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For those of you who are joining us today to hear from Vp plc who announced their interim results earlier this week on Tuesday, we have put out a research note with forecast, which you can find on our website, equity development. Otherwise, we're going to take this opportunity to run you through the presentation with Q&A at the end. Please feel free to submit questions as we go along. But otherwise, I'm going to hand over to Neil Stothard and Allison Bainbridge, who will take you through the presentation.
Thank you, Hannah. Good morning, everybody. Okay. So we're talking to our interim results to 30 of September 2022. The 3 items on the agenda, I'm going to do a quick highlight slide. I will then hand over to Allison who will talk you through the financial review. And then I will come back in to put some color on terms of the market and trading position. So moving on to highlights. The highlights for us are in terms of earnings, the quality of earnings has been maintained in the half year results despite the headwinds of inflation and interest. We measure that, particularly in terms of return on capital employed, which is 14.4% which is still a very good number, and our margins were maintained throughout the period. We've also seen further modest recovery in terms of revenue. This is partially due to agreed hire rate increases with our customers and also just an increase in activity in certain of our businesses. We have some supportive markets through the last 6 months, in particular, infrastructure and housebuild sectors, and that has also helped us trade well against an inflationary back drop. In geographical terms, particularly highlight international, which is a much smaller part of our group, but nevertheless, made very good progress. And mainland Europe, where we have 2 of our divisions operating also have a positive 6 months. In terms of capacity, the rental fleet is still in very good shape. We've maintained our fleet investment levels. And on to the next point on the ESG, our focus undiminished in support of sustainability initiatives both on ourselves and within the group and also our customers and us involved quite a bit of substitutional investments in greener products for our rental fleet. Net debt that Allison will talk to more detail, we're pleased that 62% of the 30 of September, which is just long-term fixed rate. And finally, in terms of highlights, we're pleased to report a 5% increase in our dividend, interim dividend to 11p per share. So they are the highlights, we will talk to most of those points in more details as we go through the presentation. And I'll now hand over to Allison to talk you through the financials.
Thank you, Neil. Good morning, everybody. So Neil has covered a lot of [indiscernible] highlight, what I'd really like to emphasize or reprise on is the fact that we are pleased that we had a solid first half with revenue up 6%; profit before tax and amortization of 6%, and we've maintained our net margin at 11.5%. So we were pleased with the first half. Moving on, to our return on average capital employed, which is a key measure for us, and we're pleased to report that in the first half of the year, this was maintained at 14.4%. We target 15% through the cycle, the economic cycles that we have and so therefore when we're up 14.4% we're comfortable with this level. I then move to WACC up, in my calculation, last time I presented this slide we were at 8 which is now moved up to near or 9, which reflects the impact of higher interest rates that we're experiencing at the moment. That said, we wouldn't change the target of 15% through the cycle, and that's because this target was set some 20 years ago with [indiscernible] cost of capital nearing 11%. So we'll stick to this target as the baseline. Moving on to dividends. As Neil has already mentioned, we're paying at 11p per share dividend for the first half, which is a 5% increase. When we come to the full year, we'll meet the policy that we restated or we emphasized last year-end, which was that we would have to pay out 2x dividend cutback. And this policy reflects the fact that we like to reflect the increase of profitability, but also be ensure that the profitability is sustainable in the longer term as well. My next slide is on the balance sheet. We have a strong balance sheet, and you can see that hire fleet has increased by GBP 10 million in the first half of the year as we've invested. Neil will talk to our investments in fleet in the later slides. A key feature of the balance sheet this time though is that we've had a working capital swing. This swing -- when we had the pandemic we had a benefit from working capital inflow. This time we had an outflow of working capital. And the 2 main areas of that is that it's an increase in debtors with a slide in the appendices which shows at GBP 11 million of the swing in respect to debtors up and trade debtors particularly. Half of this was because we have increased trading so we have 6% increase in revenue. And the other is because as you see at the bottom of this slide, debtor day have increased to 61, whereas at the financial year 2022, they were 55.5; last year, they were 58. We do tend to be around 60-day mark. So I think we did have a low debtor days before, but we are very aware of perhaps there might be a tendency to some of our customers to pay a slower with the increasing interest rates and the cost [indiscernible] going up. So we will keep on that and we do have good credit control team to managing that for us. Moving on to our cash flow. A key piece of our businesses, we generate strong cash flows. We had a 7% uplift in EBITDA in the first half. We did