Volution Group plc (FAN.L) Earnings Call Transcript & Summary

Hello, and good morning, and thanks very much for taking the time out to be with us. I'm Ronnie George, Chief Executive of Volution Group, and I'm delighted to be accompanied by Andy O'Brien, our Chief Financial Officer today. Just a very quick introduction to our AGM trading update. So we'd just like to talk about trading has started well in the first 4 months of the year. So Volution is growing organically at around 5%, and we've delivered growth in each of our 3 regional areas. I'm very pleased with the inorganic revenue delivery from Fantech, so 25% inorganic revenue growth in the first 4 months of the year, benefiting from the Fantech acquisition. So an overall 30% revenue growth for the group and the Fantech acquisition is now at its 12 month anniversary. And just to add to that on trading, our organic margins are consistent with the prior year and overall, our margins are continuing to be very strong. So look, the main purpose of today's presentation was actually to talk about something else other than trading, but I wanted to just stress that we've had a good start to the year and very pleased with how things are going. But look, on to something else. We're delighted to tell you about the acquisition of AC Industries. So that acquisition was signed, and we're expecting completion of the transaction at the beginning of February. But look, this is an acquisition of a leading manufacturing supplier of underground ducting ventilation systems, primarily in Australia and also in overseas markets. And the market focus is predominantly around copper and gold mining. The consideration upfront is AUD 150 million, so around GBP 75 million. And there's a contingent element of consideration that is based on some strong EBITDA growth targets over the next 18 and 36 months. The revenue -- so 2025 revenue for AC Industries, this is to June this year, was just under AUD 48 million and a strong EBITDA delivery of 17.1%. So look, we're delighted about the margins in the newly acquired company, over 30% EBITDA margins. And the exposure, as I've already said, is 80% -- over 80% of the revenue is based on gold and copper mining. And certainly, when we talk about gold and in particular, copper mining, this is for us an opportunity to benefit from the energy transition agenda. And the revenue stream is repeatable, and we can talk a little bit more about what happens here. But we've got existing customers with repeatable revenue. This is very much seen as a consumable in the mine. And it's -- we're primarily dealing with the miners directly. So loyal, blue chip, strong customer relationships that have been enduring over many years. And we're funding this transaction through cash and debt. It means at the point of completion, our pro forma leverage will be at about 1.8x and usual characteristics with Volution, we delever very fast, and we expect that at the end of the financial year, July 2026, leverage will be down to 1.5x. So a little bit of the strategic rationale. This is clearly a slight change from where we've been in the past. But look, if we just go through how we see the alignment aligned with our values, this is a proposition that provides healthy air inside the mine, critical to mine safety, critical to the efficient running of the mine. And because of the efficiency of the proposition, it helps our customers reduce their energy usage through a very efficient product. And this is important here because the running of ventilation fans in the mining sector is a hugely significant cost. And our product proposition here helps drive energy efficiency in delivering healthy air to the mining arrangements. It's aligned with the global energy transition, as we've already talked about. We know what's happened to gold as a sort of risk-averse asset over the recent years. And the copper demand is projected to grow significantly in the coming years as part of the energy transition as we decarbonize across the planet. This is a specialist provider. And what we particularly liked when we met the management team over the last couple of months is their passion for customer service. And we just felt that this perfectly aligned with Volution's sort of intimate feeling around customers and how customer service is absolutely at the center of what we do. In many respects, I think this acquisition, which we believe was hotly pursued by other strategics and indeed private equity, we think which -- one of the things that won us over with the sellers was our alignment on purpose, on customer intimacy and providing healthy air. So look, it's aligned with our financial characteristics. It's been delivering low double-digit revenue growth consistently over the last 5 years. It's high margins, it's typically mid-30% EBITDA margin, it's highly cash generative, it's asset-light and we've got this strong repeating revenue with long-term customer base. So these are characteristics and hallmarks of what we believe