SMS.L Regulatory News (SMS)

12 September 2023

Smart Metering Systems plc

Strong H1 performance; confident outlook

Smart Metering Systems plc (AIM: SMS, "SMS" or the "Group"), the integrated energy infrastructure company owning and managing meters, energy data, grid-scale batteries and other carbon reduction ("CaRe") assets, today publishes its half year results for the six months ended 30 June 2023.

H1 financial performance

1 ILARR is the revenue generated from meter rental and data contracts at a point in time. Includes revenue from third-party managed meters.

2 Pre-exceptional EBITDA is statutory EBITDA excluding exceptional items.

3 Underlying profit before taxation is profit before taxation excluding exceptional items and amortisation of certain intangibles.

4 Underlying basic EPS is underlying profit after taxation divided by the weighted average number of ordinary shares for the purpose of basic EPS.

A reconciliation between statutory and underlying performance is detailed in the Financial Review section. 

Highlights

Financial

· ILARR of £110.0m at 30 June 2023, up 13% on year-end (31 December 2022: £97.1m) and up 18% on the prior period (30 June 2022: £93.1m)

· Revenue up 26% to £79.3m (H1 2022: £62.7m)

· Pre-exceptional EBITDA up 24% to £36.1m (H1 2022: £29.1m)

· Underlying profit before taxation up 9% to £11.2m (H1 2022: £10.3m)

· Net debt at 30 June 2023 of £96.3m (30 June 2022: net cash of £38.6m)

Smart meters

· ILARR growth was supported by higher rental per smart meter, driven by indexation and an increased focus on single fuel and Industrial and Commercial ("I&C") smart meter installations

· Smart meter portfolio increased to 2.3 million (31 December 2022: 2.1 million)

· Contracted order pipeline of c.1.95 million (31 December 2022: c.2.17 million), net of c.220,000 smart meters installed during the period

· Significant year-on-year growth in total engineer-delivered works resulting in higher transactional revenues and ILARR growth

· Continued increases to engineering capacity is expected to accelerate the installation run rate in H2 2023; on track to deliver at least 500,000 installations this year

Grid-scale batteries

· Grid-scale battery portfolio increased to 860MW (31 December 2022: 760MW) including:

o  240MW operational1

§ 140MW operational during H1 2023; performance within the Board's expected range

§ Additional 100MW operational since H1 2023

o  370MW fully secured, with 50MW expected to be operational in Q4 2023

o  250MW under exclusivity

· Secured the option to increase the duration of at least 290MW 1 MW/hour sites to 2 MW/hour sites

Developing CaRe assets

· SMS continues to build delivery capability, commercial models and pipelines in developing CaRe assets, strategically aligned with adjacent markets

o  Acquired the domestic services division of Evergreen Energy on 22 August 2023, specialising in the installation and maintenance of renewable energy assets, including heat pump, solar and battery storage for homeowners

o  Development of METIS Energy - currently piloting behind-the-meter CaRe asset solutions to businesses, housing associations and consumers, beginning with domestic EV charging

o  Installed first public EV charging hubs, operated by the Clenergy EV platform

Capital allocation

· The current pipeline(2) of smart meters and grid-scale batteries can be fully funded from asset-backed internally-generated cash flows and debt facilities

· Compounding RPI on recurring revenues provides effective protection in a higher interest rate environment

· Notwithstanding this strong position, the Group may consider selective asset recycling to maintain a prudent level of gearing in the medium term and to support future growth

Outlook

· FY 2023 pre-exceptional EBITDA and underlying PBT are expected to remain in line with the Board's expectations

· The Board expects FY 2024 pre-exceptional EBITDA to be marginally ahead of its previous expectations with year-on-year growth of c.20%, and underlying PBT is expected to be in line with the Board's previous expectations

· The Board continues to be confident in the medium-term outlook with the index-linkage of SMS's meter revenues continuing to underpin long-term cash flows

· Dividend growth of 10% to 33.275p per share intended for FY 2023 in line with stated policy of a 10% per annum increase until 2024; expect to continue with progressive dividend policy thereafter

(1) Of the 240MW operational, 50MW is energised and will be trading by the end of September

(2) Current pipelines include the existing c.1.95million meter order pipeline and 620MW 1 hour duration grid-scale battery pipeline.

