Van Elle Holdings plc (VANL.L) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Van Elle results presentation. Before we begin, we would like to submit the following poll, which you will see on your screens. [Operator Instructions] The company may not be able to answer every question it receives during the presentation. However, the company will review all questions submitted today and publish responses where appropriate. These will be available via your Investor Meet Company dashboard. Finally, we would like to remind you that this presentation is being recorded. I would now like to hand you over to Chief Executive, Mark Cutler; and Chief Financial Officer, Graeme Campbell.

Thank you very much. Good afternoon, everyone. I hope you're all well. Just a quick initial overview of our results. Hopefully, you've all had a chance to read some of the narrative this morning, but just a few summary bullet points. Still quite subdued market conditions, but I think in a nutshell, some early signs of improvement and recovery, which I know has been a message that we've been looking to say for a while. But the period in question, we've seen still delays and uncertainties in most of our markets. And in particular, the Building Safety Act has continued to impact on to residential development, so our London business, Rock & Alluvium, is still loss-making in the period. In other areas, as we'll come on to in a bit more detail, we're seeing some indications of improvement. And our revenues are up, of course, a little bit. We disposed of the Canadian subsidiary just after the period end in December. We hoped to do it by the half year, but we didn't quite manage it. It proved to be a slower process than we had anticipated, which I think it summarizes our Canadian experience in one sentence. But we've agreed, and I'm happy to take questions on this, a partnering relationship with the new owners that allow us to focus on the technical expertise that we can still provide with some excellent opportunities, albeit, of course, very mindful that these delays have really hurt us, but we don't have any exposure at all now in that respect, but still got a lot of value to add, hopefully, with some opportunity over there on a consultancy basis. So revenue is up a bit. We'll talk through where that's come from. Margins down a little bit. But temporarily, we don't see this as anything to worry about. There are some explanations for this later on that we'll talk through. We're still very much on track for the 6% margin target that we've laid out before. We've got more confidence on that than ever, looking towards really FY '28 for that, and we'll explain where that's coming from. And we've also got a ROCE plan and a set of initiatives that we'd like to talk through as well, again, aiming towards 15% plus in terms of medium-term targets. We should easily achieve that by FY '28. Order book is up slightly. Nothing really too earthshattering in that. But remember, we don't include the revenues that are coming through in frameworks, and we're more confident than ever of the framework revenues that we're seeing because the nature of those frameworks is now strategically much more embedded and aligned. And in some cases, we are the sole provider. So visibility of that work is increasing all the time. I think for our next report, we're going to start reporting what that visibility looks like that we have workload in frameworks because I think it's going to be quite material over and above solely the order book, which is secured call-off orders or contracts on a stand-alone basis. Balance sheet is still strong, and a note there on the dividend, which is in line with what we've done previously.

