility with the elevated structures of the high-rise part, where there is a gap between the order and the execution. Whereas on slab on ground, that gap is much reduced, and therefore, we can manage that volatility much, much better. On CapEx, I think the only highlight really in terms of the increased CapEx is NEOM. In the first half, obviously, get the rigs and the setup into NEOM, and then the rest of it really is just the growth in the business and the CapEx associated with that.
There will be some more CapEx come through in the second half on, on NEOM, as we increase the number of, we increase the number of rigs. On ERP, we are progressing well. We're still at the template build stage in respect of, in respect of that. The profile is that, that we will test that template in the last quarter of this year, and then have the first pilot, which we're earmarking Canada, seeing as it has its own balance sheet and is a foundations business, to be the first pilot, and we will do that in the Q1, Q1 of next year. In terms of spend on the ERP, 2023 will be a heavy, heavy year, and what we've done in H1, we'll do in H2.
2024 will be a heavy year as well as we go through that rollout, we go through that rollout process, and then we should start to see it taper off in 2025. We are slightly delayed against the original schedule, probably by about three months, 'cause we thought we would be doing the pilot in the last quarter of 2023. From an overall cost perspective, we're still within, we're still within budget, in respect of our, in respect of our spend.
I'm quite pleased actually, the people t hat we are slightly delayed because, the people are actually focusing on the quality of the result rather than just getting after the process, and they are managing the risks associated with that very well. Okay. Well, thank you very much, everybody. I'm conscious of the fact it is a very busy day for results today. These will be the best results you see today. Nonetheless, thank you very much for coming, and wish you all a good day.