Tim Mortlock, Chief Executive Officer, commented:

"SMS continues to deliver operationally and financially, with the strength and resilience of our model reflected in the significant growth in ILARR and EBITDA achieved during the first half of the year.

"Our index-linked revenues provide a natural hedge against increased interest rates in the short term whilst significantly benefitting long-term cash flows.

"Our existing pipelines of meters and grid-scale battery assets can be fully funded from our internal cash flows and debt facilities. Delivery of this pipeline is expected to drive further growth, and to more than double the Group's EBITDA over the next c.4 years.

"We are working to expand these pipelines, and to deliver the significant additional growth opportunities that exist within our developing CaRe assets.

"We have always been, and will remain, focused on delivering high quality, safe and secure growth."

There will be an analyst webcast at 9.00am today - please contact sms@instinctif.com for details. The half year results presentation will be published on the Group's website shortly.

For further information:

The Company announces that its Joint Broker and Nominated Adviser has changed its name from Cenkos Securities plc to Cavendish Securities plc following completion of its own corporate merger.

Notes to Editors

Smart Metering Systems plc (www.sms-plc.com), the integrated energy infrastructure company owning and managing smart meters, energy data, grid-scale batteries and other carbon reduction assets ("CaRe") to facilitate effective energy management. The Group manages and optimises these assets through its in-house technology and data analytical platform "METIS".

Established in 1995, SMS provides a full end-to-end service, from funding and installation to management and maintenance, with a highly skilled workforce, deep engineering expertise and well-established industrial partnerships.

SMS is leading the low carbon, smart energy revolution in the UK and is committed to reducing its own carbon emissions to net zero by 2030. SMS has been recognised with the London Stock Exchange's Green Economy Mark every year since it was introduced in 2019.

SMS plc is headquartered in Glasgow with a national presence across twelve UK locations.

SMS's shares are listed on AIM.

Overview

The Group continued to deliver a strong operational and financial performance during H1 2023; a testament to the resilient nature of our business model underpinned by our index-linked annual recurring revenues, which increased to £110.0m (+13% on year-end 2022). Our operational grid-scale battery portfolio performed in line with expectations, and we continued to make progress in developing other CaRe assets. 

In H1 2023, SMS's engineering capability delivered significantly higher volumes of activity compared to the previous period. It fulfilled more transactional callout services alongside a higher proportion of single fuel and I&C installations, which generate a higher average rental per meter. The Group installed c.220,000 smart meters during H1 2023 (H1 2022: c.230,000) and, supported by continued increases to our engineering capacity, expects to accelerate the meter installation run-rate during the second half of the year and to achieve at least 500,000 installs in FY 2023.

The Group's smart meter portfolio stands at 2.3 million (31 December 2022: 2.1 million), with an additional contracted pipeline of c.1.95 million smart meters to be installed by the end of the roll-out programme.

The Group's operational grid-scale battery portfolio performed within the Board's expectations, generating an annualised EBITDA of c.£57,000 per MW in the period. An additional 100MW has become operational since 30 June 2023, bringing the Group's total operational capacity to 240MW. We expect to increase this to 290MW by year end. The balance of our grid-scale battery pipeline stands at 570MW, of which 320MW is fully secured, with 250MW under exclusivity.

The existing pipeline of meter and grid-scale battery assets is expected to more than double the Group's EBITDA in c.4 years compared to FY 2022.

Notable developments in other CaRe verticals were achieved in H1 2023, followed by the acquisition of Evergreen Energy's domestic services division in August, which will enhance SMS's capacity to deliver an extended range of low-carbon, behind-the-meter energy solutions to the UK's domestic and commercial marketplaces. The Group has been developing its new consumer-facing business - METIS Energy - and pilots have commenced for the delivery of domestic EV infrastructure. We also installed our first public EV charging hubs in Elmbridge, operated by the Clenergy EV platform. These early-stage projects are important to inform the commercial model as we seek to build a diverse pipeline of activity across the UK.

The Board expects FY 2023 pre-exceptional EBITDA and underlying PBT to be in line with its expectations. For FY 2024, the Board expects pre-exceptional EBITDA to be marginally ahead of its previous expectations with c.20% year-on-year growth. Despite the impact of higher interest rates, underlying PBT is expected to be in line with previous expectations. The medium-term outlook remains strong as our index-linked revenues provide a hedge against interest rates whilst significantly benefiting long-term cash flows.