Thanks, Mark. I'll talk through the financials and some of the highlights on the results in the 6 months to the end of October. The first slide is just a quick summary of the markets across we operate, as you know, if you joined these calls before across residential, infrastructure and regional construction markets. Historically, we've seen around about 40% resi, 40% infrastructure and 20% regional construction. You can see here that infrastructure is starting to grow as a percentage of our overall business. And this is really what we'd hoped as part of our core strategy as we see growth into energy and water sectors. And that's interesting because typically, that's the niche skill set, high-growth areas where we achieve good margins from works in those areas. On the residential side, we've seen that's declined to 32%. That's primarily around housebuilder confidence. So on new build residential low-rise housing, markets are relatively subdued. We've seen some increases in activity, some increases in inquiry and orders, but not really a sustained growth through the period, just little pockets of growth. And then, of course, we've got the Building Safety Act delays on the high-rise, particularly impacting the London market. So those delays have again have caused some subdued revenues in those areas. Regional construction, we've got the first large contract for quite some time, for a couple of years, in fact, at Sheffield Forgemasters, where we've been very active during the first half, and that project has gone very well, closing in completion. So that's bolstered revenues in the regional construction sector. In terms of the P&L for the period, I'll just pull out a couple of highlights here, but broadly, profit before tax just very slightly down on the prior comparative period. Healthy growth in revenue at 16%. Mark touched on the margin and sort of explained some of the variances there. Really, there's 3 key points here. One is that transport has moved from where we've had overhead transport costs. So this is unutilized costs in transport. That's now because we've outsourced our Transport division, that's now all being coded into jobs. So it's all within gross margin. So no impact on the group numbers overall, but there is a decrease of about 1% of the gross margin and then a commensurate reduction in the admin costs. I think post HS2, we've seen some pretty price competitive tendering out there, working hard to win work, and we've been reasonably successful there, but there has been downward pressure on some of the gross margins. And we've got one challenging job where we've taken a prudent position within our General Piling division. Not particularly unusual that we have challenging jobs moving into complex ground conditions, for example. But again, taking -- depending on the position we take at the half year-end, that has brought the blended average down. Again, as a business, we very rarely have loss-making jobs. This is just a sort of blended average pulling margins down overall. Jumping through to the divisions. I mean, the key story here is, clearly, you can see, I'll start with the middle box, Specialist Piling and Rail, where we've seen operating profit improvement. We've got an increase in the revenue there. That's supported by 2 things, in particular, Albion, which we acquired in October 2024. So there's a full 6 months of revenue built in there and reported within our Specialist Piling division. And we've also got some growth in our design capability. We set up design as a sort of separate internal division, where there's a lot of opportunity there, particularly in energy. And so a lot of that design work has been reported within Specialist Piling and that's coming through a good, strong, high margins. And so overall, period-on-period, that's a positive movement we've seen within the division. This is the area where we are going to see most of our energy and water opportunities coming through. So we do expect it to be even more opportunity as we move forward into the medium term. Looking to the left, General Piling, as I mentioned, some pricing -- competitive pricing pressures there, a reasonably challenging contract causing some downward pressure on mix. But overall, the revenues have improved. We just haven't quite got back to the level of return that we had in previous years. So I think as we get -- move into the second half, we should see some more positive margin opportunities coming through there. If we can hold the revenues, there's certainly strong potential there within General Piling, which is bedrock of the business. In Ground Engineering Services on the right-hand side, for those who've watched these presentations before, that's 80% of the revenues come from our Housing division, delivering Smartfoot and associated piling, and around about 20% comes from our ground investigation business, Strata Geotechnics. What we've seen here is a broadly flat performance year-on-year. As I mentioned, housing market remains subdued. Building Safety Act continues to impact. But importantly, Strata is starting to see some early progress, particularly north of the border in Scotland on energy sector works, where we're getting very active now in design and then that's subsequently moving into GI as well. So positive moves and good visibility in GI as we look forward into the medium term, particularly in Scotland. Balance sheet, not too many points to make here. We've had a strong investment in capital in the period, a number of new rigs arriving into the business to support future workload. But the net CapEx is relatively low because we outsource -- as we announced during the period, we outsourced our Transport division. And so whilst there's GBP 5.5 million of outgoing CapEx spend, we recovered GBP 3 million from the disposal of the HGV fleet and subsequent outsourcing. So broadly sensible movement on fixed assets. In net working capital, you see a slight improvement, so a decline in working capital. We've touched on this before in previous presentations. We had a review performed by HMRC around our R&D tax claim. That took 9 months to conclude. That was concluded successfully. And while it started as a debtor at the period end at the last financial year-end, that's now been closed out and paid in full. So we're sort of back to, if you like, normalized levels of net working capital. In terms of the rest of the balance sheet, assets held for sale, you'll see at the end of last year, we had GBP 5.6 million. That's a combination of our Canada business, along with the -- we've taken the decision at the year-end to outsource the transport fleet. So as we sit at the half year-end, the current reporting end period, the transport fleet has been disposed of and the Canada -- so what remains there is the Canadian assets. And of course, as we've said, subsequently disposed of in December 2025. So that will drop off by the time we get to the end of the reporting period, the end of the financial year. So it remains a strong balance sheet. We've got a healthy cash position, very low debt and a renegotiated facility with Lloyds. Our previous financier ABN AMRO pulled out of the market for asset-based lending, and we've now agreed a GBP 10 million HP facility with Lloyds, of which about 2 -- GBP 2.5 million is utilized. So we've got another GBP 7.6 million of available headroom there for purchase of new assets. The cash flow slide just bridges from opening to closing cash. I've touched on all of the key movements there really. The big ones are, obviously, a healthy operating cash flow. The net CapEx, we've touched on. The only one I haven't really mentioned is dividend, and we've continued with the full year dividend, which was paid in October. So a cash outflow during the period. And a couple of new slides to come. We've set out here the revised strategy. So our strategic plans were set in 2019. And this is really restating things as they currently stand.

