VP (LSE:VP.) — Full Year Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the VP PLC Full Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time just using the Q and A tab situated on the right hand corner of your screen. Just simply type in your questions at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review your questions submitted today, we'll publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. And if you could give that your kind attention, I'm sure the company most grateful. And I'd now like to hand over

0:32 to CEO, Neil Stothard. Good morning. Thank you, Mark. Good afternoon, everybody. I'm Neil Stothard, the CEO of VP PLC. And I'm pleased to introduce my colleague, Anna Bealby, who is the CFO. So results for the year ended 03/31/2023. The first slide we're going to put up just shows the headline numbers, which Anna will talk to in detail very shortly. The one point I'd make is that we see this as very much as a resilient trading performance in challenging markets. In terms of highlights, first one to flag is earnings quality.

1:18 We're very pleased that we've delivered some revenue and profit growth, but maintain the quality of the earnings that the group has delivered with our key measure of return on average capital employed still at a quality figure of 14.4%. We've delivered revenue growth in the year of 6%. In truth, the majority of that has come from higher rate price increases rather than through volume of demand. Our markets, the infrastructure and civil engineering markets in particular have been positive. Housebuilding was also supportive for us until the turn of the calendar year, and we did have a slightly quieter Q4 on housebuild.

2:09 And general construction as a whole, which is our other large markets alongside infrastructure, was generally flat.

2:17 In geographical terms, just to highlight our International division, which delivered good revenue growth and improved margins. The capacity in the higher fleet has remained at similar levels to prior year, and our investments in new products at GBP 60,000,000 was at a similar level was at the same level as last year. And our focus on cleaner products as part of our ESG initiatives also made further progress. There's a minor increase in net debt, dividends up 4% and both of those Anna will talk to shortly. And my final highlight point is just to mention the fact that Anna joined in January as CFO.

3:08 Her predecessor, Alison Bainbridge, retired after eleven years at the end of last year. And we've got two non executive directors who are new and they joined after Stephen Rogers retired at the end of last year. One Mark Bottomley, CFO at Cransworth Group and Stuart Walton, who is an ex senior partner, who also becomes Chair of our Audit Committee. So without further ado, I'll hand over to Anna, who will talk you through the financials. Anna? Thank you, Neil, and good afternoon, everybody. So I'll start with the financial highlights. Year on year, group revenue grew by 6%, which represents good progress in what was a challenging market.

3:56 We did face some cost inflation challenges and a higher interest cost, but we managed achieve an increase in our key profit measure of profit before tax amortization and exceptional items of 4%. We're also pleased to have maintained a broadly consistent net margin of 10.9% compared with 11.1% last year. As we signaled in our recent trading update, we have undertaken some minor restructuring in three of our divisions during the year. This has led to an exceptional charge of 3,300,000 We also incurred costs of GBP 1,700,000 in the first half in connection with our financial sales process.

4:41 So moving on to ROCE. Return on average capital employed continues to be a key measure in monitoring the group's performance, and we're pleased that we've been able to maintain an overall group ROCE of 14.4% against our long term target of 15%. We have seen a slight increase in our WACC, which is now close to 10% as a result of interest rate rises, but our ROCE remains consistently higher.

5:13 We're proposing a final dividend of 26.5p per share, which leads to a full year dividend of 37.5p per share. This represents a year on year increase of 4% in line with the growth in our PPTAE. Our intention is to aim for a two times dividend cover as a demonstration of profitability and sustainability over the long term.

5:39 So moving on to the balance sheet. VP has a strong balance sheet, which positions us well for future opportunities. We have a young well maintained fleet and we invested £60,000,000 in the higher fleet during the year. Our working capital has increased during the year as we signaled at the interims. In particular, we've seen an increase in debtors and a slightly higher DSO. We've also seen a slightly higher bad debt write off, reflecting some of the conditions in the external market. These write offs represent 0.9% of revenue, which remains within our historic range of 0.5% to just over 1%, and this is an area which we're controlling carefully. Our year end net debt is GBP 134,000,000, which represents a small increase on last year.