is consistent with Volution overall. And it fits really well with our Australasian organization. So over the last few years and certainly with the Fantech acquisition that was actually about 12 months earlier, so it was December 2024, but it further increases our breadth in that local market, so our industrial applications. Fantech already provides above ground for mining applications. So this is not a huge departure in terms of the mining sector, but of course, it's below ground. I'm very excited about what we're offering here. We have unparalleled nationwide logistics, and maybe we can talk a little bit more later on about how AC Industries is servicing its customers. And it's an extremely experienced leadership team. Tony Wigg, the Managing Director, has been with the company for 30 years. The earn-out focus is very much on tying in the key people, that's Tony Wigg and his Operations Director, Brad, who we believe will be with us for the long term, and we're really excited about helping partner with them to grow the business over time. And it will leverage our extensive functional and management resources and capability, not just locally, but extensively locally, but of course, across the wider group. A lot of detail on this slide. I don't propose to go through each of the individual elements. But the key takeaway here is that this is a market-leading proposition. It supports over 150 mines currently, 120 of those are in Australia. And we think there's a huge runway of opportunity to continue to grow organically in Australia. But we are excited about growing this business internationally, that would be in Asia Pac, into the African region and into North America. And that's where we've got hugely excited. The business has been growing very well more recently. But as you can see, 80% of the revenue is domestic, if you like, in Australia and only 20% international, and we think both of those elements offer a huge opportunity to grow in the future. The technology is patented, it's innovative, it's a very durable solution and it really does stand out with a wide product portfolio, over 2,000 SKUs in the product portfolio and an ability to provide this sort of selection of specific ventilation solutions in the mine. It's not dissimilar to how we talked about Fantech in the past. So this further expands our position in Australasia. So our position now is just under 60% of our total revenue in the region is in the commercial and what we are calling specialist industrial sector. We'll report this revenue and profit stream as part of our Australasian region under our commercial and industrial sector, and that complements our 42% share of residential. And look, what we've done with this acquisition, with Fantech and the other acquisitions in the region is build up a compelling market leadership position in a region that we very much like. So just finally, because I do want to make sure that Andy and I have an opportunity to answer your questions, a quick recap. Exciting strategic and value-creating acquisition, extends our comprehensive range of solutions in the region. It's underpinned by structural growth drivers of healthy air and energy efficiency in mines. This is a sector that is increasingly aware of its duty of care towards the people who work in the mines. And we talk about refresh rate. One of the things that this ventilation solution can do is reduce the refresh rate for the mine so that when they're actually mining at the face and there's -- they're letting off the explosives, the refresh rate, because of our solution, is dramatically reduced. What happens at the moment is that people exit the mine, there's an explosion, there's a ventilation solution and that refresh rate, that ability to get people safely back into the front coal phase -- sorry, front face of the mine is essential, and we help reduce refresh rate. It's got a strong record of revenue growth. We've talked about that consistent increasing of revenue growth. And we believe that we can take the business further with the international element over time. Excellent financial characteristics, over 30% EBITDA margin and strong cash generation, consistent with the wider group. So look, that's a very quick introduction. We know there'll be lots of interesting questions to follow, but this is immediately earnings accretive. It's expected to be at the early part of February 2026. There are no competition clearance or antitrust measures that we have to go through. We've simply given ourselves a little bit of breathing space because of the speed at which we executed the transaction. As I say, this was hotly pursued by other strategic and financial sponsors. And we've just given ourselves a little bit of time, so at the beginning of our half 2 at the early part of February will complete, and we're excited to get going. So look, that's, as I say, just a 10-minute overview. We'd like to finish this session at 8:30, but we're reserving the sort of remaining 15 to 20 minutes for Q&A.

