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

Good morning, everyone, and welcome to the Hill & Smith 2023 Interim Results Presentation. I'll start by covering the key highlights before passing over to Hannah. This has been a record performance for the group with 20% organic constant currency profit growth, 43% profit growth on a reported basis. The key driver has been a strong performance in our U.S. businesses, giving rise to a 240 basis point uplift in operating margins. The integration of our 4 recent acquisitions has progressed well and each business is performing in line or ahead of expectations, supported by strong margin expansion. We have a good M&A pipeline going into the second half of the year. Cash conversion has been strong at 87%, and we are declaring a 15% increase in our interim dividend to 15p. Our outlook remains positive, supported by broad-based U.S. industrial growth drivers, and we now expect operating profit to be modestly ahead of the current market consensus for the full year, reflecting continuing good momentum following the earnings upgrade in May. We expect profit to be slightly H1 weighted due to the phasing of orders in Engineered Solutions and anticipated FX headwinds in the second half. In summary, a very strong set of results. I will now pass over to Hannah to go through the financial performance in more detail.

Good morning, everyone. The group has delivered a record set of results for the first half. Revenue was GBP 420.8 million, 9% ahead of 2022 on an organic constant currency basis and at GBP 62.5 million underlying operating profit OCC growth was an impressive 20%. Acquisitions contributed GBP 41 million of revenue and GBP 8 million of operating profit in the period. Operating margin increased to 14.9%, a 240 basis points improvement compared to the same period last year. The strong margin expansion is attributable to an improved portfolio mix driven by Engineered Solutions and the benefits of operational gearing. Underlying profit before tax was 42% higher at GBP 57.2 million and with an effective tax rate of 25%. Earnings per share for continuing operations increased by 39% to 53.6p. We're also pleased to report that earnings per share for the total group increased by 24%, driven by the strong underlying performance of the business and the redeployment of the France Galva proceeds into acquisitions with higher growth and higher quality earnings. So turning to the group overview. The results reflect the strong momentum in the U.S. and a resilient performance in the U.K. As the charts at the top illustrates, the U.S. continues to grow in relative importance and generated 56% of revenue and 73% of operating profit in the period, highlighting the higher margin performance of our U.S. businesses supported by their good market positions and structural growth drivers. In terms of the weighting between divisions, the Engineered Solutions division delivered an exceptional first half performance, generating 50% of group profit driven by buoyant demand for composite solutions and electricity substation components in the U.S. The Galvanizing Services division represented 36% of group profits with a record performance in the U.S. and a resilient performance in our U.K. business. While the Roads & Security division delivered good constant currency growth, it continues to underperform compared to the other divisions, and margins were impacted by restructuring costs in our U.S. Roads business. If we now turn to our divisional performance, starting with Engineered Solutions. The division delivered a standout performance in the first half with 17% revenue growth and 89% profit growth on an OCC basis. Operating margin increased by 670 basis points to 17% reflecting the benefits of operational gearing and the quality of our faster-growing U.S. portfolio. As reflected on the top right chart, the U.S. delivered 27% OCC revenue growth and record operating profit. Our U.S. composite business delivered an excellent performance, underpinned by high demand for its range of composite solutions. The business delivered improved margins compared to H1 2020 to a soft comparator due to a more favorable product mix and increased volumes. Given the high level of composite project activity in H1, we expect full year profit to be first half weighted. We were delighted to welcome Enduro Composites to the group in February and trading since acquisition has been ahead of expectations. Our electricity substation business also delivered record profit in the period and enters the second half with a strong order book, supported by demand to expand and upgrade aging electricity infrastructure. Overall prospects for future growth in all our U.S. Engineered Solutions businesses are very positive. We expect market demand to be supported by investment to modernize the electric grid and multiyear planned government spending on infrastructure in addition to private investment to onshore vital components and processes. In the U.K., revenue fell by 4% on an organic basis but profit was at similar levels to H1 2022. The industrial flooring business delivered a resilient performance with buoyant demand from markets, including data center, battery plants and oil and gas. As expected, volumes in our U.K.-based building product business were lower than the same period last year, reflecting a slowdown in newbuild and repair and maintenance sectors. As a result, the 2023 outlook for the U.K. is more mixed than in the U.S. So turning to Galvanizing. The Galvanizing Services division delivered a robust performance in the period with 10% organic revenue growth and operating profit at similar levels to H1 2022, a strong comparator. The division continued to deliver superior margins with operating margin of 22.7%, reflecting the value-added service provided to our customers. As shown in the top right chart, the U.S. business delivered a strong performance with 18% OCC revenue growth and record operating profit. The strong growth is due to buoyant demand with a 15% organic increase in production volumes. The integration of Korns Galvanizing acquired in March is going well. The outlook for the U.S. remains positive, with the business well placed to benefit from high levels of industrial activity supported