Van Elle Holdings (LSE:VANL) — Results for year ending 30 April 2021 and prospects

0:05 Good afternoon, ladies and gentlemen, and welcome to the VAN ELLE results presentation and update on prospects. To start with, if we could cover a couple of housekeeping items. Before we begin, we would like to submit the following poll, which you'll see on your screens. Throughout this presentation, investors will be in listen only mode. However, questions are encouraged and can be submitted at any time via the q and a tab situated on the right hand corner of your screen or if anyone has dialed in via VAN ELLE at Warbrook PR dot com.

0:38 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 submitted today and publish responses where appropriate. These will be available via your investor me company dashboard. Finally, we would like to remind you that this presentation is being recorded. I'd now like to hand you over to chief executive, Mark Cutler and chief financial officer, Graham Campbell. Mark, Graham? Thank you, Tom. Good afternoon, everyone, and for Graham too. I'm gonna run through a set of slides that you may have already seen. They are the investor slides that we've been talking through during the course of this week.

1:24 And they follow a fairly familiar routine of a quick overview of FY 'twenty one. Graham is then going to talk in a bit more detail about the trading financial performance. And then I'm going to come back and talk a bit more about the strategy and the overall outlook. So in overview, we've had the second year of pretty challenging trading impacted by COVID. Just by the slight misfortune of the timing of our year end, we got hit hard in the last six weeks of FY 'twenty. And of course, Q1 of FY 'twenty one was also impacted, in particular, by site closures starting to reopen during the course of Q1 and various lockdowns throughout the year.

2:19 The good news is that we managed to hold our revenues, I think, pretty well, in line with last year, approximately £15,000,000 down on what we believe we would have done without COVID impact. And in summary, we've come through the year in resilient shape, ready for the opportunities ahead that we are seeing more clearly than any time in my time in the company. The trading, in summary, was very much a matter of quarter one to quarter three sort of recovering out of COVID quarter four, resuming the sorts of activity levels that we're more familiar with having come through the winter period as well.

3:04 And that momentum, as I'll come to you later, has continued, if not increased further through Q1 of FY 'twenty two. All of our divisions are performing pretty well and certainly back to almost near capacity in some cases, except rail, which has got a great team. We've retained all of them, but not yet back at the levels that we expect and certainly well short of what we're capable of. But very positive signs now, more so than in a long time, of key opportunities coming through in line with the areas of investment from Network Rail, in particular, that we've been talking about in previous presentations.

3:54 And we have clear opportunities now, a waiting award and a pipeline that gives us significant additional confidence than last time we spoke.

4:05 So all in all, FY 'twenty one, a small loss, not dissimilar to last year. It's been contained relatively well. You'll see in our financial results a much reduced level of non underlying items as we've tidied up the results. We've taken through a very, very clean set of results with a straightforward audit, no particular challenges, and we feel we've got provisions and reserves in the right places, as you would expect, for a business that's being prudently run. The balance sheet has been strengthened significantly during the year. As you'll be aware, we had the placing at the end of FY 'twenty as COVID started to really sort of concern many businesses, and we protected on the downside scenarios.

4:59 And we maintained that cash position and that cash benefit going through the year, but also supplemented our liquidity headroom with a facility, pounds 11,000,000 asset based lending facility, which remains undrawn, and we don't expect to draw it, quite frankly, in autumn of twenty twenty. And that rate remains in place with ABN AMRO. So we continue to have a good cash position. We're generating cash off our current trading performance. Debt is coming down, as Graham will talk about a bit more in a minute. And our confidence is further underlined by an acquisition that we made, you may have noted, on the first of April of this year. It wasn't an April fool's joke as some people thought at the time.

5:45 It really was a a very positive move, one we're delighted with in terms of its performance. And Screwfast, now very much part of VAN ELLE and contributed very well to the opportunities that we're jointly creating and responding to and jointly bidding in an integrated fashion, as you would expect. No dividend, perhaps no surprise there for FY 'twenty one, but absolutely expecting to reinstate a dividend for FY 'twenty two based on forecasted results. And just to underline what I said earlier, we remain very much on track for what we've put out into the markets for FY 'twenty two. Okay. Thanks, Mark, and good afternoon, everyone.

