VP PLC

LSE:VP

Earnings Call Transcript 2023-Q4

[Hannah Crowe, executive]

[Audio Gap]Results earlier this week. Both Neil Stothard and new FD, Anna Bielby, will be taking us through the results presentation, and then, at the end, there will be an opportunity for Q&A. Please feel free to submit questions as we head through the presentation.Otherwise, without further ado, over to you, Neil.

[Neil Stothard, executive]

Great. Thanks very much, Hannah. Good morning, everybody.So results for the year ended 31st of March 2023. The first slide just shows the headline numbers, which I think represents a resilient trading performance by Vp over the last 12 months, and Anna will shortly give you a bit more detail on those numbers. If I were to pick out the highlights for the results just on this slide, earnings quality, we against some very critical backdrop, we delivered profit growth of 4% on revenue growth of 6% and have maintained return on capital employed and margins. So we're very pleased with that.The revenue growth that we have achieved is a mix of higher rates and increase in volume, predominantly through increase in higher rates rather than a specific growth in activity. The markets we serve, which those of you followed Vp before will know, are infrastructure, construction, housebuilding and energy. The infrastructure and civil engineering element of our market has been positive. Housebuilding is actually positive for the first 9 months of the year, but it was quieter in the fourth quarter. And general construction was generally flat through the period.In geographical terms, our international divisions delivered good revenue growth that's improved margins. Investments in fleet was pretty similar to last year. In fact, almost identical at the gross CapEx level, although net CapEx is down. We've made very good progress on ESG through further good multiple initiatives. Debt shows a minor increase, about a 4% increase in dividends to 37.5p a share for the year. And finally, we welcomed 3 new members to the Board this year, including Anna, she sat with me today as CFO, and we have 2 new non-executives. All of these highlights, Anna and I will expand on in the presentation, which is to follow.So I'll now hand over to Anna, who will take you through the financials.

[Anna Bielby, executive]

Thank you, Neil, and good morning, everybody.I'm going to start with the financial highlights. Year-on-year revenue grew by 6%, which represents good progress in a challenging market. We did face some cost inflation challenges and a higher interest cost that managed to increase our key profit measure of PBTAE by 4%. We're pleased to have maintained a broadly consistent net margin at 10.9% compared to 11.1% last year. I signaled in our recent trading update, we have undertaken some minor restructuring in 3 of our divisions, and this has led to an exceptional charge of GBP3.3 million during the year. We also incurred costs of GBP4.7 million in connection with our financial sales process in the first half of the year. And just as a reminder, these results are pre-IFRS 16. The IFRS 16 impact at PBTAE is GBP0.3 million.Moving on to return on capital employed. Return on average capital employed continues to be a key measure in monitoring the group's performance. 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 nearly 10% as a result of interest rates, but our ROACE remains consistently higher. We are proposing a final dividend of 26.5p per share, which leads to a full year dividend of 37.5p. 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.Moving on to balance sheet. We have a strong balance sheet, which positions us well for future opportunities. We have a young, well-maintained fleet, and we invested GBP60 million in the hired 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 higher DSO. We've also seen a slightly higher level of debt write-offs, reflecting conditions in the external market. These write-offs represent 0.9% of revenue, which remained within our historic range of 0.5% to just over 1%, and it's an area which we are consulting carefully. Our year-end net debt is GBP134 million, which as Neil has mentioned previously, is a small increase on last year.The waterfall chart 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 GBP38 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 disposals. As already discussed, we experienced a working capital outflow in the year, mainly in half 1. There has been some level of volatility in working capital in recent years, a lot of which was a result of COVID. We expect working capital to be stable going forward. Our interest payments increased slightly over the year, mainly in the second half due to increase in SONIA. Our tax and dividend outflows were as expected, and our year-end net debt after these movements is GBP134 million.Moving on to facilities. Our facilities remain unchanged from last year. We remain in a strong position with 2 private placements providing GBP93 million of BICs low-cost debt, and this represents 69% of our year-end net debt balance. On our revolving credit facility, we did start to see the impact of rising interest rates in the second half. We continue to have significant hedge room with GBP56 million at the year-end date. We also have an uncommitted accordion facility of GBP20 million available to us as required. Our RCF expires in 12 months' time, and we've already begun conversations with our lenders and will be refinancing shortly in advance of our range.Our covenants remain unchanged from last year and led interest cover and gearing. We continue to do well within our covenant on both measures. Our EBITA interest covenant is greater than 3x, and we were 8.26x at the year-end date. Our net debt-to-EBITDA covenant is less than 2.5x and we were 1.44x at the year-end date.That's everything from me. I'm going to hand back over to Neil.

