The Alumasc Group plc (ALU) Earnings Call Transcript & Summary

Good morning, and welcome to The Alumasc Group plc Full Year Results Investor Presentation. [Operator Instructions] Before we begin, I'd like to set the following call. And I'd now like to hand you over to Paul Hooper, CEO. Good morning to you, sir.

Thank you very much, indeed, [ Sundra ]. Good morning, everybody, and thank you very much for attending the annual results of The Alumasc Group 2023. Introductions, Paul Hooper, I'm the Chief Executive, and I'm joined by Simon Dray, the Group Finance Director. If we move to Page 4, Simon, this is the overview. It was a challenging backdrop really made doubly so by a comparative year, which included a significant contribution from export contracts and in particular, for Chek Lap Kok in Hong Kong, where we had a project worth GBP 6.6 million, contributing circa GBP 2.8 million to EBIT. If we look at our revenue for the year, it was GBP 89.1 million, which was broadly level to the prior year. The underlying PBT was GBP 11.2 million versus GBP 12.7 million. It was a resilient in mine performance in a challenging market, and we had a strong performance or strong performances at building envelope and housebuilding products. Water management as expected declined due to significant export contracts in the prior year that I touched on at the start. However, we did pick up a large order in the year for Chek Lap Kok again of GBP 7 million, which we anticipated would start in the year under review, but delays prevented that, and it's actually started in the new financial year, and we've been having shipments going in, in July and August. In terms of the dividend, the full year dividend picked up by 3%, and the final dividend within that increased by 3.8%. The net bank debt was GBP 2.8 million, a gearing at 0.2x. Post year-end, we've acquired ARP Group, which is subject to CMA approval, and this will be further delivery of our growth strategy. We have a strong alignment with environmental growth drivers. We have good momentum and a strong order book, and we've had a good start to the new financial year. Overall, we have a robust platform in place. Now moving on to Page 4, strategy, and this is very important to us. And these priorities are being achieved, and I will go through them side by side, but let me just cover our progress over the last 5 years where we've grown the revenue on a CAGR basis by 6.5% and the operating profit by 17.5%. And if you look at the chart on the left-hand side, the top section, you'll see we've had reasonable growth in our top line over the last 3 years and actually moving down into the operating margin, you'll see that that's grown into the 13.5%, 14.9%, 13.6%, slight pullback there in the year under review. But nevertheless, we're into double digits. And actually, our ambition is to get into the 15% to 20% margin area. If we go back 3 straight full years ago, we took GBP 2.4 million of costs out by moving from 10 facilities to 6, and that really brought us into the GBP 10 million-plus level in terms of operating profit and into that double-digit zone. So that was a step change for us. So let's touch on each of those strategic priorities, and we'll go to Page 7. We aim to outperform in terms of accelerating sales growth in the U.K. construction market. And we've done that. We've analyzed this, and you can see that we are estimating circa 50% increase in terms of our outperformance there. We have strong positions in niche markets and the long-term growth drivers are both environmental and building reg specification where we're getting assistance we estimate in around 80% of the time. OTIF, I'm sure you know, stands for on-time in-full, and that is running at 90% to 100%. And this is a very good way of analyzing how good your customer service is. And the exemplar within the group is Timloc, the house building products company, which had a 100% OTIF in the year, which is a fantastic performance. Our NPD very key to our business. And actually, we launched Slotdrain E and had our first installation at the Farnborough Airport, very historic airport, where flights really began in the U.K. and it's very much looked upon from around the world and the fact that we've got in a couple of projects that have gone in there at this Slotdrain E system, which actually allows a reduction in the cost of installation from fewer materials in there and also speed of installation, we're estimating around a 25% reduction there. And we have a case study that will be appearing in the annual report. And at the same time, less use of concrete, which isn't the most environmentally sound product. So we're excited about that launch. We have also been very excited about our Tile Vent launch that came through housebuilding products circa 9 months ago, slightly longer perhaps. And it's already taken in the 9-month period through to the year-end, circa 8% market share. So very well launched low-cost manufactured product that's taken a very large market share and has helped to offset reductions in housebuilding activity. In terms of geographical sales expansion, right now, our exports are only in the order of 5% to 6% in the year under review, but we are looking to widen those and increase them by activity through our Singapore distributor who has a person now in the Philippines, focusing on our product range, which is Gatic. The brand name goes back to 1926. Gas and Airtight Covers is the acronym. And also following that, we will get representation into Thailand. We have 2 in India through our distributor there. We have somebody already in Spain, and we've just hired somebody in Colombia who also brought some coffee to his training session in the U.K., which made him very popular. We have one in Dubai, who's gone in there recently, who will handle the Middle East. So we're taking exports very seriously, and we feel we have the opportunity to grow those. We have a great range of products and we have one competitor that we will be, in particular, targeting that is quite dominant on the world scene. Moving further forward. We're looking to drive the margin improvement. We have a cost effective and adaptable structure, a pretty slim center, but it's agile. We empower our businesses and our production is pretty agile and flexible across the group. Our CAGR over the last 5 years has grown by 17.5%. And there you'll see the increases within each of the divisions. We expect future improvements to be driven by volume growth, both in the U.K. and export and we'll be getting the drop-through coming through from that. Inflation has stabilized, which is helpful. NPD, very key to us. And the exemplary again is Timloc housebuilding products company, where 25% of its sales have come through products that have been launched in the last 2 years. Efficiency. Now I talked about this a bit earlier that 3 straight full years ago, we reduced from 10 facilities to 6, saved us GBP 2.4 million. So we will continue to look to see how we can improve our efficiencies across the group. And it's possible. You've always got to be doing something to improve, whether it's bringing some CapEx in to make our equipment more efficient. There's always something that can be done. So now I will ask Simon to continue on championing our sustainable building products, please.

