Van Elle Holdings (LSE:VANL) — Acquisition of Rock and Alluvium

0:02 Good morning, ladies and gentlemen, and welcome to the VAN ELLE presentation on the acquisition of ROC and Alluvium. Before we start the presentation, we'd like to submit the following poll. Investors will be in listen only mode. However, questions are encouraged and can be submitted via the Q and A tab in the top right hand corner or via VAN ELLE warbrookpr.com. The company may not be in a position to answer every question submitted today, but we'll review outstanding questions and submit responses via the

0:32 IMC platform. I'd like to remind you that this presentation is being recorded. I would now like to hand you over to chief executive, Mark Cutler, and chief financial officer, Graham Campbell. Mark? Thanks, Tom. Good morning, everyone. So this morning, we just want to run through a fairly brief set of slides to explain the announcement yesterday regarding the acquisition of Rock and Illuvium and the wider trading arrangement with with Galliford Tri. And I'll just talk through these fairly quickly. Hope you can see the slides on the screen. They might be a little bit small. But, effectively, we've announced that we've agreed with Galliford Tri subject to completion accounts, which would and and a a process that would take a couple of weeks with the workforce to acquire a 100% of the share capital of Rocket Alluvium Limited, a well established piling specialist owned by Galliford Tri for, quite a few years. We'll come on to a bit more background on them in a second.

1:37 And simultaneously, a five year trading agreement with Galliford Tri to assist them in the delivery of their internal workload for piling and geotechnical works and indeed ancillary civil engineering works where it's complementary to to to those foundation activities. And and the logic to this is they would have used Rock and Illuvium for this if only Rock and Illuvium had the breadth of capability that we did. So it, you know, it kind of builds on those internal relationships as well as opening up a wider much wider pipeline for us within Ganford Tri than we've we've ever had before. As you as you know, Ganford Tri are 1,600,000,000 turnover UK construction group covering infrastructure and and the building sectors, that fits very well with our core capabilities.

2:25 The consideration is effectively in line with the net asset value of the business. You'll you'll know from looking at results that Brock and Illuvium have not been profitable in recent years. But if you look back a little bit longer, they have been particularly profitable, and that that it depends on revenue growth. And because they have a fairly narrow band of specialism around CFA piling, they haven't got the opportunities to to offer the breadth of services that we have. So we we value the business on the asset value, and that's that's the consideration that we've agreed after a due diligence period. And that's spread across two payments twelve months apart as as shown. We we get to complete completion accounts. I say that will probably take another couple of weeks, but we're not expecting any complications at this stage at all. The sale of purchase agreement is is is is with solicitors as agreed. All our due diligence has been completed, and, we're very, very happy with the the, you know, the arrangements.

3:28 We should be completed by mid November. So established in 1963. So this year, they are 40 years old. Sorry. Sixty years old. We're 40 years old next year. Rock and Lovium are 60 years old. So a well established business. The current management team are are also long serving. The managing director's been there seventeen years. He's well known to us and to my team as indeed are several of his senior team. They have a head office in Surrey, Leatherhead, and an operational base in Kent at Thorough, which suits very well our sort of regional footprint plans for for London and the Southeast, and not just for this team, but for other opportunities that we've got in the Southeast, not least some of the rail frameworks that we're bidding.

4:20 Rock and alluvium concentrates primarily on residential and commercial and also a a growing pipeline within the in the sort of public sector, government building schools in particular.

4:35 You might ask, is this good timing to invest in in a business that is is quite strong with London residential? Well, we are already seeing signs that that market is coming back. And, of course, we know there's a structural supply shortage of residential stock, and so it's been part of our strategy for some time to be stronger in the in the South and Southeast for housing, but also our other our other activities. Strong reputation. They're very well known in the industry, well regarded, and very well regarded by their customer base, which we don't have the same access to. We've done some careful mapping of this. And although there's some household names there, we rarely appear on the on the tender or preferred bidder list for some of the London based major customers that they have had long relationships with. Very experienced team and a workforce very similar to ours, directly employed, a lot of long service, very, very, very similar model in in many respects. So it's a it's a good cultural fit, we feel, with all the discussions that we've had, and we're not expecting any difficulty with the GP transition in terms of the the terms and conditions at all.

