PHX Minerals H1 24/25 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2025

There are 8 speakers on the call.

Operator

So good morning, everybody, and welcome to the interim results of Riccardo for twenty fourtwenty five. As always, before we start, please take a moment to acknowledge the disclaimer statement. So consistent with how we've managed the agenda previously, I'll start with a few opening remarks and Judith will then go through the financial results. Given the performance of the group in H1 and the outlook shared following the trading statement, I'll then spend a little bit more time going through the strategic update and the operational process. The first thing to say is we're very pleased to have completed the divestment of our defense business in The U.

Operator

S. And the acquisition of E3A in Australia. As you'll see shortly, 2324 represented the expected peak in performance of the Riccardo defense business based on expected reductions in the ABS project. We therefore believe we've achieved the right timing of the sale of defense at good value. Despite the short term headwinds and macroeconomic uncertainty, we've delivered very good profit improvement in H1.

Operator

Within our Energy and Environmental business, the performance in H1 has been behind expectation, mainly as a result of more significant impact from global elections. However, as I will explain shortly, we have very good confidence in the medium term due to resilient solutions that are needed for the longer term, and we have the highest backlog ever. In automotive and industrial, we continue to see variability in orders as customers delay investments in emerging solutions. However, we've seen good growth in our industrial market segments over the last few years, following our deliberate diversification to these markets to mitigate against continued challenges in automotive. We've made good progress in our cost base and operational efficiency over the last twelve months.

Operator

We also recognize a smaller business following the divestment of Ricarda Defense. We have more to do to underpin our short and long term profitability. The bulk of the presentation today will focus on the go forward continuing operations, but I wanted to start with a split of continuing and discontinued operations to demonstrate why we believe we have delivered against our status strategy and manage the timing of the sale of Ricardo Defense well. As expected, twenty twenty three-twenty twenty four was the peak of the Defense revenue and profit with about 75% of the profit being generated by the finite project on ABS, which was expected to materially come to an end in fiscal year twenty twenty seven-twenty twenty eight. In addition, more CapEx would have been required to develop new programs.

Operator

Revenue has declined 25%, profit by 50% and margin by six forty basis points compared to prior year. Without the divestment of the defense business would therefore have been a material drag on the performance of the go forward business. More importantly, the divestment demonstrates the successful execution in line with our strategy to simplify and transition the portfolio to provide long term resilient solutions in energy transition and environmental adaptation. We've consistently communicated our objective of delivering more than 75% of our profit generated from our environmental and energy transition portfolio. The successful divestment and the immediate back to back use of the funds with the acquisition of E3A has enabled this key milestone and again demonstrates our ability to deliver on the strategy and acquire attractive businesses at good multiples in a competitive market.

Operator

The acquisition mitigates some of the short term dilution, but more importantly, improves the long term quality of earnings. E3A delivers immediate high growth margin accretion with operating margin above 20%. It also adds to our strategic advisory capability for large infrastructure projects in rail, wider transport, water and energy, creating revenue synergy combining our advisory and technical solutions to create incremental value for our customers. I'll now hand over to Judith to take you through the key financial of continuing operations.

Speaker 1

Thanks, Graeme. Good morning, everybody. So I'm now going to take you through the results for the first half of FY 'twenty five. This is our usual KPI slide showing performance of the continuing underlying operations on a constant currency basis. You'll see our order intakes up 11% at $221,000,000, and that reflects us securing some large long term projects, mainly in our Energy and Environment business.

Speaker 1

If you strip out those multiyear programs, our underlying order intake is up around 5%. But as you're going to hear from Graeme and I throughout today's presentation, we have experienced some market headwinds. And as a result, we've seen a delay in our order intake either to the latter part of H1 or into future periods. So as a result, we've delivered modest revenue growth of 2%. However, we've seen significant improvement in our profitability.

