Vp plc (VP) Earnings Call Transcript & Summary

Good afternoon, 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 received during the meeting itself, however, the company can review your questions submitted today and will publish those responses where it's appropriate to do so. Before we begin, we'd like to tell you about the following poll. And if you could give that your kind attention, I'm sure the company will be most grateful. And I'd now like to hand over to CEO, Neil Stothard. Good morning.

Thank you, Marc. Good afternoon, everybody. I'm Neil Stothard, the CEO at Vp plc. And I'm pleased to introduce my colleague Anna Bielby.

Good morning.

Who is the CFO. So results for the year ended March 31, 2023. The first slide we're going to put up just shows the headline numbers, which Anna will talk to in detail very shortly. The 1 point I'd make is that we see this as very much as a resilient trading performance in challenging markets. In terms of highlights, first one to flag is earnings quality. We're very pleased that we've delivered some revenue and profit growth [ albeit ] maintained the quality of the earnings of the group has delivered with our key measure of return on average capital employed still at a quality figure of 14.4%. We've delivered revenue growth in the year of 6%. In truth, the majority of that has come from higher rate price increases rather than through volume of demand. Our markets, the infrastructure and civil engineering markets, in particular, have been positive. Housebuilding was also supported for us until the turn of the calendar year. And we did have a slightly quieter Q4 on house build and general construction as a whole, which is our other large market alongside infrastructure, was generally flat. In geographical terms, just to highlight our international division, which delivered good revenue growth and improved margins. The capacity in the hire fleet has remained at similar levels to prior year and our investments in new products at GBP 60 million was at similar level -- was at the same level as last year. And our focus on cleaner products as part of our ESG initiatives will also make further progress. There's this minor increase in net debt, dividend is up 4% and both of those, Anna will talk to shortly. And my final highlight point is just to mention the fact that Anna joined in January as CFO. Her predecessor Allison Bainbridge retired after 11 years at the end of last year. And we've got 2 nonexecutive directors who are new and they joined after Stephen Rogers retired at the end of last year. One Mark Bottomley, who's CFO at Cranswick Group and Stuart Wilson, who is an ex EY senior partner, who also becomes Chair of our Audit Committee. So without further ado, I'll hand over to Anna, who will talk you through the financials. Anna?

Thank you, Neil and good afternoon, everybody. So I'll start with the financial highlights. Year-on-year, group revenue grew by 6%, which represents good progress in what was a challenging market. We did face some cost inflation challenges and a higher interest cost but we managed to achieve an increase in our key profit measure of profit before tax, amortization and exceptional items of 4%. We're also pleased to have maintained a broadly consistent net margin of 10.9% compared with 11.1% last year. As we signaled in our recent trading update, we have undertaken some minor restructuring in 3 of our divisions during the year. This has led to an exceptional charge of GBP 3.3 million. We also incurred costs of GBP 1.7 million in the first half in connection with our financial sales process. So moving on to ROACE. Return on average capital employed continues to be a key measure in monitoring the group's performance and we're pleased that we've been able to maintain an overall group ROACE of 14.4% against our long-term target of 15%. We have seen a slight increase in our WACC, which is now close to 10% as a result of interest rate rises but our ROACE remains consistently higher. We're proposing a final dividend of 26.5p per share, which leads to a full year dividend of 37.5p per share. This represents a year-on-year increase of 4%, in line with the growth in our PBTAE. Our intention is to aim for a 2x dividend cover as a demonstration of profitability and sustainability over the long term. So moving on to the balance sheet. Vp has a strong balance sheet, which positions us well for future opportunities. We have a young, well-maintained fleet and we invested GBP 60 million in the hire fleet during the year. Our working capital has increased during the year as we signaled at the interims. In particular, we've seen an increase in [ debtors ] and a slightly higher DSO. We've also seen a slightly higher bad debt writes-off (sic) [ write-offs ] reflecting some of the conditions in the external market. These write-offs represent 0.9% of revenue, which remains within our historic range of 0.5% [indiscernible] to just over 1%. And this is an area which we're controlling carefully. Our year-end net debt is GBP 134 million, which represents a small increase on last year. So the waterfall chart, you can see shows movements in the group's net debt during the year. As you can see, we continue to generate strong operating cash flows. Our net CapEx was GBP 38 million this year, as well as investing a significant amount in our asset base, we also continue to generate strong cash flows and profits from our disposals. As already discussed, we experienced a working capital outflow this year, mainly in the first half. There has been some level of volatility in working capital in recent years, a lot of which was a result of COVID but we now expect working capital to be stable as we move forward. Our interest payments increased slightly over the year, mainly in the second half due to increases in SONIA. And our tax and dividend outflows were as expected. Our year-end [indiscernible] movement was just over GBP 134 million. So moving on to facilities. Our facilities remain unchanged from last year. We remain in a strong position with 2 private placements providing GBP 93 million of fixed low-cost debt, which represents 69% by year-end balance. On our revolving credit facility, we did start to see the increase of rising interest rates in the second half of the year. We continue to have significant headroom with GBP 56 million of -- so 56 million at the year-end date. And we also have an uncommitted accordion facility of GBP 20 million available to us as required. Our RCF expires in 12 months' time and we've already begun conversations with our lenders and we'll be refinancing shortly in [indiscernible] of our interims. Our covenants remain unchanged from last year and they measure interest cover and gearing. We continue to do well within our covenants on both measures. Our EBITDA to interest cover is greater than 3x and we were 8.26x at the year-end date. And our net debt-to-EBITDA covenant is less than 2.5x and we were 1.44x at the year-end date. And that's everything from me and I'm going to hand back over to Neil.

