Hill & Smith PLC (HILS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Hill & Smith 2022 Results Presentation. I'm going to start by covering the highlights before passing over to Hannah. This is a record set of results for the group with operating profit from continuing operations of GBP 97.1 million. Since the half year, we have completed 4 acquisitions, including Korns Galvanizing, which we announced today, redeploying the proceeds from the France Galva disposal. We have essentially replaced the France Galva earnings with higher growth, higher quality earnings, which will positively impact 2023 and beyond. Cash conversion was significantly stronger in the second half as we had expected, and we delivered a return on invested capital of 19.2%, up from 17.1% last year. Based on this strong financial performance, we are pleased to recommend a final dividend of 22p per share, bringing the total dividend for FY '22 to 35p per share, an increase of 13%. Given the actions taken to enhance the quality of the portfolio, we have recalibrated our medium-term financial framework to reflect the potential of the business we have today, and I will talk you through this later in the presentation. I'm now going to pass over to Hannah to talk through the results.

Good morning, everyone. The group delivered a strong trading performance in 2022. Revenue from continuing operations was GBP 732.1 million, 12% ahead of 2021 on a constant currency basis. And at GBP 97.1 million, underlying operating profit constant currency growth was an impressive 17%. Operating margins also increased to 13.3%, a 90 basis point improvement compared to last year. And the strong margin progression reflects an improved portfolio mix, operational gearing and the group's pricing power. Underlying profit before tax was 23% higher at GBP 87.9 million and with an effective tax rate of 22.4%, earnings per share for continuing operations increased by 22% to 85.4p. Earnings per share for the total group, which includes the results of France Galva, were 91.9p, an increase of 18% versus 2021. The results are testament to our agile operating model and our talented local teams who successfully navigated the challenges presented by the external environment in 2022, including taking pricing actions to offset cost input inflation. If we now turn to our divisional performance, starting with Galvanizing, our largest division in terms of profit generated for the group. The Galvanizing division delivered a standout performance in the year. OCC revenue growth was 20% and underlying operating profit increased by an impressive 23%. The division continued to maintain superior margins with operating margins increasing by 70 basis points to 24.3%. The U.S. business delivered a strong performance with 23% OCC revenue growth and record operating profit. The strong growth is due to buoyant demand with an 11% increase in production volumes, combined with good pricing power and a favorable product mix. And today, we announced the acquisition of Korns Galvanizing, which expands our capacity in the growing U.S. market. The U.K. business delivered 17% organic revenue growth and record operating profit in the year despite year-on-year volume decline. This reflects a strong first half with successful pricing actions. The second half was more challenging as certain customers began to feel the impact of rising energy costs. However, with a continued focus on mix, the business continued to perform strongly. In October, we were delighted to acquire Widnes Galvanising, which expands our geographic footprint into the Northwest of the U.K. The outlook for our U.K. business in 2023 is cautiously positive given the wider U.K. economic backdrop with our teams focused on balancing price and cost management to ensure plant profitability is maximized. The 2023 outlook for our U.S. business is, on the other hand, very positive, and I'd like to cover the reasons for this in a little more detail. Our U.S. Galvanizing business, V&S, offers hot dip galvanizing services across 9 strategically located plants, mainly in the Northeast and the Midwest corridor. V&S has a reputation for customer service and quality, and the plants are leaders within their local markets. V&S delivered a record performance in 2023, which is largely attributable to an impressive 11% growth in volume. And as you can see from the slide, the business benefits from a wide sectoral spread of customers with road and bridge infrastructure and commercial construction sectors, particularly buoyant in 2022. During the year, the labor availability challenges experienced in 2021 also eased, which supported growth in certain plants. The business has strong pricing power with customers placing a premium on service and turnaround times. And it is this pricing power alongside operational excellence and a continued focus on efficiencies, which