Breedon Group plc (BREE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Breedon Group plc Annual Results Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll, and I'm sure the company will be most grateful for your participation. I'd now like to hand over to CEO, Rob Wood. Good afternoon.

Thank you very much, and good afternoon, everyone, and thank you for joining us here this afternoon. I thought before we go and start talking about our annual results for 2024, I would take the opportunity just to remind you about Breedon Group and a bit of our history. We were formed and our first transaction was in 2010, and we were in the U.K. and we were at construction materials. Since 2010, we've grown both organically and through acquisition to build out a vertically integrated construction materials business not only in the U.K. or GB, but also in 2018, we expanded into Ireland. And so therefore, have 2 platforms. And just over 12 months ago, we expanded into the U.S. and into the Midwest in Missouri. And so we now have 3 platforms. We now employ approximately 5,000 colleagues, and we're focused on growing the business organically and through acquisition across our 3 platforms. I just thought that was useful background for all of you. If I turn to our annual results, what I'd like to say is that we're really pleased with what we've delivered in 2024. There were really quite challenging headwinds in our home market, GB. There was political and economic instability across all 3 of our platforms. And political-wise, there were elections in all 3 platforms over the last few months. And there were some poor weather conditions that impacted different platforms at different times of the year. But overall, Team Breedon stepped up, faced those challenges head on and delivered what we consider to be a strong set of results, which were just slightly ahead of market expectations. But as well as the numbers, we also achieved some other things. And we delivered some results, which were sort of in parallel to some of the strategic progress we made. And I think what I'd call out here was our announcement back in March 2024 of BMC, which was our beachhead in the U.S. had followed a couple of years of us doing due diligence and talking to investors about exploring an entry into a third platform. And I'm really pleased that was a big landmark transaction for us and gave us our big beachhead in the U.S. But in parallel to that, we made significant progress on our sustainability priorities and upgraded our targets going forward. And James also refreshed our financial framework, which he will come on and talk about separately. But all those 3 subjects were front and center to the Capital Markets event we hosted in November. And I hope if you haven't done already, you find the opportunity to go back and look at those slides and watch the video from the day because I think that really explains why we've entered the U.S. and why it was so compelling. So in summary, a strong set of results in some challenging markets, but some real strategic progress. And I think on that note, I'd like to pass over to James.

Thank you, Rob, and good afternoon, everyone. I think the thing that really struck me when I look back at the 2024 results is just how balanced they were. We successfully grew our revenue. We grew our EBITDA and indeed, we expanded our margin, helped in no small measure by that initial contribution from BMC coming into the group for the first time. But alongside that, we generated significant levels of free cash flow. We improved our cash conversion, and we've continued to invest back into the business. And I often talk about how at Breedon, we see investment as a differentiator, and we see the investment that we make today as underpinning our success in the future. We reduced our leverage over the course of the year to 1.4x from its half year peak of 1.6x. And that, in turn, gave us the balance sheet capacity and firepower to acquire the Lionmark business off the balance sheet and using our existing facilities. If there was a disappointment, it was perhaps in our return on invested capital in the year, which came in at 9%, down from 9.9% at the end of 2023. But there are really 3 significant components to that fall. The first being the increase that we've seen in our corporate tax rate. The second being BMC only being consolidated for a stub period of the year. And then finally, the trading volume decline that we saw in our British business. We remain confident that as markets return and as volumes grow, that we will see an expansion of that ROIC back towards 10%, which is the threshold target that we have established. We also grew our dividend in the year by some 7% to 14.5p. And since we first started paying a dividend back in 2021, we've paid out over GBP 160 million in dividend distributions to shareholders. So it's been pleasing to be able to continue on that progressive dividend track. Looking at the divisional EBITDA contributions, you can see that in Great Britain, despite the volume declines that we saw in the year, the margin fall was restricted to 20 basis points, which for a business that has an incremental drop-through of closer to 20% really demonstrates the success that the division deployed in terms of its cost management and cost mitigation through the year. Our Irish business saw an expansion in its margin to 17.8%, reflecting investment made back into the business, tight cost control and a much more structured approach to tendering across the island of Ireland. And there's that encouraging initial contribution from the U.S. business as well as further margin expansion seen in our cement business. And all of that led to the group margin improving by nearly 80 basis points to 17.1% compared with a threshold target EBITDA margin of 17.5%. I'd now like to hand over to Rob to talk a little bit more about the Lionmark acquisition.

