Breedon Group plc

Annual results for the year ended 31 December 2018

Group Finance Director's review

During the year we delivered strong earnings growth, which was underpinned by the contributions from our recent acquisitions (those completed during 2017 and 2018), the most significant being the April 2018 acquisition of Lagan.

Group aggregates volumes for the year were up 22 per cent at 19.4 million tonnes and asphalt volumes were up 50 per cent at 2.8 million tonnes; however, ready-mixed concrete volumes were down three per cent at 3.2 million cubic metres.

On a like-for-like basis, excluding acquisitions and the impact of the disposal of 23 ready-mixed concrete plants to Tarmac in July 2018, aggregates and asphalt volumes were up four per cent and two per cent respectively, with ready-mixed concrete volumes flat.

These like-for-like volumes were delivered in difficult trading conditions, stemming from a severe winter in the first quarter and ongoing uncertainty surrounding Brexit.

In accordance with the CMDO, we have historically been unable to report our UK cement volumes. However, following the acquisition of Lagan and the adoption of our new operating segments, we are now able to report Group cement volumes for 2018, which totalled 2.0 million tonnes.

Revenue for the year at £862.7 million was 32 per cent ahead of 2017 (£652.4 million). On a like-for-like basis, revenue was up two per cent on the prior year.

Underlying EBIT was £103.5 million, 29 per cent ahead of 2017 (£80.4 million).  Underlying EBIT also includes our share of profit from our associate and joint ventures.

On a like-for-like basis, Underlying EBIT declined by six per cent, reflecting the difficult trading conditions referred to above, together with increased input costs. The strong contribution from recent acquisitions was reinforced by the performance of Lagan, which reflects the quality of the business and its exposure to the more favourable Irish market.

Despite the difficult trading conditions in 2018, the Group's Underlying EBIT margin was broadly maintained at 12 per cent.

We continue to target 15 per cent in the medium term.

Non-underlying items

Non-underlying items in the year amounted to a net pre-tax cost of £11.8 million (2017: £2.8 million), the major items being acquisition costs, redundancy and reorganisation costs and amortisation of acquired intangible assets.

Interest

Net finance costs in the year totalled £11.8 million (2017: £6.4 million) and included interest on the Group's bank facilities, amortisation of bank arrangement fees, interest on finance leases and the unwinding of discounting on provisions. The higher costs in 2018 reflected the higher level of borrowings following the Lagan acquisition.

Profit before tax

Profit before taxation was £79.9 million, 12 per cent ahead of 2017 (£71.2 million). Underlying profit before tax was £91.7 million, 24 per cent ahead of 2017 (£74.0 million). 

Tax

The tax charge was £15.3 million (2017: £14.2 million). An Underlying tax charge of £15.9 million (2017: £14.7 million) was recorded in the year, resulting in an Underlying effective tax rate for the full year of 17.3 per cent (2017: 19.9 per cent), reflecting the fact that the acquired businesses in RoI are taxed at a lower rate than in the UK.

The Group's tax strategy is to comply with all relevant regulations, whilst managing the total tax burden and seeking to maintain a stable effective tax rate. The Group seeks to achieve this through operating an uncomplicated Group structure.

The Group endeavours to structure its affairs in a tax-efficient manner where there is commercial benefit in doing so, with the aim of supporting investment in the business and its capital expenditure programmes. It seeks to ensure that all tax affairs are administered in a lawful and responsible manner and that its actions do not adversely impact its reputation as a responsible taxpayer. The parameters which govern the Group's approach are set by the Board, which regularly reviews the Group's tax strategy.

The Board and Audit Committee are kept regularly informed of all material developments relating to the Group's tax position. The Group Tax Manager oversees tax compliance activities on a day-to-day basis and reports to senior management.

There is an integrated approach to governance across the business through management control, policies, procedures and training. Risks inherent in the calculation, collection and payment of tax are mitigated by documented policies and procedures.

On an annual basis, the Group carries out a review for the purpose of complying with the UK Senior Accounting Officer legislation.

