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

Good afternoon, ladies and gentlemen, and welcome to the Van Elle Interim Results Presentation. To start with, if we could cover a couple of housekeeping items. Before we begin, we would like to submit the following poll, which you'll see on your screens. [Operator Instructions]. 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 published responses, where appropriate. These will be available via your Investor Meet Company dashboard. Finally, I 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.

Good afternoon, everyone. Okay. We'll run through our Investor Presentation, as today, this morning to Institutional Analysts, as well as out with the same document and get plenty of time for the questions at the end. If we can just go to the overview section. I hope you could all see that. We're pretty pleased with performance in the first half, resilient performance in the face of very challenging market conditions. You'll be well aware that the Construction industry is suffering a little bit from inflation and difficulty, sort of getting momentum in terms of investment confidence in several sectors and affordability issues and high interest rates around projects in pretty much all sectors. And we expected this when we set our forecasted budgets for FY '24. So revenues are down as a result of that. And we've benefited from being as diverse as we are across Housing Infrastructure and Construction, in terms of making progress in terms of the work that we were able to bring through. Margins have been maintained broadly in line with last year. That underlying that, our gross margins are up, which we're pleased with. And we're still seeing wage inflation and some cost inflation, but we're generally quite successful passing now on to a personnel and through our contract mechanisms. No particular issues around getting caught with fixed-price deals or cost inflation, has given us any Commercial issues on projects, a very clean operational performance in the period. So that's left us with operating profit of GBP 2.7 million. And as I said, 3.9% operating profit margin. This year, I think very much is one-off. It was always going to be a flat performance. Our forecast is a touch lower than it was last year. As you will be aware, we're holding that full year forecast, but we're reaching to make more progress. But we're making more progress, as soon as the markets improve and give us some momentum in these sectors that everyone's familiar with, Housing, Rail, Highways and the Construction markets. But we've also been pressing hard on diversifying further within the U.K., with Energy and Water and also in terms of rail in Canada, which we'll touch on a little bit later. And we see tremendous potential on all of those, actually. Cash position is improved. Our net funds position has improved. Our balance sheet is very strong. We are a very safe bet for the Tier 1 blue-chip customers, that we focus on. And we have the headroom to do more in terms of acquisition and CapEx to support growth going forward. So a very, very stable financial position. And we've made a couple of comments on the front page about Canada, just to be ultra-transparent. First of all, it's taking us longer to get started than we expected, and I'll come on to that a little bit later and get to the Rail section. But we're sustainable through the turn of the year. And we're going to take our time just to review given slippage on some of the bigger programs we're targeting, how we want to make the best of our resources in the next planning period. And also, we've pointed out that we have an increasing and recurring upside from Research and Development expenditure credit card deck for short, where we've reported an increase in the contribution in this period, which we should be pleased about because that reflects the innovation that we're putting into the sorts of products and services that are kind of fuel that growth. And it's something that we expect will improve consistently going forward as well. Those 2 items broadly net off actually in the period. And we've confirmed the interim dividend, which is not out of [ kilt ] with previous announcements. Great.

