Vp plc (VP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Vp Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. These will be available via our Investor Meet Company dashboard and we'll send you an email when that's ready for your review. I would also like to remind you that this presentation is being recorded. Before we begin, we would like to submit the following poll. And I'm sure the company would be most grateful for your response. And I would now like to hand over to Allison Bainbridge, Finance Director; and Neil Stothard, CEO from Vp Group. Good afternoon, or good morning.

Good morning.

Good morning, good morning. Thank you, Marc. Yes, good morning to everybody. Thanks for joining us this morning. Allison and I are going to talk about our interim results through the 30th of September 2021. I'll kick off with a few highlights. I'll then talk to the market and trading review. And then I'll hand over to Allison, who will talk you through the key financials of the results. So in terms of highlights, I will run through this slide, but we do expand on most of these points throughout the presentation. But in terms of highlights, we delivered market-leading profit margins in the first half, which we're very pleased with. It's a strong recovery in trading, which has capitalized further profitable reinvestment into our higher fleet. The excellent performance has been driven by a combination of good infrastructure demand with some exceptions, which I'll talk to, and also buoyant housebuilding market. The overall demand in the commercial construction, civil engineering sectors have been solid, if a little bit quieter than we would like it to be. International division is stable. We operate a U.K. division, which is the larger of the 2, but we also have an international division, where activity has been stable. Substantial progress has been made in the group on ESG initiatives, with a new road map to net zero. And the focus on capital investment on fleet has been heavily focused towards eco-friendly solutions. Current trading in the business as we head into December is positive and in line with our expectations. And we have reinstated in these interim results a progressive dividend policy, reflecting our confidence in the future trading with an interim dividend of 10.5p. The headline numbers briefly. Revenues of GBP 176 million, which shows good recovery and momentum in the business as we exit the worst of the pandemic, material improvement in profitability and margins. Our key measure, return on average capital employed, which Allison will talk to later, back towards where we wanted to be. Net debt up GBP 10 million, but after GBP 32 million investment in fleet during the 6-month period. The next 2 slides, a reminder of the long-term growth trend that we have delivered as a group, and the chart is not dissimilar if you go back the 10 years before that. But clearly, we've been impacted over the last 2 year-ends by the onset of the pandemic. Our year-end is March, so the March 2020 was -- quite severely hampered our results in the end of our financial year 2020. That's why we saw the dip in revenue there and then the full impact of COVID during 2021. The last column shows our interim result, and we've also overlaid the consensus figures, average from our 2 brokers, Berenberg and Singer's. The same graph moving on in profitability terms, a very similar pattern, excellent, consistent growth from the business, severely impacted, as you can see last year through the pandemic. And again, we've overlaid the broker consensus to give some idea of where the market feels that we're heading in the current full financial year. So moving on to markets and trading. We operate in a number of core market areas. Infrastructure, construction, housebuild and energy are the 4 that we highlight. We also have a number of smaller market areas in others, such as outdoor events, aviation and mining. The market exposure has not changed much over the recent years despite all the travails of the pandemic. We have a reasonably consistent split of 40% infrastructure, of 40% general construction, 10% housebuild and the balance through energy and other markets. If I move on to the infrastructure market, which is 40% of group revenue, as in all those market areas, we saw growth, which is not unexpected. But we've had a mixed recovery. We've had great strength in our support of the HS2 projects. We've also been busy on transmission activity as well. Slightly less buoyant than we might have expected was the AMP7 work for the water industry, that capital expenditure program, which is a 5-year program which started in April 2020; and also the CP6 program in the rail industry, which was a bit slower through the summer than we might have originally anticipated. Those markets are attractive to us because they're long-term, there is a long-term commitment. There's a regulatory framework, and therefore, there's a reasonable certainty, despite some volatility, there's a reasonable certainty that, that work will come through. And we're very well positioned to benefit from that. I will comment more on the infrastructure market and the other markets as I talk to the U.K. divisional performance. In construction, we were very busy working on repair and maintenance. The RMI market was busy, and that's been a benefit to us as a group. Again, slightly more disappointingly and perhaps not surprisingly, confidence in the private investment into speculative commercial building, et cetera, has been less buoyant. And that has had an impact on certain of our activities, particularly those that support the