[Operator Instructions] We're going to go through our first question, which is from David Farrell from Jefferies.

Well, congrats on another great deal. A couple of questions for me. Just can we break down the revenue into 3 buckets, please, that amount of revenue coming from new mines, that amount of revenue coming from kind of expansion in existing mines and then the amount of revenue which you kind of call repeatable, i.e., replacing kind of the ventilation ducting that's already in place?

Yes. Look, really good question. So Andy is going to take you through a little bit of detail in a moment. But just to explain on this proposition. When the ducting is installed in an existing mine that isn't the end of the revenue if that mine doesn't extend over time. So what happens is I talked about it being a consumable that this solution is seen as the most robust and one of the longest lasting in the mine. But because of the arduous conditions, because of the traffic, because of the air flows through this particular ducting system, there is attrition. So even if we're in an existing mine and there is no further expansion, there is an ongoing further revenue stream. It's not just static as the mines are equipped. There's this ongoing attrition and replacement. Andy will give you some statistics on how that breaks...

Yes. And David, precisely saying how much dollars of revenue is expansion of the mine versus, to Ronnie's point, replacement of previously installed product, that's not possible because it's the same product. But I guess the way we would think about it is, so if you take 2025 revenues, for example, 70% of the revenue earned in 2025 was from mines that were already being serviced by AC Industries prior to 2021. So effectively, this is, if you like, your sort of installed base that's been there for sort of 4, 5 years. And then each year, you layer on a little bit of new work, which then sort of further drives that growth. So I think basically, the message being once you're in, as long as you're servicing that customer well, and that's all about the logistics and the product performance, then you do have this opportunity to enjoy quite a healthy repetition of revenue because we normally talk about our products elsewhere in the group, typically 8- to 10-year replacement cycle; well here, we're talking about perhaps a 2-year replacement cycle. So hopefully, that gives a bit of complexion.

Also to add, there's a significant upsell opportunity here because there's a product called Rhino Duct. It's a stronger, more robust solution with a premium. So the company has been very focused on already the margins are very strong, but how can they further enhance margins and provide a more robust innovative solution over time, and they've been very successful in delivering these new propositions to customers.

Okay. And then my second question was just around the international opportunity. Could you kind of tell us what percentage of revenue was international outside of Australia maybe 5 years ago? And given mining CapEx, areas of focus would be South America, North America, Indonesia, APAC, outside of Australia. How do you think about utilizing Volution's footprint to get into those areas because clearly, you're not present in most of them?

Yes. So look, we -- our sense is that it's not going to be our existing sales network that will help with that. So at the moment, company's revenue outside of Australia is about 20%, and that's grown materially over the last 5 years. So if we go back 5 years ago, it had an immaterial international revenue development. What's happened to date, and I think this is what's particularly exciting about the proposition, is the revenue growth internationally is existing, if you like, indigenous customers wanting to take this solution into other areas. So if you can imagine in the mining industry, you've got an engineer who has a great experience with working with the AC Industries proposition in Australia, goes to work in a mining area somewhere else internationally and has been effectively dragging those products into other areas. One of the key discussion points that we had with the sellers was how we could accelerate this international growth? So at the moment, 20% of the revenue is international, and that is without actually having boots on the ground as it were, that's without having sales personnel in those other 3 regions that we see as very exciting. So look, we think the business can continue to grow well organically in the Australian market, big runway of opportunity, but accelerating this international piece by investing in additional personnel looks to be very exciting for us.

Our next question is from Robert Chantry from Berenberg.

Yes, 2 questions. I'll do one at a time. So firstly, this is clearly quite a move away from, I guess, the historic core markets. Is it kind of fair to assume it's a broader signaling of the kind of broadening of the envelope for the acquisitions that Volution sees as relevant, i.e., could we expect to see more build and deals to come in, I guess, the specialist industrial area on a more global basis?

I don't know -- sorry, I think we're both very excited about this. Come back to the investment case. We want to continue to grow this business on a sort of 12% compounding basis. And we've been successful at doing that for 11 years, and there's no reason why FY '26 of July next year won't be the same again. So over time, we've always said that having a wider picking from the market is attractive. There are adjacencies now that are much more relevant that wouldn't have been when we first listed back in 2014. Clearly, the Fantech acquisition in Australia last year, very much sort of commercial industrial was a departure from being more residentially focused. This is a natural next step. I think you should see it as a sign of our wider ambition. But look, there is a central theme here. It's healthy air and it's strong aligned financial characteristics with Volution. And we don't believe that this is a huge departure from what's important from us, health air, sustainably and strong financial characteristics, asset-light proposition with strong cash generation and customer intimacy and customer service has helped these guys differentiate. So that's consistent with everything that we would say about Volution to date.

