Renew Holdings plc (RNWH) Earnings Call Transcript & Summary

So turning to our results highlights on Slide 1 of the deck. Despite a challenging economic backdrop and some sector-specific headwinds, which I'll pick up on, we're very pleased to be reporting another record set of results for Renew. They are a testament to our strategic progress and the more diverse exposure we have to our target markets. We're delighted to have further expanded our range of pureplay engineering services in both our water and relatively new transmission and distribution power markets and more on these shortly. From strong cash generation, our balance sheet is in good health, and we remain very active in terms of our M&A. Our order book remains well balanced and at record levels, yet conservatively and consistently reported and reflecting the confidence in our prospects. We've increased the interim dividend. It's up 4.9% to 7p. On Slide 2, here, I'd provide a quick reminder. It's where we amplify the differentiated nature of our high-quality, low-risk business model at Renew. We remain focused on markets underpinned by highly visible and committed funding. Our services are mission-critical and inclusively in demand. Task sizes are small and execution time frames are short, which dramatically reduces our risk profile. Our directly employed colleagues are deployed in some very complex and demanding environments that present really high barriers to any new entrants. Our compounding growth and cash generation evidence the resilience in our model. And finally, we remain committed to adding value through innovation and collaboration. At the bottom of this slide, too, you can see there's our 10 principal brands. Our recent acquisition, EDS reports under devolved both Emerald and more recently, PWR-X report under the Excalon brands.

Thanks, Paul. The first half of 2026 has been another successful period in which we have delivered record revenue, record operating profit, record EPS and a record order book. Our operating margin is ahead of the same time last year, and we have a 5% increase in our interim dividend. The first half saw record revenue of GBP 589 million, which is up by 3.5% on the same period last year. The revenue growth has been driven by a combination of organic growth and a contribution from Emerald Power, which we acquired in October 2025. Our operating profit is also up on the same period last year, driven by revenue volumes and a small increase in our operating profit margins. And consistent with previous years, the first half margin is below our guided range of 6% to 7%, but I remain confident that we will continue to trade within that range for our full year as we benefit from operational efficiencies and work mix improvements in the second half of the year. We have delivered 2.2% organic revenue growth in the first half of the year, driven mainly by a strong performance in our water, rail maintenance, electricity, T&D and highways markets. We have strong momentum going into the second half, and we expect to accelerate growth into H2. Over the past 5 years, we have averaged 9% organic growth, and we expect to continue to deliver strong organic growth over the medium term. As always, our focus is on our EPS growth, and I'm pleased to report record first half EPS of 30.9p, which is up by 10% on the same period last year. The increase has been driven by record trading performance and a reduction in finance costs due to our strong cash flows, partly offset by an increase in corporation tax paid. This slide that we always put in our deck demonstrates our long track record of value creation. We are proud of having maintained an EPS CAGR of over 15% over the last 15 years, driven by a combination of organic growth and accretive M&A. We have grown organic revenue by 40% and total revenue by 80% over the last 5 years, demonstrating this growth mix. We have managed to achieve this growth whilst consistently maintaining our net debt to EBITDA at less than 1x throughout this period. On this slide, we bridge our opening net cash position on the 1st of October 2025 to our closing net cash position at 31st of March 2026. We generated GBP 23.6 million of free cash flow, which included GBP 8.3 million of CapEx in the period. Last year's final dividend of 13.33p resulted in a GBP 10.6 million cash outflow. We spent GBP 7.8 million on acquisitions in the period, most of which was due to the acquisition of Emerald Power as well as some deferred consideration on Excalon. Clearly, the 2 most recent acquisitions were post period end are not included in this figure. And all of this brings us back to our period-end net cash position of GBP 10.6 million, which equates to a net debt position of GBP 21.6 million on an IFRS16 basis. Our free cash flow conversion of 71% in the first half is slightly ahead of the 5-year average. However, we continue to expect to generate free cash flow of over 60% over the medium term, in line with our cash compounding model. Our asset-light operating model has generated H1 ROCE of 22%, which is 12 percentage points higher than our WACC of about 10% and is consistent with the previous year. Our 5-year average ROCE is 27%, but it does move around a bit depending on the timing of acquisitions and where they sit in this cycle. We have a strong M&A track record and it remains a key component of our capital allocation policy. Our M&A focus continues to be on the high-growth markets of water and electricity T&D. However, we are also open to making acquisitions in our other key markets. During the period, we completed the acquisition of Emerald Power, and I'm pleased to report that the business is trading ahead of expectations and is integrating well. Post period end, we have announced the bolt-on acquisitions of EDS and PWR-X, which enhance our capability in the high-growth water and electricity T&D markets, respectively. Paul will talk a little bit more about them in his section. We continue to actively pursue M&A opportunities, supported by a strong balance sheet and cash flow generation. As I previously mentioned, we've refinanced our debt facilities in October, and we now have GBP 140 million RCF secured until October 2029, which provides us with significant financing headroom to support us in delivering our M&A strategy. Paul?

