VP (LSE:VP.) — Investor Presentation

0:00 Good afternoon, ladies and gentlemen, and welcome to the VP PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so, and these will be available via your investor meet company dashboard. Before we begin, I would like to submit the following poll, which would appear on your screens now. And I would now like to hand you over to the executive management team from VP PLC, Jeremy. Anna, good afternoon. Good afternoon. Thank you all and welcome. Thank you for joining us. We're today presenting our interim results for the half year to the September 30.

0:52 I'm Jeremy Pilkington, Chairman of VP. And with me today is Anna Bilby, the CEO. I'll hand over to Anna now to make the presentation. Thank you, Jeremy. So, this is my first results presentation of CEO of VP after taking over from Neil Stockard in September. Previously, I was in the CFO role from after joining VP back in January this year. I've had a busy first couple of months in role looking at the business in order to determine what the next chapter looks like. Today's presentation builds on the solid foundations and rich history of VP, and I'll be giving a bit more detail on divisional performance than we have provided before. I will also be highlighting some of the

1:35 areas that will be key to us over the coming months. Our plans are still being shaped and will be shared more fully when we come to present our prelims in June. I'm going to be covering the detail of our presentation today. Our new CFO, Keith Wynn Stanley, will join us in January.

1:55 I wanted to start with a reminder of the VP business and more importantly, the VP investment case. We have nine divisions which provide specialist equipment rental across different markets and geographies. Market wise, infrastructure of construction make up the majority of our business alongside notable activities in house building and energy.

2:19 I want to cover our investment case. I know this will be familiar to a lot of you, but I think it's an important part of the VP story. The key part for me is especially the nature of our rental model. We have market leading positions in niche sectors alongside disciplined asset management. I touched on our business in the last slide, but revenue from our diverse markets and our geography provide not only growth opportunities, but also risk mitigation. When I come to talk about the future and strategy, growth is obviously key. Looking back, the group has a strong track record and looking forward, I believe that VP has exciting growth prospects through both its alignment to markets with growth potential and through disciplined M and A.

3:04 From a financial perspective, we have consistently demonstrated strong returns with a target ROCE return on capital employed of 15%, supported by thirty years of uninterrupted dividends. We have a strong balance sheet with disciplined capital allocation. We are cash generative and we have appropriate gearing. We've recently completed the finance the refinance of our revolving credit facility, which provides us well for future opportunity. The VP's strategy is focused on growth and operational excellence, and that was underpinned by three key areas, which I'll touch on later: people, digital and ESG.

3:49 Before I go into financials, I'll start with the half one highlights. Overall, half one represented a strong performance across key metrics. Revenue and profit were ahead of last year, and we also increased our return on capital employed. Whilst our markets weren't all supportive, we were pleased with our performance, in particular, the strong infrastructure demand from the rail, transmission and water sectors. Balance sheet wise, we invested GBP 28,000,000 in fleet CapEx in the period and successfully refinanced our revolving credit facility. The Board's confidence in the future means that we increased our interim dividend by 4.5% to 11.5p per share. I'll talk about ESG and digital later in the presentation. And as you'll be aware, we have refreshed leadership in place.

4:41 Then moving on to the financial highlights. Revenue in the period grew by 2% across the group, which represents good progress in a challenging market, particularly in construction. The inflation challenges we've spoken about previously have largely settled down, and we were pleased to report a small increase in profitability despite the impact of increasing interest rates. Net margin at 11.5% is consistent with the prior period. We don't have any exceptional items in the first half, but just a heads up that there will be some minor restructuring in the second half, particularly in relation to Brandon hire station. Strength and sustainability of our returns are a key part of the VP investment case and return on average capital employed has always been an important measure for us.

5:33 Group ROCE for the period is 14.7%, a slight increase on the last full year performance and close to our long term target of 15%. Across our divisions, we have a range of individual ROCEs and return is an important consideration in our capital allocation. Where we have divisions with a ROCE lower than 15%, the focus is on driving this towards target levels. Our ROCE remains consistently higher than our weighted average cost of capital despite increases in interest rates.

