Alumasc Group (LSE:ALU) — Preliminary Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the ALUMASC GROUP PLC Preliminary Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time using the Q and A tab Just situated on the right hand corner of your screen, just simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during today's meeting. However, the company review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. And if you would give that your kind attention, I'm sure that'd be most welcomed by the company. I'd now like to hand over to Simon Drey, Group Feet and Paul Hooper, CEO. Good afternoon. Good afternoon, everybody, and thank you very much for joining, the ALUMASC GROUP PLC's, annual, results presentation for, the year to June 2022.

0:53 Introductions. My name is Paul Hooper, group chief executive joined by Simon Trey, group finance director. And I thought before we start on the presentation that I might just give you a little bit of a thumbnail sketch on what we do. We're a UK based supplier of sustainable building products, systems, and solutions. Majority of which manage the scarce resources of water and energy within the built environment and improve the quality of life for the owner occupier using recyclable materials, which is becoming more and more important. So I thought we'd start on page four. Simon, if you could move us there, which is the overview.

1:40 We've had a a very strong performance from our continuing operations with a really a record performance here for build the building products group, with revenue of 89,400,000, which grew by just under 15%. The underlying operating margin achieved was, again, just under 15%. The underlying PBT, achieved was £12,700,000, and that was a growth of 27%. Our net bank debt, increased to 4,700,000, and this was deliberately, an investment into inventory as we came through Brexit as we saw some issues on transport.

2:28 You might be aware that containers had shot up to about 12,000 pounds a unit. Fortunately, they're back down to a sensible price, and there are six k now. And there was some supply issues. So we wanted the worst thing in life is to run out of inventory, and we wanted to avoid that. But it will give us the opportunity as things have become more normal for us to be able to, reduce the stocks in the forthcoming year. And the other reason why we had increased them was the cost increases, which were quite severe, and we wanted to make sure that we had adequate stocks. Our bank facilities are GBP 29,000,000. Underlying EPS grew 27% to GBP 28.6 p, and the final dividend has grown by 6.4% to 6.65 p, giving 10 for the year, which is a growth of 5.3.

3:29 You'll see the strategic priorities listed there, which I'm going to come on to. But first of all, I wanted to discuss, ALUMASC today, and we have a reshape of portfolio with the recent sale of Levelux, which I'm going to come on to. And this is providing a platform now for an acceleration of our strategy. We've exited all installation businesses. That's both Levelux and actually for Blackdown, our green roof business, we've also exited installation there. Our markets are supported by long term environmental growth drivers. We've got premium products and brands with strong market positions. And this was evidenced by our ability to pass on price increases in the year or cost increases, and this was extremely important to achieve.

4:19 Otherwise, we'd have been in a reduced, profit position. And I think that shows the strength that we have in the marketplace because we were often the first ones to, increase our prices. And at times, we had to use force majeure, but we did it because we had to do it. We operate an entrepreneurial decentralized model. We hate bureaucracy. We have an agile and efficient business here. We're we're the very small head office, and that's how we want to keep it. We have a strengthened financial position with capacity for investment, and that's both organic and nonorganic. And we see opportunities, very much for the future, and we're absolutely focused on delivering shareholder value.

5:12 We can move on now to page seven, please, Simon. And this is covering the level of disposal. At our half year, we indicated that, the pipeline was increasing quite well for this business, both in The UK and North America. But actually coming into the second half year, we were just not able to convert these into orders. We weren't losing them in the main, but there were just delays upon delays. And then with the cost increases of coming into contractors, they chose to delay placing orders to try to negotiate lower prices. And in some cases, with Levelux, these products and systems were discretionary, and therefore, they eliminated them in some cases.

5:59 And this was just a very bad background, to make money out of this business, and it was incurring, in effect, for the full year, a £2,000,000 loss. And we decided to move away from installation. We'd already, with our customers, attempted to move into a supply only situation, but they wanted us to install as well. So we took the decision to sell the business. We approached 96 companies, and we, had one business that we preferred to work with and vice versa, and they came on board. And we have a £1,000,000 deferred consideration that will be payable from proceeds above £1,000,000 on any subsequent sale.