5:48 And, importantly, they've got a well invested rig fleet, a little bit younger on average than ours. So we see this also as a as a CapEx mitigation opportunity because those rigs will slot straight into our capability. We'll use them to a higher degree. We'll we'll increase utilization, we think, quite significantly. We won't, of course, just limit them to to rock and alluvium type works in London. They'll become part of our national fleet, and it allows us to dispose off some of our older rigs.

6:21 And we believe this this will mitigate a million pounds per annum of CapEx for the next three to five years of of investment that we'd need to have done anyway to replace some of our older older fleet. So very familiar with the rigs. We have the same sorts of rigs ourselves. Ours are very busy and have been worked quite hard for the older ones in particular. Graham, do you just wanna touch on the rock and alluvian financials very quickly? Yes. Thanks, Mark. So as as Mark just touched on, the the last few years have been a little bit more challenging for the business, mainly around a reduction in revenue through the through the pandemic and then a little bit of disruption around the market in the last in the last twelve months.

7:06 But, I mean, the business, if you go back and look sort of seventeen, eighteen, two thousand nineteen, you find the business with a very healthy profitability. Some challenges, I'll say, during the pandemic. But all of the losses that have been posted in the last sort of two to three years relatively modest. And mainly, it is around that that revenue decline. When when the business is operating up around 20,000,000, it's been it's been very profitable. Around 15,000,000, it's it's as you can see there, it's it's close to breakeven over the last over the last twelve months. We feel that with VAN ELLE's broader capability and the contracts that are broader than just CFA piling, the rock and alluvium VML being able to participate in tenders with broader capabilities and just CFA piling, That should allow us to drive significant revenue uplift from from where they've what they've delivered over the last two to three years.

8:03 In terms of net assets, if we take out cashing into company, which the deal which the deal does, of course, exclude, The if you look at their accounts, you'll find a a a very different number, but but a significant balance on the balance sheet as an intercompany debtor. Stripping those out, you see from the as Mark mentioned, 3,800,000 acquisition cost as at June, which is their last set of accounts. They are still in draft form, by the way. But the the net assets excluding cash and intercompany was 3,700,000. So to Mark's point broadly, we valued the business on a on a net asset value basis. Importantly, again, just sort of touching on Mark's point there around the residential sector short term challenges. Absolutely, they are there, but it is important to say they've got a a strong secured order book. So we are expecting that in the second half of the year, we should start to see an uplift in momentum and prod projects that have been delayed, and we've seen that across our business as well, of course, delayed projects will start to come forward and start to be delivered, and we expect that to happen in the in the second half. And, as I say, that will expect that to drive some momentum as we as we integrate our our businesses.

9:14 Yeah. That's right. So we think the timing's quite good for a and we've noticed as well with with our relatively modest London operations, delays now starting to to turn into project starts. So we think the timing's quite good for this this business to kick on now, particularly sponsored by our wider wider capability and capacity. So we've probably touched on a few of these points around strategic rationale, but it gives us a an immediate Southeast presence that we have never had. And we have several business opportunities that we've been planning for some time in in other divisions as well in and around the Southeast. I mentioned rail. We're bidding we're bidding bidding the Southern framework for network rail, for example, and we'll need a Southern base for that.

10:04 And it gives us a an immediate customer base that we're not currently serving, and we we we would struggle to break into an established player like Rock and Illuvium and and one or two competitors they have that are very, very focused on this particular market. It is the biggest market in The UK for piling, after all, London is. Also, as I've mentioned, we we we assess there are positive short term, actually, and and certainly into the medium term prospects for the sectors that that rock and alluvium are operating in, and we see the same in our in our core business. High quality rig fleet, I've mentioned, mitigating CapEx plans, I've I've mentioned already, and the opportunity to increase utilization of of this fleet too.

10:51 But what we haven't really explained very well yet is the fact that with our additional capabilities, the the the opportunity for rock and alluvium open up significantly. So as Graham said, they they focus very much on CFA piling. Most projects involve at least two different techniques. And and with our ability for rotary piling, deep CFA, sheet piling, driven piling, and smart foot in in the residential sector, the the pipeline of opportunities that Rock and Alluvium can pursue with their customer base that that that they're well established with, you know, is is is very, very exciting. And, you know, our team are ready to sort of, you know, fold into that sort of joint bidding immediately.

