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

Good morning, ladies and gentlemen, and welcome to the Lords Group Trading plc Full Year Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and will publish their responses where it's appropriate to do so on the Investor Meet Company platform. And before we begin, I would just like to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Lords Group Trading. Shanker, good morning, sir.

Good morning, and good morning, everyone. Welcome to our full year '23 results. Thank you for taking the time to join us this morning. The agenda is an overview by myself, followed by a financial review by Chris Day, our CFO and COO. There will be a strategy update and an update on our ESG to myself and Chris, and then our Chairman, Gary O'Brien will provide a summary and an outlook for the future, followed by Q&A. So over to the overview. The highlights full year '23. In principle, we believe that we have, through our wonderful 950-odd colleagues, produced a resilient performance despite challenging economic backdrops. We've also taken strategic actions to protect profitability and our cash flow. In terms of high-level numbers, we're in line with market expectations, with revenues at a record high of 2.8% like-for-like -- sorry, 2.8% overall and a like-for-like revenue still being resilient, albeit negative at 1.2%, which, I think, is a really good performance given the backdrop. We've continued to see robust Plumbing and Heating division deliver revenue growth, reflecting its recurring demand profile. This division had total growth of 8% and a positive like-for-like growth of 3.7%. In our numbers, it's clear to see that we've had a strong focus on cost control. And that discipline will be maintained throughout our 2024 period. Our ESG strategy and net-zero ambitions will be fully defined during the course of the year. And we've got a road map that we've identified to materially reduce our emissions. We remain confident in our medium-term prospects and, therefore, are maintaining our dividend of 2p in 2023. And overall, we still maintain that we remain a small business, less than 1% of a GBP 55 billion market. And our growth strategy continues to be based on product range extension, branch expansion and accretive acquisitions. I'll hand over to Chris for the financial review.

Good morning, everybody. So I'll take you through the FY '23 numbers, which I think Shanker's already said, we think is a really solid performance in a -- what's a difficult market. That's built off our operating model, and we've spoken to you before about the decentralized entrepreneurial and agile structure that we're operating. We really feel that's what has helped deliver these numbers and see the outperformance against the market. As you read through the table, revenue of GBP 462.6 million is up 12.6% on the prior year -- 2.8%. Adjusted EBITDA of GBP 26.8 million, down from GBP 30 million in FY '22, a 10.5% reduction, but we still think, in the climate, that's a very good result. That also includes the Alloway acquisition, which we announced in H2, flagged as a loss-making business at the time, absolutely clear road to recovery. It sits in 5 very strong complementary markets in south of London but, in the FY '23 period, does contribute to drive our EBITDA. Adjusted EBITDA margin of 5.8% versus 6.7% in the prior year. And I think that's really reflective of a number of things. One, you've got the outperformance of Plumbing and Heating, where margins are typically lower than Merchanting. Two, battling deflation in prior categories, particularly within Merchanting and inflation in the overhead base. And thirdly, the point I made a while ago around adjusted profit before tax of GBP 10.4 million is a GBP 7 million step back in FY '22. Simply, that's the GBP 3.2 million in EBITDA, plus GBP 2.8 million increase in interest reflective of base rate and average net debt, plus GBP 1 million of goodwill and depreciations on the cash. And to that point, free cash flow conversion remains very strong at 