Breedon Group plc (BREE) Earnings Call Transcript

[indiscernible] Breedon's 2026 Interim Results Presentation. We're joined today by Rob Wood, Breedon's CEO; and James Brotherton, Breedon's CFO. And in a second, I'll hand over to them to present their highlights from the first half of 2026. After that, we'll open the floor up to questions in the room. And as ever, we would encourage you to do your very best to limit yourself to two each. When you ask those questions if you could introduce both your name and your institution, that would be really helpful. We'll then go to the phone lines for any virtual questions before wrapping up. I think finally, to say, we know it's really busy this week. So thank you very much, everyone, for coming. We will try to get through it at a decent clip, and we'll be around afterwards if there's anything that you'd like to come back on. So without further ado, I will hand over to Rob.

Thanks, Anthony, and good morning, everyone. And welcome to our 2026 results presentation. James and I will guide you through our presentation, and then we'll open things up for questions. I'm pleased to report that in another challenging period, Breedon has proved once again the strength of our model and the quality of our people and has delivered a really solid performance. Positive momentum in Ireland and the U.S. has offset continued market challenges in. GB. Across the group, the short-term impacts of the Middle East conflict have been well managed. And given the strength of our cash generation and our confidence in our long-term prospects, we have again increased our interim dividend. In parallel to delivering this performance, I'm pleased to report that we have made significant progress on our strategic priorities. The acquisitions which we completed in the U.S. and Ireland demonstrate the ability of our teams to source and execute strategically compelling earnings accretive transactions at attractive valuations. We launched our Back British Cement campaign, more on this later, and we continue to replenish our mineral reserves, the lifeblood of our business. And we continue to focus on self-help. Lastly, our Breedon 3.0 strategy is enabled by our continued investment in people, sustainability and finance, the lenses through which we view our business. In summary, I'm pleased with our first half performance and with the progress we are making building an increasingly diversified business. I'd like to recognize the shift put in by our 4,900 colleagues for controlling the controllables to deliver a performance and continuing to make Breedon a better and stronger business. I'll now pass over to James for the financial review.

