Keller Group plc (KLR) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the presentation of Keller's Half Year Results for 2026. I'm James Wroath, and I'm the Chief Executive. Before I go on to the main business of the day, very sadly since our full year results, you'll know that the -- my predecessor, Michael Speakman, sadly passed away at Easter. And I wanted to take this opportunity to pay a final tribute to him. The results that you see today and many of the themes that come out in terms of just how great a business Keller is lead directly from Mike's work with the management team and the changes that were made in the last 5 or 6 years have been fundamental in my belief to how Keller has performed. So very sad. The business will always remember Mike, but he did an absolutely superb job with Keller. So on with the presentation for today. Firstly, the cautionary statements, which I'm sure is a slide that you're all very familiar with. For our agenda this morning, I'm going to take you through a snapshot of our results before handing over to David Burke, our CFO, who will take you through the financials in more detail. I'm then going to return to give you some greater color around our divisions, a view of the outlook and a reminder of our strategy. As I think you all know, we're going to be holding a Capital Markets Day on the 14th of October, and there we'll cover our strategy and growth plans in a lot more detail. And then finally, we're going to finish with a Q&A. So a very brief results summary. The Keller Group continues to deliver record financial performance with H1 2026 being no exception. In fact, 2026 is on course to be the group's fourth record year in a row. Revenues are up 11% overall due to significant increases in both North America and APAC. EME is holding steady despite the Middle East conflict and a tough Q1 due to the winter weather. Operating margin was also up on 2025, leading to an impressive 17% increase in underlying operating profit. Overall, H1 is a good demonstration of our geographic and sector agnosticism, where we've pivoted to key growth markets and high-demand subsectors to drive top line growth whilst continuing to maintain our margin discipline. I'm now going to hand over to David for a more comprehensive overview of this excellent financial performance.

