Keller Group plc (KLR) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the 2025 Half Year Results Presentation for Keller Group plc. I'm David Burke, the Group Chief Financial Officer. Over recent years, you will have been accustomed to Mike Speakman opening this session. Unfortunately, as previously announced, Mike has had to step down due to ill health. And on behalf of everyone in Keller, I'm sure the people in this room and the broader stakeholder group, we'd like to wish Mike all the best with his medical treatment. I also think it's appropriate that we acknowledge and thank Mike for the huge contribution that he's made to the financial and operational performance of the Keller Group over the last few years, which we will again highlight today. The onus is on us now to build on this as we move into the next phase of development for the Keller Group. I'm delighted to acknowledge the presence of James Wroath, our incoming CEO in the room, who will take on the leadership mantle from the 18th of August. James will introduce himself at the end of the session. Some admin, please note there is no fire drill planned. So if the alarm does go off, please follow the instructions of the team on the floor here, and they'll lead us to safety. And on mobile phones, please turn these to silent or off. Today, I will take us through a very good set of numbers for the first half of 2025 against a strong comparative period with underlying business performance remaining robust. Our performance is better than we expected to the extent we are confident to say we expect to hit full year consensus expectations despite the anticipated significant FX headwind and the macroeconomic volatility. Items worthy of note that I will emphasize as we go through the presentation. One, the performance of the North American business against a volatile macro backdrop where infrastructure spend has remained resilient, which bodes well for our future. Our Europe and Middle East division has turned the corner. Better project execution has given rise to improved profitability, placing us very well in a market that we expect to turn in the not-too-distant future. Our strong balance sheet, we are announcing further returns to shareholders with an increase in the dividend and an additional GBP 25 million buyback to be launched in the second half of 2025. Even with GBP 50 million of buybacks, we will still be gravitating towards net cash by the end of 2025. So here's the usual cautionary statements. And in terms of the agenda, today, I will take you through a summary, the financials, the business performance, including the divisions and the outlook, and then we'll come on to Q&A. Okay. Here are the summary highlights. These are a good set of numbers and ahead of expectations. H1 last year was particularly strong for us, so we are delighted to come so close in the first half this year. Our divisions continue to perform exceptionally well, and the margin rates achieved are surpassing our expectations, and the group is at a very healthy 7%. Our teams are very busy. Tender levels are being maintained, and our order book is strong with quality work. Cash generation is reverting to the norm after exceptional cash conversion rates in '23 and '24. We completed a GBP 25 million share buyback and announced a further GBP 25 million today, which we'll execute in the coming months. We are continuing with the progressive dividends with the intention of applying a 5% increase for 2025. This set of results allows us to say with confidence we expect to hit consensus for the full year despite the anticipated significant FX headwind and the general macroeconomic volatility. So moving on to the financial slide. This first one shows the full P&L with statutory profit of GBP 66.9 million, just GBP 2.7 million lower than a very strong H1 2024. Let's look at underlying first. Looking at revenue, the Group is marginally up by 0.6% on a constant currency basis. Volume was up in North America by 0.8%, driven by Foundations and Moretrench Industrial, offset by Suncoast. Europe and Middle East revenue marginally decreased by 0.8%, which is a good result given the 2024 comparator had several large infrastructure projects. APAC revenue increased by 2.9%, driven by higher volumes at Austral. I'll bridge that operating profit performance in the next slide. Net finance costs have decreased, reflecting lower average borrowings. Taxation at GBP 21.3 million is at an effective rate of 23%, similar to the full year 2024. The reduction in underlying earnings per share is essentially driven by reduced profitability, partially offset by a lower number of shares following the share buyback. The Board has agreed to an interim dividend of 18.3p as we look to increase the full year dividend by 5% with a 65% to 35% ratio split. We now move on to the operating bridge slide. So moving from left to right, starting with 2024 underlying operating half year profit of GBP 113.2 million. There is an FX impact of GBP 3.7 million due to the dollar weakness against sterling. Coming to the North America business first, which is down by GBP 21.2 million versus last year. You can see this is predominantly driven by Suncoast, where the residential property market is in a glut and the pricing levels achieved in H1 2024 were not repeated. We are pleased with the resilience of the rest of the North American business. The Foundations business has done really well to replace some larger margin contracts with smaller value equally impressive margin projects. Moretrench Industrial continues to perform very well and is the real driver of that green block with good weather in the Tampa region helping. This is all done in the North America market with a backdrop of lower construction growth rates and uncertainty in the macroeconomic environment. Now turning to Europe and the Middle East, where operating profit was up GBP 11.9 million. This is an operational execution turnaround story with non-repeat issues on contracts in the Middle East, including NEOM and the Nordics region. The GBP 4.8 million Central Europe block reflects the non-repeat of a major infrastructure project in Germany in 2024. The market conditions continue to be tough, particularly in the residential and commercial sectors, but we are doing very well year-to-date. The APAC division continues to perform very well and was up GBP 3.7 million on a record performance last year. Australia benefited from the closeout of project variations and Austral performed very well, and Keller Asia did well with a strong prior year. Moving on to the next slide, I'll cover off nonunderlying items. Again, the income statement at this time, focusing on the middle column, non-underlying. The analysis box shows the items that make up the GBP 5.3 million, down from the GBP 7.3 million in H1 2024, which we have split between cash and noncash items. We