BREE Breedon Group Plc

Our strategy has always focused on managing those factors within our control and maximising the Group's competitive position. In recent years we have invested in our teams, technology and equipment, accelerating self-help and driving operational efficiencies, while striving to improve our health, safety and wellbeing outcomes. We have remained active in M&A, developing our pipeline across each of our geographies.

Those disciplined actions have enabled us to deliver a resilient performance in the period.

The macroeconomic and political landscape in GB continued to present significant headwinds, exacerbated by the challenging operating conditions created by the wet weather. While inflation has returned to more normal levels, interest rates have remained elevated and UK government policy is yet to be established. In contrast, the Ireland and US markets remained positive in the period and we expect conditions in these geographies will remain supportive across the balance of the year.

Our patient search in the US has culminated in the acquisition of BMC Enterprises Inc. for an enterprise value of US$300m. BMC is a supplier of ready-mixed concrete, aggregates and building products, headquartered in St Louis, Missouri, with a strong track record of organic and transactional growth. BMC's culture is closely aligned to Breedon's local, entrepreneurial model and the management team have extensive industry knowledge and M&A experience. The integration is progressing well and the early results from our new third platform are promising.

Revenue for the Group grew 3% to £764.6m (H1 2023: £742.7m) supported by our entry into the US and an element of price growth, partially offset by reduced volumes.

Underlying EBIT increased by 2% to £71.6m (H1 2023: £70.5m) benefiting from a promising maiden contribution from BMC, which is trading ahead of prior year and plan and has been reported as a new 'United States' operating segment. We delivered strong earnings growth in Ireland and improved the margin in Cement, which helped to mitigate the drop through from reduced volumes in GB, such that we broadly maintained our Underlying EBIT margin at 9.4% (H1 2023: 9.5%).

On a like-for-like basis, excluding the impact of acquisitions, revenue in the period decreased by 6% with pricing up 2ppt and volumes down 8ppt with Underlying EBIT decreasing by 9%.

The Group's free cash flow in the period was an outflow of £9.6m (H1 2023: inflow of £20.8m) reflecting the usual seasonal working capital expansion, inclusive of BMC, and a step up in the level of capital investment, principally due to the ARM project at Hope.

Post-tax ROIC of 8.8% at the half year (H1 2023: 10.0%) reflects short term dilution from the BMC acquisition combined with the impact of increased corporate tax rates.

Net Debt increased following the acquisition of BMC to £472.3m (2023: £169.9m). Covenant Leverage at the half year of 1.6x remains within our target range of 1x to 2x, providing the strategic flexibility to deploy capital in-line with our financial framework.

In 2023 we achieved one of our medium-term financial objectives, reaching a 40% dividend payout ratio. In recognition of our confidence in the long-term growth outlook across our three platforms, our strong market positions and flexible balance sheet, the Board has approved an increased interim dividend of 4.5p (H1 2023: 4.0p).

STRATEGY REVIEW

Sustain

Keeping our people safe and well is our highest priority. We carry out frequent Visible Felt Leadership visits and regular training to reinforce the systems, processes and tools already in place. To ensure our practices are industry-leading, this year we have evolved our safety commitments with clearer and firmer rules, promoting a proactive culture of safety and risk elimination.

As an industry, the construction materials business has an ageing and shrinking workforce so it is essential we are a great place to work. We awarded a 4% pay rise and increased our emphasis on early stage careers, recruiting 32 apprentices and industrial placement students.

Having set out our ambition to achieve net zero by 2050, in 2023 we submitted our targets and methodology for validation and rating to industry bodies. This year we have been awarded our first CDP ratings of B for Climate Change and C for Water Security, placing us at the forefront of our sector, and we continue to engage with SBTi as we await formal validation of our group-wide targets.

Decarbonisation of the cement business is a priority of our strategic planning and we are progressing a number of projects in parallel to meet our net zero targets. We trialled different alternative fuels in the clinker production process, enabling both sites to increase the replacement of fossil fuels, with Kinnegad achieving 80% during the period. To further offset the energy consumption of our cement plants, Kinnegad commenced the construction of a 17MW solar farm which is on track to be commissioned in the first half of 2025. Customers are increasingly adopting CEM II following our development of a product with an enhanced strength factor. In the first half 33% of our cement sales were CEM II (H1 2023: 28%).

As a partner in the landmark Peak Cluster carbon capture and storage project, our focus is now turning to FEED (front-end engineering design) but this cannot progress without government support. Following the conclusion of the UK general election we, together with our partners, are engaging with the new Government.

Optimise

To maximise the efficiency and profitability of our quarries we implemented an improvement programme from 'face to gate' to deliver efficiencies and process improvements. Examples include process reengineering at our Leaton and Cloud Hill quarries in GB which resulted in targeted capital investment to negate the need for contract crushing and at Dowlow quarry, also in GB, where we improved productivity by increasing the wash plant utilisation following a review as part of our Running Equipment Efficiency Improvement Programme.

