VP (LSE:VP.) — Interim Results for the 6 months ended 30 September 2021

0:01 Good morning, ladies and gentlemen, and welcome to the VP Interim Results Investor Presentation. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just please simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. Have the company review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your investment company dashboard, and we'll send you an email when that's ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, we would like to submit the following poll, and I'm sure the company would be most grateful for your response. And I'd now like to hand over to Alison Bainbridge, Finance Director and Neil Stothard, CEO from VP Group. Good afternoon or good morning. Good morning. Good morning. Thank you, Mark.

0:48 Yes, good morning to everybody. Thanks for joining us this morning.

0:54 Alice and I are going to talk about our interim results to 09/30/2021. I'll kick off with a few highlights. I'll then talk to the market and trading review, and then I'll hand over to Alison, who will talk you through the key financials of the results.

1:15 So in terms of highlights, I will run through this slide, but we do expand on most of these points throughout the presentation. But in terms of highlights, we delivered market leading profit margins in the first half, which we're very pleased with. It's a strong recovery in trading, which has capitalized further profitable reinvestment into our higher fleet. The excellent performance has been driven by a combination of good infrastructure demand with some exceptions, which I'll talk to, and also Boynton Housebuilding market. The overall demand construction and civil engineering sectors have been solid, if a little bit quieter than we would like it to be.

2:02 International division is stable. We operate a U. K. Division, which is the larger of the two, but we also have an international division where activity has been stable. Substantial progress has been made in the group on ESG initiatives with a new road map to net zero. And the focus on capital investments on fleet has been heavily focused towards eco friendly solutions. Current trading in the business as we head into December is positive and in line with our expectations. And we have reinstated in these interim results progressive dividend policy, reflecting our confidence in the future trading with an interim dividend of 10.5p.

2:49 The headline numbers briefly. Revenues of $176,000,000 which shows good recovery and momentum in the business as we exit the worst of the pandemic, material improvements in profitability and margins, our key measure, return on average capital employed, which Alison will talk to later, back towards where we want it to be. Net debt, up $10,000,000 but after £32,000,000 investment in fleet during the six month period. The next two slides are a reminder of the long term growth trend that we have delivered as a group, and the chart is not dissimilar if you go back to ten years before that.

3:40 But clearly, we've been impacted over the last two year ends by the onset of the pandemic. Our year end is March. So the March 2020 was quite severely hampered our results in the end of our financial year 2020, which is is why we saw the dip in revenue there and then the full impact of COVID during 2021. The last column shows our interim result, and we've also overlaid the consensus figures average from our two brokers, Berenberg and Singer's. The same graph moving on in profitability terms, very similar pattern, excellent consistent growth from the business, severely impacted, as you can see, last year through the pandemic.

4:38 And again, we've overlaid the broker consensus to give some idea of where the market feels that we're heading in the current full financial year.

4:52 So moving on to markets and trading. We operate in a number of core market areas. Infrastructure, construction, house build and energy are the four that we highlight. We also have a number of smaller market areas in others, such as outdoor events, aviation and mining. The market exposure has not changed much over the recent years despite all the travails of the pandemic. We've had a reasonably consistent split of 40% infrastructure, 40% general construction, 10% house build and the balance through energy and other markets.

5:44 If I move on to the infrastructure market, which is 40% of group revenue, As in all those market areas, we saw growth, which is not unexpected. But we've had a mixed recovery. We've had great strength in our support of the HS2 project. We've also been busy on transmission activity as well. Slightly less buoyant than we might have expected was the AMP7 work for the water industry, capital expenditure program, which is a five year program, which started in April 2020, and also the CP6 program in the rail industry, which was a bit slower through the summer than we might have originally anticipated.

6:32 Those markets are attractive to us because they're long term. There is a long term commitment. There's a regulatory framework. And therefore, there's a reasonable certainty. Despite some volatility, there's a reasonable certainty that, that work will come through, and we're very well positioned to benefit from that. I will comment more on the infrastructure market and the other markets as I talk to The UK divisional performance. In construction, we were very busy working on repair and maintenance. The RMI market was busy, and that's been a benefit to us as a group. Again, slightly more disappointingly and perhaps not surprisingly, confidence in the private investment into speculative commercial building, etcetera, has been less buoyant, and that has had an impact on certain of our activities, particularly those that support the civil engineering sector.