Thank you, Paul. We believe a key part of our ability to outperform general construction markets and a key part of our resilience in tougher times is the alignment with long-term environmental growth drivers within the construction industry. Our products are resource and carbon efficient. We use recycled materials to create durable and low maintenance products, which themselves recycle at the end of their operating lives, and over 80% of our portfolio helps address some of the environmental challenges facing the industry. They are building decarbonization, water management and urban green spaces, which improve occupant well-being and biodiversity. But another key action we can take is the reduction in our greenhouse gas emissions. The table on the left-hand side shows the history since FY '18. And in the period to date, we have reduced our absolute level of greenhouse gas emissions by 57% and the intensity of those emissions relative to revenue by 69%, and we've achieved that through consolidation of sites into more efficient facilities, upgrade of equipment to more efficient machinery and purchasing all of our electricity from renewable sources. And we've now put in place science-based targets to reduce 2023 emissions by a further 42% by FY '30. And we're in the process of calculating our extended Scope 3 emissions across our entire value chain, which will be used to inform our Net 0 plans and also decision-making along the way. I pass it back to Paul now.

Thank you very much, Simon. We're on Page 10, and this is the final strategic delivery slide, and it's concerning value-enhancing investments. From an organic point of view, we will continue to invest in sales and marketing people. R&D and NPD will be increased and CapEx will be available where needed. We're quite well invested though from a CapEx point of view. On the inorganic side, in July 2023, we acquired ARP, but it's subject to CMA approval that we anticipate in the autumn. A maximum GBP 10 million consideration before working capital, net debt is here. We have an GBP 8.5 million initial consideration that will come in with a GBP 1.5 million earn-out over 2 years. Now we expect synergies from products and routes to market. For instance, [ CMA ] doesn't have any drainage products. We have a lot of those, and they have good strength with their routes to contractors. So we'd expect those to piggy back in to be distributed to contractors. Procurement, we've both been pretty good in different areas about procurement. So we'll take the best areas. We'll combine the 2 volumes, and we'll get further discounts. In terms of operations, fortuitously, this business is 40 minutes up the road in Leicester, and we will specialize in terms of our operations to a certain extent. We have no plans to close anything down. We want to keep all the employees there. And there is space in the facility too, that is of interest because we're somewhat confined with our space at the moment. In terms of EBITDA multiple, this is 6.8x on the initial consideration. However, with the synergies that we've touched on, we expect that to come down to 5x as those synergies are delivered. It's immediately accretive to underlying earnings. And it's quite interesting, if you look on a pro forma basis, if ARP had been fully acquired at the end of June 2023, this would have put our pro forma gearing 2.75x. So we still have a strong balance sheet left. So let me now move into the 3 divisions, and I'll start with Water Management. Actually over a 3-year period to the prior year of 2022, we doubled our profit to GBP 8.7 million with the underlying operating margin of 18.4%. But the year under review has been more subdued. The U.K. sales were resilient, supported by new product launches, but exports, as I've touched on earlier, have reduced. The order book is healthy, and that includes a GBP 7 million Chek Lap Kok order that we took in the prior year. And at the year-end, just after the year-end, actually, we acquired ARP, and we're very excited about the possibility of that business joining us. I'll now move into building envelope, which consists of our roofing business. And this is quite interesting here because against quite a tough backdrop, they increased their revenue by 18% by taking market share. We've strengthened the sales force, which absolutely contributed to this. We had new product launches, including the Olivine CO2 reducing product. And you can see a photograph there of the Airtile Villa System, which is used on flat to pitched situations, but it's also used for security in certain places where the roof is more difficult to break through. It's all one piece, and it's got steel underneath it. So it's quite an interesting product range. We're giving excellent customer service and warranties, focusing very much on high-end specification work. Just back on the warranties, January in the order of 20 years, but our roofs too last much longer than that in many cases. We have low carbon systems. We believe we've got the highest level of recycled material in our products and systems. And in terms of safety and installation, this takes place through having approved contractors who would have been trained with us. And then moving on to housebuilding products, which is Timloc. This really had an excellent performance in challenging market conditions. It grew its revenue by 19% and its profit by 46%. Its operating margin gave an equal record of 24% despite cost increases. This is a highly efficient company, and it just has a lot of automation within the plant. We managed to pass through cost increases. It has outstanding customer