SigmaRoc plc (SRC) Earnings Call Transcript & Summary

Thank you for joining us so early. Very pleased to report a good H1 despite the many challenges we faced. So revenue is up 191% to GBP 247 million, EBITDA up 212% to GBP 47.6 million and underlying EPS up 34.7% to 3.61p. So this latter demonstrates the accretion of the last 2 acquisitions, so the last 2 later acquisitions. This year, in H1, we completed 2 acquisitions. The Johnston Quarry Group and RightCast are both the extra additions to the group. Our Greenbloc low-carbon technology continues with strong momentum, giving us confidence of achieving our 2040 net zero target. We've also announced this morning a JV with ArcelorMittal to construct and operate lime kilns at the Dunkirk steelworks. These kilns will capture carbon emit and connect to the [indiscernible] storage project. This will give us a production of around 900,000 tonnes of greenlime that will [indiscernible] ETS carbon credits. I'll pass now it over to Max and Garth to give you a bit more granularity on H1.

Thank you for joining us for these half year results. I'll do a quick review platform by platform with some others on trading and outlook. Starting with the first ones that we created in the Channel Islands, slightly slower start to the year, mainly due to phasing, all projects ending pretty much at the same time at the end of last year and new ones starting early this year but not very strong in general. So we've got some momentum going through the first quarter. Generally speaking, good demand outlook, good cost management, electricity and other things and other cost inputs as well. We're working quite hard on an extension to the core [indiscernible] photograph from the slides, [indiscernible] extension, which gives us another [indiscernible] of reserves to able to continue the operations in Jersey. And we're also working quite hard on similar set of projects in Jersey. The outlook, in general, for the platform is good, both in terms of residential, local infrastructure and commercial development remain good both in this year and in early '23. And to the next platform, Precast Product Group, PPG, our business in the U.K., focusing on precast concrete, strong trading performance, in general, helped by, of course, the infrastructure portfolio that's being built in the U.K. Strong demand still in [indiscernible] and DIY spend, certainly, in the first half, starts to normalize slightly as we go through the second half. And then, generally speaking, some commercial hospital, that's still very strong. Outlook for the group remains good. Cost control is good. With slightly small additions, RightCast in the North gives us a footprint further to north in the U.K., also gives us extra skill in terms of staircases and bigger sort of structures of that nature, malt design and engineering teams that do deal with those such projects. And as a result, we are quite confident on this platform performing well throughout the rest of the year. England & Wales consists of GD Harries in Wales and the Johnston Group, which we acquired earlier in this year, so primarily quarrying activities. And Dimension Stone, good trading in the first half. A number of more tricky months to overcome in Harries because of other things but in general speaking, on track. I have now [indiscernible] South Wales stone road contract, which will start late this year and into next into '23 and then '24, '25. That's for the maintenance of the road network in South Wales, improved margins across everywhere with the types of aggregates we sell. Also, we made a good investment in the major quarry in South Wales, with the new primary fixed primary pressure, which is expected to come on-stream somewhere in September. And as a result, product mix-wise and location-wise, we are, and remain, very confident on the performance of these 2 businesses. Dimension Stone [indiscernible] over to Belgium now, strong first half of the year. That's, again, a continuation of various trends we had across last year. A, the amount of infrastructure of housing, generally speaking, means that's good for the business than we thought. But then also shipping and shipping costs means that there's stock from outside of Europe coming in, which again helps the sustainability effects of this type of material, less ESG or carbon-intensive than ceramics and other replacements. And as a result, good order book from last year, which is maintained and keeps being filled at the same rate, and that's still the case today. We are extending this course. It's probably going to be work going on that from that perspective. So again, for this platform, a good first half and a good outlook for rest of the year. Benelux, in general, that's all activities in the Benelux part, Dimension Stone, a mix between the various operations spread [indiscernible] B-Mix, concrete businesses in the North, slightly slower volumes out of the crushing at stations in [indiscernible] in the South, it has to do with allocation of volumes between us and the other wholesale class that we sell into but still in line with roughly with what we expected for the year. Cost management is good. Energy increases and so on, and the electricity price, is being managed actively. We are starting now to produce precast concrete out of our facilities in Lindberg, and that's a starting point for the PPG group we spoke about earlier to get a footprint into the Benelux and then expand from there but generally speaking, good outlook. Still good demand from an infrastructure perspective, good demand from housing perspective are demonstrated by the Dimension Stone platform as well. So again, confidence in the rest of this year. Then going to NordKalk, several challenges earlier in the year, union strike, which cost us 4 months of high-grade quality products being sold into the paper but a paper production in Finland that cost us quite a few million pound EBITDA, but we can cover that over the next few months. We had plant breakdowns of other major customers, and again, similar impact, slower production but again, through cost management and efficiency, we managed to recover all that. Energy increases, obviously, in the various markets, Finland, Poland, are significant. Dynamic pricing has helped us there. Hedging has helped us there. And as a result, we are performing well across this platform. We've bought additional limestone reserves in Poland. If I remember, there's a large [indiscernible] there that has various extension programs ongoing, and that's in line with what we expected. And so we think that volumes will remain all right across the rest of this year, and therefore, good performance out of this most recent platform. Garth?