Expand

We have a well populated and active M&A pipeline across all three platforms.

In January we completed the acquisition of Eco-Asphalt Supplies, a Merseyside asphalt supplier strategically located within the region where we service the National Highways Pavement framework. In April we acquired Phoenix Surfacing, enhancing our presence in the Midlands and reinforcing our regional surfacing, airfields and recycled asphalt capabilities.

In March, we established our third platform in the US through the transformative acquisition of BMC, creating the foundation from which we will build out our business in the Mid-West. BMC provides us with an opportunity to extend the vertically-integrated model in the US, broaden our end-market reach and extend our product set. Having successfully grown the business through a blend of organic and acquisitive growth over the past decade, the BMC team have considerable M&A experience and an active pipeline. Since completion, the pipeline of opportunities in Missouri and the surrounding states has continued to grow. 

Our land and minerals pipeline underpins the long-term sustainability and organic growth potential of our operations. During the first half we successfully secured planning approval for an additional 37 million tonnes of mineral reserves in GB and Ireland. In addition, we have more than 120 million tonnes of mineral in various stages of the planning process, equivalent to roughly five years of aggregates production at the current rate.

OUTLOOK

Growth expected in all our markets from 2025 as the economic and political landscape stabilises

Following the conclusion of the UK general election, construction will be a key aspect of the new Government's growth agenda where early indications appear to support housebuilding and infrastructure in particular. However, it remains to be seen how policy evolves in practice. Alongside the resumption of a governing Assembly at Stormont, these are encouraging developments that are starting to be recognised in confidence indicators. While the macroeconomic and geopolitical landscape is stabilising, the outlook for the remainder of 2024 in GB remains finely balanced.

In RoI, recently published housing policy reports identify a significant deficit of up to a quarter of a million homes with an annual building requirement far in excess of the current rate of c.33,000 units. This underpins the structural need for housing and infrastructure investment,  supporting the long-term growth opportunity, where we have secured positions on a number of high-profile infrastructure projects that commence in the second half on the high-speed road network.

Market fundamentals in the US are supported by significant housing and infrastructure deficits. Healthy state budgets alongside robust Federal stimulus programmes underpin the long-term growth prospects for infrastructure spending and receive cross-party political support while population growth continues to exceed housing starts creating a greater need for housebuilding.

All our markets are expected to benefit from falling interest rates in the months ahead.

The long-term track record of pricing in the construction materials market is underpinned by strong industry fundamentals and pent-up demand. Therefore, pricing is expected to continue to increase modestly in future periods, offsetting input cost inflation.

Our business remains highly cash generative, enabling us to reduce debt rapidly as with previous transformational acquisitions. Our healthy balance sheet provides us with the strategic flexibility to invest for growth, maintain our progressive dividend policy, and execute bolt-on acquisitions across each of our three platforms where we have well populated and active M&A pipelines.

In 2024, Underlying EBIT will be slightly more weighted towards the second half than is typical due to a combination of factors. The wet start to 2024 was disruptive to construction activities, affecting ready-mixed concrete and cement in particular, and the second half will incorporate a full six months contribution from BMC. Management expectations for the full year remain unchanged.

OPERATIONAL REVIEW

Product volumes

Great Britain

Market conditions in the first half of 2024 weakened further in GB as expected and construction activity was impacted by the wet conditions. Furthermore, while the macroeconomic landscape stabilised during the period and we received a good level of enquiries, political and monetary uncertainty presented a headwind to client decision-making, leading to near-term caution across most end-markets.

Volumes reduced materially in ready-mixed concrete and were lower in aggregates, reflecting the impact on housebuilding activity from the soft market backdrop, poor weather conditions and elevated comparatives following the change to housebuilding regulations in June 2023. Asphalt volumes were broadly flat year-on-year, benefitting from the continued success of our surfacing business. Pricing remained resilient and we were able to fully recover input cost increases.

Underlying EBIT declined 17%, resulting in 100bps of margin compression due to operating leverage. Against this backdrop we maintained our disciplined focus on operational excellence and carefully tailored procurement, encouraging the quarry teams to revisit the whole process from quarry face to customer delivery to maximise the efficiency of production and quality of customer service. 

Our surfacing business integrated Phoenix Surfacing into our regional delivery model and successfully completed high-profile airfield projects for the Defence Infrastructure Organisation. We have built strong relationships, creating a significant competitive advantage in this space, leading to a multi-year pipeline of work with further high-profile frameworks in tender.