And then the second question, I guess, further to the one earlier around how you perceive the cyclical exposure of the business? Clearly, it's mining, it's a different cycle, it has ups and downs. I guess, can you just put into context how that's performed over the past 5, 10 years through different periods and how you kind of see that fitting into the broader group in terms of managing that cyclical exposure?

Yes. Probably too much information for the audience, but I spent my first 20 years in the wire and cable industry. And when I first started work, the copper price was GBP 800 a tonne. And today, it's about GBP 10,000 a tonne. So what we know from a cyclical nature is copper is unlikely to be anywhere other than on an upward trend into the future. Think about the energy transition; think about how solar, wind, nuclear, these are -- this is electricity generation and transmission. And the last time we looked, there wasn't another way of transmitting electricity efficiently other than through copper. And we look at the outlook there over time. So we don't perceive there is a huge or significant cyclical risk here. And in actual fact, we've heard people refer to this more recently as a super cycle and so forth. We're not necessarily positioning it that way. But nevertheless, that's the language that we've had around the space. We see -- we did a very significant piece of commercial due diligence using Hatch who are hugely helpful for us in the mining sector. And we looked at the outlook for copper and gold mines in Australia and globally over the next 5, 10 and 20 years. And if you just think about the economics here, if you look at the gold price, and let's not look at the gold price today. Let's look at the gold price 18 months earlier. There was still a huge economic attractiveness for mining gold. And in actual fact, the gold price has more than doubled over the last couple of years, which makes that even more attractive. Copper is running in the same direction. And we evaluated this hugely. We don't see a cyclical risk. In actual fact, we think there's a huge tailwind from the wider energy transition that could be supportive for demand for many years into the future.

Our next question is going to be from Clyde Lewis from Peel Hunt.

I think I've got 3 questions, if I may. One, I suppose, is around investment in the business, whether you need to do anything, what it sounds this is asset-light, as I think you just mentioned, Ronnie, but interested to know whether you think you do need to put any new CapEx or investment into the business? Second one was, I suppose, around technology and what ACI has versus what the rest of the group has? What sort of technological sharing do you think there will be going forward, if any? And the third one was around competitors. And I suppose, particularly in Australia, who are they up against or who are you up against in that market [indiscernible].

So first one, Clyde, was investments. So look, I think from a -- we said it's asset-light. It's very cash generative. In fact, in the presentation slide, you'll see a couple of sort of zoom down shots of the facility. And you see actually, there's not huge bits of plant and machinery there. So it's very, very similar, clearly a different product, but very similar in nature to a lot of our plants. So CapEx requirements are modest. Where there is going to be investment, I guess, is back to what Ronnie sort of mentioned earlier, and this is sort of backing the growth story through resources. So this will be a case of judiciously working out how many additional sales teams, marketing, investment, et cetera, to put in, in support of that growth. But I think that's going to be more relevant as a sort of key discussion than CapEx. I think the CapEx need is going to be modest. Cash generation of the business is there or thereabouts to our 90% target that we run with across the group.

The technology proposition, so just to go back, AC Industries started 30 years ago as a textiles company. And what the company developed was a high-density polyethylene mix of high-density polyethylene textile product that is hugely durable and very light and very efficient. And this is, if you like, the sort of secret sauce around AC Industries in terms of the material technology. We spent quite a bit of time diligencing the supply chain and so forth. And that's how it's been able to stand out. And yes, there is competition. There's some Chinese competition that cannot match us in terms of product technology and in terms of the intimacy and the customer service. I said that these long-term relationships with key people are absolutely essential for us. And that's why unashamedly having this earn-out proposition to align Tony and Brad with us into the future was essential. So competition is varied. There are some more rigid solutions, but those rigid solutions are in themselves very expensive to transport. If you imagine that a ducting solution is delivered to a mine almost in a flat pack and then under 4,000 pascals of pressure -- 4,000 pascals of pressure what does that mean? A typical ventilation solution in a building is operating at 200 or 300 pascals of pressure. So these solutions effectively blow themselves up under the pressure of the airflow. So it's an extremely neat proposition. We were thinking to ourselves, how do we grow this business internationally, manufacturing in Australia. But if you can effectively palletize these in flat pack, the logistics cost of transporting those products to other regions is relatively low. The product is hugely durable. And I think it's a huge testament to the success of the brand and the proposition that it's got a very significant market share in Australia. And we think of it as a consumable, not CapEx. I've heard people talk about CapEx in mind. It's not seen as a mine as a CapEx, it's relatively low expenditure consumable.

