Lords Group Trading plc (LORD) Earnings Call Transcript & Summary

Good morning, and welcome to the Lords Group Trading plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question it received during the meeting itself. However, the company will review all questions submitted today and will publish answers/responses where it is appropriate to do so. Before we begin, I'd like to submit the following [ poll ]. I'd now like to hand over to Shanker Patel, CEO. Good morning, sir.

Good morning, everyone, and thank you for joining us this morning for our full year '22 results presentation. The agenda is I'll give an overview, followed by Chris, who will give a financial review. I, between myself and Chris, our CFO, will talk about our strategy update and our ESG strategy. And I'll conclude with a summary and an outlook for 2023, followed by answering questions in the Q&A. The overview of our results for full year '22. The highlights are that really, it's been another year of positive strategic progress underpinned by strong financial performance. And we've only been able to do this because of the outstanding performance from every one of our 902 colleagues. We've always maintained that we are a colleague-centric business, a people-focused business, and that our strategy has always been to grow our business through investing in our 3Ps, investing in our people, investing in our plant, investing in our premises. And the record performance with results ahead of expectations is due to this investment strategy. In particular, our Merchanting division has grown tremendously. Full year revenue growth of 69.2%, but more importantly, a 17.4% like-for-like growth. That is, I think, at the higher end of the industry performance and certainly far in excess of market expectations and some of our other larger peers. In our Plumbing & Heating division, margin continues to be improved via range extension and pricing decisions. We're very pleased to note an EBITDA margin accretion from 4.4% in full year '21 to 6% in full year '22. And we'd also like to reiterate that we remain very small percentage, less than 1% of a GBP 55 billion addressable market. Our growth strategies continue to be based on consolidation, product range extension and branch expansion. We'll talk a little bit about these 3 initiatives a little later. We're also very pleased to report on continued progress of our ESG agenda and strategy, and there will be some more on this point in a minute. We, on this slide, are highlighting the Lords investment case as a leading high-growth distributor of building materials in the U.K. I won't necessarily call out every block here, but the 6 main pillars of our investment case is that we have a unique customer-first proposition, with customer service and excellence is at the center pillar of what we do in our strategy. We do that through engaged colleagues, which is fundamental to our differentiated customer service offer, and it provides our customer with a great experience. We also believe in having highly specialized local recognizable brands and regional leadership. So we are a local business, and we like to make sure that we are either 1 or 2 in each local area that we trade in. A combination of the 3 above points leads to a loyal and long-lasting, long-term customer relationship. But our customer service proposition is also assisted by a successful value-creative M&A strategy. There are -- there's still a significant number of independent merchants between GBP 2 million and GBP 100 million turnover in our market. We are an attractive buyer for family businesses, more so because of the way we transacted them during due diligence, during the legal process and more importantly, the way we integrate their businesses into us. We've put a lot of focus on making sure that we develop the business that we buy or continue developing the business that we've bought. Our track record is strong. We have made at least 15 acquisitions in the last 5 years. And in particular, the discipline in buying business still remains a purchasing between 4 to 6x EBITDA earnings on a maintainable basis. Another pillar of our investment case is the organic and margin accretive growth opportunities through either new markets and customers by a new store rollouts of existing brands, the acceleration of our digital capability, which creates new repeat customers, the increasing share of customer wallet that we can get through marketing new products. And certainly, there are certain specialisms that we bought in the last year that we can then use as we synergize those businesses and integrate them into our existing portfolio. And we've got a growing penetration of decarbonization products driving margin expansion. This is all assisted by a strong financial profile. We're on track to deliver GBP 500 million revenue by 2024. The growth levers aiming to enhance EBITDA margin to 7.5% in the medium term. We're still highly cash generative with an attractive working capital profile. And we are a progressive -- we have a progressive dividend policy. In terms of our positioning in the market, we're well positioned in what we think is a substantial U.K. RMI market. We're still less than 1%, and the market is highly fragmented. 45% of revenue within the essential and resilient repair sector of RMI. And we have a good track record of high growth, a 5-year CAGR -- revenue CAGR is 50.7% versus a market growth of 1.4%. Finally, we have a strong management track record. We are recognized leaders within the industry, and we are aligned with shareholders via significant majority shareholding by management. The management team have in excess of 200 years industry experience and myself as a CEO, I've led the group that has delivered growth in the last 3 economic downturns. I'll hand you over now to Chris, who will go through the financial review.