book costs at GBP 1.9 million of exceptional items. This was in respect of the formal sales process, which we announced in April and we ceased in August. These costs were part of the financial and commercial due diligence in May, which were in respect to doing the strategic review before we launch the formal sales process. We've already discussed the working capital and the profit on sale of capital expenditure and proceeds will be covered by Neil in the later slides. But the upset is that we did have an increase in net debt of GBP 18 million. And there will be an interest rate impact with an increase in [indiscernible] that I'm going to talk about my next slide. So Neil has already mentioned, we are in a really good position in the fact that 62% of our net debt at the end of September was fixed. We have 2 private places with long -- they are long dated ones maturing, as you'll see in January 2027 and April 2028. So that puts us in a good position. That said, we do have a revolving credit facility, which is linked to [indiscernible] the rate rises that the Bank of England has been implementing recently. So we are exposed for a part of our debt. And as I mentioned earlier, this will result in an increase in the interest cost in the second half, although we haven't had seen much of an impact in the first half. We had total facilities of GBP 190.5 million. And since our net debt was GB 149 million at the end of September, we had almost GBP 42 million of headroom facilities. And also within the revolving credit facility, we have a GBP 20 million accordion, which is available for us to draw down from the Bank's [indiscernible] for growth into the right sort of investments. And then my final slide is just to share the covenants that we have against our lending facility. We have 2 covenants, EBITDA interest that has to be above 3x. And you can see that we're well ahead of that 9.8x. And the net debt to EBITDA has to be less than 2.5x. And at the half year, it was 1.6x. So we're going to have good headroom against that covenant. And now I'd like to hand over to Neil, he's going to talk about markets and trading.
Thanks, Allison. So you've heard the financial backdrop from Allison. I will now try and give you some of the reasons why we've been able to reduce the numbers that we have. The first element to cover is markets. I got 2 slides on markets. The first one is, if you like, the micro slide, which talks to how we, at Vp, see key market segments. We serve -- on the left-hand side of the slide, you'll see the core markets that we and the group serve, infrastructure, construction, housebuild energy and in a range of other smaller markets, which we service. The largest of those markets is infrastructure and construction, largest 2 of those, but they're all important. You'll see down the right-hand side of the graph that we've delivered growth in all of -- one of those markets in the 6 months period. So, I'll talk to those individually now. So in terms of infrastructure, which includes all the regulated markets that we support, it's been a good 6-month period for us on AMP7 work, which is the 5-year water industry investment program, which was somewhat delayed and did not pick up last year as we expected. But pleasingly, we have seen better financeability in the first 6 months of our financial year. We've actually also seeing some modest improvements in terms of rail industry demand with the CP6 program, also starting to gain traction during the first half of the year. The only caveat to that is that industrial actions over recent months has prevented some of the work that was preplanned weren't actually happening. So our customers have not been able to complete the work that they're planning. Therefore, there has been a modest reduction in our expected activity levels, which we've done for the most part, we've managed to replace with other work. We've also been busy in other areas like Hinkley Point. And the one area that we were very busy on last year was HS2 on the Phase 1 work. The expectation was that will continue this year in 2022, the Phase 2, which is North Birmingham. In truth that majority of that work is still [indiscernible] and therefore, we've had a quieter period and that element of infrastructure on HS2. But with the government's recent pronouncement that they were still committed to HS2, we would hope that, that will be something that we can enjoy the benefit of in 2023. Moving on to construction, which is another -- sorry, back one, Hannah, thanks. Moving on to construction which is 41% of our revenue. RMI, which is good last year, it has been good in the first half, although it's not particularly growing. We've seen some useful activity from the repurposing of buildings, which has benefited some of our divisions. And we've also seen a little pickup in civil engineering activity, which has been beneficial to the life of our ground force business. However, elsewhere, demand has been relatively flat, and I'll comment on that a bit further when I get on to the next slide. Housebuilding showed growth. And although there is some level of uncertainty looking into next year on housebuilding from the market we, as a business enjoyed sustained demand throughout the 6 months. And we enjoyed sustained demand from a market where the supply products to housebuilding sector was limited. And therefore, we're hopeful that, that will continue even if there is a lapse in -- a minor lapse in housebuilding activity going forward. In terms of energy, that looks fairly drastic fall. In truth that's primarily due to a major shutdown contract that we completed at the beginning of last year, which does not repeat on an annual basis. In actual fact, our energy