Eleco (LSE:ELCO) — Interim results for the six months ended 30 June 2021

0:01 Good morning, ladies and gentlemen, and welcome to the ELECO PLC investor presentation relating to the interim results for the six months ended 06/30/2021. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab situated on the right hand corner of your screen. Just click Q and A, scroll to the bottom, type your question and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. These will be available via Investor Me

0:31 Company dashboard, and you'll be notified once they're ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, would you like to submit the following poll? I'd now like to hand you over to Jonathan Hunter, CEO and Robert Tyrrell, CFO of ELECO LIMITED Good morning. Thank you, Paul, and good morning, everyone. Presenting today is myself, Jonathan Hunter, the CEO of ELECO. I've been on the main board since 2016, so I've possibly met many of you on previous road shows. I'm also pleased to introduce Robert Tell, the Chief Finance Officer who joined ELECO in March this year. And Robert brings a strong background in the systems and SaaS migration.

1:19 It's been a transformational first half for ELCO as we've reshaped and repositioned the company. We've launched our growth strategy and focused on our people and organic performance. The direction we're taking, ELCO, is to move towards a customer centric organisation to meet the needs of our core customer segments. So in line with our strategy, we've brought new skills into the business. We announced the new Non Executive Directors joining, three new Non Executives in the period, bringing skills and experience in mergers and acquisitions, software technology and SaaS and also importantly, the voice of the customer with Mark Castle joining today.

2:07 Culture has played an important part of our transformation and this has been driven by a leadership team that's aligned and in line with our strategic vision. Building a diverse organisation has also been a focus and we now have 32% of the workforce made up of talented women across all levels of the organisation. And while this is above industry averages, we continue to remain focused on attracting diverse talent into the organisation. Our clear strategy and our people working together is driving our performance and we continue to grow and retain customers as they love our products, they love our brand and the services we provide.

2:54 Also, our recurring revenue model is continuing to support our excellent cash generation. So let me take you through into the detail. We've had fantastic organic growth performance in the first half. As you can see, all the arrows are pointing in the right direction and I'll ask Robert to take you through the detail of the financials in a moment. But what is evident is that our new strategy has focused and energised the organisation resulting in growth across all regions by adding more new customers and also leveraging our strong existing customer relationships to support them with their digital transformation. The industry is facing challenges in material and labour shortages which emphasises the need for real time data, collaboration and world class planning.

3:54 And what we've been providing in the period is our Power Project Vision solution which is our cloud collaboration solution that provides visibility over complex projects and a number of projects within a portfolio. And that's allowing our customers to make better decisions across their organisation. And with the demand for collaboration among our enterprise customer base, we recently launched our Collaboration Cloud solution in The UK which is aimed at small to medium sized businesses. We also commenced our own digital transformation of our back office systems which will improve our visibility and operational performance and KPIs within ELECO.

4:43 We've delivered significant progress in reshaping and streamlining our portfolio to better align with the customer segments that we identified during our strategic review. The Building Lifecycle Portfolio addresses common customer segments and needs and our Visualisation and CAD products, which are niche in nature, have the opportunities to expand internationally with their own individual focus. So to provide you with an update on this transformation, within the Building Lifecycle Operations, we've made good progress on merging our three UK businesses under a single management team And the entity merger will be completed at the beginning of next year.

5:32 We've brought our German and Dutch Building Lifecycle Operations under a single Managing Director and we're already seeing the benefits of that as leads are being shared and techniques in sales and marketing have been enhanced. Anders Carlson, who served on the main board for a number of years, has stepped back to focus on growth in The Nordics regions. And then within our Visualisation CAD portfolio, I've appointed a Managing Director for our eSign and Active Online Visualisation businesses which we're currently merging and relaunching under the new brand name Views later this year. We've defined and formalised the business unit leaders for our staircase manufacturing, CAD and engineering products to provide them with the greatest potential and focus for growth.

6:27 So with that, I'll hand you over to Robert to take you through some more detail on the financials. Thank you, Jonathan, and good morning, everyone. The last six months has been a really exciting time to join the CFO of a company which has a strong financial foundation of predictable revenue and at a time when ELECO is progressing on its organic growth journey. Excellent growth has been achieved in the first half year as we have seen revenue increase from £12,200,000 to 13,800,000 a growth of 13% year on year and 9% on 2019. One of the investable qualities of our business model is recurring revenue, and our recurring revenue has grown 8% from £6,900,000 to 7,500,000 and twelve percent versus 2019, which continues to demonstrate the stickiness of the client base.