59.2%. Actually, underlying, I think, is even stronger. We'll come to that in a slide in a second around some of the movements in that cash flow. Adjusted earnings per share of 4.35p and a dividend of 2p, as Shanker said, very much reflecting our confidence in the medium and long-term outlook at the group despite a challenging 2024. For the Merchanting, resilient performance. Certainly the more exposed on the 2 divisions to the macro situation, more discretion in its spend. Overall, a good result. Revenue down 2.6% at GBP 214.9 million. Like-for-like exit, 6.3%. That does sit very well against listed peers. Adjusted EBITDA of GBP 14 million against GBP 16.1 million, and that margin compression, as I spoke about a while ago. And particularly, Merchanting, it is an operationally leveraged business. A small reduction in volume compounds quite strongly, and likewise, the return on that volume does the opposite and recovers growth. Plumbing and Heating, much more resilient. So if you step back here, 80% of the revenue is in boilers. That is an incredibly resilient product category in the U.K., kind of very, very strong consistency over a 30-year period, doesn't always behave kind of month-to-month but across the year to get this kind of really strong consistent demand in revenue. There's a difference -- the delta between like-for-like and overall growth of 8% is the full year impact of 2022 acquisitions, being Direct Heating and HRP Trade, and they continue to perform very, very well and a have real good synergies into our customer proposition. But EBITDA margin does step back. Those that have watched the stock closely will know we've made a really strong progression in overall margin, EBITDA margin, but particularly Plumbing and Heating. And so this is a small step-back, but you can understand one that should recover with market conditions. You move to the balance sheet, which we think is stable -- really stable. Net debt of GBP 28.5 million, that's comparable to GBP 19.4 million in the prior year. So that's reflective of the activity around freehold purchase of one of our sites in London, the Alloway acquisition, Chiltern Timber and the various deferred consideration commitments that flowed out in 2023. We have extended our debt facilities recently announced in after year, and they expire on 5th of April 2027. Significant cash headroom as we've discussed and cover again, mindful of the environment, and we'll be prudent in the way we execute and when we take [indiscernible]. So you get to cash flow. Start at the top with the EBITDA of GBP 23.5 million, and that delivers a bottom conversion of 59.2% or GBP 13.9 million of free cash flow. That compares to 66.9% in the prior year. But actually, the underlying position, I think, is probably stronger than the prior year. The rationale for that is of the GBP 4.9 million CapEx, GBP 2.2 million is -- relates to freeholding. And in FY '24, we expect CapEx to actually be about GBP 2.5 million as a run rate. And then you can clearly see the impact of the interest position. The one of the points to call out here is the working capital movement, GBP 0.8 million. We have a substantial base of working capital, which is very well controlled. A good oversight from a group perspective but divisionally is well controlled. So that allows us to invest for growth but fund it through other initiatives to be more efficient in the working capital base. That's the end of the financial review. I'm just going to cover the first slide in the strategic update for you before passing over to Shanker. And it's really to outline the track record of growth for the group. We've navigated 2023 very well. 2024 is the next challenge. But when you look beyond that, this is a group that's delivering very, very strong double-digit CAGR in revenue and adjusted EBITDA, 36% and 37%, respectively, over a 10-year period. Despite that growth, less than 1% of the market and very much focused on being a bigger part of that market through both M&A and organic opportunity. And Shanker will talk you through some of the initiatives.