6:32 So the waterfall chart you can see shows movements in the group's net debt during the year. As you can see, we continue to generate strong operating cash flows. Our net CapEx was £38,000,000 this year. As well as investing a significant amount in our asset base, we also continue to generate strong cash flows and profits from our disposals. As already discussed, we experienced a working capital outflow this year, mainly in the first half. There has been some level of volatility in working capital in recent years, a lot of which was a result of COVID, but we now expect working capital to be stable as we move forward. Our interest payments increased slightly over the year, mainly in the second half due to increases in Sonia, and our tax and dividend outflows were as expected.

7:21 Our year end debt athlete movement was just over 134,000,000 So moving on to facilities. Our facilities remain unchanged from last year. We remain in a strong position with two private placements providing 93,000,000 of fixed low cost debt, which represents 69% by year end balance. On our revolving credit facility, we did start to see the increase of rising interest rates in the second half of the year. We continue to have significant headroom with GBP 56,000,000 at the year end date, and we also have an uncommitted accordion facility of GBP 20,000,000 available to us as required.

8:08 Our RCF expires in twelve months time, and we've already begun conversations with our lenders and will be refinancing shortly in advance of our interims. Our covenants remain unchanged from last year, and they measure interest cover and and gearing. We continue to be well within our covenants on both measures. Our EBITDA to interest cover is greater than three times, and we were 8.26 times at the year end date. And our net debt to EBITDA covenant is less than 2.5 times, and we were 1.44 times at the year end date. And that's everything from me, and I'm going to hand back over to Neil. Thanks, Anna. So the second stage of our presentation focuses on markets and trading.

8:56 And I'm to start by with a slide just reminding people about what our business model and strategy is as a group. The performance that we which I said at the start was we saw as a resilient performance, I think is a lot of that is down to the way in which the group is made up and the way in which we operate. On the left hand side, you can see our model, which shows that proven and specialist rental is what we're about in terms of our activities. We're looking for market leading positions in niche sectors and with some diversity in terms of end markets. We want to be the employer and the provider of choice. So we want people to enjoy working for VP and building a career in VP.

9:49 We also want our customers to enjoy working with us as their provider and support. First class asset management is absolutely at the core of what we do. The rental market is very dependent upon reliability and consistency of its supply. And we focus, we buy quality products and we maintain that equipment well throughout the cycle. And finally, the fourth quadrant talks about sustainability, which is something that's become a key part of our strategy over the last few years. On the right hand side, just to say, we focus on specialist rental.

10:37 We support four core end markets, infrastructure, construction, house building and energy. We're in The UK, but we also have an international division. We do have delivered high quality returns over an extended period. We take a long term view. We don't invest for the short term. We invest for the long term. And again, I think that's a powerful attributes of VP. And finally, just reemphasizing that we're embracing our ESG responsibilities. I've now got two slides on markets. The first one is in the VP environment. The second is about how we might see the macro environment. We've got revenue growth of 6%, as has been mentioned already.

11:25 And our two largest markets, which are infrastructure and construction, which are generally about 40% of our total revenue each. This year is no different. Infrastructure is slightly down, Construction is slightly up overall. We've got we've delivered revenue growth in both markets. I think it's fair to say that in Infrastructure, we've had an element of volume growth as well as price improvement. In Construction, it's generally been price improvement rather than any pickup in market activity. Housebuilding did grow 15%, which might surprise some people, but that was because it was a relatively buoyant sector up until Christmas. After December, we saw approximately 10% reduction in activity in our house building customers.

12:19 And that seems to have for the time being, it seems to stabilize at that level. And so although we saw good house building growth in the year we're reporting on, we may see a little bit of a reduction in that in the current year. Keeping it into perspective, Housebuilding is important, but it is 8% of group revenues. The energy number will look odd. It's dropped 25%, but that's primarily due to one contract, which was we did a major shutdown contract

12:56 complex in South Wales last year. That's a contract that happens every three or four years. It obviously wasn't repeated in the year we're reporting on. Underneath that and excluding that, our energy markets actually were marginally more supportive going than they were the year before. And other, which is 12% up, that includes segments such as mining, aviation and defense and outdoor events. So again, some level of improvement in those areas. A bit of color on each of them on infrastructure, the AMP program in water and the CP6 rail program and also the long term investment program in transmission were all helpful to us during the year.