Okay. Thanks, Mark. So a quick rundown as usual, on the P&L and balance sheet, and then a quick canter through the 3 divisions or the segments that we report against. In terms of the income statement, as Mark said, a drop-off in revenue as we expected with a very challenging sets of end markets. Not least, it will be familiar, I'm sure, with the current level of New Build Housing, if you've read any of the house builders recent announcements, that is certainly a challenging sector that we expect to continue through certainly through the end of the financial year. Particularly pleasing is to see the improvement in the gross profit percent. We've talked about this again in previous presentations. And this is, I suppose, twofold really. One is the improved mix of our workload. So higher volumes of work at the upper end of our margin range. That's typically within -- you've seen Rail, Strata and some of our infrastructure works have delivered well there. And of course, with the drop-off in Housing, which is at the lower end of our margin range that balance has been slightly redress back to. So we're pleased to deliver just over 30% gross profit margin. The -- we are certainly still facing inflationary pressures on our costs. We've got a Cost Management Committee. We're looking very -- costs and what we can do to reduce them. But inevitably, as you will have read, I'm sure, across the market, wage inflation is still running high. We've got, in 2022, we saw across the year around about 10% wage inflation and 2023 calendar year, broadly 5% to 6% around that sort of level. So you've seen, of course, the inflation numbers published and that is impacting us, it's hitting us hard, but we're looking at other efficiencies to manage that cost base as best we can. The other thing in terms of the flow-through here, to the profit numbers is -- in previous years, we had a couple of challenging jobs. And this is a relatively clean set of results. So if you were to wind back to a previous RNS from the previous year, you would see comments around challenging jobs, lower margins. And actually, our operational delivery has been excellent in the first half, much fewer issues on jobs. We've closed out 2 of the largest jobs we've ever delivered as a group. We've closed that out successfully with the customer. In terms of EPS, just very briefly, we've taken a prudent position on booking a carryforward losses for the setup of the Canada business. And what that means is we effectively haven't booked a deferred tax assets in the balance sheet and therefore, it impacts EPS. So I suppose on an adjusted basis, it's a bit easier to read that, if you think about the impacts of Canada, short-term losses and the prudent position we've taken on that, you could have -- the adjusting element is about 0.6% on top of that. So arguably, on an adjusted basis, EPS true rate is more like 2.2% compared to the previous year of 2.6%. 3 divisions. I'll start with General Piling. You'll see there, clearly, General Pilings revenue down 13% period-on-period. What we've seen here is growth in Residential and Infrastructure. But much reduced levels of Commercial Construction projects. And we had a very strong comparative period in that sector within General Piling. The set for itself remains, as always, it's very competitive. And therefore, by the nature of that, it becomes very price sensitive. So the team working very hard, lots of good opportunities in the pipeline. But off the back of last year, where we had a brought forward order book, with significant projects in there, that were delivered during FY -- H1 FY '23, we had a lower order book brought into the current year. So just softer markets overall, I think, within the General Piling division. We acquired Rock & Alluvium on the 30th of November, and we were particularly pleased about it, strengthens our presence in the Southeast. You'll have seen the order book increase overall and particularly attractive there is Rock & Alluvium bringing in just short of GBP 12 million in total orders. Market is still challenging in the Southeast because they are heavily exposed to the Residential sector. We're starting to see some improvement in the market there, and that's reflected in their -- in a very strong order book. Of course, we'll touch on this a little bit later, but associating with that Rock & Alluvium acquisition is the 5-year trading deal with Galliford Try, where we will support them with Piling works over the next 5 years. The second of our segments is Specialist Piling and Rail and that is a very mixed story here. Overall, the revenues are down period-on-period, and that's reflected in the