7:34 House buildings, which fell off a cliff in the early part of the pandemic last year, recovered quickly and has maintained that recovery, and we've enjoyed sustained demand throughout the period. And finally, on energy, this is a mix of onshore and offshore activity. Offshore remains a quieter market for us, but the onshore work has been busier, and we've been able to create some recovery and growth in that market. So the group business performance. Good revenue growth on COVID-nineteen affected prior year, which you'd expect.

8:20 Profits up more than doubled to $22,500,000 That's an operating profit figure. And operating margins, I think, very importantly, have improved from 7.6% to 12.8%. You will see that the incremental revenue translation into profit half year on half year has got a disproportionate drop through margin of 35%. The and this illustrates the operational gearing impact that additional revenue can translate into higher profits on a relatively fixed cost base. It's been a strong performance in the half year. It's by no means the finished article, but we've got more potential as certain of our markets that I've mentioned before achieve recovery.

9:13 If we look at The UK, which is by far the larger of our two divisions, this is the engine room of the VP business. We grew revenues 25%. Margins there at 13.6% are pretty well at the same level of margin that we were at pre pandemic. So revenues are not back to pre pandemic levels in these results, but the margins are. And I think that's much that's very important. In terms of infrastructure, the strength, as I said, have been HS2 and transmission. That's been positive for our TPA, our ground force and ESS businesses. However, AMP7, which has had a delayed start, that has also impacted our civil engineering supporting businesses like Ground Force.

10:11 We expect that AMP7 will start in earnest in 2022. We can't tell whether that's going to be in the first quarter or later in the year. We would have normally expected on a five year cycle one years point into the program that the contractors would be busier than they are today. So disappointing on the one hand that it doesn't we haven't enjoyed that in the first half. But on the other hand, there is more to come, and we're very well positioned to benefit from that. CP6 is the equivalent program in the rail industry. We did have a the rail industry stayed open during the pandemic last year, and we were relatively busy supporting the rail sector when the lines were quiet.

11:00 That recovery or quick recovery flattened off in the summer of twenty twenty one. But pleasingly, we've seen business pick up again in the or into the autumn and into the winter, and we've become much busier on the likes of the Transpentine renewal upgrade, sorry, and other projects around the network rail region activity. So infrastructure is a positive for The U. K. Business with more to come. In construction, the RMA RMI activity is positive for Brandon, in particular. However, the lack of newbuild in terms of speculative build, as I said earlier, impacted the civil. So that's created less demand for the likes of our Ground Force business and also for our Brandon business than we might have anticipated.

12:02 I think that's the most difficult element to call in terms of recovery. I'm reasonably confident that the AMP work and the rail work will come through next year. I think that the timing of newbuild will depend upon general economic confidence in The U. K. Housebuilding has been a busy sector. We have had good activity for particularly for our U. K. Forks business, which provides rough terrain telehandlers. They've been extremely busy. And the prospects going into this coming year of 2022 remain very positive. My final point on The UK is that we made substantial cost savings in 2021 throughout sorry, cost savings in 2020 and into 2021 throughout the pandemic. And these have been maintained into this new financial year, and that's one of the benefits of the margin.

13:06 In terms of international, much quieter trading period. The more subdued recovery, unfortunately, for our international businesses, which are heavily skewed towards Southeast Asia and Australasia, we've had extended lockdowns in those countries, and that has been an inhibitor to the recovery there. Nevertheless, the businesses have remained profitable, but we haven't seen the type of recovery that we've enjoyed in The UK at this stage. But hopefully, we expect that, that will pick up into 2022 as the borders reopen and we're able to transact more easily across those countries.

13:57 In energy, the markets have remained impacted by, I've mentioned, cross border mobility challenges. We move engineers around the world to support our rental activities, particularly in offshore markets. That has been far more restricted due to COVID as well. So a quiet six months for international, but I think with better prospects heading into 2022.