11:37 And and that really sits with improving market prospects, we believe, particularly in the residential sector going forward. There are synergies as well. As you would expect, we've been modest in our statements on this so far. But, of course, we've got a synergy plan, and we do expect cost efficiencies both within the core VAN ELLE general piling division as well as potentially within the within the rock and alluvium sort of cost base today, including, for example, the shared services costings that they have from Galliford Tri, some of the operational costs that would be duplicated. We'll look to go with the strongest possible personnel. And if those are more recently appointed people in VAN ELLE that aren't as good as the rock and alluvium guys, then then then that that's absolutely fine because there there is a very, very experienced workforce here. So we're looking to in a a scarce resource sector, we're looking to keep the workforce, but there will be weaknesses in different areas where we'll look to make the most of the skills that we're acquiring.

12:45 The Thorough Depot is is is certainly gonna be useful for us for for other activities, not just the existing rock and alluvium plant maintenance yard. Transport is also very difficult around the country these days. You might know that movement orders are increasingly complex. Getting in and out of London with HGVs and low loaders is difficult. So having that sort of interim transport stop off area for us to

13:13 load and unload rigs and then, you know, break our movement orders down, you know, is actually something we've been thinking about as well rather than running everything from Nottinghamshire, you know, into London, the Southeast when when we are busy in that in that region. And in terms of performance, we expect this business to very quickly fall in line with the margins that we we typically own in general piling. No reason it shouldn't. And and to grow a little bit without too much difficulty and be margin accretive profit accretive in in f y twenty five. We've given ourselves a little bit of breathing space in the balance of f y twenty four to integrate and deal with some of the, you know, synergy work.

13:55 And so on, again, on a prudent basis, we're not going to we're not going to increase forecast for f y twenty four at this stage. But going forward, we're very excited by by the prospects that this will bring. And that's before we get to the trading agreement. So the trading agreement is is goes hand in hand with this. The two are dependent on each other.

14:16 We've agreed a five year arrangement with Gannaford Tri to to effectively be a preferred in house partner for the delivery of their geotechnical piling and civil civil engineering works. It's not exclusive to us. It would have been unreasonable probably to expect that it could be, but we are very, very confident that this will be of of material revenues, and we will be building very strong relationships. And there's a strong trading agreement that's being incorporated into the sale of purchase agreement that that sits that sits behind this and and defines a process that will operate within all the business units within Galliford try to involve us and negotiate with us effectively where where where we can, both parties, to maximize the value that we can bring as well as the opportunity that Galafa Tri can can bring to us. Because the the point here is it's a win win. We can bring significant geotechnical expertise to the early stages of projects and and then derisk them as well as help Galafa try with the best solutions, whether that's cost effective or low carbon or, you know, saving time or winning bids, in a way that they they can't really do at the moment because they're dependent on a a relatively fragmented supply chain. So we become a much closer partner adding far more sort of value than than perhaps, you know, would be would be available otherwise, and we're prepared to, you know, put a lot of effort into making that work.

15:44 It covers all their divisions, and their divisions align very well with our core capabilities. And we know them well as well. I've got personal relationships amongst the senior executive team in Gallifrey Tri. And and our chairman, you might remember, is also the ex CFO of Galliford Tribe several years ago. So there are some good relationships there already in in place. And myself and Bill Hocking, the CEO of Gallifords, you know, we we've known each other for for a fair few years as well. So we're both determined to make this work, and myself and Bill will oversee this trading agreement

16:17 to on a six monthly basis to review its performance and make sure it's working and tweak things if if for some reason there's any local leakage. And I'm sure we'll have those constant sort of, you know, tweaks that are needed just to kind of get everybody to fully buy in because they're a big organization. But for us, it it strengthens certainly our highways pipeline. Galliford have several sizable highway schemes that we probably would have priced anyway, but this puts us right in the sort of effectively in the preferred position. And very importantly, it propels us into the water sector, which is a target growth area for us ahead of the next AMP period where increased investment is is is is well known in with The UK's market leader in the water sector. Gallifers are involved in more of the infrastructure frameworks than any other single company, and that's a core part of their strategy.