[Neil Stothard, executive]

Great. Thanks so much, Anna.The second section of the presentation is sole through the market and trading review. As we commented on in the results, and we thought this was a particularly resilient performance by the Vp business or businesses during the year. And the one of the key or some of the key building blocks are on this slide. In terms of our model, we look at resilience improvement specialist rental as a key element of the Vp model. We seek to be employer of choice and also the provider of choice to our customers, first-class asset management is the core of what we do. We come up -- our customers come us before to be let down by the quality of the service that we provide. And sustainability, as you would expect, is increasingly become a key focus for us all within the managed teams of the business.In particular, the key components, I would say, specialist rental, we primarily support the infrastructure, construction, household and energy markets. We have a geographic spread of activity in both the U.K. and internationally. We seek to deliver high quality returns to our shareholders and our long-term track record, we've set that desire. We take a long-term view. Every decision we make is aimed at looking at what the long-term benefit would be that decision, not the short-term benefit. And finally, as I mentioned, we are embracing our ESG responsibilities.My next slide talks to markets. So these are the markets which we are exposed to within our Vp group. With revenues up 6%, our 2 largest market sectors are infrastructure and construction. They tend to hang around about 40% of group revenue level. This year is a difference. Both of those markets grew, one at 9%, construction at 7%. Further down, housebuilding, which is 8% of group revenues, we also saw growth there. I'll comment on these individual markets in a second. The energy line looks a bit old at 25% reduction, but that's almost entirely due to the fact that the very large shutdown project that we completed in the prior year, which is a sort of 3, 4 years that every third or fourth year did not happen in the 2023 financial year. And finally, other grew 12%. That includes markets like aviation, it includes outdoor events and also in terms of defense. So there's a long list of small markets that we're exposed to.So in particular, on infrastructure, those regulated markets, which we serve were generally pretty positive, although there were some go back -- some blips on the way. The rate improved last year in spite of the industrial action that was going on in the railway particular in 2022. And also, we a saw good demand from both transmission and the sectors for infrastructure out of the Asset Management Program 7, which is the water industry's capital investment program. I mentioned the industrial disruption. We also saw in the transmission sector, National Grid delaying some of the outages during the winter as in the autumn of 2022. There was some concern about potential for power cuts. That affected the demand for our support transmission contracts during the winter, but pleased to say that, that is now back up and running. And HS2, which is a very strong provider for us in terms of demand the year before, it was quiet state points during the year. And although we expect a little bit of a pickup on that first 2023, '24 and confers.Construction are at a very large market. There were some pockets of positive trade for us, particularly in some civil engineering activity and also within the fit-up market. However, outside of that, private industrial and private commercial and public was more subdued. And that meant that overall general construction demand, as I say, with some notable exceptions is relatively flat and continues to be so. House build was strong for the first 9 months. There was a step change from December through January. We estimate that 10% of the demand disappeared over the period. And pleasingly, that stabilized to a relative extent so far, and we still view the house build market as medium-term positive for us as a group. And then in energy, where I mentioned the lack of shutdown contracts, we have seen a pickup in activity for our well test and LNG-related activities in the energy sector over that year. So some improved prospects for us in energy going forward.Then moving on to the U.K. construction output. I used this stat before. This is from the Experian U.K. construction forecast for the spring of 2023. The graphs have changed slightly from when I last presented them and that they have been infrastructure and repair and maintenance that flattened going respectively, it flattened out a bit. New housing is big, whereas before, it was a gradual growth on nonresidential is still pretty similar. So there has been some change. Some of it affects us more than others. In new infrastructure, we still see that as positive. The regulated markets have got a lot of activity coming through, and that's a key support for us even though the graph doesn't move to grow too quickly. That's still a key support for us in the next 1 to 2 years.We believe housing will reduce in terms of demand this year, and we will react to that accordingly, probably by selling off some of the equipment, which has been very highly utilized due to strong demand during the previous 2 years, and we will take the opportunity to reduce the fleet size and, therefore, reduce the cost to serve all our sector. However, longer term, we still feel confident of activity. So new nonresidential is the key one. I've mentioned this before the COVID -- sorry, the Brexit experience impacted this sector. It then got worse as COVID happened and as trade this hasn't really recovered anywhere near to the levels that it was before. So the new nonresidential, which is public nonresidential, private industrial and private commercial offices, schools, leisure and those sorts of areas of the market, which I think are primarily impacted by general business COVID confidence, general economic confidence, particularly in the U.K., it's -- and I think until that changes, that graph line is likely to move very well. So that's my comment on the core sectors.The next slide, just briefly on business performance. The overall group operating profit was robust at GBP46 million on 6% revenue growth. And I