Keller Group plc (KLR) Earnings Call Transcript & Summary

Good morning, and welcome to Keller's Interim Results Presentation for 2023. First, a couple of housekeeping points. There are no planned fire alarms this morning. So if the alarm does go off, it is for real. If you could exit the door to the back there and move off to the left and follow one of the team from investor, I'm sure we'll find ourselves to a safe haven. Secondly, I'd ask if you could all switch your phones to silent, please. As a result of the hard work of the entire Keller team, David and I have the pleasure and privilege of presenting to you a great set of results this morning. There are 3 points that I want to impress upon you throughout the presentation. We've had a record performance in the first half. We have a very positive outlook as we move into the second half and finally, as a result of these 2, the Board has decided to continue the progression of the dividend and increase it by a further 5%. The agenda, which we'll follow is our normal agenda. I will talk to the summary. David will follow that with some details in terms of filling in the financial backdrop to the results. I will then follow with some further insights into the business performance and the group strategy, round off with the summary and outlook, and then we'll move on to questions and answers. In terms of the summary, as I said, we have a record performance in the first half just under GBP 1.5 billion, revenue has grown by 6%, demonstrating the strength of our diverse and resilient revenue streams. Operating profit at GBP 67 million increased 50% on the previous year at constant currency. And pleasingly, the margin moved forward as well to 4.6%. The profit was driven by a very good improvement in the North American foundations and David will cover that a little bit later in his profit bridge. Strong margin in terms of Suncoast, the transient pricing effect there, offset by some legacy project losses at Austral and some competitive pricing environment in Europe. Nonetheless, good progress. Earnings per share also moved forward following the operating profit free cash flow, net debt, I'll leave to David to talk about, but suffice to say at this point that we made some very good progress in terms of working capital. Order book, second highest order book that we've ever recorded, just to bound GBP 1.5 billion with a very good spread across the business. And we've returned to good progress as far as safety is concerned. I'll cover that a little bit later but some good progress statistically and some very good initiatives. And then finally, off the strength of the first half results and the prospects for the second half, the Board has decided to increase the dividend a further 5%, reflecting the confidence in the future. And with that, I'm going to hand over to David to give you a little bit more detail.

