Facilities by ADF plc (ADF) Earnings Call Transcript & Summary

Good morning, and welcome to the Facilities by ADF plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO Nicola Pearcey. Good morning to you.

Good morning, everyone, and thank you for joining us as we share our first half 2026 results and outlook for Facilities by ADF. I'll start by sharing the highlights for the half. Will Worsdell, our CFO, will then take you through the financials in detail, and I'll then close with our strategic priorities and outlook. Moving to the next slide, please. I'm really proud of the fact that Facilities by ADF continues to demonstrate best-in-class physical production facilities and services across the film and television industry, including expert on-location hire from Location One and portable roadway solutions from Autotrak across the U.K. We are trusted by global content studios, production companies and independent producers alike, having delivered services for major productions across the half, including Slow Horses for Apple, The Gentlemen for Netflix, Rivals for Disney+ and the upcoming Clayface feature film for DC Studios in addition to many more independent productions. That trust extends right across the industry, including household names, Sky, Netflix and BBC, through to Disney, Apple, Amazon MGM, Channel 5, Channel 4, Paramount+, Warner Bros., A24, Universal and many, many more. At ADF, we operate a medium -- a modern -- sorry, premium fleet of around 730 vehicles made up of make-up, costume and artiste trailers, production offices and technical vehicles with regional expertise spanning the whole of the U.K. We think of ourselves as a studio on wheels, providing the services necessary to support quality production wherever they need to be. Our Net Promoter Score of 89 reinforces our customer-facing operational excellence, genuinely world-class, and it's that level of satisfaction that drives the repeat business across our client portfolio. It reflects the scale, quality and compliance we bring to every production we work on. And our people are at the core of everything we do, and we're extremely lucky to have such a dedicated and passionate team across the whole of the business. Our ambition remains to be a one-stop shop across our family of companies, ADF, Location One and Autotrak, simplifying the production process and creating efficiencies for our clients. That gives us a strong basis for growth. We've built a modern premium fleet to meet our strategic needs, and our focus now is on capitalizing on that service excellence and industry expertise across the group, increasing utilization to improve ROCE and free cash flow and continuing to build the unique integrated offering that positions us so well for the next phase of growth. With that context set, let me turn to how we performed across the half. Next slide. It is key to acknowledge the market backdrop for the first half of the year because it's important context for the numbers that follow. U.K. film and high-end TV production spend fell 15.6% year-on-year over the period according to the latest BFI data, which was published in August. Against that backdrop, our revenue came in at GBP 16.6 million, down 4.6%. So while revenue is lower year-on-year, we have been resilient against the wider market contraction. ADF itself was down 13.4%, which reflects its concentration in high-end TV. That part of the market felt this contraction most acutely with a decline of 20.6%, again, according to BFI. What I'm genuinely encouraged by is that Location One and Autotrak both grew through the half, up 6.7% and 13.7%, respectively. That's a real validation of the extended breadth of clients we've been building across the group. Turning to operational and strategic progress. We've identified our group strategic priorities and have already begun implementing them. We've enhanced our group sales team, which is already driving cross-selling, and we're continuously sharpening our commercial discipline. We've introduced our Deluxe trailer proposition to meet the needs of our expanding client base. And we've reinvigorated our marketing strategy to extend our impact in the market, including how we reshaped to deliver one cohesive solution to market where it can really positively impact our clients. We've activated sponsorships and social media campaigns amongst many other key activations. And it's a delight to see that our Net Promoter Score held at 89, well, actually, in fact, up 2 points year-on-year. In a half where the market contracted around us, holding and improving that score really reiterates that customer excellence remains a genuine differentiator for our business. Looking ahead, we've already commenced further group efficiencies in H2 FY '26, and we expect these to deliver material cost savings in the medium term. We've mapped out a medium-term strategic plan for the business. And encouragingly, our FY '27 order book and pipeline is already up 4.5% year-on-year. That's early evidence that our reinvigorated commercial disciplines, coupled with improving open pipeline are pointing in the right direction for the outlook for 2027. With that as the backdrop, I'll hand over to Will to take you through the financial detail.

