Breedon Group plc ($BREE)

Good morning, 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 would be most grateful for your participation. And the company would now like to share a copy of the presentation.

Good morning, everybody, and welcome to Breedon's 2025 Results Presentation. James and I will guide you through our presentation and then open things up for questions. I'm pleased to report that in a testing year, Breedon has proved again the strength of our model and the quality of our people. Across all 3 of our geographies in markets that gave us very little by way of tailwind, the team delivered again. In GB, concrete volumes fell to levels not seen since 1963. In Ireland, 2 major infrastructure projects were deferred. And in the U.S., extreme weather in the first half impacted our business. None of this was within our control. What was in our control was our response. Our teams delivered over GBP 20 million worth of self-help. We simplified our management structure to a country-based model, enabling faster decision-making. And we continued to invest through the cycle in our quarries, in our plants and in our people. I thank the Breedon team for their commitment and for making Breedon a better, stronger business in 2025. In parallel to delivering a performance, I am pleased to report that we made significant progress on our strategic priorities. In 2025, we implemented our evolved strategy, Breedon 3.0, in which we committed to expand and improve the group. And I'm delighted by the progress you see here. In respect of expand, the acquisition and integration of Lionmark in the U.S. was the standout strategic achievement for the year. By adding asphalt and surfacing capability to our aggregates and concrete platform, we have created a more balanced vertically integrated business in the Midwest that now generates almost 20% of group revenue. In respect of improve, we have continued to have success more than replenishing our mineral reserves. And our operational and commercial excellence programs have continued to deliver. As you know, everything we do is viewed through the lenses of people, sustainability and finance. And with respect to each of those, we have continued to invest in our people, be it health, safety, well-being or training. And it's great that this was recognized in our industry-leading engagement score of 77%. We have made significant progress towards our 2030 sustainability targets, and this progress has been recognized with upgraded ratings. And lastly, we maintained a strong and flexible balance sheet, and James will pick up on this later. So in summary, we've achieved a great deal in 2025 despite the challenging markets and political uncertainty. I'll now pass you over to James for his financial review.

