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

Good morning, everyone, and welcome to the Hill & Smith 2024 H1 Results Presentation. I'll start by giving a summary of the key highlights, before passing over to Hannah to talk through the group's financial performance. I will then focus in on some of our key U.S. end markets as well as give an update on our most recent acquisitions. This is a strong set of H1 numbers against very strong comparators for last year. The key driver of performance has been our U.S. businesses, which represented 77% of group profits, and where we're continuing to benefit from the upswing in infrastructure spend, as well as our strong market positions. In contrast, in the U.K., we saw lower revenue as a result of both volume and price. As a group, we delivered 130 basis point margin expansion in the period from 14.9% to 16.2%. We have seen good progress in delivering on our M&A strategy, completing 3 acquisitions since the start of the year. We continue to be able to identify and secure strategically aligned, financially accretive businesses at sensible prices. We're also able to do this outside of auction processes. Cash conversion has been strong at 83%. We've also seen a good uplift in our return on invested capital from 21.3% to 22.5%, as we focus our investment on our higher growth businesses. We expect operating profit for the full year to be in line with recently upgraded market expectations, before including the impact from the recently completed acquisition of Trident Industries. I will now pass over to Hannah to review the group's detailed financial performance.

Good morning, everyone. The group delivered another strong set of results in the first half. Revenue was GBP 422.7 million, up 2% at constant currency and 3% lower on an organic constant currency basis against a strong prior period comparator. The organic revenue decline was attributable to expected lower demand in our U.S. solar lighting business and a challenging U.K. market backdrop, where we've also seen lower prices for certain products given input cost reductions. We expect to see improved organic revenue growth in the second half. At GBP 68.4 million, underlying operating profit was up 12% on a constant currency basis and up 4% on an OCC basis. We are also pleased to report that operating margin increased by 130 basis points to 16.2%, the expansion reflecting the benefits of an improved portfolio mix and good volume growth in our higher-margin U.S. businesses in Engineered Solutions and Galvanizing Services. Alongside this, our recent acquisitions are performing well and contributed GBP 22 million of revenue and GBP 5 million of operating profit in the first half. Underlying profit before tax was 10% higher at GBP 63.2 million and with an effective tax rate of 25.8%, earnings per share increased by 9% to 58.3p. And given the strong H1 performance and our confidence in the group's growth prospects, we've declared an interim dividend of 16.5p per share, an increase of 10%. So now turning to the group overview. As the charts at the top illustrate, the group is continuing to expand towards faster, structurally growing U.S. infrastructure markets with our higher-margin U.S. portfolio generating 59% of revenue and 77% of operating profit in the half. In terms of the weighting between divisions, Engineered Solutions delivered another strong performance, generating 55% of group profit with buoyant demand across our U.S. solutions offering. Galvanizing Services generated 36% of group profit with good margin expansion, reflecting strong volume growth in our higher-margin U.S. business. In contrast, the Roads & Security division saw revenue and profits decline in the first half, attributable to expected lower demand in our U.S. solar lighting business and the more challenging U.K. market backdrop. The division now represents a relatively small part of the group at 28% of revenue and 9% of operating profit in the first half. So if we now turn to our divisional performance, starting with Engineered Solutions. The division delivered an excellent performance with 15% revenue and 25% profit growth on a constant currency basis, reflecting good volume growth across our higher-margin U.S. portfolio and the positive contribution from recent acquisitions. As a result, operating margins increased by 130 basis points to 18.3%. As highlighted on the top right chart, the U.S. represented 75% of divisional revenue and delivered 5% OCC revenue growth and record operating margin against strong prior period comparators. Composites continued to see high demand across a range of infrastructure end markets and its results were ahead of H1 2023. Our business supplying structural steel products for electrical grid infrastructure delivered an excellent performance and enters the second half with a record order book. In January, we were delighted to welcome Capital Steel to the group and trading since acquisition has been ahead of expectations. We've also completed the expansion of our existing facility at Burton, Ohio at a cost of around GBP 1 million, which provides additional capacity to serve the buoyant market demand. U.S. Engineered Supports also delivered a record performance, driven by robust demand from industrial infrastructure projects. And the integration of FM Stainless, acquired in March is progressing well with trading benefiting from strong demand for water treatment and other projects. The U.S. outlook remains positive with market demand underpinned by investment to modernize the aging grid and multiyear government funding to upgrade infrastructure alongside private investment to onshore the manufacturing of critical components. The U.K. represented 19% of divisional revenue. Revenue declined by 13%, partly due to pricing, reflecting lower steel input costs. As a result, profit was lower than 2023. Industrial flooring continued to see good levels of activity from data center projects. However, the demand from smaller order customers has been more subdued. The Building Products business continued to experience lower demand levels. However, it expects to see a return to growth in 2025, in line with an expected recovery in U.K. residential construction. Our Engineered Supports business in India saw good growth, underpinned by international LNG project activity. The business enters the second half with a robust order book and good medium-term growth prospects. So turning