Ireland

Ireland delivered a strong performance in the period, increasing revenue, Underlying EBIT and margins. The business benefitted from a strong tendering season in the first half of 2024. In Northern Ireland the resumption of a governing Assembly at Stormont was an encouraging development and, as the business of Government slowly regained momentum, construction materials enquiries and activity levels picked up. In RoI, where the market is underpinned by net inward migration and foreign direct investment, creating a structural shortage of housing and infrastructure, economic growth maintained a steady pace.

Against this encouraging backdrop, asphalt volumes stabilised after a slow start in the first quarter as the effects of the unseasonably wet weather restricted construction activity. Aggregates volumes increased significantly, benefiting from the acquisition of Robinsons Quarry Masters last year, a transaction that has reinforced our position in the North Belfast market where we have a number of local authority framework contracts.

Pricing was robust and enabled the full recovery of input costs. As a result revenue was stable, growing 2% and Underlying EBIT increased 37%, driven by key project wins, excellent cost management, operating leverage and contribution from acquisitions, leading to a significant expansion in margin.

Extending our mineral reserves and resources has been a strategic priority, increasing the asset backing of our vertically-integrated model in Ireland. During the period we secured planning consents at three quarries and acquired a basalt quarry in County Derry, securing c.10m tonnes of mineral reserve. We have applications for a further 32m tonnes of mineral in the pipeline and at various stages in the planning system.

United States

In the 16 weeks since the transaction completed, BMC has contributed a strong result, ahead of prior year and plan, and we are encouraged by the performance at this early stage. Volumes in both aggregates and ready-mixed concrete have continued to grow in 2024.

While Missouri has been impacted by volatile weather conditions during the first half, construction activity remains robust and backlogs are healthy. Pricing is well underpinned by the market backdrop; population growth exceeds increases in housing completions and Federal stimulus programmes combined with healthy state budgets support an active infrastructure end-market.

Integration is progressing well and our engagement with the whole team has been well received, confirming our expectation that the culture of BMC is closely aligned to Breedon's core values. The BMC team is entrepreneurial and agile and has extensive local market knowledge.

To underline Breedon's commitment to the health, safety and wellbeing of all our employees, on acquisition we undertook an immediate safety review; implementing a series of modifications including hiring a new dedicated safety manager, updating safety guidelines and increasing the regularity of safety meetings. We are already seeing the benefit of these actions with lost time incidents significantly reduced when compared to the same period in the prior year.

The Breedon vertically-integrated model is asset-backed and BMC, with c.400 million tonnes of high-quality mineral reserves and resources, is aligned to this model. We are exploring more routes to market for our minerals, investing in plant and equipment during the period to meet additional aggregates demand.

Cement

The cement market in the first half of 2024 was challenging, primarily due to the fall in housebuilding activity in GB, exacerbated by the wet conditions which disrupted progress on construction sites. Consequently, volumes during the period reduced 12%.

Pricing was supported by atailwind from the prior year; although carbon surcharges reduced in the period, reflecting the lower cost of carbon credits. Overall margins in the period strengthened by 60bps, principally due to lower energy costs compared with the first half of 2023.

Our cement plants operate at exceptionally high levels of reliability which were sustained in the first half. We undertook two planned kiln maintenance shutdowns in January. These complex engineering undertakings completed within budget and on schedule.

The teams have continued to progress a number of major capital investment projects. At Hope the primary crusher will be replaced in the autumn and to ensure a smooth transition the team has carried out extensive preparatory work. The ARM project, which will facilitate the transport of secondary material to site via rail, continues to make good progress and is on schedule to be commissioned in the new year as planned. At Kinnegad, as well as progress on the new solar plant, we are constructing a new bagging plant which will be operational early next year.

FINANCE REVIEW

The Group delivered a resilient trading performance in the first half of 2024.

Revenue for the Group grew 3% to £764.6m (H1 2023: £742.7m) supported by our entry into the US and an element of price growth; partially offset by reduced volumes.

Underlying EBIT increased by 2% to £71.6m (H1 2023: £70.5m) benefiting from a promising maiden contribution from BMC, which is trading ahead of plan and has been reported as a new 'United States' operating segment. We delivered strong earnings growth in Ireland and improved the margin in Cement, which helped to mitigate the drop through from reduced volumes in GB, such that we broadly maintained our Underlying EBIT margin at 9.4% (H1 2023: 9.5%).

On a like-for-like basis, excluding the impact of acquisitions, revenue in the period decreased by 6% with pricing up 2ppt and volumes down 8ppt and with Underlying EBIT decreasing by 9%.

Non-underlying items

The Group recorded £14.7m  (H1 2023: £8.4m) of non-underlying items during the period comprising £9.0m of acquisition-related expenses, primarily incurred in connection with the BMC acquisition, and £5.7m amortisation of acquired intangibles.

