BRCK Group (LSE:BRCK) — Interim results

0:01 Good morning. Welcome to the BRCKability Group PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions can be submitted at any time via the Q and A tab situated in the right hand corner of your screen. Simply type in your question and press send. Company may not be in a position to answer every question received during the meeting itself. Have the company review all questions submitted today. Publish response to where it's appropriate to do so. Now I'd like to submit the following poll. Before we begin, we'd like to run a short video. We are BRCK GROUP PLC. Through our four divisions, we are specialists in sourcing and supplying bricks, timber, cladding, roofing, plumbing, doors, flooring, and renewable technologies to the construction industry.

0:52 Driving industry change through our approach to our people, our partners, and the planet, and challenging ourselves to be carbon net zero in our own operations of our sales businesses by 2030. Quality materials for a sustainable future. Always striving to exceed expectation. Supporting our customers to design and build sustainable developments where people can thrive. Innovative thinking and an entrepreneurial spirit brings together individual businesses who all offer specialist products and services, but serve the same markets, working together for the future.

1:37 We are proud of our reputation. As market leaders, we offer unsurpassed industry knowledge and experience, and we are proud of the long term relationships we build, constantly striving to enhance our comprehensive, stylish, and innovative portfolio of building products and services, and working with everyone in the supply chain to understand the needs of our customers to deliver successful projects. We aim to connect with the communities in which we live and work and improve our social impact. The BRCK Ability Group Foundation is a registered charity set on building a better future dedicated to supporting our communities, initiatives, individuals here in The UK.

2:25 We are BRCKability Group PLC, delivering on every level. I'd now like to hand you over to John Richards, chairman. Good morning, sir. Good morning, and good morning to everybody on the call. Highlights of our first half really centered around the fact that it has been a resilient performance across all group divisions in the first half despite what are adverse macroeconomic conditions. We benefited from growth in both distribution and contracting divisions, but we've also benefited significantly from our strategic decision to diversify the business and expand into new products and new end market areas. That's been a big success for us.

3:17 For the six months ended 09/30/2023, revenue decreased by 7.9% to 324,800,000. And on a like for like basis, revenues are down 14.4%. However, adjusted EBITDA increased slightly to $25,600,000 Post period, the strategic acquisition of Topek Limited further diversifies the group into new end use areas. And this now provides the group with a full range of cladding capabilities. We are continuing to look at acquisition opportunities more from Alan on that in a while. Our ESG strategy is progressing on time and on target, and the Board remains confident in the group's ability to continue to deliver on its strategy.

4:07 Board is pleased to recommend an interim dividend of 1.07p per share, reflecting the performance of the business in the half year and the Board's confidence in the longer term outlook for the group. Let's move on to the next slide. We've chosen here to look at, the brick and the home building market of all of our product areas. And BRCK GROUP PLC this year, the 2023 calendar year, are forecast to be 1,770,000,000. That's for the whole industry. And that's down from over 2,500,000,000 in the previous year. It is the lowest decade, and it mirrors the number of dwelling starts in The UK, which you can see on the top right chart, which is forecast to be in 2023, only 156,000 compared to around 200,000 in the previous two years.

5:05 This is probably not news to everybody. It is tough in the private housing market at the moment, but not on this chart is worth reiterating the general construction, public housing, and architectural specification are all going well, which is why our diversification has helped us. New builds by property type, the bottom right chart, 29% detached, which is down by 3%, however, just above semi detached homes are up by 3% correspondingly to now 30%. The fact of the matter is that there's not huge amounts of inventory in GB factories at the moment. If you look at the bottom left chart, you'll see in the orange bar that current BRCK stocks held GB factories of just over 500,000,000.

