Vp plc (VP) Earnings Call Transcript & Summary

This meeting is being recorded.

Thank you, Hannah. Good -- well, actually, good afternoon, everybody, and thanks for joining us on our results presentation for the year ended 31st of March 2021. I will run through the highlights, and I will also take you through a market and trading review before handing over to Allison, who will talk to you about the financial review for the year. So in terms of highlights, we saw an excellent business recovery after a challenging Q1. Very pleasingly, our full year 2021 results are ahead of market expectations. I think it was excellent performance in all of the circumstances. I think paramount to the quality of the result was the positive response from our colleagues, and this has allowed us to maintain the service quality to our customers throughout. The sales team and the key branch availability was also something that we firmly believe differentiated us and our offer in the market through the worst of the pandemic and has maintained excellent customer relationships with both during and after the worst of the lockdown, so -- which is very positive. We continue to a demonstrable focus on the environment and on sustainability issues and made great progress in both understanding and addressing our impact as a business on the environment. We've made very good progress so far, but there's still plenty to do. We've also delivered on a wide range of technological advancements with further investments in our digital offer, leveraging of our core hire system and improving both our internal processes and the quality of the external engagement that our customers have with us. In such a challenging year, we have inevitably focused on cash generation, which I'm pleased to say has been strong. And as Allison will tell you later, we enjoyed a significant reduction in debt. And last, but certainly an important highlight, is the fact that we're proposing a final dividend of 25p per share, which reflects our performance throughout the whole of the year but also importantly our confidence in the future. So in terms of headline numbers, revenues were GBP 308 million. H1 was severely hit by the pandemic as revenues fell away very severely in March and into April of 2020. On average, we were at 76% pre-COVID levels in H1, although we did fall as low as 50% at the start of April 2020. As the markets reopened in H2, revenues improved and on average across H2, with some volatility on the way, we were operating at 94% to prior year. Revenues restoration is clearly well underway and we exited our 2020/'21 year with 95% of pre-COVID level revenues. We're also very pleased to report profits of GBP 23.3 million after such a difficult start to the year. We enjoyed progressive improvement through the year, and this is an excellent recovery by the business in combination with strong cost control and focused engagement with those customers who sought our services through end. Net debt was GBP 38 million down on the start of the prior year. And the point for me to make here is that, that is after us investing over GBP 40 million in new fleet, even in the COVID-19-impacted financial period. Those of you who follow Vp for -- previously, will know that return on average capital employed is a key measure for us. This inevitably reduced and, in fact, below 10% at 9.2% in the full year. However, I'm pleased to say that after 2 months of trading in the new financial year, we have already recovered back to 12.4% return on capital employed, indicating a rapid recovery in the quality of our earnings. In terms of long-term progress, clearly, COVID-19 has interrupted what is an extremely strong set of results from the group over the last 10 years. COVID-19 has interrupted that, but we remain confident that the resilient characteristics of the business, which I will comment on later, will allow us to continue to deliver high-quality market-leading earnings for shareholders going forward. Moving on to the markets and trading review. We operate in a wide range of end markets, but with four particularly significant segments of infrastructure, construction, house building and energy. The largest two, as you can see from the slide, being infrastructure and construction, which represents 77% of group revenues, roughly split 50-50. I think it's fair to say that the regulatory-driven infrastructure markets recovered more quickly than many of the other sectors, which we operate in. They were the ones that stayed open even in the debt, the worst part of the pandemic. And we enjoyed throughout the