Eurocell plc (ECEL) Earnings Call Transcript & Summary

Good morning, and welcome to the Eurocell plc Half Results Investor Presentation. [Operator Instructions]. Before we begin, I would like to submit the following poll. I would now like to hand you over to our CEO, Will Truman. Good morning to you.

Good morning, and welcome to Eurocell's 2026 Half Year Results Presentation. As just introduced, I'm Will Truman, Chief Executive; and I'm with Michael Scott, CFO; also joined with Matt Worster who's the CFO Designate. This morning, I'll give you a brief overview of the half year before handing over to Michael, who will take you through the financial results in more detail before handing back to me for the strategy update. Michael will then cover the ERP upgrade, restructuring and ESG, and I will then wrap up with the summary. As you know, I was appointed in February of this year and my reflection on this first half year's results is that we've made some good progress. Alunet has continued to trade in line with our expectations, and there has been an improvement in the underlying business despite a soft first quarter to the year. The improvement in the sales momentum we saw in Q2 has continued into the second half of the year. As part of this, we have seen gains in each of the strategic initiatives, but importantly, in the underlying business as well. Alongside this, we have made progress with further restructuring and strong cost disciplines. As a result, group revenues improved 6% in comparison to the first half of the prior year from GBP 193 million to GBP 205 million. Adjusted operating profit also showed improvement from GBP 10.1 million in the first half of 2025 to GBP 11.1 million in the first half of this year. As in prior presentations, I'm pleased to report good financial management as evidenced from the strength of the balance sheet with strong cash flows, low net debt and improving total shareholder returns. I'm also pleased to report on the acquisition of ATT, the manufacturer of our garden buildings. This is a small but important acquisition in the pursuit of delivering the extended living strategy. And with that, I'll now hand over to Michael for the financial review.