activity, underlying is slightly better than it was a year ago. So there's some modest improvement coming through in that segment. And my final comment on this slide is on other. Other includes some markets that perhaps were more affected by extended lockdown and others, and that would be outdoor events. And the aviation sector where some of our business units have become busier in those areas as there's been more activity. So that's the micro view. If we move on to the next slide, I've used the U.K. construction forecast from Experian. I did use this slide at the prelims, and so it's the same sentiment involved, but not surprisingly perhaps the graph to the right of the blue vertical line, which is a forecast of flatten somewhat. However, just to remind those, this last time and you may not have heard before, the top left-hand quadrant, the top right-hand quadrant, and the bottom right hand quadrant charts, which are all core market areas for Vp. They did see some drop off, some [indiscernible] during COVID, but they all enjoyed a rapid recovery as we came out of the pandemic. And that was what has helped drive us back towards the pre-COVID levels that we're operating as a group. Prospectively, the infrastructure charge has flattened since April, since the April spring numbers that Experian put out. The new housing chart still showing some growth, but I think if we -- I'm sure if they were to do the plot today, it would be somewhat flatter again. And repair and maintenance is flat going forward as well. So for us, if that's actually what happens, that's okay. We're operating at levels above or in line with pre-COVID, and we've got a relatively stable level of demand going forward, so which we like. We can plan around stability. It's when we get shocks that is more difficult. The element of the group's markets, which have not recovered from pre-COVID illustrated by the bottom left-hand chart, where new nonresidential, which includes things like new build schools, hospitals, commercial buildings, offices. That has already started to fall post-Brexit, that accelerated during the pandemic. As you can see from the chart, there's been very little recovery stage, and it's a very modest expectation over the next 2 to 3 years. So in terms of our overall business, we're very pleased to where we were pre-pandemic in terms of revenue. But the reason that we're not quite back to where we were is bottom left one chart. Moving on. Just quickly on group performance. I think the main point to say here is that we've delivered growth. We delivered the 6% revenue and profit growth. But more importantly, perhaps, we've also maintained margins as we've delivered the growth through a mix of pricing uplift and lifting activity despite the inflationary challenges that we all have across our business units. The group split into 2 regional -- regions that we report, the first of which is largest is U.K. In the U.K. business, actually, the growth was below our average for the group overall, but nevertheless, tangible at 4% revenue, 3% operating profit and again, little or no change in operating margin. The key comments on the U.K. performs would be backing up what I said on the market slide is that AMP7, AMP transmission work has been supported throughout the period. We've seen a weakness in HS2, and we've seen recovering rail market, but impacted by the recent industrial action. On construction, RMI and Civils has been positive, but we've seen an ongoing lack of investment and volume of investments in the new builds. Housebuilding has been stable and margins have been maintained in what has been a lower-growth market growth period for the U.K. economy. In terms of international, which is much smaller than the U.K. Pleasingly, we've seen good revenue growth half year-on-half year of 28% in the 6 months and profits have more than doubled. So we see a good recovery in international markets. 2 reasons, or maybe the key reasons to that, in Australia and New Zealand, the lockdown it was extended longer than it was in U.K. and Europe. And so, we've seen a bit more of a bounce back in sort of start of our financial year. And on the other international business, our [indiscernible] unit, we see the strength of oil and gas price attracts a renewed focus on investments in that market. And so there has been some modest improvements in that market as well. Moving on to our fleet. Rental fleet investment is very similar in these 6 months as it was a year ago. So we spent GBP 34 million on new equipment in H1 '23, which is to September '22 versus GBP 32 million last year. That investment has included significant substitution investments in green equipment solutions for our fleet, which in support of both our and our customer's sustainability aspiration. So, a lot more battery powered, a lot solar power equipment coming into our rental fleet. We did accelerate investments. I did say this at the prelims, we were buying ahead of the curve, trying to get into the queue for the extended supply chain, deliveries. And that is what we've done. I think luckily, we started to look a bit harder at whether we needed all of the product that we ordered upfront. And I think it is becoming a market change where people are perhaps not going through with quite a level of orders that they originally made. And that, together with the manufacturers starting to improve their supply of componentry, I think we're seeing a slight easing of the lead time issue on equipment and on [indiscernible]. By no means [indiscernible] we don't see seeing some improvement there. My final comment on this slide is just that we have accelerated slightly in terms of disposals of equipment, which is perhaps under-utilized where