year good demand from the likes of the rail, the transmission under the utility sectors through the year and as well as the health sector. Construction was slow to recover with the nonessential elements reopening somewhat later than the infrastructure markets. Business confidence, perhaps inevitably, took longer to return in those nonregulated markets, but we are pleased to see the pace of recovery has improved and been through into the new financial year as well. Housebuilding demand remained good throughout the year after almost closing for 6 to 8 weeks at the beginning of our financial year. Our activities in energy were relatively stable. Although this was primarily due to onshore activities in support of a major U.K. oil refinery shutdown in the last quarter of the financial year. My next slide draws on the Experian UK construction forecasts in spring 2021. And you can see the impact of COVID-19 and also their expectation in terms of forecast recovery. Infrastructure, which dips less than the other sectors, looks set for a rapid recovery. And this has certainly been our experience in the current -- in the previous year. And with the likes of AMP7 in the water sector, CP6 in rail, Hinkley Point, HS2, amongst other major projects, we see a good backdrop for further investments in infrastructure. But Vp, our businesses are very well placed to support the infrastructure segment. The housing market fell very severely. As I mentioned earlier, in April and May, but quickly recovered. We deal with the majority of the major and medium-sized house builders in the U.K. So again, as with infrastructure, we are well-positioned to support what looks like a rapid recovery in the housing segment. And also, you will see as within infrastructure, housing is expected to go beyond the level of output that we have pre-COVID over the next years. Finally, general construction. This also fell severely, as the chart shows. But the expected recovery in this area is more subdued, I would say, more modest. And it creates the need for a greater confidence, I think, in the general economy for private investments in new sites, in particular, to be made. The construction recovery that we're seeing at the moment is without a doubt being RMI-led repair and maintenance sector is certainly strong at the moment. So that's it on markets. In terms of business performance, I've got three slides, one on group, one on the U.K. and one on international division. In overall terms, conditions in the first quarter were very exact, and you also can see that revenues were severely impacted as many customers temporarily stop trading in the first quarter of our financial year. Revenues of 15% down as a result. Early actions were made to reduce costs, manage cash and protect the business, and the group moved back into profitability in the third month of our financial year after 2 months of small losses. We've seen trading recover to better levels in H2 and with a bit of a blip in early January when the U.K.'s lockdown was reintroduced. But for the most part, our market seems to have taken that in a stride. We've had a strong finish to the financial year and perhaps more importantly, that momentum is carried on into the first 2 months of this new financial year. Moving on to the U.K. We -- revenues, again, down 15% and profits down by 46%, mirroring the group. So we have GBP 281 million of revenue in the full year, in the U.K. and I think the GBP 27.2 million operating profit is a strong contribution given the very difficult start that we had. As I've mentioned, it was an infrastructure-led recovery. Construction was slower to pick up but it improved. House building, very rapid recovery after closing down temporarily and that's remained strong and stable throughout. Actions were needed to be taken to streamline the business. And whilst capitalized primarily by COVID, these were most of the initiatives that were planned anyway but -- and accelerated due to the conditions at the time. So we've now got a leaner business and this will this will help restore margins and return to the coming year. On international, the international arm of Vp is smaller, but was no less impacted by COVID than the rest of the group. Our energy business suffered from canceled and postponed projects, albeit to which the operational support, I think, they suffered from travel restrictions, so we were unable to mobilize our engineers as we normally do. As we head into 2021 new financial year, some of those restrictions have been removed, but not all. We are seeing more activity in the energy