6:06 As I mentioned, we have a strong balance sheet, which positions us well for future opportunity. We have a young, well maintained fleet, and we invested GBP 28,000,000 in the high fleet during the period. Our net debt at GBP 133,000,000 has decreased significantly from September last year and is slightly lower than March with a stable working capital movement in the period. One point I do want to mention is the tougher external credit environment that we are now seeing, which is impacting us most in the construction sector. Whilst our days sales outstanding and bad debt write offs remain relatively stable, we are finding cash collection more challenging, and we expect this trend to continue in the second half.

6:53 Moving on to net debt. As I mentioned, half year net debt is GBP 133,000,000, and this waterfall chart shows movements during the period. As you can see, we continue to generate strong operating cash flows. Our outflows represent the continued investment in our asset base with GBP 28,000,000 invested in the higher fleet leading to net cash CapEx of GBP 21,000,000. Our working capital movement is back to normal after some volatility in previous years caused largely by COVID. Our dividends and tax were as expected and our interest cost includes the impact of higher interest rates.

7:32 We've recently refinanced our GBP 90,000,000 revolving credit facility for a further three years on similar terms and with covenants unchanged. We remain in a strong position with two private placements providing GBP 93,000,000 of fixed low cost debt over the medium term. This represents 70% of our period net debt. We continue to be comfortably within both our covenants, which test net debt to EBITDA and interest cover. And we continue to have significant headroom, providing opportunity for further investment growth. Our model is underpinned by a young well maintained fleet. We've continued to invest in the first half based on market opportunity and performance.

8:20 Our disposals in the period demonstrate the flexibility of our business model. UK Forks is a really good example where a more subdued house building market has allowed us to dispose of some of our fleet to align our fleet size to current market conditions. We are asset managers, not asset traders, but the markets remain supportive and we have generated profit on disposal of GBP 4,400,000 in the period. I'll talk about ESG later in the presentation. It's an important part of our strategy and we continue to invest in a cleaner, greener and higher fleet. Another key feature of the group's investment case is its thirty year uninterrupted dividend track record. Our interim dividend of 11.5p represents continued progression and reflects sustainable profitability over the long term.

9:13 As a reminder, our dividend cover target is 2x over the cycle.

9:22 I want to briefly touch on strategy. I've only been in my new role for a couple of months, but the future VP strategy is built for me. When we present our preliminary results in June, we'll present comprehensive and fully formed plan. That said, there are some important points that I want to talk to you about today. For me, the two key areas for VP are delivering growth and driving operational excellence. The growth piece has been a cornerstone for VP for some time. We have a strong track record in our specialist markets. Our balance sheet strength gives us the opportunity to continue to invest, and I think the next few years, we'll see a mix of organic growth alongside disciplined M and A activity. VP has historically had an efficient operating model, allowing us to consistently generate strong returns.

10:12 I do see opportunities in our operating model, and that's something I'm looking at, at the moment. I also think that our approach to digital will continue to shape how we do things and improve our efficiency. Growth and operational excellence are then underpinned by three key areas. Starting with people, we have a new HR Director joining us shortly, and our people plan will be front and center of the VP strategy. VP is characterized by stability and experience. This is an important part of our story, and I think the refreshed Board and refreshed leadership in me and a new CFO in January represents an opportunity for VP. In the wider workforce, we continue to invest in our colleagues through our VP Academy and our management training, and we continue to recruit new talent into the business through our graduates and our apprentices.

11:03 Our digital journey is not something we've talked about much in the past, but we have long standing digital capabilities that we need to build on. And finally, a focus on ESG, which is an increasingly important area for all our stakeholders.

11:19 As I mentioned, ESG is an important part of both our overall strategy and the way we operate on a day to day basis. We continue to make progress in our sustainability initiatives, and I'm pleased to report that we recently had our science based targets validated by the SBTI. These targets include our planetary warming projections, where we conform with the SBTI's most ambitious pathway alongside near term and longer term emissions reductions. We're doing lots of other good stuff, supporting restoration and conservation projects and achieving partner status with the Supply Chain Sustainability School. We recognize the increased importance of ESG with our customers, and we've been working on solutions, including carbon calculators and carbon comparison models. We still have work to do in this area and the next steps are around improving our focus on the S in ESG and developing our social value strategy.