6:30 Let's take, as usual, a run through the, the results for the year, a quick turn through the the divisions, and then I'll finish off with a bit on the, balance sheet and, and the cash flow position. So I think Mark's covered the the revenue. I won't go into too much detail there other than to say that in q one, of course, we are exposed heavily to the residential sector, and you'll be very familiar with the house building activity ceasing in April and taking a number of weeks, if not months, to to return back to normal. So huge impact actually in quarter one. And, and the secondary lockdowns in quarter three also

7:12 particularly around the time winter where we see seasonal challenges, weather challenges as well as a degree of Brexit uncertainty. So actually pleasing really to get revenues back to the level, comparable with the prior year. You'll see a slight decline in the in the gross margin year on year, and that's largely around some challenges with operating under the new site procedures with with COVID in place, but also mix. We've talked about rail and the rail recovery, not quite not quite there yet. And that that means that rail, where a very specialist skill set, is at the upper end of our our margin range, and that hasn't bounced back. So we are still seeing a slight pull downwards on the on the margin.

8:00 As Mark mentioned, low, levels of non underlying items, which I'll just touch briefly on the next slide, But all in all, a broadly consistent result despite 15,000,000 revenue shortfall year on year really caused by the site closures. In terms of non underlying items, just put this here really for everyone's clarity. Nothing of note other than the disclosure of share based payments, which we've historically reported as a non underlying item, and a fairly modest acquisition cost for Screwfast, which clearly is not in the ordinary course of business. Division by division, general piling, you'll see a decline in revenue of 7% and very challenging market conditions, of course, and and impacted by COVID through the course of the year, despite the decline in revenue, pleasing to see a profit, albeit not where we want it to be, of course, at naught point 3,000,000, but turning a a profit in the period.

9:05 And really, that's around, delivering operationally, better than the business has done previously. So in the last couple of years, a few a few contract challenges, and we've worked very hard to strengthen our operational and commercial capabilities, making sure we're delivering contracts to expected margins and tendered margins. I'm pleased to see that bouncing back. In Q4, the General Piling division has returned to a high level of activity. Again, not quite operating at capacity, but certainly busier than the first three quarters of the financial year. Our specialist piling and rail divisions, I'll talk through them separately. Specialist piling was the part of the business that has recovered the most quickly and has stayed strong, right the way through the majority of the year and indeed continues to do so into FY twenty two.

10:00 Broadly, Specialist Piling and Rail is split, two thirds revenue, Specialist Piling and one third Rail currently. And the Specialist Piling division has traded profitably right the way through, certainly in the latter three quarters of the of FY twenty one and has a good strong order book looking forward, into the next three to four months already. So it's an area of the business that we've continued to look at, in terms of future investment. We've invested in three rigs in, in the third and fourth quarter of the financial year as that confidence, resumed. Braille division, again, as Mark mentioned, still showing subdued revenue levels than than we would like to see, and certainly, the the business has seen hasn't seen for a number of years now broadly the same revenue as we've had over the last, two to three years. But we are starting to see some improvements in in tendering activity around a few significant contracts.

10:58 And in areas that really the rail division can deliver in, which is particularly around signaling electrification works on the rail network. And we've got we've got a very highly skilled workforce, which as Mark mentioned, we fully retained. So we're in a good place when the market does return to service all of those contracts. In terms of ground engineering services, the smaller part of this division is our Strata geotechnics, our ground investigation business, approximately 5% of group revenues overall. So a relatively small part of the group, but an important one nonetheless in terms of our end to end solutions. And that business has continued to trade relatively stably through the financial year and importantly was awarded a place on Highways England's four year national ground investigation framework.

11:49 And that hasn't yet started to deliver significant revenues, but we do expect future to look brighter in that regard.

11:57 The housing division forms the balance of revenue in this division. And the recovery has been stronger than we anticipated, certainly with quarter one and all house building ceasing for a period of several weeks. That recovery progressed through the second quarter. We've returned to pre pandemic levels by the end of the second quarter, and indeed, that's continued right through the third and fourth quarter and into into FY twenty two. So a huge amount of activity going on with house builders, a lot of new build sites, and we've we've got a very healthy looking order book as we move forward into the the second and third quarters of this new financial year. So it is, of course, at the lower end of our margin range, as you will be aware, and having having to compete against traditional foundation techniques.