sector, but I think it's still at an early stage. Moving on to TR Group, which is -- sorry, Hannah, go back one. Moving to TR Group, where business confidence has been slower to pick up in Australia and New Zealand. The lockdown in those countries to eliminate the virus is very successful and indeed normal life for such return more quickly. But unfortunately, because the vaccine rollout in those countries has been slower, there is a propensity still to have last-minute border closures and short notice, regional or localized lockdowns whenever a case is found, and that is slightly impacting business confidence. We're trading. We've traded well in April and May within TR, but we remain aware that there could be more lockdowns to come. We just don't know. But that's starting to improve, and that's international. In terms of investment, I mean, reducing investment in our rental fleet was an early action at the start of the year. Demand had fallen away very rapidly. We have plenty of equipment. We didn't need to buy new. However, it's really pleasing to report that towards the end of the year, we are accelerating capital investments again, so that we could cope with increasing demand from elements of our customer base. We spent over GBP 40 million on new equipment in the financial year just finished, which is only 20% less than -- well, nearly COVID-free full year 2020. So that was a positive, I think, for us as a group. Surplus fleet continues to be disposed of and generated a helpful GBP 17.5 million of proceeds to help cash management during the year. We entered the new financial year with a well-invested fleet, with an average age of circa 3.5 years. We have a latent revenue earning capacity in some of the businesses, which can be freed by better utilization and conscious of a lengthening of supply chain lead times, we've also invested early in products this year. So coming to outlook and our positive view of recovery into 2021. The new financial year has started strongly. Our core markets that we support are recovering well. We see good opportunity in infrastructure with AMP7 for the water industry, CP6 in rail and HS2 in rail. Construction sector, particularly with repair and maintenance, is picking up very well and housebuilding demand, which is strong, has remained stable. Elsewhere, we're planning further expansion of digital functionality. We've invested a lot in technology over the last 12 months. We've planned further investments in the next 12 as we continue to improve our offering to the customers. We also continue our focus on establishing sustainable business solutions, which are beneficial both to ourselves and also to our customer base. Investments in new talent within the group is paramount. We have an active engineering apprenticeships being, to take on 41 new engineering apprentices this year. And we've also got a Vp graduate program. We also plan to start a sales apprenticeship program in the current year. So all geographies are making good progress. We enter the -- I think I said this in the interim results. We entered the pandemic with an excellent business, and we will exit it with an equally excellent business. We're in very good shape to embrace the opportunities that we believe are coming within the sectors we support. Our long-term success and resilient model gives us confidence in our ability to respond and remain excited about the prospects for the coming year. My final slide reiterates why we believe that the model is, say, fit for purpose to maximize the benefits of recovering markets. We've a proven and resilient business model, which has been tested both in good and challenged market conditions. We have a senior management team with unparalleled experience in our sector and supported by strong divisional teams. The long-term focus on service and product excellence is critical to the delivery to our customers and the core of our success. And finally, our business diversity. We have 3 dimensions in which the Vp Group operates. We have exposure through market sectors, such as infrastructure and construction, as I talked about earlier. We have diversity through the huge and wide range of products and specialty services that we offer to our customers. And we also have geographical diversity by the businesses that we have, not just in the U.K., but in Mainland Europe, and further afield. And so we're very well based to capitalize on the opportunity as the markets recover. Perhaps all I'd like to say this afternoon, I'm going to hand over to Allison, who will now talk to you about the financial review.

