Alumasc Group (LSE:ALU) — Interim Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the ALUMASC GROUP PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the q and a tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so.

0:32 Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. I'd And now like to hand you over to CEO, Paul Hooper. Good afternoon, sir. Thank you very much, Jake, and good afternoon, ladies and gentlemen, and a very big welcome to the 2223 interim results for the ALUMASC GROUP PLC, and thank you very much for attending. So as Jake has pointed out, I'm Paul Hooper, the chief executive, and I'm joined by Simon Dre, the group finance director. We had a solid performance. We'll just move to side page four. We had a solid performance against comparative year, which included a significant contribution from export contracts, particularly to the Czech Lapkok Airport in Hong Kong.

1:23 Our revenue was £45,000,000. Our underlying PBT, 5,600,000. We managed to pass through further cost price increases, which is very important to achieve that. We had a strong performance at building envelope and house building products divisions, which I'll come on to a little later on. And water management, as expected, declined due to significant export contracts in the prior period. But this is expected to pick up in h '2, which will be assisted by, another contract at the Czech KLABCOCK Airport in Hong Kong. The interim dividend increased to 3.4 p, which is a sign, of the board's confidence.

2:12 Good momentum, is in place, and we have a record half year order book. The board is confident in achieving the full year expectations. We move now to the next slide. This is actually a strategic overview of the actions that have been being carried out and the reason for the improvement in the business, which we show on the left hand side as well, where you can see the growth in the revenue across the last three years up to £89,400,000. And at the same time, in the bottom left hand area, the operating margin has moved from 8.4% to 14.9%, just under 15% operating margin in the last full year to 2022.

3:10 Also, in terms of the CAGRs from FY '18 to '22, the operating profit has moved up by just under 20%. And this has been driven by the execution of the strategic priorities. And in terms of where we believe we can get to in terms of your operating margin in the medium term, we'd be looking in the 15 to 20% level. Already in this half year, as I'll show you later, Timlock in the house building products area has, achieved an operating margin of 23%. Last year, the water management side, achieved 18.4% and building envelope in this h one, has got up to 14.1.

3:59 So this is absolutely achievable. I'll now move on to the first of the, strategic priorities, which is about having a simple cost effective structure, which has been in place. And particularly in the last three years, going back three years ago, we took out substantial costs in the order of 2,400,000, reducing from 10 facilities to six. All of that has helped to build our margin up to this 14.9%. And additionally, our brands have been developed. Our product strength is exemplified by the passing through of those cost increases, which has maintained the gross margins absolutely essential for a business as is new product development. And I will come on to show two new exciting products that we've launched in the last few months.

4:59 And, again, really key to keep bringing the new products in, and our house building products now has 25% of its sales brought in by new products. We have to continue to invest in efficiency, capacity, capability, and we've done this particularly in the house building area, and that has assisted it to get to the 23% operating margin. At the same time, it's had the allied benefit of reducing greenhouse gas emissions, and the equipment doesn't break down so often, which is also very important. We've rationalized the manufacturing footprint, as I've touched on with the 10 to the six facilities, And we've also exited from contracting, and installing with, the sale of Levelux back in August last year.

5:55 And that is very key, actually, because it's changed really the risk profile of the group. And at the same time around Christmas time, we cease deliberately, with our activities in installing green roofs. We still supply those. And, again, it's made made us exit contracting. To reiterate, the medium term aspiration is to get to the 15 to 20%

6:24 operating margin. So moving on, please. You'll see here, here are the, two new launches that I've come on to, but we will continue to maintain and grow market shares. Again, very important. And penetrating adjacent markets, very interesting with this tile vent called Inventive, this come out of our house building products division, that actually it's being distributed through an adjacent market that we were not in before, and this is through specialist roofing merchants. The products end up in the same place on houses, but this is a special distribution channel that we were not able to break into before launching this product, and it's a big launch. There are 80 SKUs, five colors, etcetera, and the quality is very high. We've had tremendous feedback for it, to be honest, and we are, I'm sure, the lowest cost producer out of this facility, which is so efficient, very robotic controlled in terms of the equipment.