Thank you, Mike, and good morning, everybody. In the financial results section today, the key areas of focus will be the greatly improved underlying operating profit performance, noting that given our diverse portfolio, we didn't exactly have it all our own way in the first half. The cash performance, highlighting the pleasing return to cash flow from operations and talk through why for H1. That hasn't led to a decrease in net debt. And then the look-ahead modeling considerations where we'll give some guidance in respect to the second half. Okay. Let's start with the P&L. This is the full P&L showing the underlying operating profit of GBP 67 million, non underlying of GBP 10.4 million with the resulting statutory operating profit of GBP 56.6 million, an increase of 86% versus half year 2022. So let's look at underlying first. Box #1, they are revenue. Year-on-year revenue in half year 2023, increased on a constant currency and organic base by 5.8%. Volume was down in North America by 3.9% due to the reduced volume in Suncoast driven by the contraction of the residential sector and the drop-off in revenues following the completion of the large LNG contract in Recon. Despite tough market conditions, Europe did increase revenue by 8.4% and AMEA increased revenue by 53.8%, driven predominantly by large projects in Australia and the execution of the first work order on NEOM. We are very pleased to see our underlying operating profit increased by 49.8% on a constant currency basis, and our margin rate increasing 140 basis points to 4.6%. And I'll bridge that operating profit in the following slide. Net finance costs have increased by GBP 8.5 million, driven by increasing interest rates and the higher average borrowing levels. Taxation at $11.8 million is at an effective rate of 22%, in line with the full year rate for 2022. And the underlying earnings per share has increased by 48% to 56p, driven by improved underlying profitability with higher finance costs, preventing the full profit increase drop through. The Board have agreed an interim dividend of 13.5p (sic) [ 13.9p ], a 5% increase on half year 2022, which is payable on the 8th of September. We'll now move on to the operating bridge slide. Moving from left to right, with last year's restated underlying profit of GBP 42.3 million. There is an FX benefit of GBP 2.4 million given the stronger U.S. dollar in the early months of 2023. Coming to the North America division first, which is up GBP 33.6 million year-on-year. This is a really pleasing result given the issues in 2022. In North America Foundations, volume was up as more work was executed, but the margin improvement was really significant at GBP 18.5 million, which is a mixture of improved project management and commercial discipline following the issues of last year, along with some larger profitable contracts, offset by lower volumes at our Specialty Services business unit and issues on some legacy contracts. Given the residential volume declines in the last quarter of 2022, we would have expected Suncoast to be a red block on this bridge. Despite the drop-off in volume, Suncoast grew profitably as their pricing proved more inelastic than expected and the volume didn't decline as much as expected. Now turning to Europe, where it was GBP 10.3 million down overall. Volume was up GBP 4 million, but margin was hit by a more competitive pricing environment given the softer demand in the commercial and residential sectors across the whole of Europe generally, a change in contract mix and a challenging performance in Northeast Europe due to the effects of the war in Ukraine. The AMEA division was up marginally with a mixture of performance amongst the business units. Australia performed very well with volume up and an associated drop through to profitability as large infrastructure projects came on stream in the first half. The Middle East region has the positive impact of the execution of the NEOM work order one included, offset by contract issues on projects