Good morning, everybody, and thank you, Rob. So 2025 was a testing year for the group, as Rob has outlined. Both revenue and EBITDA increased year-on-year, assisted by those U.S. acquisitions. And on a like-for-like basis, revenue and EBITDA declined slightly. However, we did see a small strengthening in profitability coming through in the course of the second half of the year. Our reported margin of 16.3% reflects how volumes drop through to EBITDA, together with the structurally lower margin in our Lionmark business. However, our like-for-like margin performance was notably resilient and supported by the successful delivery of GBP 20 million of contribution from our operational excellence initiatives. Our return on invested capital was impacted by the lower levels of profitability, our continued investment back into the business and the short-term dilution from the acquisitions. We remain confident that we will deliver a ROIC in excess of 10% in more normal market conditions. The standout performance in the year was our excellent free cash flow generation of over GBP 133 million, which meant that we exited the year with leverage of 1.8x, back well within our target range. And to give some context to that, that is a record free cash flow performance post-COVID for the group and means we've improved our free cash conversion for the third successive year. We're now ahead of our target cash conversion rate and the 0.4 of a turn of EBITDA of deleveraging since the half year was our largest in-year deleveraging since 2021. Our underlying EPS fell by 8%, reflected the expected increased depreciation charge incurred as we start to depreciate our major capital projects and the higher interest charge derived from increased borrowings. But despite lower EPS, we've increased the dividend to 15p, a 3% increase across the year, reflecting our strong year of cash performance, our commitment to a progressive dividend and our confidence in the future. And this takes our declared cash distributions over the 5 years since we started to pay a dividend to over GBP 210 million at a time when we've been undertaking significant M&A activity off the balance sheet and investing back into our business. Pricing across the year was broadly flat with a 3% volume and mix impact being principally down to the market challenges we faced in GB. The GBP 20 million we generated from operational excellence initiatives meant that the year-on-year movement on costs was a net positive of GBP 9 million. In terms of our individual product sets, asphalt was our strongest category, recording volume growth on both a reported and a like-for-like basis. And the outlook for asphalt in 2026 remains positive across all 3 of our geographies. Aggregates, cement and ready-mix concrete each saw volume declines in the year. And whilst the pace of contraction in GB ready-mix has moderated, it still remains significant. The net GBP 20 million contribution from M&A principally relates to Lionmark, where the integration with BMC is now substantially complete. Lionmark was earnings enhancing in the year of acquisition as expected, and we have good line of sight to the committed synergies from the acquisition. Turning now to divisional performance, which we're reporting under our new segmental structure for the first time. As a reminder, the restated track record covering the past 5 years may be found in the appendices. In GB, like-for-like revenues fell by 4%. However, through the operational excellence initiatives, the division broadly managed to maintain its margin. Pricing in GB did come under some pressure as the year progressed, but it's probably been more resilient than I would have expected given the fact that we've had 4 years of market volume declines. And whilst I don't think that volumes will decline materially from here in GB, it remains too soon to call a recovery and pricing will really depend on where the cost environment goes to. We continue to navigate the GB environment effectively. Ireland saw revenue strengthen as the year progressed. And although there was a contraction in both underlying EBITDA and the margin over the year, the absolute margin level in our Irish business is still structurally higher than it was 2 or 3 years ago, and we remain excited about the prospects for the Irish market. A full year contribution from BMC, together with an initial contribution from Lionmark, has led to a significant increase in our reported U.S. revenue and EBITDA. On a like-for-like basis, revenue in the U.S. increased by 9% with EBITDA broadly flat. I talked at the half year about the expected balance for the year in North America being 35-65 for revenue and 25-75 for profitability. We came out slightly behind that, although still with a very significant weighting towards the second half of the year. In essence, our customers ran out of time to complete their works before winter came. The good news, however, is that, that work hasn't gone away, and we have encouraging U.S. backlogs as we enter 2026. Perhaps as importantly, the weather patterns in the U.S. -- in the Midwest in the year-to-date have been much more normal than they were last year. As we build out our platform in the U.S., the EBITDA margin will, in all likelihood, bounce around a bit, depending on the margin profile of the businesses we acquire. But over the medium term, I would expect our U.S. EBITDA margin to settle somewhere in the high teens. As you know, we're ahead of schedule in terms of the build-out of our U.S. platform. So I expect M&A in the U.S. this year to be more bolt-on in nature. And it's a real tribute to the team that yet again, Breedon has been able to report growth in both revenue and underlying EBITDA with our compound annual growth rate since our inception some 15 years ago being 18% and 22%, respectively. I talked earlier about our really strong cash generation in 2025. That free cash flow of GBP 133 million was a record post-COVID and increased by 17% in a year where we incurred a structurally higher net interest charge and increased our gross capital investment by some 7%. We continue to believe and to advocate that investment back into our business at this stage of the cycle is what will ensure that we build enduring competitive advantage as our markets recover. Our working capital performance benefited from the disposal of surplus U.K. carbon allowances. You will recall that in previous years, we have acquired significant U.K. carbon credits for cash, reflecting the lack of liquidity in the forward market. As the U.K. market has matured, we now expect to be able to buy forward in a similar manner to the EU ETS. And so we elected to dispose of around GBP 0.5 million of surplus allowances in the year to free up cash. Net debt for the year closed at just under GBP 530 million, significantly better than expectations and equates to a covenant leverage of 1.8x, again, comfortably back within our target range in a year where we completed a significant acquisition. Further details on our banking facilities, our USPP program, our covenant compliance and our repayment profile are, as usual, contained in the appendices. Turning now to our technical guidance. As you will recall, the Peak Cluster commenced engineering design during the course of the year, and we've started our own FEED on the Hope carbon capture plant. I expect we will incur single-digit millions of costs on decarbonization-related projects during the course of this year, which we will account for as non-underlying. For the group as a whole, I would expect a similar revenue and EBITDA first half, second half split in 2026 to that seen in 2025. And within that, our U.S. business will continue to have a more marked second half weighting than the other divisions. As a reminder, Lionmark is typically loss-making in the first part of the year. And in 2026, we will be consolidating January and February for the first time. Our hedging strategy remains in place. The energy costs in the cement business, we aim to have broadly full coverage for the year ahead as we come into the year with layering in place for future years. And for bitumen in the U.K. and Ireland, we aim to cover between 1/3 and 2/3 of expected outgoings with the balance priced out on a job-by-job basis. And again, as a reminder, energy and fuel costs comprise only 8% of our overall cost base. The rest of the technical guidance for this year is reasonably self-explanatory. In terms of performance against our financial framework, we've delivered yet another year of growth despite the respective end market backdrops, and thanks again to our successful execution of M&A. That like-for-like margin was remarkably resilient. And while our margin performance was below our target range, that is really a function of where we are in the cycle. We've generated record post-COVID free cash flow, which has allowed us to support investment back into the business, M&A activity and our increased dividend with our free cash flow conversion now being well ahead of our target. Returns do remain lower than we would like them to be for the reasons discussed earlier, but we remain confident that with more stable markets, we will make rapid progress back towards our 10% ROIC target. And we've continued to grow the dividend, slightly ahead of our target payout ratio, which I'm comfortable with given that excellent cash generation and where we are in the cycle, while remaining well within our leverage target range and continuing to give us balance sheet optionality. As we said previously, in the event that our leverage was to approach the lower end of our target range, and we saw limited opportunities to deploy capital were available to the group, we would then give consideration to returning surplus capital to shareholders. Thank you, and I will now hand you back to Rob.