by the IIJA, technology investment and onshoring, and Alan will cover this in more detail later. In the U.K., revenue was flat on an organic basis reflecting a 19% decline in volumes, offset by pricing actions taken to cover higher labor and energy costs. The volume decline reflects challenges of the wider end markets with certain key customers delaying projects. As a result, operating profit was lower than last year's record first half. Our market-leading U.K. business benefits from a good sectoral spread of customers. And while we expect certain end markets to be challenging, the business is focusing on more resilient growth sectors and is cautiously positive for the second half. Turning to Roads & Security. The division delivered 7% revenue growth and 15% profit growth on a constant currency basis with strong trading in National Signal, our recently acquired U.S. off-grid solar lighting business. Operating profit was lower on an OCC basis, given restructuring costs in our U.S. roads business and a more challenging U.K. economic backdrop. As a result, first half operating margin only showed a modest improvement compared to H1 2022, and we expect further margin improvement in the second half. As indicated in the top right chart, U.K. roads revenue was 5% lower and operating profit was also lower than H1 2022 on an organic basis. While the barrier rental business delivered an improved performance with an increased level of fleet utilization, our wider U.K. roads portfolio experienced challenges with inflationary and budgetary pressures resulting in project delays and cancellations. We expect the U.K. outlook to continue to be challenging into 2024, and that project activity may slow down next year in anticipation of Road Investment Strategy 3. In the U.S., trading in National Signal was very strong, supported by a high order backlog and buoyant demand from rental companies. While we do not expect to see such exceptional levels of demand in the second half, the medium-term outlook for the business is positive, underpinned by a drive towards sustainable off-grid solar solutions and an expected boom in large-scale infrastructure projects. OCC revenue growth in our U.S. roads business was 2%. However, operating profit was significantly impacted by restructuring costs, mainly associated with reengineering the trailer product line. The new senior management team are implementing a range of operational improvement plans, and we expect the business to make some progress in the second half. The medium-term outlook for the business remains positive with demand supported by increased levels of state and federal investment to upgrade U.S. road infrastructure. Our U.K. security businesses delivered a resilient performance. And while the outlook remains mixed, we expect our quality product offering and a focus on more resilient end markets such as data centers, will support further progress. So moving on to cash generation and financing. We are pleased to report that the group delivered strong cash conversion in the first half at 87%, a significant improvement compared to the same period last year. The improvement reflects a tight focus on working capital and an easing of supply chain challenges, which has enabled certain businesses to reduce their stock holding. We expect the group to deliver cash conversion in line or above our target level of 80% plus for the full year. The working capital outflow in the period was GBP 7.2 million, and capital expenditure was GBP 12.3 million, representing a multiple of depreciation and amortization of 1.2x. Cash tax paid in the period was GBP 14.9 million. The increase reflecting higher profitability and our decision to carry forward taxable U.K. losses to be used in future periods. As a result, the group generated GBP 34.8 million of free cash flow in the period, providing funds to support our acquisition strategy and dividend policy. And in the first half, we allocated GBP 38 million of capital across 2 value-enhancing acquisitions, Enduro Composites and Korns Galvanizing. We continue to maintain significant liquidity headroom and leverage capacity to support future growth opportunities. Net debt at the end of the period was GBP 132.1 million, with the ratio of covenant net debt to EBITDA remaining at 0.7x. Return on invested capital in the first half was 21.3%. The improvement reflecting the strong trading and our disciplined approach to capital investments. So now turning to our ESG focus areas. Sustainability is a structural growth driver for our business. Our products and services make infrastructure more sustainable and increased transport safety. Our ESG strategy encompasses 7 focus areas, including our commitment to reduce greenhouse gas emissions. During the period, we successfully completed an extensive exercise to establish the group-based line data for all emission scopes. And this has enabled us to submit both near- and long-term SBTi commitments for approval with an overarching target to reach net zero GHG emissions across the value chain by 2050 and this sits alongside our commitment to reach net zero for our Scope 1 and 2 emissions by 2040. As a reminder, in March this year, we set out an updated financial framework for the group against which we will judge our performance through the cycle. The framework is a translation of the capability and the potential of the business that we have today with a higher-quality, higher-growth portfolio supported by long-term structural growth drivers. As part of this, we set a metric of delivering 15% operating margin over the medium term. In the first half, the group delivered operating margin of 14.9%, which reflects the strong margin progression in Engineered Solutions and in particular, the strong start to the year in U.S. composites. The quality of the Engineered Solutions portfolio that we have today provides us with confidence that the division is capable of achieving 15% plus margins on a consistent basis, which in turn will underpin the overall group metric. The other area to highlight is cash conversion. The achievement of 87% cash conversion in the first half puts the group well on track to delivering our goal of 80% plus cash conversion, consistent with historic trends. I will now pass over to Alan.