in the UAE. The closeout of legacy projects in Austral has resulted in losses of GBP 11 million as the new management has tackled the near-shore marine projects. We expect Austral to turn a profit in the second half. Moving to the next slide, I'll cover off nonunderlying items. Again, the income statement, but this time focusing on the middle column, not underlying. The analysis buck shows the items that make up the GBP 10.4 million, which were split between cash being the ERP and restructuring and noncash being acquired intangible amortization. Let's move on now to talk about cash. This page shows the summary net debt flow from underlying operating profit down to net debt. We are pleased to see the strong operational inflow of GBP 40.8 million versus an outflow of GBP 41.6 million last year. Our working capital has normalized with inventories in Suncoast reducing and the movement in receivables and payables more reflective of the growth dynamic of the group as the supply chain pressure abated, particularly in North America. As mentioned earlier, despite this improved operational cash generation, net debt has actually increased. This is driven by increased interest payments and a significant increase in tax payments in the U.S. with the 2022 liability of circa GBP 22 million and provisional payments for H1, all being paid in the first half. The other callouts are the increased level of CapEx given the investment on the NEOM project, and cash outflow from nonunderlying has increased given the ERP costs and the payment of a claim on a legacy project that was provided in 2022. In the bottom box on the right, we hired the net debt on an IAS 17 covenant basis of GBP 244.6 million. Leverage on a lender covenant basis at the half year was 1.2x within our target range of 0.5x to 1.5x. We'll talk more on net debt later. Let's just turn to the summary balance sheet. This slide shows a summary balance sheet with comparators for December '22 and H1 of last year. For reference, we set out the movements in the boxes, which are pretty standard and with no particular call outs, I think we'll move on. This next slide provides some detail on the net debt profile during the year. So looking at the trend, the debt level was stubborn around the GBP 245 million mark throughout the year to date with tax and interest payments depressing the generation of cash from operations. We have operated well within our covenants with a leverage at 1.2x at the half year against a limit of 3x and interest cover at 11.2x against a minimum of 4x. This slide contains details of our current facilities. In June, we signed a note purchase and guarantee agreement regarding a proposed private placement of $300 million of loan notes at an average headline rate of 6.4%. The funds are due on the 10th of August that will be used to repay current debt and reduce our RCF. So coming on to the look-ahead modeling considerations. The purpose here is to give some guidance on H2. So on Suncoast, pricing will reduce, so margins will tighten to normal levels. Europe, we expect improved profitability as larger projects come on stream in the second half. On Austral, we expect it to be profitable in the second half as the new management have got the grips with the legacy contracts. The Middle East region currently expect to work order to later in the second half. And on operating profit phasing, we've had a very strong H1 so for the full year, we are more evenly weighted with H1, H2. Interest will be evenly weighted in H1, H2 and tax rate, there will be upward pressure on the tax rate because of North America profitability but we expect to be around the 22% for the full year. Cash tax normalized in H2 after the 2022 liability payment in H1 and on cash and debt, we will be in the range of [ 0.5x to 1.5x ]. NEOM will be a factor as to where we end up either side of the medium of 1x. That's it for me. Thank you for your attention. And I'll now pass you back to Mike, who will take you through the business performance update.

