Norcros plc (NXR) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Norcros 2024 Interim Results Investor Presentation. I'm joined today by Chief Executive Officer, Thomas Willcocks; and Chief Financial Officer, James Eyre. Questions are encouraged throughout the presentation and can be submitted via the Q&A box situated on the right-hand side of your screen. I would now like to hand over to Thomas to begin the presentation.

Good to see you all. Thank you for your support. Before I hand over to James, who's going to take you through the financial highlights. I'll just give you a short overview of our results, which again, are at the leading end of our sector. As we work through the set of results, there are probably three key takeaways. The first is that we continue to deliver strong organic growth and ahead of market organic growth. We are making ongoing progress on the implementation of our strategy. And despite the market being tougher than anticipated, there are further market share opportunities now and as the market does eventually recover one fine day, who knows when that might be, but I think the key point is we're not reliant on a market recovery. As we work through this short presentation, we'll demonstrate our through-the-cycle resilience and continued focus on growing our position as the U.K. and Ireland's largest branded Bathroom products designer and supplier. Just having a look at the highlights, I think there's a couple of key points here. The ahead of market organic growth has really demonstrated. I'm going to claim that 0.1% on the like-for-like revenue growth, but the score is really on the U.K. side of our business where we grew 0.9%, which I think for the half year, again, was at the top end of the range in our sector. Reported revenue was lower year-on-year, reflecting the successful completion of the sale of our Johnson's U.K. Tiles business in line with our business and strategy objectives. And again, it's encouraging if you've managed to deliver these results outside of any market recovery. The focused implementation of our strategy strongly underpinned our like-for-like organic growth, and we will continue to really focus on this area. We've got a great team, really focused on a number of core principles, and we'll share some examples with you today. Our focus on our entry into the U.K. and Ireland's Bathroom, Furniture and Sanitaryware market [ done inorganically ] And I think that's a big play. We've done that at VADO. And we'll also talk about progress on the operational front where we have consolidated our warehouse and depot footprint from 26 to 15 warehouses. This is the first major step towards driving improved efficiencies and customer service as we leverage our scale. Operating profit was 7.9% lower year-on-year, primarily reflecting additional investment in operations. So as we transition these warehouses, we ran -- we had dual running costs. We completed these projects on time with absolutely no disruption to our customers, which I think is a great complement to our team. And it also includes a noncomp 5-week manufacturing shutdown in South Africa. So it's quite important to pick up those two points in those half year results. Our balance sheet remains strong with debt at circa 1x underlying EBITDA and also interesting is increasingly a deciding factor when awarding long-term supply arrangements now. Our customers in the market are looking at this a lot tighter. They need people they can trust, they need people they know who are going to be there for the next couple of years and people with a strong track record. Interim dividend is increasing, reflecting our confidence in the group's prospects and all being equal in a strange world. We maintain our full year operating profit forecast and this will demonstrate progress towards our medium-term targets. Looking regionally. And starting in the U.K., ahead of like-for-like -- ahead of market like-for-like revenue growth was driven by ongoing market share gains, as I said, strong new product launches and increased selling collaboration across our brands. We are definitely leveraging the scale of our business more effectively with every passing month. The market remains challenging, and we don't expect a sudden rebound in the new build recovery that's been long anticipated. Given that we are able to grow revenue and share in these conditions, it means that we are very well placed for any recovery in both the RMI and new board markets. People often ask me, "Are we a recovery player?" Well, when new build recovers, it doesn't mean RMI doesn't recover. So we place to recover on both and I think that's going to be a good accelerator for us. As I said, I'll talk more to our strategy implementation, covering operations and also ESG. And just interestingly, on the ESG front, you guys know it's core to what we do. Triton received the Kings Award, which is not something that you see one in H1 this year and kudos to the team at Triton. South Africa, as you know in my home country, I have seen a stabilization in the energy grid, around six months of no energy interruptions, but the market recovery will take some time. Interest rates are still around 11.5%. People are still feeling the impact of what happened. But it is still a good market. It's a market we've made a lot of money in before but it will recover slower. I think the first signs of any potential recovery will be at the start of the new build cycle, which happens after the summer holidays in South Africa, and that would be in February and March, if we were looking for an early indicator there. So in short, a really impressive performance by our U.K. team with further strategic progress coming through in our market share gains and a resilient performance in South Africa, and we are well positioned in South Africa for the recovery when it does come. Finally, before I hand over to James, I just wanted to keep reiterating this part of the Norcros story, and this is a key to why we outperform many people in our market segment. Firstly, we're not a heavy side supplier of building products. We get lumped in with building products, but we actually sell bathroom brands, branded bathroom products. We sell those products into mid-premium part of the RMI market, which is resilient and has remained resilient. The RMI segment accounts for around 80% of the demand in bathrooms and we continue to take share in that space, both through our existing business and can continue to grow share there as we add new categories as we have in Bathroom, Furniture and also in Sanitaryware. In summary, our teams have done what we set out to do in H1, and I'm particularly pleased with the continued progress being made to leverage our scale across our broader business. Now I'll hand it over to James.