Speaker 1

With the actions we've taken to reduce our cost base, our operating margins are up four thirty basis points to 4.9%. That gives EPS of 4.7p, up over 200%. Our net debt's reduced by million to just under million, giving leverage of 0.6 times. That reflects the proceeds on the sale of our defense business, but doesn't yet reflect the cash outflow on the acquisition of E3 Advisory. If that had completed on the December 31, our leverage would have been 1.4 times.

Speaker 1

And as you'll hear from me a little bit later, our cash conversion in the first half wasn't quite where we expect it to be, and that's largely due to some delayed receipts and changes in our invoicing profile. And finally, we declared an interim dividend of 1.7 p p. That's in line with our dividend policy of maintaining cover of 2.5 to three times and paying just under a third as an interim. So we have made good progress in our continuing operations, but with those short term market challenges, we've delivered modest revenue growth of 2%. However, significant improvement in our operating profit performance with operating profit up 7,300,000.0 to 8.3 With the actions we took within our A and I business to reduce our fixed resource base and use more variable resources, with actions we've taken across the business to drive improved operational efficiency, we've seen an increase in utilization, particularly within our Energy and Environment business.

Speaker 1

And also with good project delivery, we've seen an improvement in our gross profit margin of 200 basis points to 30%. Then with actions we've taken to centralize our enabling functions and reduce our indirect costs, those costs have come down by just over million and now represent 25% of our revenue. That is higher than our 20% target but reflects the removal of the revenue from the defense business and doesn't yet include the revenue from E3 Advisory. We knew post defense, we'd need to take actions to right size our indirect costs. We've made good progress in the first half.

Speaker 1

And as we go into the second half, we'll see increase in revenue. We'll see the revenue from E3 Advisory, and we're going to continue to manage those indirect costs. So I expect further improvements in the percentage in H2. And then as we go forward, we're going to be continuing to look to right size those indirect costs to remain on our path to 20%. So that gives operating profit million, up million on last year with margins up four thirty basis points to 4.9%.

Speaker 1

Interest costs broadly in line with last year and then our underlying tax rate at 29% is up on last year as I expected. I expect to see that continue to trend towards 30% as we see increasing profits from higher tax jurisdictions, particularly in Australia on the back of the acquisition of E3 Advisory. So turning now to performance of the individual business units. In Energy and Environment, order intake was up 24%, and that reflects us securing those large multiyear programs. If you strip those out, underlying order intake is up around 10%.

Speaker 1

But as you're going to hear from Graeme later, we have experienced some market headwinds mainly around the timing of elections and some market disruption within our Water business. So as a result, we've seen delays in those orders either to the very late in December or into later periods. So as a result, our revenue is down 4% and profits down 14%. However, we have resilient offerings in this space, and we've seen our order book deliverable in the next six months up significantly on last year and on June. So we have confidence in the second half of an improved performance.

Speaker 1

Overall, I expect our full year performance to be broadly in line with the prior year. We've also made good progress on improving our utilizations. With actions we've taken to drive improved operational efficiency, we've seen our utilization up around 3% in the first half. And with increased revenue, I expect to see further improvement in H2 driving back up those margins in this business. Then in Rail, we entered the year with good order book and a strong pipeline, delivering 10% order growth and 2% revenue growth.

Speaker 1

We've seen particularly good growth in our core growth markets of Asia and North America, but more subdued performance within Australia where we operate in a more mature market. With that increase in revenue and with our focus on reducing costs, we've seen our margins increase to just over 12%, giving 15% growth in profit. As we go into the second half, I expect to see continued good performance in Asia and also within Europe. But I expect our revenue in North America to come down a little on the back of the fact our California our element of the California high speed rail projects being delayed. So again, overall for rail for the full year, I expect performance broadly in line with the prior year.

Speaker 1

And then in our emerging A and I business, we continue to see volatility in our markets there and delays in our order intake. We're also seeing ICE for longer, so seeing more of a switch towards our established A and I business than we expected. So as a result, our order intake and revenue are down on last year. But with the actions we've taken to reduce our fixed cost base, both in terms of those fixed resources and using more variable resources but also on our indirect costs, we've seen a significant improvement in our profit and delivered a profit of 1,500,000.0 compared to a loss in the prior year. Looking forward, we expect to see continued uncertainty around the timing of order intake and also continued switch towards the internal combustion engine work.