Okay. Thank you, Nick. Good morning, everybody. So turning firstly to the key financial metrics for the half. So starting with group revenue. This was GBP 16.6 million, down 4.6% against GBP 17.4 million in 2025. As you heard earlier, that compares to a U.K. film and HETV production market that contracted by 15.6% over the same period. Adjusted EBITDA was GBP 1.7 million against GBP 2.2 million a year ago. That decline reflects operating deleverage. And by that, I mean lower revenue moving through a largely fixed cost base and that's an area that we're addressing directly through a cost efficiency program that is expected to deliver material cost savings in 2027. Loss before tax was GBP 3.3 million compared with GBP 2 million in H1 '25. I'll bridge that movement in more detail on the next slide, but the 2 main drivers are the reduction in EBITDA previously mentioned and a revised depreciation policy. Net debt was GBP 14.5 million, up from GBP 13.2 million a year earlier. Again, I'll take you through the components shortly and leverage reduced to 1.7x, down from 2x in 2025. Operating cash flow was GBP 1.3 million lower than last year, but in line with lower profitability. Utilization, excluding vehicles off the road was 61%, up from 51% in 2025 and for total assets was 38%, down from 42% in H1 '25. The vehicle off-road program, and by this, I mean taking underutilized vehicles off the road and placing them on SORN commenced in May 2025 and is generating savings in the region of GBP 400,000 a year. The ex-vehicle off-road utilization metric is a key KPI for us. It tells us what utilization would be if the fleet was right-sized. And finally, return on capital employed improved to 4.5%, up 150 basis points year-on-year as the fleet base continues to unwind. Next slide, please. So now looking at the P&L in more detail, starting with revenue by business. ADF generated GBP 9.3 million, down 13.9%. This is the part of the group most directly exposed to U.K. film and HETV production spend, which itself fell by 15.6% as we've already covered. So ADF's performance was slightly ahead of that market contraction. By contrast, our 2 other businesses both grew Location One up 6.7% and Autotrak up 13.7% year-on-year, validating the group's strategy to build revenue streams less correlated to film and HETV production volumes. Gross margin was 29%, down from 33%, which reflects the operational gearing in the business and largely fixed cost base absorbing those lower volumes. As mentioned, we have further cost actions underway in the second half of '26, specifically to address this and these are expected to deliver material cost savings over the medium term. Admin expenses reduced to GBP 3.1 million from GBP 3.6 million, down 13.9%, reflecting both strong cost control and the benefit of restructuring carried out in the second half of 2025. That brings adjusted EBITDA to GBP 1.7 million against GBP 2.2 million a year earlier. Below the line, depreciation increased to GBP 3.7 million -- increased to GBP 3.7 million from GBP 3.2 million, up 15.6% after we shortened the useful economic lives on certain fleet assets to smooth out P&L volatility from disposals, and that's already been validated by a small profit on disposals in the first half of this year. Finance expenses reduced to GBP 0.7 million from GBP 1 million as our hire purchase liabilities continue to mature and roll off. So net of exceptional items, that gives a loss before tax of GBP 3.3 million against GBP 2 million in H1 '25. And finally, just to point out that the group currently has a seasonal pattern that is more heavily weighted to H2. So H2 '25 alone delivered GBP 23.9 million of revenue and GBP 7 million of adjusted EBITDA, materially stronger than H1, and we do also expect an H2 weighting this year. Next slide, please. So moving on to cash flow now. Net cash from operating activities was GBP 1.2 million against GBP 4.8 million in H1 '25, but that prior year figure was flattered by a large positive working capital movement of GBP 2.7 million, which didn't repeat this year. Working capital was broadly neutral. So stripping that out, cash generated was GBP 1.3 million against GBP 2.1 million a year ago, which by and large, tracks the reduction in EBITDA. It's worth also putting that in the seasonal context, so 75% of pre-working capital operating cash last year was generated in H2, and we expect a similar weighting again this year. On investing activities, capital expenditure was GBP 0.5 million, sharply down from GBP 2.3 million in H1 2025, with the largest single item being investment in our new executive Single Artist Trailer. We also paid GBP 0.8 million of deferred consideration in respect to the Autotrak acquisition, and there are 2 further annual earn-out payments still to come. Financing cash flows, I think we'll cover when we talk about the RCF on the balance sheet slide. So taken together, closing cash was GBP 1.9 million. We go into the second half with a clear, well-understood seasonal cash profile and a disciplined approach to both capital expenditure and financing. Next slide, please. So finally, moving on to the balance sheet. And I think the key story behind the balance sheet and the one that matters the most for returns is the continued unwind of the fleet, which splits between right-of-use assets when financed and PPE when owned outright. Right-of-use assets reduced to GBP 28 million from GBP 29.9 million and lease and hire purchase liabilities reduced to GBP 15.8 million from GBP 16.9 million. Much of this fleet was built up during the post-pandemic growth phase and is now largely in place. Its continued amortization is a direct contributor to the improvement in ROCE, which stood at 4.5% at the half year, up from 3% a year earlier. Elsewhere on the balance sheet, borrowings were GBP 3.6 million compared with nil at the December year-end. That comprises a GBP 3 million drawdown of the group's RCF and GBP 0.6 million of asset refinancing. The drawdown was both to fund contingent consideration payables for Autotrak as well as working capital requirements. As mentioned previously, we are a group with a largely fixed cost base with seasonal revenue patterns, typically generating a working capital requirement in H1 and an unwind in H2. Net debt was GBP 14.5 million, up from GBP 12.3 million at the 31st of December. That's made up of GBP 12.7 million of hire purchase liabilities that sit within lease liabilities, the GBP 3 million RCF drawdown and GBP 0.6 million of asset refinancing, less GBP 1 million of cash. So in summary, the fleet unwind remains a key driver of capital efficiency with ROCE up 150 basis points to 4.5% year-on-year. The rise in net debt reflects our normal seasonal working capital pattern and the Autotrak earn-out payments, and we expect the usual H2 unwind. And capital discipline and continued deleveraging remain central priorities as the fleet matures and I think that links directly to the group's broader strategic priorities, which Nick will take you through now.

