Nexus Infrastructure plc (NEXS) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Nexus Infrastructure plc Full Year Results Investor Presentation. [Operator Instructions]. Before we begin, I'd like to do the following poll. I'd now like to hand you over to Charles Sweeney, CEO. Good afternoon to you sir.

Good afternoon, and good afternoon, everybody. So talking today will be myself and Dawn, CFO. We've got an agenda to run through. We're going to do an introduction to Nexus, then we'll have some comments on our strategy and the progress that we've made. Dawn will then go through the key financials and I'll provide a brief overview of 2 of the sectors that we're involved in, housebuilding sector and water. Before we wrap up, we'll have a brief summary. So for those who are not familiar with Nexus Infrastructure, in essence, we are a civil engineering construction business. Tamdown is the operated subsidiary focused on the housebuilding sector and post year-end, we completed the purchase of Coleman Construction & Utilities. Again, for those who are not familiar with our business, just a few words on Tamdown. More than 48 years now in business, a long track record, provides basic infrastructure for large multiphase developments. As you can see on the image there that's involved in roads, the basic drainage, the house foundations and so on and so forth. So it's at the front end of any of the large developments -- housing developers will be wanting to undertake. And as you can see in the bottom right-hand corner, we're involved with just about all of the main housing develop -- national housing developers. A few words on Coleman. So Coleman, as I say, post year-end, we completed the acquisition of Coleman, it's busy across a range of sectors, but mainly water and rail. And we'll say a bit more about the diversification strategy just shortly now. So as we painted out, our strategy printed out some 16 months back now. So 3 elements to our strategy, growing with our customers and pleased to see that our order book has grown in line with that, and Dawn will be talking about figures later. But in essence, the order book has grown by 12%. Expanding the market, that's the diversification I made reference that with the acquisition of Coleman, very pleased with that, very excited about our future in water, in particular. And also, the third element was the focus on financial delivery. So keeping things tight and that's represented by the improvement we've had in the gross margin, which has improved to 13.7%. Dawn will be talking about that shortly now. So I'll hand over to Dawn so she can run through some of those points.

We are pleased to report that our financial year '24 delivered an improved overall financial performance. Revenue was down in the year of GBP 56.7 million, but that was as expected by the Board. It does reflect the market conditions of the housebuilding sector over the last few months, but the pace of recovery has been slower than anticipated. Customer confidence was affected by uncertainty created through the general election and slower-than-anticipated reduction in interest rates, which continues to affect affordability. Gross profit increased to GBP 7.7 million, taking the margin up to 13.7%, the improvement in this area demonstrates the operational discipline and management costs within Tamdown that is now coming through in the financial position that they see themselves in. The operating loss before exceptionals was GBP [ 2.3 ] million, both the gross profit improvement and the reduction in Nexus overheads, which was GBP 0.5 million in the year contributed to this position. Cash was GBP 12.8 million at the year-end. This will support our growth ambitions from both the working capital perspective as new contracts are secured and future strategic plans. The Board is recommending a final dividend of 2p per share. This will take the full year dividend to 3p per share, which is consistent with prior year and gives us the ability to continue to return value to our shareholders. The order book has increased by 12%, up to GBP 51.6 million, which we're pleased with because given the challenging housebuilding market that we continue to face. The improved financial performance can be seen in both the P&L and the balance sheet. The operating loss reduced from GBP 8.4 million to GBP 2.2 million. That's part of the improvement in the gross margins from the actions taken by management on costs. And the net finance expense remained the same year-on-year as we invested in machines and kept our investment in the business and growing the business going forward. Our balance sheet remains robust with net assets of GBP 30 million. Trade receivables includes retention of [ circa ] GBP 7 million, which tends to distort the figure slightly. It is long-term debt and builds over the life cycle of the contract. Our trade receivables normalized position is 45 days against contract terms of around 35. 45 to 35-day comparison is partly due to retentions, which can take slightly longer to settle than contract work. We will -- Tamdown recruited a commercial director who is focused on improving the debt position from both short term and long term, and we're working on reducing the retention balance to include reducing -- introducing caps and collecting retentions quicker. Our cash position will support the working capital requirements as the housebuilding market improves and the order book increases. As we win more work, we tend to see that we need more cash to support the early days on site. Alongside that, we've been able to complete the acquisition of Coleman from our cash balance. Coleman has a cash balance itself, which means that the net impact to Nexus after acquisition and transaction costs was around GBP 3 million. And then I hand back to Charles, who will talk about more on our market.