Thank you, James, and good morning, everybody. Welcome to another excellent reporting period. The key highlight for the first 6 months is again the power of our portfolio. North America after going backwards in 2025 is powering forward. Whilst EME is down on revenue, it is picking up on profit. And APAC is up on revenue, but flat on profit. This slide shows 9 of our most prominent financial KPIs and the performance of H1 2026 compared to H1 2025. Included in the appendix is a slide in a similar format that tracks these KPIs over the last 4 full years to 2025. For H1 2026, the picture remains very healthy with the underlying fundamentals of the business continuing the upward trajectory we've demonstrated over recent years. The most striking feature is the level of growth momentum with all KPIs improving against last year at quite a healthy clip. So let's look at some details. This slide sets out the underlying P&L for the half year. Looking at revenue, we have excellent revenue growth of 11% on a constant currency basis against a market backdrop that hasn't exactly been stable. In the box on the right, you can see North America is the driver, albeit APAC is also growing from a smaller base given the buoyant foundations market in Australia. EME is down, but driven particularly by bad weather in Q1, fewer major projects and less revenue coming through from the Trojena project in 2026. Our underlying operating profit increased by 17.1% on a constant currency basis, and we increased the margin rate to 7.3%. This again demonstrates the resilience of our portfolio where weaker pockets are offset by areas of strength. I will bridge that operating profit performance in the next slide. Net finance costs are slightly reduced given we have been net cash for most of H1 and the USPP cost is static. Taxation is at an effective rate of 23%, similar to last year. The underlying earnings per share have increased by 22%, driven by the improved underlying profitability and the impact of the share buyback. The Board has agreed an interim dividend of 28.7p, an increase of 57%. This increase is driven by our revised policy announced in March to be in the range of 2.5 to 3.5x for the full year dividend and assumes we will be at 3x cover for the full year with 35% paid at the interim. We'll now move on to the operating profit bridge slide. Moving from left to right, starting with half year 2025 underlying operating profit of GBP 102.6 million. There is an FX impact of GBP 1.9 million due to the dollar weakness against sterling compared to half year 2025. Coming to the North America division first, which is up GBP 14.1 million versus H1 last year. This is an 18% increase in a market where not everything is trending in an upward direction. The principal driver is the Foundations business with data center and infrastructure sectors driving this phenomenal growth. However, within Foundations block, we've had challenges with the Miami residential market, seeing weakness with projects shifting to the right. This Miami business within Foundations have been defying the broader residential trend for a number of years. However, concern over interest rates and broader macro uncertainty seems to have made developers more tentative. We hope this is a pause rather than a downward trend. Suncoast is up on a low 2025 base. This is the local team squeezing profitability out of what continues to be a sluggish residential market generally. The combined Moretrench RECON business is down after a strong last year. RECON has performed well, executing a sizable LNG project, but the main client for Moretrench continues to limit investment given the impact the Iran war is having on its input costs. Now turning to Europe and Middle East, where operating profit was up GBP 4.2 million despite the reduction in revenue. The Middle East defied the market backdrop with improved volumes and profitability despite a temporary pause due to the Iran war. This is predominantly driven by the UAE with strong volumes and a change order on the Trojena project also helping. Elsewhere, the market sluggishness of Europe continues. However, the team continued to execute well, increasing profitability and retaining a decent margin level. The exited businesses delta relates to the Mauritius and Seychelles business we exited and represents losses not repeating. We call out the U.K. separately given the challenges in the market with high levels of competition and a low level of opportunities, giving rise to pricing pressure. In the APAC division, Austral continues to perform strongly, offset by the Australia foundation business, which is up on revenue with reduced profitability due to Queensland weather, the impact of project settlements in '25 not repeating and price pressure as the business transitions between transport and new opportunities in energy, data centers and defense. Moving to the next slide, I'll cover off non-underlying items. The analysis box shows the items that make up the GBP 5.4 million split between cash and non-cash items. We continue to invest in the ERP program and are getting close with the final build. We are entering into a phase of extensive acceptance testing that will lead to the pilot in Canada in early 2027, followed by the subsequent rollout across the group. The restructuring cost relates to the group's finance transformation program, which is now focused on North America. I'll now move on to talk about cash. Cash generation does tend to skew towards the second half of the year with historic H1 levels being much lower and 2026 will be no exception. Whilst free cash flow has marginally increased, the conversion rate has reduced, driven by increased working capital and CapEx levels as the business grows. This is offset by a lower tax spend due to the change in the rules in respect of U.S. R&D deductions in 2025. Below free cash flow, the major increases are driven by the return of cash to shareholders with the increased dividend and increased level of share buybacks at the half year. At the half year, we are GBP 32.4 million through the GBP 100 million buyback with the balance being what was left of GBP 50 million buyback in 2025 being purchased in 2026. In the bottom right, we highlight the reconciliation to net debt on an IAS 17 covenant basis to GBP 15.9 million. This slide shows the monthly profile of net cash/debt. You can see for the majority of H1 2026, we were net cash with the final dividend payout in June pushing us to net debt. We expect the profile for the remainder of this year to be pretty similar to 2025 and hitting circa GBP 30 million net cash level after the impact of the share buyback by the year-end. Our funding facilities are in a comfortable position from a quantum and tenor perspective. We have headroom of circa GBP 655 million. This is a very resilient position, and along with our cash generating capacity, gives us confidence as we look to the future at organic and inorganic opportunities. It is worth reiterating our margin performance and our confidence in sustaining margins above 7%. This is underpinned by the portfolio resilience referred to earlier and our continued focus on discipline and control in our bidding and execution activities. This is a snapshot of our order book with growth in North America, including the I-40 project driving the 20% increase. We have called out the I-40 project separately due to its scale and multiyear duration, which will underpin future years' revenue rather than the current year. James will talk more about the divisional movement later. Finally, for me, a slide on capital allocation. We remain committed to this framework that we laid out in March. So no change here other than the value of numbers for H1 2026. We continue to prioritize the business first through working capital and CapEx, then continuing the dividends, and finally, the balance between capital spent on M&A and further shareholder returns through share buybacks. That's it for me. Thank you for your attention. I'll now pass you back to James, who will take you through the operational review section.

