Van Elle Holdings (LSE:VANL) — Acquisition of Albion Drilling Group

0:02 Good afternoon, ladies and gentlemen, and welcome to the presentation on the acquisition of the Albion Drilling Group. In today's presentation, Mark and Graham will add a little more color to the acquisition, after which we can take some questions. Please do use the q and a tab situated on the right hand corner of your screen or if anyone has dialed in via VAN ELLE at WALLBROOK PR dot com.

0:28 To remind you, this presentation is being recorded. I would now like to hand you over to chief executive, Mark Cutler, and chief financial officer, Graham Campbell. Gentlemen. Thanks, Tom. Hi, everyone. Yes. So as Tom mentioned, just an opportunity to add a bit more detail and some of our thinking behind the Albion acquisition that we announced earlier this week. This was a target that we've been considering since midsummer. And at the time of the results in late July, it was it was, you know, at a reasonably advanced stage. It would be we couldn't, of course, give any any insight as to what we were doing. It was very much on strategy in relation to what we presented and our results, and perhaps we thought it'd be a good opportunity to explain in a bit more detail how it fits and and what that strategy is.

1:20 So Albion is a is a is a small company, but is a leading business in terms of some of the specialist piloting techniques in Scotland. We've known of them for some time. In fact, we employ one or two ex Albion people, and and they're very well regarded. And they specialize in in things that we're very familiar with but bring a Scottish presence in infrastructure and some of this specialist pilot work that we simply don't have. We do have a Scottish business, but it concentrates on housing primarily, and we're underrepresented in infrastructure in Scotland because we're always visiting and never really permanently there with with customer relationships like we do have in the rest of The UK.

2:05 Albion itself is based in Stirling. Good central location as far as we're concerned. We have a depot in Blantyre not that far away, but it's a good opportunity to bring our resources together. And as I say, a very strong track record in in complex infrastructure, particularly energy. And, really, that's the backbone of our thinking behind this is the growth in the energy sector, which starts in Scotland and will come down the East Coast, and we'll come on to reminding on some of that in a minute.

2:36 We to make the most of this opportunity, we feel it's very, very important to have a a permanent Scottish presence fronted by, you know, recognizable leadership team in Scotland. And the capability that Albeam bring fits perfectly. They also bring some new skills that we don't have, including blasting, which is might sound a bit of a a a diversion from a geotechnical engineering, but, actually, it's not. It's often hand in hand on some big infrastructure schemes where there's rock involved in terms of the way the the schemes are carved out to the landscape or the aggregates are secured and and and and won for the project. And that's a that's a niche area that fits very well with what we feel we're going to be doing on some of these big projects in in Scotland in particular.

3:27 So the rationale is to to to fit very much into our energy growth strategy, followed not far behind by water, which is also a strong investment line in in Scotland. The the projects that Albion have done help us to strengthen the the bid proposals that we'll make. We can resource them more easily, and they bring new customers that we don't have for some of the transmission lines that we're already aware of and perhaps wouldn't have the same existing track record or customer relationship. So it expands our customer base. It extends our capability in terms of some of the blasting activities I mentioned. We've got a rig fleet, which we've examined closely.

4:18 It's it's very high quality. We're very happy with it. And as Graham explained, the the deal is very much asset value. Had a high quality workforce as well, directly employed, very similar model to ourselves, and a leadership team, in particular, the MD Jim King, who is is is critical to this, fits very well for our requirement for a Scottish leader to lead our growth in in the sectors I've mentioned over the next three years or so. And here, we're looking at growing. As a reminder, we're looking at growing from, you you know, know, if we take Albion as a starting point plus our visiting projects, we might be doing $68,000,000 a year at the moment in Scotland. We see that growing to 30 to 40,000,000 a year within within three years with the opportunities that we've got all within our very much within our specialist piloting high margin area. So we really do feel we need to make the most of that with the with the local presence.

5:18 Do you wanna just touch on some of the financial aspects, Graham, as well?

5:22 Yeah. I mean, I think the the there are a number of factors here with with next slide, I'll I'll touch on the consideration for the deal. But, historically, the business has performed successfully, certainly over the last three to four years post pandemic as as many in our industry had a couple of challenging years during the pandemic, but have responded strongly. The last reported financial period was the year to the 01/31/2024. They delivered 5,500,000 of revenue and EBITDA of £1,000,000. So stable, solid performance, low debt as you would expect from a a small private business. The, in terms of looking forward, I mean, we expect them to be able to, firstly, continue to to deliver, as they've done so in the last in the last three years, performed successfully.

6:14 We've got a great opportunity up in Scotland that Mark's just described. And, hopefully, we expect to see some modest synergies. Now we're not overcommitting to the synergies, for example, combining some of the leadership team, combining, our insurance programs, and potentially leveraging some of our systems, we should see some modest benefits, which should help us to to grow that bottom line from from where we are. In terms of the deal structure itself, the balance sheet that we, looked at, and that we have acquired is approximately 3,500,000, of net assets, of which approximately 500,000 is is a net cash position. So effectively, we're paying we are paying cash for cash.

