Hargreaves Services (LSE:HSP) — Preliminary Results Investor Presentation

0:00 Good afternoon, and welcome to the HARGREAVES SERVICES PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the q and a tab situated at the right corner of your screen. 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 your questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Gordon Banham, CEO. Good afternoon, sir.

0:29 Good afternoon. And, look, thank you everyone for taking the time. We're really keen to engage with our retail investors, so, hopefully, it's a great opportunity for you to hear about how the business is doing. And I'd always actively encourage you to contact Steven and myself if there's any questions you have outside of the normal cycle. So our contact details are on our website. So just moving on to the presentation. Let me take you through. So first page of the presentation, we talk about the business. Now remember, those of you who've been with us a long time know that this was a coal business. We created the platform beyond coal. We moved into the delivery stage very much in the delivery stage, so it was proving the value of these three pillars to everyone. And we're now moving to the realizations factor.

1:18 The big one we talk about today is renewables, and we'll try and give you some flavor towards that. But what I would say is you have three pillars in here. We have services. It's a very low capital model. Steven will pick that up. Very inflation resistant. You know, we've had this peak in inflation that everyone's well aware of, yet we've still delivered the profits. So very robust contracts which do deal with inflation. There's been organic growth there over 60, framework and term contracts, so, you know, that's a positive protection for us. Land, I always say this to people. Remember, it is in at cost, so we don't have this exposure to market to market. David will talk about what's happening in the general property portfolio that we own.

2:04 So remember, we are focused in the North and Scotland. So some of the things you see in the press don't affect us as badly as you might expect if if we were just a pure residential house built down in the South, for instance. So David will give you some flavor from that. We're really gonna talk about the renewables here as well. I've got a whole slide on that. And then, what I would say is we are moving the land business to a lower capital model. Now remember, most of our land was our old mining sites. As we are working those through, whether it's Westfields, Blind Worlds, even Unity, they will release cash, which we will not need, we think, going forward, such a high level of capital employed. We think we can run that business on 10 to 20,000,000. And, we'll Steven and David will give you some flavor from that. Finally, we talk about Germany, and it's a point that people I know do focus on. We do follow the the shareholder boards.

3:01 The key point to make you aware of is that we'll talk about the money being there at the moment to support trading. As trading has come off, you'll see that they've repaid our loans. So that was the first stage. Now we're in a point of inflection where if the tradings continues to slow down, recessionary pressures in Germany, then we will look to start the repatriation of cash back to The UK at a higher level. Remember, 12 p cost about 4,000,000 out of Germany. So if trading starts to slow down, then we will look to repatriate more cash to The UK. The update on that will be at the half year. The reason for that is we wanna see how it develops for the next six months, but we are having ongoing discussions with the German team who are keen if trading volumes drop off or commodities drop off to increase the dividend out. So, hopefully, we've made it clear. I think people were looking for time, so we're gonna give you a very firm answer at the half year.

4:00 Little bit too early to say now. Yes. Things are looking a bit, choppy out in Germany, but, you know, we'll update you at the half year. So just over the page, renewals is the big thing we're talking about. Again, here we are. What we're saying to you is, look. We've had this independently valued by Jones Lang LaSalle. They've said if we sell these assets today, you get 21 to 23,000,000. If we wait till they're all spinning and running, you'll get 27 to $2,829,000,000. How long will that take? Well, that's the part of that is outside of our control.

4:38 So what we've said today is maximum five years. We hope that the people get these sites up and running quicker, and then you could see that brought into maybe two to three years from there. But we are trying to make sure we're clear and we can definitely deliver. So five years is a slam dunk. Personally, I hope we can get this done sooner, but it is outside of our control, so it might be two to three years. Book value is 6,600,000. We generate obviously a quite substantial profit about ATP a share, and we are committed to passing that back to shareholders. So hopefully, that's been clear on time frame. Alongside that, we have other renewable schemes which are less developed. Still about 800 megawatts in capacity. They're beyond the five year time horizon.

5:25 The good thing about those, though, is that they are in they are effectively at the book value of the 6.6. So when we sell these and if we book all the cost to these, they will virtually be at zero cost. So you'll get the full value of those sales, but they are definitely five years ahead. But, they'll get updated in the annual Jones Lissang valuation. So, hopefully, that's clear on renewables. Just over the page, just talk about the results. So services, some growth, big amount came from HS two. We also had some growth in the M And E and Asia. I cover that later in the presentation. Blind wells, we have a contracted sale on, to Avant on 20 acres. David will cover that, but it's in the bag. It's unconditional.

6:16 So, again, David will give you some more details. HRMS, as expected, you know, it shouldn't come as any surprise. The profits of DK are linked to zinc and, pig iron prices and their pig iron price linked to iron ore. You've seen them come off. We expected the profits to come off. We told everyone they would. We always like a DK for a high zinc and a high iron ore price. Currently low, therefore, the profits have come off. How we see that going forward, I'll pick up later in the presentation. The good thing, remember, is we have a very strong balance sheet, 22,000,000 in cash, so we're not exposed to these high interest rates. So it's a good place to be, and that's why we're able to increase the dividend by nearly 3%. So on that note, I'll hand over to Steven, our new group finance director, who will chat you through finance numbers. Thanks. Thanks, Gordon.