lower operating profit. What's particularly been hit hard is the Specialist Piling division. And that has operated near capacity until 2023, the beginning of 2023, when volumes dropped off, much softer market conditions. We always thought that would be a short-term dip. But what we've seen towards the end of half 2 is despite the weaker performance in half 1, we've seen very good order winning just before the beginning of half 2. And the division is now operating at pretty much capacity. So we're expecting a much improved performance for Specialist Piling in the second half of the financial year. Rail is a slightly different story. Rail has benefited from the final year of CP6 and has been very busy in the first half. How this sector looks moving forward, and Mark will touch on this in a bit more detail, but as we exit CP6 and Network Rail goes into the planning period for CP7, we will inevitably see a drop-off in activity. We're already starting to see some of that. But the next bullet point is key, which is that we're on frameworks for the Transpennine Route Upgrade, and we expect that to provide a baseload of work through 2024. So as we see the dip in the -- between the control periods, we expect Transpennine Route Upgrade to step in and fill the gap. Mark touched on Canada already, so I'll move on. Brand Engineering Services for those that have watched the presentations before, this is effectively sort of 80% to 90% of our Housing division and then approximately GBP 8 million -- GBP 7 million to GBP 8 million or so of Strata, which is our Brand Investigation division. I mean, look, no surprises here probably, given that the volumes are off 17% demand for Housing, was extremely strong in the first quarter, very, very busy. We're very pleased with the performance in the first quarter, not least because there were new building regulations coming through in June, and we saw a bit of a hiatus, a buildup of work before we saw the decline in the second quarter. But as expected, and as many of the hospitals are talking, we've got -- we've seen that decline in workload in Q2 to continue into Q3, we expect broadly the same in Q4, before a steady market recovery. Our current view is that the dip may not be quite as severe as some commentators were predicting a few months ago. Strata, very little to say. It's going -- the division is going very well. It's at the upper end of our margin spectrum. Revenues are growing, and we've made really good progress on a number of infrastructure fronts, not least in the Highway sector and on some HS2 Ground Investigation projects. And the balance sheet. Well, I think we're in a good position. We've continued to invest in rigs and the group's transport fleet. The net CapEx in the period is GBP 2.5 million. But the story behind that is that we've actually invested GBP 3.9 million of CapEx. And we focus on high utilization, higher margin, higher return on capital rigs. And we've offloaded and disposed of a number of the lower utilization elements. So for example, we've just had a close look at our HGV fleet we've kept what we think is the optimum measure to operate our internal transport fleet, as effectively as possible. And so that gives us a net GBP 2.5 million spend, but the underlying investment in the business is close to GBP 4 million. A slight decline in working capital, as you may expect, with a reduction in the activity levels. And in terms of cash, well, we net funds -- we're in a net funds position, which is I think, a fortunate position to be in at the moment, given the way that the Construction market is. We've increased cash. We've reduced debt. We paid off at the beginning of the year, 2 of our largest high-purchase contracts. So by the end of the period, we're sitting with just short of GBP 100,000 of debt, so effectively an insignificant debt level. And we also paid the final settlement for the acquisition of ScrewFast. That was just over GBP 700,000 in the period, and of course, the dividend -- the final dividend payment as well. So broadly, I'd say very satisfied with where cash is at. We're sitting with GBP 9 million of cash, on the balance sheet at the end of the period, and we have an GBP 11 million funding facility, which is undrawn. So -- and I see plenty of liquidity headroom, which could stay in the place to be. And there it is in terms of net funds. So again, there's not really too much to add to this. You can see there very clearly, cash at the end of the period of GBP 9 million. And the GBP 100,000, I just mentioned, in terms of our remaining HP debt, brings us down to the GBP 8.9 million net funds position. Mark, could I ask you to wrap up.