continue to invest in the ERP program and remain on track for a Canada pilot in Q1 2026. The finance transformation program has now turned its attention to North America. Progress has been slower than we had initially anticipated due to finance leadership changes, and we expect the program -- but now we expect the program to accelerate in the coming months. The other operating income is contingent consideration receipts in respect to the sale of the South Africa business. Now move on to talk on cash. This page shows the summary net debt flow from underlying operating profit down to net debt. The difference in cash generation from H1 2024 to H1 2025 is essentially driven by the working capital movement. The box at the side sets out the analysis between the different components with inventory increase of GBP 25 million and a payables increase of GBP 50 million. Inventory is driven by Suncoast stockpiling steel strand before tariffs kicked in and general business growth elsewhere. The payable increase is predominantly driven by advanced payments on large infrastructure projects in 2024 in the Europe and Middle East division being utilized and not repeating in 2025. 2025 is a more typical cash generation profile given the exceptional rates achieved in 2023 and 2024. We do expect a higher level of cash generation in the second half, in line with our typical H2 bias. Other callout is cash tax reduced against last year. With the changing U.S. tax legislation, we held back payments until the rules were clearer around the R&D deductions. The initial share buyback is included in the GBP 28.8 million. In the box on the bottom right, we highlight the reconciliation of net debt on an IAS 17 covenant basis to GBP 61.5 million. Leverage on a lender covenant basis is 0.2, below the lower end of our target range of 0.5 to 1.5. Next slide is the summary balance sheet. This slide shows a summary balance sheet with comparators for 2024 half year and full year. For reference, we set out the movements in the boxes, which are pretty standard. There's no particular callouts here, so we'll move on. The next slide shows more detail on the net debt profile. You can see from the bar charts that the net debt increased the closer we got to half year. This is driven by the share buyback and the working capital movement referred to earlier. In terms of cash generation, we expect the second half bias and for us to gravitate towards net cash even with the impact of the share buyback announced today. No issues with any covenants, and we've got loads of capacity within our facilities to fund organic growth and any targeted opportunities in our M&A pipeline. Next slide is the modeling slide. A few highlights to draw out. First, the divisions. In North America, Foundations, we expect to be similar to H1, delivery of the quality order book. Suncoast, we don't expect a turnaround that will have any meaningful impact in H2. Europe and Middle East division, we don't expect too much from the residential and commercial market in H2, but steady delivery of smaller good margin projects to continue. And in the Middle East, a full year of turnaround with normal trading and good performance, particularly from the UAE. In APAC, there is a softer market in Foundations business in Australia, but that will be offset by Austral and the rest of the business continues with the steady quality delivery. Other items on phasing, our more typical weighting for H2 tax, be 23% for the full year. And on cash debt, we expect to be approaching net cash, subject to any M&A. So moving on to business performance. First slide is safety. On safety, we're very pleased that our lagging indicators, AFR, TRIR and the number of injuries have reduced. Actions continue to drive even further improvement. Safety assurance visits are now an accepted part of the control framework. And Safety Week will happen again in September this year with a focus on learning through engagement to aid accident prevention. Next slide is sustainability. We continue to embed our sustainability initiatives as part of our business as usual with the 4P's. And given the goal of profitable projects, all initiatives are viewed through a value-enhancing lens. Next slide is the order book. Really pleased with the order book in terms of size, but also in terms of quality. The North America business has done really well to maintain the order level in a slowing construction market. The drop in Europe, Middle East is driven by large infrastructure projects in 2024. They have been replaced to a good extent with a higher number of lower-value quality margin work. Austral is driving the increase in APAC now that the business is on a firm footing and is signing up sizable marine projects again. Moving on to the divisions, North America. Paul Leonard has been leading the North America business for over a year now. He has landed really well with his people and has hit the ground running and has a firm grip of the dynamics of the portfolio. As mentioned earlier, we are really pleased with the performance of the foundation business in North America against the backdrop of a slowing market. It has proved to be very resilient. Large high-margin contracts in H1 2024 have been largely replaced by smaller contracts, but still generating very good margin. Pricing has undoubtedly got tighter, but we are executing very well and maintaining a very decent margin underpinning the 9.5% achievement. The Suncoast business was impacted by expected lower pricing in the half year compared to prior year. The residential market remains challenged in the U.S., and we don't see that changing in anytime soon. Moretrench Industrial performance is very strong with increased revenue and profit driven by demand and the benign weather in Florida. So yes, North America construction output is slowing, but it is biased towards residential and commercial. Infrastructure is remaining resilient. We've done really well to keep our order book relatively flat with good quality orders. Moving on to Europe and Middle East. Peter Wyton and the team are doing a fantastic job in the division despite a sluggish residential and commercial market backdrop in Europe. The increase in profitability is a turnaround associated with execution in contracts in the Middle East and the Nordics region. The Europe businesses have proved relatively resilient with several large infrastructure projects in 2024 being replaced by smaller good margin jobs. Margins in this division are improving even better than we predicted. Should the market turn, they could go even higher. I'm going to pause the flow for 2 minutes. We often get asked about sharing with you about our projects. And here's a short video on what we did at Tangenvika, the project to build what will become Norway's longest railway bridge over at fjord at over 1 kilometer in length. [Presentation]