12:52 But we're working very hard on efficiencies, making sure that we maximize that margin that we can achieve through our own what we can control, which is our own delivery of the contract.

13:05 In terms of the balance sheet, I I think, an important area that we've we've made good progress on the year in, as Mark mentioned, capital raised back in April 2020 just before the end just before the start of the financial year, and then the refinancing with an 11,000,000 facility in October 2020. So we put ourselves in a position of having a healthy, cash position and a a good RCF headroom facility for for future growth. And as our revenues grow and we need further working capital, that provides us with a nice buffer and headroom. The only thing I'll pull out of this balance sheet slide, I think, is to mention that you'll see the working capital increase year on year, and that was really caused by a significant decline in April 2020 as as revenues dropped off the edge of a cliff with the onset of the first lockdown.

13:58 So we saw a 175% cash conversion metric in in FY twenty. And, of course, as business levels have returned and we've had to reinvest back in working capital, we've seen the reversal of that, of of that position. So a little bit more to come in terms of, working capital growth post year end, from the 6,900,000 that you see there, but, but broadly, the majority, we have returned to normal levels, and that's broadly back to a normal working capital position. The net funds, again, in terms of balance sheet strengthening, we've continued to pay down our higher purchase liabilities. And we've got a combination within the lease liabilities line there of higher purchase debt, which is true debt, and then the accounting treatment for for longer term leases for for properties and vehicles.

14:48 And of the 9,400,000 that we carry forward, that's effectively split 4,000,000 of higher purchase true debt and 5,400,000 of of lease liabilities as they're accounted for under IFRS 16. So the 4,000,000 that we have remaining, I think, is the certainly the lowest the group debt has been for a very long time. We've we continue to pay that debt down. We want to be a low debt business with with a low level of risk on the balance sheet. And indeed, if we carry on paying the higher purchase down at current rates, then we'll be down to about one to one and a half million by the end of this financial year. And of course, that will have a positive impact on on free cash flow. With the acquisition of Screwfast, we came they came on with 800,000 of of bank loans, which you'll see has appeared in the first line of the table, and another 500,000 of of higher purchase debt.

15:41 That's broadly offset by the cash that was acquired with the business. It was almost on a cash free debt free basis, but the that obviously adds to our our our short term debt position. But overall, I think we're in a very comfortable position. And if you look back at what the group debt levels were two to three years ago, they were much in excess of where we are today. And the final slide for the finance ones is just the you'll familiar with this one from the last time, which is just the bridge from opening to closing cash year on year. And you can see there the the red bar, the second the first red bar, sorry, the is the unwind of the working capital that I just referred to, and the other large red negative bar is the pay down in the higher purchase liabilities. So, again, important that a lot of the cash that's been generated in the year has gone towards, repaying that that HP debt.

16:31 And, of course, that number, as we as we pay that further down, that number will shrink and create more, available cash. I think the other items are fairly self explanatory, I won't go into those in in any detail. I'll just note that on the tax refund, you can see there 1,400,000 inflow, and that's really around, reclaiming for tax r and d, claims and also carrying back some of the, some of the losses against prior paid tax, which we've ended up with a a positive inflow through HMRC repayments. So I will hand back to Mark to to wrap up on the strategy and and the outlook. Thanks, Graham. So during the year, we've we've we've still kept pushing on with the strategic actions that we needed to take rather than waiting for just COVID to ease.

17:22 And a couple of important appointments as we've strengthened and, I think, pretty much completed the key appointments in the management team. Andy Rigott joined as commercial director in January, and so did David Buckley as rail director. And they were both important appointments in terms of areas that we wanted to strengthen. Firstly, Andy, to support the continued commercial improvements around the business and our more sort of confident approach to some of the larger contracts in general piling. You might remember a couple of years ago, we were having real commercial difficulties period after period. I was just sort of apologizing for some challenges in that part of the business. I think we're in much stronger place now in general piling from an operational commercial performance point of view.