to the Galvanizing Services division. The division delivered a strong performance in the first half. While revenue was broadly flat, operating profit was up 11% on a constant currency basis, reflecting strong volume growth in the U.S., partly offset by an expected volume decline in the more challenging U.K. market. Operating margin increased by 220 basis points to 24.9% due to the favorable geographical mix given the superior margins generated by our U.S. business. The U.S. delivered an excellent first half performance with 5% OCC revenue growth and record operating profit. And the strong growth is attributable to an 8% increase in volumes, partly offset by pricing, reflecting lower input costs. As a result, the business saw margins expand in the period and continue to deliver higher operating margins with customers valuing the excellent quality of service provided by our local teams. The outlook for U.S. galvanizing remains positive. We expect it will continue to benefit from multiyear bipartisan government and private investment to support industrial expansion and technology change as well as the onshoring of certain activities. In the U.K., revenue was down 7%, impacted by a weaker market for certain infrastructure-related customers. Volumes were in line with H2 2023 run rates and were 3% lower than the first half of last year. While end markets remain price sensitive, the outlook for the second half and into 2025 is more positive as we see the benefits of the management changes made at the start of the year with a focus on customer service and cost control. So turning to Roads & Security. Revenue was 14% lower and profit was 32% lower on a constant currency basis. The decline was mainly due to an expected softness in trading in our U.S. solar lighting business, coupled with a challenging U.K. market backdrop. As a result, the operating margin was below 2023. However, we are forecasting some improvement in the second half. As expected, revenue in U.K. roads was 8% lower than the same period last year. While the performance of our rental barrier business was robust, trading in the wider U.K. portfolio was impacted by reduced demand in the public sector. We expect the outlook for the second half to remain challenging given budgetary pressures and limited visibility on new major road schemes. However, we are cautiously optimistic for some level of recovery over the medium term. In the U.S., revenue and profit in our solar lighting business was significantly below H1 2023, a strong comparator. This was expected given the anticipated softening in demand from our largest customer as they realigned inventory levels. The medium-term outlook for the business remains positive, underpinned by a drive towards sustainable solutions. The business successfully moved to a larger facility in June, which positions it well for future growth, and we expect to see an improved performance in H2. Performance in our U.S. road safety business was better than H1 2023 with focused cost transformation and pricing actions taken in line with our business improvement plan. While improvement actions continue into the second half, the outlook for the business is moderately positive with demand underpinned by investment to upgrade road infrastructure. While revenue in our smaller security subdivision declined by 5%, profit was ahead, which reflected a good performance in our hostile vehicle mitigation business. The outlook for the security portfolio remains mixed with a current focus on higher quality growth opportunities such as security barrier operations and data center perimeter security. Moving on to cash generation and financing. The group continues to be highly cash generative and delivered 83% cash conversion in the first half. We expect the group to continue to deliver strong cash conversion in the full year, in line with our financial framework of 80% plus and consistent with historic levels. The working capital outflow in the period was GBP 13.1 million, consistent with usual seasonality with a continued focus on working capital efficiency. Working capital as a percentage of the last 3 months annualized sales was 16.4%, an improvement compared to the same period last year. Capital expenditure in the first half was GBP 9.8 million, representing a multiple of depreciation and amortization of 0.9x. And we've reduced our full year CapEx guidance to GBP 30 million, having reprioritized certain projects. Interest paid during the period was GBP 4.6 million, and cash tax paid was GBP 10.6 million. As a result, the group generated GBP 38.7 million of free cash flow, providing funds to support our acquisition strategy and dividend policy. In the first half, we invested GBP 11.7 million on 2 highly complementary acquisitions, Capital Steel and FM Stainless, and we've deployed a further GBP 10.6 million in the second half on the initial consideration for Trident. Our target is to spend between GBP 50 million to GBP 70 million per year on 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 period was GBP 101.6 million, with the ratio of covenant net debt to EBITDA maintained at 0.4x. Return on invested capital for the period was 22.5%, a 120 basis point improvement from H1 2023, reflecting the faster growth in our larger U.S. businesses, which are typically lower in capital intensity. So moving on to our financial framework. So on this slide, you can see our through-the-cycle target financial performance metrics, which we set out in March 2023. Organic revenue growth in the first half was below our target due to the strong prior period comparator, the anticipated softness in our U.S. solar lighting business and the challenging U.K. market backdrop, where we've also seen lower prices for certain products given input cost reductions. We expect to see a return to positive organic revenue growth for the full year with good organic growth in the second half. The group delivered further operating margin expansion to 16.2%. Return on invested capital increased by 120 basis points to 22.5% and cash conversion was strong at 83%. Leverage was also below our target range at 0.4x, which provides significant capacity to support future growth opportunities. And given the strong performance since the introduction of the framework and the quality of the portfolio we have today, we will be reviewing and potentially upgrading certain target metrics at the end of this year. I'll now hand back to Alan.