Thanks, Will. I'll start with the financial highlights. Despite tough market conditions, organic volumes were 1% up on H1 last year. We saw improvement in the second quarter, which reflects the actions taken to increase sales volumes and gain share. And this momentum has continued into the second half. Total group sales were up 6%, enhanced by Alunet, which we acquired in March '25. Adjusted operating profit increased by 10%. This includes a strong contribution from Alunet and good cost control, partially offset by competitive pressure on selling prices in the branches plus continued labor and overhead cost inflation. Adjusted EPS up 2% includes increased finance costs on debt following the Alunet acquisition, plus the impact of our share buyback programs. Cash generation remains good, despite being slightly down against last year, which benefited from falling raw material prices. And with leverage of 0.8x, we have good headroom on our debt facility, which is refinanced in March. Finally, this year's interim dividend of 2.5p per share is up 9%. We're focused on shareholder returns and following good delivery for '24 and '25, we do intend to continue share buybacks in due course, subject to always to maintaining a strong financial position. Turning to the full P&L. I'll come on to our sales and the other components of the EBITDA in a moment. But first, just looking below that line. Depreciation and amortization was GBP 14.3 million, up GBP 1.2 million on last year. And with our CapEx programs and lease renewals, we expect D&A for the full year to be in the region of GBP 29 million. And just to note that I've summarized all of our financial guidance at the end. Finance costs were GBP 2.9 million, up on H1 '25, reflecting the use of our RCF to fund the Alunet acquisition. H1 tax was in line with the standard rate, and we expect a slightly lower full-year rate of 24% due to the benefit of Patent Box relief. Looking down the P&L. Adjusted basic earnings per share were 6.1p, up 2% and dividends of 2.5p have already covered. Moving to the right of the slide, nonunderlying charges of GBP 9.6 million includes restructuring costs of GBP 9.4 million, of which GBP 6.7 million is noncash, plus implementation costs for our systems replacement project of GBP 2.6 million, offset by a lease liability provision release of GBP 2.7 million following the resolution of a property dispute. And later in the presentation, I'll pick up on restructuring and the systems replacement project, which is nearing conclusion. Finally, excluding Alunet, organic sales and overheads were both up 1% in H1 '25. And with the gross margin percentage only slightly down, which is a robust performance in the face of current trading conditions and ongoing cost inflation. Moving to sales. Revenues were up 6% in H1 with organic volumes 1% higher. As you know, we faced difficult macroeconomic conditions, weak consumer confidence and uncertainty over the impact of geopolitical events, and this has continued to weigh on activity in our key markets. Against this backdrop, we've taken action to increase volumes and gain share. And after a slow first quarter, it was good to see momentum improving in Q2 with organic sales up 4%. In profiles, first half sales were down 5%, with cost of living pressures, high interest rates and falling house prices, all having an adverse effect. Optimism for a housing market recovery in 2026 has faded, and we've seen an increasingly challenging market backdrop for new build housing. In the branch network, sales were up 5% with volumes 6% higher. This includes general RMI volumes down 2%, with homeowners still holding back on discretionary expenditure, but sales also include the impact of actions to drive volumes of own manufactured products through the network as well as progress with our strategic initiatives, while sales are up GBP 6.6 million, including windows and doors, up 29% and e-commerce activity up 49%. In addition, branches opened since the end of '24, delivered an incremental sales of GBP 1.8 million in the first half. Finally, Alunet is performing strongly under our ownership with first half sales growth of 13% on a calendar basis driven by market share gains. On to adjusted operating profit, where profit of GBP 11.1 million is an increase of 10% over H1 '25. Moving left to right across the chart, the adverse volume impact of GBP 2.5 million follows organic sales down 4%, excluding the strategic initiatives. The net margin decline of 0.8% has several components. Whilst revenues include selling price increases implemented early in the year to offset cost inflation, increased competition for limited demand has put pressure on selling prices in the branch network. However, we do proactively manage our gross margin and cost base and whilst we saw increased PVC resin, other raw material and electricity prices in the second quarter, these are being recovered through a combination of surcharges and sales strategies. The incremental profit impact from strategic initiatives is GBP 1.8 million, with a good overall EBIT margin on these initiatives of 16% for the period, inclusive of the drag from new branches. Alunet made a strong contribution with operating profit up GBP 2.4 million over the 4 months post acquisition period in H1 '25. Moving along the chart, labor inflation of GBP 1.5 million includes the impact of our April '25 and '26 pay awards plus the increases to National Insurance and the National Living Wage effective from April '25. Finally, the other category to the right of the chart, which is a benefit of GBP 1.5 million includes the annualization of last year's restructuring and cost reduction work, and I'll pick up on the new 2026 programs when we cover business effectiveness later. Moving to CapEx, investment of GBP 6.5 million in H1 includes GBP 1 million in recycling, mostly related to the consolidation of our 2 plants. GBP 0.9 million for warehousing is to support central distribution of trading goods from our main warehouse and GBP 1 million from the branch network is a combination of refurbishments and relocations. The balance is primarily maintenance CapEx. Our guidance for '26 is for total CapEx of up to GBP 13 million. This includes GBP 3 million for strategic initiatives such as branch refurbishments and relocations, and GBP 3 million for site consolidation. There's also GBP 3 million for facilities, welfare and safety improvements across our property estate with the remainder largely maintenance CapEx. As you know, implementation costs for cloud-based IT solutions are charged to the P&L rather than capitalized. Our ERP system replacement falls into this category with GBP 2.6 million charged to the P&L as a nonunderlying item for the first half, taking the total cost incurred to date on the project to GBP 9 million. We estimate nonunderlying costs on ERP will be approximately GBP 14 million for the 2024 to '27 period, and I'll provide further detail on the project in a moment. Coming back to CapEx. The lower chart illustrates that we have manufacturing capacity in place ahead of demand, which is an important component of being ready to deliver growth. Turning to the full cash flow which sets out the components of an increase in pre-IFRS 16 net debt of GBP 6 million for the first half. This includes the cash impact of GBP 6.4 million for the nonunderlying items I described earlier plus earn-out payments of GBP 2.6 million for Alunet based on strong profit delivery last year. Moving left to right across the chart, cash generation has continued to be good. Small outflow from working capital in H1 includes stock and debtor days broadly in line with their June '25 comparatives. CapEx payments of GBP 5.8 million of the asset additions covered earlier, plus a small increase in our capital creditor and financing charges of GBP 1.6 million include the arrangement fees payable on refinancing our RCF in March. After share buybacks and treasury share purchases of GBP 0.8 million and dividends of GBP 4 million, this results in pre-IFRS 16 net debt of GBP 28.1 million at the end of June. IFRS 16 at GBP 65.6 million to debt, which you can see in the table is down GBP 10.5 million compared to December '25. This reduction reflects cash payments on leases of GBP 10.1 million, which were accounted for within net cash from operating activities on the left of the chart, plus a noncash movement of GBP 0.4 million, being the net of new leases added less the provision release I described earlier. Overall, this leads us with a strong balance sheet with leverage at 0.8x EBITDA on a pre-IFRS 16 basis and good headroom on our recently refinanced GBP 75 million debt facility, thereby providing security, flexibility and options for the future. Turning to capital allocation. We've delivered strong shareholder returns over the last 2 years. equivalent to yields of 14% and 8% for '24 and '25, respectively. Looking ahead, we intend to drive returns through a combination of ordinary dividends plus share buybacks where appropriate. Moving left to right across the chart, our approach to capital allocation is to prioritize organic investment in line with the strategic plan, supporting initiatives to drive growth in the branch network, improvements in operations and to upgrade our IT systems. On dividends, our policy recognizes the importance of the ordinary dividend with this year's interim up 9%. The Board has also taken the decision that employee incentivization by equity should be through shares acquired rather than issued. And our target is to hold sufficient treasury shares to satisfy employee share options expected to vest over the next 2 years. Moving across the chart, Alunet and ATT demonstrate a disciplined approach to acquisitions with a clear strategic fit and a strong financial justification. Thereafter, we've been enhancing returns through share buybacks. Our intention remains to continue buybacks in due course, subject to the impact of the Middle East and as always, to maintaining a strong financial position with net debt generally not to exceed 1x EBITDA, unless there's a short-term deleveraging plan in place. So to sum up, a robust underlying financial performance with adjusted operating profit up 10%. We're focused on improving profitability. We've taken action to increase sales volumes and gain share continue to demonstrate cost discipline and implemented profit-focused restructuring, which I'll cover shortly. We have a strong balance sheet and good headroom on our debt facility. Cash conversion remains good. The interim dividend is up 9%, and the ATT acquisition, GBP 5 million in September was funded from our RCF. The business is, therefore, in a good place to deliver our growth strategy with well-invested facilities and available operating capacity. We're confident that we'll deliver further progress in 2026, and we're convinced that the medium- and longer-term prospects for our sector remain attractive. Finally, to the right of this slide, there's a summary of our technical financial guidance, which I hope is helpful. So now over to Will to update on our strategy.