Good morning, everyone, and thank you, Rob. We delivered a pretty solid first half to 2026 with our reported revenue increasing by 5% and on a like-for-like basis, increasing by around 3%. For context, that's the first time we've recorded like-for-like growth in the first half of a financial year since 2023. Underlying EBITDA was flat to 2025 and slightly ahead on a like-for-like basis, with the EBITDA margin being a touch lower at 13.5%. Our post-tax return on invested capital remains lower than we would like it to be, impacted by the short-term dilution from acquisitions and our absolute levels of profitability. However, we remain confident that when markets recover, we will see a rapid improvement in our reported returns. Our free cash outflow is lower than we saw last year, principally down to a well-controlled working capital build in the first half. And the relatively small year-on-year increase in our net indebtedness mostly reflects the strong cash generation that you'll recall came through at the back end of 2025, offset by the acquisitions and an increase in our IFRS 16 liability, which I'll talk about later. And you'll find the usual detailed breakdown of our maturity profile of our facilities in the appendices. Covenant leverage at 2.1x is slightly improved from where we were 12 months ago, although bear in mind that the timing of the cash payment of the 2025 final dividend falls into the second half of this year. So on a like-for-like basis, we're in roughly the same place as where we were this time last year. And as well as investing back into the business and completing 2 strategic acquisitions, we continue to progress the dividend, reflecting our sustained confidence in the group's long-term prospects and our thoughtful approach to capital allocation. Digging into the revenue and EBITDA movements in a little bit more detail. So for the group overall, we saw modest net pricing, which principally reflects the impact of the necessary charges we've had to implement in the first half. Volume and mix was very slightly ahead of last year with significant improvements in both aggregates and asphalt, offsetting cement and ready-mix concrete volume decreases. And the acquisitions combined contributed around GBP 17 million to revenue. Pricing and surcharges, combined with our hedging program to help offset the increase in costs, and we saw a small absolute drop-through on those improved volumes within the M&A contribution from the consolidation of the loss-making months of Lionmark offsetting the positive contributions that came through from Falling Springs and from Booth. As you'll recall, we changed the reporting structure of the group this time last year. And so our segmental disclosure has been restated under the revised format for the first time. And those restated half year comparatives have been published on the website. Turning now to each of the divisions. In GB, our revenue was flat with the surcharges broadly balancing out marginally higher costs. Performance benefited from major infrastructure project wins being delivered. However, this was more than offset by the negative drop-through that we saw on those lower ready-mix concrete volumes as a function of the residential market. We have made further progress on operational excellence initiatives in GB, and that's helped to underpin these results, and we'll have more to say on those as the rest of the year unfolds. As you know, we can't comment specifically on GB cement volumes and pricing, but our assessment is there's been little fundamental change to the GB market dynamics so far this year, as evidenced by our steady first half performance in cement. However, the introduction of an effective domestic CBAM from this coming January has to remain a key priority for the government, and Rob will talk about that a little bit more later. In Ireland, we've seen a really solid first half, delivering strong revenue growth with volume and price up mid-single digits and a promising initial contribution from Booth. Profitability in Ireland was impacted by the unscheduled cement mill shutdown, and we estimate that the net overall opportunity cost for us was a couple of million pounds. Importantly, the repair was completed on a timely basis, and we don't expect any further impact from that this year. In the U.S., we've seen a really strong like-for-like trading performance in the first half with both revenue and EBITDA up in the mid-teens and positive trends across each product category. As I referenced earlier, our working capital build has been really well controlled for the half year. And as usual, I'd expect the majority of that to unwind over the course of the next 6 months. Our CapEx spend reflects the fact that we are continuing to invest back into the business. And projects of note that are underway this year include our replacement Dublin asphalt plant, our new Scottish cement rail head and the expansion of our bitumen storage facilities in St. Louis, which will allow us to do a meaningful U.S. winter fill for the first time. In GB, we also took delivery of further cement rail wagons during the period. As we've done previously, we've acquired these on long-term leases, and that's the reason behind the increase in the IFRS 16 liability. In practice, there's very little change to the cash profile of the group arising from this transaction. Overall, we saw a free cash outflow in the period of around GBP 15 million, which compares with around GBP 25 million this time last year. As usual, I've summarized our technical guidance to cover the balance of the year. So for the year as a whole, we're expecting the first half, second half split of revenue to be around GBP 48 million to GBP 52 million, with profitability, as usual, even more weighted towards the second half of the year. The rest of our income statement guidance is largely unchanged from March other than a slight increase in the depreciation charge. Some points to note on the cash flow. Our CapEx guidance is slightly higher than it was at March at GBP 125 million to GBP 135 million, and that principally reflects the acquisitions. To confirm that we will see the usual working capital unwind across the balance of the year with our overall year-on-year position expected to be a working capital outflow of between GBP 20 million and GBP 30 million. One thing that is different this year is the timing of our cash dividend payments. All cash dividend payments of GBP 55 million will be paid out in the course of the second half of the financial year, and I'd expect that to be the timing going forward as well. Cash exceptionals, which principally comprise acquisition and integration-related costs, together with Peak Cluster and its associated decarbonization initiatives will total between GBP 10 million and GBP 15 million. And that should lead you to a net debt number for the full year of around GBP 650 million with leverage reducing to close to 2x. So to summarize, we continue to deliver against our capital allocation framework as evidenced by our organic investment back into the business, securing incremental reserves in GB, investing in our cement distribution network and upgrading our asphalt capabilities in Ireland and our bitumen capabilities in the U.S., inorganic investment through the strategically compelling acquisitions we've completed in the period; all of which came to pass as a result of the depth of our local relationships. In terms of the balance sheet, we've again extended our debt facilities, and we continue to progress returns to shareholders through the dividend. Our covenant leverage at 2.1x at the peak of our in-year working capital cycle and will reduce as the year progresses. Post-tax returns on invested capital remain lower than we want it to be. However, we are confident that when our markets recover, we will see that rapid improvement in our reported returns. We retain balance sheet flexibility, and we're on course to deliver results in line with expectations for the full year. Thank you, and I'll now pass back to Rob.