13:46 And this is despite the fact that in the rail sector, there were industrial disruption during the autumn or during the last part of 2022. And in the transmission sector, we did see some delays to work because they didn't the National Grid did not want outages at a time when there might have been power cuts over the winter. So there was a bit of a pause in activity, but that's now resumed. The previous year, we were very busy on HS2 in Phase one. This year, and we said this at the interim, the Phase 2a work is much down on what it was. We think that some of that will come back, but it won't come back to the same level that we enjoyed in Phase one.

14:38 General construction has been flat. There are some positive areas, civil engineering and fit out markets being too. But elsewhere, the investment in education and health was slow, office rent office retail and leisure was also slow. And therefore, we've not had that uplift in market demand that we might have

15:03 at some point hoped for. I'll talk to this in a second on the next slide. Housebuilding, as I've mentioned, is good three quarters and then the last quarter was quieter, and I've explained the energy change. The next slide is more of a macro outlook, and it's based on experienced UK construction spring forecast for this year. And I think that generally we feel that these do replicate our own view of those markets. So hence we use it. The infrastructure chart, the top left is still supportive, although it's a modest growth going forward.

15:48 It has recovered to well beyond COVID pre COVID levels and it remains a positive for us. New housing, this time last year, that chart just kept going up, albeit at a modest rate. We've seen this correction since January. And our view is still that the housing market is a good place for us to be in the medium term. Repair and maintenance has also flattened off compared to what was expected a year ago.

16:22 And I think that's partially tied to why new non residential is not moving forward at any great pace either. So new non residential to be clear includes publicnonresidential, private, industrial and privatecommercial. And as you can see from the graph, there is still only modest increase in activity forecast in those segments going forward. Business performance, first slide just on group. The only comment there is the fact that our operating margins have stayed resilient. They're at 12.4%, just up from 12.3% last year, overall on a 6% growth in operating profits and revenues.

17:13 We have two divisions that we report to, which is The UK division, which is the largest and international. So firstly, talking to The UK, modest revenue growth 4% and profit growth of 3%

17:31 and margins slightly down, but really from our point of view, the same as prior year almost. UK infrastructure investment was supportive, particularly rail, transmission and water, as I've already mentioned. We don't see any change in non residential construction either in these results or potentially going forward and House Buildings positive, as I said, until Q4. So overall, good margin stability in what is our largest segment. International, which is smaller, a lot smaller, some good numbers here, 24% increase in revenue, 100% increase in profitability and significant uplift in margins.

18:21 The revenue recovery was strong, both our AirPack and our TR businesses. And sectors of note, I would say, are oil and gas, mining, renewables and defense. And the final comment on this slide is that whilst we're pleased to see operating margins improve, they're still quite a bit below where we would like them to be from a group perspective. But nevertheless, we're hopeful that we can continue this renewed progression in terms of operating margin. Hopefully, we'll be able to demonstrate further progress in the new financial year. Which brings me on to investments in rental fleet.

19:06 We spent GBP 60,000,000 on new fleet this year we're reporting on, which is almost the same as we did the year before. The fleet quality was maintained and that's probably the most important thing that we invest in the quality of our fleet. The emphasis was on buying cleaner and greener rental fleet, which I'll comment on further shortly. And we've also increased our fleet disposals when we generated nearly $25,000,000 of proceeds from sale from 2018 the year before. So net expenditure actually on fleet has reduced.

19:53 But I think that was a price we felt we could take in terms of the acceleration of disposal of product that was either excess to requirements or underperforming. So we made good progress on that in the year. Just a quick slide on ESG. We've made further good progress and particularly in regard to our sustainability position. We published a medium term roadmap to net zero. There's a copy of that at the back of this in the appendices to this presentation. We have submitted our science based targets and we await the results of their validation. We did that back end of last year.

20:39 We've achieved ISO 50,001, the energy management system standard across all our UK sites. We've developed a sustainable procurement policy across all our businesses and we've also invested in supplier management software. This covers a whole host of things that includes capturing emission data, which is important to us, to our customers and to our suppliers. And we're also monitoring the ESG credentials of our supply chain overall. So a lot of progress in that area. I mentioned we spent £60,000,000 on new fleet, 15,000,000 of that, so a quarter of that was buying products that would historically have been petrol or diesel engine driven.