So this is restating our strategic objectives really on just a simple slide. So organic growth in our core markets, which is effectively infrastructure and building and residential markets, as we've always traded. We see recovery in all those areas to some degree. We'll come on and show where those opportunities are. But transformational growth in the energy sector, we're going to create a new division to deliver that. And we've set some targets here. We think these are quite prudent based on identified schemes that are, if not already locked into frameworks, in negotiation to be locked into frameworks to deliver GBP 40 million per annum of new revenues over and above the aforementioned box by FY '28. And don't forget, these are upper end margins, primarily delivered by our Specialist Piling division as it looks today, but we're going to replicate that with the new energy division with a dedicated team. A range of ROCE improvements that go hand-in-hand with that, which we'll touch on in a minute, take us comfortably to our 15% ROCE target by the same timeframe. And then the long talked about margin improvement to 6%, which I know we keep threatening to do and don't really sort of make enough progress. We can absolutely now see the glide path to that by FY '28 from the work mix that is now emerging and the operational leverage that will come with the top line growth as well because we don't really need to do anything to grow our overheads to support it. That structure is all in place. And we'll continue to be very interested in selective bolt-on M&A, where we do look at targets all the time. We don't often find something that attracts our attention. But we're pleased enough with what we've done. If we find something else in perhaps areas like design or civils, which complement our growth in energy, in particular, then we're certainly quite interested. So we're keeping an eye on that as well. All of those in the round take us to the medium-term targets that we've laid out previously. And this slide just summarizes really how the market growth is going to be delivered. It's what we see today and what we've got a pretty reasonable level of confidence will come in the future. We might not get the timing perfectly right. It's very difficult to be certain how quickly some of these markets will recover or stabilize, or in the case of highways, not really go very far from here onwards, unfortunately, it's always been such an important part of our business. And you could say the same for rail, which we see as being pretty stable. Unfortunately, it's not going to deliver much growth outside of the CP7 sort of slight improvements that we could see coming. But the big story is energy. And there's a few words on this slide to explain the quite steep trajectory that you see on those first -- on that first cluster of bars. We've already got locked in this year now GBP 20 million of revenues, we believe, for FY '26, up from GBP 7 million last year. So the sort of momentum is underway. The GBP 40 million that we've talked about by FY '28 is on the prudent side for certain. There's a great opportunity to do quite a bit more than that. But of course, at the moment, whilst we're still negotiating frameworks and kind of this movement in terms of when some of these projects start, we're just going to be a little bit careful, but we'll update this every period end. But it's moving upwards, not downwards so far in the assessments that we revisit every time we get together on the energy sector. And there's more to come there. So once the big hydro schemes start, which I mentioned on the following slide, there's some big stuff to be delivered, particularly with the help of our friends in Albion based in Sterling. And the reason that we're in a strong position here is not just the relationships, but that is very important, it's the holistic end-to-end capability that we've got, which is a unique differentiator. This ground investigation to design to delivery and all of the techniques in delivery that only we can offer, including very importantly, ScrewFast, which is the off-site modular system and the ability to deliver the ancillary civil engineering works, which we've created a team to focus on as well, is unique in the industry. I'm sure people will copy it. But so far, it's very much what our customers are looking for, and the frameworks are being designed around that package offering with us. In water, we can see similar trends, but the scale is smaller. And although AMP8 is big numbers compared to AMP7, and by the way, AMP9 is expected to be considerably bigger than AMP8, I've seen numbers that I have seen growth of another 30% or 40% in AMP9. And we're going here with embedded aligned partners such as Galliford and Volkers and Costain and Kier. The projects are smaller. So the intensity is not so great. It's a bit more fragmented. And there are delays getting AMP8 going because there are more affordability challenges there are in energy at the moment, where it's very much a can we get it done, is there enough resource. It's not quite the same in water at the moment, but we're pretty confident that it will make good progress from here onwards. I suspect these numbers, which we don't show numbers, on that second batch of lines is on the low side, but we're seeing progress, and we're pretty pleased that it's going to be an important growth area for us. Rail is steady. We'll make the most of what's to be done in CP7. TransPennine Route Upgrade will finish in the next 18 months to 2 years. And we're looking at opportunities in Ireland with our existing mature customers such as Amey and Balfour Beatty, but we'll do so cautiously. Otherwise, we'll make the most of what's available in the U.K., but there isn't quite enough in the U.K. really to sustain the ambitions that we've got, which is why we went to Canada in the first place. But I think we can focus all of our efforts on what you're seeing here in the U.K. and still achieve some exciting outcomes. Housing is coming. Very, very slow progress on normal housing. Our Smartfoot system and all the rest of it is there ready to do some quite exciting numbers when volumes pick up, but we don't think we'll see those sorts of volumes until at least next year. And that's just to get us back to 2022, '23 levels where we've been underbuilding in the U.K. for a long time. So that's nothing exciting, but it does deliver an impactful set of numbers within the business. To get beyond that is very tantalizing, but no signs of that just yet. But we're moving forward. Housebuilders are showing signs of opening bigger sites with a bit more confidence, but the Building Safety Act is also unlocking as well, and we've mentioned in our results, we've seen a fourfold increase in Gateway 2 approvals. That's quite meaningful for us because it's been a nightmare for 2 years. And so Rock & Alluvium, our London business, should stop losing money by Q4, which will be quite an important milestone, and that gives us -- will give us then a lot of confidence that we won't have that dragging on our results going forward into FY '27. And there is quite a lot going on in the wider industrial and public building markets, but we could spend all afternoon talking about the individual details. But across manufacturing, data centers, warehouses and public build programs, particularly prisons and schools, there's still quite a lot going on, but it is a competitive part of the market. This is where most of our lower barrier to entry competitors will be nipping at our heels. And so we're trying to do this more in relationships and partnerships with customers rather than just bidding for the sake of it. And we're having some success in those areas and some partnerships we're working on. We know about Galliford. We've also got Kier and Wates, where we're developing important partnering arrangements, McLaughlin & Harvey, another one. And we're going to keep plugging away at those customer-led growth initiatives rather than just try and be more -- a bit more selective. This slide, I probably have said everything I need to say on this slide. This is just a more detailed look at the energy sector, but I think I've covered all the key points already, if I'm honest.