Thanks, James. I'll start the operational review by highlighting 2 central themes that I also flagged at the interims that are out of our control, challenging markets and political uncertainty. Let's look first at our U.K. market, where the picture in 2025 has been one of further contraction. GDP grew by only 0.1% in Q4 and by only 1.3% in 2025 and growth deteriorated as the year progressed. Construction output showed a similar decline as the year progressed. Q4 actually showed a decline of 2.1%. But given relative strength earlier in the year, construction output did grow 1.8% in 2025. Activity levels within our sector have been well reported, and I have already mentioned the concrete 1963 stats. In summary, volumes across all our major mineral products are now at historic lows. Also, confidence as measured by the construction PMI Index stood at 40.1% in December, having been in contraction territory for most of 2025. Given all of this, recent ONS and CPA forecasts have been downgraded. Considered against this backdrop, our GB performance was resilient, and I will talk more about this in the business review shortly. I want to turn next to the market and ROI, where the operating environment was more positive. GDP showed strong growth of 12.3% in 2025. Modified domestic demand, the better measure of domestic economic activity rose by 4.9%. December's Irish construction PMI registered 48.4%, stronger than GP and just in contraction territory. However, optimism amongst construction firms on the prospects for increasing activity levels over the next 12 months strengthened to its highest level in nearly a year. The latest euro forecast published in November showed Ireland as one of the leading countries for construction growth across Europe in the next few years. In summary, the Irish economy is in good shape, and our business in Ireland benefited from this backdrop. Next, I want to talk about the market in the U.S. U.S. economic growth slowed for the fourth quarter of 2025 amid the government shutdown. For 2025, it was 2.2%. However, construction output declined modestly in 2025. There is no construction PMI in the U.S., but the latest FMI forecast published in October concluded that amid sustained economic headwinds, including elevated interest rates, a softening labor market and growing uncertainty around federal policy, the construction industry would contract in 2025. This was a significant change from the strong growth forecast early in the year and the modest growth forecast midyear. This slowdown has been primarily driven by weakness in the residential sector. Infrastructure spending remains comparatively resilient. Moving on to our businesses. Let's start with GB. The GB business delivered a robust outcome in a contracting market. Inquiry levels remained elevated throughout the year as customers maintained a readiness to proceed with construction activities. However, orders were impacted as fragile business confidence and the uncertain political and economic backdrop delayed project starts. Residential housebuilding was subdued, particularly in the second half. However, infrastructure activity was stable. And although volumes experienced a fourth consecutive year of decline, underlying EBITDA margins were broadly maintained as a result of our operational excellence program, which delivered material efficiency savings during the year. Our cement team sustained a high level of performance, plant reliability improved to 97%, and we achieved 39% fossil fuel replacement, a record level for Hope. Also, our CEM II sales increased to 35%. Whilst covering cement, I would like to touch on the Peak Cluster project and confirm that we have commenced FEED on this project. Moving to Ireland. The Irish business delivered a resilient performance during 2025 with revenue strengthening as we move through the year. While the marketing ROI has continued to expand, activity was more muted in NI as spending is primarily driven by central government. Our business was also impacted by the deferral of 2 major infrastructure projects. We also exited from our noncore street lighting business during the year. Our Kinnegad cement plant maintained its high performance, achieving 95% reliability while replacing 82% of fossil fuels. At times, we have been able to reach 100% substitution. Our CEM II sales also increased to 67%. Lastly, I will cover our U.S. business, where the acquisition of Lionmark established our leading position as a vertically integrated construction material supplier in Missouri. The infrastructure market remained robust during the year as federal and state funding continued to support activity. Activity more broadly was impacted by the uncertain political and economic backdrop. Residential housebuilding, in particular, remains subdued, impacted by affordability. Also as reported at the interims, Missouri experienced extreme adverse weather patterns in the first half, disrupting our customers' activity on site for extended periods. During January and February, St. Louis recorded 31 days where average temperatures were below freezing against 9 days in 2024, while April was the wettest month for over 100 years. Lastly, the integration of Lionmark into our U.S. business is now substantially complete, and we're on track to deliver the synergy benefits outlined at the time of acquisition. Moving away from 2025. Before I turn to the outlook for 2026, I would like to say a few words on cement advocacy in GB. As a leading provider of cement in GB and the largest British-owned domestic manufacturer, we have campaigned to raise the profile of this foundation industry and advocate for its key role in our national security and economic prosperity, supporting British jobs, supply chains and decarbonization. The government's ambitions to deliver 1.5 million new homes and invest in schools, hospitals, transport links and green energy infrastructure simply cannot be realized without British cement. But the industry is facing serious risks, including uneven carbon regulation, high energy prices and a surge in imports. Importing cement risks exporting jobs, investment and emissions overseas while leaving GB exposed to supply chain disruption and geopolitical shocks. In summary, our government tasks are establish a robust carbon border adjustment mechanism, address wider competitiveness challenges such as the high electricity prices, accelerate support for carbon capture technologies and promote domestically produced cement in public procurement. Using public procurement policy to support domestically produced cement could unlock huge opportunities, and it would ensure the government's investment in housing and infrastructure delivers wider economic growth. It will also protect thousands of highly skilled, well-paid jobs across all 4 nations. We encourage the government engagement and action. It's now time to look forward. Construction market conditions in GB remain subdued, although there are early signs of stabilization. The ROI structural growth story remains firmly intact. And in the U.S., federal and state infrastructure programs provide visibility for our Midwest platform. And across all 3 geographies, we see sustained and increasing levels of inquiry. I want to close our presentation with a clear message. Breedon enters 2026 a better, stronger business with confidence in our proven capability, with the confidence in the agility of the model we operate and we will continue to adapt to the uncertain outlook as it develops. We are primed and ready for when our end markets resume. Thank you.