we want to turn that into cash. So it was quite a healthy hike in disposal proceeds during the period. So in actual fact, although Allison said on her slide, net volume of fleet has gone up, the net expenditure in cash turns on fleet actually was marginally down in the current period. So my last slide or the last slide is just on the outlook. Undoubtedly, we're in a lower growth environment. And we, as a team, have to adjust our management to the business accordingly. So in fact, there's some fairly basic business management, efficient managing of costs, mitigating supply chain inflation by agreed hire rate increases to -- with customers and setting a high hurdle rate for further capital investments in light of what Allison was saying about interest costs changes, in particular. So there's no rocket science. It's basic good management principles that we're very committed to that at the moment. In the U.K., we expect it to be further strength in infrastructure so with [indiscernible] it will come through. And housebuilding is difficult to call. We still think that even if there's a modest decline in housebuilding from the group point of view, we're still in a good shape to benefit from that market. So we still -- from a Vp's point of view, we're still relatively positive about that market except, however, conversely, we don't see any particular sign or signal that's going to create a short-term revive in the construction sector, which we expect to be flat going forward. Further progress in international markets is expected. We are driving our own sustainability strategy as a group and supporting customer aspiration to where we're investing. We've continued to invest strongly in technology and also within our people, with our people in terms of learning and development. Trading for the year-to-date since the half year results has continued in line with our expectations, which is pleasing. It's not an easy market out there, but trading is more or less where we expected it to be steady. So we've got a resilient and proven business model, which operates in diversified end markets. So despite the headwinds of inflation interest slightly more challenged economy, we're confident to continue to be deliver outstanding long-term returns to our shareholders. So that's what Allison and I wanted to cover off this morning. I'll hand back to Hannah who I think will deal with any Q&A.
Thank you, Neil and Allison. Right. This individual is interested to learn of the ultimate objective of ownership. Given the recent exploration of alternative investments away from Vp, does the situation remains fluid notwithstanding the strong backing they still provide?
Now I think we were very -- obviously where -- and Allison mentioned the formal sale process. We see some processed in August. The family trust, independent trustees of family trust gave assurances to the Board that they were no, at that time, there were no further plans for the foreseeable future to selling some Vp share. And from our point of view as the Board that allows us to very clearly move on with business as usual, which is how we see things. You may have -- I'm sure that anyone who saw the announcement will see that there was a parallel announcement where we have some bold changes. Allison, my colleague, of over 11 years is finally retiring.
Yes, I am.
So we're bringing a new finance or CFO into the group at the beginning of January, and there will be handover period with Allison and then Anna Bielby, who's joining us will become CFO at that point. We've also -- we're very pleased as Steve Rogers, who's in the long term member of the Board is also retiring and where we brought 2 new non-executive directors onto the Board, Stuart Watson and Mark Bottomley, both of whom are strong additions to the group of our existing Board members. I think -- so why I say that, then I think if anyone needed an endorsement that it was business as usual from the outside or internally for Vp, then I think that's it, attracting good strong directors into the group, a very serious [indiscernible] intent on our behalf.
Probably half answers the additional supplementary questions. On that subject around have there been any ongoing distractions during that period, which are you seeing any legacy effects from now that you've exited the FSP?
Yes, I will [indiscernible]. So I think throughout the process, we've tried to avoid the distraction. So it was nearly myself that did most of the aging with the advisors and that sort of thing. We did go along the formal sales processing publicly announced. And so there was the chance of it being a distraction but we were quite clear to make it -- make it clear to everyone that they should carry on business as usual. I think Jeremy pointed out when we had an analyst presentation that we feel that, that was largely successful, and we put that down to the fact that, Neil has been in place for a while. I've been here for 11 years. And I think we've got some good lines of communication and a level of trust built up with the business as well. So I think that our colleagues they're very experienced as well, and they did carry on with their business usual through the process. So there weren't any distractions in that regard. Once the process was announced as being finished, Neil called together a meeting of the senior team from around the country in the world, and we went through some of the issues that they might have raised with some questions. I think that gave a chance to clear the air and so to put forward the point that Neil has already made where the business decision going forward as well. So I think to the extent that there were distractions, Neil and I, and I think we did okay with that.