7:10 So first slide here on on the numbers is just really a a breakdown of the of the p and l. So the revenue group revenue growing from 178,000,000 to 212. The majority of that growth coming through from the services business, 25% growth nearly. A a large chunk of that comes from the HS two contracts, largely through the earth moving, but it's not entirely due to HS2. And some of the growth has come through from winning new mechanical and electrical engineering contracts, predominantly building a large conveyor and some silos. But but also pleasingly, we've seen a lot of growth in our in our in our Asian business, which has seen significant growth through a contract with which has been very pleasing to see actually.

7:55 So that what does that translate to in terms of of profits? So PBT within services has grown from 7,600,000 to 12,300,000. Included in that 12,300,000 is 3,200,000 of asset realizations, so one off gains. And those of you who are on the half year call will have seen that 2,000,000 of that was done in the first half, a further 1.2 in the second half. So obviously, that's not really recurrent profits. No impact on revenue, obviously. And therefore, the the more underlying PBT is 9,100,000, which is again good growth, like 20% growth from 7,600,000. However, the margins actually squeezed down slightly, and that's because the margins that we're experiencing in Asia are are a bit lower than we do in The UK normally. PBT from the land business is very pleasing.

8:41 I keep to see it growing from $2,100,000 up to 3,900,000 Significant growth in that business as some of the schemes come to fruition. It is somewhat behind where we were hoping it would be, but recent conditions meant that certain sales, particularly at Blindwells, have been moved into the following year, which David will pick up on shortly. Profit after tax from our German joint venture has reduced from £25,000,000 down to £15,500,000 So this has been well flagged, I think, in a lot of our previous announcements and statements. And the £25,000,000 was never a sustainable level given the level of commodities, and we'll come on to the detail shortly. But notwithstanding that £15,500,000 remains the second best result that HRS has ever delivered for the group and is still a very good performance. Corporate costs are in line with the prior year, so not a lot to say there.

9:29 And this year, helpfully, amortization, exceptional items and discontinued operations are just amortization of £200,000 The tax rate looks a bit strange because it's 800,000 income and that's because the group has spent a lot of money on HS2 plant and equipment to fund that contract and that's meant that we've been able to take advantage of the super deduction 130% capital allowances, which is sort of flipped the tax charge around the opposite way this year. The other number I'd really like to pull out on this page is the EBITDA. So whilst profit before taxes reduced by about £3,000,000 from the prior year, that's mainly due to HRMS, which is non cash. The actual cash profits of business have increased significantly. So we've seen a 60% increase in EBITDA, which is really a testament to the amount of growth going on in the underlying services and indeed land business of the group.

10:24 So moving over the page, we just look at the balance sheet a little bit to give you an idea of where where the capital is employed across the group. So within services, it is a pure coincidence that the capital employed is exactly the same as the previous year despite the investment into tangible fixed assets, and that's because that investment has been offset by an increase in finance lease debt, which is how we fund all of this plant and equipment. But the the most the the most pleasing part about this business is the the working capital, which you'll see is negative. And this is a demonstration of our tight working capital regime and the ability to be paid before we have to pay others. And that's been the case in the services business for a long time. Within land, Gordon did mention the capital light model. It doesn't appear that way at the moment. That's where we're hoping to get to. The 16,500,000 of tangible fixed assets includes 6,600,000 of renewables, which obviously we talked about in the first slide and David will pick up on it again. We have another large development at Westfield upon which third party

11:26 is building an EFW and some infrastructure spend has gone into that. That's $5,200,000 and then there's some other bits and pieces around the group, which aren't too important for pulling out right now. The other large number on here is $39,000,000 of inventory, of which 35,000,000 is the Blindwell site. And there's also a sizable debtor within other working capital relating to Blindwells. So this is just really to give you an idea of the size of the balance sheet relating to land and how much is taken up by the Blindwells site. If you could imagine, I know it's difficult, but if you can imagine taking the Blindwells number out and following the sale of the renewables assets, actually, that 73,000,000 invested in land really comes down to a number much closer to 20 or something like that, which is sort of the model I think David wants to adopt going forward.

12:15 In terms of HRMS, those two numbers, some coming to 8,000,000, and I'll pick them up in a couple of slides time if that's okay. And on unallocated, the two numbers I'm gonna talk about are pension scheme and deferred tax assets. The tax assets of 11,000,000 has increased from 9. This is just built up losses within the group, and it's increased in the air because of the impact of the super deduction, which yes, we've got the deduction, but we weren't able to utilize it also roll into future years. And then the pension scheme number. So 5,600,000 assets on the balance sheet. This doesn't make any sense because we pay £2,000,000 a year to service the deficit, This is just the way the accounting treatment operates at this present time. So the key thing, key news on the pension scheme is the intention of the board to now buy out this scheme and to avoid having to pay this £2,000,000 a year deficit reduction contributions.

13:07 So we currently estimate given the way guilt yields are, where asset values are within this scheme, it'll cost around about £50,000,000 to buy the scheme out. That £50,000,000 buyout will liberate £2,000,000 a year from free cash flow. And it's the intention of the board to use that additional £2,000,000 to effectively bolster the dividend going forward, most likely from FY 2025 onwards, depending on the timing of when the pension scheme is able to be bought out.