7:33 We have enhanced environmental benefits that have been assisting us. And in terms of these, launches, I think the other point, to make on the tile vent is that it's, being assisted by Timlot's outstanding OTIP on time in full service so that merchants can rely on, Timlot to supply next day if an order is in by 02:00 or thereabouts. An order will go out, and in small quantities too. So it's become very focused and very successful in this area. At the same time, we've launched the new design of slot train where we brought in a patented hanger, suspension type system, which you can see surrounding it at the bottom there. It's reduced the cost of the steel, and it's also reduced the cost in terms of installation of concrete going in, which is a a very important environmental factor, and appreciated by contractors.

8:46 The speed of installation is saving, we estimate, around £5,000 labor in every 500 meters of the medium sized slot train. We're just waiting for our first full installation, which will be at a we expect. We've been told we've got the order. It's at a very prestigious airport in The UK, and then we will be able to refer to that and the savings, that we've we've estimated. But this is a big and important launch, and we know, that it will be successful.

9:23 So moving on, another strategic delivery that is important to us is to grow our exports. In h one, we were only at 5%. We have been up to 15%, and that is absolutely achievable. Again, we have key products, including the Gattic range, and that goes back to 1926. Gattic is an acronym for gas and airtight, covers. And this also, as a brand, covers the drainage systems that go into airports too. We've been very successful at Checklab Cock in Hong Kong and also in Singapore and one or two other Middle East countries, but we can do better than this. The competition, is bigger than us out there, but we feel that our products are as good and that we are going to be making a big effort now to expand geographically our sales of Gattic products.

10:23 We've also, seen in H 1, partly because of the non repeat in H 1 of the Cheknab Kok airport. We've won a large project in H 2 that will come in in the final quarter at the same airport. We also had slower sales in The Middle East partly because of the influence of the World Cup, slowed down construction. But this will turn around in the second half year added by that Check That Cock win, and the order book is building momentum right now. So unlike many other British building product companies, we do have an export side and very specialized, particularly going into ports and airports.

11:14 So we want to maximize the potential for that, and we will do so.

11:22 The next slide is about portfolio management, and it's been a pivotal moment for ALUMASC to exit Levelux with its sale in August last year and then black down roof installation exiting in December. As I said earlier, this has changed the risk portfolio to the better for the group, and it allows us to focus now on the attractive niche markets that we're in supported by long term environmental drivers. We have pricing power and market stability exemplified by our ability to pass on cost increases, very important, and we'll now be gaining repeat business from satisfied customers.

12:09 These will not be huge projects, which LevelUp was often involved in and often one off ones, but we'll focus on what we're really good at doing. Organic growth, we can see that over the last two years. We've been pretty good at growing, but we want to add on to that bolt ons, and these will be acquisitions, that are either in terms of a market extension, consolidation, building scale, adding products to go through our strong distribution channels, or maybe vice versa. Technology, that's also very key to us. So we'll be augmenting the organic growth, which is being driven by the strategy, with bolt ons.

13:00 But to be clear, we're not adding a further division. These will be bolt ons that fit into our three divisions that we currently have. So now I I will hand over to Simon, who will cover the strategic delivery delivery on environmental growth drivers, please. Thank you, Paul. Well, it's a very important part of the group's strategy to align with the environmental growth drivers within the building and construction industry.

13:29 And I there are two legs to this. The first one is the materials that we use to create our products. Circular economy is extremely important to us. 75% of the materials we use are fully and endlessly recyclable at the end of their life, and currently, 20 per six 26% of them are themselves recycled at the point we use them. We seek to continually improve these over time. And when you couple that recyclability with the durability that our products have, we tend to be the market leading products in terms of lifetime or lifespan. This helps to reduce the energy cost of building construction. But the other leg is that what our products do. Our roofing and house building products also help to reduce the energy cost of the building while it's in use through improved insulation, controlling ventilation, and even, carbon absorbing roofs.