Thank you, Chris. So in terms of our strategic initiatives, one of the things that we want to call out for -- call out here is our renewables range, where we are very well positioned to take advantage of the energy transition from fossil fuel-based heating solutions to renewable heating solutions. In full year '23, our renewables category enjoyed a 60% revenue growth, and in particular, air source heat pump, which is a subcategory, delivered very strong momentum with revenue growth of 300% in the year. The point that we make about air source heat pumps is that the average selling price is GBP 2,800 per unit versus the boiler, which is around GBP 900 per unit. So ultimately, in the transition, it's going to be very good for our business. And we think we're uniquely positioned to supply the distribution, merchanting and consumer channels as this market starts to really take off. One of the reasons why we're uniquely positioned is the fact that suppliers recognize our track record of delivering new products into the market. We've had 6 new suppliers join the network in full year '23. And the other point to call out here is the products are margin accretive and delivered by our existing in-house network. We have made substantial investments in our Plumbing and Heating division since we've acquired it 5 years ago, and we are very well placed to take advantage of this growing market. In terms of the growth of the market, it's underpinned by government targeting 600,000 installations of renewable products in the heating market by 2028. And that 600,000 per annum, even if this marker is not hit and -- around 50% of that market is still a very large opportunity for our business that we're very well placed to take advantage of. On the next slide, we call out a little bit more in terms of the transition plan. So the renewables range transition plan, that's underpinned by the government's announcement of an adjustment to the Clean Heat Market Mechanism, was originally planned for April 2024, has been pushed back to April 2025. The mechanism incentivizes boiler manufacturers through a levy, and it incentivizes homeowners through a grant to accelerate the transition towards renewable energy sources for the U.K. heating. This initiative is expected to increase demand from renewable products, including air source heat pumps, which is one of the principal products in this area. Unfortunately, the deferment of the Clean Heat Market Mechanism has caused some demand disruption in Q1 of 2024 within our B2B channel. However, we are now seeing restocking activity, and we anticipate that to potentially unwind the disruption of Q1 in Q2. In terms of our consolidation model, we wanted to update our stakeholders that we have a strong track record of acquisitions with in-house M&A expertise. That's one of our unique points. Most vendors speak to us because everything we do is in-house, and it's bespoke to a particular acquisition, not a cookie-cutter model. We have completed 15 since 2016. And all of these are fully integrated and performing ahead of expectations, indeed delivering a 25% return on investment. In many cases or most cases, management teams are retained and incentivized to perform, and we have mini case studies of this. We still see significant opportunities to accelerate consolidation. The targets are selected on their ability to enhance our geographic footprint or our product range or add to our existing e-commerce platform. Ever since the IPO, we've always maintained discipline. And that is that we're targeting acquisitions on a 4 to 6x maintainable EBITDA. The pipeline of opportunities remains very active. However, we exercise prudence given the current macroeconomic conditions. In terms of ESG, we've been working really hard to develop our strategy. Initially, we've developed the strategy in full year 2022, which provided an effective framework to drive our ESG performance. In '23, we've implemented a new environmental policy outlining our ambition to reduce our Scope 1 and Scope 2 emissions by 90% by 2035. Scope 1 and Scope 2, that's the emissions that the business generates through its operations. And the slightly more harder Scope 3, we have committed to reduce our emissions by 2050 by, again, 90%. Great amount of work has been done in revising our supplier code of conduct policies with mandated compliance that makes sure that we perform to the regulatory obligations we have against areas such as antislavery or modern slavery [indiscernible]. We're very proud of our foundation. The Lords Group Foundation distributed GBP 123,000 out of the GBP 200,000 that we committed annually to the foundation for good causes. It focuses on good causes within our local communities. We've always maintained that we're a local business with local leaders running these businesses, and we believe firmly in giving back to the local communities where our customers live or trade from. And finally, we're also very proud of the fact that despite being an entrepreneurial business, our professionalism has shown to have been recognized being shortlisted to the Corporate Governance award at the AIM Awards in 2023. We wanted to also reiterate the Lords investment case. I'm not going to go through each bullet point on this page, but we reaffirm that we are a leading high-growth distributor of building materials in the U.K. The 6 key reasons why I believe in our investment case. First, we are a customer -- unique customer-first proposition. Customer service excellence is a central pillar of our strategy. We do this through engaged colleague, which a fundamental differentiation in customer service. We have specialist, highly recognizable brands, local and regional leadership. And all of this creates long-term customer relationships. Many of our colleagues are aligned with the success of the group, with their own ability to purchase shares in the business. We have substantial organic and margin-accretive growth opportunities in either new markets or accelerating our digital capability. We have opportunities in increasing the share of customer wallet through new products. And as I've just mentioned, the decarbonization of the U.K. heating market provides us margin expansion. We're well positioned in the U.K. RMI market by being small, less than 1% of a highly fragmented and resilient market. 45% of our revenues is from the repair sector. I've talked a little bit about our M&A. That's another strong pillar. Chris has mentioned about our balance sheet, which is still strong, and our intention to enhance our EBITDA margin to 7.5%. And finally, not only an exec leadership, but right throughout our business, we have a tremendous track record. Many of our colleagues are recognized as industry leaders, and we're aligned with shareholders via significant majority shareholding of the exec team. Over to you Gary for the outlook.