12:12 We're also keen to improve the carbon literacy of our people. This is another area where you can expect more detail later in the year when we present our prelims. If you scan the QR code here, that will give you further information, which is a nice segue on to digital. VP Digital Journey is an important part of our strategy and it's somewhere that we're pricing increasing focus. We do have digital capability in the specialist rental sector, but we're only at the start of having an overarching group wide digital road map. Our current areas of focus include: firstly, customer experience, understanding our customers and making the customer journey simple and frictionless. For example, MicroLise, where we're using technology to better manage our transport and improve our interaction with customers.

13:01 Secondly, operational process, improving operational efficiency through digitally optimized processes, for example, Zendesk, which we're using to improve the performance of our higher desks. And thirdly, customer engagement, digitally enhanced selling and streamlined digital processes. For example, your solution, a self-service design solution adding value to our customers. Again, this is an area we're currently focusing on and we'll share more information with our prelims in the summer.

13:30 So moving on to our operational review. This first slide sets out our divisions by market. As you can see, we have strong diversity of markets across our business. Most of our businesses operate in more than one market, but there are some key themes. Ground Force, TPA and Torrent operate principally in infrastructure. Brandon Hyatt Station, MEP and ESS are mainly in construction. UK Forks operates mainly in house building. AirPack is exclusively in energy and TR operates mainly in other, which includes events, defense and aviation. From a group perspective, 38% of our revenue comes from infrastructure, which has generally been supportive in the first half.

14:16 41% of our revenue is construction, where the markets have been more challenging. Housebuilding has been relatively stable and accounts for 8% of our revenue, with energy representing 6%. And I want to talk in a little bit more detail about each market. Infrastructure has been generally supportive in the first half with outputs forecast to grow and a strong pipeline of transport and energy projects. Our performance in this market has been strong. Ground forces enjoyed support from water throughout seven, transmission and other infrastructure projects. TPA has benefited from a supportive transmission market and Torrent trackside was helped by CP6 in the rail market. We are still enjoying some residual HS2 revenue, but future activity stems from alternative rail initiatives.

15:08 Moving on to construction, the construction market has been tough in the first half with a decline in output during the year and a further contraction expected in 2024. Prospects of the nonresidential sector remain subdued. We've experienced a mixed performance during the period. Brandonhire Station has had a challenging first half. We've made some changes and now have a new management team in place by taking a number of actions. MEP continues to grow, but has been impacted by some project delays and a more challenging credit environment, increasing the level of bad debts. ESS continued to make progress, benefiting from its specialism and prior year restructuring.

15:51 In Housebuilding, the market has faced several headwinds due to interest rates coupled with elevated materials costs and labor shortages. The overall market has been subdued but stable. UK Forks has successfully adjusted its fleet size, generating profits on disposal, thanks to good residual values. The energy market has generally been supportive with AerCap benefiting from increased activity in exploration, distribution and infrastructure maintenance alongside renewed activity in LNG projects.

16:24 In summary, we're pleased with our resilient Half one performance and progress made against our key metrics. In half two, we will continue to leverage opportunities in our specialist markets despite some challenges, particularly in construction. Operational excellence remains a priority, and we'll continue to focus on our digital road map. Our strong balance sheet and recent refinance position us well to grow via organic and M and A opportunities. ESG remains a key part of both our strategy and our day to day operations. We have an excellent track record of navigating difficult markets through servicing diverse end markets. We're confident of the group's ability to continue delivering sector leading returns. That concludes the formal part of our presentation, and Jeremy and I will now be available to take questions.

17:15 Perfect. That's great, Jeremy. Anna, thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab that's situated on the right hand corner of your screen. But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. Jeremy, Anna, as you can see, we have received a number of questions throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But Anna, Jeremy, if I may just hand back to you just to read out those questions and give your responses where appropriate to do so, And then I'll pick up from you at the end. Thank you. Okay, great. Thank you very much. Thank you, Tyler for that presentation.

18:02 First question from Ross. What were the key factors in such robust performance in infrastructure and construction?