As in prior presentation, the strategy remains unchanged and just as relevant and in focus, principally Consists of growing the customer base of the branches, extended living, online customers and fabricators. This runs alongside digital transformation and an efficient operating model. I'll give some updates as we move through the following slides. In comparison to the half year 2025 results, there is the benefit of full 6 months in '26 compared to 4 months prior. Alunet has continued to perform in line with expectations and the acquisition model. Sales for the group were GBP 28.4 million, up GBP 10.7 million to that included in half 1 2025. Adjusted operating profit of GBP 4 million is up GBP 2.4 million compared to half 1 2025. The sales of GBP 28.4 million comprises Alunet sales of GBP 10.1 million. Comp Door sales were GBP 11.9 million, and Garage Doors, GBP 6.4 million. On a like-for-like basis, 6 months versus 6 months, the performance is impressive with Alunet increasing 15% and Comp Door, 21%. Garage Doors have declined marginally with lower volumes in a highly competitive market. Eurocell operates 205 branches, which is down from the end of the prior year following the closures of 10 branches in July. The strategy remains to expand the network of branches. But after a detailed review of the current state, it was clear that a number were not going to become profitable and contribute to the group's results. So the decision was made to close immediately and transfer accounts to nearby branches. The performance of the branch network improved in the first half with sales up 5% and volumes at 6%. This improvement was particularly evident in Q2. And I'm pleased to say this has continued into the second half of the year. In a highly competitive market, we need to support our branch managers. And to that end, we have given more freedom to trade in local markets, refreshed our own made-to-order range and reviewed our traded goods offering. This is alongside a clearer a support structure with a revised divisional leadership. In support of the customer growth, we've continued to promote the power of loyalty scheme with 11,000 registered customers to date and a target of 15,000 by the year-end. The scheme is an important aid to the branches with members demonstrating an enhanced level of spend and frequency of visit. Digital sales of GBP 4.4 million have increased by 49% compared to the prior year. This follows improvements to the website to drive traffic and improve the site experience. In addition, the site is an important portal for fabricators and helped to drive new trade accounts. We're working with new partners to explore ways to drive these gains further. These will improve the site itself and the efficiency with which customers find us when searching. The relaunch of window and door sales was a key facet to the strategy. All branches were live with the initiative by June 2025, whilst no distinction can therefore be drawn in comparisons of this half year to last. I can report that each month in 2026 has set a new record in terms of sales. While some ground was initially lost to the original strategic plan, this gap has narrowed with a new expert sales support network. Alongside this, we've improved the processes for customers making inquiries through to the delivery of windows, and we are working with our partners to drive these efficiencies further. Our fabricator partners remain vital to the group. We have looked to support them through this period of higher input prices in a highly competitive market with lower volumes being evident from the end users. Eurocell will continue to lead as a technical systems house and add value to our customers where we can. To that end, we have strengthened our team with a new technical director joining the group in the second half of the year. Garden room sales were GBP 4.8 million in the first half, in line with the prior year and we've just announced the acquisition of ATT, our partner in the manufacturer of the rooms. This acquisition will underpin the future growth in sales, whilst also capturing the end-to-end margin. During the half year, we have reviewed and enhanced the range. We're in the process of introducing new routes to market and have changed the way the sales leads are generated through to how we engage with our customers. With the acquisition now complete, the group will have a clearer organizational structure with complete control over the end-to-end process. And I'll now hand back to Michael to cover the systems upgrade and restructuring.

