SigmaRoc plc (SRC) Earnings Call Transcript & Summary

Welcome to all, and thank you for joining the SigmaRoc FY '21 results presentation. Today, we have our Chairman, David Barrett; our CEO, Max Vermorken; and our CFO, Garth Palmer. The exec is going to present the FY '21 results to you, after which there will be an opportunity for a Q&A session. [Operator Instructions] And after the presentation, we'll answer as many questions before we close the meeting at 12:50. David, the floor and the screen is yours.

Good afternoon, everybody. Pleased to present our fifth set of annual results and our fifth year of significant progress. We've doubled the underlying EBITDA, and there's a 20% growth of the underlying EPS. The business now is in all the target markets in terms of sectors, agriculture industry, construction, all the markets that we're looking to be in there, some geographical areas that we've identified that we would like to be in, but we don't have to be everywhere. We've continued to make improvements in the Benelux and the U.K. platforms, which have all performed very well. The Nordkalk business has been successfully integrated, and we've launched some performance initiatives there. Again, that's going very well. ESG heading in the right direction, we present our report in next month, and we're pleased to say that [Indiscernible] already has joined us to address the gender diversity for one, but also the experience that she will bring with [Indiscernible]. There's obviously several headwinds at the moment, which is -- we've got mitigation procedures in place to deal with, but the underlying demand remains solid, and our full year outlook is left unchanged. It's difficult to talk about anything at the moment without recognizing what's going on in the Ukraine. Obviously, as a business, as everybody individually, we deplore what's actually going on there. We had 3 employees in the Ukraine. Their families are now safely in Poland, and we're looking to keep in contact with those guys as much as we can. I'll hand you over to Max now who is going to give you some details.

Thank you, David. Good afternoon, everybody. A few slides on operations followed by some financial review, and then we'll come back to strategy. So as a background, 2021 saw us create a number of extra platforms, particularly in the Benelux. We have no aggregates in concrete as split out from the dimension stone. We've expanded our U.K. footprint with Johnston Quarry Group combined with Harries and obviously Nordkalk. If you look at next slide, in terms of revenue mix and split, gives us actually a really nicely balanced picture. We have 5 key markets, the U.K., Channel Islands and the Finland being the largest 2, followed very closely by the Benelux on Sweden and then some smaller markets wherein Baltics, Germany. And product mix, construction remains by far the largest segment, which is great because it has a lot of support currently. And then we've got a number of higher value-add markets on top of that, metals and mining, chemical, environment, paper and pulp. And when you look again at the type of products we make, and the right limestone, quicklime high grade and aggregates really in the largest ones, followed again by some product ready mix dimension stone and others. A very nicely balanced and diversified business, which is exactly the space we wanted to be. These platforms are grouped. We've grouped them roughly by the rough geographic area they're in. So there's 3 in the sort of the British Isles. We'll talk about first, followed by the other ones in the Benelux and in the north. Fundamentally, market backdrop for [indiscernible], PPG and Harries in '21 was very good. 3 sets of demand [indiscernible] construction items -- either the construction materials, housing development, RMI and then infrastructure spending, all 3 solid in these 3 markets. Ronez had a great year because of Guernsey and Jersey both performing well in spite of some lockdowns at the start of the year. PPG precast products, again, similarly very strong year. The demand that was really excellent in Q4 2020, continue all the way through '21. In large part, again, for blocks and landscaping because of the construction and RMI spend, which has been very solid in the U.K. And Harries in South Wales performed exactly in line with expectations. Again, some further lockdowns in South Wales, which were managed slightly differently than elsewhere, which slowed the recovery there a little bit, but in line with what we hope to achieve. Benelux is second set of platforms that are still now. Bluestone and the Benelux platform, which is in aggregates and concrete platform. Bluestone had a fantastic year. We had some nervous at the end of '21 on visibility, on planning, and planning approvals and that was actually in part due to working from home arrangements. Settle went fine. Demand right across year '21 was really sustained and very well, and it's continued into '22 as well. In the aggregate space, we did a joint venture deal with GduH on average [indiscernible] in North France. And we now have a full spectrum of construction of those products in the Benelux with access not just to the Belgian market, Dutch market and the French markets as well, and there's plenty of opportunity to expand that setup. When you look at Nordkalk, last set of platforms in the north. We can really split that down to the 3 markets there: Finland, Sweden, Poland. Poland had a fantastic year with lots of agriculture and construction materials demand. As Sweden primarily driven, again, by construction also by quicklime and some extra supplies of the cement works. And in Finland, a lot of quicklime production. Of course, in Finland, with CO2 and electricity costs rising needed to be managed there, but all in all, underlying demand was great, and we managed to get these cost increases pushed through by dynamic pricing and hedging strategies. So as a review of operationally, a very good year '21, but good trends continued in '22. Garth, for some financials.

