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

Good afternoon, ladies and gentlemen, and welcome to the Van Elle Results Presentation. And 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 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 by 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, everyone. We'll get straight into the results presentation. So a challenging first half of the year, perhaps no surprise to anybody on this call. Most of our markets are suffering from some form of delay or investment constraint and in the round, we believe we've delivered a pretty resilient set of results because we've got capacity to do so much more, but early signs of improvement in several areas, and we'll come on to that later. But we've already reported during the -- in fact, for some time that housing is already starting to move steadily forward. And before we finish this financial year, we believe we'll be near capacity in our housing division. There's been -- we've had several questions about the rail sector. So it's worth just reflecting the dip between Control Period 6 and Control Period 7 was always going to be a challenge for all contractors in the sector, we're no different. But we -- the actions we took to diversify our position in rail, including a major project on the Transpennine Route Upgrade has meant that we've come through that relatively unscathed. And we're now seeing growth in rail. Again, I'll touch on that later. And we have contract awards coming through in our growth sectors that started to happen in the period and have continued into the second half and fill us with a lot of confidence going forward. Again, more detail on that towards the end of the presentation. Overall, revenue was down slightly disappointingly, we've rightsized the organization accordingly because we were -- not so long ago, we're doing GBP 150 million per annum, and we think we'll go back through that term soon enough, but we've downsized anyway. So we're running a lot leaner. Gross margins have held up. And sometimes that effect is around work mix, but also that's a reflection on operational delivery performance. Very rarely do we have a significant operational problem touch wood, we've got a good team in place, and they've been long serving and well-established in the business now since the changes we made 5 or 6 years ago. And EBITDA is flat. So that's a reflection when you look at our operating profit down slightly and our margin is down slightly a reflection of additional depreciation in the business. Partly due to the acquisition of Albion at the end of the period. Albion Drilling, a leading Scottish specialist piling contractor, fits very well into the group and is already helping us with our local presence, local knowledge and relationships and resourcing for some of the growth opportunities in energy, in particular, north of the border. And we've confirmed GBP 0.4p interim dividend.