service with 100% OTIF, on-time, in-full, and it doesn't have an order book because it ships out very quickly, Orders received by mid-day, et cetera, will be shipped into the following day. We'll continue to invest and focus on sustainability. Despite not being a huge company, this was the first carbon-neutral building products manufacturer in the U.K., which we're very proud of. And we're helping with carbon-neutral homes and the future home standards will come out in 2025, and we have products like the [ RADCO1 ] that goes behind radiators that helps to seal up pipes that are coming through on central heating. We also have a good range of ventilation products, et cetera. So the new product launches will help to offset the forecast reduction in housebuilding. And as I mentioned earlier, 25% of its sales are from products launched in the last 2 years. So it's done extremely well in that area. So if I may, I'll hand back now to Simon on the financial review, please.

Thank you again, Paul. And as Paul mentioned, revenue was broadly flat year-on-year. We'll look at the components of that shortly. In spite of the inflationary environment, gross margins were strong, 36.7% compared to 37.3% last year, slightly lower due to some cost dilution or some dilution from recovery of costs. Our operating margin at 13.6% reflects the lower volumes at Water Management, a slight dilution from the cost pass-through and some investments in overhead, which we expect to see the benefit from in future years. Our UPBT was GBP 11.2 million, down 12% on the prior year, but in line with the guidance we gave the market at the beginning of this financial year. Our underlying tax rate of 20% is a result of the increase in the U.K. corporation tax rate, offset by some super capital allowances taken in the year. From '24 onwards, we expect the full year rate to reflect the higher U.K. CT rate at around 25%. The full year dividend was 3% higher on the prior year, reflecting the Board's confidence and that was covered 2.4x by underlying earnings. So looking at the reconciliation of year-on-year revenue and profit. Price inflation increased sales by GBP 4.5 million after the deduction of the inflated costs, that's dropped through to a small GBP 400,000 contribution to profit, which did have a slight dilution on margins as mentioned earlier. Net of price rises, underlying sales decreased by GBP 4.8 million, of which GBP 6.6 million was a result of the significant export contracts that were taken in the FY '22. And the profit contribution from those contracts was GBP 2.8 million. But net of all of those, there was some organic growth, GBP 1.8 million at a group level with GBP 900,000 of profit. The table on the right summarizes the divisional contribution to that. Housebuilding products grew well as did Building Envelope. Water Management, even after excluding the significant contract in the prior year, revenues declined as a result of some lower regular export business, but a better mix and some efficiency improvements and cost controls limited the impact on profits to only GBP 300,000. The group had a solid cash flow performance in the year rather than spectacular. There was a GBP 1 million outflow into working capital in the year compared to a GBP 4.9 million outflow in the prior year. Pleasingly, within that number, inventories reduced by GBP 1.8 million as the buffer stocks that we established over the prior year began to unwind. However, this was masked by the timing of some purchases and sales around the year-end, meaning overall working capital increased. We'd expect to see some small reductions in that number over FY '24. Our capital expenditure was at about the level of depreciation, which is where we'd expect it to be over the medium term. Tax payments were much lower than the prior year due to the super capital allowance and recovery of some of the payments in the prior year. And our pension scheme payments reduced by GBP 1 million in the year following the lower contributions agreed with the trustees, which took effect from October 2022 and going forward, we'll be paying GBP 1.2 million into the scheme per annum. After the cash outflow on the Levolux disposal, we reduced net bank debt in the year by GBP 1.9 million to GBP 2.8 million, which represents gearing of 0.2x. The group's principal bank facility is a GBP 25 million revolving credit facility with a GBP 20 million accordion facility, which allows us to increase it subject to bank appetite. We extended that in the year by 1 year to August 2026, and we have a further option to extend the expiry to August 2027. The pension deficit increased in the year, although it was down on the position reported at the half year. And that was a function of the lower asset values, which is driven down by equity performance, offset partially by lower liabilities due to the higher bond yields. And we're looking to maintain the current level of contributions, the GBP 1.2 million per annum and expect those together with improved equity performance to move the scheme to a low dependency thesis where the scheme can make prudent investment decisions about the future while being unlikely to need further assistance from the sponsor company over a reasonable time frame. And we've maintained discipline around capital allocation. We look to manage debt within prudent levels while still investing in organic growth, delivering progressive returns to shareholders. And when opportunities present themselves, accelerating that growth and delivery of the strategy through bolt-on M&A. And if I can hand back to Paul now for the market overview and outlook.