18:14 And David Buckley joining in Rail to really lead the development of the business into this next phase of growth. We're trying to judge the timing according to when the market was ready, and I think we got that about right. David's a very bright guy embedded in the rail industry with the sort of connections that we never had before, quite frankly. So it all has helped to increase the level of engagement ahead of the sorts of opportunities year. To And invested in additional rigs where we've seen sustainable growth opportunities and high returns on the capital potentially invested.

19:02 And primarily, that's been in the specialist piling area. And as you've heard, they've had a very strong resilient performance through much of FY 'twenty one, and that continues. And we'll continue to support them with rigs accordingly. Resources, slightly more difficult to find for with those specialisms, but we've a very strong brand name, and we are capable of attracting and developing good people in those specialist areas ultimately. And also, we're still mindful of cost reduction and efficiency opportunities. So although we are investing in growth because we are now increasingly confident of growth coming through, we are still looking to trim and prune the business where appropriate.

19:55 The property portfolio,

19:57 it's timely to tidy that up a bit. So we've pulled out of our Eastern offices. We don't need an office in Norfolk. And we also have completely moved out of our Pinkston office in the Midlands, which we will look to dispose of next, maybe not this financial year, but certainly in the near term. And the kind of rationalization of our operations in Kirkby and Ashfield has gone really well. One of the things I'm most proud of is is co locating everyone together, really allowing people to see for themselves the benefits of integrated working, open plan offices. They haven't been full yet really for a long time, but nonetheless, the mixing and the collaboration, the buzz in the in the business is much different than the company I joined in in August 2018.

20:48 Supporting that, we we changed out our HR team last year, and that's starting to have an impact in terms of the support we're giving people for training and development and also our employee engagement activities. A lot more communication going on. Every two weeks now, we've got a lunch and learn training session with with with good levels of subscription to to help educate people about things that go on in other parts of the business that traditionally was done in silos. You know, we do try and encourage sharing and movement of people now a lot more than ever before. Two months ago, we launched our online training system as well and supporting the sort of building back of our training activities, which have been shut all the way through COVID, of course.

21:37 And so we are trying to invest in people more and more. We still have a good level of apprentices coming through over the 5% threshold that we see as a benchmark. I think we're going to have to opt that going forward with the resource needs that we've potentially got. And Graham has spoken already about debt reduction and the importance of that and the, of course, the relevance of the Screwfast acquisition, which fits perfectly into our highways and railways and potentially housing operations. It brings a power sector presence that we didn't have as well. And the the brand of Screwfast is actually opening doors for VAN ELLE even though it's a subsidiary within the business. It's really worked probably even slightly better than I'd hoped, and, and the team are are thoroughly happy with a new home in in VAN ELLE.

22:29 So so really pleased really pleased with that. So looking forward and and just reflecting on on how we're going in f y '22, we're we're doing well. Trading continues to be very positive. We've completed our Q1

22:49 reporting now, slightly ahead of what we set for ourselves. Pleased to say we're very encouraged by all of the divisional performances. Rail is not losing money in case that was a question that anybody wanted to ask, but we are, of course, now on the verge of as well of growth in the rail division, which will be the final most important plank of of the recovery for all of our divisions. Excuse me. We've got a strong pipeline of of

23:22 activity in electrification and the wider c p six program, in metro programs as well. Midland metro is quite an important area. And some niche areas that combine with with specialist piling for some really complex geotechnical stuff in sensitive areas, which I hope to announce soon given their importance to the group as they come through. We do, of course, have supply chain challenges. You know, it's widespread in the in the industry. It won't be a surprise to hear us mention this. So far, we've coped with them operationally within the the local project teams, but they have caused delay. They've caused additional cost, put a bit more risk and strain on our teams to to, you know, maintain productivity, but we have overcome them.

24:15 But we're we're we're very conscious of it. In Scotland, for example, you can't get ready mixed concrete without placing your order four weeks in advance.

