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

Good afternoon, ladies and gentlemen, and welcome to the Van Elle Results Presentation. To start with, if we could cover a couple of housekeeping items. And before we begin, we would like to submit the following poll, which you will see on your screens. Throughout this presentation, investors will be in listen-only mode. However, questions are encouraged and can be submitted at any time via the Q&A tab situated on the right-hand corner of your screen or if anyone has dialed in via vanelle@walbrookpr.com. The company may not be in a position 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. Gentlemen?

Thank you, Tom. Good afternoon, everybody. We're going to follow a very similar template to previous reporting periods. We'll run through the results fairly swiftly, including the financial review and then we'll wrap up with updates on strategy, market conditions and our outlook for the business going into the medium term. So in summary, we're very pleased with performance in FY '23. You'll have seen the headline numbers by now, I'm sure, but record revenues, but most importantly, improving metrics in terms of profitability and return on capital. The kind of, I suppose, 2 measures there that are part of our medium-term objectives are both moving forward, we believe, in line with the timetable and vision that we have for a 6% target return on operating margins and a 15% to 20% return on capital. So, we're -- it feels like we've got halfway there actually after some challenging years. And don't forget our revenues dropped to around GBP 85 million and we were marginally loss-making in 2 years because of the pandemic. So, we feel we've made some good progress in the last 2 years, not just FY '23 in isolation. And also importantly, to kind of hopefully give some confidence that we are capable of growth. We are embarking on several initiatives that support us into the medium term that give us confidence that these are -- these results are stepping stone to the outcomes that we're looking for ultimately. And some of the highlights of those areas of progress include our growing presence in energy infrastructure markets with tangible progress already in terms of work winning and customer development, expansion of our housing sector activities with the launch of a new product and also some geographical expansion and also, very importantly, in the rail sector to protect against the inevitable dip between CP6 and CP7 diversification of our niche capabilities into Canada, and specifically Ontario, where we hope to start our first project in only a couple of weeks. So that helps all of us be confident that we can deliver on the promises we've made into the medium term. And we've got the diversity and the initiatives and innovation to not just depend on the same markets that we've always been in, although, we remain an extremely diverse business. We've also -- and it's been part of our improvement plan over the years to improve our commercial acumen and controls, procurement capabilities, et cetera. We've managed the impact of inflation on both materials and wages through our contract pricing mechanisms quite successfully during this year and the year before. And we've seen certainly an increase in the risk of customer bad debt during FY '23. And touchwood, we haven't yet been caught by anything material. And that's a credit to our -- cheers up on to our commercial team for the rigor that we put into our precontract checks and reviews. I hand over to you, Graeme.