5:53 That by no means represents a stock overhang. That is a sensible working inventory once a strong housing market returns. By comparison, if you look to 2009 banking crisis time, there were over 1,100,000,000 BRCKs in stock and an even smaller BRCK market. That stock overhand created pressure on price. There isn't pressure on price as we stand right now. Imports have played an important part in GB brick usage. Last year, for example, five seventy million of the 2,500,000,000 used came from imports, mostly Continental Europe. And there still remains a need for imports into GB building because quite simply, there is not the capacity for us to cope with a strong market in terms of brick need. If you turn the page, GB capacity for brick making has covered around 2,000,000,000 bricks at best for a number of years.

6:58 Right now, there are a number of brick factories from Ipstock and Forterra that are being mothballed or run at a slightly slower pace, and indeed Ipstock has permanently closed Ravenhead factory in Lancashire, taking out 45,000,000 bricks a year from the overall capacity.

7:14 Now there is new capacity coming on. We note here that Ipstock have a factory being built in the West Midlands called Atlas, and Forterra have new capacity coming on in Leicestershire at Desert, and they're refurbishing a factory called Wilmercote in Staffordshire. This will bring about 200,000,000 to 300,000,000 extra bricks when it's fully commissioned and operational into the market. However, while that will give a GB capacity then of around 2,200,000,000 bricks per annum, all the incremental bricks being made are wire cut. There are basically two main ways of making bricks, Either wire cut, where the clay is extruded from a die and then chopped into brick shape by wires, hence the name wire cut, and they're prevalent in the Midlands, in Wales, in the North, and in Scotland.

8:05 And then there's stock bricks or soft mud bricks or molded bricks, completely different technique of making. They are molded and they've always been prevalent in the Southeast. I said before, all the new capacity is wire cut. That is not suitable for the Southeast, would not be approved by planners in the Southeast. They insist on soft mud molded stock bricks. Of the GB capacity of 500 of a 2,200,000,000, only 590 is soft mud. Stock bricks, more than that number are needed and that's where imports come into their own. Because 90% of the imports coming in mostly from Belgium and Holland are that stock or soft mud type, and that is what planners insist on in the Southeast.

8:53 It helps us hugely, the requirement for imports because after Veeneberger, the manufacturer, the Brickability Group is the largest importer of these bricks by far into GB. I hand over to Mike for some finance numbers. Thank you, John. That's great. Thank you very much. So, the headline for this slide is that the group has delivered a solid performance really in half one despite the market headwinds that John alluded to just a moment ago. Moving down line by line, group revenue at 324,800,000 is a decrease of 7.9 year on year, which when adjusting for the acquisitions that we made last year, is a like for like decrease of 14.4%.

9:44 Despite the fall in revenue, gross profit of 55,000,000 is actually a fraction ahead of the same period last year. As a result, the gross profit percentage has increased by a 130 basis points to 16.9%, reflecting the recovery of significant materials price inflation that we saw across across our roofing businesses that sit in our contracting division last year, together with a change in the mix of the business unit contribution during the period across our group. Adjusted EBITDA at 25,600,000 is also slightly ahead of the previous period with the adjusted EBITDA margin increasing by 70 basis points to 7.9%. Adjusted profit before tax at 21,800,000 is 2.8% lower than the prior period.

10:35 Other items of 5,800,000 are mostly accurate acquisition related, and there's a detailed, breakdown in the presentation in the appendix, and our presentation is available on our corporate website if you haven't already got it. This gives a statutory profit before tax of 16,000,000, an increase of 8.3% in the prior period. The tax charge of 4,600,000, is comprised of two items, 5,800,000 relating to adjusted profit before tax, and then tax on other items, which is a credit of 1,200,000. That leads to a statutory earnings for the period of 11,300,000, which is 1.7% increase on the prior period, and adjusted earnings per share of 5.3p or a decrease of 11.7% on the prior period. This is driven largely by the increase in the corporation tax rate.

11:30 Net debt of 30,900,000 compares with net debt of 27,400,000 in the same period last year. I've got a slide in a moment where we go through the waterfall and break that down in a little bit more detail for you. And as John mentioned earlier, the board has recommended an interim dividend of 1.07p per share, which is an increase of 5.9%. On this slide, the divisional performance, which just breaks down our segments or our four divisions, what you can see is bricks and building materials revenue at 229,000,000 is 15.2% decrease versus the prior period. Within this, timber revenues fell by 22 driven entirely by price.