Thank you, Hannah. I'm now going to look at some of our key U.S. end markets. Over the last 2 years, we've seen significant growth and margin expansion in our U.S. businesses, which in H1 had revenues of circa GBP 249 million. We believe that our U.S. businesses in aggregate are able to deliver organic revenue growth ahead of the group target of 5% to 7%, which given their increasing weighting provides us with confidence in delivering on our group ambition. We also see the U.S. as offering significant M&A potential. The pie chart on the right-hand side of this slide shows a breakdown of revenue by end market. And I will look at 3 of our largest and fastest-growing end markets, which together represent 2/3 of our revenue. First, investment in the grid. This is driven both by the need to upgrade an aging infrastructure, much of which was built in the 1960s and '70s, but also the need to address the increasing demand coming from technology, where electricity consumption is growing exponentially. In terms of funding this investment, this is coming both from central government through the IIJA and IRA, but also from large publicly listed utility companies. In terms of where we see the impact on Hill & Smith, this is particularly strong in our V&S utilities business, where we're seeing extremely high demand for substations, where we have a record order backlog, up 30% on last year and where we're investing to build out new capacity. We are also seeing the benefits of increased demand in our Composites business, CCG, and in our V&S galvanizing business. We see the upgrading of the grid as a 10- to 20-year investment cycle. Secondly, the roads and bridge market. This was one of the first areas of infrastructure investment to materially benefit from the IIJA with 54% of the IIJA funding allocated to surface transportation. To put this in context, the U.S. has over 600,000 transport bridges and 3.9 million miles of roads, more than 10x the number of bridges in the U.K. and 15x the road network. To date, we estimate that about half of the IIJA money allocated to roads and bridges has been committed. In financial terms, we have seen the greatest benefit coming through in our high-margin galvanizing and composites businesses, while strong road investment is also an important underpin for the turnaround in our U.S. roads business, Hill & Smith Inc. Finally, industrial infrastructure. which includes the physical investment in data centers, semiconductor and EV plants as well as more general industrial plant linked to onshoring. The scale of some of these projects is enormous and multiyear and in many instances, funded jointly by the public and private sector. Almost any new industrial plant construction plays well to Hill & Smith. We're able to galvanize the steel. We can provide the cooling towers and the composite products. And finally, we are able to supply through the Paterson Group, a wide range of engineered supports. So another excellent end market for us, able to deliver strong growth over the medium to longer term. Turning to M&A. To date, we've completed 3 acquisitions for initial consideration of GBP 22.3 million. Capital Steel was acquired in January through V&S Utilities, giving us a bridgehead into the New Jersey market. Since acquisition, we've been able to significantly reduce delivery times through better scheduling using V&S' manufacturing capacity. We're also starting to see the benefits of cross-selling V&S' taper tubular products into the Capital Steel customer base. Year-to-date, the business is trading ahead of expectations. FM Stainless was acquired in March through the Paterson Group, giving us greater access into the water and wastewater market. This end market looks very strong with significant IIJA monies continuing to go into water projects. FM has a record order book and is trading well ahead of our expectations. We also announced today the acquisition of Trident Industries. Trident based in Greater St. Louis, Illinois, is a business we have known for some time through Enduro, where the latter already had a manufacturing outsourced relationship. Indeed, we were not the first owners to see the obvious logic of bringing both businesses together. Fortunately, we have been the first who's been able to execute the transaction, finding a deal structure, which would work for both Hill & Smith and Trident's 2 financial investors. Trident plays in a specific niche part of the composite pole market, supplying highly resilient single and multilayer composite poles into the U.S. and Caribbean markets. Its product offering is highly complementary, and we see material upside in using our existing sales teams to sell Trident's products into a much broader customer base, together with additional in-sourcing of Trident's current manufacturing. Turning then to a reminder of the investment case, which underpins everything we do at Hill & Smith. First is about exposure to infrastructure spend, both in 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 onshoring of manufacturing and investment in technology. 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 how we operate and the products we manufacture. Critically then, it is about an autonomous business model, which encourages and supports an entrepreneurial culture at the operating company level. Our head office is there to ensure we have the right KPIs and controls, but it is also there to support setting the ambition of each operating company, and as a result, help ensure each of our businesses deliver to their full potential. 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 and 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 the relationship with owners, supported by best-in-class execution and post-acquisition integration. Finally, to outlook. We continue to feel very positive about the outlook for our larger U.S. businesses. We're also expecting a more robust performance from our U.S. off-grid solar business in H2. In the U.K., we have good market share positions across many of our businesses. Nevertheless, the market remains challenging. As a result, in the U.K., we're focused on both tight cost control as well as looking at ways to expand our customer base into more international markets. In India, we continue to see attractive opportunities, particularly in the international LNG space. As we've demonstrated with the Trident acquisition, our M&A pipeline remains strong going into the second half of the year. Longer term, I remain convinced that the combination of our autonomous business model and our end market exposures has the potential to allow the group to period of sustained growth and outperformance. Thank you very much, everyone.

Thank you.