6:45 However, there was a noncash impairment of £14,900,000 in the year, and we anticipate a £1,700,000 loss this year. We have limited warranties and indemnities that were given, and this was a share sale on the August 26. So it was relatively recently. However, this has made us into a a new group, and you'll see the operating margins that we're capable of achieving now and our capital efficiency has been enhanced. We're a supply only business now with a simpler model and a shorter cash cycle. So, actually, with Levelax, even in the prior year when we've got it into a £500,000 profit, that wasn't really converting into cash.

7:33 And like most businesses, we're very focused on cash. So the management focus is now on organic and inorganic growth opportunities, where we will look to bring in, synergies and consolidations in the marketplace. We are keen on producing cost efficient operating structures. And if you look at this side and back in FY twenty was the year that we moved from 10 operating facilities to six. This took considerable amount of cost out in the order of just over £2,000,000, and you'll see the benefit of that going forward. We continue

8:15 to, look to see how we can absolutely be the lowest cost manufacturer. It's very important to be so. And there are one or two further opportunities that we're looking at for improving those efficiencies. We've also had the benefit of new product launches within this period of time, and you can see we're now up to 14.9% operating margin. However, it isn't just about taking costs out. It's also good fun to invest in more efficient equipment and innovation to bring new products in. And with our water management company, we've invested in tooling, particularly in Southeast Asia.

9:03 And for instance, we saw the benefit of this where greenhouse gas emissions are reduced for our suppliers because they've also invested in new technology. And actually in the China Winter Olympics where facilities were being shut down because they were polluting, our facilities' suppliers were not. So with that, ensured that we had continuity of supply. So that was good. In terms of our building envelope, we've invested in five additional roofing salesman who are right at the top end in terms of quality of people, and they have really made a difference to that business, and we have taken market share. Excuse me. For our Timlock business, we've now invested in 14 out of 16 new machine tools, and these are very much more efficient in energy and also produce less carbon carbon emissions.

10:04 And it has meant that Timlock has now become a carbon neutral status. And that is, we think, one of the first building product companies to achieve that. We have ongoing innovation with numerous new product launches, and I'll come on to those as we touch on our three divisions. So if I now I'll turn to the export sales, which has been a focus for several years, and you can see that we've built these up to 15% of our revenue now. And we're slightly different to many other UK building product companies, and that we have got this ability particularly with three key brands, which are Gattic Covers, Gattic Sotrain, which tend to go into airports and ports and are well established, particularly in Asia, Australasia, and The Middle East.

10:58 And we're also looking to expand into Latin And South America. And at a half year, we if you look at the presentation for that, we feature a photo of a highway there in Costa Rica where the SoTrain product has been Gattic salt drain has been, used. We also have wave drainage that, has the ability to be exported, and we're looking to invest in The Middle East, with increased representation. So exports are important to us, and they're an area that we will continue to focus on to grow. We had the benefit in the year of the Chaplap Kok Airport project Runway 3 in Hong Kong, And that also assisted our our business, and that was in the order of just over £3,000,000 of sales. And if I may, I'll hand over to Simon now to continue the presentation, please. Thank you, Paul. One of our other strategic priorities has been management of the group's pension scheme deficit.

12:05 At June 2018, the deficit was a little bit over £15,000,000, and Mhmm. The cash contributions were a significant drain on the company's cash flow. In the intervening period, a combination of company contributions, sensible asset choices, and investment performance and rising bond yields have reduced the deficit down to a little bit over £2,000,000. And as a consequence, trustees, this year's triennial, have agreed to reduce scheme contributions from their current level of £2,300,000 a year down to £1,100,000 a year from October this year.

12:47 There's gonna be progressive further derisking of the scheme investments, which will also help manage volatility going forward. And we're now into a position where we can start to discuss end game planning, aiming to get the scheme into a self sufficient position in a reasonable time frame.