Thank you, Neil, and good afternoon, everybody. So my first slide is financial highlight for -- of the year. I think following on from record profit in financial year 2020, COVID-19 impacted our revenues by reducing by 15% and profits by circa 50%. On a more positive side, cash generation held up. It's a feature of our business model that we are an asset-backed business and benefit from depreciation, contributing to our EBITDA. Of EBITDA, which was circa GBP 100 million before COVID-19 [indiscernible] briefly half of that was depreciation. Also, during the pandemic, we demonstrated strong working capital management, and I've got a slide later on to show how we reduced our debt. Moving on to my next slide, which is earnings per share and dividends. And as a group, we have a track record for maintaining and growing our dividends, which is partly evidenced on the chart on the right-hand side of the slide. During -- at the end of last year, we didn't pay a final dividend because of the uncertainty caused by the pandemic and we weren't sure that we were in a position to do so. So we've maintained -- we retained our options on that. And in January of 2021, we paid a special dividend of 22p per share. This wasn't in respect of the financial year we just completed, that was actually in respect of the record-breaking year for 2020 final dividend. We didn't pay an interim dividend for 2021 but the Board has reviewed its dividend policy, and we have agreed to retain the progressive policy that we have. And what we mean by the progressive policy is that we will maintain our dividends or aim to maintain our dividends. Our dividends reflect the profitability of the group, and we always have a look forward to see whether they're going to be sustainable. So we have proposed a final dividend of 25p per share to be approved at the AGM in July. And that partly reflects a positive outlook that Neil has been speaking about earlier. Historically, we've operated in a range dividend cover between 2x and 3x and in recent years, the last 5 years or so, we've been at the upper end of that range. And it's the Board's intention really to target the lower end of the 2.5x to 3x dividend cover range going forward. Moving to my next slide. Another key measure for the group is return on average capital deployed, as Neil's already mentioned. And we feel that this reflects the long-term quality of our earnings. COVID has had a temporary impact, however, our return on average capital employed even in these difficult circumstances has been ahead of our weighted average cost of capital of 8%. Through -- for last 20 years or so, we've targeted 15% return on capital employed throughout the cycle. And we're hopeful that we would return to that during 2022 or within those parameters. Neil's already mentioned that we were achieving 12.4% in the first couple of months of this financial year. And we anticipate that we'll be around 14% by March 2022. We're well on track to get back to where we'd hoped to be. Moving to my next slide, which is around our balance sheet, which is another feature of strength of the group's model. The points I would highlight here are that the hire fleet is 88% of our fixed assets, as you would expect, and Neil has already mentioned that we have a young and well maintained fleet with the 3.5 years on average age of the fleet. The other point I would make here is that we have benefited from good working capital management throughout the pandemic. So there was a GBP 30 million positive swing on the balance sheet in working capital. Around half of this was a reduction in debtors, which I have a slide on later. There is a couple of millions of reduction in inventories as we manage those. And then also an increase in creditors of this, GBP 8 million was VAT, as we took advantage of the HMRC scheme to delay and defer payment to VAT. So that cash will be going out over the next 12 months. The result of that was, during the year, we reduced net debt to GBP 121 million. That's from GBP 160 million in the previous year-end. Moving on to my next slide. I've mentioned that we do have a strength in cash management. Key features, we have already referred to the strong level of EBITDA, which was GBP 72.7 million in the year. Although impacted by COVID, this was still creditable. The other point to make out was that we did spend caused us to spend on capital expenditure, and Neil has already mentioned the GBP 40 million that we spent on fleet. And the fact that we do manage our fleet and have further prudent depreciation policies is evidenced by the proceeds from disposal. You can see from the GBP 17.5 million proceeds from disposal that we earned a 25% margin on our disposals fleet. And then the cash flow that I'd mention is the GBP 8.7 million outflow in respect to dividends, which was a special dividend, I mentioned in lieu of final dividend for 2020. As a result, net debt was reduced by GBP 38 million to the 31st of March 2020. I mentioned that we were pleased by our working capital management. And this slide illustrates debtor days at March 2021 at 56 days, which was down from the 62 of March 2020 and 58 at March 2019. Bad debt write-off as a percentage of revenue has also remained stable, which in the dark days of 12 months ago, we were quite concerned about this measure. But so far, I'll the touch wood on that one that we have maintained at sustainable levels. Moving on to my second to last slide, and on that slide, net debt and facilities. So at 31st of March 2021, we had GBP 200 million of committed facilities, which was a GBP 65 million private placement that was put in place in January of 2020 with Pricoa. This facility had a shelf available within it, which I'll refer to later. And also at 31st of March '21, we had an RCF of GBP 135 million and an overdraft of GBP 7.5 million, which gave us GBP 86 million of headroom at the year-end. The RCF, you noticed on the slide had a maturity date of December 2021. So at the time of the signing of these accounts we had 6 months left on that. So I took the opportunity to refinance since the year-end. The first element of that was to draw down fully on the Pricoa facility that was available. We had a shelf facility, so that is [indiscernible] matures in April 2028 and adds GBP 28 million of fixed rate debt to our facilities. And then we also put in place a new revolving credit facility with the banks. This is a 3-year money, has a maturity of June 2024. And also within that facility, there's a GBP 20 million of accordion, so we can draw down on that if required for growth. It's not committed but we should be able to draw on that if we require it. And so that would also leave us with headroom against the facilities of around GBP 69 million. So we have adequate headroom there. And my final slide shows the headroom against our bank covenants and lender covenants. So we had 2 covenants in our documents. One is EBITA interest cover, which has to be greater than 3x. And the other is net debt to EBITDA, which has to be less than 2.5x. And you can see from the charts that at the year-end '21, notwithstanding the impact of pandemic, we were still well ahead of both the EBITA interest cover covenant and the net debt-to-EBITDA covenant is 1.62 and 6.66. We were well within the covenants all year. This time last year, when we weren't sure what was going to happen. We did approach the lenders to have a relaxation of our covenants, which they're consented to, but I'm pleased to report that we didn't need those covenants at all. And we were able to release that relaxation in December of 2020. And that's my final slide. So I'll hand back to Hannah.

