Eleco (LSE:ELCO) — Full Year Results

0:00 Good morning and welcome to the ELCO Full Year Results Investor Presentation. Throughout this recorded presentation, will be in listen only mode. Questions are encouraged to be submitted at any time via the Q and A tab situated on the top right hand corner of your screen. Just please simply type in your question at any time and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions for today and publish responses where it is appropriate to do so. Before we begin, I'd like to split the following poll. And now I'd like to hand over to CEO, Jonathan Hunter. Good morning.

0:33 Good morning, everyone, and welcome to ELECO's twenty twenty one annual results presentation. My name is Jonathan Hunter. I'm the CEO of ELECO. I'm pleased to welcome Rose Clark, our interim CFO. And, Rose, would you like to say a few words about yourself?

0:53 Okay. Thanks, Jonathan. Yeah. Just to introduce myself, I'm a chartered accountant. I trained with, KPMG many moons ago. Most recently, I've worked as UK CFO for, Arcadis, in the, The UK business of 500,000,000 turnover an engineering and design consultancy in the buildings and infrastructure space. And more recently, I worked as CFO of their tech business. We did a tech startup. We bought a few product building companies and, launched a new tech startup business called ArcadisGen, which you may have heard of. Prior to that, I worked for Gelf Group. That was when I got my AIM experience, and we did 20 acquisitions acquisitions in in two years, really high growth, quite a bumpy ride, really exciting.

1:44 Yeah. So it was a really good experience for me too. So thank you. Thank you, Jonathan.

1:49 Thank you, Rose. So Rose has been with ELECO for, two months, helping us strive our year end, reporting among other initiatives since Robert Tell stepped down from the board, which was announced a few weeks ago. So we're going to turn our cameras off to allow the viewers to get a full screen view of the presentation. And before we dive into the progress that we made in 2021, I'd like to introduce you to who we are. ELECO is an aim listed innovative, resilient and growing business specializing in world class software solutions and services to a blue chip customer base in the construction and built environment.

2:35 We made the shift to becoming a software business in 2014 following the divestment of our building products businesses. And we've been cash generative and growing organically as well as through acquisitions since. Our core geographic markets include The UK, Sweden, Germany, Netherlands and The US where we primarily sell direct to customers. And our product portfolio comprises different licensing models based on customer needs. This time last year we simplified and split our product lines into two groups, the building lifecycle and visualisation in CAD. And as you can see in the results, this is how we report the segments and conduct our business.

3:22 The building life cycle portfolio accounts for 65% of our revenue and comprises the best of breed solutions with synergistic traits. And our visualization and CAD solutions, provide services to niche customer segments with fantastic and innovative leading positions. Let's move on to the results. We truly had a transformational year with the launch of our growth strategy in 2021. We've implemented some significant changes to simplify our operations, strengthen our management and focus on diversity and talent to deliver our strategy. As a result, we've seen excellent growth in the year, which was still affected by the pandemic.

4:12 The metric that we're following is recurring revenue which increased by 9%. We generated cash which allowed us to voluntarily repay furlough across all our regions and we also made an early repayment to clear our bank debt. And after several years, we're now debt free.

4:31 Investment in construction technology remains at an all time high, which makes our industry attractive to tech companies like ELECO. Our strategy has defended and grown our position by focusing on our customer relationships and working to leverage those relationships to offer more value.

4:52 Our customer focus has resulted in continued high customer retention rates, which is a key success factor as we embark on our SaaS journey. Our SaaS journey, which we started in quarter four of twenty twenty one, was earlier than we had planned in our strategy, and this just demonstrates the agility of our business. It also marks a pivotal change in our business. It impacts all areas of our business from organizational design, product strategy, technology roadmap, performance incentives, and financial reporting. And we're on this SaaS journey because it will add more value to our customers and ultimately our shareholders. I would like to talk a little bit more about the details about transition to SaaS in a few moments, but first let's continue on the 2021 results.

5:47 We increased our revenue by 8% and more importantly increased our recurring revenue which now accounts for 56% of our total revenue. We won the best performing software company in our sector at the recent Megabyte Awards, which is very encouraging. And we also won the best project management software of the year, and we were voted runner-up for the Best Asset Management Software at the UK Construction Computing Awards. We delivered profits in line and ahead of some of the analysts' expectations despite the move to SaaS and additional costs which Rose will explain in detail. So with that, let's dive deeper into the financials, and I will invite Rose to take over. Thank you, Jonathan.