I was in the Nordics recently with Clemens Kummerer, who now oversees the Nordic region and with Sami in Sweden and Dominic in Norway. It is a very interesting market with a lot of interesting opportunities. This was a challenging project, but the team turned around and stands us in real good stead for future opportunities in that marketplace. Right. Back to the usual flow. APAC, the best compliment I could give Deepak and the team in APAC is that after many years of volatility, their financial performance is becoming, thankfully, boringly predictable. Building on the record performance of last year, revenue is up, profit is up, margin rate is up and the order book is up. All the businesses are performing well with Austral driving the step change in the order book. The Australian infrastructure market is tighter with capacity coming into the market on the back of completion of large transport infrastructure jobs. And the margin rate achievement is very good with some one-off commercial settlements in the Australia businesses taking it above 7%. This is a very -- so coming on to summary and outlook. This is a very resilient performance year-to-date. We got strong margin performance better than expected with relatively little one-off impacts in the period. This performance further evidences the sustainability of the material step-up in performance delivered in '23 and '24. We've got a strong balance sheet with a 0.2x leverage even after the initial GBP 25 million share buyback. From an outlook perspective, underlying business performance remains robust despite the macro uncertainty. Our order book is very strong against the current backdrop, and we can only see this improving if residential and commercial improve in North America and Europe. We will continue to focus on project execution and operational performance. Even with the announcement today of a further GBP 25 million share buyback, we will be approaching net cash by the end of 2025. Full year 2025 will be weighted towards H2, and we expect to meet market expectations despite the anticipated FX headwind and the macro uncertainty. So we look forward with confidence to the rest of 2025 and beyond. Thank you very much. Now take some Q&A. Aynsley?