Speaker 1

So as a result, we've taken a more prudent assumption on our future cash flows in this area and have impaired the goodwill. So we've taken a 14,000,000 noncash adjusting item within specific adjusting items. In Performance Products, our order intake is broadly flat on last year and revenue is up 6%. Within Powertrain, we're seeing volumes up just a fraction in the first half on last year. But as expected within transmissions, we're seeing reducing volumes as two key programs come to an end.

Speaker 1

So that revenue growth is really being underpinned by pass through revenue on our new framework agreement. That attracts quite limited margins. But in the first half, we were able to recognize a one off profit there as we closed out our calendar year 2024 activities in a more efficient manner. So profit was up $800,000 on the prior year. As we go in the second half, I expect that revenue to be underpinned by that pass through revenue on that new framework agreement, and hence, I expect our profit to be just fractionally down in H2 compared to H1.

Speaker 1

And then in our established A and I business, as I've already said, we're seeing ICE for longer. We're also supporting that Performance Products framework agreement by doing some design activity. So we've seen a significant increase in order intake and revenue. Those projects have slightly higher material costs, slightly lower margins. So despite the actions we've taken to significantly reduce costs here, our performance was just below breakeven.

Speaker 1

But that's over a million improvement on the loss we delivered last year. I expect to see continued good demand in the second half and expect this part of the business to deliver above breakeven position for the full year. So as you know, we've run our ANI business as one business unit. So this just combines the emerging and established business. You'll see order intake overalls up 3% and revenues up 5%.

Speaker 1

But more importantly, with the actions we've taken to reduce our costs, we've seen a significant switch in our profit. So we delivered a profit of just over million, which is a million improvement on the position last year. So as you've heard from Graeme, the activity we've taken to sell the defense business has really simplified our group, and we've seen a shift in our mix. So we're now seeing over 80% of our profit coming from our higher margin, higher growth portfolio of environment and energy transition. I also just want to draw your attention to our central costs.

Speaker 1

From the actions we've taken to reduce indirect costs, these have come down by million to million. Turning now to our cash performance. Our net debt at the June was million, and that's reduced to million. As you can see from this waterfall chart, the main movement there has been the receipt of proceeds on the sale of our defense business. Our continuing operations delivered a cash from operations of 1,200,000.0.

Speaker 1

That reflects an EBITDA of 14,400,000.0, an increase in working capital of 13,200,000.0 to give cash conversion of 13%. I always expect lower cash conversion in the first half as we have a number of annual payments and we also pay the prior year bonuses. But that cash conversion is lower than we expected, and that's despite real focus around working capital. And it's been driven by two key reasons. First of all, our R and D tax claim that we recovered from HMRC, last year we got on December 31.

Speaker 1

This year, it's been delayed till the second half, and that's around million. But also, we're seeing some changes in our invoicing profile. Within our A and I business, we're working projects now where we receive significant money upfront at the start of the projects. And also in our Rail business, we're seeing some lengthening of our invoicing milestones as we do more work in Asia where there's larger gaps between invoicing. We're having a real rigorous focus now on improving our invoice.

Speaker 1

And our cash collection is good, but we were now really focused on driving up our invoicing. And that's right at the very start when we contract with clients making sure we get the right terms in our bids through to making sure we deliver our milestones on projects on a timely basis to get those invoices out on time. We did see improved invoicing in quarter two compared to quarter one. And with that focus, I expect further improvements in the second half along with the collection of the R and D tax claim, so expect to see improved cash conversion in H2. We also saw a million cash outflow in our defense business, and that was driven by two reasons.