civil engineering sector. Housebuildings, which fell off a cliff in the early part of the pandemic last year, recovered quickly and has maintained that recovery. And we've enjoyed sustained demand throughout the period. And finally, on energy, this is a mix of onshore and offshore activity. Offshore remains a quieter market for us, but the onshore work has been busier, and we've been able to create some recovery in growth in that market. So the group business performance. Good revenue growth on COVID-19-affected prior year, which you would expect. Profits are up, more than doubled, to GBP 22.5 million. That's an operating profit figure. And operating margins, I think, very importantly, have improved from 7.6% to 12.8%. You will see that the incremental revenue translation into profit, half year on half year, has got a disproportionate drop-through margin of 35%. The -- and this illustrates the operational gearing impact that additional revenue can translate into higher profits on a relatively fixed cost base. It's been a strong performance in the half year. It's by no means the finished article, but we've got more potential as certain of our markets that I've mentioned before achieve recovery. If we look at the U.K., which is by far the larger of our 2 divisions, this is the engine room of the Vp business. We grew revenues 25%. Margins there at 13.6% are pretty well at the same level as -- of margin that we were at pre-pandemic. So revenues are not back to pre-pandemic levels in these results, but the margins are. And I think that's much -- that's very important. In terms of infrastructure, the strength, as I said, have been HS2 and transmission. That's been positive for our TPA, our Groundforce and ESS businesses. However, AMP7, which has had a delayed start, that has also impacted our civil engineering supporting businesses, like Groundforce. We expect that AMP7 will start in earnest in 2022. We can't tell whether that's going to be in the first quarter or later in the year. We would have normally expected, on a 5-year cycle, 1.5 years into the program, that the contractors would be busier than they are today. So disappointing on the one hand that it hasn't -- we haven't enjoyed that in the first half. But on the other hand, there is more to come, and we're very well positioned to benefit from that. CP6 is the equivalent program in the rail industry. We did have a -- the rail industry stayed open during the pandemic last year, and we were relatively busy supporting the rail sector when the lines were quiet. That recovery or quick recovery flattened off in the summer of 2021. But pleasingly, we've seen business pick up again in the -- or into the autumn, into the winter. And we've become much busier on the likes of the Trans Pennine renewal -- upgrade, sorry, and other projects around the network rail region -- activity. So infrastructure is a positive for the U.K. business, with more to come. In construction, the RMI activity is positive for Brandon, in particular. However, the lack of new build in terms of speculative build, as I said earlier, impacted the civil. So that's created less demand for the likes of our Groundforce business and also for our Brandon business than we might have anticipated. I think that's the most difficult element to call in terms of recovery. I'm reasonably confident that the AMP work and the rail work will come through next year. I think that the timing of new build will depend upon general economic confidence in the U.K. Housebuilding has been a busy sector. We have had good activity for -- particularly for our UK Forks business, which provides rough-terrain telehandlers. They've been extremely busy. And the prospects going into this coming year of 2022 remain very positive. My final point on the U.K. is that we made substantial cost savings in 2021 throughout -- sorry, in cost savings in 2020 and into 2021, throughout the pandemic. And these have been maintained into this new financial year, and that's one of the benefits of the margin. In terms of international, a much quieter trading period. The -- a more subdued recovery. Unfortunately, for our international businesses, which are heavily skewed towards Southeast Asia and Australasia, we've had extended lockdowns in those countries, and that has been an inhibitor to the recovery there. Nevertheless, the businesses have remained profitable, but we haven't seen the type of recovery that we've enjoyed in the U.K. at this stage. But hopefully, we expect that, that will pick up into 2022 as the borders reopen and we're able to transact more easily across those countries. In energy, the markets have remained impacted by, I've mentioned, cross-border mobility challenges. We move engineers around the world to support our rental activities in -- particularly in offshore markets. That has been far more restricted due to COVID as well. So a quiet 6 months for international, but I think with better prospects heading into 2022. So my next slide is on rental fleet investment. We've accelerated rental fleet investment in the first half of this year compared with last and spent nearly GBP 32 million in the period. There are 3 main elements to that expenditure. The first one is our support of the businesses which have -- within our group which have now moved ahead of pre-COVID levels. There's opportunity there, and we're expanding their fleet to support those opportunities. The second element is some preemptive purchasing to try to get ahead of the supply chain issues. We've -- that are hitting most businesses in the U.K. at the moment. We are seeing a lot of extended lead times for