7:00 So in our

7:03 in our in our 3,500,000 of offer, you could say on a on a cash free debt free basis, we've effectively paid £3,000,000 for the for the transaction. What we've done internally is to take a look right down the balance sheet as you would expect. One of the key factors, of course, asset backed business very much like ourselves is to take a very close look at their assets. And, really, they're twofold. They are a $3 property based off at Sterling, which the team operates out of, and they are there are a number of a number of rigs, that, obviously, our t our internal operational teams

7:35 are very familiar with. So we value those at at what we consider to be a market value. We've compared that to what Albion felt they were worth as market value, and we've come up with broadly the same answer, which is that the 3,000,000 that we've paid is broadly somewhat fully supported actually by the market value of the kit. So I think when you look at the deal structure itself, our view is that one is fully backed by a value fair valuation of the assets, but it's also on a reasonably attractive multiple when you look at their EBITDA performance over the last over the last couple of years. The deal itself, we structured it with 2,100,000 of cash upfront and a share capital issue, which we feel felt as a board was a modest dilution for the benefits that that would bring.

8:26 So 1.4% dilution on our total share capital at an average of the previous thirty days price. And I think one of the key factors here is it is absolutely vital that we maintain that Scottish presence, and we keep the leadership team for a period of time.

8:46 And and we've got that with the share capital issue. So that is effectively a twelve month holding period with a twelve month old exit on top of that. So that that that sort of aligns the strategy that we've got for our Scottish business with the with the leadership of Albion going forward. There is a deferred consideration element. And, again, we've as we have done with previous transactions, we've tried to defer the cash element, negotiated the deferral, and some of that release is six months, twelve months, and then twenty four months. And that's just purely cash management from from our side. And the the final bullet point on the deal structure slide is is is key, which is that the Albion MD, whose level business will will stay on for a period of three years to help us drive this forward.

9:36 Thank you. And a quick reminder of why we're doing all of this in terms of big picture strategy. So you might remember some of you this slide from our results presentation in late July. Growth strategy in energy in particular and this is before I'm not gonna go through all the other sectors, but there are other growth areas in Scotland that we're very familiar with around

10:04 highways, railways, and water in particular, and quite a lot of marine activity, actually. But if we just take energy, which is the the dominant consideration here for us in our thinking, and now being have done transmission lines in Scotland going back several years now, schemes we're very familiar with and with customers that we expect to be rolling forward with. This fit fits brilliantly. And you can see the concentration of infrastructure around the energy sector that is focused on Scotland then comes down the East Coast Of England and and into East Anglia and the like as you move from SSC and Scottish Power and down into international group territory.

10:50 That sort of rolls along over the next three, five, seven years, but we'll start in earnest very much in 2025. We are we have been busy finalizing frameworks with some of our key customers. The Albion deal opens up one of the very, very large market leading tier one contractor that I'm not gonna necessarily name on this call. We're we're in negotiations that VAN ELLE were not so well positioned as Albion are. And we have two schemes on-site already in Scotland now, and we expect to be starting more in early twenty twenty five. In in in partnership with Albion, even during the during the the period of the acquisition, we came together to jointly bid a major ground investigation scheme that we would not have been able to bid on our own. This with our strategy of techniques team with resources from now being blended in and fronted by

11:52 Jim King, our MD, in terms of relationships. So we knew very early on this was gonna open up more doors than than it might look like just on a just on a financial appraisal, and that that does appear to be the case in terms of customer reaction so far. So we're going into 2025 and for us, '26, you know, soon after with a lot more confidence or ability to access more than our normal market share of the opportunities in Scotland, which will dominate,

12:24 you know, a a big part of our strategy for the next for the next three years or so. And then, well, as I say, we'll we'll we'll continue further as we go down the go down into into the Northern England. Okay. That's it. You'll be pleased to hear not too many slides. We're we're we're very excited about the whole thing. I think it's probably a fit.

12:47 We've got good reaction so far from customers and and from the wider industry. So we're happy to take any questions. Super. Alright. Well, thank you, Mark. Thank you, Graham. I'm just looking at the questions. Please do continue to submit questions using the Q and A tab. First question from John. Are there any potential long tail liabilities from Albion's past contracts on some highly technically demanding projects? Well, that's been one of our topics during due diligence, as you might expect. We've we've had quite a sizable team on due diligence on commercial and legal aspects. We're very familiar with what Albion do. The only thing that Albion do that we don't do is is is the blasting that I mentioned, but that is not permanent work.

13:32 That's creating temporary what's called temporary work, so there are no liabilities associated with that. The other stuff, very familiar to us, nothing out of the ordinary at all, not not not identified any long tail or even short tail liabilities from the work they've done. They seem they they appear to be very, very capable and highly regarded, technically adept, So no issues come to our attention whatsoever. Probably worth also saying that we've cast our eye over the insurance program that they've had in place. So a a robust program of insurance broadly similar to what we've got here. We've made sure that was comparable to the risks. We'll also run LPN as a subsidiary company for the foreseeable future, and that's the ring fences.