13:36 Just looking at the cash flow now, we started the year with £14,000,000 just under in the bank and made profit of '27. However, a large chunk of that was from the joint venture, and that's not cash until such time as they pay a dividend, so that comes out. But equally, depreciation and amortization is not cash, so that comes back in. Profit on disposal and then net CapEx is a function of selling off plant and equipment. So the net CapEx of $2,400,000 includes just over $5,000,000 spent on the Westfield development. So that's enabling the site to be able for the third party to be able to build the EFW plant that's going to build up now. And that's been offset by the capital receipts from the one off gains we've had, which I mentioned two slides ago. The significant increase in leasing debt has obviously meant we need to pay lease payments. And so £30,000,000 has been what we paid on that this year. Suspect that should grow slightly next year as we have full years of these these assets which are bought in the air.

14:36 The only really unusual item on this tab is the 15,000,000 loan to HRMS, which is a cash receipt and the equivalent chart last year showed a 50,000,000 cash outflow to HRMS. So this is where we lent the joint venture £50,000,000 for them to be able to take advantage of the trading opportunities out of that at the time. They've done so, the commodity prices have come away, let's liberate some cash. They've been able to repay the £15,000,000. Otherwise, working capital is pretty flat. The other two the other few columns are pension contributions, which are slightly higher than the 2,000,000 I mentioned, and that's because we had an additional one off payment in the year and dividends paid of 6.7, which is made up of 4,000,000 in our additional dividend, the 12p that we've paid for a few years now relating to Germany and 2,700,000 underlying dividends.

15:25 We also made a small acquisition at the start of the year for 1,700,000 within the services business. So we have a slide now on HARGREAVES, and that's important because if you look at the accounts, there's only really two numbers, and that's not really gonna give anyone a picture of what's going on. So in the top left corner, we've got a brief p and l. The three three strands of the business, which Gordon will touch on what they actually do shortly. You'll see that the trading business, the traditional trading business revenues dropped quite dramatically. That is partly due to volume reduction and partly because commodity prices have come off. Those two have a bit of a double whammy on the revenue. We've also seen a reduction in DK, that's mainly commodity driven, volumes are broadly the same.

16:11 So the reduction isn't quite as marked. That reduction therefore falls through effectively through to the bottom line. There's also been squeezed on the margin. But notwithstanding that, as I mentioned earlier, our share of the profit of £15,500,000 is still a very good return from this business and certainly better than we've seen in the past with exception of the prior year. So one question we're getting quite regularly is, like, this business has been doing extremely well for for quite a few years now. So where is all the money? Where where is that? So I hope to answer that on the balance sheet tab, which is on the bottom right. So the biggest number on there is the inventories, 136,000,000 worth of inventory tied up. That's where a lot of the profit has gone. They've reinvested the profit into the business to buy inventories to be able to take advantage of the market opportunities out there. If we look at the prior year inventory, it's come down from a 147 to a 136. It's not reduction that has meant that they can repay the short term £50,000,000 loan. So that's come back into the group this year.

17:10 The other big moving part in the balance sheet is the fixed assets. So the recycling plant at DK has needed some effectively upgrades doing to it in the air and the profit that they've made in the air, they've reinvested into that capital capital projects there. So what does that mean for our exposure? Well, that's that's the bottom left corner here. So our share of retained earnings of 68,600,000 is the profit that HRMS has built up over the last four to five years, but not repatriated to the business because it's reinvested in the business. The total loans of 11,200,000 is effectively quasi equity. This money was put in over ten years ago now as effectively as collateral for the German business to get their borrowing base, their local funding in place, and that will not come back until such time as the borrowing base is no longer there.

18:00 You'll also notice that the guarantee has increased in the air. This was a way to get local funders to increase the borrowing base for Germany without us having to put additional funds in. We don't see at the moment any reason to be putting any further funds into HRMS. In fact, then Gordon will pick up on quite the opposite. It's hopefully true.

18:23 So I'll pass over to Gordon now. Thanks for that, Steven. So just the operating review. So remember Shell is owner services business of the three pillars. As I said before, blue chip customers, you can see that there. We're in a strong position because already at the start of the year, 70% of the revenue is already in the bag, we and have a lot of framework contracts, which means that it gets topped up automatically. So we're sitting on a solid position, plus 60 framework contracts, typical operating margins of 5%. So, basically, at the start of the year, it's in the bag, and I think we've proved with inflation that, we can weather that very well over the last year. So not worried about that.

19:09 Also, the industry sectors we're in, we're not exposed to retail, so it's energy is okay, environmental is okay, UK infrastructure, obviously, HS2, and industrial sectors. So we're in good spaces at the moment, and good performance. Where did the growth come, which should be the next slide, which people always ask. On the next slide, we talk about the growth. So that is, sorry. Thank you, Steven. So there's been a growth of about 38,000,000. Big part of that was, HS2, but then we had some m and e wins as you can see, and we also had some growth in Asia, which we were happy to see. I think our investment in Asia has now reached a tipping point where we hope to see it as a larger part of the business, and, hopefully, we'll see that in the next couple of years.

19:57 So just over the page. So what's the opportunities for growth? Well, let's just take those on board. We have over two ten new framework contracts that have been added in the year that's just finished. Some of them, like quarter time biomass, do not start till October. So these 10 new contracts will start to feed in and deliver some of the organic growth in services plus new contract wins that we hope to get. So there's the growth organically. Tungsten West is worth a discussion for shareholders. Those who track it will know it's a listed vehicle. They will know that it raised £6,000,000 effectively, and that money sees them through to December.