Thank you, Max. So just a quick overview of the key measures for the first half on a financial basis. Group reported revenue of GBP 247 million, up 191% year-on-year and 17% on a pro forma like-for-like basis. EBITDA of GBP 48 million, up over 200% year-on-year and 6% on a like-for-like. EBITDA margin of 19.2%, so we had some improvement there, somewhat masked by the top line growth due to the cost pass-throughs, inflationary pressures. EPS at 3.61%, up 35% year-on-year. Cash of GBP 46 million, demonstrating its strong cash generation for the group. Bear in mind, we spent GBP 38 million on M&A and GBP 15 million on CapEx through the period. Leverage ratio, therefore, at 2.24. We did stretch ourselves to do Johnston without dilution but we managed to work that down and that trend down further through the year. Just on the income statement, it's covered off, obviously, revenue. Profit from operations grew 130%. The lower the sort of operations line. Net finance expenses increased due to a larger debt profile of the group on the back of the NordKalk acquisition. Other gains relate to ForEx call options, realized ForEx gains, gains [indiscernible] profit plan equipment and share of earnings from associates. Income tax at circa 80% of profit before tax is more in line with what we were sort of guiding in the prior period. We benefited from utilization of tax losses primarily in the U.K, and all of that translates into underlying profit of GBP 23 million. And adjusted for outside equity interest, pleased to report EPS at 3.61p, which is a substantial improvement year-on-year and demonstrates the earnings accretion from the various acquisitions we've completed recently. Looking at the balance sheet, net debt started the year at GBP 164 million, GBP 48 million in underlying EBITDA. We absorbed about GBP 19 million in working capital, and that's pretty consistent with expectations. It's mostly seasonality, paid GBP 6 million in taxes and just sort of GBP 15 million in CapEx, which translated into a GBP 7 million of underlying free cash flow. We then paid GBP 54 million in M&A. That's also including the jet we absorbed as well and GBP 6 million of other outflows. That's a combination of financial derivatives, net finance costs and non-underlying cash costs that are captured there as well. And that then translated into a closing position, net debt of GBP 27 million for the group. I've talked about the financial piece, I'll hand it back to Max.