12:16 Excluding the impact of timber, bricks and building materials revenue fell by 11.7%. Now the challenging market conditions and that, John was talking about before, particularly in the private house building sector, have seen the market for UK brick dispatches fall by approximately 28% in the six months between April and September. Our brick volumes in the bricks and building materials division fell back by a similar amount. At a revenue level, however, this was partly offset by year on year price growth. Revenue of 53,300,000 across the importing division is a decrease of 1.6% on reported figures for half one f y twenty three. Adjusting for the acquisitions, revenue was down 34.1% on a like for like basis.

13:06 The market for imported bricks is estimated to have fallen by around 40% over the period with volumes across the importing division in line with this market number, whilst the year on year price increases partly offset the impact on revenue. The distribution division revenue of 33,200,000 was an increase of 7% on the previous period driven by customer and product diversification with growth across all of the businesses in the division. And finally, contracting division reported revenues 23,400,000 or up 17.8% on the prior period through the continued recovery of the price, material price inflation I mentioned a moment ago and also the resilience of the house building market in the mid to higher end of the market in the Southeast.

13:56 Moving down to the table at the bottom, the EBITDA adjusted EBITDA table, you can see the impact of the reduced demand for bricks together with the timber price deflation has, of course, flow through into the profits of bricks and building material and importing divisions. Distribution EBITDA of 5,200,000 was an increase of 5.6%, and the divisional average EBITDA margin reduced slightly by 30 basis points to 15.7%, largely as a result of the business unit contribution within the division. Contracting EBITDA of 3,700,000 was an increase of just under 44% with the EBITDA margin percentage increasing by 290 basis points to 15.8, and that's what I previously mentioned. That's the recovery of the material price inflation we've experienced in f y twenty three. So at the total level, just the EBITDA, as I said previously, at 25.6% is marginally ahead of the same period last year.

14:57 If you can move me on to the next slide, please, Paul. Thank you. So finally from me, just to run through, the cash flow for the period. Net debt at the end of the financial year, March 23, or our opening debt here, was 8,000,000, net debt. And the group generated 22,600,000 of operating cash flow in the period. Working capital was an outflow of 19,300,000, which reflects our midyear working capital profile. And so this time last year, for that number was 17,400,000. So you can see we have an outflow during the the first half of our year, and it and it always comes back into the second half of the year. The key movements being on the working capital being 1,200,000 increase in inventory, 2,300,000 net outflow trade letters and creditors, 2,100,000 net outflow relating to earn out consideration accounted for as remuneration, and this is where our deferred consideration appears in three parts in the cash flow, actually.

16:03 So some just down to accounting. Some sits within working capital. Some sits within you can see there's a bar there for deferred consideration, and some sits within the interest, line as well. And then there's 13,700,000 in the working capital number. There's 13,700,000 of accrual movements and payments, which was as as I was alluding to before, are largely timing related, and we expect to unwind during the course of the second half of the year. The other main items of cash flow were 4,700,000 refer relating to the deferred consideration, which I referred to a moment ago in respect to six acquisitions, and 4,500,000 of property purchases, including a showroom in London and an office in the yard in Wales.

16:49 And, really, we don't have a lot of maintenance CapEx in the business. So capital expenditure in this case is is property related, and this is where we are effectively swapping from lease holds to free holds. So this is a choice. We're not we're not committed to a a large capital outflow, and that's one of the benefits of being an asset light business. So net debt at the end of September was 30,900,000. Post period, as you'll be aware, we announced the acquisition of Topic. So we expect net debt by the end of financial year to be somewhere somewhere in the region of about £44,500,000. And with that, I will hand over to Alan to run through some operational highlights.

