Vp plc (VP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the VP plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it received during the meeting itself, however, the company can review all questions submitted today and publish responses where it's appropriate to do so and these will be available via your Investor Meet company dashboard. Before we begin, I would like to submit the following poll, which will appear on your screens now. And I would now like to hand you over to the executive management team from VP Plc. Jeremy, Anna, good afternoon.

Good afternoon.

Good afternoon.

Well, thank you all, and welcome. Thank you for joining us. We're today presenting our interim results for the half year to the 30th September. I'm Jeremy Pilkington, Chairman of Vp and with me today is Anna Bielby, the CEO. I'll hand over to Anna now to make the presentation.

Thank you, Jeremy. So this is my first results presentation as CEO of Vp after taking over from Neil Stothard in September. Previously, I was in the CFO role before joining Vp in January this year. I've got a busy first couple of months in role, looking at the business in order to determine what the next chapter looks like. Today's presentation builds on a solid foundation and rich history of Vp. And I'll be giving a bit more detail on divisional performance that we have provided before. I will also be highlighting some of the areas that will be key to us over the coming months. Our plans are still being shaped and will be shared more fully when we come to present our prelims in June. I'm going to be covering the details of our presentation today. Our new CFO, Keith Winstanley, will join us in January. I wanted to start with a reminder of the Vp business and more importantly, the Vp investment case. We have 9 divisions, which provide specialist equipment rentals across different markets and geographies. Market- wise, infrastructure and construction makeup majority of our business alongside notable activities in housebuilding and energy. I want to cover our investment case. I know this will be familiar to a lot of you, but I think it's an important part of the Vp story. The key part for me is a special nature of our rental model. We have market-leading positions in niche sectors alongside disciplined asset management. I touched on our business in the last slide, but revenue from our diverse market and our geography provide not only growth opportunities, but also risk mitigation. When I come to talk about the future and strategy, growth is obviously key. Looking back, the group has a strong track record. And looking forward, I believe that Vp has exciting growth prospects through both its alignment to market with growth potential and through disciplined M&A. From a financial perspective, we have consistently demonstrated strong returns with a target ROCE return on capital employed 15%, supported by 30 years of uninterrupted dividends. We have a strong balance sheet with disciplined capital allocation. We are cash generative and we have appropriate gearing. We've recently completed the finance -- the refinance of our revolving credit facility, which provides us well to feature opportunity. The Vp strategy is focused on growth and operational excellence, and that's underpinned by 3 key areas, which I'll touch on later, people, digital and ESG. Before going to financials, I'll start with the half 1 highlights. Overall, half 1 represented a strong performance across key metrics. Revenue and profit were ahead of last year, and we also increased our return on capital employed. Whilst our markets weren't all supportive, we were pleased with our performance, in particular, the strong infrastructure demand from the rail, transmission and water sectors. Balance sheet wise, we invested GBP 28 million of fleet CapEx in the period and successfully refinanced our revolving credit facility. The board's confidence in the feature means that we increased our interim dividend by 4.5% to 11.5p per share. I'll talk about ESG and digital later in the presentation. And as you'll be aware, we have some fresh leadership in place. Then moving on to the financial highlights. Revenue in the period grew by 2% across the group, which represents good progress in a challenging market, particularly in construction. The inflation challenges we've spoken about previously have largely settled down, and we were pleased to report a small increase in profitability despite the impact of increasing interest rates. Net margin at 11.5% is consistent with the prior period. We don't have any exceptional items in the first half, but just a heads up that, that there will be some minor restructuring in the second half, particularly in relation to Brandon Hire Station. The strength and sustainability of our returns are a key part of the VP investment case and return on average capital employed has always been an important measure for us. Group ROCE for the period is 14.7%, a slight increase on the last full year performance and close to our long-term target of 15%. Across our divisions, we have a range of individual ROCEs and return is an important consideration in our capital allocation, where we have divisions with a ROCE lower than 15%, the focus is on