The Group takes appropriate tax advice and support from reputable professional firms in relation to any tax planning considerations. It is open and transparent in its dealings with HMRC in the UK and the Revenue in RoI and deals with any queries in a timely and open manner and on a full-disclosure basis. In areas of complexity, it is proactive in engaging with HMRC and the Revenue.

The Group has implemented a Prevention of Facilitation of Tax Evasion policy, which confirms both its zero tolerance approach to acts of criminal facilitation of tax evasion and its commitment to act fairly, professionally and with integrity in all its business dealings.

The Group's tax liabilities arise in the UK and RoI subsidiary companies. In terms of the corporation tax position, all years up to 2016 are agreed in respect of companies acquired prior to 2018.

The Group makes a significant contribution to the economies in which it operates through taxation, either borne by the Group or collected on behalf of, and paid to, HMRC or the Revenue. In 2018 the total taxes borne and collected by the Group amounted to over £150 million (2017: over £110 million).

Earnings per share

Basic EPS for the year were 4.01 pence (2017: 3.98 pence), reported after the non-Underlying items mentioned above. Underlying basic EPS for the year totalled 4.70 pence (2017: 4.14 pence).

Dividends

Subject to availability of distributable reserves, dividends will be paid to shareholders when the directors believe it is appropriate and prudent to do so. However, at present the main focus of the Group continues to be on delivering continued capital growth for shareholders.

Statement of financial position

Net assets at 31 December 2018 were £773.3 million (2017: £528.1 million).

The net assets continue to be underpinned by the mineral reserves and resources of the Group, which at the end of December 2018 totalled nearly 900 million tonnes (2017: around 750 million tonnes).

Cash flow

Cash generated from operating activities was £160.6 million (2017: £117.2 million).

In addition to delivering short-term earnings growth and optimising working capital, we are positioning the Group for the longer term and, as part of that, we are investing further in plant and equipment and adding acquisitions where these make strategic and financial sense.

During 2018 the Group spent £406.3 million in cash on four acquisitions: Staffs Concrete, Blinkbonny quarry, Lagan and four quarries and an asphalt plant from Tarmac (2017: £9.2 million on Pro Mini Mix and Humberside). The Group also incurred capital expenditure of £48.6 million (2017: £46.2 million).

Proceeds from the sale of property, plant and equipment totalled £4.9 million in 2018 (2017: £3.2 million).

Proceeds from the issue of shares of £171.2 million (2017: £0.8 million) included the net proceeds of the equity placing and open offer in respect of the Lagan acquisition.

The proceeds from new loans raised of £409.7 million (2017: £nil) and the repayment of loans of £246.1 million (2017: £26.6 million) reflect the refinancing undertaken at the time of the acquisition.

Repayment of finance lease obligations totalled £7.4 million (2017: £5.7 million).

Net debt

Net debt at 31 December 2018 was £310.7 million (2017: £109.8 million).

Key movements include: Underlying EBITDA of £154.4 million (2017: £117.0 million); non-Underlying items of £11.8 million (2017: £2.8 million); interest paid of £9.2 million (2017: £4.1 million); tax paid of £16.5 million (2017: £12.1 million); purchase of property, plant and equipment of £48.6 million (2017: £46.2 million); expenditure on acquisitions of £461.3 million (2017: £9.7 million); and equity raised of £171.2 million (2017: £0.8 million).

Leverage at 31 December 2018 was 2.0, a substantial reduction on the proforma Leverage* of 2.6 at the time of the Lagan acquisition in April 2018. This reduction demonstrates the highly cash-generative nature of the Group.

Return on invested capital

Year-end ROIC was 7.9 per cent (2017: 10.1 per cent). The reduction year-on-year was primarily due to the Lagan acquisition.

Using average invested capital, year-end ROIC was 9.9 per cent (2017: 10.2 per cent).

Notwithstanding this modest anticipated decline, our ROIC reflects the high level of capital invested in the Group and more than covers our cost of capital.