Speaker 1

First of all, the receipt from our main ABS client was delayed from December into January. That cash has now been received and has been passed on to us by the purchaser as part of a working capital adjustment. We also, though, saw some increase in inventory as we were purchasing some long lead time items. So that reduction in net debt means our leverage was at 0.6x, well within our banking covenants of 3x and below our target of 1.25x. But that doesn't yet reflect the cash out on the acquisition of E3 Advisory.

Speaker 1

So I expect to see our debt increase in the second half as we make that payment. And if that had completed on the December 31, our leverage would have been 1.4 times. We have in place a 150,000,000 RCF facility. And at the December, we had 38,000,000 headroom on that. And because of the sale of defense, we had a very large cash balance of 93,000,000, so good headroom on that facility.

Speaker 1

That facility ends in August 26, so we will be refinancing that in the second half of this financial year. Turning now to our order book. So we ended the half with a robust order book of million, up 13,000,000 on last year and 37,000,000 on June. You'll see from this chart some lengthening of the order book on the back of those multiyear program wins. And our order book of deliverable in the next six months of around 163,000,000 is up around million on June.

Speaker 1

It is a little down on December. But looking at that by our business units, you'll see for Energy and Environment a significant increase in our total order book on the back of those multiyear program wins. And that really demonstrates the resilience of our offerings here. But also our order book deliverable in the next six months is up significantly on both June and December, giving us confidence around our H2 performance. In Rail, again, we see an increase in the total order book, and our order book deliverable in the next six months is up on June.

Speaker 1

It is down a little on December because of a couple of annual orders that we get in The Netherlands got delayed from December until January and February. So again, confidence around delivery in the second half. In ANI, we have seen a reduction in our order book as we work some programs that have come to an end, and we're seeing those delays in order intake. Since the half year, we have been notified of a couple of large wins and are waiting for those to be contracted, and that will improve our order book position. So to summarize that we've made really good progress in the first half around our margin improvement.

Speaker 1

As we go into the second half, we're going to continue to focus on controlling our indirect costs and improving our utilization as we see more revenue come through, but also we maximize our use of flexible resources. Going forward, so we're going to continue to reshape our indirect costs post the sale of defense to maintain ourselves on that path of hitting our 20% target. As you'll hear from Graeme, we're also focusing on driving increased revenue from recurring and digital revenue streams, which attract higher margins. And we'll be continuing to review our portfolio transition. H1 cash performance was not where we expected it to be, and we're going to have a laser focus on delivery of cash collection and invoicing in the second half.

Speaker 1

And that real focus on invoicing to see where we can accelerate milestones on existing programs and get the right terms and conditions within our bids. So that improvement in invoicing along with collection of the R and D tax claim will see improved cash performance in H2. But then going forward, we're going to continue to focus on driving that operating cash performance. We're We're going to be looking at the shape of our CapEx spend given the revised shape and size of the group. And as you'll hear from Graeme, we've got a significant investment in our PP framework agreement, and we're looking at how we phase those cash flows and also fund those.

Speaker 1

And with that, I'll hand back to Graeme, who will talk about the market dynamics.

Operator

So key to our long term strategy is the high growth, high margin energy and environmental business. It's worth noting that we've delivered on this strategy to date, doubling the profit of this business since 'twenty one, 'twenty two. As Judith mentioned, we have seen good orders and order book development in H1 of our Energy and Environmental business. However, we have not seen the expected flow through to revenue and profit in H1 given the timing of orders. The geographic split and client split show that we currently have 64% of our orders generated in The UK and Europe and with 72% from public sector.

Operator

This combination means we have a disproportionate impact by The UK and European elections impacting the timing of orders. Australia at 13% has still got federal elections to come, and we are seeing similar delays in some water orders as a result. We were clearly expecting some of the delays in orders as a result of the elections, but particularly in The UK, we have seen the delay of the spending review to June of twenty twenty five that has created extra delays in project decisions. Notably, we have only 5% in North America, so we are less exposed to any uncertainty created in environmental policy following the US election. With two graphs on the right, you can see that 70% of our orders support environmental adaptation and 30% support energy transition.