14:28 Also, our water management solutions improve the resilience of built environment to climate change. They they transmit, rainwater into the drainage system, and together with our blue roofs and storm water systems, they attenuate runoff during periods of extreme rainfall to help prevent flooding. And our products also make use of the roofline area to provide green utility spaces, which help maintain biodiversity and allow a closer connection between the built and natural environments. And at the same time, we recognize our corporate responsibilities and continue our work to provide a healthy and happy environment for our employees to move towards net zero carbon operations and to promote diversity and inclusion within our workforce.

15:16 If I could hand back to Paul now for the divisional analysis. Thank you very much, Simon. We have three divisions, and I'll start with the largest one, which is water management. Despite, h one being a little more subdued than the prior year, which I've come on to, I think it's worth reflecting that in the last three years, this division has grown strongly and has doubled its profit to £8,800,000 in a full year to 2022.

15:49 H one, as I've touched on earlier, has been a bit subdued. The UK sales were strong, but it's been in the export area where we've had a reduction and partly because of the Czech Labcock airport work in the prior year, prior h one accounting for £2,800,000 of sales.

16:11 And The Middle East has been slower with some spin off really of the FIFA World Cup in Qatar, where the, focus was elsewhere rather than in construction. At the same time, our rain clear business, which has traditionally supplied self build work, has been a little slower, and this is because I think people were getting a little fed up doing DIY to an extent. And also with mortgage rates going up, they might have preferred to go off on holiday or do other things or save their money. But not put off by this, the management team there have been very good at discovering new products, and they brought in a range of new verandas and canopies, which they will be holding on their website, etcetera.

17:06 But we've also got a couple of reasonable sized national house builders interested in those particular products. So we will be expecting or we are expecting an improved h two performance. The order book is building, and we have the next phase of the new Czech Lakakak Airport coming in from quarter four of the second in the second half year, but in our quarter four. Moving on to, building envelope, which consists of roofing now only, having sold Levelax. We've really this business has really grown in the first half year by 29%.

17:53 So I'm very pleased with that, and it's been driven by market share gains. And this has been absolutely carrying out strategy of hiring very good salespeople, often from, competitors, often experienced people, and they've managed to plug the weaker regional areas that we had in The UK. Added to which, we've continued to focus on high end specification work for both, new build and also refurbishment work. We've had excellent customer service, and we give warranties on these roofs. They last sixty odd years in many cases, but our warranties tend to be much less than that, around the twenty year mark, for instance.

18:41 We have low carbon systems, and we believe that we're one of the or we have the highest recycled content in the industry. Safety and installation is important, and we have self adhesive systems, also bonded systems available. And then our final division is the house building products division, Timlock. Again, an excellent first half performance with a 24% revenue growth. Successful launch of these tile vents into an adjacent specialist roofing merchant market, and this operating margin at a record 23% despite cost increases, which have passed through, is a great performance.

19:33 And it's been brought about by efficiency, cost control, passing through of costs where it's had to, an outstanding customer service giving the 100% OTIF and the delivery next day has made a very big difference. Continued investment and focus on sustainability has been important, and Timlock is the first carbon neutral building products manufacturer in The UK. It's also helping with carbon neutral homes, to satisfy the requirements that the governments are bringing in over the next few years. The new product launches, and I touched on earlier on, that circa 25% of its sales are from new products. So those will continue and have very much been important to Timlot's success.

20:25 I will now hand over to Simon to cover the financial review, please. Thank you again, Paul. As Paul mentioned in his summary, group revenues were £45,000,000, 5.4% ahead of the last half year. I'll cover the components of that in the next slide. Gross margin was broadly similar to the last half year, half first half of the prior year as cost increases continue to be passed on through price increases.

20:56 Operating margin, however, is was 13.4% compared to 15.3% in the prior half year, and that was driven by the lower volumes at water management, which resulted in a lower contribution to fixed overheads. Underlying PBT as a consequence was £5,600,000, 10.9% below the first half of last year.