new products, between sort of 3 months, out to 12 months. And therefore, we've taken the decision to make preemptive purchases to ensure that as we hit 2022 and hopefully see improved -- further improved market conditions, that we will have the equipment that the customer requires. And the third element is that even in the markets where we have not been as busy as we might have hoped, and that will be the AMP and the rail market, we have invested into fleet, not necessarily delivered yet, but we invested into fleet to make sure that we have the appropriate level of product to support our customers into 2022 and beyond. Related to fleet investment is the disposal proceeds. We would not -- we -- as you'll see, we've generated GBP 8.2 million of proceeds over the first 6 months, which is similar to last year. We would, under normal circumstances, we would expect that there will be some correlation between the growth in disposal proceeds and fleet investment. But the reason it hasn't changed is because we've deliberately held back on selling product, that we are finding it more difficult to acquire new on longer lead times. So that product that we would have sold off is currently remaining very busy being rented to our customer base. And my final point on CapEx is that not only did we spend GBP 32 million in the first half, we had already committed another GBP 20 million at the 30th of September, which again reflects our position in terms of early investments into the group. Within the CapEx, there was a strong emphasis on environmental and eco-friendly solutions. So this slide talks to our current position in terms of environmental initiatives. We did sign up to the Science Based Target initiative earlier in the period that we're reporting on. We've developed a road map to net zero by 2050. But perhaps, more importantly, we have a short-term road map for the next 4 years, which is communicated across the group and to what we are working over the next 4 years, which is the most proximate period and one that we feel, as the current management team, we can influence the most. Within the new product investment, we -- there's a whole range of rental fleet that we've acquired, which improves the environmental credentials of the fleet that our customers are using. And examples of that are our solar panel lighting fleet, that our Torrent business has bought, which is now the largest solar panel-powered lighting fleet in the U.K., supporting their rail customers; a very wide range of cordless tools, which are displacing the previously petrol- and diesel-powered tool versions with battery; we've also introduced the electric compressors, electric telehandlers and electric mini excavators; and our first hybrid service vehicles are now in operation, supporting certain of our businesses around the U.K. Other environmental initiatives include commitment to ISO 50001, which is an international energy management standard. We've also got examples of water recycling and solar panel installation around our depot network. We're 95% renewable electricity across the group. And we have a hybrid car choice within our company car range now. So other areas that -- where we're improving our environmental impact fairly early on. We've invested in biodiversity, into 3 nature conservation projects in this first half. That's something that we intend to continue to do, with new projects each year. We're pleased with that engagement. And we're also pleased that we can get colleagues to participate in these conservation projects. A large element of our existing hire fleet, and I estimate 2/3 of the fleet does not have a diesel or a petrol engine attached to it, so we operate portable roadways, we operate shoring equipment, aluminum tower. These, for sure, generate emissions at the point of manufacture, that once they're manufactured and on our fleet, there's zero emission at point of use. And I think that's important to understand. And my final point is that rental itself as a concept is fundamentally eco-friendly. We are all about optimizing a shared resource. That's actually what we do. And therefore, I think, our credentials as a sector are also quite powerful in terms of environmental generally. So my final slide, on outlook, we continue to deliver market-leading quality of earnings, with strong ROCE and margins. We look forward to an acceleration of the AMP and CP6 rail activity. And also, there may be further upside as and when commercial new build investment increases. HS2 is a long-term opportunity for us. Housebuilding, we see as positive into next year. The sustainability initiative I was just talking about is well understood across the business, is providing vital customer support and engagement. We've invested, and have for many years and continue to invest strongly, in technology, providing digital solutions to both customers and operations internally alike. We've revitalized our learning and development within the group, investing in our people. We took on nearly 40 new engineering apprentices this year. We've taken a next tranche of our graduate recruitment program. And we've also opened up into LGV apprenticeships and sales apprenticeships in the current year. So our prospects in the U.K. and in international divisions are positive. The combination of our financial strength and of the exceptional team right across the group will deliver results. And we remain confident reporting another year of tangible progress in the full year. So that's all I have to say. Obviously, we'll take Q&A later, but I'll now hand over to Allison, who will talk you through the financials. Allison?