21:31 So and we will continue with this process until we've got complete exchange happened. So good progress on that. Outside of that, we have a lot of products that don't have engines attached to them. And we've got over 50% of our fleet that is zero emission at the point of view. So 25% of new fleet CapEx might look relatively modest in terms of sustainability, but actually a lot of our product is already zero emission at point of use. We've consolidated the waste, water, plastic and paper supply chains to further improve our handle on our sustainable credentials.

22:20 We've committed to a further three nature conservation projects, which is the third year in a row that we've done that. And our overall aim is to enable carbon and sustainability literacy across all our employees. My final slide and the final slide for presentation is just on outlook. The highlights of outlook for us would be that markets do remain stable into the new financial year. Overall, there's quite a lot going on between the different markets, but overall, we've got stability and more or less where we expected. Infrastructure has been positive in rail, water and transmission last year, and we expect it to be next. Non residential construction markets at the moment, we still think the forecasts are right and that it's going to be flat. I think it's very much about business and economic confidence as to see when that changes.

23:19 Residential construction will reduce in the short term, but we're still happy with the medium term opportunity. Rental pricing improvements will contribute. We put pricing increases of up to 10% across all or most of our businesses over the last six months. So we've not had a full year's contribution from that. That will help in the coming months of the new financial year. Notwithstanding that, we will be continuing to focus on cost management in a relatively flat general market scenario. That's paramount that we do that. We've done it for many years and we'll continue to do so.

24:05 Sustainable solutions continue to drive investment decisions. We are notwithstanding a relatively stable backdrop, investing in our people, rental fleet and property for the future. So they were in good shape to take up the opportunities as they arise, whether they be organic or acquisitive and whether they be in The UK or international. So that's the presentation finished from Anna and myself. And we'll now be very happy to take some questions, which I think could be put on to the system. That's great. Neil, Anna, thank you so much for updating investors this afternoon. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab on the right hand corner of your screen. But just while Neil and Anna take just a few moments to review those questions submitted already, I'd just like to remind you that the recording of this presentation, along with a copy of the slides and the published Q and A can be accessed via your investor dashboard.

25:04 Neil, I know you can see you've received a number of questions from investors throughout your presentation. Firstly, thank you to everybody for engagement. If I may, just ask you to read out those questions and give a response where it's appropriate to do so, and I'll pick up from you at the end. Okay. Thank you. So, well, we'll start picking these off as we go. If you read out the first question that you said from Mark, no, from Chris, sorry. Yeah. I'll I'll try and answer that. So the first question is, what lessons did you learn about the business when you went through the formal sales process from Chris? Okay. So for those that don't know, the the between April and August last year, the group was under a formal sale process, which was an open process following a approach to the board from the trustees of the majority shareholder in VP.

26:05 And following advice, we took the decision to launch formal sale process And with all the things that were happening, although there's lot of interest in it, with all the things that were happening in the market at the time, whether it be politically, whether it be economically or otherwise, it became a very difficult backdrop in which to look to execute a successful process. And we announced in August that we've not received a proposal that we felt was recommendable to all shareholders. As part of that process, we engaged in terms of some due diligence, which could be potential purchases.

26:55 I suppose in terms of lessons learned or what we learned about the business was that pleasingly there were no as we hoped, but there were no red flags that came out of that financial or commercial diligence. Clearly, were some areas which were useful to know or and it's always helpful for us as a management team to get an outside view from time to time. That was helpful. But I think generally, without trying to sound weak on it, I think it just reinforced that our view of our business was probably it was. So I think we didn't the other thing to add is that we didn't get distracted in terms of our performance because these results have all been produced through that period.

27:56 And we've moved on. And we're very much into business as usual for the group. Okay. The next question is from Mark, which is how important is international expansion to the group? And would you accelerate this through acquisitions? The international division, as I said earlier, is much smaller than The UK. It was never intended to be that significantly smaller. And I think that there will be opportunity and I hope there'll be opportunity to expand that further going forward. As I said in the presentation, markets within which our international businesses operate are positive and we made good progress.

28:47 I also for those that have had chance to read the prelims in my business review, I also pull out the fact that we have ground force and TPA businesses in Europe, Republic Of Ireland that report into The UK and are therefore part of The UK divisional results. If you include that the revenues that we get from those European activities, then we generated in the year under review 83% from UK and 17% of group revenues from outside of The U. K. I think as a rule of thumb, we've always sought to try to get to an 80%, 20% split.