13:11 We have a brand compass, which we use to tie our purpose, which is building products for a better, more sustainable future to our values, which are centered around our environmental focus, our use of sustainable materials, and around behaving and acting ethically and responsibly. And we find this helps drive better engagement with our employees who obviously have to be behind it to help deliver the group strategy.

13:43 And if I focus on on this slide on a couple of key ones around the environmental side, which is very important for ALUMASC, 80% of our portfolio helps the building and construction industry meet the environmental challenges in places. And in recognition of that, we're awarded the London Stock Exchange Green Economy Mark in the year, awarded to companies who are significant contributors to the green economy. And increasingly, the we are finding our new product developments and m and a activities are being directed towards further environmental solutions, which we believe have helped drive sales growth and market share gains in the past few years, and we'll continue to do so.

14:30 We also look to reduce our greenhouse gas emissions, our carbon footprint. This year, we achieved another 29% reduction in scope one and two emission intensity in the year. We're now our emission intensity is now a little bit under 50% of the level it was in 2017 when we started measuring it. As Paul mentioned, our Timlock size is now carbon neutral, and we're aiming to finalize plans for net zero this year to get us to a net zero position by 2050. And all the while, we use sustainable materials. Just over a quarter of our materials are sourced from recycled material, and a little bit over three quarters are fully and endlessly recyclable at their end of life.

15:22 And we have market leading durability in our products as well, and they are key USPs for customers when they when they choose to select our products. A couple of financial slides. As Paul mentioned, our revenue is 15% ahead for the year on continuing operations. Our gross margins were slightly down by 50 basis points to 37.3%, and that's mostly the dilutive effect of pass through of higher prices. Volume improvements and cost efficiencies, however, have led to operating profit and profit before tax both being 27 ahead of the prior year.

16:10 We have a few non underlying items, principally the 17,000,000 loss from discontinued operations, Paul mentioned. That's largely a £15,000,000 noncash impairment charge. And we had £500,000 of restructuring costs in the year, which were the cost of exiting the lockdown installation activities, which moved the group to a fully supply only business. And also the final costs for exiting a couple of properties which were vacated two years ago and have now expired.

16:49 Our revenue and profit bridge breaks out some components of the headline growth. As we reported last year, we believe about £2,500,000 of sales and about £900,000 of profit were deferred into FY '21, the prior year from FY '20 by COVID.

17:12 On top of that, we had significant cost price inflation in the period. We attempted to mitigate that with suppliers where possible. But where not, we passed it through to the market in sales price increases. Those sales price increases led to a £5,700,000 increase in revenue. But after deducting the associated cost price rises, that dropped through to about a £700,000 increase in profit. So we passed costs through without exception with a small diluting effect on the overall margins.

17:50 Behind all of that, however, we had strong organic revenue and profit growth in the period. £8,000,000 of sales leading to almost 4,000,000 of organic profit growth. Water management was the standout in that performance, but the other two divisions both delivered organic growth, which was very pleasing.

18:12 And we had about £800,000 of operating overhead investment principally in sales and product management resource, which we think is gonna be contributing to profit growth in the future.

18:33 Our cash flows, our net bank debt increased by £3,800,000 in the year. That was largely due to a planned investment in working capital. Supply chain disruption that we saw in the first half of the year persisted throughout the second half following the invasion of Ukraine. In order to mitigate that disruption, we we chose to hold buffer stocks of key inventory to make sure that we didn't run out of raw materials. We also repaid the last of our COVID cash deferrals, £700,000 of VAT and £200,000 of pension deficit contributions. Our CapEx was a little bit higher than depreciation at a 104%, and that's investment in tooling and plant to reduce our greenhouse gas emissions, improve our efficiency, and reduce supply chain risks.

19:30 Tax and dividends were also higher than the prior year as as the cash flows normalize post COVID.