Thank you, David. Great insight to great set of results there. Moving on to the business performance. And first of all, safety and well-being. Some great progress here. I think John Raine and his team and the whole of operations have made some excellent progress here. We've reduced the AFR down to 0.09. And that really reflects in the last 12 months, 15 accidents, 5 of which were clusters critical and that's across our workforce of roughly 10,000 people. In the same period, there was 40 recordable incidents that contributed to the TRIR. If you look beyond the statistics, which is pleasing that we're back on an improving trend, there's some great initiatives beneath all of that. And the one which I'm particularly pleased in is the assurance program, which has been undertaken this year. And that assurance program basically has made sure that the standards and policies and practices, which we've put in place the last 2, 3 years are actually embedded in the business and are actually making traction and at the same time, actually dipping to make sure that the safety culture is improving as well. Beyond that, I mentioned there the -- or grow out there another initiative that has been the Global Safety Week. We launched that last year, if you recall, second time around this time. And this time, we'll be focusing specifically on suicide prevention, which given the male workforce that we employ often remotely is a key thing which we're focusing on. And last but not least, across the whole of the workforce. And this week, in fact, we've launched a global welfare and health initiative, which hopefully will keep the whole workforce a little bit more mobile, a little bit more active. Moving on to a second aspect of ESG that have action on reducing carbon emissions. You can see here that I've slightly changed the order of the scopes and really to reflect the timeline of which we are working on them to actually get them to net zero Scope 2 by 2030, Scope 1 by 2040 and then finally, Scope 3 by 2050. Pleasingly, the one we focused on first, Scope 2. You can see there that we're looking for a further 10% reduction this year on last year, and we're roughly just below 38% below our benchmark that we set in 2019. And if we follow that particular trajectory, we will indeed make that net zero by 2030. And we're pretty confident of doing that. Work has also been undertaken on Scope 1, which I'll cover in a minute; and indeed Scope 3. Both of these are somewhat more nascent in terms of development but they are bigger scopes. And therefore, it is important that we do address them as a matter of urgency. Moving on to further action in terms of scope 1. You can see there that the photo of our new KB0-E. It's a jet grouting rig. It's proprietary to us, and it's something which typically you'll use in an enclosed environment in a very specialist application. We're particularly pleased with this because this has just been completed last month, and we'll go into trials in the autumn. And as soon as we've completed those trials, we'll start series production. But clearly, this is a significant reduction in the case of we've reduced -- replaced all of the diesel-driven parts with electric motor units. Some great improvements there. In addition to this, we're also trialing third-party rigs in terms of piling rigs across the company, one in particular, just in -- as we speak, in Sweden, which is a [ Lehar ] model. Next slide, please. Right. Moving on to the order book. The order book at GBP 1.5 billion, as you can see from the graph, is the second highest we've ever recorded. And in terms of profile, it's pretty evenly spread geographically and roughly gives the whole company for 6 months' worth of work across the whole company. Slightly weaker in Europe. I'm not so bothered by that because they actually had some good wins in July but it is reflective, I think, of the market there being pretty tough at the moment. Overall, though, the order book at stress is robust and actually gives confidence as we move into the second half. Moving on to North America. North America was very pleasing in this particular period. As David spoke to earlier, there's some great improvements there in terms of the Foundations business, in terms of the contract performance and their execution on projects, be it operationally or indeed from the commercial discipline. There's also some useful pickups there in terms of automotive projects that picked up and all of that, I think, has actually been very, very well executed by the team in the period. And I'm looking for that to be sustained as we move forward. Suncoast, volume down compared to the previous years, but they did benefit from the transient effect on pricing as the lower strong price came through. And there's a slight delay in that being fed through to the customer and user pricing. Overall, though, strong order book and that, as I say, will set us up well as we move into the second half. Europe was a little bit disappointing in contrast but there again, it's a very, very tough market in Europe at the moment, evidenced by a number of external events. And you can see that being reflected in terms of the pressure on pricing and, therefore, the margin compression, which we can see. There will be, I think, in the second half, a little bit more benefit from some of the larger projects coming through, which incrementally, we expect to give us a little bit of an uplift but we don't expect the market to do us any favors in the second half at all. Moving on to AMEA. Here, it's a bit of a mixed bag. The some very good performances from Australia. And of course, you've also got the benefit of NEOM in the first quarter. And all of that was good news. Unfortunately, the legacy contracts and the closing out of those projects in the first half was a bit of a headwind. We do expect Austral that those projects are now cleared out and tidied up and that offshore will return to profit in the second half. Overall, the order book is strengthens slightly down, but that's nothing to be concerned about. And finally, on that slide, you see at the bottom that we are -- after a further strategic review, we've decided to exit our business and activities in Egypt. Moving on to strategy. The strategy slide you see before us is completely unchanged and is indeed the one -- the slide out of all of my slides that I use the most, both internally and externally and it is there to make sure that the actions -- the company actions and management are aligned to it. If you look at the way in which we have implemented it, you can see over time, there's a progression 3 logical steps, and it's almost a shrink concentrate grow type of approach. When you think about it, 2, 3 years ago, we did some pretty significant changes to the portfolio, as you'll see in a moment. And that particular aspect is something which is always ongoing as evidenced by our decision to exit Egypt. Operational execution has been particularly focused in the last 2 years, and I suggest very strongly that the improvement in North America is evidence of that. But there are other initiatives which we've been taking as well. And then finally, market penetration. And this market penetration is there really to get operational leverage in our chosen markets and is both -- is affected both by organic initiatives and indeed acquisitive ones, as you can see there. So we move on to the summary and outlook. And here, I'm going to finish with the same 3 messages that I started with. We have had a record first half performance, both in terms of revenue and profit. We've increased the margin. And the performance has demonstrated the resilience of the markets that we've chosen to be in the revenue streams we've derived from them. And all of that's being coupled with strengthening earnings and a strengthening cash flow. We've got a positive outlook as far as H2 is concerned. The order book and the strength of the order book and the spread of it underpins our confidence as we move forward. And our expectations for the full year are unchanged. And we continue to execute the strategy, which I've just highlighted. All of those things have meant that the Board has great confidence in increasing the dividend further 5% and continuing the progression that we've had since listing. And with that, I'm going to close the presentation and open the floor to questions and answers.