driving this towards target levels. Our ROCE remains consistently higher than our weighted average cost of capital despite increase in interest rates. As I mentioned, we have a strong balance sheet, which positions us well for future opportunity. We have a young, well-maintained fleet, and we invested GBP 28 million in the hire fleet during the period. Our net debt at GBP 133 million has decreased significantly from September last year and is slightly lower than March with a stable working capital movement in the period. One point I do want to mention is a tougher external credit environment that we are now seeing, which is impacting us most in the construction sector. Whilst our days sales outstanding and bad debt write-offs remain relatively stable, we are finding cash collection more challenging, and we expect this trend to continue in the second half. Moving on to net debt. As I mentioned, half year net debt is GBP 133 million, and this waterfall chart shows movements during the period. As you can see, we continue to generate strong operating cash flows. Our outflows represent the continued investment in our asset base with GBP 28 million invested in the hire fleet, leading to net cash CapEx of GBP 21 million. Our working capital movement is back to normal after some volatility in previous years caused largely by COVID. Our dividends and tax were as expected, and our interest cost includes the impact of higher interest rates. We've recently refinanced our GBP 90 million revolving credit facility for further 3 years on similar terms and with covenant unchanged. We remain in a strong position with 2 private placements, providing GBP 93 million of fixed low-cost debt over the medium term. This represents 70% of our period end net debt. We continue to be comfortably within both our covenants, which test net debt-to-EBITDA and interest cover. And we continue to have significant headroom, providing opportunistic for further investment right. Our model is underpinned by a young, well-maintained fleet. We have continued to invest in the first half based on market opportunity and performance. Our disposals in the period demonstrate the flexibility of our business model. UK Forks is a really good example where more subdued housebuilding market has allowed us to dispose some of our fleet to align our fleet size to current market conditions. We are asset managers, not asset traders, but the market remains supportive, and we have generated profit on disposal of GBP 4.4 million in the period. I'll talk about ESG later in the presentation. It's an important part of our strategy, and we continue to invest in a cleaner, greener hire fleet. Another key feature of the group's investment case is its 30-year uninterrupted dividend track record. Our interim dividend of 11.5p represents continued progression and reflect sustainable profitability over the long term. As a reminder, our dividend cover target is 2x over the cycle. I want to briefly touch on strategy. I've only been in my new role for a couple of months as the future Vp strategy is still forming. When we presented our preliminary results in June, we'll present a more comprehensive and fully formed plan. That said, there are some important points that I want to talk to you about today. For me, the 2 key areas for Vp are delivering growth and driving operational excellence. The growth piece has been a cornerstone for Vp for some time. We have a strong track record in our specialist markets. Our balance sheet strength gives us the opportunity to continue to invest. And I think the next few years, we'll see a mix of organic growth alongside disciplined M&A activity. Vp has historically had an efficient operating model, allowing us to consistently generate strong returns. I do see opportunities in our operating model, and that's something I'm looking at, at the moment. I also think that our approach to digital will continue to shape how we do things and improve our efficiency. Growth in operational excellence are then underpinned by 3 key areas. Starting with people, we have a new HR Director joining us shortly, and our people plan will be front and center of the Vp strategy. Vp is characterized by stability and experience. This is an important part of our story. And I think the refreshed thought and refreshed leadership in me and a new CFO in January represents an opportunity for Vp. In the wider workforce, we continue to invest in our colleagues through our Vp Academy and our management training, and we continue to recruit new talent into the business through our graduates and our apprentices. Our digital journey is not something we've talked about much in the past, but we have long-standing digital capabilities that we need to build on. And finally, a focus on ESG, which is an increasingly important area for all our stakeholders. As I mentioned, ESG is an important part of both our overall strategy and the way we operate on a day-to-day basis. We continue to make progress in our sustainability initiatives, and I'm pleased to report that we recently had our science-based targets validated by the SBTi. These targets include our planetary warming projections where we conform with the SBTi's and its ambitious pathway alongside