Great. Thank you, Hannah. I now want to focus on 3 key areas: the U.S. industrial market backdrop, performance of our most recent acquisitions and recap on our investment case. We continue to see strong market demand in the U.S. We see 3 specific growth drivers onshoring, technology and federal funding in the form of the IIJA, each is having a positive impact on our businesses. What we show on this slide is a diagram of where we are seeing the focus of certain areas onshoring and technology spend. As you will see, there is a very strong overlap with our core locations in the Northeast, Midwest and Southeast. In respect of the IIJA, we are showing on the right-hand side of this slide, announced spend to date. This is very consistent with what we said in March that we are starting to see the benefit of spend in roads and bridges but we'll only see the benefit of large-scale public transportation, airport and waterway projects through 2024 and onwards. It is this combination of growth drivers which contribute to our medium- and long-term confidence. Turning to M&A. We completed 4 acquisitions over the last 9 months, recycling the proceeds from France Galva. What I wanted to do here is give a brief update on each of these acquisitions. National Signal is our California-based solar lighting business. This market remains strong, and we have seen excellent margin progression from 12% when we acquired the business to north of 15%. The 180-day integration plan is fully complete. We have also appointed a full-time CFO into the business. Over the next 12 months, we will be looking to move out of our existing 53,000 square foot facility to support future growth. Enduro is our Houston-based acquisition which sits under Creative Composites Group. The rationale for the acquisition was to provide us with greater access into the Gulf Coast region, add new applications and provide additional well-invested capacity. The 180-day plan is largely completed, and we have again seen margins move up from 10% to north of 15% as we see the benefits of synergies across the Composites Group. We've committed to a new $2.2 million pultrusion line to go in by the end of 2023, which will add significant new capacity to serve our utility customers. Korns Galvanizing has been fully integrated into our U.S. Galvanizing business, V&S and a new management team put in place on day 1. Trading is in line with expectations. We're in the process of automating the spin line which will ensure we are able to move margins up in line with our U.S. average. In the U.K., Widnes Galvanising has been similarly fully integrated into our Joseph Ash business, with a new leadership team in place at the site. Trading is ahead of our expectations, and we're seeing the benefits from improvement in health and safety as well as enhanced operating efficiencies. Overall, we're delighted with the progress with each of these acquisitions. Before leaving M&A, I wanted to use the growth of our Composites business as an example of how the group has been able to use M&A to successfully enter a new market. The origin of our investment in Composites was in the acquisition of Creative Pultrusions in 2009. Between 2016 and '18, we then made 4 bolt-on acquisitions, helping to broaden our capabilities outside of pultrusion. This year, we made our largest acquisition in Enduro Composites, giving a pro forma 2022 composites revenue of $150 million. We've been able to more than double operating margins since date of acquisition on the 4 of those first acquisitions. Creative Composites Group today is a recognized U.S. market leader and innovator in the application of composite materials. We will be hosting a seminar in late November to give you more information on this exciting market. Turning now to a reminder of our investment case. It is built upon 6 key pillars. It is about exposure to the growth in infrastructure spend through businesses, which are market leaders in the niche markets they serve and where sustainability is critical to both the products we manufacture and the way we operate. It is then about maintaining an entrepreneurial, agile business culture. We're able to use our strong balance sheet and high cash conversion to invest in both organic and inorganic growth opportunities and drive margin expansion and it is doing all of this in a consistent and highly replicable way in order to drive shareholder value. Finally, turning to outlook. Short term, while we expect to see some FX headwinds in H2, we remain confident about our full year outlook being modestly ahead of current analyst consensus. We also go into H2 with a good M&A pipeline, particularly in the U.S. Medium and longer term, we expect to continue to benefit from high levels of infrastructure spend, particularly in the U.S. but also in the U.K. That is the end of the formal part of our presentation. And what we're going to do is open up for questions in the room and then open up for questions online.