14:29 So my next slide is on rental fleet investment. We've accelerated rental fleet investment in the first half of this year compared with last and spent nearly £32,000,000 in the period. There are three main elements to that expenditure. The first one is our support of the businesses, which have within our group, which have now moved ahead of pre COVID levels. There's opportunity there, and we're expanding their fleet to support those opportunities. The second element is some preemptive purchasing to try to get ahead of the supply chain issues.

15:17 We've that's hitting most businesses in The U. K. At the moment. We are seeing extended lead times for new product between to three months out to twelve months. And therefore, we've taken the decision to make preemptive purchases to ensure that as we hit 2022 and hopefully see improved further improved market conditions that we will have the equipment that the customer requires. And the third element is that even in the markets where we have not been as busy as we might have hoped, and that will be the AMP and the rail market, we have invested into fleet, not necessarily delivered yet, but we invested into fleet to make sure that we have the appropriate level of product to support our customers into 2022 and beyond.

16:17 Related to fleet investments is the disposal proceeds. We would not we as you'll see, we've generated $8,200,000 of proceeds over the first six months, which is similar to last year. We would under normal circumstances, we would expect that there would be some correlation between the growth in disposal proceeds and fleet investment. But the reason it hasn't changed is because we've deliberately held back on selling product that we are finding it more difficult to acquire new on longer lead times. So that product that we would have sold off is currently remaining very busy being rented to our customer base. And my final point on CapEx is that not only did we spend $32,000,000 in the first half, we'd already committed another $20,000,000 at the September 30, which, again, reflects our position in terms of further early investment into the group.

17:22 Within the CapEx, there was a strong emphasis on environmental and eco friendly solutions. So this slide talks to our current position in terms of environmental initiatives. We did sign up to the science based target initiative earlier in the period that we're reporting on. We've developed a road map to net zero by 2050. But perhaps more importantly, we have a short term road map for the next four years, which is communicated across the group and to what we are working over the next four years, which is the most proximate period and one that we feel, as the current management team, we can influence the most.

18:16 Within the new product investment, we there's a whole range of rental fleet that we've acquired, which improves the environmental credentials of the fleet that our customers are using. And examples of that are a solar panel lighting fleet that our Torrent business has bought, which is now the largest solar panel powered lighting fleet in The UK, supporting their rail customers. A very wide range of cordless tools, which are displacing the previously petrol and diesel powered tool versions with battery. We've also introduced the electric compressors, electric telehandlers and electric mini excavators.

19:04 And our first hybrid service vehicles are now in operation, supporting certain of our businesses around The UK. Other environmental initiatives include commitment to ISO 50,001, which is an international energy management standard. We've also got examples of water recycling and solar panel installation around our depot network. We're 95% renewable electricity across the group, and we have a hybrid car choice within our company car range now. So other areas that where we're improving our environmental impact fairly early on.

19:50 We've invested in biodiversity into three nature conservation projects in this first half. That's something that we intend to continue to do with new projects each year. We're pleased with that engagement. We're also pleased that we can get colleagues to participate in these conservation projects. A large element of our existing hire fleet, and I estimate twothree of the fleet, does not have a diesel or a petrol engine attached to it. So we operate portable roadways. We operate shoring equipment, aluminum tower. These, for sure, generate emissions at the point of manufacture. But once they're manufactured and on our fleet, they're zero emission at points of use. And I think that's important to understand.

20:40 And my final point is that rental itself, as a concept, is fundamentally eco friendly. We are all about optimizing a shared resource. That's actually what we do. And therefore, I think our credentials as a sector are also quite powerful in terms of environmental generally.

21:04 So my final slide on outlook. We continue to deliver market leading quality of earnings with strong ROCE and margins. We look forward to an acceleration of the AMP and CP6 rail activity. And also, may be further upside as and when commercial newbuild investment increases. HS2 is a long term opportunity for us. Housebuilding, we see as positive into next year. The sustainability initiative I was just talking about is well understood across the business. It's providing vital customer support and engagement. We've invested and have for many years and continue to invest strongly in technology, providing digital solutions to both customers and operations internally alike.