near-term and longer-term emissions reductions. We're doing lots of other good stuff, supporting restoration and conservation projects and achieving partner status with the supply chain sustainability score. We recognize the increased importance of ESG with our customers, and we've been working on solutions, including carbon calculators and carbon comparison models. We still have work to do in this area, and the next steps are around improving our focus on the S in ESG and developing our social value strategy. We're also keen to improve the carbon literacy of our people. This is another area where you can expect more detail later in the year when we present our prelims. If you scan the QR code here, that will give you further information, which is a nice segue on to digital. The Vp digital journey is an important part of our strategy, and it's some way that we're processing increasing focus. We do have a digital capability in the specialist rental sector, but we're only at the start of having an overarching group-wide digital road map. Our current areas of focus include, firstly, customer experience, understanding our customers and making the customer journey simple and frictionless. For example, Microlise, where we're using technology to better manage our transport and improve our interaction with customers. Secondly, operational process, improving operational efficiency through digitally optimized processes, for example, Zendesk, which we're using to improve the performance of our hired assets. And thirdly, customer engagement, digitally enhanced selling and streamlined digital processes. For example, YourSolution, a self-service design solution, adding value to our customers. Again, this is an area we're currently focusing on. I will share more information to our prelims in the summer. So moving on to our operational review. This first slide sets out our divisions by market. As you can see, we have strong diversity of markets across our business. Most of our businesses operate in more than one market, but there are some key things. Groundforce, TPA and Torrent operates principally in infrastructure. Brandon Hire Station, MEP and ESS are mainly in construction. UK Forks operates mainly in housebuilding. Airpac is exclusively in energy. And TR operates mainly in other, which includes events, defense and aviation. From a group perspective, 38% of our revenue comes from infrastructure, which has generally been supportive in the first half. 41% of our revenue is construction, where the markets have been more challenging. Housebuilding has been relatively stable and accounts for 8% of our revenue, with energy representing 6%. I now want to talk in a little bit more detail about each market. Infrastructure has been generally supportive in the first half without this forecast to grow and a strong pipeline of transport energy projects. Our performance in this market has been strong. Groundforce have enjoyed support from water through AMP7, transmission and other infrastructure projects. TPA has benefited from a supportive transmission market and Torrent Trackside was helped by CP6 in the rail market. We are still enjoying some residual HS2 revenue, but future activity stems from alternative rail initiatives. Moving on to construction. The construction market has been tough in the first half with a decline in output during the year and a further contraction expected in 2024. Prospects for the nonresidential sector remains subdued. We've experienced a mixed performance during the period. Brandon Hire Station has had a challenging first half. We have made some changes and now have a new management team in place by taking a number of actions. MEP continues to grow, but has been impacted by some project delays in a more challenging credit environment, increasing the level of bad debts. ESS continued to make progress, benefiting from its specialism of prior year restructuring. In housebuilding, the market has faced several headwinds due to interest rates, coupled with elevated materials costs and labor shortages. The overall market has been subdued, but stable. UK Forks has successfully adjusted its fleet size, generating profits on disposals, thanks to good residual values. The energy market has generally been supported without benefiting from increased activity and exploration, distribution and infrastructure maintenance alongside the new activity in LNG projects. So in summary, we're pleased with our resilient half 1 performance and progress made against our key metrics. In half 2, we will continue to leverage opportunities in our specialist markets despite some challenges, particularly in constructure. Operational excellence remains a priority, and we'll continue to focus on our digital road map. Our strong balance sheet and recent refinance position us well to grow via organic and M&A opportunities. ESG remains a key part of both our strategy and our day-to-day operations. We have an excellent track record of navigating difficult markets through servicing diverse end markets. We're confident of the group's ability to continue delivering sector-leading returns. That concludes the formal part of our presentation. And Jeremy and I will now be available to take questions.