Okay. Thanks, Mark. So I'll just take the usual run through our financials. A very quick summary there of the sectors that we're operating in GBP 28.1 million and 43% residential. That's a combination of new build housing, so foundations for residential housing, plus an element of that is also the sort of taller schemes, so taller resi buildings as well. In infrastructure, historically, we've had exposure to rail and road. And more recently, we've expanded our capabilities and really focused heavily on energy and water sectors and they're forming a reasonable level of our 40% of total group revenues in the first half and probably excitingly, those two sectors, residential and infrastructure two areas we see real potential for growth, which Mark will talk to on some of the upcoming slides. In regional construction, a subdued period only representing 16% of total group revenues, really reflecting some of the challenging conditions that we're seeing out there in the market, the extremely competitive pricing that we're seeing and a little bit also down to lack of work partly through some delays to contracts that we've got in our order book. P&L, not a great deal to say here. I think relatively self-explanatory and driven by the 4% reduction in revenue that Mark just touched on there. I think very pleasing to see the margins holding up strongly. And if you were to look back 4 or 5 years, you'll see that, that's shown quite a positive progression over time, currently at 30.9%. And that's partly impacted by a favorable mix, so an increased proportion of higher-margin work, particularly in the infrastructure sector. And arguably, subdued work in our slightly lower margin work in the residential sector, but also operational performance, good operational performance really right across the business, showing further progression there. Mark's already mentioned the flat EBITDA performance. We've got a relatively small number of non-underlying costs in the P&L. Cost of acquisition we acquired Albion Drilling at the end of October, and that came with a modest level of legal costs. And as Mark touched on managing our cost base, so there has been some continued restructuring to make sure we're got absolute right size as the business and the markets start to come back and recover. So we cut costs reasonably hard this year, this half and that sort of changed the run rate from the exit run rate from the previous year. We will need to resource that again as the market starts to come back. In terms of the business structure, the three segments that we report against general piling, Specialist Piling and Rail and ground engineering services just touch on these briefly. Clearly, in general piling, that sits right across our three end markets and the markets have all been challenging in their own ways. Rock & Alluvium, our acquisition from Galliford Try sits within this sector and has suffered as a result of primarily the Building Safety Act. We've got approximately 40 contracts where we're in negotiations with customers all being held up because of delays to the BSA and that's about delays to getting planning approval to get on with the work. Rock & Alluvium also have about GBP 10 million worth of work in the order book and a substantial proportion of that is also being held up by delayed planning. So a real challenge for our industry at the moment, and we're doing what we can to lobby government and get these unlocked. But once they do get unlocked, we'll start to see a real throughput of that work coming back through. So the challenge here is more about delay than a lack of work. But across General Piling there, you can see the drop-off in revenue has come -- flow through to a reduced operating profit number in the period. Specialist Piling and Rail, a bit of a mixed bag here and specialist piling coming back very strongly, certainly towards the end of the first half. And you see there some positive uptick in the revenues. Rail, Mark's already touched on this, so I won't go into any detail, but we are finally starting to see some revenues coming through, which is a little bit of an upturn in CP7. But the important point here is that we've got a bedrock of work through Transpennine Route Upgrade, where we're on a -- the framework there and we're still continuing to do work in the rail station sector, which we've got a long track record of doing. So pleasingly, this is heavily exposed to the infrastructure markets, it's good margin work. It's good specialist skill techniques. And you can see there that with a slight uptick, we've got a healthy return and improvement in our operating profit numbers. Ground and Engineering services is largely the Smartfoot. So it's a housing business, housing division, with some work from Strata, which is our ground investigation division. Clearly, you won't be surprised to anyone to see the drop off in revenues at half 1 versus of last year versus this year. Half 1 benefited last year benefited from some changes to the building regulations and what we saw in the first quarter of the prior year was a real acceleration of activity in the housing sector, and we benefited from that for two to three months of the year. Since then, though, since really from August 2023, the market has been very difficult in housing. Much lower volumes, obviously, this is widely publicized with the housebuilders. And I suppose the story really is that we're slowly starting to see this come back. I don't think the market's at the level it will be. I think we'll see continued improvement, but we are now seeing much stronger orders. Our order book in housing has gone from GBP 5.4 million at the end of April last year to just over GBP 11 million at the end of December. So much more inquiries coming in, and we've now got a relatively full order book, which you'll see us right through the year-end. So we expect to operate close to capacity for the remaining four months of the year in our housing division. Strata seeing the impact of the more challenging market as well. But again, they've got a relatively full order book now to take them through to the end of the year. So a very difficult and challenging first half in that division, resulting in much lower operating profit, but a fairly optimistic outlook both in the housing sector and GI. And GI usually being the precursor to the market improving. So we start to see an uptick in activity in Strata, usually the piling divisions tend to follow. In terms of the balance sheet, again, relatively self-explanatory here, you can see the upturn in fixed assets, and that's primarily through our continued investment we're focusing on investing in rigs where we can get high utilization, high return, but also the acquisition of Albion Drilling right at the end of the period, bringing in GBP 2.7 million of assets into fair value. The working capital, we've seen further growth here. Nothing really worrying. I will just note that we've got a delay to the R&D tax credit payment, very standard at the moment, I think, there's a lot of inquiries going on. We -- to give you some comfort on this, we outsource the R&D claim with experts who do this to hundreds of claims every year. So this is a standard inquiry, but the return times for HMRC to complete their inquiries is on average 8 months. So that's caused a bit of an upturn in our working capital, about GBP 1.3 billion to GBP 1.5 million of our working capital is sitting there waiting to be settled. So nothing particularly worrying in working capital. We still do very well. With our debt collections, we have very low levels of bad debt. So I think that's all fairly sensible. Net debt has declined -- or sorry, our net funds position has declined, as you can see. Again, of course, we've continued to invest in the fleet. We've continued to invest in M&A, and that's caused some of the cash to be used off over the period. The deferred consideration that remains is the final payment on Rock & Alluvium that's now been settled post period and then we've got some remaining amounts to be paid on the Albion acquisition, which we've -- for cash management purposes, we spread those out over the next 12 months or so. I suppose importantly, there, there's a breakdown of the net funds position. You can see there. Cash is sitting reasonably healthy, modest amounts of higher purchase. So we've remained low debt to the end of the half year and IFRS 16 lease liabilities have stayed broadly the same. But importantly, we still have the 11 million facility with ABN AMRO that's available to give us that headroom that we need. The next slide is just simply the usual cash flow you can see there. I think I've touched on the key points, though, which is given the market conditions, relatively healthy operating cash flow, the working capital increase I've talked about. You can see the continued investment both in M&A and capital and of course, the dividend payment there. So hopefully, that's all fairly self-explanatory bridge.