Thank you, Garth. So 2 slides very quickly on the outlook for the second half. So generally speaking, as we're trading today, and that's between now July's trading update, that's today's numbers, we are still confident for the second half trading volumes, and that's across everything we sell, whether that's housing infrastructure or industrial minerals, in commercial real estate remain good. We benefit from the fact that we have a diversified group across multi-jurisdictions and multi-segments. 1 month [ subsecond ] can be faster and slower and another monthly turns around again but generally speaking, order books, the refilling of these order books and the outlook that we've got in the various segment seems to be holding up well. Because obviously, the big question is, do energy price increases as a result of that at some point in time, [indiscernible] demand? We're very much looking at various trends and indicators there but we haven't so far seen a significant amount of them in terms of slowing our forecast and our outlook. But that is indeed a point that we look at, cost. Generally speaking, from a cost management and inflationary pressures, we have the same strategy as we had earlier in the year, which is dynamic pricing and various [indiscernible] hedging at various stages of cost management initiatives, and as a result of that, we are managing that inflationary pressures quite well. And then looking more long term, we're very happy with the footprint and very happy with the various industries we're now exposed to. It's a decent diversified footprint that we have managed to build and we'll continue to invest in that footprint and invest in the expansion of that footprint as we go along. And one of those ideas on the next slide is a joint venture with a world steel leader, ArcelorMittal. We have a joint venture signed now to build a number of kilns, co-located on ArcelorMittal steelworks in Dunkirk. It's a significant development for us for a number of reasons. first and foremost, it is a large development, 900,000 tonnes of quicklime per year, which is a significant volume. A large proportion of that will obviously be supplied to the ArcelorMittal steelworks for the production of the steel for Dunkirk and the rest of the volume, we will be able to utilize ourselves in our network and start to commercialize that product. The main significant point here is that since we are co-located on the ArcelorMittal steelworks, we will use residual heat from the steelwork to heat the kilns, use biofuels to fuel them and we will send all the CO2 emitted by the kilns into the Dunkirk CO2 hub. As a result, this lime will be, when it's all fully operational and connected up, completely green, not requiring any ETS carbon credits. That will be the first, I think, in the industry and a very significant development for us. And we expect to invest around EUR 20 million as a JV partner, as well the other JV partner, to be part of [indiscernible] The rest will be [indiscernible] from debt, and we expect the whole setup to be operational from 2026, generating return on invested capital in line with what we had expect to generate. That wraps up the slide presentations for this morning. Very happy to take any questions on any of the points above.

In terms of CapEx and cash flow, what's your sort of expectation there for the parts in terms of what you think you is spend on CapEx and the other working capital movements without the [indiscernible] on?

It's heavily skewed into the second half, cash flow generation, so that will pick up. The operating cash flows will pick up dramatically in the second half. On the CapEx front, it's going to be similar, slightly more. Probably, there's some, some large works happening the way in Finland and in Belgium. It'll be in a similar ballpark.

So GBP 35 million, GBP 40 million?

Yes.

And then one on capital number. I mean, obviously, higher price [indiscernible] of stocks is clearly an outflow. Does that reverse a little bit in the second half or do you think that balance of sort of less physical stock but higher value is fully neutral?

Yes, it's the way the month because we essentially roll into this year with 2 fairly lean months, particularly in December, obviously. So that's when we're putting that cash flow through. And then we start with 2 relatively lean months. So it's weighted about approximately 30% to 70%. So it's a big swing in the second half.

Obviously, the JV sort of moves much more live into the business sort of as a percentage of what you do. I mean, is that the plan sort of maybe in the future, more lime as a sort of percentage of what you do? And I guess maybe your thoughts on [indiscernible] for more lime?

Okay. It's a product that we make in NordKalk. It's not a major focus to the NordKalk business. If you take NordKalk versus other lifestyle and line producers that identify themselves as line [indiscernible] have the opposite split. 90% of their business is lime and the rest is some stone. So it's something. So it's a subsegment that they have a really good position into the north but that's basically it. We think and what we see is that lime is an essential product in pretty much everything you touch every day. That's steel, paper, porcelain [indiscernible] It's into everything but it's also into a number of products of the future, batteries and all that technology need certain lime, anything has to do with cleaning up most of the industrial processes or waste, at some part, lime plays a role. So from that perspective, we see kind a bit of change in the future that we can utilize. So that's the second reason. And thirdly, if we can expand your lime footprint by having a very strong partner next to you that will help you take off large volume of the production through a JV arrangement, that makes the whole [indiscernible] quite interesting.

[indiscernible] geographic expansion opportunity, what are your sort of the views on where that might happen as you talked to Germany and places in the past? Will that shifted a little bit recently in places like Germany and not looking the best opportunistic [indiscernible] markets into things like that, I don't think it has changed at all?

We've got a footprint that's around the North Sea and the Baltic Sea, and we've shown that on slides, you see all the countries that fit in there. And then there's 2 countries that we've always pointed to that are completely empty, and that was France and Germany and obviously Denmark. And then there's countries in that that are a light footprint. France, we are starting to get a bit of a presence in now, especially through this joint venture, so that's one. Germany is still the same as it was. Are we looking at Germany? Yes, you have to, if you're in that geography. It's still the largest industrial economy in Europe and one of the largest in the world, it's within the footprint that's identified. So you need to have a look at what you do. Whether that's immediate or in the future on, I don't know yet but that's being considered actively. And then there's plenty of opportunity in the other markets, UK being one, Benelux being the other and then [indiscernible].

