Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Breedon Group PLC (LSE:BREE, Financial) delivered a resilient performance despite challenging market conditions in Great Britain (GB) and adverse weather.
- Strong performance in Ireland and a positive maiden contribution from the US business helped offset GB weakness.
- The company successfully entered the US market through the acquisition of BMC, which has already made a positive contribution.
- Breedon Group PLC (LSE:BREE) continued to strategically invest for growth, completing three acquisitions and continuing organic investments.
- The company maintained a disciplined focus on operational excellence and self-help, which helped mitigate some of the adverse impacts.
Negative Points
- Market conditions in GB weakened further in the first half, impacting construction activity.
- Revenue on a like-for-like basis contracted by 6%, reflecting the challenging GB market.
- The company experienced a modest free cash outflow in the period, and indebtedness at the half-year mark was significantly higher due to the BMC acquisition.
- Volumes in GB were down, with aggregates and asphalt down 4%, cement down 12%, and ready-mixed concrete volumes significantly impacted by GB market conditions and weather, down 18%.
- The company's post-tax return on invested capital was impacted by short-term dilution from the BMC acquisition and further increases in corporate tax rates.
Q & A Highlights
Q: Could you provide more detail on the margin sensitivities in GB and Ireland? What are the drop-through margins in each at the moment, and how do you see the potential aspirational margin for those divisions given the volume environment?
A: (Robert Wood, CEO) To get into our target range of 12% to 15%, we need more volume recovery, which hasn't come through in the first half of this year in GB. With volume recovery, you would see a drop-through of 25% to 30%. Ireland and BMC are within the target range, but GB needs volume growth.
Q: In Ireland, what are you missing in the market to take more advantage of its buoyancy?
A: (James Brotherton, CFO) We want to grow our aggregates business in Ireland and build out our vertically integrated model. We have made progress with acquisitions like Robinsons and want to continue expanding our presence, especially in aggregates and building products.
Q: What do you know about the US market now that you didn't know six months ago?
A: (Robert Wood, CEO) We have a great management team and a strong beachhead in Missouri. The long-term fundamentals for the market in that part of the US are even more compelling than when we initially entered.
Q: What level of gearing do you have in mind for more flexibility for M&A or buybacks?
A: (James Brotherton, CFO) We have a leverage target of between one and two times. Historically, we've gone up to 2.5 times for M&A transactions, but we wouldn't choose to go that high in the current interest rate environment. We retain incremental capacity for further acquisitions or investments.
Q: Can you say more about the opportunities in the US from a CapEx point of view?
A: (Robert Wood, CEO) With BMC, we acquired over 400 million tonnes of reserves and resources. We will likely invest in capital to expand production capacity and grow our aggregates business. We will also look at organic opportunities as opposed to M&A.
Q: Could you provide more color on the 3M markets in GB (infrastructure, residential, private and commercial industrial)?
A: (Robert Wood, CEO) Housebuilding is expected to have the strongest recovery moving into 2025 and onwards. The infrastructure side is fairly resilient, and our exposure to industrial commercial is smaller.
Q: What is the sustainable rate for post-tax returns over the medium term?
A: (James Brotherton, CFO) Our target remains at 10%. We aim for acquisitions to achieve our ROE target within two years. We will review all targets at our upcoming Capital Markets Day.
Q: Have you seen a mid-year price increase in Ireland, and are you tempted to follow suit in GB?
A: (Robert Wood, CEO) We have made progress on cement pricing in Ireland in 2024. I can't comment on the market or pricing in GB due to the cement market data order.
Q: What has been your experience with M&A opportunities in the US?
A: (Robert Wood, CEO) We have an active pipeline from both the existing management team and Breedon. There has been a significant uptick in inbound opportunities following our entry into the US market.
Q: Can you talk about the cost outlook for H2 and any initial comments on the first half of next year?
A: (James Brotherton, CFO) The cost outlook for the second half is broadly similar to the first half. We are past the peak of inflation, and we expect a similar cost backdrop.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