Bank facilities

At the time of completing the Lagan acquisition in April 2018 we entered into a new four-year £500 million facility agreement, comprising a term loan of £150 million and a multi-currency revolving credit facility of £350 million. This new facility replaced our existing £300 million revolving credit facility.

* Pro forma Leverage is a forecast Leverage ratio calculated as the ratio of the forecast Underlying EBITDA of the enlarged Group relative to anticipated net debt as communicated to shareholders at the point of the transaction in April 2018.

The facility is subject to a floating interest rate based on LIBOR or, in relation to any loan in Euros, EURIBOR, plus margin. At 31 December 2018, the total undrawn facility available to the Group amounted to £157.2 million. The facility is subject to Group leverage and Group interest cover covenants which are tested half-yearly. At 31 December 2018, the Group comfortably complied with these two covenants. Based on our current estimates, we expect to comply with all our covenants for the foreseeable future.

The Group has in place an interest rate hedge which partially mitigates the risk of interest rate rises on the Group's bank loans.

Adoption of IFRS 16 - leases

The adoption of this accounting standard in 2019 under the 'modified retrospective' approach will not have a material impact on the Income Statement at the Underlying profit before tax level: an increase in Underlying EBITDA will be offset by increased depreciation and interest costs.

We expect that approximately £45 million of additional debt will be recognised on adoption. On a proforma basis this would take Leverage at 31 December 2018 to 2.2.

This increase in debt will not impact our ability to comply with the covenants associated with our banking facility, as these are tested by reference to accounting policies that were in place at the time the facility was entered into.

New operating segments

The operating segments disclosed reflect the change in the structure of the Group following the acquisition of Lagan.

The Group was previously split into three reportable units: Breedon Northern, Breedon Southern and Breedon Cement.

Following the acquisition of Lagan, the operating segments have been updated to conform with our revised management reporting, as follows:

Great Britain: comprising the trade previously reported in Breedon Northern and Breedon Southern, together with the building products businesses acquired with Lagan.

Ireland: comprising the construction materials and contracting services businesses on the Island of Ireland which were acquired with Lagan.

Cement: comprising the trade previously reported in Breedon Cement, together with the cementitious operations acquired with Lagan.

Rob Wood

Group Finance Director

6 March 2019

Breedon Group plc

Annual results for the year ended 31 December 2018

Business reviews

Great Britain

Our operations in GB, which - following the acquisition of Lagan - now include our new Building Products business (bricks, tiles, clay products, decorative aggregates and Welsh Slate) generated revenues of £609.8 million (2017: £577.5 million) and Underlying EBIT of £61.4 million (2017: £64.5 million), reflecting the slow start to the year due to severe weather, challenging markets, rising input costs and the general uncertainty around Brexit.

Weather was the biggest factor in the first quarter, presenting us with the challenge in subsequent months of recovering work lost due to the 'Beast from the East'. With a lot of hard work and rigorous attention to service levels, we managed to regain much of the lost ground by the year-end and delivered a creditable performance.

In Scotland, reduced spending on infrastructure and private development made the year particularly challenging, exacerbated by increased competition in our markets from competitors who, having completed major contracts in the Central Belt, moved north to secure replacement volumes. This was to some extent offset by a strong performance on the Aberdeen Western Peripheral Route.

A major contract was won on the Aberdeen to Inverness rail upgrade, together with substantial supplies of on-site concrete to Edinburgh Airport and RAF Lossiemouth.

The acquisition of Blinkbonny quarry established us in a new market in the Scottish borders, while the acquisition of Daviot and Low Plains quarries via the Tarmac asset swap gave us direct access to valuable aggregates reserves which we have quickly internalised in our concrete and asphalt plants. We also opened a strategically important new quarry at North Drumboy to service the Glasgow market.

Significant investments in a replacement concrete plant at Port Dundas in Glasgow, a new crusher and load and haul equipment at our Raisby Quarry and a new screening system for single size aggregates at Daviot all added to our capacity, whilst new sub-metering at a number of our sites in Scotland and northern England have helped improve power management at a time of rising energy costs.