Sure. I mean the balance sheet, I suppose in summary, we're very pleased with where it currently is at. Certainly, progress over the last 3 to 4 years has been very good. We're in a net funds position at the end of the period and growing further from the previous year-end. So, we exclude the lease liabilities as most do. We're sitting with a GBP 7.5 million balance and about GBP 8.9 million in cash at the end of the period. We sit there with that cash balance and an undrawn bank facility of GBP 11 million. So, it gives us a good amount of headroom, I think, for growth initiatives, organic or M&A or for capital investment as we see fit. The only remaining debt we have on the books now is, at the period end is GBP 1.3 million of higher purchase debt remaining. And that's the pure debt balance. We took that out during the year, took out GBP 1.5 million during the year on a couple of assets, just when we had a bit of a working capital squeeze and just to give ourselves a little bit more headroom. It was on a variable rate basis, so it was repayable without termination costs and indeed, in June of this year, we've repaid GBP 1.1 million -- GBP 1.15 million of that total. So, as I stand here today, we're effectively to all intents and purposes, debt-free. There's a very, very small amount remaining on one asset, which we'll leave probably to run to its conclusion. We've increased capital spend in the year. And for those that have been on these calls before, we were very cautious during the 2 pandemic years. We spent only GBP 2 million in each of the 2 years FY '20 and '21. And we returned to a bit more normal spend last year of about GBP 4.5 million. And this year, again, we've increased the spend. So, we really are replenishing the rig fleet, particularly focused on areas of growth, upgrades to the existing fleet and that's typically mid-life overhauls to make sure that they are -- they stay as a sort of market-leading fleet. And we've also modernized the heavy haul HGV fleet, and that's the fleet that we own and we used to transport our rigs around the country. That was an aging fleet. It was -- we did not spend money on that fleet during the pandemic. And so we've gone through over the last 18 months, a complete renewal of the fleet. So, we should start to see significant improvements there on maintenance costs and and sustainability credentials as well. The order book is down slightly year-on-year, not necessarily anything to be too concerned about in particular. The order book has bounced around from anything from GBP 20 million up to a peak of GBP 50 million and the sort of short-term nature of many of our contracts means that, that number can be variable. But importantly, we present it on the most prudent basis possible. This is signed contracted work and we don't include in that number as some businesses do framework agreements or preferred bidder positions of which there are numerous. And so, we're expecting that of those, we estimate annual revenues of GBP 30 million to GBP 40 million from that work. And of course, on a framework agreement, it does depend on the work being allocated and drawn down. But there is a substantial level of baseload of work there to sustain us through the foreseeable future. Earnings per share is presented. I'll come on to that shortly. And and pleasing we were able to declare or rather recommend a dividend of 0.8p per share. So that takes with the interim dividend of 0.4p per share, that will take us to full year of 1.2%, which is a 20% growth on the prior year. In terms of P&L, I think most of these points Mark touched on, but 19% growth on prior year and that was on top of 48% growth that we've achieved in FY '22. So, a huge amount of effort to deliver at those revenue levels. Our headcount has increased from around 2 years ago, around 510 people, employees to about 650 as we stand today. So, a big effort to grow the team and deliver at that level. And margins have stayed reasonably robust. So, across general piling and brand engineering services, we've seen very strong growth, and those margins have stayed very stable. A lot of work gone into operational efficiency. And we've obviously had the headwinds and challenges of raw material and wage inflation, which is, of course, impacting everyone across the sector. And that's been managed, in my view, very well by the divisions, repricing, retendering and making sure that we have contract clauses that allow inflationary cost increases to be passed on where that can be done. And that's helped us to sustain a healthy gross margin position. Of course, inflationary pressures have impacted overheads. And you'll see that if you sort of do work the numbers through. And of course, we have seen inflation tracking at above 10%, and that has naturally hit us. So, we've been working very hard on internal efficiencies, looking at cost-saving initiatives where we can to manage that as well as possible. And the only last thing really to mention on this slide, I think, is the finance cost being down and that is just a measure of the lower average debt right across the business across the year. The EPS measure here of 4.4 versus the prior year of 1.7, in the interest of transparency, it is worth saying, we did say this in the last presentation that the prior year number was subdued slightly by a one-off deferred tax charge as a result of the changing corporation tax rate from 19% to 25%. And so if you are to compare like with like, the 4.4 is more comparable to the 2.7 that we declared as an adjusted EPS last year. But even so, I think it's a really positive story and good growth levels on that number. The next 3 slides touch on each of the divisions. I'll very quickly canter through these because most of them are success story. General Piling, very strong revenue growth, and that's come through in the operating profit improvement. We've seen stable performance across 2 of our sectors, residential and regional construction and we've seen very strong growth in the Infrastructure segment. So, 2 major energy contracts were delivered in the year. We're coming towards the end of the second now in quarter 1 of the next financial year, so -- but the bulk of that GBP 26 million has been won and delivered during the year, very challenging contracts, but both being delivered very well so far. The next division, Specialists Piling and Rail, I've separated those out to look at them separately because it's a slightly different story for both. In Specialists Piling, very strong activity levels in half 1 as we discussed at the interim results. slightly softened in the second half by some delays in highway work. And we've seen a number of delays or cancellations of activities in the second half of the year. But I think in the long term or medium term, the sector still looks very, very positive for us. We're expecting a return of highways opportunities. And we're also looking at growing our presence, as Mark touched on, in the energy infrastructure sector. I think that could be a very important area for us as we move into FY '24 and beyond. Quite a lot of spend across the country in that sector and we're gradually increasing our presence and building some strong customer relationships. In Rail, very good performance throughout the year with some challenges early on with the rail strikes. They've been managed much better since the first round of rail strikes, but that hit us quite hard in the first half. Subsequent rail strikes have not hit us quite as badly. Certainly, Network Rail have managed considerably better after the first round. So that is pleasing, very pleasing performance across the year. However, to Mark's point around CP6 and the transition into CP7, we do expect softer market conditions over the balance of this year and that's one of the reasons that we've now embarked on our Canadian subsidiary. And as Mark said, we'll be on the ground, hopefully, within a couple of weeks, delivering our first contract. And we'll be doing that with sensible contract conditions without taking any significant risks across the business. The final division, Ground Engineering Services made up of housing, which forms about GBP 40 million of that GBP 47 million revenue and Strata, the balance. Housing has been incredibly buoyant throughout the whole of the year; very, very high and record activity levels. Operating often above our capacity. We've had to bring in precast piles or beams or even higher rigs to deliver the levels that we've delivered at. So, we've seen -- in terms of moving into FY '24, you'll have obviously all seen in the press the -- what we're expecting in the housebuilding sector. And as we stand at the moment and potentially impacted by increased accelerated activity before the new building rates come in, we've seen a continued very, very strong demand in the division. So, we are absolutely not expecting that to continue over the balance of the year, but Q1 has been very strong, slightly defining gravity in terms of what we're reading out there in the housebuilding sector. But inevitably, we will see a decline in softening of this market and we've got those built into our internal forecasts and we'll manage our costs accordingly. And Strata, to wrap up the divisions, Strata has performed very well, building strong positions in highways and rail and is adding a healthy profit to the bottom line. I'll perhaps leave this slide, I think, as one that -- happy to take any questions on. But in summary, as I said, low debt position, healthy cash position. There's a reconciliation of lease liabilities there, which obviously is built into the underlying numbers. But overall, I'm very happy with the debt position. 4 or 5 years ago, it was up around GBP 18 million and that's been a drain on cash for several years. So, it's very pleasing, I think, to be getting to be in a position now where we'll no longer have that level of drain on cash and it gives us another level of stability in the business. And the final slide on the financials is the cash flow position and that just reconciles from opening to closing and you see there a very healthy operating cash flow, which we're pleased with. Impacted, of course, by cash impacted by a working capital increase with the higher volumes. So, there's a bit of a reduction there. The investment that I mentioned, over GBP 6 million invested in the year and offset by some disposals we've rationalized some of our aging fleet. But overall, that brings down to cash before financing of GBP 11.3 million. I mentioned that we've taken out the GBP 1.5 million of new HP Finance, which has then subsequently been repaid post year-end. And there's the servicing of the debt, GBP 2.8 million of lease repayments. And what this has allowed, I think, is confidence to continue with the dividend policy and dividend payment. And GBP 1.5 million has been paid out during the year. So overall, a gradual steady increase in cash position overall and I'm fairly happy we've got to a good position by the end of the year. I'll let Mark wrap up on the strategy highlights and the outlook.