Thank you, Will. Okay. So moving on to strategic priorities. We're really pleased to have mapped out our medium-term strategic plan for growth. Our strategic pillars are built around 4 priorities. We have operational efficiencies, national-to-regional operating model, diversification and customer retention. Regarding operational efficiencies, we are already activating savings through restructuring and more active fleet management. And we've identified further efficiencies across the group, pointing to material cost savings that we touched on a moment ago for the second half of the year and the future. Our commercial team is increasingly driving group sales and marketing as an integrated proposition, which is already having a positive effect. Regarding national to regional, since introducing this strategy, we have instigated efficiencies in combining hubs between our companies where we were historically more siloed, and we're further optimizing regionality to satisfy market needs. In addition to this, we are building out Autotrak specifically, investing in capacity ahead of peak demand and extending our regional coverage because it's already delivering strong returns, and we want to build on that. Diversification is a real opportunity for us. Film and events remain a major growth area for our company in particular, as we have previously highlighted, and we're well placed to extend our business here. And group cross-selling, as previously mentioned, is already having a positive impact. And finally, at our core is customer retention. We focus on sustainability and accessibility today. However, at our core is our excellence in customer satisfaction, and that is something we must uphold to maintain our partnerships. Sustainability and accessibility continue to really matter both for us and our clients. We have an industry-leading reputation for sustainable innovation. Our operations increasingly make significant carbon reduction a standard part of how productions work with us, and we've materially reduced our carbon footprint in recent years. We're also increasing accessibility across our fleet to make sure we're meeting the needs of all cast and crew. Together, these 4 pillars give you a top line indication of our medium-term plan for growth. With our strategic priorities set out, let me turn to outlook. Next slide. Our first half performance was lower than anticipated. The current shape of the Q4 pipeline means full year results are expected to be below market expectations. However, we are optimistic about FY '27. Our order book and weighted pipeline as of the 7th of September are up 4.5% year-on-year. Something else that's worth noting is that the U.K. theatrical box office is also up 11% in the first half of the year. We believe that will really help create renewed positive sentiment in the market for feature film production. We've already commenced further cost-saving efficiencies in the second half, which we anticipate will have further material impact. Our enhanced group commercial team continues to drive cross-selling and will improve our combined pipeline. And with our medium-term strategic plan now mapped out, our 4 pillars are expected to drive increased utilization, leading to stronger ROCE and free cash flow generation across the group. In conclusion, I'm confident that Facilities by ADF is very well positioned with a resilient first half behind us, a clear strategic plan in place and a business that continues to be trusted by the very best in the U.K. and film television industry. Thank you for your time. At this point, we will pause to take any questions.

