Breedon Group (LSE:BREE) — Annual Results

0:00 Good afternoon, ladies and gentlemen, and welcome to the BREEDON GROUP PLC Annual Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time just using the Q and A tab situated on the right hand corner of your screen. Simply type in your question at any time and press send. The company may not be in a position to answer every question received during the meeting. However, the company can review your questions submitted today, and we'll publish the responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and I'm sure the company would be most grateful for your participation. I'd now like to hand over to CEO, Robert. Good afternoon.

0:32 Thank you very much, and good afternoon, everyone, and thank you for joining us here this afternoon. I thought before we go and start talking about our annual results for 2024, I I would take the opportunity just to remind you, about BREEDON GROUP, and a bit of our history. We we were formed, and our first transaction was in 2010. And we were in The UK, and we were at construction materials. Since 2010, we've grown both organically and through acquisition to build out a vertically integrated construction materials business, not only in The UK or GB, but also in 2018, we expanded into Ireland and so therefore had two platforms.

1:25 And just over twelve months ago, we expanded into The U. S. And into the Midwest in Missouri, and so we now have three platforms. We now employ approximately 5,000 colleagues, and we're focused on growing the business organically and through acquisition across our three platforms. I just thought that was useful background for all of you. If I turn to our annual results, what I'd like to say is that we're really pleased with what we've delivered in in 2024. There were really quite challenging headwinds in our home market, GB. There was political and economic instability across all three of our platforms. And, you know, political wise, there were elections in all three platforms over the last few months.

2:19 And and there were some poor weather conditions that impacted different platforms at different times of the year. But overall, team BREEDON, you know, stepped up, faced those challenges head on, and delivered what we considered to be a strong set of results, which were just slightly ahead of market expectations. But as well as the numbers, we also achieved some other things, and we we delivered some results, and and which which which were sort of in parallel to some of the strategic progress we made. And I think what I'd call out to hear was, you know, our our announcement back in March 2024 of BMC, which was our beachhead in The US, had followed a couple of years of us doing due diligence and talking to investors about exploring and entering into a third platform.

3:15 And I'm really pleased. That was a big landmark transaction for us and gave us our big beachhead in The US. And but in parallel to that, we made significant progress on our sustainability priorities and upgraded our targets going forward. And James also refreshed our financial framework, which he will come on and talk about separately. But all those three subjects were front and center to the capital markets event we hosted

3:43 in November. And I hope if you haven't done already, you find the opportunity to go back and look at those slides and and watch the video from the day because I think that really explains why we've entered The US and why it was so compelling. So in summary, a strong set of results in some challenging markets, but some real strategic progress. And I think on that note, I'd like to pass over to James. Thank you, Rob, and good afternoon, everyone. I think the thing that really strikes me when I look back at the 2024 results is just how balanced they were. We successfully grew our revenue. We grew our EBITDA. And indeed, we expanded our margin, helped in no small measure by that initial contribution from BNC coming into the group for the first time.

4:34 But alongside that, we generated significant levels of free cash flow. We improved our cash conversion, and we've continued to invest back into the business. And I often talk about how at BREEDON, we see investment as a differentiator, and we see the investment that we make today as underpinning our success in the future. We reduced our leverage over the course of the year to 1.4x from its half year peak of 1.6x. And that, in turn, gave us the balance sheet capacity and firepower to acquire the Lion Mart business off the balance sheet and using our existing facilities. If there was a disappointment, it was perhaps in our return on invested capital in the year, which came in at 9%, down from 9.9% at the end of twenty twenty three.

5:24 But there are really three significant components to that fall. The first being the increase that we've seen in our corporate tax rate, the second being BMC only being consolidated for a stub period of the year. And then finally, the trading volume decline that we saw in our British business. We remain confident that as markets return and as volumes grow, that we will see an expansion of that ROIC back towards 10%, which is the threshold target that we have established. We also grew our dividend in the year by some 7% to 14.5p. And since we first started paying a dividend back in 2021, we've paid out over GBP 160,000,000 in dividend distributions to shareholders.

6:10 So it's been pleasing to be able to continue on that progressive dividend track.