Yes. Thanks, Simon. We have 2 slides left. So if we go on to the Page 21, the outlook, the industry forecast, and these are from the CPA, let's go into the middle column. And at the bottom, we have the total construction market, and these are calendar years. For 2023, you'll see the forecast is for a 7% reduction with a little bit of a tick up into the next calendar year 2024. And then above that, in particular, if we look at the total housing, that's down by 18.5%, so quite a large amount with a tick-up of 1.5%. The figures in red that we've shown there are actually the movements, the percentage change from the forecast that were there in the January time and therefore, we're seeing a slightly bigger reduction this year, but an improvement on the next year, just statuary of 0.1% overall but plus 2.6% on total housing. So these are headwinds, how we're going to offset them? We're going to be pushing our export market growth. It will take a bit of time. But we've embarked on that, as you will have seen earlier on, we're looking to take more U.K. market share growth. NPD is important and entry into adjacent markets, demand resilience for products, assisting energy efficiency and water management will help as I've touched on, we'll continue to focus on cost and efficiency. And we really look forward to bringing ARP into our group when signed off by the CMA. We have our final slide now, which is the outlook, and we've split this into a short term and a slightly longer-term basis. In the short term, there are market challenges, as I've just touched on. The Board is confident of further progress with our proven resilience of the business model. We have the first call-offs coming through from the GBP 7 million Chek Lap Kok project in early FY '24. That is happening in July and August. We're looking forward to the completion of the ARP acquisition subject to CMA approval, expected in autumn 2023. Our current trading is in line with management expectations. And if we look a little bit longer term, once conditions normalize, with our leading positions in attractive niche markets supported by environmental growth drivers that will assist, there are structural drivers out there. As we all know, there's a housing shortage, commercial building retrofit requirements, government funding for public buildings will assess. And we like building standards being changed and improved, and we strengthened and we usually strengthen our position through that, sustainability demands requiring more complex specifications are attractive to us. We have a strong balance sheet and an experienced management team, which was very important during times of current times, really when there are some challenges out there. But I hope you'll agree that we've managed to navigate ourselves through those in a reasonable way and to set ourselves up into a reasonable position for the new financial year. So are we on to questions?

[Operator Instructions] As you can see, we received a number of questions throughout today's presentation. And Simon, if I could just hand over to you just to read out the questions and give response so it's appropriate to do so. I'll put out to you at the end.