Thank you, Graeme. I'm going to talk now about some of the growth initiatives and answer the question of how do we go from GBP 130 million to GBP 140 million, up to GBP 200 million over the next 2 or 3 years, which is what our consensus forecast would indicate. And as you'd expect, we've got a plan behind the scenes to do more than that. It won't all come off, of course, but we're still happy with the forecasts are published. This is a deliberately slightly an opaque comparison of the relative growth rates from a baseline position in FY '25 of our key sectors that we've touched on already in some part and you can see the relative size of those as well in the group. So the first FY '25 bar, you can take that as being FY '25 revenues and so circa GBP 130 million, GBP 140 million and then the light blue bar on the right accumulates to circa GBP 200 million by FY '28. And that's how we get there and different dynamics in all of those sectors, different speeds and challenges and opportunities, but there's two or three things worth pointing out. First of all, in residential housing, you can see what an important part of our business, this is, you can probably there visualize the delays in the Building Safety Act that we mentioned and what that might do going from FY '26 onwards, because I don't think we'll see too much in the balance of FY '25 coming through, unfortunately. And then you can probably also visualize the growth in domestic housing and the Smartfoot impact of that for new build housing as we expand our capabilities, which we'll need to do to keep pace with what we think the market demand would be. So good, solid growth -- rate of growth in housing and residential, touching on two of our divisions primarily. The energy sector is growing faster than all of our sectors from a reasonable base in FY '25. We already have GBP 20 million of awards in substations and other non-ST-related infrastructure in the last 12 months. And we've announced on top of that the wood framework in the last few weeks, and we have two or three others that we expect to put in place behind that. Those start to ramp up very quickly from 2026 onwards. Initially, there'll be ground investigation and design, then we go into the full-blown construction. This is why we needed our resources in Scotland because a lot of it starts in the Highlands and then works its way down the East Coast as you get into other programs. Water starts from a particularly low base and grow more than steadily. This is supported by our partnership with Galliford Try and others, where we are being embedded early with unique capabilities to redesign their traditional sort of approach that's been crying out for change and modular approach to foundations, but we have a breadth of capabilities, again, that works very well in the water sector. And the spend, of course, from AMP7 to AMP8 is significantly increased and I'm very happy with where we are going into AMP8, which starts in April next year properly. Of course, all the water companies and their contractors now know what they've got to spend and are getting on with allocating the work and starting the priority schemes. Rail, a steady growth and then we forecast, not getting too carried away, that we'll reach a peak in CP7 where perhaps we may be capacity constrained given that a lot of this work is we can focus and there's a limit to how many resources we can put at this unless we see big electrification schemes come through that have midweek working. So high margin, we'll make the most of it. We think we've got plenty of opportunity to continue growth for the next three years. Highways is flat. Spend in highways is challenging. We've now seen the completion of our work on the Smart Motorway Alliance, which has been very, very good for us. I'd hope for it to be massively bigger than it has been, of course, but no new ones have been built, but the retrofit programs have gone very well. We've performed excellently, but we finished them. And this now gets replaced by discrete regional projects with typical Tier 1 partners. Again, Galliford Try features strongly here and 1 or 2 others as well. And we have a good pipeline of those schemes. And the Building & Industrial is going to grow because of commercial build. We see -- as interest rates come down, we'll see increased confidence in this area and industrial logistics manufacturing and data centers are all expected to be growth areas, and we've widened our capabilities and partnerships to take more advantage of those going forward and increase the scale of our precast factory, which will help us well for big ships. And then I've got a couple of slides that just -- I don't need to go through all of these in detail because I think I've probably touched on it, but there you can see a summary of the dynamics in housing already nearing capacity in Q4 this year, which is interesting. And then we need to expand capacity to keep pace with the opportunities ahead of us. Previously talked about our partnership with M&J Evans, that's starting