Thanks, Anna. So the second stage of our presentation focuses on the markets and trading, I'm going to start by -- with a slide, just reminding people about what our business model and strategy is as a group. The performance that we -- which I said at the start was, we saw is a resilient performance, I think is, a lot of that is down to the way in which the group is made up and the way in which we operate. On the left-hand side, you can see our model we showed that proven specialist rental is, what we're about in terms of our activities. We're looking for market-leading positions in niche sectors and with some diversity in terms of end markets. We want to be the employer and the provider of choice. So we want people to enjoy working for Vp and building a career in Vp. We also want our customers to enjoy working with us as their provider and support. First class asset management is absolutely at the core of what we do. The rental market is very dependent upon reliability and consistency of its supply. And we focus -- we buy quality products and we maintain that equipment well throughout the cycle. And finally, the fourth quadrant talks about sustainability, which is something that's become a key part of our strategy over the last few years. On the right-hand side, just to say, we focus on specialist rental. We support 4 core end markets, infrastructure, construction, housebuilding and energy. We're in the U.K but we also have an international division. We do have delivered high-quality returns over an extended period. We take a long-term view. We don't invest for the short term. We invest for the long term. And again, I think that's a powerful attribute of Vp. And finally, just reemphasizing that we're embracing our ESG responsibilities. I've now got 2 slides on market. The first one is in the Vp environment. The second is about how we might see the macro environment. We've got revenue growth of 6%, has been mentioned already. And our 2 largest markets, which are infrastructure and construction, which are generally about 40% of our total revenue each. This year is no different, infrastructure is slightly down, construction is slightly up overall. We've got -- we've delivered revenue growth in both markets. I think it is fair to say that in the infrastructure, we've had an element of volume growth as well as price improvement in construction has generally been price improvement rather than any pickup in market activity. Housebuilding did grow 15%, which might surprise some people but that was because it was a relatively buoyant sector until Christmas. After December, we saw approximately 10% reduction in activity in our housebuilding customers. And that seems to have, for the time being, it seems to have stabilized at that level. And so although we saw good housebuilding growth in the year we're reporting on, we may see a little bit of a reduction in that in the current year. Keeping into perspective, housebuilding is important but it is 8% of group revenues. The energy number will look odd. It's dropped 25% but that's primarily due to 1 contract, which was -- we did a major shutdown contract in a petrochemical complex in South Wales last year, that's a contract that happens every 3 or 4 years. It obviously wasn't repeated in the year we're reporting on. And underneath that and excluding that, our energy markets, actually, were marginally more supportive going -- than they were a year before. And other, which is 12%, that includes segments such as mining, aviation and defense and outdoor events. So again, some level of improvements in those areas. And bit of color on each of them. On infrastructure, the AMP program in water and the CP6 rail program and also the long-term investment program in transmission were all helpful for us during the year. And this is despite the fact that in the rail sector, there were industrial disruption during the autumn or during the last part of 2022. And in the transmission sector, we did see some delays to work because they didn't -- the National Grid did not want [indiscernible] at a time when there might have been power cuts over the winter. So there was a bit of a pause in activity but that's now resumed. The previous year, we were very busy on HS2 in Phase 1. And this year and we service at the interims, the Phase 2a work is much down on what it was. We think that some of that will come back but it won't come back the same level that we enjoyed in Phase 1. General construction has been flat. There are some positive areas, civil engineering and fit out markets being 2 but elsewhere, investment in education and health was slow, office rent -- office, retail and leisure was also slow. And therefore, we've not had that uplift in market demand that we might have at some point hopeful. I'll talk to this in a second on the next slide. Housebuilding, as I've mentioned, good 3 quarters and then the last quarter was quieter and I've explained the energy change. The next slide is more of a macro outlook. And it's based on Experian's UK Construction spring forecast for this year. And I think that generally, we feel that these do replicate our own view of those markets. So hence, we use it. The infrastructure chart to the top left is still supportive, although it's a modest growth going forward. It has recovered to well beyond COVID -- pre-COVID levels and it remains a positive for us. New housing, this time last year, that chart just kept going up, albeit at a modest rate. We've seen this correction since January. And our view is still that the housing market is a good place for us to be in the medium term. Repair and maintenance has also flattened off compared to what was expected a year ago. And I think that's partly tied to why new nonresidential is not moving forward at any great pace either. So new nonresidential, to be clear, includes public nonresidential, private industrial and private commercial. And as you can see from the graph, there is still