14:22 Any, you know, any any potential risk that they have has marked a very strong track record. And certainly in recent years, no no notifications of of material problems or claims. Great. Super. The very good safety record as well, which is which is pleasing. So, yeah, very, very few issues came up in due due due due diligence. And, of course, when we did the DD, we we learned from the the previous two acquisitions that we've done in terms of, you know, looking in more detail at certain areas. So we're we're we're getting we're getting a little bit more experience ourselves as well in terms of some of the areas to look at. So we got through the whole process very smoothly, actually. We're very pleased. Yeah. Super great. Alright. Well, slightly offbeat, but Ben says, any comments or thoughts on yesterday's budget?

15:15 Okay. I think I mean, I'll make two two quick observations. So we're still obviously assessing the impacts and the, you know, financial financial impact to businesses. It clearly wasn't a budget that's favorable to small, medium sized businesses. And and so I I think there there there's a positive there, which is one of the the impact on AIM was probably not as great as it could have been. So the IHT relief IHT funds relief was was not sort of dealt with as strongly as it may have been. So we're reasonably pleased. The AIM market seems to have been pretty stable.

16:01 But, of course, we've got a challenge on on wages with National Insurance, which whichever will be will be wrestling with, which is, you know, obviously, there's a 1.2% increase as well as the reduction in the the threshold when it kicks in. So we've got to we've got to put some serious thought into that over the over the next few months before it kicks in. On the positive side, transparent route upgrade is looks like it's gonna be backed has been backed. We're expecting that the sort of stuff we've just been talking about is full steam ahead. We're also waiting, of course, for final regulatory decisions on the AMP8 water programs. But, you know, the spend, at least, that we were hoping for in infrastructure and housing looks like we can we can, you know, plan on that basis. That's great. So we'll have to mitigate the the cost impacts, and and, of course, we'll have to pass some of it on. But at least the the the tailwinds from the markets that we've been talking about look like they should be available to us. Right. Yeah. And as many investors will be on this call, they will have will have witnessed yesterday the the positive reaction by stock market shares when the moderate tax changes were announced. Mark has just asked, and you have touched on this. I don't know whether there's any more you can add, but what is the condition of the Albion fleet? What is average age and reinvestment need? I don't know if there's anything more.

17:24 I know you have touched on it. Yeah. We're pretty happy with it. It's it's younger on average than our existing similar rigs, well maintained, good yard facility, good workshops, good fitters, good operators. Very happy with it. No problem at all. Not expecting major reinvestment needs. We will be growing the fleet because we see so much more work ahead of us over the next few years. And this this is this is a great sort of base baseline to to move on from. And what Albina have done as well is to invest in recent times having seen the market coming, particularly in the energy sector. They've they've reinvested in in a a number of rigs. So we will have we will inherit a small amount of higher purchase, but along with that comes, you know, for but in particular for relatively new rigs. So they've seen the market coming. They've invested up front, and and we're obviously, you know, we're obviously inheriting that that position. So I don't think there'd be any great need to sort of immediately replenish the fleet. I think the combination of VAN ELLE plus of our existing fleet plus RV's fleet will work very well together.

18:36 Yeah. Great. Okay. A question from Bruno, also slightly offbeat, but I guess we should see if we can address it. Are you seeing a pickup in work to house building and commercial building in The UK? House building, yes, we are. And we we put an update around that a couple of months ago, which was well received, and that momentum has not reduced. So, yes, we're pleased with the with the pace of recovery that we're seeing in house building. Not seeing so much in commercial building and the the regional construction markets just yet, I have to say. It's worth noting that particularly in in the major cities, there's an awful lot of construction pipeline delayed by the the building safety act and the approvals that need to go with that, which is a, you know, a a multi a multi gateway process post to control the building standards.

19:42 There's a lot there's a lot held up in that, which is in the public domain. I think the government have made some updates on it, need more resource in in the in the planning stages, but that will come. And when it does come, I think we're gonna see a a rush again of getting some of these taller buildings going as everything over over seven stories. Great. Okay. Super. Alright. Well, look. That's that's very helpful and concludes the q and a. Thank you, Mark. Thank you, Graham. Could I ask you just to close this? I think. Was that from Paul? Yes. Did I hear you correctly when you said that you have sales in Scotland of 6 to 8,000,000 currently, but anticipate 35 to 40 in a few years' time? Yes. It's a simple answer. Yes. You did. Paul, you heard me correctly. Yeah. Right. Okay.

20:28 Could I ask investors not to close this session as you will now be automatically redirect redirected for the opportunity to provide your feedback? If anyone has further questions or would like additional information on VAN ELLE, please do get in contact via VAN ELLE at walbrook pr dot com. Many thanks for attending today's presentation.