Thank you, Neil. Good morning, everybody. So my first slide is to emphasize some of the points that Neil has already made around the continuing and strong recovery. We feel we've had a good set of results for the first half of the year. Revenues were strongly ahead of prior year, up 24% to GBP 176 million. Profit before tax and amortization also increased by 135% to GBP 20.2 million. Some of our businesses are trading ahead of 2020, which we see as a pre-COVID year. And others that are still impacted by the cyclical nature of infrastructure and supply chain constraints are still trading slightly behind. Next slide is on earnings per share and dividends. We have -- Neil has already mentioned, we proposed an interim dividend of 10.5p. This is ahead of the last interim dividend we paid, which was in the financial year 2020, which was 8.5p. There are 2 elements behind this. One is a rebasing towards 2 to 2.5x cover. We found that in the last several years, we've been well ahead of 3x dividend cover, and we feel that the 2 to 2.5x is more in line with our stated policy and more appropriate. And the other thing that we're trying to achieve is a more balanced interim final split, more towards the traditional 1/3, 2/3. The next slide, again shows the long-term view of the group, and it shows that we've had a long-term progressive policy of growing dividend. It was impacted, of course, by COVID as many things were. Return on average capital employed is a key measure for the group. We're proud with our -- of our long-term track record. We target 15% throughout the cycle, and you can see here that we have achieved that target. COVID again had an impact in 2021, brought us down to 9.2%. But I'm pleased to say that we've recovered back to 13.5% by the half year, and we're well on track to get back to pre-COVID levels. Another key point to make is that we're also well ahead of our weighted average cost of capital, which we estimate to be 8%. We have a strong balance sheet. You can see that our hire fleet is a key component of that, at GBP 214 million. The hire fleet is young and well managed, that's a key strength of ours, and it's around 3.5 years on average. Other key points to make is that debtor days remained under control at 58 days, and bad debt write-off was small, at 0.4% of revenue, which is in line with previous years. And as Neil has already mentioned and explained in some detail, we grew the hire fleet during the period. Rental firms have very strong cash generation, and we are similar, we have the same. And I'm pleased to say that we have had strong recovery in EBITDA to GBP 44.5 million. Key elements of the cash flow during the year, Neil has already mentioned the GBP 34.9 million of capital expenditure. That total fleet was GBP 31.7 million. And we've also had a benefit of working capital during the year -- sorry, a disbenefit of working capital during the year. During the COVID period, as revenues fell, we had a working capital inflow. And then as we've recovered, there's been a working capital outflow during the period, which was inevitable. We have -- net debt and facilities, we have generous headroom against the facilities. Our total committed facilities are GBP 183 million, and combined with our overdraft, we have GBP 190.5 million of facilities. Our net debt at the half year was GBP 131.7 million, leaving us GBP 58.8 million of headroom. In the first half of this calendar year, we carried out a refinance, which has left us very well-placed. We had a revolving credit facility that was due to mature this month, December 2021, that was for GBP 135 million, and we refinanced that with 2 elements. One was to make use of a private placement shelf provided by Pricoa, and that was GBP 28 million we drew down, and this matures in 2028. And combining this with the existing GBP 65 million of private placement, which matures in 2027, we have a good balance of long-term fixed debt. The RCF, since it's fairly new, also matures in June 2024, leaving us plenty of room and time for any future refinancing. And also, the RCF includes a GBP 20 million accordion, which, although it's uncommitted, is there for us to grow. So with the headroom and the accordion, we feel we're well placed for any future growth of the business, either organic or by acquisitions. And then my final slide is just to demonstrate that we have robust headroom against our covenants. Our financial documents, both for the RCF and the private placement just have 2 covenants, financial covenants. One is the EBITA interest cover has to be greater than 3x. And you can see that the half year, it was 9.65. And you can see that throughout the pandemic and before, we've always had plenty of headroom. And then the other covenant is that net debt to EBITDA has to be less than 2.5x. And again, you can see that at half year, we were down at 1.49, adequate plenty of headroom in there, and that was also maintained throughout the global pandemic. And so I don't have any further slides, so that -- we're happy we've completed those. And if -- we're happy to take any questions that you might want to -- well, if we're going to go through the questions, that would be great.