Thank you, Graeme. I've touched on some of these, but just to go into a bit more detail. We've been determined for 2 or 3 years to increase our presence on long-term frameworks and larger projects that are not necessarily riskier, but certainly give us greater visibility, high utilization opportunities and more embedded customer positions than them being mainly a tactical bidding business that receives thousands of inquiries and bids everything. And we continue to make quite good progress here, to be honest, so that our revenues are underpinned by much more reliable, consistent terms and conditions and perhaps a more select customer base than the very broad range that we've typically had. And this is because we won't grow easily without this backbone of workload and then all of the other smaller projects coming and going on top of that allows us to scale up. Otherwise, I think we would plateau. So, the Smart Motorways Alliance and the TransPennine Route Upgrade and 2 or 3 larger highway schemes that are effectively multi-year framework contracts have all been progressed in the year and remain very important areas for us to grow into this year and beyond because the truth is we haven't yet been able to get going. We've been tied up in design, budget reviews, political machinations, particularly in Smart Motorways and all of these opportunities ahead of us, I'm pleased to say we should be catching the back end of FY '24 with some of it, but it certainly makes a material impact in FY '25 onwards. And we're bidding others. So, we should be announcing a major framework in the energy sector as well associated with high-voltage transmission infrastructure as we referenced earlier. And indeed, as mentioned just further below. We've talked about Canada a little bit. We have a team now embedded in Canada. Our subsidiary is fully up and running from an operational and business point of view, very high customer interest in what we're bringing to Ontario at this stage. Two rigs have been exported and are ready to go. And the team that we've recruited have been over here for training and are back ready to start our first project in a couple of weeks. We're quite excited that this will grow quicker than we first thought. And we've also been able to agree very benign terms and conditions in terms of effectively operated plant hire and cost-plus arrangements that allow us the confidence to go through the natural learning curves that we will do over the next few months. I think I've mentioned point 3. Point 4, we still see enormous opportunity in housing. Notwithstanding the current dip, it is potentially our most reliable long-term opportunity amongst all of the opportunities we have because it's such a structural need for new housing as we're all well aware. Government pronouncements this week are helpful and we remain reasonably confident that come FY '25, the market will normalize to a degree to allow us to make more confident predictions regarding the volumes that we would do compared to FY '24. We have modeled a 33% drop in revenues for FY '24. So, we've lost a year really in terms of the growth that we might continue to build on in housing. But we've diversified our capabilities ready for the inevitable bounce back, including the Smartdeck system that we announced a couple of months ago that sits alongside our Smartfoot beam system. And we're using the opportunity now of investing in sales effort and preconstruction effort with our housing customers to maximize the opportunities when they do come back and making sure we've got enough focus into the affordable and social housing markets, not just be overdependent on private housebuilders. It's worth noting, of course, the demise of the 2 biggest modular builders in the U.K. recently, both Ilke Homes and L&G Modular has not been helpful. And we've invested quite a lot of time with Ilke in particular, developing solutions that were ready to go and would have been rolled out on a national basis. So that goes to show that we haven't been lucky there, but what we haven't done either is caught a bad debt and compared to others, we feel we've handled that as well as we possibly could in the circumstances. We've also grown something that we sometimes talk about in passing, but it's increasingly important to us, which are ground improvement capability. This is alternative to piling, strengthening the ground. We still use piling rigs, but it's a very quick, relatively cost-efficient process using either concrete columns in the ground rather than piles or stone. And we've recruited the team back in 2020 and they've done very, very well from a standing start to grow that business to GBP 10 million revenues at margins are better than the average that we earn in the residential sector, where they do quite a bit of their work. So, very pleased with that and that continues to be an area of investment for us. Graeme mentioned the investment in rigs and fleet, HGV fleet, that continues to be important, including our first rig in the ground improvement sector mentioned above. And also in terms of non-financial priorities, we've invested more time and commitment into succession planning and talent development than we've ever done before. We've launched our leadership program, which the first of its kind in Van Elle. 14 high potentials going through very structured mini-MBA-type program sponsored by us as individuals and then another group going through in about 9 months' time for the first time as well. So, really trying to bring through the succession planning in the business that we need given that there's still a resource shortage in the industry overall. And we've done a great job of retaining our people in the last 6 months. And we fought off the the poaching from HS2, I'm pleased to say quite well. And now we've kept our