Vp plc (VP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the VP plc Full Year 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 of the questions submitted today and publish responses where it's appropriate to do so. These will be available via your Investor Meet company dashboard, and we will notify you by e-mail when these are ready for your review. Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand over to CEO, Neil Stothard. Good morning.

Thank you very much. Good morning, everybody. I'm Neil Stothard, the CEO of VP.

I'm Allison Bainbridge, Group Finance Director.

So we're looking forward to telling you a bit about our results the year ended the 31st of March 2022 for Vp plc, the equipment rental specialists where I will run through the highlights and market and trading review, and Allison will complete the presentation talking to the financial review. This photograph, we say we're an equipment rental specialist. I think it's worth just focusing on this photograph. This is in Gothenburg. It's a large metro contract for our ground force business. You can see this is a highly complex and highly skilled offer that we have and a great demonstration of how we are a specialist in equipment rental. I'll start with the highlights. We had a material growth in profits of 67% year-on-year. We're very pleased with that, albeit we realized that this was on the back of a COVID hit and impacted year -- prior year, but 67% is good progress. One of the highlights of the results is the recovery and the quality of earnings of the business. They're back to our pre-COVID levels of return on capital employed of 14.5%. Allison will talk to ROCE in her section, but it is a highlight for us that we're back to the same quality of earnings that we were 3 years ago. In terms of our markets, I'll talk to these in more detail later, but in highlights, infrastructure strength from HS2 and transmission was good and the AMP7 Water program and rail CP6 programs were a bit slower but they did improve at the end of the final quarter. In general construction, we also saw a mixed behavior going on, strong repair and maintenance revenues were balanced by weaker new build activity. House building held up well throughout the year, and the International division saw a steady recovery in profits. We invested nearly 50% more in our CapEx in our fleet this year with an emphasis on lower emission solutions for our customers. We did make significant progress on overall ESG implementation and indeed in technology and our digital innovation across the group in the period. And final highlight would be that we acquired M&S Hire, which is an acquisition we made in the back end of 2021, which gives us good exposure to the commercial fit-out market. And right at the end of the financial year, we acquired the funds and tools fleet of Watkin Jones, PLC and entered into a 5-year trading agreement with that company. Headlines. Again, we'll talk to these in more detail later, but 14% increase in revenues to GBP 351 million, PBTA to GBP 38.9 million, that's improved margins. Return on average capital employed at 14.5%, a net debt increase of GBP 8.7 million after GBP 59.8 million investments in the fleet. In terms of revenues, we made material improvements in our revenues in these results. We're not quite back to where we were pre-COVID, but we are well on track. I think the final element of the closing the gap to 2019 will come as and when some of the markets which have still been laggards in the recovery, do recover in due course. And I'll talk to that later in the market slide. In terms of profits, after material and not an expected drop in profitability during the pandemic, we've shown very good recovery in these results and back to double-digit margins of 11%. Now to the market and trading review. I think understanding the core markets that Vp supports is critical to understanding the performance of the business and the opportunity within the business. This slide shows our relative exposures to what we see as our key market areas of infrastructure, construction, housebuild and energy. We also have other markets, they include outdoor events. They include aviation, defense, mining and medical. But for the purpose of this presentation, I'll focus on the top 4. In infrastructure, we experienced a positive 12% improvement in activity with highlights being the engagement on the HS2 contract and also in transmission work. Important rail and that markets to Vp and those of you that know Vp well will understand that they are an important part of the infrastructure exposure that we have, they were slower than expected during the summer, particularly last year. Pleasingly in Q4 towards the end of Q4, we started to see some of the work comes through, and we also saw some of the rail projects that we're involved in starting to pick up as well. In terms of construction, I mentioned about repair and maintenance markets see before whilst the new build was slower. Private commercial and public nonresidential were weak. And I talked to that at the macro level on the next slide. Housebuilding, 4% increase looks relatively modest, but it was the sustained level of demand and the housebuilding market recovered actually more quickly after the start of the pandemic than perhaps any of the markets we're involved in. So we were -- we've been growing from a lower base, if you like, in housebuild and we're very pleased with the activity in housebuilding. We're continuing to make good progress in winning new customers in that segment. Energy was also very positive, 26% improvement. That's partially because we've seen our well test activity pickup and also pipeline maintenance work. But the energy numbers spiked a little bit because we did a major shutdown at the Valero refinery in South West Wales at the start the financial year, which gave that segment a boost. So there, that's the run-through on our core market segments. To try and put some context