17:36 Thank you, Mike. A good performance despite a challenging environment in the first six months of the year. The the group has benefited from its diversified multi business strategy. Strong performance and growth in cladding with SBS, cladding, and Taylor Maxwell and Co. U Power, our renewable energy solar panel business, continues to grow, and we expect the growth rate to accelerate over next year. Forum Tiles is growing and contributing now to the group profits as a

18:07 start up business two years ago. FSN Doors, again, a smaller business, higher margins, and BRCK has had its best year ever and has a very strong order book moving forward. The contracting division has grown. The mid truck end of the housing market remains very, very strong at the moment, and we have a full order book for most of next year. The German roof tiles are expected to be online and being manufactured April, May next year. We're continuing our IT system with operation or financial rollouts. Cost controls and disciplines remain. And post six month figures, the acquisition of Topic, the the cloud in business was made.

18:54 If you could turn the page, please. Acquisitions. We did a small one earlier in the year with within SBS, the cladding business. And then we completed the big one, Topic, for 45,000,000, 65% upfront in October. This complements the group's existing cladding portfolio, as we said, Taylor Maxwell, SBS cladding, and we also have architectural facades. The group now has a full range of cladding capabilities, design, fabrication, supply, and also installation. Pipeline moving forward, another specialist cladding contractor, more or less identical to Topeak, just in a different part of the country, the Southeast Of England.

19:40 A specialist roofing contractor. We own other roofing contractors that are very much in the housing market. This one is a flat roofing business that does offices, schools, etcetera. And then we're also looking at a a roofing contractor group, which has nine divisions. If you look at the next slide, page 13, when we floated originally, we only displayed the house,

20:04 and we had probably six products at the time. We now have 12 products, and we've also moved the dial to diversify the business. So 50% of the the group business's net revenue is now nonBRIC, and we have all sorts of cladding products available, noncombustible, obviously. If you could then change to page 14, the outlook. The the fundamental drivers of our industry still remain strong. We have built a robust and increasingly diverse business with with a broad project portfolio. We have very strong customer relationships and good cost control discipline and the ability to adapt. The gap between supply and demand for housing indicates significant potential for further growth, And we are continuing to look at other acquisitions

20:54 alongside our continued organic development. In October, in our October trading update, we noted that the volume reduction experienced by housebuilders and manufacturers were expected to have an impact on the second half of the year through the financial year. However, the board remains confident in the group's ability to continue to deliver on our strategic objectives. I'll hand back to you now, Paul. Fantastic. Thank you very much indeed, Alan. Thank you very much indeed to you all for the presentation. Ladies and gentlemen, do please continue to submit your questions just while the team take a few moments to review those submitted today. I'd like to remind you the recording of the presentation along with a copy of the slides and the q and a can be available via your dashboard.

21:40 We've received a number of questions both pre submitted and throughout today's meeting. So perhaps if I can start with the first one, which I think I'll direct to you, John, actually, I may. It reads as follows. Do you have a precise date when Frank Hanna will take over as CEO from Alan?

21:54 Yes. He'll Frank will start on the April 15 next year. Fantastic. Thank you very much indeed. Next question we've got here, and I think this is probably more one for you, Alan, reads as follows. Can you give an update on the price inflation in the sector? It's very strange, actually. You mentioned that. We've actually had a price increase notification from Ipstock today, saying they're gonna have a price increase of 6% from March.

22:22 So if Ipstock are having a price increase, it it would follow the Veenenburg and Forterra. Maybe we'll have a price increase then. Prices, we didn't have any price increases during this year at all. Obviously, last year, we had lots of price increases where BRCK's probably rose by 30 to 40%. Prices have moved down slightly, and then they've they've sort of stabilized. But Ipstock, as I said, have just announced they're having a price increase of 6% in March. So I would expect the other manufacturers to follow as well.