Index-linked annualised recurring revenue

ILARR grew to £110.0m as at 30 June 2023, which includes the annual RPI adjustment. This represents a 13% increase since the year end (31 December 2022: £97.1m).

The Group's ILARR grew in line with the Board's expectations with higher rental per meter, driven by indexation and an increased delivery of single fuel and I&C smart meter installations.

UK smart meter rollout

SMS installed c.220,000 (H1 2022: c.230,000) smart meters during the first half of 2023, increasing the Group's smart meter portfolio to 2.3 million (31 December 2022: 2.1 million). The Group has maintained market share of c.14%, in line with FY 2022.

The UK smart meter rollout continues to present a significant opportunity to grow our ILARR, with a contracted smart meter order pipeline at 30 June 2023 of c.1.95 million meters (31 December 2022: c.2.17 million), net of meters installed in the period. Once fully installed this pipeline is expected to add c.£47m of EBITDA, excluding the impact of RPI. The roll-out programme aims to have at least 75% of all meters exchanged to smart by the end of 2025.

SMS's engineering capability delivered higher volumes of activity compared to the prior period, fulfilling more transactional callout services alongside a higher proportion of single fuel and I&C installations (which generate a higher rental income per meter). The positive net outcome was strong growth in ILARR and higher transactional revenue. We also continued to ensure the efficient overall utilisation of our engineering capacity during this period.

The Group has further increased its engineering capacity and expects the meter installation run-rate to accelerate during the second half of the year as a result; we expect to install at least 500,000 meters in FY 2023.

H1 2023 saw a concentrated drive to recruit and retain skilled talent amidst a competitive engineer labour market, with high demand across the industry. There will be ongoing investment in these initiatives during H2 2023, especially in the southeast of England, to ensure we appropriately and efficiently balance regional engineering capacity with customer portfolios. This, coupled with SMS's strong supply chain and inventory levels, provides the Board with confidence in the Group's ability to deliver successfully its contracted smart meter pipeline.

SMS has continued to support the enrolment and adoption of first generation ('SMETS1') smart meters into the Data Communications Company ("DCC") platform. The migration of the Group's own SMETS1 portfolio is progressing and is expected to continue through the remainder of the year in line with the wider enrolment and adoption programme.

During H1 2023, SMS won a pilot project with Alternative Home Area Network Company aimed at removing the technical barriers for smart meters in 'hard to reach' residential properties, which account for c.4% of UK households. This project builds on our previous provision of test centre facilities for this technical solution, which, alongside the Group's end-to-end integrated platform, provides additional growth opportunities in smart metering.

Grid-scale battery storage

At 30 June 2023, the Group's portfolio of grid-scale battery storage assets totalled 860MW (31 December 2022: 760MW), split as follows:

· 240MW1 operational

· 140MW operational during H1 2023

· additional 100MW became operational in H2 2023

· 370MW fully secured, with 50MW expected to be operational in Q4 2023

· 250MW under exclusivity

Performance of the operational sites in H1 2023 has been within the Board's expected range, generating an annualised EBITDA of c.£57,000/MW. As anticipated, a larger volume of available battery storage capacity across the UK has saturated the frequency market, which was the primary grid service for the Group's portfolio in the prior year. Revenues year-to-date have been largely generated from balancing services, which forms the basis of our long-term expected annualised EBITDA contribution.

The successful energisation and commencement of operations for the additional two 50MW sites in September is a significant milestone for the business as we continue to execute on our pipeline and grow our operational, revenue generating, portfolio. A further 50MW project is in advanced construction and is expected to be operational by year end.

SMS has secured the option to increase the duration of at least 290MW 1 MW/hour sites to 2 MW/hour sites, which will enable the Group to access further revenue opportunities from delivery of balancing and other wholesale services.

(1) Of the 240MW operational, 50MW is energised and will be trading by the end of September

Developing CaRe verticals

Our developing CaRe verticals are strategically aligned with adjacent markets in which we can leverage our closely related technologies, engineering expertise and wider capabilities.

Behind-the-meter

SMS has been actively developing METIS Energy, contributing to the Group's journey to provide behind-the-meter CaRe solutions for businesses, housing associations and consumers, which are critical to the UK's transition to net zero.