has enabled the business to deliver consistently high margins year-on-year. In the coming years, we expect our U.S. Galvanizing business to deliver growth ahead of GDP. The U.S. federal government commitment to upgrade infrastructure through the IIJA will benefit a range of galvanizing end markets from 2023 to 2027 and beyond. Alongside this, we expect the business to benefit from a more general move to the onshoring of certain activities. A further growth driver is the increasing market penetration of galvanizing due to full life cycle cost and sustainability benefits. As an indicator, according to the American Galvanizers Association, only 35% of galvanizable steel in the U.S. was actually galvanized in 2021. Our plants are currently running at around 60% of technical capacity and are therefore well placed to service the growing market demand. There is also a potential for market consolidation through acquisitions as evidenced through our acquisition of Korns Galvanizing. Alongside this, we continue to identify and evaluate options to build further plants. So now moving on to our Engineered Solutions division. The division continued to deliver in 2022 with 21% revenue growth and 24% profit growth on an OCC basis. And with a strong second half performance, operating margins for the full year increased to 12.1%, reflecting the quality of our faster-growing U.S. portfolio. Our U.S.-based businesses delivered 23% OCC revenue growth and strong profit growth against robust prior year comparators. And it's worth noting that operating profit in the U.S. represented about 80% of the total division in 2022, highlighting the increasing importance of these businesses to the group's growth strategy. Our U.S. composite business continued to see strong demand for its range of composite solutions, and we were delighted to welcome Enduro Composites to the group in February to further accelerate our strategy in this exciting market. Our electricity distribution substation business delivered record profit in the year and enters 2023 with a record order book, supported by strong project demand to upgrade aging electricity infrastructure. Our Engineered Supports business also had a record year due to strong demand from commercial construction and in particular, the growth markets of water treatment and electric vehicle assembly. The prospects for future growth in all our U.S. Engineered Solutions businesses are very encouraging, and the outlook for 2023 is positive, supported by strong order books. In the U.K., revenue grew 21% on an organic basis. The Industrial Flooring business delivered strong growth with buoyant demand from data centers and oil and gas markets, which is expected to continue into 2023. Our lower-margin U.K.-based building products business delivered a performance in line with 2021 as markets cooled in the second half with wider concerns around interest rates and house prices. As a result, the 2023 outlook for our U.K. businesses is more mixed than in the U.S. Turning to Roads & Security. Revenue and profit were broadly in line with 2021, and operating margin was maintained at 6.9%. In the U.K., revenue was 3% higher than 2021 on an organic basis. As previously outlined, in January 2022, the U.K. government issued its response to the Transport Committee review on the safety of smart motorways. This, coupled with U.K. government uncertainty, resulted in a lower level of road safety barrier fleet utilization in 2022. We expect overall fleet utilization to increase in 2023 as central reservation upgrade projects commence after redesign work. In contrast, we saw good demand across the wider U.K. roads portfolio, including Prolectric, our off-grid solar business, which delivered strong growth and has a healthy order book supported by increasing demand for low carbon and energy cost-saving solutions. The acquisition of U.S.-based National Signal further strengthens our off-grid solar expertise and trading since acquisition has been ahead of expectations. It's worth noting that off-grid solar delivered around 10% of the division's revenue in 2022. And based on the market growth and the full year benefit of the acquisition, we expect this proportion to increase significantly in 2023. In our U.S. Roads business, revenue was 10% higher than last year on an OCC basis, with revenue growth mainly driven by increased demand for crash attenuators and barrier rentals. As previously outlined, profit was lower than last year due to challenges with production processes, which impacted margins. We have taken action to address the issues, including appointing a new MD and refreshing the senior management team. Demand for our range of roadside safety products remains strong, and we expect the business to make progress in 2023. In the year, we invested GBP 5.5 million in rental barrier in Australia to support strong market demand. And