Thank you, both. Jeremy, perhaps, would you like to make a few closing comments before we take questions?

Well, yes, I think the overall theme is that we've delivered an extremely strong set of results for last year, particularly given the uncertainty at the beginning of the year, ahead of our expectations and ahead of market expectations, so we're very thankful to all the employees that have contributed to that and very happy to be in a position to report those results. And building on that theme, the momentum that grew towards the end of the last financial year has continued into the opening months of this year, and we've had a good couple of months of the new financial year. So overall, a very positive position to be in. And I think, particularly given the background of great uncertainty that we're now exiting. So we're very happy with the position we're in, I think.

[Operator Instructions] So let's make a start. One here on pricing, have you seen any inflation in the supply chain? And how quickly do you think, if you have, you will be able to pass this on to customers?

Okay. I'll take that one up. So we have seen some supply chain inflation. I think the main impact on supply chain at the moment, however, is in terms of lead times. That was the early change that we saw some months ago, where we were being quoted much longer lead times to get both spares and equipment. So I referred in the CapEx slide about making some preemptive purchase to try and mitigate against that. So that has twofold effects. One, it protects us as best we can against not having the right equipment and the right spares available. The second is that we're buying before any potential price increases to come. We know that the price breakdown for steel has more than doubled in recent months. This will inevitably have a knock-on effect throughout the whole supply chain in due course. In terms of pricing and passing it through to customers, it depends. A lot of our customers like a lot of major players in the rental market will have -- they will have 1-year deals, they will have 1-year pricing arrangements, which are subject to renewal as a -- on an annual basis. Now those renewals happen throughout the year. So I'm sure that as we get to renewal, there will be an opportunity to try to pass that price increase on. For our ad-hoc's rental customers, that opportunity already exists. And the truth is the pressures on the supply chain and the potential inflation on price has, I think, in certain segments, already reduced the supply and therefore, as classically, if demand, which is picking up as markets are picking up, if demand is starting to announce strict supply, then that puts us in, I think, in our sense, are in a rare position of being able to both through necessity and also because of positive product in certain areas, we will inevitably be looking to put pricing up. But I don't think it's as obvious as just saying, "Oh, well, there's not enough to go around. We'll just have to go and put the price up to all the customers." It doesn't work that way. We've got long-term, very important relationships with our customer base. We have grown in conversations with them when we do get supply chain inflation. But that conversation isn't necessarily available straightaway, that we may have to wait.

Okay. Well, perhaps then looking at the other integral side for your business, access to labor, are you seeing any wage implications in a tight market?

Not at the moment. I mean I think we're aware there are choke points within certain industries at the moment in terms of getting labor. At the moment, that's not a particular issue for us. But that's not to say that we're complacent about that. I think that it will be very interesting to see how the pace of recovery and the need for staffing will impact that. So at the moment, not so much, maybe that's to come.

Okay. Another one here about acquisitions. They believe we've been an excellent acquirer of businesses over the years. But here today, are you seeing any opportunities to make value-accretive ones?

Yes. I mean we've always used acquisitions as an opportunity to help us deliver step-change growth. But I think we've never been any more excited about an acquisition as we are about investing organically into the fleet. So I think in the same way that -- and we've already done so, we can see that spend of GBP 40 million last year. Some of that is organic investment to support newly won contracts. I'm very happy spending increasing amounts of money on new fleet to support new contracts so they -- to make an acquisition for the group. But it is a fact that acquisitions have been an important factor in the group's success over the last 20 years. I don't see that changing. Last year, it was not a year in our view to make acquisitions. Allison's talked through the financials. We've got loads of headroom, but it's not burning a hole in our pocket. And I think the biggest opportunity for Vp right now is still to reap the reward of the late and turning opportunity in the investment we already have in the group. Yes, there will be more opportunity on acquisitions going forward. I'm sure, and I'd be disappointed if we're not picking some up over the next 12 or 18 months.

