Hargreaves Services Plc (H6W.F) Earnings Call Transcript & Summary

Good afternoon. Welcome to the Hargreaves Services Plc Preliminary Results Investor Presentation. This is a recording meeting,[Operator Instructions]. Before we begin, I would like to submit the following poll. I'd now like to hand you over to Gordon Banham, CEO. Good afternoon, sir.

Good afternoon. Thank you very much. Thank you, everybody, for taking the time to listen to the Hargreaves presentation. I always welcome these presentations as an opportunity for retail investors to engage. You obviously have the forum here to ask questions, but Stephen and I and Simon are always available in the interim stages. So if you ever want to drop us a note and ask any questions, please feel free to do so. So let's just talk about the team, I think everyone knows myself, after all these years, Stephen, I think everyone knows as CFO. But the person you haven't met is Simon. So Simon has joined us as our Chief Operating Officer. Key function is to drive the growth of the services business. So I'll just give Simon a little opportunity to introduce himself to you also. Simon, please.

Pleased to be here. Hello, everybody. I'm Simon Hicks, obviously. I'm an engineer by background. I've been 35 years in energy and infrastructure, broken into a few key chunks. One is the first 10 years, my career was in new build building gas-fired power stations, both in the U.K. and the U.S. I then spent 5 years leading a logistics business. 15 years, which is the bulk of my experience in U.K. and overseas services, similar services that Hargreaves' offers, very similar customer base, key standout projects involved in Hinkley and the nuclear Ireland, involved in the carrier contract within the carriers. Ran a very large services business for a number of years until we were acquired and put into private ownership, stayed on for 3 years to integrate that business and then move on to Southern energy from waste assets for U.K. pension funds. And then I'm here at Hargreaves, I'm really pleased. Why is that important? I guess, common customers, understand the sectors and have good, strong relationships with our key customers in the markets in which we operate.

Thank you very much, Simon and welcome on board. So just if you bear with me, those who are existing shareholders know the value proposition, but we may have some new people who are not quite so familiar with yourself. So what we explained to everyone is that the business has basically 3 pillars. So the Services business will be covered in detail by Simon. Simon has been brought in to drive the growth. We think there's a lot of opportunities there, and he'll talk about that in some detail. Then we have our Land business. Now our land business is really simple in 2 parts. First of all, you have the land that was part of our old mining businesses. So it's held at historic cost. That's a very important point. Alongside that, we have renewable assets. Now they're on the books at about GBP 7 million. Jones Lang LaSalle have valued them every year. Again, they've revalued them this year and said they're worth GBP 27 million compared to GBP 7 million, so you got GBP 20 million of uplift. We've made it very clear to existing shareholders. The plan is that you add the GBP 80 million to the GBP 20 million, you have GBP 100 million of value in your Land portfolio, and the plan is to sell that down to GBP 20 million over the next few years, that will release GBP 80 million of cash, and you'll have a business which has got GBP 20 million of cash tied up, making about a 20% rocky, so making GBP 4 million a year. Now one of the great benefits of Hargreaves is the fact that we have cash in the bank, we have no bank borrowings. So the timing of that will depend on where the market sits, and I'll pick that up in a bit more detail. But the most important thing is the value is there and it's captured. We haven't written the prices of the Land up. So there is a lot of intrinsic value sitting there, waiting to be harvested. We appreciate the time value of money. So we're not going to, on one side, rush and sell it at distressed prices. At the same time, there's a lot of value there for shareholders, which we will realize in the next few years. Finally, as HRMS, the German business, 2 parts, trading plus DK, and I'll talk about that in detail, 2 parts of that business, and I'll explain what's going on there. So just flicking on to the next slide, key highlights. What we have always said and we're still consistent is that we will be paying shareholders to wait while we realize value from our portfolio. So we've put the dividend up by 3%. The underlying profit before tax is up by 4% and you might say, well, that doesn't look very much, Gordon. Well, the answer is Land had a very good year last year. And therefore, that's gone down, but Services, which is obviously less lumpy, much more recurring in income stream is up significantly. And again, we'll -- Stephen will pick that up in the presentation. As I said, again, we have over GBP 23 million of cash in, so we're in a very solid, safe position. So on that note, I think I'll hand over to Stephen, who will just run through the financial numbers for everyone.