29:38 The relevance of international is it's an opportunity, but it's also a way of mitigating the risk of being totally UK dependent. Okay. I will take the next one, but to give Neil a break. So Chris asks, what attributes the VP group influenced Anna to join the company? So my understanding of VP before I joined was it was a good business with a good track record and a really nice culture, and I'm pleased to say that there's been no surprises in that regard since I've been here. I touched briefly on the strength of the balance sheet in the presentation. And I think the facilities that etcetera we've got available to us means we're well positioned for opportunities in the future. And therefore, I think that it's an exciting role, and I think the future of VP looks bright.

30:29 Okay. So next one is from Steve, which is, what does the competitive landscape look like and how optimistic do you feel about the prospects for the group moving forward? Okay. I think the competitive landscape is I mean, our business areas, like most business areas, will always be competitive. I think that given the components of the backdrop of how we're operating at the moment with high inflation, stretched supply chains, cost of money going up. I think that there is a general a general what's the word, calmness about competition at the moment that perhaps is typical at this point in the market development.

31:30 That won't last for long. But I think the competitive market our markets remain competitive. I think there are opportunities, but the opportunities, I'm sure, I mean, I can't speak for any of the businesses. But from our point of view, our focus remains on improving our position within the business streams that we're already invested in and within the investments we've already made rather than looking to grow our businesses outside of that market backdrop. So that will change, markets will improve, some markets will come back. It's just we just don't know when that's going to be. So for the time being, it's business as usual. It's doing all the right things in terms of making the business efficient, investing in those areas where there is growth and reducing investment levels in those areas where our performance might be suboptimal.

32:36 And I think have you got the question again? Because there was a bit at the end, which I can't remember. Yes. And so prospects going forward, I think I talked to markets and I think we need we've got lots of opportunity. I think we will progress going forward. But one of the reasons we're not quite back to where we were pre COVID is on that market, the slide I showed you that the non residential construction market is still way off what it was. And when that does eventually change, whenever that might be, that will be a bonus for us as a business. But in the meantime, we concentrate on working with what we've got. Do you want to do that? Yes. So from a capital allocation perspective, would you consider a buyback program for your shares in addition to dividend?

33:37 So we've at the moment, we're we although we've discussed this as a potential as a Board, at this stage, we've decided that we won't be doing that, but we will leave that under review. So we will revisit that point going forward. There's a lot that we're aware, there's a lot of corporates in the market that are doing some share buybacks. One of the there are different challenges for different businesses. We're very aware of liquidity in the business. We want there to be liquidity for shareholders.

34:26 So we have to take that into account when considering a buyback. We want to make sure that we've got sufficient funds available to be taking the opportunities that are going to, we believe, inevitably come our way in the next twelve to twenty four months. And we don't want to spend that if we need to use it. So it's I think the short answer is we have considered it. We don't think it's appropriate at the moment, but we will remain it it will remain under review. Okay. I don't know. I think I think that's it. Sorry. I'm squeezing some of my That that's perfect, Neil, Anna. And if any further questions do make themselves available, of course, we'll make those present to you, and we can publish responses post today's meeting if it's appropriate to do so. Neil, Anna, I know investor feedback will be particularly important to you, and I will shortly redirect those on the call to give you their thoughts and expectations.

35:32 But I wonder before doing so, if I may, ask you for a few closing comments just to wrap up with. Yes. First of all, thank you to everyone who has attended this session and listened to what Anna and I had to say. I hope that you have got a good understanding of the fact that markets have been relatively challenging for us as a business as they have for many businesses. But hopefully, you'll be left with an impression that we have a highly resilient business model and that we've got the opportunity going forward to make further good progress for the group and therefore for shareholders. Thank you. That's great. Neil, Anna, thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as we now automatically redirect you for the opportunity to provide your feedback in order the management team can better understand your views and expectations.

36:26 This may take a few moments to complete, but I'm sure it be greatly valued by the company. On behalf of the management team of VP PLC, would like to thank you for attending today's presentation. I wish you all a very good afternoon. Thank you. Thank you.