into our experience on that. I've got 4 graphs, 4 charts here, which show -- which draw on the Experian U.K. construction forecast for spring this year. Forecasting at the moment, obviously, is quite tricky, but these, I think, are a good representation of how we see these markets as well. On the top line, the new infrastructure chart shows that the impacts of the pandemic in infrastructure spend was relatively modest. It did dip, but it was relatively modest fall. And it's been followed by a sharp recovery in the last 12 months with the potential for further recovery thereafter. Similarly, in new housing, we saw a sharp drop with a rapid recovery and with an ongoing prospect of housing activity continuing to grow into '23 and '24. And then in the bottom right quarter, we've got total repair and maintenance. And that again illustrates the fact that maintenance activity picked up very quickly post the pandemic. And the prospects for that segment are -- remain very, very good for us. So they're positives. I think they -- those macro charts reflect our experience at a micro level in terms of business performance. Where the gap, I believe, lies is in the chart in the bottom left quarter -- quadrant where new nonresidential, which actually started to fall pre pandemic, post Brexit. That construction works fall away. It's accelerated, it's dropoff. And in the 2021 calendar, it is only flattened as opposed to other markets, which have picked up quite quickly. New nonresidential is about 21% in experience view, it is about 21% of the total U.K. market. And what that chart shows you is that that's nothing like back to where it was, not only pre-COVID, but also pre-Brexit. And the recovery that's expected is tangible, but relatively modest. And I think that recovery, whenever that may come, is another opportunity for us. We, as a business, have been obviously diverting our energies towards those markets that are growing. But nevertheless, some form of recovery in elements of new nonresidential, which include public nonresidential, private industrial and private commercial would be very beneficial to the group. By way of example, to finish on this slide, new nonresidential would include schools, hospitals, leisure and offices. So it's -- I think that some of those segments, it is feasible that those are going to pick up in due course, but we're not banking on it. So moving to the group performance business. The group delivered 14% improvement in revenue with 56% increase in profits -- operating profits to GBP 43.3 million. The incremental revenue drop through to profit is very strong, and I show that a 36% margin. So that, I think, illustrates the gearing -- operational gearing impact of the business, which has a number of fixed costs. If we can put more through on the top line, then we can get more profit coming through below. And that, I think, is a key driver to operating margins going up from 9% to 12.3%. And these results, which in our view, are very good, have been delivered in a market backdrop, as you just heard from me, which is not yet back to pre-COVID levels. The U.K., which is the main driver for the group's performance this year, similar increments in profitability and revenue and also in terms of operating margin. I talked about the markets, infrastructure, HS2 and transmission. And the businesses within the group, which benefit from structure activities such as HS2 transmission include our TPA business, our ground force business. Those businesses that are -- and they've both been highly involved in both HS2 and transmission work as our ESS. But those businesses are also particular Groundforce impacted by slower AMP program. We're now coming into year 3 from April at the AMP program. And we are starting to see more work coming through. And I think that's going to be a positive for us in the coming 12 months. CP6, which is rail. That also is a critical path for Torrent, Torrent Trackside business. Again, after a slow 2021, the Torrent has seen activity levels pick up and particularly in the Trans Pennine upgrade work, Southwest Wales core value lines, contracts and also just general CP6 activity. Construction. Repair and maintenance has been busy, as I said. That's very positive for the likes of Brandon and for MEP. But equally, new build being quiet to the nonresidential sort of flattening off is also -- means that the likes of Brandon are not as busy in that segment as they perhaps could have been with a better market backdrop, but that's a latent opportunity. Housebuilding. Consistent demand that's been very good for UK Forks. One of the challenges to UK Forks has been that getting new product has been difficult. And that has meant that we've hung on to our fleet a bit longer than we would normally do to make sure that we are able to satisfy customer demand, which has remained very good through that process. Margin improvement illustrates operational leverage, but it also reflects the fact that we're combating inflationary cost increases with pricing improvements in terms of higher rates. And that's certainly been a success for us in the last 12 months. International. As you can see, smaller activity, but it has made a reasonable recovery. Unlike in the U.K., the -- most of the jurisdictions where our international business operates have lagged the U.K. and Europe in terms of opening up from lockdown. So they haven't had -- they're probably 3 or 4 months behind the U.K. in terms of business getting back to some form of normality as a result of COVID. And therefore, I think in that context, these are very good results for them. I think it will continue to improve as we get a 12-month hopefully, fingers crossed, 12 months clear window on that. In terms of our aircraft rental business. They rely on being able to move operators cross-borders. Our customers rely on being able to move equipment across borders, et cetera. So there was an inevitable slowing of that business through the pandemic, but