Thanks, James. Look, we were really pleased to announce the acquisition of Lionmark last week. And when we started our journey just over 12 months ago in the U.S. in BMC, we did have our beachhead. It was in an attractive market in the Midwest, which was ready for consolidation. And it came with a really high-quality management team. But if there was a negative, it would be potentially that it was overexposed through its ready-mix concrete to the residential sector. And our desire as Breedon is to have vertically integrated businesses with a majority exposure to infrastructure and roads. And I think Lionmark couldn't have been a need to fit. It builds us out into asphalt and surfacing, contains further acquisitions to expand our geographical footprints -- sorry, aggregates to expand our geographical footprints. And what it does overnight, and if I just move forward a slide or 2, that one back. And what it is if you look at those pie charts in the middle, you'll see our overexposure to residential pre-Lionmark and then post Lionmark, where the majority is now through to infrastructure and roads. So really, really, really quite -- I mean from an end user point of view, very good. I think what I'll then stress is -- I'm losing control of the slides here. So it's really what it's got. And it is a leading regional construction and servicing business. It's headquartered in Missouri. I mean, literally, the head office is only 10 or 15 minutes away from our BMC head office. It has a strong track record of organic growth and has an ambitious and culturally aligned management team. And as I said, just when I started, it really does vertically integrate our business. But it does come with more. It's got over 100 million tonnes of reserves and resources across 8 quarries, 4 asphalt plants and has a bitumen terminal and increases our exposure to infrastructure and positions us to benefit for the construction growth that is expected and we expect in the Midwest in the medium term. And I won't dwell on this slide, but I think this gives you some of the forward projections and just really just why it is an attractive acquisition and why it is an attractive market. But what I would say is in summary, we are really pleased. Overnight, we now have a vertically integrated business in the Midwest, a real beachhead to build out from. And James and I and the Board and the team in the U.S. are very excited about building that business further. And I think I'll pass back over to James now just to give you some financial highlights.

So in Lionmark, we're buying another really good Midwest infrastructure-based business at an enterprise value of $238 million, a multiple paid of 7.7x 2024 EBITDA. And that's inside the multiple that we paid for the BMC transaction a year ago and is in line with, if not ahead of comparable transactions paid for in the U.S. construction materials market in recent years. The vendors are taking around 5% of the consideration in Breedon equity, and they've undertaken to hold those for at least 12 months. Coming into this year, the business has a backlog of over $210 million, which compares with a revenue delivered in 2024 of around $246 million, and it generates an EBITDA margin of 12.6%, which we would hope to be in a position to expand in future years. How we're going to go about doing that is in part through generation of synergy benefits, and we've identified $3 million of synergy benefits that will come through over the course of the next 3 years. We will need to make some investment back into the business in the first year of ownership. But there will be other opportunities, particularly around vertical integration and cross-selling of materials between the Lionmark and BMC businesses over the course of the next few years. We've already completed on the transaction, so the business will now be consolidated by Breedon over the course of the next 10 months.

And I think in summary, I think that's it. Really, really pleased with the strong performance in 2024 and really pleased to be able to announce Lionmark and just what a good fit it is for our U.S. business. And whilst there are some challenges ahead, particularly in the U.K., we're excited about the future as Breedon. And it's probably an appropriate time now to open it up for questions then.

That's great. Rob, James, thank you very much indeed for updating investors. [Operator Instructions] And Rob, James, we've had a number of questions from investors this afternoon. So thank you to everybody for your engagement. Perhaps I could start with the first one, which we received ahead of today's event. The Ireland division is described as strong in 2024, and there was a nice step-up in EBITDA margin, but revenue in the Ireland division have been flat for 4 years. What is holding back revenue?