Operator

This is supported by the fact that water, air quality, policy strategy and economics make up more than 75% of our business area mix. These are services that are required regardless of the pace of energy transition. With increased demand for energy, we are also seeing high growth in our power planning solutions, particularly focused on industrial decarbonization, where customers are looking for cost reduction and energy resilience from renewable energy sources. The one area we are seeing some longer term headwinds are in is in corporate sustainability, but this represents only 6% of our orders mix. As mentioned on the previous page, we've seen short term headwinds from the particularly the global elections and perhaps a more permanent challenge to corporate sustainability.

Operator

However, we continue to see medium term tailwinds that support our long term growth. In air quality, we are a leading provider of air quality solutions in The UK with strong long term order book. We see significant opportunity to expand internationally into Asia and The Middle East with both public sector and corporate clients. In our key water segments of The UK and Australia, there is a large investment required with aging infrastructure and increased population demand. The key focus is to provide advisory support on the optimal use of investment within utilities.

Operator

In policy, we're seeing increased demand globally for climate risk and adaptation solutions. This gives us opportunity to expand both internationally and more in the corporate sector. With increasing energy demand globally, we see an opportunity to accelerate the take up of our digital application for power planning across Europe. This is required by financial institutions, utilities and high users of energy to support their investment decisions in new infrastructure. While there is a challenge to some ESG solutions, there is still demand for supply chain resilience and circularity solutions that provide longer term economic benefit.

Operator

Within automotive and industrial, we have good progress in returning the business to profitability in the first half following the change in the operating model and shift to a more variable resourcing model we introduced last year. Judith has also shown the importance of our strategy of being technology agnostic and supporting our customers with both established and emerging solutions. We've not seen the growth in the emerging solutions we expected over the last few years due to the geopolitical uncertainty, higher interest rates impacting levels of investment, and higher inflation impacting consumer take up. However, this has been offset to some extent by our established solutions where we have seen the general trend of internal combustion engine for longer. On a combined A and I basis, we've delivered a 3% order growth, 5% revenue growth and a $5,000,000 profit improvement in H1.

Operator

We've also talked about the proactive diversification into new markets of industrial, being aerospace and defense, marine and off highway to offset the declines that we've seen in variability within automotive. In 2022, the industrial segments made up just 25 of the A and I mix, with 75% coming from traditional automotive sectors enjoyed by Ricardo in the past. We delivered good growth in the industrial sectors over the last three years. And in H1, the mix of orders for industrial makes up about 60% of our orders with 40% coming from automotive. We see good opportunity to continue this trend with growth in our industrial segment going forward.

Operator

Within Rail, we've seen good margin accretive revenue and profit growth with margins now at circa 12%. I've talked previously about the importance of our proactive sales and diversification of our Rail business. This is because historically, we have enjoyed success in our traditional mature markets of The UK, Europe, and Australia. However, these mature markets are increasingly challenged on funding from national or state governments, meaning there are fewer larger infrastructure projects. Instead, focus is more on operational efficiency and reduction in maintenance costs.

Operator

We're therefore focused on continued development of our signaling capacity and pivoting our solutions to operations and maintenance. We do see good potential for growth in North America, Asia, and The Middle East. These markets have opportunity for good growth in both metro and high speed rail between cities where we provide safety assurance and systems engineering for both rolling stock and signaling requirements. Following the fires in California, our work on the high speed rail project has been deferred. We're hopeful to recover some of this lost work over the next twelve months with additional projects working with other partners in The U.

Operator

S. Performance Products has had a solid first half with automotive driveline and assembly business. However, with a couple of the driveline projects coming to an end and the powertrain volumes expected to continue to be down in the second half, we have again looked to diversify away from the automotive sector. The new marine framework agreement that has been announced last year continues to progress well and is expected to create significant value for Riccardo. Whilst there is an initial investment by Riccardo of circa million, the net cash investment on the project is only million as we have contracted the customer to pay million back to Riccardo at the start of the production in fiscal year twenty seven, twenty eight.