Yes, first one is thank you for your continued effort that you put into the business, which I'm sure that will be recognized sooner related by the market, which is very kind. Recognition, I think, well, if you have the right strategy and you deliver it effectively, I think sooner or later will be recognized. So I think we're on that track. Next question is the RLS ARP as well reduce the multiple from 6.8 to 5x. I think we've answered that one, the delivery of the synergies, but please ask a follow-up question if anything wasn't clear. That's probably one for me, Paul, the possibility to buy back your own shares. Why was the acquisition of ARP a more favorable use of capital? Share buyback, it does increase EPS, but it's financial engineering rather than an increase in the underlying value of business. It does have relevance if you want to rebalance debt and equity or return surplus capital. I don't think we're in that position at the minute. I think the Board sees a lot of opportunities to invest in organic and inorganic growth. And I think there's no plans currently to look at share buybacks. There are [ organic ] opportunities, which we think will grow the business and deliver a better return to shareholders over the medium and long term. But obviously, it's a tool that we retain should we wish. One for you, Paul. If you woke up one day and felt the urge to play golf for future years, who would be in charge of the company?

Well, the Board would decide upon that, but I have no plans at the moment to retire, and actually, I'm not a very good golfer either. So I have been showing it too much. I really still enjoy get a big buzz out of running this business with my team. And the challenges each day are always interesting. And the fact we've now made a further acquisition following the one that weighed 4 years to go. I find all of that really interesting and challenging and trying to improve the situation for our shareholders.

Has the Board considered transferring the pension fund liability to a third party? And if so, what would be the cost? It's not our driving strategy at the minute because the cost would be extremely high. Certainly, the last time we looked, it was in the order of 10s of millions of pounds. It's something that we will continue to review. Right now, the strategy is to get the scheme into a low dependency basis, which, whilst technically, the company is still on risk, there's a low likelihood of the scheme requiring further contributions. But while we're on that journey, if there are opportunities to transfer all or parts of the liability to a third party, we'll certainly take a look at those provided we believe it to be an efficient use of capital. One for you, Paul. Do you see any opportunities for your products in the remedial works likely to be required in school buildings, et cetera, due to the recent issues in the news, presumably the concrete?

Yes. That's an interesting question, which we've been considering really across the last few days, in particular. And there could be opportunities because as these concrete plants are replaced. That's if they are replaced because these buildings in most cases are around 30 years plus old and they may be not down because it may not be efficient just to replace the roofs. But if they are, then in terms of putting concrete plants down, replacing them, insulation, et cetera, then requiring a hot melt, cover on them as it were. We have [ Hydratec ], which would be an opportunity for that brand and then paving stones tend to go on top of that. So there could be an opportunity, although we note that there won't be additional funds available that they will be taken out of current budget. So we have to be cognizant of that as well.

I think the next question is the same. It deals with the same topic. But you mentioned bolt-on acquisitions to expand your offerings. What are the typical metrics you look for characteristics?

Good question as the others have said as well, of course. Yes, the metrics really are straightforward. We're not looking to bet the farm. So it's got to fit within a certain criteria of size of what it will cost, and the sweet spot, it's absolutely ARP, GBP 10 million in terms of consideration, they would need to fit into one of our divisions. We're not looking to expand into a new division, they would have to have synergy, which would usually come from that, of course. And we'd be looking to grow whatever is purchased, and we're not looking for turnarounds because usually, it takes a heck of a lot of effort, and it's not always well rewarded. Sometimes it can be, of course. But the other one is, we don't want them too small because again, you can put a lot of effort in and find that despite whatever may be achieved, it may turn out to be quite small in the end. I don't know if you want to add to that Simon...

Only, I guess you call it a metric, but a multiple payments very much depends on the business we're looking at. We want to pay proper money for good businesses but quite what multiples we'll be looking at and depends on what the business is, where it sits in our portfolio, what the growth looks like and what synergies it brings to the business.

And we find nice businesses sort of got assets with them as well...

So I think that is the end of the questions.

I think you have addressed all those questions from investors. And of course, the company will review all the questions later today and will publish such responses on the Investor Meet Company platform. So just before we redirect investors provide their feedback, which knows particularly important to the company. Paul, could I just ask you for a few closing comments?

Yes. It's really to thank everybody who's attended today so much for your interest and making the effort to attend today and also for the great questions, and thank you for your support.

Paul, Simon, thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This then take a few moments to complete and I'm sure will be greatly valued by the company. On behalf of the management team of The Alumasc Group plc, I would like to thank you for attending today's presentation, and good afternoon to you all.

Thank you very much.

Thank you very much.