think, importantly, despite strong inflation cost pressure during 2022, in particular, we managed to keep operating margins at a similar level, in fact, slightly improved on prior year overall.The next slide, if I then split out the 2 constituent divisions of the group, the U.K., which is by far our largest element shows modest revenue growth and profit growth of 4% and 3%, respectively. But as I say, that was against the backdrop of a pretty tumultuous market generally during 2022. A little bit of a drop-off in operating margins, but not really that significant, and we're quite pleased that that's where we got to. The key elements of rail, transmission and AMP7 was supported to our U.K. division, and we see that continuing into next year. No change in nonresidential construction, which remains flat. Housebuilding was positive to Q4, as I mentioned, and it will be rebased at a lower level in 2023. But through a combination of the actions that we've made, whether it be on improving higher rates or becoming more efficient as a business, we've managed to protect margins in the U.K. activity.Moving on to international. This is a much smaller division, as you can see. But nevertheless, these are very good results in terms of improvement on prior year with profit stabling from GBP1.5 million to GBP3.1 million on a 24% increase in revenues. So particularly pleased with this, the margin at 8.1% is still below where we wanted to be. But nevertheless, we're making good progress in terms of improving the earnings quality internationally, and we see bay straight for that going forward. The revenue growth came from the mix of energy, particularly with our Airpac division and also mining, defense and outdoor events and other areas for the TR Group.So then I then move on to rental fleet investments. I mentioned at the start that we had a similar CapEx spend at gross level of just under GBP60 million for the year. So we're continuing to maintain an up-to-date fleet and investing in product as is appropriate and according to where the demand lies. Emphasis has been on investing in cleaner greener rental fleets. And the other item was the -- in terms of our making the business as efficient as possible, we identified a product within the rental fleet that was not earning the required level of return, and we increased or accelerated some fleet disposal activity, particularly during the second half of the year. And that's why we ended up with the sale proceeds of just under GBP25 million and net capital expenditure on the group was GBP35 million, reduced from GBP42 million. And I think that this is another element of how we managed to protect our return on average capital employed throughout the years is to ensure that we're really carrying investment on the balance sheet that we can really book.In terms of ESG, there are a host of ESG initiatives, which we have engaged in during the year and make -- I think, make some very good progress. We published our medium-term road map. We submitted science-based targets, which were awaiting validation on at the moment. We achieved ISO 50001, which is the International Energy Management standard across the -- in U.K. We've developed a sustainable procurement policy and to help support us with that, we've invested in new supply management software, which is, amongst other things, enables us to capture emission data and monitor the ESG credentials of the supply chain. Scope 3 emission data is vital for all businesses going forward. And we need to have an efficient and comprehensive way of collecting that information from our supply base.So the GBP60 million that we invested in new fleet, we spent GBP15 million on what we call substitutional products. So they are -- we have invested in battery and solar powered products to replace products which historically have been casual diesel engine driven. About 1/4 of our fleet investments in the year, and it will take us -- we're well on with that, well advanced with that conversion. It will probably take a couple more years to see the full replacement of those products. But on top of that, it's important to flag that over 50% of our fleet is 0 emission at point of use. So a lot of the products within ground forces in TPA, there are no engines. There's no field usage in that product. So any emissions that have been created were created when the metal was made in first place. So we have a good starting point as a group.We consolidated our waste, water, plastic and paper supply chain, gaining improving our sustainability. We've got an ongoing commitment to another 3 new nature conservation projects. So about the half a dozen that we've already done, and we'll continue to do that. And I think overall, we aim to enable the carbon and sustainability is something that's well understood within all our colleagues within the group.So my final slide is on outlook. And quickly on that, as we head into the new financial year, there's been no particular change since March and into April. Overall, although some markets are more volatile than others, but overall, I describe the market has been stable at this stage. Infrastructure, we see, as I've mentioned, it's already been very positive for us in rail, water and transmission. We build our plan around the flat nonresidential construction markets. So any improvement on that will be a benefit. And we're very aware of the precious on the residential construction market, which, as I said, I am excited, a very important market for us for only 8% of group revenues.The rental pricing improvements, which all our colleagues have negotiated with their customer base over the last 6 to 12 months will contribute and be an important factor in the current year. We will, however, focus -- continue to focus on cost management and investing into further sustainable solutions. We'll also be investing in our people, our rental fleet, in our portfolio and that's designed to make sure that we're in a good shape as possible because inevitably, as always happens in the cycle, opportunities will arise. There'll be organic and acquisitive and they'll be both in the U.K. and internationally, and we want to be in the best place to deliver on that.So that's all from Anna and myself on the results. But Hannah, I'm guessing there may be some questions, which we're also very happy to take.