The initial focus of METIS Energy will be the delivery of domestic EV charging infrastructure, with the aim of extending this to solar, storage and air source heat pump solutions in the near term. The Group has been operating several pilots and is actively engaging with the market, in particular housing associations and end consumers, to develop the commercial asset models required to scale full operation. 

SMS purchased the domestic services division of Evergreen Energy Limited in August 2023, bringing into the Group significant technical expertise in domestic heat pumps, solar PV and battery storage. This strategic acquisition bolsters the Group's overall capacity to deliver these carbon reduction assets on a wider national scale, to a fast-growing domestic and commercial marketplace.

We have also partnered with Samsung to deliver a UK Government funded heat pump trial in Oxford, comprising 150 heat pumps. This initial project is part of a wider requirement for 30,000 air source heat pumps across the council by 2040 and could be further upscaled nationwide.

Public EV charging infrastructure

The Group has installed its first public EV charging hubs in Elmbridge. The hubs will be operated by the Clenergy EV technology platform, a charge point operator platform which now manages over 3,500 public charging stations across the country. We are working with landlords, businesses, local authorities and fleet operators to build a pipeline of activity in the destination and rapid charging segments of the EV market and early-stage projects like this are important to inform the business case.

This is a developing area of our business and one which is closely aligned to our existing engineering skills and technology platforms, and where we see significant growth opportunity over the longer term.

Energy data management

Earlier this year we were pleased to be the largest independent aggregator of customers into the National Grid Demand Flexibility Service, which we believe is an important precursor to the development of a more flexible energy system - built on the data from smart meters.

As an established provider of accredited half hourly data services to businesses and energy suppliers in the I&C space, we have extended this capability in recent years to ensure we can obtain data effectively from domestic smart meters.

We are, therefore, well positioned as the industry programme to facilitate the mandatory market wide introduction of half hourly settlement to energy suppliers on smart meters progresses. SMS have been accepted as early adopters for the programme, with our METIS data services platform scheduled to participate in system testing in Q4. This programme, once implemented by 2026, will enable a more flexible UK energy system.

Energy Services

As expected, H1 2023 saw continued growth in our traditional consultancy and energy management services compared to the prior period, with ongoing pressures on our Industrial & Commercial customers to reduce costs in response to the current inflationary environment and retail energy prices.

ESG progress and sustainability

During H1 2023, SMS continued to make progress in executing its 2030 net zero roadmap.

Energy-efficiency upgrades are almost complete at one of our major office sites, including the use of solar, batteries and air source heat pumps. Almost one-fifth of the Group's fleet are expected to transition to mild-hybrid (MHEV) vehicles by the end of the year, firmly on track to transition the entire vehicle fleet to fully electric by 2030. 

SMS's 'handprint' (carbon emissions mitigated through our customers using our products and services) during the period was twenty-two times higher when compared to our total Scope 1 and Scope 2 'footprint' (carbon emissions generated through our operations for the reasons explained below).

We have also seen continual improvement across our ESG ratings during H1 2023. Notably:

· MSCI - upgraded to AA rating

· S&P Global - increased score of 50 from 39, performing significantly above the average global score of 23

· Sustainalytics - performance in the top 4th percentile for the 'Global Universe' and 'Subindustry' categories

· Moody's - performance above sector average across all ESG performance categories

Capital allocation

The Group's current pipeline of smart meters and grid-scale batteries can be fully funded from asset-backed internally generated cash flows and debt facilities.

The Group has incurred c.£60m of capital expenditure on grid-scale battery storage sites still in construction and not yet operational as at 30 June 2023. Adjusting for this, the Group's leverage ratio is closer to c.0.5x (unadjusted: c.1.3x).

Notwithstanding this strong position, the Group may also consider selective asset recycling to both maintain a prudent level of gearing in the medium term and to support future growth.

Board changes

Mike Winkel was appointed as a Non-executive Director of the Group from 6 June 2023. As former COO of E.ON SE and CEO of its renewables business, Mike has extensive energy industry experience, which will be of significant value to the Group as it continues to build on its established growth platform. 

Current trading and outlook

Meters:

· ILARR at the end of August 2023 stood at £111.0m (30 June 2023: £110.0m).

· Expect to install at least 500,000 meters in 2023 with a higher average rental per meter than our previous expectations.

Grid-scale battery storage:

· Two 50MW sites operational in September; further 50MW site expected to become operational by the end of the year.