7:28 As a comparison, for the year ending 2020, the full year recurring revenue growth was 5%. Strong license sales, particularly for our building life cycle business, have shown a growth of overall of 20% from 2,700,000 to 3,300,000 and an 8% growth on 2019. Service revenue returned to normal rates despite working remotely, growing from 2,500,000 to 3,000,000 with a growth of 19%. This slide shows our resilient revenue performance by geography, and I've included 2019 to show a pre COVID comparison.

8:17 Revenue for the group increased by 13%, as mentioned before, or 12% at constant currencies. We have a natural hedge with operator no beds in all of the regions. Sales within The UK has grown by 591 k versus prior year, which accounts for 37% of the total growth. Scandinavia, which was worst hit by the pandemic, has shown a bounce back to pre COVID levels in 2021. Project management has never been more important with supply chain disruption and labor shortages. Project management has grown 17%, largely reflected by the growth in The UK.

9:04 Engineering growth of 28% was primarily due to the bounce back of Sweden, and information growth of 24% is largely driven by growth in Germany. So you've seen great performance across all regions.

9:23 Our cash position has increased from £9,800,000 to £12,200,000 year on year, an increase of £2,400,000 We have reduced our borrowing from £5,300,000 to 3,700,000 with capital repayment movements of circa 1,700,000 and with cash net of bank debt increasing by £4,000,000 from £4,500,000 to £8,500,000 after paying $3.29 k of dividends in the first half of this year. Our strong gross margin growth has delivered EBITDA growth of 11%, increasing from £3,300,000 to £3,600,000 and our adjusted EBITDA less capitalized cost has increased from £2,500,000 to £2,900,000 Our free flow cash was impacted by onetime hits.

10:16 The 135 k repayment was furloughed in the first half of this year where we got a credit of 133 k in the same period last year and a cash dividend of 329 k where we had paid none last year. In the prior year, there was also a VAT deferment of 396 k, which was paid in the second half of twenty twenty.

10:49 We continue to maintain our levels of development at 1,600,000 to delight our customer base. The amount capitalized has grown 4% from $7.59 k to $7.90 k as we continue to focus on our strategy of developing products for our core customer needs. We recognize we capitalize our intellectual property based on criteria of IAS 38.

11:23 ELECO adjusted EBIT margin is 20% compared to 19% last year, growing 15% from £1,900,000 to 2,200,000 We are continuing to invest in sales and development talent while managing the transition from one off licenses to recurring revenue, and we would expect a temporary reduction in the margins as we divert a long term predictable revenue model. Over to you now, Jonathan. Thank you, Robert. So I'd like to take you through our strategic priorities and the outlook as well as some customer cases. Our strategic priorities set the foundations to deliver on our vision and our vision is to provide world class software solutions that create certainty across the built environment and allow our customers to make better decisions.

12:20 So to emphasise the direction we're taking, ELECO's growth strategy is focused on organic growth by transforming the company away from its product silos into a customer centric organisation with a strong culture and talented leadership that is empowered to deliver that growth. So earlier this year, we strengthened our product management function within the business to align our building life cycle product strategies with the customer needs. And as solutions, we'll consider buying, building or partnering to deliver against those customer needs in the most effective way possible. We've committed to our SaaS journey, which will further enhance our growth platform, but inevitably this will temporarily impact our revenues and profits as we recognise revenues over a longer period of time.

13:22 So the move to SaaS will add value for both the customers and shareholders. We've carried out a lot of heavy lifting in the period, taking us on that strategic journey to becoming a SaaS organisation And it starts with the subscription licensing for our products as we take them into new direct markets and also new customers within.

13:49 What SaaS provides is a low entry point for our customers so that the initial upfront fee is less because it's a subscription and therefore encouraging our customers to move to our products at a lower price point will attract more customers. It provides for elastic pricing allowing more flexibility in pricing and a clear upgrade path which will enhance our predictable recurring revenue. And we can offer new and bundled cloud services. I mentioned the collaboration cloud which launched in The UK last week and that adds value. It will also incentivise customers to adopt the subscription in cloud services.

14:37 What that provides is a lower customer acquisition cost and higher customer lifetime value. The model provides for self servicing, ease of purchasing and license management by the customer and we also see the benefit of lower maintenance when it comes to supporting older versions of our software. So the team are really excited about embarking on this journey which will strengthen our business and also strengthen our customer relationships.