Interest

Net interest costs in the period were £10.4m (H1 2023 £5.6m) with the increase primarily due to interest payable on the debt drawn to finance the BMC acquisition. The Group continues to benefit from longer-term fixed rates of borrowing at a blended rate of c.2% from the £250m of US Private Placement notes issued in 2021, with repayment dates between 2028 and 2036.

Taxation

The underlying tax charge in the period has been based on the estimated effective weighted average rate applicable for existing operations for the full year. This represents a combined underlying effective rate of 22.4%, with the increase in the effective rate (FY 2023: 20.4%) a result of the increased UK corporation tax rate and the impact of our new US operations where the statutory tax rate is higher than the Group average at around 25%.

Earnings per share

Adjusted Underlying Basic EPS for the period fell to 13.9p (H1 2023: 15.3p) reflecting increased interest and corporation tax rates as well as a higher number of shares in issue. Statutory Basic EPS was 10.0p (H1 2023: 13.0p).

Statement of financial position and post-tax ROIC

Net assets at 30 June 2024 were £1,120.7m (FY 2023: £1,110.7m).

We have completed an initial exercise as required by IFRS 3 - Business Combinations to assess the provisional fair value of assets acquired and liabilities assumed through the three acquisitions completed in the first half of 2024. Goodwill of £55.0m has been recognised which equates to 30% of the equity value of the acquired businesses.

Post-tax ROIC of 8.8% (H1 2023: 10.0%) reflects short term dilution from the BMC acquisition combined with the impact of increased corporate tax rates.

Free cash flow

The Group's free cash flow in the period was an outflow of £9.6m (H1 2023: inflow of £20.8m) reflecting the usual seasonal working capital expansion, inclusive of BMC, and a step up in the level of capital investment principally due to the ARM project at Hope.

The primary driver for the increase in Net Debt is the incremental borrowings taken on by the Group to fund the acquisition of BMC.

Net Debt

Closing Net Debt at 30 June 2024 was £472.3m (H1 2023: £220.4m) and Covenant Leverage was 1.6x (H1 2023: 0.7x), comfortably within our target range of 1x to 2x.

Refinancing of borrowing facilities

The Group completed the refinancing of its RCF subsequent to the period end, increasing the facility size from £350m to £400m and retaining the option of a further £100m accordion. The amended facility secures access to longer-term finance, running for an initial four-year period to at least July 2028, and offers an incremental reduction in ongoing debt service costs.

Fees and expenses incurred in connection with the refinancing amounted to approximately £2.0m and will be amortised over the amended life of the facility.

The remaining facilities available to the Group comprise the £250m USPP, the terms of which are unchanged from those disclosed in the 2023 Annual Report.

Dividend

We have announced our intention to pay an increased interim dividend of 4.5p per share (H1 2023: 4.0p per share) reflecting our confidence in the prospects of the Group and in keeping with our dividend policy. The dividend will be paid on 1 November 2024 to shareholders who are on the Register of Members at the close of business on 27 September 2024. The ex-dividend date is 26 September 2024. The latest date for registering for the Company's DRIP is 11 October 2024 and further details of how to join the DRIP are available on the Company's website.

2024 technical guidance

Management expectations for the full year remain unchanged, with Underlying EBIT slightly more weighted to the second half in 2024.

Net interest expense for the full year will be c.£25m, following the refinancing of the RCF.

We expect an effective tax rate for the full year of c.22% (2023: 20.4%) which will impact our post-tax performance measures (including ROIC), with cash taxes materially in line with the effective rate.

Total capital expenditure for the full year will be c.£130m.

The cash cost of the interim dividend paid in the second half will be £16m, resulting in a total cash cost of dividends paid during 2024 of £48m.

We continue to expect a modest inflationary increase in working capital over the full year cycle of c.£30m, with Covenant Leverage reducing over the balance of the year.

RISK

The Group's principal risks that might adversely impact the Group in the remaining six months of the current financial year are:

Further details of the principal risks facing the Group are set out on pages 54-70 of the Group's Annual Report for the year ended 31 December 2023.

The Board has undertaken a risk review in the period to 30 June 2024, which included specific consideration of any changes to the Group's risk profile arising from the acquisition of BMC Enterprises and from the challenging market conditions experienced in GB during the first half of 2024.

The nature of the Group's principal risks as described in the 2023 Annual Report and the associated risk ratings have not changed as a result of this assessment. The Board continues to manage these risks and to mitigate their expected impact. 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors confirm that, to the best of their knowledge:

·      the condensed consolidated half-year financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the UK

·      the interim management report includes a fair review of the information required by:
 

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed consolidated half-year financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

The Directors of Breedon Group plc are listed in the Group's 2023 Annual Report on pages 112-113.

Since the publication of the 2023 Annual Report, there have been no changes to the composition of the Board.