Thank you, Sean. Now let's take a bit of a closer look at each of our end markets. Slide 14. You see that we set out the strength of our addressable is our pureplay engineering services are described across these 4 very different market sector blocks in rail represents about 40% of total group revenues in the current shape of the group, where the operating margin range is 7% to 8%. We then move to infrastructure, which is our highways, communication networks and aviation activities, around 15% of total group revenues for those services. Operating margin range, 6% to 7%. In Energy, which includes our civil nuclear, our onshore wind and our power transmission and distribution activities, again, around 15% of total group revenues. Again, operating margins in the range of 6% to 7%. And then our fourth segment, growing quite nicely, our environmental activities, both our water, more general environmental services around 30% now of total group revenues margin. And for each of these sectors, as illustrated here, you can see our annualized addressable market, together with the very specific details of the programs we're either engaged with or have targeted in those respective areas. We currently access all of this activity by around 250 long-term frameworks -- and we've assessed our annualized addressable total market at around GBP 30 billion, presenting plenty of headroom for further expansion. So looking a little closer at each of our 4 sectors, I'm going to start with rail on Slide 15 this is our largest client, Network Rail. We remain committed to record levels of funding to operate, maintain and renew their national rail network through to 2029. We've recently moved into year 3 of the most recent control period, CP7, where we hold the position as the largest supplier of infrastructure services to that client nationally. The mix of work through the cycle remains very different to our initial expectations where record levels of maintenance activity are balanced with lower levels of renewals work. Our brands have responded really well to the challenge by flexing their delivery models, collaborating effectively and expanding our exposure to a wider U.K. rail, a lot of work going on in our rail segment. Moving to Infrastructure on Slide 16. We continue to strengthen our position across highways, communication networks and aviation. In highways, we've made the most of a very strong momentum and run at the end of road investment strategy 2, including expanding our geography, making good progress into Scotland. And we're very much looking forward to the growth opportunities in Road Investment Strategy 3, which recently commenced in April, which promises an increased demand for the very specific services that we provide on the strategic roads network. In aviation, our organically grown capabilities are gradually scaling our exposure to a broader airside client base nationally. And in Communication Networks, we are a very well-established partner to all of the U.K. network operators. In addition, we're successfully diverging our routes to market, building relationships with smaller and private network operators. Moving to energy on Slide 17. Our onshore wind services have been impacted by underperformance and an ongoing restructure in the France region. But despite this, the business remains ideally positioned to capitalize on the significant growth opportunities ahead. We've secured new MSAs service agreements at a rate that we anticipated, and we're in active pursuit of a very healthy pipeline of opportunities. In civil nuclear, we felt the headwinds created by a long-running site-wide industrial relations issue at Sellafield, our biggest civil nuclear site. Although not under our control, this matter will be resolved, and we're very much looking forward to making the most of our deeply embedded position at this site, where the medium and very long-term growth opportunities in this incredibly specialist area are underpinned by the nuclear decommissioning authorities' GBP 4 billion commitment annually to this complex challenge ahead of us. In transmission and distribution, we're delighted with the progress we're making in this relatively new but incredibly exciting growth market. We're expanding our capabilities here. Emerald and PWR-X are really good examples of this in response to market demand and the market backdrop is stronger and perhaps more immediate than we had initially anticipated. We're also leveraging group collaboration, a lot of businesses working together in this sector now with numerous brands getting access to this relatively new market sector that again, presents a really high barrier to any new entrant. And finally, our environmental activities on Slide 18, working for 10 of the 12 combined waste and water companies across the U.K. We have experienced record levels of activity in a number of our regions as we've transitioned from AMP7 into now the second year of asset management program 8. We very successfully broadened our geographical exposure and secured a wide range of framework positions in a number of these regions, further deepening