Thanks, Max. Good afternoon, everyone. I'm pleased to present our results for 2021 from a financial perspective, reporting revenue of GBP 272 million for the year, up 119% year-on-year. Underlying EBITDA of GBP 49 million, up 106% year-on-year. These results were ahead of estimates and benefited from a full year contribution from Harries, by about 8 months from B-Mix and 4 months from Nordkalk. Revenue was GBP 30 million higher than we expected, which was due to the pass-through of higher input costs, which did impact our margins, and we'll provide a bit more detail on that shortly. We achieved underlying EPS of GBP 0.054, up 19% year-on-year, demonstrating the earnings enhancement from the recent acquisitions and the effectiveness of our operational efficiency programs across the group. Our adjusted leverage ratio closed at 1.88x below our self-imposed 2x target, and that gave us headroom to complete the Johnston acquisition post year-end without any dilution to shareholders. A quick overview of volumes for the year. Aggregate volumes were up to 6.3 million tonnes, primarily driven by addition of Nordkalk for 4 months. Cash flow and contracting services were up to 257,000 [Indiscernible], an increase of 12% year-on-year [Indiscernible] was up 38% to 94,000 tonnes, positively impacted by the macro shipping environment due to competitive imports. Ready mix and concrete products were up 63%, 365 cubic meters due to the acquisition of B-Mix in April. And then we have the additional products from the Nordkalk acquisition, 4 months of quicklime at 275,000 tonnes, and high-grade line some products at 860,000. A quick overview of the macroeconomic conditions impacting the markets we're operating in. We experienced substantial energy price increases through the year, particularly in Q4 and specifically in December. Year-on-year coal prices were up 215% and gas, 430%. And in terms of electricity on a country basis, it's up 250% in Sweden, 195% in Finland, 84% in Poland or 274% in the U.K. It's a very inflationary environment. Everyone's acutely aware. In terms of how we're managing that, the significant cost input cost pressure, obviously affecting [indiscernible], but also impacted freight and materials. Big ticket items such as freight, energy and carbon are separately itemized on customer invoices and pass-through at market prices. We're actively shifting energy supplies to more advantageous sources in line with ESG and the government sanctions. Solar capacity at CDH in Belgium is covering approximately 30% of its electricity means. That's obviously very beneficial. Where applicable, legacy pricing and no energy hedging mechanisms in acquired businesses has been rolled off and replaced with dynamic pricing systems and more active hedging policies as and when possible. These new pricing mechanisms, environment hedging have allowed the protection of our net profitability in 2021. However, as mentioned, it has increased our turnover and that has impacted margins, which we'll get going to on this following slide. Essentially, this shows the pass-through of the increasing costs through the year. So we obviously achieved higher EBITDA through a combination of volumes and operational efficiencies. We're now measuring that EBITDA against the inflated topline loan to the pass-through of pricing pressure on freight, materials, hydrocarbons and energy, resulted in an additional GBP 30 million of revenue. So we're reporting EBITDA margins of 88.1%, but we didn't have that increased cost. We'd be looking at 20.4%, which is a strong improvement over 2020 at 19.2. Just a quick overview of the income statement. I touched on sort of the above the EBITDA line. Obviously, substantial growth there with various contributions of our acquisitions over the last 12 months. Looking below the EBITDA line, net finance costs increased on the back of the acquisition of Nordkalk and the higher debt profile of the group. Other net gains of 2 million related to ForEx call options, realized ForEx gains, gains on sale of property, plant and equipment and share of earnings from associates. Income tax is more in line with future expectations at around 78% of profit before tax. Historically, we've had carryforward losses in the various U.K. entities that pretty much use those up now. And we do have a slightly inflated tax expense this year with the change in U.K. tax rates impacting our deferred tax liabilities. All of that's translated into profit before tax -- underlying profit before tax of GBP 22 million. Adjusting for outside equity interest, translating into EPS of GBP 0.0537 per share. In terms of key assets for the group, with the acquisition of Nordkalk and also the resource extension at Soignies in Belgium, reserves and resources have increased by 250% to 1.3 billion tonnes. Total assets now stand at GBP 769 million, up 200% year-on-year, and we have 76 operational sites across 10 countries and over 1,800 personnel in the group. Lastly, just in terms of our net debt evolution, we started the year at GBP 44 million net debt. We have GBP 49 million of underlying EBITDA through the period, GBP 8 million positive working capital movement, primarily deferral around trade and other payables, GBP 5 million in tax paid, GBP 19 million net capital expenditure outflows, which translated into underlying free cash flow of GBP 33 million. And we had -- we raised GBP 255 million net of fees in equity as part of the Nordkalk acquisition, and then paid in aggregate including fees and net debt acquired GBP 394 million across the year for acquisitions. There was a further GBP 40 million of other outflows primarily financial derivatives and net finance costs, which translated into a closing position of GBP 164 million net debt, which if we strip out IFRS 16, leases to be closer to 140. So that concludes the financial review. I'll hand back to Max for strategy and outlook.