15:14 I'd just like to take you through some customer examples of what we've been working on in the period. And in the period, we attracted many new customers and one we worked closely with in particular is Ren Kitchens, the leading kitchen retailer and manufacturer in The UK. And through our APIs, we integrated our maintenance management software, Shire Systems, with Wren's supervisory control data system which monitors their manufacturing performance and as a result, what we've been able to offer is an automated process of maintenance and repairs. And this has provided WREM with immediate benefit with pre check processes being reduced from one hour to ten minutes.

16:03 What Wren have identified is also that this is improving their work practices and output as they aim to increase their production by 15% to 20%. So our customers are experiencing significant value by taking our best of breed solutions and integrating them with other systems.

16:26 Another example of our customer centric focus is our commitment to supporting the success of our existing customers through collaborative data exchanges. Power Project Vision, our SaaS portal for collaborating on construction schedules, has been selected to support the digital transformation of Vinci Construction's planning process in The UK. With the same templates and planning methodology across its sites, Vinci have the ability to deliver the same level of service in the same format across the whole business. And this is making life easier for their planners with pre coded, pre costed and pre resourced activities all defined and which frees up the planners time to use their knowledge and skills to better optimise their project schedules.

17:20 The standardisation of workflow also improves the governance and provides real time visibility of project stages, gateways and authorisations. So this is an example of a real leap forward when it comes to collaborative planning.

17:42 So to summarise, we've had a strong performance and a transformational first half. We've been making good progress on our strategy to become a customer centric and nimble organisation and the transformation continues to grow our platform. We have a proven product portfolio that's attracting new customers and we're also providing fantastic services which is allowing us to leverage our existing customer relationships to offer more value. We've done the heavy lifting on SaaS which will allow us to go to market with subscription later this year. And the benefits of SaaS will be both for the business but also in enhancing our customer relationships.

18:29 I'm seeking a Chief Technology Officer to technically deliver our aligned product roadmap strategy. And we've brought on an

18:43 experience to the board with M and A, SAS and the voice of the customer. And today I have joining us joining the business and leadership team is a Group Transformation Director who will be involved in driving forwards on our integration and strategic initiatives. So therefore, the Board are confident with the outlook for the remainder of the year. Fantastic. Jonathan, Robert, thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your question using the Q and A tab situated on the right hand corner of the screen. I just want the team to take a few moments to review those investor questions submitted already, I'd like to remind you that recording this presentation, along with a copy of the slides and the published Q and A, can be accessed via your investor dashboard on the Investor Me company platform.

19:34 I'd also like to remind you that your feedback is important to the company. Immediately after the presentation has ended, you'll be redirected for the opportunity to provide your feedback in order the company can better understand your views and expectations. Jonathan, Robert, we have received a a couple of pre submitted questions. If I may, I'll just read the first one out, which I think I can direct you actually, Robert. It reads as follows.

19:55 Is the SaaS model only for new customers or will existing customers also be moved across to that subscription basis? Our focus at the moment is for new customers and new markets. So we're not we're not looking at existing customers, although some existing customers have expressed an interest. So I think the initial answer to your question is is only new customers.

20:21 Fantastic. Thank you very much indeed. The second question we've got here is for comparison purposes, would you consider reporting revenues to highlight the shift from perpetual license to SaaS? Yeah. I mean, we we we talk to auditors obviously to to discuss the best practice, but we we'd look at showing invoice value or contracted value as a way, a measure if you like, a comparison to the revenue recognition. Fantastic. That actually concludes the pre submitted questions. So if I may just ask you click on that Q and A tab and just where appropriate to do so, if you could read out the question and give your response please. So there's a question that's been asked. How long do you think it will take to shift to a 100% SaaS and what are the drivers for new business wins?

21:10 I think that builds on the on the pre the question that was asked earlier. This is certainly a journey for ELCO and, you know, we've we've done a lot of the heavy lifting to be able to get us to position to offer this subscription. So we've updated the licensing model in in the in our software. We've aligned the sales teams, reset the incentives, changed the culture to the SaaS subscription. Also, back office systems have been, you know, been worked on to be able to offer this model. So I think we're certainly our initial phase of the journey is to offer subscription to new customers and we have done some piloting over the summer and actually what's really encouraging is in one of the markets, Germany, where we felt that the culture was more towards buying software rather than subscribing.