people. I'm determined to get the very best out of their potential. And not to be missed, we've also invested and planned expansion to our facilities at Kirkby and the taking back under our control our ex-premises at Pinxton that we sublet for 3 years because we need the space and we're expanding with other ideas for investment, not only some fast fabrication opportunities that we see coming in the next 2 to 3 years where we need bigger facilities at Kirkby to deliver in-house. So, we're quite excited by the work we've done there at Pinxton to bring it back into the portfolio. Current trading, as we've referenced, is very good. We're ahead of our own plan, which is encouraging, but we do know there's a dip coming. So, we are remaining cautious in our outlook for the year and standing by the forecast that we've previously issued. We do expect revenues to be down overall in FY '24, unfortunately, due to the reasons I mentioned earlier. But partly due to work mix and partly due to continuous improvement, we are expecting margins to keep improving. So, we expect to make progress, not least because we're poised ready for the growth that will come through in FY 2025 as well, which won't happen if we just sit back and wait for it. So, there's an awful lot of work going on to make sure we're ready to go when our markets improve, particularly highways and housing. Very, very confident about the market conditions going forward into the medium and long-term supporting growth in excess of the 5% to 10% sort of indication that we've previously given. We've got tremendous opportunities. We just need to make the most of them. And I've touched on some of the newer areas that we're putting some effort into. I haven't mentioned the water sector where we are also putting a fair bit of effort into. And you'll all be aware that, that is another sector where increased spending is always going to be mandated and we expect to be an important part of that. I've touched on Canada, where we may well have 6 rigs in Canada by the end of the financial year or soon after if things go to plan, which is potentially 1/3 of our current fleet involved in work in Canada. So, gives you an indication of the potential there that could come through quite quickly. And as I've also mentioned, we are certainly confident of achieving our medium-term financial targets, which we've listed that again for absolute clarity. And the next 2 slides really are more for reference, I suppose, it's a reminder of our targets on the right-hand side and some commentary on the sectors as we see them. Opportunities mixed with some realistic assessment of the current challenges that we face. I guess, the only one I haven't mentioned is HS2, where candidly, we needed to be organized back in 2016-2017 to have had an embedded partnership role. We've tried extremely hard over the last couple of years to barge our way in. We haven't made the progress I would like to have made despite our best efforts. So, we continue to undertake occasional projects on Phase 1, but at the same time, we're able to see from a distance the impact of the pause and the delays and the difficulties around budgets on the program. But what we are able to do and have done well is position ourselves for Phase 2, which I know is also delayed, but certain aspects of this will start early not at least the ground investigation aspects where we've been bidding for frameworks direct to HS2 and hope to give an update in the near future. And we have customer partnerships ready for the construction phases as well with some of our preferred Tier 1 partners. So, in a much better shape, again, in the future, rather right now to benefit more strongly from the High Speed 2 investment in the U.K. I think we've touched on key risks and challenges. They are fairly common sense. But we are, I think, doing well at managing them, but they remain and they are a drag on us sometimes. But nonetheless, we've got a team in place that's doing well and is very experienced commercially in particular and financially. And just to round off, corporate activity is very much near the top of our strategic agenda. So really, in summary, a twin strategy of pursuing growth in markets where we know there is additional investment coming through in terms of U.K. commitment and also accelerating bolt-on acquisitions to complement what we do today. And there are 3 areas that we would consider anything to do with rail and specialist piling. It's important to us that we continue to meet several companies in that field. Scaling up Strata Geotechnics is something I've said before and is a live strategy that we're working on and also regional expansion potentially in areas where we see pockets of the country where we expect growth but haven't got a sufficient permanent presence. And the obvious area is the Southeast and the South, where we've been considering that for some time and that's still very much part of our assessment as well. And some statistics to finish, which we're happy to take any questions on, but very, very useful to notice not just the financial measures often utilization stats are of great interest. You can see there's still capacity in our utilization stats to do more. And that's reflective of the delays and frustrations that we've seen in H2 in some areas that we could have been doing more in some parts of our business. You can see the number of inquiries coming through. But you can also see our accident frequency rate has improved significantly, along with our headcount going up. So, we're controlling safety better and getting more people trained and competent as well. If you look, for example, the growth in training days delivered, all of that's in-house. We were quite proud of the progress we've made with our approach to safety and competence in the business. Thank you.