We stepped up our engagement with external stakeholders during the year with an extended programme of quarry visits for Members of the Scottish Parliament in Scotland. In all, we hosted over a dozen visits to our quarries across the country.

Looking ahead, we are focused this year on delivering the next phase of the A9 dualling project and are placing a particular emphasis on bringing our Daviot and Low Plains quarries up to full strength. As always, we will seek to maximise price growth and apply robust 'self-help' wherever weak markets demand it.

In England and Wales, aggregates volumes were generally ahead of our other products, especially in the Midlands, helped by the East Midlands Gateway project to which substantial quantities of material were supplied during the year. The south-east of England also showed signs of improvement in the second half and a robust housebuilding sector led to a general improvement in ready-mixed concrete sales as the year progressed. We were also delighted that our newly-formed joint venture, Breedon Bow Highways, was awarded Midlands Lots 7 and 9 and East Lots 6 and 8 on the Highways England Pavement Framework.

Our newly-acquired quarry at Borras and quarry and asphalt plant at Minffordd were successfully integrated following completion of the Tarmac asset swap and their performance has steadily improved.

We also completed the integration of Welsh Slate, acquired as part of Lagan, along with bricks and tiles which, together with our decorative aggregates and masonry products, now constitute a new Breedon Building Products business.

In our concrete business we strengthened our mini-mix offer with the acquisition of Staffs Concrete, which extended our reach to the north of Birmingham. This operation, together with Pro Mini Mix, acquired in 2017, has now been integrated into our 1stMix network, which has expanded significantly since its formation in 2012 to the point where we now have a substantial fleet of 1stMix trucks operating across the Midlands.

Dowlow, one of our flagship quarries, benefited from substantial investments in a new wash plant, which has significantly improved the yield on our crushed rock output, and in a new asphalt plant, which was installed towards the end of the year and gives us access to new road maintenance markets in and around Derbyshire. In addition, incremental mineral reserves and resources were secured at our quarries at Norton Bottoms, North Cave and Raisby.

We achieved a substantial increase in employee training days in 2018, including the introduction of the Breedon Management Development Programme (BMDP), as we sought to increase engagement of our colleagues in all aspects of our business.

Whilst we delivered a strong safety performance in Scotland and northern England in 2018, our experience in the Midlands and southern England was more disappointing. Looking ahead, we are committed to a material improvement in this area. This will depend in large measure on achieving higher levels of engagement with our colleagues, in turn part of a wider engagement programme aimed at embedding our purpose and values more firmly across the business.

Ireland

Our operations in Ireland trade as Whitemountain in NI and Lagan in RoI. Both are fully-integrated aggregates, downstream products and contracting services businesses. They produced a strong result in 2018, generating an Underlying EBIT of £20.9 million, on revenues of £156.3 million.

Despite being hampered by exceptionally poor weather in the first quarter and the absence of a Local Legislative Assembly, which hindered progress on major infrastructure and housing projects, Whitemountain delivered a strong performance. This was due in no small part to our strategy of selective route-to-market decisions and a focus on high-calibre contracts in both NI and GB.

In the second quarter we relocated our NI head office from Lisburn, where it had been based for 15 years, to newly-refurbished offices in Mallusk, to the north of Belfast, providing a first-class working environment for our colleagues with the potential for further expansion in the years ahead.

Whitemountain's aggregates business had another encouraging year. We continued to ship quantities of high PSV stone to GB from our quarries in NI and there is a great opportunity to expand these shipments in the future, enabling us to satisfy the growing demand for this high-margin product in England, Scotland and Wales.

Whitemountain's contracting services business also enjoyed a strong year, winning significant quantities of work in GB, including landmark schemes at Colley Lane in Somerset, Kettering and Wellingborough, the latter projects generating aggregate and asphalt activity for our business in the Midlands.