19:44 On our balance sheet, I would just highlight two things. Firstly, the reduction in capital invested from the impairment of the Levelux assets has naturally driven the return on investment higher, albeit it does point to the quality of the underlying businesses, the core businesses. Secondly, our net bank debt, £4,700,000, was about 0.4 times geared compared to a covenant of less than two and a half. We refinanced our revolving credit facility in August this year, increased the facility amount by 5,000,000 to 25,000,000. And we've added a £20,000,000 accordion facility, which allows us to increase the facility should we require. It's for an initial three year term, and we have two one year extension options, which would take us to October August 2027 if we if we exercise them.

20:41 And those provide headroom for value accretive investments, organic and inorganic. I hand back to Paul now for the business review. Thank you very much, Simon. And we have three divisions, and I will start with the water management division. This is a division that's been my direct responsibility for a couple of years now. And we had record, revenue of £47,600,000, which was 9,200,000, 24% higher than the prior year. We had a record operating profit of £8,800,000, with an 18% operating margin. And this was £2,700,000, 43% higher than the prior year.

21:28 And interestingly, in the prior year, that had grown by £1,300,000, 27% versus the prior year. So that had also grown pretty well. The operational gearing helped us pass through of cost increases, which was essential to do. Also, the £3,300,000 win of Czech Papcock Airport in Hong Kong assisted the performance. This was an excellent performance by Water Management and is indicative of its potential. Our new financial year for this division has started well, the carryforward of a good order book. Our next division is Building Envelope, which is now consisting of roofing only, and its revenue increased by a million pounds, 4%.

22:22 The underlying operating profit remained in line with the prior year despite some market disruption, including significant cost increases, which was successfully passed on. It's been able to hold a double digit operating margin at 12.2%, and installation activities were exited in the year, for our black down green roofs, and we're now focused on supply only. And that's correct, Same for the whole group, only now. We gained market share. We had the benefit of five new, very professional salespeople who joined the roofing division in the year and have been performing very well.

23:04 We've had good good work on academies and schools along with refurbishment, and we've had a strong start to the new financial year, again, with a good order book carry forward. And our final division is house building products, which is Timlock, grew its revenue by 1,300,000, 12%, and it has a terrific operating margin here of just under 20%, 19.7%, which has been maintained, and cost price inflation was largely mitigated. It's very good at launching new products, and these were focused largely on noncombustible products with the FR stop cavity stop sock being an example of that and a number of roofline products too.

23:52 Customer service remained outstanding with a 100% OTIF. And with its constant focus on improving efficiencies to be the lowest cost producer, new product development and customer service, Timlock is really well positioned to maximize opportunities presenting by the presented by the housing sector, and we have parts f and l of building regs coming in that it's ready to it's prepared for. And the division is well placed to assist house builders with the introduction of housing to the future home standard in 2025. And lastly, we have an important launch of the tile vent range, planned for just into the this new financial year.

24:39 And this is a very big launch. We have a 108 SKUs, 21 types, five colors, and this will be taking us into a new distribution channel of independent roofing merchants. And the feedback so far is extremely positive with a very high quality product, so we're excited about this launch. Okay. We move into our final site, Simon, which is the outlook. And the group is now repositioned following the disposal of Level X, much simplified business model, no exposure contracting and installation and shorter cash cycle. Strong brands continue here positioned behind long term environmental growth drivers. We have long term customers across diverse end markets, including exports.

25:28 The export opportunities, are growing in selected markets. We have further cost efficiency opportunities, which are under investigation. And we see a benefit coming into our future cash flow from this reduced pension contribution. It's virtually half there or minus half of 1,100,000 annualized. And we have the unwind of the buffer stops as supply chains and material prices normalize. We have extended bank facilities providing headroom for value accretive M and A, and we are serious about M and A, and we will be, I anticipate, making acquisitions in the new financial year. We've had a robust start to the new financial year with strong order books, and the group is well positioned to deliver medium term sales and margin ambitions despite the macroeconomic uncertainty.

26:25 So that is our presentation. Thank you very much for your attention. Are there any questions that That's we can answer great. Paul, Simon, thank you very much indeed for updating investors this afternoon. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab just situated on the right hand corner of your screen. Before the company take a few moments to review those questions submitted already, I'd 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 Meet company dashboard. Paul Simon, as you can see, investors have submitted a number of questions throughout your presentation. So thank you for everybody for your time in doing so this afternoon. Simon, if I may, could I just hand back to you to maybe share those questions if I could ask you to read them out and give a response where it's appropriate to do so? And then I'll pick up from you at the end if that's okay.