Good morning, everybody. So FY '22 results summary table here. I'll take you through them, but to reaffirm what Shanker's already said an excellent year for the group and strong performance across both of our divisions. I think credit definitely goes to our teams and the results are a reward for their hard work and kind of commitment towards our high-service customer-first proposition. Running through the table, revenue of GBP 450 million for FY '22 is a 23.9% increase on the prior year. Adjusted EBITDA of GBP 30 million represents a 34.4% improvement and that flows through then into the adjusted EBITDA margin of 6.7%, 60 basis points ahead of FY '21. We see that as a great achievement and very much kind of recognizes and reflects the execution of our strategy, which is based on driving that EBITDA margin to 7.5% over the medium term, throwing the fact that there were inflationary pressures across the board last year, and I think it makes that position even more impressive. Adjusted EBITDA at GBP 17.4 million is a 42.4% increase from the prior year and adjusted earnings per share of just over GBP 0.08, represents a 31.5% increase. We have a progressive dividend policy and are committed to that and GBP 0.02 per share for the full year, represents a 5.8% increase on FY '21. Free cash flow generation remains very strong and partly funds that and the dividend and allows the growth strategy to continue and we'll take you through the cascade of free cash flow shortly on the third slide. Merchanting, clearly, a very strong year for Merchanting. Shanker has already covered the revenue, GBP 220.8 million of revenue represents 69.2% growth and kind of real evidence of that market share opportunity that we have. We remain less than 1% in the market and clearly have a great opportunity to continue to grow and take share and consolidate. On a like-for-like basis, that's 17.4%. Clearly, probably last year was both price inflation, which is the smaller element of the mix, but also volume growth across all of our brands. That flows through to adjusted EBITDA of GBP 16.1 million. That's a margin of 7.3% and 34.3% growth in quantum and in margin, you can see a step back. But that was flagged at half year and very much in line with our expectations, reflecting the inflationary pressures and the kind of disorderly way on which price inflation was passed through from our suppliers. We have long-term customer relationships and wanted to make sure that we helped our customers pass that through in a more orderly fashion to -- into their projects and commitments. Moving on to Plumbing & Heating, and I think where Merchanting undoubtedly gets the kind of the accolades for the revenue growth, I think Plumbing & Heating is equally impressive. Despite the fact of a significant industry-wide boiler shortages, our P&H division managed to grow its EBITDA. Adjusted EBITDA to GBP 13.8 million, which represents a 34.5% increase. It's done that in the face of inflationary pressures on the supply, but also the consequence of that being falling revenue 1.5% overall and 9.1% on a like-for-like basis. So we're really pleased with the profit improvement and the margin accretion. I think for those that were with us at the half year, we were talking about the fact we felt probably we're at the end of a 2.5, 3-year program of transforming Plumbing & Heating, and it was really ready to come step on and push its margins north. And clearly, this is a good evidence of that. It's being delivered through product range extension as we supply a greater non-boiler mix of products, and we're talking there about radiators, heating controls and floor heating, air source heat pumps, plumbing spares, heating spares and bathroom showrooms, it's all accretive to gross margin level. And if we're already servicing our customers, it has a lower cost to serve that ship and how is to continue to grow and improve EBITDA margins. Many will have seen the IRFS that went out on the statement in April, reflecting the refinance on the 5th of April. I think a really good, excellent outcome for the group. We've transitioned from a single hold with HSBC to a syndicate with HSBC, NatWest and BNP. We've managed to expand our facilities and reduce the lender margins that are attracted against those clearly provides significant cash headroom and more importantly, gives us the facility and a partnership that can take us up to and well beyond the GBP 500 million revenue target that we've set. I said we'd come back to free cash flow more detail, you can see how that cascades through from adjusted EBITDA of GBP 30 million down to cash generated by operating activities of GBP 24.1 million and ultimately, free cash flow of GBP 19.1 million. I think a couple of lines to call out in their working capital, we're always extremely disciplined in terms of how we deploy that. You have to deploy it for growth that the -- where we have more mature businesses and more mature portfolio. We're able to leverage that working capital to continue to make it ever more efficient. And that partially funds the growth typically working capital is in a range of about 10% to 11% of revenue. You can clearly see that the -- it's not linear with growth, and that's because of the way we're optimizing the core working capital in the group. CapEx of GBP 3.5 million, I would say, is a more kind of normalized position. I think probably on the enlarged group, including the acquisitions from last year, we kind of typically guide [indiscernible] GBP 3.5 million to GBP 5 million per annum of CapEx. I will pass it back to Shanker.