6:32 So it's important to note that during act twenty twenty one, as Jonathan said, we were on the start of a journey. So, initially, we've refreshed, our strategy and refocused our business on the core segments of the building's life cycle and CAD and visualization, and that's how how we've reported at the end of the year. And we commenced, as Jonathan said as well, the the move of pricing from perpetual licenses into subscription, for our new, customers buying products from us, excuse me, as as we moved on our SaaS journey. So our our revenue, a very predictable revenue growth that comes from a strong recurring revenue business with organic growth of 8%, growth across all the categories of perpetual licenses, services, and recurring revenue.

7:25 And in particular, 9% growth for recurring revenue, which is at 56% of the total. And and our recurring revenue includes subscription, SaaS licenses, as well as maintenance and support contracts. And we expect this recurring revenue to grow as we implement our strategy. We started with our our license sales to to new customers and we'll be moving forward to selling that to existing customers as we move along on our SaaS journey. Our deferred income levels at 7,100,000 at the end of the year representing good security over future years revenue and prior year was 6.4 and our gross margins are at 90% of total revenue.

8:13 We've positive revenue growth across our business, so across our our different areas that we operate in, so UK, Scandinavia, Germany, etcetera, and across building life cycle, CAD and visualization segments, as well as reselling of other third party software and related services. And the particular growth in the year because of the building life cycle in The UK, the dominant factor really was as the building sector adapted to COVID restrictions and and our clients started buying licenses again. One area to to draw out is The US. We we called out as an area of focus in our strategy refresh last year. The business has grown by 16%, but not quite as we anticipated.

9:00 And it has grown through our reseller channel where the intention was really to grow through direct sales. We started out initially selling through the homebuilders market in Texas then quickly realized that wasn't quite the right market for us. We're revisiting our our sales strategy to focus on our core specialism with working with more complex commercial property market players in the construction field.

9:27 Profitability. So our our margins are strong. Our EBITDA margin over 27%, and and we still maintain that as we kick started the move from perpetual license sales to subscription. The the margin should reduce slightly as we're continuing to invest in sales and development talent while managing the transition from our from our one off perpetual licenses to recurring revenue. And we would expect a temporary reduction in the margins as we develop long term predictable revenue. The transition to SaaS is a journey for us as we've talked about.

10:09 Sorry. Can we just go back? Yeah. We've actually priced just to give a little bit more color on it, we've actually our move from perpetual licenses to recurring revenue have been priced such that if you if you add the total of the the the revenue that we get from our perpetual license plus three years of maintenance contracts, that is equivalent to the subscription pricing over the same three year period. And as we do have very strong renewal rates with our clients of over 90% on our products, that means a much more enhanced customer lifetime value for the shareholder as we go forward. Our operating profit, our EBITDA has grown during 2021, but our operating profit remained relatively flat and that's because we chose to product to impair one of our products at a at a cost of 600,000.

11:08 And it was because that product is is what is really successful in being used as a replacement for current clients on a similar system, And it's it's very successful in that field, but not as successful as we expected in selling in the market to new clients as as yet. So we've taken quite a prudent view, I think, and and impaired that product. We do think it still has has the opportunity in in those markets, just not actually demonstrated as yet. And our profit after tax, the corporation tax in The UK the corporation tax rate in The UK has increased or will increase from the 04/01/2023 from 19 to 25%, and that's increased our deferred tax charge, and that's hit our profit after tax, which is why that's lowered year on year.

12:01 It's the same reason that has caused a reduction in our earnings per share. It's that corporation tax rate change. Without that, we'd still be at the same sort of level, 3.9, 3.8 in our earnings per share. And I'm just gonna call out our dividends. So we've returned to a much more normalized level of dividend in 2021 with an interim and a recommended final. And you can see we took a took a pause in that during the sort of COVID impact when when we're dealing with that that that impact of the business. So we've now returned to that much more normalized level, which is really important to a selection of our shareholders. Appreciate not everyone, but to a selection. We've continued with positive investment in our product development running over 12% of total revenue. We typically capitalize around half of that. We we're quite prudent in the way we capitalize and and we we capitalize just around those benefits, those added developments that we think are really gonna bring future revenue streams to the business.