Okay. Well, thank you, Shanker, Chris. I'll start of actually by congratulating you both and the whole team for, I think, producing a really good set of results in very difficult circumstances. And then having talked about difficult circumstances, that probably takes me onto outlook. Facts is, it is difficult circumstances. We've seen this at the macroeconomic environment living in. We would have never perceived the interest rates will be at the rates of that, with the geopolitical issues we've got worldwide as well, unfortunately. But against that, we have, I've got to say, outperformed our peers within the sector. We've been very pleased with the results. And that is what we would continue to do. We've highlighted several points on this slide down below. I'm not going to repeat them. It's things that Shanker and Chris both covered. But the key thing is we will continue to, I think, perform well against the market, and we are certainly trading at the moment in line with market expectations. And we would look forward and hope that -- well, it's sunny outside today. We're hoping it's going to continue sunny and that things will start to improve after a very difficult 9 months. I'll pass it across to Chris, who is going to manage the Qs and As.

Thanks, Gary. Okay. Thank you. We've got some questions that have come through. So I'll read them out one by one. We'll start with a question from [ Michael J ], maybe for Shanker. Are you pleased with the full year results? Or do they feel disappointing [ overall ]?

I think we're pleased with the results given the economic backdrop and the fact that the economic backdrop changed quite rapidly in the second half of last year. But equally, when the business goes backwards, it is disappointing. Nobody, certainly management, should ever feel that a regression is to be celebrated. I think it's in context of the market where we feel that we've performed as well as we can, but we are not agnostic to the market. And in particular, the severity of the macroeconomic decline that U.K. has seen over a very short and rapid period. So in light of that, we're pleased, but at the same time, we're not going to be complacent by being pleased. We recognize that a step-back is, in all intents and purposes, a step-back, and we will work hard to ensure that we grow our business and grow our profitability moving forward.

Okay. A second one from [ Michael J ]. And the question is around the projected year-end target versus the GBP 500 million revenue. I can probably start with this. So through the website, there is access to analyst research. And consensus is below GBP 500 million, so it's at about GBP 560 million, so projected miss against the GBP 500 million. I think the point to say there is that was a target set at the beginning of 2021 in very different -- in a very different environment. And whilst we have the opportunities to take us over the line to GBP 500 million, we want to exercise prudence. You'll see in the exceptional items for 2023 that was abortive acquisition costs. We had 2 transactions that were very well advanced, close to completion in H2, and we took the decision to postpone or abort those discussions because we've always said, as Shanker covered a while ago, 4 to 6x maintainable. And the only thing you can't change about an acquisition is the price you pay for it. So we want to exercise that discipline and not lunge for the GBP 500 million for the sake of hitting target.

And I think, Chris, just to add to that. You saw in the slide, our 10-year sales CAGR. And therefore, it just goes to show that actually over the medium term, we will certainly achieve our stated objectives. But we have to be mindful of the ever-changing backdrop from '21 when we made that statement.

We've got a couple from [ Maxine W ], so cover those. What drove the profitability decline? And when do you expect to return to historic levels and midterm target? So I think we've probably covered that largely. But just to summarize, in Merchanting, you have product deflation in key categories, predominantly in timber and metals; overhead inflation; and the absorption of Alloway, as I said, a loss-making business at the time we bought it but with a clear plan to recover over the next 12 months. Historic levels of midterm targets. Well, midterm targets are unchanged. As I said a minute ago, the GBP 500 million, it will be achieved. The CAGR shows that. As Shanker said, we're less than 1% in the market. We will get to GBP 500 million, but we're not going to force us to those through -- by bloating the business through acquisitions in this market in 2024. And the second question from [ Maxine ] is, why is there an EBITDA margin step-back as boiler availability normalized? If the shortage of boilers is going away, shouldn't investors expect an improvement in the margin there? So particularly on the margin, again, I think it goes back to actually if our gross margins have improved year-on-year. And we're pleased with that, although an element of it is channel mix and segment mix. But I think what I would say is the boiler availability position last year actually made price a secondary consideration because when people -- when boilers were short, customers were more interested in availability than price. That's clearly normalized this year as supply has normalized. So combine that with, in Plumbing and Heating, the overhead inflation, and that's why you're getting that EBITDA margin step-back. I made the point post IPO that the overall margins have still shown progression. And in an operationally leveraged business, as I said a while ago, it will rebound back with volume. Right. A question from [ James H ]. Do you sell and fit solar panels?

No, we don't. But it is an area that we will look at. I'm not sure about fitting as a group. We've not been involved in providing any construction or installation service. But in terms of solar supply, that is certainly something that is part of our road map of product [indiscernible].