20:44 Now we are in detailed discussions with the board of Thomson West, and they are hoping to raise a further I think it's in the region of 50,000,000. If they get that 50,000,000, under the terms of the agreement, they will pay our shareholders back the 5,000,000 that's secured against the asset. This is the million a year royalty. So they will repay that 5,000,000, so we'll get a 5,000,000 inflow. Also, we will start the mining services contract, which is open book cost plus seven and a half percent. So work on plus 20,000,000 of sales, seven and a half percent, 1,500,000. So you get 1,500,000 of annualized profit on the long term contract. You get the 5,000,000 of cash, and you do not get a credit exposure because the terms of the contract, which were negotiated when we sold the site to Hungsten West, are that we get paid in advance.

21:39 So shareholders have no credit exposure because people would be worried with the history of Tungsten West about what happens if it gets into a model. I don't think it will. It has a very strong management team now, but I'm just saying you are protected just to reassure you. Just moving on to the major infrastructure projects, we are now preferred partner with Balfour Beatty on the Lower Thames Crossing, and we have done two contracts at Sizwell. One has, already completed, and that was for subcontractor. The second one is direct for size well. So we're hopeful, especially as those of you who know our offices in Essex close to size well, the localism agenda should work well for us, and it's worked well for us in Lower Thames. So we we see Earthworks going HSP two has another couple of years to run.

22:30 We then move on to Lower Thames then to Seismo. So you can see this pipeline going out quite a way.

22:37 And we are also tendering on several mechanical and engineering projects, which will get would flow into services. So the outlook I believe is quite good for the services group. David will now take you through land and I'll ultimately take you through Germany. Okay. Thanks, Gordon. So just turning to slide 16 then just to explain what HARGREAVES SERVICES does. We operate in four sectors. So we have the master, what we call the master developer role.

23:04 This is one where we are the the lead developer on a number of large scale sites that are multiphase, typically have at least a decade of life in them. We own two of them outright. These are two are held and their options which we draw down sort of as required. Typically, will basically put an infrastructure against full sale commitments and then sell service plots to house builders and with commercial sites we'll either sell the plots through to end users or intake the direct development of the schemes themselves. The second area we have is the turnkey project delivery. These are bespoke schemes. We operate primarily in the retail warehousing and logistics space market. So retail warehousing is normally pre let to retailers and forward sold.

23:52 Logistics space again is typically pre let or at least forward sold to investors. And these are one off projects that take several years to set up and then get delivered within a twelve month window. The third area is the planning promotion agreement side, which is really strategic planning. So this is where we identify normally greenfield sites, which have potential to secure planning sent on through the local plan process. We secure these by ways of options or conditional contracts or promotion agreements. And then we promote them through the plan process. That's normally anywhere between a five and ten year period. It can be very variable from two or three years to ten years plus. And really at the end of it, the agreements provide that we recover our costs together with the margin as we've said to the sale price. And at the moment, we've got just up to 2,500 residential blocks spreading out across just over 200 acres under contracts and promote being promoted.

24:53 And finally, it's good to mention we've got the renewables.

24:57 These are this is the land that we own. Just to be clear, we're not the developer of the renewable assets. We have facilitated securing the grid connections at the planning consents, and then we have contracts with third party renewables providers who are actually doing the direct job. So we we have no CapEx spend on this at all,

25:18 but we end up getting a revenue stream for each of those assets. Normally, least twenty eight years duration linked to the actual either the energy current value of the energy being generated or fixed numbers linked to CPI. At the moment, we've got nine projects that are progressing through where we have certainty on the commercial values of these, which is why we've had Jones Lang LaSalle value them. The reality being is until they get quite advanced, it's difficult to predict the timescales and the actual overall revenue generation. But we're on those projects, we've now got to a stage where these can be reasonably accurately predicted. Hence why we've done have the valuation done externally. Turning to the key events for FY 2023, just as a backdrop into the general market conditions, Q1 of that year, we had very strong market conditions both the commercial and residential sectors.

26:14 If anything, I would just say it's actually very frothy, particularly noticeable in terms of the activity in the residential sector by house builders and the sort of values they were throwing about. And also on the investment market from commercial space particularly extremely buoyant, very keen yields being sort of provided underpinned by investors looking to gain greater exposure to that market. Q2 and Q3 rapidly deteriorated conditions for reasons we all know about. The result was that the market effectively stopped. People weren't willing to buy into a falling market, so very little was done. And then finally in Q4, the market's conditions have begun to stabilize at that point. They definitely wouldn't be described as having stabilized, but definitely beginning to stabilize with a bit more activity beginning in the market as people start to rebuild confidence.

27:07 And so with that in mind that during the year we had a number of key transactions and events. First one really was Westfield where we completed the infrastructure for the phase one development which was servicing the EFW scheme which we're not building as in to add and for the 40 acres of employment adjacent, which will benefit from low cost heating power thrown off by the EFW. Secondly, we completed the ready to retail warehouse scheme, which had been delayed due to the contractor going bust. So we had to sort that out, but we weren't didn't have financial exposure because we were cutting off by insurance. We sold our 50% share in auction house investment at Maltby. The opportunity came, it was a good way of sort of bringing that cash in early.

