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

Good morning, everyone, and welcome to the Hill & Smith 2023 Full Year Results Presentation. I will start by giving a summary of the key highlights before passing over to Hannah to talk through the financial performance. I will then look at where we are against our key performance metrics, focusing on our most recent acquisitions from 2023 and the start of 2024 and then talk about the significant growth opportunities we see in our U.S. Utilities business. Before starting, I would just note, this is Hill & Smith's 200th anniversary year since the business was founded by Edward Hill and his brother-in-law, Henry Smith, at Brierley Hill in the West Midlands, a not inconsiderable achievement. Once again, this is a record set of results for the group. We've seen strong revenue and profit growth with 76% of group profits now generated from our U.S. businesses. This is testament to our clear strategy and improving execution. We continue to see good progress in delivering on our M&A strategy, completing 4 acquisitions during 2023 and a further 2 acquisitions in the U.S. in the first 2 months of 2024, one of which we announced this morning. We are pleased with the momentum we have built, identifying and securing strategically aligned, financially accretive businesses at sensible prices and where we have the opportunity to complete our diligence outside of a competitive auction process. Cash conversion has been extremely strong at 115%. We have also seen a good uplift in our return on invested capital from 19.2% to 22%, as we focus our investment on our higher-growth businesses. The Board has approved a final dividend of 28p, giving a full year dividend of 43p, up 23% on prior year. We have started 2024 with good momentum and a strong M&A pipeline. I will now pass over to Hannah to talk through the detailed financial performance of the group.

Good morning, everyone. I'm pleased to report that the group delivered another record set of results in 2023. Revenue was GBP 829.8 million, a year-on-year increase of 14% at constant currency. And at GBP 122.5 million, underlying operating profit was up by 26% on a constant currency basis and well ahead of our initial expectations for the year. Acquisitions contributed GBP 74 million of revenue and GBP 13 million of operating profit in the year, reflecting strong trading in National Signal and Enduro, our 2 larger recent U.S. acquisitions. Organic constant currency revenue growth was 5% and operating profit OCC growth was 12%. Operating margin increased by 150 basis points to 14.8%, reflecting the improved portfolio mix and operational gearing benefits of significant volume growth in Engineered Solutions. Underlying profit before tax was 27% higher at GBP 111.9 million. And with an effective tax rate of 24.6%, earnings per share for continuing operations increased by 23% to 105.4p. So now turning to the group overview. The impressive results reflect strong momentum in the U.S. and a resilient performance in the U.K. As the charts at the top illustrate, our faster-growing and higher-margin U.S. businesses now represent a significant part of the group and generated 56% of revenue and 76% of operating profit in the year. In terms of the weighting between divisions, Engineered Solutions delivered an exceptional performance, generating 53% of group profit, driven by buoyant demand for composite solutions and electricity substation components in the U.S. Galvanizing Services generated 37% of group profits and maintained superior margins with a record performance in the U.S. and a resilient performance in the U.K. In contrast, the margin performance in Roads & Security was disappointing, reflecting the impact of one-off operational improvement costs in U.S. Roads together with nonrecurring charges relating to certain U.K. businesses. So if we now turn to our divisional performance, starting with Engineered Solutions. The division delivered an excellent performance with 27% revenue and 84% profit growth on a constant currency basis. Operating margin increased by 540 basis points to 17.5%, reflecting operational gearing and the quality of our faster-growing U.S. portfolio. As highlighted on the top right chart, the U.S. delivered 20% OCC revenue growth and record operating profit. U.S. Composites delivered a standout performance, underpinned by high demand for its range of innovative composite solutions. We were delighted to welcome Enduro Composites and United Fiberglass to the group during the year, strengthening our reach and capability in the high-growth U.S. composites market. Our U.S. electricity substation business also reported record profits and enters 2024 with a strong order book. The business spaces into an attractive end market, and we are investing to accelerate growth, which Alan will expand on later in the presentation. U.S. Engineered Supports generated record results, underpinned by a number of large infrastructure construction projects and a buoyant HVAC market. Overall, the outlook for the U.S. remains very positive. Market demand is supported by investment to modernize the power grid and multiyear planned government spending on infrastructure in addition to private investment to onshore vital components and processes. In the U.K., revenue declined by 6%, but profit was at a similar level to 2022. Building products experienced lower volumes, reflecting a wider slowdown in U.K. residential construction. However, this