Yes. So 2 points here. One is the short-term trading conditions are likely to remain challenging until the end of the financial year. We all know that the Housing market is going to take some time to come back and there is a draw spending constraints in Infrastructure, not least because of the Department of Transport budgets are affected by HS2 and the kind of change in control period in the Rail sector. Highway spend is also sort of carefully being controlled one at the minute as well. But we are seeing opportunities to make further progress in Q4, ahead of ramp-up in FY '25. And as we said earlier, we can offset some debts with other opportunities already with us, such as the frameworks that we have in -- on Transpennine route upgrade. The Smart Motorway framework will commence in Q4. And we've got a very good workload in Specialist Piling coming through, as well. We're seeing early signs of the Housing market already coming back. And so we think we have worked with past the worst of the of the dip in Housing, and we can see an uptick in inquiries and orders for projects going in towards Q4. And that gives us confidence further field into FY '25. So we're confident in terms of our full year forecast. We're holding it. We've got contingency to allow us to have further delays and set backs if we need to in terms of projects proceeding because a feature of the industry delays and retendering and affordability difficulties, but interest rates are stabilizing, as we all know, inflation stabilizing, and we do sense that is giving a general sign of more confidence around the industry. And so going into the medium term, FY '25 and onwards, we're very, very confident around the possibilities. In fact, the almost that we think certainties of growth that we've been talking about and have seen flashes off, over the last few years, starting to come to fruition, along with our customer work and business development work to diversify ourselves sufficiently and position ourselves in high-margin niche areas that benefit from sustainable less cyclical investment challenges. And that's why we've been working hard on the Power sector, High-voltage Power sector. So this is transmission and distribution infrastructure. I'll come on to a bit more detail in a minute. Also in the Water sector, where we've been making progress, particularly with our partnership with Galliford Try, who are particularly strong in Water, and that's part of the thinking of that deal. We have Rock & Alluvium helping us with a geographical spread and particularly in the Southeast, where we're seeing early signs of the Commercial and Residential markets coming back more quickly than the rest of the country already. And there's no -- it's no accident really that Rock & Alluvium's order book is proportionately quite strong compared to the rest of Van Elle at the moment. We think we want to understand features is coming back quite well. Just a quick word on the Galliford Try Trading agreement. We see significant opportunity here. We've modeled GBP 10 million to GBP 15 million in the first full year of trading here of incremental revenues on a partnership basis. It's not an exclusive arrangement with us. We'll have to perform, but we are a partner of first choice. And that means that we're embedded with Galliford and helping them win projects and to engineer them efficiently. And will become a very dependable team for them. And I think it's just a good deal for them as it is for us. So that -- all of those things combined give us significant prospects to improve over and above the natural recovery of Rail, going into CP7 and a wider Housing and Construction markets, that we've touched on. So as far as we're concerned and our forecast around the marketplace, there's no reason we shouldn't be doubling our profits in the next 3 to 4 years. Absolutely no reason at all. You'll see forecast out there for FY '25 and FY '26. We'll be disappointed if we can't beat those, as you would expect. And perhaps with a bolt-on acquisition, every year or so, we can boost our speed of progress, and that's certainly what we're focusing on at the moment. Just a quick further word as well about Canada because it is important to just explain because we do see significant opportunity in Canada. And although we've -- we spent the first half of the year investing in our setup. We set up a very professional capability in Toronto. We got a top team over there. We've trained our workforce. We've shipped our rigs. We've made the adoptions for winter working. We've got the necessary certifications, all in place to work on the [ Metrolinx ] Network, sponsored by a strong set of Tier 1 contractor customers, who are glad to have us on board, and we're starting to see workload flowing through quite impressively. We're in a sustainable trading position, as we speak now, and we do expect to make further progress. But because the on express program for Metrolinx has been delayed, has been announced have been delayed to couple of years, possibly up to a couple of years we are going to take stock and review right, what we need to do here to take the most of this opportunity. And is this the best use of capital and what's the original plan still the very best plan. And we'll do that by the end of the financial year. But the opportunities are significant and certainly flowing through faster than we're seeing in terms of the U.K. Rail market, which is what we hope for. Just a couple of slides just to put a bit of color on the 2 exciting sort of newer growth segment to complement all the other sectors that we work in consistently and have done for some time. I've mentioned already Energy. This customer base here is as below. We have frameworks in place with Morgan Sindall and Wood and Freedom. Actually, part of the NG Bailey Group and commitments that we're going to support Murphy and [indiscernible]. These are all established Tier 1 contractors in the transmission and higher voltage range of the distribution network. And we're looking here at eye-watering investment levels to deal with good connections, aging infrastructure and energy security, all being pushed along by Ofgem and the big energy transmission companies. And we expect to see our first projects on site for Wood Group and possibly Morgan Sindall as well before the end of FY '24. And it will grow significantly from there. We're looking at a huge investment areas and the major concern in this sector is the capacity to deliver things got to be done. And at the same time, we're pushing on Water. And this is, as I say, propelled to some degree by our partnership with Galliford Try. This is part of the rationale. Galliford's only leading water infrastructure contractor in the U.K. but also there's some good household names on that page, where we're also in a very strong position. Two of them are on the previous page, that's quite helpful. They tend to be the same management teams in some cases. And we have -- we're spending 5 years now working on closer customer partnerships, which has started to yield frameworks and repeat business and their level of trust with us as a business, that we can support through our breadth of capability, our scale of resource, strengthen balance sheet, all the innovation in our techniques and processes, evidenced by the [ RTC ] point earlier. And innovation like ScrewFast, for example, which is a sort of stuff that is very, very helpful indeed in these sectors where you don't want big Piling rigs and Greek peak, sort of temporary works and rest of it in the traditional sense. And this is further supplemented by a new division that we've opened, which is only small at this stage, but capable of doing quite a lot of work quite quickly, which is our Civil Engineering division, which complements our Foundations and Piling divisions very nicely because we're finding customers want us to do ancillary minus civil engineering work, around the foundation of Piling works that we do, sometimes taking away tendencies that they might have provided for us and doing it ourselves, making a lot more simple, reducing interfaces. And we started doing this in Rail, 2 or 3 years ago for all those reasons, you don't want multiple contractors on track getting in each other's way, if you can avoid it. It works very well. The Rail market is relatively niche, compared to the opportunities in Water and Energy, where this model has been very, very well received. We're the only people doing it. And we're the only people with the breadth of geotechnical piling capabilities that we got as well, it's a good combination. So that's how we're going to fuel our growth in these high-margin sectors through these frameworks. And there's a page of statistics there, really more for reference, probably tell the same story, which it's been a challenging first half of the year compared to what we're expecting ahead of us, but we're in good shape.