relationships in a sector with secured funding asset. We are delighted to have recently announced the acquisition of EDS to further expand our expertise in line with a long-standing strategic ambition they provide specialist marine and underwater services that are increasingly in demand for a number of our water customers. And as a final point, we would also note an increased U.K. commitment to defense investment, another potential growth sector for our very relevant core expertise in electromechanical and civil activity. Moving the presentation through to conclusion. On Slide 20, we've set out a simple bridge here to illustrate the key growth levers that we're using. I would say initially that our markets growing naturally overall -- but I think more significant than that feature, we're seeing that incremental increase in a focus on asset care, renewal and maintenance in all of our clients wherever we're working, the level of expenditure in that area is on the increase. And our M&A record speaks for itself. We have a very healthy pipeline of opportunities to complement our organic growth ambitions. And in addition to that backdrop, we're able to pull a number of levers that has enabled us to take a greater share of our markets. I would point to our ability to attract, develop and retain our people. We're a people-intensive organization, putting 7,000 people to work today effectively. We have 400 employees going through early careers, training, development programs, a real differentiator for Renew. We're also maintaining our entrepreneurial spirit by adopting innovation in a lot of what we do, a lot of routine tasks and done in a semi-automated way in the world of Renew. Part of our responsibility as we bring new businesses into the group is maintaining the entrepreneurial spirit. We want them to challenge normal modus operandi. We're doing that well. And we made tremendous progress through the collaboration of brands. Our challenge in running a holding company with independent brands in the group is making the most of their joint potential. We're getting that now. We're getting more share of client wallet as a consequence of joining our brands capabilities together. We had tremendous success in winning new frameworks and getting deeply embedded into programs as a consequence of working together and ongoing issue. On Slide 21, we provide a quick reminder of the key characteristics of our compounding model is how we are thinking about growth for Renew, include a very disciplined approach to our organic and acquisitive expansion, focus on reliable quality operating margins, a key differentiator for Renew, good cash generation and a fundamental focus on the return of capital employed. This disciplined approach on these specific metrics have served us really well and we'll continue to do so, therein lies the further compounding growth opportunity for Renew and it's model. And finally, as an outlook on Slide 22, I would say that after a record first half performance, we remain very confident in taking advantage of numerous market wins. Our pure play engineering focus on critical infrastructure presents a resilient and compelling investment case. Funding in our markets is underpinned by the critical nature of the assets that we support and look after. We're successfully broadening our range of services and exposure to these end markets. We recently demonstrated how active we are from an M&A perspective. And this, of course, is supported by a diligence in the strength of the balance sheet. We have a record order book, as you can see from the report, and we're, therefore, very confident in making further strategic and financial progress. Thank you very much. That concludes the presentation. We purposely made that presentation slick in response to a request. We'll have a little bit more time to answer any questions and get into some more detail with your request. So happy to take any questions from people joining us online or people in the room.

Thank you very much, Paul. [Operator Instructions]

Yes, James Beard from Deutsche Numis. I've got a couple of questions, please. If I start on water, we saw a couple of weeks ago, the equity raise by United Utilities based around a desire to increase their own CapEx budgets and go back to up on multiple reopeners. Do you think that's the trend that will -- I know you're not exposed to UU, but is that a trend that's going to proliferate across the wider industry, do you think? And sort of second part of the water question, obviously, you sort of -- you flagged that there's a couple of regions that have not quite been up to speed, I think, in the Northeast. Just any sort of update on sort of where the progress is in those 2 respective regions would be useful as well. And then the second question was on highways. If I read the statement correctly, the renewals budget for RIS3 is set to be about 75% higher than it was for RIS2. So I guess the question is, are you in a position, do you have the capacity to meet that level of demand should that be the case? And if not, how would you propose about meeting that demand?