17:09 So we'll be we'll be going with them, adding particular low carbon solutions, which is a big driver for the water sector into their foundations and and minor civil engineering works. The the work mix will be blended across general piling and specialist piling. So

17:26 better even than the rock and alluvial business I've just been talking about. The the margin mix here is better because I would anticipate at least half of the work will be done by specialist piling as opposed to rock and ILUVIEN sitting in with general piling doing doing that more sort of open site work. So good margin mix expected from from this trading agreement. And, of course, you know, we'll be agreeing the price together, so it's a low risk model as well without lots and lots of competitive tendering. We've put a prudent assessment of £10,000,000 per annum. I'll be disappointed if this isn't 20 millions 20,000,000 per annum. I think their market internally is is 25 to 30,000,000 of of relevant work, so you can see the size of the opportunity. And, of course, it's subject to performance, and and and so it should be. We've got to deliver and perform and and look after those relationships and add value. There's a balanced scorecard that sits behind the trading agreement that measures all of this that we've designed and and Gallif and Troy totally agree with. So we've got to you know, this isn't this isn't going to be just, you know, us us us getting the work no matter what we've got to perform, which which we we know we can do very well.

18:38 Oh, and that's that's that's us finished. That's a summary of everything. Sorry. But I'm sudden sudden finished. I hope that explains all the key points. Thank you, Mark. Thank you, Graham. It looks like a very neat fit. So a question we have in, which, I guess, looks at the origination of the deal, how did you source the deal? Was it a competitive process? No. It wasn't. It was negotiated after a conversation that Bill and I had several months ago.

19:07 Great. There you go. That's a super sup short answer. Okay. Well, look, I I think that we've covered the the majority. Hold on. Quick question in from Toby. Oh, it's quite detailed. Hold on.

19:23 Yes. We may have to respond, Toby, offline on this because you've got some quite granular financial questions in there, which I think might be hard to address just off the cuff. Would you agree to that, Graham? Is that Yes. I'm I'm happy to Yeah. I think take those offline and and publish. We can publish some answers on those Yeah. Just shortly after the presentation. Yeah. Toby. So Good question, Toby. Back to you on that on we'll sideline that one. One one further question just on m and a strategy. You've now made two strategic bolt on acquisitions with Screwfast Screwfast proving to be a successful deal, what are your aspirations for further m and a, and what does the pipeline look like? Maybe we could just tackle that one.

20:12 Yes.

20:15 So I haven't got an acquisition team working on a a a long or short list of targets at this stage, and we we we are aware that perhaps we need to be slightly more strategic about identifying targets. But within the divisions, we are now identifying gaps and and potential targets that we want to follow-up with further conversations. I've said before, the main the main criteria that we're looking for would include regional expansion, and I said this is exactly, you know, talking to that particular point and niche gaps in our capabilities. This doesn't this doesn't plug a niche gap, but it certainly opens up significant growth opportunities. So so we're we're we're very pleased with this particular model. I wouldn't be surprised if there could be there there could be more opportunities like this where you know, because Gallifords will rightly say that this perhaps is not a business that they can easily grow and and support as a as a general contractor. It's a bit of a it's not strictly core.

21:24 And how do they invest in it and and, you know, turn it into a market leader? Probably quite difficult. So I wouldn't be surprised there are other main contractors that might also have a conversation about a similar approach, and we'd be very interested in in that sort of thing. I've I've long said that, you know, longer term customer framework arrangements is is is the very best way for us to grow our business, and and this is an important a very important part of that. But, otherwise, it would be niche capabilities in high margin areas as well. And so we are still looking at targets in strata and rail and specialist piling, and those would be most likely the areas that we would we would want to bring forward when we find the right opportunity.

22:10 We we still talk to one or two companies at any point in time. And during the course of the last twelve months, we we will have spoken to, you know, six or 10, and and we've done due diligence on a few of them. We've been very selective and quite disciplined about it, and we're probably gonna continue to follow exactly that that pattern. Great. Okay. Couple of quick questions. How much Sam asks how much of Rock and Illuvium's revenues come from Galliford at present? Well, the good news is very little. So no more than 1,500,000. Right. Okay. Philip asked, you mentioned the South being important for rail work. Is there a specific project you have in mind?

23:01 Yes. We're bidding Network Rail's Southern Region framework for c p seven directly as a part of their procurement model that they've created. There's there's a series of framework roles for specialists, which is which is not replicated in every other region, but for Southern, it is we're we're down to the final stages of that. So no no guarantees just yet. It's still early early, I guess. But that would mean that we would be permanently in the Southern Region with Network Rail doing piling and related civil engineering works for up to ten years if we if we're successful all across the Southern Region. So we'll be using the thorough depot for for that as a base, and an office in other head would be very handy too. So we've taken that into account.