21:57 We revitalized our learning and development within the group, investing in our people. We took on nearly 40 new engineering apprentices this year. We've taken a next tranche of our graduate recruitment program, and we've also opened up into LGV apprenticeships and sales apprenticeships in the current year. So our prospects in The U. K. And in international divisions are positive. The combination of our financial strength and the exceptional team right across the group will deliver results. And we remain confident reporting another year of tangible progress in the full year.

22:44 So that's all I have to say. Obviously, we'll take Q and A later, But I'll now hand over to Alison, who will forward you through the financials. Alison? Thank you, Neil. Good morning, everybody. So my first slide is to emphasize some of the points that Neil has already made around the continuing and strong recovery, we feel we've had a good set of results for the first half of the year. Revenues were strongly ahead of prior year, up 24% to $176,000,000 Profit before tax and amortization also increased by 135% to 20,200,000 Some of our businesses are trading ahead of 2020, which we see as the pre COVID year. And others that are still impacted by the cyclical nature of infrastructure and supply chain constraints are still trading slightly behind.

23:38 Next slide is on earnings per share and dividend. Nils already mentioned, we proposed an interim dividend of 10.5p. This is ahead of the last interim dividend we paid, which was in the financial year 2020, which was 8.5p. There are two elements behind this. One is a rebasing towards 2% to 2.5% cover. We found that in the last several years, we've been well ahead of three times dividend cover, and we feel that the two to 2.5 times is more in line with our stated policy and more appropriate. And the other thing that we're trying to achieve is a more balanced interim final split more towards the traditional one third, two third.

24:21 The next slide, again, shows a long term view of the group and it shows that we've had a long term progressive policy of growing dividend. It was impacted, of course, by COVID as many things were. Return on average capital employed is a key measure for the group. We're proud of our long term track record. We target fifteen percent throughout the cycle, and you can see here that we've achieved that target. COVID again had an impact in 2021, brought us down to nine point two percent. But I'm pleased to say that we've recovered back to thirteen point five percent by the half year, and we're well on track to get back to pre COVID levels. Another key point to make is that we're also well ahead of our weighted average cost of capital, which we estimate to be 8%.

25:13 We have a strong balance sheet. You can see that our higher fleet is a key component of that at GBP $214,000,000. The higher fleet is young and well managed. That's the key strength of ours, and it's around three point five years on average. Other key points to make is that debt to days remained under control at fifty eight days and bad debt write off was small at 0.4% of revenue, which is in line with previous years. And as Neil has already mentioned and explained in some detail, we grew the higher fleet during the period.

25:49 Rental firms have very strong cash generation, and we are similar, we're the same. I'm pleased to say that we've had strong recovery in EBITDA to $44,500,000 Key elements of the cash flow during the year, Neil has already mentioned the 30,000,000 of capital expenditure. That total fleet was GBP31.7 million. And we've also had a benefit of working capital during the year sorry, a disbenefit of working capital during the year. During the COVID period, revenues fell. We had a working capital inflow. And then as we've recovered, there's been a working capital outflow during the period, which was inevitable. Net debt in facilities, we have generous headroom against the facilities. Our total committed facilities are GBP 183,000,000.

26:37 And combined with our overdraft, we have GBP 190,500,000 of facilities. Our net debt at the half year was GBP 131,700,000, leaving us GBP 58,800,000 of headroom. In the first half of this calendar year, we carried out a refinance, which has left us very well placed. We had a revolving credit facility that was due to mature this month, December 2021, that was for GBP 135,000,000, and we refinanced that with two elements. One was to make use of a private placement shelf provided by PERCOA, and that was GBP 28,000,000 we drew down, and this matures into 2028. And combining this with the existing million of private placement, which matures in 2027,

27:22 we have a good balance of long term fixed debt. The RCF, since it's fairly new, also matures in June 2024, leaving us plenty of room time for any future refinancing. And also, the RCF includes a GBP 20,000,000 accordion, which although it's uncommitted, is there for us to grow. So with the headroom and the accordion, we feel we're well placed for any future growth of the business, either organic or by acquisitions. And then my final slide is just to demonstrate that we have robust headroom against our covenants. Our financial documents, both for the RCF and the private placement, just have two covenants financial covenants. One is that EBITDA interest cover has to be greater than three times, and you can see that the half year was 9.65 times. And you can see that throughout the pandemic and before, we've always had plenty of headroom.