So let's start with water. What I would say about water is the backdrop is very different compared to previous asset management cycles that we've experienced in our time of doing this. We just started yet -- regardless of what we hear about debt management and funding of our -- our experience is exactly as we anticipated, if not slightly stronger, driven largely by the regulatory requirements and challenges in the networks. I think the model and the progress that we've made in aligning our opportunities with 12 largest waste and water combined businesses is serving us really well. I think we've really picked out those regions of the U.K. with the biggest issues and therefore, the most reliable funding. We've been very specific that we are accessing those work streams that are super reliable. So just as a reminder, we're not waiting for decisions on big treatment complex. This is in the OpEx kind of area that we're accessing. [indiscernible] renewal, for example, is a major program wherever did we operate. Just as a quick reminder, we're going to AMP8 with a stronger geographical footprint. We pushed inorganically to Southwest Water as an example. If you read the note in some detail, you'll see that we've improved our position in a number of regions, but I'd point to Welsh Water, big region, historic region for us, where we've elevated our position with now the [ RM ] product in that region on the Waste Water, Clean Water Network Alliance program. And this is a pattern that we've had in the new to both organically push as well as seeking some acquisitions to broaden our offering, which we've done really well. So the market backdrop is super reliable. We've seen the funding come through as we anticipated it. But you're right to point out of those 10 large regions for us that we have 2 of those that are playing a bit of catch-up in Northumbrian and Yorkshire Water. They're a little bit slower into the cycle the kind of things that we do. So therefore, there in lies the opportunity to have the framework positions that work bank is gradually emerging. And therefore, that is the growth opportunity as we move towards the end of year 2 into year 3 perhaps. So feeling pretty good about the world of water. You asked a question about resources in moving into highways. But actually, you can understand that building capacity in our people work pool is biased currently towards those water skills. EDS is a good example, I think, in the period of broadening our offering, listening to what the customer wants. We do a lot of work in reservoir assets, for example, which is where EDS are experts. We know the EDS business. We work with EDS for many years, privately run business. It was in a sale process, but delighted to have that brand as part of Renew. We took on their involvement. It will actually provide services to all of our water activities. That's our ambition. So initially focused in the Southwest, but it will broaden its marine and underwater services. And we're delighted to broaden the capability of Renew's that we have there. I have some other things to look at, too. There are 2 pieces of geography that are alluded as United Utilities there and we're not currently in Scotland. We're not giving up on those. We will perhaps think about organically pushing through our M&A activity by some established to find somebody who is established in those regions. But waters in a good place with record performance over the few years, and we've plenty more to go at. You then moved into highways, and it's appropriate at this point in time, we've just gone into Road Investment Strategy 3, which commenced on the 1st of April. I suppose to some of the headline level of commitment through the Department for Transport to our client, National Highways didn't look like a significant change from RIS2. But actually, if you drill into the determination, the big increase, you're quite right to point out, James, is on the amount of commitments within that overall budget of the kind of things that we do, the renewal and maintenance of the strategic roads network is increasing significantly. We believe through the 5-year term, our addressable market could in fact double. That's how we're thinking about the opportunity. We have one principal brand in highways, but we now have 4 brands very interested in the growth in the highway sector, working collaboratively together. I would remind you that through an interesting collaboration that we launched a few years ago now with the AGC collaboration, AmcoGiffen and Carnell working together from a standing start, we became one of the leading trade providers nationally on the strategic roads network by combining those capabilities. So we've got a lot of that in our thinking moving forward. What we have to do in -- so RIS3 is just the way our client fills budget. Our commercial terms run now, we have been extended. So our commercial arrangements through what we call scheme delivery frameworks are contracted through to 2028 they were extended recently to give them time this year to go through the SDF2 procurement process. So we've prequalified for that. We're in a good position for that, but we have to tender and optimize our route to market. The lotting restrictions are helpful to us this time around in that procurement. So we see the opportunity to actually grow our position getting a wider suite of frameworks through SDF2 that procurement process, which will run through 2026 and possibly into 2027. But some real optimism. I think the momentum in the extended year of the 1-year extension to road in Strategy 2 was good for us. It was exactly, if not a little ahead of where we thought it would be that momentum into this year. So yes, the exciting times in highways, but perhaps a little bit beyond acceleration that we're seeing in power and water at the moment.