23:55 You know, we we haven't secured that yet, but if we are we we have a reasonable level of confidence. But if we are successful, it will fit very, very well on top of all the benefits I've described. Yeah. Great. Okay. So we'll come back to Toby on his question. There's one final question here, which you you you principally covered, which is how will you deliver work arising from the trading agreement? Will you incorporate a mix from the existing VAN ELLE group? I think your answer was yes, but would you like just to confirm that? Yes. We would do we would do, hopefully, practically all of the ground investigation work that kind of are trying to do through Strata. We would do a lot of the open site piling through general piling and using the rock and alluvium team and their relationships that they have too because, of course, they've known each other for quite a long time even though they don't do very much of it because it because rock and alluvium are quite narrow in what they can do and quite geographically constrained.

24:46 And specialist piling and ScrewFast will play a big role here as well. So a lot of work we do in water will be ScrewFast led and work that we do around some of the more complex schemes, you know, the wider specialist piling business will be involved. And our housing division will be involved. So I mentioned SmartFoot in particular, which which, of course, is an important product that the housing division focus on. There are frameworks that Rock and Illuvium have with the likes of Vistree and Barkley and Bellway all in the South and Southeast that we don't have. But don't forget that Vistree was created out of the combination of Galliford Tri's previous housing divisions on both his homes and countryside, And those are all relationships that actually there's quite a lot of synergy there, and we're expecting to to make some progress with those in the in the coming weeks. So the housing division's got a big role to play as well. So almost all of our business, apart from the rail division, because Canifer Tri don't really operate in rail.

25:47 Great. Okay. Super. One very final question from Sam. How much financial scope do you have for further acquisitions? I can take that one, Mark. Look, I think the the reality is that we have been constrained over the last number of years with cash being cash operating cash flow being diverted to repaying our significant debt levels and and, you know, pleasing to be in a position now of having effectively zero debt. We've got about a 100,000 left on one on one higher purchase contract, so insignificant. There are three short term leases remaining that will come along with with the rock and alluvium, so that won't add too much of the debt profile. We sit with very roughly at our low cash point, $1,617,000,000 of of cash headroom and be mindful of sort of normal working capital movements that does constrain us with what we can do without without a further funding raise.

26:44 We understand that. And that's one of the reasons that we focused on these sorts of bolt on acquisitions that can that can hopefully drive drive shareholder benefit without, you know, without stretching the company too much. Again, it's another reason why we've negotiated the the payments over over a twelve month period. So so really, I think, yes, there is still some capability to to drive further acquisitions. They will need to be in the absence of further funding. They will need to be at this sort of modest level. But, you know, could we do something of this scale and size once a year? I think, yes, we've got broadly the the capability to do that, but but not to stretch ourselves much much further beyond that just because of the the headroom that we we maintain. Obviously, noting the point that the balance sheet is an awful lot stronger position than it was four or five years ago.

27:32 Yeah. Great. Okay. So that leads on to this question, which is, are there any gaps geographically or gaps in technologies you still feel you need to add post this acquisition? I don't think geographically, we have any any remaining gaps. This was one that we've long said that we, have identified and would like to do something, about. We have a base in Scotland, a base in the Northwest and the Northeast and the Midlands, and this this complements, you know, all of that very well. You could imagine I mean, the chairman will kill me for this, but you can imagine we might make an acquisition in Canada one day. But we need to give it a couple of years, I think, to to really get up firing on all cylinders, which we're well on with.

28:21 But not in The UK. No. In terms of technology, yes, there are some. Probably, you know, I'm not gonna bore you perhaps now with some of the examples. But, yes, there are some areas, especially around specialist piling and niche skills in rail and and in strata, you know, those three areas I mentioned earlier where we do see gaps, and we could we could provide an even wider offering. And and particularly in rail, reduce the the cyclical nature of the the very niche works that we do by by, you know, blending blending other other capabilities with it, which we do now with civils to some degree, but I think we could we could find other areas as well, and and we we have a list of these things. So in in short, yes, there are in in those areas, I think.

29:07 Great. Alright. Super. That's a lovely place to stop. Thank you, Mark. Thank you, Graham, and thank you all for to all investors for their questions. The feed feedback is important to the company, so you will be redirected post the close of this presentation to provide your feedback. Many thanks for that. If you would like any further information on VAN ELLE, please do get in touch via VANELLE@WarbrookPR.com. In the meantime, thank you for attending, and we look forward to updating you again soon. Thank you.