Thanks, James. The one theme that runs through the operational review is the Middle East conflict. And I'm pleased to report that our hedging programs, along with our pricing actions, has ensured that the impact of this has been minimal in the first half. Let's look first at our U.K. market, where the ongoing residential weakness weighs on market volumes. Year-on-year, May 2026 GDP has grown by 1.3%. However, momentum has stalled in recent months and the economy recorded 0 growth across April and May. Construction output has fallen 1.6% over the first 5 months of the year compared to the first 5 months of 2025, with infrastructure being the only part of the market that continues to provide some resilience. Activity levels within our sector have been well reported, and you are all aware of the concrete 1963 stat, but the MPA now predicts that '26 volumes will be the fifth year of market decline. The latest data available from the MPA volumes for Q1 confirmed that the market for mineral products is still declining with volumes in the year to March down 3% for aggregates, up 5% for asphalt and down 12% for concrete. The residential weakness is clear to see in the concrete number. Also, confidence as measured by the construction PMI index stands at only 38.4% in June after hitting a 6-year low of 38.2% in May. Given all this, recent MPA and CPA forecasts have been downgraded. Considered against this backdrop, I am really pleased with our GB performance. Revenue was flat, reflecting modest improvements in selected infrastructure and nonresidential building end markets, offset by continued weakness in residential construction. Volume and pricing trends were flat overall, but varied across products according to their end market exposure. Low levels of residential construction particularly impacted concrete, where volumes declined further 8% to the first half of 2025, putting pressure on both pricing and margins. Our cement operations had a steady first 6 months with earnings broadly flat compared to the first half of 2025. We continue to invest in our cement distribution capability with a new Scottish railhead expected to open in early 2027. Our teams maintained a strong commercial focus, while delivering further operational excellence and self-help initiatives. I think you will now understand why I'm so pleased with the GB performance. Before moving away from our GB performance, I would like to give an update on our Back British Cement campaign and also give an example of a material infrastructure opportunity that is coming down the line. In March, we launched our Back British Cement campaign to reinforce the vital role domestic cement manufacturing plays in supporting U.K. construction, economic growth and national resilience. The key policy asks for the campaign are targeted at providing a level playing field, including effective border measures, carbon border measures to allow domestic cement producers to compete fairly with overseas manufacturers who do not face the same costs arising from U.K. policy choices. To date, we've had good engagement with stakeholders, but the government's commitment to introducing a robust carbon border adjustment mechanism from January 2027 is an imperative. Turning to the material infrastructure opportunity. I want to briefly highlight Scottish Renewables. The GBP 50 billion plus Scottish renewables opportunity is to be delivered as part of Ofgem's accelerated strategic transmission investment framework or ASTI, to upgrade the electricity grid, and it will have a material impact on demand for our industry's products in Scotland over the next few years. To put the potential scale of this demand into context, it's estimated that the Beauly to Peterhead upgrade in the north of Scotland alone will require over 4 million tonnes of aggregates. For context, across 2025, our GB business, we sold just over 20 million tonnes of aggregates. Given our footprint in Scotland that you can see highlighted as yellow dots on this slide, we are well positioned to participate in this opportunity. I want to turn next to the market in the Republic of Ireland, where the operating environment was more positive. A record 12.1% fall in Irish GDP in the first quarter of 2026 was distorted by the surge in exports in 2025 ahead of the feared U.S. tariffs. Modified domestic demand, the better measure of domestic economic activity, rose by 4.3%. Construction output over the same period grew by 3.9%. And whilst the June Middle East impacted construction PMI stands at only 45.4, it is clear that there is significant confidence in the 12-month outlook for construction activity. Also, the latest Euro construct forecast predicts that the Irish construction sector is entering a multiyear period of construction output growth at a rate more than double the Western European average, and it is expected to remain the fastest-growing construction market in Europe through 2028. It is clear that the economy is in a much better place than the U.K. one. And our business in Ireland benefited from this backdrop. Ireland delivered a strong revenue growth, benefiting from improved construction activity in the Republic of Ireland, including some major projects delayed from 2025 and the initial contribution from Booth. Pricing trends were positive across our core product categories. Volumes were generally ahead of 2025. There was a short-term impact on our Irish margin following an unscheduled shutdown of the cement kiln at Kinnegad during May. The mill is now back operating at full capacity and is not expected to impact the performance during the second half of the year. Excluding this disruption, the trading performance of the business was encouraging, reflecting strong market fundamentals and continued commercial progress. We made further investments to support our growth strategy, reopening a quarry in County Sligo, progressing the replacement of our Dublin asphalt plant and completing the acquisition of Booth, which secured mineral reserves within reach of the strategically important Dublin markets. Next, I want to talk about our market in the U.S.. U.S. GDP increased by 2.7% in the year to March. Construction output over the year to May declined by 1.5%, impacted by weak rate-sensitive residential. Infrastructure spending remains comparatively resilient. There is no construction PMI in the U.S., but the latest FMI forecast concluded that whilst construction output in 2026 is likely to be broadly flat, growth is restored in 2027 and 2028. Our U.S. business had a strong start to the year with growing market demand and more supportive weather conditions than those experienced in the first half of 2025. While residential demand, which is more sensitive to interest rate environments, was slightly softer, healthy infrastructure and nonresidential demand provided an overall favorable trading backdrop with pricing and volume trends positive for all products. Reported profitability included the 2 loss-making winter months for Lionmark, which were consolidated for the first time following completion of the acquisition in March 2025, partially offset by the initial contribution from Falling Springs. The business continues to demonstrate success in its tendering processes with healthy backlogs as we enter the second half of the year. This included some initial wins for the supply of materials to data center projects, a sector which -- it's activity levels are noticeably increasing in the Midwest. We also expanded our footprint in the U.S. in the period. And I'd like to touch on the acquisition of Falling Springs at this point. Falling Springs Quarry is a well-invested, highly automated quarry with significant reserves, strategically located approximately 15 minutes from Downtown St. Louis. It's very complementary to our existing St. Louis area footprint, as you can see on this slide, where you can see our existing quarries as blue dots and Falling Springs as yellow dots. Integration into the group's existing operations in the region is progressing to plan, and the business delivered an encouraging additional contribution for the first month of ownership. We now have a great platform in the U.S. and look forward to scaling it further. I'd now like to turn to the outlook. We are building an increasingly diversified business in the structurally attractive Irish and U.S. markets, while still retaining significant upside in GB when volumes recover. Across the balance of the year, we expect continued positive momentum in Ireland and the U.S. with organic growth complemented by the contributions from acquisitions completed to date. In GB, although infrastructure activity provides some support, demand is expected to decline for the fifth consecutive year, and the timing and pace of recovery is unclear. But overall, we continue to expect to deliver 2026 in line with current market expectations. I want to close our presentation with a clear message. With a strong team, significant mineral reserves and a well-invested production capacity, we are well positioned to deliver long-term growth in all 3 of our platforms. Thank you. We now welcome your questions.