only a modest increase in activity forecast in those segments going forward. Business performance, third slide, just on group. The only comment there is the fact that our operating margins have stayed resilient. They're at 12.4%, just up from 12.3% last year overall on a 6% growth in operating profits and revenue. We have 2 divisions that we report to, which is the U.K. division, which is the largest and international. So firstly, talking to the U.K., modest revenue growth, 4% and profit growth of 3%. And margins slightly down but really, from our point of view, the same as prior year almost. U.K. infrastructure investment was supportive, particularly rail, transmission and water, as I've already mentioned. We don't see any change in nonresidential construction, either in these results or potentially going forward. And housebuilding is positive, as I said, until Q4. So overall, good margin stability in what is our largest segment. And international, which is smaller, a lot smaller, some good numbers here, 24% increase in revenue, 100% increase in profitability and a significant uplift in margins. The revenue recovery was strong, both our Airpac and our TR businesses. And sectors as you know, I would say, oil and gas, mining, renewables and defense. And the final comment on this slide is that whilst we're pleased to see operating margins improve, they're still quite a bit below where we would like them to be from a group perspective. But nevertheless, we're hopeful that we can continue this renewed progression in terms of operating margin. And hopefully, we'll be able to demonstrate further progress in the new financial year. Which brings me on to investments in rental fleet. We spent GBP 60 million on new fleet, this year we're reporting on, which is almost the same as we did the year before. The fleet quality was maintained and that's probably the most important thing that we invest in the quality of our fleet. The emphasis was on buying cleaner and greener rental fleet, which I'll comment on further shortly. And we've also increased our fleet disposals when we generated nearly GBP 25 million of proceeds from sale, up from GBP 18 million the year before. So net expenditure actually on fleet has reduced. But I think that was a price that we felt we could take in terms of the acceleration of disposal of product that was either excess to requirements or underperforming. So we made good progress on that in the year. Just a quick slide on ESG. We've made further good progress particularly in regards to our sustainability position. We published a medium-term road map to net zero. There's a copy of that at the back of this in the appendices to this presentation. We have submitted our science-based targets and we await the results of their validation. We did that back end of last year. We've achieved ISO 50001, the energy management system standard across all our U.K. sites. We've developed a sustainable procurement policy across all our businesses. And we've also invested in supplier management software. This is -- it covers a whole host of things that include capturing emission data, which is important to us, to our customers and to our suppliers. And we also are monitoring the ESG credentials of our supply chain overall. So a lot of progress in that area. I mentioned we spent GBP 60 million on new fleet. GBP 15 million of that, so 1/4 of that was buying products that would historically have been petrol or diesel engine driven. So -- and we will continue with this process until we've got complete exchange happened. So good progress on that. Outside of that, we have a lot of products that don't have engines attached to them. And we've got over 50% of our fleet that is zero emission at the point of use. So 25% of new fleet CapEx might look relatively modest in terms of sustainability. But actually, a lot of our product is already zero emission at point of use. We've consolidated the wastewater, plastic and paper supply chains to further improve our handle on our sustainable credentials. We've committed to a further 3 nature conservation projects, which is a third year in a row we've done that. And our overall aim is to enable carbon and sustainability literacy across all our employees. My final slide and the final slide of the presentation is just on outlook. The highlights of outlook for us would be that markets do remain stable into the new financial year. Overall, there's quite a lot going on between the different markets. But overall, we've got stability and more or less where we expected. Infrastructure has been positive in rail, water and transmission last year and we expect it to be next. Nonresidential construction markets, at the moment, we still think the forecasts are right in that that's going to be flat. I think it's very much about business and the economic confidence as to see when that changes. Residential construction will reduce in the short term but we're still happy with the medium-term opportunity. Rental pricing improvements will contribute. We put pricing increases of up to 10% across all or most of our businesses over the last 6 months. And so we've not had a full year's contribution from that, that will help in the coming months of the new financial year. Notwithstanding that, we will be continuing to focus on cost management in a relatively flat general market scenario. That's paramount that we do that. We've done it for many years and we'll continue to do so. Sustainable solutions continue to drive investment decisions. We are, notwithstanding a relatively stable backdrop, investing in our people, rental fleet and property for the future. So that they're in good shape to take up the opportunities as they arise, whether they be organic or acquisitive and whether they be in the U.K. or international. So that's the presentation finished from Anna and myself. And we'll now be very happy to take some questions, which I think could be put on through system.