in Sweden, we completed the divestment of the rental and infrastructure divisions of our loss-making Roads business, and we are assessing options for the small part of the business that remains. The U.K. security businesses delivered 6% organic revenue growth with an encouraging recovery in U.K. and international markets for hostile vehicle mitigation solutions. Our U.K. security barrier business performed strongly in the second half as our security solutions were deployed to support the Commonwealth Games in Birmingham. Moving on to cash generation and financing. The group delivered much improved cash conversion in the second half at 93% compared to 2% in the first half, with overall cash conversion for the year at 51%. Assuming more typical trading patterns, we expect the group to deliver improved cash conversion in 2023, in line with our target level of 80% plus and consistent with historic levels. The working capital outflow in the year was GBP 42.6 million, reflecting working capital absorption to support good growth alongside an increase in inventory due to cost inflation and a tactical increase in stockholding in certain businesses to manage supply chain challenges. Capital expenditure was GBP 31.5 million, representing a multiple of depreciation and amortization of 1.5x. Significant investment in the year included GBP 8.5 million on temporary barrier fleet for the U.S. and the Australian roads market. 2022 spend was below previous guidance, mainly due to lower investment in the U.S. temporary barrier fleet as a result of higher demand for barrier sales in the second half. The group generated GBP 20.1 million of free cash flow in the year, providing funds to support our acquisition and dividend policy. We received proceeds of GBP 62 million from the disposal of the lower growth, lower-margin France Galva business, and we reallocated part of this capital to make 2 portfolio-enhancing acquisitions in the year and 2 more early in 2023. We continue to maintain significant liquidity headroom and leverage capacity to support future growth opportunities. Net debt at the end of the year was GBP 119.7 million with the ratio of covenant net debt to EBITDA standing at 0.7x. The group continues to operate well within its financing facilities. And in November, we were pleased to complete the refinancing of our principal bank debt facility on competitive terms. We use return on invested capital to measure our overall capital efficiency. Return on invested capital from continuing operations was 19.2%, the improvement from 2021, reflecting the strong trading and our disciplined approach to capital investment. ESG is a structural growth driver for our business. Our products and services help infrastructure become more sustainable and protect people as they travel or work in the transport industries. With this in mind, we established our ESG strategy last year, and our 7 key focus areas are shown on the slide. As part of this, we've committed to reach net zero for our Scope 1 and 2 carbon emissions by 2040, alongside a commitment to validate SBTi targets by August 2023. Our Head of Sustainability joined in February and has been leading an extensive project to baseline the group's Scope 3 carbon emissions. We've made good progress and are pleased to report that we are on track to submit our SBTi targets ahead of the required August 2023 deadline. Alongside this, our teams are continuing to drive local energy saving initiatives and explore green technology options to underpin our carbon reduction plan. These efforts have been reflected in a 10% year-on-year reduction in Scope 1 and 2 carbon emissions. Keeping our employees safe while at work remains our #1 priority. During the year, our operating companies developed local safety improvement plans alongside group-led initiatives, including the implementation of life-saving rules and hazard identification training. While we have more work to do, we are pleased that the actions taken resulted in a 35% reduction in lost time injuries with LTIR reducing to 1.1 ahead of our target of 1.5. Talent development and an engaged workforce are critical to our future success. And with this in mind, we expanded our talent management program and introduced a new approach to managing director development with growth mindset, ESG and innovation identified as focus areas. We were pleased that employee engagement levels improved to 61% from 55% last year. As an organization, we aim to employ the best people for the job, and we know that we can only do this by considering talented people from the whole community. During the year, we were delighted to welcome our first 2 female managing directors to the group. Our apprenticeship scheme is also key for attracting more diversity, and we have made some progress with 33% of new apprentice hires being female in 2022. I'd like to now hand back to Alan.