· Trading performance of the Group's operational portfolio in H2 2023 is expected to remain in line with H1 performance.

Outlook:

· Index-linked revenues provide a hedge against short-term interest rates whilst significantly benefiting long-term cash flows.

· FY 2023: The Board expects pre-exceptional EBITDA and underlying PBT to remain in line with its previous expectations.

· FY 2024: The Board expects pre-exceptional EBITDA to be marginally ahead of its previous expectations, with year-on-year growth of c.20%, and underlying PBT to be in line with its previous expectations.

· The Board remains confident in both the near-term and medium-term outlook.

Financial review

Revenue

Asset management revenues of £53.6m are 20% up on the prior period. This growth reflects the flow-through effect of meters installed by the end of 2022, new assets installed in H1 and the annual RPI uplift which took effect on 1 April 2023.

Asset installation revenues of £17.6m increased 43% on the prior period as a result of increased volume in transactional meter works, including emergency callout services.

Energy management revenues of £8.1m were 45% up on the prior period. This includes £4.0m revenue from our grid-scale battery sites (H1 2022: £2.8m); two further sites became operational in December 2022. Revenue from energy management excluding grid-scale batteries was £4.1m, up 46% on the prior period as a key customer project in the hospitality sector sustained momentum with a sector focus on energy efficiency. At the beginning of the period, the energy management division also benefited from the successful participation in the National Grid Demand Flexibility Service using our Flexigrid platform.

Gross margins

SMS includes depreciation on revenue-generating assets within cost of sales for statutory reporting purposes. Removing this from the gross margin provides a better comparison of the Group's underlying trading performance year-on-year.

Depreciation-adjusted gross margin for the asset management segment was 93% which is in line with prior period (H1 2022: 93%).

The asset installation segment gross margin was 25% (H1 2022: 14%). As expected, the margin recovered through the second half of 2022 and into H1 2023. H1 2022 margin was depressed by additional one-off costs incurred in the sizeable upscaling of the Group's engineering workforce. Investment in our engineering capacity has continued in H1 2023, whilst ensuring efficient utilisation.

The energy management segment depreciation-adjusted gross margin has slightly decreased to 46% (H1 2022: 49%). This is due to our grid-scale battery sites which generated a 68% depreciation-adjusted gross margin over the period (H1 2022: 75%), impacted by timings as two further sites ramped up revenue-generating activity following completion of construction at the end of 2022. Grid-scale batteries delivered revenue of £4.0m and depreciation adjusted gross profit of £2.7m in the period. The gross margin on the segment's other activities remained broadly constant at 25% (H1 2022: 23%).

Overall, the depreciation-adjusted gross margin at the Group level remained consistent with the prior period at 73% (H1 2022: 73%).

Pre-exceptional EBITDA

Pre-exceptional EBITDA provides a measure of underlying performance that is comparable over time. Pre-exceptional EBITDA of £36.1m is 24% higher than in the prior period (H1 2022: £29.1m).

The £11.8m increase in depreciation-adjusted gross profit is partly offset by a £4.6m increase in net operating costs, excluding depreciation and amortisation. This has been driven primarily by an increase in staff costs, with several reward initiatives delivered in the period in recognition of the sustained inflationary pressures.

IT costs have also increased on the prior period, driven by strategic investment in key technologies and platforms to support growth in both our existing and developing CaRe verticals.

Underlying profit before tax

Depreciation costs on meter assets increased 15% to £15.7m (H1 2022: £13.7m) due to the increase in the meter asset portfolio.

Depreciation costs on grid-scale battery sites increased 275% to £1.5m (H1 2022: £0.4m) as a consequence of the commencement of depreciation on operational grid-scale battery sites at the end of 2022 and into H1 2023.

Depreciation costs on general property, plant and equipment, excluding meter assets and grid-scale battery sites, has reduced by £0.5m to £1.4m (H1 2022: £1.9m) due to some computer equipment and fixtures and fitting now being fully depreciated.

Amortisation costs on our intangible assets of £2.4m (H1 2022: £2.1m) mainly consist of software amortisation and are slightly higher than the prior period as a result of ongoing investment in our IT systems.