was offset by pricing and cost management actions. Industrial flooring delivered a robust performance with good demand from data center, battery plant and oil and gas markets. Our Engineered Supports business in India delivered a record performance with buoyant demand for international LNG projects. And the business enters 2024 with a strong order book and good medium-term growth prospects. So if we turn now to the Galvanizing Services division. The division delivered a robust performance with 9% revenue growth and 4% profit growth on a constant currency basis. In line with expectations, the division maintained superior operating margins at 23.2%, reflecting the value-added service provided to our customers. In the U.S., revenue grew by 9% on an OCC basis with record operating profit against a strong 2022 comparator. The performance reflects an 8% organic increase in production volumes and focused pricing actions. The medium-term outlook for U.S. galvanizing remains positive with our business well placed to benefit from high levels of industrial activity supported by the IIJA technology investment and a more general move to the onshoring of certain activities. In the U.K., revenue was broadly flat on an organic basis, reflecting a 15% decline in volumes, offset by pricing actions. The volume decline is attributable to an overall downturn in the U.K. galvanizing market and the impact of certain key customers delaying projects with volumes stabilizing in the second half. As a result, operating profit was lower than last year's record performance. The U.K. business benefits from a wide sectoral spread of customers. And while we expect end markets to continue to be challenging in 2024, we've taken proactive steps to strengthen the management team to support performance delivery. So turning to Roads & Security. Performance in Roads & Security was disappointing with 2% revenue growth and 31% profit decline on a constant currency basis. The results reflect strong trading in National Signal, our U.S. off-grid solar business and resilient trading in our core U.K. roads business. However, this was offset by certain one-off charges included in underlying trading. As a result, operating margin was 4.7%, below our expectation, and we anticipate an improvement in 2024. U.K. roads revenue was 3% lower and operating profit was significantly lower than 2022. While the Barrier Rental business delivered good profit growth with an increased fleet utilization, our wider U.K. roads portfolio experienced challenges with inflationary and budgetary pressures curtailing customer spend. While U.K. markets continue to be challenging, we expect U.K. roads to deliver a flat performance in 2024. Our U.K. off-grid solar business experienced a slowdown in construction end markets during the year and has turned its focus to the more resilient facilities management sector. At the end of 2023, the business identified an issue with the historical installations of one of its products, and the provision for expected rectification costs has been included in the group's underlying results. The team acted quickly to take appropriate remedial action. And in the group context, the issue is relatively small. During the year, we exited Berry Systems, a small loss-making car park solutions business, and the results include an underlying charge in relation to future losses expected on a small number of legacy contracts. In the U.S., trading in National Signal was very strong, particularly in the first 3 quarters, supported by a high order backlog and strong demand from rental customers. While we've seen a slight softening in demand coming into the first half of 2024, which is factored into our group outlook, the medium-term outlook remains positive, underpinned by a drive towards sustainable solutions and an expected boom in large-scale infrastructure projects. Revenue in our U.S. roads business was lower than 2022 and operating profit was significantly impacted by one-off operational improvement costs, mainly associated with reengineering the trailer product line. The business is implementing a comprehensive improvement plan, and we expect progress in 2024. Our Security subdivision saw revenue decline by 6% and operating profit also declined. This reflects lower utilization of our U.K. security rental barrier fleet compared to a record 2022 and continuing challenges in our perimeter access security business. While the outlook for the security portfolio remains mixed, we expect that a focus on more resilient end markets such as data centers will support further progress. So moving on to cash generation. We are pleased to report that the group was highly cash generative in 2023 with underlying cash conversion of 115%. We expect the group to continue to deliver strong cash conversion in 2024, in line with our financial framework of 80% plus and consistent with historic levels. The working capital inflow in the year was GBP 22.8 million, reflecting the benefits of lower raw material costs and a tight focus on working capital efficiency. Capital expenditure was GBP 31.8 million, representing a multiple of depreciation and amortization of 1.5x. Significant growth investments included GBP 4 million to support capacity expansion in our U.S. Composites business and GBP 1.5 million on an automated kettle line in the recently acquired Korns Galvanizing. Cash tax paid in the year was GBP 31.7 million, the increase reflecting higher profitability, the phasing of payments in the U.S. and our decision to carry forward taxable U.K. losses to be used in future periods. As a result, the group generated GBP 97 million of free cash flow, providing funds to support our acquisition strategy and dividend policy. In the year, we invested GBP 48 million of capital across 4 value-enhancing acquisitions. 