Operator

The return for Riccardo is therefore expected to be many times the initial net investment, creating long term value. So bringing all of this together, we're very clear on how we create value for each of our business units. Within EE, we have leading capabilities in resilient solutions that are looking to scale in new geographies outside of The UK and Europe, We're also increasing our private sector mix. We're also increasing the strategic consulting capability to create differentiated value by combining our strategic and technical consulting as demonstrated with the acquisition of E3A. Within Rail, we continue to diversify into new growth markets and pivot our solutions in mature markets to focus on cost optimization in operations.

Operator

Within ANI, we continue to focus on growing new customer relationships in industrial segments where we're seeing good growth and creating cost and operational efficiencies for the automotive sector. Within PP, we're focused on creating significant returns on the net investment from the new framework agreement whilst maintaining our existing automotive programs. For the EE, Rail and ANI business units, they are connected by the need globally to align policy, transport and energy and environmental infrastructure to adapt to climate change. Ricardo is developing digital and engineering IP that can support these interrelated complex challenges and create more resilient recurring revenue streams for the future. Much has changed in the macroeconomic and geopolitical situation since we set out our original May '2 ambitions.

Operator

However, as we look forward, albeit from a lower base, we expect to deliver strong profit growth over the next few years. We expect our EE business to deliver double digit revenue growth with mid- to high teens margin. Rail is expected to deliver single digit growth and double digit margin. Automotive and Industrial is expected to deliver single digit growth and trend towards high single digit margin. Performance Products is expected to deliver single digit revenue growth with mid single digit margin performance.

Operator

This all blends to a group revenue growth of mid single digits and expected margin improvement trending towards 10%. Our other targets for the group of cash conversion, CapEx, dividend and leverage remain unchanged. In the first half, we've demonstrated good progress in delivery of the strategy to reposition the portfolio of the group, having divested the finite profitability of defense and replaced it with higher quality of earnings for the long term with E3 Advisory. We remain confident this creates long term value with more than 80% of our profit now generated from environmental and energy transition solutions. We delivered strong year on year profit improvement with ANI now profitable and showing 5% revenue growth.

Operator

The changes we have made to variable resourcing model mean we can now more effectively manage the variation in timing of orders. H1 performance is also supported by continued strong focus on cost management, and we can also take confidence from the strong order intake and order book, particularly in EE and Rail. There remains uncertainty in some of our end markets, which is creating delays in orders timing. As a result, we are laser focused on cash management and minimizing cost to mitigate any challenge in the timing of orders in H2. However, we are also increasingly prioritizing both our portfolio and market focus to deliver more resilient order intake and revenue.

Operator

The transformation we are undertaking is complex with many variables, but despite the short term market headwinds impacting our order timing, we remain confident in our strategy, median turn outlook and expect to deliver strong profit growth over the next few years. Thank you for listening, and I'll now open up for questions.

Speaker 2

Participants can submit questions in written format via the webcast page by clicking the ask a question button. If you have dialed into the call and would like to ask a question, please signal by pressing star one on your telephone keypad. That is star one if you wish to ask a question on the phone.

Speaker 3

James Bayless from Berenberg here. Two questions, if I may. Firstly, when we think about leverage covenants, the RCF refinancing, which is coming up later that year, Can you just talk a bit more around where you're thinking might be on all of that, specifically picking up on some of those comments around that marine framework, phasing of CapEx spend, customer payment? Is there any scope to separate that out from how you and the banks are thinking about underlying group leverage and cash? Any comments there would be appreciated.

Speaker 3

And then secondly, your medium term targets, is there a soft guide on what year you're aiming to achieve those? Specifically then, when we look at what you're saying you're aiming to achieve in ANI, which is high single digit margins, can you just comment on any of the moving parts around how would you get to that?