22:55 Fantastic. Thank you. And sticking with you, think, Alan, for the next one as well. Please, can you give an update on the Yopawa performance? Has this been better or worse than you thought when you acquired it? Obviously, the the new regulations came in from June. And prior to that, all of the big house builders were putting new footings and not starting units to obviously avoid having to build to new regulations. So I would say it's been slower than we expected, but the actual order book on orders we've received is actually double the same stage as last year. So we're contracted to do 16,000 roofs a year in the Southeast with Barratt's, Taylor Wimpey, etcetera, etcetera. Of each roof, it's £2,800 to £3,200 fixed.

23:44 So last year, we did £10,000,000 turnover. So if if you do the math, when we get the numbers fully moving, we're gonna go from 10,000,000 to to 40,000,000 within a couple of years. It's just a case of it it all getting going now, and it had to start from June this year. So it's been slower than we thought, but we are expecting quick growth. So we'd expect

24:05 UPower to go from, as I said, 10,000,000 to 30 to 40,000,000, really, over the next two two years. Fantastic. Thanks, Alan. The presentation suggests there isn't sufficient UK capacity for BRCK once the housing market normalize. I thought there was more capacity coming online. Please, can you explain? I think this was one, John, that you were touching on earlier, if I could could hand back to you. Yeah. The capacity in GB to meet the brick demands hasn't been there probably for twenty five years. UK kept closing Brickworks every time there was a slight downturn. And where we are now is a capacity of just under 2,000,000,000 bricks with the new capacity that's coming online. That will take it to somewhere between 2.15, 2,200,000,000 bricks.

24:55 But if we build 200,000 houses a year, which most years,

25:00 recently, we have done there or thereabouts, you need 2,600,000,000 bricks as a minimum in order for those homes to be built. With a capacity of just under 2.2, you only have to do the math to see that there's going to be at least 400,000,000 imports needed per annum once we're back to a normal market. Fantastic. Thank you very much indeed, John. What have we got here? The next question reads as follows. Given the market and economy, how affected has breakability been by bad debts in the past month? Probably one for you, Mike. Yeah. Thank you. Yeah. So we should never be complacent, of course, and we obviously monitor our debt situation all the time. However, a large amount of our debts are covered by credit insurance.

25:53 So we haven't really seen much of a impact in our half one results. But, yeah, as I say, it's it's not something that we can place in balance, and we and we do spend a lot of time looking through that. Fantastic. Thank you. I'm probably sticking with you again, actually, Mike, because it's a CapEx question. What was driving the continued CapEx spend? Yeah. I And as I went through on the waterfall, actually, we don't have a great deal of maintenance CapEx because we are an asset light business. So what we've done is we've taken the opportunity when the opportunity arose to convert leasehold properties to to freehold by buying those freeholds. So in our forecast going forward, made some assumptions that we will continue to do that, but it's very much choice, and and we'll evaluate each opportunity as it arises.

26:47 That's great. Thanks, Mike. There's a lot of mention about diversification strategy. Please, can you provide some more detail? Probably, I think that would be one for for you, Alan. Yes. No. I mean, we've we've we've taken BRCK to quite a high level. We're about 22 and a half percent of the market. So we've very much been looking business again that won't be affected by the house building side. So the acquisition of TOPEC, they only at the moment, they're doing student accommodation, hotels, office buildings, etcetera. They're not they're not involved in the house building market. So we've been looking at businesses that aren't direct as directly involved in house building. When when we started, Brickability was 85% house building.

27:34 That was the reason we're so keen to employ so we purchased Taylor Maxwell because of there was only a 9% customer overlap, but they're very much in with the Morton, the Higgins, the Wilmot, Dixons, etcetera, on the construction side. So we would look to diversify the group. So we're only 50% in the actual housing market now and 50% nonBRIC. Also, of the other businesses like UPower and the Cladding are at higher margins than BRCK's as well. Topic's net profit is around 20% EBITDA. And the UPower solar panels, we're selling those between 3040% profit margin, whereas BRCK is around 14.5%. So we're looking just to diversify into other areas and also at higher margins.