to yield opportunities to embed with customers a bit earlier and that help us expand into the Southwest as well. There are distinct advantages to our system. It's probably worth mentioning that help with the growth in housing starts and more sites needed to get built faster and opening up work front where there's resource shortage in the industry because of course, this is a modular approach that speeds things up. So we do expect Smartfoot to become more popular in addition to housing growing in terms of volumes, if that makes sense. So we feel like there are good opportunities for us to grow position as the housing market improves. The energy sector, there's a diagram of all number of different transmission lines and interconnectors, lots and lots of big substations dotted around as well, which is a key area for us, where ScrewFast is increasingly popular. We've already -- we're on several schemes now and we can see some big frameworks here. We have a GBP 200 million target pipeline. This isn't just everything that we're aware of. This is with customers that we expect to convert some or all of those opportunities in partnership in due course, whether we have to share them with other partners because we might be awarded everything solely ourselves, but it really is a very exciting pipeline of growth for us, and we've got off to a pretty good start with wood and that will, we think, with them go into another one, and there were two or three others like this, not far behind hopefully, over the next 6 to 9 months that we'll be able to announce as well. I've mentioned the acquisition of Albion, which was designed specifically to support us given that a lot of this work will be initially in the [ Highlands ]. In water, we -- again, I've touched on the growth between AMP7 and AMP8, our partnership with Galliford Try. You can see on the right-hand side, what a typical water treatment plant looks like and the modular structures are the different techniques are needed to deliver a lot of this work during AMP8. And we've got the breadth of skills that help us with that. A lot of this work is early contractor involvement where we get embedded at an early stage and help redesign the foundation solutions to something that not just suits us, but is more efficient and differentiates us. And those partnerships are -- Galliford's a very important one, of course, and it's a key part of their growth, we will do all of their ground engineering work, I hope, in this area, but we have two or three others that have a similar intents towards us that we expect to make progress with. And in rail, the CP7 spend is slightly more biased towards our strengths in CP6, there's a lot more sort of drainage and climate change-related infrastructure works that are needed. We've got a good diverse portfolio, including TRU, as Graeme mentioned, but also big stations in Canada, the works that we've started so far during -- in this period, we're quite happy with. We started our 10-year framework in the Southern region with Network Rail, albeit slow, we can see the opportunity, and that is -- that's the biggest framework -- longest framework we've had ever in the rail sector and it hasn't really even got properly started yet. In Canada, we're a bit more cautious than perhaps 6 months ago. We've seen further delays to the big major program that we mobilize for disappointingly, but on the other hand, we've been very successful at securing frameworks direct with Metrolinx for other associated works. So we're kind of -- we're in a stable, but not yet, fully profitable position were sort of roughly breakeven. And we want to be making a bit of a profit this year, but I don't think I'll be able to do that, but we won't be repeating the scale of the investment losses that we made last year. And we're going to review after this quarter really how the landscape looks and we'll go from there. So all in all, we absolutely continue to be very optimistic about the future. I fully appreciate that there's always reasons why things are not moving forward as fast as they should be. We are in a very challenging market right now. I don't think there's any doubt about that. I think we're coming through quite well, if I'm honest with you, and the growth opportunities ahead of us are fantastic. I think we've positioned ourselves very well for those. I've ran through them in enough detail, hopefully, to give you all a good update as to what we're up to. We'll continue to make bolt-on acquisitions where appropriate to help us accelerate things. But we won't be building up significant debt in doing that. We're trying to fund this through the way we structure it and to our own cash reserves. Our order book is already up materially, and we expect to see quite a bit of that delivered in Q4, which is going to help us with the second half weighting that's implied in our confidence that we're going to hit this year's results, and we're certainly confident of hitting our medium-term objectives in the time frames we've laid out. Thank you very much.