13:10 Our cash generation is very strong, and we've continued free positive free cash flow in the business in 2021. That's really enabled us, as Jonathan mentioned earlier, to pay back our bank debt. We were due to pay that back by 2023, and we were able to pay that back in the last quarter of twenty twenty one. Our UK bank debt, and we had a small amount of bank debt in Germany in one of our subsidiaries, and we've now repaid that in the first part of twenty twenty two. So we are debt free as a business and our net cash position has increased to just over 10,000,000. So in summary, to summarize the financial highlights, so a very strong recurring revenue, predictable revenue business with with very high customer retention over 90%, strong cash position, and we're on a shareholder we're creating shareholder value on a SaaS journey, which Jonathan will talk about a bit more later on the presentation and a very experienced management team in the business now to deliver growth.

14:18 Thank you. Over to Jonathan.

14:22 Thank you, Rose. So in this part of the presentation, I'd like to take you through our purpose and the progress we're making on our strategy. Following the refinement of our revised vision, we went out to stakeholders and defined our purpose, which is solving the challenges of the built environment through digital transformation. The way we will achieve this is by providing world class solutions to companies in the construction and built environment sectors. And where we want to be in the future is creating certainty for the built environment. This is by allowing our customers to have certainty of time, cost, productivity, environmental impact, and compliance in order to make better decisions throughout the project.

15:15 Our strategic pillars are to innovate, strengthen, and grow. And twelve months on since we launched our strategy, the company has moved from a portfolio of disparate siloed businesses to focusing on those products that provide the most growth potential, targeting customer segments where we have the strongest market positions and geographies that offer the greatest opportunity to expand. We're building on our strengths that differentiate us today, such as our customer relationships and best of breed solutions, which will further secure and build our competitive position in the market. We also shaped our business around our customer segments, which led us to simplify our organizational design. We merged business units, and we made key appointments, all of which will drive efficient and resilient operations.

16:08 We also strengthened and structured our product management and technology organization to align with those customer segments. And the implementation of our group culture, employee support, and onboarding portals has given our management and our people the direction to deliver growth in all regions. Therefore, we're extremely proud of the progress we made in what was a pivotal transformation in the business.

16:35 Moving into the short to medium term, we will continue to focus on innovation by maintaining and strengthening our established portfolio while considering r and d investments in house through partnerships or acquisitions. It's key for us to align our cloud services and deliver an improved, user experience on our SaaS journey, and we're embarking on setting these foundations this year. The ELCO business platform is strengthening, and we demonstrate this through our resilience, which is further supported by the increasing predictability of our revenue and our geographical footprint. The challenge that, I see ahead is inflation and rising staff costs, which puts pressure on us to retain and attract new talent.

17:25 Therefore, carrying on the work we did in 2021, one of our strategic initiatives is to run a group wide program to ensure that pay scales, job descriptions, career progression, and succession, is planned, and we continue to reinforce our cultural values throughout. Those values are, of openness and trust, customer centricity, a growth mindset, and striving for excellence in everything we do. Why is this so important? Well, culture is driving our strategy forward. We'll also, continue to drive growth through direct sales to new and existing customers and by focusing on developing our recurring revenues.

18:11 It's important that we retain customers while attracting new customers. Therefore, we'll continue to invest in our account management It's and customer success capabilities. The move to SaaS is all about creating predictability, strengthening our revenues, and ultimately creating value for our customers and our shareholders. And we're already seeing the benefits of this as our customers are taking advantage of the lower entry level pricing, which allows them to make quicker buying decisions. And as a result, we're seeing a reduced sales cycle. We're also pleased with the predictability of revenues with minimum agreements being twelve months and automatically renewed. The impact of this transition to subscription will change the profile of our revenues with one off perpetual license revenue, which is recognized immediately, being transitioned to a higher lifetime value subscription revenue, which is recognized over a longer period of time.

19:14 Thus, our total reported revenue growth will temporarily

19:18 soften during this transition to a high value predictable recurring revenue. The construction software markets are changing and still remains an exciting and attractive market to be in. There's huge investment in infrastructure as well as construction. Therefore, we haven't seen the demand slow down. The, the construction sector has increased its level of technology adoption, but the level of digitization still remains low compared to other industries. The drivers in the industry continue to be a focus on cost reduction and productivity, the ongoing development and adoption of new construction techniques, and an area receiving more focus is sustainable building practices.

20:12 All industries are moving towards reducing their impact on the environment, but also buildings with green credentials are more sellable, attract higher rents, and therefore have a higher value. We're also seeing the ongoing development and adoption of new technologies, especially in in data collection and the usage of that data.

20:37 So I'd like to demonstrate to you some examples of where we're meeting the needs of our customers and the industry. We're proud to be working with Wilmot Dixon who are pioneering in off-site manufacturing techniques across The UK. They won the award for they won an award for its for their prefabricated construction of the University of Warwick's Biomedical Research Building. And what we're seeing is that global sustainability concerns are driving businesses like Wilmont Dixon to look for alternative technology technology driven ways to manufacture and assemble buildings. So we're seeing more design that's catered to manufacturing, so simple manufacturing, and then safe and simple assembly on-site.