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 108.4 million, better than we had expected with the ratio of covenant net debt to EBITDA falling to 0.4x. Return on invested capital for the year was 22%, the improvement reflecting the strong trading and our disciplined approach to capital investment, which more than offset the impact of acquisitions in the year. So if we now turn to sustainability. Our group's sustainability strategy encompasses 7 priority areas, including our commitment to reduce greenhouse gas emissions. During the year, we successfully baselined our full Scope 3 GHG emissions, which enabled us to submit near- and long-term commitments to the science-based targets initiative with an overarching target to reach net 0 GHG emissions across the value chain by 2050. We are delighted to report that our targets were approved by the SBTi in December 2023, and this sits alongside our previous commitment to reach net 0 for our Scope 1 and 2 emissions by 2040. We also continue to make progress across our other sustainability priorities. In health and safety, our focus has been on accident prevention. And while there's more work to do, the lost time incident rate reduced by 61% to 0.43. Talent development and engagement are key priorities for our sustainability strategy. And within this, senior level succession is currently a key focus, including the development of high potential individuals and enhancing manager and supervisor training. Alongside this, we were pleased that our recent employee survey highlighted that we are making some positive progress with diversity and inclusion. We also remain committed to our U.K. apprenticeship program and now have 60 apprentices, a 9% increase compared to the end of 2022. So overall, a really strong set of financial results and good progress on our sustainability strategy. I will now hand back to Alan to summarize our progress against our financial framework.

Thanks, Hannah. Set out on the left-hand side of this slide are the through-the-cycle target financial performance metrics we set out last year. We've successfully delivered against all of these metrics, consistent with the good momentum we're seeing within the business. We saw 5% organic revenue growth and 13% total revenue growth in 2023, reflecting the positive impact from M&A. As a reminder, our focus is on trying to complete 2 to 4 deals a year, investing in aggregate between GBP 50 million and GBP 70 million. We also saw positive margin expansion from 13.3% to 14.8% noting that our target of 15% was set as a 2024 full year target figure. In 2024, we expect to see further margin expansion as a result of both accelerated growth in our higher-margin businesses and through improved performance in our Roads & Security margins. Excellent cash conversion and return on invested capital, up from 19.2% to 22%, leaves gearing at 0.4%, well below our target range of 1 to 2x. This gives us significant headroom for organic and inorganic investment. During the year, we completed 3 principal acquisitions, in addition to which we made a very small bolt-on within our Novia business. In aggregate, we invested GBP 48 million. Enduro has been fully integrated into Creative Composites Group. Since acquisition, we have seen strong trading supported by a circa 300 basis point expansion in operating profit margins. We have also committed GBP 2.2 million of CapEx on a new pultrusion line, which will be operational by the start of April and where we have excellent order book visibility. We acquired United Fiberglass at the end of last year. United, based in Springfield, Ohio, is a market leader in the use of filament winding technologies, providing a range of lightweight applications into the utility, infrastructure and industrial markets. United also has a strong CEO in Kevin Barnett, and we are very pleased to have Kevin as part of our wider composites team. 3 months in, the business is trading well and in line with our expectations. United has started the year with a strong order book. Korns Galvanizing was acquired in March 2023 and has been fully integrated into V&S Galvanizing. Trading is ahead of our expectations, and we have seen good margin expansion. We're also making good progress on our GBP 2.9 million investment in a new automated spin line. The acquisition of Korns has been an extremely well-executed integration process over the last 12 months and provides a playbook for future galvanizing acquisitions. Each of these acquisitions were consistent with our strategic framework, acquiring businesses outside of auction processes and where we have an existing relationship with both management and business. Since the start of the year, we have announced 2 further acquisitions, investing GBP 11.6 million. Both acquisitions sit within our Engineered Solutions division. In January, we announced the acquisition of Capital Steel based in Trenton, New Jersey. The business serves the transmission and distribution market and gives us both access to new customers, but also significant cross-selling opportunities across our broader taper tubular product range. We will also be able to