Thanks, Gordon. So first slide is the usual run through the P&L for what happened in the prior year. If I start looking at revenue, revenue is up significantly on the prior year. 25% growth up to GBP 264 million. 19% of that growth coming out of Services, so up to GBP 244 million, and that growth in revenue is coming from an increased volume of activity predominantly on major infrastructure sites. But also a growing baseline of smaller contracts, which we've been building up over the several years now. We've also seen a significant growth in revenue within Hargreaves Land. This is a slight anomaly because of the way that revenue is sometimes treated within our Land business because of the split of assets we have. Last year, we sold 2 significant investment properties for total combined proceeds of around GBP 13 million because we are investment properties, they did not class as revenue, which is why the revenue looked lower last year. So that's part of the growth in revenue this year. What does that mean for profit? Well, in underlying profit before tax for Services, we've delivered GBP 15.9 million in the year, which is up from GBP 11.4 million, a significant increase. So part of that is off the back of the growth in volume, on these major infrastructure projects and other contracts. And probably most pleasingly is also the read through to margin. So we're putting higher volume on the same overhead delivering a higher margin, 6.5%. So real good progress through that. And it really sort of demonstrates the quality of contracts we are working on. We're not looking for low volume -- high volume, low margin. We're looking for good quality margin that rewards our high-quality health and safety, ESG and our high quality systems. Looking at Land next, so Land on the face of it, profit has come down from GBP 8.2 million to GBP 2.3 million, but I would stress last year was a record year in the history of Hargreaves land at GBP 8.2 million. We did always flag this to come back more to normality, which is what has happened this year at GBP 2.3 million. Gordon will pick up on some of the key transactions in there, but it has been nice to see a couple of sales complete within Blindwells during the year. Our share of profit after tax of HRMS which is our German joint venture is the next element here, profit up from GBP 1.3 million last year to GBP 4.1 million. A lot of that growth is in relation to the DK Recycling facility, which I'll touch on in a couple of slides time, in terms of what's driven that. Corporate costs and interests are slightly higher than they were last year. Large driver behind that is last year, we had the benefit of interest income on our defined benefit pension scheme. For those of you who follow the story, you will know that we bought in the pension scheme at some point during 2024 and therefore, that opportunity for upside on that interest is no longer there, that's the main reason for the difference. That gives us underlying PBT of GBP 17.5 million, up 4%. So a lot of moving parts in that growth. Everything else is fairly straightforward. I think the tax rate is at a slightly lower than it was this time last year. This year's effective rate is 20%. Last year was 25%. The reason for the discrepancy is last year, we had a prior year adjustment relating to the tail end of the super deduction. Elsewhere on this slide, dividend up 3%, but something I'd like to draw people's attention to is EBITDA was increasing at a faster rate than our PBT, and that is because of the mix of our profits more coming out of Services than Land. So just over the page, where is all of the capital tied up in the balance sheet. So if I go left to right, this is a fairly similar story to those of you who followed us for a little while. On the left Services, total capital employed of just under GBP 8 million. It is up from GBP 5 million, I think last time -- last year, we had an exceptionally low level of working capital in Services. Typically, I would expect this to be between GBP 7 million and GBP 12 million depending on timing and how much volume of work we have on, high level of tangible fixed assets in Services is plant equipment, plant diggers, dozers and such like funded by leasing debt or HP. If I look at Land, next column along, GBP 83 million of capital employed slightly up on the prior year. That's due to continued investment in to Blindwells. However, the pleasing thing is, this is down from our November presentation. So we're starting to see cash come out of Land, albeit modest at the moment. Just a reminder, everything in Land is held at cost. So any fluctuations in market price values don't affect our balance sheet value. Next column is HRMS. So this is our share of the German joint venture, currently sitting at GBP 68 million in total, split GBP 54 million in terms of our investment, which is profits still in the German joint venture, they haven't yet paid to us the dividend and GBP 14 million in other working capital loans. Most of that is long-term loans to secure funding in Germany. And