6:22 Looking at the divisional EBITDA contributions, you can see that in Great Britain, despite the volume declines that we saw in the year, the margin fall was restricted to 20 basis points, which for a business that has an incremental drop through of closer to 20%, really demonstrates the success that the division deployed in terms of its cost management and cost mitigation through the year. Our Irish business saw an expansion in its margin to 17.8%, reflecting investment made back into the business, tight cost control and a much more structured approach to tendering across the island of Ireland. And there's that encouraging initial contribution from The U. S. Business as well as further margin expansion seen in our cement business. And all of that led to the group margin improving by nearly 80 basis points to 17.1% compared with a threshold target EBITDA margin of 17.5%.

7:26 I'd now like to hand over to Rob to talk a little bit more about the Lionmark acquisition. Thanks, James. Look, we were really pleased to announce the acquisition of Lionmark last week. When we started our journey just over twelve months ago in The U. S, In BMC, we did have our beachhead. It was in a an attractive market in the Midwest, which was ready for consolidation. It came with a really high quality management team. But if there was if there was a negative, it would be potentially that it was overexposed through its ready mixed concrete to the residential sector. And and our desire as BREEDON is to have vertically integrated businesses with a majority exposure to infrastructure and roads.

8:20 And I think, you know, Landmark couldn't have been a need to fit. It it builds us out into

8:29 asphalt and surfacing, con contains further acquisitions to expand our geographical foot footprints sorry, aggregates to ex expand our geographical footprint. And and what it does overnight and if I just move forward a slide or two that one back. Oh. And what it does, if you look at those pie charts in the middle, you'll see our overexposure to residential pre pre pre landmark and then post landmark where the majority is now through to infrastructure and roads. So so really, really, really quite to me, from an end use point of view, very good. I think what I'd then stress is oh, sorry. I'm I'm losing control of the slides here.

9:18 Here. So it's really what it what it's got, and, you know, it it is a leading regional construction and servicing business. It's headquartered in Missouri. I mean, literally, the head office is only ten or fifteen minutes away from our BMC head office. It has a strong track record, of of organic growth and has an ambitious and culturally aligned management team. And as I said just when I started, it really does vertically integrate our business. But it does come with more. It's got over 100,000,000 tonnes of reserves and resources across eight quarries, four ash rock plants and has a bitumen terminal and increases our exposure to infrastructure and positions us to benefit for the construction growth that is expected and we expect in the Midwest in the medium term.

10:11 And I won't dwell on this slide, but I think this gives you some of the forward projections and just really just why it is an attractive acquisition and why it is an attractive market. And but what I would say is, you know, in summary, we're really pleased. You know, overnight, we now have a vertically integrated business in the Midwest, a real beachhead to build out from. And James and I and the board and the team in The U. S. Are very excited about building that business further. And I think I'll pass back over to James now just to give you some financial highlights. So in Limel, we're buying another really good Midwest infrastructure based business. That's an enterprise value of $238,000,000 a multiple paid of 7.7x twenty twenty four EBITDA.

11:04 And that's inside the multiple that we paid for the BMC transaction a year ago and is in line with,

11:11 if not ahead of, comparable transactions paid for in The U. S. Construction materials market in recent years. The vendors are taking around 5% of the consideration in BREEDON equity, and they've undertaken to hold those for at least twelve months. Coming into this year, the business has a backlog of over $210,000,000 which compares with a revenue delivered in 2024 of around $246,000,000 and it generates an EBITDA margin of 12.6%, which we would hope to be in a position to expand in future years.

11:46 How we're going to go about doing that is in part through generation of synergy benefits, and we've identified $3,000,000 of synergy benefits that will come through over the course of the next three years. We will need to make some investment back into the business in the first year of ownership. But there will be other opportunities, particularly around vertical integration and cross selling of materials between the Lionmark and BMC businesses over the course of the

12:15 next few years. We've already completed all the transactions, so the business will now be consolidated by BREEDON over the course of the next ten months. And I think in summary, I think that's it. Really, really pleased with the strong performance in 2024. Really pleased to be able to announce Linemark and just what a good fit it is for our U. S. Business. And whilst there are some challenges ahead, particularly in The UK, we're excited about the future as BREEDON. It's probably an appropriate time now to open it up for questions then. That's great, Rob James. Thank you very much indeed for updating investors. Ladies and gentlemen, please do continue to submit your questions just using the Q and A tab situated on the right hand corner of your screen. And Rob James, we've had

13:06 a number of questions from investors this afternoon. So thank you to everybody for your engagement. Perhaps I can start with the first one, which we received ahead of today's event. The Ireland division is described as strong in 2024, and there was a nice step up in EBITDA margin, but revenue in the Ireland division have been flat for four years, but it's holding back revenue. I think if you unpick the Irish business and the Irish performance, we did see a really encouraging improvement both to the EBITDA and to the margin in the course of 2024. In part, that was down to exceptionally good cost control. But another big component of that was us taking a very structured approach to our tendering process Ireland and not being afraid to walk away from projects that were less economic for BREEDON. So that, in turn, has meant that we have moved turned down revenue opportunities where we felt that the margin was insufficient to cover the risk and the investments involved.