So thanks, Dawn. Just a couple of points to emphasize the housebuilding sector, again, for those people who are involved already in the sector. This won't come as any news. But in essence, I'll just make reference to a couple of things. First, we've always made the comment about the importance of the housebuilding sector to the nation. For many, many years, we've been way behind the targets needed in order to provide new high-quality housing at an affordable rate to the nation. So the numbers of completions have never got anywhere near the target of 300,000. But the government, the new government, Labor government is doing some pretty interesting things on the planning side in order to try to alleviate that difficulty or that roadblock. So the target I set out now is 370,000. And as you can see on that chart, you may be able to see on that chart. In recent years, we peaked out at around 240,000, something like that. So I mean, who knows if we will get to 370,000, let's hope that is the case. It's supposed to be 1.5 million homes in the light of the parliament. That's a big target. But the positive thing about it is 2 things. One, there is that political push. We could be talking about the sector that was really not in favor. So it definitely has got the political push behind it. And the general economics appear to be easing. Again, we're all second guessing as to how this year is going to turn out. But we should see all being well, we should see some further rate reductions, which will help mortgage rates going forward. So at some point, and we think it is in the course of this year, we will see a pickup in housebuilding and then a surge thereafter in order to meet the targets that the government has set out and to meet the requirements of the housebuilding sector. So very, very confident on that. The second thing I just wanted to talk about was our move into the water sector. I could also mention rail because Coleman is involved in rail too, but the water sector in particular. Again, for those people who are familiar with it, you'll know that Ofwat and its final determination from the price review was completed in December. And the spend for the next 5 years is planned to be 104 billion. I mean that is a huge increase against what the expenditure was in the previous price review. If I turn to the numbers that I've seen Ofwat published is that PR19 as in the last price review, the numbers were GBP 61.5 billion, whereas in this PR24, as I've stated, it's GBP 104 billion. And with regards to new capital investments, it's a quadrupling of the expenditure previously outlined in PR19. I mean, where does that come from? Fortunately, it comes from us all in terms of water bills and the fee increases in the water bills to pay for that. But the fact of the matter is due to climate change and due to population growth and so on and so forth and aging infrastructure, we have to deal with -- we have to spend money in order to deal with the pollution of the rivers, the leakage of the pipes and strange enough even in the summertime, the avoidance of drought. So the AMP8 is the program, asset management plan programs, which each of the water companies had to present to Ofwat to show what they would be needing to spend their money on. And the attraction besides the fact that it's GBP 104 billion, it's a huge number. The attraction from a contracting -- construction contracting point of view is the transparency of the workload in that 5-year period in front of us. So just transparency and visibility of what work is required, when it will be required and of what nature. So with that framework type approach for the execution of the work, it means that Coleman will be able to approach the workload in a very clear and planned out manner. So that's as we're wrapping up now is just turning to the point what would be the takeaways. I mean we list out there the various factors which should be the interest that you would have in Nexus. But there's 2 things I would just like to mention as takeaways out of that listing. One is, as I say, is Tamdown's future and the growth of Tamdown will come with the housing sector, the recovery in the housing sector. It's a chronic undersupply of housing, and we're absolutely confident that sector is going to come back. And when it comes back, it's going to come back with some gusto. The second thing, as I mentioned, is our diversification, and we're diversifying into sectors, which are long-term expenditure with a great deal of transparency and visibility. So with that, that would be the point at which we would close the presentation, and I'll hand back so that we can go to questions and answers.

Perfect. Charles, Dawn. Thank you very much for your presentation. [Operator Instructions]. We have received a number of questions, and I want to start the Q&A session off with this one here. What's the atmosphere in the housebuilding sector? What's your clients saying about the state of the housebuilding sector?

I think there's -- we're pleased, I'd say, in general, pleased to see the moves that have come into play the NPPF -- revised NPPF, it was published last month on the further policy changes planned in order to ease the planning side of things. Again, those people that are involved in looking at the sector will see that completion rates are up for most of the developers from last year. I remind you that last year was pretty dire. So -- but it's good to see that they're at the top end of their range. And in terms of comments on, is there an interest out there? Again, you'll see the statistics, but what they're saying is in line with that is that they are seeing a lot more inquiries. The number of sales per outlet per week are up across the Board. So it's a recovery but they're not quite sure as to the strength of the recovery and what will be happening over the next couple of months. As we all know, decisions in families, it comes down to feelings. Is there a confidence in the family household? Is now the time to buy that new car or is now the time to make that house move. It doesn't take much for the trigger to be pulled and for us to be well into the recovery of the housing sector. But I'd say just bubbling on too much further, is encouraged, but waiting to see what will happen in the next couple of months as to how that [ option ] will go.