And just going back to the opportunities, obviously, you're in acquisitive mode and there's quite a lot of empty space there. Is that where we should think activity may be in terms of future M&A to fill in some of these blank spaces...

Are you talking blank spaces in that geographic map? I don't think we look specifically at that lens. I think where we are sort of weaker is you would want to see some more organic or inorganic growth, slightly more in the South because there's no question, you've got a population moving down, and you've definitely got a lot of investment there. So you would see some slightly further down. But no, I don't think it would be right, Joe, to say, well, there's a map 2/3 were not really in. And therefore, we need to be there. I think it's more playing to where our best end markets, where our existing businesses and where can we get the best synergy between what we've already got.

And then on the U.K. Galvanizing, I think the volumes, I think you said, were down 19%, but the revenues are up kind of 1%. Is that simply the pricing action you took to kind of bridge us together...

Yes. It's pricing essentially just taken to offset some of the labor inflation we've seen and also energy costs in the U.K.

Yes. Three questions from me. Actually, firstly, on the margin of Engineered Solutions [ through coming from 10.3% to 17% ]. Obviously, you've got a huge swing. I just wondered if you could give us some, I guess, a bit more clarity on the kind of mix effect, the pricing dynamics and then the kind of ultimately guidance for the full year. You talked about in the presentation around getting to 15%. Two, and -- yes, I guess when you talk to the kind of structural drivers in the U.S. market, clearly, the big federal programs are huge. What is the on the ground dynamic of trying to tender and win and get a large-scale infrastructure project through your business relative to some of the smaller [indiscernible] projects or the general business environment as it's been so far. Does that change the game? Is it different route to market? How does that work? And then thirdly, just in terms of pricing strategy, I know there's a question there on the U.K. business, but just could you talk a bit more around the management of lag, the dissemination of price changes, the role of surcharge, et cetera, how exactly the dynamics of pricing worked, particularly in the U.S. market in the past 6 months?