Super. All right. Well, look, thank you, Mark. Thank you, Graeme. If we can now turn to the questions. We've had a number of questions submitted ahead of the presentation. However, please do continue to submit your questions using the Q&A tab situated on the top right-hand corner of your screen. Additionally, your feedback is important to the company. So immediately after the presentation has ended, you'll be redirected for the opportunity to provide that feedback. But maybe we can just pick up where you left off, Mark, in and around acquisitions. James asked, and you have answered it, but I'm just for reference read it out. Would you look at acquisitions at this stage or continue to build the balance sheet and be debt free, which I think you've answered. But another question we had was what would you ideally spend on the bolt-on acquisition. Maybe you can just add some detail there.

Well, our current thinking, and I'm sure we'll be told if we've got this wrong is that we don't intend to raise capital for acquisitions in the near term. We don't believe the appetite is sufficiently there for that and it doesn't feel that the right thing to do. We believe having improved our balance sheet and not least cash position, we should be able to finance, self-finance maybe with a little bit of debt from the facilities available. The scale of acquisitions that we're considering that can still be transformational enough. We're not looking here at acquisitions that are so small that they won't make any difference from our own resources.

Okay.

Look, and in terms of scale, we would look at considerations of up to GBP 5 million, GBP 6 million at this stage.

A couple of questions for you, Graeme, which are more financially-led. Nick asks, what are the typical payment terms for your contracts and cash flow characteristics?

Well, they do vary. They vary by sector and they carry the normal characteristics of a construction contract, which on the larger type agreements can lead to protracted final account negotiations, which can take some time if it's a very large contract. But ordinarily, we would be working on normally sort of 30 -- anything between 30 and 60-day terms and that would be on measured work. So, one of the advantages of our sector are a little subsector of the construction industry is that we -- a lot of what we do is measured works; number of piles in the ground, meters have piled in the ground, multiplied by the rate that we charge for the work. And so that's relatively straightforward and uncontentious. So, we tend to see relatively sensible cash flows on our contracts. We typically carry anything between working capital of, sort of, between 6% and 9% typically of revenue. And that's fairly flat over the last 2 to 3 years. One point that's possibly worth highlighting is on the debt collection. Again, we are -- it is important to know that we are typically first up on site on a construction site. And that brings with it considerable advantage. It means that the project typically has sensible cash reserves at that stage, not necessarily towards the end of contracts where cash can become tighter. We also warrant our piles and warrant our work. And often, that's aligned to pile testing. So, we can test the piles or plies can be tested externally. And then ordinarily, we would hold the warrant back -- the warranty back until we've received payments. So, one of the reasons that Van Elle has not suffered from significant bad debts in the past is for that very reason alone. Most companies would agree a final account position settle up and we'd issue the warranties concurrently.

Just one other financial question. And you did talk earlier about the fact that you've been able to successfully pass on increases in the underlying cost, but maybe you could add a little on the trends. The question is, are you able to update on input costs and supply chain.