That's great. Thank you very much, Charles. Moving on to the next question. What's the potential for a profit rebound due to better assets/crew utilization should the housebuilding market rebound over the next 12 months? Your peers, Van Elle has given detailed insights into their utilization levels and profit rebound potentials that make the attractiveness of their low valuation clearer to potential shareholders. Maybe their [ rigs ] are easier to communicate, but comparing gross profit margin as gross profit per employee as a proxy for utilization levels, do you see the potential to return to pre-COVID levels?

I think from an external reporting point of view, gross margin is a good measure for the business. You can see how Van Elle's has improved over the last couple of years, and we're seeing a return to higher margins. So it's a good judge from an external position and shows how we work in to improve delivery, better use of our resources as we move forward and gross margin continues to improve.

Great, thank you very much Dawn. The next question, what is your expectation by when Nexus Infrastructure reports positive net income? What's your expectations of gross profit margin should the homebuilding activities rebound?

As we've just discussed, the Tamdown business has seen improving gross margin. And when market conditions return to normal, we would expect to see gross margins of around 15%. Revenue should return to pre-COVID levels. We've seen Tamdown operating around the GBP 100 million mark previously on revenues. Overheads rate in Tamdown are likely to be around the 10% mark.

Moving to the next question. With lower revenue, can you give more color on your trade receivables?

As I mentioned during the presentation, our trade receivables gets distorted by our retention number. This is long-term debt that accumulates across the length of the contract, which can take 3 to 4 years to deliver. And it takes time to get this release once the contract is completed. So they can be holding retentions on us from 4, 5, 6 years before we get the full final release on it. And at the end of September '24, our retention balance is GBP 7 million. I'm pleased we've seen an improvement in that actually as well over the last 18 months as we focused on collecting the older term debt.

The next question is really around share buybacks and read as follows. With the cash on your balance sheet, have you considered a share buyback to return value to shareholders? And what's your strategy around this?

We certainly did and would continue to consider that amongst all the options in front of us. However, when we looked at this, this would be some 12, 14 months back and our strategy overall. We thought the best thing as a Board, we thought the best thing for the business and for the shareholders would be for us to follow the strategy as we've outlined here, and that didn't include a share buyback.

And staying on a similar theme, up until 2021, the noncash working capital has been negative. Do you foresee a return to a negative noncash working capital or is this a permanent change due to the sale of the 2 divisions?

It's fairly unlikely that we will have returned to noncash working capital.

That's great. The next question. Congratulations on the acquisition. Can you give us some more color on the expected performance as you mentioned, do you expect it to be earnings enhancing?

So it's a really good business, the Coleman business. So -- at the moment, the gross margins, I suppose I could talk about are in the mid-20% gross margins. In the RNS -- at the back of the RNS, we've indicated how there's an earn-out and the earn-out gives some reference to the range of possibilities in terms of EBITDA, I don't know if that's helpful.

Sticking with the similar theme. Can you give any more detail on your future M&A ambitions?

So we certainly would consider future M&A. It's not the only way in which to achieve the growth and the diversification that we're after. So it's under continuous review. I wouldn't say any more than that. So we wouldn't discount it. Anything we would do would be on a considered -- obviously a considered basis. So I think at first, we want to make sure that we do right by Coleman, provide Coleman with all the support that we can to help them grow. But yes, we would certainly consider another acquisition should that be appropriate.

That's great. The next question here, can you comment on the one-off positive impact? Does this settle the claim against supplier?

Yes, the claim against the supplier is full, but we are not able to share any details on the claim itself.

That's great. The next question, the first move in terms of diversification is Coleman and water. You hinted possible further acquisitions. What sectors are most attractive to you? And would you consider doubling down on water and making a complementary acquisition in the sector?