That's great. Thank you very much, Allison and Neil for updating investors this morning. [Operator Instructions] But just while Neil and Allison take a few moments to review the investor questions submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your Investor Meet Company dashboard. And you'll be notified by email when that's ready for your review. I would also like to remind you that your feedback is important to the company. And immediately after this presentation has ended, we will redirect you for the opportunity to provide your feedback in order that the company can really better understand your thoughts and expectations. Allison and Neil, I know I haven't given you a long time to review the questions. But perhaps, if I may, if I could hand back to you to open up the Q&A tab and just read out the questions and give response where it's appropriate to do so, and then I'll pick up from you at the end?

Great. Thank you, Marc. So we do have 1 or 2 questions. The first one is have general market supply chain issues affected the business, and how have you dealt with these? And I'll take that one. I think that, for sure, the general market supply chain issues have affected our business just as they have affected many -- well, all businesses around the country. And I did talk to elements of that in the presentation. We have seen -- from our own point of view, we've seen extended lead times on products that we want to purchase, and we've seen some uncertainty in terms of timing of getting consumables. But that, I think, is generally quite well-managed and under control. We have now taken preemptive actions to try to mitigate that. I think the interesting part about market supply chain though is that it also affects perhaps, more importantly, our customer base. So our contractors, who rely on material supply are, I think, being hampered to a degree by the sort of rather volatile nature of the material supply chain at the moment. We -- it appears that it's improving, and it appears that, hopefully, in 2022, that will be less of an issue than it is in 2021. But there's no doubt that our -- the demand for our services in certain sectors is perhaps marginally subdued by the fact that the contractors are perhaps not committing to the same level of contracts that they would have done were the supply chain more effective at the moment. So I think that would be my answer to that question. Another one, which is probably for me, do you see overseas expansion becoming a more meaningful part of future group revenue? We -- as I explained, we have an international and we have a U.K. division. What's perhaps less obvious is that our European activities are within -- reported within our U.K. division, which is where they ultimately report into. So if I take the European and the international division activity together, we've got 17% of our overseas -- sorry, 17% of our revenues come from outside of the U.K., 83% within the U.K. We lost the questions. And the -- so we're already quite well-committed to develop that overseas -- those overseas markets. They have been quieter than we would expect. I think we -- in the longer-term, I would see a sort of 80%, 20% split of activity as being more reasonable and more in term of our long-term strategy and targets. We are keen to grow both our -- our European business is based in Germany, that supports the business in Austria, Scandinavia and France, amongst others. And it's -- in particular, it's our Groundforce and TPA brands that are operating in those countries. There is certainly scope for further growth in that -- in those markets. Further afield, Airpac and TR are based largely in Singapore, apart from in the U.K., but based in Singapore and Perth, and then around Australia and New Zealand for TR. We see opportunity to grow those businesses further as well. So I think that the international side, which is, as I said, has been disproportionately impacted by COVID, we certainly will have -- it will become a more meaningful part of the group, is the question, I think, said. I can't see it. Anyway, so that's where we are in terms of international. It's very much part of our process. The reason we're in international at all is because we want to -- we see opportunity, obviously, but we also see the benefit of it acting as a reduction in risk to being just committed to the U.K. market alone and so provide some resilience to, in particular, the downturn in the U.K. The next question, which I'll hand over to Allison is -- it is noticeable that the return on average capital employed is showing a long-term downward trend. Could you give your views on the reasons for this and the expected future trends? So I'll let you answer that.