I'm Aynsley Lammin from Investec. Just 2 for me, please. On both North America, actually. On the margin, the 9.5% you delivered in the first half, is all the kind of froth, the boost you had from exceptional market conditions now largely played out. And I think in the past, you've talked about 8% to 9% structurally you can deliver from that business. Just interested in hearing an update on that question one.

Yes. Yes, no, you're absolutely right in terms of what we've said in the past that we've kind of moved our thought process from a 7% to 8%. And we said with the operational changes we would put through maybe 8% to 9%. We've been really pleased with how the business has performed in the first half. Obviously, the Suncoast number is margin accretive against that 9.5%. So yes, we look forward in the future, we could well have an underlying margin in the U.S. that is greater than 9% if we can keep going with the level of execution that we're currently doing. There is -- previous years, we pulled out one-offs when the margin has been high. I can't really point to anything from a one-off perspective. A lot of the fraud has gone, as you mentioned.

And second question, the order book obviously held up relatively well in North America, the U.S. Just if you could give a bit more color maybe what's -- which areas of the end markets are resilient. And you have to work a bit harder to maintain that order book? Or is it still the market is resilient generally?

The market is resilient generally. I mean our bidding teams are just -- they're just as busy as they were 12 months ago when there was that level of froth in the marketplace. I think from a sector perspective, we are relatively agnostic, and we can move depending on where items are being built. So a few years back, it was warehousing, then it was electric vehicles. Now it's data centers, and we can move around with that. I think infrastructure is holding up relatively well in that marketplace. But we're pretty agile. And I think the teams are getting really good at not chasing revenue and actually chasing profit and cash.

Joe Brent from Panmure Liberum. I'm sure it's big for everyone I'm wishing Mike all the best in the speedy recovery. Three questions, if I may. Would you refer one at a time?

Yes, one at a time since I'm up here on my own.

That was my thought. So firstly, could you give us an indication of the size of the Australian settlements?

Yes, you can see them actually in the waterfall chart. That's roughly what they pan out to be. And the reason we bought them out there, is that the trading in Australia is roughly flat and the settlements get you that bit of a boost half year-on-half year.

And secondly, when we look at the operational performance around the group, it sounds good in most places. Are there any areas still that are underperforming that give you scope for further improvement?

To be perfectly honest, I don't think so. And actually, if you look right across the portfolio in all 3 divisions, the only thing we're really leaning into is that commercial settlement on the [indiscernible] project, which we have provisioned in previous years. Yes, there's obviously operational issues, but they're relatively small and are covered by overperformance in other areas. Actually, we're not leaning into anything from a large project issue perspective.

And the final one was on the balance sheet, fairly obvious question, really, it's a very strong position. Can you just give us an update on your thinking of future buybacks versus acquisitions, if you see any particular interesting areas in your acquisition pipeline?

Yes. So I think our positioning around capital allocation policy hasn't changed. So we have the operational part of the business, CapEx and working capital, then the dividend, then bolt-on acquisitions. And I think that hasn't changed for us. We have got an active pipeline that we are looking through. So we have announced a GBP 25 million buyback because there is nothing on the block at the moment that we could point to. And I think people just need to expect that when we do make a decision in respect of M&A then we would have the flexibility to stop doing the share buybacks. Jonny?

Jonathan Coubrough from Deutsche Numis. I also extend my best wishes to Michael and also congratulate him on a great job done and yourself and the team on another very good half year. Firstly, I'd just interested to hear how good do you think your visibility is at the moment and whether that's changed over the past 6 months?

I don't think so. Our order book tends to represent 6 months of work. We don't see that dynamic changing. And even in some of the markets which are slowing, we seem to be quite resilient in terms of holding that up. I think what is good is we -- is the profitability or the quality of that order book, it just continues to be very good, which is why we talk about the strong margins that we're actually achieving.

And you mentioned potential changes to the tax regime in the U.S. from R&D credits. How do you think that might impact you going forward?