24:25 You know? But we do have a batching plant in Scotland and a batching plant in England that we can divert concrete from that feeds our factories. So there's different ways of working around these things. We're buying additional ready mix truck mixes for our own fleet. We already have two, and they're invaluable when when supplies are at a premium. We're going to make sure we're less dependent on the ready mix suppliers going forward on that basis. We can protect ourselves against steel price increases, by the way. We negotiate our new contracts, and we've got

24:56 price adjustment mechanisms in our longer running contracts, which we didn't have a few years ago. So there's lots we can do and we are doing to try to protect ourselves. I think we're past the worst of self isolation now. Thank goodness. But for the last few months, we've had quite heavy disruption of our gang structures, operational sort of competencies that need a blended team. We don't have specialist skills just waiting to to to back up with substitutes. So that's been difficult for us with agency workers and and in some cases, not being able to meet our our mobilization dates because the gangs are are not not able to to to come into the working environment. But that that now looks, thank goodness, a bit bit healthier.

25:50 I've mentioned ScrewFast. High hopes for Screwfast achieving their their objectives this year, and they're, of course, focused on an earn out arrangement, which which works very well for the group. And the team, you know, should should achieve somewhere,

26:07 we think, partway between between their historical run rates and the maximum of their earn out, which exactly what we would hope going forward. And they're very, very excited by all of those prospects that are coming through now as part of a wider group. And that has helped support the order book growing a bit. Screwfaster won a good chunk of smart motorway work. The wider group has also been very successful in housing contract awards and continue to do very well with housing sector work winning. And as I said earlier, more than once, we expect some rail and infrastructure schemes to come through soon, including big bids that we've got in for the Smart Motorways Alliance, which I have mentioned on previous presentations, is a fundamentally important strategic move for us as the smart motorway delivery in the in England moves to a ten year alliance.

27:03 And our plan and our bid is to be the leading geotechnical partner within that. So touchwood, we'll know about that in a few weeks. So all in all, we are pretty confident that we can meet our market expectations for FY 'twenty two. It's too early for us to translate the positive start into anything slightly more ambitious just yet, But we'll be giving a trading update on the September 27 for our AGM. And hopefully, there'll be some news flow on contract awards before then, too. And of course, at the half year, we'll be in a better position to assess where we are taking into account the winter months, of course, where we will always have a dip.

27:49 And we'll see where we are with the rail market coming back as we've been describing. But all in all, taken in the round, we're pretty confident with the progress that we're making towards our midterm financial objectives that we've talked about before. And in fact, to summarize again in this slide pack on Slide twenty nineteen, which in summary are 7% to 8% operating profits and 50% return on capital. We stand by these. We believe these will be in the period FY 'twenty four to FY '25. Not going to pin it down more accurately than that yet, but definitely in that in that time frame. So we think we're moving in the right direction.

28:39 Thank you. That's me finished. Alright. Thank you. Thank you, Mark. Thank you, Graham. So if we could just turn to some of the questions, we've had a number submitted ahead of the presentation. However, please do continue to submit your questions using the q and a tab situated on the top right hand corner of your screen. I'd just like to remind everybody that this that there will be a recording of this presentation along with a copy of the slides and published q and a that will be accessed via your investor dashboard in due course. Additionally, your feedback is important to the company. So immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback. While you're submitting questions, maybe we can look at some of those that have been submitted ahead of the event. In fact, there are a number of questions that that you have indeed addressed through the the course of the presentation. And I I I just point out the the question from Andy referenced supply chain issues. I I think we've we've covered that in in a bit of detail.

29:39 And there was also a question in respect of your medium term targets that you set out. But maybe I can just combine a couple of them together because there were two questions which related to your return to profitability, and and that probably blends slightly in with those medium term targets. So will the group be able to return to previous levels of profitability? And I guess that relates also to your medium term target goals. So by previous levels of historical profitability, you know, we're quite mindful that the group reported, you know, quite a quite quite extraordinary results in and around two thousand sixteen, twenty seventeen. Performance was not evident to me in 2018 when I joined despite very high budgets and expectations being set.