21:21 The most significant non underlying item was the 1,800,000 loss on disposal of the Levelax business. With the assets written down to zero at June 22 at our last year end, this further loss represented the cash sold in the business and transaction costs on on completion in August. Underlying earnings per share were 12.3, which were 12.8% lower than h one last year, which is a result of both the lower underlying profit, but also the increase in the rate of UK corporation tax from April this year. And the board's declared an interim dividend of 3.4 p per share. In a typical full year, we expect to distribute around 30 to 40% of earnings, I. E, maintaining a cover of two and a half to three times.

22:15 Looking at those components of the change in profit and revenue, starting on the left hand side, the first column shows the effective price increases. Revenue increased by £3,200,000 as a result of selling price increases to pass on cost increases. All divisions continue to successfully navigate the inflationary pressures, which were, still there in the first half of this year, albeit to a lesser extent than we saw over FY '22. After deducting those cost price increases, there was a small drop through to profit of about £1,400,000. Organic revenue growth, which is the change in revenue after excluding the price changes and the significant export contracts, was 2,000,000.

23:08 And organic profit growth was £500,000. As you can see from the table on the right hand side, building envelope and house building products had a very strong half year. Water management sales were down 1,400,000 even after excluding those significant export contracts, But cost control mitigated the impact on profit to only a £100,000. And the final column shows those, those significant export contracts contributed £2,800,000 to the prior half year. Nothing this year due to the timing. And the contribution from those sales, together with some longer term operational investments, was responsible for a £1,600,000 reduction in profit this half year.

24:02 On the cash flow side, our operating cash conversion, which is operating cash flow as a percentage of underlying operating profit, was better this year at 92% compared to 78% in the prior half year. This was due to a lower seasonal cash outflow into working capital following the strategic inventory investments we made throughout last financial year. We expect a net cash inflow from working capital over the second half as some of these positions unwind. Capital expenditure was consistent with the prior year as we continue to invest in value accretive opportunities. And tax payments were significantly lower than the prior half year due to the capital allowance super deduction.

24:50 Tax payments in the second half will be more aligned to the tax charge. And there was a £1,700,000 outflow on the level of disposal as discussed on the income statement slide. Net bank debt at the end of the period was £6,800,000, which is about 0.5 times gearing compared to our banking covenant, which is to maintain gearing at lower than 2.5 times. So we have a significant headroom. And finally, on the balance sheet, capital invested this December compared to a year ago was reduced by the Levelux divestment. We have a £25,000,000 bank facility in place, which is committed to August 2025, with options to extend it to August 2027.

25:38 And that has a £20,000,000 accordion facility within it, which will allow us to move the, the total facility up to £45,000,000. The other point on the balance sheet was an increase in the pension deficit, from, 2,500,000 a year ago to £8,400,000 at December 2022. This was due to volatility in both the equity and bond markets. The assets decreased due to lower equity valuations, and that was the largest component of the, increase in deficit. The liabilities also decreased due to the higher bond yields, but that was partially offset by hedging. So liability driven investments, LDIs, and bonds held within the scheme.

26:26 Our trial was was last March, and at that meet meeting, we agreed with the trustees a lower deficit repair payment going forward from October 1. So we are currently paying £1,100,000 lower contribution into scheme annualized. The deficit, while disappointing, is it remains within the scenarios modeled at the last triennial. So we continue to anticipate clearing the deficit from from these lower cash contributions and the recovery in the medium term in investment performance within a reasonable time frame. If I can hand back to Paul now for the outlook. Thank you very much, Simon. We have two more slides.

27:13 The first of these, I touch on the CPA forecast, which have come out in the last ten days. And then if we look on each of these sections, you'll see that they're mainly showing reductions for 2023 with the exception of infrastructure. I don't wanna dwell on those because our view is that they are what they are. We've got to make our own luck, and we're going to be doing that by pushing the export side of the business, which I've touched on earlier. We're going to be taking market share in The UK and entering adjacent distribution markets is very important. And the demand resilience for products that assist energy efficiency and water management are absolutely out there and strong, and that will help us.