Thanks, David. Our H1 2026 results demonstrate perfectly some of the key strengths of the group. Keller continues to showcase the power of our portfolio, and these are a record set of results driven particularly by volumes of infrastructure and data center work alongside superb Austral performance. But they do also come in the context of a slow South Florida market, one of our normally strongest performers. They come in the context of challenging volumes for Moretrench who had an excellent 2025. And they come in the context of a thriving but highly competitive Australia foundations market. Keller's geographic portfolio aligned to our market-leading portfolio of products and techniques that enable us to win both small and large jobs is proving again to be a winning combination. On top of this, the quality of our people is ensuring that margins are maintained despite teams being very busy. Much of this is possible because the business has the scale to support itself where required and advancements in the last few years have transformed internal collaboration. I'm going to cover our U.S. I-40 project shortly, which is a perfect example of how all this comes together to deliver fantastic results for customers and for Keller. Safety also remains a strength. And as market leader, Keller sets the standard in our industry. However, we're not complacent, and our forthcoming Annual Safety Week is our opportunity to remind each other of this. Now I'd like to cover a bit of subsector analysis. We're going to cover more of this at the Capital Markets Day, but I wanted to give a bit more color at these results because I think it really illustrates the power of Keller's portfolio, our sector agnosticism and our ability to pivot to the latest megatrends. This slide illustrates the top 5 subsectors for the group and for each of our 3 regions. The arrow denotes the trend versus H1 2025. Importantly, the top 5 represent less than 40% of group revenue, and I think that illustrates the breadth of our subsector coverage. Aside from this, I'm sure nobody is surprised by the surge in data centers. They now represent the largest subsector for the whole group with 9% of group revenue compared with 3% in 2025. Excluding Suncoast from the revenue numbers, they're more than 15% of our U.S. revenue year-to-date. Data centers are also in second place in the APAC division, driven by new buildings in Australia. While we do expect the data center trend to continue, I also have great confidence in Keller's ability to pivot to whichever construction megatrends exist in our market. Another notable trend on this slide relates to the decline in multifamily residential, largely because of Miami, this held up in 2025 despite an overall tough U.S. residential market. However, in 2026, as David just said, we've seen major developments delayed and the revenue in this subsector declining by approximately 1/3. All other top 5 group sectors were up with mining in APAC, particularly impressive due to Austral's strong performance. Now I look at the regions in a little bit more detail. As David has already said, North America delivered a record first half performance with revenue up 16.7% to GBP 984.4 million and operating profit up 17.7% to GBP 93.8 million, both at constant currency levels and margin steady at 9.5%. Growth has been driven by underlying volumes across our Foundations business, especially within data centers, as we've just heard, but also in high-value major infrastructure projects such as I-40, the Hudson River Tunnels and the Second Avenue subway extension. Data center demand is a true megatrend. We've done more of these projects in H1 of 2026 than we did in the whole of 2025. Again, Keller's ability to pivot fast to growth subsectors remains a key differentiator. The resultant standout contributions from our Southeast, our Central, our North and our Canada business units through strong project execution and commercial management of the increased volumes more than offset Q1 weather disruption and the softer South Florida residential market. Again, as David said, RECON delivered a strong performance on a major Gulf Coast LNG project, offsetting the softer Moretrench trading. The order book is also up strongly to GBP 1.367.9 million, reflecting our major infrastructure awards and in particular the I-40 highway remediation expansion. The data mega center trend -- sorry, the data center megatrend continues, representing just over GBP 100 million of our work in hand. And finally, Suncoast stayed resilient despite weaker residential markets through diversification and disciplined cost management. We are confident on the outlook for the remainder of 2026 in North America with that record work in hand and a healthy pipeline, leaving us well positioned for continued profitable growth and strong cash generation in H2. And now a little more in-depth look at I-40. So I-40 is the largest project by quite a distance in Keller's history. The job is to reconstruct the highway from the Tennessee Stateline to North Carolina following significant damage caused by Hurricane Helene in 2024. The multiple complex techniques required illustrate both the enormous technical expertise that exists in our business and the ability to marshal the resources required to deliver at scale. I think Keller has been transformed in this respect over the