Thank you, Chris. Between me and Chris, I will give you a strategic update. I'm going to focus on 3 areas of organic growth that are very much part of our ongoing strategy. First is our strategy of growing the renewables range product category within our P&H business as well as in our Merchanting business. The backdrop of this is demand for energy-efficient technology is driven by either increasing energy prices or government greenish initiatives and regulation. We believe we're uniquely positioned to supply via distribution, merchanting and consumer channels, the alternative to traditional heating products in the form of a heat pumps either air source or ground source. And the reason why we're able to do that is, firstly, the suppliers recognize Lords track record of delivering new products into the market. Not only do we have the infrastructure to be able to position or reposition from selling boilers, which are essentially an item that's boxed to air source heat pump and items that are also boxed but slightly different configuration and requires slightly different logistics and capability. The other element of transitioning is that these products are margin accretive and they're delivered via our existing in-house network. So we don't really need to invest sums of money as these products become more universally adopted within the marketplace, either through government initiatives or through general consumer demand for alternative energy products. We've managed to secure new supply agreements in the first half of 2022, and that is driving increasing customer demand. We have the sales force, we have the cometary managers who really are now starting to ramp up our offering. And what you can see is that this product area is growing in our business, air source heat pumps have grown 267% in full year '22, underfloor heating, 185% and smart home tech 44%. In addition, we also have a few brands that are right for organic growth opportunities, one being George Lines. It's a very strong regional brand with national expansion plans and opportunities, a specialized civils merchant selling aggregates, concrete, drainage and ducting products, which we acquired in 2016 as a single site, essentially all the products that it supplies is at that ground level or below. By full year 2022, George Lines now operates from 3 locations with revenues in excess of GBP 25 million, representing a revenue CAGR of 13% since acquisition. The organic growth plan is in the medium term to open 6 to 8 locations nationwide. We opened our third branch in Q2 '22 in an area of Horsham, in the Southeast of -- Southwest of England, and that location is trading ahead of expectations. The other benefit of the organic growth opportunities, in particular with George Lines is that the new site returns on this investment through this brand are greater than our current hurdle rate that we have set for investments. Another area that is right for organic growth expansion is our newly acquired business Advanced Roofing. This strengthens our customer offer. We acquired a 2-site roofing merchant in January 2022 on a 4.6x EBITDA multiple, which effectively is immediately earnings accretive. And it's an excellent example of how regional bolt-on acquisitions can enhance our overall customer proposition. The proposition is aligned with Lords in the sense that what we bought was product expertise via engaged colleagues. And this in itself allows us access to a greater share of our customers' wallet from our existing Lords' customer base. So whereas before, we would have had to purchase roofing material through specialist distributors, now we have a roofing inquiry in any of the Lords customer base that roofing inquiry would go to our own in-house specialist brand in Advanced Roofing. We've commenced the expansion by implants in selected sites. The first one opened in Beaconsfield in full year '22. And overall, the business is trading ahead of expectations in its first year. Revenues are up ahead by 16% and adjusted EBITDA by 37% in full year '22. I'll hand over to Chris to talk you through our acquisition track record.