Thank you. So I think as demonstrated on the long-term slide, and I did mention that we do have a target for 15% throughout the cycle, so what we're trying to do is return on average capital employed is a key measure for us because it makes -- it demonstrates the quality of our earnings, whether that's derived from organic or from acquisitions. We target 15%. We've generally achieved that, but we don't slavishly follow that. So we want to balance growth with achieving the quality of earnings that I mentioned there. In 2017, we acquired Brandon, which was our biggest acquisition so far. We paid GBP 69 million for that. We deliberately and knowingly decided to lever up in order to make that key acquisition, so we went to over 2x EBITDA and GBP 200 million net debt, which, as an aside, we've actually repaid that now because we're down at net debt levels of GBP 130 million. But buying Brandon did reduce the average capital -- return on average capital employed for 3 years. And then we were just about to get to the point where we had fully integrated Brandon and we're about to get the full benefits of that acquisition, and then we were impacted by the pandemic, which brought the returns down to 9.2%. You can see that we recovered rapidly, I believe, and strongly back to 13.5%, and we would expect to be back in the 14% and above levels by the year-end and back up to the 15%, throughout the target again. So hopefully, that answers the question.

Yes. I would perhaps just add on the longer term, the reason that we, I mean, we describe ourselves as equipment rental specialists, and that goes back 20 years ago when we decided to exit the general plant hire market, to make sure we improve returns in that 15% target, as Allison said, we set all that time ago. And I think, apart from 2021, through COVID, we've never been below 12% and we've generally been -- hovered between 14% and 16%. I think we were as high as 19% on a year throughout that 20-year period. So I don't see the short-term trend as being a concern. Another question. Are there any new areas the business could expand into to complement the existing business? What would you look for? Is there a size of business you would consider? So the first thing to say is that acquisitions and organic growth, we're equally interested in and excited about. We did make a small acquisition a few weeks ago of M&S Hire, which is a very well-long-established business in the Southeast, which has gone into our MEP business. However, I don't see that M&A is going to be a significant aspect of our growth over the short term. I'm not sure that there will be that many opportunities around in the short term. I think it's much more likely that vendors will start to -- for businesses on the market, once they've been able to prove that the business they have pre-pandemic is just as good post-pandemic. In terms of new areas, we're always looking for new areas. I don't think, geographically, we're looking to significantly move anywhere new. I think, geographically, we are in the regions that we want to be. I think that the specializations that we have are largely where we want to be. So I think it's going to be -- going forward, it's going to be more about more organic and built on acquisition growth of the likes of M&S Hire rather than any significant major change of direction. We were never -- we never slowed to -- or were never afraid to try things that are very fresh and new. The Brandon Hire acquisition, which is our biggest-ever acquisition, that was certainly a significant step for us as a group. And I think we've proved that we can absorb an acquisition of that size, and therefore, at some point in time, I'm sure that we would look to add further. And equally, our expansion into Australasia, with the TR acquisition, again shows our ambition in that area. So I think that's how I would answer that question at the moment.

Thank you. Neil, Allison, I might just jump in at this point. I think you've answered pretty much every question that's coming from investors this morning. And thank you to all those investors that have taken time to submit those questions. If any more do come in, we'll obviously make those available to you, Neil and Allison, after the meeting, so that would be fine. I know investor feedback is important to you guys, and I'll shortly redirect investors to give you their thoughts and expectations. But before doing so, maybe if I can, if I could hand back to you, Neil, just for a few closing comments, that would be great.

Yes. Thank you, Marc. Thank you very much for all of you who have listened today. I hope that you -- it has given you a better understanding of how Vp is trading in the current environment. I think we're very pleased with the first half results that we've announced last week. It's not the finished article. There's still some way to go as we get back to the levels of performance that we have pre-pandemic. But hopefully, you will see from the presentation that there are plenty of grounds through optimism in terms of the quality of revenue and the quality of return on capital that we're delivering, which is back to pre-COVID levels. And the revenue growth is -- has a realistic chance of recovering through the -- those markets, our core markets, such as the rail industry, the water industry and general construction, that those markets will recover, and we will recover in line with that. So thank you very much again for attending our presentation. And Allison and I will sign off. Thank you.

Okay. Thank you. Goodbye.

That's great. Allison and Neil, thank you once again for updating investors this morning. Can I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the company can really better understand your thoughts and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Vp plc, we would like to thank you for attending today's presentation. That now concludes today's session. Good morning to you all.