Vp plc (VP) Earnings Call Transcript & Summary

Welcome to the Vp final results for the year ended March 2025. I'm Anna Bielby, and I'm joined today by our CFO, Keith Winstanley. I'll kick off with a brief summary of our business. Keith will then cover the financial review, and I will talk through our operational performance with an update on our strategy. I'll start with a summary of our business. We are leaders in equipment rental with a focus on being specialist. We operate in 4 end markets with the majority of our activity in infrastructure and construction. We have a strong track record of consistent financial performance and high returns. And we have a number of specialist divisions, but we increasingly talk about our business in relation to the end markets that we serve. Moving on to our highlights for FY '25. Overall, in some varied market conditions, our performance has been resilient with results in line with market expectations. Our return on average capital employed remains industry-leading at 14.2%, demonstrating the quality of our earnings. We remain in a strong financial position with well-controlled net debt, which has allowed us to invest GBP 65 million in fleet CapEx. From a market perspective, we have seen varied conditions. In our 2 largest markets, infrastructure has been strong, notwithstanding a slower start to CP7 in rail and construction has been more challenging, but we've seen positive momentum in specialist construction. We've made good progress on our strategy, which is focused on driving profitable growth. This includes the acquisition of CPH and the launch of Vp Rail, alongside the continued evolution of our operating model. Moving on to our investment case. Put very simply, we buy assets, we rent them out and we sell them at end of life. We believe that our key differentiator is our focus on being specialist. This is something that has served us well over the years. We believe that this specialism drives strong relationships and customer loyalty through our deep understanding of markets and assets, provides high barriers to entry and allows us to deliver a more consistent financial performance. We believe we have exciting growth prospects, including operating in supportive markets and locations. Underpinning that, our financial profile is strong. And overall, as a business, we are well positioned. We operate in 4 end markets. In infrastructure, where activity is typically aligned to large multiyear spend programs, conditions have been favorable, providing confidence for us to invest. In construction, conditions have been less supportive with a fall in U.K. construction output in 2024, although modest growth is expected in 2025. In Ireland, where we made the acquisition of CPH during the year, market conditions have been stronger. In housebuilding, output contracted in 2024. However, we are optimistic that activity levels will increase with government targets and a rise in new home applications. In energy, where we mainly operate in oil and gas, the market has been solid with a good level of project activity. I'll talk about our performance in each of these markets later in the presentation, but I'll now hand over to Keith to cover the financials.

Thanks, Anna, and good morning, everyone. We'll get straight into our financial highlights. Pleasingly, our revenues have grown 3% in the year. Even when adjusting out for the impact of our CPH acquisition, revenue has still grown 2%, demonstrating the resilience of our diversified business model against a mixed market backdrop. Despite the increase in revenues, EBITDA is roughly flat, predominantly due to our investments in our people and technology. Our adjusted profit figure is our main profit metric and is profit before tax, exceptional items and most intangible amortization. Adjusted profit reduced from GBP 39.9 million to GBP 36.7 million, which includes the impact of those items I've just mentioned as well as increased depreciation as a result of additional fleet investment and a small increase in interest costs. Exceptional items totaled GBP 10.9 million and predominantly covered 2 areas. The first is our CPH acquisition, which includes the accounting for future deferred and earn-out payments, the accounting for an in-year gain on purchase and acquisition-related costs such as legal fees. Together, these totaled GBP 1.7 million. The second is costs relating to Brandon Hire Station. As Anna has already touched on, the general construction market remains challenging, and this significantly impacts the performance of our Brandon Hire Station division. After considering Brandon's performance, we recorded a noncash impairment of GBP 5.4 million within exceptional items and a further GBP 0.9 million impairment of intangible assets recorded separately within the income statement. Alongside these impairments, we have incurred around GBP 3 million of branch closure costs as we continue to rightsize the physical footprint. Anna will specifically cover Brandon Hire Station later in the presentation. Moving on to the balance sheet. Our balance sheet remains strong and robust, which positions us well for future opportunities and investment. In fact, we increased the gross investment in our rental fleet from GBP 63 million to GBP 65 million. We navigated