27:55 And then at Blind Rolls, we had 77 plots completed and we exchanged them conditionally for the three forty two plots. Ideally, that would have happened last financial year, but given the turmoil in the market that got delayed, but the key thing there is

28:10 that the exchange is unconditional and it will complete in January 24 in this financial year. And then we now have the 140 plots that are now subject to agreed sales terms and are now finding their way through legals. So potentially that's going to add a further upside to the year. And in some this is one of bespoke schemes, which is retail warehouse scheme. We'd forward sold it to Home Bargains. As it turned out, we secured the planning set in relatively quick order. Home Bargains sought to basically do the direct development sales and we were quite happy with that because the time construction costs were very uncertain given the inflation rate. So we simply sold the site on the top of the margin that way with sort of effectively zero ongoing risk. And then finally at Unity Doncaster as part of our large mixed use scheme, we're well on-site now with the construction forward sold logistics unit just over a couple of thousand square feet.

29:05 That's currently slightly ahead of program is due to complete in November this year. Turning over the page then. In terms of the looking forward to develop pipeline, develop pipeline is important from HARGREAVES As as you'll probably appreciate, the land takes quite a long time to bring through to delivery. And therefore, we need to have a constant topping of the pipeline to keep that momentum going. So at the moment, we have just under 6,000 residential plots plus 800 acres, six sites, which are consented or allocated and have a GDV that's essentially the service site value of circa 200,000,000. And then we've got a further 2,800 residential plots across another seven sites which adds up to about 300 acres where which we have under contract. So we own and we're promoting through the various local parent processes which if they all secure planning would have a service block value of around about 120,000,000.

30:06 So again, it gives you a clear view of the pipeline going forward.

30:10 And then on commercial side, we've now got about 5,700,000 square feet of allocate or consent to commercial space across six sites, which gives a lot of visibility on really commercial going forward in the long term as a GDV to build space of around just over GBP 600,000,000.

30:29 So in terms of the outlook then, what we've seen generally in the market is the residential markets demand for quality sites has certainly continued to stabilize. It is at lower levels than we saw in Q1 twenty twenty two. But to be honest, that point was very frothy and probably unsustainable in any event. And we certainly hadn't budgeted at that level. So it has an obviously big impact on us. We're certainly seeing a decent amount of interest in house builders and offers being made, albeit the range of pricing that comes forward is much more variable than perhaps was previously.

31:06 On the commercial markets, commercial occupier market remains reasonably active. They're not quite being pushed to act as quickly as they were before, but still demand is out there from the occupier side. We've seen a significant softening of investment yields for the investment side and that's taken a lot of the speculative development out to the market. But what we have also seen is the fact that rents and capital values have increased

31:32 for the only occupiers and tenants because it's the only way they can actually get their buildings financed and that hasn't been particularly an issue. There continues to be a decent demand for new units, particularly smaller end of the scale where there's never been a significant build out of speculative space, so that helps our portfolio. And then finally on the renewables projects, we've got a very extensive range of these projects now moving forward. We've got the first batch, which we talked about earlier where we're expecting

32:02 to start talking about taking those to market in the next year or so. It will take a few years to sell those throughout and that timescale is largely when they reach a stage where the value is optimized, which is typically where they're actually turning and generating revenue and that revenue visibility is optimized. And then we have a further tranche of additional renewable opportunities, similar ones, wind farms, battery storage, together one, two more exhaustive ones such as high Neptune farms where we are working our way through the planning process, agreements with operators, and we expect those to come on stream in the next five years. So you'll sort of follow on sale of packages probably towards the end of the five years for those. But, again, it's it's something which we're we're pleased that we've seen that being built on.

32:52 Right. Jeremy, do have other? Thanks, David. So Germany is, you know, a big part of the group. So just to recap, remember that we have 49.9% of the voting rights, but we get 86% of the economic interest.

33:06 Business was always a trading business. Talk about it in a bit of detail, but what we've added to it is these assets, coal pulverization plant and DKA recycling. They all trade around each other. The advantage trading now has that it sells probably a 100 and sick sorry, 260,000 tons of additional product that goes into the pulverization plant or DK recycling. So all three units work very well together. Talking about the detail, though, in each business. So remember trading, in some respect regard to this low quality earnings because it's volatile. But having said that, they have never made a loss. It's back to back trading. They've done very well over the years, but look how it spiked up. Well, two sides to why it spiked up. One, commodity prices moved up, so they were able to benefit from commodity prices, but it was also that additional volume that's come a function from owning DK and the grinding plant. So you can see high levels. It will drop away as commodities normalize and maybe trading activity slows down a bit in Europe, but it won't drop to the levels previously because as this inbuilt additional volume of over a quarter of a million tons. So just take you over the page.

34:19 This is very interesting. This is the coal pulverization plant. So what does it do? It pulverizes steam coal, then can be used in cement plants and steel plants. Now the investment was nearly 30,000,000 in this. At the moment, it's doing a 100,000 tons a year in breakeven. So you'd look at that and say, why isn't it doing 400,000? Reason is because Germany closed its nukes, and then when the gas problem with the invasion of Ukraine hit, they were loathe to close their lignin brown coal mines. So they're still producing. When they close, the cement plants who are moving towards carbon capture will need a new source of raw material, and this is perfect. So a lot of cement plants have trialed this polarized coal, happy to use it.