28:15 And then the other covenant is that net debt to EBITDA has to be less than 2.5x. And again, you can see that half year, we were down at 1.49x, adequate plenty of headroom in there, and that was also maintained throughout the global pandemic.

28:30 So I don't have any further slides. So that we're we've completed those, and if we're happy to take any questions that you might want to while we're going to go through the questions that you've raised. That's great. Thank you very much, Alison, Neil, for updating investors this morning. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. But just while Neil and Alison take a few moments to review the investor questions submitted already, I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q and A, can be accessed via your Investor Meet company dashboard, and you'll be notified by email when that's ready for your review. I'd also like to remind you that your feedback is important to the company. And immediately after this presentation has ended, we'll redirect you for the opportunity to provide your feedback in order the company can really better understand your thoughts and expectations. Alison, Neil, I know I haven't given you a long time to review the questions, but perhaps if I may, if I could hand back to you to open up the Q and A tab and just read out the questions and give a response where it's appropriate to do so, and then I'll pick up from you at the end.

29:27 Great. Thank you, Mark. So we do have one or two questions. The first one is, have general market supply chain issues affected the business? And how have you dealt with these? And I'll take that one. I think that, for sure, the general market supply chain issues have affected our business just as they've affected many well, all businesses around the country. And I did talk to elements of that in the presentation. We have seen from our own point of view, we've seen extended lead times on products that we want to purchase, and we've seen some uncertainty in terms of timing of getting consumables.

30:18 But that, I think, is generally quite well managed and under control. We have taken preemptive action to try to mitigate that. I think the interesting part about market supply chain, though, is that it also affects, perhaps more importantly, our customer base. So our contractors who rely on material supply are, I think, being hampered to a degree by the sort of rather volatile nature of the material supply chain at the moment. It appears that it's improving, and it appears that hopefully in 2022,

31:03 that will be less of an issue than it is in 2021. But there's no doubt that our the demand for our services in certain sectors is perhaps marginally subdued by the fact that the contractors are perhaps not committing the same level of contracts that they would have done were the supply chain more effective at the moment. So I think that would be my answer to that question. Another one, which is probably for me. Do you see overseas expansion becoming meaningful part of future group revenue? We as I explained, we have an international, we have a U. K. Division.

31:53 What's perhaps less obvious is that our European activities are within reported within our U. K. Division, which is where they ultimately report into. So if I take the European and the international division activity together, we've got 17% of our overseas sorry, 17% of our revenues come from outside of The U. K, 83% within The U. Lost the questions. And the so we're already quite well committed to develop that overseas those overseas markets.

32:41 They have been quieter than we'd expect. I think we in the longer term, I would see a sort of 80%, 20% split of activity as being more reasonable and more in terms of our long term strategy and target. We are keen to grow both our European business is based in Germany but supports business in Austria, Scandinavia and France, amongst others. And in particular, it's our Groundforce and TPA brands that are operating in those countries. There is certainly scope for further growth in those markets.

33:29 Further afield, AirPack and TR are based largely in Singapore apart from in The U. K, they're based in Singapore and Perth and then around Australia and New Zealand for TR. We see opportunity to grow those businesses further as well. So I think that the international side, which is, as I said, been disproportionately impacted by COVID, certainly will have it will become a more meaningful part of the group as the question, I think, said. I can't see it. Anyway, so that's where we are in terms of international. It's very much part of our process. The reason we're in international at all is because we want to we see opportunity, obviously, but we also see the benefits of it acting as a reduction in risk to being just committed to The U. K. Market alone.

34:30 And so it provides some resilience to particular downturn in The U. K. The next question, which I'll hand over to Alison, is it is noticeable that the return on average capital employed is showing a long term downward trend. Could you give your views on the reasons for this and the expected future trends? So I'll let you answer that. Thank you. So I think as demonstrated on the long term slide, and I did mention that we do have a target for 15% throughout the cycle. So what we're trying to do is return on average capital employed is a key measure for us because it demonstrates the quality of our earnings, whether that's derived from organic or from acquisitions.