[indiscernible] part of a good contribution from operational efficiencies [indiscernible] that you think may be helped, first? And then maybe what you [indiscernible] in relation to the second half, there's so more to come, what the aim was in that case in the second half is just [indiscernible].

I think we've stated previously what we lost on the union strike. So we obviously managed to hit our target, so it was a combination of operational efficiencies there and some overperformance elsewhere in the business. So it's probably halfway on each, thereabouts. So we expect the operating efficiencies continue through the second one.

Looking towards this wind terms, you kind of progressively hedge out over time, specifically sort of looking into the next sort of 6 months as it were. Do you know what percentage is hedged essential service here right now, more than 50% of [indiscernible] rough idea of that?

So it varies. I don't...

You said NordKalk, maybe that's [indiscernible] sort of energy-intensive part of the business?

Yes. It's over 60%. Yes. There's 2 effects that need to be taken into account. So there's electricity, obviously, fuels and then gas. Interestingly, we hedge fuels for both gas for [indiscernible] What we are doing is shifting significantly away from gas because of its viability concerns to other fuels and then also to more use of electricity as we think. When you're into the year and you've got a nice balanced picture in terms of what you hedged and what you haven't, that is obviously with an expectation of certain type of fuel use. If you dramatically will shift away from one and dramatically increase the other, then you obviously mess with that balance. That said, we're quite happy with how we approach the year in terms of energy. But in terms of gas supply and gas prices, we're paying are not very near what they're currently looking like. Electricity, in some way, is the same sort of thing. And there's slightly less efficient hedges but then compensate with dynamic pricing and price increase. So it's a good picture so far.

Just on NordKalk and the UPM strike. I think the original expectation was to get the volumes back in a couple of years, so it would take into next year. Is that still the idea?

Yes. So we lost 4 months of volume and then probably half a month of May because they were ramping up. The rest of the year was not long enough to recapture the entire volume. We are capturing a portion and the rest goes into the early parts of next year. That said, the petrol pumps are running well, so as long as the energy doesn't start to cause a problem there, that trend continues as it is.

And Belgium, a couple of questions. You've obviously gained from [indiscernible] because of high shipping costs, shipping costs are coming down a bit. And those volumes coming back or just the rates to fall on way further. But I was just wondering if you could remind us of the timing of this 1 new expansion and whether that's on track [indiscernible] and stuff?

We don't see [indiscernible] coming back in. I think some of the supply routes that have been disrupted this much, so that will have a while to go before that gets shifted around. There's also constraints in all supply starting to start out of certain parts of Asia, particularly China, where they just basically stopped selling it outside of their own country. So all of that means that a certain logistical chain is now broken and it doesn't necessarily come back that quickly. There's a focus on ESG and the fact that this stone that we said is fairly local and therefore, fairly light in terms of environmental footprint. That's helpful. And so from that perspective, we are [indiscernible] all the permits for the extension that are in place and have been in place for a while. So that's good. It's the extension behind the crushing lines section that you could see on some pictures. And that will start to open the first part to that end next year. We have replaced or removed the road that was crossing that section. That road should be finished by the end of this calendar year. And that then leaves us with [indiscernible] section open for [indiscernible] and then starting to get that stone there. So that's in line with our planning.

Good. And sorry, just on the Belgian stone business again. You talked about, I think, a sort of strong order book and wanting to drive the orders coming in to replenish that [indiscernible] onshore right? I mean even with that is going out, is the order book is still in place? Just by a way of reminder, how long is that order book now compare to your [indiscernible].

It's not so much an order book in terms of length of months, it's an order book in terms of volume of stone committed. It has been running at a much higher level than it used to. So we're in sort of 50% higher order book volume than a normal trend would have been in the past. It has stayed there, and that's since been the volume of order books from the end of the last year and replenishes therefore, automatically the same volume. There are some bigger projects that have come in. As you mentioned, the [indiscernible] City Center. It's actually also the picture that we see on the home page of our website. It's quite a nice key project. And these sort of infrastructure projects are now coming in, that's very helpful. So for now, still low, still the same.