Rob Chantry, Berenberg. So I guess two questions. So firstly, vertical integration in the U.K. Do you think there's any areas where you're short exposure and hence, pull-through volumes are limited, i.e., are there any areas you want to kind of expand on? And then secondly, in terms of further diversification in the U.S., clearly, it's kind of quite a St. Louis bias and the kind of related weather impact that has during the season. Is there any kind of prospecting you're doing outside of that area? Is it all kind of very Midwest centered focused?

I'll start, and we'll see where we go. In terms of vertical integration in the U.K., I mean, what we've always said consistently and reaffirmed when we've had capital markets events is that in the U.K., there's white space where we would like to grow our business. And then we would like further vertical integration. And our core products being aggregates and cement, we've always said it's likely to be more into concrete products. I think in terms of the U.S., again, we've been very clear. BMC was our beachhead, Lionmark, Falling Springs have complemented that and vertically integrated the business. But we've always set the ambition to base ourselves in Missouri, but include what we consider to be the Midwest, which is the neighboring states. And I think in the appendix, there is a slide which just gives you a feel of the opportunity that's available in those surrounding states.

Aynsley Lammin From Investec. Just two for me as well, please. Maybe if you could comment on some of the trends you're seeing in the kind of GB, particularly around energy costs and how you're dealing with that? Are the surcharges sticking? What's the underlying pricing kind of dynamics looking like for H2? And then the second question, I think you mentioned we'd hear more about potential cost savings towards the end of this year. Have you got kind of plans underway to take more costs out of GB? Or is it a wait-and-see approach as you kind of take a better view of next year?

Thanks, Aynsley. So clearly, there's been significant volatility that's come through in the first half around energy costs. We have managed that through surcharges. The narrative, I think it's fair to say, is inconsistent, and that does present some challenges because clearly, when the oil price is coming down at speed, customers are much more reluctant to take surcharges. But the business is being proactive and is staying close to the customers. And what we're trying to do is to be fair to everyone. Clearly, if we're seeing increased costs coming into the business and increased cost to serve, then we would expect that to be recoverable from the customers. But equally, what we're not trying to do is overexploit the volatility in the oil price. In terms of cost savings and operational excellence, I mean, the programs still continue. What we've seen in the first half is really the tailwind from 2025 coming through to help support performance. We're continuing with our sort of targeted approach that we first adopted last year of identifying a smaller number of projects where we're dedicating resource, and we'd expect some things to come through in the course of the second half. But we remain focused that -- the one thing we don't want to do is to compromise the recovery. Clearly, the recovery has taken longer to come than any of us hoped or expected, but we still fundamentally believe that our markets will improve. And when that happens, we want to be in the best possible position to take advantage of them. And Rob put the slide up earlier highlighting the opportunity that exists in Scotland because of the fact that we have all of those sites, all of those quarries that are in a position to support that investment that is going to come. And I think it's -- if you like, a real-life case study of why we want to stay invested and why we're not looking to cut costs, that would compromise the future.

Clyde Lewis at Peel Hunt. Two for me. You talked about the acquisition pipeline looking pretty good at the moment. Could you maybe expand on that in terms of sort of, I suppose, the geographical mix within that? And the second question, probably one for James around the split of costs. It would be great to get a bit of an update as to how much is fixed and how much is semi-variable. And obviously, I can work out the variable as the balance, but it would be great to get an update on that, thinking about, again, operational gearing going forward.

In terms of the acquisition pipeline, you're right. It is healthy. I think given the momentum in the U.S. and Ireland at the moment, it's likely that, that will be our priority in the short term.

Clyde, if you haven't got to Slide 34, at some point [indiscernible], you do because that does break down the cost base and gives you the mix of fixed and variable. I mean, it does move around a little bit. And sometimes costs that you would like to think are variable, you actually find out in reality are fixed. But equally, it can also go the other way around. But ballpark, we reckon the cost base is 40% fixed and 60% variable.