past few years with the One Keller initiative, a major factor in bringing the full power of the business to opportunities. This is a multiyear project involving a range of techniques critical to restoring to full operation a vital piece of American infrastructure. Moving on then to EME. Revenue in EME was down 5.2% to GBP $396.1 million at constant currency level. Strong Scandinavia volumes due to the Lulea project that we talked about at full year were offset by Q1 weather disruption and fewer large projects than in H1 of 2025. Underlying profit -- operating profit was up 28% to GBP 19.2 million, with margin improved to 4.8% from 3.6%, driven by Middle East profit growth despite the conflict and also by strong European execution. The poor margin NEOM contract from 2025 has also not been repeated in 2026. Overall, the Middle East has seen resilient trading and profit growth despite the ongoing conflict. We've prioritized staff safety throughout and a brief productivity dip in March has been offset by a strong start to the year and a solid Q2. As we look ahead, Western Europe remains subdued with government infrastructure and defense spend yet to materialize. The U.K. market remains particularly challenging with volume and profits down. The order book is very healthy, though, and it's supported by smaller jobs such as the 2 residential projects I saw recently on a trip to Warsaw. These are very much the bread and butter of Keller, particularly in Europe. Overall, the order book is up 16.5% to GBP 396.7 million, and we, therefore, expect continued improved trading in H2, supported by higher Q3 volumes and a very healthy tendering pipeline. Finally, in APAC. APAC revenue was up 22.8% to GBP 227.5 million, driven by excellent momentum in Austral and record volumes at Keller Australia. Underlying operating profit was broadly flat at GBP 13.8 million, sorry, due to margin pressures in Keller Australia and the non-repeat of prior year project closure settlements. Austral continues to thrive with revenue and profit both up. I witnessed firsthand earlier this year the impressive civil works this business does in the mining sector and tendering volumes for complex high-value civil and nearshore marine projects for late '26 and '27 remain high. Indeed, we will be announcing today that Austral has won a project at Parker Point worth circa AUD 90 million which will go into our order book at the full year. Keller Australia has record revenues on the back of strong public spending demand in areas such as hospitals and data centers, but profit has been impacted by pricing pressure as well as unusually severe Queensland weather. In Keller Asia, revenue and profit were broadly flat with India expected to see volume growth in H2 after a slow start and with investment expected in the market. Our Singapore business is benefiting from growing construction demand, such as the new Terminal 5 at Changi Airport that I and our executive team visited back in March. The team is confident of maintaining recent momentum despite the order book being 18.9% lower at GBP 174.6 million. This is mainly due to a strong comparable period in 2025, where Austral won several major marine contracts. We still have solid work-in-hand, good pipeline visibility and supportive market conditions, and we expect the order book to pick up in H2, and it certainly helps with that recent win from Austral. So the summary and outlook, beginning with our strategy for long-term value. Clearly, we'll be using the Capital Markets Day to outline our strategic plans in much greater detail. The structure we will use is the same as I described for our 2025 full year results. I believe passionately that the power of Keller's geographic and product portfolio multiplied by the excellence of our people and their performance can deliver a highly attractive pipeline of opportunities. During the event, we'll use both Keller and market data to illustrate why this is the case and to be clear on our growth ambitions. We continue to make progress on all of our 2026 priorities. As David said, as an example, our new ERP will be ready for rollout at the start of 2027, beginning with Canada. And I've hired a new Chief People Officer, Matt Stripe, to bring real impetus to our talent agenda. But clearly, much more to follow in October. I hope to see you all there. For the summary and our outlook, the record results, I think, largely speak for themselves. We've continued our focus on commercial discipline and operational execution and volumes clearly, particularly in the U.S., have been really strong. The H1 2026 results are a testament to this. We've got strong momentum entering H2 with performance as ever weighted to the second half. We remain confident in achieving our recently upgraded FY '26 market expectations. Data centers prove that the business can pivot to growth sectors, and we remain confident that this trend is going to continue for some time. But even more so, we remain confident in Keller's ability to pivot to whichever construction megatrends exist in our markets at any given time. Our balance sheet remains very strong with optionality to grow both organically and inorganically through bolt-on acquisitions. And I look forward to sharing much more of these plans with you in October at our Capital Markets Day. And with that, I'll pass to a Q&A. Thank you.