Speaker 1

Okay. Should I talk to everyone? And I do have my banks in the room. So look, you know, that performance products CapEx investment, we are first of all looking at options at how can we fund that and phase that and seeing if we can reduce the the impact on our leverage from that perspective. Obviously, I will be shortly opening discussions with my banks that are in the room to see what options we have around ring fencing that within our covenant calculations as well.

Operator

Yes. Look, I mean, in terms of the medium take guidance, what we've tried to do is be pretty explicit by business unit, which then obviously trends to the total group number. As with our there are many moving parts obviously within each of the business units, which is why, again, we want to look through that for the longer term transition more broadly and why we're confident in the longer term. So look, we can go into lots of detail at each of the business unit levels. We've tried to separate those out and got good confidence we can deliver at the business unit level, but also at the average group level.

Speaker 4

Joe Brent from Pamyolibro. I've got three questions. If I ask to do them one at

Operator

a time.

Speaker 1

That would be good.

Speaker 4

Excellent. I can at least remember them. So the first one was a really useful slide on the A and I mix. And you tell us where industrial is today. Where do you think that could get to on a medium term view?

Operator

So look, we've seen very good orders growth in industrial. As we've said, look, that covers both aerospace and defense, marine and then also, sorry, the off road commercial space. We see opportunity there across, again, multi geography in terms of key customer relationships that we're building. And we would expect that to continue at single digit type revenue growth over the medium term. The challenge is in the automotive space, and we've seen that decline fairly consistently.

Operator

And again, that the trends and the challenges in that market are well publicized. So look, we're very keen to, again, diversify the focus and develop in these other areas.

Speaker 4

Thank you. And then at EE, you talk about sustainability perhaps being exposed to some of the macro changes being only 6%. If we look at the other 94%, are parts of that affected by geopolitics as well?

Operator

So limited, we think, in the longer term because of the, again, the focus on adaptation. So about 70%, as we said, is in adaptation with 30% more in that energy transition space. Even within that energy transition space though, there is significant growth opportunity for industrial decarbonization. So where people are looking for cost reduction from renewable sources and energy resilience from renewable sources. So we see that for the medium term actually very strong resilient solutions across the board.

Speaker 4

Thank you. And then in terms of finally on M and A, I mean clearly a busy period behind you. We're looking at sort of complexity around your balance sheet and the government tests and the leverage and lots of moving parts. But could you help us kind of understand what the future might look like in terms of further disposals and further M and A, which order you might do that in and sort of what fire pay you think you've got?

Operator

So look, again, back to the strategy. We've said consistently we want to develop and grow in environmental and energy transition. We've made good progress, we believe, with the four acquisitions and two divestments in the last two or three years. With that, the defense is obviously the biggest element of that in the most recent times. We're still left with the established mobility space where we've got clearly the performance products piece and an element of ANI.

Operator

We'll be looking at, again, how do we monetize and create value in the longer term. We have the benefit of long term contracts in there, so it creates cash generation to support in the short term as well. So again, looking at ways to monetize in both the short term cash generation of those programs plus potentially for the future. So that will be the area we'll be looking at.

Speaker 5

Samuels here from Stifel. Two questions for me, please. Just firstly on E3 advisory, appreciate you had it for a few months, but any color on how that's bedding in and how that's doing would be great. And then on the medium term targets, is it right to assume you basically get there just by the indirect cost going down given you're already at 30% gross margin? Is there still scope to improve that gross margin further within the mix as well?

Speaker 5

So perhaps the 10% could be a touch higher in the longer term?

Operator

So let me do E3A first. So look, we're really, really excited about the E3 acquisition. Look, they are leaders in commercial advisory support for big infrastructure projects. And increasingly, they are doing those in environmental solutions, and that's wind, energy storage, water type infrastructure type projects. So there's a very significant crossover from an energy and environmental perspective, but also from a transport perspective, they also support significant rail and road projects.