28:07 And, also, it's very important that we continue to be as efficient as we can be to be the lowest cost producer in each of our divisions, is also very important or lower cost operator. So we'll move on to the final side now, please, which is the outlook. We have encouraging momentum as we enter h two. We have a record half year order book, including the next phase of Chekhlaab Kok Airport in Hong Kong. The board is confident in achieving its full year expectations despite macroeconomic uncertainty. We have a robust strategy and market positioning, attractive markets underpinned by these brands that we continue to develop and also the environmental drivers out there.

29:04 Self help is very important, and the opportunities there are to continue structural cost reductions, to launch those new products, very key to have them, to take market share and to move into expand into new geographies and m and a, which is very important too. So the group remains well positioned to deliver long term outperformance. Thank you very much. If I may, I'll hand back to Jake now, please. Paul, absolutely. And Simon as well, thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab that's situated on the right hand corner of your screen. But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard.

30:04 Simon, Paul, as you can see, we have received a number of questions throughout your presentation this afternoon, and thank you to all of those for taking the time to submit their questions. Simon, perhaps I could hand over to you now to chair, the q and a session with Paul. Just respond to those questions where it's appropriate to do so, and I'll pick up from you at the end. Thank you. Great. Thank you, Jake. Paul, I think you've covered a few of these in these slides. But Yeah. Would you like to summarize the key drivers in getting group operating margins to 15 to 20% range? Yes. The key drivers will be continuing within each of the divisions to operate as efficiently as we can. We've seen, our house building division move up to 23%, which is a record for it, an outstanding performance, and it sets the precedent that we've got to start to all be looking at how they're doing this and, taking on ideas of more automation, which we're prepared to do.

31:06 And at the same time, to ensure that we're passing on any cost increases, we have to be absolutely ruthless about this so that we're not caught with those costs. We've been very successful at doing that. We've also got to grow our top line. The organic growth is very important, and that will happen. And also to enable our exports to grow further by investing into those markets where we see the further potential for our exports, particularly for Gattic. And at the same time, bringing in new products. Because with new products, you can have higher margins until the competition catches up, and then, those margins will start to erode over time. So you bring new products in, and so it continues.

31:57 We've got to purchase in an efficient way, and we've got to be very demanding of our suppliers, which we will continue to be. So I see those as being very key factors, and they've served us well in the last year, a couple years, really. And, you know, m and a will also assist us along the way. Thank you. And and how do you how do we win market share? Is it price or is it range or anything? No. Price, definitely not. No. We prefer I'm very averse to that. New products are a part of it without doubt. An example would be our Olivine product that we've launched on the building sorry, on the roofing side of the business.

32:44 And this is a very clever roofing system that when it rains, the c o two present in the atmosphere will come in contact with the olive vine on the roof. And that contact, there's a chemical reaction that takes place which neutralizes the c o two, and the residue is made up of silicon dioxide, which is sand really, and magnesium carbonate, two products that are harmless to the environment. One kilogram of olivine granulates have the capacity to neutralize 1.25 kilograms of c o two. So new products, innovation, this will help us and it is helping us to take market share. Hiring really good salespeople is also very key.

33:29 And again, we've seen that. We've set the strategy out to do that. We've achieved it in h one, Strengthening the areas where we're perhaps weaker has also been a benefit. So I would see those as very key and having a really good customer service. The fact that Timlock has this 100% OTIF, I don't think there are many companies with that that could say that for a full year that that has been achieved or they've achieved it. And also to be at the forefront of the environmental change that's happening out there now, and to be leading this, to be in the vanguard of it. And, again, Timlock has been one of those companies.

34:15 It's actually been to merchants to present on this at their request. So to be at the forefront of innovation, new products, giving fantastic customer service, I see as all part of taking further market share in our businesses and giving that great technical support that that's demanded by customers now. Thank you. A couple of questions relating to exports. First one, I think it's just an opportunity to clear up misapprehension. How do you mitigate for the timing risk you've previously seen on CLK Airport? Now I don't think there was a timing risk there. I think just by its very nature, it's a big contract.