28:25 Thanks very much, Alan. Next question we have here kind of splits into two parts, and I think I'll take the first part actually, which reads as follows. The company has been active with acquisitions since IPO. Two questions on this, please. The first one, realistically speaking, what's the growth potential through acquisitions over the Two times current revenue, five times? And I think that's one for for you, if I may, John. John? Yes. Well, when we floated in the summer of August two thousand nineteen, we targeted 500,000,000 of revenue within five years. Now we achieved that within four years, because much of building materials distribution is fragmented, still remains fragmented, and that's one of the reasons we have such an active pipeline of opportunities.

29:10 We expect that we can get to the 1,000,000,000 mark through organic and, acquisitive growth within the next five years and that's the target we're setting ourselves. Thank you very much indeed, John. The second part of this question, which is an interesting question actually. How would the ROI and the recent acquisitions compare to share buybacks? One cannot help but wonder if better to buy back the company shares at current price, especially when considering the risks associated with acquisitions? Perhaps, as I say, one for you there, Mike. Yeah. Thanks, Paul. We evaluate all options, including share buybacks as well, and we have discussed this with our many of our institutional shareholders as well. The ROI in our acquisitions that we've made thus far is very good, as you'll see in our numbers.

30:01 And the business has made, well, a number of acquisitions before IPO. There's been 12 acquisitions post IPO, which have all been successful and added to the profitability and the growth and diversification of the business as we've all been just talking about. So we believe as a board that the the value the shareholder value that we generate through acquisitions is is still the right strategy for the for the group. So, you know, I we're cognizant of the point that's been made there about share buybacks with the rating as it is at the moment on the group. But we think I think as we've all been saying that this is a sort of lull in the market, and, we believe very much in the the growth strategy of the group. So, yeah. So that's that's how we're looking at the moment. There there's also, I could say, another question in the q and a, which relates to the so if you don't mind, Paul, just pick this up at the same time about the debt facilities. It's having increased the debt facility.

31:01 We look to use this for future acquisitions in a weaker market for competitors. And the answer is, yes. You know, we we've increased the debt facility to give us some headroom. Alan outlined that we've got an active acquisitions pipeline, and we're always looking at things. So, yeah, that would be that would be the intention, and that fits with the question about the share buyback and the IRR on on acquisitions. That's something we we would continue to pursue. Fantastic. Thank you very much indeed there. We got here, are you doing anything in relation to cost cutting, staff redundancies? What happens to employees and contractors of newly acquired companies? And probably one for you, Alan. On certain businesses, we are having some cost cutting at the moment where the sales have fallen back. They're not but in other parts of the business, we're actually in new power and architectural facades, etcetera. We are employing more people.

32:01 So some of the businesses, even though the housing market is slowing down, they're growing. So we are actually taking on more staff, but some of them are affecting the the housing side. I think we probably made 30 or 40 people redundant recently. That's great. Thank you. Thank you very much indeed. That covers all those questions that we have through from investors. Of course, any further questions that come through, we'll pick those up and the company can publish responses where appropriate to do so. On that basis, John, perhaps I could just ask you for a few closing comments before I redirect investors to provide their feedback, which I is particularly important to you and the team. Yes, of course. Well, I think we can summarize it by saying it has been a robust performance in the first half of our year, despite the headwinds that we've faced. And there are clear headwinds, particularly in the private housing arena as people on the call will be aware. We've benefited enormously from the diversification of the business. And as Alan has said, it was around about 85% of our business into private housing when Brickability IPO ed, and today it's around about 50%.

33:09 And the acquisitions are making that number fall further still. Our growth aspirations remain very strong despite the cyclical headwinds, housing fundamentals deep down remain very strong as well. So as a board, we remain ambitious and we remain confident as we look forward to the future. Fantastic. Thank you very much indeed, John, Alan, Mike for updating investors today. Can I please ask investors not to close the session? You should now automatically be redirected to provide your feedback in order the management can better understand your views and expectations. Will only take a few moments to complete, and that's greatly valued by the company. On behalf of the management team at Brickability Group PLC, we'd like to thank you for attending today's presentation. That concludes today's session, and good morning to you all.