21:31 In this case, by manufacturing 50% of the building off-site and coordinating all of the operations using Power Project, our scheduling software, Wimont Dickson were able to reduce site deliveries by nearly 40%. This lowered the building's carbon footprint, reduced waste, and, of course, improved the safety on-site. ELECO's focus on strengthening and building a resilient operation is also important for our customers, and Hansen Yukon a commercial construction business based in Australia that have been established for more than a hundred years, are using Power Project Business Intelligence to deliver, their latest project management innovation, which is a custom analytics dashboard.

22:21 Power Project stores and drives the master construction schedule, and the data coming out of Power Project is real time progress reporting. This initiative is capturing the attention of the wider industry and was presented to MBA statistics students at the University of New South Wales demonstrating just how real time analytics dashboards can enhance cost company performance. Hans and Yukon's ultimate goal is to enable five dimensional project management. So this is using the three d model and adding cost information and progress information to that model. We we provide in power project four d, which is the three d model and the and the progress in one system.

23:10 So what this will allow is for Hansen Yukon's regional teams to be able to monitor cash flow alongside time management and visualize that in three d, comparing progress that's planned and progress on-site. Something this is a project we're really pleased to be involved in and supporting our customers through this data driven platform.

23:35 So to demonstrate just one example of where we're growing, our customer is growing with the adoption of technology, within our visualization business, Views, we provide imaging and marketing tools to the interiors market, primarily primarily servicing interior surface manufacturers. So what we provide is an online room configuration solution that allows consumers to visit a manufacturer's website and select flooring, wallpapers, curtains, doors, tiles, etcetera. So if you have, if you've purchased flooring in the past, you would have experienced just how much this sector is in need of digitization and visualization tools to make, consumer buying decisions.

24:23 In 2020, we released our artificial intelligence tool which allows consumers to upload their own room photo. And what our AI software does is it will identify the floor area including shadows and reflections and instantly allow consumer to be able to configure that floor within their their own room photo that they uploaded. Since its release, 90% of our flooring, customers have adopted the AI tool, which is priced based on uploads. And within that period, we've seen over 3,000,000 uploads of photos and that continues to grow. Taking this a bit further, we recently combined the full cloud visualization offering and we now provide an integrated ecommerce solution which allows consumers to configure their room and then purchase their flooring online.

25:19 This is a really exciting development because it's, driven by the demand for manufacturers to service consumers directly. So I'm pleased to share some of these examples of how we're solving the challenges of the built environment through digital construction. To summarize and provide you with an outlook, we've had a strong performance and a transformational year. We're making excellent progress on our strategy as we become a customer centric and nimble organization. We embarked on on the pivotal transformation and transition to becoming a SaaS company, which continues to enhance our growth platform.

26:07 And we've done all of this through a through a pandemic year. ELECO has a good track record of m and a. It's how the group has been formed. During this transfer transition and transformation of the business in 2021, we we put, we put that on hold. We're now exploring market opportunities, but it's really important for us to, to look carefully because we've simplified our business, and we want to ensure that technology, that we that we bring in, or businesses fit into our customer segments where we're focusing or the key geographies where we're focused. We have a proven product portfolio that's continuing to attract new customers, and we also provide fantastic services, which is allowing us to leverage our existing customer relationships to offer more value.

27:03 And we'll continue to grow at predictable revenue to deliver more value to our stakeholders. Therefore, we're confident with the, with the year ahead. That concludes our presentation. We'll be happy to take questions. So if you could please type your questions into the Q and A tab. We'll do our best to and we'll turn our cameras back on. That's perfect. Thank you very much for your presentation. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated on the top right hand corner of your screen. But just while I come and take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation along with a copy of the slides published Q and A could be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation and thank you to all investors for submitting their questions. If possible, please could I ask that you read out the question and give a response where it's appropriate to do so, and I'll pick up from you at the end.

28:01 Okay. So there's a there's a question from Matthew. Do you see further partnership and data integrations moving forward? And typically, how long is the process from introduction to integration? It's a good question. It it certainly links to what we're doing and and achieving. So that's great that that's come through. We our customers, we we we're customer focused and we're continuing to add more value to meet their need. And we've seen many examples of integration through data, through API throughout the year, actually. So if I draw to one in particular, Shire Systems, our customer Ren Kitchen, the largest kitchen manufacturer in The UK, we integrated with their manufacturing monitoring system to allow for automated maintenance, and it's all logged within Shire Systems. So Shire Systems will pull the data in and generate a work order for a maintenance engineer to to address either a maintenance request or a service that that may be due to equipment vibrating or a sensor, you know, driving that.