Thank you, Hannah. What we've set out on this slide is an updated financial framework for the group against which we will judge our performance through the cycle. The portfolio actions we have taken have resulted in a higher quality, higher growth portfolio, supported by long-term structural growth across a number of our end markets. The updated financial framework reflects this and is a translation of the capability and growth potential of the business we have today. I would draw out delivery of double-digit annual revenue growth with 5% to 7% of this driven organically. 15% operating profit margin. We are currently at 13.3%, but believe 15% is a very deliverable target over the next 2 to 3 years based on volume growth and product mix. A financial leverage level of 1x to 2x, allowing for GBP 50 million to GBP 70 million of M&A each year and 80% plus cash conversion. In terms of the shape of the business, we are close to 50-50 U.S. U.K. from a revenue perspective, with 64% of operating profit coming from the U.S. This reflects the higher margin performance of our U.S. Galvanizing, utilities and composite businesses. If we include the full year impact of the recent acquisitions, the U.S. contribution increases to 70% of profits. In terms of the weighting of profits between divisions, we don't see this changing materially as we go forward with revenue growth and margin recovery in Roads & Security, combined with continued strong growth in Galvanizing and Engineered Solutions. We see M&A potential across all 3 divisions, but with a focus on the U.S. One of the key drivers of growth in the U.S. will be the positive impact of the IIJA. At the half year, we said we expected to see this first in roads and bridge projects and later in areas of spend, which require greater federal and state alignment. This is largely how it is playing out. We are starting to see an increased level of bid activity coming through in our U.S. Roads and Galvanizing business on spend we can directly link to the IIJA. For example, in our U.S. Galvanizing business, we are seeing very strong demand from our larger bridge customers. In terms of larger federal projects, we are having positive discussions with architects and contractors in terms of getting specified on these projects and expect to see a strong impact from these in 2024 and beyond. Beyond the impact of the IIJA, we are also seeing a positive impact from onshoring of manufacturing in the U.S. I now want to turn to look at 3 of the 4 acquisitions we have completed since the half year and give some context around why we believe these are strong fits for Hill & Smith. It is worth noting that all 4 transactions were completed outside of a formal sale process, which I believe is testament to our ability to position Hill & Smith as both a good home for businesses and a reliable counterparty. Starting with National Signal. National Signal is a market leader in solar lighting towers in the U.S. This is an extremely high-growth area of the market as rental groups and construction companies seek to transition their current diesel fleets. National Signal is also complementary to our existing investment in Prolectric. We see significant growth through broadening the customer base and product range. At the current time, National Signal's largest customer is Sunbelt. We are also going to be investing in additional manufacturing capacity. We have seen strong trading in the 5 months since we acquired the business ahead of our initial expectations and a record order book. Turning to Enduro Composites. This business is highly complementary to our existing Northeastern and Midwest Composites business, Creative Composites Group. We have acquired a very strong management team, while critically Enduro gives us access into the Gulf Coast market. We see significant revenue and margin growth through leveraging our larger sales and marketing resource while also seeing benefits from engineering collaboration and purchasing synergies. Enduro also brings with it an extremely well-invested facility in Houston. Finally, Korns Galvanizing. This is an acquisition we announced this morning. It is the first acquisition we have done in Galvanizing in the U.S. since we acquired V&S in 2007. It is a business which will be absorbed into V&S and where we see the opportunity to both cross-sell to our existing customers and to drive significant operational and purchasing synergies. Turning to outlook. I've just come back from visiting our U.S. businesses. I came away very positive in terms of the continued momentum, which we have seen carried forward from the end of last year. In the U.K., while the economic backdrop is less favorable, it feels more positive than it did back in September. And while we are seeing some market uncertainty, overall, our order book has held up reasonably well. This reflects the strong market positions of a number of our businesses and the resilience of our customer base. It also reflects the more specialist nature of certain of our end markets where we see above-market growth rates. Overall, therefore, I feel we have entered 2023 with positive momentum. If I look to the medium and longer term, there is no doubt that the need for investment in infrastructure is not going away. Indeed, it feels like we are in the early stage of a 5- to 10-year upswing in spend, particularly in the U.S. Thank you, and that is the end of our results presentation.