Sure. So this is a slide that shows the 13 acquisitions that the group has made since 2016. And I think it's principally put on the screen to show you that whether it's Plumbing & Heating or Merchanting, whether it's a small acquisition or a large acquisition in the south of the country and the north of the country. We have a track record of driving real tangible growth in terms of revenue and EBITDA across the portfolio of acquired businesses. Overall, for the 13, 25% revenue improvement over the period post ownership and on an EBITDA level, IFRS, a 53% improvement in EBITDA. So we maintain -- there's a consolidation opportunities. As we have said a couple of times already that we're still less than 1% of the market. And our objective of making 3 to 4 transactions per annum remains absolutely on track with [indiscernible] and on the 31st of March this year, and we're confident of adding a couple more through the balance of the year because the pipeline remains very healthy. And the acquisitions that we're looking for are -- they need to be good geographical fit and they need to help add or take share of wallet from customers. So that's product range extension and accretive in its EBITDA performance as well. And if we can find those 3 things together and buy it in a good maintainable rates, and we talk about 4 to 6x EBITDA multiple. Post IPO, we've made fixed transactions, and it blends to an average of 4.8x EBITDA, so comfortably within that range. If we can find things that fit that criteria, then we're absolutely interested. This slide covers a little bit around ESG. I think it was a big year for our ESG strategy. We appointed some external advisers to help support and drive that thinking. And the update is we've got a great strategy that's focused on delivering tangible improvement in the E and the S and the G already clearly quite mature. Environmentally, we have a great opportunity to drive reduction through energy consumption through our 3Ps investments, so people, planet, premises where we can switch alternatives in fuel or in fleet, and there are opportunities that we continue to pursue. And on the S, we're delighted that we formally launched the foundation in 2022, and the group is committed to giving the foundation [ GBP 20,000 ] per annum, and the engagement in our branches for the foundation is fantastic. And what we're looking to do there is support local community initiatives nationwide where we have a presence and really kind of help our branches become part of that community and support their community and the customers that they serve, whether that's the builder or the end customer. So I think a really strong initiative that sets us well for the future. We've spoken about these targets a couple of times through the presentation. I think the left-hand side GBP 450 million revenue in FY '22, GBP 500 million is a completely manageable step for us, and we remain very confident of delivering that. On the right-hand side, I suspect the step forward in EBITDA margin in that inflationary period to 6.7% kind of bread great confidence into that target at 7.5% over the medium term. We absolutely believe it's achievable. It will come through those pillars in the graphic, which is accretive acquisitions, new sites and implants. You've heard us talk about Advanced Roofing implants, George Lines natural rollout, the Mr. Central Heating opportunity that we have taken that brand from 9 locations to 50 over the medium term. The product range extension, again, always accretive at gross margin with a lower cost of service, we're already fulfilling other products to the customer. And then operational leverage, clearly, as we continue to leverage the infrastructure of the group that we believe is constructed and capable to absorb more and drive that leverage.

Thank you, Chris. I'll cover off the final slide of our presentation, which is give you an update on the outlook that we see in our business. But we're mindful of the macroeconomic environment and the fact that it's impact on our sector in the short term could be quite significant. However, the group continues to trade in line with market expectations. And the reason for that is that the fundamentals of the Lords investment proposition still remain. We have robust customer demand in our well-positioned geographic and RMI segments. We have acquisitions that we made in full year '22, which are performing in line with or ahead of expectations. We still maintain that we are small, we're less than 1% of a very large market, and we have, therefore, large market share opportunity via organic growth levers and value-added acquisitions. And in conclusion, we're still on track to deliver our stated aim of GBP 500 million revenue in 2024 with a 7.5% EBITDA margin in the medium term. So thank you all for your time and listening to the presentation. We're happy to take questions.

Shanker and Chris, thank you very much for presentation this afternoon. [Operator Instructions] Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via our investor dashboard. As you can see, we have received a number of questions about today's presentation, and thank you to all investors for submitting their questions. Can I please ask you to read out the questions and give response as where appropriate to do so, and I'll pick up for you at the end.

Right first question, probably for you, Shanker. What the plans for penetrating the market share and improving cross-sales across the existing distribution range? Are incentives offered for loyal customers, i.e., discounts which could encourage new customers if loyalty schemes are in place.

So we -- traditionally, the way we expand ranges is by offering customers a competitive price product that we don't currently offer. So in Plumbing & Heating, in particular, whilst we were very much able to provide a very good value offering on boilers, we didn't have an equivalent value offering on controls, especially controls such as Honeywell or pumps such as Stuart Turner. So these are leading brands that we didn't -- we couldn't distribute. Due to one of our acquisitions, we managed to get the distribution rights to those products. And we've introduced them to our existing and new customers. But with more of a promotion and a short-term promotion rather than a long-term discount. The business prides itself on excellent customer experience, great advice, which is a big part of that, having the right stock holding so that we can maintain that next day delivery, which is a big part of our offer. So our loyalty schemes in general are not centered around giving discounts, but centered around making sure we make the process of buying from us very easy, which allows us to have repeatable continuously from all our various markets. But that said, we do routinely run promotions either to attract new customers or to provide our existing customers with a price-led incentive. In Mr. Central Heating in particular, we have a -- we have just launched a monthly or bimonthly promotion that will be based on around 10 to 12 key products, most of our installer base buy and that will be run now on a 2-weekly basis as long as you sign up to our newsletter and you have an account with us -- a digital account with us. So there are schemes that we're using to attract new customers and to provide our loyal customers with the discount. But in the main, this is not a discount-led strategy. Our strategy is operational excellence through great customer service at reasonable value-added prices.