again, as borders have reopened, we're starting to see a recovery in our energy activity. So like any rental business. We have to make sure that our fleet remains in good condition and is appropriate to what customers require, and we continue to do that. We have a very fresh and well-aged fleet. We spent GBP 60 million in the year on new fleet, which is a 50% increase on prior year. This is a mix of growth, back in growth in those businesses, which have recovered quickly from the pandemic and are securing new opportunities. It also reflects a bit of preemptive investment to try to make sure that we've got the right level of supply from our customers, given the lead times from suppliers have largely extended quite significantly over the last 12, 18 months. But nevertheless, that's a healthy investment, which we're pleased with. Within that investment, there's a strong emphasis on eco-friendly products as a substitution. We're engaging both with manufacturers in making sure that we are producing the best solutions, which are reliable and to deliver sustainability improvement. And we're also engaging with our customers who integrate our 4-way solutions. So we're continuing to improve the quality of our fleet in the normal way, but we're also managing to retire the -- a lot of the petrol and diesel powered equipment with battery and cellular powered equipment as substitutes. And then the final comment on this slide was capital commitments. We've got GBP 14.5 million of orders at 31st of March for CapEx. That's a bit higher than we would normally have. And that again reflects the fact that we have to order much earlier than we used to do to ensure that we're going to get the delivery of the equipment that we require to run the business. ESG is an important topic for us within the group. We have a commitment to science-based targets initiative, which underpins our ESG -- or our environmental plan. We have a short-term road map, which is at the back of the presentation, which has been adopted within the group and is well understood and being delivered on. I mentioned in the CapEx slide, we've invested in new rental fleet focused on greener solutions. These include solar funnel lighting, particularly used in the rail sector, new charge pods designs, which are used on sites and widened increasing range of battery-powered tools of all varieties. And finally, starting to build on our fleet of electric compressors, electric telehandlers and the electric mini-excavators. 71% of the group's fleet are actually 0 emission point of view. So 29% by definition of our fleet does generate emissions through the likes of petrol or diesel engines, for example. But our target is to continue to reduce that as we can and as the solutions are secured from the manufacturers. Internally, vehicle and property emission reductions, the focus we're looking at a lower emission commercial vehicle replacements across the commercial fleet, the company car fleet transition to sustainable vehicles. We have renewable electricity to all our U.K. locations and we're installing several panels at key locations across the country. 96% of our waste is diverted away from landfill. We've also committed to separate U.K. conservation projects, which are now well established and with colleague engagement opportunities for people within the business to engage on those 5 diversity projects. And finally, my comments on environmental is that sharing resources, which is what we do in the rental market, this concept makes rental actually fundamentally eco-friendly option because the product is being shared -- is a shared resource and not solo resource. My final slide and outlook. We're continuing to deliver market-leading quality of earnings measured by both ROCE and margin. Our new financial year has started well and in line with where we expected it to. We've seen an encouraging pickup in AMP7, which is water and CP6 rail activity into the new financial year. And HS2 does remain a long-term opportunity for us. Residential construction is stable and robust. And then in terms of supply chain, we are encountering delays and there are inflationary pressures out there, but we are having good success in negotiating rental price improvements with our customers and also, obviously, continuing to drive cost efficiencies to mitigate the worst of the inflation increase. The labor market remains very tight. Recruitment, as in any business, I think at the moment, is much tougher than it used to be. And apart from doing the obvious in making sure that we are paying at the right level. We're also investing in the future of our colleagues by mobilizing more activity in learning and development, and we've developed a completely new program in that area, which is now underway and very much focused on allowing colleagues to develop and to look at career progression within the group. And our digital roadmap has continued to evolve across a number of our businesses. We launched our -- in particular, we launched our new web app in Brandon High station in January to go a new website, and we think that's going to provide a useful platform for further growth. I've talked about environmental, that we have got excellent momentum and environmental initiatives, and we are delivering sustainable solutions to customers. We won't be talking any more about formal sale process announced in April, but we did announce that. And the important message to shareholders is despite that announcement, it is very much business as usual within the group. And everyone is very engaged in continuing to deliver on our plans. And certainly, that is my view of how -- of what's going. So we're well positioned to make further good progress as we embrace the opportunities and also manage through the inevitable challenges which the current market is casting to us. So that's my piece. I'm going to hand over to Allison, who is going to talk to you about the financial highlights of the results.