Thanks, Will. With the near-term market outlook likely to remain challenging, we've prioritized restructuring to increase business profitability. The 3 major projects shown here should deliver more than GBP 5 million of annual savings with GBP 2 million realized this year. Non-underlying charges of GBP 9.4 million have been recorded for these programs of which GBP 6.7 million is noncash asset write-downs and impairments. First, we're consolidating our 2 recycling plants onto the existing facility at Ilkeston. This required relocation of some critical equipment from the Selby site plus CapEx of GBP 2.6 million at the Ilkeston plant to eliminate single points of failure and improve the land. We've now ceased operations at Selby and began processing at Ilkeston with the Selby site exit to be concluded shortly. To improve profits in the branch network, we closed 10 sites in July, consolidating our footprint in the London region and exiting Ireland. We've retained 10 branches inside the M25 and transferred customer accounts where possible. Given the much higher property and staff costs in London, the consolidated footprint should deliver a stronger overall result. We've also withdrawn from Ireland where the transport and admin costs from operating 2 sites were disproportionate to the returns generated. Finally, we've implemented a targeted headcount reduction to deliver a more efficient business with several management roles removed from the structure. Moving to the right of the chart, as you know, we're replacing our business systems. GenetiQ, the new trade counter system will transform the way we interact and transact with our customers in the branches, including simplified processes and the use of EPOS functionality. With IFS, the new ERP system, we expect to deliver an improved efficiency by the automation of processes. I covered the estimated cost of the project earlier, we're now in the testing and training phases with the transition to new systems on track to take place at the end of the year. On People First, after improved safety results in '24, our LTIFR slipped back in 2025. Given these results, we made some changes to health and safety leadership in Q4 last year and developed an improved plan focusing on the behaviors needed to drive a more proactive safety culture, and an early signs that this is now embedding across the group. On ESG, Eurocell is already a leader in PVC recycling, preventing 3 million waste windows being sent to landfill every year. And our use of recycled material in extrusion remains substantial at 28%. We've also made progress on our other carbon reduction plans with our use of renewable electricity now at 100% and the recent investments in on-site generation are now delivering good returns. Finally, we do think there's an opportunity for Eurocell with sustainable construction. Government regulation and consumer demand is pushing our sector towards sustainability. The future home standard final implementation begins this year with all new homes required to comply by 2028. Eurocell's products can help our customers meet or exceed the future home standard. Many of our standard profiles have a high recycled content and our window and door systems, such as Logik and Aluna+ are energy efficient with ratings well above industry standards. We, therefore, believe we are well placed to benefit from these tightening regulations as they come into effect. So now back to Will to wrap up.

So in summary, a stable and improving performance for the first half of the year with momentum continuing into the second half. Whilst the profile side of the business remains challenging due to reduced end demand particularly in new build housing, there has been an improvement in the branch network underpinned by the strategic initiatives. Alunet has continued to perform well. Further to this, we've made operational changes to improve efficiency and improve management structures to speed up decision-making. In the second half of the year, our focus remains on continued strong financial management, cost control throughout the group whilst continuing to drive the commercial initiatives to increase volumes.

And that's the end of the presentation. So with the operator, we can now look to address the questions which have been submitted. So the first one, what additional revenue and profit opportunities do you see from Alunet? And when should further synergies become visible?

I don't think we've really canceled on any further synergies at this time from that acquisition. And in terms of the additional revenue and profit, it's trading pretty much in line with our expectations in the acquisition model, and has been above slightly for the first half of the year today. And I think we see that continuing. As we said in the presentation, on a calendar basis, Alunet's up 13% in the first half of the year versus the first half of 2025. Growth at or close to single digit -- sorry, double-digit top line is well within their grasp and in line with our original assumptions that we made at the time of the acquisition.

Second question, how much further pricing pressure do you expect in the second half, particularly across the profiles and branch network businesses?