Net finance costs increased by £3.0m to £4.6m (H1 2022: £1.6m). Finance costs relating to our loan facility increased £3.1m as we started drawing on the facility in the second half of 2022 and macro-economic conditions have driven up interest rates in the current period. Interest on leases also increased £0.1m in relation to land leases on our grid-scale battery sites. The impact was, however, partly offset by interest income earned.

As a result, underlying profit before taxation increased by 9% to £11.2m (H1 2022: £10.3m).

Exceptional items

Exceptional items of £2.0m (H1 2022: £3.3m) mainly comprise a £1.9m loss on the traditional and first-generation smart meter ('SMETS1') portfolio (H1 2022: £3.3m). In line with the Group's established policy, these losses are shown separately as exceptional items in order to enhance disclosure of underlying continuing profitability. Other exceptional operating items amounted to £0.1m (H1 2022: £nil).

Effective tax rate

The Group's capital expenditure on meter assets qualifies for capital allowances, providing the Group with tax relief on this expenditure. These allowances are claimed in the tax year in which the asset is acquired and set against taxable profit for that year, thus reducing the total tax payable. As a result, the Group was not tax-paying in either the current or prior period.

The current estimate of the effective tax rate on pre-exceptional profits for the full year is 27.41% (30 June 2022: 25.49%). This broadly represents the announced rate of UK corporation tax of 25% from 1 April 2023, which is the rate that will apply when the deferred tax liability generated by the capital allowances unwinds. The increase in the forecast full year effective tax rate is largely attributable to a reduction in the deferred tax asset on the Group's share options.

Earnings per share

Underlying basic earnings per share (EPS), which excludes exceptional items, amortisation of certain intangibles and their associated tax effect, was 6.13p (H1 2022: 5.92p), reflecting the growth in underlying profitability of the Group. Statutory earnings per share increased to 4.32p (H1 2022: 3.37p).

Dividend

A 30.25p per share dividend in respect of FY 2022 was approved at the Group's Annual General Meeting in May, and the fourth and final instalment of this was paid in July 2023. A dividend accrual of £10.1m has therefore been recognised at 30 June 2023 in our interim financial statements.

In line with the Group's policy to grow dividends at 10% per annum until 2024, a 33.275p per share dividend is intended in respect of FY 2023. This is expected to be settled in four equal quarterly instalments in accordance with the provisional timetable below:

The Board remains comfortable that future dividend payments are sufficiently secured by long-term,

sustainable cash flows generated from our existing portfolio of metering, data and grid-scale battery assets.

Cash flow and capex investment

Operating cash inflow in H1 2023 was £30.3m (H1 2022: £18.6m). The cash inflow reflects £36.1m pre-exceptional EBITDA, £2.7m of non-cash costs included in EBITDA and a £8.5m cash outflow on working capital net of tax receipts, largely due to a deliberate build-up of inventory levels to mitigate the risk of delays in the supply chain and ensure that meters are available to grow our installation run rate.

The Group drew down a further £75.0m under its loan facility during the period, taking the total facility drawn to £140m.

The cash generated from operations and from our borrowing is funding continued investment in our revenue-generating meter and grid-scale battery assets.

Capital expenditure on property, plant and equipment was £63.0m (H1 2022: £59.1m). Of this, £50.1m was invested in meter and data assets and £10.2m in developing grid-scale battery sites.

Investing activities also include payments of £0.5m to settle deferred consideration on battery sites acquired in prior periods and a further £7.9m of instalment payments for grid-scale batteries which have not yet been delivered. On the balance sheet, the sites under development are classified as assets under construction within property, plant and equipment and the instalment payments for batteries are classified as other non-current receivables.

A further £2.6m (H1 2022: £1.1m) investment has been made in intangible assets, mainly relating to the development of software to support the metering, data and installations businesses.

Financial resources

Net debt at 30 June 2023 was £96.3m (31 December 2022: £31.2m). This excludes restricted cash and lease liabilities accounted for under IFRS 16.

The Group has in place a £420m debt facility and was fully compliant with all its bank covenants throughout the period. The Group has £45.3m available in cash (31 December 2022: £32.8m) and £280m in unutilised facilities (31 December 2022: £355m) and therefore continues to have the financial flexibility required to deliver growth in a capital-efficient way.

The Group's leverage ratio, calculated as net debt over the 6-month annualised EBITDA, was c.1.3x at 30 June 2023. However, this includes c.£60m of cumulative capital expenditure on the construction of grid-scale battery storage sites that are not yet operational. Adjusting for this, the Group's leverage ratio is closer to c.0.5x.