Let me touch on our ROCE improvement plan. So this was one of the pillars of the strategy that we just set out. And really, this is just a quick summary of some of the actions that we've taken and continue to take, recognizing that the business is a capital-intensive business, carrying a lot of assets. So ROCE is a key -- absolutely key metric for our business. What have we done in terms of the asset base? Well, last year, we disposed of surplus property assets. We disposed of our old head office and a plot of land that was being underutilized. As I mentioned, we outsourced the transport fleet during the current period, so May 2025. We're constantly now looking at our underutilized rigs and equipment and making sure that where possible and where they're not required, if there's an opportunity to sell them. And if they're only being used on a very low basis, leaseback, that is an option. And we've got around 20 rigs that we're looking to offload historically. And now we would like to sell them outside of the U.K., so they're not remaining and competing against us because they're still reasonable quality assets. It's just not necessarily generating the return that we would like. As we mentioned, disposal of the Canada operation in December, that's taken a chunk off the balance sheet, about GBP 2.5 million of assets that were held for sale. And importantly, when we're looking at investing in new rigs, we're making sure that we're not investing in anything anywhere near less than 25% of return on capital. And normally, we see significantly higher forecast returns on our new rig purchases. We've touched quite a bit on energy and water, which we're very excited about as 2 sectors. Importantly, there, the average rig acquisition cost is not as large as some of those very big General Piling rigs, which can cost well in excess of GBP 1 million. These sorts of rigs that we will need to deliver these works, we will need to buy more, but typically, they're not very expensive rigs. We're talking more like sort of between GBP 0.25 million and GBP 0.5 million per rig rather than the very large stuff that we've acquired over the -- over recent years. Of course, we're heavily focused on profit and margin improvement. The mix is a key factor in energy and water, we -- a higher technical skill set, and therefore, we expect to deliver normal infrastructure margins, which is sort of healthy and at the upper end of our normalized range. Operational leverage, as residential comes back, as the market volumes come back, we're sort of at the modestly profitable part of the business. As soon as volumes come back, we do expect that leverage to improve. The design capability that we now have in the business, no capital, of course, required, but generating operating margins for the business. And of course, as you would expect any business to be doing, we're looking at cost reductions and efficiency improvements on a consistent basis where we can deliver more effectively.