27:16 So if I could just ask you to read out those questions where it's appropriate. Thank you. Sure. And first one, I think most of these are for you, Paul, thankfully. We're good. First one from Simon c says, what are your ambitions regarding international growth? Yeah. It's a good question. We are looking to add to our representation in The Middle East. And over time, you know, I've worked for companies that have had 80% of their products exported. Actually, that was the case when I started at Wrexham. And I'm very familiar from my previous life of being an export marketing manager. So I'm keen on exports, and I would like us to get up to 25% over time. And that I think would be a reasonable ambition to achieve. And that is absolutely possible with especially with our products that are well established around the world, but we can do more.

28:16 And related question from David L. Do you see a benefit of exports from weaker sterling currently? Most definitely. Conversely, where we've seen some metal prices falling, those in some cases, not all, have been offset by that weakness in sterling. But, yes, it has to be a benefit, and we should take the op opportunity of benefiting from that. Thank you. A couple of acquisition related ones. Mark a asks, following the level of disposal, what plans do you have for acquisition through expansion through acquisition? Apologies. Ryan n asks, would you consider adding new divisions? If so, any areas of specific interest? Very good and interesting questions.

29:05 Right. Well, I think I'll start by saying before we did decided to do any further acquisitions, we needed to sort LevelUp's out, And we have now. It is gone, so it's behind us. And so now we're in a position of being able to make acquisitions. And these will be sticking to the knitting. They'll be in areas that we understand well, and they'll be in areas of one of our three divisions. And we'll look for consolidation, but more importantly, look for synergies. For instance, if a company that we're looking to acquire has got products that could go through our strong distribution channels, that will obviously be a plus and vice versa. And there are companies out there that we have got to focus on that have this ability.

29:52 And so those are the types of businesses that we'll be doing, looking at. They were sticking to the netting very much, and we're not looking actually to add another division to our group. We're very happy with the three that we have. And over the last three years, we've shown some pretty good growth out of them, including 15% overall for the group in the year just under review. So we're we're going to be cautious, but we can see opportunities out there. And that's also for products that sorry, for companies that may not be officially for sale, but we'll have run a side rule over them and then have approached them. They're often not for sale there. But if we take Wade, which was the last acquisition we made, I think it's fair to say that I'd written to and contacted the owner for about twelve years, and he would write increasingly shorter letters back to me or emails, which was along the lines of not interested.

30:56 And then one day, he came and knocked on the door. So, you sometimes have to be a little patient in game, but we will be making acquisitions. And relating to that, also, Mark w, follow-up question. Do you have a view on valuations and size? Yes. Again, another very good question. In the past, we'll have been probably looking in the 5 to 10,000,000 size, and we don't want them too small. Because my experience with BTR, Williams Holdings, Brexit, and where we are now at ALUMASC is that if you get them too small, they often haven't got the infrastructure in there. You can put a lot of work in and get very little reward at the end of the day.

31:45 So I would say we're now targeted really in the 10 to 20,000,000 size value wise in terms of, you know, sale in in terms of cost of the acquisition, maybe a sweet spot around 15,000,000, I would say. K. So Thank you. A couple of supply chain questions for you. How is inflation impacting the business and pricing with customers from Ryan N? Yeah. I think that's probably a question about how we're managing it and whether there's an infinite capacity in the market. Yeah. And can you from Mark H, can you explain the main supply supply chain dependencies in terms of which country's product is sourced from? Yes. Okay. Both are getting very good questions.

32:33 If I take the start of this financial year, we were not seeing the level of increases in costs that we started to incur in h two or the start of h two in particular. And so this was a bit of a novelty for us and our customers seeing such inflation. And I have to say it was tough going to get those price increases in, but we had to do it. And we had to use force majeure in a couple of situations, but it was accepted. And for a while, we were there were companies on websites that were being listed for increases, which was always very interesting to look at from some of our customers.