Thanks, Thomas. Good morning, everybody. Good to see you all again. So throughout the presentation, we will compare to September 2023, which included Johnson Tiles, U.K. and in part, Norcros Adhesives. Results are also shown on a like-for-like basis and to a comparison where appropriate. And we also include the full year March '24 numbers for information. So turning to Slide #7 and the income statements. H1 revenues totaled GBP 188.4 million. That's 0.1% higher on a constant currency like-for-like basis. And like-for-like means we take the current year and prior year comparator and adjusted for Johnson Tiles U.K., which was disposed of and Norcros Adhesives, which we closed. In turn, reported underlying operating profit at GBP 19.7 million was GBP 1.7 million below the prior year. And the reported return on sales for the group was 10.5%, in line with prior year. The finance charges were GBP 3.3 million in the period, and that was the same as last year. And this includes bank interest of GBP 2.5 million and the IFRS 16 finance charge, which was GBP 0.8 million and underlying PBT of GBP 16.4 million was 9.4% lower than last year. An exceptional cost of GBP 2.1 million was recognized in the period, and that was largely due to the depot consolidation, which Thomas mentioned at Grant Westfield. And I think Thomas is going to talk in more detail about that later on. Acquisition and disposal-related costs primarily related to the previously disclosed noncash loss on disposal of Johnson Tiles U.K. in May 2024, which was GBP 21.4 million. And also included in this line is the amortization of acquired intangibles of GBP 3.3 million, which was in line with last year. There's also a noncash finance income, which totaled GBP 0.2 million. And overall, this resulted in a reported loss before tax of GBP 11.7 million compared to GBP 11.7 million profit before tax last year. So if we move now to Slide #8 and looking at the revenue and underlying operating profit bridges to give a bit more color. Starting with the top left. First half total revenue decreased by GBP 13.2 million from last year to GBP 188.4 million, with GBP 13.7 million of that reduction driven from portfolio development activities. U.K. revenue was GBP 1.1 million higher on a like-for-like basis, and that reflects market share gains. Constant currency revenue reduced by GBP 1 million in South Africa. And despite a more stable macro and energy environment, consumer confidence remains subdued. And to note, reported revenue was GBP 0.6 million lower than the prior year. In total, as shown in the bottom left-hand chart, overall group like-for-like constant currency revenue increased by 0.1% with the U.K., plus 0.9% and S.A. down 1.7%. So now looking at the underlying operating profit charts. On the top right, underlying operating profit was GBP 19.7 million. This was GBP 1.7 million below prior year and reflected, one, the removal of Johnson Tiles U.K.; two, the investment at Grant Westfield; and three, a 4-week shutdown at Johnson Tiles S.A., which took into account the subdued demand environment. So now looking at the bottom right chart, Underlying operating profit in the U.K. was GBP 17.8 million, GBP 0.9 million lower than the prior year, with the U.K. return on sales increasing from 13% to 13.6% benefiting from the impact of disposing of Johnson Tiles U.K. Underlying operating profit in South Africa was GBP 0.8 million lower in the period at GBP 1.9 million and a return on sales of 3.3% compared to 4.7% in the prior year. And overall, the return on sales for the group was 10.5%. So moving on to Slide 9 to look at earnings, dividends and tax. The underlying tax charge in the period was GBP 3.7 million and the underlying effective tax rate was 22.6% slightly higher than the FY '24 rate. We expect the full year tax rate to be in line with this in the low 20s. Applying the tax charge to underlying PBT resulted in underlying earnings attributable to shareholders of GBP 12.7 million and diluted underlying earnings per share of 14.1p. And just turning to the dividend. In light of this resilient first half performance, the strong financial position and the confidence in the group's prospects, the Board has declared an interim dividend of 3.5p per share, an increase of 0.1. So now looking at the cash flow on Slide #10. The group generated an underlying operating cash flow of GBP 14.8 million in the period, compared to GBP 27.4 million in the prior year. This represented a conversion rate of 69% of underlying EBITDA and the reduction against last year reflected an investment in working capital in the first half of the year of GBP 9.6 million, with increased inventory and debtors, particularly offset by an increase in creditors and the increase in debtors was largely due to the 26-week accounting period ending on the 29th of September compared to the standard payment date of the 30th of September. CapEx was GBP 4.4 million in the first half with investment in new product development and projects focused on further driving operational excellence. Cash tax paid was GBP 1.8 million and exceptional cash costs largely reflected the depot consolidation cost at Grant Westfield and the cash impact of prior year projects. Overall, the net cash outflow in the period was GBP 7.9 million compared to GBP 4.3 million inflow last year. And to note, this was post the payment of the full FY '24 full year dividend of GBP 6.1 million. So just turning to Slide 11 and the balance sheet. Net debt was GBP 44.9 million, excluding finance lease liabilities compared to net debt of GBP 37.3 million at March '24 and in part reflects the investment in working capital in the period. Importantly, the balance sheet remains strong and in good shape with leverage around 1x underlying EBITDA. And to note, the group continues to have significant liquidity and funding headroom for RCF GBP 130 million banking facility which is committed to 2027. As you can see from the right-hand chart, the pension scheme continues to be appropriately funded and well managed and remains in an accounting surplus of GBP 16.5 million at September 24. And just finally, turning to Slide 12 and everyone's favorite subject, pensions and a reminder on the pension scheme. We've come a long way. The chart in the top right corner shows the significant progress that has been made from an accounting deficit in 2017 of GBP 63 million to an accounting surplus in the last three years in excess of GBP 15 million. At the last triennial actuarial valuation in 2021 showed a deficit of GBP 36 million, resulting in accompanying additional contributions of GBP 3.8 million per annum plus CPI until 2027. Importantly, we now have the 2024 triennial actuarial valuation that is underway, and it's progressing well. With the company and the scheme's trustee continue to work constructively together, we envisage reaching conclusion early next year, and we are confident of making further progress. And with that, I hand back to you, Thomas.