Thanks, Garth. Okay. Our strategy, in general, is always captured in sort of 4 words: invest, improve, integrate and innovate. So if we look through what we've achieved over the last year and what we're going to achieve in the year coming in these 4 categories, the invest part, of course, is very busy in '21. We were primarily U.K. focused business before. We started in the Benelux in '19. We split that business up into 2 and created specific construction materials platform in Belgium and expanded with Nordkalk across North Europe and into Scandinavia. As a result of that, we have a footprint, which is the target footprint we set out in 2016 to achieve with significant further possibility of expansion in these various markets. Think about Germany, think about North France, Denmark and other parts of North Europe. So from that perspective, the strategic position of the group across 2021 made a huge leap forward, and we're now in a great place to keep going. So that's the invest aspect. And obviously, once we've acquired these businesses, we like to improve and integrate them. I'll take you back to what we achieved in Belgium. As an example, first, to give you a bit of an idea of what we can achieve in the north as well. We bought the dimension stone business and immediately saw there were 2 companies within that, the Granulats du Hainaut business on the one hand, and Dimension Stone business on the other. We split those out and started to review the operating processes and realize it could make the whole thing a lot more efficient. Turning the aggregate side of things from a loss-making business to a profitable business in part by, for instance, renewing number of operators, a number of plants and equipment used, nearly reducing that by 45%, 50%. And making other aspects more streamlined with the same 2.5 -- 1.5 million to 2 million tonne output per year. So that's an example of what we've achieved in Belgium. We're now applying the same logic and the same principles to Nordkalk through our various integration teams. We try to be adding them up. As a result of that, in the first quarter of this year already, we implemented changes that lead to a year, a full year impact of GBP 1.5 million synergistic cost savings, but has just started -- but as you can see on the list below, quite a dozen or so initiatives are ongoing. Financial integration of the Nordkalk within the group, the reporting structures within our set up, the creation of specific teams to chase these synergies have been completed. And the next phase of our review and integration is going to be primarily focused on machine utilization, limitations of waste and waste materials aligned with the sales and processes -- sales and production processes and then a whole raft of reviews in the realm of energy use, CO2, hedging and kiln operations. All that's ongoing with local teams and will lead to further cost savings in the second half of this year and into entering '23. So plenty of potential within that group so far and for the future. We then look at the fourth pillar of our strategy, innovates. We're very happy in 2021 to launch the first U.K. construction -- concrete construction block, the Greenbloc product line, ultra-low carbon products, to receive EPD certification. We're the first ones to do that. And to give you an illustration of the impact of this innovation, the graph on the slide, 2018 shows you the volume of blocks produced by the CCP business, our block making business as we acquired it in 2018. The dark blue column in the middle is the additional capacity that we've extracted from the same plant machinery to get the dollar column 21, which is our total production in 2021 by proportion, which generates the net CO2 -- of the gray column you can see in the middle of the slide. We're now -- in 2022, we're going to change over nearly more than half the production from standard gray concrete blocks to Greenbloc product, which will lead to a net carbon reduction of the green column on the right and a net carbon emission on the far right of the slide. You can see that the net CO2 emitted with a much higher volume of concrete product is starting to be significantly lower