[indiscernible] from Peel Hunt. I've got 3, and I think they probably fit into your kind of 3 points of the strategy, actually. In terms of, I guess, point number one is the scale. You kind of mentioned that portfolio management is ongoing. Can you give some color around sort of potential scale of further portfolio management? Are we kind of really at the tail end of that management or the bigger things in the pipeline you might look at? Secondly, on the sort of operational focus and the particular things you mentioned in the U.S. and the improvement in foundations and the kind of super normal profits I guess, in Suncoast margins. Have those things washed through in the first half now? Should we expect sort of a normal performance in inverted commas i.e., no more improvement in foundations in H2 or next year and return to open in Suncoast? And then lastly, just on the potential scale of this swing back to the NEOM could bring if WT comes forward by 2 months or it gets pushed back by 2 months just a sense of how big that might be in terms of either back into this year or next?

Okay. Well, I'll first pass all 3 of those, but David chip in as you see fit. In terms of portfolio management, I think that, I guess I'd stress 2 elements that. Firstly, a lot of the heavy lifting we did 2, 3 years ago. And I think as we move forward, this is really about incrementally looking at things which are in the gray area, especially post COVID. When we went through COVID, there was a time where all the markets were up and down all over the place, and it's hard to read what the sustainable business would be in a given territory or country and whether it was worth staying there or not. Now we're kind of 2 years downstream of that. It's much easier to make a read on that. On Egypt, for instance, that economy is in a tough place at the moment. And certainly, the level of activity there doesn't lend itself for us to be a profitable entity there. And therefore, we've redeployed most of those assets and resources to Saudi, where we will get much better returns for that effort. And that's the sort of thing which we will incrementally do. There will be further reviews on some of our smaller activities. And that's just quite natural, and I think it's also very healthy. In terms of operations on the North American activities. I'll leave you to talk about Suncoast vote. In terms of the rest of the business, apart from Suncoast, I think that the improvements, which we have seen in the first half are sustainable. And I would hope that over time, we will see progressively a further nudge further improvement. I think it -- as you get -- I think we've accessed a lot of the low-hanging fruits in terms of improvements, and I think it will get progressively harder and there will be ups and downs as we go through the period. But I think, generally, I expect to be a further improvement over the next 2, 3 years.

Suncoast, I think in terms of volume this time last year were particularly high, and they are down year-on-year. But we saw that volume reduce in the second half last year. So I don't think there'll be as much of a differential from a volume perspective in the second half from a profitability perspective in terms of margin. I think we have had this trend in pricing on the slab-on-grade, I think that will work its way through in the second half. And I think by the time we exit '23, we'd be back to a normalized level in terms of the profitability on Suncoast.

And then with respect to NEOM, NEOM is tremendously difficult in terms of being specific about at the moment. The client, I think, has done a very sensible thing in terms of the revised the way in which they're approaching the Hidden Marine and have effectively lowered the workroom foundations down to the base level of the marine rather than ground 0, which is typically what you do. And I think that's entirely sensible because it means that when you're building the basement, if you will, of the major modules, you're actually doing it in free space, and you can therefore have a much higher quality build than if you're actually doing it subterranean. So I think what they're doing is entirely sense -- what it does mean, though, is they've got another 20 meters worth of earth to remove before we can start work. And it's, by the way, I mean, all the piling specialists. So everybody at the moment is delayed by another sort of 3, 4 months. So I don't expect us to be starting work until the final quarter and probably reasonably late in the final quarter. That having been said, there are new opportunities and new information crop up every week during our weekly review meeting. I don't know whether you want to comment on the financials at all I think is.

In terms of NEOM, yes, I mean an investment in working capital that will be required on NEOM. And I did mention in there about whether it would be on either side of the median of 1x, and that really is all around at what point will we crank up on -- will we crank up on NEOM because if that happens in December, we'll probably be around the one mark or slightly less. If it happens in September, and we'll probably be above the 1x map because there will be more working capital tied up at year-end just in terms of the billing cycle and getting the payments in.

Talking about payments, actually, to date, they have paid us pretty much when they're supposed to and there's been some pretty big payments on what the most recent one, they paid 2 days early.

May I just follow up on NEOM and get you understand your expectation of the trajectory in say the next 5 years and where you think it might peak? Secondly, you mentioned 2 large European projects in the second half. Could you elaborate on those? And then finally, dividend cover now stands at 4x. Could you remind us of your dividend policy and where that cover could go?

Okay. I'll talk to NEOM. I'll let you talk to the European projects, and we'll both come back on the dividend. NEOM, I said a little bit earlier, is tremendously difficult to call in terms of timing and trajectory. I do think -- I do hope to expect that once we start the work on the head marina, that will continue at a steady state for a reasonable period of time. We should do logically. So I think once we start work on that and they build up momentum on it, at that point, it should become more steady state. So I expect that the tail end of next year, we'll probably get to a reasonable run rate. What that run rate is, will really depend upon circumstances at that time. We are being very measured about NEOM, and we don't want to overextend ourselves. We don't want to come over dependent on it. but neither do we want to ignore the opportunity that it gives us. So in terms of risk management on all fronts, we're being very considered about that.

In terms of the European projects that are coming on stream in the second half is Tangenvika and Sodertaliye. I think I'm pronouncing that right. And so they have started, but there's not that much in the first half. And actually, they start to come through more in the second half and also the SMS project that got stopped last year. There's an element of that, that has come back, and we're just starting that piece of work as well.