Thanks very much, James. And just to walk you through our strategy. It's well published, we spent a lot of time on this on the Capital Markets event. And I'm just trying to get some highlights through to you. Just a covering slide with our medium-term targets on it. We do have a successful and scalable platform. There are still significant opportunities to grow, as I've pointed out and our four pillars of our strategy, which are portfolio development or M&A, organic growth, operational excellence and ESG are all in play and are delivery, as you can see in the results that we've pushed out. We also remain confident of making progress towards our medium-term targets by year-end. When we have a look at those four strategic pillars, there's really three things I want to call out here. And the first is in and around our first full bathroom offer that includes Bathroom, Furniture and Sanitaryware and that was the Cameo range launched by VADO. I'm very pleased to be able to do that. That is the strength of ours. We can either do stuff through M&A or do it through our existing business organically. We'll talk a bit more about that. The U.K. and Ireland warehouse consolidation under operational excellence. I mean I think at the end of last year, we had a good question here about what exactly are we doing there? And I said we'd report back. That is the first step and an important first step. And I'll also share an example of another very important sustainable product launch, which is Naturepanel by Grant Westfield. So just reminding you on portfolio development. Our target themes really are filling gaps in the U.K. and Ireland, adding new capabilities, specifically around sustainable products, which we continue to do and looking very carefully at new markets, which would really be adjacent markets in all likelihood. We have not made any acquisitions in the period, and people often ask us when the next going to happen. I think you know us well. We're conservative. We look for the right ones. We look for ones that will be strategic aligned. We've got a good team working on it, and I'm sure when we find the right one, we'll make the right decision. But again, moving on to the organic growth slide, we have this ability to keep growing, getting into new sectors and new capabilities using our organic growth accelerators. And here are the 2 key ones that we really want to talk about is new product development and our cross-selling. So on the new product development side, our vitality levels remain around 25%, which means 25% of the products we sold [indiscernible] were launched in the last 3 years. So it remains healthy and our excellent pipeline remains intact and continues to be developed with more and more collaboration across the group as we do that, especially in terms of putting this complete bathroom offer together. The second driver, specifically labeled by our scale is cross-selling, and we've spoken previously about the work we've been doing, including the work with Grant Westfield, which continues to flow and flourish. Just having a look at the Cameo bathroom range that was launched by VADO. This is a very, very important move for us. We've done this in South Africa. making it a lot easier for our customers to put a new bathroom in by helping them match and source from a single point of supply. And when you look at this picture, everything other than the floor comes from Norcros. You've got matched bathroom furniture from VADO, matched taps, matched mirrors, matched showers, matched toilets, matched flush plate with a Grant Westfield panel on the back and a stunning Merlyn shower and shower tray on the floor. So we've had some really good progress and interest in this range, some early wins in key retail and spec accounts. And really important to point out, again, this was done through in-house design, leveraging off our experience in South Africa as well. Given the success of this launch, we are accelerating the rollout of additional ranges to ensure we reach the critical mass that we need to really compete in this area. But between sanitaryware and bathroom furniture, you're looking at a GBP 1 billion market. So even if we get a smaller share initially in it, it's meaningful in terms of our numbers. So really, really pleased with that. A key enabler of this launch has been the work that was done at group operations to ensure that we were able to handle these new categories in an accurate and efficient manner. When we look at operational excellence today, I'm going to talk about coordinated logistics and warehousing and supply chain collaboration and efficiencies. And really 2 major projects across the business, the one in one specific business and that being VADO, which traditionally had 1 warehouse in Ireland, 5 in the U.K. In the U.K., we've reduced that to 1. We have built a -- or not built, but taken over a really good warehouse down in Bridgewater. It's a modern new warehouse. We've got all of our stock in a single place. It means we can hold less stock. We can move stock around more efficiently and more accurately. And in this specific business, we've always had an issue where we had the product available, but our OTIF was significantly lower than the product availability. That gap has almost gone. That warehouse was also purpose designed to take in our new bathroom wear ranges, and we've done that seamlessly. So again, excellent project, no