14:10 Within the Irish business as well, we've seen a significant increase in the amount of aggregate sales that we make

14:18 from that business, reflecting the transformation that has been brought on the Irish business since the acquisition of Lagan back in 2018 when the business was pretty much exclusively a servicing business. That's great. Thank you. The other pre submitted question we had was around share price. Rob and James, is there anything that they can do differently in the future to increase the share price, which has been slightly lagging behind? Well, I'll start with that one, and James will probably add to it. But, I mean, I think the most important we thing we can do is keep delivering control the things that are in that are under our control. There's been a lot of macroeconomic influences on not only our share price, but but London share prices as well, and and we're not directly able to influence those. And when we speak to our major investors, I mean, what they've always told to do is to focus focus on the things we can control and and and focus on improving the business.

15:21 Yeah. And I and I think what I would add to that is that, really, over the course of the last twelve months, the share price has moved forward really quite materially. And since the announcement of our results last week, the share price has made further strides forward. So I think that we remain very focused as a management team. The top team within the company are very incentivized and motivated to move the share price forward, and we will continue to do our best to ensure that our results and our performance are appropriately communicated to the market. That's great. Thank you. Let's turn to the next question. How are you positioned to capture opportunities from the UK government's infrastructure spending plans?

16:05 I think we have a well, you know, a well populated sort of geographical footprint to be able to to to benefit. When it comes to infrastructure, I mean, if you look at roads and take that as a as as a as one part of it, I mean, we have relationships with national highways on the Northern Super Region. We have relationships up in Scotland with Transport Scotland, and so we're well placed to benefit from spending on the road network. I think what's clear, though, is that, you know, RIS three, which is the next five year spending program for roads, is unlikely to have a lot of new capital projects in. It's likely to be much more maintenance focused. And one of the few capital projects that was still in it was the A 303, which was a tunnel under Stonehenge.

16:59 The new government, scrapped that road new road, literally quite shortly after they came into power last year.

17:08 But we shouldn't be disappointed. If it's maintenance spending, it tends to be asphalt and the laying of asphalt, and it tends to be that our industry and, therefore, BREEDON gets to share more meaningfully in in the pots as opposed to capital projects. And also maintenance spending can be actually mobilized relatively quickly. Capital projects often take years to to to move from an idea through to a project. And outside of roads, there there's a number of infrastructure projects that are required, it's water, whether it's electricity, whether it's hospitals, all of them will be good. Spending on them will be good for the heavy construction materials industry, and BREEDON should benefit from such spending.

18:01 You recently announced, and I know you just touched on this, the LINEmark acquisition. How does this fit into your U. S. Expansion strategy? And what synergies do you expect? I think as I touched on earlier, we bought a really good business in Landmark. And I think there are a number of particular features about this acquisition that are very relevant in the context of us establishing our U. S. Platform. The first of those is just how local it is to the existing BMC business. Both businesses headquartered in St. Louis, Missouri and both very well known in the construction material space in the Missouri market. Alongside that, the acquisition at a stroke diversifies our U. S. Business from being very focused on residential housebuilding, very focused on ready mix concrete to being a much more infrastructure based business.

18:57 And if you look at the rest of the BREEDON GROUP, our focus tends to be on being infrastructure led. In terms of synergy opportunities, we're targeting those $3,000,000 that should come through over the course of the next three years. And those are very much what I would call hard synergies, so I. E, costs that we have identified that will not need to recur under BREEDONBMC ownership. Over the course of those three years, those synergies will come in roughly 50% in 2026 and fifty percent in 2027. And then there may well be further opportunities for growth on top of that as we vertically integrate the businesses. Question here around, I guess, different expansion verticals.