Our next question is going to be from Christen Hjorth from Deutsche Bank.

Brilliant. Just a couple of, hopefully, reasonably quick ones from me. First of all, I mean, this may be tying in a few of the other questions, but clearly, that EBITDA margin is highly impressive, ahead of the group's highly impressive EBITDA margin already. So what -- when you did your DD, I suppose, what did you conclude as the key drivers of that and how sustainable it will be going forward? Because obviously, it's not the capital intensity, and you've touched on a few of these, but just be interested to get in more detail. And second of all, obviously, the M&A focus with Fantech and ACI has been very much outside of Europe over recent deals. Should we expect this to remain the case going forward or is there nothing really to read into that?

So look, in terms of the EBITDA margins, Christen, I mean, I guess, we would always encourage value pricing and businesses to know what their value is to their customer and to charge accordingly. And I think what we learned, and sort of Ronnie has touched on this earlier, is as a share of the cost of the mine, the ducting itself is relatively small. The impact it can have on the energy consumption by its performance is far, far larger than the cost of the item itself. The importance of having stock and really, really good customer service because if you're repeating this -- sorry, if you're replacing this relatively regularly and you're expanding, what you can't have is interruption and stop of production because the product isn't there and available to you. So that sort of excellence of customer service, that quality of the product performance allows you to charge appropriately for the value you bring to your customers. So on that basis, we are not worried at all about the sustainability of the margins because I think, again, they've established a really, really strong position there and the proposition and the customers clearly value it. We did a piece of customer referencing work. And yes, I mean, pricing was one of the factors, but it was by no means in the top couple of factors. It was all about product performance, reliability of supply, quality of engagement with the sales and the sort of customer service operation was more important. In terms of M&A focus, I mean, I think if you think about us in Australasia, it's been a series of building blocks over the years and almost each one that happened first enabled what happened next. So I guess if I go from last to first, would we have done this now if we haven't done Fantech a year ago? Probably not because that established our nationwide presence in Australia, it established our sort of commercial and industrial capability as well as residential. Would we have done Fantech if we hadn't done what preceded it with Simx and Ventair, again, probably no. So it's been that sort of sequential journey. In Europe, we will look at market by market. And as long as it meets our financial characteristics, as long as it meets our sort of strategic intent, which we tried to lay out here, we are open for different types of acquisitions. And I think this does show that we do have a breadth that we can operate too.

Absolutely. I mean just to add, I mean, we've got 3 geographic regions. We think we've got a very substantial sort of pool to fish in as it were. And this is hugely attractive. And look, if we're going to continue to deliver 12% compounding of earnings, then M&A pricing discipline is key. And that doesn't mean that we won't pay higher multiples for attractive opportunities if we can see value. But we've talked previously about a couple of deals that we participated in that we were unsuccessful due to our pricing discipline. And I think that's really important. It sounds a little bit corny, but absolutely shareholder value creation through disciplined M&A is something that we won't disregard. And look, it's an attractive region. We've carved out -- I mean, we've been -- it's been indicated to us who the trade competition was and I have to say we heard a bit of a little bit of feedback last night. I was very proud of the fact that our team has been able to convince a seller to maybe not max out on the pricing opportunity because of Volution credentials and that we really do take care of assets, and we'll look after this company. We'll look after the people who are involved. And I think we'd be very disappointed if we're not paying them the earn-out in 3.5 years' time. And I think that's a great reputation. And this is a wonderful market with probably higher barriers to entry logistically than many others.