35:04 And because they're getting it down the carbon capture technology route, they will still consume coal. So in my view, this is poised ready to go. Ukraine has caused a delay of profit for shareholders. I have to admit that, but it's ready to go. And hopefully in the next few years, as the lignin brown coal mines close, this will open up. So just over the page, DK Recycling. Remember the business model is that we get dust from steel plants around Europe. We get paid a gate fee for taking them. We then process it through our own unique process. It's the only one in the world, and it produces pig iron and zinc. Zinc, is typically sold, at 50% we hedge, 50% open. Now as you look at this graph, you'll see that the numbers peaked, so they've now come off, and that obviously comes straight off the bottom line, which again shows why the profits have dropped from where they were.

36:02 The other side is pig iron. Our competitors obviously buy buy iron ore. So when prices of iron ore are high, then it's great for us because we are only pay we're getting a gate fee for our input, but it's fixed. So now iron ore prices are coming off. That obviously suppresses the profit in DKA. So really high zinc, high pig iron prices are good for DKA, lows pig iron and zinc prices are not so good. But what we show in the graph on the left is the fact that one of our biggest inputs is coke, which, reduces the, iron ore to, liquid iron, and that tracks iron ore prices. So the cost of one of our major input raw materials is dropping, which is helping to compensate for the pig iron drop, but obviously not compensating for all of it, but gives us a degree of protection.

36:57 So just over the page, we talk about ESG. ESG is really important to us because of the type of customer deal with and it's morally right. We have got CSR, gold accreditation with integrum a rating. That's very important for winning new contracts with the type of customers we deal with. It is embedded into the business. It's important part of what we do. So just over the page. So really the summary and outlook. So services, I hope you've seen, it's all targeted on organic growth. It's very cash generative. It's very cash light as Steven demonstrated. We've proved the inflation protection. The growth is there. You've got lower terms, size well, the m and e growth. So fine. Really solid.

37:46 Looking forward to the next twelve months there. Land, yes, we've got this renewables, which is gonna be maybe 80 p a share. Remember, we're making it very clear that as soon as it is sold, we will return the money to shareholders. Underneath that, it's a property business. We developed out our own property assets that we owned that were at cost. Remember, they held up the books at cost. Don't think that was wrong. That was the right thing to do. As we've harvested that profit, you will see the cash invested in the property side of the business drop to the lower version. So from where it is typically in the 10 to 20,000,000 is all we'll have invested. So you can see a whole layer of cash being returned, as these big sites get sold out and turned in into capital.

38:34 And, again, we are in the North at Scotland, so we think that we have some natural protection from the downturn. We're not all residential in the South, for instance. HMS, very interesting dynamic there. Hopefully, you've seen from Steven's slide that they've been able to repay the debt thanks to the profits they've had, the money they owed us, so the loans have come back. Now detailed discussions are going on with the German management team to talk about if the trading is not there and the commodity prices aren't so high, it's an ideal opportunity to repatriate cash to The UK and to them as shareholders. And we will update the market very clearly in January about what's gonna happen. So they'll either be really good profits because they've got really good opportunities or we'll be sitting down and telling shareholders we're gonna increase the dividend.

39:29 Interestingly, the 12 p is fixed and that's fine and secure, but it only costs about 4,000,000 to give you 12 p. So the opportunity to increase that dividend significantly is there. So I think when you look at the group, both land and services are in a very good place. HS2 getting up to full speed. Line rolls is already in the bag for David and his team. Pension buyer, it's a really good moment in time to take it out where the market is at the moment. We're moving as fast as we can to get that done. Once it's done, the 2,000,000 we paid out to the pension trustees, we will then look to increase the dividend by 2,000,000 when it's all done and dusted and out of the way. Again, the benefit of sitting on this cash means we're not exposed to inflation, and we're not moving into the borrowing levels either. So let's be clear.

40:21 We won't have an exposure to interest rates. So a good opportunity. The group's in a very good position. Just to close, hopefully, you're all reassured. We have a very grown up board. Remember, I'm an 8% shareholder, so I'm very much aligned with yourselves. Roger McDowell, well known to many people on AIM, quality chairman, and Christopher Mills at HARGREAVES SERVICES PLC on the board. So we have a really strong board, really strong balance sheet. There's some visibility, which I hope we've made very clear for you today. What I would encourage retail investors is we we look at some of the message boards. Please just ring us and ask us and we'll tell you so you don't need to speculate. We'll tell you what's going on in the business so that there's no misunderstandings.

41:13 You can see our discount to NAV, and our job as a management team is to communicate very clearly to everyone to narrow that gap for the benefit of all our shareholders. So on that note, I'd like to close and open up to questions. So Perfect. Gordon, David, Steven, thank you very much for your presentation. What I'll do now is I'll just bring your camera up to full screen. Ladies and gentlemen, please do continue to mute your questions just by using the q and a tab, which is situated on the top right corner of your screen. Just But while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation, along with a copy of the slides and the published q and a, can be accessed by your investor dashboard. As you can see, we've received a number of questions throughout today's presentation. And, Steven, if I could just hand over to you just to share the q and a, I'll pick up from you at the end. Yeah. Sure. Thanks very much. And so we've had quite a few. We'll see how many we get through. We'll try and get through them all.

42:04 And so this question is a piece of that one. And I think this has been answered, but, Gordon, if you could just how optimistic are you about the outlook going forward and why? Yeah. Let me put it another way. You can see very, very positive on the outlook for services. I hope I've demonstrated that. Land, David's in a good position, confident with his numbers. Blindwell's already in the bag. You know land, it's it's big transactions. I think we've been cautious this year. He could put another couple in in the back of the net, if some deals clear, so positive with that. Germany, of course, is an area that that we look at because of recession in Germany. Everyone can see that in the press. But, again, if things close down, the trading team do not take risks, so they will back out of the trading environment, which will liberate a lot of cash.