Sort of touched a bit on that already. But as I mentioned, Coleman is involved also in rail. So rail has got a similar expenditure is not as large as water, but has got a similar attraction in that it's 5-year programs. So in the case of rail, it's CP7 was from March '24 for the first 5 years. Some of the work which has been awarded stretches, in fact, beyond the 5 years. It's actually into the next period as well. So quite attracted by helping Coleman to further develop in that area, too. Water though, as a starting point for the reasons I've spoken about already, is hugely attractive to us. And in due course, we could consider other sectors such as power, road. But at the moment, water is our priority with rail.

The housebuilders have all sounded tentatively optimistic on planning, although initial decisions can take times trickle down to detailed consents. Can you give a rough idea about how long it takes to get from full planning permission to Nexus starting on site?

Sometimes, it's the case that planning, the final step of planning is ongoing prior to us submitting our tenders and it can be in the few weeks prior to us being awarded the work that final permission is given. I mean, of course, from a client point of view and also from our point of view, it would prefer it to be the case that the planning is already completed. And that does happen. But as I say, sometimes it's in the final stages as we are submitting our tender. Just in a round, I would say that when the market is really busy, then it can be the case that Tamdown receives an inquiry, it responds to the inquiry, and it can be starting on site within a period of even 6 weeks to 2 months when the market is really busy. In more recent times, for a variety of different reasons, but planning being one of them being a significant one, that can stretch to 4 to 6 months. So as things stand at the moment, the words -- I was asked the question earlier. The word around is that the intent is there, and they're already seeing some early changes in the turnaround of planning because it's more a case of this is having to get completed sooner rather than it being a matter for debate. So good early signs from the planning side.

Another question here. Seeing the gross margin improvement is great. What sort of things have been implemented in the business to improve it?

So we have been focused on technological improvements which has included things like biometric sign-in for our site staff or telematics in the vehicles. One of the things that we have seen go down very well with our staff is the enhancing of the IT skills for our site managers, and we'll be making further use of that going forward. We've also seen improvements in resource planning and forecasting through continuing talking to our clients about their requirements for the next 3 to 4 weeks and out longer as far as they can look with us to help improve the resources we have sitting on our site.

That's great. Charles, Dawn thank you very much for answering these questions came from investors. Of course, the company can review all the questions submitted today, and we will publish the responses on the Investor Meet Company platform. Just before redirecting investors to provide with their feedback, which is particularly important to you both. Charles, can I just ask you for a few key takeaways and closing comments.

Okay. Thank you. As one thing I do want to say on the housing side, I was reminiscent not to mention it earlier. Just a few figures bear with me. I did look at the ONS statistics on housing starts and housing completions over the last few years, the information is presented quarterly. If I look at the year 2018, 2019, and these figures I'm looking at are the periods which are July, September is the first quarter through to the fourth quarter being April to June. So if we look at 2018, '19, the number of houses in total by quarter 200,000 for the year. It's actually 201,000 and the number of completions was 208,000 approximately. If I take that forward into the year '22, '23, the number of houses started with 220,000, the number completed 203,000. So the sort of imbalance by these numbers. I was quite surprised to see in these numbers, but perhaps it confirms of what the matters we were talking about before is the year '23 to '24, then there were only 114,000 houses started according to these figures, yet the number of completions in that period was 193,000. So basically, what this appears to be indicating to me is that the main developers have been working through their existing sites, been able to push on with completion of houses rather than starting on to new ones. So that pent-up demand is going to be there if they're going to carry on with this level of 200,000. Never mind the 370,000 that we talked about even to get to the 200,000. The number of starts in the previous year to emphasize this was only 114,000 houses. There's going to need to be a huge increase in the number of houses started, the new developments. And as I mentioned before, and here's to conclude the point is that from a housebuilding sector point of view, as a takeaway is that Tamdown is at the leading edge. It's the first on site. It will be the entity that's most needed in order to start the sites off when that recovery happens. And then the second thing is the matter, as I said, about the diversification, particularly into the water sector. Water sector overall, GBP 104 billion 5-year plan. And if you look into it, you'll see that all the water companies have about to present their AMP -- 5-year AMP programs as part of a 25-year strategy. I mean it's a great sector to get involved in. So I'm really pleased to have made that first step with the acquisition of Coleman and we're going to help them to grow into the future. So thank you very much from [indiscernible] points to make. [indiscernible].

Charles, Dawn, thank you very much for updating investors today. Can I please ask investors not to close the session. I should now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This going to take a few moments to complete, which I'm sure will be greatly valued by the company. On behalf of the management team of Nexus Infrastructure plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.