Perfect. That's great. Jeremy, Anna thank you very much indeed for your presentation this afternoon. [Operator Instructions] But just while the team take a few moments to review those questions that were 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 dashboard. Jeremy, Anna as you can see, we have received a number of questions throughout your presentation this afternoon. Thank you to all of those on the call for taking the time to submit their questions. But Anna, Jeremy, if I may just hand back to you just to read out those questions and give your responses where appropriate to do so, and then I'll pick up from you at the end.

Okay. Great. Thank you very much. Thank you to Anna for that presentation. First question from Ross, what were the key factors in such robust performance in infrastructure and construction? Thank you for that. Well, infrastructure markets were very supportive in the first half, less so from construction, which was a softer market. But we're pleased that overall, the combination of these 2, given the -- as part of our strategy of serving diverse markets, the different dynamics enables us to publish results as a whole that move forward compared to the position last year. But the experience in infrastructure was quite different from that in construction in H1. And [ Ian ] asked another question. With a strong balance sheet and the recently refinanced RCF, what types of M&A opportunities is the company exploring and how will they fit into the existing business model? Anna, you would like to probably do that?

Yes. I'll take that one. I think it's fair to say that our M&A strategy is currently forming and that's something that we will share more information out in the funnel, and we've got a more fully formed strategy. I think the key thing for me when it comes to M&A is that the businesses need to be specialists and they need to fit into our specialist model. And also, they need to generate strong returns, that 15% return on capital is the absolute cornerstone of our business, and we need to make sure that any M&A activity that we do drive that forward. At the moment, we haven't concluded where we think that the opportunities lie in that area, but we think there'll be bolt-on acquisitions that complement existing divisions and then they will be more strategic opportunities that represent new divisions, but we will share more information in the future. But the level of concerns going to be the key point there, I think.

Do you want to do -- and the second...

Yes. Also, are there -- are the plans to further diversify revenue stream? I think our revenue streams at the moment are quite well diversified. We've got exposure to those 4 key markets that I talked about in construction, infrastructure, house build and energy. And we also have the geography diversification in terms of the performance in the U.K. and also overseas. So I think we've got enough diversity in our revenue streams. And I think we've seen the success of that model in the first half in our ability to grow revenue and returns. So...

Next question. The share price has fallen less almost 40% from the highs in the absence of any profit warning. Does the Board not feel a share buyback would be supportive to the share price as well as being a good investment at these low levels, especially as the low liquidity volumes have prohibited Vp from joining any FTSE indices and new institutions could consider investing in Vp Group? This is a question that lies very close to our heart and is very close to the Board's deliberations. Mechanically and arithmetically, our share buyback from the current very low depressed levels of share price could be attractive. However, that buyback would exacerbate the liquidity issue that you referred to here and also in canvassing some of our institutional shareholders. There's very little appetite to -- for them to exit their holdings, often, which have been held for a very long time. So whilst it's a theoretically interesting question, I think in practice, it will be difficult to implement in any meaningful way. And therefore, any impact on share price could be very, very limited.

And finally, a question from Andrew N. Where does the company see the most significant opportunity for growth in the near future? I think there are pretty 2 things from my perspective. I think there are significant growth opportunities in the existing portfolio of businesses. We've recently undertaken a 3-year revolving exercise in the existing businesses. And even in the challenging markets in which we are currently operating, I think there's a high level of confidence in terms of future growth potential. And I think as I mentioned before, the strong balance sheet and the recently refinanced RCF gives us the ability to complement that with disciplined M&A activity, which I think we will continue to focus on over the coming weeks and months. And we will share more on the M&A strategy later on in the year.

Jeremy. And if I may just jump back in here. Thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended, just for you to review to then add any additional responses, of course, where it's appropriate to do so, and we'll publish all those responses out on the platform. But Jeremy, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that would be great.

Yes, certainly, happy to do that. I think we're very satisfied with the results that we've reported today for the first half, albeit the improvements in turnover and profitability fairly modest. Given the significant challenges that we face in many of our markets, we think there are results that the organization as a whole should be very proud of. I think it further underscores the strength of our diversified business model servicing and a large number of end users in different geographies and different market sectors. And if ever there was to be a testing period to expose any weaknesses in that business model, I would have thought this year's first half would have been it. So we take some comfort from that, albeit we're certainly not complacent, but this is the level of growth in revenues and profitabilities that the business [indiscernible]. I would also just reemphasize that as an expression of the Board's confidence in the short and medium term, we have pushed the interim dividend forward by 4% this year at the half year stage.

Jeremy, Anna that's great. Thank you once again for updating investors this afternoon. 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 the management team can really better understand your views and expectations. This will only 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, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.

Thank you very much.

Thank you.