[Operator Instructions] That's great. Thank you very much indeed, Rob, James. [Operator Instructions] Just before we go into Q&A session, I just like to remind you a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your Investor Meet company dashboard. Rob, James, we received a number of questions ahead of today's event and a number throughout today's meeting. Thank you to everybody for engagement. Rob, maybe I can start with the first one with you, if I may. I'd like to know the long-term aim of the company. Are there plans to expand into a number of platforms, for example?

Thank you. Look, the company has always been a buy-and-build play. originally in GB. And then in 2018, we added a second platform in Ireland. And then most recently, in 2024, we added the U.S. platform and particularly the Midwest in the U.S. We genuinely believe we will continue to develop those 3 platforms. We think having expanded into the U.S. and the Midwest, we have a long runway of opportunities to grow our business in that third platform. And we believe that has the potential to keep Breedon busy buying and building over the next 5 or 10 years. And we don't see the time or the need at this stage to consider an additional platform.

A question here around revenue mix, I guess, what percentage of group revenue is tied to public versus private residential?

If you look at the split of revenue across the group, around half of our revenues are derived from infrastructure projects, some 20% from residential and around 30% from industrial commercial. I think it's worth just unpicking that a little bit more, though. When you look at our U.S. business now, the business that we acquired, BMC back in 2024 was predominantly weighted towards residential construction. And what we've been able to do through the acquisition of Lionmark, which we announced this time last year, is really balance out that end market exposure. So the U.S. end market exposure now for Breedon is around 50% infrastructure, just as for the rest of the group. Slightly more weighted towards residential so 25% residential and the balance being industrial, commercial. And that acquisition of Lionmark essentially has meant that we're now ahead of schedule in terms of the build-out and balance of that U.S. business.

Okay. Let's move on. Sorry, a question from John. John, thank you very much indeed. How confident are you that 2026 is the bottom for GB Construction?