some challenges in the credit environment during the year, but I'm pleased to say that our focus in this area resulted in both an improvement in DSO and lower bad debt write-offs. Driven by the acquisition of CPH, our net debt has increased, which I'll cover in a bit more detail over the next few slides. This chart gives a breakdown of the circa GBP 13 million increase in net debt. In terms of inflows, cash generation remained strong and consistent with last year. In terms of outflows, we continue to be disciplined in how we allocate our capital. The highlighted section of the chart shows the total of our net fleet CapEx, which is fleet CapEx less disposal proceeds and our CPH acquisition. This is our investment for growth, and I'll give some more detail of where we're targeting that investment in a couple of slides' time. Outside of this investment, our cash is spent on other CapEx. We pay our interest and our tax, and we continue to return funds to our shareholders via our dividend, which is uninterrupted for over 30 years. I wanted to remind everyone of our finance facilities. Including our overdraft, we have around GBP 190 million of facilities. These facilities include 2 fixed rate low-cost private placements, the first of which matures in 2027. We also have a GBP 90 million revolving credit facility, which was extended in November for a further year. This facility now matures in November '27. Our loans are subject to 2 financial covenants around interest cover and the net debt-to-EBITDA gearing ratio. We are operating well within these covenants. Our net debt-to-EBITDA gearing was 1.5x, comfortably within our stated target of 2x. We continue to operate with significant headroom and well within our covenants. We have the funds available, which we will continue to allocate with discipline. We're committed to maintaining a young and well-invested rental fleet. And as I mentioned earlier, we increased our gross CapEx from GBP 63 million to GBP 65 million this year. The table on the left shows that investment alongside the proceeds from our disposed fleet and our acquisition of CPH. I wanted to give you some detail of where we're targeting this investment. We allocate our capital to markets that we believe will maximize our growth, principally being infrastructure and specialist construction. Included within those markets, there are 2 locations that are of particular interest to us. The first of those is the Republic of Ireland, where construction output is expected to grow at 8% for the next few years. Our investment here totaled GBP 15 million and is a mixture of rental fleet investment and the acquisition of CPH in October. As a reminder, we were pleased to acquire CPH for an initial GBP 10 million. CPH is a specialist powered access business operating principally in clean rooms. Post acquisition, CPH has been trading in line with our plans. The previous owners remain with the business, and we look to take advantage of opportunities to grow with its existing customer base and more widely across the growing Irish market. Taking advantage of Irish growth opportunities is not limited to just CPH, and we also continue to explore opportunities for the wider group. To that point, I'm pleased to announce the post year-end acquisition of another Irish business, Excel Tool Hire. This is a small bolt-on acquisition operating in specialist construction. The second location is Germany, where the upgrade of the German transmission network represents a significant opportunity for the group. During the year, we invested around GBP 8 million in our German rental fleet, the vast majority being steel panels to provide temporary access solutions to network locations. Investments in Ireland and Germany account for 45% of our total net investment. We expect our growth in these 2 countries to outperform our U.K. growth in both the short and medium term. Outside of Ireland and Germany, the remaining 55% of investment is spread across our other divisions, but this has been weighted towards opportunities in infrastructure and specialist construction. Moving on to our returns and our dividends. I've used these 2 charts in previous presentations, but I think they do a really good job of summarizing the financial strength of Vp. The top graph shows our ability to deliver remarkably consistent and strong returns over several years. The bottom graph shows our dividend story with an uninterrupted dividend history stretching back over 30 years. And despite some challenges in some of our end markets, we are proposing an increased final dividend of 28p, reflecting our confidence in the future. Before I hand you back to Anna to quickly summarize this section. Against a mixed market backdrop, we've seen resilient overall performance with top line growth. However, the challenges in the general construction market have led to exceptional restructuring costs and impairments in our Brandon High Station division. We have a strong balance sheet, and we operate well within our finance facilities. We have increased the investment back into the business, both organically and inorganically, but this has been targeted to where we see the largest growth opportunities. And we've just seen our consistent and strong returns alongside our increased final dividend. Anna?