[Operator Instructions] But just while Neil and Anna take just a few moments to review those questions submitted already, I'd just 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, Anna, you can see you've received a number of questions from investors throughout your presentation. So firstly, thank you to everybody for engagement. If I may, just ask you to read out those questions and give response to as appropriate to do so and I'll pick up from you at the end.

Okay. So well, we'll start picking these off as we go. Anna, can you read out the first question that is from Mark? No, from Chris, sorry?

Yes.

I'll try and answer that.

So the first question is what lessons did you learn about the business when you went through the formal sales process? From Chris.

Okay. So for those that don't know, the -- between April and August last year, the group was under a formal sale process, which was an open process following a approach to the Board from the trustees of the majority shareholder in Vp. And following the advice we took the decision to launch a formal sale process. And with all the things that were happening, a lot of interest in there with all the things that were happening in the market at the time, whether it be politically, whether it be economically or otherwise, it became a very difficult backdrop in which to look to execute a successful process. And we announced in August that we've not received a proposal that we felt was recommended -- recommendable to all shareholders. As part of that process, we engaged in terms of some due diligence, which could be used for potential purchases. And I suppose in terms of lessons learned or what we learned about the business was that, pleasingly, there were no [indiscernible] as we hoped but there were no red flags that came out of that financial or commercial diligence. Clearly, there were some areas which were useful to know or and it's always helpful for us as a management team to get an outside view from time to time. That was helpful. But I think generally, without trying to sound weak on it, I think it just reinforced our view of our business was probably what was, it was. So I think -- we didn't -- the other thing to add is that we didn't get distracted in terms of our performance because these results have all been produced through that period and we've moved on. And we're very much into business as usual for the group.

Okay. So next question is from Mark, which is, how important is international expansion to the group? And would you accelerate this through acquisitions?

The International division, as I said earlier, is much smaller than the U.K. It was never intended to be that significantly smaller. And I think that there will be opportunity and I hope there will be opportunity to expand that further going forward. As I said in the presentation, the markets within which our international businesses operate are positive and we made good progress. I also, for those that have had a chance to read the prelims in my business review, I also [ pull out ] the fact that we have ground force and TPA businesses in Europe, including Republic of Ireland, they're reporting to the U.K. and are therefore part of the U.K. divisional results. If you include that the revenues that we get from those European activities, then we generated in the year under review 83% from U.K. and 17% of group revenues from outside of the U.K. I think as a rule of thumb, we've always sought to try to get to an 80%, 20% split, the relevance of international is, it's an opportunity but it's also a way of mitigating the risk of being totally U.K. dependent.