The Group's current pipeline of smart meters and grid-scale batteries can be fully funded from asset-backed internally generated cash flows and debt facilities. Notwithstanding this strong position, the Group may also consider selective asset recycling to both maintain a prudent level of gearing in the medium term and to support future growth.

Definitions of alternative performance measures

Reconciliation of statutory to underlying results

SMS uses alternative performance measures, defined above, to present a clear view of what the Group considers to be the results of its underlying, sustainable business operations. Excluding certain items enables consistent year-on-year comparisons and aids a better understanding of business performance. A reconciliation of these performance measures is disclosed below:

1 Exceptional items are those material items of income and expense which, because of the nature or expected infrequency of the events giving rise to them, merit separate presentation on the consolidated income statement.

Financial tables and notes

Consolidated income statement

For the period ended 30 June 2023

1 Refer to note 4 for details of exceptional items.

Consolidated statement of comprehensive income

For the period ended 30 June 2023

The profit from operations arises from the Group's continuing operations.

Earnings per share attributable to owners of the parent during the period:

Consolidated interim statement of financial position

As at 30 June 2023

Consolidated interim statement of changes in equity

For the period ended 30 June 2023

Consolidated interim statement of cash flows

For the period ended 30 June 2023

1 Non-cash material exceptional items include £1,857,000 for losses on our meter portfolio (30 June 2022: £3,293,000).

2 Payments for acquisition of subsidiaries comprise £543,000 of deferred consideration from prior period acquisitions settled in the current period. There were no new subsidiaries acquired in the period ended 30 June 2023.

Notes to the interim report

For the period ended 30 June 2023

1 Basis of preparation

This condensed consolidated interim financial report for the half-year reporting period ended 30 June 2023 has been prepared in accordance with Accounting Standard IAS 34 Interim Financial Reporting. The Company is a public limited company incorporated and domiciled in Scotland whose shares are quoted on AIM, a market operated by the London Stock Exchange.

The financial information contained in this half-yearly financial report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. It does not therefore include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2022.

The financial information for the six months ended 30 June 2023 is also unaudited.

The comparative information for the year ended 31 December 2022 has been extracted from the Group's published financial statements for that year, which were prepared in accordance with UK-adopted international accounting standards and have been delivered to the Registrar of Companies. The report of the auditor on these accounts was unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Going concern

Management prepares budgets and forecasts on a five-year forward-looking basis. These forecasts cover operational cash flows and investment capital expenditure and are prepared based on management's estimation of installation run rates through the UK smart meter rollout and the planned roll-out of grid-scale battery storage assets.

Management has modelled several different meter installation and grid-scale battery storage scenarios, including a downside scenario which assumed a reduced rollout of new meter installations over the five-year period and delayed energisation of grid-scale battery storage sites. The scenario proved that the business would still have sufficient cash flow to continue to operate, banking covenants would remain satisfied with adequate headroom, and adequate cash would be available to cover liabilities and operating costs. This modelling provides confidence to management that, even in adverse circumstances, the business will still have sufficient resources to continue to operate.

The Group has a £420m revolving credit facility which matures in December 2025. At 30 June 2023, the Group had drawn down £140m (31 December 2022: £65m) and had a net debt position of £96.3m (31 December 2022: £31.2m).

The Group was compliant with all its debt covenants at 30 June 2023. The financial covenants attached to the facility are that EBITDA should be no less than 4.00x interest and net debt should be no more than 4.75x EBITDA. At 30 June 2023 these stood at 11.79x and 1.28x respectively, demonstrating significant headroom. The Group does not expect to breach these covenants in the year from the date of release of this report.

The Group balance sheet shows consolidated net assets of £510.9m (31 December 2022: £533.5m), of which £456.4m (31 December 2022: £429.7m) relates to revenue-generating meter and data assets. The liquidity of the Group thus remains strong and continues to provide the financial flexibility required to support the Group's long-term growth prospects.

With significant coverage provided by existing long-term, inflation-linked and recurring cash flows, the Group remains committed to its enhanced dividend policy. It approved a 30.25p per share annualised dividend in respect of FY 2022 and all four cash instalments had been paid at the date of approving the interim financial statements. The Group intends to pay a 33.275p per share annualised dividend in respect of FY 2023.