Aynsley Lammin from Investec. I think I've got 3, please. I wonder if you could just give a bit more color on the kind of data center megatrends you talked about in terms of where is that kind of all across the U.S.? Are we at the very early stages of that? Do you expect that to get bigger and bigger over the next kind of 12, 18 months? And second question, maybe mainly on the U.S. as well. Just any comment around cost inflation, whether cement, steel, higher energy costs or whether anything has changed on energy cost? And then third question, just on the EME margin. Is that step-up more of a function of kind of better execution of some of those bigger projects? Or is that actually some structural improvement that we should expect to be sustained in that division?

Shall I take the first one, you take the second 2?

Yes. That's fine.

So data centers are pretty much all over the U.S. There doesn't seem to be a particular trend. And there doesn't seem to be a particular trend in terms of rural or urban either. They pop up everywhere. We like them when they're in challenging geological conditions because they require more of Keller's expertise to make them happen. And in terms of the cycle, I think we believe the projections, and I think the number that I've heard quoted is $650 billion to be spent on data centers. And I think we're still relatively early in that cycle. So all the noises at the moment coming out of the U.S. so the trend will continue.

Yes. In terms of cost inflation, I mean, as we've always said in the past, we are a short order business. So we get the opportunity to reprice if things do increase. And if we have longer-term projects, then we always insist on some form of protection, whether it is an escalation clause or we'll price escalation into the job as well. So actually, we're not seeing that much impact even with the fuel cost, we did a bit of an exercise in the early part of the year to understand what the impact from the Iran war was. Actually, it didn't turn out to be that material at all. So we feel reasonably comfortable with that. EME margin, I think it's a combination of a few things. I think one aspect is the fact that the Trojena project, which we provided for fully in '24 came through as revenue in '25 with no margin. So that's not repeating in '26. So that gives the margin a bump. But also the fact that the UAE has had good volume through its business and at a reasonable margin rate, that has helped as well. And I think the other aspect with the rest of the business is even though the market is sluggish, they are executing very well. And you can see there's even a bump in profitability from the rest of the business despite that -- the fact that the market isn't great. So there probably is a bit more to go on EME margin, particularly if the market turns.

Clyde Lewis at Peel Hunt. I think I've got half a dozen, but I'll do half of them now and come back later. Canada, no mention at all on the North American slide. So it'd be interesting to get an uptake on an update on where you are there and how that business is performing. The second one on acquisitions. Is there anything in the pipeline at the moment? Are you getting close to anything? And has your, I suppose, geographical preferences changed at all? And the third one, I suppose going back to Aynsley's question on data centers. It's missing from that top 5 list in Europe. Is there nothing happening in European markets in terms of data centers? Or are you just not in that market at the moment?

I can do Canada. I'll take that.

Sorry?

I can do the Canada bit.

You want to do Canada? Yes.

Yes. I think Canada from a couple of years back has actually transformed its deliveries, had a very good year in '25 and it continues to be. That's why it doesn't feature in that bridge slide is because it's had 2 good half years in a row. So there is a lot of infrastructure work going on in Canada, and we actually visited some sites in Toronto when we were there a couple of weeks back, very solid performance in that business.

Yes. It was really inspiring. We -- I mean, we have lots of young talent all around the world, but Canada, in particular, we have some really talented engineers and they're working on big projects for the Toronto Metro. But good note, we'll bring out a bit more in the Capital Markets Day. From an M&A perspective, I think the first thing to say is -- and I can't keep saying I'm new, right? I think that's just about run out. But this has been my first 12 months with the business. And I think before doing any acquisitions, big or small, you want to take some time to just really understand where we're at. And also, as you've seen from the numbers, the organic growth is terrific. So I think we can afford to be patient with M&A. I still believe -- and we'll talk about it more at the Capital Markets Day. I still believe that there are opportunities in certain geographies to accelerate our organic growth through using some bolt-on inorganic acquisitions. We do have a pipeline, and we are actively looking at things, but I want to make sure that they really do make a difference to the business and don't disrupt that -- the fantastic momentum that we've currently got. Data centers, that's a very good challenge. And again, I think that's something that we can pick up in the Capital Markets. We just aren't seeing the same level of opportunities in Europe for Keller as we are in Australia or in the U.S. I honestly don't know to what degree that's to do with how many are being built versus Keller's market positioning. I suspect less are being built, but we'll pick that up and provide a bit more analysis at the Capital Markets Day.