Next question is from Aynsley Lammin from Investec. [Operator Instructions] Okay, unfortunately, we're not hearing you at the moment. Maybe if we go to Tania Maciver.

Great. Congrats on the acquisition. Just a couple of small questions. Out of the 150 mines, how many customers is that? Are there many customers with multiple mines? And is there an average remaining life of the 70% of mines that are operating? And then just one more question, I'll add. Just in terms of the product itself, are there any unique materials that are difficult to source or that could sort of restrict growth if there was a shortage of supply? And are there controls associated with the product for quality control deep in the mines for...

Okay. Let me do the -- Andy is going to look up some of the data on the first question. But the second one first is there is a clever sort of polymer textile technology, but there are multiple suppliers. So we don't see -- they've already thought about this in terms of the growth trajectory and mitigating that risk. So we think we're in a good place. And I certainly believe our procurement capabilities internationally will help and also with the accessories. We've talked a lot about the ducting solution, but there's also the accessories and so forth that go with this. So we don't see any constraints to providing the raw material to grow. When it comes to the mines, and Andy can help me with this a little bit, but 120 mines will not be 120 discrete customers because clearly, there are miners in Australia that operate more than one mine. Although I think because of the intimacy and the engineering relationship, although it could be the same umbrella customer, they do actually treat each individual mine like a discrete customer because it does have its own individual decision-making process. When we look at the life of mines, we're talking about many tens of years into the future. I mean, I think we've talked about Olympic Dam with another...

Yes, if I look at the top 20 quickly, Tania, so the top 20 -- the top 20 actual mines they're serving into, there's about 15 different customers, if you like. So there's a couple of repeats, but it's mainly sort of individuals. On the future life of the mines, again, for that sort of top 20, there's 4 that have got an assessed life of less than 5 years ahead of them from now. The other 16 have all got more than 5 and look a lot of them are north of 15, 20, one even up to sort of north of 50 years sort of assessed life of mine. So on average, it's probably sort of 15 to 20 years. But again, there's only the 4 that are in sort of the very near-term expiry.

What was reassuring in the DD process for us is that the company projected the life to go for existing customers, and we overlaid that independently. And I think the delta was a year or 2. So it was the business plan that we've effectively bought into was independently verified by what we consider to be one of the experts in the space. Should we just try Aynsley and then see it -- Aynsley, are you able to unmute and we can get your question?

Can you hear me now?

We can. Go.

Just 2 for me. You may have actually covered this actually. Depreciation for the full year, obviously, EBITDA margin is very high with the kind of post depreciation margin be around 20%. And then secondly, just on the interest charge on that GBP 75 million of consideration, what would be a full year kind of interest on that?

Yes. I mean, the depreciation is, as I mentioned, the CapEx is light, fixed assets are light. So look, there's a difference between EBITDA and EBIT, it's not going to be massively different from what we have elsewhere across the group from a modeling perspective. So it doesn't bring the margins down substantially. Interest charge, you can see that -- so we've drawn the GBP 75 million upfront from our revolving credit facility. So you can see in the annual report the sort of the margin rate that we typically sort of pay on that. It's in Aussie dollars. So effectively, I think it's Aussie base rate plus about 1.25% is the current margin that we pay on top of that.

And rates in the region have actually been coming down recently. So that's helpful. And of course, as Andy says, we effectively hedge the balance sheet by denominating the debt in dollars. So we're just hedging the risk on the asset. So that's something we've always done. Any other last questions?

No. I think back to yourself for any closing remarks.

Okay. Brilliant. Well, look, thank you very much. I know, obviously, it was at short notice that we called this update. But look, we're super excited. It's been a good start to the year. The markets aren't particularly helpful, but to deliver 5% organic growth across our business is pleasing. Fantech is going well. And of course, that gave us the additional confidence to make this acquisition of AC Industries. We're super excited to be working with these new partners and helping them continue to grow well. So look, it's a very exciting time for us. Pleased to have your interest today. And certainly, if after the meeting, there are any further questions, reach out to either Andy or I, we'd be delighted to help. But that's it from us. Thank you very much for your attention. Thank you.