Thanks, Keith. I'm now going to run through our operational review, which is based on the 4 end markets we set out previously. Starting in infrastructure, the work we do here principally supports the rail, water and transmission sectors. Our customers are generally key contractors alongside network rail. The majority of our activity is in the repair, maintenance and renewal of infrastructure assets alongside supporting new projects. Infrastructure is around 40% of the group's revenue, and it's the area where we see most opportunity for growth because of the large multiyear spend programs. We're able to generate returns in this area, which are typically higher than the group's target return on average capital employed of 15%. In FY '25, almost half of our fleet CapEx has been invested in infrastructure, we expect to drive growth. As Keith mentioned, transmission opportunities in Germany are a good example of this. During the year, performance in infrastructure has generally been strong aside from the slow start to CP7. Looking ahead, we've made a good start to FY '26 across infrastructure, and we remain optimistic about our ability to drive growth. In Rail, we expect CP7 to pick up in the second half of our financial year with rail revenue further benefiting from the progress of Vp Rail. In construction, we categorize our activities as specialists in general. In specialist construction, our customers are typically key contractors and our activities are focused on site redevelopment alongside access equipment in clean rooms such as data centers, pharma and food and beverage. In this area, our returns are typically slightly higher than the group's target return on average capital employed. During the year, we've invested in fleet CapEx and also M&A with our acquisition of CPH demonstrating our particular interest in the Irish market. FY '25 performance in Specialist Construction has been strong. And looking ahead, we are optimistic about future prospects. In general construction, conditions have continued to be tough, largely caused by wider economic headwinds. From a divisional perspective, this mainly relates to our Brandon Hire Station division, which I'll talk about in more detail on the next slide. In the group's Brandon Hire Station division, we have made changes and taken a number of actions in both the current and prior financial years. However, we have not seen the improvement in financial performance that we had hoped for. The actions we have taken include reducing the number of branches and refining both our offering and the customers we target. We've also made improvements to process control and pricing. Alongside divisional performance and serving its own customers, I want to explain why Brandon Hire Station's assets are useful to the wider group. A good proportion of these assets are general in nature and generate high returns, for example, nonmechanical plant, i.e., scaffolding tower and fence panels. These assets complement and enhance the specialist offering of our divisions, and this allows us to best support our major customers and our complex projects. This is increasingly important as we execute our growth strategy of improved collaboration across our divisions and our group go-to-market strategy. Overall, we are disappointed in the performance of Brandon Hire Station. And in terms of next steps, work is ongoing and further decisive actions will be taken and materially completed in FY '26. In Housebuilding, where we provide material handling solutions to major housebuilders, the market has been stable but subdued. In response to this, we have taken further cost actions to rightsize the business. Despite these challenging conditions, we remain optimistic about the government's housebuilding targets, and we are well positioned to take advantage of market improvement. In energy, the majority of our activities relate to oil and gas and conditions continue to be good. We support a number of upstream and downstream projects, both in the U.K. and overseas, and performance in FY '25 has benefited from industrial shutdown projects, which we expect to continue. Moving on to strategy. We set out our refreshed strategy last year, and I want to provide an update on the progress we are making. The key areas are delivering growth and driving operational excellence, and I'll talk about our growth plans on the next slide. On operational excellence, we've been making progress with our operating model through the centralization of certain functions such as rehire, property and procurement to ensure we have the right balance between agile divisions and efficient group functions. Growth and operational excellence are then underpinned by our approach to people, digital and ESG. On people, we continue to invest in our teams to ensure that Vp is a great place to work. This includes recruiting the right people, for example, our apprentices and graduates and ensuring that our people are supported, developed and fairly rewarded so that they can grow their careers with us. On digital, we are progressing our digital road map, which will both improve our efficiency and unlock opportunities for growth. And on ESG, our focus is supporting our customers to achieve their own ESG objectives. We aim to grow sustainably with a positive impact on society. I want to talk about where I see Vp's growth coming from. On divisional growth, our specialist divisions remain a key part of how we operate, and we will continue to invest in divisional growth plans. This has been a successful growth engine for Vp for a number of years. In Ireland and Germany, as Keith mentioned earlier, we see significant potential as we operate in supportive markets and have been investing heavily. We expect our growth in these 2 countries to outperform our U.K. growth in both the short and medium term. On Brandon Hire Station, as I've just mentioned, we will be taking further decisive actions to improve profitability and returns. On Vp's group go-to-market strategy, we believe we can drive growth in both existing and new customers. One final area I want to touch on is our M&A strategy, where Ireland and Germany are of particular interest alongside smaller bolt-on acquisitions to existing divisions. We will also continue to review the performance and returns of each of our divisions, and we will consider divestments where appropriate. I want to talk in a bit more detail about our group go-to-market strategy, which complements our specialist divisional offering. We see a real opportunity to drive performance through our divisions working more closely together and a group-wide approach to major customers and contracts. On major customers, we are responding to customer feedback by providing central account management and simple access to all of Vp's specialist divisions. We believe this approach will improve the customer experience and increase our share of wallet. About GBP 50 million or 13% of the group's revenue is now managed centrally in this way, and we will transition more customers during FY '26. Alongside this, the Vp Group go-to-market strategy allows us to tender for contracts and projects with a true Vp Group offering. To date, we have won contract and have 3 major bids in the pipeline. We spoke in our interims about Vp Rail, a one-stop solution, giving rail customers simple access to all of Vp's rail capabilities. Vp Rail has made a good start and has won 2 contracts so far. In summary, we have reported a resilient performance in FY '25 despite challenges in some of our end markets. We are continuing to progress our strategy, including improving divisional collaboration and end sector focus, progressing our M&A strategy and continuing to evolve our operating model. We are optimistic about future growth opportunities and have a strong track record of navigating difficult markets. We have made a solid start to FY '26 with strong momentum in infrastructure and specialist construction, and we expect performance to be in line with current market expectations.