within the unallocated column, 2 things I'll pick up on. One is the deferred tax asset, which is down to GBP 7.8 million from GBP 11.3 million last year. That's really demonstrating the fact, we are using our tax losses which we said would happen, meaning we reduce our tax payments. And then cash, important to remind everyone, a positive cash balance of GBP 23 million. We have no external bank funding other than the HP. So a very solid balance sheet. Next slide, just considers some points of valuation. If you're making your opinion on how Hargreaves should be valued, just laying out some factors to consider on this slide. First of all, our Services business, good level of earnings, good visibility going forward. Clearly, some sort of earnings multiple would be appropriate here. So we've listed the EBIT number and the EBITDA. EBITDA now grown up to GBP 30 million on the Services business. So in terms of multiples, you can add whatever you want to that. Land, Gordon has covered this in quite some detail, I think, already. But base value cost of GBP 80 million with a renewables uplift of GBP 20 million has now reconfirmed by JLL, gives us over GBP 100 million of value sitting within land, which we plan to unlock over the next 4 to 6 years. And then HRMS, book value is just under GBP 70 million now. We are receiving an annual cash dividend of between GBP 6 million and GBP 7 million, which we are using to fund the dividend onwards to our shareholders and we will continue to focus on getting cash out of that business to fund. Next slide is just a quick cash flow. So we started the year with GBP 23 million in the bank. EBITDA broken down there is operating profit, add back depreciation and less the sale of fixed assets was just under GBP 34 million. Small movements in working capital and then interest, tax and CapEx are fairly standard and straightforward, I think, to understand. We then received our dividend from our German joint venture this year was GBP 6.3 million. The next slide is a bit of an unusual one. This is a GBP 4 million cash receipt from the pension fund. So if we looked at this slide 12 months ago, that would have been the other way around because when we bought in the scheme, we had to lend GBP 4 million to the trustees for them to purchase the insurance policy. They did that and have since recovered funds from the underlying sticky assets they had, and they've repaid the GBP 4 million to us in total. Next column relates to lease payments. This lease payments number is high compared to previous years. Part of that is because we've invested in plant and machinery in order to fund the growth in revenue on these major infrastructure projects. And as you can see, the leasing payments broadly cancel out the depreciation earlier on in this slide. It's never going to be 1 for 1. And in this year, I'd say leasing payments are slightly higher than I'd expect them to be going forward. Paid a dividend of GBP 12 million, which ended this year with GBP 23 million. And then the next slide is really just to give a little bit more color on each HRMS because if you looked in the announcement that we went this morning, we can't see too much on HRMS because it is a joint venture, and all you see is the share of profit. So on the right-hand side, we have the table just outlining some of the key financials. In green, we have the revenue for the 2 elements of the business. If I start with HRMS, the trading business, revenues are down to just under GBP 180 million from GBP 220 million. And that is not volume related. Volumes have been pretty standard. What that is, commodity prices have come down yet further. And predominantly coke prices have come down. So whilst that's reduced revenue, HRMS has been able to hold the margin. So margin as a percentage has gone up to 5.7%, but they've held the PBT at GBP 10 million. So really strong performance from the team over there in what is a challenging market at the moment. The other slides of that reduction in coke prices, though, which has reduced revenue has benefited in DK. So DK profit, you can see in the other -- or rather loss, I should say, in the yellow, has reduced from GBP 7.4 million loss last year to GBP 1.4 million loss this year. Two main factors for that. One is the securing of solid fuel prices, being coke in the main, significantly better than it was 12 months earlier. So the prices have come down, reducing the input costs and secondly, gate fees on the waste material have been improved this year, which has again helped to improve the results within DK. And Gordon will touch on a few other factors in the DK that could further move that going forward. At the bottom of the table here, we're just breaking down really what was on a couple of slides previous, what is the total exposure to HRMS. We're now down to GBP 68 million HRMS, which is reflective -- coming down GBP 3 million reflective of the fact that we received the dividend, and that was offset by some further profits in the year. And I will hand over to Simon to talk about Services now.