Next question. Are there any further acquisitions in the pipeline and will there be any new shares being offered from these deals, if done?

There are always acquisitions in the pipeline being very publicly stating that one part of our strategy is to grow through acquisitions. We are always talking to a number of interested parties who would like to sell the businesses. With regards to new shares being offered, I think that really depends on the environment and a particular acquisition that we couldn't necessarily fund from our existing resources. We have just refinanced. We've got a tremendous amount of headroom. But that said, of course, we're not closed to offering new shares if the opportunity is right and the market conditions are right.

The last one of the pre-submitted. Margin has been fine, what is being done to improve these? Happy to go with this one. I think we just had it on the previous slide. We're extremely confident that accretion in our EBITDA margin. We -- as I said a while ago, we have multiple levers through acquisitions, product range extension, new stores and operational leverage and combined, they have the ability to take us to our medium-term target of 7.5%. You can see a really sizable step forward in the margins this year, up 6.7% and remember that in an inflationary period. So we're absolutely confident that we can continue to drive EBITDA margin.

Last question from L&D, PM Rishi Sunak is set to be considering relaunching the GBP 29 billion fund to move voters as thousands struggle to get on the housing matter. What's your view on this for growth in building materials going forward over the next -- over the, say, the next 5 years? Any assistance to the new build market, be it through predominantly first-time buyers, will always filter through to growth in building materials. I think the U.K. is very dependent on housebuilding and house prices as well as housebuilding. So any government assistance always underpins the market. We've seen the housebuilders publicly withdraw from new sites post the mini budget, something that if it does feed into higher reservation rates for them, which we think it will, will naturally then lead to greater demand for building products. And certainly, the last 24 months, we've seen quite elevated levels of house building from the national housebuilders. That in itself in years to come, feeds into our RMI market as those homes start to age and devise into transact and move on or either move up, that feeds into our market. So we believe that the government intervention is, by its very nature, going to support the growth in building materials going forward for the next 5 years and beyond.

Then just have one final one come in where you were answering that from [indiscernible]. How does the business embrace technologies to improve margins and efficiency, are all acquisitions transferred onto a central system?

I'll answer the second half of it.

Yes, there's probably 2 questions there. So in terms of technologies to drive margins. So we operate a collection of ERP systems, what's common across them all is a business intelligence tool that we use. That allows our management teams and our business development teams to see real-time trends in customers' margins, product mix and more importantly, opportunity to enhance some opportunity to get a better share of custom from customers opportunity to take a bigger share, an opportunity to look to rectify where perhaps volume and rate are misaligned to drive further improvement. In terms of the second part around acquisitions, I'll let Shanker answer.

Yes. So our business model is decentralized. So we are anti a big center. But there are central systems that we do deploy. So HR systems are generally central. We have a business software system that pulls all the trial balances out of the various ERP systems and then provides management accounts and annual accounts through -- on unified format. But in terms of business operating systems, we take a case-by-case approach. If you look at our group, we have regional differences into different types of customers. Some businesses, if they're dealing with civils merchants do a lot of direct, some businesses that are predominantly ex-yard businesses, dealing with customers either calling in or coming into our premises and then need slightly different systems and different methods by which they trade. The very essence and growth of our business comes from allowing these local businesses with local leaders, local managers and managing directors control of their own business. And unfortunately, a centralized, unified ubiquitous system will end up invariably restricting the commercial benefits that they get from being independent. So our approach is on a case-by-case basis. There are lots of parts of our business systems that are unified and common, but there are lots of differences in each of those businesses. And the differences are permitted so that those businesses can trade better on their own, independently with their own systems. And then if they were unified across a common system that doesn't take into account the subtle differences within each of these businesses. So I hope that answers.

Shanker, Chris, thank you. And I think you've addressed all those questions you've had from investors. And of course, the company will review all questions submitted today, and we will publish those responses on the Investor Meet Company platform. Perhaps before redirecting investors to provide you with their feedback, which I know is particularly important to yourself and the company, Shanker, can I please just ask you for a few closing comments.

Yes. Firstly, thank you all for attending today's presentation of our full year '22 results. We're delighted with the results for full year '22. And more importantly, we would like to thank all of our colleagues in helping us deliver an outstanding set of results in '22 as we look forward to now repeating the performance of the business in full year '23. Thank you.

Shanker, Chris, thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Lords Group Trading plc, we'd like to thank you for attending today's presentation. Good afternoon to you all.