Okay. You mentioned their investments in the fleet. This is a nice segue then into perhaps a more energy-efficient bits of kit and how they are impacting on, obviously, to charge more and whether they are attracting a larger, better customer base who are looking to fulfill perhaps obligations to society and the environment.

Yes. I mean, clearly, it's a huge topic. And it's something that we've devoted a lot of energy to over the last 12 months, in particular, albeit that it's a continuation of work we've been doing before that. Some of our products already naturally environment -- more environmentally friendly in that they don't require engines. They are already battery driven or solar-powered. And we're just seeing a greater breadth of those products being available on the market to us. I think the engagement at all levels, whether it's our supply chain that serves with its own customers in sustainability environment is going to help drive change sort of universally. I mentioned in our -- my business review that we're trialing electric telehandlers, we're trialing electric mini-excavators, battery-driven electric mini-excavators. We're trialing the HVO fuels. These are all the relatively early stage of acceptance, I think, and trialing rather than being wholesale available. But we think that the level of interest in engaging from customers, in particular, will be such that we'll be able to -- and obviously, the manufacturers that are developing these solutions will enable us to gradually change our fleet holding to increasingly more sustainable solutions. There is a cost. The cost of these products is quite a bit higher at the moment than the equivalent, in some cases. That's a challenge for us. It's a challenge for the manufacturer and also, obviously, for the -- ultimately for the customer is going to be renting it. There are also challenges in terms of the fact that some of the products are still not demonstrably as efficient as the products. But from an operational point of view as efficient as the products that have historically been used. So we've got to win the hearts and minds on the site as well as make sure that the practical and theoretical solution works. So it's a big area, one that I'm comfortable moving along nicely with in a lot of different parts of the group, and there'll be more of that rather than less going forward.

Good to hear. Another one here. From a macro perspective, do you believe in the narrative of the roaring '20s and the commensurate tailwinds to infrastructure and construction generally? Or is this too much to hope for?

That one's for you, Allison. Or Jeremy? Jeremy, you can answer that one.

Sounds like for Jeremy.

You were around then.

That's a very unkind remark.

I didn't mean.

Without getting carried away, I think that a lot of the fundamentals for our major markets are looking very positive at the moment. For some time, before the pandemic, you'll recall a thing called Brexit, which caused a lot of uncertain disruption to sort of orderly markets. But since then, the leveling-up agenda and the building back better agenda can only be good news, I think, for the construction industry generally and for all businesses serving that. And then more specifically, with regard to the market segments that are very important for us on the infrastructure side, it just so happens that a lot of the major multiyear reinvestment programs are starting almost simultaneously. So you have the water industry program, you have the rail program, you've got HS2 kicking off, you've got Hinkley Point. So there's an awful lot of good news coming together at about the same time, which as hopefully, we are managing the impact of COVID in the U.K. Those very positive medium-term trends will come together and provide a very supportive backdrop for us. So yes, I'm cautious, but fundamentally very optimistic about the near-term opportunities. Yes.

Thank you, Jeremy. It looks like the last one, so if anyone does have another one, please do submit it, but here we go. Can you help us to understand roughly what you expect EPS or revenues to grow at over the next 3 to 5 years? And what would you suggest very roughly is an achievable CAGR? I think perhaps I should be directing people towards our research note at this point, but if you have any other comments to add?

I think -- yes, I think the research note covers it. But obviously, I guess the only general comment I'd make is to a number of areas in terms of extrapolating what we've said about how we see the next 12 to 18 months. The market backdrop that Jeremy has referred to, the markets which we operate in, if you believe that those markets are going to be relatively supportive, then we firmly believe as a team that we've got the -- a very good business which can leverage off that demand. So yes, I mean, I don't think it's for us to try to guess what that -- those numbers might be, but I can assure you we'll be doing our best to maximize that opportunity going forward.

Well, the outlook sounds very encouraging, particularly given the past 12 months we've just had. So many thanks for your time today and to our listeners for joining us. As a reminder, you can find the research on our website, and a recording of this presentation will be made available, if not today, shortly tomorrow morning. So thank you all for joining us, and we look forward to catching up with the team again in 6 months' time.

Great. Thank you, Hannah. Thank you, everybody else.

Thank you.

Thank you.