Thanks, Stephen. Let's start with first time I've talked about Services and reflecting on this, important thing to remember is the markets in which we operate. We operate broadly for 3 key sectors. It's got connectivity, which is transport getting people from one place to another transport, where airports is in that sector. Energy and net zero that transition of the energy base into a zero carbon place and the environment, which includes water and waste. It's publicly known lots of announcements that -- have seen us so the increase in that infrastructure core market going forward for the next 5 to 10 years, which positions the services we offer in a very strong place. Remember, though, that 70-plus of our contracts, and that's grown this year from 65 up to 70 in assets that already exist and assets that we maintain, we operate and we look after for our customers. So what does that mean? It means that with those secured orders for a strong pipeline of orders, we can be selective on the work that's coming towards us as part of the infrastructure pipeline and it's really important for us to remember being selected is the thing that protects our exposure to credit. It allows us to make sure our contracts are inflation resistant. And we've seen that in recent years when inflation has been higher, we've still delivered the results that we've been delivering. And it gives us that resilience in our base market to drive selection. And that's all leading us to those positive cash flows, good strong cash flows this year, really good return on capital employed. And for the first time, we've gone over 6%. So you've seen in Stephen's slides, we've gone from 5.6% to 6.5% margins. So the more work we bring through as part of that forecasted increase in the market that will drop straight through to our bottom line. So really strong business with really positive outlook. The sort of services we do, you will not see on the high street, we're not in retail, and we're not in one-stop, one-off project construction. We do deliver major projects into new build. But the bulk of our business is in services that we offer to customers that exist, mechanical engineering, turnkey engineering. We've got a very strong presence in waste management. all handling materials of transport business and the land remediation business. So as we mature our customer relationships over a number of years, which we're doing, we start to pull through these services and increase the amount of revenue we've taken from our customers by delivering a really strong excellent service. What underpins the model is the quality of the people that we employ and our ability to deliver those services in a safe, efficient and effective way. We have a strong focus within the teams to make sure that we deliver to our customers what they require from us. So taking a look forward the pipeline, some successes this year. If you then take the connectivity sector, HS2, 2 more seasons to run. HS2 is now taking us forward to the Lower Thames Crossing project with a preferred partner there to Balfour Beatty. So as HS2 starts to run off over the next 2 seasons, we'll see the volumes increase in Lower Thames Crossing. And of course, that now announce growing pipeline of infrastructure starts to think about things that are further in the future, most important one on the horizon that we can see is, of course, the Heathrow expansion. Blindwells business already has been active in that space when we delivered the Terminal 5 upgrade. And of course, we did the initial design work for that when it was on the drawing board. So we know that project, and we're quite optimistic about that going forward. Energy, again, strong tailwinds, Sizewell C went through FID last week. We are doing the enabling work there and we have works service provision. And that now will move forward into the main construction islands and the associated infrastructure around that plant. So nuclear in energy, clean energy, a very important sector that we're very well positioned in. And it's sort of customer where we can deliver a good service and pull through additional services that we showed on the previous page. Not forgetting, of course, that we're already across the U.K. energy sector, we deliver to energy for waste companies. We're supporting energy companies in multiple clusters. A number of those are considering decarbonization options, and we're well placed to take advantage of that. And we're supporting the growth in the other bit of the nuclear power sector, which when it comes forward the nuclear fusion reactor at West Burton, we're already positioned on that site doing work through our Industrial Services business. Moving to the environment. We made good progress here. We've now secured new contracts with Yorkshire, Northumbria and Severn Trent water, really good service we're providing there through both our industrial and our environmental businesses and our SBU business that we acquired a few years ago, is well positioned in some frameworks for the -- end of AMP7 and moving into AMP8 cycle now. So we're supporting the water customers in that space and not forgetting our earth moving business, of course, with the rollout of the country's new 9 reservoirs. We're already doing the trial pit digging on 2 of those reservoirs, then we'll see our relationship with that increasing and improving over the years. So what we're saying here is -- good sector spread, which gives us balance. We're in sectors that are forecast to grow over the years, and we've got really strong long-term relationships with customers in those sectors, high-quality blue chip customers, providing us with confidence that we continue to grow the services business in this space.