service Capital Steel's customers through our new expanded facility at Burton, Ohio, where we've added a further 44,000 square feet. We also announced today the acquisition of FM Stainless. FM is a business we're acquiring through the Paterson Group. We've probably not talked enough about the Paterson Group in the past. This is a business which has delivered a 35% profit CAGR organically over the last 5 years as it has taken advantage of significant infrastructure spend in the U.S., particularly around onshoring. It is also led by a very strong management team. FM Stainless manufactures a range of high-precision steel products from a single site in Ellijay, Georgia, and is a perfect fit in terms of geographic and customer complementarity. It also gives us a much greater exposure into the water and wastewater market, where we see significant medium-term spend. We're also extremely pleased that Chad Hood, owner of FM, will be remaining with the business post acquisition. Going forward, we have a strong M&A pipeline and would hope to execute on further acquisitions during 2024. I'd now like to focus on one of our fastest-growing businesses, V&S Utilities. The business fabricates and supplies products into the electrical utility market, providing structural steel and component packages for high-voltage electrical substations and transmission and distribution lines. It delivered record revenue in 2023 of $75 million and operating margins significantly above the group and divisional average. This builds on a good growth performance over the last 5 years with an organic revenue and operating profit CAGR of 13% and 21%, respectively. And the business has started 2024 with a record order book. We see the U.S. electrical and transmission and distribution market as very attractive in the medium term, with growth driven by the need to upgrade aging infrastructure, supported by government investment and increasing demands on the electric grid driving capacity expansion. Given this, we are making thoughtful investments to support the growth potential in this business. A number of initiatives are underway to support organic growth, including a GBP 1 million investment in capacity expansion at our Burton site, which will be complete over the coming months and future plans to upgrade our Muskogee site in 2025. Alongside this, the team are making investments in automation and production efficiency. We're also looking at M&A opportunities in this attractive end market, and the acquisition of Capital Steel is a first example of this. As you can see on the map, we currently have significant white space where we can use M&A to access new customers and cross-sell our products. Turning then to a reminder of the investment case, which underpins everything we do at Hill & Smith. First, it is about exposure to infrastructure spend in both the U.K. and U.S., as governments seek to upgrade the quality of their national infrastructure to support economic growth. Specifically in the U.S., our businesses are benefiting from the IIJA, which was the bipartisan infrastructure bill introduced in 2021, increasing onshoring of manufacture and investment in technology in the form of data centers, semiconductor and EV plants. We see this as a 10- to 20-year megatrend for which we're only just starting to see the impact on our businesses. It is then about market leadership in the niches in which we operate, allowing us to enjoy high barriers to entry and therefore, strong operating margins. We do not want to be competing against commoditized players. Sustainability is core to our business model in terms of both how we operate and the products we manufacture. Critically, it is then about an autonomous business model, which encourages and supports an entrepreneurial culture at the operating company level. Our head office team is there to ensure we have the right KPIs and controls, but it is also there to support setting the ambition for each operating company and as a result, help ensure each of our businesses delivers to their full potential. And finally, it is about ensuring we maintain a strong balance sheet capable of supporting organic growth while also allowing us to deliver on our M&A strategy. We see significant opportunities to use M&A to help us expand into new customers, new end markets and into new technologies. Effective delivery on this M&A strategy is about ensuring that our group M&A team works hand in glove with our MDs to source opportunities and build relationships with owners, supported by best-in-class execution and post-acquisition integration. Finally, turning to outlook. We continue to see a very strong market in the U.S., and this is where we have our biggest businesses and some excellent management teams. Recovery in our Roads & Security margins is an absolute requirement for 2024, and we believe we have a route map to deliver on this. Our ability to continue to source and deliver highly complementary M&A opportunities will also be an important driver of growth. As a result, we expect to make good progress after a strong performance in 2023 with the year modestly second half weighted, in line with historic norms. Turning to the medium and longer term, I believe it is a combination of our attractive end markets, our agile operating model and our ability to source highly accretive M&A opportunities, which makes me confident about the group's prospects. Thank you very much, everyone, for coming along.

Thank you very much.