We worked hard to further embed a strong safety culture in Whitemountain during 2018 and received a number of awards, including a Silver RosPA Award and a WISHNI (Waste Industry Safety and Health Forum Northern Ireland) Ambassador Award for Alpha Resource Management, our waste management business. We placed a particular emphasis on engaging with subcontractors and drivers and commenced a new Road Worker Safety Campaign in conjunction with QPANI and Transport NI.

Recognising the importance of our colleagues' mental as well as physical wellbeing, we rolled out an extensive programme of mental health awareness training for operatives, supervisors and managers and a group of colleagues have been trained in Mental Health First Aid at Work. In addition, we mounted several wellbeing campaigns in 2018 and launched a new-look Health & Wellbeing Newsletter which has since been rolled out bi-monthly across Breedon.

Looking ahead to 2019, we will seek further commercial opportunities with our current customers and aim for steady and sustainable growth in both our materials and contracting businesses, whilst identifying new activities and markets that present opportunities for expansion. We will focus on further reducing our environmental footprint and continue to invest in training and resourcing, with an emphasis on the safety and wellbeing of our colleagues.

Market conditions in RoI improved substantially during the year. The volume of Government maintenance contracts tendered increased by 65 per cent and Lagan saw continued improvement in the private sector, especially in the Greater Dublin area. As the year progressed, this began to spread to other major conurbations, including Cork, Galway and Limerick. We were particularly pleased to have maintained market share and improved pricing throughout the year.

Following the restructuring of our Irish operations, Lagan now operates - like Whitemountain - as a fully-integrated aggregates, downstream products and contracting services business.

Major contracts undertaken included several substantial resurfacing projects, notably the second runway at Dublin Airport, key sections of the M1 motorway and the New Ross Bypass in County Wexford.

Visible Felt Leadership (VFL) training was rolled out to the Lagan senior management team and followed up with the implementation of Breedon's Safety Commitments across the business. Recognising that we have a particularly sizeable contracting business in RoI, we also developed a bespoke training programme called 360° Safety, focused on improving safe interaction between people and vehicles.

Over the longer term we aim to increase the scale of our aggregates business in RoI.

As we look ahead to the remainder of 2019, we are confident that our markets will remain strong and that we will continue to benefit from our share of the major contracts in the pipeline. We will also be reviewing potential bolt-on acquisition opportunities as we seek to build on and extend our platform in RoI.

Cement

Cement comprises all our cementitious operations in GB and Ireland. In common with other areas of our business, the first quarter was severely affected by weather. However, for the year as a whole Cement performed in line with our expectations, delivering revenues of £176.5 million (2017: £141.6 million) and Underlying EBIT of £31.4 million (2017: £25.8 million).

The integration of Lagan into the Group enabled us to flex our supply strategy during 2018, exporting cement from Kinnegad in RoI to GB. In the next few months we will further strengthen our supply chain by importing cement from Kinnegad through a new terminal at Runcorn, optimising our cement logistics.

Major investments during the year included the expansion of our transport fleet in GB, new mobile plant at Hope quarry and the next stage of our four-year project to replace our plant control systems at Hope Works.

Our bagged cement operations in Ireland and GB were combined during the year, which means we can now supply a full range of bagged cement products to our customers in the south of England from our plant at Dagenham, with a similar range shipped from our Kinnegad plant to customers in the Midlands and north of England, as well as to customers in Ireland.

We continued energetically to engage with our local communities, most notably the Peak District National Park with which Hope Works has had a longstanding positive relationship. During the year we sought to quantify our contribution to the local Park community by publishing a socio-economic report which concluded that we provided £53 million of Gross Value-Added to the Peak District community in 2017.

In 2019 our primary aim is to recover the recent cost increases through higher prices. We will also be looking to secure further efficiencies and cost-reductions by expanding our owned haulage fleet.

Our largest single investment during the year will be the replacement of the raw mill drive at our Hope plant, which will bring benefits to the plant operation principally via operational risk reduction.