Andrew Nussey from Peel Hunt. I'll try 3, if I may. First of all, the slide where you articulated the growth drivers to the Renew model over the coming years, clearly focused on revenue. As that model evolves, do you see any change to the thoughts around margin or risk-adjusted margin and cash flow? And the second question sort of around the broadening base of business. Any change to your views around leverage when it comes to sort of the M&A opportunity moving forward? And thirdly, on rail, just how you see the remaining components of CP7 evolving in terms of that maintenance and renewal activity split?

Yes. So look, I think as the business evolves, we're not expecting any material changes to the margins. Clearly, if we entered into a new market or we particularly we entered into a market which was a bit more capital intensive, that might change the margin profile. But current plan with the markets we're focused on the type of work that we're doing, that 6% to 7% range sort of stands firm. I think the 2 little acquisitions that we've done now are both higher margin than what we've typically done. But given the size, they're not going to move the overall group numbers in any meaningful way. And I think we often test ourselves on margins to say, are we -- is it right? Are we getting the most value out of these frameworks. And a good test for us always is when we look at -- on the M&A side, we look at the business we're looking to buy, and it's very unusual and never we see businesses with better margins than what we have. So I just think there is a tolerance and there's a trade-off between risk and reward here. And for the risk that we're accepting on those frameworks and the way those contractual terms work, this is the maximum margins you can earn. I think we're happy with it where it sits. Same goes on cash flow. So the type of work that we're doing now, there's no likelihood of any change to the cash flow profile. As you know, we are very, very reliable on our cash generation, greater than 60% free cash flow. We had for many, many years and continue to do so. And there's no reason -- there's no change to the model. There's no change to the working capital profile or anything that would lead me to believe that, that is going to change. On to the balance sheet, again, it's something we sort of do debate amongst ourselves as to whether the sort of soft rule that we set ourselves at 1x is net debt to EBITDA, trying not to go above that is right. I think the honest truth is that at the moment, with the drumbeat of acquisitions that we have and the cash flow that we generate, there's not really a need to go to any higher levels of leverage. I think where we would have a question to ask ourselves is if we're looking to do a slightly bigger acquisition, which I think you're aware, we're open to doing if the right one comes along as to what -- how much debt we would tolerate for that acquisition versus supplementing it with an equity raise. But at the moment, it feels like there's no need to change the policy. We've -- on that EPS chart, which shows the track record of EPS growth over the last 15 years at no point in that cycle, no reporting point in that cycle anyway, we've been greater than 1x net debt to EBITDA. We went very, very briefly over that when we acquired QTS in 2018. But by the time we reported it had come back down with the cash flows we had generated. So there's no real need to change the model because it's working well. And whilst we always like to talk and we're often challenged by investors and analysts about doing bigger M&A, the reality is the vast majority of the businesses we see that are coming up for sale at the right point in their life cycle for sale, they don't tend to be that big because usually by the time they get to that next level, that often picked up by private equity and they've grown and had multiple acquisitions themselves. And actually, probably those businesses most times are not the right sort of businesses for us because of where the process is going to be run because the value that's already been extracted and where the opportunity has already been taken out of it. So those owner-managed businesses, they get to a certain size working for a handful of customers on premise is being generally fairly focused and specialists, they kind of get to that inflection point when they are sort of between sort of GBP 30 million and GBP 50 million in value. They can't kick the business on from there, and that's a good point for us to buy them.