delays and no real impact to our customers. So we'll report more on that as we go forward. The second project for Grant Westfield work with Merlyn and again, showing how we collaborate. And after we bought and have been in the group a while, they went and had a look at the Merlyn approach, which is a cap-light 3PL warehousing logistics approach out of a single site, Merlyn are able to move big showing closures anywhere in the U.K. in 48 hours through our distribution hub at Grant Westfield, it could take up to 7 days. The teams work closely together, put together a really careful plan. And then they delivered this complex product -- project and reduced the number of Grant Warehouse warehouses by 6, moving into the same facility as Merlyn. And it's a facility and distribution setup that has been in place for many years and is market-leading. So really, really pleased that both these projects were completed ahead of schedule with no disruption to our customers. And although we have incurred some once-off additional dual running costs, we've done that to make sure that those service levels are protected. I'm pleased to announce that we are already seeing early evidence of demand efficiency and customer service benefits that will help progress our medium-term targets. More importantly, this again bears testament to the quality and nontransactional nature of the collaboration between our broader teams that defines the way Norcros runs our business. It is fairly unique. On the ESG front, we have 3 key focus areas: people, products and planet. I know a number of companies use those, but this is a really important part of what we're doing. As part of our journey, what we're really looking to do is provide our customers with a powerful choice for better living. We're not saying to our customers, you have to buy this or you have to buy that, but we're going to give you the choice to make a difference. And we have an increasing and growing portfolio of products that allow our customers to do this. Measuring our progress here, we have validated near-term SBTi targets, and we're making good progress towards those. We've got great tailwinds from the Future Homes Standard. And over the last 12 months, we've reduced our Scope 1 and Scope 2 emissions by 9%, which means we're on track to meet our 2028 obligations. Doing what is right does make money to the shareholders. And the people that are not doing this are going to get left behind. It's as simple as that. I'm now going to just move on to a sustainable alternative to tiles, which is Grant Westfield, one of the reasons we bought this business. When you look at building going forward, our panels is going to be one of the fastest already and will continue to be one of the fastest-growing areas in building products. We have a leading position here, and we will continue to build on that position. We have a very strong new product development pipeline. And this particular product, which some of you would have seen at the Capital Markets event has launched well. The production is run using carbon-free electricity. The materials are sourced from sustainable sources, as you can see from the Forestry Service Council, and the end product is almost fully recyclable. As I've said, panels are a fast-growing part of the coverings market and will play a growing and very important role in the sustainable building products market, both in and outside of the bathroom. So the panels have moved outside of the bathroom. So again, another area for natural growth for us. Naturepanel has been well received by the market and is already an award-winning product. We've had to bring in another CNC machine to look after demand here, and that really talks to the actual results. Looking forward, I think these are another set of ahead of market results. Our market-leading brands continue to grow share in the more resilient mid- to premium RMI market segments, and we're well placed to benefit from the market recovery in both RMI and new build. At the start, I spoke about 3 key takeaways. I think we've shown that we continue to deliver on the organic growth story in what remains a difficult market. Our focus on strategic implementation continues to deliver demonstrable progress across our 4 strategic pillars, driving organic growth efficiently, and we are really strongly positioned for any recovery in the market, as I said. There are share growth opportunities, both organic and through M&A that are not dependent on any market recovery, and we will continue to focus on the right opportunities to take advantage of these. The timing of the long-awaited market recovery is up in there, who knows. I'm not going to guess, but I think the key message is that we don't -- we are not reliant on it. And really to close, there's a lot of boom and doom out there, a lot of bad news, and I can't not use this sporting analogy. But when you play a game of rugby, you can't always choose the weather, but you have to play to win. And a bit like my local rugby team, we've developed a proven track record of finding a way to win regardless of the market conditions. And I believe that the clarity of our game plan and the quality of our team and especially the people that run our businesses out in the market and manage the relationships with our suppliers and customers has set us apart and will continue to make a difference going forward. Thank you for your time.