42:49 So I think even if there's a downturn in Germany, that will improve the repatriation of cash much quicker to The UK. Thank you. Next one is, what would be the effect on the company if HS2 was canceled? So remember, our piece of HS two will not be canceled. We're talking about a big slice of Buckingham that's already Buckinghamshire has already been ripped up. That bit's gonna happen. There's no plans to cancel that. What they're talking about is reducing where they're coming at, to Houston and also maybe not going beyond Birmingham. None of the stuff beyond Birmingham was in our forecasts. So simple answer is the bit that we do will not be canceled in the next two years, and the point is that we didn't have further pieces forecast because they're not gonna they've spent so many billions. They're gonna finish this bit is my view.

43:41 And, how how much reluctance is that from the 51% voting shareholder in HSPR to pay out a dividend? None at all. They are a management team who are well aligned with ourselves. They've just seen the opportunity to make a lot of profit, they kept the cash in the business. They believe in the business, but they like us are saying, don't need to sit in the bank doing nothing. Let's take it out if if it's if it's not needed. So first of the questions that was submitted from Mark C. How long will the HS two business continue at its current level? About a couple of years. This year, one more, and then it will start to tail away, which is fortunately for us is when low attempts picks up. I think this one's for you, David. It's from Alan C Regarding the other land in the business. So, you know, he's thanking us for the renewables valuation by Jones Lang LaSalle, a lot of other land in the business.

44:36 Could we have that valued and and what so we can see what that might be worth. Yeah. We've we've we've looked at this. I'm not a big fan of value in development land. The reality being is that a huge number of assumptions need to be made to actually do a develop to an evaluation on that. And as a result, maybe the the valuation is is questionable, I think, because the assumptions have to all fall to to be around. So really, the reason why we did the renewables was the fact we had some very clear income expectations, which were based in reality, and therefore, we could actually be quite accurate with the valuation. You can't put them up conditions. You can't say that when you're developing bare land because, you know, when is it gonna be sold, how much it's gonna take to develop that, what's the rate of development, what's the cost of the infrastructure, etcetera. Too many variables to do give you anything that which would otherwise be misleading.

45:26 But I think to reassure you, they are held at cost. Yes. So that should give you confidence because that builds into our NAV, which is a a big discount to to our share price at the moment. Picked up on some questions that might be coming. Alright. Sorry. Not this one, though, from Mark B. So, if trading increases at HRMS, will we need to provide a further capital loan or can they fund it themselves with an RCF or something? And the answer is that we will not be putting any more money across to Germany. They can fund themselves. Yeah. Another one from the same mark. So regarding tungsten west, they mentioned that there were issues with low frequency noise. Mhmm. That needs to be resolved to gain environmental approval. Have you got any comments on that? Yeah. So we we as I said, you can imagine as the main mining contractor, we're in detailed discussions with them.

46:12 They've submitted the, to the EA, and they think they'll get the answer in the next twelve to sixteen weeks. Once they get it, they'll go out with their fundraise. You know, will they get it or not? I can't comment because I'm not an expert in that field, but that's their plan, and they seem a very confident management team that they're now. Thank you. So the next question is from Kevin c. You seem to have some activities growing and some contracting. What do you see the business looking like in a few years' time? It's a very good question. We talk internally here that we see a situation where look at land capital light having 10 to 20,000,000 in, I. Services business, that continues to grow organically, and you can look at the numbers yourself there.

47:05 And then Germany is the the question that that I haven't got an answer for you today. Does it naturally sit as part of the group? There's a lot of money tied up there. I think it's the the update that we will give you hopefully in twelve months time about where we see the long term future of Germany. Another one from from Alan. The three businesses are distinct from one another and some of the parts valuation would suggest companies worth between 7 to £8 a share. How do you how do you hope to close the account? Well, I think one of the things that we're doing now is trying to commune our job is to try and communicate clearly, so that people can see the value there. That's what this is about, what the roadshow is about. I mean, the markets, as everybody knows, are very difficult out there.

47:52 Share prices are very depressed. We've all had that, hit us in our pensions or whatever. Our job is to keep talking and doing a good job. The market should eventually see the value in the company. This one's for David from Brandon. What's the estimated construction cost to realize the $620,000,000 GBV on the commercial pipeline? Normally, you'd be talking round about I would have said that's probably getting us about £500,000,000 of construction cost, but we it will be something that we would fund. Those projects will be forward to solve. So effectively, they build to buy and will fund that construction cost as it is incurred as we've done on the the first 191,000 square foot logistics unit where we sold the sites through and then the funders fund the construction costs. So our exposure is very enlightened to fully recover when the deal happens.

48:42 And another question from Brandon again for you, David. When do we think the first renewable disposal will take place? We're targeting next financial year. We think there'll be enough of a package by then to take to the market. We're not entirely in control of all of the events, but we think there'll be enough there to make it worthwhile taking to the market next financial year. And I think one for you, Gordon. Rohit has asked questions. I think it's similar to one that we've had before, but with HARGREAVES looking like moving towards an asset line line model, what will the business look like in five years' time? Will it end up just being a services business? I think I think I I land services business where it's capital light where so not the one that we have heavy capital in top in it. So land will still be part of the group and the services business. Yeah. That's what we see the business turning into over a period of time.