Thank you, Neil, and good morning, everybody. So on the financial review, my first slide will be the financial highlights. Neil has touched on most of the highlights in the course of his presentation, but I will reiterate the fact that we have got a good set of results with a 14% increase in revenue and a 56% increase in profit. Another key measure for us as well is our EBITDA, we generate cash -- strong cash flows and they were up 22% in the year. Earnings per share and dividends. We've had growth in our earnings per share, in line with growth in profit, and we are proposing a final dividend of 25.5p per share subject to shareholder approval, and that would make a 36p per year full year dividend. This reflects a rebasing more towards the 2x cover, which we trailed our interim results and a more balanced interim final split. There is a large uplift year on year on the dividend per share, but that reflects the fact that we didn't have an interim dividend in 2021 due to the uncertainty caused by COVID-19. And here, this slide -- chart shows the long-term view of our dividends, and you can see that we have progressively grown our dividend over the years. And apart from the blip, which was caused by COVID, we have grown those in line with that growth in our profitability over the period. And again, a key measure for the group is our return on capital employed. We're very keen that we don't just deliver growth in revenues, but we have quality of earnings. And this is our measure to make sure that we do, do that both through our organic growth and through growth for our acquisitions. I'm pleased to say that we have returned to our pre-COVID levels of 14.5%. As a group, we target 15% through the cycle. And you can see that we broadly achieved that over the period. And also, I'd like to point out to the fact that this is well ahead of our weighted average cost of capital at 8%. Two of the features of the group. I mentioned the cash generation. We also have a strong balance sheet, which helps us grow and capitalize on that. High fleet is the largest number on our balance sheet. And Neil mentioned that we have grown that by GBP 10.6 million during the year by investing GBP 59 million in the year. The point on -- point 2 is we have had a reversal of working capital. COVID inevitably meant that we did benefit from the working capital inflow in FY '21. And as we've recovered from the COVID pandemic, this has reversed during the year. Net debt across the slide later on that cash, that grew, increased by GBP 8.7 million, which we see as being marginal, considering the size of the capital investment that we made and also the small acquisition that we did as well. Debtor days, I'm pleased to say has gone down by 1 day. We feel that that's at the right level. We try and balance, making sure that we take appropriate amounts of risk so that we can grow and develop the business, but also we keep that well under control. And bad debt write-off as a percentage of revenue is sort of at historic levels, which is just the same as it has been for a number of years at around 0.5% of our revenues. Strong cash generation has continued. As I mentioned, EBITDA was up to GBP 88.9 million. I've also referenced the reversal in working capital, which is due to our recovery from COVID and the large amount of capital expenditure that we've passed. So a modest increase in net debt of GBP 8.7 million, and the unwinding of the working capital inflows are demonstrated here. My final 2 slides are on our net debt facilities and on our covenants. During the year, we did a refinancing, so we had GBP 135 million RCF, which was due to mature during the period. So we refinanced that. We did that in 2 ways. We already have in place a private placement and so we had a further shelf for that. And we grew down another GBP 28 million. And also, we had a -- put in place GBP 90 million revolving capital facility. So that gives us committed facilities of GBP 183 million, and at the year-end had headroom of GBP 60 million over that. The fixed debt, I think puts us in a good place. We have 51% of our facilities at fixed rates and also this 5 to 6 years to maturity on those facilities and the RCF matures in June 2024. And then finally, on our facilities, we have 2 covenants. One is EBITDA interest cover, which has to be greater than 3x. And you can see that at the year-end, it was 10.12x, so plenty of headroom there. And the other one is that net debt to EBITDA has to be growth less than 2.5x. And at the year-end, it was 1.3x. So well within our covenants. That's my final slides, so we can -- we're able to take your questions.