Yes, no, it did. I think the best signal, whether it's [indiscernible] the quality of the results that we just announced that if it's been a major distraction to the business then we wouldn't have been able to -- I'm not -- the FSP through the first 5 months, the number that we've just reported. So I think that's also a strong signal that we didn't get a very busy season, got [indiscernible] or businesses. They get on a day-to-day basis with delivering on their business aspirations and I think that these results demonstrate that.
Thank you. Back to you, probably Allison, what will be the impact on your debt interest payment in your market if the Bank of England base rates go up to 5% and stay at that level for the next few years?
Well, I mentioned that half of our facilities are fixed. And obviously, Neil mentioned some of the messages that we're doing about managing the investments and the hurdle rates. What we have forecast and what has been put into a bold note was the impact in the second half will be million more interest and we've put in the growth rates that the Bank of England will be flat going forward. I think that's not the best answer. I think we've got it covered in our forecast.
On to current trading in the fleet hire element of the business, I think you mentioned there about the interest from customers in green and electric options. Is the cost of this more expensive in terms of buying in? Is there a risk that it could push down the return on capital metrics?
Yes, good question. There are lots of products that we've been able to identify and bring onto fleet where the capital cost of the substitution products is not very different to the historic product that we would have use. So there are lot of products where there isn't a significant change in the rental rate to the customer to have a greener solution which is good. There are some products where there is this -- a bit of a rising rate, but the fact that it's not burning petrol or diesel anymore, means that there is a fuel consumption savings through the substitutional product. So then you've got to look at the total cost of operations from the customer point of view for certain products. But as I -- and working in hand-in-hand with manufacturers and getting support from customers, we will continue to push the envelope. But the truth of the matter is that the larger the product at the moment, the more difficult it is to get a reliable solution. And the bigger the green premium is that you've got to pay to swap it down with a traditional petrol or diesel energy alternative. So I think it's a long way to go. We've made terrific progress. I think we, as we say, about over 60% of our fleet is 0-emission point of views anyway. So we've got about 1/3 of our fleet that's the concentration of our activities in that substitutional area. The small to medium size products, there's some really good solutions out there, which probably do work for customers. But then once you get beyond that, the cost of the equipment can't be significantly higher, and that creates an additional cost despite the best intentions to reduce emissions. It just doesn't work at this stage. That will change. It will change over time. So yes, I don't see it as an inhibitor to the performance of the group, that's for sure.
Good. Next question is around the lack of recovery in the nonresidential market. Obviously, that's to some degree out of your control. But are you holding on to market share there? And what can you do to drive additional growth in that area?
Yes, I think we could be confident to say we're holding market share in that segment just as we are elsewhere. I think that the way that we don't sit and wait for the markets to cover the businesses and Brandon Hire Station will be typical one. The businesses a bit more exposed to that area are finding new ways to market with new products, new offerings and slicker ways of dealing with the customers in terms of technology, innovation. And we're doing what we always do, we move to where the action is. The reason that I showed the slide to demonstrate that there is a latent opportunity there, but at the moment, we can't see that being available for some time. It will change at some point. But we're not -- I wouldn't want people to think that we just sat there waiting for that market to cover. I think that's more a case of being ready for that market when it happens. But in the meantime, our numbers demonstrate, we're obviously finding alternative areas to growth.
One more on the sales process. The timing seems unusual, bearing in mind market uncertainty during the start of the year. Could you talk about the timing of it? And supplementary to that, did the strategic review reveal anything you can share with shareholders?
So to remind everybody that the [indiscernible] catalyst to the decision to go with the FSP was a communication from the majority shareholder which always the Board have to respond, and taking into account that request, taking into account even the markets of that, the stage that which obviously, the process was launched in April. The Board, along with advisors felt it was appropriate to launch that process. What subsequently happened was that markets got worse, inflation got a lot worse, interest rises, a lot of political issues going on. And therefore, I think by the time we ceased the process in August, the market had changed, not out of all recognition but it was significantly worse. And perhaps we were just a bit unlucky in that respect that the severity of the change from a [indiscernible]. In terms of the strategic review, I think we were pleased that there were no what we would call red flag to that process, but there were -- there were some useful information and new observations that came out, which we've shared with businesses and we've taken into account ourselves. So we -- there will be some value in that process for us going forward. But if there's anything in the strategic review that made us think that we have to have a significant change in direction for the business.
Well, thank you to you both. That seems to be it on the questions for now. So we look forward to an update in another 6 months' time.
Great. Thank you very much, everybody.
Thank you, everyone.
Thanks, Hannah.
Bye.