I think if you unpick the Irish business and the Irish performance, we did see a really encouraging improvement both to the EBITDA and to the margin in the course of 2024. In part, that was down to exceptionally good cost control. But another big component of that was us taking a very structured approach to our tendering process in Ireland and not being afraid to walk away from projects that were less economic for Breedon. So that in turn has meant that we have turned down revenue opportunities where we felt that the margin was insufficient to cover the risk and the investments involved. Within the Irish business as well, we've seen a significant increase in the amount of aggregate sales that we made from that business, reflecting the transformation that has been brought on the Irish business since the acquisition of Lagan back in 2018 when the business was pretty much exclusively a surfacing business.

Great. The other pre-submitted question we had was around share price. Rob and James, is there anything that they can do differently in the future to increase the share price, which has been slightly lagging behind?

I'll start that one, and James will probably add to it. But I mean, I think the most important thing we can do is keep delivering and control the things that are in -- that are under our control. There's been a lot of macroeconomic influences on not only our share price, but London share prices as well. And we're not directly able to influence those. And when we speak to our major investors, I mean, what they've always told to do is to focus on the things we can control and focus on improving the business.

And I think what I would add to that is that really over the course of the last 12 months, the share price has moved forward really quite materially. And since the announcement of our results last week, the share price has made further strides forward. So I think that we remain very focused as a management team. The top team within the company are very incentivized and motivated to move the share price forward, and we will continue to do our best to ensure that our results and our performance are appropriately communicated to the market.

Thank you. Just turning to the next question. How are you positioned to capture opportunities from the U.K. government's infrastructure spend plans?

I think we have a well-populated sort of geographical footprint to be able to benefit. When it comes to infrastructure, I mean, if you look at roads and take that as one part of it. I mean we have relationships with National Highways on the Northern Super Region. We have relationships up in Scotland with Transport Scotland. And so we're well placed to benefit from spending on the road network. I think what's clear, though, is that RIS3, which is the next 5-year spending program for roads is unlikely to have a lot of new capital projects in. It's likely to be much more maintenance focused. And one of the few capital projects that was still in it was the A303, which was a tunnel under Stonehenge. The new government scrapped that road, new road literally quite shortly after they came into power last year. But we shouldn't be disappointed if it's maintenance spending, it tends to be asphalt and the laying of asphalt, and it tends to be that our industry and therefore, Breedon gets to share more meaningfully in the pot as opposed to capital projects. And also maintenance spending can be actually mobilized relatively quickly. Capital projects often take years to move from an idea through to a project. Outside of roads, there's a number of infrastructure projects that are required, whether it's water, whether it's electricity, whether it's hospitals, all of them will be good. Spending on them will be good for the heavy construction materials industry and Breedon should benefit from such spending.

You recently announced, I know you just touched on this, the Lionmark acquisition. How does this fit into your U.S. expansion strategy and what synergies do you expect?

I think as I touched on earlier, we bought a really good business in Lionmark. And I think there are a number of particular features about this acquisition that are very relevant in the context of us establishing our U.S. platform. The first of those is just how local it is to the existing BMC business. Both businesses headquartered in St. Louis, Missouri and both very well known in the construction materials space in the Missouri market. Alongside that, the acquisition out of stroke diversified our U.S. business from being very focused on residential housebuilding, very focused on ready-mix concrete to being a much more infrastructure-based business. And if you look at the rest of the Breedon Group, our focus tends to be on being infrastructure led. In terms of synergy opportunities, we're targeting those $3 million that should come through over the course of the next 3 years. And those are very much what I would call hard synergies. So i.e., costs that we have identified that will not need to recur under Breedon/BMC ownership. Over the course of those 3 years, those synergies will come in roughly 50% in 2026 and 50% in 2027. And then there may well be further opportunities for growth on top of that as we vertically integrate the businesses.

Question here around, I guess, different expansion verticals. Are there any plans to expand your presence into high-growth sectors like data centers, renewable energy infrastructure or commercial real estate?

Yes. We have exposure into all those sectors. Energy infrastructure, I mean, for us, whether it's new nuclear or whether it's onshore or offshore wind, we have been involved and we continue to be involved. And we have a good business and a strong business up in Scotland. And for new onshore wind or further offshore wind, we're very well placed. And some of the inquiries and some of the prospects that we're looking at now could be quite rewarding to Breedon over the next few years. I think in terms of new nuclear, it's not only high-profile projects like Sizewell C, there's also the need for modular nuclear. And there's a lot of other areas as well. I would say out of all those areas that you touched on in that question, it's probably the commercial that's probably the weakest at this stage. But it doesn't mean that if that sector improves that we wouldn't be able to participate.