[Hannah Crowe, executive]

Thank you to you both. And yes, there are. Right, which go first. In international, obviously, you've seen a good acceleration there in terms of growth in profit. Do you have any plans to capitalize on that with an acquisition?

[Neil Stothard, executive]

I think that I did comment in terms of the margin on international as being not quite where we like it to be. So I think the prime focus for us is on the international business is to continue to improve the quality of the return and the margin that we're getting from the segment. And that will require further organic growth for sure.I think in terms of M&A, we're always alert to opportunities. I don't think we necessarily absolutely need M&A in the international business at the moment, but we're certainly not afraid of it and our medium- and longer-term strategy would be indeed to be looking to add businesses to our international businesses going forward. But it's dealing with the question directly, M&A is the #1 priority for that division at the moment.

[Hannah Crowe, executive]

Okay. And more broadly, another question, are the acquisition prices looking more attractive now? And are there any more prospects?

[Neil Stothard, executive]

I just don't think it's the right time at the moment for M&A. So it's very difficult to tell. You would expect that prices may become more attractive going forward. I think at the beginning of or the end of 2021, I think I probably said that I thought that M&A would be more prevalent by the end of '22 and into '23. However, had I known what was going to happen to the world in 2022, then I would probably have a different view at that point. So I think that the general challenges that I mentioned and mentioned earlier that happened during 2022 as sort of slow down M&A opportunity. It will come through. I'd probably be bold enough to say that it's going to be in 2024, hopefully, barring any further uncertainty that we can't predict at this point in time. So we have always used a strong balance of organic and acquisitive growth to develop Vp. It's a well-trod path for us. We don't particularly favor one route rather than another. We look at each one on this on merits. And we're all very keen to get back to that sort of more normal -- as everybody is more normalized environment so that we can pursue both opportunities.

[Hannah Crowe, executive]

Okay. A couple of questions on inflation. First of all, can you talk about the impact of inflation on your fleet of equipment at replacement costs? Presumably, the list prices of the equipment, which constitutes your fleet has increased dramatically since 2019, and therefore, the ROACE as reported, is significantly overstated relative to the replacement cost economics.

[Neil Stothard, executive]

Well, interesting point. The investment -- sorry inflation that we took in terms of capital supply chain in 2022 was quite significant. Our view is that, that will drop significantly over the next 12 months or is doing already -- there's already a change in terms of that backdrop. I often say to people that the great thing about rental is that we've got a number of years to claw back the -- any secular spikes in terms of input costs. So if we were a trading business, we were buying a product to price and to make our living, we have to sell it the following day or the following week or the following month after another price, then we would suffer a lot more of what we do. We buy a product today, and we live with it for the next 7, 8 years.And that incremental price increase is solved over and blended a period of time. So I don't think that, that is in a one-off element is not an issue. We are certainly our fleet relatively quickly as well. So that we've solved GBP60 million of new products at new prices. I can't remember what the cost on the balance sheet is, but I'm guessing we turn our -- I'm guessing and we turn our costs in 5 years or something. So no, I think that it's obviously an unhelpful pressure in terms of our targeted return on capital. But as we always see, we continue to focus on it. I think these results show that so far, thus far, we've been able to protect that and we expect to do so going forward.

[Anna Bielby, executive]

I think the 2 things -- the 2 points I would add there are, yes, we absolutely see it would like to hit the cost of our assets and also the cost of the business. But we have in the last couple of months to see that stabilize. So we're not seeing continued peaks in that, we're seeing stability. And then offsetting that is the success we have in price increases effective across all of our markets and all of our businesses. So yes, it's been challenging. And yes, we continue to see challenges, but we haven't managed to that. We have been able to manage our tests.

[Hannah Crowe, executive]

Okay. And I guess then the corollary to that is the price increases that you've put through. Can you give a little bit more flavor on customer response to that churn, any churn that you might have seen?

[Neil Stothard, executive]

Yes. I mean the price increases that were put in by the businesses were negotiated with all our customer base. And for the most start, they stuck and were not aware of any significant customer losses as a result. So I think that there was a general understanding -- my colleagues would smile at that comment, but a general understanding within our customer base, the world has changed quite significantly in terms of the cost to serve and having a healthy supply chain economically is just as important to them. And to protect ourselves, we need to put those promising improvements in. So I'm sure many of those negotiations were not easy to start with, but I'm pleased to say that we've negotiated some sensible price increases across the states, which protect us to a degree from the inflationary pressures that we saw from.