Thank you, Simon. So just moving on to the Land piece, again, for people that don't know us, I just want to highlight what we do really. So 2 parts to the business. We owned a lot of land, which has to do with the old mining business, and that's held at historic cost. So therefore, we are working through that as a multi-phase master developer. We're doing bespoke commercial development. So we're working on that section alongside its renewables. Now a lot of our land is in Scotland, and therefore, there's a lot of wind farms, batteries, solar on that. So those are the 2 parts of the business, as I mentioned earlier, one of them sits with about GBP 80 million of balance sheet there. The other is in that GBP 80 million is GBP 7 million of renewables worth about GBP 27 million. So you've got GBP 100 million of value Land at historic cost in here. So it's all about harvesting that. So just take you over the page. Blindwells is our flagship. It's about GBP 40 million of cash tied up in there. And you can see that it's a fantastic site close to Edinburgh. So that site will continue to be sold down and generate that cash, also working on unity, and we're looking to sell some of the renewables. Now key point is that the property market is a bit quiet at the moment. Let's be honest. You can see that everywhere. We're not concerned because we are holding the land at, as said historic cost. So the important thing is we will, as a board, make the decisions on when we look to sell, bits and pieces as it's appropriate to get the best value for shareholders. So that's the land piece in itself. I just want to move on to renewables, so the good thing for everyone is Jones Lang LaSalle did another revaluation of this portfolio and has confirmed that it's still worth about GBP 27 million to GBP 29 million. We mentioned earlier that we brought to the market about what Jones Lang LaSalle valued at nearly GBP 13 million of assets. We are in detailed discussions to sell that portfolio and I hope to make an announcement shortly on that, probably a little bit later than I would have expected, but I'm fine, we're determined to get the best price. So I hope to very shortly update that. Remember, we talk about -- so Jones Lang LaSalle have only valued GBP 27 million to GBP 29 million. We then have these further out schemes further down which we think will add some more significant value over time, and we will update the market each time on that. Finally, in Land, as I said, you start with GBP 100 million, we're going to trade it down to GBP 20 million, delivering a rocky of about 20%, so making about GBP 4 million. And this is all about the future. This is about option agreements, promotion agreements, et cetera, that we have, and we're building that pipeline. So as the cash comes out, it will turn into much more this option type business. And this is just giving you a flavor of how that's growing and how we're securing that long-term stream from that type of business. So Land, the outlook is very good. We have real upside coming through, and it's just going to happen over the next 3 or 4 years. Just taking over the next one. Thank you. So this is just Germany. So remember, Germany split into 2 bits. Again, for those of you who do not know us, there is a trading business, that's ring-fenced from DK. So those are the 2 bits of the business really. Trading business, so if we talk about that first on the next slide, we always said to everyone, it will trade in this blue box range between GBP 10 million and GBP 15 million. Guess what, everyone knows that Europe's had a quite difficult last 12 months. Guess what? We came in at the bottom of the range. The volume was still very similar to prior year. So happy with the volume and it made the number we expected. So a nice steady recurring income, but I've always said to people it's a trading business. So please, in your own head as a sum of the parts value it as book. And one day when the trading team decided they want to retire we'll just close this business down. There's no closure costs because it makes about GBP 1 million a month, so when the traders retire, we'll just close the books 3 months to clear the inventory, that will make GBP 3 million, and that will deal with the closure cost. But like I said, we have a great trading team. They're keen to move forward with us. But one day, it will close down when they retire, and then you'll get booked back. DK Recycling is the interesting thing. So what does it do? Again, for those of you who don't know, it takes waste dusts from steel plants across Europe. There is really a little bit to the options if you're a steel plant. If you put it into landfill, you give it to us or there's a small amount that can go into the cement sector. So really, as the ESG agenda pushes into the steel plants they really have to come to us instead of go to landfill and that gives us pricing power. What we do is we mix about 500,000 tonnes of dust with coking coal in the blast furnace, and you produce pig iron, zinc and energy. The energy is we sell a little to the grid, but basically, we're protected from spiking energy price because we generate our own power. So what really drives the profitability of the business? Well, if you think about it, it's pig iron prices, zinc price and gate fees. So that we're looking to drive gate fees on. In the period, we were able to not only drive on gate fees, but also we were able to reduce the cost of the input raw materials, the coke and coal. We did expect pig iron prices to move up due to Russian embargo, et cetera. Now the Russian embargoes kicked in now. It's affective from September, obviously, everyone is appreciative of the fact that with the tariffs on steel, the market has been very, very flat. So it hasn't moved up very much. But to give you an idea, a 1% movement in pig iron price adds million to the bottom line. So I'm looking forward to updating you in January about what's happened with pig iron prices. I think they're on the floor at the moment, I can't see them go much lower. If they move up, that will be a positive thing for us. So just over the page, ESG is very important to us. And I'd like to reassure you as a fellow shareholder that this is not about ticking a box. It's what our customers are demanding from us. And that's -- this is all about value for money for you as a shareholder. So the customer wants ESG, we're providing what the customer wants because that helps us win work. So the team and the ESG team are held accountable by the divisional MDs to make sure they're helping them win contracts. So we don't have this ESG team. They are a value-add not just an overhead. So they're keenly focused on delivering value to the business. So ESG is part of what we do. It's important. So in summary, just take you through to recap, like I said, a lot of you know this, so really starting at the bottom, Germany continues to pay the dividend, great, bottom of the cycle, we expect that to move up. Land, you've got a huge amount of value in there. We hope to throw off about GBP 80 million of cash in the next few years with the sale of renewables and the land assets at least. If we get better than booked, clearly, you'll get a profit on top of that as well. So Land will go down to a much smaller business, making about GBP 4 million. The big driver is the Services group, and that's why Simon joined us to give it that focus and attention. Those of you who know who have been on the journey know that the group has come a long way, now is the critical moment to really take that opportunity in Services. And I have to say that, again, those of you who have been with me a long time, we're probably in the best place I've ever been. We've tidied up the history from a coal company to a green company. And now you'll have to, I'm not taking the credit for this because it wasn't about positioning, we've been very lucky. The sectors that we live in and we are exposed to are going through a golden patch that we will look to capitalize. And that's why Simon is here to help you with the execution, and take those opportunities for shareholders. So just over the page and to complete before I move over to questions. Please remember, you have a very experienced Board. You have Roger McDowell. You also have Harwood Capital represented on the Board. So as our biggest shareholder that means that's some very strong shareholder alignment. Also strong balance sheet, no debt, so we don't have to do suboptimal. We are very conscious, a number of our shareholders are keen for the dividend. So again, you'll see it was increased by 3% to reflect inflation. So we're keeping pace with that. And I think we have 3 very strong pillars that are easy to understand for people and work out the value of the business as sum of the parts. So look, that's done the presentation. I think I now hand over for...