Okay. Well, I'll leave Hannah to take the pricing one? I'll take the first 2. So if you go back to what we said in March, we said that Engineering Solutions was a division which we saw getting up to a 15% margin. So 17% is clearly a very strong margin and has exceeded where we thought it would get to. But I think that sort of consistent 15% margin in Engineering Solutions, is something we should be able to consistently hit. In terms of why is that? Well, if you look at where is the greatest growth coming from in that division, it's coming from the composites business, which is a much higher margin activity and that is a business that is both a design and build business. So it's got a lot more innovative. It's a much more solution-driven business. So it is intrinsically a higher-margin business. And the other key area of growth is our V&S utilities business. So that is the substation business, slightly lower margin business but that is all about scale. So we've got 3 facilities. You put more revenue through that, you will see margin expansion. So that is what is driving it, 17%, clearly a very good margin, but we don't see why that shouldn't be a consistent 15% margin division. In terms of structural drivers, I think, probably it's wrong to think that we are sort of bidding specifically on big products, we are a provider of services into those big products. So you speak to our Galvanizing team in the U.S., they are absolutely talking to the architect around those big projects, but we're clearly not the lead contractor in them. So we want to be talking to those contractors, clearly talking to the architects. In terms of the timing of how that flows through, we see those big projects really flowing through 2024 onwards. And that would be pretty consistent with what you would have seen in feedback from the likes of a Caterpillar and an Eaton, it's the same dynamic around those big projects.

The pricing dynamic in Engineered Solutions, they will price on a sort of bespoke basis for each job, given that they are sort of quite solution-based in their pricing. So they will potentially have clauses in their contract that announce them to flex the price depending on the underlying cost of resin but we are not seeing that sort of as a significant dynamic. It's more around sort of the solution pricing-based approach.

So value-add bespoke...

Like the pricing, yes.

And 2 questions from me. I'll take them individually. In Galvanizing, U.S., you talked about superior margins in the U.S. Galvanizing still, obviously, the U.K. margin has come down. Can you just confirm the U.S. Gal margin is broadly where it's been historically? Or is it down on last year, just so kind of we can work out back out where the U.K. is?

Yes. So as you've just pointed out, the overall margin is a function of both the U.K. and the U.S. And we've seen a 260 basis point reduction versus the same half last year. There's a couple of things I would call out. So the first one is the impact of the 2 recent acquisitions that we've made. So Korns in the U.S. and to a lesser extent Widnes in the U.K. So that has had -- Korns in the U.S. has had a sort of pull down on the margins in the first half. We will expect over time that the margins in Korns, particularly with the investment in the automation that we called out will improve. So that's sort of one of the key factors I would draw out. The second one is around, and as you pushed out the volumes in the U.K. has had a sort of pulled down on their margins. And then there's another [indiscernible] number of other moving parts, but those are the 2 I wish to call out.

Okay. So like-for-like U.S. margins probably...

They are but they are down because of the Korns, yes.

Okay. And then second one, just around roads in the U.S. You talked about reengineering trailer line -- product lines...

Yes. So we have got -- essentially, you need to break our U.S. roads business down into 3 pieces. So it is the barrier business where we have got a very good product. Demand is very strong. So we see good growth there. Utilization at the moment is pretty -- we're almost totally out. We're about [ 90%, 7% ] utilization. I mean it slightly peaks in the summer. So you won't see that through the whole year. Barrier business, good product, good utilization, demand is strong. We then have 2 other businesses. So we've got the attenuator business and the trailer mounted business. The attenuator business is a business that is probably operating at half the margins it should be at, and that is all about just operational improvement. So we know what we need to do. That takes time to work through. The trailer business is about operational improvement, taking cost out, it's also about quality. So the quality and the product is not good enough at the moment. So I was down there in May. We've got a new guy Kurt who is running that operation, and we need to change all of those 3 dynamics, all of which are within our [ gift ] to change, but they just take time. So I think the barrier business is in a good space. Demand is good, attenuators and trailers, that is about operational change. We have changed out 6 of the top 9 managers in that business. I think as we mentioned in March [indiscernible] joined in January, he's the new MD. [ Tau ] in March. A new guy down in [indiscernible] running the trailer business. So we need to see now progress in that operational side. The demand side for attenuators and trailers is good. So there's not a demand issue. We just need to get our product quality absolute right cost base absolutely right, and that will drive up the margin.