[Operator Instructions] 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 dashboard. Neil, Allison, as you can see, we have received a number of questions throughout today's presentation. Thank you to all the investors for submitting their questions. If I could please just hand back to you to run through that Q&A., and where it's appropriate to do so if you could please just read out the questions and give your response, and then I'll pick up from you at the end.

Okay. Thank you. I'll read the question. I'll let Neil answer. So the first question is, what trends are you seeing in the market from an inflationary point of view? And are there any supply constraints impacting the business?

Yes. I did touch on that briefly in the presentation. Yes, the inflation is a challenge as it is, I think, for all businesses at the moment. We're seeing inflation increase in our -- the price we're paying from our CapEx, the fleet. We are certainly incurring increased costs for fuel, transport and that is a challenge, if you like, that we've not seen for some years. We're mitigating, I think we're doing well against those challenges at the moment. In terms of CapEx, we are we -- as a rental company, we've got the ability to spread that increased cost over a number of years. It's not like we're buying an inflated piece of kit that's just an inflated cost, which we then have to sell the following day, we will run that equipment for 3, 5, 7, 9, whatever years, depending on what it is. And that gives us the ability to absorb the impact of that increase in capital cost over time rather than be presented with an immediate problem. Our way of mitigating that is to negotiate, as I said in the presentation, to negotiate improved pricing with our customers. I think there is a realization and an acceptance within the customer base that these price increases are to be expected and we are making good progress on that. So I'd say that we are encountering inflation within the business. But at the moment in time, I think that we're largely mitigating the impact of that.

Okay. Thank you. Good answer. With infrastructure and construction at circa 77% of market exposure, will you look to M&A to balance the different segments, where would your focus be?

I think the fact that infrastructure and constructions are 3/4 of the business is not something that gives us concern. The reason it's at that level is because we're comfortable with it at that level. We like infrastructure because it gives more visibility. There's more of a commitment. It is volatile, as I've said before, about the infrastructure market, whilst there is regulation, regulatory bodies involved and there is a commitment there. It doesn't always necessarily happen when you're expecting it. And I'd point to the AMP and rail comments, as I made earlier. And in construction I think that we -- our exposure to repair and maintenance is balanced against new build but we're not concerned. The same equipment on new build is used on repair and maintenance. So it's up to us as a business to target those areas where there is growth and possibly at the expense of those areas that we may have historically worked in. In regards to M&A, therefore, I don't think we're looking to build in specifically in, say, housebuild and energy as the other segments to somehow level the playing field. They're just not as big a market for us, and we're quite happy with that. I think M&A, which we've not -- just comment on M&A, M&A is something that we've not engaged in particularly much over the last 2, 3 years, mainly because of the pandemic but we did make the acquisition of M&S higher in November, December last year. We also bought Watkin Jones fleet in March. And as I've said on a number of calls. I think that as this year evolves, I think vendors that we're thinking of selling and exiting, I think it's quite possible that more of those will come to the fore during 2022 and certainly into 2023, which will create more opportunity. So M&A and organic growth will always be fundamental partners for us within Vp and growing business.

And I'd just add that with the energy sector, that has been very subdued for a number of years. I said there is, to a degree, an element that if those markets recover, then we'll see an increase in organic growth in that.

Yes, yes. No, definitely. Okay.

So I'll read this slowly. Please, may I ask a question on the competitive environment across the various divisions. Does the company hold leading market positions in any of the sectors in which it operates?