49:38 Has the current level of trading with HRMS already reduced to facilitate cash repatriation to The UK at this stage? Say that again, Steven. Has the current level of trading within HRMS reduced to facilitate cash repatriation to The UK? Oh, so could they pay money it now. Yes. I think they could do. And that's and the answer is that at the moment, they're in discussions with a couple of potential suppliers to take on an agency deal for product, which could have significant volume. And they've said, look. Let's hang on, see if we can win those and the profits that go with them. If they don't win those agency contracts, then I think the cash is coming back, but we just need to see how those happen. The next question is from from Richard. It's quite a long quite a long one, but the point is given the extremely large discounts in NAV, is the board concerned about a lowball takeover approach? And to what extent would institutional shareholders support or reject an offer?

50:34 I think you should be comfortable that HARGREAVES and they've got a track record of of of not selling at the bottom. So I'm very comfortable. You've got 8% sitting with me. You've got HARGREAVES sitting there with nearly 29%, and we have a lot of respect for that team. So everything's for sale if the price is right, but a lowball, I don't think would get very far. And and another question from Rohit. How will cash be returned to shareholders? Special dividend, buyback? So that's a very good question. And and, again, we've been asked that on the roadshow. And the and the answer is, you know, if the if we were sitting with a lot of this execution having taken place, and one of the things I do say to people is, look, this is a complicated model over in time. It's becoming much more simple. I think everyone should, by the end of this presentation, see there's a clear route to value.

51:26 It's all about will we execute successfully over the next couple of years for you. If you believe we will, you should see the share price correcting. If the share price doesn't correct, then share buybacks make a lot of sense because we are very convinced of the sum of the parts valuation for the business. So if share prices stayed where they were, it would be share buybacks. Of course, if the share price rises to a level which appropriate, then we would go to the dividend route. Great. Next question is from Ian, which I think I'll cover regarding some confusion between the cash flow and the fact that we've had a looks like we paid back £9,000,000 worth of debt on the balance sheet, but actually, liabilities have gone up. Ian, you said in there, are they excluded from the cash flow, hence the miss mismatch?

52:14 You you're absolutely correct. The cash flow that we that I went through before was purely cash. So whilst during the year, we paid back some of the leasing debt, we've paid the lease providers. During the year, we've also brought in a lot more leasing debt. So the net debt of the leasing debt has increased, and we paid off some of that using cash. We tend to just run through cash because leasing debt is linked to the assets specifically, and and isn't quite as meaningful as thinking about an RCF or some other sort of revolving debt. Next question, think it's for David. What is the value to HARGREAVES of the $670,000,000 GDV? Our normal rule of thumb is that we would target 15% profit on GDV net of costs. So that gives you a rough target as to where our expectations will be on that.

53:05 And then Robert's got another question regarding what's the top do we have a target EPS for three to five years' time? Or should we look to use maybe ordinary dividend per share as a guide for valuation? I think you you we we cannot give forecast. So I think the you have to look at the single note order Yeah. For for answers to that. Yeah. Philip's question, how is the latest position on the DB pension scheme contribution situation? I think the the point here, Philip, is we're currently paying off paying contribution deficit contribution repayments of just under £2,000,000 a year. And so we've just gone through the triennial valuation in which we agreed we'd have to pay that for certainly the next three years at least. Beyond that time, we'd hope that the gap had closed.

53:52 But unless we buy it out, the gap can always remain and markets can always move against us and trustees can be very cautious wanting more and more money from the employer. So that's why we're looking at right now stars of the line somewhat to try and take this out whilst we have the surplus cash for not harming the other aspects of the business, and that will then release the cash to be able to hopefully push the dividend up in a couple of years' time. And the final question from Rohit, rather than repatriate earnings from HRMS, is there any interest from the JV partner or third part or a third partner in buying our stake out? And the answer is, we haven't opened that dialogue yet, so not at the moment, but there may be.

54:39 And that is the final question. Thank you very much. Gordon, David, Steven, thank you very much for that. I think you actually managed to address every single question from investors, and, of course, the company will review all questions submitted today, and we'll publish those responses on the Investor Me company platform. Just before we direct investors to provide you with their feedback, which is particularly important to the company, Gordon, could I just ask you for a few closing comments? Well, the first thing, if you don't mind me, is closing to say, just so shareholders know, this is not our office. This is our broker. So the pictures in the background have nothing to do with us. You know, it's not what we're used to, but, you know, we do have to have a broker, so therefore, we're using their offices. Look. It's really important to us retail shareholders know what we're doing. Please, I actively encourage you if there's any issues that anyone wants to ask.

55:26 You're equally important to us as the big shareholders down here, so please contact us, and we'll feedback anything to help educate because our job, I think, is was picked up in one of the questions is to narrow the gap on the share price, and that's only gonna be done by clear communication. So if we've done things wrong or haven't made it clear, I'm not too proud to to get criticism and try and improve it next time around for you. So, look, thank you for your time. Thank you for your interest, everyone. Have a good evening. Perfect. Gordon, David, Steven, thank you once again for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, so I'm sure it'll be greatly valued by the company.

56:14 Behalf of the management team of HARGREAVES SERVICES PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.