33:22 But over time, there was I would say there had to be a greater acceptance of those increases. Now as to whether there's a finite time when you're you're gonna sort of price yourself out of the market. That didn't seem to happen. What I'm pleased to say now is that there is a turndown to an extent, although offset by the weakness of sterling in some of those metal costs that we had, some severe increases on and also on polymers. In terms of the, areas around the world that we're sourcing from, there'd be Far East, there'd be The US, and there'd be Europe, which would be the prime areas. I know that sounds like virtually the whole world, but it's it is fairly well spread across those areas, to be perfectly honest.

34:15 And any potential impact from the current energy price increases? Yeah. Okay. Great question. We're very fortunate in that we're not using a lot of energy. It's less than 1% of our turnover. Yes. It has gone up, of course, like everyone else at home or in business. But we're talking about probably 10 or 20% of 1%, if that makes sense. So very small impact on us And within our price increases, as you all have seen, total cost increases, we've been able to pass those costs on. So luckily, you know, of course, some, you know, the metals, raw materials that we're buying will be influenced by those energy cost increases. But as a company, we've had very little effect from it.

35:07 One for I think I'll be able to cover from Mark h. Last year, clearly had a big working capital cash outflow. Are you expecting this year to be more balanced? Yes. That's right. We had about £4,000,000 outflow into working capital in the year just ended. As things alleviate on pricing and supply chain issues, we'd expect at least half of that to reverse this year. Now that does rely on the supply chain problems alleviating. They seem to be at the minute, but I don't want to be in a position to call what's been fairly newsworthy last twelve months. We'll call the end of the end of disruption, but it seems we're moving in the right direction.

35:53 And as things normalize, we do have plans to wind those buffer stocks down. Exactly. And, you know, see whether we have one perhaps to touch upon, do you or your broker have any further ideas to enhance the market valuation ascribed to ALUMASC? Yeah. It's yeah. That's a good one. That's close to the heart. We think probably like every company management that our company is undervalued. And I think what we have to do as a management team is to provide a consistent improvement in the results, which we've been doing for three years now. That has to continue, so the confidence is there on the company.

36:45 But I think we also have to market ourselves better, and this would be an example of that because we haven't marketed ourselves adequately to the retail area, for instance. And we had one or two emails, literally one or two, and I said, well, let's go for it. Let's have a go at this because we need to broaden the message because a lot of people still think of ALUMASC as a beer barrel manufacturer or a supplier of automotive components to the car industry, which didn't have a great, business model attached to it in terms of getting price increases or getting a return on what was a high CapEx business. So we've really reengineered this business now, very much focused on its building products, its own brands, etcetera, low CapEx requirements, cash generative, all the things that we really like.

37:39 And we've got to do a better job at getting that message across where we have started to do that in the last year, but we need to do more, I would say. That's great, Simon, Paul. Thank you very much indeed. And I think you've addressed all those questions submitted from investors, and thank you to those also for submitting those in. Paul, Simon, I know investor feedback is particularly important to the company, and I'll shortly redirect investors on the call to give you their thoughts and expectations. But before doing so, I wondered if I may, Paul, just finally ask you for a few closing comments, after which I'll redirect investors to give you their feedback. Yeah. Thank you very much. It's it's been a challenging year. We've come through. We've grown the business, and we're in a strong position now to grow further through acquisition and also organic growth.

38:30 We've got some terrific products here. We've got some great people working for the company, and we will continue to grow this business. And that is absolutely our ambition, and we're starting to prove that we can do it. So we're we're ambitious, and we will lead this business further forward both in terms of revenue and profit. So thank you very much for everyone's attendance today. That's great. Paul, Simon, thank you once again for updating investors this afternoon. Please ask investors not to close this session. As we mentioned, we'll now automatically redirect you for the opportunity to provide your feedback in order 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'd like to thank you for attending today's presentation, and may wish you all a very pleasant afternoon.