Yes. I mean our -- the rental market has always been competitive and I think always will be. I think that my view of the wider rental market is that unlike after the last recession, where we saw a lot of competitors in difficulty, I think that as we come out of the pandemic, the market is generally in much better shape. I think there's less propensity of rental companies to try to be all things to all people by investing in lots of different areas. I think that rental companies are tending to stick to what they are good at. There's different models out there. There's different ways of operating and the fact that they are different, I think, is healthy. It's healthy for customers. It gives customers a choice. We believe in the model that we operate in, but that doesn't make the models irrelevant or wrong. In terms of market positions, that's quite fundamental to Vp's structure that many years ago when we exited our general [ quantile ] division, we -- one of the key elements was that we felt that we needed to be specialists. We needed to develop strong market positions across all our businesses. And the truth is that we do have leading market positions. And leading might not be #1, but it's certainly in the top 1 or 2 or 3, pretty well in all the divisions we operate in either in the U.K. or internationally. And that's an important and a great strength of the group.

Okay. Next question. What ambitions do you have to grow international operations?

So in terms of -- clearly, the International division is somewhat smaller than the U.K. at the moment. Again, the reason for international is that we like the idea versus 3 dimensional exposure of the group and geographic is one of those exposures. So having some resilience against the U.K. economy by having activities both internationally. I don't know if it is international, but from our point of view, European -- our European activities are actually reported in the U.K. division. It is very important as the resilience against just being strong in the U.K. market. And overall, if you take into account our European businesses, that's Republic of Ireland, Germany, Austria, et cetera, that we -- our revenues are about 17% ex U.K. So I prefer -- I think my targets some time ago is to get that to above 20%, but in truth, for all sorts of reasons, not least at which the point that Allison made earlier about the energy markets being very quiet for some years now is that that's held back the ability to grow the international market. So yes, we would like to do more internationally. We're certainly capable of doing more internationally, and that would be both in Asia Pacific and Australasia, but also in Mainland Europe as well. And that are the 2 key geographic regions of growth.

Okay. So we have one final question, which is a good one. So as residual volume of equipment increase significantly, are you booking now a larger gain on the disposal of equipment?

Yes. So the short answer is yes, residuals have improved quite well. I think that it's a bit like a car -- used car market. I think that is a very similar scenario where acquiring new is both more expensive, it's slower and it's less available, and we've seen residuals go up. However, the ability to secure those gains on sale have been deliberately subdued buyers because we would rather keep the equipment on fleet a year longer to make sure that our customers are not let down where they need to rent products. So we are hanging on to some equipment longer than we would have done historically, which is not detrimental to the quality of the business. We will still be able to sell that fleet in a year's time, if that's how long it takes, which you could do for the supply chain issues to subside. But at the moment, where we are selling equipment and there's -- I think it was 17 million proceeds in these results. So we're not stopping, which is that we could do more. And historically, if we see residuals where they are, we'd have probably been doing more selling, but there is a reason why residuals are where they are. And that's because we can't get as much new product as we would like. So yes, so gain on sale is holding up well as a result. We could do more in a different market. But at the moment, we're hanging on to equipment and that arguably is slightly subduing our bottom line profitability.

Okay. That's a finish with the questions.

Neil, Allison, thank you very much indeed for taking the time to address all of those questions that came in from investors this morning. And of course, if there are any further questions submitted today, we'll make these available to you immediately after the presentation has ended for your review. And ladies and gentlemen, we'll publish all those responses where it's appropriate to do so on the Investor Meet Company platform. And you'll be notified by e-mail when they're ready for your review. Neil, perhaps we'll be directing those on the call to provide you their feedback, which I know is particularly important to yourself and the company. If I could just ask you for a few closing comments to wrap up with, that would be great.

Yes. Thank you. Well, thanks very much for all of you that have been listening in today. I hope that you are more appraised and understand the backdrop to these results. I reiterate, I think they're very good results. I think the best in the market. New financial year started well. We're not back to where we were, but I don't think that's anything to do with us as a business. I think that's about certain of our markets not being back to where they could be. So we're, certainly, as I said, well positioned for further good progress in the next 12 months, and we look forward to delivering on that.

Thank you for your questions.

Neil, Allison, thank you very much indeed for taking the time to update investors today. Could 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 management team can better understand your views and expectations. It's going to take a few moments to complete and 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. So good morning to you all.