Just a follow on. I guess the products you have are in demand, they are selling -- so they're working as obviously, historically, but you want to improve them and therefore, to get better pricing or just because the customers are demanding a high-quality product to continue.

No, I think in the trailers, the quality of our product is not good enough. So we need to get back to a -- we got a great brand with the [ WABCO ] brand. We just are not putting out a great quality product. So we've got to improve the quality of that product. In attenuators, that is all about just getting our operational cost base absolutely right.

Attenuators, when the regulation changed a few years back, you had a lead on the others because you're the only one that was [indiscernible] actually that actually not changed.

Well, yes, there are probably marginally more people in that marketplace, but we are innovating our products as well at the moment.

Clearly in a really strong position in the U.S. next few years is going to be kind of super normal profit. How do you think about kind of the more medium to long-term reinvestment of capital to perhaps diversify away from U.S. infrastructure and so there's kind of [indiscernible] in 2030?

So yes, 2030 is quite a long way out. And the U.S. is a pretty strong, robust economy through the sort of long term, but you're absolutely right. So when we look at our M&A spend, what we're trying to do is, yes, absolutely maximize spend into our best markets into our best businesses, but we're also trying to look at what could be the market, businesses and end markets that 4, 5 years out are suddenly 4, 5-plus profit businesses that actually can be the drivers in the medium and longer term. So what we've said is we want to try and allocate I know, 20%, 30% of our M&A spend to slightly more longer-term market opportunities rather than just being totally focused on what we're doing today.

And just to follow up on the U.S.-based business and the [ road ] business as a whole. If I look at the organic numbers, the margins was 3.5%. Is it fair to say that the restructuring costs and the delta between 3.5% and 6.5% margins?

Yes, I would say so, yes.

On opportunities just to continue with that theme. And in March, you mentioned Australia as a new growth market for you specifically for the roads business. Are you still looking at opportunities there while deciding on the strategy?

Yes, I'm not sure we were quite -- that was quite -- well, I think we meant to say was Australia is a business that we've been in that market a long time. It doesn't make a huge contribution. So we even need a really clear strategy to grow in that market or we shouldn't be there. It looks a pretty good marketplace. I think our sense was we didn't have the right leadership in that business. So we changed out the leadership of that business about 4 weeks ago. We've got a guy who was in our U.K. business who is now out there running it. And what we're going to do is bring a sort of new planned vision for that business back to the board at the end of the year. So feels like a good market. There's quite a lot of investment. We have been there quite a long time. We've got a good product. I don't think we had a particularly well-run business there, but we've now changed out the management.

I want to follow one [ more on RIS this time ], U.K. obviously looking a bit weaker short term. Do you think you're going to have to take cost action there next year before the next RIS comes through? Or sort of what's the medium-term feel if you feel that U.K. has sort of come back to being one of the stronger?

I mean I think if you look at our performance at the moment, it's -- I would say, particularly our temporary barrier business is actually probably doing a little bit better than we were expecting. The MD of that business is quite cognizant that the barrier utilization may not be at the levels that it was sort of back in the sort of peak of risk too and is sort of taking action to sort of rightsize his business both in terms of people and operations but also in times -- in terms of the actual fleet that we need going into Road Investment Strategy 3. We sort of signpost that we don't know, but we think there might be a little bit of a hiatus as we transition between RIS to in RIS 3 as we did between RIS 1 and RIS 2. But I think in the longer term, we think that's still a good business. I mean if you look at road utilization in the U.K., it's only going in one direction and there needs to be a solution to that.

Follow-up on Henry's question. The -- how similar are the product, the U.K. on to U.S. [indiscernible] would you consider shipping product given a strong demand over there and...

Pretty similar to the sort of basic eye, but how they pin it is different and how they use cushioning between it is different and the regulation is different. So it is not as simple as I've got 10 kilometers here, can I shift it straight into the U.S. market, probably could more easily shift it into the U.S. market.