[Hannah Crowe, executive]

Okay. A question here on the conclusion of the formal sale process. Obviously, didn't get a high enough bid and the share price is calling on small volumes. Are you considering a share buyback program because of the current price this is at?

[Neil Stothard, executive]

Yes. As a Board, we're aware of share buyback being a potential opportunity for us, and we keep that as a potential opportunity on the table for us. At this stage, we not decided to do that for a number of reasons. And we think that we've got sort of -- we've got other opportunities that we can pursue, which will perhaps be more beneficial to us and the shareholders than that at this stage. I mean that Anna might talk to dividend. I mean share buyback is another way of sort of redistributing back allocation, dividend is another way.Do you want to just sort of reflect on dividends that we faced?

[Anna Bielby, executive]

Yes. I mean COVID and Brexit in general where we've had a strong track record of dividends over the year. I think year-on-year, we're looking at 4% dividend growth, and we consistently showed strong yields.

[Neil Stothard, executive]

We don't -- we won't go to -- we've got a very good track record long term of dividend payments. We also want to keep our powder dry in terms of any opportunities that may come up and share buyback, cash allocation is just one of a stream of possibilities that we could consider. So all I can say to the question is it is something that we've looked at, and we will continue to review as a potential action on our part.

[Hannah Crowe, executive]

And I guess, again, leading on from that, have you seen any churn in management leading the various businesses since the sale process was concluded?

[Neil Stothard, executive]

No, we haven't. I think that the process itself was kept to a very small number of people within the business, particularly to avoid it being a distraction and the great thing about process, that's around freight was that when we ceased the process in August last year, which is not coming up to the year fairly shortly, the business did continue as usual. And I think we, as best we could in a very confidential elements of process we kept, our colleagues is up to date as we were into within the confines of confidentiality. And I think there's been a very good response to that. We've moved forward. We've got fresh plans. And I think as the results have demonstrated the FSP was not a detrimental process to the overall operational performance of the group. And I think that's the most important thing of all. So no, we've not seen any change as a result of that.

[Hannah Crowe, executive]

Okay. Will the reported GBP10 billion increase in spending by the water companies and benefit Vp? And separately, how do you see the outlook for AMP spending over the next few years with the transition from AMP7 to AMP8?

[Neil Stothard, executive]

Well, I think the answer is hopefully that extra investment will be beneficial to us. I said in the presentation earlier that the AMP7 program, if in true AMP7 has been quieter than we expected it to be. We're now in the -- I think we're now in the fourth year. So I think it will finish in 2025. And there's already plans being put together for AMP8. I think our view at the moment is that AMP7 will sort of merge in with AMP8, and we'll see ongoing activity there. We like the regulated markets. And there is some certainty of spend, the uncertainty of spend is that it can be volatile as to when it actually happens. So we've seen, as we've gone through 3, 4, 5, 6, 7, every time it is transitioned, we get different experience, it's quite often necessary to start and then the back-end loaded. So just because we're focusing on AMP7 right the way through to the end, doesn't need to say that we'll just transition to move into AMP8. It's too early to say is jumping. But overall increased expense from the water companies is very good for us, yes.

[Hannah Crowe, executive]

A follow-up here on the point you made earlier regarding M&A. Were you implying that you are looking for certainty in end markets in order to acquire something? And would that not generally mean higher valuations for acquisition candidates?

[Neil Stothard, executive]

No. I mean I think that it's -- the key to getting acquisitions right is to make sure that there's a very positive reason for buying the business, which might be that it's filling a gap in our portfolio, which might be -- whether it be product-wise, service lines, regionally, geographically, but we look at every one on its own merits. We, right at the end, are saying how we're investing at a time when markets are generally flat. So our expectation for the next 12 months is that we're not going to get too many favors outside of -- not going to get too many flavors from the markets and support. So we have to create our own opportunity. But opportunities will come up. And if we wait and I think that made the indication, the question, if we wait until markets have redressed and are back to where they were, then yes, we'll have missed the opportunity or if we haven't, we'll have to pay top dollar to get the opportunity. But there's a sort of -- there's a middle ground, middle zone at between where we are today and the skill of ourselves and my colleagues is to make sure that we identify when that trend is changing. And as soon as we see that trend changing is to then up the investment levels, again, whether it be organic or whether it be targeting an earning.

[Hannah Crowe, executive]

Well, thank you to you both. That is it from our questions today. Thank you to our audience for joining us. And we look forward to a further update in 6 months' time.

[Neil Stothard, executive]

Great.

[Anna Bielby, executive]

Thank you.

[Neil Stothard, executive]

Thanks very much. Thank you all, cheers.

[Hannah Crowe, executive]

Bye-bye.