Great. All right. Well, thank you, Mark. Thank you, Graeme. Turn to the questions, we have a number of questions. [Operator Instructions] If we can start, Lawson has submitted a couple of questions. His first is, you state that cost savings have been implemented, but admin costs are up 4.5% on the comparative period, in line with inflation. So where are the savings.

Yes. That's a good question. So a number of factors that play here. If you compare it to the previous half year, you're absolutely correct. But two things happened in the second half of the year, which increased our run rate. So if you look at the second half of the previous financial year, you'll see a ramp-up in our overhead cost base. One of those because we acquired Rock & Alluvium and brought in their run rate of overhead costs. And the second part was that we were seeing increased confidence in the market, which pre- and post general election, I think, was dampened. So if you look at our end of the previous financial year in April, we saw very, very strong ramp-up in activity levels. That unfortunately wasn't sustained. And we were gearing up to really go for it. Of course, the market has been very subdued in across many of our competitors and our customers. So therefore, what we've done is we've taken steps to reduce that cost base. So if you look at the run rate in the second half of the previous financial year versus the first half, you'll see a relatively healthy reduction. And that's even taking into account the inflationary increases that we've seen. That's reduced our overall cost base. We've continued to do that. We continued to do that even into the second half. So we expect to see some further reductions. But I think that puts us in a much better place for the level of revenue that we're currently delivering.

And another question for Lawson, good improvement in specialist piling, but the other two divisions have shown a reduction of GBP 2.8 million in operating profits on a drop in turnover of just GBP 5.8 million seems very high. You refer to issues with Strata, but give them a quantum or color. Are these issues ongoing on the cost making margin on these two divisions is just 1.9%. So could you add some color to that?

Yes. Look, again, a good question. I think there's -- again, there are a few factors here to mention. One is that yes, you're absolutely right, a drop-off in operating profit is disappointing. But in a capital heavy business, where we've got fixed overhead costs, a drop off in revenue can hit the bottom line quite severely. We're not operating at the levels we need to be to deliver those higher returns that we promised. Now we think the market is coming back to allow that. And what you'll see is that on relatively modest increases in turnover, you'll see that profit come back relatively quickly. You are right that we note the Strata contract. The reason that we haven't put any quantum to it is -- it's a challenge that has brought the blended margin down. It is very, very rare for our business to have loss-making contracts. I'm not saying they don't happen, but I can't remember the last time we had a significantly loss-making contract in the business. All that's happened here is we've got a large proportion of our Strata business had a decent size contract that normally would deliver around 50% gross margin, and in this circumstances delivered around 20% gross margin. So we were as a business disappointed with that performance, but it's brought the blended margin down rather than caused as a major problem for the future. The contract is finished. We're in final account negotiations. We've made sensible provisions in the balance sheet. So I don't think there's any ongoing issues there to talk through.

Okay. And talking on a provisions question here, Provisions at 30th of April, '24 were over GBP 8 million. but that seems to have reduced around to GBP 2 million at 31st of October, '24, where has this reduction gone?

Yes. So we've got -- most of this was in the public domain through our RNS releases. This is a legal matter that has been relates to a contract dating back to 2012, it was an insured matter, and therefore, the balance sheet was grossed up. So what you would have seen is an increase -- the growth in the balance sheet within our debtors but also within our provisions. And that was effectively to show the amount that we expected to come in from our insurer and then pay out to the customer. This is a contract 12 -- at least 12 years ago, delivered well before our time that we failed to deliver and have been going through the legal challenge ever since. Very pleased to say, and we did put a note out on this, that the matter was closed off. I think it was in May, I need to go back and check these at dates, within our insurance limit, and is now fully settled. So as a result of that, at the end of the year, at the end of the last financial year, the position was still in play. It wasn't settled until post year-end. We've now netted down the balance sheet. So there's nothing particularly since there around the movements in provisions.