Okay. A question from [ Gary V ]. Lords has continued its expansion through acquisitions. How have the recent acquisitions of Chiltern Timber, Alloway Timber contributed to the revenue and margin profile of the group? Can you elaborate on the integration process? And any synergies realized so far? So perhaps if I talk about the revenue margin, and Shanker will talk about the synergies. So revenue we believe -- I mean Chiltern Timber, the rationale for that was specialist timber range that sits very neatly from a geographical perspective. So it allows cross-sell into our existing customer base. So the rationale there is cross-sell. We bought the business at the bottom end of our 4 to 6x EBITDA multiple range as well. And I think that integration has gone well. So what we mean by integration is it's fully integrated and [ high up ] into our core limited entity on our single ERP system for Merchanting and is now being run by our management team to realize these synergies. And I think actually Chiltern Timber had a record-ever trading month in April. So a good example of how that cross-sell opportunity is flowing through. Revenue is relatively modest. It's a cross-sell opportunity. Alloway Timber, we bought that business on a run rate of GBP 12 million. Our ambition is to take that towards and beyond GBP 20 million over time. We've got a track record of doing that. So where Shanker is talking about 25% return on investment in our 13 acquisitions, I think 4 of those have similar profiles of insofar as their performance, and they've all come through and can go through the Lord's proposition being applied and some investment in people, plant and premises. In terms of margin, they should both ultimately reach the blended average of Merchanting. There's nothing to differentiate them in terms of their performance. Clearly, at the moment, particularly Alloway, is dilutive to EBITDA and EBITDA margin.

Okay. In terms of the integration process and synergies realized so far. Chris has mentioned in terms of synergies, we've seen Chiltern Timber show a record April. The integration is around the product side itself through our network, allowing our existing network new specialist opportunities. And the integration process, it's never easy acquiring businesses and not for the faint-hearted. It's always something that we are very mindful of when we take our time in trying to win the hearts and minds of the new colleagues. But the way we work that through is by investing in these businesses. Both of the businesses that we've acquired have had substantial support and investment. And then Alloway, in particular, all but one of the outlets has been refurbished. Refurbishment program is coming to a Phase 1 closure, and then we will reevaluate and provide further investment, which will then, in turn, lead to that return of the performance. So having done this at least 15 times since 2016, we apply our same model, be very focused on integrating the customers. But first, we want to integrate the colleagues, and it's through them that we'll find the performance starts to pick up alongside our investment in what we call our 3Ps, our people, plant and premises.

All right. A question from [ Stephen K ]. What performance metrics does Lords use to assess the success of new store openings? And how long does it typically take for new stores to reach profitability? So the model here is, we've talked consistently about wanting a 20% return on our investments. So that's what -- internally, that's the hurdle, what we set, and that's the bar that divisional management teams have to reach. So that's what good performance looks like. In terms of how long it takes to reach profitability, we're trying -- the trick is -- stating the obvious, really is the lower -- is to make the losses as small as possible in year 1 and then drive it to breakeven mid/early into year 2. And that's typically how we drive that performance because we're not only focused on the return. We want to pay back, so the smaller the loss at the beginning and the quicker it turns, actually the quicker the payback flows through. And so our teams are very focused on trying to refine the model. There's a lot of that work going in Mr Central Heating around the CapEx that is required to open one of those. The stock that we need to hold can make a material difference to the return.

Okay. And then last question?

Yes. Final question, unless any more come through. And one for Shanker, I think, is there any overlap between your business and that of Brickability? Do you regard them as a serious competitor?

The overlap between our business and Brickability is around the fact that we serve the same customer. But we're in different parts of the chain. We're a stockist. We're a true distributor. So for us, a lot of the -- a lot of what we do is around distributing building and heating products. But invariably, we have an overlap in distributing to the same customer. Housebuilding industry is very large. Brickability is predominantly in that section. So we have a common customer. And that's where there are commonalities that if you look at the product ranges, it's complementary, not competitive to each other. Brickability also, a little bit up the supply chain in bricks as a factor. So quite often, we would be trading with them. And again, we have a strong trading relationship with Brickability. So we don't really see them as a serious competitor. They go after a particular part of the market that we don't necessarily concentrate on. Of course, we do overlap from time to time but not often.

Shanker, Chris, Gary, if I may just jump back in there and thank you very much indeed to addressing all of those questions that came in from investors. And of course, if there are any further questions that do come through and we'll make those available to you immediately after the presentation has ended, just for you to review, to then add any additional responses, of course, where it's appropriate to do so. And we'll publish all those responses out on the platform. But Shanker, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

Firstly, I'd like to thank all our colleagues for their great efforts in our resilient performance of 2023. We recognize the step-back in our profitability, but we're also very confident about the medium-term opportunities for our business. We've given you a snapshot of all the organic and acquisitive opportunities that we have in our business and the fact that we're very well placed to take advantage of the market as it starts to turn heading into later 2024 and 2025. Thank you all for your attendance, and we look forward to seeing you again at our next virtual.

Shanker, that's great. And thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations? This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Lords Group Trading plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.