35:01 Yeah. And they tend to be lumpy. And you have them for a while, and then you don't have them, and you try and win the next one. So I think there's there's not so much timing risk with that, but it's about how to win other big contracts, like medium sized contracts, small contracts. So would you like to just touch on our strategy for for getting more export No. That's a good way of interpreting it, I would say, Simon. And, yeah, it's great when we win these big contracts. Very nice to have. But unless you can keep them coming in and you have a funnel ready, you need a funnel of these opportunities. And we're getting a lot of more data now, out there as to where activity is starting to happen on any, large contract, and these can take years to come through.

35:52 And we need to be in there right at the start and offering our services, our products. And then over time, we will have a funnel of these bigger projects that will be coming in to replace the ones that get sold through because, it's lovely to have them, but if you don't have them the following year, that isn't so good. So therefore, our strategic intent of putting more people overseas to sell the Gattic product range and Wade in particular, we see as the key to success there. And it also goes into our quality of earnings, which is a very important factor for some investors and for many investors, in fact. Okay. Thank you. And one on m and a.

36:41 Yes. We've spoken you spoke previously about the the sort of key areas. Are there any hotspots for you where you you you think that there's definite opportunities to bring something into the group that we don't already have? Well, first of all, we would be focusing on our three divisions. We're not putting a fourth one in. We're not kind of bedding the farm, etcetera. It would be, we would acquire businesses where we understood those marketplaces quite well or very well. We would make sure there was going to be a fit, particularly on the products that are brought in and that we may well benefit from having our own products go through their distribution channels as well as vice versa.

37:34 And there may be some consolidation in purchasing, which could be attractive, where we could be getting better prices from consolidation, and that will definitely happen. So I would say whatever we were likely to be purchasing would be similar types of products in similar markets that may give us greater reach, may just give us that opportunity to piggyback from a marketing point of view. Okay. Thank you. And just trying to run through. Think we may have, yeah, identified targets.

38:31 Think at any one point, I guess, fair to say we've probably got about two or three companies that we're running the slide rule over. Some of these some of those might come to nowhere. They might prove to be not the fit we're looking for. Some of them might be want to keep on the watch list, but not immediately available, and some may some may drop into a more active line of investigation. But so there's always a dynamic process of of reviewing companies going on. Very much so. They're in and out for a number of reasons. The the owners could withdraw. You've got to be very patient really in this game. Try not to be too disappointed when the one you really wanted goes away for whatever reason. But hopefully, for our acquisitions that we've made over the years, the vendors have been happy to sell to us and realize that we're very responsible acquirers.

39:32 We're not into asset stripping, etcetera. We're bill we're buying them to build those build those products companies up, and we've got a reasonable record, I think, in that area. Paul, Simon, if I may just jump back in there. Thank you very much indeed for being so generous of your time then addressing all of those questions that came in from investors this afternoon. And, of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended for you to review to then add any additional responses, of course, where it's appropriate to do so. Paul, perhaps before redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that'd be great.

40:19 Thank you very much, Jake, and thank you everybody for attending too. What I'd like to say is that we're encouraged with the momentum in place as we enter our h two. We have got a record half year order book, including the next phase of Czech Ladkok Airport. We're and I think this is very important that the board is confident about achieving that full year expectation despite what is going on out in the outside world. And we've deliberately put in place a pretty robust strategy of self help, which will be in terms of, you know, keeping our costs down, continuing to improve our efficiencies, bringing out those new products, very, very key, and taking market share and expanding geographically as well as m and a.

41:11 So we're pretty busy and we'll continue to be so, and we believe we are well positioned to deliver long term outperformance. So I thank you all very much for your attendance today. Paul, that's great. And Simon as well, thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of ALUMASC GROUP PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all. Thank you very much. Thank you.