John has a question on the HMRC R&D tax claim. Given the delays in HMRC R&D tax claim receipts, do you foresee any further impact on working capital and what measures are in place to mitigate such risks?

Well, yes, if working capital in general, no. I think we've got the normal procedures in place that you would expect to have, which is around debt collection, managing our payment terms, all of that sort of stuff is robust. I think the question is specifically around our R&D position. This is a standard inquiry that HMRC are now becoming far more active in particularly in the R&D space and particularly for construction companies. We employ an external expert to do our calculations. They do hundreds of these or they have done hundreds of these claims. They are reputable business who specialize in this. We are probably 2/3 of the way through that inquiry. It's not unusual, of course, for HMRC to query taxes claims, et cetera. And this is just a standard inquiry rather than focus on anything that you see as a particular problem. We are working with them to resolve their queries at the moment, I'm expecting that to be resolved, hopefully in advance of the year-end, but normally, you wouldn't expect HMRC haven't gone through a query to then make further inquiries in a less defined a problem. We're not aware of any issues that they found to date, but it is certainly the case that they are being more aggressive in chasing down those customers who are not -- sorry, those taxpayers who are not necessarily following the due process. But we feel that we have -- I would say, we pay a robust fee for a professional service to do this claim for us.

All right. Okay. And Paul asks, I'm slightly puzzled by the confidence in meeting market expectations of GBP 6 million. Your paid for research analysts has cut its estimates to GBP 5.5 million. He then adds that this downgrade might be temporary, but it's pretty unsatisfactory. What is the number GBP 6 million or GBP 5.5 million?

Well, the answer is that the analysts have formed a view. You may not have access to all of the notes. You'll find that Peel Hunt have remained and kept their numbers flat. You'll find that [indiscernible] who have initiated have come in at a slightly lower number reflecting their assessment of a number of factors, including what the economy is likely to do over the next few months and how swift that recovery will be. [indiscernible] looked at their numbers and kept those flat for the current year. And our pay for research, as you mentioned there, I think you're referring to progressive, have taken a slightly more cautious view. So the range at the moment is GBP 5.5 million to GBP 6 million in a very difficult market. And I think that they are all taking a sensible view given the uncertainties around the balance of the year. Our confidence is really about future periods and the -- all the sectors that Mark just talked through look very positive as we move forward. But there is no doubt that we are suffering from contract delays at the moment. And if they continue, that will cause a challenge. But as we sit here today, we have got work schedules and a healthy order book for delivery through to the end of the year.

On the point of the broker, why did you feel the need to appoint a joint broker?

You want me to [indiscernible].

Yes, go for it.

Well, I think there's a lot of factors here. We've got a number of investors who've been with us since IPO. And if we're completely honest, the market has been difficult for the last 5 years. And if we're really transparent, the company underperformed post-IPO. And we've got a number of those who are looking at their investments understandably. Of course, they would be. And we've had redemptions in the market where shares have become available. And that's just a factor of the market mechanics and so we've been working very hard as a team to make sure that we firstly work with Peel Hunt to find a home for those shares. People who see the opportunity that Van Elle has. We've worked very hard on retail to make sure that we've been open through whether it's [indiscernible] presentations or through this forum to present and create that market for our shares. And Dow [indiscernible] bring a slightly different approach to the -- looking at investors. And so we felt that the combination of Peel Hunt plus [indiscernible] for a sensible cost overall, we felt that might drive a better performance. What can I tell you other than at the moment, we've got a very full schedule of investor meetings over the next 3 to 4 days, which we have not had for the last 5 years, generating the level of interest has improved. And I think it will be -- I think it will be a good partnership.