than what we would have even committed at the start of that acquisition. So we're very happy with the results and with the potential that the Greenbloc product line has as we roll that out across all our corporate products this year. And that leads to the next phase of our ESG and then on our ESG leadership. There's a detailed report that will be published in April 2022 with full detail on our roadmap. Our roadmap is already included in this annual report, has a Net Zero target of 2040 and pretty much everywhere leading targets against all the various classifications that we have. This roadmap on the screen here as an illustration. As obviously not just environmental initiatives, but also social and governance. We've appointed a new Board member. We'll continue to diversify our Board over time. We've worked on a lot of innovation, a lot of solar and other renewable energy, digitalization of the group, which is a high business, a very successful initiative, and there's more to come. We have joint ventures, amongst others being Marshalls and to work on new products and new streams. So from an ESG perspective, we think that we're very well positioned, certainly industry-leading from a lime perspective and perhaps, even more so as a sector in general. There's one point that some people forget about lime. Lime has got an interesting product, which, for instance, contrary to cement has a very active reabsorption capacity when it comes to CO2 recarbonization. So few graphs here, which you can take away and look at it in more detail, but the overall message is, CO2 emitted by the stone production gets reabsorbed within the 5 years post production as you can see on these graphs, which is sometimes forgotten and will help even more on our net journey to net zero that we showed you in the graph before. So all that leads then to the outlook for 2022. There's a few headwinds, which are fairly obvious, I think. The Ukraine poses a significant challenge potentially for the whole European economy. What are the spill overs? Are there any? Will there be cost inflation, availability of energy and other resources? So these things obviously need to be flagged, and there are potential headwinds in the European markets. We have a strike at UPM, one of our key customers in Finland, which is a paper maker. So these are obviously other headwinds, but we know about them, and we've put together a whole list of initiatives which form the tailwinds on the side on the right. Our competitive positioning in the northern markets is strengthening, which is very good. There's a whole bunch of synergy and cost improvement programs ongoing right across the group in Nordkalk as well. The integration of Nordkalk has gone really smoothly, thanks also to the teams up there. And so that helps us to extract further value from that business. The hedging strategies initiatives are being looked at in density. There's obviously a roll off of [indiscernible] existing hedging [Indiscernible] structures, and the newer ones are a lot more efficient, which will help us with the management of energy in the future. And then there's some catch-up demand expected for when the strike in Ukraine is over, which will help the bottom line there. So all in all, to summarize that on our last slide for this presentation, good customer demand everywhere. The known, the unknowns, the headwinds, the inflation are identified programs set up to make sure that we recover any losses there. Nordkalk integration, very solid, very good with further synergies expected for the second half and into '23. Our buy-and-build strategy remains attractive, both in good and bad markets. There was always good opportunities to go after. The ESG roadmap is published that will be available with preferred retail next month. And as a result of that, our outlook for the year remains unchanged, which means very positive and our midterm targets as outlined at the bottom of the slide, again, remain unchanged as well. So a positive outlook for what we hope to be most of the year in spite of some headwinds. Thank you very much for your attention. Very happy to take any questions, which [Indiscernible], I think you can moderate.