29:20 So we are continuing to have to see these data integrations with other vendors. We so to answer the second part, how long does this process take? That's a difficult one to answer because there's a it's case by case, but generally, it's through the API systems that we have. It it's fairly quick, and, you know, that makes it intuitive. So there's there's not much code writing involved. A question from Mark. What are your plans regarding expansion outside of The United Kingdom? We're we're really focused on our core markets.

30:09 So outside The United Kingdom, we're focused on the Northern European market, includes Germany and The Netherlands, Sweden, and The US. We we've seen the best results through our direct sales where we can port sell to and support customers directly, and that's where we're we're driving our growth. We do have examples of customers being attracted to our our products through resellers internationally. So I mentioned, you know, in the case study, Hansen Junkin in Australia. So we continue to see see those customers joining our joining us and adopting our software, but we're we're still quite we're still heavily focused on our core regions.

30:57 We believe there's more opportunity to to expand on in those regions. Another question from Mark. Can you talk about the competition in the market, other technology providers, what makes you different, and why you have 87 of the top 100 contractors? That's a great question. We are are best of breed. So what we're providing are those solutions that are world class. And we continue to develop those further. They've been developed over many years of customer relationships, discussions, iteration, and development, therefore extremely difficult to rep just replicate overnight.

31:46 And as we continue to enhance those, we're sharing you know, we're making the systems more collaborative. We're making use of data. That's further differentiating us in the market and defends our market position against competitors. If we we have a number of competitors throughout each region. If we look at power project, which is the one that's referenced in the question, 87 of the top 100 contractors, the the key competitor we see is Oracle, Primavera, and Microsoft Project, are the ones that we come up against. I think we have a strong position because Power Project is storing the master construction schedule and the output of that is the the BIM visualization and and data that's being pulled out for reporting.

32:40 So Power Project is the single source of the truth on the project, making it a very sticky and important product for our customers. Another question has come in. Please, can you talk about competing software products and outline how ELCO's products compare and contrast? So similar to previous question, hopefully, answered that in the previous response. We we are very focused on on being best of breed. Our strategy, one of our core pillars is to strengthen, and that refers to not only strengthening ourselves as a business, but strengthening our market position and our relationships with our customers.

33:36 So we're we're very good at retaining customers. We have very long relationships with our customers. We're also good at offering more value to those customers. So that that's allows us to continue to be competitive in the market. Can't see any further questions. There's one that's pre submitted. What are your hopes and plans for expansion in The US? So as Rose mentioned in the presentation, we we set out to to sell direct to market. We're focused on the state of Texas and house builders.

34:26 Many house builders are using simple scheduling tools. We've seen that they're they're using Excel, for example, Microsoft Excel. And we felt that there there could be an upgrade path for the products for our products, which is specialized for construction. But what what we quickly found was that the complexity of house building doesn't warrant, you know, the software that we're providing. And therefore, you know, making the house builders shift was was going to involve quite a long sales cycle. So we're we're revisiting and focusing on, you know, the complex projects. That's where in The US in particular, we're seeing, you know, the adoption of our software. It is very different in The UK. We do see house builders. We have a number of house builders using our software, and we've a got very strong position there.

35:21 So they they see the value in having a construction dedicated planning tool. And also, you know, we've seen in the period in particular, a number of our customers have been standardizing on the platform which allows them to create templates so they can more quickly, you know, with repetitive build types, more quickly create a project schedule and focus on the area that's key, is is scheduling and and planning. Jonathan, that's perfect. I think you've addressed all those questions you can from investors today. And of course, the company will review all questions from today, and we will publish these responses on the investment company platform. But just read but just before redirecting investors to provide you their feedback, which I know is particularly important to the company, please go and ask for a few closing comments.

36:11 So thank you all for your questions, and thank you for attending. It's been a great year and we're looking forward to 2022 and really look forward to seeing you all again at the interim results. Jonathan and Rose, thank you for updating investors today. Could I please ask investors not to close this session It will only take a few minutes to complete, but I'm sure it will be greatly valued by the company. On behalf of management team at ELECO, we'd like to thank you for attending today's presentation, and good morning to you all. Thank you.