[Operator Instructions]. Stephen, if I may just hand back to you just to read out those questions where appropriate to do so and once completed, I'll pick up from you at the end?

Of course, yes. And first question, Gordon, it's probably for you. This is a pre-submitted question. Has there been any improvement in the profitability of the German coal pulverisation plant.

So for those who don't know the business has a pulverisation plant that basically grinds coal for cement plants. It was positioned to replace the lignum coal mines that were in Germany. Now interesting fact for those of you who don't track it, is that Germany still has a huge carbon footprint because it runs a lot of its power stations on horrible lignum brown coal because of the issue in Ukraine and the fact they closed their nuclears, they are still continuing to run their lignum brown coal mines, which is a huge CO2 footprint. When those close, that will open the opportunity for this grinding plant to supply the cement industry in Europe. Remember, cement will always produce CO2. It doesn't matter if it burns coal or not, it's part of the chemical process. So they will have to pick carbon capture. So at the moment, it hasn't moved, but we still think there's a good long-term future for it.

Thank you. I think you picked this one up, but just to close it out, John is asking, when do you anticipate the sale of some of the renewable assets to be completed?

In the very near future, thank you for asking. To be honest, I expect it to happen before this road show. And some of these things take a little bit longer. So it's really irritating. I will be really disappointed if I'm on the roadshow in January that hasn't happened. We are at very advanced stage. So don't be surprised, hey, you might see it in a couple of weeks, but it isn't very far away.

I think this one is relating to Services. So Paul is asking with strong cash generation and improved profitability are their plans to pursue bolt-on acquisitions, particularly in Services and renewable energy infrastructure?