And in terms of the dividend, I mean, the dividend and dividend policy is something which the Board reviews as you'd expect it to at points in time. And we have a history of paying a dividend throughout the cycle. And we are in a cyclical industry and what the company as itself does have various characteristics which actually dampen that cycle. Nonetheless, the macro, which we work in is very much cyclical. And against that, we have progressively increased the dividend over time since listing. And that's what I think we will continue to do and that demonstrates the strength of the cash generation and the earnings generation of the business over time. I don't think that we'll be necessarily looking at big increases. But if appropriate, we will look at special events and circumstances as they unfold.

Jonny Coubrough at Numis. Can I ask firstly on North American Foundations? And you've spoken about it already, but it was a massive increase in profitability, I think GBP 18 million year-on-year. Could you give us a bit more detail around what those operational improvements were and the improvement in commercial discipline? And then also on North America, what's your strategy now for steel price exposure? Do you view that something you'd like to hedge in case they go back up? Or is there a price risk you're just going to carry? And then if I could also ask on CapEx, which was up a lot in H1, why that was? And then any updates on where you are with the ERP investment?

I like your question because I'll do the first one and you can do the remaining 3, if you don't mind. In terms of North American foundations, if you step back from our business and you step back from the presentation we've given you today, the company is, in fact, the consolidation of roughly 6,000 projects every year. Think about those as 6,000 P&Ls. And that's the way we're encouraging people to actually think about the business. Each project is a profit and loss and needs to be driven as such. And I think what they've really done this year has got a lot more sharp in terms of the contractual side of it into -- and pricing upfront to make sure that in terms of the risks that we carry as opposed to that our suppliers, our clients are more appropriate and frankly, a lot more disciplined about the way we approach it in particular, things like inflation. North America, I think, was -- has been a pretty benign environment as far as inflation is concerned for a long period of time up until recent times in contrast to parts of Asia, which inflation was a lot higher. And therefore, contractual protections are always in place. In North America, that wasn't always the case. So there's things like that on the contractual side of things, but also operational execution. They are a lot sharper this year in terms of monitoring progress on projects and responding early both positive and negative to events as they unfold. So it's actually both commercial and operational improvements, which has served to improve that margin.

Okay. On the steel price, I mean when you look back at '21, '22 in terms of where steel and the steel price went up a bit like a black swan -- a Black Swan event in terms of the impact and the volatility that threw into the Suncoast business. But we did set an objective for ourselves actually to try and see if we could hedge the other way. And we have practically honest, we've struggled to find a hedging instrument that can do it because there is none that seems to just follow the steel and steel trend price. So it is volatile, and I think it will always be -- there will always be an element of volatility with the elevated structures of the high-rise part, where there is a gap between the order and the execution, whereas on [ slave ] and ground that gap is much reduced. And therefore, we can manage that volatility much better. On CapEx, I think the only highlight really in terms of the increased CapEx is NEOM in the first half, obviously got the rigs and the setup into NEOM and then the rest of it really is just the growth in the business and the CapEx associated -- the CapEx associated with that. There will be some more CapEx come through in the second half on NEOM as we increased the number of rigs. On ERP, we are progressing well. We're still at the template build stage in respect of that. And the profile is that we will test that template in the last quarter of this year, they have the first pilot, which we're earmark in Canada and seeing is that it has its own balance sheet and is a foundation's business to be the first pilot, and we will do that in the first quarter of next year. In terms of spend on the ERP, 2023 will be a heavy year and what we've done in H1, we'll do in H2 and '24 will be a heavy year as well as we go through that rollout -- we go through that rollout process, and then we should start to see it taper off in '25. We are slightly delayed against the original schedule probably by about 3 months because we thought we would be doing the pilots in the last quarter of '23. But from an overall cost perspective, we're still within budget in respect of our spend.

I'm quite pleased actually the people that we are slightly delayed because the people focusing on the quality of the result rather than they're just getting up to the process, and they are managing the risks associated with that very well. Okay. Well, thank you very much, everybody. I'm conscious the fact it is a very busy day for results today, these will be the best results you see today. But nonetheless, thank you very much for coming, and I wish you all a good day.