A question from Gavin. Thank you, Gavin. Is the U.S. servicing business a regional political thing? Have you reached adjacent territories if so?

So I would say it's a regional business, but I'm not sure what you mean by political, but it will be public authority led just like our work in England is with National Highways and our work in Scotland is with Transport Scotland. Most of that work will be on trunk roads in Missouri, where the major part of the business is, and it will be with what's called MoDOT, which is the Missouri Department of Transport. But the positive is there is that as well as the federal funding through the IIJA and a number of other acts that have been passed in Missouri, there's also a gas tax and the proceeds from that are ring-fenced for spending on the highways. And the outlook and the forecast for the next few years are really quite strong for Missouri.

I got 3 questions in one for Mike. Thank you, Mike, for your question. In the U.S., given the new exposure is weighted heavily to infrastructure and nonresi, do you anticipate future M&A to largely follow this new pro forma mix? Can you discuss plans on where you see U.S. contribution to earnings within the group over the next 3 to 5 years? And then lastly, where is a comfortable level for leverage for the right acquisition?

So I think in terms of the general profile of our U.S. business, we would expect that to be maintained on the sort of structure that you've seen following the announcement of the acquisition of Lionmark. That's not to say that the next acquisition might not be another ready-mix concrete business. But over time, I would expect that infrastructure exposure to remain around 50% of our end market exposure. I think in terms of the size of the group and the size of the aspiration in the U.S., Andy Arnold, who's the MD of our U.S. business at the Capital Markets event back in November, expressed an aspiration to grow division of Breedon that will be the equivalent size of the Great Britain and Irish business combined. In announcing the acquisition of Lionmark, we're already at a size in the U.S. on a pro forma basis, which is the equivalent size of our Irish business. Finally, with respect to leverage, leverage on a pro forma basis on the day of announcement is 1.9x. We will see some natural deleveraging over the balance of 2025, but between 1/4 and 1/3 of EBITDA, which gives us a degree of balance sheet flexibility. We would take leverage a little bit above our target range of 1 to 2x for the right transaction, but always with a view to deleveraging in relatively quick order thereafter.

Thank you. I think this is the final question we have from Gavin. Had BMC and Lionmark spoken before being so local? And why was it you that has merged them?

Yes, they did know each other. And I mean, it was interesting, but even in the early days after we'd announced BMC and I know that Andy was talking to the team there. It's an interesting question. One of the reasons that BMC became available was that the previous vendor ultimately have decided that he didn't want to put more capital at risk. And I think given the size of Lionmark, I think it would have been hard for them to find the equity and the debt to be able to do that and it wasn't something that the previous owner wants to do. I think when we came in, that changed that because it gave access to capital. And I think when they met each other over the last few months, as James and I have got to know the Lionmark team well, it became quite clear that there was an opportunity for them to join the Breedon team and help us start to build something really quite exciting in the Midwest.

Great. Rob, James, thank you very much indeed. That's taking care of all the questions from investors. If any more questions do come through, we'll make those available post today's meeting. Rob James, I know investor feedback will be forwarded to you both, and I'll shortly redirect those on the call to give you their thoughts and their expectations. But before doing so, if I could ask you for a couple of closing comments.

No. Well, thank you, everyone, for joining us this afternoon. As I said, a good '24, not just the numbers, but on strategic progress. And really, with the Lionmark acquisition, we're really quite optimistic now that we've got a great platform to build out from in the years ahead in the U.S. and we are incredibly excited about the future.

That's great. Rob, James, thank you very much indeed for updating investors. I please ask investors not to close this session as we'll now automatically redirect you to the opportunity to provide your feedback in order that the company can better understand your views and expectations. This may take a few moments to complete. I'm sure it will be greatly valued by the company. On behalf of the management team of Breedon Group plc, I'd like to thank you for attending today's webinar, and good afternoon to you all.