Look, we've had 4 years of declining volumes in GB. And I think our most challenged product has been ready-mix concrete. And the end use or the predominant end use for that product is residential. And it's a residential market that really is on its knees at the moment. Infra interestingly, is relatively stable. So it all depends when the residential market will inflect. If you'd asked us a week ago before the events of the Middle East and where the trajectory was on interest rates and where the confidence was emerging amongst the housebuilders, we would have probably had the view that 2026 could be the bottom for residential. And there could, if the wins were behind us, see some degree of inflection later in the year. I think the jury is out at the moment. I think the key thing is whatever happens, we will continue to focus on the things we can control, and we'll continue to make sure that Breedon delivers.

How much of the GBP 20 million operational savings are structural, I guess, versus one-offs?

So the GBP 20 million of operational excellence initiatives that we talked about in the results presentation, around 1/3 of that will repeat into future years and 2/3 of it is one-off in nature. But I think what I would say around the operational excellence initiatives is this is very much a part of what Breedon does day-to-day, week-to-week within our business. We're always looking at ways to challenge the cost base, at ways to challenge our ways of working and looking at how we can improve the business sequentially year-on-year.

Thank you. Turning just to the next question. What is the addressable market size in the Midwest where you operate?

If you haven't seen our presentation from the Capital Markets event in late 2024, I would ask that maybe you go and have a look because there's some interesting reading in there. And that was exactly what we tried to show at that time. For the states that our target states, Missouri and the surrounding states, the GDP of those states is approximately equal to the GDP of the U.K. and Ireland. So it gives you an idea of the scale and the size of the opportunity ahead in the Midwest. And what's interesting, though, is that the aggregate consumption per capita is double that of GB and Ireland. So it just gives you an idea of just how long the runway is in the Midwest.

Great. What is the expected pipeline size for acquisitions over the next 12 to 24 months? And I guess, how disciplined will you be on valuation in a weaker construction market?

We are very much a buy-and-build business, as Rob talked about earlier. And I would expect that we will continue to make bolt-on/tuck-in acquisitions across each of our platforms over the course of the next year to 2 years. I talked earlier about the fact that our U.S. business and U.S. platform build-out is ahead of schedule. And for that reason, I would expect our acquisitions in North America during the course of 2026 will be more bolt-on in nature. We recently announced the acquisition of Booth in the Republic of Ireland, and that's a very exciting transaction for us, giving us aggregate opportunity close to the Dublin market for the very first time. And we've done a couple of small bolt-on acquisitions in GB. So I would say more of the same when it comes to M&A over the next couple of years.

Thank you very much indeed. A question around buybacks. I guess at what stage might you consider a share buyback?

Where our leverage sits at the moment, we're just within our target range. So our target range is 1 to 2x. We're at 1.8x as we come out of 2025. What we've always said is if we were to approach the bottom of that range and there would be limited opportunities for us as a business to deploy capital, at that point, we would consider means of returning capital to shareholders.

And I guess a final question, and I think a nice one perhaps to end on is what does Breedon 3.0 success look like in 3 to 5 years?

When we first presented on the U.S. and post the acquisition of BMC and Andy Arnold, who runs our U.S. business, joined us at the Capital Markets event back in late 2024. Andy was very clear in his level of ambition for that business. And he wanted to grow a business over the next 5 or 10 years that would rival the scale of our GB and Irish business and in effect, doubling the size of the Breedon business over the next 5 or 10 years. And his level of ambition has prompted the Irish and the GB business to up their game to and up their level of ambition. So I think the next 5 or 10 years, there is a desire. There is an ambition and there is an ability for us to double the size of this business.

Perfect. Thank you very much indeed. And thank you to everybody for your engagement today. Thank you for all your questions. If any more questions do come through, we'll make those available to the company post today's call. Rob, James, I know investor feedback is important to you both. I'll shortly redirect investors on the call to give you their thoughts and their expectations. But perhaps, Rob, I could just come back to you for a couple of closing comments.

Yes. No, thank you very much, everyone, for joining us this morning. Breedon enters 2026 a better and stronger business. And whatever the uncertain global outlook delivers, we will adapt. We've proven that we can adapt in the past. We have a good model. We have a great team, and we look forward to markets inflecting and Breedon delivering significant value in the years ahead. Thank you.

That's great. Rob, James, thank you once again for updating investors. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views.