If we could turn to the questions, we have number submitted ought at the presentation and there have been plenty during it. Mark, if I could just turn to a quick terminology question, Eric asked, we talked about a bit, CP6 and CP7. So what is meant by CP6?

Apologies. Control Period 6 and Control Period 7, these are the 5-year investment period set by the Rail -- Network Rail and the department for the funding settlement that Network Rail spend on its infrastructure.

Okay. And second question from Eric, which is on the Canadian subsidiary. How is the Canadian subsidiary being managed? And how are the local managers being held accountable?

Okay. So the Canadian subsidiary is managed by a local regional manager, a Canadian chap, who is very well embedded with the marketplace and supervised by 2 directors, who alternate their time in Canada, so that there's full time support. And they -- those guys report to me, and we're all accountable.

Great. Okay. And there has been much commentary on the health of particularly smaller construction companies. What is your experience? And I guess this also plays into the supply chain as well, if you could just add a bit on that, too.

Yes. So we've seen an increase in trade credit risk, as you might expect with the construction companies, going out of business [indiscernible] in the industry. Lot of people caught by fixed price contracts, having to absorb significant inflationary cost increases, not being able to -- no where to go, really. We took out last year. Trade credit insurance for the first time as a business, and that's proved to be a good decision and has helped us in a few situations, where otherwise we would be self-insuring effectively. And we'll continue to do that. We're pretty -- I suppose, I don't think, I should apologize, they're quite difficult to get into contract with people that we have any doubt about their stability and creditworthiness. And we negotiate hard and usually get the protection and security we need or we don't do the work. So that's how we manage the upside -- upstream, downstream, we self-deliver almost everything. So we're dependent on very few subcontractors, only occasional very niche things and also big blue chip suppliers of our bulk raw materials, such as concrete products and reinforce steel and the like. And we have a strengthened procurement team, who have strategic arrangements in place with those who are big enough and capable enough to deliver our needs and stand by the commitment to give us. So I think we're in much better shape actually up and downstream as a result.

Great. Okay. And you touched on this earlier, but I wonder if you could just add a little bit to it. But what are you seeing in the rebound on Housing demand? And will that contribute to H2?

We're not expecting a huge contribution to H2 from a rebound in housing we'll be quite happy to deliver the forecast that we've got, which is broadly breakeven in housing until things pick up. We've retained the capability very well. And downsize to an appropriate level without sort of shooting ourselves in the foot, for when things come back more strongly. I do expect the Housing market to offer increased work volumes for us though, before the end of Q4. But I'm not relying on it for our results. Certainly, in FY '25, almost certainly we'll fair bit better than what we've seen in the last 3 quarters of FY '24. So we will be forecasting, I expect an increase in -- when we get to our budget stage, an increase in Housing activity in FY '25, but all the indications are there. So our forecast for next year are out in the marketplace broadly GBP 6.5 million PBT, that will come -- housing will certainly help that increase, as well all the other things I've described earlier.

Okay. And on a similar theme Douglas says, I'm expecting some economic optimism to return after the general election. If demand increases, how fast can you ramp-up capacity?

We can ramp-up pretty quickly. We've got 130 rigs. And if -- and utilization on that stat sheet, as you'll see, has room for significant increase. And we employ 450 people out in the field, who are desperate to be even busier and we can resource up as well. And so we have a direct employment model that works very well. We can -- you might think it's difficult to reduce, but we have stand-down have arrangements with in our contracts that [indiscernible] are comfortable with. But we can also recruit up pretty quickly. We're quite good at it. We have the ability to ramp-up quite quickly. We rarely hire rigs, for example, but we can do, and we can bring in more labor. The overheating in the market has dipped a little bit now that HS2 Phase 1 geotechnical works have started to ramp down. So we can pick and choose, I think, a lot better than maybe a couple of years ago. Good people at more affordable rates than the overheating that was taking place at that point in time.