Operator

So the combination of their advisory capability with our technical capability creates a very compelling value proposition for the customer bases. So we are looking at the specific projects. We are already bidding on a number of projects as a result of the combination. Those are specific projects, but also new framework agreements that we can bid on together. So look, if anything, we are more excited having got under the skin of where the opportunities are and how that's developing.

Operator

So it's developing well.

Speaker 1

And then from the margin perspective, there's two things that we can really drive to drive margins. First of all, as you say, is that indirect cost, but it's more around operational efficiency. So how do we drive that operational efficiency, which will reduce our indirect costs could also nudge up our utilization a little bit as we drive efficiency in how we deliver projects. But then also, as Graeme, I both said through the presentation, we are looking at driving increases in that recurring digital and IP revenue, which is higher margin, and things like the E3 Advisory acquisition has a higher margin than the rest of the group. So I think that getting to that 10% target will come from a mix of driving operational efficiency, but also a little bit around the shift in the mix of our portfolio.

Speaker 6

Richard Jeans, Hardman. On technology, I'm just curious about what was behind the reduction in the R and D spend and what you maybe a bit of color around your technology strategy going forward and whether you can use it to improve productivity as well, please? Thank you.

Speaker 1

Do you want me to pick up the spend? Yes. So, look, our R and D spend is a mix projects which get classified as R and D. So we can see some switches in our R and D spend depending on some of the projects we work with. So we do a lot for Department of Energy in The U.

Speaker 1

S. That are treated as R and D projects where we fund those. So our R and D spend can switch a little bit from year to year as a result of that. The R and D spend in sort of developing the IP and developing technology and digital products is still continuing at pretty similar levels to prior year. So that's the real focus on how do we drive the investment in products that give us a return for the future.

Operator

The other thing that is that we're also spending more on the digital solutions. We've developed the platform, the first application that's being launched in Greece, and we're now looking to roll that out across Europe. So again, that is an area where we're also prioritizing our investment in addition to just the R and D space.

Speaker 7

Hi there. Just two quick questions. Just on the $14,000,000 goodwill write down, can you just characterize that a bit more for us? And what percentage of the segment goodwill is that? And do you think there's any more to come?

Speaker 7

And then just on the order intake and the site, can you characterize the size of orders? And if there's anything you can do to help manage timing of them and prevent further delays? So

Speaker 1

million goodwill, that is the entire goodwill in the emerging A and IE business. Look, we took the decision when we saw that the prudent view on our future cash flows was going to be lower than we'd used previously. It was indicating some impairment. So we took the decision to write off the full amount of the goodwill in that business to avoid any future write offs. That goodwill arose on an acquisition we made many years ago in Germany and was actually blended across both the emerging and established business when we did the split of those businesses.

Speaker 1

We wrote off the established a few years ago and are now written off the full amount of the emerging.

Operator

In terms of the size and scale of projects, look, it clearly varies business by business. But I guess just to give a sense of scale, particularly within the A and I business where, look, variation and uncertainty causes some delays. If we've got a $10,000,000 project, which is delivered over a twelve to eighteen months, it can be anywhere of $500,000 to $1,000,000 a month in terms of lost revenue if there is a delay of that sort of magnitude. So and we are seeing or have seen causing the implications on the trading statement that those have moved out as a result of the increased certainty uncertainty over November, December, January. So that is the size and scale.

Operator

What are we doing to mitigate that? We're actually trying to create bridging orders where for many of our customers, they will have a commitment. So we might not have the end customer who is ultimately taking the solution. We're trying to create bridging solutions that says, okay, how do we do the first half a million or a million to get you going, where there is a no regrets type of delivery before they've even got their end order from their end customer. So we're trying to work proactively to manage customer risk and deliver short term so we get the monthly revenue activity without that big order.

Operator

So we're trying to chunk up the orders to manage them more effectively.

Speaker 6

There are no questions at all. If there are any further questions in the group, please raise your hand.

Operator

Okay. Thanks, everybody. Appreciate your time.

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Earnings Conference Call
PHX Minerals H1 24/25
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