30:33 I think when we look back, it's pretty clear that we benefited from premium margins and profits from the great Western electrification in rail, which was a time where it's fairly chaotic procurement, and VAN ELLE did extremely well out of that, not through anything that we did that wasn't contractually sort of appropriate, but we just benefited from the sort of premium returns that I don't think are ever likely to be repeated as procurement has tightened up and lessons have been learned. But it is true that for us to achieve upper end performance, and at the moment, we're saying 7% to 8% operating profit, which, you know, some might argue is short of what we've achieved before, but we believe is a realistic reflection. And there will be times that we could do a little bit better than that in parts of our business.

31:33 But we do still need, you know, a good healthy mix of rail work mixed with specialist piling and general piling and housing. And that blended mix of revenue and profit profitable returns from those different sectors gives us an optimum result that we haven't yet been able to deliver because that mix hasn't yet returned. But we believe it will. And that's where that margin target comes from. So pretty confident on that 7% to 8%. We might be able to do better if things go very well, but we won't be over promising that at this stage, clearly. And I think that's still a you know, very sort of, you know, strong performance level combined with the return on capital range that we've described as well.

32:24 Great. Okay. Appreciate that. We've got a couple of questions in and around the m and a stream. So one, in fact, is in relation to Screwfast, which asked and I appreciate you touched on this already, but asked whether Screwfast is now integrated and whether you are seeing synergy benefits. I don't if there's anything you can add to that, but there was another question which we might just just align with it, which is touching on your view on m and a and your enthusiasm for it, suggesting, I assume there are some interesting opportunities out there, whether you combine the m and a theme together there. Yeah. We get asked this a lot. So I think it's fair to question whether, you know, after the successful integration of Screwfast and demonstrating that it can deliver what we we assessed, know, really that ought to give us the confidence to go and, you know, plan a further sort of pipeline of suitable targets. The truth is, you know, we're still in that period where we're we're making sure that we've we've delivered on what we set out to do with Screwfast.

33:33 We're not we're not racing ahead yet with a with a pipeline of others to immediately follow, and we don't have firm targets that we're we're pursuing at all. We but we are assessing incoming opportunities, which which are out there. You know, we've seen a couple of smaller companies struggle and and have approached us, but they don't don't fit the areas that we would classify as being strategically important. We would, in the event of future acquisition, focus on bolt ons in a similar fashion, high margin areas where we can address a gap or a strategic growth area faster than we can do it ourselves, which is exactly what we do with Screwfast and probably, you know, concentrate on the areas of specialist piling and rail and strata for for slightly different reasons in all of those areas, but those will be those will be the parts of the business that we would be narrowing our targets down to.

34:40 Great. Okay. Super. And a perennial investor favorite in and around the dividend. What is the level of dividend cover that you would be targeting when you restart paying dividends? Graham, do you wanna do that one? Yep. I think it's we need to bear in mind it was still in the recovery period returning back from COVID, and it's it's very difficult, I think. And we've we've had a number of discussions as a board around dividends, but certainly haven't formalized anywhere near locking in a level of dividend cover at at this point in time. I think, you know, where we're at is that we have a desire to return back to paying a dividend having got through COVID and but but that will return at the point that we have enough confidence that that we are absolutely going to deliver to market expectations.

35:33 And what that means and and the the sensible time to have a further discussion on that, I think, is at the time of the interims. We'll know at that point what the half year looks like. We'll know how the winter has has panned out. And as Mark said, we've got a a good degree of confidence that this year's market expectations will be delivered, and then we'll have a very serious discussion about what the what the dividend looks like moving forward. But I wouldn't prejudge my colleagues on the board's views on this, which we've we've we've really started to our big focus has been to come out of COVID as strongly as possible, which we think we have done. And then as we return to dividends, we'll we'll explore this in a good deal more detail moving forward. Great. Okay. Very sensible. Great. Super. Thank you. So thank you, Mark. Thank you, Graham, invent for updating investors today.

36:19 Could I ask investors not to close this session as you will now be automatically redirected for the opportunity to provide your feedback. If you're accessing accessing this meeting from our website, the feedback page will appear. If you accessed it from a link, you'll be sent an email asking you to log in to submit your feedback. If anyone has any further questions or would like additional information on VAN ELLE, please do get in touch via vanel@walbrookpr.com. And, alternatively, many thanks for attending today's presentation. Speak to you soon.