Okay. I will take the next one, so that to give Neil a break. So Chris asks, what attributes of Vp Group influenced Anna to join the company? So my understanding of Vp before I joined was, it was a good business, with a good track record and a really nice culture. And I'm pleased to say that there's been no surprises in that regard since I've been here. I've touched briefly on the strength of the balance sheet in the presentation. And I think the [indiscernible] et cetera, we've got available to us means we're well positioned for opportunities in the future. And therefore, I think that is an exciting role. And I think the future of Vp looks bright. The -- next one is from Steve, which is, what does the competitive landscape look like and how optimistic do you feel about the prospects for the group moving forward?

Okay. I think the competitive landscape is, I mean our business areas, like most business areas will always be competitive. And I think that -- but given the components of the backdrop of how we're operating at the moment with high inflation, stretched supply chains, cost of money going up, I think that there is a general -- there's a general calmness about competition at the moment that perhaps is typical at this point in the market development, that won't last for long. But I think the competitive market -- our markets remain competitive. I think there are opportunities, the opportunities, I'm sure -- I mean I can't speak for any other businesses. But from our point of view, our focus remains on improving our position within the business streams that we're already invested in and within the investments we've already made, rather than looking to grow our businesses outside of that market backdrop. So that will change, markets will improve, some markets will come back. It's just -- we just don't know when that's going to be. So for the time being, it's business as usual, it's doing all the right things in terms of making the business efficient and investing in those areas where there is growth and reducing investment levels in those areas where our performance might be suboptimal. So -- and I think, if you got the question, again because there was a bit at the end which I can't remember. Yes. And so prospects going forward, I think I talk to markets and I think we need -- we've got lots of opportunity. I think we will progress going forward. But one of the reasons we're not quite back to where we were pre-COVID is on that market, the slide I showed you, that the nonresidential construction market is still way off what it was. And when that does eventually change, whenever that might be, that will be a bonus for us as a business. But in the meantime, we concentrate on working with what we've got. [indiscernible] Do you want to do that?

Yes. So from a capital allocation perspective, would you consider a buyback program for your shares in addition to dividend?

So we -- at the moment, we're -- although we've discussed this as a potential, as a Board, at this stage, we've decided that we won't be doing that but we will leave that under review. So we will revisit that point going forward and there's a lot that we're aware. There's a lot of corporates in the market that are doing some share buybacks. One of the -- there are different challenges to different businesses. We're very aware of liquidity in the business. We want that to be liquidity for shareholders. And so we have to take that into account in considering a buyback. We want to make sure that we got sufficient funds available to be taking the opportunities that are going to, we believe, inevitably come our way in the next 12 to 24 months. And we don't want to spend that if we need to use it. So -- and it's -- I think the short answer is, we have considered it. We don't think it's appropriate at the moment but it will remain under review.

Okay.

I think that's it.[indiscernible]

That's perfect, Neil, Anna. And if they're any further questions, do make themselves available. Of course, we'll make the present to you and we can publish responses post today's meeting. If it's appropriate to do so. Neil, Anna, I know investor feedback will be particularly important to you and I will shortly redirect those on the call to give you their thoughts and expectations. But I wonder before doing so, if I may, just ask you for a few closing comments just to wrap up with.

Yes. First of all, thank you to everyone who has attended this session and listened to what Anna and I had to say. And I hope that you have got a good understanding of the fact that markets have been relatively challenging for us as a business, as they have for many businesses. But hopefully, you'll be left with an impression that we have a highly resilient business model and that we've got the opportunity going forward to make further good progress for the group and therefore, for shareholders. Thank you.

That's great. Neil, Anna, thank you once again for updating investors this afternoon. Can I please ask investors not to close this session, as we will now automatically redirect you for the opportunity to provide your feedback in order that management team can better understand your views and expectations. This may take a few moments to complete but I'm sure it'll be greatly valued by the company. On behalf of the management team of Vp plc, I'd like to thank you for attending today's presentation and I wish you all a very good afternoon.

Thank you.

Thank you.