19:44 Are there any plans to expand your presence into high growth sectors like data centers, renewable energy infrastructure or commercial real estate? Yes. We have exposure into all those sectors, energy infrastructure. I mean, for us, whether it's new nuclear or or whether it's onshore or offshore, you know, wind, you know, we have been involved, and we continue to be involved. And, you know, we have a good business and a strong business up in Scotland. And and for new onshore wind or further offshore wind, we're very well placed. And some of the inquiries and some of the prospects that we're looking at now, you know, could could be quite rewarding to to BREEDON, you know, over the next few years. I think in terms of new nuclear, it's not only high profile projects like SISE World C, there's also the need for modular nuclear.

20:45 And there's a lot of other areas as well. I would say out of all those areas that you've touched on in that question, it's probably the commercial that's probably the the weakest at this stage. But it doesn't mean that if that sector improves, that we wouldn't be able to participate. You. Question from Gavin. Thank you, Gavin. Is The U. S. Servicing business a regional political thing? How do you reach adjacent territories, if so? So I would say the the the it's a regional business, but I'm not sure what you mean by political, but but it but it will be public, authority led, just like just like our work in England is with National Highways and our work in Scotland is with Transport Scotland.

21:32 Most of that work will be on trunk roads in Missouri where the major part of the business is, and it will be with what's called MoDOT, which is the the the Missouri Department of Transport. But but but the the positive the positive is there is that as well as the federal funding through the IIJA and a number of other acts that have been passed. In Missouri, there's also a gas tax, and the proceeds from that are ring fenced for spending on the highways. And the outlook and the forecast for the next few years are really quite strong for Missouri. Got three questions in one for Mike. Thank you, Mike, for your question. In The U. S, given the new exposure is weighted heavily to infrastructure and nonresi, Do you anticipate future M and A to largely follow this new pro form a mix?

22:29 Can you discuss plans on where you see U. S. Contribution to earnings within the group over the next three to five years? And then lastly, where is a comfortable level for leverage for the right acquisition? So I think in terms of the general profile of our U. S. Business, we would expect that to be maintained on the sort of structure that you've seen following the announcement of the acquisition of Lionmark. That's not to say that the next acquisition might not be another ready mixed concrete business. But over time, I would expect that infrastructure exposure to remain around 50% of our end market exposure. I think in terms of the size of the group and the size of the aspiration in The U. S, Andy Arnold, who's the MD of our U. S. Business at the Capital Markets event back in November, expressed an aspiration to grow a division of BREEDON that would be the equivalent size of the Great Britain and Irish business combined.

23:29 In announcing the acquisition of Lionmark, we're already at a size in The U. S. On a pro form a basis, which is the equivalent size of our Irish business. Finally, with respect to leverage, leverage on a pro form a basis on the day of announcement is 1.9x. We will see some natural deleveraging over the balance of 2025, but between zero two five and onethree of EBITDA, which gives us a degree of balance sheet flexibility. We would take leverage a little bit above our target range of one to 2x for the right transaction, but always with a view to deleveraging in relatively quick order thereafter. Thank you. And I think this is the final question we have from Gavin. Had BMC and LineMark spoken before being so local?

24:18 And why was it you that has merged them? They yes, they did know each other. And, I mean, it was interesting. But even in the early days after we'd announced BMC, I know that Andy was talking to to to the team there. It's an interesting question. One of the reasons that BMC became available was that the the previous vendor ultimately had decided that he didn't want to put more capital at risk. And I think given the size of LineMark, I think I think it would have been hard for them to to find the the equity and the debt to be able to do that, and it wasn't something, that the the the previous owner wanted to do. I think when we came in, that changed that because it gave access to capital.

25:13 And I think when they met each other and over the last few months, as James and I have got to know the the the LineMark team well, it became quite clear that there was an opportunity for them to join the BREEDON team and and help us start to build something really quite exciting in the Midwest. Great, Rob, James. Thank you very much indeed. That's taken care of all the questions from investors. If any more questions do come through, we'll make those available post today's meeting. Rob James, know investor feedback will be in talk call to you both, and I'll shortly redirect those on the call to give you their thoughts and their expectations. But before doing so, if I could, just back to you for a couple of closing comments. No. Well, thank you, everyone, for joining us this afternoon. As I said, a good 24, not just the numbers, but on strategic progress.

26:03 And and really with the Lionmark acquisition, you know, we're really quite optimistic now that we've got a great platform to build out from in the years ahead in in The US, and, we are incredibly excited about the future. That's great, Rob. James, thank you very much indeed for updating investors. But please ask investors not to close this session as we're now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This may take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of BREEDON GROUP PLC, we'd like to thank you for attending today's webinar, and good afternoon to you all.