Thank you, Thomas. [Operator Instructions] We've had a few questions pre-submitted and submitted live over the webinar. The first question is how smooth was the move from 26 to 15 warehouses? Was there any disruption for customers?

Both projects were expertly handled. They were very well planned and executed by strong management teams out in the field. The disruption was minimal. We did incur some dual running costs to ensure that, that customer experience wasn't impacted, but I'm really pleased with the results of both.

The next question is, how is your order book looking compared to a year ago?

Look, we continue to take share in the market. The order book probably reflects where the market is in terms of year-on-year comparisons and we don't expect market conditions to change materially in the short term, but we will continue to drive strategic implementation and take share through things like our strong new product development program and also our ability to cross-sell across our platform.

The next question is, what will be the impact of the increase in national insurance?

Yes. Thanks, Rachel. Although not helpful, the impact for us is not material. It will be less than GBP 1 million. And we will handle that in the usual way alongside other inflationary pressures in 2025 through price increases, efficiencies and we'll assess that as we go forward into next year.

The next question is, are things improving in South Africa?

Yes, I think we've seen some really encouraging signs in South Africa. We got some political stability post elections. We had no power interruptions for more to 6 months now. That said, I think we still have a high interest rate environment in South Africa, and the recovery there will be gradual but encouraging signs.

The next question is, are you still taking market share? If so, who from?