22:15 We actually saw some good results with an existing customer requesting to enter a SaaS subscription agreement. So that was an example where an existing customer wanted to make that shift and we're seeing the demand for subscription amongst the customers coming through. For example, in The UK Shire system, we've seen a large uptake in hosted services and hosted systems. So we're on the journey initially starting with new customers and I think as we progress into 2022, we'll have some data points to be able to provide shareholders with

22:59 more data on what that means and what that transition what the impact of the transition would be, which refers to the second question that was asked earlier. Next one was what are your thoughts on strategy around M and A? That's a good question because ELCO has been formed through acquisitions and it's certainly part of our business model as you see in our reporting accounts. And it's, as I mentioned also, as we're looking at our next generation solutions, we'll look at potentially acquiring or building or partnering. What's really key for us when it comes to M and A is ensuring that we are aligned as a business.

23:48 So we want to acquire technology that our customer, our core customer segments and therefore, you know, we're enhancing the value we provide. There's also, as part of our strategy, we're very much focused on driving into geographical markets or selected geographical markets that offer the greatest potential for growth. And therefore, if there are if there is an opportunity to acquire a customer within one of those markets and within the segments that we're targeting, then that could be a possibility. But for the remainder of the year, we're certainly we're focused on enhancing our business, completing the merger of The UK businesses and the merger of the German businesses, which will allow us to rapidly integrate any further businesses into our platform in the future.

24:53 Next question. What is the reason for not implementing the SaaS model to existing customers yet? Is it the fear of losing them? And when can we expect this to happen? There's a number of questions there. I think something that we've proven time and time again as a business is that acquire customers on a low base and we continue to expand within that customer base. So we're very good at retaining customers, building a relationship and growing within that customer base. And I think that's really encouraging because our products are very sticky and therefore, you know, we're confident, you know, with our high retention rates that the subscription model is the way forwards.

25:43 In terms of existing customers, we want to transition the existing customers when we've enhanced our subscription offering and bundled services to be able to incentivize customers to pay more for more value. And currently, of the customers have bought their licenses and they're on a maintenance contract so to move them across to a subscription, they would essentially be repurchasing the license. So what our intent is to continue to enhance our subscription services and cloud tools to incentivize customers to transition.

26:31 Yeah. It's worth it's worth adding that we you know, two out of five really nice local products are already assessed model, and our the percentage of our our revenue from nonmaintenance recurring revenue has grown from 19% to 22% in the period. So we're already seeing that in our in our existing product portfolio, and we'll see it more obviously as we move into adding the firm of building life cycle products into that SAS model. Okay. Next question. There's two questions that are relating to The US. So what are the plans for expanding in The US?

27:16 Can you provide some color? We've been in The US for a number of years through a reseller channel. So we've sold through value added resellers who provide services and sell software alongside those services. And they've been targeting the enterprise level customer base, so the government departments and large main contractors and had some success there. We now have about 25 of the top 100 US main contractors using our software. So our approach to The US was certainly not to introduce any channel conflict but to be able to enter The States and have control of that direct channel.

28:05 So initially our focus has been on the small SME side of the industry and in the state of Texas. Why the state of Texas? Because we see population growth there. There's many people moving from other states to the State of Texas. There's also infrastructure and a lot of housing developments. And actually when we compare the opportunity to The UK, it's greater, it's the size of The UK or greater in terms of output and construction projects. So there's a lot of opportunity there. We set the business up this year to be able to operate as a stand alone unit and we entered the Sunbelt Home Building Show in the middle of the year to introduce the product, to introduce Power Project initially.

29:02 And the feedback has been positive but what's evident is that what we found was Microsoft Excel was used in planning some of the projects and also Microsoft Project. Power Project is a dedicated construction planning tool. So we're confident that we have the technology to address that market. As we've been reaching out and following up on leads, we've found that we're not known that home building market in The US. So, you know, there's a lot of introductions and educating of businesses that's required and therefore, you know, that will take a little bit of time but we're certainly confident about having the products to offer.

30:00 I think actually guys, think you've actually covered off all those questions you can from investors. And of course, if any further questions do come through, will have the ability to review those and put responses where appropriate to do so. Jonathan, just on that basis, if I may just hand back to you just for a few final words before we redirect investors to give you some feedback, please. Yeah. Well, I'd like to thank everyone for attending and thank you for your questions. I hope we managed to answer everything and if there are any further questions, happy to take them offline. And look forward to seeing you all at the next roadshow. That's fantastic. Jonathan, Robert, thank you again for updating investors today. May I please ask investors not to close the session? You should be automatically redirected to the opportunity to provide your feedback in order that management can better understand your views and expectations.

30:50 This will only take a few moments to complete and is greatly appreciated by the company. So on behalf of the management team, ELCO PLC, we'd like to thank you very much for attending today's presentation. That concludes today's session. Thank you and good morning.