Australia market.

Sorry, into the Australian market but it's not...

It needs to be tested...

But how they pin it and the cushion is slightly different.

Hi, I'm Street Research. Can we just get an update on the CEO search and the sort of skills attributes and experience the Board is looking...

Yes. So what we said in May is that I would continue for a period of 12 to 18 months. So -- and the reason for doing that is, one, I think it just gave sort of a bit of certainty to shareholders clarity in the business. So consistent with that, we've sort of will be revisiting at the back end of this year that CEO search process, both in terms of internal and external candidates. So that time line that we set out in May hasn't changed. In terms of the attributes, I think, maybe this set of results is a good reflection. I mean, our best markets are in the U.S. That is where the growth is. I think M&A, if we can do it really well is a massive value add here. If you can grow top line and drive margin, you can make a lot of money in that. And it's basically never dropping the ball. So now great personality, everything actually key to that. But I think all those 3 pieces, so you need a sort of ruthless eye at the bottom because you just never want to drop the ball. M&A U.S., those will drive the value in this business.

Could you talk a little bit about the H2 versus H1 bridge, profit bridge, if you like? Because I guess you're guiding to H1 weighted performance this year whereas historically, it's been more weighted...

Thank you, Dom. So we are expecting our profits to be H1 later this year, which is quite unusual for us as a group. There's 2 sort of key factors to that, that I would call out. The first is the impact of FX, noting that U.S. dollar rate last year in H2 2022 was 1.18 versus where we are today. And we provide a ready reckoner in the pack that says for every one set movement, that's got about a GBP 700,000 movement. So we're expecting that to be sort of GBP 3 million to GBP 3.5 million of headwind in the second half. So that's one of the moving parts. The other one is around sort of the timing of phasing of projects and product mix. And there's 2 areas that I would call out in particular. So we've called out the exceptional performance in our Composites business. And we think there's a GBP 3 million to GBP 4 million of sort of profit impact around timing of projects and also product mix around composites. So that's one of the bridges. And the other area is a National Signal. So we've called out there that they had a particularly strong first half and we expect there to be sort of around GBP 2 million sort of project phasing dynamic there as well that sort of forms that bridge as to why we think that we will be maybe a little bit atypically first half weighted this year.

And just following on from that, in terms of the evolution of the inflation equation, one would assume that raw material is now beginning to soften, labor probably still fairly robust. How do you see pricing across the group in the second half?

Well, so I think those statements you -- both those statements you made are correct, including input prices are coming down. Labor market is still reasonably tight. I mean it's better than it was this time last year. I think it depends which part of our business you're looking at, the more commoditized side, you are going to get -- there is less flexibility on pricing. But if you look at business such as composites, the V&S utility, where demand side is very good. We've got a great product, a great differentiated product. I think we will still see good pricing growth. So slightly -- I don't think you can sort of generalize across the whole business.

I think it's fair to say the progress that we're expecting to make is more volume-driven than price-driven.

And a follow-on for me, when you put everything into the mix in terms of the outlook, is it reasonable to think that underlying growth should accelerate in 2024?

Well, I think the growth this year clearly looks pretty good. I don't see why we can't keep that level of growth. I mean, accelerating it when you've got 9% top line, 20% operating profit, organic growth, it will be good to achieve that. I think that would be a sort of -- maybe that would be a punchier end of growth.

Could you just talk a bit about the M&A environment specifically kind of firepower right in thinking roughly [ $50 million to $75 million ] per annum? And then secondly, on that, given the market demand is still buoyant, does that increase the price of the assets you're buying? Because clearly, the 2 or 3 recent acquisitions you've done have performed ahead of expectations. Is that increasing the pricing? And related to that, because the demand and the forecast is that seeing a lot more firms active in the space looking to buy whether [ PE or trade ], et cetera, to make it a more competitive environment?