Look, we're taking market share across the board, both in the new build sector and the RMI sector. And we're really taking share because we've got cracking new product development, extremely strong service levels. And I think in an uncertain supply chain environment, the strength of our balance sheet and the strength of our service offer has put us in a really, really strong position. We're a very trusted partner, and we continue to take share.

The next question is when do you see an uplift in housing construction?

There's the question, isn't it? Maybe the best way to answer this to say we do believe there will be an uplift. We think in the year ahead, the calendar year ahead, we'll see more houses built than in the current year. The uptake might be a little bit slower than everybody would have hoped for, but we do see positive movement there next year.

The next question is, how is your acquisition pipeline looking?

Yes, the acquisition pipeline continues to be well developed. We're looking at a number of opportunities, and we're looking for businesses that offer complementary products to our existing portfolio in geographies, mainly in the U.K., but also in Ireland and some parts of Europe. I think the mantra that we adopt is we look for businesses that we can grow faster under our ownership. And as you saw in the presentation, we're looking for ways in which we can cross-sell or bring in operational efficiencies to make those businesses better and stronger in the Norcros family. But just to note that we won't do deals for deal's sake. We're not deal junkies, and whatever we do, we will be selective and rigorous in the due diligence process.

The next question is, how are you progressing towards the medium-term targets you set out in May at the Capital Markets event?

I think we're making good progress. If you have a look at the overall deck and the implementation on the organic growth side and also on the operational excellence side, we are guiding to progress at full year against those targets.

The next question is also around Capital Markets Day in May. You mentioned M&A, and you've identified good targets. How is that pipeline looking?

Yes. Obviously, that's a similar answer to previously. I think M&A is an important strand to our strategy. But equally, we're now at a scale post the Merlyn transaction and Grant Westfield transaction where we can assess doing things organically as well. And you saw in the presentation when Thomas talked about the introduction of the Cameo range at VADO and that's been a very well-received launch in the furniture part of the market. We'll continue to look for potential acquisitions in that space, but equally, we can drive that organic development as well. So I think we're well placed to look at both inorganic and organic ways of growing.

The next question is, how important is ESG and sustainability when looking at product design?

It's absolutely core. And I think if you look at our recent launches, Naturepanel by Grant Westfield, ENVi at Triton, these are all products that are very, very much targeted to provide our customers with a powerful choice for better living. Those products are performing well, and we continue to make strong inroads. There's an in-built belief right through this business that doing the right thing will really pay off in the long term, and we want to be known as a business that's putting in more than we take out, and we're going to continue to do that. So really pleased with what we're doing in new product development, and it is at the core of what we're doing in product design.

[Operator Instructions] The next question is, any update on the triannual [ DB ] pension valuation? And when will the outcome of the valuation be made public?

Yes. I think for those that do have the deck in front them, Slide #12 gives a little bit more detail on that. The triennial valuation for 2024 is continuing. We're making really good progress. And I think a couple of things to note on that, that we work with a very collaborative discussions with the trustee, and we envisage a conclusion in Q1, that's calendar Q1 in 2025. But you can see from the numbers in the table, we've made tremendous progress over the last 5 to 10 years and we're confident of further progress at this triennial valuation for 2024.

We have another question. Have you evaluated and do you have any appetite to dispose of the South African operations to get a positive re-rating of the core U.K. business?

I think as set out in Capital Markets Day, we evaluate all of our assets all of the time. We're really committed to the targets that we've set ourselves. We've been in South Africa a long time. We understand the market well. And it would just be worth reminding people that the business was generating operating profits of GBP 8 million to GBP 9 million only 2 years ago. So we have a strong business that has upside potential and strong recovery potential. And we will just continue to evaluate all of our assets across the group. So we're happy where we are. Thank you.

Thank you for joining us today. That's all we have time for. So that concludes the Norcros 2024 Interim Results Investor Presentation. Please take a moment to complete a short survey following this event and I hope you enjoy today's presentation. Over to Thomas for any closing remarks.

I really appreciate everybody joining the call. It'd be nice to get to know a little better going forward. But if we -- if there's anything else you'd like to know, feel free to reach out to James or myself. And once again, thank you for your time.