And -- I mean, that final slide is a summary really of everything we've just said. We're cautiously optimistic in terms of the outlook ahead. Current trading is not easy yet. I think we're doing okay in the circumstances, but we can certainly see some green shoots coming through. And looking ahead to FY '27 now, we're quite excited by the projections that we have. And there's a few points there that summarize pretty much what we've just been talking about. So I don't think there's anything more I need to cover in terms of the slides.

Thank you, Mark and Graeme. Now, if we could turn to the questions, and we've had a number of questions that were submitted ahead of the presentation; however, please continue to submit your questions using the Q&A tab, situated on the right hand column of your screen. Now, there's been a number of questions and a number of sort of crossover with some of these with a few themes of note. And you have touched on some of the answers already. But the key one has been talking to the margins and the sort of revenue mix. You have sort of touched on how that's moving. But is there any more color you can provide as to sort of time scale and sort of how the revenues might sort of change from this year to next year?

Well, I think the areas that we expect to see growth in for the first time, we're getting the right balance of mix. The opportunity for -- just going back to the slide that Mark presented on the growth opportunities in each of our sectors, the real potential here is energy and a steady growth in water, where we expect to achieve solid returns. It is inevitable that if the residential market comes back, and it will do, it's just a case of timing, that, that historically is high return on capital, but lower operating margins because we're just highly competitive and competing against traditional foundation techniques. But I think, as I mentioned, on the broad 3 streams -- 3 sectors that we work in, I think as that infrastructure proportion increases and we see higher volumes in there, then I think we'll start to get towards the 6% operating margin and the 15% to 20% return on capital that we've committed to in our strategy. Overall, timing is very difficult to predict. I think, on residential, housebuilders are still fairly subdued, but we are starting to see some early positive signs, particularly in the high-rise stuff with the Building Safety Act. I think on energy and water, the spend is more committed. We're not necessarily reliant upon government spending. It's the likes of you and I who are paying our energy and water bills that will fund that work. So I think that will happen. And the fact that we're into -- deep into design and ground investigation phases already is a very positive sign that the work is likely to flow from here.

Do you see potential in the European energy market for Van Elle, similar grid infrastructure? Or are you feeling the pain from the Canadian ventures?

No, we've got no strategic intent to look at the European energy market, I'm afraid.

And you talked about potential M&A activity. Is there anything on the horizon? I assume it will be sort of small bolt-ons if anything, but just to understand a bit more about the strategy there.

Yes, nothing much more to add to what I said earlier. It would be selective bolt-ons. The obvious areas for us would be a civil engineering capability to accelerate the growth that we have started with our own team internally. But we don't have national reach or a depth of capability or resources just yet in this area. And this is because customers are increasingly interested in the packaging of geotechnical foundations work with adjacent civil engineering works, not big civils. This is all little civils, but it makes sense. And there's nobody that is able to do both in an expert way. And the other area that we're keen to explore further is design. So we are at the moment delivering a lot of design work with a very small Van Elle team and a very embedded close partner that is fine for now, but we perhaps need to bolster that capability with potential bolt-on if we can find the right sort of organization. And what we find with design is it opens up doors into other markets, and it's a fantastic business development and way of winning work because you're almost designing your own order book. So it works very well. It's taken us a while to sort of build this up to this position, but we're seeing energy and water, there's a big demand for this. So those are 2 areas I would look at most closely.

And Johnson has asked, you mentioned the national skill shortage in energy. Is labor availability a constraint on growth? Do you currently have sufficient capacity to execute on the opportunity that you see?

So I think what I said in energy is that there is a part of the speed at which these frameworks are getting put into place and the fact that embedded frameworks with the supply chain are being put in place at all is to secure the resource. And that's right because the energy companies themselves are worried about is there enough capacity in the industry to deliver everything that's got to be done. So you're right, resource is a real focal point. This is why we bought Albion Drilling last year because this is a Scottish-based business with resources and the ability to recruit locally on top of that rather than relying on resources being sort of commuting up 2 weeks at a time from the Midlands and the North of England to deliver these projects. But having said that, there's still going to be a real need to train and bring young people into the industry to deliver these big projects across the Highlands of Scotland. The part of the answer to this is to develop solutions that are less labor-intensive in their delivery, which is where some of our techniques around off-site manufacture come into play, the ScrewFast system, for example, where we can and our customers get this, but it's not applicable everywhere. Having said that, there's still going to be a need for us to train and develop a whole new additional workforce here rather than just rely on people traveling.