Well, I will do the latter. I'll pass over to Hannah on the funding side. So I think the key differentiator in where we play in the market is once you strain north of $40 million to $50 million, you are in an intermediated marketplace, you have got an adviser in there, everyone is at 10x plus and you're in some sort of auction process. that is not where we play. So we are playing more in that sort of [ 10 to 30, maybe a stretch into the 40 ] but fundamentally below that market space. And in my historic experience of buying business in private equity, but let alone in Hill & Smith, the people -- the entrepreneurs who own those businesses have a very clear view on value. It isn't driven by economic cycle. It's not driven by whether there is a comparative business that's listed who's now gone from 8x multiple to 12. They simply don't look at the world like that. They look at it in terms of absolute value. And if you can't get to that absolute value, they won't sell you the business. You can tell them the economy is terrible. So they have a much clearer view. And that valuation tends to be around the sort of 7 to 8x EBIT level. And that can sound amazingly imprecise. It's simply true. So you're absolutely right. In some of the places we're looking, those end markets feel pretty good. That doesn't materially change the multiple. It might add the margin, but what we are not seeing is suddenly the people we're talking to who are at 7 to 8 is suddenly at 10. That simply isn't the case. Are more people active? We're not particularly seeing it at our end of the market. We're probably seeing a little bit in terms of where new capacity is coming into the market. But in the M&A market, we are still able to approach owner managers who based on hitting their price expectation will buy into certainty, speed of doing it. We understand your business. And fundamentally, we don't want to completely change it. So we're trying to take your business and grow it, not restructure, take lots of cost out. So people do care about the business they own, but they have just a very clear expectation on price.

And from a sort of capacity for acquisitions, so we're at 0.7x leverage at the moment. So we've got -- not restricted in terms of firepower capacity. If we were to take leverage to 1.5x as an example, that would give us GBP 125 million additional firepower to deploy. We've said that we are looking to deploy GBP 50 million to GBP 70 million of capital per annum on acquisitions. We've deployed GBP 40 million so far this year. So I think it's fair to say we would be disappointed if we are not able to deploy more capital into acquisitions going forward.

Very quick on M&A. U.S., what's the pipeline looking like post Korns in the first one since 2008.

So I'd tell you if you want an unpredictable M&A market, that's pretty -- these are literally -- there are a lot of single site, single-owned galvanizing plants. I think as we said in the past, if you took the universe, you probably discount 70 because you'll never get there on environmental ground. So we need to be absolutely -- there's no flexibility on environmental, let's say, having done Korns, the remarkable the reaction you get in the market, and we are talking to a number of people in the market. I think those are really difficult ones to predict. They're the most difficult to predict because a lot of the people who own them built those plants in the 60s, 70s, they're probably 70, 80, their timing is the most unpredictable end. But we are -- having done that with the same impact we're doing witness in the U.K., you actually stimulate people to sort of think about you as an active buyer.

Lastly, a question on kind of competition. I think in galvanizing, one of your listed U.S. peers are adding capacity. I assume the kind of mom-and-pop shops where interest rates are, which is good for your kind of utilization. But if you look at maybe kind of composites and the other parts of the U.S. business, you're actually seeing greater competition coming through?

Well, if one starts with Engineering Solutions, I think the key way that I would look at it is composites is a good market. We have an exceptional business. V&S Utilities, we have a good business in an exceptional market. So in composites, it's not -- the market is good. We just have a very, very good business. So we aren't seeing significant capacity coming on there. In V&S utilities, so the substation market, there is more capacity coming on. It's an unbelievably sort of booming market. We are also putting more capacity on. So we are investing both at our Burton and on the [indiscernible] site to bring new capacity on. But this is a 5, 10 years. I mean, anyone who's been to the U.S., you know the distribution network there is very, very poor. So I don't think new capacity will dramatically impact us. It's more about how quickly can we get more capacity on. And in the rest of our business, no, I wouldn't call out any particular change in the market dynamic. Okay. Well, thank you very much, everyone.

Thank you.