18:10 Thank you for that. Well, infrastructure markets were very supportive in the first half, less so from construction, which was a softer market. But we're pleased that overall, the combination of these two, given the as part of our strategy of serving diverse markets with different dynamics, enabled us to publish results as a whole that move forward compared to the position last year. But the experience in infrastructure was quite different from that in construction in H1.

18:41 Ian asked another question. With a strong balance sheet and a recently refinanced RCF, what types of M and A opportunities is the company exploring and how will they fit into the existing business model? Perhaps, Anna, you'd like to answer I'll take that one. I think it's fair to say that our M and A strategy is currently forming and that's something that we will share more information about in the summer when we've got a more fully formed strategy. I think the key thing for me when it comes to M and A is that the businesses need to be specialists and they need to sit into our specialist model. And also, they need to generate strong returns. That 15% return on capital is the absolute cornerstone of our business, and we need to make sure that any M and A activity that we do drives that forward. At the moment, we haven't concluded where we think that the opportunities lie in that area, But we think there'll be bolt on acquisitions that complement existing divisions, and then they will be more strategic opportunities that represent new divisions. But we will share more information in the future, but the the level of return is gonna be the key the key point there, I think.

19:51 Do want to do in secondary then? Yes. Also, are there plans to further diversify revenue streams? I think our revenue streams at the moment are quite well

20:03 diversified. We've got exposure to those four key markets that I talked about in construction, infrastructure, house build and energy. And we also have the geography diversification in terms of the performance in The UK and also overseas. So I think we've got enough diversity in our revenue streams. And I think we've seen the success of that model in the first half in our ability to grow revenue and returns. Yes. Next question. The share price has fallen almost 40% from the highs in the absence of any profit warning. Does the Board not feel a share buyback would be supportive to the share price, as well as being a good investment at these lowly levels, especially as the low liquidity volumes have prohibited VP from joining any FTSE indices but new institutions could consider investing in VP group.

20:53 This is a question that lies very close to our heart and is very close to the board's deliberations.

21:04 Mechanically and arithmetically, a share buyback from the current very low depressed levels of share price could be attractive. However, that buyback would exacerbate the liquidity issue that you refer to here. And also in canvassing some of our institutional shareholders, there's very little appetite to for them to exit their holdings often which have been held for a very long time. So whilst it's a theoretically interesting question, I think in practice, it will be difficult to implement in any meaningful way and therefore, any impact on share price could be very, very limited. And finally, a question from Andrew M. Where does the company see the most significant opportunities for growth in the near future?

21:56 I think there are pretty two things from my perspective. I think that there are significant growth opportunities in the existing portfolio of businesses. We've recently undertaken a three year planning exercise in the existing businesses. And even in the challenging markets in which we're currently operating, I think there's a high level of confidence in terms of future growth potential. And I think as I mentioned before, the strong balance sheet and the recently refinanced RCF gives us the ability to complement that with disciplined M and A activity, which I think we will continue to focus on over the coming weeks and months. And we will share more on the M and A strategy later on in the year. Jeremy, Anna, if I may just jump back in there, and thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended just for you to review to then add any additional responses, of course, where it's appropriate to do so, and we'll publish all those responses out on the platform. But, Jeremy, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, I could please just ask you for a few closing comments to wrap up with, that would be great.

23:09 Yes, certainly. Happy to do that. Think we're very satisfied with the results that we did we've reported today for the first half, albeit the improvements in turnover and profitability are fairly modest, given the significant challenges that we face in many of our markets, we think they are results that the organization as a whole should be very proud of. I think it further underscores the strength of our diversified business model servicing a large number of end users in different geographies and different market sectors. And if ever there was to be a testing period to expose any weaknesses in that business model, I would have thought this year's first half would have been it. So we take some comfort from that, albeit we're certainly not complacent that this is the level of growth in revenues and profitabilities that the business aspires to as a whole.

24:09 I would also just reemphasize that as an expression of the board's confidence in the short and medium term, we have pushed the interim dividend forward by 4% this year at the half year stage. Jeremy, Anna, that's great. And thank you once again for updating investors this afternoon. Could 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 that the management team can really better understand your views and expectations? This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of VP PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.

24:56 Thank you very much. Thank you.