[Operator Instructions] Nicola and William, if I may, I'll move straight on to the Q&A session. And the first question here reads as follows. Can you comment on the current competitive pricing environment? And how is this affecting margins?

Yes, of course. Yes, the market is price competitive. There's no doubt about that. And certainly, it becomes weighted in a contracted market as we have experienced. I think with that in mind, the positive open pipeline and improved order book and weighted pipeline for next year suggests that the market will be this year, which then should have an impact. But we should also be mindful that budgets have absolutely been squeezed. There are always requests and questions for how everyone can be more efficient in the geopolitical climate in which we're operating. And therefore, we have to be considerate of that and just work out how to best manage that alongside everyone else operating in the industry.

Thank you, Nicola. And the next question is on debt. Can you provide an update on net debt and your expectations for debt reduction over the medium term as free cash flows normalize?

Yes. I think that's probably one for me. So as covered in the presentation, we are a seasonal business with a largely fixed cost base. So based on current seasonality, we usually see an increase in net debt in the first half of the year and a decrease in H2 as operating cash flows increase. So we're currently forecasting a decrease in net debt to GBP 13.9 million at the end of the year from the GBP 14.5 million at the end of H1. Looking more forward, in 2027, we're forecasting higher levels of operating cash flow as a result of our strategic priorities, none of which are particularly capital intensive. And therefore, net debt is forecast to drop further at the end of next year to GBP 11.9 million by the end. I think probably the final comment here is that the Board takes a disciplined approach to leverage and bringing that debt down further remains a priority for us over the medium term.

Thank you, William. Moving on, what is management's current appetite for targeting overseas expansion or capturing a higher share of internationally mobile production?

Good question. We're very aware that productions can be international in scope. I've worked on many of those myself. We already work with production companies whose films will be set in multiple territories. And as part of that, we would offer our services to those productions as applicable. We're currently on a production right now in another territory, for example, productions may, of course, often elect to use a local player as it is more efficient to do so or we will partner with them to provide those services required, which we are certainly keen to do. So it's something that's on our radar.

Another investor asks here. Following the integration of Autotrak and Location One, what does the M&A pipeline look like? And what is the acquisition criteria?

I think firstly, we'll always keep an eye out for value-accretive opportunities. But I think we're mindful of how we finance them, and we don't want to put the balance sheet under any pressure to chase acquisitions. I think near term, our priority is really the strategic pillars that Nick talked about and strengthening the core group. And as that starts to bear fruit, we're generating higher levels of free cash flow, I think that's what gives us more scope to look at bigger, more material add-ons down the line.

The next question we've got here is, you've previously talked about optimizing the fleet. If assets are underutilized, are you looking to dispose of more?

Yes. So when the wider market contracts like we saw in H1, demand for disposals naturally softens, people just aren't buying as much. I think we expect that to turn around as we move into '27, and we're already seeing the early signs of a stronger market next year. But that said, we did sell a number of assets in the first half, and we made a small profit on those disposals as I covered. I think going forward, there's a balance to strike between rightsizing for an optimal fleet and also making sure that we've got what we need to actually deliver on the business over the next few years.

Thank you, William. Someone here has asked, you said the business is well positioned and that the actions being taken are already bearing fruit. What measurable KPIs should shareholders use to judge the next 12 months?