Max, can you update us on Greenbloc. It looks as if you broadened the product offering into pretty much all corns of [indiscernible] So is it being successfully sort of some or is that sort of still sort of a promise? And is it being taken up by all the customers and I suppose sort of presumably you can move it to the new acquisitions [indiscernible].

Yes. So we're making or scheduled to make about 20 million breeze blocks this year in concrete, we might actually exceed that. That will then be 60% volume block that we make, 40 being standard. We have a range of available products in all the type of [indiscernible] that we make, retention walls, structural concrete of various types. We started to make precast files out of a green coke mix. So from that perspective, it is exactly doing what we hoped. We offer everything that we can sell [indiscernible] the customer then can choose, and we think that we can systematically move that further to more and more of our portfolio. The new business, RightCast, its specialism is staircases, precast staircases, they're into very sort of little charts and train platforms and so on, where very specific structural companies needed. Sometimes, the required strength does exceed what you can out agree or the permission with the status that allow. So that's something that we need to work on. And that's also one of the things that we work collectively with [indiscernible].

And I'm assuming that a fairly good idea is to, what price premium you get there to green. I mean can you give us an idea as to how much more expensive it is for a customer or [ Bridgebox ], for example?

We have always said that we don't make it much more expensive than the standard so that nobody can argue that it's too expensive to use. So it's a few percentage points more expensive than a standard block. Things are also starting to be more interesting in terms of the ingredients used. They start to be more expensive to start on cement. So we just have to think of suppliers at various ingredients, this is greener than your standard product, give us a bit more money. So that will likely find the gap a bit in time as we pass that on. But the philosophy remains, let's try and make as much in low carbon and have the benefit of having a lower footprint as a business and not ever giving anybody the argument that it's too expensive to use.

And a general one on pricing. I mean, clearly, you can keep moving around still on energy and fuel as we've highlighted. But as we stand here today, what sort of base level price increase do you think you need across the group to cover off all the cost elements?

All. Effectively what we pushed through so far, that's essential, the same rhythm.

It's a difficult one to [indiscernible] 2 products. If we were making one [indiscernible] and it depends on how much agility is used in the production but particularly materials.

That's a good answer. But if you look at forecast turnover last year versus actual turnover this year, you can see, you can back out what that sort of means on average. As David said, prices are [indiscernible] product.

We just had a question for [indiscernible] Asking on the GBP 30 million debt due in 12 months and how that would be funded and how the JV as well would be funded?

First debt, that we got from [indiscernible] pounds worth of debt due in 12 months.

The amortization will [indiscernible] operating cash flow.

So that's on the first answer, it's just out of operating cash flow that we generated from the group, and that's the amortization of the main debt facilities that get classified as due at 12 months because that's a proportion of our global debt that needs to be repaid as part of the [indiscernible] there. The JV is a stand-alone business. We will be an equity investor in the JV as [indiscernible] around about EUR 20 million into that JV. JV will then become a company that itself can take on debt facilities to fund its activity, and that is the expectation. So that, as an entity, will be a levered entity. And that debt will then be secured against the plants and the contracts that the JV will have, so fairly standard setup.

Question from Christian [indiscernible] Does the group still have the ability to hit 20% EBITDA margin targets, given inflationary backdrop?

I believe so. Currently, with the inflation as it stands, we're obviously protecting overall profitability, that's the whole strategy. Sometimes margins suffer a bit. Sometimes you can maintain it as a margin percentage. We're quite happy with how we achieved that so far. In the longer term, the structure of the group, positioning of the group, I think, will allow us to get to above the 20% point as we have systematically stated in various [indiscernible].

Another question from Christian. What is the Board's appetite for M&A in a current uncertain backdrop?

Yes, it's fairly simple if it's accretive and it's on the table.

Yes, to add to that, maybe there's a number of things that really strategically make a lot of sense for the group to do. And as you can see with the joint venture we've done, we've also got some of the extensions in Belgium and crushing lines, JV, we've got there. These are various projects which are phased across years. And it allows us to continue to develop the group. Even though the current outlook may be uncertain, these project starts to come in '25, '26. And so we keep the pipeline of developments of this business relatively filled, which allows us again to build it further. So that's the approach that we currently take given [indiscernible] levels given uncertainty. Okay.

Thank you very much everyone, if there's no further questions.

Thank you.