35:15 We target 15%. We generally achieve that, but we don't slavishly follow that. So we want to balance growth with achieving the quality of earnings that I mentioned there. In 2017, we acquired Brandon, which was our biggest acquisition so far. We paid GBP 69,000,000 for that. So we deliberately and knowingly decided to lever up in order to make that key acquisition. So we went to over two times EBITDA and 200,000,000 net debt, which as an aside, we've actually repaid that now because we're down at net debt levels of GBP 130,000,000. But buying Brandon did reduce the average capital return on average capital employed for three years. And then we were just about to get to the point where we'd fully integrated, Brandon, and we're about to get the full benefits of that acquisition. And then we were impacted by the pandemic, which brought the returns down to 9.2%.

36:11 You can see that we recovered rapidly, I believe, and strongly back to 13.5%, and we'd expect to be back in the 14% and above levels by the year end and back up to the 15% throughout the target again. So hopefully, that answers the question. Question. Yes. I'd perhaps just add in the longer term, reason that we I mean, we describe ourselves as equipment rental specialists, and that goes back to twenty years ago when we decided to exit the general plant higher market to make sure we improved returns. And that 15% target, as Alison said, was set all that time ago. And I think apart from 2021 through COVID, we've never been below twelve percent, and we've generally been hovered between 1416%.

37:00 I think we were as high as nineteen percent one year throughout that twenty year period. So I don't see the short term trend as being a concern. Another question. Are there any new areas the business could expand into to complement the existing business? What would you look for? Is there a size of business you would consider? So the first thing to say is that acquisitions and organic growth were equally interested in and excited about. We did make a small acquisition a few weeks ago of M and S Hire, which is a very well long established run long established business in the Southeast, which has gone into our MEP business.

38:01 However, I don't see that M and A is going to be a significant aspect of our growth over the short term. I'm not sure that there will be that many opportunities around in the short term. I think it's much more likely that vendors will start to put businesses on the market once they've been able to prove that the business they have pre pandemic is just as good post pandemic. In terms of new areas, we're always looking for new areas. I don't think geographically, we're looking to significantly move anywhere new. I think geographically, we are in the regions that we want to be.

38:50 I think that the specializations that we have are largely where we want to be. So I think it's going to be going forward, it's going to be more about more organic and built on acquisition growth of the likes of M and S higher rather than any significant major change of direction. We're never slow to or never afraid to try things that are very fresh and new. The Brandon Hire acquisition, which is our biggest ever acquisition, that was certainly a significant step for us as a group. And I think we've proved that we can absorb an acquisition of that size. And therefore, at some point in time, I'm sure that we would look to further.

39:44 And equally, our expansion into Australasia with the TR acquisition, again, shows our ambition in that area. So I think that's how I would answer that question at the moment. Thank you. Neil, Alison, I might just jump in at this point. I think you've answered pretty much every question that's coming from investors this morning. And thank you to all those investors that have taken time to submit those questions. If any more do come in, we'll obviously make those available to you, Neil and Alison, after the meeting. So that will be fine. I know investor feedback is important to you guys, and I'll shortly redirect investors to give you their thoughts and expectations. But before doing so, maybe if I can, if I could hand back to you, Neil, just for a few closing comments, that would be great. Yes. Thank you, Mark.

40:30 Thank you very much for all of you who've listened today. I hope that it's given you a better understanding of how VP is trading in the current environment. I think we're very pleased with the first half results that we've announced last week. It's not the finished article. There's still some way to go as we get back to the levels of performance that we had pre pandemic. But hopefully, you will see from the presentation that there are plenty of grounds for optimism in terms of the quality of revenue and the quality of return on capital that we're delivering, which is back to pre COVID levels.

41:15 And the revenue growth is has a realistic chance of recovering through the those markets, our core markets, such as the rail industry, the water industry and general construction, that those markets will recover, and we will recover in line with that. So thank you very much again for attending our presentation. And Alison and I will sign off. Thank you. Thank you. Goodbye. That's great. Alison, Neil, thank you once again for updating investors this morning. Can I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the company can really better understand your thoughts and expectations? This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of VP PLC, we'd like to thank you for attending today's presentation.

42:05 That now concludes today's session. Good morning to you all.