Based on the current cash flow projections and facilities in place and having given consideration to various outcomes of future performance and forecast capital expenditure, including extreme downside scenarios, the Directors consider it appropriate to continue to prepare the financial statements on a going concern basis and are of the view that there are no material uncertainties regarding the Group's going concern status.

Significant accounting policies

As required in AIM Rule 18, the interim financial report for the half-year reporting period ended 30 June 2023 is presented and prepared in a form consistent with that which will be adopted in the annual statutory financial statements for the year ended 31 December 2023 and having regard to the accounting policies applicable to such annual accounts.

The accounting policies adopted are consistent with those followed in the Group's financial statements for the year ended 31 December 2022, except for the adoption of new standards effective 1 January 2023.

For periods of account commencing on or after 1 January 2023, IAS 12.15 (d) has amended the scope of the Initial Recognition Exemption ('IRE') to prevent its application to deferred tax assets and liabilities arising from a single transaction. The application of this amendment to the Group has been assessed at 30 June 2023 and is not considered to have a material impact on the condensed consolidated interim financial results.

Several other amendments apply for the first time in 2023 but do not have an impact on the condensed consolidated interim financial report for the half-year reporting period ended 30 June 2023.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

Critical accounting judgements

The critical accounting judgements made by the Directors in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those described in the Group's published financial statements for the year ended 31 December 2022.

2 Segmental reporting

For management purposes, the Group is organised into three core divisions, as follows:

• Asset management, which comprises regulated management of gas and electric meters, ADM™ units and energy data assets within the UK;

• Asset installation, which comprises installation of domestic and I&C gas meters and electricity meters throughout the UK; and

• Energy management, which comprises the building and operation of grid-scale batteries, the provision of energy consultancy services and the management of Distributed Energy Resources (DER) assets.

For the purpose of making decisions about resource allocation and performance assessment, it is the operating results of the three core divisions listed above that are monitored by management and the Group's chief operating decision-maker, being the SMS Board. It is these divisions, therefore, that are defined as the Group's reportable operating segments.

Segment performance is evaluated based on gross profit.

The following segment information is presented in respect of the Group's reportable segments together with additional balance sheet information:

Inter-segment revenue relates to installation services provided by the asset installation segment to the asset management segment.

Depreciation of £15.7m (30 June 2022: £13.7m) associated with meter assets has been reported within Cost of sales, in the asset management segment, as the meter assets directly drive revenue.

Depreciation of £1.5m (30 June 2022: £0.4m) associated with grid-scale batteries has been reported within Cost of sales, in the energy management segment, as the battery assets directly drive revenue.

Within the energy management segment, Revenue of £4.0m (30 June 2022: £2.8m) and depreciation-adjusted Cost of sales of £1.3m (30 June 2022: £0.7m) associated with the grid-scale battery service line have been reported, generating a depreciation-adjusted gross profit of £2.7m in the period ended 30 June 2023 (30 June 2022: £2.1m).

All material revenues and operations are based and generated in the UK. Following the acquisition of Solo Energy Limited in September 2019, a small minority of operations are based in the Republic of Ireland.

Segment assets and liabilities

Assets not by segment include cash and cash equivalents, trade and other receivables and investments. Liabilities not by segment include trade and other payables and deferred tax liabilities.

3 Disaggregation of revenue from contracts with customers

The Group reports the following segments: asset management, asset installation and energy management, in accordance with IFRS 8 Operating Segments. We have determined that, to meet the objective of the disaggregation disclosure requirement in paragraph 114 of IFRS 15, which is to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors, further disaggregation is required into the major types of services offered. The following table thus discloses segmental revenue by type of service delivered and timing of revenue recognition, including a reconciliation of how this disaggregated revenue ties in with the asset management, asset installation and energy management segments, in accordance with paragraph 115 of IFRS 15.

4 Exceptional items

5 Earnings per share

The calculation of earnings per share (EPS) is based on the following data and number of shares:

6 Dividends

Per the Group's dividend policy, a 30.25p per share dividend was approved in respect of FY 2022, payable in four instalments of 7.5625p per share. The final instalment of the FY 2022 dividend was paid on 27 July 2023.

A 33.275p per share dividend is intended in respect of FY 2023 payable in four instalments of 8.31875p per share.

7 Property, plant and equipment