We've had no formal questions submitted. We do have an attendee with a hand up. So I wonder at least it could maybe let Christian take the floor. Or if not, Chris...

Can you hear me okay?

Yes.

Excellent. I've got 3, if that's okay. First on Greenbloc. Just a bit more information perhaps on the market demand of this new product and potential to expand that outside of the U.K. as well? The second for Garth, given the inflationary backdrop and the impact on margins in 2021, should we expect a similar impact in 2022 with those dynamics on margins? And then thirdly, just to touch on the M&A pipeline, and Max, I know you did touch on this just at the end, but the appetite for M&A given the increased sort of geopolitical uncertainty.

Okay. I'll go. So Greenbloc first. The demand has been -- that demand page has been evolving over the last 2 quarters until now and what changed a lot and helped a lot was the [Indiscernible] certification, which we were first in. As a result of that, a lot of the specification and architects are allowed to specify this product now because there's no certification on its green credentials. And you'll see, as we announced, I think at the end of last year, pretty much all the big contractors, all the big merchants [Indiscernible] and all the big contractors specified in projects that are coming. So the demand is extremely good, and as a result of that, we've been able to already forecast that 60% of our block production out of CCP in Manchester -- again, Manchester and Liverpool is going to be on a green mix basis. So from that perspective, we are very encouraged to see that. We also offer now in all our precast products, everything that is Poundfield based, which are more into infrastructure jobs, and that demand is also coming through. So I'm very hopeful that by the end of this year, more than half of our production will be on the green mix and then into '23, the entire production.

Christian also asked about the possibility for expansion [indiscernible].

Yes, that's a good point. Yes, we are looking at that. So the PPG Group is already expanding into Belgium. That's first with the precast and infrastructure-related precast business, and will then go into other countries where we have quarries and operations, and the expansion into those countries will be primarily driven by Greenbloc mixes, not [indiscernible] mixes.

On a margin point, we're expecting an uptick in margins through the full year. So won't be similar to where we landed in '21 for the half year, but then we'll pick up through the second half. That's obviously depending on macro situation, but that's our expectation. We [indiscernible] to the 20% lime.

And then the M&A question, Christian. So the appetite for the group to do M&A and to further expand remains exactly the same. We've got 10 deals live at any point in time. The geographies we're in means that we have a lot of choice. There's lots of choice in such a small or large or midsized M&A different markets as markets where we have no presence in or very little, which obviously have a bit of focus to tie the whole structure around to seem together a bit more. The bad market -- the economic and bad market or good market doesn't make much of the difference to us. They present different types of opportunities. A good solid family business is probably less likely to be sold in a bad market because they've all seen it all before. They just [Indiscernible] and see it through. But you get the bigger groups that restructured our balance sheet a bit and are happy to then dispose of some units. So it doesn't really matter what the market really looks like. And from our perspective, as long as we can generate further EPS growth, which is ultimately the only thing that really matters from that perspective and make the strategic footprint better, more valuable, more integrated, more connected business. We'll always have a look at buying more assets.

Max, we don't have any more questions from many of the attendees on the call. So if there's nothing else to answer, I'll thank David, Max and Garth for your time, and thank everyone who joined the call to listen to the SigmaRoc FY '21 presentation.

Thanks, everyone.

Thank you very much.